Australian Taxation Law 2019 [29 ed.] 0190318473, 9780190318475

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AUSTRALIAN TAXATION LAW 29th Edition 2019

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R OBI N WO E L L N E R STEPH E N BARKO C ZY SH IRL E Y  MU RPH Y CH R I S  E VAN S DALE PI N TO

1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries. Published in Australia by Oxford University Press Level 8, 737 Bourke Street, Docklands, Victoria 3008, Australia © Oxford University Press 2019 The moral rights of the author have been asserted. First edition Second edition Third edition Fourth edition Fifth edition Sixth edition Seventh edition Eighth edition Ninth edition Tenth edition Eleventh edition Twelfth edition Thirteenth edition Fourteenth edition Fifteenth edition Sixteenth edition Seventeenth edition

September 1987 February 1990 December 1990 January 1993 December 1994 January 1996 January 1997 December 1997 December 1998 November 1999 December 2000 December 2001 December 2002 December 2003 December 2004 December 2005 December 2006

Reprinted Eighteenth edition Nineteenth edition Reprinted Twentieth edition Reprinted Reprinted Twenty-first edition Twenty-second edition Twenty-third edition Twenty-fourth edition Twenty-fifth edition Twenty-sixth edition Twenty-seventh edition Twenty-eighth edition Twenty-ninth edition

March 2007 December 2007 January 2009 June 2009 December 2009 July 2010 September 2010 December 2010 December 2011 December 2012 December 2013 December 2014 December 2015 December 2016 December 2017 December 2018

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited Level 15, 233 Castlereagh Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsimile: (02) 9394 7601 Email: [email protected] This edition edited by Natasha Broadstock, Roz Edmond, Carolyn Leslie,    Valina Rainer and Gaby Grammeno Index and Tables by Trischa Mann Text design by Denise Lane, Sardine Design Cover image: Shutterstock Printed by Sheck Wah Tong Printing Press Ltd

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FOREWORD TO THE FIRST EDITION If two of the important criteria of a ‘good’ taxation system are simplicity and certainty (¶1-190 and ¶1-195), the Australian taxation system and particularly the Income Tax Assessment Act 1936 fail the test miserably. The spate of anti-avoidance legislation, a reaction to the excesses of the tax avoidance era of the seventies, and the more recent taxation reform package have brought about legislation of almost unrivalled complexity. The legislation is in some cases unintelligible: without a commerce or law degree the ordinary taxpayer stands no chance of finding his way through the morass and even with these qualifications his advisers will of necessity have to struggle to make sense of language that is as convoluted as it is confusing. Nor is the task of the taxation officer any easier. Many provisions in the legislation are not applied for the simple reason that no one is able to comprehend them. The need for a work that will operate as a guide to the traveller through these murky waters is painfully apparent. In 1946, Mr Hannan, in his ‘Treatise on the Principles of Income Taxation’, while adverting to the desirability of enunciating a series of authoritative propositions (on s 51(1)), resignedly accepted the impossibility of such a task. Some 40  years on, the possibility of formulating authoritative principles on any matter relating to tax is even more daunting. The torrent of decisions, judicial and administrative, that has been handed down over that time, together with the outpourings of the legislature, have made the study of taxation almost unmanageable. The need for a systematic approach to the study of taxation is obvious enough to the student. If the student were to see taxation as involving no more than an endless series of individual instances no overview of the subject would be possible. But it is not only the student who is in need of a systematic approach to the problem. The practitioner who is unaware of the system will have endless difficulty even finding the problem, let alone proceeding to a solution for that problem. So it is not the student alone who will benefit from the present work. Indeed there are to be found discussed in these pages many of the great taxation issues of the present, without an appreciation of which it would be impossible to predict the outcome of particular factual situations. By way of example, no issue could be more significant in the judge-made law of income taxation than the issue of the role of purpose in s 51(1) of the Act. The course of authority from Ure v FC of T 81 ATC 4100 and Ilbery v FC of T 81 ATC 4661 to the more recent cases of FC of T v Just Jeans Pty Ltd 87 ATC 4373 and FC of T v John 87 ATC 4713 have been a judicial reaction to tax avoidance; yet the boundaries of the doctrine (that purpose is relevant) are far from clear. Two taxpayers incurring the same outgoings in circumstances identical save for their subjective motives and purposes should be treated in the same way for the purposes of an income tax law. To grant a taxation deduction to the taxpayer who is naive, while denying it to the taxpayer who is sophisticated, would be arbitrary. If an outgoing is incurred in circumstances where there is, objectively seen, a connection between the incurring of the

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Foreword to the First Edition

outgoing and the activity which is directed towards the production of assessable income, that outgoing should satisfy the tests of deductibility irrespective of either subjective motivation or purpose. Once it is accepted (as it must presently be) that subjective purpose intrudes to some extent into the issue of deductibility (albeit not necessarily as a test of deductibility),there is opened up the question whether the relevant purpose is the sole purpose, the dominant purpose or some purpose less than the dominant purpose. For the present these issues are best discussed, in Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542, in judgments in which two members of the present High Court, then sitting in the Federal Court, participated. What, however, has not yet been the subject of discussion is the problem thrown up when a deduction is disallowed on the basis, say, that it was incurred for the sole purpose of obtaining a tax deduction, yet assessable income is in fact derived in the course of the scheme. Is the assessable income to be ignored, or is the result that the deduction only is to be ignored, leaving the taxpayer nevertheless in receipt of the assessable income upon which he is then to be taxed? Further in deduction cases, what role does an anti-avoidance section play? In the long run, however, it is not the ‘common law’ of taxation that holds the greatest significance. If there is one lesson that must be learned by anyone who wishes to understand taxation it is this: Go back to the Statute and read it! One of the all time great taxation advisers was once asked a question by a client concerning s 51(1). The adviser had undoubtedly read the section hundreds, perhaps thousands of times. Yet, perhaps to the surprise of his lay client, he opened the Statute, perused the words and tested the issue by reference to the words he read. There is no other alternative. So it is, that the authors of the present work return the reader to the Statute, offering on the way a helpful summary of its salient features. Australia has over the years been well served by its taxation literature—the present work continues the tradition. 23 September 1987 Graham Hill, QC

v

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PREFACE TO THE TWENTY-NINTH EDITION Australian taxation law has experienced considerable changes over the past few decades, and the deluge shows no signs of abating. Recent years have seen the introduction of a range of new laws designed to deal with ‘phoenix’ behaviour and the promotion of tax exploitation schemes, a ‘remedial’ power enabling the Commissioner to avoid unintended consequences of legislation, refinement of the attribution regime for managed investment trusts, GST on low value imports and the ‘Netflix’ tax. Increased penalties for Significant Global Entities have also been introduced, as well as the Multinational Anti-Avoidance Law and the Diverted Profits Tax. Other developments include clarification of the status of bitcoin as currency, measures to combat the black economy, withholding tax on purchases of Australian real estate by foreign investors as well as obligations on buyers of new residential properties to pay GST direct to the ATO. All this has been accompanied by endless ongoing tinkering with superannuation (including the introduction of a transfer balance cap), CGT rules (with changes to the main residence exemption and modified treatment for ‘angel’ investors), small business concessions, corporate and individual tax rates, imputation rules and various other aspects of the already complicated tax system in Australia. The stream of significant court and tribunal decisions also continues apace, with a regular flow of key decisions that impact on the interpretation and operation of the tax laws. In 2018 these included, for example, the High Court Thomas decision on streaming of tax credits, the appeal in Hacon on the ATO’s obligations in relation to private rulings, and Msaus (on GST adjustments and the margin scheme). In addition, the ATO continues to produce a steady stream of rulings, determinations, advices, taxpayer alerts, decision impact statements and other materials, including Law Companion Guidelines and Practical Compliance Guidelines. Australian Taxation Law aims to provide guidance in clear and simple language through this morass of complex and ever-changing law. To make it easier to understand the application of the law to practical situations, we have made extensive use of flow charts and practical examples. While the book covers State land tax, payroll tax and stamp duties, its primary focus remains the federal taxation system, with particular emphasis on income tax, capital gains tax, corporate tax, fringe benefits tax, goods and services tax, and the operation of the tax administration system that drives the whole process. This 29th edition of Australian Taxation Law incorporates the major legislative, case law and administrative reforms up to 1 September 2018, as well as various key developments since that date, ensuring that it remains the most relevant and up-to-date tax text available. The authors would like to thank all those who have provided insightful feedback, comments and assistance in updating chapters for this new edition. In particular, Robin again thanks Prof Steve Graw for his assistance with an aspect of Chapter 17, and Chris would like to thank Peter Mellor, who has provided invaluable research assistance in updating various chapters.

vi

Preface to the Twenty-Ninth Edition

Most importantly, we particularly wish to thank our families, whose ongoing support, encouragement and sacrifices make completion of each edition possible.

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October 2018 Robin Woellner, Stephen Barkoczy, Shirley Murphy, Chris Evans and Dale Pinto

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ABOUT THE AUTHORS Robin Woellner is a Chartered Tax Adviser and Fellow of the Australian Institute of Management. Robin is currently an Adjunct Professor in the School of Law at James Cook University and the School of Taxation and Business Law in the Business School at UNSW Sydney. He has practised in taxation in the private sector and in the ATO, and has for many years taught revenue law and advanced revenue law courses at undergraduate and postgraduate level, as well as teaching in a wide range of other commercial law subjects. He has been a member of editorial panels on various tax journals, and is the author/co-author of numerous books, articles and conference papers. Stephen Barkoczy is a Professor in the Faculty of Law at Monash University. He is also a member of the Innovation Investment Committee of Innovation and Science Australia. He has served on several government and industry panels and committees, and was a consultant with a major law firm for over 10 years. Stephen is the author/co-author of several books and articles on taxation law and is a former editor of the Journal of Australian Taxation. In 2008, he received the Prime Minister’s Award for Australian University Teacher of the Year.

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Shirley Murphy has taught in the areas of taxation and superannuation law at a number of tertiary institutions and has acted as a taxation and superannuation consultant to industry groups. She has written in the areas of taxation and superannuation for many years, is the co-author of the Australian Master Superannuation Guide, and has contributed over many years to a wide range of publications including the CCH Australian Master Tax Guide. Chris Evans is a part time Professor in the School of Taxation and Business Law (Atax) in the Business School at UNSW Sydney and a part time Extraordinary Professor at the University of Pretoria in South Africa. He is also an International Research Fellow at the Centre for Business Taxation at Oxford University and a Senior Research Fellow at the Tax Law and Policy Research Group at Monash University. He is the author/co-author of numerous books, articles and conference papers, and is the former Editor of the Australian Tax Review. Dale Pinto is Professor of Taxation Law in the Curtin Law School as well as being the Chair of the Academic Board at Curtin University. He is also a Fellow of the Taxation Law and Policy Research Group at Monash University. Dale is the author/co-author of numerous books, refereed articles and national and international conference papers, and is on the editorial board of a number of journals as well as being the Editor-in-Chief of several refereed journals. Dale is a Fellow of CPA Australia, a Fellow of the Australian Academy of Law, a Chartered Accountant and Chartered Tax Adviser (Life). Dale served as an inaugural member of the National Tax Practitioners Board and is a current member of the Board of Taxation’s Advisory Panel and the ATO’s Tax Technical Panel. He was appointed as a Director to the Board of CPA Australia from 1 October 2018 for a 3-year term.

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ACKNOWLEDGMENTS Robin Woellner dedicates this book to Gil, Glad, Ruth, Sally, Helen and Cheryl; Stephen Barkoczy to Mei-Ling, Stephen and Johnny; Shirley Murphy to Bill and Marjory; Chris Evans to Kate Collier; and Dale Pinto to Dudley, Dagmar, Catherine, Joseph and Isaac.

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The author and the publisher wish to thank the following copyright holders for reproduction of their material. Australian Tax Office (for the Commonwealth of Australia) for extracts; Federal Register of Legislation for extract from Legislation found at www.legislation. gov.au by Creative Commons 4.0 https://creativecommons.org/licenses/by/4.0/; Lexis Nexis UK for case extracts from All England Reports (All ER) Reproduced by permission of RELX (UK) Limited, trading as LexisNexis; Thomson Reuters for extracts from Commonwealth Law Reports (CLR) and Federal Law Reports (FLR); Wolters Kluwer, CCH for extracts from Australian Tax Cases (ATC) Every effort has been made to trace the original source of copyright material contained in this book. The publisher will be pleased to hear from copyright holders to rectify any errors or omissions.

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CONTENTS

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Foreword to the First Edition Preface to the Twenty-Ninth Edition About the Authors Acknowledgments List of Abbreviations Key Tax Websites 1 Introduction to Income Tax Law 2 Tax Formula, Tax Rates and Tax Offsets 3 Assessable Income: General Principles 4 Income from Personal Exertion 5 Income from Property 6 Income from Business 7 Capital Gains Tax: General Topics 8 Capital Gains Tax: Concessions and Special Topics 9 Non-Assessable Income 10 General Deductions 11 Specific Deductions 12 Capital Allowances and Capital Works 13 Tax Accounting 14 Trading Stock 15 Small Business Entities and Concessions 16 Taxation of Partnership Income 17 Taxation of Trust Income 18 Taxation of Corporate Tax Entities and Their Members 19 Corporate Tax Losses, Net Capital Losses and Bad Debts 20 Taxation of Consolidated Groups 21 Special Taxpayers and Incentive Schemes 22 Taxation of Financial Transactions 23 Superannuation  24 International Aspects 25 Tax Evasion, Avoidance and Planning 26 Fringe Benefits Tax 27 Goods and Services Tax 28 State Taxes 29 Administrative Aspects of Taxation

iii v vii viii xi xiv 1 57 115 141 191 220 285 383 454 493 601 645 694 748 783 806 836 885 962 997 1043 1143 1224 1287 1456 1535 1585 1657 1704

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Contents

30 Tax Rulings, Tax Returns and Assessments 31 Challenging an Assessment 32 Collection and Recovery of Tax 33 Offences, Penalties and Regulation of Tax Practitioners 34 Rates and Tables

1752 1793 1835 1911 1976

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Table of Cases 1985 Decisions of Boards of Review and AAT (Taxation Appeals Division) 2021 Table of Legislation 2025 Table of Rulings 2087 Index 2093

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LIST OF ABBREVIATIONS

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The following abbreviations are used in Australian Taxation Law. AAT Administrative Appeals Tribunal AAT Act  Administrative Appeals Tribunal Act 1975 ABN Australian Business Number ABN Act  A New Tax System (Australian Business Number) Act 1999 ABR Australian Business Register ADF Approved deposit fund ADI Authorised deposit-taking institution ADJRA  Administrative Decisions ( Judicial Review) Act 1977 ADR Alternative Dispute Resolution AFOF Australian venture capital fund of funds AFTS Report Australia’s Future Tax System Report to the Treasurer (Final Report of the Henry Tax Review) ANAO Australian National Audit Office APRA Australian Prudential Regulation Authority ATC  Australian Tax Cases (CCH) ATO Australian Taxation  Office ATR  Australian Tax Review AUSTRAC Australian Transaction Reports and Analysis Centre AWOTE Average weekly ordinary time earnings BAS Business Activity Statement BELC Broad-exemption listed country CFC Controlled foreign company CGT Capital gains tax COT Continuity of ownership test CPI Consumer price index DAC Departure authorization certificate DFC of T Deputy Federal Commissioner of Taxation DPO Departure prohibition order DTA Double taxation agreement DVS Direct value shift EST (Australian) Eastern Standard Time ESVCLP Early stage venture capital limited partnership ETP Employment termination payment FBT Fringe benefits tax FBTAA  Fringe Benefits Tax Assessment Act 1986

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xii FC of T Federal Commissioner of Taxation FIF Foreign investment fund FIFO First in first out FLA  Family Law Act 1975 FLIC Film licensed investment company FMD Farm management deposit FOIA  Freedom of Information Act 1982 FTC Foreign tax credit FTRA  Financial Transaction Reports Act 1988 GIC General interest charge GST Goods and services tax GSTA  A New Tax System (Goods and Services Tax) Act 1999 GVSR General value shifting regime HECS Higher Education Contribution Scheme HELP Higher Education Loan Programme IED Income equalization deposit IGT Inspector-General of Taxation IRDB Industry Research and Development Board ISC Insurance and Superannuation Commissioner ITAA36  Income Tax Assessment Act 1936 ITAA97  Income Tax Assessment Act 1997 ITAR Income Tax Assessment Regulations 1997 ITR Income Tax Regulations 1936 ITRA  Income Tax Rates Act 1986 ITTPA  Income Tax (Transitional Provisions) Act 1997 IVS Indirect value shifting JALTA  Journal of the Australasian Law Teachers Association LILO Last in last out LPR Legal personal representative LTA  Land Tax Act 1956 LTMA  Land Tax Management Act 1956 MRRT Minerals resource rent tax OSSA  Occupational Superannuation Standards Act 1987 PAYE Pay-as-you-earn PAYG Pay As You Go PDF Pooled development fund PPLL Paid parental leave levy PPS Prescribed payments system PRRT Petroleum resource rent tax

List of Abbreviations

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List of Abbreviationsxiii

PRRT Act  Petroleum Resource Rent Tax Act 1987 PRRTAA87  Petroleum Resource Rent Tax Assessment Act 1987 PST Pooled superannuation trust R&D Research and development RBA Running balance account RBL Reasonable benefit limit RPS Reportable payments system RSA Retirement savings account RSAA  Retirement Savings Accounts Act 1997 RSAR Retirement Savings Accounts Regulations 1997 SBT Same business test SCTACA  Superannuation Contributions Tax (Assessment and Collection) Act 1997 SCTIA  Superannuation Contributions Tax Imposition Act 1997 SGAA  Superannuation Guarantee (Administration) Act 1992 SGAR  Superannuation Guarantee (Administration) Regulations 1993 SGC Superannuation guarantee charge SGCA  Superannuation Guarantee Charge Act 1992 SISA  Superannuation Industry (Supervision) Act 1993 SISR  Superannuation Industry (Supervision) Regulations 1994 SME Small or medium enterprise SPOR Shorter period of review (taxpayers) SSAA  Small Superannuation Accounts Act 1995 STCT Small Taxation Claims Tribunal STS Simplified Tax  System TAA  Taxation Administration Act 1953 TBRL Temporary budget repair levy TFN Tax file number TLIP Tax Law Improvement Project TPTACA  Termination Payments Tax (Assessment and Collection) Act 1997 UAP Uniform administrative penalty VCA  Venture Capital Act 2002 VCF Venture capital franking VCLP Venture capital limited partnership VCMP Venture capital management partnership

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KEY TAX WEBSITES KEY TAX AND TAX REFORM SITES Australia’s Future Tax System (Henry Tax Review): www.taxreview.treasury.gov.au Australian Taxation Office: www.ato.gov.au Board of Taxation: www.taxboard.gov.au

Tax Practitioners Board: www.tpb.gov.au

FEDERAL GOVERNMENT Australian Business Register: www.abr.business.gov.au

Australian Competition & Consumer Commission (ACCC): www.accc.gov.au Australian Government Entry Point: www.australia.gov.au

Australian Prudential Regulation Authority (APRA): www.apra.gov.au

Australian Securities & Investment Commission (ASIC): www.asic.gov.au Commonwealth Ombudsman: www.comb.gov.au

Department of Finance & Deregulation: www.finance.gov.au Department of Treasury: www.treasury.gov.au

Inspector-General of Taxation: www.igt.gov.au Parliament House: www.aph.gov.au

Single Business Service: www.business.gov.au

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Tax Issues Entry System (Ties): www.ties.gov.au Treasurer: www.treasurer.gov.au

STATE AND TERRITORY REVENUE OFFICES Australian Capital Territory: www.revenue.act.gov.au New South Wales: www.osr.nsw.gov.au

Northern Territory: www.nt.gov.au/ntt/revenue Queensland: www.osr.qld.gov.au

South Australia: www.treasury.sa.gov.au Tasmania: www.treasury.tas.gov.au Victoria: www.sro.vic.gov.au

Western Australia: www.finance.wa.gov.au

Key Tax Websitesxv

COURTS ACT Supreme Court: www.courts.act.gov.au/supreme Administrative Appeals Tribunal: www.aat.gov.au

Family Court of Australia: www.familycourt.gov.au Federal Court of Australia: www.fedcourt.gov.au High Court of Australia: www.hcourt.gov.au

Supreme Court of NSW: www.lawlink.nsw.gov.au/sc

Supreme Court of Victoria: www.supremecourt.vic.gov.au Supreme Court of Queensland: www.courts.qld.gov.au

Supreme Court of Tasmania: www.supremecourt.tas.gov.au

Supreme Court of Western Australia: www.supremecourt.wa.gov.au

OTHER USEFUL SITES FOR SOURCE MATERIALS Australasian Legal Information Institute: www.austlii.edu.au

Australian Tax Law Library: www.austlii.edu.au/au/special/tax ComLaw (Commonwealth Law): www.comlaw.gov.au Worldlii: www.worldlii.org

KEY TAX AND SUPERANNUATION ASSOCIATIONS/ORGANISATIONS Association of Superannuation Funds of Australia (ASFA): www.superannuation.asn.au

Self-Managed Super Fund Professionals’ Association of Australia (SPAA):  www.spaa. asn.au

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Taxation Institute of Australia: www.taxinstitute.com.au

ACCOUNTING ASSOCIATIONS/ORGANISATIONS Association of Taxation & Management Accountants: www.atma.com.au CPA Australia: www.cpaaustralia.com.au

Institute of Chartered Accountants in Australia: www.charteredaccountants.com.au Institute of Public Accountants: www.publicaccountants.org.au National Tax & Accountants Association: www.ntaa.com.au

INTERNATIONAL TAX AUTHORITIES Canada (Canada Revenue Agency): www.cra-arc.gc.ca

China (State Administration of Taxation): www.chinatax.gov.cn Hong Kong (Inland Revenue Department): www.ird.gov.hk

Malaysia (Inland Revenue Board of Malaysia): www.hasil.gov.my New Zealand (Inland Revenue): www.ird.govt.nz

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Key Tax Websites

Singapore (Inland Revenue Authority of Singapore): www.iras.gov.sg United Kingdom (HM Revenue & Customs): www.hmrc.gov.uk

United States of America (Internal Revenue Service): www.irs.gov

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United States of America (US Department of the Treasury): www.treasury.gov

CHAPTER 1

Introduction to Income Tax Law Overview¶1-000

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Historical background: general ¶1-020 – ¶1-045 Introduction¶1-020 Early developments ¶1-030 Beginnings of the modern taxation system ¶1-040 Tax resistance through the ages ¶1-045 Historical background: Australia History of income tax in Australia The federal government and income tax Between World Wars

¶1-050 – ¶1-070 ¶1-050 ¶1-060 ¶1-070

Background issues Taxation and the social process ‘Incidence’ of taxation Tax expenditures

¶1-100 – ¶1-115 ¶1-100 ¶1-110 ¶1-115

Functions and objectives of taxation ¶1-130 – ¶1-170 Conventional view of the taxation system ¶1-130 Provision of social and merit goods ¶1-140 Support for those not provided for by the free market¶1-150 Correcting other free market imperfections ¶1-160 Problems in using taxation for social engineering ¶1-170 Criteria for evaluating a taxation system General outline Fairness or equity

¶1-180 – ¶1-232 ¶1-180 ¶1-185

2

Introduction to Income Tax Law

Simplicity¶1-190 Compliance costs ¶1-193 Certainty¶1-195 Efficiency/neutrality¶1-200 Flexibility¶1-205 Evidence¶1-210 Other criteria ¶1-215 Conflict and compromise between objectives ¶1-230 Overview of the Commonwealth taxation system ¶1-232 Tax reform initiatives in Australia ¶1-235 – ¶1-250 Criticisms of the current Australian taxation system ¶1-235 Challenges of e-commerce ¶1-237 Guidelines for tax reform ¶1-240 Options for further tax reform ¶1-250

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The current Australian legal system Sources and principles of taxation law Sources of Australian taxation law The role of taxation regulations

¶1-310 – ¶1-520 ¶1-310 ¶1-320 ¶1-520

Constitutional aspects of taxation ¶1-530 – ¶1-620 Distribution of legislative powers ¶1-530 The Commonwealth’s power to make laws with respect to taxation ¶1-540 The concept of a ‘tax’ in s 51(ii) ¶1-550 Prohibition against discrimination between states or parts of states ¶1-560 Other constitutional provisions ¶1-570 Wide effective reach of Commonwealth taxation power¶1-580 Section 109: Commonwealth law prevails over an inconsistent state law ¶1-595 Removal of the states from the income tax field ¶1-600 Impact of the GST on Commonwealth–state tax relations and the vertical fiscal imbalance ¶1-620

Introduction to Income Tax Law3

[¶1-000] Overview Before proceeding to a technical analysis of taxation law in later chapters, it is useful to provide a broader context and perspective on income and other taxes. This overview involves a brief analysis of the history of taxation and its socio-economic and political role and implications, and the present structure of taxation in Australia. It is all too easy to lose sight of these wider aspects, and to focus exclusively on the increasingly intricate technical principles and practices of taxation law. However, taxation is a social process and, without some understanding of how and why taxation develops and changes, it is difficult to understand the present system or the dynamics which precipitate change, or to develop a feeling for likely future changes and directions.

What is a tax?

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There are technical definitions of a ‘tax’ for constitutional law and other purposes, which are discussed at ¶1-550. However, at a general level, the Concise Oxford Dictionary defines a ‘tax’ as a ‘compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions etc’, while the OECD defines a tax as ‘a compulsory, unrequited transfer … to the general government sector’.1 Allan prefers the wider view of tax as ‘any leakage from the circular flow of income into the public sector, excepting loan transactions and direct payments for publicly produced goods and services up to the cost of producing these goods and services’.2 This view would regard profits made by nationalised postal services as taxes levied on postage; and would also cover ‘taxes in kind’, such as the loss or ‘cost’ to the owner of property compulsorily acquired by a government at less than free market prices. On this view, pensions and subsidies would also be seen as (negative) taxes. There is a wide range of possible taxes—one possible categorisation of common taxes is set out in Figure 1.1.3

1

In the OECD definition, ‘[taxes] are described as “unrequited” because the benefits provided by the government to individual taxpayers are not necessarily proportional to their contribution, though the government may use the revenue generated to provide benefits to the community as a whole, or segments of it: RF Warburton and PW Hendy, International Comparison of Australia’s Taxes, Report to the Commonwealth Treasurer, 3 April 2006, 20.

2

CM Allan, The Theory of Taxation (Penguin, 1971) 24; cf R Posner, ‘Taxation by regulation’ (1981) 2(1) Bell Journal of Economics 22.

3

Adapted from Allan, ibid 29.

1

4

Introduction to Income Tax Law

Figure 1.1 Common taxes INDIRECT (CONSUMPTION) TAXES

DIRECT TAXES

Income Taxes

Property Taxes

Sales Taxes

Personal income tax

Death duty

Retail or wholesale

Company tax

Wealth tax

Sales tax

Poll tax

Goods and services tax (GST)

Gift duty

Turnover tax

Inheritance taxes

Factor Taxes Payroll tax Land tax Real estate taxes Carbon tax

Purchase tax Expenditure tax Stamp duties Customs and excise Profits from governmentrun industries

HISTORICAL BACKGROUND: GENERAL (¶1-020 – ¶1-045)

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[¶1-020] Introduction It has long been recognised that a democratic government needs to raise revenue in order to govern effectively, and that one of the most effective means of raising this revenue is by the imposition and collection of taxes.4 Indeed, as Mills observes: It is one of the empirical certainties of history that no structural society has ever arisen without taxation. [The] power of taxation is one which is particularly liable to abuse … but without that power no Government … is possible. ‘The power to tax is the one great power upon which the whole national fabric is based. … It is not only the power to destroy, but the power to keep alive.’5

It is not surprising, therefore, that attitudes to taxation vary radically. At one extreme, Justice Oliver Wendell Holmes ( Jr) observed in Compania de Tobacos v Collector that ‘taxes are what we pay for civilized society’.6 This view was echoed more recently by the Hon Bill Shorten, who commented in 2011: 4

Warburton and Hendy, above n 1, 20; Star City Pty Ltd v FC of T 2007 ATC 5216, 5239 (Gordon J).

5

S Mills, Taxation in Australia (Macmillan, 1925) 1, Isaacs J in R v Barger (1908) 6 CLR 41 quoting Nicol v Ames [1899] USSC 82; 173 US 509, 515.

6

275 US 87 (1904), 100.

Introduction to Income Tax Law5

With taxes you buy civilisation … Taxes fund the provision of goods and services that the private sector cannot or will not provide, but are of crucial importance to the way we live … [and also] provide us with resources to pay for vital community services such as roads, hospitals and medical care, schools, colleges and universities, defence of the nation, courts, police, museums, libraries, sporting facilities, [and] parks.7

Not all commentators have been so positive. A more cynical view is that the ‘art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing’,8 and it has also been said that ‘there is one difference between a tax collector and a taxidermist—the taxidermist leaves the hide’.9 Whatever view one takes, an understanding of the history and dynamics of taxation is important—the lessons of the past can be instructive for modern proposals and reforms, and many of the older taxes have their modern equivalents. The politicians and citizens of different countries and times have shared many of the visions and problems which modern taxation systems still face—questions of tax equity, simplicity, incidence and efficiency have been perennial difficulties, as have the existence and implications of tax avoidance and evasion (see ¶1-045 for a definition of these terms). The main focus of this book is on income tax, and the following segment accordingly deals mainly with the development and introduction of the Australian income tax. The goods and services tax (GST) which changed the face of taxation in Australia is dealt with in Chapter 27; state taxes are dealt with in Chapter 28; and CGT and FBT are dealt with in Chapters 7–8 and 26 respectively.

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[¶1-030] Early developments Taxation has been part of organised society for much of recorded history.10 In early times, the emphasis was on indirect taxes. In ancient Persia, for example, taxes included tributes paid as a proportion of produce and by the provision of personal service, as well as dues paid at ferries and market places. Customs duties (portoria) were levied by Roman kings up to the 7th century BC, reintroduced together with a broad-based excise tax by the Emperor Augustus in the Roman Empire,11 and brought by the Romans to Britain upon its conquest. Other Roman taxes included consumption taxes and, under Julius Caesar, a 1% general sales tax, as well as a ‘head’ tax (later extended to land holdings) and temporary property taxes levied in times of war to support the state’s military needs. 7

‘What We Get for our Taxes’, Address to the Taxation Institute of Australia, 26th National Convention, Brisbane, 4 March 2011, 1.

8

Jean Baptiste Colbert in JP Smith, Taxing Popularity: The Story of Taxation in Australia (Federalism Research Centre ANU, 1990).

9

MM Capwell, Time Magazine, 1 February 1963; cf McPherson JA in Macpherson v FC of T 99 ATC 4014, 4021.

10 Smith, above n 8; S James, Self-Assessment and the UK Tax System (The Research Board of the Institute of Chartered Accountants in England and Wales, 1995) 11–19; Rise of Parliament—Archives, ‘Taxation’, www.national archives. gov.uk/pathways/citizenship/rise_parliament/tax.htm (accessed 11 October 2016). 11 Mills, above n 5, 3–4, observes that although the Roman people were nominally untaxed in the intervening period, they ‘voluntarily’ contributed large amounts for public purposes.

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Other taxes followed: in England a ‘subsidy’ on goods and land was levied in the early Middle Ages, while the ‘Danegeld’ (a form of land tax based on the amount of land held) was originally levied in times of emergency as a direct tax on landowners,12 but became a regular tax under the Norman kings until it was abolished in the 12th century.13 Other taxes levied in medieval England included ‘scutage’ (‘shield money’:  1159– 1332), which was payable by a feudal landowner in lieu of military service in the King’s army. There were also taxes on movable goods, beginning with the ‘Saladin tithe’, which was levied in 1188 to fund the Crusade against the Saracens, and was the forerunner of modern property taxes. In the early 17th century, ‘ship money’ was levied by the Stuart kings for the defence of the realm, and poll taxes were also levied from time to time as required.14

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[¶1-040] Beginnings of the modern taxation system In 1715, customs and excise duties produced some 73% of total English tax revenue, and this proportion grew to 82% by 1755. The heavy reliance in England on indirect taxation of goods continued up to the end of the 18th century. During this period, English taxes were levied mainly on the external indicia of wealth; for example, the ‘window tax’ of 1696 levied a progressive tax based on the number of windows in a house, while the ‘assessed taxes’ were levied on carriages, female servants, racehorses, hair powder, clocks, watches and the like. Direct taxation and income tax did not become a regular feature in England until the 19th century, and even then direct taxation was usually imposed only when additional revenue was needed for extraordinary purposes; for example, during times of war or other social upheaval. One reason for the ad hoc nature of taxes up to the 19th century may have been a lack of the administrative infrastructure and expertise necessary for the efficient control of an ongoing broad-based system of taxation. Indeed, until the 17th century, it was not uncommon for the Crown to sell the right to collect taxes to private individuals (‘farming the revenue’), as had been the case in ancient Rome. It was not until the latter half of the 17th century that the practice ceased, and government officials (‘inspectors’) were appointed to administer and collect taxes. Gradually, an efficient staff and system of taxation administration began to develop in England, and by the end of the 18th century the administrative machinery for regular taxation was in place. However, as so often happens in the history of taxation, the final impetus came from a national emergency.

Introduction of income tax By 1798, the armies of Emperor Napoleon Bonaparte controlled continental Europe. England and its allies were hard-pressed to resist the French advance, and widespread 12 For example, in the 10th century in order to raise funds to buy off Scandinavian pirates. 13 It was replaced by the ‘carucage’, a regular tax levied on a similar basis. 14 For example, the poll tax of 1380 was levied to meet the cost of the King’s bad financial management and military extravagance: BEV Sabine, A History of Income Tax (George Allen & Unwin, 1963) 12.

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evasion by taxpayers meant that the 1797  ‘triple assessment’ on ‘taxable establishments’ had failed to produce adequate revenue to support the War. William Pitt, who was Prime Minister of England at the time, viewed a tax on incomes as ‘repugnant to the customs and manners of the nation’. Nevertheless, the desperate military situation forced Pitt to impose a general tax ‘on all the leading branches of income’. Ironically, in light of subsequent developments, Pitt justified the move to an income tax on the basis of the need ‘to prevent all evasion and fraud’ which had plagued the triple assessment. The first Income Tax Act (in 1799)  was only moderately successful in its revenueraising aims, yielding some 50% of targeted revenue. With the temporary peace following the Treaty of Amiens in 1802, the tax was abolished, but renewed hostilities with the French shortly afterwards saw the reintroduction of income tax under the pseudonym of ‘duties on land and property’. The Income Tax Act 1803 introduced the concept of the five schedules or categories of taxable property (which still characterises the English taxation system), as well as the concept of deduction of tax at source for certain classes of income.15 The 1803 income tax was repealed in 1816, apparently because it was feared that the tax might become a permanent feature, and a ‘potential instrument of tyranny’. England remained free of income tax until the next social crisis, in 1842. Then, at a time of great commercial depression and social unrest, Sir Robert Peel reluctantly felt compelled to impose a tax on incomes at a maximum rate of some 3%. The tax was intended to be an experiment for three years only, but the ‘experiment’ has survived (with various modifications) to the present day—a story by no means unusual in the taxation context.

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[¶1-045] Tax resistance through the ages From the earliest biblical times, taxes and tax collectors have been unpopular, and historical commentaries suggest that some people have always tried to evade or avoid the payment of taxes. Not surprisingly, therefore, taxes and taxation systems have regularly been the cause of heated (and sometimes violent) controversy. The Boston Tea Party, with its slogan of ‘no taxation without representation’, is perhaps the best-known ‘revolt’ against perceived tax injustices. However, the Stuart ‘ship money’ taxes were a factor contributing to the outbreak of the English Civil Wars in the 1640s; and the 20th-century poll tax introduced by the British Thatcher Government was widely seen as a factor in that government’s fall. While many tax protests are symbolic, this is not always the case:  during the 1381 ‘Peasants’ Revolt’ in England, a group of citizens aggrieved at a poll tax and oppressive collection methods cut off the Chief Justice’s head and paraded it round Bury St Edmunds on a pike; frustrated taxation reform was a factor in the onset of the French Revolution; and the imposition of miners’ licence fees was a factor in the bloodshed of the Eureka Stockade rebellion on the Ballarat goldfields in 1854. A more subtle but equally significant revolt against taxation is through tax avoidance (the creation by legitimate means of a situation in which a taxpayer is liable to pay less 15 This latter concept is still used in the Australian taxation legislation today (eg in the PAYG system: see ¶32-405ff ).

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or no tax) or tax evasion (the intentional non-declaration of income or over-claiming of expenditure or other benefits). In a sense, tax avoidance/evasion ‘is the Siamese twin of the charge to tax in any system based upon certain statutory enactment. No other area of the law touches human activity at so many points, so that it is scarcely surprising that tax avoidance should be so widespread and ingrained in our consciousness’.16 Indeed, tax avoidance and evasion are not new. The actions of 17th-century English taxpayers who sought to avoid the window tax by blocking up windows until the tax collector had gone and then reopening them were merely somewhat less subtle predecessors of the tax avoidance schemes of modern times. Yet however understandable tax avoidance and evasion may seem from some perspectives,17 they can have serious consequences for the equity of a taxation system.18 For example, the underground or untaxed ‘cash’ economy in Australia was estimated in 2012 as at least 1.5% of GDP; that is, around $25 billion pa.19 This means that billions of dollars in tax revenue are lost each year through evasion, and this lost revenue must then be made up by other means; for example, by imposing higher rates on those who do pay tax. In response, a number of national governments have in recent years taken strong steps to block egregious tax avoidance and evasion20—see, for example, ¶33-221—while, ironically, at times themselves using the lure of tax benefits to attract taxpayers to their jurisdictions. Chapter 25 considers tax evasion and avoidance in more detail.

HISTORICAL BACKGROUND: AUSTRALIA (¶1-050 – ¶1-070)

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[¶1-050] History of income tax in Australia Early taxes Although the different Australian states had levied taxes of various types from the time of their establishment, the first income tax in Australia (on land and incomes) was introduced by the South Australian Government in 1884. The history of income tax in Australia began 16 A Thompson, ‘Some thoughts on tax avoidance’ (1978) New Law Journal 629. 17 RW McGee, K Devos and S Benk, ‘Ethical attitudes toward tax evasion: A cross cultural study between Turkey and Australia’, paper presented to the Australasian Tax Teachers Association Conference, University of Adelaide, 19–21 January 2015. 18 See eg The Senate, Economic References Committee, Corporate Tax Avoidance, Part III: Much Heat, Little Light So Far, May 2018. 19 And it ‘could be larger today’: Treasury, Black Economy Task Force—Interim Report, March 2017, 13–14. The net income tax gap for individuals not in business was estimated at 6.4% or $8.7 billion for 2014/15: ATO, ‘Estimating the tax gap for individuals not in business’, ATO website (accessed 14 July 2018). See also Commissioner of Taxation, Annual Report 2016–17, 87–9, Tables 2.13, 2.15. 20 See eg Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018 (Cth); Identity-matching Services Bill 2018 (Cth); cf in the United Kingdom, the Criminal Finances Act 2017, which creates the criminal corporate offence of failure to prevent the facilitation of tax evasion—with an unlimited fine as penalty.

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with commendable moderation, with the South Australian tax imposing a flat rate of 1.25% on income from personal exertion, 2.5% on income from property, and 0.2% on landholdings. Victoria imposed an income tax in 1895 through the Land and Income Tax Assessment Act 1895, which was motivated by economic necessity—Victoria had a huge deficit of more than £650,000, almost 10% of total revenue. New South Wales had attempted to introduce an income tax in 1886, but opposition was so vehement that the proposal was dropped. Indeed, one member of parliament is quoted as saying that: ‘If the Devil had sent a representative here to institute a means of destroying the morality of the people, he could have found no better instrument than an income tax.’21 However, an income and land tax was successfully introduced into New South Wales in 1895, again following heated debate and driven by economic necessity: the New South Wales Government faced a large revenue deficit. The New South Wales income tax was levied at a flat rate of 2.5%, with a number of exemptions. The land tax was levied at a flat rate of 0.42%, with a threshold of £240. In 1899, Western Australia introduced a tax on company dividends and profits at a rate of 5%, and ultimately introduced a general income and land tax in 1907, with a flat rate of tax on incomes at 1.66% for residents (2.49% for non-residents). Tasmania had introduced a tax on dividends as early as 1880, but did not introduce a general income tax until 1902, when income tax was levied at progressive rates on property income between £100 and £400, and above that amount at a flat rate of 5%. Queensland followed in 1902 with an income tax at progressive rates up to a maximum of 5% on personal exertion income and a flat rate of 3.75% on property income.

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[¶1-060] The federal government and income tax Until 1915, the revenues derived from customs and excise duties had sufficed to meet the fledgling Australian Government’s revenue needs. Moreover, many of the early federal cabinet ministers were former state premiers, and were not initially sympathetic to the idea of a centralised federal income tax.22 Once again, however, the pressures of war led to a fundamental change. In 1915 the Commonwealth was forced to impose an income tax in order to raise the additional revenue needed to successfully maintain Australia’s efforts in the First World War. Accordingly, the federal government introduced an Act which imposed tax at differing rates on income from personal exertion, income from property, and income of companies.23

21 Quoted in Mills, above n 5, 66; cf Smith, above n 8, 40–1. 22 Cf Chief Justice Robert French, ‘Tax and the Constitution’, DG Hill Memorial Lecture, Canberra, 14 March 2012, 16–21. 23 The Income Tax Assessment Act 1915 (Cth) was intended to tax ‘surplus wealth’, and consisted of 65 sections covering 22 pages.

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In introducing the Act, the Commonwealth Attorney-General observed that: This Bill, of course, is frankly a War measure designed to meet the present circumstances … No doubt this Bill reaches the high-water mark of income taxation, but it does not do so without ample warrant24

However, the lesson of history is that income taxes tend to take root once in place, and the rates imposed rarely fall in real terms. The 1915 Act was no exception:  despite the circumstances of its birth, the tax survived the ending of the War, and the ‘high-water mark’ of the 1915 tax rates was soon eclipsed.

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[¶1-070] Between World Wars Following the end of the First World War in 1918, the Commonwealth continued to levy its own income tax. The various states also continued to impose their own income taxes, though there was little uniformity in the states’ legislation, and the differing bases and rates used by the various governments created difficulties. It gradually became clear that an optimal system could only be achieved if there was greater uniformity or integration between the state and federal government income taxes. Accordingly, a series of conferences was held for federal and state ministers from 1916 to 1921, aimed at increasing uniformity in the revenue laws. Little was accomplished—draft uniform income tax legislation was put forward in 1917, but was not adopted by any of the states, and only partially by the Commonwealth. Little more was done to encourage uniformity until another major social crisis intervened. This time the catalyst was not war, but the coming of the Great Depression of 1930, which exacerbated the problems created by having both state and Commonwealth income taxes. Driven by economic pressures, the Commonwealth government appointed a Royal Commission on Taxation (1932–33) to investigate Australian taxation. The Commission ultimately developed a draft Uniform Tax Bill, which was adopted in substance by the Commonwealth and the states in 1936. However, differences gradually developed again between the Acts of the various states and the Commonwealth, though it was not until 1942 and the pressures generated by the Second World War that the Commonwealth government seized sole control of income tax, ousted the states from the income tax field and introduced the Uniform Tax Scheme which still operates today. The political mechanism by which the Commonwealth government achieved this result is discussed at ¶1-600.

24 Commonwealth, House of Representatives, Hansard, Vol lxxvii, 5845.

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BACKGROUND ISSUES (¶1-100 – ¶1-115) [¶1-100] Taxation and the social process The revenue system is an intrinsic part of, and affected by, the broader social process. For example, the taxation system is inevitably affected by: •

political changes (such as the election of a new government with a different ideology)

•

social factors (such as an ageing population).

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•

economic developments (such as the onset of a recession or ‘boom’), and

Modern governments recognise the impact that taxation can have upon social behaviour patterns, and from time to time intentionally use the taxation system not only for direct financial purposes such as the generation of revenue, but also indirectly to try to influence or modify aspects of society or societal behaviour to achieve ‘social engineering’ objectives. Thus, a government may seek to discourage certain activities it deems undesirable by imposing a high tax on those activities for (ostensibly at least) socially beneficial purposes. For example, it may impose a high tax on petrol to reduce consumption and thus conserve a scarce social resource; or increase tax on lump sum retirement benefits to encourage retirees to take out annuities rather than relying on the government age pension; or impose a carbon tax on heavy polluters, to reduce damage to the environment. Alternatively, a government may seek to encourage activities which it sees as desirable by offering tax incentives or benefits; for example, to assist those engaging in petroleum exploration, primary production and the like; or to people prepared to live in remote areas; or by providing tax breaks for buildings that utilise ‘green’ (environmentally friendly) technology such as solar heating.25 The use of the taxation system for social engineering is complicated by the possibility that taxation may also have unintended and sometimes undesirable results. These issues are discussed more fully below (at ¶1-130 to ¶1-170).

[¶1-110] ‘Incidence’ of taxation In analysing the impact of taxation, it is important to identify the real ‘incidence’ of taxation (loosely, the ‘burden’ of taxation). A tax is ‘regressive’ if it takes a decreasing proportion of income as income rises, so that its impact is proportionally greatest on lower income earners. Many consumption taxes (including the GST) are regressive. For example, if the tax component of the price of a loaf of bread is $1, this will represent tax at 10% to a taxpayer on an income of $10, but only 1% to a taxpayer on an income of $100.

25 GS Cooper, ‘The benefit theory of taxation’ (1994) 11(4) Australian Tax Forum 397, 400ff; Commonwealth, Architecture of Australia’s Tax and Transfer System (August 2008)  174, 278–90; cf P Pearce and H Hodgson, ‘Promoting smart travel through tax policy’ (2015) 19(1) The Tax Specialist 2; A Mortimore, ‘Will cars go green under the ACT’s reformed vehicle purchase tax?’ (2016) 31(4) Australian Tax Forum 717.

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A tax is ‘proportional ’ if it takes the same proportion of income at all levels, so that all persons pay the same ‘flat rate’ of tax; for example, a tax at a flat rate of 20% on all income. A tax is ‘progressive’ if it takes an increasing proportion of income as income rises, so that the tax impacts proportionally more heavily on higher income earners. For example, income tax in Australia is currently levied at progressive rates for resident individuals, varying from 0% on the first $18,200 of taxable income to 45% on taxable income over $180,000. Australian personal income tax is therefore highly progressive in theory, though experts disagree on its actual progressive impact in practice. A distinction must also be drawn in the income tax context between marginal rates and average rates of tax. The marginal tax rate is the rate of tax payable on certain ranges or ‘brackets’ of income. For example, tax on the income in the ‘bracket’ between the tax-free threshold of $18,200 and $37,000 might be set by the Act at a prescribed statutory rate of 19%, while the ‘bracket’ between $37,001 and $80,000 might be taxed at 32.5%. The average or effective rate of tax, by contrast, is the rate actually paid overall on total income and, because of tax-free thresholds and the like, the actual tax imposed on a taxable income of, say, $80,000 might be only around $17,547 or 21.9%.26 The other aspect of incidence is the financial impact of a tax; that is, who actually bears the burden of paying the tax. In this context, it is important to distinguish between formal (or nominal) incidence and effective (economic or actual) incidence. As the Henry Tax Review observed, ‘[a]‌ll taxes ultimately bear on people, not businesses or other entities. It is the economic burden of taxes that is important for equity, not who remits the tax’.27 Thus, although X may be nominated by the legislation as the taxpayer (formal incidence), if X can shift the impact of the tax forwards or backwards to Y, the effective (or actual) incidence of the tax will fall on Y. For example, a manufacturer may be the nominal taxpayer, but may be able to shift the effective incidence of the tax forward onto consumers (by increasing the price of the goods sold). Employees may be able to shift the impact of an income tax backward onto employers by demanding higher wages. However, the issues are complex, and it is sometimes hard to determine the actual incidence of a tax; for example, because the ability to shift incidence may depend on how easily other items can be substituted for the taxed item. The issue is further complicated by the need to take account of the effect of ‘tax transfers’—that is, cash payments by governments to individuals and families through pensions (eg the age pension), allowances (eg the carer allowance or Austudy), supplementary payments (eg rent assistance) and family payments (eg the child care benefit). Where a cash payment is made to one group (rather than another), this effectively

26 S Davidson and R Heaney, ‘Effective tax rates and the political cost hypothesis:  A re-evaluation of Australian evidence’ (2012) Australian Tax Forum Highlights e-journal 4. 27 Commonwealth, Australia’s Future Tax System, Report to the Treasurer (Final Report of the Henry Tax Review) (‘AFTS Report’) (December 2009) 19, 20, Chart 2.2; L Cao et al, Treasury Working Paper 2015-01, Understanding the Economy-wide Efficiency and Incidence of Major Australian Taxes, April 2015.

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redistributes income within society and reduces the net effect of taxation on the group receiving the payment.28

[¶1-115] Tax expenditures A ‘tax expenditure’ is a provision in a tax law that gives a benefit to a specified activity or class of taxpayer that is different to the tax treatment that would normally apply.29 Most tax expenditures are positive; that is, they usually confer a benefit, such as the exemption of most food from GST, or lower taxation of funded superannuation payments. However, on occasions, a tax expenditure may be negative—where the arrangements impose a higher cost rather than a benefit (such as the higher excise duties on certain cigarettes). Tax expenditures can be provided in many forms—through a tax exemption, tax deduction, tax rebate or offset, concessional tax rates, or by deferring a tax liability. Thus, for example, a government could either seek to encourage primary production by paying direct monetary subsidies to farmers, or, alternatively, could use tax expenditures to achieve the same broad aim by providing farmers with tax (expenditure) concessions such as lower tax rates (eg via ‘averaging’ of income) and special tax rebates or deductions (eg for farm fences and equipment). Sometimes direct subsidies and tax expenditures may be used at the same time. A tax expenditure inevitably changes the distribution of tax between taxpayers, because those benefiting from a positive tax expenditure pay less tax, while those excluded from the benefit will generally need to pay more tax in order to enable the government to raise the same total revenue. There are important differences between direct payments and tax expenditures, including:

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•

•

tax expenditures generally involve forgoing revenue which is never received, rather than the expenditure of an amount which is received and then publicly spent, and

direct payments must generally be approved again in each government budget, whereas a tax expenditure ‘once legislated becomes part of the tax law with a recurring fiscal impact and does not receive regular scrutiny through the budget process’.30

While tax expenditures provide various benefits,31 a cynic might argue that using a tax expenditure rather than a direct payment may be an attractive option where a government wishes to provide benefits to a particular group of taxpayers, or implement government policies, without drawing attention to what it is doing. Indeed, critics point to a number of issues with tax expenditures. For example:

28 Productivity Commission Working Paper, Tax and Transfer Incidence in Australia, October 2015, esp [2.2], [2.3], [2.4], [3.0], [3.3], [4.0], [4.10], [5.0], [6.2]. 29 Treasury, Tax Expenditures Statement 2013, January 2014, 2.  Cf the broader definition suggested by Burton:  M Burton, ‘Extending the tax expenditure concept in Australia’ (2018) 33(2) Australian Tax Forum 281. 30 Treasury, Tax Expenditures Statement 2004, January 2005, 1; cf Treasury, Tax Expenditures Statement 2012, January 2013, 2, 14. 31 Treasury, Tax Expenditures Statement 2013, January 2014, 2, 14.

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because … tax expenditures do not require annual appropriation bills … [they] are less transparent and accountable than program measures, they are not subject to routine evaluation and usually there is no ‘sunset’ provision … Because Australia has a progressive tax system … most tax expenditures deliver a higher rate of subsidy to the more affluent … [and] … are often granted as a result of lobbying, and due to their lack of transparency, are often seen as unfair … more often than not, [they] make the taxation system more complicated.32

In its Tax Expenditures Statement 2017, the Commonwealth Treasury estimated the largest positive tax expenditures in 2017/18 (calculated on a ‘revenue forgone’ approach)33 as being:34 •

CGT main residence exemptions ($74,000 million)

•

GST exemption on food ($7,100 million)

• • • •

superannuation ($36,150 million)

GST exemption on education ($4,550 million)

GST exemption on health ($4,100 million), and

GST exemption on financial supplies ($3,400 million).

The largest negative tax expenditures were customs duty (–$1,260 million), and the higher rate of excise levied on cigarettes not exceeding 0.8 grams of tobacco per stick (–$2,360 million).

FUNCTIONS AND OBJECTIVES OF TAXATION (¶1-130 – ¶1-170)

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[¶1-130] Conventional view of the taxation system In seeking to explain the current role of the taxation system, theorists traditionally begin from the proposition that in a perfectly competitive economy, the problems of production, distribution and exchange would be solved by the competitive process itself—‘the free actions of men pursuing their personal desires in free markets’.35 According to this theory, entrepreneurs in a free market would attempt to maximise profits, but would be restrained by market forces from improperly exploiting their position. Similarly, workers would attempt to maximise pay and conditions, but again market forces would prevent them from obtaining more than the value of their labour and its products. Thus the self-regulating market would find its own balance, and, by definition, the exchanges between persons in such a market would be ‘fair’, because unless both parties 32 H Gobbett, ‘Australia tops the charts … in tax deductions’, Flagpost, Parliamentary Library Blog (accessed 12 February 2014). 33 Treasury, Tax Expenditures Statement 2015, January 2016, 1–3. 34 Ibid 9, Table 1.1. 35 See eg CM Allan, The Theory of Taxation (Penguin, 1971) 13; RA and PB Musgrave, Public Finance in Theory and Practice (McGraw-Hill, 2nd ed, 1976) 50ff.

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to a transaction received an acceptable benefit they would refuse to exchange money for goods (or vice versa). If this is so, why then do governments impose taxes? The conventional answer is that the market is not in fact in a state of perfect competition, and there are three main factors which create a need for taxation: (1) the need for governments to provide social and merit goods (see ¶1-140)

(2) the need for governments to support those for whom a free market would not otherwise provide (see ¶1-150), and (3) the intentional use of taxation to correct other free market imperfections (see ¶1-160).

[¶1-140] Provision of social and merit goods Allan36 argues that the free market operates upon two key principles:

(1) exclusion: meaning that those who do not pay the market price for goods are excluded from the consumption of those goods, and

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(2) revealed preference: meaning that the market operates upon information revealed by consumers about their consumption preferences. Consumers reveal their preferences for particular goods through their consumption patterns; for example, if people want to eat a roasted chicken, they must buy one, thus ‘revealing’ their preference for chicken rather than other food, such as hamburgers. The market then organises itself to supply those revealed preferences.

The principles of exclusion and revealed preference tend to be effective in organising the production, distribution and exchange of ‘private consumption goods’; that is, those goods where supply is limited and consumption by one person excludes others from consumption of the same goods (eg eating a chicken). Market forces are able to cater for the supply of such goods because the principles of exclusion and revealed preference provide the market with the necessary information about consumer demand. However, market forces will be less able to provide efficiently for goods which do not trigger the exclusion and revealed preference principles, and thus do not provide the necessary market information. Two such categories are social and merit goods.

Social goods Social goods are characterised by ‘joint’ (or ‘non-rival’) consumption and ‘non-excludability’. An example is street lighting, because the more street lighting that one person receives, the more benefit everyone in that area receives—and it is in practice impossible to exclude anyone from enjoying the benefits of the lighting. Hence individuals do not have the same incentive to pay for street lighting. As a result, the private market may not obtain accurate information on the extent to which potential consumers want, need or value street lighting, and therefore may tend not to supply appropriate amounts of it.

36 Allan, ibid.

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On this view, social goods therefore need to be provided by the state rather than by the private sector.

Merit goods In the case of merit goods (meaning, simplistically, goods which are deemed to be ‘beneficial’ to their user, such as education, health foods and exercise), the problems in ensuring adequate supply through free market forces arise mainly because of the factors of ignorance and externalities. Ignorance

People may be expected to make rational consumption choices in relation to goods which generate easily understood benefits and costs. It is comparatively easy, for example, for people to understand that clothing or housing provides warmth and protection, and thus to calculate the extent of their needs for such products. However, other goods may have costs and benefits which are less easily perceived or evaluated. There may be difficulties because, for example, the nature of the costs and benefits of a particular product may not easily be understood by consumers (eg a carbon/ pollution tax), or else because there might be a significant time gap before the consumer can evaluate the cost/benefit of the product (eg the benefits of education or the dangers of smoking may not become apparent to the consumer until many years after the opportunity for consumption arises).

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Externalities

The free market’s effectiveness in supplying merit goods is also reduced by difficulties in perceiving and evaluating externalities (the effect of one person’s actions upon others)— such as the costs to family and society when a smoker develops lung cancer and requires expensive treatment or hospitalisation.37 To correct for consumers’ perceived inadequate analyses of the effects of their behaviour, a government might attempt to discourage consumption of certain (‘demerit’) goods; for example, by imposing heavy discriminatory taxes upon those goods or their component materials (eg on cigarettes or tobacco).38 On the other hand, it might attempt to encourage consumption of other (‘merit’) goods by providing subsidies or tax benefits (eg tax rebates on health foods). Thus taxation may be used either directly (to fund the supply of goods) or indirectly (through onerous taxation on the one hand, or benefits or subsidies on the other) to attempt to modify patterns of supply and consumption of goods and intangible items.

37 ‘[W]‌hen an externality is present there is a divergence between private and social cost’: CJ Dahlman, ‘The problem of externality’ (1979) 22 The Journal of Law and Economics 141, 141. 38 AFTS Report, above n 27, 56. It is not clear, however, whether such taxes are always as effective as legislators hope—though see M Thomas, ‘Tobacco excise increase’, Budget Review 2016–17, Parliamentary Library Research Publications, n 18 and accompanying text.

Introduction to Income Tax Law17

[¶1-150] Support for those not provided for by the free market Taxation is also required to enable governments to support those persons whom a free market might otherwise ignore (eg the poor). That is, even where free market forces do make available necessary goods (such as food, clothing, housing and education), there may be persons who cannot pay the market price for these goods (whether in terms of money, skills, or other means of payment). If society deems it desirable that all citizens have food, clothing and education, the taxation system can be used to help achieve this aim; for example, by using tax revenue to fund low-cost housing or by making cash grants to those in need.

[¶1-160] Correcting other free market imperfections Free market forces may also create what a political or wider social perspective regards as other market imperfections requiring correction. Examples might include at one extreme monopolies, which may cause prices to be set arbitrarily at excessive levels or, at the other extreme, wasteful competition, such as where competing airlines use the same routes at the same time, with each company operating at less than optimal capacity. A government may use taxation to remedy these and other imperfections; for example, to: • •

accelerate the rate of economic growth—by using taxation subsidies to counteract investors’ ignorance of long-term external benefits of investment, or maximise economic stability—by using increases or decreases in tax levels to smooth out trade cycles, or to reduce inflation or unemployment (eg increasing taxes or lowering subsidies when excess private expenditure threatens to cause inflation).

Of course, taxation is not the only method of correcting free market imperfections, nor is it necessarily always the best method. More direct methods might include: Copyright © 2019. Oxford University Press. All rights reserved.

• • •

• •

correcting consumer ignorance through advertising and labelling laws (as with notices and graphic pictures warning of the damage caused by tobacco products) controlling demerit goods through production quotas, or restrictions in relation to food and other health law controlling the location of dangerous industries in cities through zoning laws

controlling or prohibiting monopolies, price fixing and other ‘undesirable’ market dealings through competition or consumer protection legislation, or using the criminal law as a control mechanism or deterrent.

[¶1-170] Problems in using taxation for social engineering Taxation is a powerful and intrusive tool, which can sometimes be effective in modifying private behaviour to more closely reflect a government’s policy objectives (at least where

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there is some elasticity of demand).39 However, the use of taxation in this way has a number of limitations, including the following.

(1) Taxation is a blunt instrument—taxation rules are usually framed in general terms and apply to broad groups or classes of persons (such as spouses, primary producers, employees and the like), who are generally all treated in the same way. The taxation system is not inherently well suited to dealing differently with unique individuals within a single category (eg individual ‘employees’), although granting broad discretions to the Commissioner may enable solutions to be tailored to individuals in some cases. (2) Taxation is an indirect instrument—it is sometimes difficult to predict how effective a tax will be in achieving its stated aims. (3) Taxation may create unintended or undesirable side effects. For example, it has been argued that a high level of income tax lowers the incentive to work and save because the bulk of additional earnings are lost in taxation.40 It has even been suggested that tax changes may impact on birth rates.41

Such issues are rarely straightforward. For example, the relationship between progressivity and incentive is complex. Some studies suggest that people think tax is a disincentive for others, but not necessarily for themselves, and for persons with fixed levels of post-tax outgoings, progressivity may actually result in increased work effort in order to maintain the net income needed to cover their fixed expenses.42

CRITERIA FOR EVALUATING A TAXATION SYSTEM (¶1-180 – ¶1-232) Copyright © 2019. Oxford University Press. All rights reserved.

[¶1-180] General outline It is probably true to say, as Alexander Pope sagely observed, that:  ‘Whoever hopes a faultless [tax] to see, hopes what ne’er was, or is, or e’er shall be’.43 Somewhat facetiously, Hugh Dalton suggested that the ideal taxation system is one under which ‘the rich should pay more taxation than they think, while the poor should think that they pay more than they do. This double illusion … will keep the rich contented and the poor virtuous, and will tend to maximise work and saving by all’.44

39 P Pearce and D Pinto, ‘The role of motor vehicle taxes in shaping Australia’s oil policy’ (2013) 17(2) The Tax Specialist 75. 40 ‘The costs of taxation’ (2005) 26 CCH Tax Week [429]. 41 JCA Dique, Australia’s Declining Birth Rate: Its Relationship to Increasing Taxation (Veritas, 1984). 42 DJ Collins, ‘The issue of progressivity in personal income tax reform: A case against flat rate income tax’ in PD Groenewegen (ed), Australian Taxation Policy (Longman Cheshire, 1980) 254. 43 A Pope, An Essay on Criticism (1711). 44 H Dalton, Principles of Public Finance (Allied Publishers, 1922) 49.

Introduction to Income Tax Law19

However, assuming that a society has (or is considering creating) a particular taxation system, it is important to be able to evaluate the performance of that system. That is, how does one identify a ‘good’ taxation system? Structuring a taxation system appropriately is important because, as Parsons observed, ‘[a]‌tax will not have respect, and will not deserve respect, unless it is coherent in principle and has a claim to fairness’.45 Accordingly, it is important to identify some guidelines or criteria which can be used to judge the performance of a taxation system, or to evaluate proposed reforms, so that a system can be re/structured appropriately. A number of functional criteria have been suggested traditionally; for example, the Henry Tax Review applied design criteria of equity, efficiency, simplicity and sustainability.46 Several traditional criteria47 are discussed in the following paragraphs (¶1-185 to ¶1-215). However, a problem in evaluating such criteria is that often there can be an inherent tension between the needs of individual taxpayers or groups, and the need to protect the revenue for the benefit of the community as a whole.48

[¶1-185] Fairness or equity ‘Equity, or fairness, is a basic criterion for community acceptance of the tax system ...’.49 Indeed, fairness is a practical as well as moral necessity, because a system which is perceived by taxpayers generally as being basically unfair or discriminatory is unlikely to enjoy widespread support. Perpetuating an unfair system may eventually provoke an informal ‘taxpayer revolt’, in which significant numbers of taxpayers seek to avoid or evade their tax liabilities; or a more formal revolt, in which taxpayers seek to remove (perhaps forcibly) the tax or the government which imposed it (see ¶1-045).

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General problems in measuring ‘fairness’ As the Asprey Committee pointed out long ago, ‘in tax matters [fairness] is an ideal exceedingly difficult to define and harder still to measure’.50 One problem is that there is a wide diversity of views on how to measure the ‘fairness’ of a particular taxation system, and views invariably also differ on whether a particular system is sufficiently fair. That is, even if agreement could be reached on a definition of ‘social justice’, there remains the question of how much priority social justice should be 45 Prof RW Parsons, ‘Income taxation—An institution in decay’ (1986) 3(3) Australian Tax Forum 233, 258. 46 AFTS Report, above n 27, 17; cf M Stewart, A Moore, P Whiteford and RQ Grafton, A Stocktake of the Tax System and Directions for Reform:  Five Years after the Henry Review (Tax and Transfer Policy Institute, ANU, February 2015)  ch 1; Commonwealth (‘Ralph Committee’), Review of Business Taxation, A  Tax System Redesigned, Final Report, 1999, 104. 47 Some commentators have suggested that ‘modern tax theory’ applies quite different criteria:  see eg G Cooper, ‘Theories of modern tax reformers’ (2011) 15(1) The Tax Specialist 2, 4–6; G Smith, ‘Tax reform:  Priorities and prospects’ (2011) 46(3) Taxation In Australia 89. 48 Inspector-General of Taxation, Context for Scoping Review, Issues Paper No 1, 2003, 5. 49 Commonwealth (‘Ralph Committee’), A Strong Foundation, Discussion Paper, November 1998, [39]; Ralph Committee, above n 46, 105; AFTS Report, above n 27, 29. 50 Commonwealth, Taxation Review Committee (‘Asprey Committee’), Full Report, 1975, 12.

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Introduction to Income Tax Law

provided through taxation policy; for example, assuming the better-off should pay more tax, how much more should they pay? There is no definitive or objective answer to this question. A divergence of views on the meaning of fairness is significant, because different perspectives may lead to support for markedly different types of taxation systems. For example, persons defining fairness in terms of merit and reward for effort may tend to favour a system with low marginal rates of income tax, and no capital gains, death or wealth taxes. By contrast, persons viewing fairness from a social equality or ‘needs’ perspective are likely to favour a system with high progressive personal income taxes, as well as capital gains, death and wealth taxes designed to redistribute wealth.

Particular difficulties with horizontal and vertical equity

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Traditionally, two particular aspects of equity are identified: horizontal equity (people in similar positions should be treated similarly), and vertical equity (persons in different positions should be treated differently, with those who are better off bearing an appropriately heavier burden). The problem with horizontal equity in practice is that, while persons with the same taxable income can be required to pay the same amount in income tax, this will only produce ‘fairness’ if taxable income is the appropriate measure of a taxpayer’s economic well-being. However, two persons (X and Y) each earning $80,000 pa may not be in the same overall economic position; for example, because X has no dependants, whereas Y has a dependent spouse and three young children, or because Y has a chronic illness which costs $20,000 pa for treatment. In these circumstances, X arguably is in a stronger financial position, even though X is earning the same income as Y. The Asprey Committee pointed out a number of other difficulties facing those attempting to improve horizontal equity:51 (1) It is difficult to determine the appropriate taxing unit—should economic well-being be measured by reference to individuals, or to the average or total income of all members of a family (or some other measure)?52

(2) While it is administratively convenient to calculate and levy taxes on an annual basis, this may not be equitable. For example, a progressive rate income tax, together with such things as zero tax thresholds, means that a person whose taxable income varies markedly from year to year (eg $50,000 in Year 1, $30,000 in Year 2 and $40,000 in Year 3) will usually pay more tax in total under a progressive taxation system over a given period of years than a person earning the same total income by way of equal annual sums over the same period (eg $40,000 each year). Thus, on the basis of published 2017/18 income tax rates (ignoring levies and other items), the ‘irregular income’ taxpayer would pay a total of around $14,586 in 51 Ibid 12–14; cf AFTS Report, above n 27, 19–21. 52 The Asprey Committee observed that in its widest sense, equity requires that taxation be the same for individuals whose total lifetime ‘well-being’ is the same. Indeed, ‘more than a single life-time is relevant when the fairness of taxation upon an individual’s capacity to do his duty to his heirs is considered …’: Asprey Committee, above n 50, 14.

Introduction to Income Tax Law21

income tax for the three years, whereas the taxpayer earning $40,000 each year would pay only $13,641.

(3) The effects of inflation may also reduce the practical equity of a system which is conceptually fair.

Vertical equity is also intrinsically meritorious, but it too is often difficult to achieve in practice, for reasons analogous to those discussed above in relation to horizontal equity. Moreover, also as noted above, views may differ as to the appropriate degree of unequal treatment which the taxation system should prescribe (eg how much more income tax should be paid by a person deriving taxable income of $100,000 pa than by a person earning $60,000 pa?). Overall, then, it may be said that while most persons would see equity or fairness as an essential attribute of a revenue system, it is often quite difficult to structure a taxation system in such a way as to ensure that both horizontal and vertical equity are simultaneously maximised.

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[¶1-190] Simplicity Governments often identify simplicity as a major aim of taxation reforms.53 A tax may be described as ‘simple’ if the cost of official administration and collection together with the ‘compliance costs’ (the costs in money, effort and stress involved in taxpayers meeting their obligations) are low. These costs will be minimised if both the assessor and the taxpayer can establish easily and with certainty the tax payable, and the system minimises the number of dealings that taxpayers must have with government departments or others in order to complete their taxation obligations. Where a taxation system does not optimise simplicity, the costs of complexity include reduced transparency,54 which makes it harder for people to understand their taxation rights and obligations without incurring additional expenses for professional advice. This impacts most heavily on those who are least able to deal with complexity and have least access to professional advice. The Ralph Committee in its Final Report suggested that: Complexity is one consequence of continually building the business tax system upon a foundation deficient in policy design principle … [and is] reflected in unintended or inconsistent statutory interactions, as well as excessively specialised provisions which lack general application and adaptability. Such structural complexity fuels a dynamic process of exploitation and anti-avoidance response that generates escalating complexity … Complexities in the administrative arrangements add to business (and government) costs, and do little to promote voluntary compliance.55

53 Commonwealth, Tax Reform Road Map—A Stronger, Smarter and Fairer Tax System, May 2013, 5, 9–12; cf Asprey Committee, ibid [3.19], [3.20]; AFTS Report, above n 27, 17; Ralph Committee, above n 46, Overview, [41]– [43], [106]. 54 AFTS Report, ibid 21. 55 Above n 46, 106; S Yong and F Martin, ‘Tax compliance and cultural values: The impact of “individualism and collectivism” on the behaviour of New Zealand small business owners’ (2016) 31(2) Australian Tax Forum 289.

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Introduction to Income Tax Law

Australian income tax law has certainly become much more complex and voluminous over time. The 1915 Act was only 22 pages in length, while the original 1936 Act was a mere 126 pages. By contrast, ITAA36 and ITAA97 now total some 5,700 pages. In Denlay v FC of T, Logan J lamented that at the time of introduction of the 1915 Act: we were able, even under the revenue demands of a world war, to encapsulate everything then considered necessary not only for the assessment of liability to income tax but also for its collection and recovery into a statute of no more than 25 pages of provisions readily comprehensible by a literate layman. A  century later, neither of these features remains in our current income tax law.56

Indeed the High Court commented some time ago on the ‘extraordinarily complex’ CGT provisions before it, which ‘must be obscure, if not bewildering, both to the taxpayer who seeks to determine his or her liability by reference to them and to the lawyer called upon to interpret them’.57 Similarly, Hill J observed in FC of T v Cooling,58 that the provision in question was ‘drafted with such obscurity that even those used to interpreting the utterances of the Delphic oracle might falter in seeking to elicit a sensible meaning from its terms’.

Reducing complexity The Ralph Committee observed that because of the inherent complexity in many business transactions, it is not possible to make all taxation legislation completely simple, and the objective of simplification therefore needs to be approached from two perspectives: •

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•

The business tax system should be designed in as simple a manner as possible, recognising economic substance in preference to legal form. Where the tax treatment of particular transactions is likely to be complex, such additional complexity in the tax law should be justified by the improvement in the equity or economic growth that may be achieved.59

Various techniques have been utilised over time to help reduce complexity. For example, the Tax Law Improvement Project (TLIP) in 1993 was intended to simplify

56 2013 ATC ¶20-382, 23. 57 In Hepples v FC of T 91 ATC 4808, 4810 (Mason CJ). Toohey J commented at 4824 that ‘even allowing for the difficulties inherent in legislating for a capital gains tax, these provisions are unduly labyrinthine’; cf the observation by Greenwood J in Thomas v FC of T 2015 ATC ¶20-526, [550]; N Brooks, ‘The Role and Responsibilities of a Judge in Interpreting the Legislation and Preventing Tax Avoidance’ in GS Cooper (ed), Tax Avoidance and the Rule of Law (IBDF, 1997) 123–9. This complexity may have helped contribute to the ‘risks of over-specialisation in both the practising profession and the judiciary’ (blinding them to the impact of other areas of the law) on which Logan J commented (obiter) in Ellison v Sandini Pty Ltd; FC of T v Sandini Pty Ltd [2018] FCAFC 44. 58 90 ATC 4472, 4488. 59 Ralph Committee, above n 46, Recommendation 1.3:  ‘Charter of Business Taxation:  Promoting Simplification and Certainty’; cf C Evans and J Kerr, ‘Tax reform and “rough justice”: Is it time for simplicity to shine?’ (2012) Australian Tax Forum Highlights e-journal 65, who suggest at 88 that while ‘genuine reduction in complexity involves some winners and some losers, such rough justice may be necessary in order [to achieve] … a much more simplified tax system as a whole’.

Introduction to Income Tax Law23

the wording and structure of taxation legislation significantly, and render it more userfriendly.60 This was replaced in 1998 by the more general Tax Reform project,61 and subsequently by ‘coherent principles-based’ drafting in 2005.62 The principles-based approach to policy development and its legislative expression and administration63 aims to draft the law ‘in a series of operative rules or statements of principle about what the law is intended to do—rather than details about the mechanism that gets it there’.64 However, principles-based drafting requires ‘legislation which is clearly thought through and clearly expressed’.65 Unfortunately, this has not always been a strong feature of Australian taxation legislation. More recent reforms designed to reduce complexity include:  trebling the zero tax threshold to remove the need for many people to lodge tax returns; reducing the complexity of information required for ‘ordinary’ taxpayers (eg by allocating standard deductions to taxpayers in certain categories or introducing simpler ‘short-form’ returns for taxpayers with simple affairs); and ‘pre-filling’ tax returns with information already held by the ATO.66

[¶1-193] Compliance costs A taxpayer’s compliance costs will include costs of record-keeping, completing tax returns and other documents, and calculating and paying their tax liability. These costs may be: •

monetary (eg fees for advice or assistance paid to professional advisers)

•

psychological (eg anxiety caused by inability to understand complex laws).68

•

temporal (eg the time needed to keep records or complete returns),67 or

Such costs may be:

60 A Towler, ‘Tax law improvement building the new income tax law’ (1995) 7(2) CCH Journal of Australian Taxation 46. Copyright © 2019. Oxford University Press. All rights reserved.

