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TASMANIAN SCHOOL OF
BUSINESS AND ECONOMICS
Review of Last Lecture
• Introduced the Australian tax system – recall
sources of law:
BFA391 Taxation
• Two main Acts ‐ ITAA36 and ITAA97
• Case law helps give meaning to legislative terminology
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• Rulings issued by ATO
• Also discussed who should pay tax in Australia
and on what income:
Topic 2 ‐ Income • Residence ‐ four tests – only have to pass one
• Source
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• Exempt Income
• Calculation of income tax payable – worked out on
• Non‐assessable Non‐exempt Income
taxable income ‐ s 4‐10 (3)
• Categories of Income
income tax = (taxable income x rate) – tax offsets
• Personal Services
• Business
• Property • How to work out taxable income ‐ s 4‐15
Text: Chapters 5, 6 (not pp 157‐172), 8 and 9 3 taxable income = assessable income – deductions 4
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• Tax offsets
• Taxable income and assessable income are NOT
the same
• Division 6 covers assessable income and exempt
income – which income must you include in your
tax calculation?
5 6
• Division 8 covers deductions (next lecture)
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• exempt income ‐ s 6‐20 • Foreign Resident – must include ordinary income
• non‐assessable non‐exempt income ‐ s 6‐23 derived from Australian sources ‐ s 6‐5(3)
• No specific guidance in legislation as to meaning
of ‘income according to ordinary concepts’ ‐
Note: words in the Act with an asterisk (*) are defined in must rely on case law
the Act at s 995‐1
7
• More on Ordinary Income later in lecture 8
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• Amount may not be “income according to • Consequences:
ordinary concepts” but is statutory income • It is not assessable income ‐ s 6‐15(2)
because there is a specific section of the act • Does not go on tax return as it is not taxable income
making it assessable • However, may affect offsets and reduce or limit
• S 10‐5 – this table lists types of statutory income deductions (such as tax losses and losses carried
forward)
and the relevant section numbers (numbers in
9 10
bold are ITAA36)
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• Certain ordinary or statutory income is exempt if assessable income and is not statutory income”
derived by certain kinds of taxpayers, eg foreign • Subdivision 11‐B contains a list
source income of foreign residents, family tax • Examples –
benefit, defence force reserves pay ‐ s 11‐15 • fringe benefits (eg school fees paid by employer for
employee’s children)
• GST payable on a taxable supply
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income character will be ordinary income and assessable
• The distinction is still important because:
• Some gains are clearly of an income character and will • Some receipts are exempt from Capital Gains Tax
constitute ordinary income such as wages received by an • Amount of tax payable may differ due to Capital Gains Tax
employee Discount
• Others such as a birthday gift of $20 from your • The distinction between capital and income is relevant to
grandmother do not constitute income that is assessable both the assessability of receipts and the deduction of
expenses.
• The classification of some receipts is not as clear
13 • For income the distinction is often made by applying the 14
• Common law principles provide some guidance “flow” concept – see slide 17.
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10 ATR 696, income even if not attributable to employment or services
• S 21, 21A ITAA36 enacted to deal with non‐cash business benefits rendered, eg some Centrelink payments
that are not convertible to cash – should be treated as if they • Contrast to lump sums however note that lump sums can
were convertible to cash. Would this have changed result in
Cooke and Sherden? also be ordinary income depending on the character of the
• Note: s 15‐2 ITAA97 – non‐cash convertible benefits of employees payment – eg contract to do a one‐off job
may be assessable as statutory income • FCT v Dixon (1952) 86 CLR 540 – weekly payments to soldier
• Real gain by former employer for difference between civil and
• Receipt must be a genuine gain – the taxpayer must be better off military pay
15 16
• Eg, reimbursement of a work related expense is not a real gain
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• Sale of the source is capital
• Eg, rental on a house is income, sale of the house is capital, • Unrealised gains are not ordinary income
dividends on shares are income, sale of shares is capital
• Income has a ‘nexus’ or connection with an earning source • Gain of a capital nature is not income
but is ‘severable’ or can be extracted without affecting the • Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188
underlying source • but contrast FCT v Whitfords Beach Pty Ltd (1982) 150 CLR
355
17 18
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be assessed even if gain is directed to someone else
• Mutuality principle • Business income
• Must be a gain or receipt by the taxpayer
• Cannot derive income from oneself – if one makes a
payment to themselves there is no gain • Property income
• Income must “come in” from an outside source
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no nexus to services rendered • Allowances such as travel, uniform, site, dirt are
• Is the receipt a reward or payment for performing a assessable ‐ Sec 15‐2 ITAA97, TR 92/15
particular activity ‐ for “personal exertion”? • Fringe benefits – benefits in a non‐cash form from
• Does not necessarily have to come from employer an employment relationship – assessable to
but must be distinguished from personal gifts employer under FBT Act – non‐assessable non‐
• Income from earnings includes overtime, LSL, exempt income in hands of employee ‐ s 23L ITAA36
holiday pay etc 21
(to be covered in week 12) 22
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because of the level of service provided by the taxpayer • Was the gift a lump sum or regular payments?