61 Commonwealth, Tax Reform Plan, 13 August 1998, 149. 62 Commonwealth, Review of Aspects of Income Tax Self-assessment, Discussion Paper, 2004, Appendix 3; R Deutsch, ‘The old chestnut—Principle-based drafting vs detailed black letter law’ (2018) The Tax Institute, Member Newsletter 07, 2 March 2018. 63 Inspector-General of Taxation, Review into Improving the Self-assessment System, August 2012, [5.55]–[5.82], [5.83]–[5.85], [103]. 64 Quoted in M Dirkis, ‘Senior Tax Counsel’s report—Clarifying and simplifying the law through coherent principles drafting’ (2005) 39(10) Taxation In Australia 510, 510. 65 Sir Anthony Mason, ‘Global challenges in tax administration’ (2005) 40(4) Taxation In Australia 197, 199. 66 Though these ‘technologically driven initiatives may not have been sufficient to slow the increase in personal tax compliance costs’: B Tran Nam, C Evans and P Lignier, ‘Personal taxpayer compliance costs: Recent evidence from Australia’ (2014) 29/1 Australian Tax Forum 137; B Tran-Nam, P Lignier and C Evans, ‘The impact of recent tax changes on tax complexity and compliance costs:  The tax practitioner’s perspective (2016) 31(3) Australian Tax Forum 455; P Lignier, C Evans and B Tran-Nam, ‘Tangled up in tape: The continuing tax compliance plight of the small and medium enterprise business sector’ (2014) 29 Australian Tax Forum 217. The increased reliance on technology may also pose compliance risks: N Warren, ‘e-filing and compliance risk: Evidence from Australian personal income tax deductions’ (2016) 31(3) Australian Tax Forum 577. 67 ATO, Taxation Statistics 2015–16, ch 17. 68 R Woellner, C Coleman, M McKerchar, M Walpole and J Zetler, ‘Can simplified legal drafting reduce the psychological costs of tax compliance? An Australian perspective’ (2007) 6 British Tax Review 717; cf N Faridy,

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•

‘regular’ (ongoing)

•

‘commencement’ (once-only start-up costs), or

•

‘temporary’ (as where an existing tax is changed)

• mandatory/voluntary. • • •

Research has identified several key characteristics of compliance costs.69 They:

tend to be more diffuse, less visible and more likely to be overlooked than administrative collection costs are often capricious in their incidence, regressive in their impact, and do not reduce over time, and tend to be resented more by the taxpaying population than administrative costs.

Compliance costs may be offset to some extent by benefits flowing from the compliance, in the form of: •

• •

cash flow benefits (holding tax collections from, eg, GST or PAYG for a period of time before remitting them to the ATO) tax deductibility benefits (some tax compliance costs can be deducted for tax purposes), and

managerial benefits (eg where information obtained during compliance procedures enables taxpayers to manage their business or personal affairs more efficiently).70

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The average gross annual tax compliance costs in 2012 for micro, small and medium enterprises in Australia was estimated to be A$3,392, $12,169 and $54,605 respectively, with an overall average of $11,004.71 The other side of taxpayers’ compliance costs is the cost to government of collecting tax owing. The gross costs per $100 of tax collected by the ATO amounted to $0.74 in 2016/17.72

[¶1-195] Certainty The Ralph Committee, in its final report, commented that because the collection of (business) tax relies largely on voluntary compliance by taxpayers: ‘Losing sleep:  The psychological costs of VAT—Evidence from SMEs in Bangladesh’, paper presented to the Australasian Tax Teachers Association Conference, University of Adelaide, 19–21 January 2015. 69 C Sandford, M Goodwin and P Hardwick, Administrative and Compliance Costs of Taxation (Fiscal Publications, 1989)  9–12; P  Lignier and C Evans, ‘The rise and rise of tax compliance costs for the small business sector in Australia’ (2012) 27(3) Australian Tax Forum 617. 70 P Lignier, ‘Measuring the managerial benefits of tax compliance: A fresh approach’ (2009) 24(41) Australian Tax Forum 5. 71 P Lignier, C Evans and B Nam-Tram, ‘Tangled up in tape:  The continuing tax compliance plight of the small and medium enterprise business sector’ (2014) 29 Australian Tax Forum 217; C Evans and B Tran-Nam, ‘Tax Compliance Costs in New Zealand: An International Comparative Evaluation’ (Tax Administration for the 21st Century Working Papers WP 02/2014); cf Treasury, International Comparison of Australia’s Taxes, 2015, ch 13-02. 72 Commissioner of Taxation, Annual Report 2016–17, 103; cf OECD, Tax Administration 2013:  Comparative Information on OECD and Other Advanced and Emerging Economies, 2013, 180, Table 5.3.

Introduction to Income Tax Law25

compliance should be fostered by making the business tax system as simple, inexpensive and certain in its application as possible. Tax laws should be designed from the perspective of those who must comply with and administer them … [They] should be as clear and concise, and provide as much certainty as possible. They should be framed in plain English and based upon a consistent set of stated design principles. Their structure should be able to accommodate continuing change.73

There are four aspects of tax ‘certainty’:74

(1) certainty of incidence: the degree of certainty with which taxing authorities can predict who will actually bear the burden of the tax (there can often be a significant difference between the intended and actual incidence of a tax—see ¶1-110)

(2) certainty of liability: the ease and accuracy with which liability to tax can be assessed. Retrospective legislation causes particular difficulties in relation to certainty of liability75 (3) evasion ratio: the extent of evasion and avoidance, and the extent to which the taxing authorities can overcome avoidance and evasion techniques, and collect the intended revenue, and (4) fiscal marksmanship: the certainty with which taxing authorities are able to predict the revenue which will be collected in a particular year.

Each of these aspects of certainty can affect the extent to which taxation legislation achieves its policy and revenue aims.

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[¶1-200] Efficiency/neutrality One important aspect of efficiency is administrative efficiency, that is, minimisation of administrative and compliance costs (see ¶1-193). Neutrality is another key aspect of efficiency; that is, the impact of tax should not unintentionally influence individual or business choices by artificially distorting or altering the costs (and therefore attractiveness) of alternative goods, different modes of investment or different activities. For example, taxation should not affect the choice of operating through a partnership versus a company, or buying orange juice versus soft drink, by making the taxed product more expensive. Governments may nevertheless intentionally use taxation to interfere in free market dealings in order to encourage—or discourage—the output or consumption of particular goods or services (see ¶1-140, ¶1-170). However, the Asprey Committee suggested that such ‘non-neutralities’ should be introduced only ‘in a deliberate and explicit way for proven, explicit and quantified purposes’, after it had been shown that other approaches (such as tariffs, subsidies, monetary control, marketing organisations and the like) were likely to be less effective.76 73 Above n 46, Recommendation 1.3: ‘Charter of Business Taxation: Promoting Simplification and Certainty’. 74 CM Allan, The Theory of Taxation (Penguin, 1971) 38–40. 75 P Cowdroy, ‘Ineptitude in tax law tardiness’ (1995) 30(4) Taxation In Australia 171. 76 Asprey Committee, above n 50; Ralph Committee, above n 46, 105.

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[¶1-205] Flexibility If the taxation system is to be effective in achieving non-fiscal objectives, then tax structure and rates need to be easily adjustable, and changes in a tax should have a speedy and decisive impact on revenue yields and taxpayers’ behaviour. Indirect taxes tend to be ‘flexible’, since changes in rates can be made readily and then have a relatively swift impact upon taxpayers’ behaviour (eg an increase in tax on petrol will lead almost immediately to price increases at the petrol pump). On the other hand, death duties and CGT tend to have a delayed impact, since it may be many years before a liability for tax arises.

[¶1-210] Evidence ‘Evidence’ is the extent to which taxpayers ‘know about’ or are made aware of their tax liabilities. An argument for high ‘evidence’ in relation to taxation is that citizens in a democratic society should have full information about the actual impact of various taxes, so that as voters they can decide upon the extent to which they wish to support or subsidise a government’s programs and objectives. Income tax has high ‘evidence’—each PAYG taxpayer knows or can ascertain how much tax is taken from their earnings, because it is shown on pay slips and is reinforced in annual tax return calculations. In contrast, the GST has lower ‘evidence’ in Australia, because the tax payable tends to be ‘hidden’ in the total price of goods.

[¶1-215] Other criteria In addition to the above criteria, a tax should:

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•

• •

have ‘fiscal adequacy’, meaning that it should generate the requisite amount of revenue needed by the government

have ‘political acceptability’; that is, the tax should not provoke political difficulties, either within Australia or with other tax jurisdictions, and be suitable for promoting and achieving the macro-level economic objectives that a government is seeking to achieve—including, for example, optimising economic stability and growth, redistributing income or wealth, raising employment levels or lowering inflation.

[¶1-230] Conflict and compromise between objectives There is considerable potential for tension or conflict between the above ‘ideal’ criteria, and it is unlikely that anyone will ever create a taxation system which simultaneously maximises each of these elements. In practice, there need not be any significant conflict between simplicity and neutrality: a broad-based tax at uniform rates on all consumption of goods and services would be both simple and neutral.

Introduction to Income Tax Law27

However, the potential conflict between simplicity and equity is often significant. Taxes which aim to maximise equity tend to be complex—the Australian CGT and GST being good examples. One reason is that many fine distinctions and exceptions/exclusions may be deemed necessary in order to achieve equity among selected taxpayers and groups (or provide political ‘handouts’ to select groups). Another reason may be that the need for greater equity requires more complex anti-avoidance legislation, and as detailed antiavoidance provisions increase, the tax and the overall system become correspondingly more complex.

[¶1-232] Overview of the Commonwealth taxation system The Commonwealth taxation system has changed dramatically over time, with the introduction of important new taxes (eg CGT, GST, FBT, dividend imputation and others), the removal of others (eg wholesale sales tax), and significant reductions in the statutory rates of tax (eg company and personal tax).77

Historical tax data The following table sets out key Commonwealth revenue data for selected years over the period 1949/50 to 2016/17. Trends in Australian taxation over time are revealing.78 For example: •

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• •

In 1910, there was only one tax; some 15,000 returns were lodged; and around £1.4 million was collected. By contrast, there are currently some 125 taxes imposed in Australia (99 imposed by the Commonwealth government, 25 by the states and territories, and one by local government).79 In 2015/16, total net tax revenue collected was some $343.35 billion, or 28.1% of GDP (Commonwealth government: 22.4%; state/territory governments: 4.8%; local governments: 1%).80 The Commonwealth in 2016/17 collected 79.8% of total tax revenue ($488,499 million) for that year ($389.80 million), with the states/territories (16.8%; $82,255 million) and local government (3.6%; around $17,418 million) collecting the balance.81

Despite a slump following the global financial crisis in 2008, total ATO tax collections increased by some 234.1% over the period 1999/2000 to 2016/17, and more than trebled (an increase of some 408%) over the period 1994/95 to 2016/17:  from $88.306 billion to $359,983 million.

77 The system is ‘in some ways unrecognisable from what it was [in 1983]’: Parliament of Australia, Parliamentary Budget Office, Trends in Australian Government Receipts (‘Trends’), January 2014, 3. 78 See generally Australian Bureau of Statistics, 5506.0—Taxation Revenue, Australia, 2016–17 (‘ABS 5506.0’), 26 April 2018. The source for the statistics that follow, unless otherwise indicated, is Trends, ibid. 79 Though over 90% of total tax revenue at all levels is generated by just 10 taxes—including, in rank order, personal income tax, company tax, GST, excise, payroll tax and stamp duties:  Architecture of Australia’s Tax and Transfer System, above n 25, 14; Commissioner of Taxation, Annual Report 2013–14, 5. 80 ABS 5506.0, above n 78, 2. 81 Ibid, ‘Taxation Revenue Key Figures’. In 2014/15, the Australian tax-to-GDP ratio was 28.2%, well below the OECD average of 34.0%: OECD, Revenue Statistics, 2017.

1

392 (38.7%)

720 (38.4%)

884 (35.1%)

1,569 (41.1%)

2,855 (44.7%)

7,966 (54.9%)

50,027 (65.8%)

51,239 (58.0%)

1954/55

1959/60

1964/65

1969/70

1974/75

1989/90

1994/95

Gross PAYE/ PAYG $m

1949/50

Year

9,481 (10.7%)

Gross other individuals $m

15,588 (17.7%)

12,926 (17.0%)

2,566 (17.7%)

1,187 (18.6%)

722 (18.9%)

455 (18.3%)

343 (18.3%)

167 (16.5%)

Companies $m

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11,624 (13.2%)

10,132 (13.3%)

1,105 (7.6%)

569 (8.9%)

363 (9.5%)

328 (13.0%)

201 (10.7%)

85 (8.4%)

Sales tax $m

1,765 (12.2%)

939 (14.7%)

631 (16.5%)

504 (20.0%)

286 (15.3%)

132 (13.0%)

Excise $m

GST $m

770 (5.3%)

414 (6.5%)

268 (7.0%)

168 (6.7%)

202 (10.8%)

155 (15.3%)

Customs duties $m

8,298 (9.4%)

395 (0.5%)

347 (2.4%)

416 (6.5%)

266 (7.0%)

179 (7.1%)

122 (6.5%)

83 (8.2%)

Other* $m

(7,924)

Individual refunds $m

88,306

75,983

14,519

6,380

3,819

2,518

1,874

1,014

Total tax $m

28 Introduction to Income Tax Law

97,304 (45.0%)

149,807 (47.8%)

179,355 (49.8%)

2004/05

2012/13

2016/17

42,871 (11.9%)

33,294 (10.6%)

22,554 (10.4%)

13,370 (8.7%)

Gross other individuals $m

68,408 (19.0%)

66,924 (21.4%)

40,404 (18.7%)

24,346 (15.9%)

Companies $m

0

0

–10

16,560 (10.8%)

Sales tax $m

21,800 (6.1%)

25,412 (8.1%)

21,888 (10.2%)

19,811 (12.9%)

Excise $m

60,022 (16.7%)

48,271 (15.4%)

35,063 (16.3%)

GST $m

Customs duties $m

15,891 (4.4%)

16,176 (5.2%)

9,260 (2.9%)

5,985 (3.9%)

Other* $m

(–28,364) (–7.9%)

(26,801) (8.5%)

(13,734)

(10,946)

Individual refunds $m

359,983

313,082

216,097

153,744

Total tax $m

The collections data presented in this table was adjusted by the ATO compilers to exclude expenses and better align with the ATO’s financial statements and the final budget outcome.

Basic 2016–17 figures have been reproduced from Commissioner of Taxation, Annual Report 2016–17, 83, Table 2.2. Because of the effects of rounding, refunds and the like, the percentages may not sum to exactly 100%.

Due to a change to the calculation method which occurred in 2007/08 (and was applied retrospectively), the data prior to 1999 is not directly comparable to the data after 1999.

* ‘Other’ includes superannuation funds; the superannuation guarantee; the SMSF levy; petroleum resource rent tax; FBT; other indirect taxes; and unclaimed monies.

Note:

79,731 (52.2%)

Gross PAYE/ PAYG $m

1999/00

Year

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Introduction to Income Tax Law29

1

30 •

•

•

•

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•

Introduction to Income Tax Law

Until 2000, Australia had placed comparatively little reliance on indirect taxes—such as sales tax—as a source of Commonwealth revenue. This situation changed with the introduction of the GST, which in 2016/17 generated 16.7% of total revenue collected by the ATO.82 However, despite the introduction of the GST and other changes, Australia is still similar to most advanced Western countries in that it raises the majority of its tax revenue through direct taxes on income (eg wages, salaries and profits). Indeed, Australia’s reliance on direct taxes is heavier than most OECD countries.83 In 2016/17, major components of the ATO tax collections were: individuals 53.8% of total revenue; companies some 19.0%; GST 16.7%; and excise 6.1%; while superannuation, FBT, resource rent and other indirect taxes contributed minor proportions.84

Australia has traditionally placed more reliance on company tax than other OECD countries,85 a trend which has become significantly more pronounced over the past 30 years. Collections from companies are volatile, but still increased by some 257% between 1999/2000 and 2015/16, and by 155% since 2004/05 (despite drops in the period 2008/09 to 2010/11, as a result of the global financial crisis, and a drop of 6.4% from 2014/5 to 2015/6).

Historically, Australia has generally not been heavily taxed overall by international standards, being regularly placed within the bottom third of OECD countries in terms of overall tax burden,86 and comparatively low in respect of taxes on goods and services.87 However, Australia is among the highest OECD countries in levels of personal income and company tax.

In 2014/15, the distribution of the tax burden in Australia was:  20.1% on capital, 47.5% on labour, 23.6% on consumption, and 8.9% on other bases.88

82 Commissioner of Taxation, Annual Report 2016–17, 83. In 2016/17, the Australian GST rate of 10% was well below the OECD average of around 19%. 83 Trends, above n 77, 1, chs 3, 4, 5; The Hon R Edmonds, ‘Structural tax reform: What should be brought to the table?’, address to the Australasian Tax Teachers Association Conference, University of Adelaide, 18–21 January 2015, 2. See generally PwC, Paying Taxes 2014: The Global Picture, which compares key aspects of 189 economies and taxes worldwide. 84 Commissioner of Taxation, Annual Report 2016–17, 83. 85 19% of tax receipts in 2015 as compared to the OECD average of 9%: OECD, Revenue Statistics, 2017. 86 OECD, Revenue Statistics, 2017 indicated that at 28.2% of GDP, Australia in 2015 had the eighth lowest tax-toGDP ratio (ranking 28th of the 35 OECD countries), with the unweighted OECD average being 34.3%. 87 An OECD analysis found that in 2017, of a selection of 35 countries, Australia had the 4th lowest GST rate, behind only Canada, Japan and Switzerland, with the top rate being 27% (Hungary) and the unweighted average being 19.1%: OECD Consumption Tax Trends, 2017, 83. 88 In 2015/16, income taxes on individuals in Australia constituted 41.3% of total tax revenue, up from 38.4% in 2010/11. By contrast, income taxes on enterprises constituted 15.3%, down from 19.4% in 2011/12 (a drop of some 21.1%), with a similar result in 2016/17: OECD, Revenue Statistics, 2017.

Introduction to Income Tax Law31

• • •

In 2016/17, total average taxation per capita in Australia was $20,032, an increase of 3.4% from 2015/16, with average state and local taxes being $4,079. Over the same period, Commonwealth taxation per capita rose 3.67 to $15,985.89 Gross costs of collecting the revenue (excluding GST) decreased from $0.88 per $100 to $0.74 per $100 between 2010/11 and 2016/17.90

Despite progressive taxation (see ¶1-170), the distribution of wealth in Australia is uneven. In 2013/14, the wealthiest 20% of the population owned 62% of total wealth, while the bottom 20% owned less than 1%.91

This inequality appears to be increasing: in 1980 the top 20% of the population received five times their ‘share’ of household income—but by 2009/10, this had doubled to 10 times their ‘share’.92

TAX REFORM INITIATIVES IN AUSTRALIA (¶1-235 – ¶1-250) [¶1-235] Criticisms of the current Australian taxation system Some general criticisms of the current system include suggestions that: •

•

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•

it is not sufficiently equitable, because taxable income is not the best measure of economic well-being

the neutrality of the system has been unduly eroded over time by successive governments’ attempts to appease sectional interests by granting them ad hoc tax benefits, and the system has comparatively low political acceptability.93

These and other criticisms have from time to time generated calls for reform of the taxation system. The materials below discuss some of the proposals for reform that have been put forward.

89 ABS 5506.0, above n 78. 90 Commissioner of Taxation, Annual Report 2016–17, 103. 91 Australian Bureau of Statistics, 6253.0—Household Income and Wealth, Australia, 2013–14 (‘ABS 6253.0’), 4 September 2015; cf D Neal, C Govan, M Norton and D Ariely, Australian Attitudes Towards Wealth Inequality and Progressive Taxation (Empirica Research, 15 April 2011) 7; OECD, Economic Surveys—Australia, March 2017, 8, Figures 3A–3C. 92 The Australian Bureau of Statistics found that in 2013–14, the top 20% of households received over 40% of total income, whereas the lowest 20% received 7.3%: ABS 6253.0, ibid. In 2017, Oxfam Australia reported that the top 1% received 40% of total income, while the lowest 20% received some 8%; and the top 20% held 61% of the total wealth (and around 1.5 times as much wealth as all other groups combined), while the bottom 20% held less than 1%: Oxfam Australia, ‘An Economy for the 99%’, Australian Fact Sheet, January 2017. 93 Inspector-General of Taxation, Identification of the Main Systemic Tax Administration Issues and Concerns Facing Taxpayers (2003) [12]; H Ergas, ‘The Inefficiencies In and Distortions Caused by our Tax System’ (2011) 46(3) Taxation In Australia 94.

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[¶1-237] Challenges of e-commerce Taxation systems can generally cope reasonably well with transactions that take place physically within a country’s borders. However, traditional taxation systems have struggled to cope with the rapid development of the international digital/internet economy, where a person using a computer anywhere in the world can conduct transactions with taxpayers in multiple countries without ever having a physical presence in those countries. Taxpayers have increasingly taken advantage of these factors to avoid tax through complex multijurisdictional cyberspace arrangements. These activities have provoked responses from host countries (eg the introduction of a ‘diverted profits’ tax in Australia and elsewhere)94 aimed at ensuring that taxpayers pay their ‘fair share’ of tax.95 Australia has also introduced general legislation designed to combat multinational tax avoidance (the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Cth): see ¶24-910), as well as specific legislation that seeks to deal with other aspects of e-commerce (see ¶27-167: non-residents supplying intangible property to Australian consumers, and ¶27-169: offshore supplies of low value goods). This area is likely to see significant further development over coming years.96

[¶1-240] Guidelines for tax reform In evaluating possible future reforms, Mathews97 suggested some time ago that tax reform is effective only if it achieves the ‘overriding requirement’ that the taxation system’s intended and actual effects are the same. This in turn requires that opportunities for avoidance, evasion and other manipulations are minimised. The broad criteria that Mathews suggested for evaluating reform proposals included:98

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•

•

The revenue bases should be easily identifiable and measurable, and should, as far as possible, be determined by reference to market or other objectively verifiable values.

Transactions and transfers should, so far as possible, be taxed at the time they take place (eg by deduction of tax at source) to avoid the need for multiple records of transactions and to enable tax liabilities to be finalised when the transactions occur.

94 For example, through the OECD and G20  ‘BEPS’ Project:  see OECD, Action Plan on Base Erosion and Profit Shifting, 2013. 95 See ¶24-910; S Hatcher, ‘Australia and the digital economy’ (2015) TIA Convention Papers (South Australia) 123; R Gelski, ‘Law, morality and multinationals’ (2017) 20(4) The Tax Specialist 174. 96 Cf European Commission, Report of the Commission Expert Group on Taxation of the Digital Economy, IP/14/604, 28 May 2014. 97 R Mathews, ‘The Structure of Taxation’ in J Wilkes (ed), The Politics of Taxation (Hodder and Stoughton, 1980). 98 Ibid 82, 108–12; cf N Wilson-Rogers and D Pinto, ‘Tax reform: A matter of principle? An integrated framework for the review of Australian taxes’, (2009) 7(1) eJournal of Tax Research 72; PwC, GST and Personal Income Tax Reform: The Yin and Yang of Tax Policy (November 2015). For a more humorous—but incisive—view, see T Dwyer, ‘Tax policy in two (or ten) minutes’ (2015) 44 ATR Rev 209.

Introduction to Income Tax Law33

• •

• •

Transactions and transfers should be taxed at proportional rates. Exemptions and concessional allowances should be consistent with social security arrangements and paid directly to eligible taxpayers. Tax bases should be consistent, eg between business and personal taxation.

Generally, the broadest possible revenue base should be used, except where specific taxes are intentionally imposed to achieve vertical equity or other particular distributional, stabilisation or allocative objectives. As far as possible, internal checking mechanisms should be built into the taxation system as a means of verifying tax liability.

The Ralph Committee suggested that in designing a taxation system, international factors also need to be taken into account.99 Given the various reform proposals that have been put forward from time to time, it may be puzzling that so few have actually been implemented. Perhaps part of the reason is that, as Edmonds pragmatically observed: changes to the taxation system are so riddled and infected by politics, [that] changes amounting to real tax reform cannot even make it to the table for consideration and discussion, let  alone be adopted as policy for implementation … For too long now, structural reform of many areas of the Commonwealth’s legislative jurisdiction has been anaesthetised by … politics100

[¶1-250] Options for further tax reform

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The 2008 Henry Tax Review: Australia’s Future Tax System The Henry Tax Review101 took a long-term perspective and foresaw a number of significant changes with which the Australian taxation system would have to cope, including technological advances and the ageing of the population (with the latter predicted to significantly reduce some tax bases and raise the costs of health, aged care and dependency).102 One of the review’s key recommendations was that that revenue raising should be concentrated on four robust and efficient tax bases, namely: (1) Personal income tax—the tax and transfer system should be simplified and progressivity in the taxation system increased by introducing a broader definition of ‘income’, as well as other steps.

99 Above n 46, [1.3]; cf Stewart et al, above n 46, ch 2; Wilson-Rogers and Pinto, ibid 72; The Hon Joe Hockey, address at the PwC Tax Reform Forum, Melbourne, 15 July 2015. 100 Edmonds, above n 83, 5, 16. 101 AFTS Report, above n 27, v, xv, 23; A Creighton, ‘The Henry Review—A liberal critique’ (2011) 46(3) Taxation In Australia 98; M Stewart, A Moore, P Whiteford and RQ Grafton, ‘A stocktake of the tax system and directions for reform—Five years after the Henry Review’, Tax and Transfer Policy Institute, ANU College of Asia and the Pacific. 102 AFTS Report, ibid xv.

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(2) Business income taxes—to encourage innovation, entrepreneurship and investment in Australia the company income tax rate should be reduced to the OECD average of 25% over the short to medium term. Australia should also adopt a broader, more uniform company income tax base, together with simplified arrangements for small business and, in the longer term, should move towards a business-level expenditure tax.

(3) Private consumption—consumption spending is potentially an efficient and robust tax base if broadly defined—and one of the least damaging to economic growth. However, Australia currently has a number of inefficient taxes on consumption.103 For example, the GST is not optimally efficient because it does not tax consumption on a comprehensive basis (eg it does not include the family home), and is operationally complex and costly, particularly for small business. Accordingly, the GST and inefficient state consumption taxes on insurance and payroll taxes should gradually be replaced by a low-rate, broad, destination cash flow tax. (4) Economic rents from natural resources and land—the immobile nature of natural resources and land means that they provide an efficient tax base, at least where the taxes are imposed on a comprehensive base104.

Land tax should apply equally to all land uses (including the family home) and aggregate a taxpayer’s holdings, but with a threshold set to exclude most lower-value use land (eg agricultural property), and moderate rates (eg 1% of value) applying to most other land.105 Beyond the four ‘robust’ taxes above, the Review recommended that the only taxes which should be retained are specific taxes imposed in order to:

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• • •

efficiently address social outcomes or market efficiency through better price signals (eg taxes on tobacco, alcohol and gambling)106 improve market or social outcomes by addressing spill-over costs and benefits, or help counteract self-control problems.

Current taxes, such as payroll taxes, stamp duties, property transfer taxes and other taxes that do not meet the above criteria should be abolished over time. The review also observed that:  ‘Australia’s ageing population will create rapidly increasing demands for governmental support in the future, and accordingly, significant changes should be made to improve the equity of the superannuation and pension systems.’107

103 Ibid 51. 104 Cf Cao et al, above n 27. 105 See also ibid 47–8. 106 Ibid 25, 52, 53–7 (see ¶1-170). 107 Ibid 29, 34–6.

Introduction to Income Tax Law35

Subsequent developments—the Re:think tax discussion paper In March 2015, the federal government released a tax discussion paper108 as a first step towards development of a promised Tax White Paper (now apparently abandoned). The Re:think discussion paper covered a wide range of issues and sought to develop a ‘better tax system’ that delivered lower, simpler and fairer taxes, which would ‘improve productivity and foster jobs, growth and opportunities’109 in order to respond to the significant problems identified by the Henry Tax Review, namely: • globalisation • •

declining productivity growth in Australia, and

an ageing population and shrinking workforce.110

Key points raised in the discussion paper included that the Australian taxation system is outdated, with the changing global environment, technology and other developments placing it under increasing strain. Particular issues discussed included the following. •

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•

• •

The Australian taxation system is too complex. This is a major driver of costs to individuals and entities, and also produces unintended consequences inconsistent with good policy outcomes. Various steps need to be taken to reduce complexity, including making use of technology to simplify processes and provide assistance to taxpayers.111

Compared to most developed countries, the Australian system relies too heavily on personal and corporate income tax, with ‘bracket creep’ likely to see individuals’ effective rates increase dramatically in coming decades. Accordingly, Australia should place greater reliance on broad-based consumption taxes such as the GST and improve the mix of indirect taxes. The taxing of savings raises issues of potential double taxation, and whether different forms of income from savings and negative gearing should be taxed differently. The relatively high level of Australian corporate tax will make it harder for Australia to attract necessary (particularly international) investment, imposes high long-term costs on living standards, and encourages tax minimisation.

There are important current developments driving the need for tax reform in Australia, including globalisation and the growth of the digital economy, resulting in opportunities for tax minimisation through Base Erosion and Profit Shifting (BEPS) and other means;112 and posing a threat to the GST.

108 Commonwealth, Re:think—Better Tax System, Better Australia, Discussion Paper, March 2015. See also PwC, Tax Reform White Paper Process Begins with Release of Discussion Paper, March 2015; cf Stewart et al, above n 46, esp chs 1–3. 109 Commonwealth, ibid 7. 110 See also The Hon Joe Hockey, Treasurer, ‘Tax White Paper consultation process to be extended’, Media Release 0592015, 16 June 2015. 111 Ibid 177–91. 112 Ibid 8, 81–2, 89–90; see ¶24-910.

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Introduction to Income Tax Law

The GST rate is one of the lowest among developed countries—around half the OECD average. As with the Henry Tax Review, Re:think recommended that the GST rate and base should be reviewed and expanded in light of the significant amount of GST revenue foregone because of the broad exemptions (see ¶27-133ff ),113 which reduce the efficiency of the GST and the reward for effort and incentives to work,114 and increase complexity and compliance costs, which fall disproportionately on small businesses.115

The traditional distinction between revenue and capital as a basis for taxing or nontaxing should be reviewed and alternatives explored.116 Concessions intended to benefit small business may increase complexity and compliance burdens; therefore their overall effect should be reviewed and alternatives such as a lower or zero rate for small businesses explored.117

Other possibilities for reform There are a number of other possible avenues for reform of the Australian taxation system. One of the more interesting is a wealth tax.

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Wealth tax

There is currently considerable inequity in wealth distribution in Australia (see ¶1-232), which a wealth tax might help to reduce. A wealth tax is usually levied on the annual value of all property owned by the taxpayer, less the value of their liabilities.118 Exemptions are often provided on the basis of equity, efficiency and administrative expediency; for example, for persons with net wealth below a prescribed threshold, and for household effects.119 Wealth tax is generally levied at low progressive rates (0.5% to 2.0%), and the resulting revenue often forms only a small proportion of overall tax revenues (0.5% to 5.4%). Thus wealth taxes are generally aimed at increasing social equity rather than generating large revenue returns.120 •

Advantages of a personal net wealth tax include increasing the overall equity of the taxation system by reducing the concentration of wealth. If there are no exempt

113 Ibid 132–3, 134–7. 114 Ibid 138. 115 Ibid 138. In 2016, the federal and some state governments raised the possibility of increasing the GST rate to 15% and broadening the GST base. To date, these proposals have not been acted upon. 116 Ibid 96–7. 117 Ibid ch 6, esp 113–19. 118 See generally MRG Fiedler, A Wealth Tax—A Study of its Economic Aspects with Special Reference to Australia (Australian Tax Research Foundation, 1983) section 2; Mathews, above n 97, 112–17. 119 Asprey Committee, above n 50, [26.1], 505; PD Groenewegen, ‘The Feasibility of a Federal Net Worth Tax’ in PD Groenewegen (ed), Australian Taxation Policy (Longman Cheshire, 1980) 305, 311. 120 Asprey Committee, ibid 505; CS Shoup, ‘Wealth Taxation Today’ in JG Head (ed), Taxation Issues of the 1980s (Australian Tax Research Foundation, 1983) 385, 386; P Saunders, ‘An Australian Perspective on Wealth Taxation’ in Head, ibid, 397, 404.

Introduction to Income Tax Law37

•

categories of assets, taxpayers may be encouraged to make more productive use of resources—particularly because, being a tax on individuals, it is difficult to ‘shift’ liability from one taxpayer to another. Disadvantages include that a personal net wealth tax may tend to discourage savings because of ‘double taxation’, and that it may generate significant administrative difficulties. It may also inhibit the capacity or willingness of persons to take entrepreneurial risks, thus reducing levels of employment and productivity.

To date, these advantages and disadvantages remain theoretical, because while a wealth tax has conceptual merit, it seems to be politically unacceptable in Australia, and no Australian government in recent times has shown any strong inclination to introduce this type of tax.

THE CURRENT AUSTRALIAN LEGAL SYSTEM (¶1-310 – ¶1-520) [¶1-310] Sources and principles of taxation law The tax consequences of a transaction (eg the question whether an amount is deductible or a receipt is assessable) will in many cases depend upon whether or not that transaction falls within a particular provision of the taxation legislation. It is therefore necessary to have a basic understanding of: • •

the sources of taxation law, and

the legal principles which the Commissioner—and ultimately the AAT and courts— apply when they seek to resolve taxation questions or disputes.

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[¶1-320] Sources of Australian taxation law There are in effect three sources of taxation law in the Australian context: (1) statute law

(2) case law, and

(3) the practice of the ATO as a de facto source of ‘law’.

Statute law (or ‘legislation’) Statute law is the law made by parliament and contained in statutes and ancillary legislation, including regulations made under such Acts (see ¶1-520). Australia is a federation with two main levels of government (federal and state/ territory), each of which has its own parliament that passes appropriate legislation. The federal or Commonwealth government is responsible for governing (and taxing) the whole of Australia, and taxation statutes passed by the federal parliament include ITAA36, ITAA97, TAA, and the FBT and GST Acts. The various state and territory governments are responsible for governing their particular state or territory, and taxation legislation passed by these governments traditionally includes stamp duties, land tax and payroll tax Acts (see Chapter 28).

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There is also a third ‘local’ level of government. Local councils govern municipalities or districts and levy taxes, usually in the form of land rates and various other service charges, pursuant to authority conferred by the various local governments and other enabling Acts.

Case law (or ‘common law’) Case law is created by the decisions of courts and tribunals.121 The courts have two main roles in relation to the operation of the taxation system. (1) Creation of law to fill a legislative vacuum

The courts create common law in situations not covered by legislation. An example in the tax context is the issue of identifying a ‘business’, where there is as yet no definitive provision in the general tax legislation (see ¶29-210ff ). Some have been concerned that judges may at times take too proactive a role in creating law.122

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(2) Statutory interpretation (interpretation of legislation)

In recent times, the increasing tendency of governments to introduce very detailed taxation legislation to deal with perceived problems means that ‘to an ever greater extent, the energies of the superior courts are devoted to … the intellectually exacting, but spiritually sterilising duty of interpreting [Acts of Parliament]’.123 In an ideal world, there would be no need to ‘interpret’ legislation, because its intended meaning would be so perfectly clear that it would be indisputable. Unfortunately, parliaments cannot always achieve this—a problem which tends to increase with the complexity of the legislation. Many English words have more than one possible meaning, and as Hill J noted, ‘the English language is seldom so clear and unambiguous that only one construction [of a provision] is open’.124 Thus, in a complex area such as taxation, where tax arrangements are often sophisticated and sometimes artificial, it can be particularly difficult to achieve the dual aims of comprehensively covering all relevant aspects of a problem area, and at the same time ensuring that the legislation is clear and unambiguous. Indeed, GSA Wheatcroft observes that: no country has yet succeeded, or is likely to succeed, in framing its tax laws in such a way that it is clear how the tax liability will be calculated on any conceivable set of facts. Even the most accurate draftsman of a law will not always be able to find precise language to 121 Decisions of the AAT may be said to be a source of law, at least as between the particular parties to a reference; though, as an administrative body, the AAT does not create legal precedents in the strict sense. 122 Cf DG Hill, ‘Great expectations: What do we expect from judges in tax cases?’ (1995) 30(1) Taxation In Australia 21, 27–9; DG Hill, ‘A judicial perspective on tax law reform’ (1998) 72 Australian Law Journal 685; T Lonnqist, ‘The trend towards purposive statutory interpretation: Human rights at stake’ (2003) 13(1) Revenue Law Journal 17; R v Beckett 2015 ATC ¶20-534, [61] (Nettle J, dissenting on this point). 123 The Hon Murray Gleeson, ‘Statutory interpretation’, Justice Hill Memorial Lecture (2009) 44(1) Taxation In Australia 3, 25, 30; cf Chief Justice Robert French, ‘The judicial function in an age of statutes’, Goldring Memorial Lecture, Wollongong, 18 November 2011. 124 MLC Ltd v DFC of T 2002 ATC 5105, 5112.

Introduction to Income Tax Law39

convey his meaning and the wisest legislator cannot foresee every possible situation that may arise.125

Some neutral body is therefore needed to interpret legislation when disputes arise, in order to determine what a particular piece of legislation means in a given context, and ‘to expose the meaning of the words which Parliament has enacted’.126 Under the common law system, that task of statutory interpretation falls ultimately to the courts and the judges who preside in them.127 In determining the meaning of a statutory provision, judges apply principles of statutory interpretation128 which have been developed over time and—more recently— been supplemented by statutory provisions.129 The principles of statutory interpretation and their application, as well as the doctrine of precedent are dealt with in texts such as Statutory Interpretation in Australia.130 While the prevailing view in recent times has been that revenue statutes are to be interpreted in the same way as other legislation, Allsop CJ in Channel Pastoral Holdings Pty Ltd v FC of T observed that: Revenue statutes of the detail of the 1936 [ITAA] Act and the 1997 [ITAA] Act may not admit of the flexibility of interpretation that may attend statutes expressed in more general terms … As [ Judge Learned Hand] said in Helvering v Gregory 69 2d 809 at 810 (1934 2nd CCA) ‘as the articulation of a statute increases, the room for interpretation must contract’131

(3) The practice of the ATO as a de facto source of ‘law’

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The practice of the ATO is applied through its assessment and review procedures; dayto-day decisions in formal and informal dealings with practitioners and the public; public and private rulings and other advices; and its objection and review (litigation) procedures.

125 Quoted in GS Cooper (ed), Tax Avoidance and the Rule of Law (IBDF Publications, 1997) 17; see also J Steyn, ‘The intractable problem of the interpretation of legal texts’ [2003] Sydney Law Review 1. 126 CPH Property v FC of T 98 ATC 4983, 4995 (Hill J); cf Cooper, ibid 19–20. 127 As to the ongoing ‘dialogue’ between statute and judiciary, see M Leeming, ‘Theories and principles underlying the development of the common law: The statutory elephant in the room’ (2013) 36(3) University of New South Wales Law Journal 1002. 128 JM Macrossan, ‘Judicial interpretation’ (1984) 58 Australian Law Journal 547, 552; GL Davies QC, ‘The role of courts in construing the “Income Tax Assessment Act” ’ (1980) XVI(8) Taxation In Australia 749, 750; DG Hill, ‘Great expectations’, above n 122, 27; E Wheelahan, ‘Contemporary issues in construing tax legislation’ (2016) 51(4) Taxation In Australia, 197; Ward v FC of T 2015 ATC ¶10-385, [11]–[20] (Frost DP and Popple SM); GHP 104 160 689 Pty Ltd v FCT 2014 ATC ¶10-373, [103]–[111] (Kerr DP). 129 Such as s 15AA Acts Interpretation Act 1901 (Cth); see C Mortimer and R Loiacono, ‘The use of extrinsic materials by the courts in the interpretation of taxation legislation’ (2015) 19(2) The Tax Specialist 86. 130 DC Pearce and RS Geddes, Statutory Interpretation in Australia (Lexis Nexis Australia, 8th ed, 2014). 131 2015 ATC ¶20-503, [6]‌.

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While not technically ‘law’, in some situations ATO interpretations or actions create informal law, in that many practitioners and their clients accept ATO practices or rulings without challenge, and structure their affairs accordingly.132 ATO rulings

ATO rulings are in an unusual situation because specified ATO rulings are binding on the ATO in the sense that the ATO must apply such rulings even if they are found subsequently to be wrong (see ¶30-010ff ). These specified rulings have moved closer, therefore, to ‘formal’ law. ATO discretions

To enable taxation law to apply to a myriad of different taxpayers and situations, Commonwealth governments have conferred various discretionary powers upon the Commissioner and their delegates. The Commissioner’s formal discretions may be divided loosely into three broad categories: (1) ‘machinery discretions’ (relating to time, or factual or operational matters) designed to enable the Commissioner to administer the day-to-day operation of the taxation law

(2) ‘anti-avoidance’ discretions designed to enable the Commissioner to negate ‘improper’ tax avoidance, and

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(3) ‘discretions used in the calculation of elements of taxable income’; for example, empowering the Commissioner to determine a ‘reasonable amount’, and so on.

To the extent that the determination of an element of the taxpayer’s assessable income or other matters is left within the discretion of the Commissioner or their delegate,133 the Commissioner does, in a sense, have a power to ‘make’ law in the individual case. While this flexibility is useful, it has disadvantages—in some situations, reliance on the exercise of a discretion increases uncertainty for taxpayers, because it may be difficult to predict how the Commissioner will exercise that discretion in particular circumstances. In 2017, the federal government passed legislation giving the Commissioner a ‘statutory remedial power’ which enables the Commissioner to alter the administration of statutory provisions in order to avoid unintended consequences and ensure that the provisions achieve a fair result in individual cases, consistent with the policy objectives underlying the provisions:134 see ¶29-010

132 R Tomasic and B Pentoney, ‘Tax compliance and the rule of law: From legalism to administrative procedure?’ (1991) 8(1) Australian Tax Forum 85. 133 See eg Trustees of the Post Office Staff Superannuation Scheme v FC of T 99 ATC 4926; s  99A(2)–(3) ITAA36; ss 123(4)–(6), 124 FBTAA. 134 Provided the statutory remedial power results in a beneficial outcome for taxpayers and has a negligible revenue impact.

Introduction to Income Tax Law41

Review of Commissioner’s discretions by the AAT and courts There are very significant differences between the powers available to courts and administrative bodies such as the AAT to review an exercise of the Commissioner’s discretion. In reviewing a decision of the Commissioner, the AAT stands in the shoes of the Commissioner, and may exercise all the Commissioner’s powers and discretions under the legislation. Thus, the AAT can review the merits of the decision, consider whether the Commissioner’s exercise of a discretionary power was the correct or preferable one in the circumstances, and override that decision where it feels that a different decision is preferable (see ¶31-570). By contrast, a court has a far more limited power to review discretions, and can overturn an exercise of the Commissioner’s discretion only where the Commissioner has made an error of law; for example, by taking into account irrelevant factors, or excluding relevant factors (see ¶31-165).135 Thus, taxpayers seeking to challenge an exercise by the Commissioner of a statutory discretion on the basis that it is unduly harsh or inappropriate (but not wrong in law) may only be able to effectively challenge that decision in the AAT (see ¶31-500ff ).

[¶1-520] The role of taxation regulations

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Section  266 of the ITAA36 and s  909-1 of the ITAA97 empower the GovernorGeneral to make regulations (delegated legislation)136 dealing with relevant matters, and prescribing penalties not exceeding five penalty units (currently $1,050) for breach of those regulations. The Commissioner, therefore, has a limited formal power to ‘make law’ through these regulations.

CONSTITUTIONAL ASPECTS OF TAXATION (¶1-530 – ¶1-620) [¶1-530] Distribution of legislative powers Each level of government in Australia (Commonwealth, state and local) has only limited power to make laws, and cannot make laws of unlimited scope on any topic it might wish.137 For example, the Commonwealth government can only legislate on specified topics (see ¶1-540), while state governments can generally only legislate for the ‘peace, order and good government’ of that state.138 135 Giris Pty Ltd v FC of T 69 ATC 4015, 4018, 4024; (1969) 119 CLR 365, 374, 384. 136 Regulations provide the practical detail needed to render the broader legislative provisions operational, and among other things, prescribe forms and procedures. See further DC Pearce and S Argument, Delegated Legislation in Australia (LexisNexis Butterworths, 2005). 137 Austin v Commonwealth 2003 ATC 4042. 138 I Killey, ‘Peace, order and good government: A limitation on legislative competence’ (1989) 1 Melbourne University Law Review 17, 25–9.

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Significantly, the Commonwealth does not have exclusive power to impose taxes. The states have concurrent power to tax,139 subject to the constraints of provisions such as ss 90 and 109 of the Commonwealth Constitution (see ¶1-570, ¶1-595). Nevertheless, it has always been clear that the Commonwealth taxation power is potentially very broad in scope (see ¶1-580), extending to ‘any form of tax which ingenuity may devise’, with federal parliament free to ‘select such criteria as it chooses, subject to any express or implied limitations prescribed by the Constitution, irrespective of any connection between them’.140

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[¶1-540] The Commonwealth’s power to make laws with respect to taxation The Commonwealth government is a government of ‘enumerated powers’, and can only exercise those powers which are specifically or impliedly granted to it by the terms of the Commonwealth Constitution. Accordingly, for a Commonwealth law to be valid, it must be possible for the court to ‘pigeon-hole’ that law within one of the heads of power granted to the Commonwealth.141 These heads of power are contained mainly, though not exclusively, in s  51 of the Constitution, which gives the Commonwealth government power to make laws ‘with respect to’ 38 specific areas, together with an express incidental power to legislate with respect to ‘matters incidental to the execution’ of any of those powers. The Commonwealth’s taxation power is found primarily in s 51(ii), which provides that: ‘The [Commonwealth] Parliament shall … have power to make laws with respect to … (ii) Taxation; but not so as to discriminate between States or parts of States’.142 Accordingly, for a Commonwealth law to be valid under s 51(ii), it must be possible to characterise that law as being one which both satisfies the positive test of being a law ‘with respect to … taxation’,143 and also one which does not offend the prohibition against discrimination between states or parts of states. A law which fails either of these tests is invalid. Not surprisingly, there have been a number of constitutional challenges to taxation laws over the years, some raising unusual issues. In Melkman v FC of T,144 the court held that imposing tax on a Dutch pension awarded to a survivor of a Second World War concentration camp did not breach the Racial Discrimination Act 1975 (Cth); while in Clark v FC of T,145 the AAT held that the ATO had not breached the Age Discrimination 139 That is, each state has the constitutional power to levy a (state) income tax, if it chooses to do so. The decision not to impose a state income tax is a result of political choice rather than a constitutional prohibition: see ¶1-610. 140 MacCormick v FC of T 84 ATC 4230; (1984) 158 CLR 622, 655 (Brennan J). 141 SGH v FC of T 2002 ATC 4366, 4374 (Gummow J); Pape v FC of T 2009 ATC ¶20-116, 9813 (French CJ). 142 See French, above n 22, 6–13. 143 Mutual Pools & Staff Pty Ltd v Commonwealth 94 ATC 4103, 4105; 179 CLR 155, 166 (Mason CJ); Leask v Commonwealth 96 ATC 5071; (1996) 187 CLR 579. 144 87 ATC 4855, 4858–9 (Fox J); 15 FCR 311; cf Ellenbogen v FC of T 88 ATC 2012. 145 2010 ATC ¶10-137, 3406 (Sweidan SM).

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Act 2004 (Cth) by declining to apply concessional tax treatment to an alleged ‘redundancy’ payment made to a 76-year-old taxpayer. In Skyring v FC of T,146 the Full Federal Court rejected an argument that by requiring taxpayers in effect to pay income tax out of property owned by them, ITAA36 was unconstitutional because it violated rights guaranteed by Magna Carta. The taxpayer in Re Burrowes; Ex parte DFC of T147 put forward the ingenious argument that he should be excused from any liability to pay tax because he held a conscientious objection to paying taxes which might be used for military expenditure. The taxpayer also relied on legal principles arising from the Nuremberg War Trials, international conventions and the defence of necessity. Heerey J rejected all of these arguments.148 With equal optimism, the taxpayer in Atkinson v FC of T149 argued that he had paid the tax owing by tendering a number of shovels. Heerey J rejected this argument on the basis that the ITR required payment by legal tender rather than in kind (see ¶32-040). Interesting challenges to taxing regimes are not confined to Australia. In the UK, regulations which required businesses to file VAT returns and pay tax electronically were held to be unlawful on the basis that the regulations breached the human rights of older taxpayers, those with disabilities, and those living in remote areas where broadband access was unreliable or non-existent.150 Against that background, the taxing power in s  51(ii) raises two particular issues which are worthy of closer examination, namely: (1) the concept of a ‘tax’ in the context of s 51(ii) (¶1-550), and

(2) the prohibition against discrimination between states (¶1-560).

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[¶1-550] The concept of a ‘tax’ in s 51(ii) The characterisation of a law in this context is usually based on the substance of the law, rather than mere form.151 Two definitions of ‘tax’ that are traditionally applied to s 51(ii) of the Constitution are: ‘a compulsory exaction of money by a public authority for public purposes enforceable by law’;152 and the process of ‘raising money for the purposes of government by means of contributions from individual persons’.153

146 92 ATC 4028, 4030. 147 91 ATC 5021. 148 Ibid 5023–4. See also DFC of T v Keenan (1999) ATC 4465, 4465–6. 149 (2000) ATC 4332. 150 LH Bishop Electrical Co Ltd A F Sheldon (t/a Aztec Distributors) v Revenue & Customs [2013] UKFTT 522 (TC). 151 Ha v New South Wales 97 ATC 4674. 152 Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263, 276 (Latham CJ), applied by the High Court in Roy Morgan Research Pty Ltd v FC of T 2011 ATC ¶20-282 (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ at 12853; Kirby J at 12857). 153 R v Barger (1908) 6 CLR 41, 68 (Griffith CJ, Barton and O’Connor JJ).

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In MacCormick v FC of T; Camad Investments Pty Ltd v FC of T, Gibbs CJ, Wilson, Deane and Dawson JJ in the High Court identified the following characteristics of a ‘tax’, namely that:154

•

payment is compulsory

•

moneys do not constitute a fee for services rendered156

• • • •

moneys are raised for government purposes155 payments are not penalties157

exactions are not arbitrary or capricious,158 and exactions should not be ‘incontestable’.159

Some later cases have taken a broader approach and avoided the use of such ‘checklists’ of relevant factors.160 Thus in Luton v Lessels,161 the High Court held that child support legislation did not impose a ‘tax’ for the purposes of s 51(ii). Gaudron and Hayne JJ commented that while all the factors above are important, the presence or absence of any of them is not determinative; it is necessary, in every case, to consider all the features of the legislation.162 Significantly, in Austin v Commonwealth,163 the High Court indicated that the Commonwealth power to impose taxation under s 51(ii) is wide, but constrained by the essential nature of the Australian federal structure, which assumes the ongoing effective operation of both the Commonwealth and the states as separate political bodies.

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154 84 ATC 4230, 4236–7; (1983–84) 158 CLR 622, 639–641; cf Brennan J at ATC 4242; CLR 649; FC of T v Futuris Corpn Ltd 2008 ATC ¶20-039, 8509; WR Carpenter Holdings Pty Ltd v FC of T 2008 ATC ¶20-040; [2008] HCA 33; Roy Morgan Research Pty Ltd v FC of T 2011 ATC ¶20-282, 12853–4 (French CJ, Gummow, Hayne, Heydon, Crennan, Kiefel and Bell JJ). 155 Roy Morgan 2011 ATC ¶20-282, 12850, 12855; cf Air Calédonie International v Commonwealth (1988) 165 CLR 462, 467, suggesting that a payment need not be to a public authority or for public purposes; Australian Tape Manufacturers Association v Commonwealth (1993) 176 CLR 480, 503, 506; Northern Suburbs General Cemetery Reserve Trust v Commonwealth 93 ATC 4118, 4124; (1993) 176 CLR 555, 574–5. 156 Queanbeyan City Council v ACTEW Corporation Ltd [2009] FCA 943 (Buchanan J). 157 R v Barger (1908) 6 CLR 41, 97–9; cf Woodhams v DFC of T 97 ATC 5119. 158 Chevron Australia Holdings Pty Ltd v FC of T 2015 ATC ¶20-353, [532]–[533], [542], [548] (Robertson J); Keris Pty Ltd v DFC of T 2015 ATC ¶20-545, [42]–[45] (Siopsis J); FC of T v Hipsleys Ltd (1926) 38 CLR 219, 236. 159 FC of T v Futuris Corpn Ltd 2008 ATC ¶20-039, 8509 (Kirby J); Commr of Taxation v Bosanac [2016] FCA 448, [63]–[79] (McKerracher J). 160 Indeed, it had been suggested that, in light of these later decisions, ‘the core understanding of tax’ in Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 and MacCormick v FC of T 84 ATC 4230; (1984) 158 CLR 622 was ‘no longer a reliable guide in practice’: G Brysland, ‘What is a tax?’ (1993) 5(3) CCH Journal of Australian Taxation 23; V Morabito and S Barkoczy, ‘What is a tax? The erosion of the “Latham Definition” ’ (1996) 6 Revenue Law Journal 43. 161 2002 ATC 4311, 4313 (Gleeson CJ; McHugh J agreeing at 4324). 162 Ibid 4319–20, 4321 (Gaudron and Hayne JJ); see also 4326ff (Kirby J). 163 2013 ATC ¶20-405 4042, 4048 (Gleeson CJ); 4068, 4069, 4080 (Gaudron, Gummow and Hayne JJ); cf 4084, 4085 (McHugh J); 4096–7 (Kirby J, dissenting as to the result); cf Pape v FC of T (2009) ATC ¶20-116, 9838, 9839 (Gummow, Crennan and Bell JJ); Permanent Trustee v Commr of State Revenue (Vic) 2004 ATC 4996, 5017 (McHugh J).

Introduction to Income Tax Law45

[¶1-560] Prohibition against discrimination between states or parts of states

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The terms of s  51(ii) expressly require that a Commonwealth taxation law must not discriminate between states or parts of states.164 Generally, this prohibition on discrimination has been interpreted as meaning that a law must not impose a differential liability to tax upon persons merely because they live or have property or operations in different states or parts of states. This does ‘not require that … laws must operate with complete uniformity throughout the Commonwealth …. What [is forbidden] … is a taxation law which would impose a taxation burden upon a person because of some connexion with a State or a part of a State, which would not fall upon other persons not having that connexion’.165 However, s 51(ii) only prohibits direct legal discrimination in the law’s operation, not indirect/consequential discrimination. The test is whether the law inherently discriminates in its necessary legal operation, and, so long as the law itself does not breach this prohibition, it does not matter that its practical operation will impact more heavily on some taxpayers in particular locations. Thus, in Fortescue Metals Group Ltd v Commonwealth166 the High Court held that the former minerals resource rent tax (MRRT)—which imposed a tax on profits above $75 million made by mining companies throughout Australia—did not breach s 51(ii) (or s 99: see ¶1-570). The key point was that the MRRT was legally neutral in its impact; the tax applied in the same way to all miners, wherever they were located. It was not sufficient to show that the actual amount of MRRT paid by miners in different states would vary because the Act allowed a credit for amounts paid under state mineral royalty legislation, and the rates for such royalties varied in different states. The issue for constitutional validity was the operation of the Commonwealth (not state) law. Crennan J stated that: The rate of [MRRT] taxation applied to the tax base, above normal profit, is imposed equally throughout Australia. Any differential or unequal operation … does not arise from the MRRT legislation, the structure of the MRRT, or a discriminatory method of calculating a taxpayer’s MRRT liability, but is due to different business conditions between States [ie the different State mining royalties].167

However, where a Commonwealth law directly creates a discriminatory outcome based on geographic locality, it will be invalid. Thus, in Cameron v DFC of T,168 taxation regulations applied different methods of valuing livestock depending upon the state in 164 Regions or Commonwealth places within states are parts of states for the purposes of s 51(ii): Permanent Trustee Australia Limited v Commr of State Revenue (Vic) 2004 ATC 4996, 5016–17, 5024–5 (McHugh J, dissenting). Sections 99 and 117 of the Constitution impose analogous limits. 165 Conroy v Carter (1968) 118 CLR 90, 103 (Menzies J). 166 2013 ATC ¶20-405. 167 Ibid 172, 174; French CJ at 26, 29–30, 34–5; Hayne, Bell and Keane JJ at 105, 113, 116–17, 119; Kiefel J at 199–202, 210–11, 221–6; cf Hayne, Bell and Kearne JJ at 121, 125; see also R Cormick, ‘Digging up the dirt on the Minerals Resource Rent Tax constitutional challenge’ (2013) 16(4) The Tax Specialist 171, 173–5. 168 (1923) 32 CLR 68.

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which the livestock was located: the same horse would be valued at £8 if it was in New South Wales, but £15 in Victoria. The legislation was struck down as discriminatory, because its legal effect necessarily discriminated between taxpayers in different states. Isaacs J said:  ‘the only test supplied by the regulations for determining … the value of livestock is the State or part of a State in which it is found … I find it difficult to conceive of a clearer case of discrimination between States.’169

[¶1-570] Other constitutional provisions Section 99: Prohibition on tax preferences Section 99 of the Constitution complements s 51(ii) by prohibiting the giving of a tax preference.170 In Elliott v Commonwealth171 Latham CJ suggested that ‘[p]‌ reference necessarily involves discrimination or lack of uniformity, but [the latter does not] necessarily involve preference’, and noted that unlike s 51(ii), there is nothing in s 99 that prevents the Commonwealth from giving preference to one part of a state over other parts of the same state.172

Section 51(xxxi): Power to acquire property This section gives the Commonwealth power to acquire property ‘on just terms from any State or person in respect of which the Parliament has power to make laws’ (see ¶1-550).173 It has been said that a valid taxation law will ‘rarely, if ever’ be struck down as an acquisition of property on unjust terms within s 51(xxxi) of the Constitution, because ‘if it is in truth a tax, its very nature prevents it amounting to an acquisition of property’.174

Section 53: Senate may not introduce or amend taxation laws

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Section 53 provides that laws imposing taxation may not be introduced or amended by the Senate, although the Senate may return such laws to the House of Representatives with a request that nominated items or provisions be amended or omitted from the legislation.

169 Ibid 72, 79; cf Permanent Trustee Australia Ltd v Commissioner of State Revenue (Vic) 2004 ATC 4996, 5010–5012 (Gleeson, Gummow, Hayne, Callinan and Heydon JJ); 5018, 5024 (McHugh J); Conroy v Carter (1968) 118 CLR 90; Clarke v FC of T [2009] HCA 33. 170 James v Commonwealth (1928) 41 CLR 442, 460. A constitutional challenge based on s 99 was dismissed in Carter v FC of T 2013 ATC ¶10-303, 5493 (CR Walsh SM). 171 (1936) 54 CLR 657, 668. 172 Cf Permanent Trustee Australia Limited v Commr of State Revenue (Vic) 2004 ATC 4996, 5010, 5012 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Fortescue Metals Group Ltd v Commonwealth 2013 ATC ¶20-405, 121, 125 (Hayne, Bell and Keane JJ); Cormick, (above n 167), 174. 173 Bank of New South Wales v Commonwealth (1948) 76 CLR 1, 349–50 (Dixon J); Clunies-Ross v Commonwealth (1984) 155 CLR 193, 202; Commonwealth v Tasmania (1983) 158 CLR 1. 174 MacCormick v FC of T 84 ATC 4230, 4236; (1984) 158 CLR 622, 638; Ha v New South Wales 97 ATC 4674; (1997) 189 CLR 465.

Introduction to Income Tax Law47

Section 55: Laws imposing taxation are to deal only with the imposition of taxation and only with one subject of taxation As a measure to protect the Senate in light of its inability to amend taxation legislation, s 55 limits laws imposing taxation to those dealing only with: • •

the imposition of taxation, and

one subject of taxation (except laws imposing duties of customs or excise, which must deal only with duties of customs or excise respectively).175

Laws imposing taxation shall deal only with the imposition of taxation

For a law to be one ‘imposing’ taxation, it must create a liability to tax.176 However, a law which prescribes matters such as the persons who are to pay tax and the classes of income on which they are to be taxed, and provides for the assessment, collection and recovery of tax, would be one ‘dealing with the imposition of taxation’ even though it does not actually impose a tax.177 The first limb of s  55 is designed to combat the legislative technique known as ‘tacking’. Without this paragraph, the House of Representatives could pass a law which imposed an essential tax, but then ‘tack’ or add on to it provisions dealing with some other more controversial or objectionable non-taxation matters, and thus face the Senate with an ‘all or nothing’ choice, which would effectively prevent the Senate from amending any portion of the composite Bill.178 The s 55 restriction does not limit the effective reach of the s 51(ii) power, but rather the means by which it may legitimately be exercised.179 To avoid breaching this restriction, the Commonwealth parliament has traditionally passed two separate Acts when imposing a tax:

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•

•

a Rating Act, which does little more than impose the tax and stipulate the rates of taxation, and

a separate Assessment Act, which contains all the other provisions setting out the criteria for liability, deductions and the like, and the various administrative and machinery provisions necessary to make the imposition of tax effective (such as those relating to returns and assessments, objections and appeals, anti-avoidance provisions etc).

175 Permanent Trustee Australia Limited v Commr of State Revenue (Vic) 2004 ATC 4996, 5002–9 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). 176 O’Meara v FC of T 2003 ATC 4406, 4408 (Hely J); State Chamber of Commerce and Industry v Commonwealth 87 ATC 4745; (1987) 163 CLR 329. 177 Permanent Trustee Australia Limited v Commr of State Revenue (Vic) 2004 ATC 4996, 5008–9. 178 Buchanan v Commonwealth (1913) 16 CLR 315, 328. 179 Air Calédonie International v Commonwealth (1988) 165 CLR 462; Australian Tape Manufacturers Association v Commonwealth (1993) 176 CLR 480.

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However, this legislative dichotomy is conservative, and many matters traditionally contained in Assessment Acts could legitimately be dealt with in the Rating Act itself.180 Laws imposing taxation shall deal only with one subject of taxation

The second limb of s 55 precludes a law imposing taxation (other than a customs or excise law) from dealing with more than ‘one subject of taxation’. This is intended to prevent the House of Representatives from presenting the Senate with a single Bill containing a number of separate taxes (some being acceptable to the Senate and others not), and thus forcing the Senate to pass all the taxes if it wishes to pass any of them.181 The test of whether a law deals with more than one subject of taxation is ‘whether a general consideration of the law reveals on the basis of common understanding and general conceptions, rather than … any analytical or logical classification’,182 two or more subjects of taxation broadly ‘distinguishable from one another’.183 That is, the test is whether— looking at political relations rather than economic consequences or operation on legal rights—the parliament has chosen to tax ‘a single unit rather than a collection of matters necessarily distinct and separate’.184 This test gives the concept of a ‘subject of taxation’ a broad operation. Thus, in O’Meara v FC of T,185 Hely J rejected the taxpayer’s argument that the GST dealt with more than one subject of taxation (both goods and services), characterising the GST instead as a law dealing with a single subject of taxation, namely ‘final private consumption in Australia’.  186

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Section 90: Duties of customs and excise The Commonwealth parliament has clear power under s 51(ii) to impose duties of excise, customs and bounties on the production or export of goods. The effect of s 90 therefore is not to confer legislative power on the Commonwealth, but rather to prohibit the states from imposing such duties.187 Section 90 is a crucial provision, because it defines the limits of state taxation powers in a key revenue-generating area, and therefore plays an important role in determining the federal–state financial balance. The broad interpretation of s  90 generally applied by the High Court has expanded the Commonwealth’s exclusive taxing power, and correspondingly limited the effective scope of states’ taxing powers, the amount of revenue which they can generate and, thus, the degree of their economic independence.

180 Northern Suburbs General Cemetery Reserve Trust v Commonwealth 93 ATC 4118; (1993) 176 CLR 555; Austin v Commonwealth 2003 ATC 4042, 4082; Permanent Trustee Australia Limited v Commr of State Revenue (Vic) 2004 ATC 4996, 5004–5, 5007–9. See ¶1-580. 181 Resch v FC of T (1942) 66 CLR 198, 222–3. 182 Austin v Commonwealth 2003 ATC 4042, [190] (Gaudron, Gummow and Hayne JJ). 183 MacCormick v FC of T 84 ATC 4230, 4244 (Brennan J). 184 Austin v Commonwealth 2003 ATC 4042, [190]–[192] (Gaudron, Gummow and Hayne JJ). 185 2003 ATC 4406 (Fed Ct). 186 Ibid 4409–10. For similar reasons, the FBT legislation has been held not to offend s 55: State Chamber of Commerce and Industry v Commonwealth 87 ATC 4745. 187 Capital Duplicators Pty Ltd v Australian Capital Territory (No 1) (1992) 177 CLR 248.

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Defining a duty of excise

A duty of ‘excise’ has been described as ‘a tax directly related to goods, imposed on some step in their production or distribution before they reach the consumer’: Mutual Pools & Staff Pty Ltd v FC of T.188 In Ha v New South Wales,189 a majority of the High Court held that a state levy on retail tobacco sales by two duty-free stores was a duty of excise. In reaching this conclusion, the majority applied the factors identified by Brennan CJ and McHugh J in Philip Morris v Commr of Business Franchises (Vic):190 (1) there was close proximity between the licence period and the period in respect of which the tax is calculated (2) the licence period was short

(3) the tax imposed was large and was borne once only in the course of distribution, and (4) it exhibited a revenue-raising rather than regulatory purpose.

The effect of the decision in Ha was to widen the concept of a duty of excise, and thus ‘significantly erode the tax base and financial autonomy of the States [by narrowing] the scope for the introduction of new State taxes’.191 It is clear that a s 90 duty of excise may be imposed on the production, manufacture, sale or distribution of goods. Thus a sales tax, as well as a value added tax such as the Australian GST, could be a duty of excise.192 While it has been held in several cases that a licence fee imposed under a regulatory regime as a prerequisite to carrying on a business is not an excise duty,193 in Capital Duplicators Pty Ltd v Australian Capital Territory (No 2) the majority of the High Court made it clear that a levy described as a licence fee may still be a duty of excise if it is really ‘directed to … raising … revenue rather than to the creation of a regulatory regime designed to protect the public’.194 Copyright © 2019. Oxford University Press. All rights reserved.

Section 96: The grants power Under s 96, the Commonwealth parliament ‘may grant financial assistance to any state on such terms and conditions as the Parliament thinks fit’. These conditions are not limited to financial matters, nor to areas in respect of which the Commonwealth itself has legislative

188 92 ATC 4016, 4017 (Mason CJ, Brennan and McHugh JJ); Commr for ACT Revenue v Kithock Pty Ltd 2000 ATC 4559. 189 97 ATC 4674. 190 (1989) 167 CLR 399, 463 (Brennan CJ); 501 (McHugh J). 191 Sir Harry Gibbs, ‘The tax system:  Seriously wrong in principle’ (1993) 28(1) Taxation In Australia 31, 36; N Halliday, ‘Ha v State of New South Wales; Walter Hammond & Associates v State of New South Wales’ (1998) 20 Sydney Law Review 158. 192 G Williams, ‘New battles over state taxation—A state GST?’ (1997) 17 CCH Tax Week [225]; Commr ACT Revenue v Kithock Pty Limited 2000 ATC 4559, 4563–5 (Spender, Mathews and Sundberg JJ). 193 See Hughes & Vale Pty Ltd v New South Wales (No 1) (1953) 87 CLR 49. 194 93 ATC 5053, 5062; Queanbeyan City Council v ACTEW Corporation Ltd [2010] FCAFC 124.

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powers; and they are also not subject to the prohibition on discrimination/preference which applies to ss 51(ii) and 99. It would seem that the only restrictions on the s 96 power are that any action required of the state government must be within its constitutional capacity; the state cannot be compelled to take the Commonwealth grant, or to observe the conditions; and the exercise of the s  96 power must not be ‘merely colourable’—that is, an attempt by the Commonwealth to evade a constitutional limitation on its legislative powers. Traditionally, over half the Commonwealth grants made to the states have been through s 96 ‘tied grants’ made on the condition that they are used for specified purposes (eg roads, hospitals and the like). To the extent that a grant is conditional on the use of the funds for purposes of legitimate concern to the Commonwealth, the fiscal balance between state and Commonwealth is not disturbed. However, commentators have argued that where grants are made conditional on a state taking action in an area solely within the state’s legislative power (ie outside the Commonwealth’s legislative power): The power of the States to control their own affairs is seriously diminished, and the State Governments are rendered less accountable … The system leads to a lack of efficiency. Forward financial planning is made difficult for the States by uncertainty as to the amount of future grants. What is perhaps worse, from a national point of view, is that the ability of the Commonwealth to pursue policies in matters which are strictly of State concern has resulted in an expensive duplication of bureaucracies195

Overall, ‘the practical effect [of s  96] … has been that in the revenue field the Commonwealth has established an overlordship’196 (see ¶1-620).

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Section 114: Tax on state/Commonwealth property Under s  114, the states are prohibited from imposing tax on property of any kind belonging to the Commonwealth without the Commonwealth’s consent,197 and similarly the Commonwealth is not to impose tax on property of any kind belonging to a state.198 In DFC of T v State Bank of New South Wales,199 the High Court held that, in order to attract the s  114 immunity, it is not necessary that the entity in question represent the Crown in right of a state (or the Commonwealth as the case may be), as the terms ‘are wide enough to denote a corporation which is an agency or instrumentality of the Commonwealth or a State’.200

195 Sir Harry Gibbs, ‘The need for taxation reform’ (1993) 10(1) Australian Tax Forum 1, 11–12. 196 Former Prime Minister Sir Robert Menzies, quoted in PH Lane, The Australian Federal System (Law Book Company, 1979) 853. 197 Paliflex Pty Ltd v Chief Commr of State Revenue (NSW) 2002 ATC 4124. 198 Section 114 has been described as a ‘particular instance, covered by express prohibition, of federal taxation inconsistent with the federal nature of the Constitution’:  Austin v Commonwealth 2003 ATC 4042, 4053  (Gleeson CJ). 199 92 ATC 4079. 200 Ibid, 4083; SGH v FC of T 2002 ATC 4366 (Gleeson CJ, Gaudron, McHugh and Hayne JJ).

Introduction to Income Tax Law51

In Queensland v Commonwealth,201 the High Court denied the protection of s 114 to the state of Queensland in respect of FBT levied on the use by state employees of motor vehicles and dwelling houses owned by the state, because: the tax … is not imposed on the ownership or holding of the car by the State as employer or on its possession or use of the car. Nor is it imposed on the disposition by the State of any interest in its property. The tax is imposed because the employer provides the employee with a benefit in connexion with his employment.

Section 114 has been used successfully on a number of occasions by state authorities to protect them from Commonwealth taxes; for example, in the State Bank of New South Wales case202 (bank exempt from sales tax on printed material for the bank’s own use) and South Australia v Commonwealth203 (state superannuation body exempt from CGT—but not ‘ordinary’ income tax—on disposals of property). While it is usually state bodies that have sought shelter from the Commonwealth under s 114, the Commonwealth or its bodies have sometimes sought protection under this section from state taxes—with mixed results.204

[¶1-580] Wide effective reach of Commonwealth taxation power The above discussion (at ¶1-550 to ¶1-560) of the limitations on the s 51(ii) power might suggest that the Commonwealth government’s taxing power is relatively narrow. However, there are four factors whose combined operation significantly expands the effective scope of the Commonwealth’s taxing power.

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(1) The only legal limits on the Commonwealth’s legislative power to impose taxation are those prescribed by the Constitution itself.

Provided a tax observes the constitutional boundaries, the power given by s  51(ii) is in practice restricted more by political than by legal constraints:  ‘[under s  51(ii)] the Parliament has, prima facie, power to tax whom it chooses … exempt whom it chooses … [and] impose such conditions as to liability or as to exemptions as it chooses’.205 (2) The introductory phrase in s 51 gives the Commonwealth parliament a wide power to make laws ‘with respect to’ taxation.

In Bennett & Dix v Higgins, Le Mere J noted that ‘the phrase “in respect of ” has been said to have the widest possible meaning of any expression intended to convey some connection or relation between two subject-matters’.206

201 87 ATC 4029, 4041; (1987) 162 CLR 74, 98–9 (Mason, Brennan and Deane JJ). 202 DFC of T v State Bank of New South Wales 92 ATC 4079. 203 92 ATC 4066. 204 Superannuation Fund Investment Trust v Commr of Stamps (SA) 79 ATC 4429; Superannuation Fund Investment Trust v Commr of Stamps (SA) (No 2) 80 ATC 4392; Allders International v Commr of State Revenue (Vic) 96 ATC 5135. 205 Fairfax v FC of T (1965) 114 CLR 1, 16 (Taylor J), 12–13 (Kitto J); Northern Suburbs General Cemetery Reserve Trust v Commonwealth 93 ATC 4118; (1993) 176 CLR 555; Austin v Commonwealth 2003 ATC 4042, 4046. 206 2006 ATC 4041, 4046–7.

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Under this power, a s  51(ii) law can validly not only impose taxation directly, but may also deal with necessary ancillary matters, such as rules for returns and assessments, imposing penalties for the making of false returns,207 the collection and recovery of the tax,208 the creation and staffing of an administrative tribunal to hear disputes,209 requiring reporting of cash transactions to prevent tax evasion,210 and a variety of other matters exhibiting only a ‘relevance to or connection with’ taxation as such.211 (3) The incidental powers.

The Commonwealth’s legislative powers in s 51 are further expanded by two ‘incidental’ powers: • an implied incidental power arising from the common law principle that the grant of a power inherently also gives power to do all things properly necessary to make that power effective,212 and

• an express incidental power in s 51(xxxix), which gives parliament power to make laws with respect to matters incidental to the execution of any of its legislative powers.

In practical terms, the express incidental power seems to add little to the implied power.213

(4) In characterising laws for constitutional purposes, the High Court has generally taken the view that a law must be characterised by reference to its direct legal effect, regardless of any indirect economic, social or political results.

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This is the case even where the law’s primary aim is to achieve these non-legal results (see ¶1-560). Thus, in South Australia v Commonwealth (the ‘First Uniform Tax Case’), Latham CJ stated that: … the validity of legislation is not to be determined by the motives or the ‘ultimate end’ of a statute … The true nature of a law is to be ascertained by examining its terms and, speaking generally, ascertaining what it does in relation to duties, rights or powers which it creates, abolishes or regulates … Even though an indirect consequence of an Act, which consequence could not be directly achieved by the legislature, is contemplated and desired by parliament, that fact is not relevant to the validity of the Act.214

207 R v Kidman (1915) 20 CLR 425, 449–50; DFC of T v Fontana 88 ATC 4751. 208 Bank of New South Wales v Commonwealth (1948) 76 CLR 1; Keris Pty Ltd v DFC of T 2015 ATC ¶20-545, [45] (Siopsis J). 209 Shell Co of Australia Ltd v FC of T (1930) 44 CLR 530. 210 Leask v Commonwealth 96 ATC 5071, 5099–100; (1996) 187 CLR 579, 637–8. 211 Grannall v Marrickville Margarine Pty Ltd (1955) 93 CLR 55, 77 (Dixon CJ). However, in Leask, ibid, Kirby J cautioned that this did not mean that ‘any law which might make the task of tax gathering easier would necessarily fall within … s 51(ii)’: 96 ATC 5071, 5100. 212 D’Emden v Pedder (1904) 1 CLR 91, 110; Australian Boot Trade Employees’ Federation v Commonwealth (1954) 90 CLR 24, 43. 213 Victoria v Commonwealth (1957) 99 CLR 575, 614. 214 (1942) 65 CLR 373, 412, 424–5; cf Roy Morgan Research Pty Ltd v FC of T 2011 ATC ¶20-282, 12857 (Heydon J).

Introduction to Income Tax Law53

This approach has enabled the Commonwealth government to use its taxation power to achieve a wide range of indirect social, political and economic objectives. For example, the High Court has upheld the validity of a scheme designed to encourage higher levels of investment in Commonwealth securities by means of a law giving favoured taxation treatment to superannuation funds whose investment portfolio included a prescribed percentage of Commonwealth securities.215 It is true that the High Court has on occasion struck down a purported taxation law on the basis that it is in substance a law on some other topic ‘disguised’ as a law with respect to taxation. However, this has been the exception rather than the rule.216

Overall effect The four factors outlined above have significantly expanded the Commonwealth government’s law-making power in relation to taxation, and greatly strengthened the position of the Commonwealth government by enabling it to extend its policies indirectly into a wide range of areas over which it lacks direct legislative control. Another key element in the dominance of the Commonwealth has been the operation of s 109.

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[¶1-595] Section 109: Commonwealth law prevails over an inconsistent state law In respect of all taxes (other than excise), the state and Commonwealth governments have concurrent law-making power, so that it is possible that both parliaments may inadvertently or intentionally pass taxation laws which are inconsistent and incompatible. Because taxpayers could not comply with both laws in such circumstances, s 109 of the Commonwealth Constitution provides that the Commonwealth law will override the state law—but only to the extent of the inconsistency (i.e. the state law will not necessarily be wholly invalid).217 The test most commonly applied for s 109 ‘inconsistency’ was established in Clyde Engineering v Cowburn218 and requires an assessment of whether the Commonwealth law is expressly or impliedly intended to ‘cover the field’.219 Thus, in Re Mazuran; Ex parte DFC of T, 220 Jenkinson J held that a state Act which provided for payment of debts by 215 Fairfax v FC of T (1965) 114 CLR 1. Similarly, a progressive land tax arguably intended to prevent a person from amassing or retaining large landholdings was held valid in Osborne v Commonwealth (1911) 12 CLR 321; see also Northern Suburbs General Cemetery Reserve Trust v Commonwealth 93 ATC 4118; (1993) 176 CLR 555. 216 R v Barger (1908) 6 CLR 41. 217 Bell Group NV (in Liquidation) v Western Australia [2016] HCA 21; AMS v AIF (1999) 24 Fam LR 756, 763, 766–7, 808. However, if the state law is inherently invalid (eg ultra vires), there is nothing on which s 109 needs to operate: Allders International Pty Ltd v Commr of State Revenue (Vic) 96 ATC 5135, 5161. 218 (1926) 37 CLR 466. 219 As to ‘direct’ tests for inconsistency, see D Meagher, A  Simpson, J Stellios and F Wheler, Hanks Australian Constitutional Law—Materials and Commentary (LexisNexis Butterworths, 10th ed, 2016) 570ff. 220 90 ATC 4814; DFC of T v Homewood 91 ATC 4633. Other tests for inconsistency are whether simultaneous obedience to both state and Commonwealth laws is impossible; or whether one law removes a right or privilege conferred by the other: Telstra Corporation Ltd v Worthing (1999) 197 CLR 61, 76–7.

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instalments could not override the recovery provisions of ITAA36 (which empowered the Commissioner to recover the full amount as a lump sum). This aspect of the state Act was inconsistent with the Commonwealth law, and thus (to that extent) the state law was invalid.

[¶1-600] Removal of the states from the income tax field At the time of Federation in 1900, the various states levied their own income taxes (see ¶1-050 to ¶1-070). The Commonwealth government introduced its first income tax Act in 1915 and attempts were made to achieve uniformity in income tax laws throughout Australia. However, by 1942 uniformity had been eroded through local amendments to the various state Acts, and, allied with the pressing need for revenue to enable the Commonwealth to sustain Australia’s effort in the Second World War, this prompted the federal government to assume sole control over income tax. The Commonwealth did not have the constitutional power to simply forbid the states from levying their own income taxes. A more indirect (or devious) approach was needed— an arrangement known as the ‘Uniform Tax Scheme’.221

Uniform Tax Scheme In order to force the states out of the income tax field, the Commonwealth government in 1942 passed four complementary Acts, under which:

(1) a Commonwealth income tax was imposed Australia-wide at a substantial rate, calculated to yield the same amount of income as the state and Commonwealth Acts had together previously collected: Income Tax Act 1942

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(2) taxpayers were required to pay the Commonwealth income tax before paying any state income tax: Income Tax Assessment Act 1942

(3) the Commonwealth effectively agreed to reimburse to each state the amount which they would have obtained from their own income taxes, but only if that state had not levied an income tax in the prior year: States Grants (Income Tax Reimbursement) Act 1942, and (4) state taxation officers were temporarily transferred to the Commonwealth’s service: Income Tax (War-Time Arrangements) Act 1942.

The High Court in the First Uniform Tax Case222 upheld the validity of the scheme on the basis of the Commonwealth’s powers under ss 51(ii) (taxation), 51(iv) (the defence power) and 96 (tied grants) of the Constitution. The crucial point, in the High Court’s view, was that the Commonwealth did not attempt to prohibit the states as a matter of law from exercising their undoubted legislative power to levy an income tax. Each state was still free—in theory at least—to impose its own income tax. However, as a matter of harsh (political) reality, the inevitable and

221 Chief Justice Robert French, ‘Tax and the Constitution’, DG Hill Memorial Lecture, Canberra, 14 March 2012, 16–21. 222 South Australia v Commonwealth (1942) 65 CLR 373.

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intended result of the Commonwealth’s scheme was to make it politically and economically impossible for any state to exercise its power to tax incomes.223 The effect of the High Court’s decision therefore was to force the states out of the income tax field—not as a matter of legal mandate, but out of practical political reality. Although the High Court subsequently held in the Second Uniform Tax Case that the provision of the Income Tax Assessment Act 1942 which gave priority to the Commonwealth tax (s  221(1)(a)) was invalid, the High Court nevertheless upheld the validity of the balance of the Uniform Tax Scheme,224 and the states have not since re-entered the income tax field. The Fraser and Turnbull federal governments each put forward proposals for states to raise their own income taxes, but in each case the states declined to do so (probably for political reasons).

[¶1-620] Impact of the GST on Commonwealth–state tax relations and the vertical fiscal imbalance As noted at ¶1-570, the Commonwealth government’s exclusive collection of income tax has resulted in a vertical fiscal imbalance (VFI), reflecting the financial dominance of the Commonwealth over the states, which do not have access to taxes that generate such large revenues. With the introduction of the GST in July 2000, the Commonwealth and state governments entered into arrangements,225 under which, among other things: •

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•

the Commonwealth government repealed its sales tax, and the states in return agreed to repeal nine of their taxes226

the Commonwealth agreed to transfer the revenue raised by the GST to the states in accordance with horizontal fiscal equalisation principles; that is, the GST is distributed among the states in accordance with a formula intended to put states in an equal fiscal position, recognising that some states have greater capacity to generate other income (eg from mining activities) and have different costs structure (eg higher wage levels),227 and

223 Ibid 416, 423–4. 224 Victoria v Commonwealth (the ‘Second Uniform Tax Case’) (1957) 99 CLR 575, 614, 625–6, 661–2. 225 COAG, Intergovernmental Agreement on the Reform of Commonwealth–State Financial Relations (25 June 1999). 226 Financial institutions duty; bank account debits tax; stamp duty (on marketable securities; business properties; certain credit arrangements, instalment purchase and hiring arrangements; leases; mortgages, bonds, debentures and other loan securities; cheques, bills of exchange and promissory notes); and bed taxes. 227 Productivity Commission, Horizontal Fiscal Equalisation, Report No 88, 15 May 2018, esp 27–37, suggested replacing the current distribution formula with the ‘ETA’ (equalisation to the average of all states); the federal government indicated that it hoped to come to a final agreement on transition to a new arrangement with the states by the end of 2018: Treasury, ‘Government interim response to Productivity Commission inquiry into horizontal fiscal equalisation’, 5 July 2018, https://treasury.gov.au/publication/p2018-308096/ (accessed 23 July 2018); Commonwealth Grants Commission, Report on GST Revenue Sharing Relativities—2015 Review (2015) esp Vol 1: ‘Main Findings—Overview’ and ch 1; Budget 2016–17, Budget Paper No 3, ‘Part 3: General revenue assistance’.

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the Commonwealth undertook to maintain the GST base, and the GST rate at 10%—these elements can only be varied with the unanimous agreement of the states, and the Commonwealth government’s endorsement and enabling legislation.

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The fact that the revenue generated by the GST is transferred by the Commonwealth to the states has given the states access to a ‘growth’ tax. The GST revenue has risen from some $23,788 billion (14.5% of total federal tax collections) in 2000/01 to $60,022 billion (16.7%) in 2016/17—though in recent years the GST has not generated the levels of revenue expected (see ¶1-232).228 The transfer of GST revenues has arguably improved the states’ fiscal positions, though it has not completely corrected the VFI and disputes continue on the fairness of the distribution formula (see ¶27-000).229

228 B Carter, ‘GST distribution review’ (2013) 47(9) Taxation In Australia 560, 563; The Hon J Snelling, ‘State tax reform and GST’ (2013) 49(7) Taxation In Australia 555, 555–6. 229 Carter, ibid 561–3; Snelling, ibid; M Butler, ‘State taxes reform: A practitioner’s viewpoint’ (2013) 47(9) Taxation In Australia 567; P Mellor, ‘Reform of federalism: The GST and state income taxation’ (2008) 11(4) The Tax Specialist 272. Cf D Pinto and M Evans, ‘Returning income taxation revenue to the states: Back to the future’ (2018) 33(2) Australian Tax Forum 379. 

CHAPTER 2

Tax Formula, Tax Rates and Tax Offsets

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Calculation of tax payable Taxable income—general principle Example of calculation of tax payable Other income concepts affecting the taxation ofindividuals

¶2-000 ¶2-030 ¶2-040 ¶2-050

Rates of tax ¶2-100 – ¶2-200 Introduction¶2-100 Resident individuals ¶2-110 Prescribed non-resident individuals ¶2-120 Working holiday makers ¶2-125 Companies¶2-130 Trustees¶2-140 Superannuation funds ¶2-150 Tax-free threshold ¶2-200 Temporary budget repair levy Liability to temporary budget repair levy

¶2-250 ¶2-250

Medicare levy and Medicare levy surcharge ¶2-300 – ¶2-350 Liability to pay the Medicare levy ¶2-300 Amount and collection of levy ¶2-320 Medicare levy surcharge ¶2-350 Higher Education Loan Programme Higher Education Loan Programme (HELP) Repayment thresholds and rates for 2017/18 Family assistance Family tax benefit

¶2-400 – ¶2-405 ¶2-400 ¶2-405 ¶2-410 ¶2-410

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Tax offsets ¶2-500 – ¶2-790 Overview¶2-500 Limit on amount of offset ¶2-510 List of offsets ¶2-520 Dependant (invalid and carer) tax offset ¶2-570 Education tax offset ¶2-580 Entrepreneurs’ tax offset ¶2-590 Baby bonus ¶2-600 Medicare levy surcharge lump sum in arrears offset ¶2-610 Sole parent rebate (notional only) ¶2-620 Housekeeper rebate ¶2-630 Tax offsets for low and middle income earners ¶2-640 Medical expenses rebate ¶2-650 Private health insurance tax offset ¶2-660 Mature age worker tax offset ¶2-670 Child care benefit ¶2-680 Income arrears rebate ¶2-690 Zone rebates ¶2-700 Overseas defence force rebate ¶2-710 Civilians serving overseas with United Nations forces ¶2-720 Seniors and pensioners tax offset ¶2-730 Social security beneficiary rebate ¶2-740 Rebate for bonuses on certain life assurance policies ¶2-760 Land transport offset ¶2-770 Seafarer tax offset ¶2-790

[¶2-000] Calculation of tax payable The starting points in the calculation of tax payable are s 4-1 and 4-10 of the ITAA97 which provide that: (1) income tax is payable by ‘each individual and company, and by some other entities’(s 4-1)

(2) income tax must be paid for each ‘financial year’, defined in s 995-1(1) of the ITAA97 to be the year from 1 July to 30 June (s 4-10(1))

(3) income tax is worked out by reference to the ‘taxable income’ (¶2-030) derived by the taxpayer during the ‘income year’, which is the same as the financial year, except for: • companies, whose normal income year is the previous financial year, and • situations where the Commissioner allows the taxpayer to adopt an accounting period ending on a day other than 30 June (¶13-030) (s 4-10(2)), and

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(4) the amount of income tax payable is calculated by multiplying the taxpayer’s taxable income by the applicable tax rate (as set out in the Income Tax Rates Act 1986 (Cth) (ITRA)) and then subtracting tax offsets (s 4-10(3)).

Some entities work out their income tax by reference to something other than their taxable income (s 4-10(4)). These entities are listed in s 9-5 of the ITAA97. Levies such as Medicare levy may be added after a taxpayer’s final income tax liability has been calculated.

Tax rates The tax rates, which are contained in the Income Tax Rates Act 1986 (Cth), vary according to the nature of the taxpayer, eg individual, company or superannuation fund. If the taxpayer is an individual, the tax rates depend on whether, for tax purposes, the taxpayer is a resident (¶2-110) or a prescribed non-resident (¶2-120). Resident taxpayers are entitled to the benefit of a tax-free threshold (¶2-200). This threshold may be lower if the individual becomes or ceases to be a resident during the year. Tax rates for companies are discussed at ¶2-130, for trustees at ¶2-140 and for superannuation funds at ¶2-150.

Formula for calculating tax liability Income tax payable by a taxpayer for a financial year is calculated according to the formula in s 4-10(3), as follows: income tax = ( taxable income × rate ) − tax offsets

The amount of income tax payable is calculated using the following steps.

(1) Calculate the taxpayer’s taxable income for the income year (¶2-030).

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(2) Calculate the basic income tax liability on the taxable income according to the applicable tax rates. (3) Calculate the taxpayer’s tax offsets for the income year.

(4) Subtract the tax offsets from the basic income tax liability. The result is how much income tax is payable for the financial year. (5) Levies, charges and surcharges may then need to be added.

Tax offsets The term ‘tax offset’ is used in ITAA97 but not in ITAA36, which refers instead to ‘rebates’ and ‘credits’. Some of the rebate and credit provisions are in ITAA36, but new tax offsets (eg the private health insurance offset) are generally inserted into ITAA97. The term ‘tax offset’ is used interchangeably with the terms ‘rebate’ and ‘credit’ throughout this book. In most cases, tax offsets can only reduce a taxpayer’s tax liability to nil and excess tax offsets (ie the amount that exceeds the basic income tax liability) are lost. In some cases, excess offsets are refundable, eg the franking credit offset, or may be transferred to a spouse, eg the seniors and pensioners tax offset (¶2-510). A tax offset must be distinguished from a ‘deduction’. While a deduction is subtracted from assessable income to calculate taxable income (s  4-15 ITAA97), a tax offset is

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subtracted from the tax payable on taxable income (s 4-10). This makes a tax offset more valuable than a deduction. It also makes a tax concession in the form of a rebate, credit or offset more equitable than if it is in the form of a deduction. See the discussion of tax offsets from ¶2-500.

Levies, charges and surcharges A taxpayer may be liable for levies such as Medicare levy (¶2-300), charges such as repayment of higher education debts (¶2-400) and surcharges such as the Medicare levy surcharge (¶2350). These amounts are added after the taxpayer’s income tax liability has been calculated. Although generally imposed to raise revenue, levies are sometimes imposed for social purposes. The purpose of the temporary budget repair levy, which was payable by certain high income earners for the 2014/15, 2015/16 and 2016/17 financial years, was to repair the Federal Budget. The levy rate was 2% on the part of an individual’s taxable income that exceeded $180,000. Other levies have included: • •

• • •

the 2011/12 flood and cyclone reconstruction levy, which financed the rebuilding of infrastructure in areas affected by floods the gun levy, which funded the federal government’s 1996/97 gun buy-back scheme

the training guarantee levy imposed on employers who failed to set aside sufficient funds for training employees a levy for redundancy payments to the staff of Ansett Airlines in 2001, and

a levy imposed from 2003 on insurers of commercial buildings to pay for reinsurance against the risk of terrorist attack.

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Payment of income tax Income tax is due and payable as set out in s 5-1 and 5-5 of the ITAA97 which state that income tax is only due and payable if the Commissioner makes an assessment of income tax for the year. For the rules on when tax is due and payable, see ¶32-000. Under the PAYG (Pay-As-You-Go) scheme, income tax may be paid during the income year either in instalments by entities deriving business or investment income (¶32460) or by tax being withheld from payments by the payer, eg by an employer from wages paid to employees (¶32-410). When the taxpayer lodges an income tax return, credit is given for tax already paid or withheld during the year. The taxpayer may then be liable to pay additional income tax or be entitled to a refund. See ¶2-040 for an example of the calculation of tax payable by an individual for 2018/19.

Liability to other taxes A taxpayer may be liable to taxes other than income tax. Other important taxes include: •

1

capital gains tax1on the disposal of certain assets (Chapters 7 and 8)

Although a taxpayer’s net capital gain for a year is included in their assessable income under s  102-5 ITAA97,

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• •

fringe benefits tax that is payable by an employer when a fringe benefit is provided to an employee (Chapter 26)

goods and services tax that is payable by consumers of goods and services (Chapter 27)

• excess contributions tax which may be payable when excess superannuation contributions are made for a member of a superannuation fund in a year (¶23125), and •

various state taxes, such as pay-roll tax, stamp duty or land tax (Chapter 28).

[¶2-030] Taxable income—general principle Taxable income is defined generally according to the formula in s 4-15(1). The formula for calculating taxable income is as follows: = taxable income = assessable income − deductions

A taxpayer’s taxable income for an income year is calculated using the following steps.

(1) Add up all the taxpayer’s assessable income for the income year. (2) Add up all the taxpayer’s deductions for the income year.

(3) Subtract the deductions from the assessable income and the result is the taxpayer’s taxable income.

If the deductions equal the assessable income, the taxpayer does not have a taxable income. If the deductions exceed the assessable income, the taxpayer may have a tax loss (¶11-500), which can be carried forward for deduction in a later year. In some cases, taxable income is worked out in a special way, eg where a company is a member of a consolidated group (¶20-010) at any time in the income year (s 4-15(2)).

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Assessable income ‘Assessable income’ consists of ‘ordinary income’ and ‘statutory income’ (s 6-1(1) ITAA97). Ordinary income is ‘income according to ordinary concepts’ (s 6-5(1) ITAA97). Statutory income is amounts that are not ordinary income but are included in assessable income by a provision of the Act (s 6-10(1) ITAA97). If an amount is neither ordinary income nor statutory income, it is not assessable income and no tax is payable on it (s  6-15(1) ITAA97). Exempt income2 and nonassessable non-exempt income3 are both non-assessable income (s 6-15(2), (3) ITAA97). Amounts are included in assessable income for the income year in which they are derived by the taxpayer. The question of when income is ‘derived’ for tax purposes is dealt with in Chapter 13.

liability to capital gains tax is calculated according to specific rules in Pt 3-1 and 3-3 ITAA97. 2

See ¶9-020 for a discussion of the circumstances in which an amount is exempt income.

3

See ¶9-005 for a discussion of the circumstances in which an amount is non-assessable non-exempt income.

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Deductions ‘Deductions’ fall into two categories:  general deductions (s  8-1 ITAA97) and specific deductions (s 8-5 ITAA97). Deductions are discussed in Chapters 10, 11 and 12.

Currency translation rules Where amounts are in foreign currency, they must be translated into Australian dollars before tax liability can be calculated. The foreign currency translation rules are discussed at ¶22-240ff.

Variations to the general taxation principles The general principles as to how taxable income is calculated need to be read in the light of the following points.

(1) Jurisdictional rules. The calculation of a taxpayer’s assessable income and deductions is subject to important jurisdictional qualifications. Generally:

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(a) taxpayers who are residents for tax purposes are required to include in their assessable income the ordinary and statutory income they derive from all sources, whether in or out of Australia (s 6-5(2); 6-10(4)) (b) foreign residents generally include in their assessable income only the ordinary and statutory income they derive from Australian sources (they may also be required to include amounts in their assessable income on some basis other than having an Australian source—foreign residents are, for example, only taxed on capital gains from CGT assets that are ‘taxable Australian property’ (¶8-700) (s 6-5(3); 6-10(5))), and (c) a temporary resident, basically a person in Australia on a temporary skilled work visa that allows them to stay up to four years, is generally taxed like a foreign resident and does not pay tax in Australia on most income derived from foreign sources (¶9-015).

Example—Resident assessable on overseas income An Australian resident individual receives interest from a deposit in a French bank. The taxpayer is assessable on the interest in Australia. If the taxpayer is also assessable in France on the interest income, they may be entitled to claim a foreign income tax offset (¶24-320) to prevent the amount being taxed twice.

Jurisdictional rules in the Australian tax system operate subject to a broad range of exceptions, including rules in international tax agreements to which Australia is a party (¶24-020).

(2) Anti-duplication rules. Anti-duplication rules ensure that a particular receipt or expense is only brought to account once. These rules prevent, for example, a receipt being assessed both as ordinary income and statutory income or an expense being deductible under both the general and specific deduction provisions.

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In the case of income, unless a contrary intention appears, the statutory income provisions prevail over the rules about ordinary income (s 6-25). An example of the contrary intention appearing is s 118-20 of the ITAA97 which states that a capital gain (statutory income) made from a CGT event is reduced if, because of the event, an amount is also included in assessable income under another provision (¶7-710). This means that priority is given to taxation of the amount under the non-CGT provisions. If two or more provisions allow a deduction for the same amount, the ‘most appropriate’, generally the more specific, provision will apply (s 8-10 ITAA97).

(3) Interactions with GST. To ensure that there is no double effect from the imposition of income tax and GST, the income tax rules have the following effect: (a) GST payable on a taxable supply is disregarded when calculating a taxpayer’s assessable income (s  17-5 ITAA97). If a GST-registered taxpayer supplies a good or service with GST added in the course of a business, the GST paid on the taxable supply is expressly stated not to be either assessable income or exempt income for the supplier (¶3-120). (b) A deduction is not allowable to the extent that a loss or outgoing incurred by a taxpayer includes an amount relating to an input tax credit to which the taxpayer is entitled (s  27-5 ITAA97). If a GST-registered taxpayer purchases an item with GST added for use in their business, a deduction is not allowed for the amount of the expenditure that can be claimed by the purchaser as an input tax credit, generally the amount of GST paid (¶10-535).

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(4) Tax liability may be based on something other than taxable income. For some entities, tax liability may be worked out by reference to something other than taxable income (s 9-5 ITAA97). The income tax liability of a superannuation fund may, for example, be based on its no-TFN contributions income as well as on taxable income (¶23090).

Other income concepts relevant to the taxation of individuals Although taxable income is generally the basis for calculating tax liability, there are other income concepts that may affect an individual’s liability to taxation or their entitlement to tax concessions. These concepts, such as adjusted taxable income and reportable employer superannuation contributions, are discussed at ¶2-050.

[¶2-040] Example of calculation of tax payable The following example illustrates the calculation of tax payable by a resident individual for 2018/19 based on the steps in s 4-10(3) (¶2-000). Example—Tax liability of resident individual Ellie, who is employed by a finance company, is a single resident taxpayer with private health insurance. Step 1: calculate the taxpayer’s taxable income.

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During 2018/19, Ellie earns the following amounts: • salary of $100,000—$19,000 tax is withheld by her employer during the year and remitted to the ATO • franked dividends of $7,000 with franking credits of $3,000 • rent of $10,000 from an investment property, and • interest of $3,000. Her assessable income is $123,000 ($100,000 + $7,000 + $3,000 + $10,000 + $3,000). Ellie’s employer makes compulsory superannuation guarantee contributions for Ellie. These contributions are not taken into account in calculating her assessable income. During 2018/19, Ellie’s deductible expenditure is: • self-education expenses of $4,000 • gifts of $10,000 • investment property repairs of $12,000 • car expenses of $2,000 • bank fees of $200, and • brokerage fees of $300. She has allowable deductions of $28,500 ($4,000 + $10,000 + $12,000 + $2,000 + $200 + $300). Ellie’s taxable income is $94,500 ($123,000 assessable income minus $28,500 deductions). Step 2:  calculate the basic income tax liability on the taxable income according to the applicable tax rates. Ellie’s basic income tax liability on a taxable income of $94,500, using the 2018/19 tax rates for a resident individual (¶2-110), is $22,462. Step 3: calculate the taxpayer’s tax offsets.

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Ellie is entitled to an offset for the $3,000 franking credits (¶18-390). Step 4: subtract the tax offsets from the basic income tax liability. Ellie’s $3,000 franking credit offset reduces her basic income tax liability to $19,462. Step 5: credit is given for the tax withheld. Ellie receives a credit for the $19,000 tax withheld by her employer during the year, and her income tax liability is reduced to $462 ($19,462 - $19,000). Step 6: levies and charges are added. Ellie is liable to Medicare levy (¶2-320) of $1,890 ($94,500 × 2%). She is not liable to Medicare levy surcharge (¶2-350) because she has private health insurance. Step 7:2018/19 tax is payable. When Ellie lodges her tax return for 2018/19, she will receive a notice of assessment for income tax payable of $2,352 ($462 + $1,890).

Tax Formula, Tax Rates and Tax Offsets65

[¶2-050] Other income concepts affecting the taxation of individuals Although a taxpayer’s income tax liability is based on their ‘taxable income’, other measurements of income may affect the taxpayer’s entitlement to tax concessions or their tax obligations. These income measures, which have generally applied from 1 July 2009, derive from the aim to enhance the fairness of the tax system by removing inconsistencies in the treatment of different forms of remuneration received by individuals. The most important consequence of these measures is the reduced effectiveness, for tax purposes, of salary sacrifice arrangements (¶4-070). These measures expanded the definitions of income, for certain purposes, to include: •

• • •

amounts contributed to superannuation under a salary sacrifice arrangement— as a result of the change, individuals who reduce their assessable salary income by contributing pre-tax salary to superannuation may be treated on an equivalent basis to those who pay tax on the salary deducted personal superannuation contributions

net losses from financial investments and from rental property, and the value of certain fringe benefits provided to an employee.

The income concepts, and the areas of their application, are discussed below.

(1) Reportable employer superannuation contributions ‘Reportable employer superannuation contributions’ of an individual, as defined in s 16182 sch 1 of the TAA, are amounts contributed:

(a) by an employer of the individual, or an associate of the employer, for the individual to a superannuation fund

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(b) to the extent that the individual has the capacity, or might reasonably be expected to have the capacity, to influence: (i) the amount of the contribution; and/or (ii) the way the amount is contributed so that their assessable income is reduced.

Reportable employer superannuation contributions do not include contributions that an employer is required to make (eg superannuation guarantee contributions for an employee: ¶23-800), but are often employer contributions resulting from a salary sacrifice arrangement entered into by an employee (¶4-070). An employee is treated as not having the capacity to influence the size of a contribution if the employer is required to contribute the amount. If an employee has the capacity to influence the size of an employer’s contribution, it is only the amount of the contribution in excess of the amount required to be made by law (eg under the superannuation guarantee scheme) that is a reportable employer superannuation contribution. Tax consequences

Although reportable employer superannuation contributions must be reported by an employer on an employee’s payment summary (s 16-153 and 16-155 sch 1 TAA), they are not included in the employee’s assessable income and no tax is payable on these amounts. The contributions are, however, taken into account in determining eligibility for: •

a government co-contribution (¶23-150)

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Tax Formula, Tax Rates and Tax Offsets

•

a low income superannuation tax offset (¶23-155)

•

a dependant (invalid and carer) tax offset (¶2-570)

• • • • •

a tax offset for spouse contributions (¶23-145) a seniors and pensioners tax offset (¶2-730)

a deduction for losses from non-commercial business activities (¶11-558) a medical expenses rebate (¶2-650), and

employee share scheme concessions (¶4-400).

Reportable employer superannuation contributions are also taken into account in calculating a taxpayer’s liability to Medicare levy surcharge (¶2-350) and repayments of HELP debts (¶2-400), and their entitlement to family tax benefit (¶2-410).

(2) Reportable superannuation contributions An individual’s ‘reportable superannuation contributions’, as defined in s  995-1(1), it is the sum of: • •

the individual’s reportable employer superannuation contributions (see above), and

personal contributions made by the individual for which a deduction has been allowed (¶23-120),

but does not include any excess superannuation contributions (¶23-125) made for the individual. Tax consequences

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Reportable superannuation contributions are taken into account in calculating liability to the Medicare levy surcharge (¶2-350) and repayment of HELP debts (¶2-400), and entitlement to the following tax concessions: •

a dependant (invalid and carer) tax offset (¶2-570)

•

a low income superannuation tax offset (¶23-155)

• • • •

a seniors and pensioners tax offset (¶2-730)

a deduction for losses from non-commercial business activities (11-558) a medical expenses rebate (¶2-650), and

employee share scheme concessions (¶4-400).

(3) Total net investment losses The total net investment loss of an individual for an income year means the sum of: •

•

•

the amount by which their deductions attributable to ‘financial investments’ exceed their gross income from financial investments, and

the amount by which their deductions attributable to rental property exceed their gross income from rental property (s 995-1(1)). ‘Financial investment’ includes:

a share in a company (whether an Australian or a foreign company)

Tax Formula, Tax Rates and Tax Offsets67

• • • •

an interest in a managed investment scheme within the meaning of the Corporations Act 2001 (Cth) (this means the ITAA97 requirement for a managed investment scheme to have more than 20 members does not apply) a forestry interest in a forestry managed investment scheme a right or option in respect of any of the above, and

investments of a ‘like nature’ to the above investments (s 995-1(1)).

Tax consequences

Total net investment losses are included in the income tests for the following purposes: •

Medicare levy surcharge (¶2-350)

•

a seniors and pensioners tax offset (¶2-730)

• • • •

HELP debt repayments (¶2-400)

a dependant (invalid and carer) tax offset (¶2-570) employee share scheme concessions (¶4-400), and family tax benefit (¶2-410).

(4) Adjusted fringe benefits total From 1 January 2017,4 an individual’s adjusted fringe benefits total for a year is calculated as:

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reportable fringe benefits total × FBT rate

‘FBT rate’ is the rate of tax set by the Fringe Benefits Tax Assessment Act 1986 (Cth) for the FBT year. The FBT rate for the 2017/18 and 2018/19 FBT years is 47%. The ‘reportable fringe benefits total’ (¶26-350) is the amount that must be reported on an individual’s payment summary. Where a taxpayer receives fringe benefits from an employer in an FBT year with a taxable value of at least $2,000, the grossed up value of those fringe benefits must be reported on the payment summary. For the 2017/18 and 2018/19 FBT years, the taxable value is grossed up by 1.8868. If the fringe benefits received by the taxpayer have a taxable value of less than $2,000, no amount needs to be reported. Example—Employee’s adjusted fringe benefits total In the 2018/19 FBT year, an employer provides fringe benefits to two employees. (1) One employee receives fringe benefits with a taxable value of $3,000. The amount that is reported on her payment summary (her reportable fringe benefits total) is $5,660 (ie $3,000 × 1.8868). Her adjusted fringe benefits total is $2,660 ($5.660. x 47%).

4

Budget Savings (Omnibus) Act 2016 Sch 15, amendments to the definition of ‘adjusted fringe benefits total’ in s 4 of the A New Tax System (Family Assistance) Act 1999 (Cth) insertion of new definition of ‘adjusted fringe benefits total’ in s 6(1) of the ITAA36 and repeal of the definition of ‘reportable fringe benefits total’ in s 6(1) of the ITAA36.

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Tax Formula, Tax Rates and Tax Offsets

(2) A second employee receives fringe benefits with a taxable value of $1,800. He has no reportable fringe benefits total because the taxable value of his fringe benefits is less than $2,000, and he also has no adjusted fringe benefits total.

Before 1 January 2017, an individual’s ‘adjusted fringe benefits total’ for a year of income was the amount worked out by using the formula: taxpayer’s reportable fringe benefits total × ( 1 − FBT rate )

The effect of the definition of adjusted fringe benefits total before 1 January 2017 was that a taxpayer’s adjusted fringe benefits total was the amount that was the taxable value of the fringe benefits before it was grossed up. As the FBT rate for 2016/17 was 49%, a taxpayer’s adjusted fringe benefits total was effectively 51% of their reportable fringe benefits total. A taxpayer did not have an adjusted fringe benefits total unless they received fringe benefits in an FBT year with a taxable value of at least $2,000. Despite the change in the definition of adjusted fringe benefits total from 1 January 2017, the change does not apply to fringe benefits sourced from certain not-for-profit institutions that are eligible for exemption from fringe benefits tax (¶26-310). These employers continue to be assessed under the pre-1 January 2017 arrangements. Tax consequences

An individual’s adjusted fringe benefits total is included in income tests for: •

a seniors and pensioners tax offset (¶2-730)

•

a dependant (invalid and carer) tax offset (¶2-570), and

• •

a medical expenses rebate (¶2-650) family tax benefit (¶2-410).

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(5) Adjusted taxable income ‘Adjusted taxable income’ is, since 2012/13, most commonly used in the terms ‘adjusted taxable income for offsets’ and ‘adjusted taxable income for rebates’ and has the meaning that is relevant for the purposes of the family tax benefit.5 For family tax benefit purposes, an individual’s adjusted taxable income is the sum of the following amounts: •

taxable income

•

tax-free government pensions or benefits

• •

• 5

adjusted fringe benefits amount

target foreign income, which includes income earned from overseas that is not already included in taxable income or received in the form of a fringe benefit reportable superannuation contributions, and

Adjusted taxable income for offsets’ is defined in s 995-1(1) of ITAA97 as meaning ‘adjusted taxable income for rebates’ within the meaning in s 6(1) of ITAA36, ie it means ‘adjusted taxable income (within the meaning of the A New Tax System (Family Assistance) Act 1999 (Cth) disregarding clauses 3 and 3A of Schedule 3 to that Act’.

Tax Formula, Tax Rates and Tax Offsets69

•

total net investment loss,

minus the amount of any child support payments made by the individual. Otherwise, ‘adjusted taxable income’ has the meaning given by ss 45-330 and 45-480 in sch 1 to the TAA, and is used to calculate the instalment rate of a PAYG instalment payer (¶32-460). Tax consequences

Eligibility for a dependant (invalid and carer) tax offset (¶2-570) is subject to a $100,000 threshold, which is tested against the individual’s ‘adjusted taxable income for offsets’ for the year. Adjusted taxable income is also relevant in determining eligibility for: •

a zone rebate (¶2-700)

•

a medical expenses rebate (¶2-650), and

• •

an overseas defence force rebate (¶2-710) a low income superannuation tax offset (¶23-155).

RATES OF TAX (¶2-100 – ¶2-200) [¶2-100] Introduction Tax is payable at rates set out in Rating Acts passed by parliament (normally during the Budget sitting each year). Rates applicable to individuals vary according to whether the person is, for tax purposes, a resident or a prescribed non-resident.

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Resident or non-resident rates A resident individual taxpayer pays tax at resident rates (¶2-110) on their taxable income for the year. A person is treated as a resident for these purposes if they are a resident (¶24050) for income tax purposes at any time during the income year or in receipt of certain social security benefits. A non-resident individual taxpayer pays tax at non-resident rates (¶2-120) if they are a ‘prescribed non-resident taxpayer’, which is a person who at all times during the year is a non-resident. This means the non-resident rates only apply to the taxable income of a person who is a non-resident for every day of the year. If they are a resident for at least one day, the resident rates apply to their taxable income for the year. These resident and non-resident rates come from the Income Tax Rates Act 1986 (Cth), in particular the definitions of ‘resident taxpayer’, ‘non-resident taxpayer’ and ‘prescribed non-resident taxpayer’ in s 3(1) and Parts I and II in sch 7 of that Act. An individual who is a resident for all the year is entitled to a tax-free threshold of $18,200, but they are only entitled to a part threshold if they are a resident for only part of the year (¶2-200). Prescribed non-residents are not entitled to the benefit of a tax-free threshold. Medicare levy (¶2-300) and Medicare levy surcharge (¶2-350) may be payable by an individual who is resident for at least one day of the year. An individual is exempt from both the Medicare levy and the Medicare levy surcharge if they are a ‘prescribed

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Tax Formula, Tax Rates and Tax Offsets

person’(s 251U ITAA36), which is an individual who is a non-resident during the whole year. The Medicare levy and Medicare levy surcharge are imposed by the Medicare Levy Act 1986 Cth). For the 2014/15, 2015/16 and 2016/17 income years, the temporary budget repair levy was added to the top tax rate of a resident individual or a foreign resident individual whose taxable income exceeded $180,000 (¶2-250). The levy brought the top tax rate to 47% for income over $180,000. The temporary budget repair levy does not apply from 2017/18.

Calculating the assessable income of a resident or non-resident For the period of a year that a taxpayer is a resident, they include in their assessable income amounts derived from both Australian and non-Australian sources (s 6-5(2) and 6-10(4) ITAA97). For the period of a year that a taxpayer is a non-resident, they include in their assessable income only amounts derived from Australian sources (s 6-5(3) and 6-10(5) ITAA97).

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Tax concessions for certain taxpayers Individuals who carry on a small business generally pay tax at ordinary individual rates on their business income. From 2015/16, an individual who is a ‘small business entity’ (¶15-100) may be entitled to a small business income tax offset. The offset is calculated as a percentage of the income tax payable on the small business income and is capped at $1,000 for an income year (¶15-210). Taxation concessions are afforded to primary producers (¶21-100ff ) and to artists, composers, inventors, performers, production associates, sportspersons and writers (¶21300ff ). These concessions allow income to be ‘averaged’ over a number of years to minimise the impact of income fluctuations and progressive tax rates. Norfolk Island resident individuals, companies and trustees were, before 1 July 2016, exempt from income tax in relation to their Norfolk Island sourced income and their foreign sourced income, and were also exempt from Medicare levy and Medicare levy surcharge. The enactment of the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 (Cth) means that these exemptions no longer apply. The income tax changes complement substantial changes to the governance and social welfare arrangements for Norfolk Island.

Basic tax rates The tax rates applicable to various types of taxpayers are set out at ¶2-110 and following. The rates cover: •

resident individuals (¶2-110)

•

working holiday makers (¶2-125)

• • • •

prescribed non-resident individuals (¶2-120) companies (¶2-130)

trustees (¶2-140), and

superannuation funds (¶2-150).

Tax Formula, Tax Rates and Tax Offsets71

Repeal of 2015/16 income tax changes The Clean Energy (Income Tax Rates Amendments) Act 2011 (Cth) made amendments to s 3(1) and Pt 1 of sch 7 to the Income Tax Rates Act 1986 (Cth) to apply from the 2015/16 income year. These amendments were to increase the tax-free threshold for individuals from $18,200 to $19,400 and to increase the second lowest personal marginal tax rate from 32.5 per cent to 33 per cent. The amendments were also to reduce the maximum value of the low income tax offset from $450 to $300. The Labor 2013-14 Budget Savings (Measures No 1)  Act 2015 (Cth) amended the Clean Energy (Income Tax Rates Amendments) Act 2011 (Cth) to repeal these tax changes that were to take effect from 2015/16. This meant that the rate changes for 2015/16 as proposed in the 2011 legislation did not proceed.

[¶2-110] Resident individuals A ‘resident taxpayer’ is defined in s  3(1) Income Tax Rates Act 1986 (Cth) (ITRA) as a taxpayer who is not a prescribed non-resident taxpayer. Because a ‘prescribed non-resident taxpayer’ is defined in s 3(1) of the ITRA as a person who at all times during the year is a non-resident, a person is treated as a resident for an income year if they are a resident for one or more days of the income year. Resident individuals pay tax at progressive rates on taxable income from all sources, ie on Australian-source income and on income from a source outside Australia. The progressive rates mean that the higher the taxable income the higher the rate at which tax is imposed. A resident individual may be liable to Medicare levy (¶2-300) or Medicare levy surcharge (¶2-350) in addition to their basic income tax liability. A resident individual may also have been liable to temporary budget repair levy (¶2-250), but only for the 2014/15, 2015/16 and 2016/17 income years. Copyright © 2019. Oxford University Press. All rights reserved.

Tax rates for 2018/19 The tax rates6 for resident individuals for 2018/19 are set out in the following table. The resident individual tax rates will remain the same for 2019/20, 2020/21 and 2021/22. The third income tax threshold in the table was increased to $90,000, up from $87,000, from the 2018/19 income year by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (Cth). The tax rates in the table do not incorporate the 2% Medicare levy or the Medicare levy surcharge which are added, if appropriate, after income tax liability is calculated.

6

ITRA s 12(1); sch 7, Pt I.

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Tax Formula, Tax Rates and Tax Offsets

 

Resident individual rates 2018/19 Taxable income $

Marginal tax rate

Tax payable

0 to 18,200

0%

Nil

18,201 to 37,000

19%

19 cents for each $1 over $18,200

37,001 to 90,000

32.5%

$3,572 plus 32.5 cents for each $1 over $37,000

180,001 and over

45%

$54,097 plus 45 cents for each $1 over $180,000

90,001 to 180,000

37%

$20,797 plus 37 cents for each $1 over $90,000

Example—Resident individual with $40,000 taxable income Rohan, a resident, has taxable income in 2018/19 of $40,000. His tax payable is calculated as follows:

Tax on $18,200

Plus ($37,000 − $18,200) × 19%

Plus ($40,000 − $37,000) × 32.5%

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Tax payable

$

0

3,572 975

$4,547

Rohan’s marginal tax rate (ie the rate at which he pays tax on the top dollar of his taxable income) is 32.5%. His tax liability is reduced by the amount of any tax offsets to which he is entitled (¶2500), for example, a low income tax offset and a low and middle earners tax offset (¶2-640). Medicare levy would need to be added (¶2-300). This would add $800 to Rohan’s tax liability (ie 2% × $40,000). Rohan is not liable to Medicare levy surcharge because his income is below the surcharge threshold (¶2-350).

Example—Resident individual with $193,000 taxable income Emma, a single resident taxpayer with private health insurance, has taxable income in 2018/19 of $193,000. Her tax payable is:

Tax on $18,200

Plus ($37,000 − $18,200) × 19%

Plus ($90,000 − $37,000) × 32.5% Plus ($180,000 − $90,000) × 37%

Plus ($193,000 − $180,000) × 45% Tax payable

  $

0

3,572

17,225 33,300

5,850

59,947

Tax Formula, Tax Rates and Tax Offsets73

Emma’s marginal tax rate (the rate at which she pays tax on the top dollar of her taxable income) is 45%. Her tax liability is reduced by the amount of any tax offsets to which she is entitled (¶2-500). Emma would also have to pay Medicare levy of $3,860 (ie 2% × $193,000), but is not liable to Medicare levy surcharge because she has private health insurance.

Tax rates for 2017/18 The tax rates for resident individuals for 2017/18 are set out in the following table. The rates do not incorporate the 2% Medicare levy or the Medicare levy surcharge which are added, if appropriate, after income tax liability is calculated. Resident individual rates 2017/18 Taxable income $

Tax thereon $

% on excess (marginal rate)

18,200

Nil

19

37,000 87,000

180,000

3,572

32.5

54,232

47

19,822

37

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[¶2-120] Prescribed non-resident individuals A ‘prescribed non-resident’ is defined in s 3(1) Income Tax Rates Act 1986 (Cth) as a person who at all times during the income year is a non-resident (¶24-050) of Australia. A person is not a prescribed non-resident if they receive a taxable Australian social security or veterans’ compensation, pension, allowance or benefit at any time during the income year. A prescribed non-resident pays tax on all of their taxable income (ie there is no tax-free threshold), but their taxable income generally only includes Australian-source income. A prescribed non-resident is not liable to Medicare levy (¶2-300) or Medicare levy surcharge (¶2-350).

Tax rates for 2018/19 The tax rates7 for prescribed non-residents for 2018/19 are set out in the following table. The prescribed non-resident tax rates will remain the same for 2019/20, 2020/21 and 2021/22. The second income tax threshold in the table was increased to $90,000, up from $87,000, from the 2018/19 income year by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (Cth).

7

ITRA s 12(1); sch 7, Pt II.

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Tax Formula, Tax Rates and Tax Offsets

 

Non-resident individual rates 2018/19 Taxable income $

Tax thereon $

% on excess (marginal rate)

0

0

32.5

62,550

45

90,000

180,000

29,250

37

Example—Non-resident individual’s tax liability Danny is a non-resident for every day of 2018/19 and is therefore taxed as a prescribed non-resident. He has taxable income of $120,000, made up of $29,000 from investments in Singapore (and therefore from a foreign source) and $91,000 from providing services in Australia. As a foreign resident, Danny only has to pay tax in Australia on the $91,000 derived from Australian sources (s  6-5(3) ITAA97). His tax payable is calculated as follows: $

$90,000 × 32.5%

29,250

Plus ($91,000 − $90,000) × 37%

370

Tax payable

$29,620

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Danny’s marginal tax rate (ie the rate at which he pays tax on the top dollar of his taxable income) is 37%. He does not add Medicare levy (¶2-300) or Medicare levy surcharge (¶2-350) to his tax liability because he is a prescribed non-resident. .

An individual who is a resident for at least one day of the year is taxed at resident rates (¶2-110).

Tax rates for 2017/18 The tax rates for prescribed non-residents for 2017/18 are set out in the following table. Non-resident individual rates 2017/18 Taxable income $ 0

87,000

180,000

Tax thereon $

% on excess (marginal rate)

0

32.5

62,685

45

28,275

37

[¶2-125] Working holiday makers The Government announced in the 2015/16 Federal Budget that it proposed to change the tax residency rules so that certain people who are temporarily in Australia for a working holiday (often called ‘backpackers’) would be treated as non-residents for tax purposes,

Tax Formula, Tax Rates and Tax Offsets75

regardless of how long they are in Australia. Working holiday makers for these purposes are individuals holding a Subclass 417 (Working Holiday) visa, a Subclass 462 (Work and Holiday) visa or certain related bridging visas. The backpacker tax proposal was enacted by legislation that commenced on 1 January 2017,8 A 15% tax rate is applied to ‘working holiday maker taxable income’ on amounts up to $37,000 and ordinary tax rates (¶2-120) apply to taxable income above $37,000. Working holiday maker taxable income comprises all Australian-sourced income earned while the taxpayer is a working holiday maker, eg employment income and interest income. The tax rates for working holiday makers for 2018/19 are set out in the following table. Working holiday maker rates 2018/19 Taxable income $ 0 to 37,000

15

Tax payable 15 cents for each $1

37,001 to 90,000

32.5

$5,550 plus 32.5 cents for each $1 over $37,000

180,001 and over

45

$56,075 plus 45 cents for each $1 over $180,000

90,001 to 180,000

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Marginal tax rate

37

$22,775 plus 37 cents for each $1 over $90,000

Employers of working holiday makers are required to register with the ATO, which allows them to withhold tax at the income tax rates applicable to working holiday makers. An employer who fails to register must withhold from a working holiday maker’s wages at the general non-resident rate of 32.5%. These tax rates only apply if the working holiday maker provides their tax file number to their employer–otherwise, the employer must withhold at the top rate (45% for 2018/19 and 2017/18). A working holiday maker is entitled to a refund of any excess PAYG withholding amount when they lodge their income tax return. Working holiday makers are not liable for Medicare levy and are not entitled to the benefit of tax offsets. Employers must make superannuation guarantee contributions (¶23-800) on behalf of their working holiday maker employees in the same way as they make contributions for other employees. A working holiday maker who has left Australia can apply to the ATO to have their superannuation money paid to them as a departing Australia superannuation payment (¶23-580). Any such payment made from 1 July 2017 is taxed at 65%.

ATO view Before these changes, the ATO view was that most working holiday makers were nonresidents due to the transient pattern of their working and holidaying while in Australia. As a non-resident for tax purposes, they would be taxed only on their Australian-sourced income and would commence to pay tax on the first dollar of income they earn at the nonresident rate of 32.5% (¶2-120).

8

The most important legislation was the Treasury Laws Amendment (Working Holiday Maker Reform) Act 2016 (Cth), the Income Tax Rates Amendment (Working Holiday Maker Reform) Act 2016 (Cth), the Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act 2016 (Cth) and the Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act (No 2) 2016 (Cth).

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Tax Formula, Tax Rates and Tax Offsets

In Koustrup v FC of T,9 the Commissioner successfully argued that the taxpayer was not a resident of Australia and therefore was not entitled to benefit from the tax-free threshold (¶2-200) when calculating her tax liability. The taxpayer had entered Australia on a working holiday visa, intending to stay as a visitor for about eight months. While in Australia, she worked for short periods in various parts of Australia, and returned to Denmark after 287 days. The AAT found that the taxpayer had a usual place of abode at her parents’ place in Denmark at all relevant times and that she was a non-resident of Australia.

[¶2-130] Companies For many years, most companies (‘corporate tax entities’) have paid tax at a single flat rate (the ‘general corporate tax rate’) of 30%.10 Special rates have applied to certain companies, such as life insurance companies (¶21-400) and non-profit companies (¶21-530).

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Reduced rate for some companies For the 2015/16 income year, a reduced tax rate of 28.5% was introduced for corporate tax entities that were ‘small business entities’. These were essentially companies that carried on business and had aggregated turnover of less than $2m (¶15-100). For 2016/17, the aggregated turnover threshold for small business entities was increased from $2 million to $10 million and the tax rate for these entities was decreased from 28.5% to 27.5%. From 2017/18, companies that are ‘base rate entities’ pay tax at the 27.5% rate. A company is a base rate entity for a year if: (i) no more than 80% of its assessable income for the year is base rate entity passive income (as defined in s 23AB ITRA), and (ii) its aggregated turnover is less than the turnover threshold for the year (s 23AA ITRA). The threshold is $25 million for 2017/18 and $50 million from 2018/19 to 2023/24). In the 2016 Budget, the government proposed an increase in the aggregated turnover threshold at which the 27.5% rate (later to be reduced to 25%) would apply, so that eventually all companies would benefit from the lower rate. This proposal was to be implemented by the Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017, but the Government did not succeed in persuading the Senate to pass the Bill. As currently enacted, the corporate tax rates are as follows. Income year

Aggregated turnover threshold

Tax rate for base rate entities

Tax rate for other companies

2017/18

$25 million

27.5%

30%

27%

30%

25%

30%

2018/19 to 2023/24 2024/25

2025/26 2026/27

9

[2015] AATA 126

10 ITRA s 23(2); 24; 25.

$50 million

$50 million

$50 million $50 million

27.5% 26%

30%

30%

Tax Formula, Tax Rates and Tax Offsets77

Tax rates applicable to companies are discussed further at ¶18-020. Complementing the lower tax rate available to some companies, certain individuals may be entitled to a ‘small business income tax offset’ (¶15-210) capped at $1,000 for a year.

[¶2-140] Trustees Tax rates for trustees for 2018/19 are as follows.

(1) Minor beneficiary presently entitled •

•

Where the trustee is assessed under s 98(1) or (2) of the ITAA36 on income to which a minor beneficiary is presently entitled and the trust income is taxed at div 6AA rates as eligible assessable income (¶21-030), tax is payable by the trustee at the rates discussed at¶21-050.11

Where the trustee is assessed under s 98 on income to which a minor beneficiary (or any other beneficiary under a legal disability) is presently entitled and the div 6AA rates do not apply, the general individual rates apply as follows: – for a resident individual beneficiary, at the rates set out at ¶2-110, and – for a prescribed non-resident individual beneficiary, at the rates set out at ¶2120.

Medicare levy is added, where appropriate, if the beneficiary is a resident.

(2) Non-resident beneficiary presently entitled Where the trustee is assessed under s 98(3) or (4) on trust income to which a beneficiary who is a non-resident at the end of the income year is presently entitled, the applicable rates (except where (1) above applies) are as follows: •

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•

where the beneficiary is a prescribed non-resident individual, at the rates set out at ¶2-12012, and

where the beneficiary is a company, at the general corporate tax rate of 30% or at the rate of 27.5% if the company is a small business entity (¶2-130).

Medicare levy may be added if the trustee is paying tax on behalf of an individual resident beneficiary.

(3) No beneficiary is presently entitled and s 99A applies Where no beneficiary is presently entitled to the income of the trust estate (¶17-063), the trustee is assessed under s 99A of the ITAA36 (unless s 99 applies–see (4) below). Under s 99A, the trustee is taxed at the flat rate of 45% for 2018/1913.

(4) No beneficiary is presently entitled and s 99 applies The Commissioner has discretion to assess the trustee under s 99 of the ITAA36 if satisfied that it would be unreasonable for s 99A (see (3) above) to apply. 11 ITRA s 13(3), (4); 15(3); sch 12, Pt I and II. 12 ITRA s 12(6); sch 10, Pt II. 13 ITRA s 12(9).

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Tax Formula, Tax Rates and Tax Offsets

A trustee who is assessed under s 99 in respect of the net income of the trust estate of a person who died less than three years before the end of the year of income is taxed as follows: where the trust estate is resident—as set out at ¶2-11014 and where the trust estate is non-resident—as set out at ¶2-12015. A trustee who is assessed under s 99 in respect of the net income of a trust estate, other than the estate of a person who died less than three years before the end of the year of income, is taxed as follows: (i) in the case of a resident trust estate, the rates are:16 Share of net income $

Tax thereon $

% on excess

416

Nil

50

 670

37,000

90,000

180,000

127

19

7,030

32.5

57,555

45

24,255

37

(ii) in the case of a non-resident trust estate, the rates are as set out at ¶2-120.17

(5) Public trading trusts The trustee of a public trading trust (¶21-740) is liable to pay tax at the rate of 30% for 2018/19, unless the trust is a small business entity (¶15-100) in which case the tax rate is 27.5%.18

[¶2-150] Superannuation funds

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The rates at which superannuation funds, approved deposit funds and pooled superannuation trusts pay tax for 2018/19 are as follows: Type of fund

Rate of tax

Complying superannuation funds and complying approved deposit funds – assessed on income, including capital gains and assessable contributions

Legislation

15%

s 26(1) ITRA

– assessed on non-arm’s length income, private company dividends and certain trust distributions

45%

s 26(1) ITRA

– assessed on income, including capital gains and assessable contributions

45%

Non-complying superannuation funds and non-complying approved deposit funds

14 ITRA s12(6); sch 10, Pt1 15 ITRA s 12(6); sch 10, Pt II. 16 ITRA s 12; 14; sch 10, Pt I. 17 ITRA s 12(6); sch 10, Pt II. 18 ITRA s 24; 25.

s 26(2) and 27(2) ITRA

Tax Formula, Tax Rates and Tax Offsets79

Type of fund

Rate of tax

Pooled superannuation trusts

– assessed on income, including capital gains and assessable contributions transferred to the pooled superannuation trust

– assessed on non-arm’s length income, private company dividends and certain trust distributions

Legislation

15%

s 27A ITRA

45%

s 27A ITRA

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[¶2-200] Tax-free threshold Resident individuals are entitled to the benefit of a tax-free threshold, which is an amount of taxable income on which the individual is not liable to pay tax (s 16 to 20 ITRA). For 2018/19 (and for the previous six years), the threshold is $18,200. The tax-free threshold was previously $6,000. Only part of the tax-free threshold is available if a taxpayer is a resident for only part of the year. To benefit from the tax-free threshold throughout the year (rather than only when a tax return is lodged), an employee needs to indicate on the Tax File Number Declaration form they give to their employer that they wish to claim the threshold. This reduces the PAYG (Pay As You Go) tax that the employer withholds from payments to the employee (¶32-410). An employee should generally only claim the tax-free threshold from one employer at a time; otherwise, insufficient tax may be withheld during the year resulting in a tax bill for the employee when they submit their tax return. The ATO states on its website19 that, where taxpayers receive income from more than one source and they are certain they will earn less than $18,200 in total income for the financial year, they can claim the tax-free threshold from all their employers and other withholding payers (eg the payer of a taxable pension). If their income estimate for the year increases to above $18,200, they should review, and perhaps amend, the declarations they have made. Although an individual whose taxable income is under the tax-free threshold does not generally need to lodge a tax return, in some circumstances a tax return may need to be lodged, eg where the individual: (1) received income such as salary or bank interest during the year and tax has been withheld (2) has paid tax under the PAYG instalments system (¶32-460)

(3) has reportable employer superannuation contributions (¶2-050) or a reportable fringe benefits amount (¶26-350) on their PAYG payment summary

(4) is an Australian resident for tax purposes and has exempt foreign employment income (¶24-210) and $1 or more of other income, or (5) can claim a tax loss made in a previous year (¶11-050).

Prescribed non-resident individuals (¶2-120) are not entitled to a tax-free threshold.

19 https://www.ato.gov.au/individuals/working/working-as-an-employee/claiming-the-tax-free-threshold/

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Tax Formula, Tax Rates and Tax Offsets

Low income and middle income taxpayers For 2018/19, resident individual taxpayers are entitled to a low income tax offset if their taxable income is below $66,667 (¶2-640). A low or middle income earner may also be entitled to a low and middle income tax offset if their income does not exceed $125,333 (¶2-640). Entitlement to these tax offsets effectively increases an individual’s tax-free threshold.

Taxpayer is a resident for only part of a year Only a portion of the tax-free threshold is allowed in a year in which an individual is a resident for only part of the year, eg because they start to live in Australia during the year. The tax-free threshold of such an individual is calculated as: $13,464 +

$4,736 × Number of months in the year the individual is a resident 12 months

The effect of this formula is that an individual who is a resident for only part of a year has a tax-free threshold of at least $13,464, with an additional amount of tax-free threshold according to the number of months the individual is a resident. Example—Calculation of part tax-free threshold

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Jaipei arrives in Australia on 20 October 2018 to take up permanent residence. From 1 February 2019 to 30 June 2019, she earns $31,000. Jaipei has a reduced tax-free threshold because she is a resident for only part of the year (8 months from November 2018 to June 2019). Her tax-free threshold is calculated as: $13,464 + $3,157 [ie, $4,736 × 8 months/12 months] = $16,621 The first $16,621 of Jaipei’s taxable income is tax free. The remaining $14,379 is taxed at the rate of 19%.

In Groves v FC of T [2011] AATA 609, a taxpayer who was a resident from 2 July 2009 to 27 May 2010 was only entitled to a part tax-free threshold. The AAT dismissed the taxpayer’s argument that, as he was continuously in Australia for more than 183 days and had a usual place of abode in Australia, he should be treated as a resident for the full year and entitled to a full tax-free threshold. In Guissouma v FC of T [2013] AATA 875, a French citizen who spent 128 days in Australia on a working holiday visa in 2011/12 was a resident for that period because he lived in regular places in Sydney, undertook work and rented accommodation. He was therefore entitled to a pro-rated tax-free threshold when his tax liability on the $5,222 he earned in Australia was calculated.

TEMPORARY BUDGET REPAIR LEVY (¶2-250) [¶2-250] Liability to temporary budget repair levy Resident and foreign resident individuals may have been liable to pay temporary budget repair levy for the 2014/15, 2015/16 and 2016/17 financial years. The levy, which was

Tax Formula, Tax Rates and Tax Offsets81

imposed at the rate of 2% on the amount of an individual’s taxable income that exceeded $180,000, was repealed from 2017/18. An individual with taxable income below $180,000 was not liable to the levy unless they derived other income on which the levy was specifically imposed. This could be the case, for example, if the individual was a minor receiving income from a discretionary trust (¶21-050).

Calculating the levy An individual’s basic income tax liability is calculated according to s 4-10(3) of the ITAA97 (¶2-000). The levy liability was not included in the basic income tax liability and had to be calculated separately. A note at the end of s 4-10 states that s 4-11 of the Income Tax (Transitional Provisions) Act 1997 (Cth) (ITTPA) could increase the amount of income tax worked out under s 4-10. Section 4-11(1) of the ITTPA provided that a taxpayer must pay extra income tax (temporary budget repair levy) for a financial year if: (1) they were an individual

(2) their taxable income for the income year exceeded $180,000, and

(3) the financial year was a ‘temporary budget repair levy year’, defined in s 4-11(5) as the 2014/15, 2015/16 and 2016/17 financial years.

The amount of the levy was 2% of the part of the individual’s taxable income that exceeded $180,000 (s 34 in sch 1 Income Tax Rates Act 1986 (Cth)).

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Example—Tax liability includes levy Wanda, a resident taxpayer, has taxable income of $210,000 in 2016/17. The only offsets to which she is entitled are refundable franking credits of $15,000 and she is liable to Medicare levy but not to Medicare levy surcharge because she has private health insurance. Wanda’s tax liability is calculated as follows. (1) Her basic income tax liability on taxable income of $210,000 is $68,332 (¶2-110). Her income over $180,000 is taxed at 47%, which includes the 2% temporary budget repair levy. (2) The $15,000 franking credits are subtracted from the basic income tax liability, leaving a liability of $53,332. (3) Medicare levy of $4,200 (2% × $210,000) is added, giving a liability of $57,532.

Non-refundable tax offsets in excess of an individual’s basic income tax liability could not be used to reduce liability to the temporary budget repair levy, unless the offset was a foreign income tax offset (¶24-320).

Imposition of the levy reflected in other tax rates To ensure the fairness of the tax system and to minimise opportunities for avoiding the temporary budget repair levy, the levy was incorporated into a number of tax rates that are based on the top personal tax rate or that are based on the sum of the top personal rate

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Tax Formula, Tax Rates and Tax Offsets

and the Medicare levy. This generally means the tax rates were increased by two percentage points to incorporate the levy for 2014/15, 2015/16 and 2016/17. The changes to the tax rates affected, for example: •

the FBT rate which increased to 49% from 1 April 2015

•

taxation of the unearned income of minors

• • • •

PAYG withholding rates and PAYG instalment amounts where trustees were liable to taxation on behalf of individuals taxation of uncontrolled partnership income, and

withholding tax rates for departing Australia superannuation payments.

MEDICARE LEVY AND MEDICARE LEVY SURCHARGE (¶2-300 – ¶2-350) [¶2-300] Liability to pay the Medicare levy Australian resident individuals may be liable to pay Medicare levy20 based on their taxable income. The levy is generally payable by an individual who, at any time during the year of income, is a resident of Australia (s 251S(1)(a) ITAA36). It is not payable by a prescribed non-resident individual (¶2-120), ie a person who is not a resident on any day of the year. Full or partial exemption from the levy is granted to certain low income earners, seniors and pensioners, defence force members, repatriation beneficiaries, holders of healthcare cards, foreign government representatives and certain trustees (s 251T; 251U ITAA36).

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Levy may be payable by a trustee Medicare levy is payable by a trustee (¶17-063)who is liable to be assessed under s 98 of the ITAA36 in respect of the share of the net income of the trust estate to which a resident beneficiary is presently entitled (s 251S(1)(b)). The levy is calculated as if that trust income were the only taxable income of the beneficiary (s 10 Medicare Levy Act 1986 (Cth)), and is subject to the normal exemptions. The levy is also payable where the trustee of a trust estate (other than a deceased estate) is liable to be assessed and pay tax under s 99 or 99A of the ITAA36 in respect of net income of the trust estate to which no beneficiary is presently entitled (s 251S(1)(c)).

[¶2-320] Amount and collection of levy Medicare levy is imposed at a flat rate of 2% of taxable income (at 1.5% for years before 2014/15). The amount of the levy is specified on the taxpayer’s notice of assessment (s 251X ITAA36).

20 The relevant legislation is contained in Pt VIIB ITAA36 (s 251R–251X) and the Medicare Levy Act 1986 (Cth).

Tax Formula, Tax Rates and Tax Offsets83

Once a resident individual’s taxable income reaches the Medicare levy ‘low income threshold’ for the year, Medicare levy is payable unless the individual qualifies for a reduction or exemption. There are different low income thresholds for individuals and families and the thresholds generally ensure that Medicare levy is not payable if taxable income is not high enough for income tax to be payable. The following discussion is based on the Medicare levy threshold amounts for 2017/18, because the threshold amounts for 2018/19 are not yet available.

Medicare levy liability of single individuals for 2017/18 For 2017/18, Medicare levy is payable as follows (s 7 Medicare Levy Act 1986 (Cth)): •

• •

levy is payable by a single individual whose taxable income exceeds the low income threshold of $21,980 a reduced levy is payable by a single individual whose taxable income is more than $21,980 and less than $27,475—the levy is 10% of the amount over $21,980, and

levy is payable at the rate of 2% of taxable income by a single individual whose taxable income exceeds $27,475.21 The Medicare levy rates for single individuals for 2017/18 are therefore as follows:

Taxable income

Levy payable

0–$21,980

Nil

over $27,475

2% of taxable income

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$21,981–$27,475

Nil + 10% of excess over $21,980

Example—Calculation of Medicare levy payable (1) Madeleine, who is a single taxpayer, has taxable income of $28,000 for 2017/18 Medicare levy is calculated as 2% of $28,000, ie $560. Madeleine has to pay this levy in addition to her ordinary tax. (2) Val, who is a single taxpayer, has taxable income of $24,300 for 2017/18. Medicare levy payable is: 10% × ($24, 300 − $21, 980) = $232

Medicare levy liability of families for 2017/18 For an individual who has a spouse or dependants, Medicare levy is payable if the ‘family income’ of the individual exceeds the ‘family income threshold’(s  8 Medicare Levy Act 1986 (Cth)). For 2017/18, the family income threshold is $37,089 plus $3,406 for each dependent child or student. The levy is phased in for families above these limits, with the phase-in depending on the number of dependants.

21 The amount of the taxable component of a superannuation benefit for which a taxpayer aged between 55 and 60 is entitled to a tax offset under s  301-20(2) (¶23-510) is not included in the calculation of taxable income for Medicare levy purposes (s 251S(1A) ITAA36).

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Tax Formula, Tax Rates and Tax Offsets

Persons living in a de facto relationship (including in a same sex relationship) are treated as being spouses of each other for these purposes. This covers persons who have lived together on a bona fide domestic basis although not married to each other. A dependant is defined in s 251R(3) to (6) of the ITAA36 as including the person’s child aged under 21 years or the person’s child who is aged under 25 years and is a fulltime student.22 Where an individual’s family income exceeds the family income threshold by a small amount, the levy is shaded in, so that the levy payable is 10% of the excess of the family income over the family income threshold (s 7 Medicare Levy Act 1986 (Cth)). The Medicare levy rates for families for 2017/18 are as follows: Families with the following children and/or students

No levy payable if family taxable income does not exceed $

Reduced levy if family taxable income is within range (inclusive) $

Ordinary rate of levy payable where family taxable income is equal to or exceeds $

0

37,089

37,090–46,361

46,362

2

43,901

43,902-54,876

54,877

1 3 4 5 6

40,495 47,307 50,713 54,119 57,525

40,496-50,618 47,308-59,133 50,714-63,391 54,120-67,648 57,526-71,906

50,619 59,134 63,392 67,649 71,907

Where there are more than six dependent children or students, the threshold is increased by $3,406 for each extra dependant supported by the taxpayer.

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Seniors and pensioners Seniors and pensioners entitled to the seniors and pensioners tax offset (¶2-730) can earn up to $34,758 in 2017/18 before they incur Medicare levy liability. If a taxpayer’s taxable income is more than $34,758 but less than $43,447, Medicare levy is 10% of the excess over $34,758. The full levy is payable by a taxpayer whose taxable income exceeds $43,447. The family threshold for seniors and pensioners is $48,385 plus $3,406 for each dependent child or student. These thresholds ensure that the individual does not pay the Medicare levy until they are liable to pay income tax. Proposal for increase in Medicare levy has been withdrawn

The Government announced in the 2017/18 Federal Budget that it would increase the Medicare levy to 2.5% from 1 July 2019 to fund the National Disability Insurance Scheme and to guarantee Medicare. Other tax rates that are linked to the top personal tax rate,

22 Where two parents live separately and apart from each other and are both eligible for a specified percentage of Family Tax Benefit Part A for a child (¶2-410), the child is a dependant of each parent for Medicare levy exemption purposes for so much only of that shared care period as represents that percentage of the period (s 251R(5)).

Tax Formula, Tax Rates and Tax Offsets85

such as the fringe benefits tax rate, would also be increased. The Treasurer announced on 20 April 2018 that the Government would not proceed with this proposal.

[¶2-350] Medicare levy surcharge Medicare levy surcharge is payable by individuals if:

(1) their ‘income for surcharge purposes’ is in excess of the surcharge threshold for the year; and (2) they do not have private patient hospital cover through private health insurance.

Medicare levy surcharge is not payable by an individual who is a foreign resident for all of the year. If the individual is a foreign resident for part of the year, no surcharge is payable if the individual does not have any dependants or if all their dependants are exempt. Otherwise, the individual is liable for surcharge for part of the year.

Surcharge thresholds and rates Medicare levy surcharge is imposed at the rate of 1%, 1.25% or 1.5% depending on the person’s income for surcharge purposes (s 8B to 8D Medicare Levy Act 1986 (Cth); s 13 to 16 A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Act 1999 (Cth)). The surcharge rates for 2018/19 are the same as they were for the previous four years and will be the same for the years up to 30 June 2021. This is because indexation of the Medicare levy surcharge thresholds has been paused for those years (Budget Savings (Omnibus) Act 2016 (Cth)). The Medicare levy surcharge thresholds and rates for 2018/19 are shown in the following table.  Surcharge thresholds and rates for 2018/19

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Singles—Income for surcharge purposes $ 0–90,000

Families*—Income for surcharge purposes $

Medicare levy surcharge

0–180,000

Nil

210,001–280,000

1.25%

90,001–105,000

180,001–210,000

Over 140,000

Over 280,000

105,001–140,000

1%

1.5%

* The threshold for families increases by $1,500 for each dependent child after the first.

A taxpayer may be liable for surcharge for a part of a year, for example, if private health insurance is taken out during the year.

Private patient hospital cover Section 3(5) of the Medicare Levy Act 1986 (Cth) provides that a person only has private patient hospital cover if their insurance policy is a complying health insurance policy (within the meaning of the Private Health Insurance Act 2007 (Cth)) and, for a policy under which only one person is insured, any excess payable is not more than $500 in any 12-month period. Private health insurance under an overseas visitors policy with an Australian health insurance company would not be sufficient as the policy is not a

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complying health insurance policy for these purposes (Private health insurance rebate eligibility, ATO guidance at ato.gov.au). A person may have private patient hospital cover for these purposes if they are covered for liability for fees and charges for at least some hospital or day hospital facility treatment, but not if they have only ancillary cover. A policy with an annual excess over $500 (or $1,000 for families) is deemed not to provide private patient hospital cover.

Income for surcharge purposes Medicare levy surcharge is only imposed on an individual whose ‘income for surcharge purposes’ exceeds the relevant surcharge threshold for the year. A  person’s ‘income for surcharge purposes’ means the sum of the person’s (s 995-1(1) ITAA97): •

taxable income (¶2-030)

•

reportable superannuation contributions, and

• •

reportable fringe benefits total total net investment losses,

less, if relevant, the amount of superannuation benefit for which the person is entitled to an offset under s 301-20(2) (¶23-510). The meaning of ‘reportable fringe benefits total’, ‘reportable superannuation contributions’ and ‘total net investment losses’ is explained at ¶2-050.

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Liability to the Medicare levy surcharge Although an individual may become liable to Medicare levy surcharge because their income for surcharge purposes exceeds the relevant surcharge threshold for the year, surcharge is only imposed on the total of the individual’s taxable income plus reportable fringe benefits total for the year (which may be less than the amount of their income for surcharge purposes). Surcharge is imposed at the rate of 1%, 1.25% or 1.5% as appropriate (see table above). In the case of a couple, if their combined income for surcharge purposes exceeds the family surcharge threshold, but the total of the taxable income plus reportable fringe benefits total of one member of the couple does not exceed the Medicare levy low income threshold, that member is not liable to surcharge. The Medicare levy low income threshold was $21,980 for 2017/18 (¶2-320), but the threshold amount for 2018/19 is not yet available. Example—Calculation of Medicare levy surcharge In 2017/18 , Eric has a salary of $110,000, reportable fringe benefits total of $14,000 and net investment losses of $2,000. Eric is single and does not have private health insurance. Eric’s taxable income, for Medicare levy purposes, is $108,000 ($110,000 − $2,000), and his income for surcharge purposes is $124,000 ($108,000 + $2,000 + $14,000). He is liable to Medicare levy and Medicare levy surcharge as follows:

Tax Formula, Tax Rates and Tax Offsets87 Medicare levy: 2% × $108,000 taxable income Medicare levy surrcharge: 1.25% × $122,000

($108,000 taxable income

+ $14,000 reportable fringe benefits total )

$2,160

$1,525

The taxpayer in West v FC of T23 unsuccessfully argued that his ex-wife, to whom he had been ordered to pay spouse maintenance, was a dependant for Medicare levy surcharge purposes and that he was therefore exempt from surcharge because his income was below the family threshold. The AAT said that the taxpayer had no dependant because he no longer had a spouse, and the fact that he paid maintenance to his former spouse was irrelevant.

Medicare levy surcharge lump sum in arrears offset A taxpayer may be entitled to a tax offset if liability to Medicare levy surcharge is caused by the receipt of a lump sum payment that accrued in a previous year (¶2-610).

HIGHER EDUCATION LOAN PROGRAMME (¶2-400 – ¶2-405)

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[¶2-400] Higher Education Loan Programme (HELP) The Higher Education Loan Programme (HELP) provides Commonwealth loans to assist students to pay their higher education fees. Under HELP, most domestic tertiary students make a financial contribution, with part-time students paying pro-rata amounts, towards the cost of their tertiary education. The HELP scheme was introduced by the Higher Education Support Act 2003 (Cth). Students liable to make contributions towards their higher education studies can take out a HELP loan for some or all of the student contribution. Before 1 January 2017, a 10% discount was available for upfront payments of at least $500, and a 5% bonus was given for a voluntary repayment to reduce a HELP debt. The discount and bonus are no longer available.24 New Zealand citizens and holders of permanent visas (other than permanent humanitarian visa holders) are required to pay their student contributions upfront.

Repayment income Students do not have to start repaying their HELP debt until their ‘repayment income’ reaches a certain level ($51,957 for 2018/19). HELP debts are indexed each year to maintain their real value, but otherwise they are interest-free. A person’s repayment income is the total of their: (i) taxable income, (ii) exempt foreign employment income, (iii) reportable fringe benefits total, (iv) reportable superannuation contributions, and (v) total net investment losses.

23 [2003] AATA 368. 24 These measures were removed by the Labor 2013-14 Budget Savings (Measures No 2) Act 2015 (Cth).

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Tax Formula, Tax Rates and Tax Offsets

The meaning of ‘reportable fringe benefits total’, ‘reportable superannuation contributions’ and ‘total net investment losses’ are explained at ¶2-050.