so assessable as ordinary income • Has recipient already been remunerated?
• With other payments, assessability depends on facts of • Is there a personal relationship?
each case ‐ the nature of the receipt in the hands of the • Was the gift given due to personal qualities of the
recipient, the reason for the gift or payment and the taxpayer?
relationship between the parties • Smith v FCT (1987) 19 ATR 274
• More weight given to nature of receipt in hand of • Scott v FCT (1966) 117 CLR 514
recipient than motives of donor 23 • Hayes v FCT (1956) 96 CLR 47 24
• Gifts from employers ‐ what was motive of donor?
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usually result of occupation or business activity – not
• Note: may now create liability for CGT (event D1) usually earned from personal exertion
Fees Received by Sportspeople • May be income if received as part of taxpayer’s business
• FCT v Stone (2005) 59 ATR 50 ‐ sportsperson carrying on activity – eg share trading or professional gambler
business (as most now are) salary and wages are assessable
• TR 1999/17 – medals and trophies not assessable – given for
personal achievement
25 26
• IT 2307 – signing‐on fees normally assessable
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a choice of prizes
under s 6‐5 ITAA97
• A cash prize of $1,000
• Gains flowing from ‘trading’ transactions or received as
• A leather briefcase (retail value $1,200) embossed with her ‘ordinary proceeds’ or ‘ordinary incidents’ of business
name and the name of the award activity are generally income in nature
• 12 equal monthly payments of $100 each through the next • Determining ordinary income from a business requires:
year of study 1. determining whether taxpayer is carrying on a business
What are the tax implications of each prize? Would they be 2. considering whether particular receipts are the normal
considered ordinary or statutory income? Why or why not? 27
proceeds from carrying on the business or from some 28
Explain your answers. other activity (income or capital)
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• intention to make a profit – profit‐making intention is a strong
• Operating in a business‐like manner – existence of a business
indicator but lack of it does not preclude there being a
plan, applying business methods of others in similar industries
business. Not necessary to show existence of actual profit
• size and scale – includes nature and type of capital and actual • FCT v JR Walker (1985) 16 ATR 331
turnover – the smaller the scale the more likely it is a hobby • Ferguson v FCT (1979) 9 ATR 873
• commercial approach taken – professional advice sought,
markets for produce explored For interesting reading see the section in your text on page 235 re the
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“sharing economy”, ie Air BNB, Uber, Stayz
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transaction outside the normal business activity of the taxpayer, • Common examples:
it was nonetheless designed with the purpose of making a profit
or gain and hence was assessable • Interest on bank accounts
• TR 92/3 ‐ profit from an isolated transaction is generally • Dividends paid on shares
assessable where • Royalties from use of intellectual property
• intention or purpose of taxpayer was to make a profit or gain • Rent on a house or commercial property
• transaction was entered into and profit made in the course of • Not the same as gains realised on the sale of capital
carrying on a business
31 investments which are capital in nature and may be 32
• FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355
captured by capital gains legislation
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• s 6‐20 Exempt Income
• Statutory
• s 6‐23 Non‐assessable non‐exempt income
• Exempt • s 10‐5 Statutory Income List
• Non‐assessable non‐exempt • Subdivision 11A Exempt Income List
• Characteristics of ordinary income • Subdivision 11B Non‐assessable non‐exempt Income List
• Division 15 Some items of Assessable Income
• Categories of income – personal services, business, • Division 59 Non‐assessable non‐exempt income
property • Note that lists are guides – s 950‐150 explains “guides”
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Text Chapter 12
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