[¶2-405] Repayment thresholds and rates The repayment thresholds and rates for 2018/19 are shown in the following table. HELP repayment income $

Repayment rate % of HELP repayment income

Below 51,957

Nil

57,730 to 64,306

4

51,957 to 57,729

2

64,307 to 70,881

4.5

74,608 to 80,197

5.5

86,856 to 91,425

6.5

100,614 to 107,213

7.5

70,882 to 74,607 80,198 to 86,855 91,426 to 100,613

107,214 and above

5 6

7 8

HELP repayments

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HELP debts are collected through the PAYG system (¶32-405ff ). If an employer is aware that an employee has an accumulated HELP debt and their HELP repayment income has reached the minimum threshold, the employer must withhold additional tax. Otherwise, HELP repayments are made when a taxpayer’s tax liability is assessed for the year. Example—Repayment of HELP debt Olga’s taxable income is $47,700 for 2018/19. In her tax return she claims a net rental loss on a rental property of $1,450 and has a reportable fringe benefits amount of $3,610. Olga’s repayment income is: $47,700 + $1,450 + $3,610 = $52,760 The repayment rate on $52,760 is 2%, so Olga must pay $1,055 ($52,760  × 2%) in addition to her income tax liability.

The taxpayer must advise the employer of an accumulated HELP debt by completing a Tax File Number Declaration (if starting a new job) or a Withholding Declaration (if a HELP debt is acquired after employment commences). HELP repayments are not generally deductible (s 26-20 ITAA97). As an exception, an employer who pays a HELP debt on behalf of an employee may be able to claim a tax deduction if the employer also pays fringe benefits tax on the payment.

Tax Formula, Tax Rates and Tax Offsets89

Relief from HELP repayments On the death of a taxpayer with a HELP debt, only any compulsory HELP repayment included on an income tax assessment for the period up to the death needs to be paid from the estate. The remainder of the debt is cancelled. The Commissioner may defer or amend an assessment if the payment of the assessed amount would cause serious hardship to the taxpayer or if special circumstances make it fair and reasonable to make the amendment. A taxpayer’s application to have HELP repayment assessments reduced to nil on hardship grounds was rejected in Case 12/200425. The AAT found that the payment of the assessed amounts would not cause the taxpayer serious hardship. At the relevant time, the taxpayer had spent significant amounts on the purchase of a vehicle, on renovations, fittings and furnishings for her home, and on an overseas trip. Although the taxpayer had suffered injuries in a motor vehicle accident and had ongoing medical problems, the AAT was not persuaded that this constituted special reasons warranting amendment of her HELP repayment assessments.

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Recovering HELP debts from non-resident Australians Australians who move overseas for more than 183 days are required to repay their HELP debt in the same way as if they reside in Australia. This measure has applied since 1 January 2016 to both new and existing debts, and was enacted by the Education Legislation Amendment (Overseas Debt Recovery) Act 2015 (Cth). Debtors going overseas for more than six months must register with the ATO before they leave, and those already overseas at 1 January 2016 were given until 1 July 2017 to register. Failure to register with the ATO constitutes a failure to comply with a taxation law and substantial penalties may be imposed. Foreign resident HELP debtors were required to start making repayments from 1 July 2017 if their 2016/17 worldwide income exceeded the repayment threshold. Repayment rates and thresholds are the same as for resident debtors. Non-resident debtors were not previously obliged to make HELP repayments. An affected taxpayer’s obligation to repay a HELP debt is based on their ‘assessed worldwide income’, which is equal to the person’s repayment income plus their foreignsourced income for the year converted into Australian currency. Liability is imposed as a levy (the ‘overseas debtors repayment levy’) by the Student Loans (Overseas Debtors Repayment Levy) Act 2015 (Cth). A person is liable to pay the levy if, for an income year, they are a foreign resident, their assessed worldwide income exceeds the repayment income threshold and, on the first of June immediately before an assessment is made of the person’s income for the income year, they had an accumulated HELP debt. In order to encourage reciprocal cooperation from other countries, Australian taxation officers may disclose taxpayers’ contact and income information to a foreign government agency. This will assist the agency to identify people with student loan

25 2004 ATC 234

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repayment obligations living in Australia and to potentially recover outstanding student loan amounts.

Changes to HELP repayments from 2019/20 From 2019/20, there will be a lower minimum repayment threshold of $45,880 with a 1% repayment rate, and a further 17 thresholds and repayment rates up to a top threshold of $134,573 at which a 10% repayment rate will apply. The repayment thresholds will be indexed to the Consumer Price Index. From 1 January 2019, a combined loan limit amount will put a ceiling on the amount students will be able to borrow under HELP. The limit will be $150,000 for students studying medicine, dentistry and veterinary science courses and $104,440 for other students. A student’s HELP balance will be renewable up to the ceiling amount as the student makes repayments of their HELP debt.

FAMILY ASSISTANCE (¶2-410) [¶2-410] Family tax benefit Since 1 July 2000, three forms of family assistance have been available—Family Tax Benefit Part A, Family Tax Benefit Part B and Child Care Benefit.26 Family assistance, which is administered by Centrelink and the Department of Human Services, is paid fortnightly or as reduced child care fees and is exempt from income tax (s 52-150 ITAA97).

Eligibility for Family Tax Benefit To be eligible for Family Tax Benefit, a taxpayer must:

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•

•

• • •

be an Australian resident, or have a temporary visa for social security purposes and be in Australia not reside outside Australia for more than three years

provide care for a dependent child (but the benefit may be denied if the child has income above certain limits)

care for the child for a minimum of 10% of the assessment period, if they share the care of a dependent child with another person who is not their current spouse, and have family income below the threshold for the year.

Eligibility for Family Tax Benefit Part A is tested against the ‘adjusted taxable income’ of a taxpayer’s family. The meaning of adjusted taxable income is explained at ¶2-050. Family Tax Benefit Part B is aimed at assisting single income families and is not payable where the primary income earner in a couple, or the sole parent, earns more than

26 The A New Tax System (Family Assistance) Act 1999 (Cth) sets out the eligibility conditions for, and rates of payment of, family assistance. The A New Tax System (Family Assistance) (Administration) Act 1999 (Cth) sets out the administrative, procedural and technical rules.

Tax Formula, Tax Rates and Tax Offsets91

$100,000 in the income year. This amount may be indexed in later years in line with movements in the CPI. Payment of family tax benefit is based on an estimate of adjusted taxable income for the year. The estimate is compared with actual adjusted taxable income after the end of the financial year. If the actual amount is less than the estimated amount, the taxpayer could be paid a lump sum or the underpayment could be offset against a tax debt. If actual income is more than estimated income, money may have to be paid back to the Family Assistance Office after the end of the financial year or may be offset against the taxpayer’s entitlement for the next year.

TAX OFFSETS (¶2-500 – ¶2-790)

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[¶2-500] Overview A taxpayer’s income tax liability is calculated by multiplying the taxpayer’s taxable income by the appropriate rate of tax and then subtracting tax offsets (s 4-10 ITAA97). The term ‘tax offset’ is used in ITAA97 but does not appear in ITAA36, which refers instead to ‘rebates’ and ‘credits’. The discussion of tax offsets in this chapter extends not only to tax offsets as provided by ITAA97 but also to rebates and credits as provided by ITAA36. The chapter covers most of the tax offsets that are available to taxpayers. Some offsets are, however, covered in other chapters. For example, the R&D tax offset is discussed at ¶21-960 in the context of concessions for R&D expenditure, the franking credit offset is discussed at ¶18-390 in the context of the imputation system, and the small business income tax offset is discussed at ¶15-210 in the context of small business concessions. A list of tax offsets is given at s 13-1 of the ITAA97. The table in ¶2-520 shows the most important tax offsets, where they are found in the legislation and the paragraphs where they are discussed.

Value of a tax offset A tax offset must be distinguished from a ‘deduction’. While a deduction is subtracted from assessable income to calculate taxable income (s 4-15 ITAA97), a tax offset is subtracted from the income tax payable on taxable income (s 4-10 ITAA97). This makes a tax offset more valuable than a deduction. It also makes a tax concession in the form of a rebate or offset more equitable than a tax concession in the form of a deduction. Example—Offset or deduction? Jaime has taxable income in 2018/19 of $28,500, giving him a marginal tax rate of 19% (¶2-110). If he were given a choice between a $100 offset and a $100 deduction, Jaime should choose the offset. This is because the offset is worth $100, in that it reduces his tax payable by $100, whereas the deduction is worth only $19 ($100 × 19%). The monetary value of the offset is exactly the same for Jaime as for a taxpayer on a high income. For each person, the offset is worth $100.

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The monetary value of a deduction, on the other hand, increases as the taxpayer’s taxable income increases. For Jaime, a $100 deduction is worth only $19 because his marginal tax rate is 19%, whereas a $100 deduction is worth $37 to a taxpayer who has taxable income of $110,000 and a tax rate of 37%.

Some offsets are indexed annually in line with changes in the Consumer Price Index according to the formula in s 159HA of the ITAA36. Other offsets may be indexed as provided by sub-div 960-M of the ITAA97, eg the dependant (invalid and carer) tax offset (¶2-570).

Need for the taxpayer to be a resident A concessional rebate provided by div 17 sub-div A of the ITAA36 is available only if: (1) the taxpayer is a resident individual, or

(2) the taxpayer is a trustee who is liable to be assessed under s 98 of the ITAA36 in respect of the share of the net income of a trust estate of a beneficiary who is a resident (s 159H).

The concessional rebates to which this rule applies are the rebate for low income taxpayers, the medical expenses rebate and the notional sole parent rebate. Tax offsets provided under other provisions also generally require the taxpayer to be a resident, eg the low and middle income tax offset, the dependant (invalid and carer) tax offset, the franking credit offset and the zone rebate.

[¶2-510] Limit on amount of offset

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General rule The general rule is that tax offsets are applied against a taxpayer’s income tax liability but the sum of the tax offsets available to a taxpayer cannot exceed the amount of income tax otherwise payable by the taxpayer (s 160AD ITAA36). To the extent that the sum of the tax offsets would otherwise exceed a taxpayer’s income tax payable, the excess tax offsets are lost and cannot be refunded or (unlike excess deductions: ¶11-500) carried forward into future years. Example—Offset limited to amount of tax payable Anil has an income tax liability of $3,600 for the 2018/19 income year and is entitled to tax offsets worth $4,200. Under the general rule, Anil’s tax liability can be reduced to nil by the tax offsets, and the $600 of tax offsets that exceed her tax liability are lost.

Exceptions to the general rule There are exceptions to the general rule that excess tax offsets in a particular year are lost. •

Some offsets may be refundable to the extent that they exceed the income tax payable. This is the case for the franking credit offset (¶18-390), but not if it is received by a corporate shareholder, and the private health insurance offset (¶2-660).

Tax Formula, Tax Rates and Tax Offsets93

• • •

The unused portion of some offsets may be transferred to a spouse, eg the seniors and pensioners tax offset (¶2-730) and the child care tax offset (¶2-680).

The unused portion of some offsets can be carried forward to a later income year, eg from payment of franking deficit tax (¶18-380). Excess franking credits received by a corporate shareholder may be convertible into tax losses and carried forward (¶19-260).

Priority rules maximise the offset values A taxpayer who is entitled to more than one tax offset for an income year should apply the offsets against their basic income tax liability in the order shown in the table in s 63-10 of the ITAA97. This table is intended to ensure that tax offsets apply in the order that gives the greatest benefit to the taxpayer. Tax offsets that are refundable or that can be carried forward as a tax loss are therefore applied last. To the extent that an amount of a tax offset remains, the table shows what happens to the excess. The effect of the table in s 63-10 is that offsets are applied against a taxpayer’s tax liability in the following order. (1) A seniors and pensioners tax offset under s  160AAAA and 160AAAB of the ITAA36 (¶2-730) is applied first, with any excess transferred in accordance with the regulations (items 5 and 10 in the table).

(2) A tax offset under s 160AAA in respect of certain benefits (¶2-740) is applied next, with any excess transferred in accordance with the regulations (item 15 in the table).

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(3) A low income tax offset under s 159N (¶2-640) is applied next, and any excess is lost because it cannot be refunded, transferred or carried forward to a later year (item 17 in the table). (4) Any tax offset that is not covered by another item in the table is applied next, and any excess is lost because it cannot be refunded, transferred or carried forward (item 20 in the table).

(5) A foreign income tax offset under div 770 (¶24-320) is applied next, and any excess can be applied against the taxpayer’s Medicare levy and Medicare levy surcharge liability (and against the temporary budget repair levy for the 2014/15, 2015/16 and 2016/17 income years). Any remaining amount is lost because it cannot be refunded, transferred or carried forward (item 22 in the table). (6) A child care tax offset under sub-div 61-IA (¶2-680) is applied next, with any excess transferable to the taxpayer’s spouse (item 25 in the table).

(7) A landcare and water facility tax offset under former sub-div 388-A is applied next, and the excess can be carried forward (item 30 in the table). (8) An ESVCLP tax offset under sub-div 61-P (¶21-760) may be carried forward to a later income year (item 32 in the table). (9) A tax offset available under sub-div 360-A (¶21-998) to early stage investors in innovation companies may be carried forward to a later year (item 33 in the table).

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(10) An R&D tax offset (¶21-950) that is not a refundable tax offset under s 67-30 is applied next and any excess can be carried forward (item 35 in the table).

(11) A tax offset that is subject to the refundable tax offset rules in div 67, eg an offset for franking credits, is applied next, with the excess amount being refundable (item 40 in the table).

(12) A tax offset arising from the payment of franking deficit tax (¶18-380) is applied last, and the excess can be carried forward to a later year (item 45 in the table).

The tax offset carry forward rules in div 65 state that an offset that is carried forward must be applied first to reduce certain amounts of net exempt income; and impose restrictions on a company’s ability to carry an offset forward to a later income year. Example—Application of the offsets

A taxpayer entitled to the child care tax offset (item 25 in the table) should apply it only after applying, if appropriate, a tax offset covered by items 5 to 22 in the table. If an amount of child care tax offset remains after being applied by the taxpayer against their income tax liability, the taxpayer can transfer the entitlement to the excess to their spouse (¶2-680). An individual taxpayer entitled to a refundable franking credit (item 40 in the table) should apply it only after applying, if appropriate, a tax offset covered by items 5 to 35 in the table. If an amount of franking credit remains after being applied by the taxpayer against their tax liability, the taxpayer is generally entitled to a refund of the remaining amount.

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Refund of excess offsets As stated above, the general rule is that the amount of a tax offset that exceeds a taxpayer’s income tax liability is lost. An exception is if excess offsets are refundable. The rules about refunds of tax offsets are set out in div 67 of the ITAA97. Franking credits are refundable tax offsets (s  67-25) unless they are received by a non-complying superannuation entity, by a trustee assessed under s  98 or 99A, by a corporate shareholder or by a foreign resident that carries on business in Australia through a permanent establishment (¶18-130). The following offsets are listed as refundable tax offsets in the table in s 67-23: •

the tax offset relating to the principal beneficiary of a special disability trust(¶17-040)

•

first child tax offset (¶2-600)

• •

• • • •

most private health insurance tax offsets (¶2-660) the seafarers tax offset (¶2-790)

the tax offset available to a foreign resident member of an attribution managed investment trust (¶17-040) the tax offset for the tax paid on no-TFN contributions income (¶23-090) the film production offset (¶20-110)

the National Rental Affordability Scheme tax offset (¶21-850)

Tax Formula, Tax Rates and Tax Offsets95

•

•

the junior minerals exploration incentive (¶21-235), and

the tax offset where a life insurance company’s subsidiary joins a consolidated group (¶20-070).

The tax offset to which an R&D entity is entitled under s 355-100 may be refundable (¶21-960) if certain conditions are satisfied (s 67-30). Example—Refundable tax offsets applied last A low income individual taxpayer has an income tax liability of $550 for 2018/19 and is entitled to a low income tax offset of $445, a low and middle income tax offset of $200 and franking credits of $600. According to the priority rules in s 63-10, the low income tax offset is applied first (item 17 in the table), the low and middle income tax offset second (item 20 in the table) and the franking credits offset last (item 40 in the table). Application of the $445 low income offset and the $200 low and middle income tax offset reduces the $550 tax liability to nil, and the $95 excess amount is lost. The franking credits offset, which is not used as the income tax liability has already been reduced to nil, is refundable to the taxpayer.

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Applying offsets against Medicare levy or Medicare levy surcharge Tax offsets are not generally applied against a taxpayer’s liability to pay Medicare levy or Medicare levy surcharge, so an offset can reduce the taxpayer’s income tax liability but not their liability to Medicare levy or Medicare levy surcharge. The exception to this rule is the foreign income tax offset (¶24-320) which can be applied against the taxpayer’s liability to Medicare levy and, if any offset remains, against liability to Medicare levy surcharge (s 63-10(1) (item 22 in table)). To the extent that an amount of foreign income tax offset remains, it cannot be refunded, transferred or carried forward to a later year. Tax offsets could be applied in the same way against a taxpayer’s liability to temporary budget repair levy (¶2-250) as they are for the purposes of the Medicare levy and Medicare levy surcharge.

[¶2-520] List of offsets The most important tax offsets and the places at which they are discussed in this book are set out in the table below. Type of tax offset Baby bonus

Bonuses on certain life insurance policies

Child care benefit

Civilians serving overseas with UN forces

Dependant (invalid and carer) tax offset

Education tax offset

Relevant provisions sub-div 61-I ITAA97

s 160AAB ITAA36

sub-div 61-IA ITAA97

s 23AB(7) ITAA36

sub-div 61-A ITAA97

sub-div 61-M ITAA97

Discussed at ¶2-600

¶2-760

¶2-680

¶2-720

¶2-570

¶2-580

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Type of tax offset

Relevant provisions

Employment termination payment tax offset

div 82 ITAA97

Entrepreneurs’ tax offset

Excess non-concessional contributions tax offset

Film production offsets

Foreign income tax offset

Franking credit offset

Franking deficit tax offset

Fringe benefits tax rebate

Housekeeper rebate

Income arrears rebate

Land transport offset

Low income tax offset

Mature age worker tax offset

Medical expenses rebate

Medicare levy surcharge lump sum in arrears offset

National Rental Affordability Scheme Tax offset

No-TFN contributions income offset

Overseas defence force rebate

Primary producers averaging offset

Private health insurance offset

R&D tax offset

Seafarer tax offset

Senior and pensioners tax offset

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Tax Formula, Tax Rates and Tax Offsets

SG late payment offset

Small business income tax offset

Social security beneficiary rebate

Sole parent (notional)

Superannuation spouse contributions

Superannuation death benefits

Superannuation member benefits

Tax offsets for low and middle income earners Unused leave payments

Zone rebates

sub-div 61-J ITAA97

s 292-30 ITAA97

div 376 ITAA97

s 770-10 ITAA97

s 207-20 ITAA97

s 205-70

s 65J FBTAA

s 159L ITAA36

s 159ZRA ITAA36

div 396 ITAA97

s 159N ITAA36

sub-div 61-K ITAA97

s 159P ITAA36

sub-div 61-L ITAA97

div 380 ITAA97

Discussed at ¶4-755

¶2-590

¶23-125

¶21-910

¶24-320

¶18-390

¶18-380

¶26-310 ¶2-630

¶2-690

¶2-770

¶2-640

¶2-670

¶2-650

¶2-610

¶21-850

s 295-675 ITAA97

¶23-090

div 392 ITAA97

¶21-130

div 355 ITAA97

¶21-950

s 79B ITAA36

sub-div 61-G ITAA97

s 61-695 ITAA97

s 160AAAA ITAA36

s 23A SGAA

¶2-710

¶2-660

¶2-790

¶2-730

¶23-840

sub-div 328-F ITAA97

¶15-210

s 159K ITAA36

¶2-620

s 160AAA(3) ITAA36

sub-div 290-D ITAA97

div 302 ITAA97

¶2-740

¶23-145

¶23-550

div 301 ITAA97

¶23-500

div 83 ITAA97

¶4-820

s 159N ITAA36, s 61-105 to 61-115 ITAA97

s 79A ITAA36

¶2-640

¶2-700

[¶2-570] Dependant (invalid and carer) tax offset A dependant (invalid and carer) tax offset is available to taxpayers maintaining dependants who are genuinely unable to work due to invalidity or carer obligations. The non-refundable

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tax offset is provided by sub-div 61-A of the ITAA97 (s  61-1 to 61-45) and has been available from 2013/14.

Eligibility for the offset A taxpayer is entitled to a dependant (invalid and carer) tax offset if they satisfy the following conditions (s 61-10).

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(1) During the year, the taxpayer contributed to the maintenance of another individual who is: (a) their spouse (b) their parent or their spouse’s parent, or (c) aged 16 years or over and is their child, brother or sister or a brother or sister of their spouse.

(2) During the year, the individual being maintained meets one or more of three requirements: (a) the individual is being paid a disability support pension or a special needs disability support pension under the Social Security Act 1991 (Cth) or an invalidity service pension under the Veterans’ Entitlements Act 1986 (Cth) (b) the individual is the taxpayer’s spouse or parent or the taxpayer’s spouse’s parent, and is being paid a carer allowance or carer payment under the Social Security Act 1991 (Cth) relating to the care of a person who is aged 16 or over and is the taxpayer’s child, brother or sister or the brother or sister of the taxpayer’s spouse, or (c) the individual is the taxpayer’s spouse or parent, or the taxpayer’s spouse’s parent, and is wholly engaged in providing care for an individual who is aged 16 years or over, is the taxpayer’s child, brother or sister or the brother or sister of the taxpayer’s spouse, and is being paid a disability support pension or a special needs disability support pension under the Social Security Act 1991(Cth) or an invalidity service pension under the Veterans’ Entitlements Act 1986(Cth). (3) During the year the individual being maintained is an Australian resident or, if they are the spouse or child of the taxpayer, the taxpayer had a domicile in Australia.

A taxpayer may be entitled to more than one tax offset for a year if they contributed to the maintenance of more than one other individual (none of whom is their spouse) during the year, or they have different spouses at different times during the year. Where a taxpayer maintains two or more spouses for whom the taxpayer may be eligible for the offset, the taxpayer may only receive an amount of offset for the spouse with whom the taxpayer resides (s 61-15).

Income test Eligibility for the offset is income tested against the income limit for family assistance purposes (s 61-20). The test is based on the ‘adjusted taxable income for offsets’ (¶2-050) of the taxpayer for the year where the offset relates to a spouse, or is based on the combined adjusted taxable income for offsets of the taxpayer and the taxpayer’s spouse where the offset relates to any other class of dependant.

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The income threshold for the income test is $100,000 from 2015/16 (as specified in cl 28B(1) of sch 1 to the A New Tax System (Family Assistance) Act 1999 (Cth)), and was previously $150,000. Example—Income threshold test Vlad and Miro are married. Vlad has adjusted taxable income for offsets of $120,000 in 2018/19. Miro does not work as she cares for her father who receives a disability support pension. Vlad cannot claim the dependant (invalid and carer) tax offset in respect of Miro because his income exceeds the $100,000 income threshold.

A taxpayer is not entitled to the offset for a spouse for a period of the income year if they or their spouse receive Family Tax Benefit Part B (without shared care) (s 61-25; 61-40).

Amount of the offset The maximum amount of the dependant (invalid and carer) tax offset for 2018/19 is $2,717 for each eligible dependant (s 61-30). The offset amount is indexed annually in line with the CPI. The offset amount may be reduced: (1) if the taxpayer and their spouse have a shared care arrangement for a child (s 6135), or (2) if the taxpayer is only entitled to the offset for part of the year (s 61-40).

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The amount of the offset may also be reduced by $1 for each $4 by which the eligible dependant’s adjusted taxable income exceeds $282 for the period that the taxpayer contributes to their maintenance (s 61-45). This means the offset is reduced to nil once the dependant’s adjusted taxable income is $11,150 or more in 2018/19. Dependant spouse tax offset for pre-2014/15 income years

For years before 2014/15, the dependant spouse tax offset delivered a concession to taxpayers who maintained a dependent spouse. The tax offset was provided by former s 159J of the ITAA36. Eligibility depended on:  (a) the taxpayer contributing to the maintenance of a dependant, (b) both the taxpayer and the dependant being residents, and (c) the adjusted taxable income of the taxpayer being less than $150,000. For 2013/14, a dependant spouse tax offset was only available to taxpayers who maintained an invalid spouse or a carer spouse who was born before 1 July 1952. Taxpayers eligible to receive an amount of the zone rebate (¶2-700), the rebate for civilians serving overseas (¶2-720) or the overseas defence force rebate (¶2-710) could claim an additional amount equal to the dependant spouse tax offset (or the dependant (invalid and carer) tax offset from 2014/15) for a dependant spouse born after 1 July 1952 as part of their entitlement to those rebates.

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[¶2-580] Education tax offset Before 2011-12, a taxpayer was entitled to a refundable education tax offset if: • •

the taxpayer was receiving Family Tax Benefit Part A (¶2-410) for a child who was undertaking primary or secondary schooling, or

the taxpayer was undertaking primary or secondary school studies and was entitled to Youth Allowance or another relevant payment (former sub-div 61-M ITAA97).

The offset covered purchases of items such as uniforms, laptops, home computers, home internet connection, printers, educational software, trade tools for use at school, textbooks and stationery. Excess expenditure in a year could be carried forward to the next financial year, but not any later.

Schoolkids Bonus The education tax offset was terminated from 1 July 2011 and replaced by the tax exempt Schoolkids Bonus. From 1 January 2013 to 31 December 2016, the Schoolkids Bonus was paid automatically to families receiving Family Tax Benefit Part A and to students receiving Youth Allowance and some other income support and veterans’ payments. The Schoolkids Bonus was not paid or administered through the tax system. The Schoolkids Bonus was abolished with effect from 1 January 2017 (Minerals Resource Rent Tax Repeal and Other Measures Act 2014 (Cth)).

[¶2-590] Entrepreneurs’ tax offset

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The entrepreneurs’ tax offset, which was available from 1 July 2005 to 30 June 2012, reduced the tax liability on business income of certain small business entities. Former sub-div 61-J of the ITAA97, which provided the entrepreneurs’ tax offset, was repealed by the Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 (Cth), effective 1 July 2012.

[¶2-600] Baby bonus There have been two ‘baby bonus’ schemes intended to compensate a taxpayer for the loss of income following the arrival of a first child. The first scheme, which operated as a refundable tax offset, applied where a taxpayer first became legally responsible for a child on or after 1 July 2001 and before 1 July 2004 (sub-div 61-I ITAA97). The bonus enabled some or all of the tax paid by the mother in the income year before the birth of the child to be refunded to her in instalments over the next five years. The last date on which a claim for the offset could be made was 30 June 2014. The first scheme was replaced by a baby bonus which was payable for each child born on or after 1 July 2004. From 20 September 2012 to 30 June 2013, the baby bonus was $5,000 for each eligible baby. From 1 July 2013 to 28 February 2014, the baby bonus was $5,000 for first children and $3,000 for second and subsequent children. The baby bonus was replaced from 1 March 2014 by higher family tax benefit payments (¶2-410).

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[¶2-610] Medicare levy surcharge lump sum in arrears offset A tax offset may be available to a taxpayer who becomes liable for Medicare levy surcharge (¶2-350) because of the receipt of a lump sum payment in arrears (sub-div 61-L s 61-575 to 61-590). The amount of the offset is the amount of the surcharge liability created by the receipt of an eligible lump sum (an ‘MLS lump sum’). An MLS lump sum is basically a lump sum payment of ‘eligible income’ that is included in the taxpayer’s assessable income of the year of income but that accrued, in whole or in part, in an earlier year or years (s 61-590). Eligible income is income that is: (i) eligible income for the purposes of the income arrears rebate (¶2-690); or (ii) exempt foreign employment income, ie amounts that are exempt from tax under s  23AF and 23AG of the ITAA36 (¶24-210).

Eligibility for the tax offset A taxpayer is only eligible for the tax offset if the lump sum payment in arrears is equal to or greater than 10% of their income for surcharge purposes in the current year, less the total lump sum payment in arrears. This test is described in s 61-580(1)(d) in terms of the value of the lump sum being greater than or equal to 1/11th of the taxpayer’s ‘income for surcharge purposes’(¶2-350) in the current year. This test ensures that a taxpayer is only eligible for the offset if they receive a significant lump sum.

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Example—Test of eligibility for the offset In 2018/19, Beth, a single woman, earns $72,000 as a freelance signwriter. She also receives $19,000 when a dispute with a former client for work done in 2012/13 is settled. She does not have private patient hospital cover. If Beth had not received the lump sum payment in arrears, she would not have had a Medicare levy surcharge liability as her income for surcharge purposes was under $90,000. Receipt of the lump sum increases that income to $91,000 and makes her liable to Medicare levy surcharge of $910. The lump sum payment is eligible income as it meets the definition of an MLS lump sum in s 61-590 and the size of the lump sum satisfies the 10% test: $19,000 = 26% $91,000 − $19,000

Amount of the offset The value of the tax offset is the amount of Medicare levy surcharge liability attributable to the lump sum payment in arrears (s 61-585). This can be represented as: amount of offset =

total Medicare levy surcharge total Medicare levy surcharge payable for the current year, − payable, when the lump sum when the lump sum is included is disreggarded

Tax Formula, Tax Rates and Tax Offsets101

Example—Offset entitlement In the above example, Beth was eligible for the offset because her eligible lump sum met the 10% test. Her offset entitlement, using the formula in s 61-585, is calculated as: Amount of offset =

$910 − $0

= $910

Offset for spouse A family’s Medicare levy surcharge liability is determined by adding together both spouses’ incomes to ascertain whether the family Medicare levy surcharge threshold has been reached. This means that the receipt of a lump sum payment in arrears by one spouse may affect the surcharge liability of both spouses. If receipt by a taxpayer of a lump sum payment in arrears results in the creation of a Medicare levy surcharge liability for the taxpayer’s spouse, the spouse will receive an offset equal to the amount of that surcharge liability. The spouse cannot be entitled to the offset unless the recipient of the lump sum is also entitled to the offset (s 61-580(2), 61-585(2)).

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[¶2-620] Sole parent rebate (notional only) Before the 2000/01 income year, a taxpayer having the sole care of a dependent child under 16 or student under 25 could be entitled to a sole parent rebate (former s 159K ITAA36). The full rebate was available if the taxpayer could demonstrate that he or she would be entitled to a notional class 3 or 4 (child or student) dependant rebate if those rebates had not been removed (¶2-560). The rebate was available to a married taxpayer (including a de facto husband or wife) but only if there were ‘special circumstances’ and then only to the extent that the Commissioner considered reasonable. The meaning of ‘special circumstances’ in this context was considered by the AAT in Irwin v DFC of T27 and Black v FC of T.28 These cases, both involving a de facto couple, indicate that special circumstances will only arise where a taxpayer bears the whole cost of caring for a dependant, not through a personal decision but because of some onerous outside event. In the case of a taxpayer with a de facto spouse, each caring for a child from a previous relationship, the maintenance of separate accounts for the payment of expenses for each child may not constitute ‘sole care’ if household expenses are paid from a joint account to which both partners contribute. Even emotional and practical support from another person may be sufficient to indicate that a taxpayer does not have sole care of a child (Case M7829).

27 98 ATC 2317. 28 99 ATC 2001. 29 80 ATC 549.

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Since 1 July 2000, the sole parent rebate has not been available, although it is notionally retained for the purpose of calculating zone and overseas forces rebates and for determining eligibility to the Medicare levy family income threshold. The rebate has been replaced by Family Tax Benefit Part B (¶2-410). The notional sole parent rebate has been rewritten in sub-div 961-B of the ITAA97 from 2015/16, but there are no changes to the operation of the rebate. Section 159K was repealed and sub-div 961-B inserted by the Tax and Superannuation Laws Amendment (Measures No 1) Act 2015 (Cth).

[¶2-630] Housekeeper rebate Under former s 159L of the ITAA36, a rebate was available to a taxpayer in respect of a housekeeper who was wholly engaged in keeping house for the taxpayer in Australia and caring for: •

•

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•

a child of the taxpayer less than 16 years of age

a dependant in respect of whom the taxpayer qualified for a notional class 3 or 4 dependant rebate (¶2-560), or

an invalid relative or invalid spouse for whom the taxpayer was entitled to a dependant rebate (¶2-560) (former s 159L ITAA36).

From 2012/13, a housekeeper rebate was only available to taxpayers who were eligible for the zone rebate (¶2-700), overseas defence force rebate (¶2-710) or rebate for civilians serving overseas with United Nations forces (¶2-720). Taxpayers who were not eligible for a housekeeper rebate may have been entitled to a dependant (invalid and carer) tax offset (¶2-570). The rebate was only available if the adjusted taxable income of the taxpayer was less than $150,000. If the taxpayer had a spouse, the sum of the adjusted taxable income of both the taxpayer and the spouse had to be less than $150,000. A taxpayer was not entitled to claim the rebate if they had a spouse unless that spouse was an invalid spouse or the Commissioner considered that special circumstances existed, and then only to the extent considered reasonable by the Commissioner. Such special circumstances were found to exist where the taxpayer had an extremely busy public life as a politician (Coleman v FC of T30), where the taxpayer had a severely disabled child who needed constant attention (Case M8331) and where the taxpayer’s wife suffered from serious mental illness over a prolonged period and required hospitalisation (Case R9832). Section 159L was repealed and the housekeeper rebate abolished by the Tax and Superannuation Laws Amendment (Measures No 1) Act 2015 (Cth).

30 77 ATC 579. 31 80 ATC 613. 32 84 ATC 642.

Tax Formula, Tax Rates and Tax Offsets103

[¶2-640] Tax offsets for low and middle income earners Low income tax offset for pre-2018/19 years A low income tax offset (LITO) has been available for many years to resident individuals with low taxable incomes (s 159N ITAA36). The offset has also been available to trustees who are liable to be assessed under s 98 of the ITAA1936 (¶17-063) on a share of the net income of the trust on behalf of a low income resident beneficiary that is under a legal disability (¶17-063). For the years 2012/13 to 2017/18, the maximum LITO was $445 and it was phased out at the rate of 1.5 cents for every $1 by which a taxpayer’s taxable income exceeded $37,000. The offset was completely phased out where the taxpayer’s taxable income exceeded $66,667. The LITO was not available in relation to the unearned income of minors taxed under Div 6AA of the ITAA36 (see ‘Low income minors’ below). Example—Calculation of the offset A resident individual with taxable income of $41,000 in 2017/18 was entitled to a LITO calculated as follows: Maximum offset

Reduction ($41,000 − $37,000) × .015

  Low income tax offset

$

445 60

$385

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Tax offsets for 2018 /19, 2019/20, 2020/21 and 2021/22 For the years 2018/19, 2019/20, 2020/21 and 2021/22, a taxpayer may be entitled to a low and middle income tax offset (LMITO) in addition to a low income tax offset (LITO). The LITO for 2018/19, 2019/20, 2020/21 and 2021/22 is calculated in the same way as it was in 2017/18. The maximum LITO is $445, and the offset is phased out at the rate of 1.5 cents for every $1 by which a taxpayer’s taxable income exceeds $37,000. It is completely phased out where a taxpayer’s taxable income exceeds $66,667. A taxpayer may also be entitled to the LMITO for 2018/19, 2019/20, 2020/21 and 2021/22 if they are: (1) an individual who is an Australian resident at any time during the income year and whose taxable income for the year does not exceed $125,333 (s 61-105(1) ITAA97), or

(2) a trustee who is liable to be assessed under s 98 of the ITAA1936 on a share of the net income of the trust on behalf of an Australian resident beneficiary that is under a legal disability (¶17-063) where the amount of that share does not exceed $125,333 (s 61-105(2)). A trustee who is entitled to a LMITO in relation to shares of more than one beneficiary of the trust is separately entitled to the offset in respect of each share of a beneficiary for which the trustee is taxed (s 61-105(3)).

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The amount of LMITO to which an eligible taxpayer is entitled depends on their relevant income for the income year (s 61-107(1) ITAA97), as shown in the following table. Amount of relevant income

Amount of LMITO

Not more than $37,000

$200

Exceeding $48,000 but not more than $90,000

$530

Exceeding $37,000 but not more than $48,000

Exceeding $90,000 but not more than $125,333

$200 plus 3% of the amount of the income that exceeds $37,000 $530 less 1.5% of the amount of the income that exceeds $90,000

The ‘relevant income’ of an entity is the taxable income of an individual or the share of the net income of the trust on which a trustee is taxed on behalf of a beneficiary. The LMITO is not available in relation to the unearned income of minors taxed under Div 6AA of the ITAA36 (see ‘Low income minors’ below) (s 61-107(2) and (4)).

New low income tax offset for 2022/23 and later years A new low income tax offset (LITO) will replace both the LMITO and the previous LITO for the 2022/23 and later income years. The new LITO will be available in the same circumstances as the LITO was for previous income years, ie to individuals who are Australian residents and whose taxable income does not exceed $66,667 (s 61-110(1) ITAA97). It will also be available to trustees in the same circumstances as in previous years (s 61-110(2)). The amount of the LITO from 2022/23 will depend on the relevant income of the individual or trustee for the income year (s 61-115(1) ITAA97), as shown in the following table.

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Amount of relevant income

Amount of new LITO

Not exceeding $37,000

$645

Exceeding $41,000 but not more than $66,667

$385 less 1.5% of the amount of relevant income that exceeds $41,000

Exceeding $37,000 but not more than $41,000

$645 less 6.5% of the amount of relevant income that exceeds $37,000

The ‘relevant income’ of an entity will be the taxable income of an individual or the share of the net income of the trust on which a trustee is taxed on behalf of a beneficiary. The new LITO will not be available in relation to the unearned income of minors taxed under Div 6AA of the ITAA36 (see ‘Low income minors’ below) (s 61-115(2) and (4)).

Priority and withholding The LITO, the LMITO and the new LITO from 2022/23 are non-refundable and cannot be carried forward or transferred. Their priority in application is consistent with other tax offsets not given a specific priority because they come within item 20 of the table in s 6310(1) of the ITAA1997 (¶2-510).

Tax Formula, Tax Rates and Tax Offsets105

Part of a taxpayer’s entitlement to a LITO (and a new LITO from 2022/23) may be delivered during an income year through reduced amounts of PAYG tax being withheld (reg 24(e) Taxation Administration Regulations 1976 (Cth)). It is expected that a taxpayer’s entitlement to a LMITO will not be taken into account in the same way.

Low income minors A taxpayer under the age of 18 years who is a prescribed person for the purposes of div 6AA of the ITAA36 (¶21-020) cannot apply the LITO or the LMITO (or the new LITO from 2022/23) against their tax liability on their ‘eligible assessable income’ (¶21030). This is unearned income such as distributions from discretionary trusts, dividends, interest, rent and royalties. The tax liability of the minor on such income is based on the div 6AA rates (¶21-050) with no reduction for the tax offsets. This rule does not affect minors who are disabled or an orphan, or minors who are engaged in a full time occupation at the end of the income year. Income derived from the investment of any property transferred to a minor as a result of compensation payments, inheritances or marriage breakdown is also not affected. Minors can still use the tax offsets to reduce tax payable on their earned income such as salary and wages.

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[¶2-650] Medical expenses rebate A medical expenses rebate is intended to be compensation for the cost of eligible medical expenses paid by taxpayers for themselves or for a resident dependant (s 159P and 159Q ITAA36). The rebate is being phased out and will not be available from 1 July 2019 (Tax and Superannuation Laws Amendment (Measures No 1) Act 2014 (Cth)). The amount of medical expenses eligible for the rebate is reduced to take account of ‘any amount which the taxpayer or any other person is entitled to be paid, in respect of those medical expenses, by a government or public authority or by a society, association or fund’ (eg by Medicare, a private health fund or the National Disability Insurance Scheme) (Case U223, 87 ATC 1231). Since 1 July 2012, eligibility for the medical expenses rebate has been tested against a taxpayer’s ‘adjusted taxable income for rebate purposes’. The rebate gives taxpayers a nonrefundable rebate for out-of-pocket medical expenses above the taxpayer’s rebate threshold. As defined in s 6(1) of the ITAA36, ‘adjusted taxable income for rebate purposes’ (¶2-050) has the same meaning as adjusted taxable income for family tax benefit purposes except that it excludes elements of the adjusted taxable income definition that involve a taxpayer’s spouse’s income or how a spouse is treated in certain special circumstances.

Medical expenses rebate thresholds Eligibility for the medical expenses rebate for 2017/18 is shown in the following table.

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Eligibility for medical expenses rebate for 2017/18 Status of taxpayer

Adjusted taxable income for rebate purposes

Rate of rebate

Single

$90,000 or less

20% of net medical expenses over $2,333

Family*

$180,000 or less

20% of net medical expenses over $2,333

In excess of $90,000 In excess of $180,000

10% of net medical expenses over $5,504 10% of net medical expenses over $5,504

* ‘Family’ status applies to a taxpayer who has a spouse on the last day of the income year or has a dependant on any day of the income year. A taxpayer is ‘married’ for these purposes if they are in a relationship as a couple on a genuine domestic basis with a person of the same or a different sex.

Where the taxpayer has more than one dependent child, the threshold is increased by $1,500 for each dependent child after the first. A ‘dependant’ is defined for these purposes to include (s 159P(4)): • •

•

a legal or de facto spouse of the taxpayer

a child of the taxpayer who is under 21—‘child’ includes an adopted child and a stepchild (s 995-1(1) of the ITAA97), and

a child or student in respect of whom the taxpayer qualifies for a notional tax offset under sub-div 961-A of the ITAA97 (¶2-560).

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Example—Application of family threshold Ollie and Ellie are a couple during all of 2017/18. They are therefore considered to be ‘married’ for rebate purposes on the last day of the year and the $180,000 family threshold is applied to determine their eligibility for a medical expenses rebate. Ollie’s adjusted taxable income for rebate purposes for 2017/18 is $71,000 and Ellie’s is $83,000. These amounts are added together to determine their family adjusted taxable income for rebate purposes, ie $154,000. Because this amount is below the family threshold, the rebate rate is 20% of their out-of-pocket expenses above $2,333. Ellie has incurred medical expenses for herself and Ollie during the year and, after reimbursements from Medicare and her health insurer, she has out-of-pocket expenses of $3,580. Ellie is eligible for a medical expenses rebate of $249, ie 20% of ($3,580  − $2,333 = $1,247).

A taxpayer is entitled to an offset for medical expenses paid from a joint bank account to the extent of the taxpayer’s beneficial ownership of the bank account. If the taxpayer can show that the entire amount deposited in the account was derived from their income, it would be accepted that the taxpayer had beneficial ownership of the funds in the account and would be entitled to the offset (Interpretative Decision ID 2004/272). A  taxpayer would also be entitled to the offset for expenses debited to the credit card of the taxpayer’s spouse and then reimbursed by the taxpayer (Interpretative Decision ID 2004/273).

Tax Formula, Tax Rates and Tax Offsets107

Eligible medical expenses ‘Medical expenses’ is defined exhaustively in s 159P(4). The definition specifically includes payments to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation; payments to a dentist for dental treatment; and payments to an appropriately qualified person for eye tests or for the supply of prescription spectacles. Eligible medical expenses also include payments for therapeutic (ie healing or curing) treatment if administered at the direction of a doctor. Physiotherapy is a common example. Foods for special dietary purposes do not qualify as therapeutic treatment (Taxation Ruling IT 2146). The cost of an artificial limb or eye or of a hearing aid is automatically covered, as is the cost of other medical or surgical appliances if prescribed by a medical practitioner. Payments for maintenance of a guide dog or for an attendant of a person who is blind or invalided or hearing impaired or otherwise suffering from a disability may also qualify. Procedures solely for cosmetic purposes are not eligible for the rebate. Cosmetic procedures for legitimate medical need, such as skin grafts or reconstructive surgery, may be eligible (Taxation Determination TD 94/5). Despite the wide definition of eligible medical expenses, during the rebate phaseout period from 2014/15 to the end of 2018/19, taxpayers can only claim the rebate for medical expenses relating to disability aids, attendant care and aged care.

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[¶2-660] Private health insurance tax offset Individuals who have private health insurance may be entitled to an incentive equal to 30% of the cost of the private health insurance premiums. The incentive may be taken in one of three ways: (1) the insurance fund can deduct the 30% upfront from the premiums; (2) by direct payment from the government on proof of payment of premiums; or (3) as a tax offset claimed when lodging a tax return (under sub-div 61-G ITAA97). The tax offset is generally only available to individual taxpayers who satisfy two conditions: (1) the individual pays a premium in respect of a complying private health insurance policy within the meaning of the Private Health Insurance Act 2007 (Cth), ie a policy that provides hospital, ancillary or combined cover and where each of the persons covered by the policy is a person who is eligible to claim benefits under Medicare; and

(2) the premium is paid in the same income year that it is claimed as an offset (s 61205(1)).

A taxpayer is not entitled to an offset for private health insurance premiums if direct payment has already been made or if the premiums have already been reduced (s  61205(3)). The amount of a taxpayer’s private health insurance rebate that exceeds their income tax liability for a year is refundable (¶2-510).

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Income testing of private health insurance rebate The private health insurance rebate is income tested from 1 July 2012. For 2017/18 the 30% rebate is reduced for individuals earning more than $90,000 or families earning more than $180,000, and cuts out completely for singles earning more than $140,000 and families earning more than $280,000. An individual’s entitlement to a rebate is tested against their ‘income for surcharge purposes’ (¶2-350). Three tiers of rebate entitlement apply for individuals or families who are not entitled to the 30% rebate: • • •

Tier 1: singles earning between $90,001 and $105,000 and families earning between $180,001 and $210,000 can receive a 20% private health insurance rebate Tier 2: singles earning between $105,001 and $140,000 and families earning between $210,001 and $280,000 can receive a 10% rebate, and

Tier 3: singles earning above $140,000 and families earning above $280,000 are not entitled to a rebate.

Entitlement to the rebate also varies according to the age of the individual (s 61-210), and, where more than one person is covered by a policy, the rate of the rebate is based on the age of the oldest person. The family threshold is increased by $1,500 for each dependent child after the first. The income thresholds that determine the rebate on private health insurance have been paused at the 2014/15 rates up to and including the 2020/21 years (Budget Savings (Omnibus) Act 2016 (Cth)). The income thresholds and rebate entitlements for the years 2014/15 to 2020/21 are shown in the following tables.

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Income thresholds Singles

Families

$0–$90,000

$0–$180,000

Tier 1

$90,001–$105,000

Tier 2

Tier 3

$105,001–$140,000

Over $140,000

Tier 1

Tier 2

Tier 3

25%

15%

0%

$180,001–$210,000

$210,001–$280,000

Over $280,000

Rebate Age under 65

30%

Age 70 or over

40%

Age 65–69

35%

20% 30%

10% 20%

0% 0%

Medicare levy surcharge Rates

0%

1%

1.25%

1.5%

Tax Formula, Tax Rates and Tax Offsets109

Example—Offset for insurance premiums Liam and Kelly, who are each aged 39, have one child and pay private health insurance premiums of $4,400 in 2018/19. Liam’s income for surcharge purposes is $63,000 and Kelly’s is $120,000, so their combined income for surcharge purposes is $183,000. As Liam and Kelly come within Tier 1 and they are aged under 65, they are entitled to an offset of 20% of their insurance premiums. Their offset is $880 (ie 20% × $4,400).

[¶2-670] Mature age worker tax offset Older workers may, for years before 2014/15, have been entitled to a non-refundable mature age worker tax offset. Subdivision 61-K of the ITAA97 (s 61-550 to 61-570) allowed a maximum $500 offset for eligible workers. To be eligible in a particular year, a worker must have been a resident, aged at least 55 years and have received net income from working. From 1 July 2012, the offset was not available for workers born on or after 1 July 1957. ‘Net income from working’ was the sum of the taxpayer’s: (i) personal services income (including salary and wages); (ii) business income; (iii) assessable farm management repayment amounts (¶21-160); (iv) reportable fringe benefits; and (v)  reportable superannuation contributions, less deductible expenses relating to the taxpayer’s personal services or business income (s 61-570). The Tax and Superannuation Laws Amendment (Measures No 5)  Act 2015 (Cth) abolished the mature age worker tax offset from the 2014/15 income year.

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[¶2-680] Child care benefit Before 1 July 2018, child care benefit and child care rebate were available for child care expenses incurred by eligible taxpayers. From 1 July 2018, the concession for child care expenses has been converted to a direct payment which is handled by the Department of Human Services. The new system includes: –

a Child Care subsidy paid direct to service providers

–

the number of child care hours that are subsidised being tied to satisfaction of an activity test, where the eligible activities include work, training and education.

–

subsidy caps based on family income and subsidy rates based on income, and

While it is no longer a tax system benefit, payment of the child care benefit is still linked to the tax system to the extent that lodgment of a tax return and, where applicable, an income assessment are part of the eligibility and approval processes.

[¶2-690] Income arrears rebate A rebate of tax is available to individuals who receive certain income in a lump sum containing an amount accrued in an earlier year of income (s  159ZR to 159ZRD ITAA36). The rebate is designed to offset the adverse tax effect of ‘bunching’ this income into one year.

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• • • •

Tax Formula, Tax Rates and Tax Offsets

Income eligible for the rebate (‘eligible income’: s 159ZR(1)) includes:

salary or wages to the extent to which they accrued during a period ending more than 12 months before the date of payment salary or wages paid to a person after reinstatement to duty following a period of suspension, to the extent to which the salary or wages accrued during the suspension period income by way of superannuation, pension or retiring allowance or by way of annuity, and

income by way of sickness or accident pay in respect of incapacity for work, but not including payments under an insurance policy made to the owner of the policy.33

For a taxpayer to be eligible for the rebate, the amount of income in arrears must be at least 10% of the taxpayer’s ‘normal taxable income’ less the income in arrears (s 159ZRA(1)). ‘Normal taxable income’ is, broadly, the taxpayer’s actual taxable income for the year reduced by lump sum payments on termination of employment in lieu of annual leave or long service leave (¶4-820), special professional income (¶21-300), net capital gains and the amount of the eligible lump sum that accrued in earlier years (s 159ZR(1)).

Calculation of rebate The rebate is calculated according to the formula in s 159ZRB. The formula has the effect that the taxpayer receives a rebate to compensate for the additional tax payable in the year the lump sum is received. The assumption is that less tax would have been payable if the income had been taxed in earlier years as it accrued.

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[¶2-700] Zone rebates A rebate of tax is available under s 79A of the ITAA36 to residents of certain prescribed areas of Australia ‘in recognition of the disadvantages … of … uncongenial climatic conditions, isolation and high cost of living’. The relevant areas are described as Zone A and Zone B,34 the concessions available in respect of the former being slightly higher because of the isolation, uncongenial climate and higher cost of living. An increased rebate is available to residents of ‘special areas’, being particularly isolated areas in each zone. The tests for residence in a particular area are set out in s 79A(3B).35 From 2015/16, a person must genuinely live and work in a designated zone to be eligible for the rebate and it is not sufficient that their connection to the zone is as a fly-in fly-out worker.

33 The enactment of the Business Services Wage Assessment Tool Payment Scheme (Consequential Amendments) Act 2015 (Cth) expands ‘eligible income’ to include, from 1 July 2014, ‘BSWAT payment amounts’, ie amounts paid to a person under the Business Services Wage Assessment Tool Payment Scheme Act 2015 (Cth) where the person has an intellectual impairment and has been employed by Australian Disability Enterprise. 34 Zone A is the area described in Pt I of sch 2 ITAA36; Zone B is the area described in Pt II of sch 2 ITAA36. The current Australian Zone List is available from the ATO at ato.gov.au. 35 The Commissioner has a discretion to treat places marginally outside a special area as falling within that area (s 79A(3E)). See also Taxation Ruling TR 94/27 and Case W96, 89 ATC 798.

Tax Formula, Tax Rates and Tax Offsets111

Rebate amounts Taxpayers eligible for the zone rebate are entitled to a base amount and either 20% or 50% of their ‘relevant rebate amount’ entitlement. The ‘relevant rebate amount’ is the sum of the dependant (invalid and carer) tax offset (¶2-570), the notional child and student tax offset to which the taxpayer is entitled under sub-div 961-A of the ITAA97 (¶2-560) and the notional sole parent tax offset to which the taxpayer is entitled under sub-div 961-B of the ITAA97 (¶2-620). These last two offsets are offsets to which the taxpayer would notionally be entitled if they had been retained, calculated without regard to any family assistance received. The zone rebate amounts are as follows (s 79A(2)). (1) A taxpayer who is a resident of the special area in Zone A or of the special area in Zone B in the year of income is entitled to a rebate of $1,173 + 50% of the relevant rebate amount. (2) A taxpayer who is a resident of Zone A in the year of income but has not resided or actually been in the special area in Zone A or Zone B during any part of the income year is entitled to a rebate of $338 + 50% of the relevant rebate amount. (3) A taxpayer who is a resident of Zone B in the year of income but has not resided or actually been in Zone A (including the Zone A special area) or in the special area in Zone B during any part of the income year is entitled to a rebate of $57 + 20% of the relevant rebate amount.

A taxpayer who resides in a zone area but does not fit into any of the above three categories is entitled to a rebate of whatever amount the Commissioner considers reasonable: see Taxation Ruling TR 94/27.

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[¶2-710] Overseas defence force rebate A taxpayer serving as a member of the Australian Defence Force at a specified overseas locality is eligible for a rebate under s 79B of the ITAA36. A specified overseas locality is one designated by the Treasurer by notice in writing to the Commissioner. Where the taxpayer’s total period of service at overseas localities during the year is more than one-half of the year, or where the taxpayer dies at an overseas locality, the rebate is the sum of $338 and 50% of the concessional rebate amount. The ‘concessional rebate amount’ is the sum of the dependant (invalid and carer) tax offset (¶2-570), the notional child and student tax offset to which the taxpayer is entitled under sub-div 961-A of the ITAA97 (¶2-560) and the notional sole parent tax offset to which the taxpayer is entitled under sub-div 961-B of the ITAA97 (¶2-620). These last two offsets are offsets to which the taxpayer would notionally be entitled if they had been retained, calculated without regard to any family assistance received. A taxpayer’s period of service in an overseas locality includes any period during which the taxpayer served as a defence force member in Zone A or Zone B (¶2-700), but does not include any period of service for which the taxpayer is entitled to an exemption from tax under s 23AC or 23AD of the ITAA36. These sections exempt the salary and allowances of defence force members serving with certain United Nations forces or other

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organisations overseas. If the taxpayer qualifies for a zone rebate as well as the defence force rebate, the taxpayer can claim the higher rebate. A list of the specified overseas localities can be found on the ATO website at: www. ato.gov.au.

[¶2-720] Civilians serving overseas with United Nations forces Civilian personnel contributed by Australia to an armed force of the United Nations overseas may be eligible for a rebate (s 23AB(7) ITAA36). Where the taxpayer’s total period of United Nations service during the year is more than one-half of the year, or where the taxpayer dies while performing that service, the rebate is the sum of $338 and 50% of the sum of the dependant (invalid and carer) tax offset (¶2-570) and the notional child and student tax offset to which the taxpayer is entitled under sub-div 961-A of the ITAA97 (¶2-560). A taxpayer’s period of overseas service with the United Nations includes periods of service in Zone A or Zone B (¶2-700). A taxpayer who qualifies for a zone rebate as well as the overseas service rebate is only entitled to the higher rebate.

[¶2-730] Seniors and pensioners tax offset A seniors and pensioners tax offset is available to two classes of taxpayers:

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(1) a taxpayer, whether a pensioner or a self-funded retiree, who for at least one day in the income year:  (i) receives a pension, allowance or benefit under the Veterans’ Entitlements Act 1986 (Cth) (or is eligible but did not actually receive one), has reached age pension age under that Act and is not in gaol, or (ii) qualifies for an age pension under the Social Security Act 1991(Cth) and is not in gaol, and (2) recipients of various ‘rebatable benefits’, including the age pension, the disability support pension, the disability wage supplement, the wife pension, the parenting payment (single), the widow pension (class B), the carer payment and the mature age partner allowance (s 160AAAA ITAA36).

The amount of the offset (ss 10 and 11 Income Tax Assessment (1936 Act) Regulation 2015 (Cth)) depends on a number of factors, including whether the senior or pensioner is single or a member of a couple. The rebate shades out at the rate of 12.5 cents for each dollar by which the pensioner’s rebate income exceeds the rebate income threshold for the year. No rebate is available once rebate income reaches the cut-out rebate threshold. Offset entitlements for 2017/18 are shown in the following table. Status of taxpayer

Rebate income threshold

Cut-out rebate threshold

Maximum offset

Single

$32,279

$50,119

$2,230

Couple (combined)

$57,948

$83,580

$3,204

Couple (each)

Couple (combined, living apart due to illness)

$28,974 $62,558

$41,790 $95,198

A taxpayer is eligible for the maximum offset in 2017/18 if:

$1,602 $4,080

Tax Formula, Tax Rates and Tax Offsets113

(1) they do not have a spouse and their rebate income is less than $32,279

(2) they have a spouse and the combined rebate income of the taxpayer and the spouse is less than $57,948, or

(3) at any time during the year, they and their spouse live apart due to illness or because one of them was in a nursing home and their individual rebate income is less than $31,279.

The combined effect of the seniors and pensioners tax offset and the low income tax offset (¶2-640) is that, at maximum tax offset eligibility, no tax is payable. Medicare levy may, however, still be payable. A person entitled to both the seniors and pensioners tax offset and the beneficiary rebate (¶2-740) in an income year can claim one, but not both, of the offsets if they are of the same value, or the offset of the greater value if they are not the same. In the case of a partnered taxpayer, any unused part of their offset can be transferred to the other partner if that partner is also eligible for the offset.

[¶2-740] Social security beneficiary rebate The social security beneficiary rebate is calculated to offset the tax liability on certain social security and other benefits paid to a taxpayer during a year. The rebate ensures that persons wholly dependent on such benefits have no tax liability. The beneficiary rebate is available to persons receiving ‘rebatable benefits’(s 160AAA(1) and (3) of the ITAA36) such as:

(1) social security benefits and allowances, eg newstart and sickness allowances, widow allowance, partner allowance and additional parenting payment (partnered), youth allowance and mature age allowance (2) payments of exceptional circumstances relief Copyright © 2019. Oxford University Press. All rights reserved.

(3) specified Commonwealth education and training payments, and

(4) income support component of wages paid to participants in the CDEP Scheme.

The beneficiary rebate is calculated using the formula in s 13 Income Tax Assessment (1936 Act) Regulation 2015 (Cth). A taxpayer who is eligible for both the seniors and pensioners tax offset (¶2-730) and the beneficiary rebate is only entitled to the higher of the two (s 160AAA(4)).

[¶2-760] Rebate for bonuses on certain life assurance policies Section 160AAB of the ITAA36 provides a rebate in respect of amounts included in assessable income by virtue of s  26AH of the ITAA36, namely bonuses and similar amounts paid on certain life assurance policies. The rebate rate is 30%. The rebate may be claimed where a trust beneficiary or a partner has an amount included in his or her assessable income as a result of the inclusion of a s 26AH amount in the assessable income of the trust or partnership. The rebate is also available to trustees of superannuation funds, approved deposit funds or pooled superannuation trusts.

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In Taxation Ruling IT 2499 the Commissioner indicates that the rebate can be offset against the tax payable on income from any source and not just the bonus income assessable under s 26AH.

[¶2-770] Land transport offset To support the private sector provision of public infrastructure, div 396 of the ITAA97 (s 396-5 to 396-110) provides a 30% tax offset on interest derived by lenders to approved public road and rail infrastructure projects. The tax offset is available to resident lenders to an approved land transport infrastructure project in the first five years of borrowings by the project borrower. To be approved as a borrower for the purposes of the offset, an entity must be an incorporated body, a corporate limited partnership, a corporate unit trust or a public trading trust.

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[¶2-790] Seafarer tax offset From 1 July 2012, a company may be entitled to a refundable tax offset (a seafarer tax offset) for salary, wages and allowances paid to Australian resident seafarers who are employed to undertake overseas voyages on certified vessels. The offset is contained in sub-div 61-N (s 61-695 to 61-710) whose object is to stimulate opportunities for Australian seafarers to be engaged on overseas voyages and to acquire maritime skills. The seafarer tax offset was introduced by the Tax Laws Amendment (Shipping Reform) Act 2012 (Cth), which provided a number of taxation incentives to stimulate investment in the Australian shipping industry. To be eligible to claim the offset in an income year, a company must employ at least one individual in qualifying positions, on certified vessels, for qualifying overseas voyages for at least 91 days in the year. Employment on a particular day qualifies if the seafarer: (i) is an Australian resident for tax purposes, (ii) is employed on an overseas voyage as a master, engineer, integrated rating, steward or deck officer, and (iii) undertakes the voyage on a ship for which the company holds a certificate under the Shipping Reform (Tax Incentives) Bill 2012(Cth). The amount of offset for an income year is worked out using the formula: Gross payment amounts × 30%

where ‘gross payment amounts’ means the total amount of withholding payments (salary, wages, leave and training allowances) payable by the company in an income year to individuals employed for 91  days or more within the year, and paid in relation to employment or leave accruing due to being engaged on such a voyage.

CHAPTER 3

Assessable Income: General Principles Overview¶3-000 Competing concepts of income ¶3-020 – ¶3-050 Introduction¶3-020 Economic perspective—income as a ‘gain’ ¶3-030 Judicial perspective—income as a ‘flow’ ¶3-040 Diminishing influence of ‘flow’ concept ¶3-050

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Assessable income ¶3-080 – ¶3-120 Meaning of ‘income’ under the ITAA97 ¶3-080 Income that is not assessable income ¶3-100 Interaction between GST and assessable income ¶3-120 Ordinary income ¶3-150 – ¶3-290 Introduction¶3-150 Ordinary income ‘comes in’ to the recipient ¶3-160 Characterised in the hands of the person who derived it ¶3-170 Doctrine of constructive receipt ¶3-180 Characterised at the moment of derivation ¶3-190 Amount has a sufficient nexus with an earning activity ¶3-210 Ordinary income is money or something convertible into money ¶3-230 Compensation may have the character of ordinaryincome ¶3-250 Ordinary income will often exhibit periodicity, recurrence and regularity ¶3-260 Illegal, immoral or ultra vires receipts may be ordinary income ¶3-270 Capital gains are not ordinary income ¶3-280 Generally, there must be some gain to the taxpayer ¶3-290

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Recoupment of deductible amounts Reimbursement of a deducted expense Statutory recoupment rules

¶3-400 – ¶3-420 ¶3-400 ¶3-420

[¶3-000] Overview The first step in determining the taxable income of a taxpayer for an income year is to calculate their total assessable income for the year (s 4-15(1) ITAA97). The purpose of this chapter is to introduce the basic principles relevant to the inclusion of amounts in assessable income. These principles are set out in the ‘core provisions’ of the ITAA97, that is, Pt 1-3 (div 4 to 8).

Sum of ordinary income and statutory income The assessable income of a taxpayer for an income year is the sum of their ordinary and statutory income for that year (s 6-1(1) ITAA97). The term ‘income’ is not defined in the legislation, though descriptions of ordinary income and statutory income are provided. An amount may be brought into assessable income either as: • •

ordinary income under s 6-5, or statutory income under s 6-10.

There are two types of income that are not assessable income. They are:  (a) nonassessable non-exempt income (¶9-005); and (b) exempt income (¶9-020). Income tax is not payable on either of these types of income.

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Ordinary income Ordinary income is stated in s  6-5 to be ‘income according to ordinary concepts’. This refers back to the notion of income developed by the courts through case law precedents. Over many decades, the courts have developed a range of attributes and tests to identify ordinary income amounts. These tests are discussed at ¶3-180 to ¶3-290. An amount is most commonly ordinary income if it has its source in an earning activity, being the provision of labour, the investment of capital or the carrying on of a business. For this reason, ordinary income has traditionally been divided into income from personal exertion, income from property and income from business. The discussion of assessable income in this book is largely structured in line with this division, with income from personal exertion discussed in Chapter 4, income from property in Chapter 5 and income from business in Chapter 6.

Statutory income Statutory income, as defined in s  6-10, means amounts that are not ordinary income but are included in assessable income by particular provisions of the ITAA36 or the ITAA97. The most important type of statutory income is a capital gain (Chapters 7 and 8). Other important types of statutory income are lump sums or income streams paid by a superannuation fund (¶23-400), lump sums paid by an employer on termination of an employee’s employment (¶4-700), and dividends paid to a shareholder of a company (¶18-200).

Assessable Income: General Principles117

Some types of statutory income are discussed in chapters that deal with both ordinary income and statutory income. For example, Chapter 4 deals not only with ordinary income from personal exertion such as payments from employers for services performed, but also with statutory income, such as employment termination payments and shares and options granted to employees under employee share schemes. Similarly, Chapter 5 deals not only with ordinary income from property such as rent from an investment property or interest on money invested, but also with statutory income from property such as annuities and royalties. Instead of being paid salary or wages, employees may receive remuneration in the form of a fringe benefit such as a low-value loan, private use of a car or payment of expenses. Fringe benefits are not included in statutory income and the recipient of a fringe benefit is not assessable on the value of the benefit (s 23L ITAA36).Fringe benefits tax may instead be imposed on an employer who provides a fringe benefit to an employee (Chapter 26).

Taxation of an amount that could be both ordinary and statutory income There is considerable overlap between ordinary income and statutory income and a particular transaction may cause an amount to be potentially taxable as either. The general rule as set out in s 6-25 is that, unless the contrary intention appears, ‘the provisions of this Act (outside this Part)’ (ie outside the core provisions of Pt 1-3) prevail over the rules about ordinary income. In most cases this means that statutory income rather than ordinary income provisions will apply.

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Example—Annuity taxed as statutory income Ali uses the $300,000 that she inherits when her grandmother dies to purchase an annuity (¶5-300) from an insurance company. The annuity agreement is for her to receive $15,000 per year payable in weekly instalments. The weekly payments would be: (a) ordinary income because they are regular and recurring (¶3-260), and also (b) statutory income because s  27H of the ITAA36 includes in a taxpayer’s assessable income the amount of an annuity derived by the taxpayer during the year. The effect of s 6-25 is that s 27H prevails over the ordinary income provisions and the payments are taxed according to the method set out in s 27H (¶5-320).

Important instances of a contrary intention appearing are: •

section 118-20 of the ITAA97, which applies where a CGT event gives rise to both a capital gain and an amount that is assessable under another provision such as s 6-5— this could apply where the sale of shares by a share trader results in a capital gain and also in the derivation of ordinary income from the carrying on of a share trading business. The effect of s 118-20 is that the amount would be taxed first under the other provision (in this case s 6-5), and the CGT provisions only apply to the extent

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Assessable Income: General Principles

that the capital gain from the event is greater than the otherwise assessable amount (¶7-710), and

section 15-2 of the ITAA97, which applies where a taxpayer receives a benefit such as an allowance (¶4-110)—s 15-2(3) states that, if the benefit is assessable as ordinary income under s 6-5, it is not taxed under s 15-2.

Example—Share trader sells a parcel of shares The sale of a parcel of shares by a share trader could be treated as resulting in: • the derivation of $500 ordinary income from a share trading business, and • a capital gain of $520 from the disposal of CGT assets (assuming the capital gain calculation takes different factors into account). The effect of s 118-20 is that the $500 ordinary income would be taxed under s 6-5 and only the $20 capital gain in excess of the ordinary income amount would be taxed under the capital gains tax provisions. This means that, if the share trader is entitled to a CGT discount because the shares have been held for at least 12 months (¶7-915), the discount would only apply to the $20 capital gain amount.

COMPETING CONCEPTS OF INCOME (¶3-020 – ¶3-050)

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[¶3-020] Introduction The two components of assessable income in the ITAA97, ordinary income and statutory income, have their source in fundamentally different notions of income. The concept of ordinary income has been developed in judicial decisions in which the underlying principle is that of income as a ‘flow’. Despite this, the inclusion of amounts in assessable income, particularly in recent years, has been based on the traditional economic thinking of income as a ‘gain’. There is a fundamental conflict between the judicial and economic notions of income, and these concepts have continually jostled for recognition in Australian tax jurisprudence.1 The judicial and economic notions of income are briefly discussed below.

[¶3-030] Economic perspective—income as a ‘gain’ According to traditional economic thinking, income is regarded as a ‘gain’. This perspective is reflected in Henry Simons’ famous statement that:2

1

See RW Parsons, ‘Income taxation: An institution in decay’ (1986) 3 Australian Tax Forum 233, 236–240.

2

Henry Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (University of Chicago Press, 1938) 49–51.

Assessable Income: General Principles119

Personal income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption, and (2)  the change in value of the store of property rights between the beginning and end of the period in question. In other words, it is merely the result obtained by adding consumption during the period to ‘wealth’ at the end of the period and then subtracting ‘wealth’ at the beginning. The sine qua non of income is gain, as our courts have recognised in their more lucid moments—and gain to someone during a specified time interval [and measured according to objective market standards] … This position, if tenable, must suggest the folly of describing income as a flow …

As is explained in ¶3-040, the judicial concept of income applies only to realised gains, and the mere increase in value of property over a period is not income even if the gain may constitute income once realised. Economists, on the other hand, generally regard both realised and unrealised gains as income. An unrealised gain on appreciated property is therefore considered to be income, as it represents economic gain to the owner of the property. Statutory income provisions are designed to bring into the tax base gains that fall outside the ordinary concept of income and, for the most part, these are included in assessable income on a realisation basis. For example, capital gains are included in the income base only when there is a disposal of the property generating the gain or when the taxpayer’s ownership of the property otherwise ends.

[¶3-040] Judicial perspective—income as a ‘flow’

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The judicial notion of income has traditionally differed from the economist’s notion. In Scott v C of T (NSW)3, Jordan CJ stated: The word ‘income’ is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention [to the contrary] …

The judicial notion of income, therefore, is income according to the ordinary concepts and usages of mankind. Importantly, the courts have emphasised that the ordinary concepts and usages of mankind are not fixed, but rather change over time to reflect changes in society itself, as was demonstrated so dramatically in FC of T v Whitfords Beach Pty Ltd4 and FC of T v Myer Emporium Ltd5 (¶3-050). There is no single rule for determining whether a particular receipt is income according to ordinary concepts; however, a number of propositions can be extracted from the cases, and these propositions collectively comprise the judicial notion of income (¶3-150ff ). In explaining the notion of income as a flow, judges have often relied upon agricultural metaphors. The classic example of such a metaphor is in the US case of Eisner v Macomber6 3

(1935) 35 SR (NSW) 215, 219.

4

82 ATC 4031; (1982) 150 CLR 355.

5

87 ATC 4363; (1987) 163 CLR 199.

6

252 US 189 (1920), 206, 207.

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where Pitney J stated that ‘The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.’ Central to these metaphors is the proposition that income is something that has its source in an earning activity. Although the earning activity may be the employment of labour or capital, income as a flow is best illustrated in the area of income from capital, such as interest from debts, rents from the lease of property, royalties from the licensing of intellectual property rights, and dividends from shares. An amount that has no relationship to an earning activity (eg a pure gift) is not generally within the judicial notion of income.

[¶3-050] Diminishing influence of ‘flow’ concept Until recent times the ‘flow’ concept of income dominated Australian tax law, to the virtual exclusion of any notion of ‘gain’ as a criterion of taxability. However, over time, the dominance of the flow concept has been eroded by two key developments:

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(1) Changes in judicial attitudes: In the area of income from business, the High Court in FC of T v Whitfords Beach Pty Ltd7 and FC of T v Myer Emporium Ltd8 has held that a net gain can be income according to ordinary concepts. Indeed, as Hill J stated in Warner Music Australia Pty Ltd v FC of T:9 ‘It is now too late to argue in the case of a taxpayer carrying on a continuing business and thus required to account on an accruals basis, that income is confined to that which comes in. Gains, at least if they are capable of being converted into money in a practical and commercial sense, may clearly constitute assessable income.’ (2) Legislative enactment of ‘gain’ principles: There are a number of specific provisions in the tax law which reflect a ‘gain’ approach to the concept of income. The most striking of these are the capital gains tax rules which expressly include within the income tax base many gains which would be excluded from the judicial notion of income, eg because they involve the mere realisation of a capital asset, which, being of a capital character, is not ordinary income (¶6-410).

The result of these judicial and legislative initiatives is that the notion of income as a gain has become firmly entrenched in Australian tax law, and income as a flow has receded.

ASSESSABLE INCOME (¶3-080 – ¶3-120) [¶3-080] Meaning of ‘income’ under the ITAA97 For income years before 1997–98, s  25(1) of the ITAA36 included the ‘gross income’ derived by a taxpayer in their assessable income for that year. The ITAA36 did not provide

7

82 ATC 4031; (1982) 150 CLR 355: ¶6-430.

8

87 ATC 4363; (1987) 163 CLR 199: ¶6-440ff.

9

96 ATC 5046, 5052; (1996) 70 FCR 197, 205.

Assessable Income: General Principles121

a definition of ‘income’, and therefore its meaning was developed by the courts, which held that income in s 25(1) meant income according to ordinary concepts. Since 1997/98, the tax provisions affecting income have generally been found in the ITAA97, which uses the terms ‘assessable income’, ‘ordinary income’ and ‘statutory income’. Section 6-1(1) of the ITAA97 provides that the assessable income of an entity for an income year is the sum of the ordinary income and statutory income derived by the entity for the year. These are the only amounts that are included in assessable income. This is made clear in s 6-15(1), which provides that an amount that is neither ordinary income nor statutory income is not included in assessable income. If an amount is exempt income (¶9-020) or non-assessable non-exempt income (¶9-005), it is not assessable income (s 6-15(2) and (3)). An amount of ordinary income or statutory income can have only one status (ie assessable income, exempt income or non-assessable non-exempt income) in the hands of a particular entity (s 6-1(5)).

Designed to avoid structural problems The ITAA97 has been drafted with a view to avoiding structural problems relating to the relationship between ordinary and statutory income. It does this in two ways.

(1) The ITAA97 expressly provides for jurisdictional limits in the inclusion of amounts in assessable income (¶2-030). Separate jurisdictional rules are stated for ordinary and statutory income of an Australian resident or a foreign resident.

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(2) Reconciliation rules apply where more than one provision in the tax law may include an amount in assessable income. Two situations may require reconciliation.

The first situation is where the same amount may be both ordinary income and statutory income. Section 6-25(2) provides that, unless the contrary intention appears, the provisions of the ITAA97 other than the core provisions in Pt 1-3 prevail over the rules about ordinary income (¶3-000). The other situation is where the same amount is statutory income under more than one provision of the tax law. In such a case, the Explanatory Memorandum simply states that the amount is assessable under the ‘most appropriate provision’, although no rules are provided for determining the most appropriate provision. In some cases, express reconciliation rules may be provided in the tax law.

[¶3-100] Income that is not assessable income Assessable income is income that is counted in working out the amount of taxable income that is subject to tax. Two types of income are not assessable income on which income tax is payable. They are: • •

exempt income (¶9-020), and

non-assessable non-exempt income (¶9-005).

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Exempt income is not counted directly in working out taxable income. However, it is counted in reducing prior year tax losses that can be deducted in the current year and in reducing tax losses carried forward to later years (¶11-520). Non-assessable non-exempt income is also not counted in working out taxable income but, unlike exempt income, it has no effect on tax losses. There can be no overlap between assessable income, exempt income and nonassessable non-exempt income. If an amount is one type of income, it cannot be either of the other two types (s 6-1(5); 6-15(3); 6-20(4)).

[¶3-120] Interaction between GST and assessable income If a business taxpayer makes a supply to a customer and GST is included in the price, the GST paid by the customer is non-assessable non-exempt income (¶9-005) for the business taxpayer and is disregarded when working out their assessable income. The GST paid to the supplier is not assessable income for the supplier because the supplier merely collects and holds the GST until it must be remitted to the ATO. GST is discussed in detail in Chapter 27. GST payable on a taxable supply is expressly excluded from being either assessable income or exempt income (s 17-5(a) ITAA97)10. Example—GST excluded from assessable income

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Bob, who carries on a business of building houses, adds 10% GST when he charges customers for the work he carries out. One client pays a bill of $16,500 which includes $1,500 GST for services that would, in the absence of GST, cost $15,000. Bob is not liable to tax on the GST that he collects for the ATO because it is non-assessable non-exempt income.

Treatment of GST adjustments Also excluded from assessable income is the amount of any increasing adjustment (¶27095) relating to a taxable supply, for example if the amount ultimately received is greater than that receivable at the time of the supply, thereby increasing the entity’s net GST liability (s 17-5(b)). An amount of a decreasing adjustment may be assessable income unless the entity that has the adjustment is an exempt entity (s 17-10 ITAA97).

ORDINARY INCOME (¶3-150 – ¶3-290) [¶3-150] Introduction The assessable income of a taxpayer for a year of income includes the ordinary income and statutory income of the taxpayer for the year (s 6-1(1) ITAA97). Ordinary income is

10 Complementary rules for deductions (div 27 of the ITAA97) are examined at ¶10-535.

Assessable Income: General Principles123

income according to ordinary concepts (s 6-5(1)).Relevant factors in determining whether a taxpayer has ordinary income have been shown by the courts to include: •

whether the amount comes in to the taxpayer (¶3-160)

•

whether an amount is treated as being received by the taxpayer even if it is instead dealt with in some other way (¶3-180)

•

• • •

the character of the amount in the hands of the taxpayer (¶3-170)

whether the payment is the product of an earning activity such as employment, or providing services (¶3-210) whether the amount is money or convertible into money (¶3-230), and

the way in which the amount is received, eg whether it is received regularly (¶3-260).

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[¶3-160] Ordinary income ‘comes in’ to the recipient An amount can only be ordinary income of a taxpayer for an income year if it has ‘come in’ to the taxpayer during the year. This means the amount must have been ‘realised’ in the sense that the taxpayer has actually made a profit when an asset that has increased in value is sold or when payment is made for services. In contrast, nothing has ‘come in’ to the taxpayer if an asset has merely appreciated in value while it stays in the taxpayer’s hands. In the terminology of s 6-5 of the ITAA97, an amount has come in to the taxpayer if it has been ‘derived’ by the taxpayer.11 As a general rule, if an amount does not come in to the taxpayer, it will not be ordinary income. An amount that does not come in to the taxpayer may, however, be treated as coming in to the taxpayer, and as having been derived, if the amount is applied or dealt with on the taxpayer’s behalf or as the taxpayer directs (¶3-180). A former employee of the Australian Federal Police received a lump sum workers’ compensation payment in 2015 for loss of earnings in the years 2000 to 2006. He argued that he was assessable on the amount spread out over the six years to which it related, rather than being assessable on the full amount in the year of receipt. The AAT said no amount had ‘come home’ to the taxpayer in a realisable form, and there was no amount that could be applied or dealt with on his behalf or as he directed, until 2015 when the lump sum was actually received. The payment therefore was assessable in 2015, the year of receipt (Edwards v FC of T 12). In FC of T v Cooke & Sherden,13 the taxpayers (sellers of soft drinks on a ‘door to door’ basis) were provided with free holidays by the soft drink manufacturer. The holidays were not transferable to anyone else and could not be converted to cash. It was held that the fact that the taxpayers would have had to expend money had they wished to provide the holidays for themselves did not make the benefit ordinary income. The principle stated 11 The concept of derivation is based largely on the principles of tax accounting and, in particular, on whether the entity accounts for tax purposes on a cash or accruals basis (Chapter 13). An entity that accounts on a cash basis treats an amount as derived when it is received and an entity that accounts on an accruals basis treats an amount as derived when the right to receive it arises. 12 2016 ATC ¶10-436; [2016] AATA 781 13 80 ATC 4140, 4149.

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by the court was that, if the receipt of an amount merely saves a taxpayer from incurring expenditure, this does not necessarily make the amount ordinary income because ‘income is what comes in, it is not what is saved from going out’.14

Taxpayer is beneficially entitled to the amount Even if an amount is received, it will not be ordinary income unless the recipient is beneficially entitled to the amount, ie has the right at law to the benefits attached to the amount. This means that amounts mistakenly paid as salary or wages to employees, or unemployment or sickness benefits paid by mistake or error by a government agency, which the recipient is obliged to repay are not ordinary income. In Zobory v Commissioner of Taxation,15 an employee earned interest on money that he stole from his employer. The interest was held not to be assessable income because the employee was not beneficially entitled to it and the funds were held on constructive trust for his employer. In Reiter v Commissioner of Taxation,16 fortnightly instalments of workers’ compensation were repaid by the taxpayer after they were mistakenly paid by the WorkCover Corporation. Because the Corporation was not legally obliged to pay, and the taxpayer was not beneficially entitled to receive, the amounts, they had not been derived as ordinary income by the taxpayer. If an employee is obliged to repay amounts mistakenly paid by their employer and the employer later waives that obligation, it might be said that the employer has provided a debt waiver fringe benefit (¶26-430). In such a case, the employer may be liable to pay fringe benefits tax on the value of the benefit (¶26-000).

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Reduction in the amount of a liability A reduction in the amount of a liability can give rise to a gain that is ordinary income. This has been recognised for some time in the area of foreign currency exchange movements. In FC of T v Unilever Australia Securities Ltd,17 a finance company entered into an arrangement under which it paid a third party an amount in return for the third party agreeing to take over the finance company’s obligation to repay loan principals in the future. The Full Federal Court concluded that the difference between the amount paid and the face value of the loans to be repaid was a revenue gain to the finance company.

Amount subject to a condition The fact that an amount is subject to a condition does not prevent it being ordinary income. In Sent v FC of T,18 the Federal Court held that an employee was liable to tax on bonus entitlements of $11.6  million that were paid to an employee share trust on his behalf. The employee’s entitlement to some of the bonus had already accrued, but some was 14 80 ATC 4140, 4149; (1980) 42 FLR 403, 416. Another important issue in Cooke & Sherden—the fact that the benefit received was neither cash nor convertible into cash—is discussed at ¶3-230. 15 (1995) 64 FCR 86; 95 ATC 4251. 16 (2001) 113 FCR 492; 2001 ATC 4502. 17 95 ATC 4117; (1995) 56 FCR 152. 18 2012 ATC ¶20-318.

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conditional on the future performance of the company. According to the court, the fact that some of the bonus entitlements were contingent on events that had not yet occurred did not mean that the payment lost its character as income. The Full Federal Court dismissed the taxpayer’s appeal.19 In Sent, the court found that the bonus payment was not subject to a ‘claw back’ condition that required amounts to be repaid, eg if the company’s future performance fell short of expectations. Even if a taxpayer is obliged to repay an amount in certain circumstances, the amount may still have been derived as ordinary income. In Case R107,20 a footballer was held to have derived as ordinary income an advance payment of $10,000 paid by a football club in order to secure his services, even though, if the player had been unable to obtain clearance from his current club, he would have had to repay part of that sum. In Case T6,21 an insurance agent was entitled to receive a commission of $16 per $1,000 of the value of each policy he wrote, and on the first anniversary of the policy a further $4 per $1,000. If the policy was not renewed the taxpayer was obliged to repay $8. It was held that the possibility of repayment of the $8 merely created the possibility of a loss or outgoing occurring at some future date, and did not prevent the full amount from being derived as ordinary income in the agent’s hands when received. In Tagget v FC of T22 a taxpayer who obtained a contingent equitable interest in a proposed parcel of land under a deed in 1988 unsuccessfully argued that his liability to tax arose in 1988 when he acquired the interest and when the land was valued at $450,000 rather than in 2005 when the land, then valued at $1.2m, was transferred to him. The Federal Court held that in 1988 the taxpayer’s entitlement to the land was of a contingent nature and the value of his entitlement was quite uncertain. Nothing in the nature of income could have come in to the taxpayer until the land was transferred to him or a sum of money was due to him as a result of an agreement reached or a valuation struck under that deed. The taxpayer only derived the income when there was no longer any contingency about the transfer.

[¶3-170] Characterised in the hands of the person who derived it The character of an amount is determined in the hands of the person who derives it. This is illustrated by Federal Coke Co Pty Ltd v FC of T.23 In that case, Bellambi Coal Co had a contract to supply coke to an overseas company, Le Nickel. When Le Nickel was unable to accept the full amount of coke stated in the contract, it agreed to pay Bellambi an amount as consideration for Bellambi releasing Le Nickel from its contractual obligations. After Bellambi took tax advice, the release agreement was renegotiated so that the compensation was paid by Le Nickel to Federal Coke, a wholly-owned subsidiary of 19 Sent v FC of T (No 2) 2012 ATC ¶20-364. The High Court refused the taxpayer’s application for special leave to appeal. The doctrine of constructive receipt was also considered in Sent (¶3-180). 20 84 ATC 717. 21 86 ATC 141. 22 2010 ATC ¶20-162 (Federal Court); 2010 ATC ¶20-210 (Full Federal Court). 23 77 ATC 4255.

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Bellambi. The amount paid was expressed to be as compensation for Federal Coke closing down its coking works as a result of the supply agreement being cancelled. At no stage had there been any legal relationship between Le Nickel and Federal Coke. The Commissioner argued that if the amount had been derived by Bellambi it would have had the character of income in the hands of Bellambi and that it retained that character even though it was actually derived by Federal Coke. The court dismissed this argument and held that an amount must be characterised in the hands of the person who derives the income. The amount was derived by Federal Coke and, in its hands, it was a pure gift and had the character of capital.24 In FC of T v McNeil,25 the issue was the assessability of rights issued under a share buy-back arrangement to a retiree who had a portfolio of shares in public companies. In January 2001, St George Bank announced an off-market share buy-back scheme. The buyback was implemented by the issue of sell-back rights, each of which entitled the holder to sell one ordinary share in St George Bank for a premium over the share price. In April 2001, the taxpayer received $576.64 from her participation in the scheme. The High Court held that the market value of the sell-back rights was ordinary income for the taxpayer. The assessability of the amount received by the taxpayer depended on its character in her hands, and not on the nature of the bank’s capital reduction that gave rise to the gain. Using the analogy of the tree and the fruit in Eisner v Macomber (¶3-040), while the receipt of the sell-back rights was a product of the taxpayer’s shareholding, it was severed from that shareholding and did not involve the receipt of assets or property. The pre-McNeil tax position was later restored by the enactment of s 59-40 of the ITAA97 which provides that an amount equal to the market value of rights issued to existing shareholders is non-assessable non-exempt income at the time the rights are issued, provided the shareholders’ original shares were not revenue assets or trading stock. As a consequence, a capital gain or loss would generally arise on disposal of the interests acquired by the taxpayer as a result of the exercise of the rights.

[¶3-180] Doctrine of constructive receipt Where the doctrine of constructive receipt applies, a taxpayer is treated as having received an amount even if the amount is not actually received by the taxpayer. The doctrine generally applies when a taxpayer who is entitled to receive an amount, because, for example, they have carried out some work or provided services, arranges to not receive the amount and for payment to be made in another way. In the ITAA97, a taxpayer is taxable on the assessable income that they ‘derive’ in an income year. In working out whether a taxpayer has derived an amount of ordinary income and, if so, when, the taxpayer is ‘taken to have received the amount as soon as it is applied or dealt with in any way’ on the taxpayer’s behalf or as the taxpayer directs (s 6-5(4)). Section 6-10(3) applies similarly in relation to statutory income. The doctrine of constructive receipt is given legislative force by these two provisions. 24 The doctrine of constructive receipt (¶3-180) was not taken into account in the case. A different decision may have been reached if it had been. 25 2007 ATC 4223.

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Entitlement to bonuses In Sent v FC of T, the taxpayer was entitled to bonuses under his employment contract, and for the three years to 30 June 2001, had earned, but not taken, $7 million worth of bonuses relating to services he had provided. Under a scheme devised to get around the company’s liquidity problems and to minimise the taxpayer’s tax liability on the bonuses, the $7 million bonus entitlements already accrued, and another $4 million worth of future or contingent bonuses, were extinguished and $11 million was paid into an executive share trust on his behalf. The taxpayer acquired all the units in the trust, and the trust used the $11 million to buy five million shares in the taxpayer’s employer company. After 12 months, the taxpayer could cash in his units in the trust and receive the $11 million that, in the absence of the scheme, would have been taxed as bonus payments in the previous year. The AAT held26 that, to the extent the extinguished bonus entitlements were referable to services already provided (ie $7 million worth of bonuses), they were assessable income but, to the extent they were referable to services not yet provided (ie $4  million worth of bonuses), they were not assessable. The Federal Court disagreed with the AAT and held that the taxpayer was assessable on all of the bonus entitlements because the whole amount was paid in consideration of the taxpayer waiving an entitlement to bonuses under his employment contract and therefore was a reward for services.27 The Full Federal Court dismissed the taxpayer’s appeal and held that the whole of the $11  million was assessable as ordinary income to the taxpayer. The shares were as much income as actual payment of the bonus entitlements would have been. There was no difference between the employer issuing shares to the taxpayer or paying the amount of $11 million to the taxpayer or his nominee. While the payment was made to the trust, it was at the request of the taxpayer, triggering s 6-5(4) of the ITAA97.28

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Entitlement under a ‘profit participation plan’ An employee of an international commodity trading company who participated in the company’s ‘profit participation plan’ was entitled to be paid US$160  million when his employment was terminated in 2007. The employee negotiated to relinquish his entitlement to the payment under the profit participation plan and to receive instead twenty instalments of the payment over a five-year period ending in 2011 (Blank v FC of T).29 According to the Federal Court, once it was decided that the amount was ordinary income as a reward for the employee’s services (¶4-060), the question arose when the income was derived by the employee. Was this when it fell due as a quantified sum or when the money was paid to the employee over the five-year period of the instalments?

26 2011 ATC ¶10-178. 27 Sent v FC of T 2012 ATC ¶20-318. 28 Sent v FC of T (No 2) 2012 ATC ¶20-364. The High Court refused the taxpayer’s application for special leave to appeal. In Yip v FC of T 2011 ATC ¶10-214, contributions by an employer to an employee share trust, using salary sacrificed by an employee, were ordinary income of the employee. It was assumed that the employee would have asked the employer to deal with the remuneration on her behalf, and the effect of s 6-5(4) was that she was taken to have derived the amount. 29 Blank v FC of T 2014 ATC ¶20-442; taxpayer’s appeal dismissed by the Full Federal Court in 2015 ATC ¶20-536.

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In the view of Edmonds J, the income was derived by the employee ‘as and when it was paid to him, or applied on his behalf ’ (at para 105). The income was therefore derived and assessable in 2007, the year the entitlement to the payment arose.

Employee’s remuneration paid to his private company In Southern Group Ltd v Smith,30 an individual’s remuneration as managing director of a public company was paid to his private company. This continued the practice required under an earlier consultancy contract between the two companies. The court held that the managing director had been appointed as an employee and that, when payments for his services were paid to his private company, this was a constructive payment of salary to the employee. The doctrine of constructive receipt is discussed further at ¶13-220.

[¶3-190] Characterised at the moment of derivation An amount must be characterised at the moment of its derivation. It is irrelevant that the amount may have had a different character if derived at an earlier or later time. This principle is illustrated by Constable v FC of T31 in which an employer made a contribution to a provident fund established for the benefit of its employees, including the taxpayer. At the time of the payment of the contribution, the contribution may have been characterised as a reward for services rendered by the taxpayer, and therefore as ordinary income. However, the taxpayer did not derive the amount at that time, having no right to any specific amount from the fund until the occurrence of certain specified events (eg retirement or a relevant change in the fund’s rules). A payment later made by the fund trustee was not, according to the High Court, ordinary income as it was a payment from the capital of a trust in satisfaction of the employee’s rights in the fund. It did not matter that, if the amount had been derived at the time of the contribution, it might have had an income character, because its character must be determined at the time of actual derivation. Copyright © 2019. Oxford University Press. All rights reserved.

[¶3-210] Amount has a sufficient nexus with an earning activity An amount is ordinary income if it has its source in an earning activity such as providing labour or carrying on a business. Generally, an amount that does not have a sufficient nexus with an earning activity will not be ordinary income. There are exceptions to this and, in some cases (such as income stream payments),32 the regularity of the payments may of itself mean an amount is ordinary income (¶3-260).

Windfall gains and gifts The need for a sufficient nexus with an earning activity means that windfall gains and mere gifts are not normally characterised as ordinary income. The Macquarie Dictionary defines a windfall as an unexpected piece of good fortune. This would include, for example, winning lotto or finding a $100 note on the footpath.

30 98 ATC 4733; (1997) 37 ATR 107. 31 (1952) 86 CLR 402; (1952) 10 ATD 93. 32 FC of T v Dixon (1952) 86 CLR 540.

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Another example of a mere gift is the large sum received by the solicitor in Scott v FC of T,33 where the High Court held that a payment from a former client was made as a personal gesture rather than for services performed (¶4-040). Much depends on the context and the nature of the taxpayer’s activities. It may be difficult for an employee to successfully argue that something received from an employer is in fact a gift rather than a reward for services or an inducement to work harder.

Competitions and prizes The Commissioner’s views on competitions and prizes (Taxation Ruling IT 167) are that: • •

•

in the absence of unusual features, no liability to tax would ordinarily arise where a member of the general public participates casually in a competition and wins a prize

if a taxpayer makes regular appearances in radio or television programmes, the reward received for doing so would be assessable income, and the taxation position would be the same whether the award for appearing is paid directly as a fee or indirectly through the opportunity to win prizes, and

a prize or award won in circumstances where it is an incident of the taxpayer’s income producing activities (eg a best player award won by a professional footballer or a prize won by a farmer for being Farmer of the Year) would have the character of income and, if the prize is goods rather than cash, the market value of the goods would be assessable income in the year the prize is received.

In the context of gambling, taxpayers may argue that they are in the business of gambling. In that case, gambling winnings would be ordinary income, being the normal proceeds of a business rather than merely the product of luck or chance, and gambling losses would be deductible. Both the ATO and the courts have been reluctant, however, to accept this argument. (See ¶6-060).

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Amount related to employment or services rendered An amount that is a product or ordinary incident of employment or a reward for services rendered is ordinary income. This is referred to as the ‘income from personal exertion’ principle. Examples include salary, wages and commissions. Tips are also ordinary income as they are, in principle at least, paid by a satisfied customer in return for services performed by, for example, a taxi driver or a waitress. Generally, an amount that does not have a sufficient nexus with employment or services rendered will not be ordinary income for an individual. The income from personal exertion principle is discussed in Chapter 4. Allowances may be ordinary income (¶4-025) or may be assessable as statutory income under s  15-2 of the ITAA97 (¶4-110). These include travel, meal, clothing or entertainment allowances.

33 (1966) 117 CLR 514.

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Income from carrying on a business The proceeds of a business will have the character of ordinary income where they are the proceeds of ‘what is truly an act done in carrying on the business’:  Californian Copper Syndicate v Harris.34 In Warner Music Australia Pty Ltd v FC of T, Hill J held that even an abnormal gain (in the sense of infrequent) may be so intimately connected with a taxpayer’s business as to be an incident of the business and therefore ordinary income.35 Ultimately the conclusion reached in any specific case will depend on an analysis of all the facts—particularly the nature of the business and of the transactions involved. The taxation of income from business is the subject of Chapter 6.

[¶3-230] Ordinary income is money or something convertible into money To be ordinary income, what the taxpayer receives must be money or convertible into money.36

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Convertible into cash The question of convertibility into cash was considered in FC of T v Cooke & Sherden.37 In that case, where a free holiday provided to the taxpayers could not be cashed in or transferred to anyone else, the Full Federal Court stated that ‘If a taxpayer receives a benefit which cannot be turned to pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages … [though] it is not necessary that the pecuniary alternative be available by way of direct conversion of the benefit received.’ Similarly in Tennant v Smith,38 where a bank employee was required as part of his duties to occupy a bank house, but was not entitled to sublet the house or use it for anything other than bank purposes, it was decided that the employee could not be assessed on the yearly value of the rent-free residence. In Payne v FC of T39 (¶4-140), the taxpayer joined an airline’s consumer loyalty program and accrued reward points from employer-paid travel and some private travel. The flight rewards could not be cashed in or transferred to anyone else but they could be made out in the name of family members, and the taxpayer used reward points to acquire airline tickets in the name of her parents who visited her from England. The Federal Court held that the flight rewards:  (a) were not ordinary income as they were not money or convertible into money; and (b) were received as a result of the personal contract between her and the airline rather than because of services she performed. 34 (1904) 5 TC 159. 35 96 ATC 5046; (1996) 70 FCR 197. See also Whitfords Beach v FC of T 50 ATC 4031 (¶6-430) where an isolated transaction constituted the carrying on of a business, and FC of T v The Myer Emporium Limited 87 ATC 4363 (¶6440) where an extraordinary transaction generated ordinary business income. 36 Cross v London & Provincial Trust Ltd [1932] 1 All ER 428, 430 (Greene MR). 37 80 ATC 4140, 4148; (1980) 42 FLR 403, 414. 38 (1892) AC 150. 39 96 ATC 4407; (1996) 66 FCR 299.

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Some non-cash benefits may be treated as convertible into cash even if this is not obviously the case. In Heaton v Bell,40 an employee was given the free hire of a car and if he surrendered the free hire he would become entitled to a higher wage. This benefit was treated as convertible into cash. In Abbott v Philbin,41 a secretary of a company was granted an option to purchase shares in the company at a certain price. The monetary value of the option was taxable because, even though it could not be cashed, it allowed the holder to obtain shares from the company and those shares would be freely convertible into money.

Treatment of non-cash benefits Although a benefit that is not money and not convertible into money is not ordinary income, the benefit might still be taxed.

(1) If a non-cash benefit is provided in return for the provision of services, the value of the benefit may be included in the recipient’s assessable income under s 15-2 of the ITAA97 (¶4-110). (2) If the benefit is provided to employees in respect of their employment, the employer may be assessed to fringe benefits tax (¶26-040) but the employees would not have any tax liability (s 23L ITAA36).

(3) A non-cash benefit that is provided in respect of a business relationship (s  21A ITAA36) may be deemed to be convertible into cash, and the recipient of the benefit may as a result be assessable on the arm’s length value of the benefit (¶6-480).

Section 21 of the ITAA36 provides that, if any non-cash consideration is paid to a taxpayer, the money value of that consideration is deemed to have been paid. This does not deem the consideration to be income, but merely attributes a money value (¶13-200).

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Barter transactions In its simplest form, bartering involves the direct exchange of goods or services for other goods or services without reference to money or a money value. The essential principle when dealing with barter transactions is that they are assessable or deductible to the same extent a similar cash or credit transaction would have been. If goods or services are exchanged within a business relationship, the market value of the goods or services is included in assessable income (Taxation Ruling IT 2668).

Transactions involving bitcoin and other crypto-currencies Transacting with bitcoin and other crypto-currencies has similar tax consequences as a barter arrangement. This means: •

if bitcoin is received for goods or services provided as part of a business, the fair market value of the bitcoin must be included in Australian dollars in the recipient’s ordinary income

40 [1970] AC 728. 41 [1961] AC 352.

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there are no income tax consequences if bitcoin is used to purchase goods or services for personal use or is received for goods or services provided as part of a personal transaction

a taxpayer in the business of mining and selling bitcoin is assessable on income derived from the transfer of the mined bitcoin to a third party; bitcoin held by the taxpayer is trading stock (¶14-020) and any bitcoin on hand at the end of an income year must be brought to account (¶14-060) the proceeds of carrying on a business of buying and selling bitcoin as an exchange service are included in assessable income, and any bitcoin on hand at the end of an income year must be brought to account, and profits from the sale of bitcoin acquired as an investment are not assessable unless the taxpayer is carrying on a business of bitcoin investment or the transactions amount to a profit-making undertaking or plan (Tax treatment of crypto-currencies in Australia – specifically bitcoin, ATO at ato.gov.au).

[¶3-250] Compensation may have the character of ordinary income A compensation payment will generally take the same character as what it replaces (Meeks42). Consequently, compensation for the loss of earnings or other income flows will generally be characterised as ordinary income, while compensation for the loss or substantial impairment of a capital asset will generally be characterised as capital (¶6-800ff ).

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Example—Lump sum had character of income A taxpayer worked as a medical practitioner until May 1997 when injuries received in a car accident meant he could no longer work. From that time until October 2009, the taxpayer received monthly payments of $2,500 under an income replacement insurance policy. In October 2010, after the taxpayer signed a deed of release which extinguished any further rights he might have had under the insurance policy, the insurance company paid him a lump sum of $200,000. There was no dispute that the lump sum was received by the medical practitioner as compensation for the injuries that meant he could no longer work. But there was dispute about the character of the lump sum – was it ordinary income or capital? According to the cases, the character of the lump sum should be determined according to the payments it replaces. As the lump sum replaced monthly income payments, the lump sum amount was also taxable as income (applying Sommer v FC of T43).

Where a lump sum compensation amount has both income and capital components, the whole payment may be characterised as capital44 if the income component cannot be ‘severed’ from the capital component and separately characterised (¶6-880). 42 C of T (NSW) v Meeks (1915) 19 CLR 568. 43 2002 ATC 4815; discussed at ¶6-805. 44 McLaurin v FC of T (1961) 104 CLR 381; Allsop v FC of T (1965) 113 CLR 341.

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[¶3-260] Ordinary income will often exhibit periodicity, recurrence and regularity The characteristics of ‘periodicity, recurrence and regularity’ are often seen as indicators that an amount is ordinary income. This simply reflects common experience, where payments of salary, wages, allowances or pensions are periodic, recurring and regular. The periodic nature of top-up payments to compensate an ex-employee for lower military pay when he joined the army was an important factor in FC of T v Dixon.45 Although the payments were voluntarily made by a bank to a former employee, the fact that they were periodic and were relied upon was significant in their characterisation as ordinary income (¶4-040). In contrast, the lack of recurrence and regularity was a key factor that distinguished the single pension supplement payment in FC of T v Harris46from the series of payments in FC of T v Blake.47 The taxpayer in VPRX v FC of T48 created a domain name and website in 20016 which generated revenue through Google Advertising. Three years later he sold the domain name to a US company under a ‘sale agreement’ and ‘revenue share agreement’. The taxpayer received an initial payment of $11,000 in 2009, then 18 payments of an average amount of about $3,000 in 2010 and three payments of $62,000, $38,000 and $21,000 in 2012. The AAT held that the regular payments were ordinary income received under the revenue share agreement and were not capital amounts received from the sale of the domain name. Where an expected periodical payment forms part of the receipts upon which a taxpayer depends for their regular expenditure, and the payments are made for that purpose, this points to the payment being income. This is shown by the decision in Anstis 49 where the High Court concluded that youth allowance payments were ordinary income because recipients could rely upon them for regular expenditure and could expect to receive them so long as they satisfied the requirements of the social security legislation. Recurrence and regularity was a key factor in the finding in Keily v FC of T50 that an old age pension was ordinary income. In applying the principles from the joint judgment of Dixon CJ and Williams J in Dixon’s case, White J in Keily said51 that: In the case of an aged person’s pension, the generally accepted characteristics of income (recurrence, regularity and periodicity) are present. In addition, the pensioner has a continuing expectation of receiving periodic payments, an expectation arising out of established government policy with respect to the support and welfare of aged citizens. Pension payments form part of the receipts upon which a pensioner depends for support.

45 (1952) 86 CLR 540. 46 80 ATC 4238. 47 84 ATC 4661. 48 VPRX v FC of T [2017] AATA 2156. 49 FC of T v Anstis 2010 ATC 20-221, discussed at ¶10-440; (2010) 241 CLR 443. 50 83 ATC 4248. 51 Ibid 4249.

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And a pension is paid to the pensioner for that purpose. A pension therefore satisfies the criteria or characteristics of income discussed in Dixon’scase.

In C of T (Vic) v Phillips,52 the taxpayer received compensation payments for surrendering his rights under a service agreement. The fact that the payments were made at the same regular time periods as the salary would have been paid if the service agreement had continued was an important factor in the court’s conclusion that the series of payments were ordinary income.

Significant factors, but not decisive Factors such as periodicity, recurrence and regularity are significant but not decisive. It is difficult to make absolute propositions in this field, as recognised by the High Court in FC of T v Montgomery:53 ‘income is often (but not always) a product of exploitation of capital, income is often (but not always) recurrent or periodical, receipts from carrying on a business are mostly (but not always) income.’ In unusual cases: (1) a lump sum may be ordinary income, as in Allman v FC of T,54where a lump sum was ordinary income because it was paid in substitution for wages lost from the time an employee was wrongly dismissed to when he was reinstated, or (2) a series of payments may be capital, as in Foley v Fletcher,55where they were instalments of an agreed price for the purchase of an asset.

Parental leave payments

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Under the federal government’s paid parental leave scheme,56 employees who have or adopt a child may be entitled to 18 weeks of paid parental leave at the national minimum wage. Parental leave payments to employees, which are generally paid by the employer according to the employee’s usual pay cycle, are ordinary income because they are regular, expected and able to be relied upon.

[¶3-270] Illegal, immoral or ultra vires receipts may be ordinary income A receipt may be ordinary income even if it is illegal, immoral or ultra vires. There are many picturesque examples of this principle in the case law, including: •

Partridge v Mallandaine57 (‘business’ of burglary)

•

Lindsay v IR Commrs59 (whisky smuggler)

•

Minister of Finance (Canada) v Smith58 (illegal bookmaker)

52 (1936) 55 CLR 144. 53 (1999) 198 CLR 639 at 663—discussed at ¶6-448. 54 98 ATC 2142. 55 (1858) 157 ER 678; see further ¶5-380. 56 The scheme was enacted by the Paid Parental Leave Act 2010 (Cth) and has applied since 1 January 2011. 57 (1856) 2 TC 179. 58 [1927] AC 193. 59 (1933) 18 TC 43.

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• •

No 275 v MNR60 (prostitution), and

England v Webb61 (ultra vires activities of a company).

This principle is not only logical, but good social policy—unless gangsters, whisky smugglers and drug dealers were taxed on the proceeds of their activities, the tax system would in effect be facilitating crime and immorality. The converse of this is that losses from illegal activities may be deductible—see, for example, FC of T v La Rosa62 where a drug dealer won a deduction after funds intended for a drug purchase were stolen (¶10-160).

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[¶3-280] Capital gains are not ordinary income Capital gains (ie gains made on the disposal of capital assets) are not ordinary income, but are included in assessable income as statutory income (s 102-5 ITAA97: ¶7-950). Before the commencement of capital gains tax in Australia, the distinction between an income and a capital amount was important because a taxpayer generally escaped tax on an amount found to be capital. In Bennett v FC of T,63 for example, a lump sum paid to the managing director of a radio station was not taxable because it was a capital payment in consideration of his surrender of valuable rights under his services agreement (¶4-060). The practical importance of the distinction between income and capital was greatly diminished by the introduction of capital gains tax on assets acquired on or after 20 September 1985. The availability of a ‘discount’ on capital gains when assets are disposed of after 21 September 1999 has, however, recreated, to some extent, the incentive to structure transactions to derive capital gains rather than ordinary income (¶7-915). As discussed at ¶3-040, the traditional approach to distinguishing income from capital receipts has been to adopt metaphors which liken capital to a tree (or land), and income to the fruit (or crops) which it produces from time to time. In the business context, the distinction between capital and income items has also been equated to the distinction between fixed and circulating assets. A fixed asset is one which ‘the owner turns to profit by keeping it in his own possession’, while a circulating asset is one which the owner ‘makes a profit of by parting with it and letting it change masters’: per Lord Haldane in John Smith and Son v Moore.64 For example, the machinery used by a manufacturer to produce goods will be a fixed asset, while the goods produced and sold to customers will be circulating assets.

[¶3-290] Generally, there must be some gain to the taxpayer In order for a taxpayer to derive ordinary income, there must be some gain to the taxpayer. This is illustrated by the decision of Lord Denning in Hochstrasser v Mayes65 where the 60 (1955) 13 Can Tax ABC 279. 61 [1898] AC 758. 62 2003 ATC 4510. 63 (1947) 75 CLR 480. 64 [1921] 2 AC 13. 65 [1960] AC 376.

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taxpayer was employed by a company which compensated employees for any loss incurred on the sale of their homes when they were transferred from one place of business of the company to another. The taxpayer incurred a loss on the sale of his house when he was transferred to a new place of employment, and was paid £350 to compensate him for the loss. Lord Denning held that the £350 was not income because the taxpayer did not make a gain. The other members of the House of Lords held that the payment was not income because there was an insufficient nexus with the taxpayer’s employment. This principle was applied in Lees & Leech Pty Ltd v FC of T66 where the taxpayer received $40,000 from its landlord as part reimbursement of the costs the taxpayer incurred in fitting out premises it leased. The work which the taxpayer undertook produced no gain to the taxpayer, as the value of the work at the expiration of the lease would be no more than scrap value. The taxpayer was not therefore assessable on the $40,000.

RECOUPMENT OF DEDUCTIBLE AMOUNTS (¶3-400 – ¶3-420)

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[¶3-400] Reimbursement of a deducted expense In FC of T v Rowe,67 the High Court considered whether an amount received by a taxpayer as a reimbursement of a previously deducted expense is necessarily ordinary income. The taxpayer in Rowe had claimed a tax deduction for legal costs incurred in relation to an inquiry about his suspension from employment. After being cleared of any wrongdoing, the taxpayer received an ex gratia voluntary payment from the Queensland Government, equivalent to the costs he had incurred. The Commissioner sought to include the payment in the taxpayer’s assessable income on the basis of a general principle that, where a payment is made as reimbursement of a deductible amount, it is ordinary income. The High Court held that no authority supported the Commissioner’s argument that there is such a general principle, and that the real question to be answered was whether the receipt was income according to ordinary concepts.

Character of the reimbursement According to ordinary concepts, the character of a reimbursement, not the fact of the reimbursement, must be considered. A receipt is assessable as ordinary income if it has an income character, such as where a taxpayer’s gain is made in the course of carrying on a business rather than from disposing of an asset used in the business. In HR Sinclair & Sons v FC of T,68 a company that carried on business as a sawmiller and timber merchant paid royalties to a State Forests Commission for supplies of timber. Royalties that were later refunded by the Commission because of an overpayment were held by the High Court to be assessable income in the year they were received by the sawmiller. 66 97 ATC 4407; (1997) 73 FCR 136. 67 97 ATC 4317; (1997) 187 CLR 266. 68 (1966) 114 CLR 537.

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In Goldsbrough Mort & Co Ltd v FC of T,69 a taxpayer who sold income-producing properties had received, under the sale contracts, an amount on adjustment of rates and taxes. The court held that the adjustment was correctly included in the taxpayer’s assessable income because the rates and taxes were to be treated ‘as part of the flow’ of outgoings and were inextricably connected with the profit derived from the business carried on by the taxpayer.

[¶3-420] Statutory recoupment rules A reimbursement of a previously deducted expense may also be statutory income. Under statutory recoupment rules in sub-div 20-A of the ITAA97 (s 20-10 to 2055), a taxpayer’s assessable income includes an ‘assessable recoupment’ of a loss or outgoing which is deductible in the current or a previous income year (s 20-35) or which is deductible over more than one income year (s 20-40). The assessable recoupment rules in sub-div 20-A operate as provisions of last resort because they only have effect where the income is not otherwise ordinary income or statutory income under a provision outside sub-div 20-A. The rules broadly capture two types of recoupments: (a) an amount received by way of insurance or indemnity as recoupment for any deductible loss or outgoing, and

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(b) any other recoupment of a loss or outgoing that is deductible under one of the provisions listed in s 20-30 (s 20-20).

In Denmark Community Windfarm Ltd v FC of T70, a grant of almost $2.5 million received by a taxpayer under the Commonwealth’s Renewable Remote Power Generation Program for the establishment of windfarms was held to be an assessable recoupment. The Commonwealth provided rebates for renewable energy projects in remote areas, and the taxpayer received a grant for 50% of the eligible project costs it incurred in the construction of two wind turbines. The costs related to the purchase of equipment and services in the design, construction and commissioning of the wind turbines and the cost of modifying equipment to incorporate the turbines into the electricity grid. Depreciation deductions for this expenditure could be claimed under the capital allowance provisions in ITAA97 div 40. The taxpayer argued that the grant did not satisfy the tests in s 20-20 because it was not received by way of indemnity or insurance and the taxpayer did not claim any deductions for the loss or outgoing (deductions had been claimed for the decline in value of the assets rather than for actual loss or outgoings). The Federal Court found the grant was an assessable recoupment under s  20-20 because:  (i) it was received as a recoupment of an outgoing, even though the payment was treated as being on capital account by the taxpayer, (ii) it fell within the meaning of ‘indemnity’ because it was received as compensation for an expense incurred by the

69 76 ATC 4343. 70 2017 ATC ¶20-619

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taxpayer, and (iii) the taxpayer could deduct an amount (under either ITAA97 div 40 or subdiv 328-D) for the outgoing for the current or an earlier income year. The Full Federal Court71 unanimously dismissed the taxpayer’s appeal, rejecting the argument that the depreciation deductions it claimed were not ‘for the loss or outgoing’ under s 20-20. The Court considered that the phrase ‘for the loss or outgoing’ was sufficiently broad to pick up a depreciation deduction where the relevant outgoing was the cost of the depreciating asset. The Court noted that the inclusion of div 40 in the table of deductions in s 20-30 pointed strongly against the taxpayer’s contention. Section 20-30 gives a long list of deductions that could give rise to an assessable recoupment, including for bad debts, tax-related expenses, rates or taxes, capital allowances, mining expenditure and R&D expenses. Amounts received to reimburse legal costs incurred in disputes concerning termination of employment are included in assessable income as an assessable recoupment under s 2020 where the legal costs are deductible under s  8-1 (Taxation Ruling TR 2012/8). The legal costs may be deductible if they are incurred to enforce a contractual entitlement that relates to a right to income, but not if they are incurred to seek compensation for loss of employment (a capital receipt), such as in an action for wrongful dismissal.

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Example—Legal costs award is an assessable recoupment When Mona’s employment was terminated, she took legal action to enforce her entitlement to income under the employment contract. The court enforced Mona’s contractual entitlement to the income due under the contract and also awarded interest and identified legal costs. Mona’s legal costs were incurred in gaining assessable income and the character of the advantage sought in the litigation was of a revenue nature. The legal costs are therefore deductible under s 8-1. The legal costs award is paid to indemnify her for the cost of the litigation and is not ordinary income or an employment termination payment. The legal costs award is an assessable recoupment under s 20-20. The legal costs award would not have been an assessable recoupment if Mona had taken legal action seeking damages for breach of contract because, in that case, the advantage sought by the litigation—compensation for loss of employment—would have been of a capital, not a revenue, nature.

‘By way of insurance or indemnity’

The meaning of ‘by way of indemnity’ in s 20-20 was considered in Batchelor v FC of T72 where the AAT observed that a payment by way of damages can be a payment of indemnity, and the term ‘indemnity’ can apply to a loss already incurred and is not restricted to a loss that may happen in the future. 71 Denmark Community Windfarm v FC of T 2018 ATC ¶20-646 72 2013 ATC ¶10-297.

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Based on these observations, the AAT concluded that the repayment to the taxpayer of a deposit paid upon entering into a contract to buy a retirement village was an assessable recoupment because it was received by way of indemnity. The amount received could not be characterised as ordinary income (¶3-400) because at most it was a compensatory amount equal to what the taxpayer had previously expended in the form of a deposit and there was therefore no gain to the taxpayer. The Full Federal Court set aside the AAT decision that the amount received was an assessable recoupment and remitted the matter to the Tribunal for re-determination (Batchelor v FC of T).73 The court said that the return to the taxpayer of her deposit was not an amount received ‘by way of insurance or indemnity’ because it was not an amount paid to compensate a loss. The amount was received as a return of what the taxpayer had contributed to the venture and should not have been included in the taxpayer’s assessable income under s 20-20(2). In Falk74, the AAT found that an amount paid to a doctor to cover his legal expenses after he successfully brought an unfair dismissal action against his employer was an indemnity payment. The payment was made by the Australian Capital Territory Treasurer as an Act of Grace Payment on behalf of ACT Health, the taxpayer’s employer. In return for the payment, the taxpayer was required to withdraw his application for reimbursement of legal costs. The AAT found that the payment was structured as an Act of Grace Payment only to comply with the Australian Capital Territory internal procedures and that the payment was made in return for the doctor withdrawing his application for costs and providing a release of the Australian Capital Territory in relation to the costs. The payment could not therefore properly be characterised as an ex gratia payment but was received by the doctor as indemnity for the legal costs he had incurred. In a Decision Impact Statement on the Falk case, the ATO said it accepted the AAT’s decision and would adopt its reasoning, where applicable, when determining if an amount is received by way of indemnity for the purposes of s 20-20(2). The ATO also said the decision confirms the Commissioner’s view as set out in para 54 of Taxation Ruling TR 2012/8 that payments in settlement of a claim for legal costs are received by way of indemnity. Recoupment for a loss or outgoing

‘Recoupment’ is widely defined in s 20-25. It includes a reimbursement, refund, insurance, indemnity or recovery, as well as a grant in respect of a loss or outgoing. Furthermore, a taxpayer is taken to have received a recoupment in respect of a loss or outgoing where another entity pays the loss or outgoing on behalf of the taxpayer, or where the taxpayer has disposed of the right to the recoupment of the loss or outgoing. The amount of such a recoupment is the amount which the other entity has paid or received for the disposal.

73 2014 ATC ¶20-450. 74 Falk v FC of T [2015] AATA 392

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Example—Rebate was assessable recoupment A rental property owner receives a government rebate for the purchase of an energy saving appliance for use in the rental property. This rebate is an assessable recoupment because it satisfies three requirements: • the rebate is not ordinary or statutory income (s 20-20(1)): it is not income derived from a business because the property owner is not carrying on a business of property rental, it is not income from renting a property to a tenant, and, although the rebate is a bounty or subsidy, it is not assessable under s 15-10 of the ITAA97 because it is not received in relation to carrying on a business • the rebate is a recoupment of the rental property owner’s outgoing on the purchase of the appliance (s 20-25(1)), and • a capital allowance deduction is available for the decline in the asset’s value. This example is derived from Taxation Determination TD 2006/31.

A deduction for the decline in the value of a depreciating asset is a deduction for a loss or outgoing (s 20-20(3)), although the amount to be included in assessable income at a particular time is limited to the loss or outgoing that can be deducted at that time (s 2040). Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit is assessable in later income years to the extent that further amounts are later deductible.

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Amount of assessable recoupment that is included in assessable income The amount of an assessable recoupment for a particular year cannot exceed the amount of the loss or outgoing (s 20-35(2)). Furthermore, where a loss or outgoing is deductible over a number of years and the recoupment exceeds the amount of deductions available to the date of the recoupment, the balance portion of the recoupment amount must be set off against future deductions available in respect of the loss or outgoing. In such a case the amount assessable for the current year is calculated by following the steps in the method statement in s 20-40(2).

CHAPTER 4

Income from Personal Exertion Overview¶4-000

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Ordinary income ¶4-020 – ¶4-070 Nexus between the amount and an earning activity ¶4-020 Allowances¶4-025 Payments by a party to an employment or services relationship¶4-040 Payments by a third party ¶4-046 Payment for services or for disposal of a capital asset? ¶4-050 Payments received for giving up valuable rights ¶4-060 Salary sacrifice arrangements ¶4-070 Statutory income ¶4-100 – ¶4-190 Introduction¶4-100 Benefits in the nature of income ¶4-105 Allowances, benefits, grants, etc, in relation to employment and services ¶4-110 – ¶4-190 Background¶4-110 Benefit provided to the taxpayer ¶4-140 Nexus with employment or services rendered ¶4-150 Reimbursement of car expenses ¶4-190 Employee share schemes ¶4-400 – ¶4-490 Background¶4-400 Overview of the pre-1 July 2009 regime ¶4-420 Taxation of employee share schemes from 1 July 2009 to 30 June 2015 ¶4-440 Taxation of employee share schemes from 1 July 2015 ¶4-460

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Treatment of ESS interests issued by eligible start-up companies¶4-480 Reporting, payment and withholding obligations ¶4-490 Termination payments ¶4-700 – ¶4-820 Introduction¶4-700 Employment termination payments ¶4-740 Life benefit termination payments ¶4-750 Taxation of a life benefit termination payment ¶4-755 Transitional termination payments ¶4-760 Death benefit termination payments ¶4-780 Genuine redundancy payments and early retirement scheme payments ¶4-800 Unused annual leave and long service leave payments ¶4-820

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[¶4-000] Overview ‘Income from personal exertion’ is defined widely in s 6(1) of the ITAA36 as meaning amounts such as salaries, wages, commissions, allowances, bonuses, pensions and retirement payments. The definition encompasses amounts that may be received by an individual because they make a personal effort in the sense that they are employed, they provide services or they carry on a business either alone or as a partner with another individual. It does not generally include interest and does not include rents or dividends. An amount derived from personal exertion may be included in assessable income as either ordinary income or statutory income. Alternatively, if an employer provides a fringe benefit to an employee, the benefit will be non-assessable income to the employee (s 23L ITAA36), and the employer may be liable to fringe benefits tax on the value of the benefit. Assessable income can be generated in a number of ways, but personal exertion, property and business are the three bases on which income is commonly seen to be generated. Income from personal exertion is discussed in this chapter, income from property in Chapter 5 and income from business in Chapter 6.

Ordinary income from personal exertion Income from personal exertion is ordinary income (¶3-150) if it is a product or incident of the employment of, or a reward for services rendered by, a person. Salary or wages are a common example (¶4-020).

Statutory income from personal exertion Regardless of whether an amount derived is ordinary income, it may also be statutory income (s 6-10(1) ITAA97). If an amount is both ordinary income and statutory income, the statutory income rules apply unless the contrary intention is stated (¶3-080). Section 15-2 of the ITAA97 includes in the assessable income of a person the value to the person of any allowances, gratuities, compensations, benefits, etc, given to the person in relation to any employment or services rendered by the person (¶4-110). Despite its

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broad intention, s 15-2 has only a limited role because it does not apply to an amount that is ordinary income (s 15-2(3)(d)) or is a fringe benefit (s 23L ITAA36). Employee share benefits provided to an employee are not taxed as ordinary income. Rather, a separate statutory regime taxes the employee at a concessional rate if certain conditions are satisfied (¶4-400). Regular workers compensation payments to a current or former employee are ordinary income. An amount received when an entitlement to regular payments is converted to a lump sum is also treated as ordinary income (¶6-860). There are various types of lump sum payments that an employee may receive on termination of employment. These include employment termination payments, genuine redundancy payments and accrued annual and long service leave payments. A lump sum may also be paid by an employer when an employee dies. These amounts are taxed as statutory income (¶4-700). Another amount related to personal exertion that may be included in assessable income arises where an employee’s car expenses are reimbursed by an employer (¶4-190).

Income derived as a benefit Although a benefit derived by a taxpayer may be ordinary income, certain benefits, such as a fringe benefit or a non-cash benefit given in a business relationship, are generally not assessable income of the taxpayer (¶4-105).

Salary sacrifice arrangements

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Personal exertion income is generally taxed in the hands of the person who is employed or provides the service, but a person who enters into a salary sacrifice arrangement may be able to contractually give up their entitlement to the income. An effective salary sacrifice arrangement leads to the person not being assessed on the sacrificed amount, and may lead to other tax consequences including the employer being liable to fringe benefits tax. Salary sacrifice arrangements are discussed at ¶4-070.

Alienation of personal services income Attempts to divert personal exertion income to another entity are a popular tax planning device. This is particularly so where the diversion leads to tax being imposed at a lower rate (eg at the company tax rate rather than at the top marginal tax rate), or where significant deductions become available (eg for superannuation contributions made on behalf of an employee of the entity). The alienation of income from personal exertion is discussed at ¶25-450.

ORDINARY INCOME (¶4-020 – ¶4-070) [¶4-020] Nexus between the amount and an earning activity An amount is ordinary income, and therefore may be included in assessable income under s 6-5(1) of the ITAA97, if there is a sufficient nexus, or connection, between the amount and an earning activity (¶3-210). This most commonly means salary or wages, allowances from an employer and payments for services provided by, for example, a contractor.

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An amount may satisfy the nexus test even though it is payment for past services, eg for services provided by a person who is no longer employed, or for future services, eg an advance payment to a person in return for a promise to provide services, as in Riley v Coglan.1 An amount may be paid by a third party, eg by a television station to a footballer as in Kelly2, or result from an isolated act of service as in Brent. 3 Prizes won on quiz shows would rarely be income from personal exertion (¶3-210), unless perhaps they are ‘prizes competed for in a competition requiring the exercise of skill and ability’.4 Even if there is a nexus with an earning activity, a benefit that is not money and cannot be turned into money is not ordinary income (Tennant v Smith;5 FC of T v Cooke & Sherden:6 ¶3-230). If the benefit is convertible into money, the ordinary income amount may be the money value of the benefit (¶13-200).7 Generally, the characterisation of an amount as a product or incident of employment or a reward for services rendered is quite obvious—for example, salary, wages, allowances, fees and commissions are clearly consideration for employment or services rendered.

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Lump sum payment may be ordinary income in unusual cases Although normally treated as capital and taxable under the capital gains tax rules, a lump sum payment may sometimes be ordinary income. A lump sum inducement payment that was refundable if the taxpayer did not satisfy a minimum period of service was characterised as an advance payment for services to be rendered and, therefore, ordinary income in Riley v Coglan.8 A lump sum payment made at the commencement of employment to compensate the taxpayer for giving up benefits under a former employer’s employee share scheme was held assessable because the money was ‘an integral part … [and] one of the main attractions’ of the salary package accepted by the employee, representing a ‘straightforward inducement’ for entering into the new employment, and being in the nature of a payment for future service (Pickford v FC of T9). In Allman v FC of T10 a lump sum payment for income lost because of wrongful dismissal was held to be in substitution for income which the taxpayer would have earned, and therefore assessable as ordinary income.

1

Riley v Coglan [1968] 1 All ER 314; [1967] 1 WLR 1300 (¶4-060).

2

Kelly v FC of T 85 ATC 4283 (¶4-046).

3

Brent v FC of T 71 ATC 4195; (1971) 125 CLR 418 (¶4-050).

4

Case S42 (1966) 17 TBRD 227.

5

[1892] AC 150; (1892) 3 TC 158.

6

80 ATC 4140.

7

Heaton v Bell [1970] AC 728.

8

[1968] 1 All ER 314; [1967] 1 WLR 1300.

9

98 ATC 2268, 2271 (DJ Trowse, Member).

10 98 ATC 2142.

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Taxed as a reward for services even though paid to another entity Under the constructive receipt rule (¶3-180), an amount that has been earned by an individual may be their ordinary income even if it is paid to another entity rather than to the individual or if it is dealt with, on behalf of the individual, in another way.

• In Forrest,11 a director of a company who was entitled to a $3.5 million termination payment when he retired was assessable on a $3.5 million donation by the company to a charitable trust because the director had directed that the amount be paid as a donation to the trust rather than it being paid to him personally.

• In Blank,12 an employee who was entitled to a payment of US$160  million under his employer’s ‘profit participation plan’ when his employment was terminated in 2007 negotiated to receive instead twenty instalments of the payment over a fiveyear period ending in 2011. The employee was assessable on the full amount in 2007 because he was entitled to the amount at that time and, even though he had directed that it be paid over five years, the amount had been derived as assessable income when his employment ended. • In Sent v FC of T,13 an employee was liable to tax on bonus entitlements paid to an employee share trust on his behalf—the bonus entitlements were a reward for services already performed or yet to be performed. • In Southern Group Ltd v Smith,14 payments to an employee’s private company by his employer were the employee’s ordinary income because the payments related to services already provided by the employee.

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Characterising an amount In characterising an amount, the court will not confine itself to labels or to the form of supporting documentation, but will look at the whole of the circumstances surrounding the receipt. In Brown v FC of T,15 property transferred to the taxpayer as a ‘mere gift’ was found to be a reward for services and assessable as ordinary income. The services provided by the taxpayer were to introduce the seller of several parcels of land to the purchaser, to lend his name to the purchaser’s application to the Foreign Investment Review Board, and to act as an intermediary between the seller and purchaser following a misunderstanding about the contract price. After the sale of the land yielded a profit of around $10 million to the seller, a third party transferred to the taxpayer a home unit and associated benefits valued at around $1 million. The taxpayer argued that the benefits were not assessable income because they were a mere gift. The court rejected this argument and held that the benefits were a reward for the services rendered by the taxpayer.

11 Forrest v FC of T 2010 ATC ¶20-163 (¶4-750). 12 Blank v FC of T 2015 ATC ¶20-536 (¶4-060). 13 2012 ATC ¶20-318. 14 98 ATC 4733; (1997) 37 ATR 107. 15 2002 ATC 4273 (Full Federal Court).

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[¶4-025] Allowances Allowances may be assessable as work-related payments to an employee in various circumstances, such as:

(1) for difficult working conditions, such as danger or height allowances on building sites (2) to recognise qualifications or special duties, such as to a safety officer

(3) to help cover expenses that are not deductible, such as for entertainment, clothing or home to work travel, or (4) to support the employee with work-related expenses that may be deductible, such as for petrol, telephone or travel between work sites.

Allowances may be ordinary income because of their nexus with employment or services rendered, or because they are received periodically, in the same way as salary or wages. Allowances may also be statutory income under by s 15-2 of the ITAA97 (¶4-110), but s 15-2(3)(d) states that an allowance is not included in assessable income under s 15-2 if it is assessable as ordinary income under s 6-5. It would most commonly be the case that an allowance is taxed under s 6-5 rather than under s 15-2. Special rules apply to living-away-from-home allowances that are paid to compensate an employee for additional expenses and disadvantages incurred because of being required to live away from home to perform their employment duties. Such an allowance is generally a fringe benefit for which the employer may be liable to fringe benefits tax (¶26-520) and is not assessable income for the employee (s 23L ITAA36). If the period away from home does not exceed 21 days, the allowance is taxed in the hands of the employee as a travelling allowance (Taxation Ruling MT 2030).

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Allowance or reimbursement? It is important to distinguish between an allowance and a reimbursement because the tax consequences differ. Allowances are paid to cover estimated expenses or as compensation for conditions of employment, and are paid regardless of whether the employee incurs the actual expense. The employee is generally assessable on the amount received, but may be entitled to a deduction for the expenses if they are incurred in gaining the employee’s assessable income. In contrast, reimbursements made to employees are exact compensation for actual expenses incurred. If the reimbursement is a fringe benefit (¶26-500), the employer may be liable to fringe benefits tax and the amount is not assessable income for the employee (s 23L ITAA36).16 Example—Tax treatment of amount paid An employee is paid an allowance of $200 per fortnight to cover the estimated cost of petrol. This amount is paid regardless of the actual cost of petrol for the employee. The allowance is ordinary income and assessable to the employee, but the employee may be 16 The Commissioner’s views on the differences between allowances and reimbursements are set out in Taxation Ruling TR 92/15.

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able to claim a deduction for expenditure on petrol that relates to work travel and for which there is appropriate documentary evidence (¶10-695). Another employee is told by her employer that the employer will reimburse her whatever she actually spends on petrol each fortnight. This is a fringe benefit rather than an allowance and the employee is not assessable. The employer pays fringe benefits tax on the taxable value of the benefit.

Reporting of allowances on an employee’s payment summary Like other employment income such as salary, wages and bonuses, an allowance may need to be reported by an employer on a payment summary given to an employee at the end of the income year. As an exception, travel allowances and overtime meal allowances do not have to be reported unless they exceed the amounts stated by the Commissioner to be reasonable for the year. The reasonable travel and overtime meal allowance expense amounts for 2017/18 are set out in Taxation Determination TD 2017/19. An allowance that is reported on an employee’s payment summary is taxed in the same way as the employee’s other income, but the employee may be entitled to deductions (eg for transport or equipment expenditure that is related to earning the income) that reduce the tax liability.

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[¶4-040] Payments by a party to an employment or services relationship An amount received by a party to an employment or services relationship is ordinary income if the payment results from, or is related to, the employment or is a reward for services rendered. Payments are generally made because they are required to be made, eg work has been performed by an employee or services have been provided by a contractor. The fact that an amount is paid voluntarily, in the sense that it is not required to be paid, does not stop it being ordinary income as long as it has a nexus or connection with employment or services rendered. Example—Treatment of bonus paid to employee An employer pays a bonus to an employee in recognition of the level of sales achieved by the employee during the year. Even if the employer is not under an obligation to pay the bonus, it would still be a product of employment because it is directly connected with services provided by the employee. The employer pays another employee an amount because the employee gets married. It could be argued that this payment is purely on personal grounds and, although received from an employer, is not a payment for services.17

17 Hayes v FC of T (1956) 96 CLR 47; Scott v FC of T (1966) 117 CLR 514.

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An amount must be characterised in the hands of the recipient (¶3-170), and while the motive of the payer may be relevant it will seldom be decisive. Nevertheless, the context may be important and it may be difficult to satisfy the Commissioner that an amount is not assessable income if it is given in a situation such as employment where payment is normally in return for services rendered. A voluntary payment may be ordinary income whether made by a party or former party to the services relationship, eg an employer or former employer, or by a third party (¶4-046).

Voluntary payment during the employment or services relationship

In almost all cases, a voluntary payment made in the course of an ongoing employment or services relationship is ordinary income and only in exceptional cases is it a mere gift that is not assessable. A gift given by an employer to a continuing employee will generally be treated as income of the employee, unless it can be shown that the reason for the gift is something other than the employment relationship, eg as a personal gesture on the birth of an employee’s child.

Voluntary payment after the relationship ends

The fact that a relationship has ended does not prevent a voluntary payment being ordinary income of the recipient. Whether the payment is ordinary income may depend on: •

•

the reason it is made—whether it is, for example, a ‘mere gift’ which is not ordinary income, or it relates back to services performed during the relationship, or its character in the hands of the recipient—eg, if payments are made regularly, they may, for that reason, be ordinary income (see ‘Regular periodic payments’).

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Mere gift rather than payment for services

An example of a mere gift, after a services relationship had ended, is Scott v FC of T.18 In this case, the taxpayer was a solicitor who had, over a period of years, performed various legal services for a widow. The solicitor had previously acted for her husband (before his death) and a personal friendship had developed between the solicitor and the widow. The widow made a gift of £10,000 to the solicitor which was expressed to be in appreciation of his friendship rather than for any legal services performed. The Commissioner argued that the nexus test was satisfied because the gift was a ‘consequence’, however indirect, of services rendered. This formulation of the nexus test was rejected by Windeyer J who held19 that: ‘an unsolicited gift does not … become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered’. It was held that the receipt was a mere gift. Factors supporting such a characterisation included the size of the gift, the unusual circumstances in which the gift was made, the fact that the solicitor had already been fully paid for his services, the fact that gifts had been made to other persons at the same time, and the fact that it was unexpected and unsolicited. 18 (1966) 117 CLR 514. 19 Ibid 526, 527.

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In Hayes v FC of T,20 the taxpayer was employed by Richardson until the business was incorporated and Richardson gave up management of the business. The taxpayer was then employed by the company and issued with shares in the company. When the company failed to trade successfully, Richardson agreed to take active control on the condition that all its issued shares were transferred to him. The taxpayer reluctantly transferred his shares, and under Richardson’s control the company traded successfully and was eventually floated. As a gesture of goodwill, Richardson made several large gifts of shares in the company, including to the taxpayer. It was held that the shares were a mere gift because the taxpayer had already been fully remunerated for the work done for Richardson and for the company. A similar conclusion was reached in the UK case of Moore v Griffiths.21 In this case, the taxpayer had been a member of the successful England World Cup soccer squad of 1966. A payment of £1,000 was made by the English Football Association to each player in the squad after their services agreements with the Association were terminated. It was held that the payment was a mere gift, being in the nature of a personal tribute for the victory and as a mark of the Association’s esteem rather than as a reward for services rendered. Also important was the fact that it was an unexpected one-off payment which was not provided for in the players’ services agreement.

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Regular periodic payments Regular periodic payments (¶3-260) need to be analysed differently. In FC of T v Dixon,22 the taxpayer’s employer had sent a circular to staff during World War II advising that any staff who enlisted in the defence forces would be paid amounts to ‘make up the difference between their present rate of wages and the amounts they will receive from the naval or military authorities’. The employer was under no legal obligation to make the payments, the employee did not undertake to later return to the employer and the employer did not promise to re-employ the taxpayer after his war service ended. The taxpayer enlisted in the army and received a series of payments from his former employer during the year ended 30 June 1943. The payments were held by three judges of the High Court (Dixon CJ, Williams and Fullagar JJ) to be ordinary income, although their reasons differed. Dixon CJ and Williams J held that the payments were really incidental, regardless of their source, to the taxpayer’s employment or service as a soldier. After considering the total situation of the taxpayer, they concluded (at p 556, 557): Because the £104 was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income. 20 (1956) 96 CLR 47. 21 [1972] 3 All ER 399. Would a similar decision be reached in Australia today? The High Court decision in Stone (¶4-046) may suggest otherwise. 22 (1952) 86 CLR 540.

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Fullagar J did not consider that the payments satisfied the nexus test in relation to the taxpayer’s military service, but held that the payments took the character of that which they replaced, namely salary and wages from the former employer, and therefore were ordinary income. All judges agreed that the payments were not additional remuneration for past services rendered to the donor. This can be contrasted with FC of T v Harris,23 which involved a one-off voluntary payment. The taxpayer had previously been employed by a bank and was receiving a pension from the bank’s superannuation fund. The fund made a voluntary payment of $450 to the taxpayer and other employees out of concern over the effect of inflation on their pensions. The Full Federal Court held that the receipt was not ordinary income. The payment was not a product of past services rendered to the bank, because the taxpayer had already been fully remunerated for those services.

[¶4-046] Payments by a third party An amount may be characterised as a product of employment or services rendered even though it is paid by a third party, ie by someone outside the services relationship. Where, for example, a payment is received for a public appearance, product promotion, prize or endorsement as a direct result of the employee’s employment, although not under an arrangement with the employer, it may be assessable income. A payment by a third party is likely to be ordinary income where the amount is a ‘clearly recognised incident’ of the recipient’s employment. The classic example of this is a tip paid (theoretically, at least) in appreciation of the quality of the services rendered (Calvert v Wainwright;24 Penn v Spiers & Pond Ltd;25 Great Western Railway Co v Helps26).

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Sportspersons Benefits received by individuals from involvement in sport (whether as referee, coach or amateur or professional participant) are treated in the same way as other payments related to employment or the provision of services (Taxation Ruling TR 1999/17). This means that cash payments or other benefits (eg prizes or awards) are assessable income if connected with employment or services rendered or the exploitation of personal skills in a commercial way. In Kelly v FC of T,27 a professional football player who was employed by a football club received a cash award of $20,000 from a television station for being voted the competition’s best and fairest player for the year. Although it was received from a third party, the award was ordinary income for the footballer because:

23 80 ATC 4238. 24 (1947) 27 TC 475 (taxi-cab driver). 25 [1908] 1 KB 766 (railway dining-car waiter). 26 [1918] AC 141 (railway porter). 27 85 ATC 4283.

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(1) there was a sufficient nexus between the award and the footballer’s employment, as the award was incidental to his employment as a professional footballer (2) the payment was made because of the footballer’s pursuit as a professional footballer and his playing football to the best of his skill and ability, and (3) the footballer’s employment facilitated the payment as it rendered him eligible to receive the payment and also obliged him to play to the best of his abilities.

In contrast, benefits from the pursuit of a pastime or hobby, or occasional voluntary payments received on purely personal grounds (eg a medal or trophy), are not considered to be income, being more in the nature of a windfall gain (¶3-210). Benefits received by amateur sportspersons are less likely to be treated as income than those received by professionals. In Moorhouse v Dooland,28 the taxpayer was a professional cricketer entitled under the terms of his contract of employment to collections from spectators whenever he performed outstanding cricketing feats (which occurred with a degree of regularity). The moneys collected from spectators on these occasions were held to be income from personal exertion. On the other hand, in Seymour v Reed29 the proceeds of a one-off benefit match for a professional cricketer were characterised as a tribute to the taxpayer’s personal attributes rather than as a reward for his cricketing services.30

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Payments to an employee from an employment remuneration trust Contributions by an employer to an employee remuneration trust established by the employer may be assessable to an employee as ordinary income if the purpose of the trust is to provide payments and other benefits to employees. Employee remuneration trust arrangements involve a trust being established to receive employer contributions that are later used to provide payments and other benefits as remuneration to employees or contractors related to the conduct of the employer’s business. An employer contribution to the trust may be assessable income of the employee at the time the contribution is made if it has the character of ordinary income and is applied or dealt with on the employee’s behalf or as the employee directs. This could be the case, for example, if the employer contributes a bonus earned by an employee to a trust rather than paying it as salary or wages to the employee. A payment or distribution by a trustee to an employee would not be assessable remuneration for the employee if it is made at the trustee’s absolute discretion under the trust deed rather than under the terms of the employee remuneration trust established by the employer. Draft Taxation Ruling TR 2017/D5, which was released on 8 June 2017, sets out the Commissioner’s views on how the taxation laws apply to an employee remuneration trust arrangement (other than an arrangement that comes within div 83A: ¶4-460).

28 (1955) 36 TC 12. 29 (1927) 11 TC 625. 30 It is likely that today a benefit match would be regarded as a normal incident of the employment of a professional sportsperson.

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[¶4-050] Payment for services or for disposal of a capital asset? It is important to distinguish between: •

•

a gain arising on the disposal of a capital asset, which would not be ordinary income (Trustees of Earl Haig v IR Commrs31), and an amount received where the disposal of a capital asset is only ancillary to the provision of services, in which case the amount would be ordinary income (Hobbs v Hussey32).

The distinction between the two characterisations was particularly important before the commencement of capital gains tax on 20 September 1985 (¶7-000) because a capital amount was generally tax free. Even since the introduction of capital gains tax, a capital amount may be taxed more favourably than an income amount, eg because the CGT discount may reduce the amount of the gain included in assessable income (¶7-915).

Payment for services In Brent v FC of T,33 the taxpayer, who was the wife of the great train robber Ronald Biggs, entered into an agreement under which she ‘sold’ the exclusive rights to the publication of her life story. The taxpayer argued that the amount she received was not assessable income as it was received in return for the sale of copyright in her story (ie the sale of a capital asset). This argument was rejected by the High Court, which characterised the payment as being for services rendered, namely the making of herself available for interview by journalists, the communication of her story to the journalists and the signing of a manuscript prepared by the journalists.

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Payment for giving up an asset In contrast, the taxpayer in FC of T v McArdle34 was granted a number of options under an employee share acquisition scheme and later received a payment of $1  million in consideration for the surrender of his options. This payment was a capital receipt as it was received for the disposal of the options rather than as a reward for services rendered.

[¶4-060] Payments received for giving up valuable rights To be income from personal exertion an amount must be a product or incident of employment or a reward for services rendered. An amount that is given in return for some other consideration moving from an employee or provider of services will not be income from personal exertion. Such payments are usually made in return for the recipient giving up valuable rights and may be made before, during or after the period of service.

31 (1939) 22 TC 725—although the CGT rules may apply (Chapter 7). 32 [1942] 1 KB 491. 33 71 ATC 4195; (1971) 125 CLR 418. 34 89 ATC 4051.

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Receipt of capital or payment for services? Where an amount is received for giving up valuable rights, it will be capital and not income from personal exertion. A  payment may, for example, be capital if it is an ‘inducement payment’ made to encourage a person to enter into a services agreement and the person is at the same time required to relinquish some status or right. On the other hand, an amount that is a payment for services that have been rendered or an advance payment for services yet to be rendered will be ordinary income.35 In Blank v FC of T,36 an employee of an international commodity trading company was entitled, on the termination of his employment in 2007, to be paid US$160 million from his participation in the company’s ‘profit participation plan’ for key employees. When his employment ended, the taxpayer negotiated to give up his claim to payment under the plan and to receive the US$160 million instead in twenty instalments over five years. The taxpayer argued that the amount was received as a contractual right and was assessable as a capital gain after reduction for the 50% CGT discount. Dismissing the taxpayer’s argument, the Federal Court held that the profit participation plan was intended to provide the taxpayer with deferred compensation in consideration of the services to be rendered by him to his employer. His entitlement to payment was a pre-requisite to his employment arrangement with the company, and the relationship between the right to the payment and the services to be provided gave the payment the character of income as a reward for services. A majority of the Full Federal Court dismissed the taxpayer’s appeal37 and confirmed that the instalment payments were assessable to the taxpayer as ordinary income in the year the right to the payment arose. The term ‘deferred compensation’ in the profit participation plan was not merely a label (as the taxpayer had argued) but an apt description of the character of the payment. Pagone J dissented and took the view that the amount was a capital gain. The High Court unanimously dismissed the taxpayer’s appeal38 and held that the amount was income according to ordinary concepts on the basis that it was deferred compensation for services the taxpayer had performed in his employment. The fact that the payments were made after the termination of the contract of service, by an entity other than his employer and separately to ordinary wages, did not detract from their characterisation as income as the payments were ‘a recognised incident of his employment’. The Court confirmed that the income was derived in the income year in which the taxpayer’s employment ended and the right to the payments arose. The assessable income of the taxpayer in De Figueiredo v FC of T39 was found to include an amount of $3.6m after 16 shares were issued to him in May 2011 by the 35 The amount may also be statutory income, as s  15-3 ITAA97 includes in the assessable income of a person an amount received under an arrangement intended to induce the person to resume working for an entity. 36 2014 ATC ¶20-442. 37 Blank v FC of T [2015] FCAFC 154; 2015 ATC ¶20-536. 38 Blank v FC of T [2016] HCA 42; 2016 ATC ¶20-587] 39 De Figueiredo v FC of T [2018] ATC ¶10-470

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Glencore International group of companies. The taxpayer was employed as an engineer by one or more subsidiaries in the Glencore Group. He had been issued with shares and units under an employee profit participation plan in 2006 and 2008 when he worked for the Glencore Group in Zambia before becoming a resident of Australia. These entitlements were exchanged for 16 new shares in May 2011 in the course of a restructure and initial public offering involving the Glencore Group. The Commissioner assessed the taxpayer on the basis that $3.6m, being the value of the shares, was ordinary income derived in the year ended 30 June 2011. The taxpayer sought to distinguish his circumstances from Blank’s case on several grounds including that he did not receive any payment and there was no ‘triggering point’ as, unlike in Blank, he did not terminate his employment with the Glencore Group. Upholding the assessment, the AAT said that Blank’s case was the starting point for the analysis because the taxpayer’s rights were relevantly identical to those considered by the High Court in that case. Although amounts had not been paid to the taxpayer, he derived as income an amount equal to the market value of the 16 shares when he agreed to transfer his entitlements under the profit participation plan and became the beneficial owner of the shares free and clear of any contingencies. The taxpayer derived as income an amount equal to the market value of the shares when he had an absolute beneficial interest in the shares. The $3.6m was ordinary income when the taxpayer was issued the shares.

Difficulty in characterising a payment As the following cases show, it may be difficult to predict how a payment will be characterised, and the determining factor will be the facts as found by the court.

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•

Where the taxpayer is already a professional athlete, a signing-on fee or similar payment may be characterised as a normal incident of employment as a professional athlete and therefore assessable income (Case R107).40

• In Case 13/99,41 a professional rugby league player was paid $50,000 as an inducement to enter into a contract to play football in a ‘Super League’ competition. The signingon fee was income derived by the player when he signed the contract.

• In Jarrold v Boustead,42 the taxpayer was an amateur rugby union player who received a signing-on fee to play as a professional for a rugby league club. The fee was characterised as being compensation for the giving up of the taxpayer’s amateur status, which was regarded as a permanent advantage (because it allowed the footballer to represent his country in international games) that, once lost, could not be regained. The fee was held not to have been paid in return for services to be rendered by the player to the club making the payment and was a non-taxable capital receipt. • In Riley v Coglan,43 an inducement payment to a footballer was found to be taxable income because it was an advance payment for services he was to render to the club, 40 84 ATC 717. 41 99 ATC 240. 42 (1964) 41 TC 701. 43 Riley (Inspector of Taxes) v Coglan [1968] 1 All ER 314; [1967] 1 WLR 1300.

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as indicated by the fact that the payment had to be refunded if the taxpayer did not satisfy a minimum period of service. The Court said decisions could only be made on the facts of each case, but that here it was necessary to distinguish between a signing-on fee that is truly paid as consideration for giving up a permanent asset as in Jarrold v Boustead, and one that is truly paid in return for services to be rendered, as in this case.

• In Pritchard v Arundale,44 the taxpayer was a senior partner in a firm of chartered accountants. One of his clients offered him a senior management position which he was reluctant to accept because it would mean giving up his established position in private practice. Eventually the client arranged for the taxpayer to be issued shares in a related company as an inducement to accept the offer. The inducement was characterised as compensation for the loss of status involved in giving up his position in private practice, and therefore it was a capital receipt and not an advance payment for services to be rendered. In contrast, the taxpayer in Glantre Engineering Ltd v Goodhand was an employed accountant rather than a partner and this made it harder to argue that the taxpayer was giving up valuable rights.45

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Payments received for the surrender of rights Consideration for giving up valuable rights of a capital nature under a service agreement will not constitute ordinary income. In Bennett v FC of T,46 the taxpayer was employed as the managing director of a radio station under a seven-year services agreement entitling him to an annual salary of £1,040 plus a percentage of profits. As part of the negotiations for the sale of the station, the taxpayer agreed to cancel the services agreement and enter into a new one. The new agreement reappointed him as managing director but for a shorter term and with reduced power, although there was an option to extend the period of service to the date when the original agreement would have expired. As consideration for the cancellation of the original agreement, the taxpayer was paid a sum of £12,255 in three instalments. This amount was repayable if the taxpayer exercised the option to extend. The payment was characterised as being in consideration for giving up valuable rights of a capital nature under the former services agreement and for entering into the new agreement with different rights.47 In Case Z9,48 the taxpayer’s employer unilaterally varied the terms of his employment by terminating his right to a rostered day off each fortnight and increasing his formal working hours from 35 to 38 per week. The taxpayer received a lump sum amount equal to three months’ salary as compensation for the loss of the days off. Although payable in three instalments, the compensation was characterised as consideration for the surrender of valuable rights of a capital nature, and therefore was not ordinary income. 44 [1972] Ch 229. 45 Glantre Engineering Ltd v Goodhand [1983] 1 All ER 542. 46 (1947) 75 CLR 480. 47 See also Prendergast v Cameron (1940) 23 TC 122 and Wales v Tilley (1943) 25 TC 136. 48 92 ATC 144.

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Termination payments

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Although a lump sum received on termination of a contract will normally be taxed as a capital receipt or as an employment termination payment (¶4-740), an additional payment for past services would be ordinary income. In Case 1/2000,49 a partner in a law firm which merged with two other firms received monthly retirement payments calculated by reference to the value of the work in progress of the old firm at the time of the merger. The AAT rejected the partner’s argument that the payments constituted a premium or inducement to enter the merged firm or were capital receipts for the work in progress. The value of the work in progress was simply a measure by which the partner’s entitlements could be calculated, and the payments represented the partner’s entitlement to a share of profits and were assessable. Damages for unfair or wrongful dismissal are not ordinary income, unless perhaps they are received in substitution for income lost because of the dismissal. In Allman,50 a lump sum damages award was ordinary income because it was calculated on the basis of wages lost from the time of the taxpayer’s dismissal from employment to when he won the court case against his former employer. Where consideration for the surrender of rights takes the form of periodic payments in substitution of payments which would have been received under a services agreement, those payments may be ordinary income under the compensation principle (¶6-800). For example, in C of T (Vic) v Phillips51 the taxpayer received payments for agreeing to early termination of his services agreement. The total amount was an estimate of what the taxpayer would have earned if the agreement had not been cancelled and they were paid in monthly instalments over the unexpired period of the agreement. It was held that the taxpayer had been fully remunerated for services rendered prior to termination and therefore the receipts were not a product of any services rendered. However, the receipts were still held to be ordinary income on the basis that they took the character of that which they replaced, ie salary and wages.

Lump sum payment for entering into restrictive covenant A restrictive covenant payment may be made in return for an employee’s promise not to compete with their employer, for a certain period and within a certain geographical area, on termination of their employment. Such a payment is generally characterised as capital in character on the basis that it is made in return for the employee giving up a right. In Beak v Robson,52 the taxpayer received a lump sum payment of £14,000 for promising not to be involved for five years after termination of his employment in any competing business within 50 miles of the current employer’s premises. The House of Lords held that the payment was not a product of the taxpayer’s employment because, even though the covenant was entered into while Robson was still serving his current employer,

49 2000 ATC 101. 50 98 ATC 2142. 51 (1936) 55 CLR 144. 52 [1943] AC 352.

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the obligations under the employment contract were ‘entirely separate’ from those he undertook under the restrictive covenant, and the agreement not to compete would only become operative after Robson had ceased to render services, not during the course of his current employment. The payment was thus not a reward for services rendered or to be rendered, but a capital receipt for agreeing to restrict his right to perform services for others in the future. The result was the same where a restrictive covenant payment was made in a nonemployment context. This was the case in Higgs v Olivier,53 where, in an endeavour to protect the profitability of the recently completed film Henry V, the film company paid the star of the film (Sir Laurence Olivier) a lump sum of £15,000 for his agreement not to act for 18 months in any other film. The sum was held to be capital, having been paid to Olivier because he gave up the right to earn income as an actor during the specified period. In some circumstances, a restrictive covenant payment may be taxed as ordinary income because there is a nexus with an earning activity, such as where: • • •

the restriction is to operate during the currency of the existing employment, or is really only payment in advance for services to be rendered54 the covenant is a normal incident of a particular employment (for example, restrictive covenants entered into by professional footballers on joining a club),55 or in reality, there is no significant restriction on the recipient’s freedom of activity.56

Application of capital gains tax

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Since the introduction of capital gains tax in 1985, there are two questions when a payment is received for giving up valuable rights—whether the payment is ordinary income and, if not, whether the payment is taxed under the capital gains tax provisions. Capital gains tax may apply if a taxpayer receives payment in return for giving up a right—see, for example, ¶7-150 which applies to rights generally and ¶7-165 which applies when a restrictive covenant payment is made.

[¶4-070] Salary sacrifice arrangements A salary sacrifice arrangement is basically where an employee agrees contractually to give up part of the remuneration that they would otherwise receive as salary or wages, in return for their employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed only on the reduced salary or wages and that, if the benefit is a taxable fringe benefit, the employer is liable to pay fringe benefits tax (¶26-000). Benefits commonly provided include additional superannuation contributions for the employee, private use of a car and access to child care.

53 [1951] Ch 899; (1952) 33 TC 136. 54 Riley v Coglan [1968] 1 All ER 314; [1967] 1 WLR 1300. 55 Case A14 69 ATC 80. 56 Case A14 69 ATC 80; Case G31 75 ATC 185.

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Whether a salary sacrifice arrangement is successful in reducing the employee’s assessable income depends, according to Taxation Ruling TR 2001/10, on whether the arrangement is ‘effective’ or ‘ineffective’. A salary sacrifice arrangement can only be effective if it involves an employee contractually giving up a future entitlement to salary or wages, and an employee cannot ‘effectively’ sacrifice salary or wages to which they are already entitled. An employee becomes entitled to salary or wages when they have performed the work and are entitled to be paid. Example—Effective or ineffective arrangement? On 31 December 2018, Megan is told by her employer that she is entitled to a $10,000 bonus because of her successful sales in the previous 6  months. Megan asks her employer to contribute the amount to a superannuation fund on her behalf. This would not be an effective salary sacrifice arrangement as Megan has already earned the bonus and she would be assessable on the amount. If, instead, Megan’s employer had told her on 1 July 2018 that a bonus would be paid to her on 31 December 2018 if she achieved certain sales, she could enter into an effective salary sacrifice arrangement with her employer by agreeing, in advance of her carrying out the work, that the bonus would be paid as superannuation contributions rather than as salary. Megan would not be assessable on the amount of the bonus sacrificed into superannuation.

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Tax consequences Salary sacrifice generally has the effect that lower tax is paid on the benefit than would be paid if the amount had been paid as salary. Although the FBT rate is tied to the top marginal tax rate, salary tends to be sacrificed into benefits that are exempt from FBT, eg superannuation, or that receive concessional FBT treatment, eg private use of a car. For the 2018/19 FBT year, the FBT rate is 47%, comprising the 45% top marginal rate and 2% Medicare levy. Although sacrificed salary is not income because the taxpayer does not actually derive it as income, it may be reported on the employee’s payment summary as reportable employer superannuation contributions (¶2-050) or as a reportable fringe benefit total (¶26-350). It may then be taken into account in calculating various entitlements and obligations, for example: •

liability to Medicare levy surcharge (¶2-350)

•

entitlement to family tax benefit (¶2-410)

• •

liability to make HELP debt repayments (¶2-400) liability to penalties for excess superannuation contributions (¶23-125)

• entitlement to a tax offset for superannuation contributions for a spouse (¶23-145), and • entitlement to a government co-contribution for personal superannuation contributions (¶23-150).

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STATUTORY INCOME (¶4-100 – ¶4-190) [¶4-100] Introduction There are several provisions in the tax law that include amounts derived from an employment or services relationship in assessable income as statutory income. These provisions are discussed as follows: • •

• •

allowances, benefits, grants, etc, in relation to employment and services (¶4-110 to ¶4-160) reimbursement of car expenses calculated by reference to distance travelled (¶4-190) employee share schemes (¶4-400 to ¶4-440), and employment termination payments (¶4-700).

[¶4-105] Benefits in the nature of income On general principles, if a taxpayer derives income when a benefit is provided to them, whether in an employment, services or business relationship, the benefit may be taxed as ordinary income under s 6-5 or as statutory income under s 15-2 (¶4-110). Special rules apply, however, to certain benefits which are specifically stated not to be assessable income.

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(1) Income derived by a taxpayer when an employer provides them with a fringe benefit is non-assessable non-exempt income (s 23L(1) ITAA36). This only covers benefits provided to an employee, where the provision of the benefit may cause the employer to be liable to fringe benefits tax (¶26-000). The employee is excused from tax liability to prevent double taxation. (2) Income derived by a taxpayer when their employer provides them with a benefit is exempt income if the benefit would have been a fringe benefit except that it is made an exempt benefit (¶26-110) by s 136(1)(g) of the Fringe Benefits Tax Assessment Act 1986(s  23L(1A)). This means that an employee derives exempt income if they are provided with an exempt benefit such as a remote area housing benefit or certain taxi travel. Section 23L(1A) does not apply to a benefit which is the reimbursement of car expenses to which s 15-70 of the ITAA97 applies (¶4-190).

(3) Income derived by a taxpayer consisting of non-cash business benefits within the meaning of s 21A of the ITAA36 (¶6-480) is exempt income if the total amount to which s 21A applies does not exceed $300 in the year of income (s 23L(2)).

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ALLOWANCES, BENEFITS, GRANTS, ETC, IN RELATION TO EMPLOYMENT AND SERVICES (¶4-110 – ¶4-190) [¶4-110] Background

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Section 15-2 of the ITAA97 includes in a taxpayer’s assessable income the value to them of ‘allowances, gratuities, compensation, benefits, bonuses and premiums’ provided to them in respect of employment or services rendered. Section 15-2 has applied since 2006 in substitution for s 26(e) of the ITAA36, which, like s 15-2, was intended to tax benefits which were not ordinary income because they were not money or convertible into money (¶3-230). This was the case in Tennant v Smith,57 where the Court decided that an employee who was required to live rent-free in a house provided by his employer, with no power to sublet the house, could not be taxed on the value of the rent-free housing. Although s  26(e) was intended to overcome the decision in Tennant v Smith by requiring benefits to be taxed by reference to their ‘value to the taxpayer’, this subjective valuation made s  26(e) difficult to enforce and was largely responsible for its being superseded in 1986 by the Fringe Benefits Tax Assessment Act 1986 (Cth). Despite the wide range of benefits to which s 26(e) and now s 15-2 purport to apply, the sections have had only a residual role since the introduction of fringe benefits tax in 1986. If an employee is provided with a benefit by an employer, the employer may be liable to fringe benefits tax and there are unlikely to be tax consequences for the employee because s  23L of the ITAA36 states that the benefit is not assessable income for the employee (¶4-105). Another reason why s 15-2 has only limited operation is that s 15-2(3) specifically excludes the following amounts that are taxed under other provisions: (1) a superannuation lump sum (¶23-500) or an employment termination payment (¶4740) (2) an unused annual leave or long service leave payment (¶4-820) (3) a dividend or non-share dividend (¶18-205)

(4) an amount that is assessable as ordinary income under s 6-5, for example, allowances (¶4-025), and (5) certain employee share schemes benefits (¶4-400).

The intent and wording of s  15-2 and former s  26(e) is very similar and, for that reason, judicial analysis of former s 26(e) is generally applicable also to s 15-2.

57 [1892] AC 150.

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[¶4-140] Benefit provided to the taxpayer For s 15-2 of the ITAA97 to apply there must be an allowance, gratuity, compensation, benefit, bonus or premium provided to a taxpayer. These words must be construed in their context, but are intended to cover a broad area. In Taxation Ruling TR 92/15, the Commissioner ruled that an ‘allowance’ is a predetermined amount to cover an estimated expense which is paid regardless of whether the recipient incurs the expense or the anticipated amount of the expense. An allowance is generally ordinary income (¶4-025). In Taxation Ruling TR 92/15, the Commissioner stated that a requirement that expenses be substantiated supports the characterisation of a payment as a reimbursement, as does an obligation to refund unexpended amounts. If a payment is a reimbursement rather than an allowance, it may be an expense payment fringe benefit (¶26-500). This would potentially have tax consequences for the employer but not for the employee. It was held in Case L5458 that ‘benefit’ refers to ‘an advantage, profit, good’ in the ordinary sense of that word, and connotes ‘to do good to, be of advantage or profit to; to improve, help forward’. In this case, the payment of school fees by the taxpayer’s employer was held to be a benefit as it relieved the taxpayer of the obligation which he would otherwise have incurred. Commission paid to an executor or trustee of a deceased estate for services performed as executor or trustee is assessable under s  15-2 as a benefit granted in respect of the services rendered. The fact that the taxpayer does not ask for nor expect the commission is not relevant (Interpretative Decision ID 2014/44).

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Has a benefit been ‘provided’? Section 15-2 includes in a taxpayer’s assessable income the value to the taxpayer of certain allowances, benefits, etc, provided to the taxpayer. ‘Provide’, as defined in s 995-1(1) of the ITAA97, includes to ‘allow, confer, give, grant or perform’ a benefit. In Constable v FC of T,59 the taxpayer was a member of an employer-sponsored superannuation fund. The taxpayer only became entitled to his employer’s superannuation contributions to the fund after a minimum period of service and only then on the happening of certain events. The High Court held that the employer contributions were not ‘allowed, given or granted’ to the taxpayer when they were paid into the fund. The contributions were not credited to his account until sometime later, and even then he was not entitled to the credited amount until certain events occurred. When a payment was later made from the fund, this resulted from the taxpayer’s contingent right becoming absolute, and the happening of the event which made the right absolute did not amount to an allowing, giving or granting of a benefit to the taxpayer. In any event, when a payment was made from the fund, the section did not apply because there was not a sufficient nexus to employment or services rendered.

58 79 ATC 399. 59 (1952) 86 CLR 402.

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In Payne v FC of T,60 an employee of a firm of chartered accountants was required to undertake considerable travel as part of her employment. As a member of an airline’s frequent flyer program, the employee accrued points when she travelled and she could use the points to claim free flights with the airline. When the taxpayer used frequent flyer points to obtain airline tickets for her parents, the Commissioner assessed her on the value of the points. The taxpayer successfully argued that the provision of the free tickets resulted from a contractual arrangement between her and the airline, and therefore was not a benefit allowed, given or granted to her in relation to her employment.

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[¶4-150] Nexus with employment or services rendered The nexus test in s 15-2 of the ITAA97 requires the benefit to be provided ‘in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by’ the taxpayer. There must therefore be an employment or services relationship. In FC of T v Cooke & Sherden,61 the taxpayers sold soft drinks obtained from a manufacturer. In 1970, the manufacturer introduced an ‘Island Holiday Scheme’ to encourage retailers to increase sales. The scheme was purely voluntary, and no legal rights were conferred upon any retailer. Under the terms of the scheme, a retailer could not obtain cash payments instead of the holiday trip, and could not transfer the tickets or the benefit of the award to anyone else. When the taxpayers achieved the required sales quota, they won an island holiday. The Full Federal Court held that the value of the trip was not caught by former s 26(e). The relationship between the taxpayers and the manufacturer was one of vendor and purchaser and not that of employer and employee, so that there was no relevant ‘employment’. Moreover, there had been no ‘rendering of services’ by the retailers to the manufacturer:62 ‘ “the rendering of services” should consist of the doing of an act for the benefit of another, which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract.’ Although the conduct of the retailers’ business increased the manufacturer’s sales and public awareness of the manufacturer’s products, the retailers did not render a service to the manufacturer.63

‘Consequence’ of employment or services may be sufficient In Smith v FC of T,64 which concerned an incentive payment to an employee on successful completion of a study program, the High Court held that there is a sufficient nexus if the benefit is a product, incident or consequence of employment. 60 96 ATC 4407; (1996) 66 FCR 299. 61 80 ATC 4140. 62 Ibid 4151,Brennan, Deane and Toohey JJ, quoting McTiernan J in Revesby Credit Union Co-operative Ltd v FC of T (1965) 112 CLR 564, 578. 63 The statutory response to problems posed by this decision, the introduction of s 21A ITAA36, is discussed at ¶6480. See also Case Q65 (1965) 15 TBRD 308 where the provision of low rent accommodation to an employee fell outside former s 26(e) because it was made available to the recipient in his capacity as a creditor of the company and not as an employee or in relation to services rendered. 64 87 ATC 4883; (1987) 164 CLR 513.

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In Payne v FC of T,65 which involved flight reward points earned by an employee while travelling in the course of her employment (¶4-140), the Commissioner argued that, as a result of Smith’s case, the nexus test is satisfied if the employment relationship is merely a circumstance which must exist before a benefit is granted. Foster J held that Smith’s case did not support this argument and that the taxpayer’s employment must be either wholly or partly the reason for the benefit. That was not the case here as the benefit arose from a contractual relationship between the employee and the airline. The ATO confirmed in Taxation Ruling TR 1999/6 that a flight reward received by an employee from employer-paid expenditure is not assessable income. A flight reward received by an individual who renders a service or has received the reward as a result of business expenditure is also not assessable income as the flight reward arises from a personal contractual relationship. Rewards are only likely to be assessable if the person renders a service in return for the rewards or if the rewards arise from business activities. The nexus with employment or services rendered was also not established where there was a payment to an executive in consideration for the surrender of options under an employee share acquisition scheme (FC of T v McArdle66), nor where a payment was made to discharge a statutory obligation to compensate a taxpayer for the loss of earning capacity (FC of T v Inkster67). The nexus was, however, satisfied for a lump sum paid to an employee as compensation for the unilateral variation of the terms of his contract of employment (Case Z968).

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Valuation rule The amount included in assessable income under s 15-2 of the ITAA97 is the value to the taxpayer of the benefit. This subjective test would technically oblige the Commissioner to examine the circumstances of each taxpayer receiving benefits, in order to establish the value of the benefit to that taxpayer. From time to time, there have been attempts to reduce the rigours of this test. In Donaldson v FC of T,69 Bowen CJ, in valuing share options, applied a semi-objective test, stating that, in ascertaining value to a taxpayer, it may be appropriate ‘to determine what a prudent person in his position would be willing to give for the rights rather than fail to obtain them’.

[¶4-190] Reimbursement of car expenses Section 15-70 of the ITAA97 includes in the assessable income of a taxpayer a reimbursement of car expenses that is an exempt car expense payment fringe benefit under s 22 of the FBTAA (¶26-500), ie where the reimbursement is calculated by reference to the distance travelled by the car.

65 96 ATC 4407; (1996) 66 FCR 299. 66 89 ATC 4051. 67 89 ATC 5142; (1989) 24 FCR 53 (Lee J; Gummow J agreeing). 68 92 ATC 144. 69 [1974] 1 NSWLR 627.

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Even though the reimbursement is an exempt fringe benefit, it is expressly excluded from the application of s 23L of the ITAA36, which would otherwise treat such a benefit as exempt income. A deduction may be allowable for car expenses if the substantiation rules are satisfied (¶10-695).

EMPLOYEE SHARE SCHEMES (¶4-400 – ¶4-490) [¶4-400] Background General principles Under an employee share scheme, an employee of a company is offered shares, or rights to shares, in the employer company at a price which is a discount to the market value. Under general principles, the discount is an employee benefit that could be: • •

taxed in the hands of the employee as ordinary income from employment, or

assessed as a property fringe benefit, making the employer liable to fringe benefits tax.

Example—Offer to purchase shares at a discount An offer to an employee allows shares to be purchased for $1.50 when the market value is $2.50. The $1.00 discount could, under general principles, be taxed as ordinary income from employment or could be assessed under the fringe benefits tax law as a property fringe benefit.

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Specific rules override general principles Instead of these general principles applying, the following specific regimes have taxed the benefit received by an employee who is entitled to acquire shares or rights at a discount to the market value: •

s 26(e) of the ITAA36 before 1974

•

div 13A of Pt III of the ITAA36 from 28 March 1995 to 30 June 2009

• • •

s 26AAC of the ITAA36 from 1974 to 27 March 1995

the original div 83A of the ITAA97 from 1 July 2009 to 30 June 2015, and the amended div 83A of the ITAA97 from 1 July 2015.

The tax treatment of a share or right acquired under an employee share scheme is discussed in the following paragraphs: •

for the regime that applied before 1 July 2009, at ¶4-420

•

for the regime that applies from 1 July 2015:

•

for the regime that applied from 1 July 2009 to 30 June 2015, at ¶4-440, and – –

for companies generally, at ¶4-460, and for eligible start-up companies, at ¶4-480.

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Reporting, payment and withholding obligations imposed on companies that provide shares or rights under an employee share scheme are discussed at ¶4-490.

[¶4-420] Overview of the pre-1 July 2009 regime Division 13A of Pt III of the ITAA36 (s  139 to 139GH ITAA36) applied to the acquisition of a share or right under an employee share scheme after 27 March 1995 and before 1 July 2009. Section 139B(1) included an amount in the assessable income of a taxpayer who acquired a share or right at a discount under an employee share scheme. In the ordinary case, the amount of the discount was the market value of the share or right when it was acquired, less any consideration given by the taxpayer for the acquisition (s  139CC(2) ITAA36). The market value depended on whether or not the share or right was publicly listed on a stock exchange. Two concessions were provided by div 13A to reduce or defer the taxpayer’s liability on the discount: (1) under the exemption concession, the taxpayer could elect to include the discount in assessable income in the year the shares or rights were acquired, but, if certain conditions were satisfied, be exempt on the first $1,000 of the discount, or

(2) under the deferral concession, where restrictions were imposed on the taxpayer’s ability to dispose of the shares or rights, the taxpayer could defer, for up to 10  years, the inclusion of the discount in assessable income.

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Under the exemption concession, where a taxpayer made an election and certain conditions were satisfied, the amount of the discount was only included in assessable income to the extent that it exceeded $1,000. The conditions that had to be satisfied were as follows: (1) The share or right was a qualifying share or qualifying right. A share was a qualifying share if it was an ordinary share in the employer company, at least 75% of the permanent employees of the company were entitled to acquire the shares, and the taxpayer did not hold (and was not capable of controlling the voting of ) more than 5% of the shares in the company. A qualifying right was required to satisfy these same conditions, other than the requirement that 75% of permanent employees be entitled to participate in the scheme. (2) There were no conditions under the scheme that could result in the taxpayer forfeiting ownership of the share or right.

(3) The taxpayer could not dispose of the share or right before the earlier of three years after the acquisition or the time when the taxpayer ceased the employment to which the scheme related. (4) Participation in the scheme was open to at least 75% of the permanent employees of the employer.

If either concession applied, capital gains tax might have been payable when the shares were ultimately sold by the taxpayer, with a 50% discount available if the shares had been held for 12 months.

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[¶4-440] Taxation of employee share schemes from 1 July 2009 to 30 June 2015 From 1 July 2009, discounts on the market value of shares and rights provided to an employee through an employee share scheme are taxed under div 83A of the ITAA97 (s 83A-1 to 83A-335). Division 83A only applies if there is a discount on the allocation of the shares or rights provided to the employee. Division 83A, as it applied from 1 July 2009 to 30 June 2015, is discussed in this paragraph. Division 83A, as it applies from 1 July 2015, is discussed at ¶4-460 for companies generally and at ¶4-480 for eligible start-up companies

Objects of div 83A The objects of div 83A as it applied from 1 July 2009 to 30 June 2015 were: • •

to ensure that benefits provided to employees under ‘employee share schemes’ are subject to income tax at the employees’ marginal rates instead of being subject to fringe benefits tax, and

to increase the extent to which the interests of employees are aligned with those of their employers by providing a tax concession to encourage lower and middle income earners to acquire shares under such schemes (s 83A-5).

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An ‘employee share scheme’ is a scheme under which ‘ESS interests’ in a company are provided to employees (or associates of employees) of the company (or subsidiaries of the company) in relation to the employees’ employment (s 83A-10(2)). Some individuals may be treated as employees for this purpose if they are in a relationship similar to employment, eg they are engaged in service in a foreign company as the holder of an office (s 83A-325). An ‘ESS interest’ in a company is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company (s 83A-10(1)).

Alternative taxing rules Division 83A contains two alternative taxing rules for ESS interests acquired under an employee share scheme at a discount: •

•

a scheme where there is immediate inclusion of the discount in assessable income, ie the discount is taxed upfront—this is the default position, and a scheme where there is deferred inclusion of the gain in assessable income—this may occur where an employee acquires an ESS interest under a salary sacrifice arrangement or where the employee receives an ESS interest that is subject to a real risk of forfeiture.

To avoid double taxation, the acquisition of an ESS interest is specifically stated not to be a fringe benefit (para (h) of the definition of a fringe benefit, s 136(1) FBTAA).

1. Upfront taxation of the discount Upfront taxation is the default position in that, generally, an employee’s assessable income for the income year in which they acquire an ESS interest includes the discount given in relation to the interest (s 83A-25(1)). If the employee is a foreign resident, only the part

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of the discount that relates to their employment in Australia is included in their assessable income (s 83A-25(2)). For the purposes of other provisions of the Act (in particular, for capital gains tax purposes), but not for the purposes of div 83A, the shares or rights acquired by an employee are taken to have been acquired for their market value (rather than for their discounted value) (s 83A-30). In Fox v FC of T70, the taxpayer entered into an ESS in 2011 and received 750,000 Performance Rights without having to pay anything. Half of the rights were converted into shares in 2013/14 when the vesting conditions were satisfied and the $106,058 discount on the shares was included in her assessable income for 2013/14. The taxpayer objected to the assessment on the grounds that she had received no financial benefit from the acquisition of the shares because the company had been wound up and her shares were worthless, that she was not given adequate opportunity to obtain advice and that she had been coerced into signing the ESS offer in 2011. The AAT confirmed that the taxpayer was assessable on the discount, finding that the taxpayer had not been coerced into accepting the ESS offer and that she had been explicitly warned in the offer letter of the need to obtain independent advice. Even though an employee may be liable to pay tax upfront in the year they acquire an ESS interest, the amount that is included in their assessable income may be reduced by up to $1,000 if certain conditions are met. The purpose of these conditions is to limit the concession to genuine schemes broadly available to all permanent employees who do not already have anything other than a minor interest in their employer (s 83A-15) and to encourage lower and middle income earners to acquire shares under such schemes (s 83A-5(b)).

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Conditions to be satisfied

The amount of a discount that is included in an employee’s assessable income may be reduced by up to $1,000 (but not more than $1,000) if all of the following conditions are met (s 83A-35(1)).

(a) The sum of the employee’s taxable income (which includes the discount but not the upfront exemption amount), reportable fringe benefits total, reportable superannuation contributions and total net investment losses for the income year71 does not exceed $180,000 (s 83A-35(2)). (b) The employee is employed by the company, or by a subsidiary of the company, offering the ESS interest (s 83A-35(3)).

(c) All of the ESS interests available for acquisition under the scheme relate to ordinary shares (s 83A-35(4)).

(d) When the employee acquires the ESS interest in the company, it is not the case that:  (i) the predominant business of the employing company is the acquisition, 70 [2018] AATA 2791 71 The meaning of reportable fringe benefits is discussed at¶26-350. Reportable superannuation contributions and total net investment losses are discussed at ¶2-050.

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sale or holding of shares, securities or other investments, and (ii) the employee is employed by the company, and (iii) the employee is also employed by a subsidiary of the first company, or by a holding company of the first company or by a subsidiary of a holding company of the first company (s 83A-35(5)).

(e) The scheme is offered in a non-discriminatory way to at least 75% of Australian resident permanent employees with at least three years of service (continuous or noncontinuous) with their employer (s 83A-35(6)). (f ) The shares or rights are not at real risk of forfeiture (s 83A-35(7)).

(g) The shares or rights are required to be held by the employee for at least the earlier of three years or until the employee’s employment ends (s 83A-35(8)).

(h) The employee does not, immediately after they acquire the ESS interest, hold a beneficial interest in more than 5% of the shares in the company, and they are not in a position to cast, or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company (s 83A-35(9)).

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Example—Exclusion of first $1,000 of discount Volodya is employed by a company that offers its employees the chance to purchase shares in the company at a discount. Volodya purchases 2,000 shares under the employee share scheme, paying $6,000 for shares with a market value of $9,000. Unless Volodya is entitled to defer his liability to pay tax on the $3,000 discount on the purchase price, he is assessable on the discount upfront. He would, however, be entitled to an exemption of $1,000 of the discount if the conditions in s  83A-35 are satisfied. These conditions include that the sum of Volodya’s taxable income (which includes the discount but not the $1,000 exempt amount), reportable fringe benefits total, reportable superannuation contributions and net investment losses for the year do not exceed $180,000. If the exemption conditions are satisfied, Volodya is exempt on $1,000 of the discount, but must include the remaining $2,000 in his assessable income in the year the shares are acquired.

2. Deferred taxation of the discount The taxation of the discount on the acquisition of an ESS interest may be deferred if the ESS interest and the employee meet the conditions in s 83A-35(3), (4), (5) and (9) (see under ‘Upfront taxation of the discount’ above), and the ESS interest: (a) is subject to a real risk of forfeiture, or

(b) is acquired under a salary sacrifice arrangement (s 83A-105).

In either case, at least 75% of the Australian resident employees with at least three years’ service must be, or at an earlier time have been, entitled to acquire ESS interests in their employer or a holding company under an employee share scheme.

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Real risk of forfeiture

An ESS interest would be at real risk of forfeiture if there is a real risk that, under the conditions of the scheme, the employee would forfeit or lose the ESS interest, other than by disposing of it. Salary sacrifice arrangement

ESS interests, being shares (but not rights), are treated as being acquired under a salary sacrifice arrangement if:

(a) they are provided in return for a reduction in the employee’s salary or wages or, as part of a remuneration package, where it is reasonable to conclude that the employee’s salary or wages would have been greater if the ESS interest had not been provided (b) the discount is equal to the market value of the shares because the employee does not pay any amount for the shares, and the rules governing the scheme expressly state that the deferred tax arrangement applies, and

(c) the total market value of the ESS interests received by the employee during the year under a salary sacrifice arrangement does not exceed $5,000. Time when deferred tax liability arises

Taxation of the discount on an ESS interest, being either a share or a right, is deferred until the ‘ESS deferred taxing point’. This is generally the earliest of (s 83A-115; 83A-120): •

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• •

•

when there is no real risk that the employee would lose the ESS interest under the conditions of the scheme other than by disposing of it and there are no restrictions preventing disposal when the employee ceases the employment in respect of which the ESS interest was acquired seven years after the employee acquires the ESS interest, and

if the ESS interests are rights, the earliest time when there are no longer any genuine restrictions on the exercise of the right, or resulting share, being disposed of and there is no real risk of the employee forfeiting the right or underlying share.

This generally means that shares or rights that are granted without a real risk of forfeiture are taxed when they are granted. If there is a real risk of forfeiture on grant, the taxing point is generally deferred. For rights, the taxing point is generally when they are first able to be exercised, even if the employee decides not to exercise the right until a later time. If the ESS interests are disposed of within 30 days after the day that would be the ESS deferred taxing point, the ESS deferred taxing point is instead the date of disposal.

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Amount included in assessable income

Under the deferred tax arrangements, the market value of the ESS interest at the deferred taxing point reduced by the cost base of the ESS interest is included in assessable income for the income year in which the deferred taxing point occurs (s 83A-110).72 The effect of s 83A-110 is that the employee is taxed on the increase in value of the ESS interest since it was acquired by the employee. In Munnery v FC of T73 the AAT found that a ‘preservation payment’ (equal to the market value of the shares) made by the taxpayer to retain the shares in the employee share scheme after restrictions on them had been lifted did not form part of the cost base of the shares for the purpose of determining the amount to be included in the taxpayer’s assessable income under s 83A-110. The AAT said that the taxpayer already beneficially owned the shares when the preservation payment was made and had already given consideration for their acquisition when salary was foregone under a salary sacrifice arrangement.

Refund of tax if ESS interest is forfeited An employee may be entitled to a refund of tax paid in relation to discounted ESS interests if the employee had no choice but to forfeit the ESS interests and the employee has been taxed on the discount (s 83A-310). A refund is also allowed where the forfeiture results from the employee choosing to cease employment. The refund is not intended to protect the employee from market risk, and is not available if the interest is forfeited only because the value of the securities falls due to market losses.

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Employee share schemes and capital gains tax Because the employee share scheme rules in div 83A are intended to be the primary taxing regime for ESS interests, ESS interests are generally disregarded for CGT purposes during the period that div 83A applies (s 130-75). If an ESS interest is later disposed of, the capital gain or capital loss is calculated as if the employee had paid market value at the time the interest was issued (where the discount is taxed upfront) or at the ESS deferred taxing point (where deferred taxation applies) (s 130-80). Eligibility for the CGT discount is based on these deemed acquisition dates. The treatment of ESS interests under the CGT rules is discussed at ¶8-625.

Deduction by employers An employer is entitled to deduct an amount for shares or rights they provide to employees under an employee share scheme if the scheme meets the conditions for an employee to receive the upfront concession (s 83A-205). The $180,000 income test in s 83A-35(2)(b) is disregarded when calculating an employer’s eligibility to claim a deduction. The amount of the deduction is the lesser of: (a) $1,000; and (b) the market value of the ESS interest less the consideration paid by the employee (s 83A-205).

72 The cost base of the ESS interest includes consideration paid and expenses incurred in the acquisition. For these purposes the market value substitution rules in s 112-20 and 116-30 ITAA97 are ignored (s 130-80(4)). 73 2012 ATC ¶10-241.

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[¶4-460] Taxation of employee share schemes from 1 July 2015 Significant changes to the taxation of employee share schemes from 1 July 2015 were intended to: •

• • •

improve the 2009 reforms (¶4-440), including by extending the maximum deferral period for shares received under an ESS, making changes to the maximum ownership and voting rights limitations and changing the rules on the refund of income tax on forfeited rights

allow rights schemes that do not contain a real risk of forfeiture to access tax deferred treatment where the scheme rules state that tax deferred treatment applies and the scheme genuinely restricts an employee from immediately disposing of the right introduce a tax concession for employees of certain small start-up companies (¶4480), and support the ATO’s development of safe harbour valuation methods and standardised documentation that would streamline the process of establishing and maintaining an ESS.

The treatment of ESS interests issued by eligible start-up companies from 1 July 2015 is discussed at ¶4-480. Reporting, payment and withholding obligations imposed on companies that provide ESS interests are discussed at ¶4-490.

Comparison of 2009 and 2015 scheme rules

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The following table74 compares some aspects of the 2009 scheme for the taxation of ESS interests and the 2015 scheme. 2009 scheme

2015 scheme

In ESS deferred schemes where income tax is deferred, the taxing point is the earliest of: • when there is no real risk of forfeiture of the benefits and any restrictions on the sale or exercise are lifted • when the employee ceases employment, or • 7 years after the shares or rights were acquired.

In ESS deferred schemes where income tax is deferred, the taxing point is the earliest of: For shares • when there is no real risk of forfeiture of the shares and any restrictions on the sale are lifted • when the employee ceases employment, or • 15 years after the shares were acquired. For rights • when there is no real risk of forfeiture of the rights and any restrictions on the sale of the rights are lifted • when the employee exercises the right, and after exercising the right there is no real risk of forfeiture of the underlying share and the restrictions on sale of the share are lifted • when the employee ceases employment, or • 15 years after the rights were acquired.

74 Derived from the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (Employee Share Schemes) Act 2015 (Cth).

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2009 scheme

2015 scheme

ESS rules and concessions apply equally to all corporate tax entities and their employees.

Employees of certain small start-up companies receive further concessions when acquiring certain shares or rights in their employer or a holding company of their employer. These further concessions are an income tax exemption for the discount received on certain shares and the deferral of the income tax on the discount received on certain rights which are instead taxed under the capital gains tax rules.

The ESS rules generally use the ordinary meaning of market value and do not specify which valuation methodology can be used. The method for calculating the value of an ESS interest can also be specified by regulation.

The ESS rules generally use the ordinary meaning of market value. The Commissioner can, by legislative instrument, approve optional safe harbour valuation methodologies which will be binding on the Commissioner. The method for calculating the value of an ESS interest can also be specified by regulation.

Treatment of ESS interests issued by companies generally from 1 July 2015 The taxation of ESS interests issued by companies from 1 July 2015 is set out in div 83A of the ITAA97 (s 83A-1 to 83A-340). Division 83A contains two alternative taxing rules for ESS interests acquired under an employee share scheme at a discount. The discount can either be: •

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•

taxed up-front, ie on issue, with the employee qualifying for an exemption of up to $1,000 provided the employee earns less than $180,000 in the income year, or

taxed when the right is exercised or the share is sold, ie taxation is deferred to a later time.

An ‘employee share scheme’ is a scheme under which ‘ESS interests’ in a company are provided to employees or associates of employees of the company (or subsidiaries of the company) in relation to the employees’ employment (s 83A-10(2)). An ‘ESS interest’ in a company is a beneficial interest in a share in the company or in a right to acquire a beneficial interest in a share in the company (s 83A-10(1)). If a beneficial interest is an ‘indeterminate right’, div 83A applies as if the right had always been a right to acquire a share (s 83A-340). An indeterminate right is a right that is acquired under a contract that later becomes a right to acquire a share. According to Taxation Determination TD 2016/17, a contractual right becomes a right to acquire a share when a condition of the contract is satisfied and is enforceable against the other party under the terms of the contract, even if only to the extent of the condition. The condition’s satisfaction must directly cause an employee to have a right to acquire a share. This would not be the case if a right may eventually lead to, or have a distant causal connection with, the eventual acquisition of a right to acquire a share.

1. Upfront taxation of the discount Upfront taxation is the default position in that, generally, an employee’s assessable income for the income year in which they acquire an ESS interest includes the discount given in relation to the interest (s 83A-25(1)). If the employee is a foreign resident, only the part

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of the discount that relates to their employment in Australia is included in their assessable income (s 83A-25(2)). For the purposes of other provisions of the Act (in particular, for capital gains tax purposes), but not for the purposes of div 83A, the shares or rights acquired by an employee are taken to have been acquired for their market value (rather than for their discounted value) (s 83A-30(1)). Even though an employee may be liable to pay tax upfront in the year they acquire an ESS interest, the amount that is included in their assessable income may be reduced by up to $1,000 if certain conditions are met. Conditions to be satisfied

The amount of a discount that is included in an employee’s assessable income may be reduced by up to $1,000 if all of the following conditions are met (s 83A-35(1)).

(1) The sum of the employee’s taxable income (which includes the discount but not the upfront exemption), reportable fringe benefits total, reportable superannuation contributions and total net investment losses for the income year75 does not exceed $180,000 (s 83A-35(2)). (2) The employee is employed by the company, or by a subsidiary of the company, offering the ESS interest (s 83A-45(1)).

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(3) All of the ESS interests available for acquisition under the scheme relate to ordinary shares (s 83A-45(2)).

(4) When the employee acquires the ESS interest in the company, it is not the case that:  (i) the predominant business of the employing company is the acquisition, sale or holding of shares, securities or other investments, and (ii) the employee is employed by the company, and (iii) the employee is also employed by a subsidiary of the first company, or by a holding company of the first company or by a subsidiary of a holding company of the first company (s 83A-45(3)). (5) The scheme is offered in a non-discriminatory way to at least 75% of Australian resident permanent employees with at least three years of service (continuous or noncontinuous) with their employer (s 83A-35(6)). (6) The shares or rights are not at real risk of forfeiture (s 83A-35(7)).

(7) The shares or rights are required to be held by the employee for three years or until the employee’s employment ends (s 83A-45(4) and (5)).

(8) The employee does not, immediately after they acquire the ESS interest, hold a beneficial interest in more than 10% of the shares in the company, and they are not in a position to cast, or to control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of the company (s 83A-45(6) and (7)).

75 The meaning of reportable fringe benefits is discussed at ¶26-350. Reportable superannuation contributions and total net investment losses are discussed at ¶2-050.

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2. Deferred taxation of the discount The taxation of the discount on the acquisition of an ESS interest may be deferred if both the ESS interest and the employee meet the conditions in s 83A-45(1), (2), (3) and (6) (see under ‘Upfront taxation of the discount’ above), and the ESS interest: •

• •

is subject to a real risk of forfeiture, or

is a share acquired under salary sacrifice arrangements and the employee gets no more than $5,000 worth of shares under those arrangements, or

is a right and the scheme restricts the employee from immediately disposing of the right and states that the deferral rules apply (s 83A-105).

An ESS interest would be at real risk of forfeiture if there is a real risk that, under the conditions of the scheme, the employee would forfeit or lose the ESS interest, other than by disposing of it (s 83A-105(3)). Certain rights schemes can access deferred taxation treatment even though they do not contain a real risk of forfeiture. This applies to an ESS interest acquired by an employee at a discount if: (a) the ESS interest is a beneficial interest in a right, and (b) at the time the employee acquired the interest, the scheme genuinely restricted the employee immediately disposing of the right and the scheme rules expressly stated that the scheme is subject to deferral taxation (s 83A-105(6)). Shares acquired under a salary sacrifice arrangement

ESS interests which are shares (but not rights) are treated as being acquired under a salary sacrifice arrangement if: •

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• •

they are provided in return for a reduction in the employee’s salary or wages or, as part of a remuneration package, where it is reasonable to conclude that the employee’s salary or wages would have been greater if the ESS interest had not been provided

the discount is equal to the market value of the shares because the employee does not pay any amount for the shares, and the rules governing the scheme expressly state that the deferred tax arrangement applies, and the total market value of the ESS interests received by the employee during the year under a salary sacrifice arrangement does not exceed $5,000 (s 83A-105(4)).

ESS deferred taxing point

Where an employee chooses to defer taxation of the discount on shares, the ESS deferred taxing point will be the earliest of: • • •

when there is no real risk of forfeiture of the shares and any restrictions on the sale are lifted, when the employee ceases employment, and

15 years after the shares were acquired (s 83A-115).

Where an employee chooses to defer taxation of the discount on rights to acquire shares, the ESS deferred taxing point will be the earliest of:

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• • • •

when there is no real risk of forfeiture of the rights and any restrictions on the sale of the rights are lifted when the employee exercises the rights and, after exercising the rights, there is no real risk of forfeiture of the underlying shares and the restrictions on sale of the shares are lifted when the employee ceases employment, and

15 years after the rights were acquired (s 83A-120).

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Dividend equivalent payments to employee participants in an ESS The tax treatment of dividend equivalent payments to employee participants in an ESS is considered in Taxation Determination TD 2017/26. For these purposes, a ‘dividend equivalent payment’ is a cash payment by a trustee of a trust to an employee participant of an ESS (who is also a beneficiary of the trust) where the cash payment is funded from dividends or income from other sources that the trustee has been assessed on in previous income years because no beneficiary of the trust was presently entitled to the income. The amount of the dividend equivalent payment is ordinarily calculated by reference to the amount of the dividends or other income received by the trustee during a specified period, less the amount of tax paid by the trustee on that amount. A dividend equivalent payment is assessable to the employee as ordinary income under s 6-5 of the ITAA97 if it has sufficient connection with the employee’s employment and is not excluded from the operation of s 6-5, eg because it is net income of the trust that is assessed under div 6 of Pt III of ITAA36. The fact that both the trustee and the employee pay tax on the dividends (or on the dividend equivalent payments) means that double tax will be paid. TD 2017/26 applies generally to ESS interests issued on or after 1 January 2018. In an appendix to TD 2017/26, the Commissioner states that a dividend equivalent payment will be treated as not connected with services provided as an employee and therefore is not assessable to the employee under s  6-5 if the following conditions are satisfied: •

• • •

•

the trustee of the trust is not an associate of the employer

the trustee makes the dividend equivalent payment to the person because they are a beneficiary of the trust the trustee exercises its power under the trust deed to make the dividend equivalent payment independent of any direction or wishes of the employer

the dividend equivalent payment is not paid in relation to the employee’s continued employment with their employer, the employee meeting individual employmentrelated targets such as performance conditions, or the employee’s termination of employment the dividend equivalent payment does not arise from a contractual agreement to which the person and their employer are party, and

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the trustee was assessed on the dividends or other trust income that the dividend equivalent payment is calculated on in the income year the dividends or other income were received.

[¶4-480] Treatment of ESS interests issued by eligible start-up companies Special concessions have been available since 1 July 2015 for ‘eligible start-up companies’ that reward their employees by offering ESS interests at a discount to market value. Instead of the discount being included in assessable income, any future increase in the value of the share, ie the capital growth, is taxed as a capital gain when the share is disposed of, with 50% CGT relief being available if the share has been held at least 12 months.

Eligible start-up company To qualify as an eligible start-up company, a company must satisfy not only the conditions in s 83A-45 that apply to companies generally (see ¶4-460), but also the following conditions. •

•

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•

•

The company must not have equity interests listed on any approved stock exchange at the end of the most recent income year before the ESS interest is acquired. This prohibition extends to any company that is a subsidiary, a holding company (within the meaning of the Corporations Act 2001 (Cth) or subsidiary of a holding company of the first company at the end of that income year (s 83A-33(2)).76

The company must have been incorporated (and all companies referred to in s 83A33(2) have been incorporated) less than ten years before the end of the most recent income year before the ESS interest is acquired (s 83A-33(3)).

The company must have an ‘aggregated turnover’ not exceeding $50 million for the company’s most recent income year before the ESS interest is acquired. ‘Aggregated turnover’ (as defined in s 328-115) includes not only the turnover of the company but also of companies connected or affiliated with the company (s 83A-33(4)).77

The company must offer an ESS interest with only a small discount, which means that: (i) in the case of a beneficial interest in a share, the discount is no more than 15% of its market value when it is acquired, and (ii) in the case of a beneficial interest in a right, the amount that must be paid to exercise the right is greater than or equal to the market value of an ordinary share in the company when the ESS interest is acquired (s 83A-33(5)). The Commissioner has issued ‘safe harbour valuation methodologies’ to help start-up companies to value their shares (Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 (Cth)). The approval specifies two alternative methodologies which taxpayers can use to determine the value of an ESS right, but taxpayers may choose instead to calculate market value using general principles.

76 When identifying any holding company, eligible venture capital investments by a VCLP, ESVCLP or AFOF are disregarded, as are investments by an exempt entity that is a deductible gift recipient (s 83A-33(7)). 77 When working out aggregated turnover, eligible venture capital investments by a VCLP, ESVCLP or AFOF are disregarded, as are investments by an exempt entity that is a deductible gift recipient (s 83A-33(7)).

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• •

The company must be an Australian resident company when the ESS interest is acquired (s 83A-33(6)).

Where the ESS interests being offered are rights, the company must ensure the scheme genuinely restricts the employee immediately disposing of the rights and the governing rules expressly state that the scheme is subject to deferred taxation (s 83A105(6)).

Taxation of ESS interests in an eligible start-up company For ESS interests in an eligible start-up company, an employee does not include a discount on the ESS interests in their assessable income if the scheme and their employer meet certain conditions (s 83A-33(1)). The tax treatment of the discount is as follows. •

•

• •

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•

In relation to shares, the discount is not subject to income tax and the share, once acquired, is subject to the CGT rules with a cost base reset at market value. . In relation to rights, the discount is not subject to upfront taxation and the right is subject to CGT with a cost base equal to the employee’s cost of acquiring the right (s 83A-30(2) and 130-80(4)). There is no CGT on the exercise of rights and the resulting acquisition of shares, but, upon exercise, the exercise price of the rights forms part of the cost base of the resulting shares.

The employee generally includes any capital gain in their assessable income, as part of working out their net capital gain or loss, on disposal of the resulting shares. Modified CGT discount rules allow a CGT discount to be available when the shares are disposed of so long as the right and underlying share are sequentially held for 12 months or more. If the start-up concession is available, other ESS taxation rules are excluded. This means there is no access to either the $1,000 up-front concession or the deferred taxation concession (s 83A-35(20(c) and 83A-105(1)(ab)).

Example—Employee of eligible start-up company Omar is issued 5,000 options on 1 September 2018 under an ESS operated by his employer which is an eligible start-up company. The options allow Omar to acquire 5,000 ordinary shares in his employer after paying the exercise price of $2 per right, which is more than the current market value of $1.50 per share. Omar and the ESS meet all the conditions for the 5,000 rights to be covered by the eligible start-up company concession. In December 2022, Omar exercises each right by paying $10,000, then immediately sells each share for $2.50 with his total proceeds being $12,500. On acquisition of the options on 1 September 2018, Omar did not include any amount in his assessable income, and his options have a nil cost base for CGT purposes. There is no CGT for Omar when he exercises his rights and receives his shares (due to the availability of a CGT rollover). On exercise, the cost base of the shares is $2 per share. On sale of the shares, Omar will have a discount capital gain of $1,250.

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Reporting, payment and withholding obligations imposed on companies that provide ESS interests are discussed at ¶4-490.

[¶4-490] Reporting, payment and withholding obligations Reporting obligations Companies that issue ESS interests to employees are required to report prescribed information to the employees and to the ATO. Generally, a company must report when a taxing event in relation to an ESS interest has occurred for at least one of its employees during the relevant financial year. The company must: • •

report to the affected employees by providing an ESS statement by 14 July after the end of the year, and provide an ESS annual report to the ATO by 14 August after the end of the year.

This allows the ATO to match data provided to them in the ESS annual report with information provided in individual employee tax returns. The occurrence of a taxing event may vary depending on the circumstances in which the ESS interests were acquired, eg whether the taxpayer is taxed up front on the discount or there is a deferred taxing point and whether the concession for start-up companies applies. The information that must be included in a statement to an employee or to the ATO for a financial year, and the form of the statement, are prescribed by TAA sch 1 ss 392-5 and 392-10.

Payment and withholding obligations

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TFN withholding tax (ESS) is payable if:

(a) a company provides ESS interests to an individual under an employee share scheme, and

(b) as a result, an amount is included in the individual’s assessable income for the year, and (c) the individual has not quoted a tax file number, or Australian Business Number if the individual acquired the ESS interests in relation to services provided in the course of an enterprise carried on by the individual (TAA sch 1 s 14-155).

The TFN withholding tax (ESS) is payable by the company and is due and payable by 21 days after the end of the income year in which the relevant amount was included in the individual’s assessable income. The TFN withholding tax (ESS) rate is 47% for the 2018/19 and 2017/18 income years (49% for 2014/15, 2015/16 and 2016/17). The tax is imposed by the Income Tax (TFN Withholding Tax (ESS)) Act 2009 (Cth). The required method of paying the tax depends on the size of the paying entity (TAA sch 1 s 16-70 and 16-85), If any tax remains unpaid after the due date, general interest charge is payable on the unpaid amount (TAA sch 1 s 16-80).

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A company that pays TFN withholding tax (ESS) may recover the amount of the tax from the individual, and may set off the amount against a debt due by the company to the individual (TAA sch 1 s 14-165). If TFN withholding tax (ESS) is overpaid, the Commissioner must refund the amount overpaid and the individual is not entitled to a credit for the amount (TAA sch 1 s 14-175).

TERMINATION PAYMENTS (¶4-700 – ¶4-820) [¶4-700] Introduction A lump sum payment by an employer to an employee in consequence of the termination of their employment may be taxed as statutory income at rates that are more generous than if the payment was taxed as ordinary income. Some of the lump sum payments that may be made by an employer on termination of an employee’s employment are discussed in the following paragraphs. The payments are: • • •

employment termination payments to the employee or to someone because of the employee’s death (¶4-740 to ¶4-780) genuine redundancy payments and early retirement scheme payments (¶4-800), and unused annual leave and long service leave payments (¶4-820).

From 1 July 2007, the tax treatment of termination payments is set out in div 80 to 83 of the ITAA97.

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Taxation of termination payments before 1 July 2007 Before 1 July 1983, lump sum retirement benefits were taxed on an extremely concessional basis under former s  26(d) of the ITAA36. This provision included in a taxpayer’s assessable income only 5% of any allowance, gratuity or compensation paid in a lump sum in consequence of retirement from, or the termination of, any office or employment. From 1 July 1983 to 30 June 2007, sub-div AA of div 2 of Pt III of the ITAA36 (s  27A to 27J) contained complicated rules for taxing eligible termination payments (ETPs). This term covered a wide range of lump sum payments, the most important being lump sum payments from an employer in consequence of termination of employment and lump sum payments from a superannuation fund. The taxation of an ETP involved a series of steps and the complexity of the system was a major reason for the rewrite of the ITAA36 provisions. From 1 July 2007, the taxation of termination payments from employers is separate from the taxation of superannuation benefits (¶23-400) and all of the relevant ITAA36 law has been replaced by provisions in ITAA97. Before 1 July 2007, unused annual leave payments were taxed under s 26AC of the ITAA36 and unused long service leave payments under s 26AD of the ITAA36.

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[¶4-740] Employment termination payments An employment termination payment (ETP) is a payment received by a person on or after 1 July 2007: •

•

in consequence of the termination of that person’s employment, or

after another person’s death, in consequence of the termination of the other person’s employment (s 82-130 ITAA97).

To receive concessional tax treatment as an ETP, a payment must generally be received no later than 12 months after the termination, unless the Commissioner considers that a later time is reasonable. A  payment that fails the 12-month test is taxed as ordinary assessable income (s 83-295). Generally, ETPs cannot be rolled into a superannuation fund, but must instead be taken in cash. The exception is if the payment was a transitional termination payment (¶4760) which the employee directed to be paid to a superannuation fund. There are two types of employment termination payments, each with their own taxing rules: • •

a lump sum received by a person in consequence of the termination of that person’s employment—a ‘life benefit termination payment’ (¶4-750), and a lump sum received by a person after another person’s death causes the termination of employment—a ‘death benefit termination payment’ (¶4-780).

Amounts that are stated not to be ETPs Certain amounts are specifically stated not to be ETPs (s 82-135). These excluded amounts, which are either tax free or are taxed under their own taxing rules, include: •

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•

• •

•

a superannuation benefit (ie a lump sum or income stream from a superannuation fund) (¶23-400) unused annual leave and long service leave payments (¶4-820)

the tax free part of a genuine redundancy payment or early retirement scheme payment (¶4-800) certain foreign termination payments (¶24-212), and

a capital payment for personal injury, so long as the payment is reasonable having regard to the nature of the personal injury and its likely effect on the taxpayer’s ability to derive income from personal exertion. Such a payment is also exempt under the CGT rules (¶7-715).

To successfully argue that a capital payment is for personal injury, and is not therefore an ETP, it is not enough for the taxpayer to show that there has been personal injury. It must also be shown that the payment is made because of that personal injury and is calculated according to the nature and extent of the taxpayer’s injury and likely loss.

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Example—ETP, not a personal injury payment After the taxpayer resigned from his employment, he made a claim against his former employer for unlawful discrimination and breach of contract. One allegation was that he had been subjected to bullying and harassment which brought on a stress disorder. The matter was settled by the former employer making a settlement payment of $395,000. The taxpayer applied for a private ruling on the tax treatment of the payment, and later sought a review by the AAT of the Commissioner’s ruling that the entire amount was an ETP. The AAT ruled that the entire payment was an ETP and rejected the taxpayer’s argument that all or part of the payment was a ‘capital payment for, or in respect of, personal injury’ which would have been excluded from being an ETP under s  82-135(i). The settlement payment was a single, undissected lump sum and, even if the taxpayer had suffered pain and suffering, it was not possible to say that any part of the lump sum was paid for that reason. For the taxpayer to succeed on this point, he would have to show that the payment was ‘calculated by reference to the nature and extent of the injury or likely loss’ (High Court in FC of T v Scully (2000) 201 CLR 148) and he had not shown this. (Example derived from AAT Case [2010] AATA 912, 17 November 2010.)

[¶4-750] Life benefit termination payments A life benefit termination payment is an ETP received by a person in consequence of the termination of that person’s employment (s 82-130(1)(a)(i)).

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‘In consequence of’ the termination of employment To be an ETP, a payment must be made ‘in consequence of ’ the termination of employment. There must therefore be a ‘nexus’ between the payment and the termination of employment. The degree of nexus required for this purpose has been considered in a number of cases involving former s 26(d). In Reseck v FC of T,78 severance payments were made to a construction worker whose employment on one site was terminated on Friday (because no further work was available in that district), and who was re-employed at a different site on the following Monday. The payments were held to be termination payments and assessable under s 26(d). Gibbs J was of the opinion that a sum is paid ‘in consequence of ’ the termination where payment ‘follows as an effect or result of ’ the termination. His Honour also stated that it was not necessary that the termination of the services should be the ‘dominant cause’ of the payment.79 In McIntosh v FC of T,80 a taxpayer elected (in accordance with the terms of a pension fund) seven days after his retirement to commute 50% of his pension entitlement to a lump sum of $27,000. The taxpayer argued that the payment was not received in consequence 78 75 ATC 4213; (1975) 133 CLR 45. 79 Ibid ATC 4216; CLR 51. 80 79 ATC 4325.

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of retirement, but in consequence of the decision to commute—a decision made after, and separate from, the retirement. All three judges of the Full Federal Court rejected this argument, and held that the amount was received in consequence of the termination of the taxpayer’s retirement and was assessable under s  26(d). Brennan J stated that, for a payment to be in consequence of the termination of employment, there must be more than a mere temporal link between the termination and the payment, although termination need not be the direct (ie ‘immediate’) or dominant cause of the payment. At least where there is an entitlement to the payment, the termination must be ‘the occasion of, and a condition of, entitlement to the payment’.81 In Freeman v FC of T,82 lump sums were voluntarily paid to former company directors by their former employer, following the sale of the employer’s business. Northrop and Fisher JJ held that, where a taxpayer does not have an enforceable entitlement to a payment (as here, where the employer chose, and was not required, to make the payments), the question is whether there is a sufficient causal nexus between the retirement and the payments to make the retirement the ‘occasion’ of the payment.83 According to the Court, the payments had not been made in consequence of retirement, the termination of the taxpayers’ employment was not the ‘occasion’ of the payments, and the payments were assessable under s  26(e) (¶4-110). Relevant factors were that:  (i) the payments were voluntary; (ii) it was more than six months after the taxpayers’ retirement before a decision was made to pay the amounts to them; (iii) it was almost 12 months after their retirement before the amounts were actually paid to them; and (iv) the amounts were paid as part of an arrangement designed to enable the purchaser of the business to pay the purchase price for the business by the agreed date. In Forrest v FC of T 2010 ATC ¶20-163, a $3.5 million donation by an employer to a charitable trust on behalf of a retiring CEO was held by the Full Federal Court to be assessable to the retiring CEO as an ETP. The taxpayer resigned from the company when he and his family, who were minority shareholders, lost control of the company, and he argued that the donation resulted from the battle for control of the company rather than being paid in consequence of the termination of his employment. The court said that the donation would not have been made but for the taxpayer’s resignation and therefore the taxpayer was liable to tax on it. In Purvis v FC of T,84 lump sum payments to former Qantas pilots under a ‘loss of licence insurance’ scheme when they lost their pilots’ licences for medical reasons were assessable to the pilots as ETPs. The AAT rejected the taxpayers’ argument that the payments were received for the loss of the pilots’ licences and were not in consequence of the termination of employment. The AAT concluded that the payments were ETPs as the terms of the pilots’ employment anticipated the termination of employment of a pilot who received the payment. The Federal Court dismissed the pilots’ appeals from the AAT 81 Ibid 4328. 82 83 ATC 4456. 83 Ibid 4472 (citing Lockhart J in McIntosh 79 ATC 4325, 4328): this is ‘essentially a question of fact’. 84 2013 ATC ¶10-296.

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decision (Bond v FC of T 2015 ATC ¶ 20-499), finding that there was not only a temporal connection between the payment and the termination of employment but termination of employment as a pilot was a prerequisite to payment, and in that sense payment followed on the termination of employment and had the necessary connection with it. The ATO views on the meaning of the phrase ‘in consequence of ’ are set out in Taxation Ruling TR 2003/13. The ruling states that: (i) a payment is made in consequence of the termination of a taxpayer’s employment if the payment ‘follows as an effect or result of ’ the termination; (ii) the phrase requires a ‘causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment’; and (iii) ‘the greater the length of time between the termination and the payment, the more likely that the causal connection between the termination and the payment will be too remote’.

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In consequence of the ‘termination’ The payment must be made in consequence of the ‘termination’ of the taxpayer’s employment. ‘Termination’ is defined to include both retirement from and cessation of employment by reason of the taxpayer’s death: s 80-10. The issue of whether there has been a termination has arisen where the taxpayer has been re-employed by the same employer or engaged by that person in some other capacity. In Reseck, a construction worker had his employment terminated on Friday at one site and was re-employed on Monday at a different site. Although the Board of Review found that the taxpayer’s employment had been terminated, when the matter went to the High Court Gibbs J stated:85 ‘In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated.’ The Full Federal Court in Grealy v FC of T86 expressed some reservations about the view of Gibbs J in Reseck. Their Honours interpreted Gibbs J as stating that a ‘short gap’ between two contracts is not ordinarily to be treated as a termination of employment. It would appear though that Gibbs J was really querying whether a termination on Friday and a re-employment on Monday would be a genuine termination. In Grealy’s case, the taxpayer was a lecturer employed under a fixed term contract which entitled him to a gratuity in lieu of superannuation. When the taxpayer accepted a permanent appointment commencing simultaneously with the termination of the fixed term contract, the issue arose as to whether there had been a termination of employment. It was held that the employment had continued even though there had been a change in contractual relations.

85 75 ATC 4213 at p 4216; (1975) 133 CLR 45 at p 50. 86 89 ATC 4192; (1989) 24 FCR 405.

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[¶4-755] Taxation of a life benefit termination payment A life benefit termination payment received by a person in consequence of the termination of their employment may be made up of two components—the tax free component and the taxable component.

Tax free component The tax free component is non-assessable non-exempt income (s 82-10) and may comprise either one or both of the following: (i) an invalidity segment; and (ii) a pre-July 83 segment (s 82-140). The invalidity segment is the part of the ETP that satisfies the following conditions (s 82-150): • •

•

it is paid to a person who stops being gainfully employed because of ill-health

the gainful employment stops before the person’s ‘last retirement day’ (generally when a person reaches 65), and

two medical practitioners certify that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

A formula in s 82-150(2) ensures that the invalidity segment is made up only of the part of the ETP that compensates the person for the years of employment that are lost because of ill-health. The pre-July 83 segment is the part of the ETP that is attributable to employment before 1 July 1983 (s  82-155). An ETP cannot have a pre-July 83 segment unless the employee was working for the employer before 1 July 1983. The amount of the pre-July 83 segment is worked out by a formula in s 82-155(2).

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Taxable component The taxable component is the amount of the ETP minus the tax free component (s 82145). The taxable component is included in assessable income but the employee is entitled to a tax offset that puts a ceiling on the tax rate that may apply (s 82-10(2) to (4)).

Tax payable on the taxable component The tax payable on the taxable component, after application of the tax offset, depends on the age of the employee and the amount received, with the tax offset ensuring that, as a general rule: •

• •

tax does not exceed 15% on the amount up to the ‘ETP cap amount’ ($205,000 for 2018/19) if the taxpayer has reached their ‘preservation age’ (¶23-070) on the last day of the income year tax does not exceed 30% up to the ETP cap amount if the taxpayer is below preservation age, and

in all cases, tax is payable at the top marginal rate on the ‘employment termination remainder’, ie on the amounts in excess of the ETP cap amount. The tax treatment for 2018/19 can be seen in the following table:

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  Taxation of life benefit termination payments: 2018/19 Payment amount

Preservation age or older

Below preservation age

$0 to $205,000

Up to a maximum 15%

Up to a maximum 30%

Above $205,000

45%

45%

Notes: 1 Medicare levy is added where appropriate (¶2-300). The Medicare levy rate is 2%. 2 For the 2014/15, 2015/16 and 2016/17 income years (but not for 2018/19 or 2017/18), temporary budget repair levy (2% on the part of a taxpayer’s taxable income above $180,000) may have been added (¶2-250), but the tax offset mechanism ensured that the maximum tax rates noted above continued to apply. 3 High income earners who receive ETPs may be taxed differently (see ‘Higher tax imposed on high income earners’ on the following page). 4 The ‘ETP cap amount’ is indexed from year to year and was $200,000 for 2017/18, $195,000 for 2016/17 and 2015/16, $185,000 for 2014/15, $180,000 for 2013/14, $175,000 for 2012/13, $165,000 for 2011/12, $160,000 for 2010/11 and $150,000 for 2009/10.

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Example—Tax on life benefit termination payment In November 2018, Gary retires from his employment at age 65. He had commenced work for this employer on 1 December 1979 and there is therefore some pre-July 1983 employment. Assuming that he receives a $400,000 termination payment and that this contains a $35,000 pre-July 83 segment and a $365,000 taxable component, Gary’s tax liability would be: • the $35,000 pre-July 83 segment is tax free, and • the $365,000 taxable component is taxed at no more than 15% on the first $205,000 and at 45% on the remaining $160,000. Medicare levy ($365,000 x 2%) would need to be added.

The ETP cap amount ($205,000 for 2018/19) is reduced for each life benefit termination payment already received by the employee in the same income year or received for the same termination either in that or an earlier year (s 82-10(4)).

Calculating the tax payable when taxpayer has allowable deductions The calculation of tax payable on the taxable component of an ETP where the taxpayer has allowable deductions was considered in Boyn. The taxpayer received an ETP in 2009/10 comprising a taxable component of $250,880 and a tax free component of $144,120. The taxable component of the ETP was divided into: (i) the ‘ETP cap amount’ ($150,000 for 2009/10), which would be taxed at 15%; and (ii) the ‘employment termination remainder’ of $100,880 ($250,880 minus $150,000), which would be taxed at 45%. The taxpayer had deductions of $180,733. The issue for the AAT, and then on appeal by the Commissioner for the Federal Court, was whether the deductions could be offset first against the employment termination remainder (reducing it to nil) or should be offset first against

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the ETP cap amount with only the excess deductions applied against the employment termination remainder. The taxpayer had set the deductions first against the employment termination remainder, and the unused amount was set against the ETP cap amount, producing a tax liability of $8,512.05. The Commissioner applied the deductions first against the ETP cap amount, with only the excess deductions being applied against the employment termination remainder, producing a tax liability of $31,891. The AAT disagreed with the Commissioner’s method on the basis that it would largely erode the benefit of the concessional tax rate on the ETP cap amount. According to the AAT, the Commissioner should act in accordance with his normal administrative practice and allow the most favourable allocation of deductions, as stated in the taxpayer’s calculations.87 The Federal Court upheld the Commissioner’s appeal, ruling that the deductions should only be applied to reduce the employment termination remainder to the extent that they were not first absorbed against the ETP cap amount. There was no lack of clarity in the relevant provisions, the court said, and no obligation on the Commissioner to allocate deductions in the manner most favourable to the taxpayer.88

Higher tax imposed on high income earners From 1 July 2012, only the part of a life benefit termination payment that takes a person’s taxable income (including the termination payment) to no more than $180,000 is eligible to be taxed at a maximum of 15% or 30% as appropriate (the rate depending on the taxpayer’s age) (s 82-10(4) to (8)). Amounts that bring the person’s taxable income above the $180,000 income cap are taxed at ordinary tax rates (para 1(b) in Pt I of sch 7 ITRA). These rules do not apply to death benefit termination payments (¶4-780) or genuine redundancy payments (¶4-800). They also do not apply to a person who:

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(1) loses their job due to invalidity, or

(2) receives a compensation payment for personal injury, unfair dismissal, harassment or discrimination and the payment exceeds the amount that could reasonably be expected to be received if the employment was terminated voluntarily. Example—Tax on payment to high income earner Vahid, who is aged 61, has salary of $103,000 for 2018/19 and also receives a life benefit termination payment of $85,000 when his employment is terminated on 31 August 2018. Vahid’s preservation age is 55 years (¶23-070). The tax on the life benefit termination payment is calculated as follows. (1) Only the amount of the life benefit termination payment that, when added to Vahid’s other income, brings his taxable income to $180,000 is eligible for the tax offset that puts a cap on the applicable tax rates. As Vahid’s other income

87 FC of T v Boyn 2012 ATC ¶10-276. 88 FC of T v Boyn 2013 ATC ¶20-378.

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is $103,000, only $77,000 of the termination payment can benefit from the tax offset and, as he is aged above preservation age, the $77,000 is taxed at 15%. (2) The other $8,000 of the life benefit termination payment is taxed at ordinary tax rates, ie at 45%. (3) Medicare levy ($188,000 x 2%) is also payable.

[¶4-760] Transitional termination payments A transitional termination payment is an ETP: (a) that was received on or after 1 July 2007 and before 1 July 2012; (b) under a legal entitlement in a contract, agreement or law that existed just before 10 May 2006, and (c) where the amount of the entitlement was specified in the contract, agreement or law or could be calculated (s 82-10 ITTPA). The taxpayer in Case 5/2014 2014 ATC ¶1-067 could not convince the Commissioner or the AAT that a large lump sum received in 2009 was a transitional termination payment. Even though the payment was accepted as being paid in consequence of the termination of the taxpayer’s employment, it was not established that an identifiable part was attributable to a contractual entitlement in force as at 9 May 2006. A transitional termination payment could be made up of a tax free and a taxable component. If a payment was taken in cash, the taxable component was included in assessable income but the employee was entitled to a tax offset that put a ceiling on the tax rate that could apply. An employee could choose to roll over a transitional termination payment to a superannuation fund rather than take it in cash. Such a payment was then a ‘directed termination payment’ and was not taxable until the employee later withdrew it from the superannuation fund.

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[¶4-780] Death benefit termination payments A death benefit termination payment is an ETP received by a person after another person’s death in consequence of the termination of the other person’s employment (s 82-130(1) (a)(ii)). A death benefit termination payment may be made up of two components—the tax free component and the taxable component. The tax free component of the payment, ie the invalidity and pre-July 83 components (discussed at ¶4-755), are non-assessable non-exempt income. The taxable component is included in assessable income but a tax offset puts a ceiling on the tax rate that may apply. The tax treatment depends on whether payment is made to a dependant, a non-dependant or the trustee of the deceased person’s estate.

Dependant of the deceased For this purpose, a dependant is:

(1) the deceased person’s spouse or former spouse (this includes a de facto spouse and, since 1 July 2008, a same sex spouse)

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(2) the deceased person’s child aged less than 18 (including, since 1 July 2008, a child of a same sex relationship) (3) any other person with whom the deceased person had an interdependency relationship just before he or she died, or

(4) any other person who was financially dependent on the deceased person just before he or she died (s 302-195).

Two persons have an interdependency relationship (s 302-200) if: (i) they have a close personal relationship; (ii) they live together; (iii) one or each of them provides the other with financial support; and (iv) one or each of them provides the other with domestic support and personal care. Two persons may also have an interdependency relationship if the only reason they do not satisfy these conditions is that either or both of them suffer from a physical, intellectual or psychiatric disability.

Taxation of death benefit termination payments The following table shows the taxation of the taxable component of a death benefit paid to a dependant or a non-dependant in 2018/19. Taxation of death benefit termination payments: 2018/19 Amount of payment

Payment to dependant

Payment to non-dependant

$0 to $205,000

0%

Up to maximum 30%

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Above $205,000

45%

45%

Medicare levy is added where appropriate. The $205,000 lower cap amount is reduced by the amount of any death benefit termination payment already received in consequence of the same termination. The lower cap amount is indexed from year to year, and was $200,000 for 2017/18 and $195,000 for 2016/17 and 2015/16. A death benefit termination payment to the trustee of a trust estate is taxed in the hands of the trustee in the same way as if paid directly to the dependant or non-dependant who is intended to benefit. The taxation of death benefit termination payments is set out in ss 82-65 to 82-75 of the ITAA97.

[¶4-800] Genuine redundancy payments and early retirement scheme payments Genuine redundancy payments and early retirement scheme payments receive the same tax treatment. In each case, the payment may contain a tax free amount, and the amount in excess of the tax free amount is taxed as an ETP.

Genuine redundancy payment A genuine redundancy payment is a payment made in consequence of the dismissal of an employee because their position is genuinely redundant (s 83-175). ‘Dismissal’ implies that the termination of the employment is involuntary and has been initiated by the employer, although an employee may volunteer to accept a redundancy package offered

Income from Personal Exertion189

by an employer to staff who perform certain tasks. ‘Redundancy’ implies that there is work the employer no longer wants performed, eg if an employer changes the focus of a business from manufacturing to sales. This does not include where an employer dismisses an employee and the employer wants the employee’s work to continue to be done but by someone other than that employee (Weeks v FC of T).89 If a payment on termination of employment is not a genuine redundancy payment, the payment is most likely taxed as an ETP. In Harste,90 a termination payment received by a 67 year old when his position was abolished was not a genuine redundancy payment as defined in s  83-175(2) because he was not dismissed before turning 65  years. The termination payment was included in the taxpayer’s assessable income and taxed as an ETP.

Early retirement scheme payment An early retirement scheme payment is a payment received by an employee whose employment is terminated early under a scheme approved by the Commissioner for the reorganisation of an employer’s operations. Concessional tax treatment is given to so much of the payment as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at that time (s 83-180).

Tax treatment of genuine redundancy payment and early retirement scheme payment Both a genuine redundancy payment and an early retirement scheme payment may be composed of a tax free amount and an assessable amount which may be taxed as an ETP (¶4-740). The tax free amount is calculated by the formula in s 83-170(2): base amount + ( service amount × years of service )

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where, for 2018/19, the base amount is $10,399 and the service amount is $5,200. Example—Taxation of genuine redundancy payment In 2018/19, after 15  years of service with her employer, Mona is dismissed from her employment when the section of the company in which she worked is closed down. She is paid $91,000 as a genuine redundancy payment. The tax free amount is calculated as: $10,399 + ($5,200 x 15 years) = $88,399 The $2,601 amount in excess of the tax free amount is assessable and taxed as an ETP, ie at the appropriate rate according to Mona’s age (¶4-755).

89 2012 ATC ¶20-315, Federal Court; the taxpayer’s appeal was dismissed by the Full Federal Court in Weeks v FC of T 2013 ATC ¶20-366, and the taxpayer’s application to the High Court for special leave to appeal was refused. 90 Harste v FC of T 2013 ATC ¶10-331. See also Coker v FC of T 2010 ATC ¶10-136.

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To receive concessional tax treatment:

the dismissal or termination must take place before the employee’s 65th birthday or their normal retirement date

the payment must not be more than would be paid if the employer and employee were dealing with each other at arm’s length, and

there must not be an agreement for the employee’s re-employment by the employer (s 83-175(2) and 83-180(2)).

[¶4-820] Unused annual leave and long service leave payments Taxation of unused annual leave payments An unused annual leave payment is included in full in a taxpayer’s assessable income in the year it is received and, subject to exceptions, is taxed at marginal rates (s 83-10). The exceptions are where the payment: • •

is made in respect of employment before 18 August 1993, or

is a genuine redundancy payment or early retirement scheme payment (¶4-800) or is the invalidity segment (¶4-755) of an ETP or superannuation benefit (s 83-15).

In the case of the excepted payments, a tax offset ensures that the maximum tax rate that can apply is 30% (plus Medicare levy).

Taxation of unused long service leave payments The assessable income of a taxpayer includes: •

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•

a long service leave payment to the extent that it accrues after 15 August 1978, and

5% of the amount of a long service leave payment that accrued before 16 August 1978 (s 83-80).

The amount included in assessable income is, subject to exceptions, taxed at marginal rates. The exceptions are where the payment: • •

is made in respect of employment between 16 August 1978 and 17 August 1993, or

is a genuine redundancy payment or early retirement scheme payment (¶4-800) or is the invalidity segment (¶4-755) of an ETP or superannuation benefit.

A tax offset ensures that the rate of tax on the excepted payments does not exceed 30% (plus Medicare levy) (s 83-85).

CHAPTER 5

Income from Property Overview¶5-000 Interest What is interest? ‘Interest’ and compensation Discounts and premiums Debt defeasance arrangements

¶5-200 – ¶5-275 ¶5-200 ¶5-210 ¶5-215 ¶5-275

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Annuities ¶5-300 – ¶5-380 What is an annuity? ¶5-300 Tax treatment of non-superannuation annuities ¶5-320 Distinguishing annuity payments from capital instalments of a purchase price ¶5-380 Leases and rental income ¶5-400 – ¶5-475 Introduction¶5-400 ‘Rent’ received by lessor ¶5-410 Premiums¶5-420 Disposal of a car where lease payments have been deducted ¶5-470 Luxury car leases ¶5-475 Royalties What is a royalty? Royalties in ordinary usage Royalties that are not ordinary income Statutory royalties that are ordinary income Amounts that are similar to royalties Royalties collected by collecting societies

¶5-500 – ¶5-540 ¶5-500 ¶5-510 ¶5-515 ¶5-520 ¶5-525 ¶5-540

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Assignment of right to income stream Assignment of ‘right to receive income from property’

¶5-600 ¶5-600

[¶5-000] Overview Ordinary income may be generated in a number of ways, most commonly from personal exertion, from property and from business. This chapter discusses income generated from property. ‘Income from property’ is defined in s 6(1) of the ITAA36 as being all income that is not income from personal exertion. This definition adds little apart from indicating what is not included. Essentially, income from property is income that is derived from the mere ownership of property. It may be derived without active labour or business input by the owner of the property, and for that reason is often described as ‘passive income’. A capital gain may also be derived from the ownership of property, generally on its disposal, with the net capital gain included in assessable income as statutory income under the capital gains tax (CGT) rules. The treatment of a capital gain or loss from the disposal of property is discussed in Chapters 7 and 8.

Common examples of income from property This chapter discusses four common examples of income from property.

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(1) Interest Interest is income derived from the use of money, eg from lending money to a borrower. In its simplest form, interest is clearly ordinary income, but in more sophisticated transactions (eg using discounts and premiums, or in debt defeasance arrangements) may have more the flavour of capital and be subject to CGT rather than the ordinary income rules. The tax treatment of interest is discussed at ¶5-200 – ¶5-275.

(2) Annuities Annuities are an income stream, generally purchased in return for the transfer of funds or property to an annuity provider such as an insurance company. For tax purposes, an annuity is divided into two components: (a) the amount of each payment that is really the return to the taxpayer of capital used to purchase the annuity—this amount is tax free; and (b) the payment to the taxpayer of interest on the capital—this amount is included in the taxpayer’s assessable income. The meaning of annuities and their tax treatment are discussed at ¶5-300 – ¶5380. Annuities paid by superannuation funds are discussed at ¶23-500.

(3) Rent Rent is the price paid for the right to use another person’s property, whether that property is land, a building, machinery, equipment, a motor vehicle or other goods. Although it can generally be said that rent receipts are ordinary income, the tax treatment of a ‘premium’ (usually an amount paid by a potential lessee to induce the lessor to grant the lease to the lessee) is less clear-cut. Rent, premiums and leases are discussed at ¶5-400 – ¶5-475.

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(4) Royalties

Royalties are generally amounts paid for the right to use or exploit another person’s property, whether tangible (eg a copper mine) or intangible (eg copyright in a film). There are various types of royalties for tax purposes, and a royalty may be treated as: (a) ordinary income because it inherently has that character and is assessable as such under s 6-5 of the ITAA97; (b) statutory income which is assessable under s 1520 of the ITAA97; or (c) a capital gain. Royalties are discussed at ¶5-500 – ¶5-525. Special rules apply when royalties are collected on behalf of members of a royalty collecting society (¶5-540). Another important type of income from property is dividends received by a shareholder. Dividends are discussed in Chapter 18.

Assignment or transfer of the right to receive income from property The right to receive income from property (eg rent or interest) may be assigned or transferred from one person to another. If the purpose or effect of the assignment or transfer is to reduce a tax liability, anti-avoidance rules in s  102CA of the ITAA36 or the High Court decision in FC of T v Myer Emporium Ltd(‘Myer’)1 may be used by the Commissioner to prevent this being achieved. The Myer decision and the assessability of a lump sum received for the assignment of the right to receive income from property are discussed at ¶5-600.

Receipt of passive income linked to entitlement to lower tax rate From 2017/18, a corporate tax entity qualifies for a lower corporate tax rate if it is a ‘base rate entity’ for the income year (¶18-020). This means: (i) no more than 80% of its assessable income for the year is ‘base rate entity passive income’, and (ii) its aggregated turnover is less than the threshold for the year. Passive income is defined for this purpose as including: Copyright © 2019. Oxford University Press. All rights reserved.

•

dividends, other than non-portfolio dividends (ie dividends received by an entity that holds at least 10% of the voting shares in the dividend paying company) and franking credits attached to such dividends

• interest

• royalties • rent • •

1

net capital gains, and

passive income traced through an interposed partnership or trust to the corporate tax entity as a partner of the partnership or beneficiary of the trust.

87 ATC 4363; (1987) 163 CLR 199.

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INTEREST (¶5-200 – ¶5-275) [¶5-200] What is interest? There is no general definition of ‘interest’ in the tax law, so reference must be made to the common law. Interest is commonly thought of as the price of money which is borrowed. It is the ‘return or consideration or compensation for the use or retention by one person of a sum of money belonging to, in a colloquial sense, or owed to another’.2 In Riches v Westminster Bank Ltd,3 Lord Wright described interest as being:

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a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have had if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation

Interest is usually included in a taxpayer’s assessable income on a cash basis, ie when it is received by, or applied for the benefit of, the taxpayer. If the receipt of interest is within the ordinary activities of the taxpayer, eg where the taxpayer is a financial institution or the interest is charged on trade debts, the interest is more likely included in the taxpayer’s income on an accruals basis (¶13-100). Interest earned on a joint bank account is derived by the account holders in equal shares (Taxation Determination TD 92/106), unless their entitlement to the interest is not equal, eg because one account holder is merely a signatory to the account, in which case each of the account holders is assessed according to their beneficial entitlement (Taxation Determination TD 92/182). Although it can generally be said that interest is ordinary income (s 6-5 ITAA97), there are exceptions, for example pre-judgment interest in personal injury cases (¶5-210) and some discounts or premiums (¶5-215). Periodic payments under mortgage investments which subsequently went bad (with no likelihood that the taxpayer would be repaid the principal) were held to be interest in Maber4 and Horn.5 In both cases, the AAT considered that the mortgage was enforceable, that the periodic payments under the mortgage had the character of interest and that the character of the payments was not altered by the fact that the mortgagees were likely to lose their principal.

Discounts and premiums Lenders often rely on discounts and premiums to supplement the nominal interest rate charged. In some types of short-term debt, including government Treasury bills and bills of exchange, the entire return to the lender may take the form of a discount.

2

Re Farm Security Act 1944 of the Province of Saskatchewan [1947] SCR 394, 411–12 (Privy Council).

3

[1947] AC 390.

4

Maber v DFC of T [2001] AATA 19.

5

Horn v FC of T 2003 ATC 2111.

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Gains to a lender from a discount or premium are generally treated as capital (¶5-215).

Interest and inflation Interest rates may contain an inflation component to compensate the lender for the devaluation over the term of the loan in the purchasing power of the loan principal. For tax purposes, no account is taken of the effects of inflation on the real value of the interest. An argument that the amount of the taxpayer’s assessable interest income should be reduced by an inflation factor was rejected in Case R112 (Milosh6).

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[¶5-210] ‘Interest’ and compensation Interest is the price paid to a lender in return for a loan to the borrower. If interest is imposed on amounts such as damages or compensation due to a taxpayer, there has been no voluntary loan to a borrower but instead a debt arising because of the amount owed. If the compensation portion of the payment is not ordinary income and is also exempt from CGT because, for example, it is for personal or professional damages suffered by the taxpayer, the issue arises as to whether interest payable on the compensation should be treated as income or as part of the non-assessable amount. The sort of situation in which this issue arises is illustrated in Federal Wharf Co Ltd v DFC of T.7 The taxpayer, Federal Wharf, owned property that was compulsorily resumed. The Act under which the property was resumed provided for payment of interest at 4% pa on the compensation moneys from the time the resuming body entered into occupation of the premises until the compensation was paid. The premises were ultimately valued at some $319,000, and interest on that amount was paid to the taxpayer. Rich J held that the interest was assessable income of the taxpayer, being:8‘recompense for loss of the use of capital during a period of time in which it would earn income … It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund.’ A similar result had been reached in Riches v Westminster Bank Ltd,9 where the court had awarded the taxpayer damages which included interest totalling some £10,000. Viscount Simon held that the £10,000 was assessable; the fact that the interest was awarded by the court to compensate for the injury suffered through not getting payment of the lump sum promptly did not alter its character as income. The Full Federal Court considered the issue in the context of personal injury damages in Whitaker v FC of T,10 a case in which the taxpayer successfully sued for damages after an operation that left her blind. She was awarded both ‘pre-judgment interest’ and ‘postjudgment interest’. The pre-judgment interest, which was for the period from when the

6

84 ATC 741.

7

(1930) 44 CLR 24.

8

Ibid 28 (Rich J).

9

[1947] AC 390.

10 98 ATC 4285; (1998) 82 FCR 261.

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negligent act occurred to when the judgment took effect, was characterised by the court as capital as it merged into the initial judgment of a capital amount. The post-judgment interest, which was payable on money unpaid from when the judgment took effect, was ordinary income as it had no connection with the underlying cause of action. Following the Whitaker decision, the legislation was amended to ensure income tax would not be payable on interest received to compensate for a delay in final court determination or settlement of a personal injury action. Section 51-57 of the ITAA97 was inserted into the Act to make such interest tax free (¶9-080).

[¶5-215] Discounts and premiums A common technique used to adjust the rate of return is to lend funds subject to a loan discount or premium. Under a loan discount arrangement, the borrower receives a discounted loan principal, with the loan agreement obliging the borrower to repay a principal amount that is greater than what was actually borrowed. Interest, meanwhile, is charged on the higher principal amount, not on the discounted loan principal. Under a loan premium arrangement, the borrower is provided with the notional principal for the loan, but is required to repay an additional premium when the loan is redeemed or paid off. In the interim, interest is charged on the notional principal, not on the amount required to be repaid.

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Income or capital? Whether a discount or premium is in the nature of income or is a capital receipt is difficult to resolve and the judicial reasoning can point in either direction. In some circumstances, the discount or premium may be assessed as a capital gain to the lender, as the amount received when the debt is repaid exceeds the cost of the debt. The discount or premium will more likely be income, however, where the loan is by a financial institution, being ordinary business income of the lender, or if it is a substitute for interest. Although each case must be considered separately, the question is whether the discount or premium is intended to be: (i) part of the return to the lender for the use of the lender’s funds, in which case it will be ordinary income; or (ii) compensation for another purpose, such as risk assumed by the lender, in which case it may be a capital receipt. The key factor considered by the courts when characterising a discount or premium is whether the borrower was charged the normal rate of interest that would otherwise be levied on such a loan or whether the interest rate was below the benchmark rate at the time. The distinction is illustrated by Lomax v Peter Dixon & Son Ltd.11 The taxpayer was a company that had lent funds to a business in Finland just before World War II. Because of the security threats to Finland, it was considered a high risk jurisdiction, and, to compensate for the higher risks, English lenders to Finnish borrowers required a much higher rate of return than the ordinary rate charged to equivalent borrowers in the UK. The

11 [1943] 1 KB 671 (C of A).

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lender in this case negotiated both a discount and a premium for the loan as compensation for the additional risks involved, while charging an interest rate just slightly above the rate charged by the Finnish central bank to its secure borrowers. The House of Lords concluded that this was the appropriate benchmark rate against which the taxpayer’s loan should be measured, and accordingly accepted the taxpayer’s argument that the discount and premium were matters of capital to cover the risk of non-payment of principal. In FC of T v Hurley Holdings (NSW) Pty Ltd,12 the High Court considered a discounted bill of exchange purchased for $442,199 in January 1983. The bill had a face value of $500,000 and matured in January 1984. The taxpayer had purchased the bill as an isolated transaction so that assets could be maintained in a liquid form until the sons of a director of the taxpayer could take over the taxpayer’s business. The Commissioner treated the $57,801 discount on the bill of exchange as assessable income. Upholding the assessment, the court said that the fact that the purchase of the bill was an isolated transaction did not of itself deprive the amount of the character of income. The taxpayer sought to invest its funds with no risk and for a reasonable return and the discount compensated the taxpayer for the loss of the use of the money during the term to maturity of the bill.

Factors to be considered In determining whether a premium or discount contains an element of interest, the courts have often been guided by the propositions set out by Lord Greene in Lomax v Peter Dixon & Son Ltd,13 namely: (i) even though a loan is made at or above the reasonable commercial rate of interest applicable to a sound security, there is no presumption that any associated premium or discount is to be characterised as interest (although, where no interest as such is payable, a premium will ‘normally, if not always’, be interest), and

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(ii) the true nature of the discount or premium must be ascertained from all the circumstances of the case, and the courts will look particularly at such matters as: • • •

the term of the loan the rate of interest (if any) expressly stipulated under the contract, and the nature of the capital risk of non-repayment, and the extent to which the parties took that risk into account in negotiating the terms of the contract.

[¶5-275] Debt defeasance arrangements Under a debt defeasance arrangement, a borrower pays another party:

(1) to assume its obligation to pay interest payments over the life of the loan (2) to pay the loan principal on maturity of the loan, or (3) to pay both the interest and principal.

There are generally two types of debt defeasance arrangements:

12 89 ATC 5033. 13 Ibid 682–83, MacKinnon and Du Parcq LJJ concurring at 683.

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where the lender agrees to a third party accepting all responsibility for repayment of interest or principal or both, and completely releases the original borrower from its obligations, or

where the lender may (or may not) agree to a third party accepting responsibility for payments and the original borrower is liable to repay the full interest and principal if the third party fails to meet its obligations.

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Taxation of difference between present value of the debt obligation and its face value The tax consequences of debt defeasance arrangements were considered by the Full Federal Court in FC of T v Unilever Australia Securities Ltd14 and the High Court in FC of T v Orica Ltd.15 In each case, the taxpayer paid a third party the present value of a loan principal obligation in return for the third party agreeing to repay the principal after several years. A key difference between the two cases was that the taxpayer in Unilever was a finance company while the taxpayer in Orica was not. The Commissioner sought to assess each of the taxpayers on the difference between the commercial value (or the present value) of the debt obligation at the time the obligation was assumed by third parties and the nominal value of the principal to be repaid in several years’ time by those parties. The Commissioner argued that in each case the taxpayer enjoyed a gain equal to the difference between the amount it paid for the defeasance (the present value of the principal repayment) and the future face value of the amount it would not have to repay as a result of the defeasance. The taxpayer each time argued the gain was illusory, created by comparing the current value of an obligation with its face value several years in the future, with no recognition of the time value of money. That is, the taxpayer argued the value of the obligation avoided by the defeasance was its value at the time of defeasance, not its value several years in the future. The Full Federal Court in Unilever concluded that the difference between the amount paid and face value of the obligation constituted ordinary income to the original borrower, realised when the third party repaid the debt, and that the CGT provisions had no application to the transactions.16 By way of contrast, the High Court in Orica held that the defeasance difference was not ordinary income to the original borrower as it arose from an unusual and isolated transaction, but that the CGT measures would apply to the original borrower. The High Court reasoned that the taxpayer had acquired an asset when it entered into the defeasance arrangement (the asset being the taxpayer’s right to require the third party to repay the debt) and it disposed of the right when the third party repaid the debt. The difference between the cost of the right and its value at the time of disposal (the face value of the principal) was an assessable capital gain (¶7-150).

14 95 ATC 4117; (1995) 56 FCR 152. 15 98 ATC 4494; (1998) 194 CLR 500. 16 95 ATC 4117, 4120; 56 FCR 152, 157 (Lockhart J), ATC 4144; FCR 188 (Hill J).

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The High Court’s decision in Orica did not overrule the decision in Unilever which applies to finance companies and similar businesses that regularly deal with debt rights and obligations.

ANNUITIES (¶5-300 – ¶5-380) [¶5-300] What is an annuity? An annuity is defined in the Macquarie Dictionary as: ‘a specified income payable at specified intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior instalment payments or in a single payment.’The individual who is entitled to receive the annuity is the ‘annuitant’. Annuities were first devised as a way of providing support for a person out of property, usually property left under a will. The trustee of a deceased’s estate would be expected to pay the income generated from the property for the benefit of a beneficiary such as the spouse of the deceased. The capital would be used to make up any shortfall between the income and the amount promised to the beneficiary, with the result that the capital amount would be diminished over time.

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Purchased annuities The concept of an annuity was later transferred to the commercial field and developed into purchased annuities. Under a purchased annuity, a taxpayer transfers funds or property to an annuity provider such as an insurance company in exchange for an income stream. Annuities may be fixed term annuities payable for a specified number of years, or life annuities payable for the life of the annuitant. In the case of a fixed term annuity, the provider takes the capital provided by the annuity purchaser, estimates interest that will be earned over the agreed term and calculates the payments that can be made to the annuitant to return all the capital and interest over the fixed term of the annuity. Life annuities are most commonly acquired for retirement purposes as the purchasers seek to convert a lump sum into a stream of income that will last for their lifetime. To calculate the annuity payments, the annuity provider uses the purchaser’s gender and life expectancy as determined by actuarial tables. For any given annuitant, the life expectancy period is unlikely to be exactly the actual survival period, but over a large pool of annuitants estimates based on the actuarial tables will average out so that funds saved when some annuitants die before their life expectancy can be applied to make annuity payments to those who live longer than was expected. A joint life annuity pays annuity payments for the longer of two persons’ lives (often the purchaser of an annuity and the person’s spouse). With a variable annuity, the amount of payment is not fixed for the entire annuity. An example of a variable annuity is one in which annuity payments are adjusted for inflation so they maintain the same real value over the life of the annuity. Provided the formula for

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calculation of the regular payment is fixed, the fact that payments may fluctuate will not prevent the arrangement from being characterised as an annuity.17

Taxation of annuities The taxation of an annuity depends on whether it is a superannuation or non-superannuation annuity. •

•

Annuities paid by superannuation funds (‘superannuation income stream benefits’) receive concessional tax treatment under div 301 of the ITAA97 if they comply with prescribed payment conditions. The taxation of superannuation income stream benefits is discussed at ¶23-500ff.

Non-superannuation annuities are taxed under s  27H of the ITAA36. Their tax treatment under s  27H is discussed at ¶5-320. Before 1 July 2007, all annuities (including those paid from a superannuation fund) were taxed under s 27H.

[¶5-320] Tax treatment of non-superannuation annuities For non-superannuation annuities, the tax treatment depends on whether the annuity has been purchased. Purchased annuity payments contain an interest component and a component representing a return of part of the initial capital sum used to purchase the annuity. Traditionally, the entire annuity payment was for tax purposes treated as an income amount. In legal terms, the purchase of an annuity was seen as an extinguishment of the original capital sum and its conversion to a pure income stream. Treating the entire amount of each payment as ordinary income could, however, lead to significant injustice in the case of purchased annuities because taxpayers would be assessed on the whole amount received without any recognition of the fact that part of each payment represents a return of their own capital. Copyright © 2019. Oxford University Press. All rights reserved.

Inclusion of an annuity in assessable income To avoid this injustice, although the amount of an annuity received by a taxpayer in an income year is included in their assessable income by s 27H of the ITAA36,18 a formula is used to exclude the capital portion of the payment (the ‘recovery of capital’ exclusion). An annuity is defined for this purpose in s 27H(4) as including a pension paid from a foreign superannuation fund, but not a superannuation income stream within the meaning of the ITAA97 (¶23-400). From 1 July 2007 therefore, s 27H applies only to annuities that are not taxed under the rules that apply to superannuation income streams. Before 1 July 2007, s 27H applied not only to annuities within the ordinary meaning but also to a superannuation pension and a pension or annuity paid from a foreign superannuation fund.

17 Superannuation Fund Investment Trust v Commr of Stamps (SA) 79 ATC 4429, 4441 (Mason J) (the fact that pension or superannuation fund payments may vary does not derogate from their character as annuity payments). 18 Section 27H is subject to div 54 ITAA97 which provides a tax exemption for certain payments under structured settlements (¶9-200).

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Return of capital is excluded from assessable income To avoid taxing the taxpayer’s own capital, s  27H(2) provides an exclusion for the proportion of each purchased annuity payment that represents a return of that part of the capital investment for which the annuitant has not obtained a tax deduction. Section 27H(2) excludes from the annuitant’s assessable income each year the amount (the ‘deductible amount’) ascertained under the formula: A ( B − C) D

The meanings of the elements in this formula are set out as follows.

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A means the proportion of the annuity to which the taxpayer is entitled in the year of income. Where, in the year of income, the taxpayer is entitled to receive the whole annuity, A will be 1; where, however, the taxpayer is entitled to receive only ¾ of the annuity (ie it is shared), A will be ¾ (s 27H(4)).

B means the ‘undeducted purchase price’. The ‘purchase price’ basically means the contributions and payments made to purchase the pension or annuity (s  27H(4)), but not including contributions or payments made by, or on behalf of, an employer (s 27H(5)). The ‘undeducted purchase price’ has the meaning given by s 27A of the ITAA36 before it was repealed from 1 July 2007, that is, so much of the purchase price paid on or after 1 July 1983 as was not allowed as a deduction. The purchase price may be either money or money’s worth (see Secretary of State in Council of India v Scoble);19 but the price must be ascertained or ascertainable. The consequences of failure to identify the price are illustrated in a leading annuities case, Egerton-Warburton v DFC of T.20 The taxpayer in Egerton-Warburton had sold a farming property and stock to his sons in return for: (i) an ‘annuity’ of £1,200 for the duration of the taxpayer’s own life (ii) after his death, an ‘annuity’ of £1,000 to his wife for her life, and (iii) thereafter a sum of £10,000 to his daughters and granddaughters.   The first issue to be decided by the court was whether the payments were taxable annuity payments or tax free capital instalments of the purchase price paid by the sons for the farm (¶5-380). The High Court concluded the payments were annuity payments, but did not exclude from assessable income the part of the payment that might be considered a repayment of capital. This was because there was no evidence before the court on the value of the farm property and stock transferred as consideration for the annuity agreement. C means the residual capital value of the annuity or pension, ie any capital amount payable on termination of the annuity or pension. D means the relevant number. Under s 27H(4), the ‘relevant number’ will be one of the following (depending on the circumstances):

19 [1903] AC 299 (Phillimore J). 20 (1934) 51 CLR 568 (HCA).

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(i) the number of years for which the annuity is stated to be payable (eg where the annuity is payable for 10 years, the relevant number will be 10) (ii) the life expectancy in years of a person for whose lifetime the annuity is to be paid, calculated in accordance with the relevant Australian Life Tables prepared by the Australian Government Actuary. Thus, where the annuity is to be paid only during a person’s lifetime, and at the date the annuity is first payable that person has a life expectancy of, say, 19.09  years, the relevant number will be 19.09, or (iii) in any case not covered by (a)  or (b), ‘the number that the Commissioner considers appropriate’, having regard to the total number of years during which the annuity may reasonably be expected to be payable. Where an annuity is to be paid during the lifetimes of X and Y, X having a life expectancy of five years and Y of 10 years, the Commissioner has indicated that he will ordinarily regard the relevant number as being 10 (ie the period of the longer life expectancy) (Taxation Ruling IT 2157).21 Example—Assessable amount of the annuity Assume that X purchases an annuity of $30,000 pa to be paid to X for life, then to his wife Y for life, and on Y’s death a lump sum of $50,000 is to be paid to their child Z. Assume also that the undeducted purchase price which X paid for the annuity is $150,000 and that, at the date when the annuity first becomes payable, the life expectancy of X is five years, and that of Y is 10 years. The deductible amount is calculated under s 27H(2) as follows: A (B − C)

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D

=

1 ($150,000 − $50,000 )

= $10,000

10

The amount to be included in X’s assessable income each year under s  27H(1) is $20,000—that is, the amount of the annuity ($30,000) minus the deductible amount ($10,000).

The Commissioner has a discretion to vary the deductible amount calculated under s 27H(2) where he is of the opinion that the amount so calculated is ‘inappropriate’, and can substitute the amount he deems appropriate (s 27H(3), (3A)).

[¶5-380] Distinguishing annuity payments from capital instalments of a purchase price Where a series of amounts is received by a taxpayer, it may be arguable in some cases that they could be either annuity payments or instalments of the agreed capital amount from 21 This approach was applied in Case Z19, 92 ATC 204, where the AAT rejected an argument that the relevant life expectancies of husband and wife should be ‘averaged’, because the reasonable expectation was that the annuity would be paid during the expected life of the wife, who had the longer life expectancy.

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the disposal of property. If the amounts are instalments of a capital amount, they may be tax free if they relate to assets acquired before the introduction of CGT, or the taxpayer may be entitled to the CGT discount (¶7-915) that reduces their tax liability. This result is quite different from the tax treatment of annuity payments, which may be assessable in full if there is no ascertainable undeducted purchase price (¶5-320). Although the correct characterisation of an amount can be difficult,22 the tax consequences may be significant.

True nature of a payment In ascertaining a payment’s true nature, Rich, Dixon and McTiernan JJ pointed out in Egerton-Warburton v DFC of T23that in each case it is necessary to determine whether the taxpayer has sold property in return for: (i) an annuity—in which case the annuity will be taxable

(ii) a capital sum to be paid in instalments, as in Foley v Fletcher24—in which case the payments are capital, not ordinary income, or

(iii) what looks like an annuity, but is in fact payment of a capital sum spread over a period together with interest—in which case the interest, but not the capital instalments, will be taxable (Secretary of State in Council of India v Scoble25).

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Importance of fixed gross sum In endeavouring to distinguish between annuities and instalments of capital, the courts have often placed considerable weight on whether or not the parties’ agreement stipulates a ‘fixed gross sum’ as the foundation of the agreed price. Thus, in Chadwick v Pearl Life Insurance Co,26 Chadwick assigned the residue of a lease in return for a lump sum payment of £1,000 and annual payments of £1,625 during the balance of the lease. Walton J observed that the distinction between payment of a debt by instalments and an agreement to make a series of annual payments was ‘a fine one, and seems to depend on whether the agreement between the parties involves an obligation to pay a fixed gross sum’.27 Being unable to find any gross amount in the parties’ agreement, Walton J held the annual payments to be income as an annuity. A similar result was reached in Egerton-Warburton v DFC of T.28 The High Court held in that case, since there was no fixed gross sum or definite purchase price—because the total amount payable would vary depending upon how long the taxpayer lived— the £1,200 payment received each year for the duration of the taxpayer’s life was not an instalment of a capital price, but rather an assessable annuity payment.

22 See, for example, the comments of the High Court in Atkinson v FC of T (1951) 84 CLR 298, 304; and Chadwick v Pearl Life Insurance [1905] 2 KB 507, 514 (Walton J). 23 (1934) 51 CLR 568, 572, quoting Rowlatt J in Jones v IR Commrs [1920] 1 KB 711, 714–15. 24 (1858) 157 ER 678. 25 [1903] AC 299; [1903] 1 KB 494. 26 [1905] 2 KB 507. 27 Ibid 514. 28 (1934) 51 CLR 568. See ¶5-320.

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Similarly, in Just v FC of T,29 a third party created a ‘rent charge’ over certain premises, entitling Just to receive 90% of the rent for the premises. In the High Court, Webb J indicated that, if the £17,500 stipulated in the parties’ agreement had been the purchase price of the land rather than merely its value for stamp duty purposes, he might have characterised the payment as instalments of the purchase price plus interest on the balance outstanding. However, in the absence of a fixed gross sum, his Honour held the amount to be assessable income: the substance of the transaction was that ‘the Justs bargained to have not a capital sum but an income’.30 More recently, in Moneymen Pty Ltd v FC of T,31 the taxpayer sold its wholesale milk business and assigned its rights under a lucrative milk supply contract with Caboolture Co-operative Association Ltd (‘CCA’) for an amount payable over the remaining term of the contract. Under the milk supply contract, CCA (which purchased milk from various suppliers at prices that changed daily) was liable to pay its highest daily price for a specified amount of milk supplied by the taxpayer. The amount payable to the taxpayer in respect of the sale and assignment was calculated as a proportion of the net price payable for a specified quantity of milk supplied each month. The Full Federal Court found that there was never any fixed gross sum payable for the rights sold by the taxpayer, and that therefore the case was indistinguishable from Egerton-Warburton. The taxpayer had transferred a ‘structural’ or capital asset in return for periodic payments of an income nature. On the other hand, in Foley v Fletcher32 the taxpayer sold her rights in certain property for £45,000, with payment being by way of a lump sum of £3,885, and the balance by sixmonthly instalments for a period of 30 years. Since the price of the property was clearly specified as £45,000 (a fixed gross sum), the court was able to characterise the half-yearly payments as mere instalments of a capital price, and not annuities.

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Payment of specified lump sum in variable instalments In Foley, there was a clear fixed gross sum stipulated in the agreement upon which the court could focus. Not all the cases are so straightforward. For example, in IR Commrs v Ramsay,33 Ramsay purchased a dental practice for £15,000, the contract providing that the agreed price was to be met by the purchaser paying a £5,000 lump sum immediately, plus an annual payment for each of the next 10 years equal to 25% of that year’s net profits from the practice. The agreement provided that the purchaser remained liable to pay the percentage of net profits in each of the 10 years even though the sums paid might total more than the balance of £10,000 (the agreement expressly providing that in such a case the purchase price ‘shall be increased accordingly by the amount of such excess’). Conversely, if the capital sums paid during the 10 years amounted to less than the balance of the primary price, the vendor was obliged to

29 (1949) 8 ATD 419. 30 Ibid 422. See also Atkinson v FC of T (1951) 84 CLR 298. 31 91 ATC 4019. 32 (1858) 157 ER 678. 33 [1935] 1 All ER 847.

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‘take and accept such sums in full satisfaction of such balance, and the primary price shall be diminished by the amount of the deficiency’. Ramsay argued that the 10 payments of 25% of annual profits were not instalments of capital, but were annual payments in the nature of income, which he would therefore be entitled to deduct from his total income in calculating his tax liability. The UK Court of Appeal unanimously held that the 10 annual payments were not annuities, but were instalments of the balance of purchase price outstanding. Their Lordships were influenced by the fixed gross sum of £15,000 that was stipulated in the contract as the purchase price. According to Lord Wright, the ‘primary’ debt of £15,000 was the overriding purchase price. In his view the clause providing for payment of a percentage of the net profits for 10 years created a situation where ‘a capital lump sum has been stipulated as the price of a piece of property, and it is none the less so because the payment of that sum is to be made by instalments … at certain specified periods … but not instalments of a fixed price’. The requirement for instalments of varying amounts, which in the aggregate might amount to either more or less than £10,000, simply meant that Ramsay might in the end have to pay a total sale price of more or less than £15,000.

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Fixed gross sum may not be conclusive The decision in Dott v Brown34 shows that the presence or absence of a fixed gross sum is merely a guideline, and not conclusive. Brown owed Dott approximately £9,500. The parties entered into a compromise agreement under which Dott accepted in full discharge of the debt (in addition to certain other items and undertakings by Brown) a covenant by Brown to pay Dott £1,000 on 31 March of each of the next two years and thereafter £250 on each 31 March so long as Dott should live. The court held that the annual £250 payments were instalments of a capital sum (the price for extinguishment of the prior debt of £9,500), and not annuities. Scott LJ stressed that the words ‘a fixed gross sum’‘are not conclusive and may be misleading, and [one must be] very careful not to treat a particular signpost in one case as conclusive of another case on different facts’.35

LEASES AND RENTAL INCOME (¶5-400 – ¶5-475) [¶5-400] Introduction Where property (whether land, a building, machinery, equipment, a motor vehicle or other goods) is leased, the price paid for the right to use that property is rent and is assessable as ordinary income. Under a leasing contract, the lessor remains the owner of the goods, and the lessee pays for the right to use them for a specified period, with the lessee obliged to return the property in reasonable condition at the termination of the lease.

34 [1936] 1 All ER 543. 35 Ibid 552.

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[¶5-410] ‘Rent’ received by lessor Rent is the payment which a lessee or tenant contracts to pay the lessor or landlord for the use of premises or goods: United Scientific Holdings Ltd v Burnley Borough Council.36 Rent is by its very nature ordinary income (Adelaide Fruit and Produce Exchange Co Ltd v DFC of T37). In determining whether or not a payment is rent, it is the reality or substance of the matter, rather than the label given by the parties to the transaction, which is decisive. In Ex parte Lathouras; Re Vendardos,38 a lease agreement between two parties contained a clause requiring a payment of ‘a premium of [a certain amount] monthly in advance’. Despite the wording of that clause, Walsh J held that for the purposes of certain rent control legislation, the monthly payment in reality represented additional rent. By contrast, in Case M9639 the taxpayer for charitable reasons permitted people in distressed circumstances to live in a flat on payment of a weekly amount which was well below the market rental and was calculated only to meet the costs of the food consumed by the lodger. In denying the taxpayer a deduction for the expenses, the board expressed the view in passing that the lodgers’ payments were not rent, but simply ‘a partial recoupment of private expenditures’. Where rental income is received under a non-commercial or domestic arrangement, amounts paid for board would not generally give rise to the derivation of assessable income. Taxation Ruling IT 2167 states (at para 18): ‘Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income ....’ Amounts paid by a local or international student to a host family to cover expenses such as food, phone and electricity under a homestay arrangement are treated by the ATO as non-commercial or domestic and not assessable income (ATO Interpretative Decision ID 2001/381). If a receipt is really rent, the manner of its payment is irrelevant, and it may even be paid in a lump sum (Case B5140).

Lease surrender receipts Taxation Ruling TR 2005/6 sets out the Commissioner’s views on the tax consequences of receiving a payment for the surrender of leases of land and buildings. Generally, a lease surrender receipt would only be ordinary income if received in the ordinary course of carrying on a business of trading in leases or as an ordinary incident of business activity. Otherwise, the lease surrender receipt would be of a capital nature and potentially be taxable under the CGT provisions (¶7-150). 36 [1978] AC 904, 935 (Lord Diplock), 947 (Lord Simon), 963 (Lord Fraser). 37 (1932) 2 ATD 1. 38 [1964–1965] NSWR 254. 39 80 ATC 683. 40 70 ATC 253.

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Amounts received from lessee for non-compliance with covenant to repair A lessor is assessable under s 15-25 of the ITAA97 on amounts received from a lessee who fails to comply with a covenant to repair premises, where the premises are used by the lessee for the purpose of producing assessable income, and the amount received is not ordinary income for the lessor.

[¶5-420] Premiums More difficult problems arise in relation to taxation of a ‘premium’ which, in this context, is usually an amount paid by a hopeful tenant to induce the landlord to grant the lease of particular premises to that tenant. For example, a person anxious to lease particular premises might offer the owner a once-only lump sum payment of $1,000 (in addition to the rent) if the owner agreed to lease those premises to the person rather than to someone else (Australian Mercantile Land and Finance Co Ltd v FC of T41).

Premiums are generally capital A premium received as consideration for the grant or assignment of a lease will usually be capital in character. This is because the premium would normally be a lump sum linked to access to, rather than use of, the premises. CGT event F1 may happen when a taxpayer grants a lease and the capital proceeds from the event include the premium received by the taxpayer (¶7-255).

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In unusual cases premiums may be income A premium may be assessable as ordinary income where the taxpayer’s business includes the receipt of such premiums (Kosciusko Thredbo Pty Ltd v FC of T42), or where the premium is really a disguised payment of additional or advance rent (Australian Mercantile Land and Finance Co Ltd v FC of T;43 Dickenson v FC of T;44 Ralli Estates Ltd v Commr of IT45). In Kosciusko Thredbo, after entering into a 45-year lease of part of the Kosciusko State Park, the taxpayer set about developing the area as a tourist resort. The taxpayer constructed apartments which it sub-let at substantial premiums for long periods of time so that, on reversion of the sub-lease, only a few years of the head lease would be left. The taxpayer argued that the premiums should be treated as capital as they were received as the purchase price for a capital asset. The New South Wales Supreme Court (Rogers J) held that the premiums were assessable as ordinary income on the basis that the taxpayer was carrying on its business of selling sub-leases: all other things being equal, the receipt of premiums for parting with a sub-lease for almost the entirety of the balance of the period of the head lease, usually represents a receipt of capital. In those circumstances it is truly the purchase price for a capital asset.

41 (1929) 42 CLR 145, 153 (Rich J). 42 84 ATC 4043. 43 (1929) 42 CLR 145. 44 (1958) 90 CLR 460. 45 [1961] 1 WLR 329, 350 (Denning LJ).

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Another way of putting the same proposition was that all the [taxpayer] was doing here was realising part of its assets, the head lease, to the best advantage. However, the better view is that for many years the [taxpayer] was carrying on its business of selling subleases initially of sites and in later years of apartments within the demised area. More recently the sales were by way of time sharing arrangements. The transactions of sale were repetitive and recurrent and were an essential ingredient of the operation of the business to commercial advantage.46

Characterisation of a payment as additional or advance rent on the one hand, or a capital premium on the other, depends upon analysis of the facts of the particular case. The label attached to the payment by the parties is not definitive.

Impact of the CGT provisions on premiums Under s 104-110 and 116-20(2) of the ITAA97, for CGT purposes premiums payable on the grant of a lease will usually be fully assessable to the lessor, whether paid as a lump sum or by instalments (with the premium constituting a capital loss to the lessee on termination of the lease: s 104-25(1) of the ITAA97). Lease premiums which do not fall within the ordinary income provisions are dealt with exclusively under the CGT provisions. As a result, a smaller amount of income may be brought to account because, whereas expenses incurred in granting a lease are not normally deductible because they are capital, they will reduce the taxpayer’s capital gain (¶8-650). If the receipt of a premium gives rise to a capital gain and is also assessable as ordinary income, double taxation is avoided by s 118-20(1) of the ITAA97 which effectively reduces the amount of the capital gain by the amount that is assessed as ordinary income (¶7-710).

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[¶5-470] Disposal of a car where lease payments have been deducted If a car is leased and the lessee claims a deduction for the lease payments, an amount may be included in the lessee’s assessable income if they later acquire the car from the lessor and then sell it at a profit. The amount of profit included in assessable income is limited to the lesser of: (a) the total deductible lease charges over the period of the lease; and (b) the amount of notional depreciation for the lease period, ie the amount that could have been deducted for depreciation if the car had been owned by the lessee instead of being leased (s 20-100 to 20-160 ITAA97). The purpose of these rules is to reverse the effect of previous deductions for car lease payments. The limits ensure that the assessable profit does not exceed the total deductions that were claimed by the lessee, or that could have been claimable if the lessee had owned the car. Generally, where the profit on the disposal of the car is also taxable under another provision, priority is given to that other provision, thus avoiding double taxation (s 20-150). These rules do not apply to luxury car leases (¶5-475).

46 84 ATC 4043 at p 4052.

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[¶5-475] Luxury car leases Leases of luxury cars are treated as sale and loan transactions and the lessee (rather than the lessor) is treated as the owner of the car. The lessor under such a lease is taken to have notionally sold the car to the lessee for the car’s market value and made a loan to the lessee to finance the notional acquisition. A car is a luxury car for these purposes if its cost is more than the luxury car tax threshold ($65,094 generally for 2017/18 and $75,526 for fuel efficient luxury cars) for the year the lease commences).

Tax treatment of luxury car leases

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The tax treatment of luxury car leases is set out in div 242 of the ITAA97, which applies to a car that: (a) is leased (but not under a hire purchase agreement) for consideration; (b) was a luxury car when the lessor first leased it; (c) is not trading stock of the lessee; and (d) has not been modified to carry individuals with a disability. Lease payments are divided into interest on the notional loan and the actual lease payments to the lessor. The lessor’s assessable income includes the interest on the notional loan (ie the return on funds lent), worked out and assessed annually over the term of the lease on a compounding accruals basis. The lessor cannot claim deductions for the car’s decline in value. The lessee of the luxury car is treated as the owner until the lease term ends or the lease is terminated before that time. The lessee is entitled to a deduction equal to the interest on the notional loan worked out each year on a compounding accruals basis. A deduction is not allowed to the extent that the car is used for private purposes. The lessee is also allowed deductions for the car’s decline in value, up to the car depreciation cost limit. The lessee is not allowed deductions for lease payments under the lease. The return of the car to the lessor on termination of the lease is treated as a disposal, and a depreciation balancing adjustment (¶12-210) may be required.

ROYALTIES (¶5-500 – ¶5-540) [¶5-500] What is a royalty? In general terms, a royalty is an amount paid for the use or exploitation of another person’s property. Some examples of ‘royalties’ in ordinary usage include: • •

payments for the use of intellectual property and know-how belonging to another person, eg royalties for the use of copyrights, patents, trademarks and industrial processes, and payments for exploitation of real property calculated by the rate of exploitation, eg payments for minerals or trees taken from a person’s property.

The wide ordinary meaning of royalty is expanded further by the definition in s 6(1) of the ITAA36.

Types of royalties for tax purposes There are four types of royalties for tax purposes:

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(1) royalties within the ordinary meaning of royalty that are assessable as ordinary income under s 6-5 of the ITAA97 (¶5-510)

(2) royalties that fall within the ordinary meaning of royalty but do not constitute ordinary income and are assessable as statutory income under s 15-20 of the ITAA97 (¶5-515) (3) amounts that fall outside the ordinary meaning of royalty but are defined to be royalties under s 6(1) and are assessable as ordinary income under s 6-5 (¶5-520), and

(4) amounts that fall outside the ordinary meaning of royalty but are defined to be royalties under s  6(1) and do not constitute ordinary income assessed under s  6-5 (¶5-525). These royalties cannot constitute statutory income under s 15-20 (because that section only applies to amounts that are royalties within the ordinary meaning), but may be included in the calculation of a capital gain (¶7-510).

[¶5-510] Royalties in ordinary usage Originally, the concept of a royalty was limited to rights granted by the Crown. However, the scope of the term has expanded over time, and now has a broad reach. In Stanton v FC of T,47 the High Court identified the essence of a royalty as follows: In the case of monopolies and the like the essential idea seems to be payment for each thing produced or sold or each performance or exhibition in pursuance of the licence. In the same way in the case of things taken from the land the essential notion seems to be that the payment is made in respect of the taking of something which otherwise might be considered to belong to the owner of the land in virtue of his ownership. In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised. (emphasis added)

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Calculated by reference to exploitation or use While royalties are normally calculated by reference to actual exploitation or usage (eg an amount per book sold, per showing of a film or per item produced using a licensed process), a direct connection between the amount of payment and exploitation or usage is not essential so long as the payment is calculated indirectly by reference to the exploitation or usage. For example, a lump sum payment may be a royalty where it is a pre-estimate of the anticipated amount of further use (IR Commrs v Longmans Green & Co Ltd48). Similarly, it may be a royalty where it is based on past usage (Mills v Jones;49 Constantinesco v R50). 47 (1955) 92 CLR 630, 642. 48 (1932) 17 TC 272 (UK HC) (author received lump sum characterised by the court as royalty calculated by reference to anticipated sales even though agreement did not describe payment as a royalty). 49 (1929) 14 TC 769 (UKHL) (inventor received lump sum as compensation for use of his patented improvement to bomb manufactured during World War I). 50 (1927) 11 TC 730 (UKHL) (inventors received lump sum as compensation for use of their gearing invention by UK and US military).

Income from Property211

An ‘advance’ of royalties will not be a royalty if there is no requirement for it to be refunded if there is no use made of the licence (Case U3351). Neither will payments for the right to remove items from the taxpayer’s property constitute royalties where the payments are not based on the actual amount taken. This may be true even if the payments are partly refundable if the property does not yield an anticipated quantity of resources (Earle v FC of T52). The distinction between a royalty and a non-royalty payment is illustrated by the contrast between the leading High Court decisions in McCauley v FC of T53 and Stanton v FC of T.54

McCauley

In McCauley, the taxpayer was a dairy farmer who owned land upon which trees grew, although he had not acquired the land for the purpose of growing timber or selling it. In 1940, he entered into an agreement with Laver, under which he agreed to sell Laver the right to cut and remove the standing milling timber on a portion of the land ‘for a price or royalty of 3/- for each and every 100 superficial feet of such milling timber so cut’. Laver in turn agreed to cut and remove all the milling timber from the property within a period of 12 months, and to pay monthly the appropriate ‘price or royalty’ under the contract. On these facts, the High Court by majority held that the amounts received by McCauley were royalties. As Latham CJ pointed out:55 the word ‘royalty’ is properly used for the purposes of describing payments made by a person for the right to enter upon land for the purpose of cutting timber of which he becomes the owner, where those payments are made in relation to the quantity of timber cut or removed. Thus … the moneys received by McCauley [calculated per 100 feet cut] were royalties and accordingly were part of his assessable income

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• • •

The payments in McCauley exhibited all the classic indicia of an ordinary royalty: they were paid for the right to remove the timber

the amounts payable were measured by the quantum of timber removed, and the payments were made contemporaneously with the exercise of the right.

Stanton Eleven years later another taxpayer, having learnt from McCauley’s experience, achieved the same commercial effect by a more advantageous taxation route. In Stanton, the taxpayer was again a grazier, with an interest in land bearing pine and hardwood timber, who entered 51 87 ATC 250 (Bd of Rev) (taxpayer received payment described as an ‘advance’ of royalties in consideration of the right of the licensee to make lawn edgers using the taxpayer’s patent but there was no requirement to refund payment if licensee did not manufacture edgers). 52 86 ATC 4441 (QSC) (taxpayer received instalment payments for right to remove rock from taxpayer’s land with provision in the agreement for a proportionate reduction of purchase price if property did not yield prescribed quantity of rock). 53 (1944) 69 CLR 235. 54 (1955) 92 CLR 630. 55 69 CLR 235, 241. Cf Case H19, 76 ATC 143.

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into an agreement with a sawmiller for the sale of the timber. The agreement stated that the vendors sold to the purchaser three million super feet of millable timber, with the right to cut and remove the timber from the land. The price was to be £17,500, of which £500 was to be paid as a deposit and £17,000 by equal quarterly instalments without interest. Payment was required whether or not the sawmiller cut any timber, although there was provision for a proportional rebate if there were found to be less than three million super feet of timber on the land. The High Court held that the ‘essential notion’ of a royalty was absent, because the amount to be paid was not related to the quantity or value of timber felled under the agreement, or to the occasions on which the relevant right was exercised. The High Court saw the facts in Stanton as amounting in substance to the sale of a capital asset (timber) at a lump sum price which was based on the amount of timber found to be standing upon the land, rather than on the amount of timber cut or removed. Moreover, the price was payable in quarterly instalments which became due regardless of the amount of timber removed, so that the full price remained payable independently of the extent to which the purchaser exercised his right to cut and remove timber. The High Court therefore held that the payments were capital receipts. In the absence of capital gains provisions at the time, the gain realised by the grazier was not assessable; after 19 September 1985, the sale would have given rise to an assessable capital gain.

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[¶5-515] Royalties that are not ordinary income Section 15-20 of the ITAA97 expressly contemplates that there will be payments which constitute royalties under the ordinary meaning of the word which will not be characterised as ordinary income. The purpose of s  15-20 is to include these amounts in assessable income as statutory income. It is very difficult to discern from the cases what types of receipts might be royalties under ordinary usage but not ordinary income. In virtually all cases where receipts are found not to be ordinary income, they are also found not to be royalties. There is some speculation in cases that an amount could be a royalty within the ordinary meaning but be considered a capital receipt. However, no actual examples have been found in the cases.56

[¶5-520] Statutory royalties that are ordinary income ‘Royalty’ is defined in s 995-1(1) of the ITAA97 as having the meaning given by s 6(1) of the ITAA36. The definition is intended to characterise as royalties for tax purposes some types of ordinary income that are not royalties under the ordinary meaning of that term. A royalty includes ‘any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not’ to the extent that it is paid or credited as consideration in one of the circumstances listed in the definition. These include: •

for use of any copyright, patent or design

56 Cases in which this speculation arose include First Provincial Building Society Ltd v FC of T 95 ATC 4145, 4151; (1995) 56 FCR 320 (Hill J) (Full Federal Ct FCA), and Case V122, 88 ATC 764.

Income from Property213

•

for use of any industrial, technical or scientific equipment

•

for use, in connection with television or radio broadcasting, of visual images or sounds transmitted by satellite or cable, optic fibre or similar technology.

•

for supply of scientific, technical or commercial knowledge, or

Significance of the characterisation The characterisation of an amount as a royalty is most important for international tax reasons. Australia has entered into international tax treaties with most of its principal trading partners and under the treaties Australia has forgone its rights to tax residents of the treaty countries on many types of income sourced in Australia where the non-resident does not operate in Australia through a permanent establishment. One type of income derived by residents of treaty countries over which Australia has retained taxing rights is royalty income. The primary purpose of the definition is to characterise ordinary income that is analogous to royalty income as royalty income so Australia can exercise its taxing rights under the international tax treaties. The statutory definition works in conjunction with s 6C of the ITAA36 to ensure payments from Australia that fall within the statutory definition of royalty will have an Australian source.

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Payment for the use of know-how One example of ordinary income that is characterised as a royalty by the statutory definition is a payment for the use of know-how where the payer does not actually acquire a right to intellectual property or know-how. This situation is illustrated in FC of T v Sherritt Gordon Mines Ltd.57 In that case, Sherritt agreed to supply technical assistance to Western Mining Corporation Ltd in the form of know-how, instructions to Sherritt employees and contractors, and assistance in the preparation of plans for a nickel refinery. In consideration of this assistance, Western Mining agreed to pay Sherritt an ‘aggregate sum expressed as a percentage of the Aggregate Sales Value of the nickel and by-products produced … by the practice of the Sherritt System’;58 the payments being spread over a period of 15 years from the commencement of operations. The High Court by majority held that the payments were not royalties. The majority reached this conclusion because, under the agreement, the payments were not made in consideration of the grant of a right: Here the substantial, if not the sole, consideration for the payments was not the grant of a right but … the provision of technical assistance and information which Western [Mining] was entitled to use once it was supplied, without the grant of any additional right so to do. The express grant of the right to use and sell … was no more than a recognition of the consequence which automatically flowed from the provision of the technical assistance and information.59

57 77 ATC 4365; (1977) 137 CLR 612. 58 Ibid ATC 4373; CLR 629. 59 Ibid ATC 4372; CLR 626.

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Sherritt Gordon was a resident of Canada with no permanent establishment in Australia and, under the international tax treaty with Canada, Australia could only tax the income received by Sherritt Gordon if it were a royalty payment. The payments dealt with in the case were subsequently added to the statutory definition of royalty when the decision showed they would not be royalties under the ordinary meaning of the term. The statutory definition of a royalty includes amounts described in the definition that are paid ‘or credited’ to a taxpayer. The latter words were added to the definition in response to the decision of the Supreme Court of Victoria in Aktiebolaget Volvo v FC of T,60 a case involving an amount credited but not paid to the account of a non-resident supplier.

[¶5-525] Amounts that are similar to royalties Taxpayers may receive amounts that are similar to royalties but which fall outside the ordinary meaning of that term. Even though the amounts are not royalties, they may be ordinary income as income derived from the use or exploitation of property or income from business. In other cases, they may be characterised as capital receipts. The reconciliation of cases in which these payments are found to be ordinary income and those in which they are treated as capital payments is difficult. However, it is possible to identify the principal tests used by the courts to make the distinction:

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(1) If the taxpayer is an individual in the business of creating income-generating property rights, as would be the case with, say, an author, the sale of copyright for a lump sum would normally give rise to an income, albeit not a royalty, receipt (Mackenzie v Arnold61). However, if the person disposing of rights is no longer in the profession that gave rise to the rights, the lump sum may constitute a capital receipt, assessable only under the capital gains provisions (Nethersole v Withers62).

(2) In the case of an entity that makes an outright sale of rights, the character of the consideration received will depend on the nature of the taxpayer’s business. If the taxpayer is established to receive royalties from the exploitation of rights in many jurisdictions and in addition sells rights outright in only a few rare cases, the sale receipts may constitute capital receipts, assessable only under the capital gains provisions (Collins v Firth-Brearley Stainless Steel Syndicate Ltd63). On the other hand, the payments may be ordinary income receipts if the taxpayer intended primarily to hold rights to derive royalties but always contemplated sale for profit as a possibility and left users with the option to purchase rights (Ducker v Rees Roturbo Development Syndicate Ltd64). 60 78 ATC 4316 (VSC). 61 (1952) 33 TC 363 (UK Ct of Appl) (author disposed of copyright in 20 novels for a lump sum payment). 62 (1948) 28 TC 501 (UKHL) (payments to dramatist for film rights in a novel and play dramatised by the taxpayer characterised as capital receipts). 63 (1925) 9 TC 520 (UK Ct of Appl) (gains from the sale of patent rights in Japan and the US were capital receipts where taxpayer retained rights to royalties from patents or sold rights for royalty payments in all other jurisdictions). 64 [1928] AC 132; (1928) 13 TC 366 (UKHL) (taxpayer received royalties from patents and sold US rights to a US user when the buyer exercised an option to purchase in the royalty agreement).

Income from Property215

(3) Where a taxpayer sells intangible rights such as patents or know-how of secret processes on an instalment basis, the character of the instalment receipts may depend on whether the sale was an absolute assignment of ownership or merely for a limited period. In the latter case, it is more likely payments will be considered income in nature (British Dyestuffs Corporation (Blackley) Ltd v IR Commrs65).

(4) When characterising receipts for the exploitation of real property that look similar to royalty payments, courts will look to see if the payment is for actual use or exploitation of an asset or is compensation for the effects of use or exploitation. For example, payments for minerals extracted from land would be royalties and ordinary income but a payment as compensation for damage to land caused by extraction of materials may be a capital receipt (Barrett v FC of T66). (5) Where a taxpayer provides intellectual property rights for a lump sum plus royalties, the character of the lump sum portion of consideration may turn on whether subsequent royalties are based on actual usage or are based on flat annual amounts regardless of usage. In the former case, particularly if the agreement is for a nonexclusive licence so there is no impairment of the taxpayer’s ability to exploit the intellectual property by the grant of other licences, the lump sum may take on the character of ordinary income, which is in effect a substitute for larger royalties (IR Commrs v Rustproof Metal Window Co Ltd67). If subsequent ‘royalty’ payments are based on flat annual amounts regardless of usage, the lump sum may be characterised as a separate capital receipt (IR Commrs v British Salmson Aero Engines Ltd68).

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(6) Where a licensing agreement provides for the payment of royalties for the use of intellectual property and a separate lump sum (which might be paid in instalments) for the licensor agreeing not to compete in the jurisdictions covered by the licence agreement, the payment for non-competition may be a capital receipt, assessable only under the capital gains provisions (Murray v Imperial Chemical Industries Ltd69). (7) Where a taxpayer sells know-how for a lump sum, the payment is likely to be an income receipt if the provision is seen as an integral part of the taxpayer’s business (Jeffrey v Rolls-Royce Ltd70), or a capital receipt if the provision of know-how is

65 (1924) 12 TC 586 (UK Ct of Appl) (instalment payments over the life of an agreement to sell patents and secret processes for a 10-year period characterised as income receipts). 66 (1968) 118 CLR; (1968) 15 ATD 149 (HCA) (landowner received payment from a mining company for damage to land calculated by reference to the amount of soapstone removed from the land). 67 (1947) 29 TC 243 (UK Ct of Appl) (taxpayer assessed on lump sum payment as income even though agreement required it to refund up to two-thirds of the payment if the licensee did not manufacture expected amount of units). 68 (1937) 22 TC 29 (UK Ct of Appl) (taxpayer received a lump sum of $25,000 payable in two instalments characterised by court as capital receipt plus a fixed annual ‘royalty’ of $2,500 for a 10-year licence agreement). 69 (1967) 44 TC 175 (UK Ct of Appl) (court characterised non-competition covenant payments payable by way of six annual instalments as capital receipts where the agreement also provided for royalties based on the value of products manufactured using the licensed patent). 70 [1962] 1 All ER 801; (1962) 40 TC 443 (UKHL) (taxpayer sold aircraft engines, but where governments required local production it sold plans and advice on how to assemble engines locally).

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outside the normal course of business for the taxpayer (Evans Medical Supplies Ltd v Moriarty71).

[¶5-540] Royalties collected by collecting societies Special tax rules may apply when a collecting society collects royalties on behalf of members of the society. These rules apply when royalties are collected by copyright collecting societies and resale royalty collecting societies.

Copyright collecting societies Copyright collecting societies administer certain rights of copyright on behalf of copyright owners such as authors and composers. The copyright owners generally become members of the society and copyright income received by the society is allocated to the appropriate copyright owner. A ‘copyright collecting society’ is defined for this purpose in s 995-1(1) of the ITAA97. Copyright collecting societies are generally non-profit companies which collect copyright licence fees for the use of ‘works’ (music, lyrics, sound recordings, film, television, visual art and literature), when licences on an individual basis are impractical. The fees are then distributed to their copyright owner members. Exemption for income derived by copyright collecting societies

From 1 July 2002, a copyright collecting society is exempt from income tax on: •

•

copyright income collected or derived by the society in an income year, and

non-copyright income derived by the society in an income year to the extent that it does not exceed the lesser of:

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–

5% of the total of the copyright income and non-copyright income collected and derived by the society in the income year, and – $5  million or such other amount as is prescribed by the regulations (s  51-43 ITAA97). Small amounts of non-copyright income that is ancillary to the copyright collecting business is thus exempt but an amount in excess of the cut-off threshold is subject to the trust provisions in div 6 of Pt III of the ITAA36 (Chapter 17). The excessive noncopyright income would be assessed to the directors of the society as trustees under s 99A of the ITAA36 unless members were presently entitled to it within two months after the end of the income year. Members assessed on distributions

When a copyright collecting society pays copyright or non-copyright income to a member, the payment is included in the member’s assessable income. The exception is amounts on 71 [1957] 3 All ER 718; (1957) 37 TC 540 (UKHL) (taxpayer agreed to supply secret processes on the manufacture of pharmaceutical products to the Burmese government and not to sell competing products into the Burma market in return for a lump sum characterised as capital and an annual fee of the greater of 5% of the value of all products produced or $25,000 for continuing technical and management advice).

Income from Property217

which the directors of the society, as trustees, are assessed and are liable to pay tax under s 98, 99 or 99A of the ITAA36 (s 15-22 ITAA97). When s 15-22 applies, s 15-20 of the ITAA97 (¶5-515), which would ordinarily include royalties in the assessable income of members, will not apply. This ensures that there is no double taxation of amounts collected or derived by copyright collecting societies.

Resale royalty collecting societies The resale royalty scheme, established under the Resale Royalty Right for Visual Artists Act 2009 (Cth), entitles eligible visual artists to a 5% royalty on the sale price of any commercial resale of their original works of art over $1,000. The resale royalty right applies to works by living artists and for a period of 70 years after an artist’s death. The scheme covers original works of art, such as a painting, a collage, a drawing, a print, a sculpture, a ceramic, an item of glassware or a photograph. For the resale royalty right to apply, the seller must have acquired the work on or after 9 June 2010. The following tax treatment applies to royalties collected by a resale royalty collecting society and then distributed to an artist: •

•

resale royalties collected by a resale royalty collecting society and interest on those royalties are tax-free, and the society is also exempt from tax on other income to the extent that it does not exceed the lesser of $5m or 5% of its total income for the year (s 51-45), and

resale royalty payments to an artist are included in the artist’s assessable income (s 15-23).

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An amount received by a resale royalty collecting society in excess of the cut-off threshold is assessed to the directors of the society as trustees under s 99A of the ITAA36 unless members are presently entitled to it within two months after the end of the income year. Visual artists are not liable to tax on amounts on which the directors have been assessed.

ASSIGNMENT OF RIGHT TO INCOME STREAM (¶5-600) [¶5-600] Assignment of ‘right to receive income from property’ A loan agreement can be separated into interest payment and principal repayment components. The right to receive interest payments over the life of the loan and right to receive repayment of principal at the end of the loan can separately be sold or assigned to third parties for their commercial value (the present value of the stream of payments or single deferred payment).

Myer—assignment of the right to receive interest

One of the leading cases in Australia on the judicial concept of ordinary income, Myer 72, involved the dissection of a loan and assignment of the right to receive the interest. The impact of the decision is discussed in detail at ¶6-440. 72 87 ATC 4363; (1987) 163 CLR 199.

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The taxpayer in Myer had adopted a marketed arrangement that, if it had succeeded, would have led to a very favourable tax minimisation result. One member of a company group had extended a substantial loan to another member of the group. The loan provided for interest payments over the life of the loan and principal repayment upon maturity. The ‘lender’ member dissected the loan into a separate right to interest payments and a right to principal repayment and then assigned the right to interest payments to a third party financial institution for its commercial value. It also dissected the ‘cost’ of the two components by attributing part of the amount lent to the right to interest payments (the present value of the income stream) and part to the right to principal repayment (the present value of the future lump sum payment). The Commissioner sought to counter the effectiveness of the arrangement by assessing the taxpayer on the amount received from the third party bank. The Commissioner failed before the Federal Court, which held the amount received for the assignment of the income stream was a non-assessable capital receipt.73

Statutory response—consideration for the assignment to be included in assessable income Concerned by the revenue costs that might flow from widespread marketing of Myer schemes by financial institutions, the government moved to halt the schemes by announcing that legislation would be enacted to overcome any potential tax advantages from Myer schemes. The legislative response was subsequently adopted as s 102CA of the ITAA36. Before the legislation was enacted, the High Court reversed the Federal Court decision in a celebrated case that, in the eyes of many observers at least, dramatically widened the judicial concept of ordinary income (¶6-440). Under s 102CA, where:

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• • •

a right to receive income from property is transferred by one person to another (except by will) consideration is received or receivable in respect of the transfer, and

the short-term alienation provisions of s 102B of the ITAA3674do not apply,

then the full amount of the consideration is included in the transferor’s assessable income for that year (whether or not the full consideration has been received). Certain transfers are excluded from the operation of s 102CA. Although s  102CA was expressly enacted to overcome the Federal Court Myer decision, the section is not limited to assignment of the right to receive interest, but applies to the transfer of any ‘right to receive income from property’, as that phrase is defined in s 102A(1) of the ITAA36. Such transactions might also fall within the CGT provisions (¶7-160ff ).

73 85 ATC 4601; (1985) 8 FCR 136. 74 The application of s 102B is discussed at ¶25-445.

Income from Property219

Broad effect of s 102CA While the High Court decision in Myer and s 102CA may have achieved an appropriate result in the context of the Myer scheme, it could lead to quite unfair results in ordinary financial transactions involving sales of income rights. Sales of rights to income or principal repayments are quite common financial transactions and in situations not involving a tax avoidance scheme it is clear the assignor should be assessed only on the net gain or loss on the transaction, not the gross receipt. This should be measured as the difference between the consideration paid for the assigned right (which may require dissection of a loan receipt into the present value of the interest stream and the present value of the principal repayment) and the amount received in respect of the assignment. Notwithstanding the broad effect of Myer and of s  102CA, the Commissioner’s practice is to require legitimate traders in income streams to recognise only the net gain or loss resulting from an assignment of a right to receive income.

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5

CHAPTER 6

Income from Business

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Overview¶6-000 Identifying a business ¶6-010 – ¶6-150 Initial questions ¶6-010 Indicators of a business ¶6-050 – ¶6-150 Factors identified by the courts ¶6-050 System and organisation ¶6-060 Scale of activities ¶6-070 Sustained, regular and frequent transactions ¶6-080 Turning talent to account for profit ¶6-085 Prospect of making a profit ¶6-090 Commercial character of transactions ¶6-100 Characteristics or quantities of property dealt in ¶6-110 Running a business through an online trading site ¶6-120 Other matters to be taken into account ¶6-130 Weighing up the factors ¶6-150 Commencement or termination of a business Commencement of a business Termination of a business

¶6-250 – ¶6-280 ¶6-250 ¶6-280

Taxation of income from carrying on a business ¶6-400 – ¶6-455 Introduction¶6-400 Mere realisation or carrying on a business ¶6-410 Identifying the normal proceeds of a business ¶6-420 Isolated or one-off transactions ¶6-430

Income from Business221

Extraordinary transactions ¶6-440 First strand of the reasoning in Myer: ‘Extraordinary’ transactions¶6-445 Application of the Myer principle to lease incentives ¶6-448 Second strand of the reasoning in Myer: Income conversions ¶6-455 Statutory expansion of the ‘business proceeds’concept Non-cash business benefits Profit-making undertakings or plans Bounties and subsidies

¶6-480 – ¶6-495 ¶6-480 ¶6-490 ¶6-495

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Applying the ‘normal proceeds of business’ principle ¶6-500 – ¶6-560 Introduction¶6-500 Realisation of assets by bankers ¶6-510 Realisation of investments by insurers ¶6-520 Agreements for the sale of ‘know-how’ and related items ¶6-560 Compensation payments ¶6-800 – ¶6-910 Compensation generally takes the character of what it replaces ¶6-800 Distinguishing between income and capital compensation receipts ¶6-805 Cancellation of business contracts ¶6-810 Loss of trading stock ¶6-820 Temporary disablement of income-producing assets ¶6-830 Cancellation of a structural agreement or permanent loss of a fixed asset ¶6-840 Termination of agency and management contracts ¶6-850 Compensation for loss of wages ¶6-860 Insurance or indemnity for loss of assessable income ¶6-870 Apportionment of compensation payments into income and capital components ¶6-880 Discounting compensation payments for tax ¶6-900 Impact of CGT on compensation payments generally ¶6-910

[¶6-000] Overview Although ordinary income may be generated in a number of ways, it is generally categorised as coming from personal exertion, from property or from business. This chapter discusses the third of these categories—income from business.

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‘Income from business’ is not defined in either ITAA36 or ITAA97, although ‘business’ is defined (s  6(1) ITAA36; 995-1(1) ITAA97) as ‘including any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. Essentially, income from business is income that is not personal exertion income (Chapter 4), is not income from property (Chapter 5) and is income derived from carrying on a business.

Is a business being carried on? Before discussing the tax treatment of income from business, this chapter identifies the circumstances in which a business is being carried on, looking at various indicators that are taken into account by the courts (¶6-050 – ¶6-130). These factors must be weighed up to reach a decision in a particular case (¶6-150). In some cases, it is necessary to determine the time when a business commences or ends—this is because income cannot be income from business if the business has not yet commenced or, generally, if the business has already ended. Deductions may also be denied to the taxpayer if expenses are incurred before the business commences or after it ends. The commencement and termination of a business are discussed at ¶6-250 and ¶6-280. Income from business is taxable either as ordinary income because it is caught by the common law principle that the normal (and sometimes extraordinary) proceeds of a business are income or as statutory income under a specific provision of ITAA36 or ITAA97.

Common law principle: normal proceeds of a business are income The common law principle that the normal proceeds of a business are ordinary income is discussed at ¶6-410 and ¶6-420. The ‘normal proceeds of a business’ principle has been expanded by two important  cases.

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(1) Whitfords Beach 1982 shows that the proceeds of an isolated or one-off transaction entered into by a business may be taxed as ordinary income (¶6-430).

(2) Myer Emporium 1987 shows that the proceeds of unusual or extraordinary transactions entered into by a business may be taxed as ordinary income (¶6-440, ¶6-445). As an example of the application of Myer, lease incentives payments received by a business are considered at ¶6-448. As an alternative ground for reaching its decision in Myer, the High Court held that a lump sum received by a business for the assignment of its right to receive interest payments was assessable as ordinary income. This second strand of the High Court’s reasoning is discussed at ¶6-455.

Statutory expansion The circumstances in which an amount is income from business activities has been expanded to reach amounts which may not otherwise be covered by common law principles. The following are considered in this chapter: (1) non-cash business benefits (¶6-480)

(2) profit arising from carrying out a profit-making undertaking or plan (¶6-490), and (3) bounties and subsidies (¶6-495).

Income from Business223

Applying the ‘normal proceeds of business’ principle The common law principle that the normal proceeds of business are assessable income applies to many commercial situations. This chapter considers the application of the principle in the following cases: (1) the realisation of assets by bankers (¶6-510)

(2) the realisation of investments by insurers (¶6-520), and

(3) agreements for the sale of ‘know-how’ and related items (¶6-560).

Compensation payments Compensation payments, whether received by a business or a private individual, may be taxed as ordinary income or as capital receipts that are potentially subject to capital gains tax. Compensation payments are discussed at ¶6-800 to ¶6-910.

IDENTIFYING A BUSINESS (¶6-010 – ¶6-150) [¶6-010] Initial questions Because the normal proceeds of a business are assessable income, two initial questions need to be asked: (1) How is a business identified? and (2) When does a business begin or end? Determination of these questions can be of considerable significance.

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Example—Business or hobby? An individual makes model aeroplanes and sells them at regular intervals. The proceeds from the sales could be taxed in either of two ways. (1) If the taxpayer is found to be in business rather than merely pursuing a hobby, the proceeds of that business will generally be assessable as ordinary income, and the taxpayer may be eligible to claim deductions for expenses incurred in running that business. (2) Conversely, where the taxpayer is merely pursuing a hobby and is not in business, the proceeds from sales of the models would not be assessable as ordinary income, and the taxpayer could not claim deductions for expenses incurred in making the models.

Where the activities are profitable, it is usually the Commissioner who argues that the taxpayer is in business (in order to tax the proceeds), and the taxpayer who vigorously denies it. Where the activities are operating at a loss (from gambling perhaps, or in the preliminary stages of a business), it is usually the taxpayer who seeks to characterise the activities as a business (in order to deduct the losses), and the Commissioner who vigorously denies it. However, in Thiel v FC of T1 the unusual situation arose of the taxpayer arguing 1

90 ATC 4717; (1990) 171 CLR 338.

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that an amount was income (to bring it within the benefit of a double tax treaty provision), and the Commissioner arguing that it was not assessable.

Identifying the taxpayer It is important to correctly identify the person in business, because it is only that person who is assessable on income from, and able to claim deductions relating to, the business operations. Normally, identifying the ‘correct’ taxpayer is not hard. However, where business vehicles such as companies, partnerships or trusts are involved, care needs to be exercised to avoid the type of problem which arose in Case V12.2 In Case V12, the taxpayer was denied a deduction for his share of the tax loss allegedly suffered by the partnership which the taxpayer claimed had conducted a particular business. The evidence showed the business (if it existed at all) had not been conducted by a partnership but by a different legal entity, namely a company incorporated by the taxpayer. In Executor for the late Joan E Osborne v FC of T,3 the AAT found that a business of share trading was not being carried on when the nephew of the taxpayer, appointed to act under her power of attorney, managed the taxpayer’s portfolio of shares while she was in a nursing home. The taxpayer had been holding the shares as investments for capital growth and dividend purposes to fund her expenses and had paid tax in previous years on the basis that there was no business. The AAT found that it was the intention of the taxpayer, and not of the nephew, that had to be considered, and her presumed intention under the power of attorney was highly relevant. It was implicit in the arrangement that the taxpayer’s intention was never to conduct a business, either personally or through her agent, and the character of the activities ‘must be viewed through the prism of the agency’ (at para 55) that permitted the nephew to conduct transactions on her behalf.

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Pursuit of a hobby A taxpayer who is found to be merely pursuing a hobby is not carrying on a business for taxation purposes, with the result that money earned is not assessable income and expenses incurred are not deductible. Indicators of a hobby are, according to the ATO in Taxation Ruling TR 97/11, that: •

• •

•

it is evident that the taxpayer does not intend to make a profit from the activity

the activity is motivated by personal pleasure and there is no plan in place to show how a profit can be made the transaction is isolated and there is no repetition or regularity, and

the activity is carried on on a small scale, and sales are to friends and relatives rather than to the public at large.

2

88 ATC 159.

3

2014 ATC ¶10-352.

Income from Business225

INDICATORS OF A BUSINESS (¶6-050 – ¶6-150) [¶6-050] Factors identified by the courts Section 995-1 of the ITAA97 defines ‘business’ as including ‘any profession, trade, employment, vocation or calling, but … not … occupation as an employee’. This definition is of little practical assistance, and accordingly it has been left to the courts to add substance to the concept. The question whether particular activities constitute a business is very much one of fact and degree. The court forms a general impression, often after applying various criteria to the particular fact situation, and determines their weight and influence in that context. Accordingly, particular caution must be exercised in relying on decisions in previous cases for more than general guidance.

What the courts look for The main factors referred to by the courts in identifying a business are:

(1) the extent to which the activity is characterised by system and organisation (¶6-060) (2) the scale on which the activities are conducted (¶6-070)

(3) the extent to which the activities involve sustained, regular and frequent transactions (¶6-080) (4) whether talent has been turned to account for profit (¶6-085) (5) whether there is a prospect of profit (¶6-090)

(6) the commercial character of the transactions themselves (¶6-100), and

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(7) characteristics or quantities of the property dealt in (¶6-110).

Various other factors to be taken into account in determining whether or not a business is being conducted are discussed at ¶6-130. No one factor is decisive, and in the end the factors should be weighed to find the substance of the arrangement (¶6-150). In particular contexts, different or additional criteria may be applied. Gambling as a business is, for example, discussed at ¶6-060 and the activities of sportspersons at ¶6-085. Carrying on a business through an online trading site is considered at ¶6-120.

[¶6-060] System and organisation It has been said that, in general, to carry on business means to ‘conduct some form of commercial enterprise systematically and regularly … and implicit in this idea are the features of continuity and system’.4 This is consistent with common experience—a business normally organises its trading activities as efficiently as possible, in order to maximise profits, this being the usual aim of business activity.

4

Hyde v Sullivan (1956) 73 WN (NSW) 25, 29.

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When called upon to distinguish between, on the one hand, a business, and on the other, a mere hobby vigorously pursued, the courts have often placed considerable importance on the extent of the system and organisation involved.

System and organisation even though on a small scale Activities that are conducted even on a very small scale may be a business if they are conducted with system and organisation. In Ferguson v FC of T,5 the taxpayer was a naval officer who wished to engage in primary production activities upon his retirement. Starting to build up a herd while still in the navy, Ferguson leased five cows for four years, with the cattle pastured and bred by a management company. The Full Federal Court, influenced by the fact that the taxpayer carried on his activities in a systematic and well-organised way, held that the taxpayer was engaged in a business of primary production. Fisher J felt it significant that ‘the venture as a whole had a commercial flavour, was conducted systematically and … in a business-like manner. It could not be said that there was anything haphazard or disorganized in the way in which he carried out the activity’.6

In FC of T v JR Walker,7 a taxpayer who began with only one angora goat was held to be in the business of goat breeding, largely because he was conducting his activities in a ‘businesslike’ way. The goat was kept at a stud farm in another state, cared for by experts at considerable cost, and used as the basis of a breeding program involving the transplantation of live embryos. The taxpayer was found to be in business even though the venture was not particularly successful—only four offspring were produced before the female died and the venture ended, and there had not been a profit in 14 years. The presence of system and organisation contributed to the finding that the taxpayer was in the business of primary production.

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Application of business methods and operating in a business-like manner In examining the extent of system and organisation in a taxpayer’s activities, the courts have often placed some importance on whether the taxpayer has applied the business methods and procedures ordinarily used in the type of business in question. In IR Commrs v Livingston, Lord Clyde said a key question was whether the taxpayer’s operations were ‘of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made’.8 Accordingly, in Case T58,9 a taxpayer who fished irregularly, for shorter hours than was normal for commercial fishing, and used fishing techniques different from those used

5

79 ATC 4261.

6

Ibid 4271. Being in business meant the taxpayer was able to claim deductions for leasing fees, agistment fees, artificial insemination fees and insurance premiums.

7

85 ATC 4179; Taxation Ruling IT 2234.

8

(1927) 11 TC 538, 542.

9

(1968) 18 TBRD 306.

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Income from Business227

by most professionals, was held not to be conducting a business, but rather to be pursuing a hobby. Similarly, in Greig10 the taxpayer failed to convince the Federal Court that a loss of $11.85 million, incurred when shares he had purchased over many years were cancelled for nil consideration, was deductible because it was a revenue loss incurred in a business operation or commercial enterprise. According to the Court, the shares were purchased with the desire that they would increase in value and be sold for a profit, in the same way as purchasers acquire shares with a view to profiting from dividends or an increase in the share price. The hope or expectation of a profit did not necessarily make the purchase a business operation or commercial transaction. Although the share portfolio was large, the shares were not held in a business-like manner as would ordinarily be expected if a business was being carried on, and the size of the portfolio did not convert the nature of the share acquisitions from private long-term investments into a business operation. The taxpayers in Block11 satisfied the AAT that their horse and sheep breeding activities amounted to the carrying on of a business despite incurring losses of more than $700,000 over three years. The activities were conducted in an appropriate business-like and commercial manner with the intention of making profits, and the breeding activities were not a private recreational pursuit or hobby. The AAT accepted that the taxpayers had invested a significant amount of capital, time and effort and that infrastructure improvements and upgrades to stock were likely to secure future profits. In Case 10/2011,12 a taxpayer who traded shares on the share market using his laptop and his iPhone claimed that he was carrying on a business of share trading in 2007/08 and that his share trading losses were deductible. Because of the global financial crisis, the taxpayer changed his investment strategy to retain his shares rather than crystallise his losses and he did not, as a result, sell much of his share portfolio in the relevant period. The AAT was satisfied that the taxpayer was carrying on a business because his activities occurred on a relatively large scale, at least in value (share investments worth $1.3 million and access to loan funding of around $2.75 million under a margin loan facility), and, although he did not keep ‘books’ as such or maintain a separate office, he followed a systematic strategy and made purchase decisions according to consistent criteria. McCabe SM observed that the concept of operating in a business-like manner is becoming ‘increasingly fluid’ and that the taxpayer ‘was a thoroughly modern business-man who relied on his lap-top and internet connection (and increasingly his mobile phone, complete with apps) to do business from where he was located at any given time’ and this implied ‘a degree of sophistication and a business purpose’ (at para 21).13 In Case 4/200814 a wealthy individual was found to be carrying on a business that was, according to his evidence, the development of a museum-quality collection of ‘blue chip’ 10 Greig v FC of T [2018] FCA 1084) 11 MR & SL Block v FC of T [2007] AATA 1897. 12 2011 ATC ¶1-037. 13 See also Mehta v FC of T 2012 ATC ¶10-246—a doctor who bought and sold listed shares and units in a listed aged care property trust was held to be carrying on a business of share trading. 14 2008 ATC ¶1-003.

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appreciating art works, all of which would double in value every seven years and were for sale ‘at the right price’. The art works were housed in the taxpayer’s private residences and were not actively marketed for sale—over eight years, the taxpayer acquired over 300 at a cost of around $5m, but made very few sales. The AAT’s finding that the taxpayer was in business was based on his record keeping and business philosophy, his use of professional consultants and the substantial annual budget and value of the property.

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Gambling as a business Where a taxpayer’s activities are conventional business dealings, the court may accept there is a business even if there is a low level of system and organisation. Where the activities are more like a hobby (¶6-010) or recreation, the courts tend to require much stronger evidence of system and organisation. This has been the case where taxpayers have argued they were entitled to deductions for gambling losses on the grounds that they were carrying on a business of gambling. As the Full Federal Court observed in Brajkovich v FC of T,15 it may be said, ‘more as a matter of usage than logic’, that the gambler who seeks to demonstrate that he or she is in a business of betting (in order, presumably, to claim a deduction for the gambling losses) has to show more by way of system and profit motive than those who engage in ‘more conventionally commercial’ activities. The courts’ approach reflects not only the strong influence of chance and luck in gambling, but also perhaps an acknowledgment of the pleasure which many persons derive from betting. The ATO has consistently argued against gambling being a business, but this may be based more on the potential cost to revenue if gambling losses are deductible than on how the gambling activities were being conducted. The taxpayer in Brajkovich retired at age 36 from his other activities to concentrate on gambling. He owned a number of racehorses, regularly attended the races, bet on credit and also played cards and two-up. He considered himself to be in the business of gambling, but was denied a deduction for his gambling losses. The court identified various criteria by which the existence of a gambling business could be determined, including: •

• •

systematic and organised methods—as illustrated by the gambling taxpayer in Babka v FC of T who was found not to be in business because an office was not maintained, staff employed, a computer used or detailed records kept16 volume and size—playing blackjack at a casino for 30 hours a week using a card counting system was found in Case 49/96 not to be a business because of the modest size of the bets17

whether winning is based on skill or chance—the court observed in Brajkovich that two-up is clearly a game of pure chance and is, therefore, unlikely to constitute a business, and

15 89 ATC 5227, 5234. 16 89 ATC 4963. 17 96 ATC 478.

Income from Business229

•

profit motive—despite the taxpayer’s clear profit motive in Brajkovich, the court pointed out that, in relation to the taxpayer’s two-up gambling at least, any profit motive could only have been self-delusion, since the deduction of a ‘house’ percentage meant losses were virtually certain for anyone playing regularly.

In Evans v FC of T18 the Federal Court decided that the taxpayer was not carrying on a business because the element of system or organisation was lacking. The taxpayer did not maintain an office or employ any staff to assist him, did not keep any records, did not use a computer or subscribe to any tipping or information services and did not spend a lot of time studying form. The taxpayer's preference for betting with the TAB or on-course totalizator, rather than with bookmakers, and his tendency to invest in exotic kinds of bets seemed inconsistent with the systematic, businesslike character which is an essential ingredient in the carrying on of a business. According to Taxation Ruling IT 2655, although it is possible for a mere punter to be carrying on a business of betting or gambling, it would be rare for a taxpayer with no connection with racing other than betting to be carrying on a business of betting or gambling. Ultimately each case depends on its own facts, but there is no Australian case in which the winnings of a mere punter or gambler have been held to be assessable or the losses deductible. This is because the intrusion of chance into the activity as a predominant ingredient would generally preclude such a finding. If a taxpayer is involved in other business activities in the racing industry, it would be more likely that betting activities are of a business nature Taxation Ruling IT 2655 was issued following the Federal Court decisions in Evans, Babka and Brajkovich. The issue in each of these cases was whether a taxpayer with no businesslike connection with the racing industry (eg, as a trainer or breeder of horses) was carrying on a business of betting or gambling on races.

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[¶6-070] Scale of activities The larger the scale of an activity the more likely it will be that the taxpayer is carrying on a business. But this is not always the case and, as Walsh J observed in Thomas v FC of T,19 ‘a man may carry on a business although he does so in a small way’. Thus, in FC of T v JR Walker,20 the taxpayer was held to be in the business of goat breeding even though he began with only one goat (¶6-060). However, it is clear that the courts are influenced by the size and scale of a taxpayer’s activities and that, in general, the smaller the scale of the activities, the more likely the courts are to characterise them as the pursuit of a mere hobby or pastime, rather than a business. The smaller the scale of the activities, the more important other factors such as system and organisation become (Taxation Ruling TR 97/11).

18 89 ATC 4540; (1989) 20 ATR 922 19 72 ATC 4094, 4099. 20 85 ATC 4179. See also the five cows in Ferguson v FC of T 79 ATC 4261.

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[¶6-080] Sustained, regular and frequent transactions In most businesses the aim is to maximise turnover through frequent and regular transactions over a lengthy period. Thus, although frequent activity does not necessarily signify a business, it is useful supporting evidence. On the other hand, the courts acknowledge the commercial reality that a business may go through periods of comparative quiet, and have stressed that ‘business is not confined to being busy’.21 In appropriate circumstances, even isolated transactions may amount to the carrying on of a business. Thus, in IR Commrs v Livingston,22 the refitting of a cargo steamer was held in effect to amount to the carrying on of a business. As was said in FC of T v St Hubert’s Island Pty Ltd (in liq):23 a person will in ordinary language be trading if, having purchased a commodity in bulk for the purpose of resale, he then proceeds to sell it on the occasions where and the quantities for which there is a market … It was not necessary … that he repeat or intend to repeat the venture. The one venture was a single trading operation

Nevertheless, the regularity, frequency and duration of activities is often regarded as being of considerable significance.

Carrying on business as a share trader Whether or not someone is engaged in carrying on business is a question of fact. A summary of factors in the context of share trading activities was suggested in AAT Case 6297 (1990) 21 ATR 3747 at 3755–6, as follows: (a) repetition and regularity in the buying and selling of shares (b) turnover

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(c) whether the taxpayer is operating to a plan, setting budgets and targets, and keeping records (d) maintenance of an office

(e) accounting for the share transactions on a gross receipts basis, and (f ) whether the taxpayer is engaged in another full-time profession.

A client services manager who, as a private pursuit, engaged in buying and selling shares in work time by phone from his employer’s premises was held to be carrying on a business of share trading in Shields.24 Although the taxpayer carried out only a limited number of trades (his activities lasted only one month, during which time he suffered losses of $51,756), there was a regular and systematic pattern of trading.

21 Viscount Sumner in South Behar Railway Co Ltd v IR Commrs (1925) 12 TC 657. As Davies J observed in FC of T v [MJ] Walker 84 ATC 4553; (1984) 2 FCR 283, ‘A business … may have quiescent periods.’ 22 (1927) 11 TC 538. 23 78 ATC 4104, 4118; (1978) 138 CLR 210, 237–238 ( Jacobs J). 24 FC of T v Shields 99 ATC 4783. See also Case 10/2011 2011 ATC ¶1-037 discussed at ¶6-060.

Income from Business231

In contrast, in Smith v FC of T,25 a taxpayer who bought and sold shares over two years was found not to be carrying on a share trading business because: (a) the shares were held for periods longer than a share trader would generally hold them; (b)  restrictions on trading imposed by his employer meant the activities did not have the repetition and regularity of a business; and (c) the taxpayer worked full-time in a very responsible position, and could not say how much time he spent on the share activities. The taxpayer was also found not to be carrying on a share trading business in Hartley v FC of T where the taxpayer conducted share purchase and sale activities during standard work hours. The AAT’s view was that ‘a business can rarely be conducted by a person where that person is engaged in a full-time occupation as an employee and the activities that are said to constitute that business requires that person’s participation during standard work hours on a flexible and frequent basis.’26 In Devi v FC of T,27 a childcare worker was denied a deduction for a $20,000 loss from trading shares in 2011 when the AAT found her to be a share investor and not a share trader. In the relevant year, the taxpayer earned $40,000 and made share sales and purchases worth around $600,000. After considering the key indicators listed in AAT Case 6297, the AAT decided against the taxpayer on the grounds that there was a lack of regular and systematic trade, her methods of research were insufficiently sophisticated to support a share trading business and she lacked knowledge and experience in share trading.

[¶6-085] Turning talent to account for profit

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Stone In FC of T v Stone,28 the High Court appeared to alter the ‘existence of a business’ threshold when it found that the earning activities of Stone, an Olympic sportsperson, amounted to a business because she had turned her talent to account for a profit. The case examined whether Stone’s receipts from her successful participation in the sport of javelin throwing were assessable income. Although she also worked as a police officer, during the 1998/99 income year Stone received $93,429 from local and international sporting events, $27,900 as government grants, $2,700 in appearance fees and $12,419 cash and in-kind payments from sponsors for promoting their products. At first instance, Hill J concluded that Stone had embarked upon a business and that all of her income attributable to javelin throwing was assessable (2002 ATC 5085). On appeal, the Full Federal Court said that where an athlete ‘has a full-time career and the socalled “business” is said to be that of a sportswoman, the evidence points against a business activity’ (2003 ATC 4584). On appeal to the High Court, it was decided that Stone had turned her sporting ability to account for money and that she had been engaged in a business during the 1998/99 year. It was significant that: 25 [2010] AATA 576. 26 2013 ATC ¶10-333, at para 42. 27 [2016] AATA 67 28 2005 ATC 4234.

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Income from Business

Stone was paid to endorse a company or its products as an athlete, demonstrating that she had turned her athletic talent to account for money the amounts involved were more than trivial, and

the amounts were paid in return for the taxpayer undertaking obligations to promote the sponsor’s products.

The High Court accepted the Commissioner’s argument that ‘an athlete was to be identified as having turned his or her talent or skills to account for money when others recognised the athlete as a celebrity or personality having marketable value’ (at para 47). The commercial nature of the athlete’s activities, including the existence of sponsorship support, warranted the conclusion that the athlete was carrying on a business: Once it is accepted, as the taxpayer did, that the sums paid by sponsors to her, in cash or kind, formed part of her assessable income, the conclusion that she had turned her sporting ability to account for money is inevitable. The sponsorship arrangements cannot be put into a separate category marked ‘business’, with other receipts being put into a category marked ‘sport’.

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Spriggs and Riddell In Spriggs and Riddell, two professional footballers argued that they were carrying on business and should be entitled to deductions for fees paid to managers to negotiate employment contracts with their football clubs and to arrange sponsorships and other income-earning activities on their behalf. During the 2004/05 income year, the total income of Spriggs, a professional Australian Rules football player, was $106,869 of which $641 came from licensing fees paid by the AFL for the use of his image on playing cards. Riddell earned $220,174 as a professional rugby league player and $11,394 from promotional activities. For both taxpayers, business income was only a small proportion of their total income for the year (0.6% for one and 5% for the other). The taxpayers relied on Stone to argue that their activities, including those performed under the playing contracts, constituted the conduct of a business of turning their sporting prowess to account for money. The Commissioner contended that the taxpayers’ playing activities (as employees) should be separated from their non-playing activities (a business) and that the fees were not deductible because they were incurred to procure new employment contracts rather than for business purposes. The High Court29 upheld the taxpayers’ deduction claims on the basis that it would be artificial to separate the stream of income from their non-playing activities from the stream of income from their playing contracts with the clubs. The High Court said: ‘Even assuming that the management fees were paid solely for the service of negotiating the playing contracts, that service and the management fees were productive of both playing income and non-playing income, each flowing from the business of each appellant of exploiting his sporting prowess and associated celebrity.’ (at para 72).

29 [2009] HCA 22; 2009 ATC ¶20-109.

Income from Business233

Proposal for taxation of high profile individuals The Government proposed in the 2018 Federal Budget that from 1 July 2019 high profile individuals would not be able to take advantage of lower tax rates by licensing their fame or image to another entity. Currently, high profile individuals such as sportspersons, actors or artists can license their fame or image to an entity such as a related company or trust and the income derived goes to the entity that holds the licence. This creates opportunities for tax to be minimised. The Government proposes that all remuneration, including payments and non-cash benefits, provided for the commercial exploitation of a person’s fame or image would be included in the assessable income of the individual. Legislation for this proposal has not yet been introduced to Parliament.

[¶6-090] Prospect of making a profit A business is ordinarily carried on for the purpose of making profits, so the presence of a profit motive is a common feature of business activities. A mere ‘fond hope’ (Case V13830) or ‘self-delusion’ (Brajkovich v FC of T31) may not be enough. However, where the taxpayer undertakes a transaction with the intention of achieving financial gain, the fact that the chances of doing so are ‘extremely slim’ (Glennan v FC of T32) need not prevent there being a business. The ATO considers that the prospect of making a profit is a significant indicator of a business and that it is important that a taxpayer can show how their activity can make a profit (Taxation Ruling TR 97/11). Evidence may come from the taxpayer conducting research into the proposed activity, consulting experts or receiving advice on the running of the activity and its likely profitability before setting up the business.

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No reasonable prospect of a profit A more difficult question is whether a taxpayer is carrying on a business where there is no reasonable prospect of a profit, either in the immediate future or at all. Judicial opinion has generally been that the fact that a venture can never succeed will not necessarily preclude a finding that the taxpayer is in business. However, where there is no real prospect of ever making a profit, a taxpayer will find it difficult to persuade a court that the activities amount to the carrying on of a business. A taxpayer would need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable (Taxation Ruling TR 97/11). Nevertheless, a taxpayer may succeed in appropriate circumstances. Even though the taxpayer in Daff v FC of T,33 had failed to make a profit for 14 years, he was found to be carrying on a business of primary production because he was experienced in farming,

30 88 ATC 865, 866. 31 89 ATC 5227, 5233. 32 99 ATC 4467, 4481. 33 98 ATC 2129, 2135. The ATO view is that the ‘prospect of profit’ is ‘a very important indicator’ (Taxation Ruling TR 97/11 para 47).

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Income from Business

genuinely believed a profit was possible and had devoted considerable effort towards operating the property to that end. The inability to show the likelihood of making a profit, and the underlying recreational character of the activity, was the stumbling block for taxpayers who argued that a business of hiring boats was being carried on. In Ell v FC of T,34 two taxpayers were held not to be carrying on a yacht charter business because, even though they earned substantial income from the boats, the deductions claimed were considerably greater and the taxpayers had failed to show that there was a real expectation of generating a profit.35

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[¶6-100] Commercial character of transactions The courts have on occasions attached importance to whether the transactions in which a taxpayer was involved had a commercial character. This is because a person in ‘business’ is usually prepared to trade ‘on the open market’ (ie with all willing and suitable customers) on the normal terms and conditions applying in that sort of business. In Case No S3936 the Board found that the taxpayer was not engaged in a business of money lending. According to the Board, it was ‘not sufficient to prove that he has occasionally lent money at a remunerative rate of interest; it is necessary to prove some degree of system and continuity in his money-lending transactions and something more than loans to friends or relatives’. In contrast, in FC of T v Bivona Pty Limited,37 where a company borrowed $4 million overseas and immediately lent most of it to another company in its corporate group, with the balance being lent to unrelated companies, the court rejected the argument that a moneylender must lend to the public at large, and held that the making of some loans outside the corporate group showed that the taxpayer was willing to lend to eligible applicants. Burchett J observed that ‘business’ should not be narrowly interpreted ‘so as to exclude ordinary business transactions’ between members of a corporate group which yield profits to a member of that group.38 Whether transactions have a ‘commercial character’ depends not only on the context in which they take place, but also on their content. Art businesses, for example, typically have different characteristics from other businesses, with a greater emphasis on reputation building and market creation. The Commissioner recognises the inherently different characteristics of an art business in Taxation Ruling TR 2005/1, which states that whether a taxpayer’s activities constitute a business is primarily a matter of general impression and degree, and no single indicator is determinative.

34 2006 ATC 4098. See also Phippen v FC of T 2005 ATC 2336 and Athineos v FC of T [2006] AATA 661. 35 Taxation Ruling TR 2003/4 considers the various indicators of a business in the context of a boat owner who is paid to provide the boat to a charter operator to hire, lease or charter to others. 36 (1966) 17 TBRD 208, 209 (RJ Gale, Chairman). 37 89 ATC 4183. 38 On appeal, the Full Federal Court endorsed this approach: FC of T v Bivona Pty Ltd 90 ATC 4168; (1990) 21 FCR 562.

Income from Business235

In VBF v FC of T,39 the AAT held that the taxpayer was carrying on a business from the time he had established his artworks in a format able to be commercially exploited, and that, although there may be only a slim prospect of making a profit, the activity could still constitute a business if the artist expected, on objective grounds, that his activities would eventually become profitable. The AAT in Case 4/200540 held that a taxpayer’s attempts to bring his work to the market, including the hiring of space in a gallery and holding an exhibition, his work in projecting his images onto T-shirts for sale, and the use of a public relations consultant to establish his professional image, constituted the carrying on of a business as a graphic artist.

[¶6-110] Characteristics or quantities of property dealt in The courts have from time to time attached importance to the type or quantity of materials being dealt in. For example, if the goods are inherently unsuitable for domestic use, this may suggest a business activity—as where a taxpayer purchases quantities of iron ore, or some other item which ‘does not serve to adorn the drawing room of its owner (but) is a commercial asset and nothing else’.41 Although the purchase of goods that are inherently suitable for domestic use may suggest a private activity, if the goods are purchased in quantities vastly exceeding normal personal requirements this would give the transactions a commercial flavour. In Rutledge v IR Commrs42, a taxpayer who purchased one million rolls of toilet paper, and later resold them, was unable to persuade the court that his dealings related solely to personal or domestic needs rather than business activity.

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[¶6-120] Running a business through an online trading site The introduction in recent years of online sites for the trading of goods or services has significantly changed the way business may be conducted. Indicators of business activity such as physical premises and sales staff may not be present even though a vibrant business is being conducted. The ATO’s response has been to monitor trading on online sites and to launch a data matching program to identify traders whose buying and selling activities may amount to the carrying on of a business. The ATO warned in 2010 that its data matching program would focus on individuals and businesses who had conducted a business by selling goods or services on the online selling sites eBay and The Trading Post in any of the last three financial years (ATO Media Release 2010/21, 27 July 2010). An individual or business would be treated as having conducted a business for these purposes (and not therefore engaged in merely private activities) if they had sold more than $20,000 in goods or services in a particular year. The ATO stated that anyone running 39 [2005] AATA 226. 40 2005 ATC 144. See also Pedley v FC of T 2006 ATC 2064. 41 Edwards v Bairstow [1956] AC 14, 30 (Viscount Simonds). 42 (1929) 14 TC 490.

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a business through online selling sites, or who had an existing business and was making additional sales through these sites, needed to include this income on their business activity statement and/or their tax return. The data matching aimed to detect businesses that were under-reporting income generated from these sources. In a gazette notice issued on 21 April 2015, the ATO said it would request online selling data from eBay relating to taxpayers who sold goods and services of a total value of $10,000 or more for the 2013/14 income year. The requested information would include the account name and contact details, the number and value of annual and monthly sales, and the status of the seller. The data would be electronically matched with data already held by the ATO to identify possible non-compliance with registration, reporting, lodgment and payment obligations under taxation law. In a gazette notice issued on 26 October 2016, the ATO said it would acquire from eBay online selling data relating to taxpayers who sold goods and services to an annual value of $12,000 or more during the 2015/16, 2016/17 and 2017/18 financial years. In Cronan, an individual who bought and sold coins, banknotes and stamps on eBay failed to convince the AAT that default assessments for income tax and GST issued to him by the Commissioner were excessive.43 The taxpayer did not keep records of his trading transactions and relied principally on feedback left by vendors and buyers on eBay to keep track of his purchases and sales. The Commissioner conducted an audit of the taxpayer based on data obtained from eBay, then issued default assessments for 2008/09 and 2009/10 amounting to $12,123 income tax payable plus a penalty of 75% of the shortfall amount. The Commissioner applied industry benchmarks for the cost of goods sold and business expenses for antique and used goods retailers in Australia to determine the taxpayer’s taxable income. The AAT said the Commissioner’s use of industry benchmarks to assess the taxpayer’s liability was appropriate in the absence of records from the taxpayer and that the taxpayer failed to show that the assessments were excessive. In determining that the taxpayer was carrying on a business, it was significant that: •

•

he conducted his eBay trading activities in a business-like manner, using industry events and publications to derive specialised knowledge which he used to evaluate and select the coins and banknotes that he believed would yield the best results, and

his trading activities were characterised by repetition and regularity and were conducted on a commercial scale, as shown by his daily purchases and sales and the fact that he made sales worth $144,000 and $135,000 in the two years.

[¶6-130] Other matters to be taken into account There are various other matters referred to from time to time by courts and tribunals as factors to be taken into account in determining whether or not a business is being conducted.

43 Cronan v FC of T [2015] AATA 745.

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(1) The fact that transactions are illegal does not prevent them constituting a business for taxation purposes. An interesting illustration of this is FC of T v La Rosa, a case about whether a drug dealer was entitled to a deduction of $220,000 when funds for an intended drug purchase were stolen. In the course of the dispute, the taxpayer challenged assessments for four years which included amounts for ‘funds from unexplained sources’. The taxpayer argued that, even if the amounts assessed were proceeds from the illegal sale of drugs, there was no specific provision in the tax law and no precedent which would include them in assessable income. The AAT44 found that the taxpayer profited from drug dealing at least in the last four years of income and that was sufficient for the proceeds from the sale of such drugs to be treated as assessable income. On appeal, the Federal Court45 agreed that the amounts assessed in respect of illegal activities were income. As illegal receipts may constitute ordinary income (¶3-270), the question is simply whether those receipts are derived from business or private activities.

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(2) The fact that a taxpayer has a main business or employment does not necessarily preclude a finding that the taxpayer also conducts another business:  Ferguson v FC of T.46 Conversely, the fact that a taxpayer has no other sources of income does not necessarily mean that remunerative activities which the taxpayer continues or subsequently enters into constitute a business. In Brajkovich v FC of T,47 the taxpayer gave up active control of a real estate business and devoted himself exclusively to regular and heavy betting activities, but was held not to be in the business of gambling. (3) The fact that a taxpayer does not carry on the relevant activities by free choice but rather because circumstances compel it does not mean that they are not in business. For example, in Tweddle v FC of T48 the taxpayer wished to dispose of a property, but was forced by circumstances to run, maintain and upgrade the property for some ten years before he was finally able to sell it. The High Court found the facts ‘just sufficient’ to establish the carrying on of a business pending sale of the property.

(4) The circumstances in which an item is disposed of may affect the character of a transaction. In Case V113,49 a builder and his wife sold land at a profit, but the wife’s sudden, serious and ongoing illness which had ‘overwhelmed’ the family, in conjunction with other family matters, justified a finding on the balance of probabilities that the disposal was caused by personal factors and was not part of a business.

44 Case 10/2000 2000 ATC 189. 45 FC of T v La Rosa 2002 ATC 4709. 46 79 ATC 4261. In FC of T v Stone 2005 ATC 4234, the High Court held that a taxpayer who was employed as a police officer was also carrying on a business when she derived income as a world class athlete (¶6-085). 47 89 ATC 5227. Similarly, a retired public servant who devoted half of his time to betting was not in a business of gambling (Babka v FC of T 89 ATC 4963). 48 (1942) 7 ATD 186. 49 88 ATC 719.

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[¶6-150] Weighing up the factors Ultimately, these various factors relevant to identifying a business are no more than matters to be taken into account and weighed one against the other, their weight varying with the context. No single factor determines whether a taxpayer is carrying on a business.

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Substance, rather than form, is important In weighing up the various factors, the court will look at the substance of the arrangements. In Deane & Croker v FC of T,50 a taxpayer had entered into a partnership designed to carry on what purported to be a business of share trading. The taxpayer’s main object was to establish share trader status for the purpose of a tax minimisation scheme. In rejecting the taxpayer’s claim for a deduction, Rogers J focused on substance rather than form, commenting that the loss in question was designed only to secure a tax loss or advantage, and that none of the participants was in reality concerned with the small commercial profit generated. In John v FC of T,51 the High Court held that a partnership whose share trading activities disclosed ‘a pattern of trading activity rather than a series of discrete transactions’, was in the business of share trading, and ‘[t]‌he fact that its formation and activities can also be ascribed to a desire to obtain a taxation advantage cannot alter the fact that [the partnership] was at relevant times a share trader’.52 In Taxpayer Alert TA 2014/1, the ATO warns property investors against incorrectly characterising the proceeds from property developments as capital instead of income. The ATO describes an arrangement where a trust undertakes property development activities as part of its normal business and, when the properties are sold, returns the proceeds as capital and claims the 50% capital gains tax discount (¶7-915). Various factors may indicate the trustee of the trust is carrying on a business of property development so that the gross proceeds from the sales are ordinary income rather than capital amounts. Financing documentation or contacts with real estate agents may point to the true substance of the transactions being on revenue account. This would mean the 50% discount is not available on the sale of the properties.

50 82 ATC 4112. 51 89 ATC 4101; (1989) 166 CLR 417. 52 Ibid ATC 4107; CLR 430.

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COMMENCEMENT OR TERMINATION OF A BUSINESS (¶6-250 – ¶6-280) [¶6-250] Commencement of a business When a business begins and ends can be of considerable significance since, among other things, a taxpayer may be unable to claim deductions for expenses incurred before the business actually commences or after it has been terminated (¶10-160). The time at which a particular business commences is a question of fact and degree. Ordinarily, a business commences with the beginning of ‘current operations’,53 which may vary according to the nature of the business involved. There is, however, sometimes a fine line between pre-commencement activities and actual business activities. Various names have been given in the cases to pre-commencement activities, eg preparatory, preliminary or pilot projects.

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Preparatory activities In Softwood Pulp & Paper Ltd v FC of T,54 a Canadian firm conducted investigations to determine whether a paper mill would be viable in a particular area. Subsequently, the taxpayer company was incorporated in Australia to carry out further feasibility studies and to run the paper mill, should the venture proceed. The Canadian company ultimately abandoned the project. The taxpayer derived no substantial income from the paper mill project, but claimed a deduction for expenditure incurred on investigating the feasibility of the project, and for certain follow-up expenses. Rejecting the taxpayer’s claim, the Supreme Court of Victoria held that the expenses were not incurred in the ‘carrying on’ of the business, since the taxpayer had not ‘committed itself ’ or decided to go ahead ‘in any definitive sense’ with the project, and certainly had not done anything to actually carry on the business:55 The critical point is that the company had not reached a stage remotely near the carrying on of a business … All that had happened had been that certain investigations had been made to decide whether or not the business was feasible, and whether or not it was economically viable on a competitive basis, but nothing had been done which could be said to be carrying on a business or anything associated with or incidental to the actual carrying on of a business. Everything which was done was concerned with making a decision whether or not steps should be taken to set up a business, but no decision on even that matter had been reached.

53 Commr of IR (NZ) v City Motor Service Ltd [1969] NZLR 1010, 1017 (Turner J). 54 76 ATC 4439. 55 Ibid 4451.

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Preliminary activities Activities preliminary to the commencement of an actual business of primary production, such as merely preparing land for primary production, do not amount to engaging in primary production.56 In Dalton v DFC of T, the taxpayers had no experience in establishing an orchard, made virtually no investigations as to the suitability of the land or the most suitable type of fruit, planted several varieties of fruit trees, lost many early crops to kangaroos because their fencing was inadequate, and at no time produced sufficient fruit for a commercial harvest. It was held that the steps taken of clearing noxious weeds, preparation and planting were merely preparatory to establishing an orchard.57 On the other hand, in Case 75/96,58 the taxpayers had bought a 420-acre property that had previously been part of a larger property used in a sheep breeding business. Immediately after acquiring the property, the taxpayers bought a significant amount of stock, and began carrying out maintenance, including digging out poisonous plants, repairing fences and dams, and clearing paddocks. The AAT found that the taxpayers were in the business of farming from the time they purchased the property and the expenses incurred were deductible. It was significant that the taxpayers had acquired land which had been actively used in primary production up to the date of purchase, intended to engage in primary production activities on the land as soon as was commercially feasible, and were actively engaged in activities associated with the property during the relevant year.

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Pilot projects A taxpayer is not carrying on or engaged in a business while merely experimenting in order to choose between alternative possible products. Thus in Case D6959 a taxpayer planted fruit as a ‘pilot project’ to check on the viability of the business before finally committing himself to it. The Board held that the taxpayer was not engaged in a business of primary production, but was merely ‘tinkering’ with the property to decide what might be done in the future. Contrast Thomas v FC of T60 where, although the taxpayer’s farming activities were on a small scale (30 avocado trees, 75 macadamia nut trees and 1,800 pine trees), he had definitely committed himself to them, and was held to be in business.

[¶6-280] Termination of a business The cessation of activities does not necessarily mean a business has terminated. The status of the business is a question of fact and degree and depends on factors such as the intention of its controllers, the nature of the business and the reason for the cessation of trading activities. If, for example, the cessation is due to a temporary adversity which the taxpayer is actively trying to overcome, this will suggest the business has not been terminated. 56 Southern Estates Pty Ltd v FC of T (1967) 117 CLR 481. 57 98 ATC 2025. 58 96 ATC 677. 59 72 ATC 409. 60 72 ATC 4094.

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In AGC (Advances) Ltd v FC of T,61 the taxpayer company was a financier lending money for the hire purchase of goods. When the taxpayer struck financial difficulties, in December 1968 it ceased all but a small portion of its business operations, and in March 1969 entered into a scheme of compromise and arrangement with creditors. The scheme manager subsequently arranged to sell all the shares in the taxpayer to AGC Ltd. Prior to completion of this transaction, all the taxpayer’s assets (other than the debts owing to it) were transferred to its parent company. After the sale of the shares in the company to AGC, the taxpayer resumed the business of financier in early 1970, although it had changed its name, its business premises and its clients, and its shareholding had completely changed. The High Court by majority took the view that the taxpayer’s business had not been terminated at any relevant stage. Barwick CJ said that:62 in the present case, the facts … satisfy the idea of a ‘continuing’ business except upon the very narrow view that a business is not relevantly continuing if it has had any substantial break in its continuity, a view which … I  am unable to accept. Here the scheme of [arrangement] was entered into in order to enable the companies to extricate themselves from their financial embarrassment so as to be able, if they so chose, to carry on the business which had caused them the financial embarrassment. The break in years was relatively short … There was no change in the nature of the business at all

The AGC decision was arguably close to the borderline, and in practical terms the less active a taxpayer is and the longer the period of inactivity continues, the more likely it is that the business will be treated as having terminated.

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Period of inactivity The fact that a business is comparatively inactive for a period of time does not automatically mean that the business has terminated. Indeed, in Avondale Motors (Parts) Pty Ltd v FC of T, Gibbs J said:63 ‘In South Behar Railway Company Ltd v IR Commrs (1925) AC 476 at p 488, Lord Sumner said: “Business is not confined to being busy; in many businesses long intervals of inactivity occur.” In some cases, the very nature of the business is such that its conduct may require little activity.’

TAXATION OF INCOME FROM CARRYING ON A BUSINESS (¶6-400 – ¶6-455) [¶6-400] Normal proceeds of a business are ordinary income Once a business has been identified (¶6-010  – ¶6-150), the next step is to determine which proceeds of the business are assessable as ordinary income. While traditionally it

61 75 ATC 4057; (1975) 132 CLR 175. 62 Ibid ATC 4066; CLR 188. 63 71 ATC 4101, 4105; (1971) 124 CLR 97, 103.

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was said that only the normal proceeds of a business (¶6-420) were ordinary income, the proceeds of an isolated transaction (¶6-430) or from an extraordinary transaction (¶6440) may also be caught. Not all business receipts are assessable as ordinary income. Some business receipts may, for example, be a capital gain which is not ordinary income, and the distinction between income and capital has been the basis of many disputes between business taxpayers and the ATO. Before the commencement of capital gains tax (CGT) in 1985, a finding that an amount was capital generally meant that there was no tax liability (¶3-280). It now may mean liability to CGT but with less onerous tax consequences than if the amount were taxed as ordinary income, eg because of the application of the CGT discount (¶7-915).

[¶6-410] Mere realisation or carrying on a business The starting point in determining whether receipts of a business are assessable income under common law principles (and therefore ordinary income under s 6-5 ITAA97) is the following statement in Californian Copper: It is quite a well settled principle in dealing with questions of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on, or carrying out, of a business … What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being … is the sum of gain that has been made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying out a scheme for profit-making? (Emphasis added.)64

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The Californian Copper decision drew a distinction between:

(1) a ‘mere realisation’ of an investment, and

(2) doing an act that is truly the ‘carrying on, or carrying out, of a business’.

The High Court adopted this distinction when it held in Scottish Australian Mining65 that a mining company was not assessable on a large profit it made when it sold subdivided allotments of land. The company had purchased a parcel of land in the 1860s and had mined it for coal until 1924 when the main coal seam was exhausted. The company then decided to sell the land. In order to receive a high price, the company incurred considerable expense in subdividing the land, constructing roads and building a railway station on the land. The Commissioner assessed the company on the profits from the sale of the land on the basis that they were the proceeds of a business of selling land. The High Court held that the profits were not assessable as ordinary income but were a tax-free capital receipt,

64 Californian Copper Syndicate v Harris (1904) 5 TC 159, Lord Justice Clerk at 165–166. 65 Scottish Australian Mining Company Ltd v FC of T (1950) 81 CLR 188.

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because the company had merely taken ‘the necessary steps to realise the land to its best advantage’: The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to its best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out.66

The Scottish Australian Mining case received close attention from the High Court 32 years later in FC of T v Whitfords Beach67involving land developers (¶6-430), and it is unlikely that a case on similar facts would be decided in the same way today.

ATO guidance on mere realisation or carrying on a business distinction A draft consultation paper (Draft Property and Construction Website Guidance) has been released by the ATO on the distinction between mere realisation and carrying on a business in a property and construction context. The paper outlines real cases and ATO decisions and includes 12 examples.

[¶6-420] Identifying the normal proceeds of a business To determine whether a particular receipt comes within the normal proceeds of a business and is therefore assessable as ordinary income, it is necessary to establish: (1) the precise nature and scope of the business, and

(2) a relationship between the receipt and the business, generally because the receipt is produced by or is an incident of the business.

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Step 1: Identifying the precise scope of the taxpayer’s business In CMI Services Pty Ltd v FC of T, Lockhart J indicated that in applying the Californian Copper criterion it is necessary to have regard to:68 ‘the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realisation which produced the profit’ The importance and potential impact of this preliminary ‘identification’ step is illustrated by the decision in GP International Pipecoaters Pty Ltd v FC of T.69 In that case, the taxpayer was a joint venture company incorporated for the sole purpose of carrying out a contract with the State Energy Commission of Western Australia (SEC) which required the taxpayer to erect a pipe-coating plant complex, and to use that plant to coat pipes which the SEC used in building a natural gas pipeline. Under the contract, the SEC paid the taxpayer $4.675 million ‘establishment’ costs in three equal instalments to enable the taxpayer to erect the plant complex without having to borrow money for that 66 Ibid 195. 67 82 ATC 4031; (1982) 150 CLR 355. 68 90 ATC 4428, 4437, Jenkinson and Gummow JJ concurring at 4438. 69 88 ATC 4823; (1988) 19 FCR 516.

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purpose, thus enabling the taxpayer to avoid incurring interest and other financing costs. The taxpayer argued that the $4.675 million was capital in character (being paid for the creation of a capital asset—the plant) and therefore not assessable as ordinary income. The High Court identified the key issue as: ‘What was the scope of the business in which the establishment costs were received and what was the taxpayer’s purpose in engaging in it?’, and concluded that the $4.675 million was assessable as ordinary income.70 The activity of the taxpayer corresponds with what the contract required … The establishment costs were received by the taxpayer under the contract as part of the monetary consideration payable for the taxpayer’s agreement to perform, or its performance of, the entire contract. It is impossible to treat the business of the taxpayer as limited to the coating of the pipe when the construction of the pipe-coating plant was an integral part of the work which the taxpayer was bound to perform. The establishment costs were not received under a severable part of the contract relating to the construction of the plant. [The taxpayer] earned the money by doing the work it had contracted to do.

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The courts have often taken a dynamic view of the scope of a business’s activities, and recognised that the nature and scope of business activities may change, eg by expansion or diversification into new areas. Thus, in Kosciusko Thredbo Pty Ltd v FC of T,71 premiums received by the taxpayer for sub-leases of ski lodges were held to be assessable as normal incidents of the taxpayer’s business, on the basis that sub-letting individual apartments was ‘but a different method of exploitation of the resort facilities, or a new found way of conducting the business’,72 and therefore assessable under the Californian Copper principle (¶6-410). Similarly, in Jennings Industries Ltd v FC of T,73 a new type of involvement in property development (taking up shares in a joint venture company which erected a building, rather than direct construction itself ) was a step in the diversification of the business, while in FC of T v Cooling a lease incentive payment was held to be assessable income on the basis that:74 [w]‌here a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer’s assessable income … [and] the evidence established that in Queensland in 1985 it was an ordinary incident of leasing [substantial] premises in a new city building … to receive incentive payments of the kind in question.

By contrast, in the Merv Brown case75 the company sold clothing by wholesale, some of the clothing being imported into Australia by the taxpayer under import quotas. Following a change in government policy, the taxpayer decided to concentrate on its more profitable 70 90 ATC 4413, 4421; (1990) 170 CLR 124, 139. 71 18 84 ATC 4043. 72 Ibid 4052 (Rogers J). 73 84 ATC 4288; (1984) 2 FCR 273. 74 90 ATC 4472, 4484; (1990) 22 FCR 42, 56. 75 FC of T v Merv Brown Pty Ltd 85 ATC 4080; (1985) 7 FCR 1.

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lines, and accordingly sold certain of the quotas for less profitable lines. In the court’s view, the sales of quotas, which represented a small percentage of the taxpayer’s total quota holdings, were for a special purpose outside the scope of the taxpayer’s trading operations, and were not normal incidents of the taxpayer’s business. The decision depended upon the particular business of the taxpayer, and would not seem to apply where, for example, a business sells quotas as a normal part of its business.76 Broad or narrow approach?

As the discussion above illustrates, it is critical to determine the precise scope of the taxpayer’s business. A broad approach will expand the range of activities which may be treated as part of the normal conduct of the business, with the proceeds related to those activities being assessable and expenses deductible; a narrow approach will have the opposite effect. Australian courts have tended in recent times to take a fairly broad view of the scope of a business, and to be receptive to arguments that a new type of activity represents merely a new aspect or diversification of an existing business, rather than an activity wholly outside the normal conduct of that business. Given the flexible nature of many modern businesses, there is much to be said for such an approach.

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Step 2: Establishing a sufficient nexus between the business and the amount received In straightforward cases it is easy to identify the proceeds of a business. For example, if a taxpayer runs a retail fish and chip shop, the sales of fish and chips, drinks and related items will clearly be part of the normal proceeds of the business. In less straightforward cases, the cut-off point for the normal proceeds of a business may be difficult to pinpoint and is often a matter of degree and impression. As a result, some decisions are not easily reconcilable. The taxpayer in GKN Kwikform Services was in the business of hiring out scaffolding, but charged customers the retail list price if scaffolding was not returned. The Full Federal Court held that the amounts received for failure to return scaffolding were income, being a regular and ordinary incident of GKN’s business. Beaumont J found that the amounts were assessable since they were ‘in the nature of an additional hiring fee to compensate it for breach of the customer’s obligation to return the equipment... [they have] the same revenue character, in essential respects, as the hiring fees themselves’.77 In contrast, in Hyteco Hiring Pty Ltd, a taxpayer in the business of hiring out forklifts was not assessable on income from the sale of forklifts that were no longer suitable for hire. According to the Full Federal Court, it was significant that the taxpayer did not acquire the trucks with the intention or purpose of making a profit from their resale, which meant that the Myer principles (¶6-445) did not apply. Accordingly, the profits would only be

76 See Taxation Ruling IT 2163 para 6; decisions to similar effect in Kwikspan Purlin System Pty Ltd v FC of T 84 ATC 4282; Kratzmann’s Hardware Pty Ltd v FC of T 85 ATC 4138. 77 FC of T v GKN Kwikform Services Pty Ltd 91 ATC 4336 at 4342.

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income if they were made in the ordinary course of the taxpayer’s business, but this was not the case.78 Contrast also Memorex Pty Ltd v FC of T79 (where a taxpayer principally involved in selling new equipment derived ordinary income when it sold leased equipment) with FC of T v Cyclone Scaffolding Pty Ltd80 (where a taxpayer in the business of hiring and selling scaffolding equipment did not derive ordinary income from the sale of equipment that it treated as capital plant and depreciated). According to the Full Federal Court in Cyclone Scaffolding, the decision in Memorex should be distinguished on the basis that in that case the goods in question did not form part of the taxpayer’s plant at the relevant time. Particular difficulties can arise where the taxpayer is a member of a group of companies operating as a single unit. In GRE Insurance Ltd v FC of T,81 a broad approach was taken, and the subsidiary’s activities were held to be an integral part of the parent company’s insurance business, but in AGC (Investments) Ltd v FC of T82 a narrow approach was taken, and the subsidiary’s activities were held not to be an integral part of the parent company’s insurance business.

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[¶6-430] Isolated or one-off transactions As noted above, ‘sustained, regular and frequent’ transactions suggest that a taxpayer’s activities constitute a business (¶6-080). However, this is only one factor, and there is no conceptual reason why in an appropriate case a single transaction cannot constitute a business. Before 1982, isolated transactions were unlikely to be held to constitute a business by Australian courts. This was because the courts showed a marked tendency to characterise one-off transactions as involving the ‘mere realisation of a capital asset’ (Californian Copper), with any improvements or changes to the asset (eg subdivision, provision of roads, water and other services) being characterised as merely steps to enable the asset to be sold for a high price83 and therefore yielding capital profits. The more broadly the ‘mere realisation’ exception was extended, the less scope was left for the ordinary income provision to apply.

Whitfords Beach

FC of T v Whitfords Beach Pty Ltd84 was therefore a landmark decision, because it severely limited the practical scope of the ‘mere realisation’ doctrine, and significantly expanded the potential for receipts from isolated transactions to be caught as ordinary income.

78 FC of T v Hyteco Hiring Pty Ltd 92 ATC 4694. 79 87 ATC 5034. 80 87 ATC 5083; (1987) 18 FCR 183. 81 92 ATC 4089; (1992) 34 FCR 160. 82 92 ATC 4239. 83 See Scottish Australian Mining Company Ltd v FC of T (1950) 81 CLR 188, discussed at ¶6-410. 84 82 ATC 4031; (1982) 150 CLR 355.

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In Whitfords Beach, a group of fishermen had formed the taxpayer company (‘Whitfords’) in 1954 for the purpose of having it acquire the title to a strip of land behind their beachfront shacks, to ensure that they would always have access to the shacks. In 1967, some 13 years later, development companies wished to acquire the land for subdivision and sale, but knew that if they simply bought the land direct from Whitfords and resold it at a profit they would have been assessable under s 25A(1) of the ITAA36 (¶6-490). The developers decided instead to buy the shares in, and thereby to take control of, Whitfords and then to have it subdivide and sell the land. They believed that such a subdivision and sale of the land, which Whitfords had not acquired for profit-making purposes and had held for a long time, would fall within the ‘mere realisation’ exception. The fishermen did not mind which course was adopted, because in neither case would they be liable to tax on any profit made on their shares—in their hands the sale would indeed have been a ‘mere realisation’. The developers bought the shares in Whitfords and had Whitfords arrange for the rezoning of the land in June 1969, the granting of subdivision approval, extensive subdivision and development (including construction of roads, provision of services and parklands), and the sale of subdivided vacant lots.

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High Court decision The developers were no doubt surprised when the High Court held that the ‘profit’ made by Whitfords on the sale of the subdivided lots was assessable as ordinary income. While each of the judges gave slightly different reasons, the following analysis gives the essence of their approach. Gibbs CJ took the view that the ‘mere realisation’ doctrine as applied in Scottish Australian Mining Co Ltd v FC of T85 would have applied if the developers had not taken over the company in 1967, but the takeover meant that Whitfords was ‘transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit’.86 This changed the extensive subdivision development from mere realisation into a business venture whose proceeds were assessable. Gibbs CJ’s judgment was the least ‘radical’, in that he approved the Scottish Australian Mining decision and imposed the least severe limit on the ‘mere realisation’ doctrine. The other judges went further. Mason and Wilson JJ thought that, quite apart from the change in ownership in 1967, Whitfords’ subdivision and development activities in themselves constituted business activities, and suggested that Scottish Australian Mining may have been wrongly decided.87 Mason J expressly disagreed with suggestions in earlier judgments that a sale of subdivided land is ‘necessarily’ no more than ‘mere’ realisation of an asset in an enterprising way:88 85 (1950) 81 CLR 188 (¶6-410). 86 82 ATC 4031, 4039; (1982) 150 CLR 355, 370. 87 Mason J expressly, ibid at ATC 4048; CLR 385; Wilson J by implication at ATC 4056, 4057; CLR 398ff. 88 Ibid ATC 4047; CLR 385.

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That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realisation of an asset

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Significance of Whitfords Beach The High Court was unanimous in holding Whitfords assessable on the ‘profit’ made on the land sales, and the practical effect of the decision was clear and profound. The court clearly indicated that it was willing to treat isolated transactions as constituting a business generating ‘gross income’ falling within the ordinary income provision, and would be far less sympathetic to the ‘mere realisation’ defence than in the past. For example, in McCurry v FC of T,89 two brothers who purchased land, removed a worthless old house, obtained a further bank loan to develop the land, erected three townhouses, moved into two of them when they were unable to sell them, and some two years later sold the three units at a profit, were held to be assessable on the profit. In the court’s view, even though the brothers lived in two of the town-houses for a period before the sale, profit-making by the sale of the units ‘always remained an option … notwithstanding that, for some period, when it was convenient to do so, the units were used for another purpose’.90 In contrast, in Statham v FC of T91 and McCorkell v FC of T,92 taxpayers in similar circumstances were held to have engaged in the mere realisation of farming properties acquired from their parents and subsequently subdivided and sold at a profit. Factors which influenced the courts included that the taxpayers were prepared initially to sell the land as one parcel, carried out only limited work to develop the subdivision and had little or no involvement in advertising or promoting the sale of the land. In Gutwenger v FC of T93 the taxpayer’s wife carried out a land subdivision and then gave the subdivided land to her husband. The Full Federal Court held that the taxpayer did not solicit, procure or cause the gift and simply ‘disposed of it in a way that had been predetermined for him by the actions taken by his wife. He did not engage in any business venture or any profit-making undertaking or scheme’.

Calculating the assessable amount Where a transaction comes within the Whitfords Beach principle, it is necessary to calculate the ‘profit’ on which tax is to be levied. This is because the High Court held that the net profit on the land sales fell within the concept of gross income under the ordinary income provision. This was a surprising decision since it involved taxing what might be seen as a 89 98 ATC 4487. 90 Ibid 4493. 91 89 ATC 4070. 92 98 ATC 2199. 93 95 ATC 4008; (1995) 55 FCR 95.

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(‘net’) gain on disposal of an asset, rather than the (‘gross’) flow of income generated by the income-earning activity (with deductions being claimed separately). The High Court decided that the profit was to be calculated by subtracting from the gross proceeds of sale the value of the relevant land at the date it was ‘ventured in’ the taxpayer’s land development business. The High Court referred back to the Full Federal Court the question whether all the land was ventured in on 20 December 1967 (as the Commissioner submitted) or whether it was ventured in piece by piece as the development and subdivision occurred (as the taxpayer submitted). The Full Federal Court decided that all the land was ventured in the taxpayer’s land development business on 20 December 1967, as this was the date that business began. Although the development was to occur in stages over a number of years, there was from 20 December 1967 an intention to develop all the land and a continuous course of conduct to carry out that intention. The conclusion was inescapable that the taxpayer’s business of developing, subdividing and selling the land commenced as soon as the intention to take steps for that purpose in relation to the entire land was formed.

[¶6-440] Extraordinary transactions The High Court decision in FC of T v The Myer Emporium Limited (‘Myer’)94 was the second landmark decision that limited the scope of the ‘mere realisation’ doctrine in Californian Copper (¶6-410). The first decision was Whitfords Beach (¶6-430). The Myer decision meant that income from an ‘extraordinary’ transaction could be taxed as ordinary income even though it was outside the course of the taxpayer’s normal business.

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Myer

Myer Emporium Ltd (‘Myer’) was in the business of retail trading and property development when it decided to expand its operations. It needed to obtain external funds for this expansion but was restricted from doing so because of conditions attached to loans it had previously taken out. To overcome this problem, Myer entered into a prearranged series of transactions under which Myer sold certain shares in subsidiary companies to an associated company for $80m, then on 6 March 1981 lent that $80 million to Myer Finance Ltd (‘Finance’, a shelf company acquired two weeks earlier) at an interest rate of 12.5% pa. As arranged, three days later on 9 March 1981, Myer assigned to Citicorp Canberra Pty Ltd (‘Citicorp’) for seven years and three months95 the ‘moneys due or to become due as the interest payments’ on Myer’s loan to Finance. In return, Citicorp paid Myer a lump sum of $45.37 million. Citicorp had tax losses available to wipe out any tax liability on the interest payments from Finance. The Commissioner sought to counter the tax effectiveness of the arrangement by assessing Myer on the lump sum amount received from Citicorp, but the Federal Court held the amount was a non-assessable capital receipt.96 94 87 ATC 4363; (1987) 163 CLR 199. 95 The period of the assignment was structured to exceed seven years so that certain anti-avoidance provisions (¶25445) would not apply. 96 FC of T v Myer Emporium Ltd 85 ATC 4601; (1985) 8 FCR 136.

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The government announced that legislation would be enacted to overcome any potential loss of revenue from Myer schemes. Before the legislation (s  102CA of the ITAA1936:  ¶5-600) was enacted, the High Court upheld the Commissioner’s appeal from the Federal Court decision. The High Court found as a fact that all the pre-arranged transactions were interlocked and interrelated, and that Myer would not have made the loan to Finance if Citicorp had not agreed in advance to take the assignment of income and pay the lump sum of $45.37 million to Myer. The High Court, in a joint judgment (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ) held that the $45.37 million received by Myer from Citicorp was ordinary income and endorsed the basic principle in Californian Copper as interpreted in Whitfords Beach (¶6-430). The High Court confirmed the narrowing of the ‘mere realisation’ doctrine, commenting that ‘the emphasis is on the adjective “mere” ’, and that ‘profits made on a realisation or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value’.97

Two strands of the reasoning in Myer

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The High Court in Myer confirmed the willingness displayed in Whitfords Beach to treat the profit from isolated transactions as ordinary income and, to this extent, the judgment is unremarkable. But the decision is made up of two further strands, each of which is more controversial and therefore merits examination.

(1) The first strand of the Myer reasoning is that, where a taxpayer is carrying on business, even extraordinary transactions (ie not of a type that the taxpayer engages in regularly in the course of its business operations) can generate ordinary income. This first strand is examined at ¶6-445, and the application of this reasoning to lease incentives is considered at ¶6-448. (2) The second strand of the Myer reasoning concerns the conversion of an income stream into a lump sum. The High Court’s finding that the lump sum takes on the character of the income stream which it replaces is discussed at ¶6-455.

[¶6-445] First strand of the reasoning in Myer: ‘Extraordinary’ transactions Not only was the transaction in Myer an ‘isolated’ one, it was also ‘unusual or extraordinary’ because it was not a transaction of a type which Myer engaged in regularly in the course of its normal business operations. In fact, Myer had never before entered into such an arrangement and argued that the proceeds of the loan assignment were not part of its ‘normal proceeds of business’ within the Californian Copper principle (¶6-410), and therefore were not assessable as ordinary income.

97 87 ATC 4363, 4368–4369; (1987) 163 CLR 199, 213.

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The High Court rejected this argument, holding that even ‘extraordinary’ transactions in this sense can generate ordinary income. The difficulty in determining precisely what principle the High Court applied in reaching this conclusion is that the court in the course of its judgment gave a number of slightly different formulations of the applicable principle. These ranged from a small extension of the position reached in Whitfords Beach to a formulation which, read literally, could produce the proposition that any profit received in the course of business operations by a person during a period in which that person was conducting business operations intended to produce a profit would be ordinary income. Later cases have accepted that the correct principle to be drawn from the first strand of Myer is found in the following portion of the High Court’s judgment:98 Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose [of the overall business], thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income [depending on the circumstances] … Generally speaking … it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business … if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. (Emphasis added.)

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On the facts in Myer, the High Court held that:99 Myer’s business at all relevant times was that of retailer and property developer. Before acquiring Myer Finance, Myer carried on business as a financier [within the Myer group] … The transactions in question here were entered into by Myer in the course of its business. The transactions, more particularly the assignment, were novel in the sense that it was the first time that Myer had entered into such an arrangement. But this fact does not take them out of the course of the carrying on of Myer’s profit-making business.

That is, as Hill J observed in FC of T v Cooling,100 while the fact that a transaction is a normal incident of the business activity will be conclusive of the income character of the profit derived from that business, the converse is not the case, and ‘the profit arising from an unusual or indeed extraordinary transaction may be income at least where … the transaction was entered into by a taxpayer with the intention or purpose of making a profit’. 98 87 ATC 4363, 4366–4367; (1987) 163 CLR 199, 209ff. 99 Ibid ATC 4370; CLR 216. 100 90 ATC 4472; (1990) 22 FCR 42.

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According to the High Court in Myer, in determining that the profit on a realisation or change of investment is income, it would be significant: (i) that the investments were initially acquired as part of a business and with the intention or purpose that they be realised subsequently in order to capture the profit arising from their expected increase in value, and (ii) that the intention or purpose existed at the time of acquisition.

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Clarification that not all amounts are income It is clear that Myer does not mean that all amounts received by a business are income. In Taxation Ruling TR 92/3, para 44, the Commissioner indicated that ‘It is not our view, nor has it ever been, that all receipts of a business are income’.101 In FC of T v Cainero, Foster J stated that it was ‘quite clear’ that the High Court in Myer was not seeking to reverse ‘the long line of authority’ establishing that mere realisation of a capital asset does not produce assessable income, nor ‘to introduce some new concept of income into revenue law’.102 In Traknew Holdings Pty Ltd v FC of T,103 Hill J stated that once it is found that assets not derived in the ordinary course of business were not acquired for the purpose of resale at a profit, amounts will not be assessable as ordinary income unless the taxpayer does ‘something more than merely realizing the profit inherent in the capital asset’. This was illustrated in Westfield Ltd v FC of T,104 where the taxpayer’s main activity was design, construction, letting and management of shopping centres. The taxpayer had acquired land for $450,000—originally taking an option for the purpose of itself establishing a shopping centre and, after that had lapsed, taking a further option in order to block development on the site by a rival. The taxpayer ultimately sold the land to AMP for $735,000, on the basis that AMP would employ the taxpayer to design and construct the shopping centre which AMP proposed to build on the site. The profit made on the sale to AMP was held to be non-assessable. Hill J reiterated that the Myer doctrine did not mean that every profit made by a taxpayer in the course of carrying on business activities must be of an income nature. He stressed that a mere temporal link is not sufficient: ‘To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit’.105 Similarly in FLZY v FC of T106 a taxpayer in the property development business successfully argued that a vacant car park it acquired and developed and later sold for a $40 million profit had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit. This meant the $40 million profit was assessable as

101 See, for example, FC of T v Spedley Securities Ltd 88 ATC 4126, where the Full Federal Court pointed out that such an approach ‘would be contrary to authority, to the Act itself and to basic concepts concerning the distinction between capital and income’ (4130). 102 88 ATC 4427, 4435, 4436. 103 91 ATC 4272, 4281. 104 91 ATC 4234; (1991) 28 FCR 333. 105 50 Ibid ATC 4242; FCR 342, citing the situation of a taxpayer selling its headquarters building (at a profit) in order to move to larger premises as a clear example of a capital transaction. 106 [2016] AATA 348

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a capital gain and the taxpayer was entitled to the CGT 50% discount. According to the AAT, the taxpayer had over many years purchased properties for resale at a profit but also acquired and developed commercial properties to hold as capital assets for the purpose of deriving rental income. The evidence pointed to the fact that, in the case of the property that was acquired and then sold for a $40 million profit, the taxpayer’s initial intention was to develop it into commercial property to lease to government agencies. The property was sold simply because the offer received was too good to refuse, not because it had been acquired for that purpose.

Principles governing the application of Myer In Westfield Ltd,107 Hill J outlined a number of principles that govern the application of the first strand of the Myer doctrine.

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(1) Where the transaction which generates the profit is ‘not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity’, the profit will not be assessable as ordinary income unless the transaction was ‘commercial’ and at the time the transaction was entered into the taxpayer had ‘the intention or purpose of making a relevant profit’. Thus, if the profit was generated by the purchase and sale of property, the profit-making purpose must exist at the time the property was acquired. Although the ATO view is that the relevant ‘purpose’ is not the taxpayer’s subjective purpose, but the taxpayer’s intention or purpose as discerned from an objective consideration of the facts and circumstances of the case, a court may rely on the taxpayer’s subjective purpose if this is clear. It is not necessary that the purpose of profit-making be the sole or dominant purpose—it is sufficient if it is a significant purpose. Where the taxpayer is a company, the relevant purposes are those of its controllers (Taxation Ruling TR 92/3).

(2) The purpose of profit-making must exist in relation to the particular operation which gives rise to the profit, and by the very means by which the profit was in fact made. Pushed to extremes, this proposition could produce what might be thought to be some unusual results. For example, if a taxpayer clearly intended to profit by the eventual surrender of an investment life assurance policy when his daughter wished to enter university, but in fact made the profit through allowing (by arrangement with the insurer) the policy to lapse after two years through non-payment of further premiums, it might be held that the taxpayer had a specific intention to make a profit by means other than those eventually used, and thus the profit may be held to be non-assessable. This was the decision in Case 1/99,108 although on appeal the Federal Court held that the only essential departure from the taxpayer’s original plans was that the receipt of cash occurred earlier than originally contemplated. The amount received was ordinary income.109 107 91 ATC 4234, 4242ff; 28 FCR 333, 342ff. 108 3 99 ATC 101. 109 FC of T v Haass 99 ATC 4814.

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Any rigidity in this second proposition is alleviated somewhat by the third principle which Hill J put forward.

(3) While a profit-making scheme may ‘lack specificity of detail’, in that the means to be adopted to generate the profit may not have been precisely determined at the outset, the profit will be assessable provided the mode of achieving it was contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised.

In Rotherwood Pty Ltd v FC of T,110 Chancery Services Pty Ltd, a unit trust, provided administrative and related services to a firm of solicitors. The trustee held a long-term lease of certain premises. Due to concern as to the financial position of the unit trust, it was decided to replace it with a discretionary trust. As part of this process, and as an incentive for entry into the new lease, the head lessor paid Chancery Services $6  million in return for surrender of the lease. On these facts, Lee J held, applying Myer, that it was part of Chancery Services’ business to dispose of property as determined by the legal firm, and that accordingly the $6 million was assessable as ordinary income. In his view, the surrender was an integral part of an arrangement which constituted a ‘profit-making transaction undertaken in the course of [Chancery Services’] business’, and it was irrelevant that the particular transaction was unusual or extraordinary by reference to transactions in which Chancery Services usually engaged.

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Calculation of the ‘profit’ made by Myer Having determined that the ‘profit’ to Myer was assessable, the court had to determine the amount of that profit. The High Court took a very simple and legalistic approach to the calculation of Myer’s profit under the first strand. In the court’s analysis, for an outlay of $80m, Myer had acquired a debt of $80 million owed by Myer Finance and, in addition, a lump sum cash payment of $45.37 million from Citicorp. On the simple face value or historical cost approach applied by the High Court,111 Myer’s profit in the 1981 year was $45.37 million, and Myer was taxable on that amount in full in that year.

[¶6-448] Application of the Myer principle to lease incentives A lease incentive is basically a payment or benefit provided by the owner of rental premises to induce businesses to enter into a lease of the premises. A  lease incentive may take many forms, including large upfront cash payments and non-cash benefits such as holiday packages, rent-free periods for the leased premises, free fit-outs of the premises or payment of removal costs. A number of interesting situations have arisen in relation to receipt of lease incentives, and these cases provide insights into the development of the ‘business proceeds’ doctrine as expounded in Myer. They must be read, however, with some caution since the decision in Montgomery’s case discussed in the following section. 110 96 ATC 4203; (1996) 64 FCR 313 (Full Fed Ct). 111 87 ATC 4363, 4370–4371; 163 CLR 199, 216–217.

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Taxation of lease incentives In FC of T v Cooling,112 a lease incentive payment of $162,000 made to a firm of solicitors to induce it to change premises was held to be assessable as ordinary income. Hill J’s reasoning (Lockhart and Gummow JJ concurring) was as follows.

(1) Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the new premises ‘are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer’s assessable income’. Once evidence was accepted that in Queensland in 1985 it was an ordinary incident of leasing substantial premises to receive incentive payments of the type received, it followed that the incentive payment was ordinary income.

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(2) Alternatively, the incentive payment was assessable as ordinary income, in accordance with the first strand of Myer, as the product of a profit-making scheme. The transaction formed part of the business activity of the firm and ‘a not insignificant purpose of [the transaction] was the obtaining of a commercial profit by way of the incentive payment’.

A number of situations relating to lease incentives have, however, been held to fall outside the Myer/Cooling principle, and to be non-taxable. Indeed, the trend of decisions up to the 1999 High Court decision in FC of T v Montgomery113 was to restrict the application of the Myer/Cooling doctrine. In Lees & Leech Pty Ltd v FC of T,114 a retailer of surfwear and related items moved to a leased shop in new premises. As part of the arrangements, the lessor paid the taxpayer $36,690 in return for the taxpayer fitting out the shop—the fit-out actually cost the taxpayer $90,000. Although the fixtures which the taxpayer installed could be removed at the end of the lease, evidence showed that few of the fixtures had any recoverable value once they were installed. The Federal Court held that, even if the taxpayer had a profit-making purpose, there was no assessable amount because it was not certain that the taxpayer had made a gain. In Selleck v FC of T,115 the landlord of premises (AMP) had agreed to pay a firm of solicitors $1 million towards the cost of a fit-out, with the fit-out remaining the lessee’s property. After the fit-out was completed, the lessee sold the fit-out items to Westpac Bank in return for a cash payment of $1.5 million and then leased them back from the bank. A distribution of $1.06 million was subsequently made to the partners of the law firm. The Full Federal Court held that the only purpose which the law firm had in entering into the transaction with AMP was to obtain premises from which to conduct its legal practice. The fact that it was a new firm created by the merger of two well-established firms, which wanted new premises from which to start its activities so that all staff could

112 90 ATC 4472; (1990) 22 FCR 42. 113 99 ATC 4749; (1999) 198 CLR 639. 114 97 ATC 4407; (1997) 73 FCR 136. 115 96 ATC 4903.

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be accommodated together, was a crucial consideration in determining the true character of the incentive payment. The court found that the firm had not been influenced in its decision to move into the property by the incentive payment, and the incentive payment was non-assessable.

High Court view on lease incentives The High Court stated its view on the application of the Myer principle to cash lease incentives in FC of T v Montgomery.116 The taxpayer, a large legal firm, had recently completed refurbishing its rented premises when the landlord advised the partners that it proposed to totally renovate the building and remove asbestos—this would commence in two years, and take some four years to complete. The partners were concerned both by the likelihood of disruption to their business activities and possible danger to staff while the asbestos was being removed. Accordingly, the firm began negotiations with other lessors and sometime afterwards its service company signed a lease for new premises. As part of the lease arrangement, the lessor paid the service company a lease incentive of $21.77 million. The evidence indicated that, at the time, it was common in the Melbourne central business district for property developers to require business tenants to pay abovemarket rent, with the lessors in return offsetting the ‘above market’ element of the rent by providing tenants with cash and other incentives to reduce the effective net rent to market rates. As a partner in the firm, Montgomery received a share of the cash lease incentive. The Full High Court117by a 4:3 majority held that the $21.77 million was assessable as ordinary income to the partners. The court made the following points.

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(1) The receipt of the lease incentive payments was an ordinary incident of the firm’s business activity, even though it was an extraordinary and unusual part of that activity. as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt ... And that is why, in FC of T v Cooling ... the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm’s business activity.118

(2) The firm used or exploited its capital in the course of carrying on its business to obtain the incentive payments, albeit in a singular or extraordinary transaction, and the payments it received from the transaction came in and were derived for the separate use, benefit and disposal of the firm, and did not augment the firm’s profityielding structure. (3) If a significant purpose of a transaction, even if not the only significant purpose, is profit-making, then the receipt from it may be regarded as income.

116 99 ATC 4749; (1999) 198 CLR 639. 117 99 ATC 4749; (1999) 198 CLR 639. 118 99 ATC 4749, 4769; 198 CLR 639, 676.

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(4) The taxpayer’s argument that the incentive payments were capital receipts, because the lease was part of the firm’s profit-yielding structure and the payments were received to bring into existence an asset or advantage for the enduring benefit of the firm, should be rejected as contrary to a long line of authorities, and the Privy Council decision in Commr of IR v Wattie119 should not be followed. The court in Wattie had said it was impossible, when characterising amounts for tax purposes, to distinguish between a payment of a lease premium by a lessee to a lessor as an inducement to grant a lease (which is normally a capital payment) and a lessee’s receipt of a lease incentive from a lessor as an inducement to take a lease. The High Court was, however, not persuaded by this argument. According to the High Court, it is ‘wrong to assume exact congruence between the capital and revenue character of a sum as a receipt and its character as expenditure; it is also wrong to assume exact congruence between the character of a sum when received or paid by one taxpayer and its character when received or paid by another’.120

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Non-cash lease incentives Following the decision in Montgomery, non-cash lease incentives that are convertible into cash (eg computer equipment) and that are received by business taxpayers in relation to business premises are treated as ordinary income, taxable at their full monetary value. Non-cash lease incentives that are paid from a business relationship and that are not convertible into cash may, despite the principle that a receipt can only be ordinary income if it is money or convertible into money (¶3-230), be treated as ordinary income if s 21A of the ITAA36 applies (¶6-480). The amount included in assessable income as a result of the application of s 21A may be reduced to the extent that: (a) the taxpayer would have been entitled to a ‘once-only’ deduction if they had paid for the benefit themselves rather than have it provided by the other party to the business relationship (s 21A(3)); or (b) the benefit would be non-deductible entertainment expenditure to the provider (s 21A(4)). Taxation Ruling IT 2631 sets out the Commissioner’s views on the application of s 21A to non-cash lease incentives, as follows: •

• • •

a rent-free period is effectively tax-free (applying the exemption in s 21A(3))

an interest-free loan is effectively tax-free provided it is a genuine business loan and not a disguised cash payment (applying the exemption in s 21A(3)) a free fit-out of the premises is effectively tax-free if the fit-out is owned by the landlord (applying the exemption in s 21A(3)), and assessable if owned by the lessee (with the lessee being entitled to depreciation deductions for any depreciating assets) a free holiday is effectively tax-free if the expenditure by the landlord is nondeductible entertainment expenditure and the exemption in s 21A(4) applies, , and

119 [1999] 1 WLR 873. 120 99 ATC 4749, 4766; 198 CLR 639, 671. The reasoning of the High Court in Montgomery was followed in O’Connell v FC of T 2002 ATC 4628 and Proctor v FC of T 2005 ATC 2132, both involving an inducement payment of $8m to a firm of accountants.

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a payment of removal costs is fully taxable because removal expenses, other than those relating to the transport of trading stock, have a non-deductible capital nature and there would generally be no reduction under s 21A(3).

[¶6-455] Second strand of the reasoning in Myer: Income conversions As an alternative basis for its decision, the High Court held in Myer that the $45.37 million received by Myer Emporium for the assignment of its right to receive interest payments from Myer Finance (¶6-440) was assessable as ordinary income on the basis that where a lender sells a mere right to interest for a lump sum:121 ‘the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not a capital item—the taxpayer simply converts future income into present income. (See Commissioner of Internal Revenue v PG Lake, Inc (1958) 356 US 260 at pp 266–267.). The High Court held that it was immaterial that the lender received the profit not from the borrower but from the assignee (Citicorp) and that the profit was received in a single lump sum, rather than gradually over the period of the loan. Interestingly, the High Court applied principles analogous to those applied in the area of compensation payments, where the basic principle is that the compensation payment takes the same character as the amount which it replaces (¶6-800).122

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Henry Jones

This aspect of the Myer decision arose directly in Henry Jones (IXL) Ltd v FC of T.123 When IXL decided to quit the canned foods market, it entered into agreements to grant two companies the sole and exclusive use of certain labels and trade marks for a period of 10  years, in return for royalties of 5% of worldwide sales (with specified minimum payments). In accordance with its pre-existing aim of converting the future royalty income into a tax-free capital sum, IXL entered into arrangements with Citicorp Canberra Pty Ltd under which IXL transferred all its right, title and interest under the royalty agreement to Citicorp, which in return paid IXL a lump sum of around $7.58 million. The Full Federal Court held that the lump sum was assessable as ordinary income. Hill J held that:124 121 87 ATC 4363, 4371–4372; (1987) 163 CLR 199, 218–219; distinguishing and in any event disapproving IR Commrs v Paget [1938] 2 KB 25. The High Court’s reasoning in relation to Paget was criticised by DG Hill, ‘A PreBicentennial Reminder of our Heritage — Commissioner of Taxation v The Myer Emporium Ltd’ (1987) 22 (1) TIA 12, 17, and by ICF Spry, ‘The Implications of the Myer Emporium case’ (1987) 16 (3) AT Rev 152, 156–157. 122 ICF Spry, ibid 156, criticises the High Court’s reasoning on this point on the basis that the sale of the interest stream represented a ‘capitalisation’ of rights to interest. This was the view of the Federal Court (and many practitioners and commentators), but the fact that Myer was a joint judgment of five members of the High Court suggests that it is unlikely that the High Court will recant from the Myer formulation on this point. 123 91 ATC 4663; (1991) 31 FCR 64. 124 Ibid FCR 78; ATC 4675. The ATO has indicated that it accepts Hill J’s formulation on this aspect (Taxation Ruling TR 92/3).

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Myer must be taken as establishing that, except in the case of the assignment of an annuity where the income arises from the very contract assigned, an assignment of income from property without an assignment of the underlying property right will, no matter what its form, bring about the result that the consideration for that assignment will be on revenue account, as being merely a substitution for the future income that is to be derived. Thus, the fact that the future income may be secured by an agreement, and that the assignment is of the right title and interest of the assignor in that agreement will not affect the result. So stated the principle is consistent with the development of the law in cases involving compensation for rights of income

The width of the second limb in Myer was demonstrated by the decision in SP Investments Pty Ltd (as Trustee of the LM Brennan Trust) v FC of T; Perron Investments Pty Ltd v FC of T.125 In that case, the taxpayer’s predecessor as trustee had acquired an interest in an iron ore venture which entitled it to receive royalties. The taxpayer assigned its royalty rights to National Mutual Life Association for more than seven years in return for a lump sum payment of almost $4 million. Hill J held that the second limb of Myer applied to the assignment. The lump sum was paid in substitution for an income stream (royalties) and, therefore, was of a revenue nature. This was the case even though the taxpayer was not carrying on a business.

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Exceptions to the second strand in Myer In Henry Jones, Hill J stated that the Myer principle does not apply to an annuity (¶5-300), because an annuity is ‘the produce of the very agreement which produces it [so that the] assignment of a contractual right to be paid an annuity will … normally be capital in the hands of the vendor as the price received for the sale of a capital asset’.126 Taxation Ruling TR 92/3 states that the second strand may render an amount income ‘even where the income is regarded as produced by a contractual right rather than the relevant property’. But it will not apply where the right to income transferred is unrelated to any other property or where the taxpayer transferring the right to income has never owned the underlying property.

STATUTORY EXPANSION OF THE ‘BUSINESS PROCEEDS’ CONCEPT (¶6-480 – ¶6-495) [¶6-480] Non-cash business benefits In FC of T v Cooke & Sherden,127 holidays provided by a manufacturer to retailers who sold the manufacturer’s goods were held not to be assessable as ordinary income because they were not cash or convertible into cash (¶3-230). The decision exposed gaps in the tax

125 93 ATC 4170; (1993) 41 FCR 282. 126 91 ATC 4663, 4673; (1991) 31 FCR 64, 75. 127 80 ATC 4140.

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law coverage of business benefits, because it showed that non-cash business benefits, if structured so as not to be convertible into cash, could avoid taxation.

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Benefit brought into account at its arm’s length value To deal with this situation, s 21A, which was introduced into ITAA36 in 1988, provides that, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible into cash is to be treated as if it is convertible to cash (s 21A(1)). A ‘noncash business benefit’ is defined in s 21A(5) as property or services provided wholly or partly in respect of a business relationship (and not, therefore, provided in the context of an employment relationship). Section 21A may apply if a non-cash business benefit is ‘income derived by a taxpayer’, ie income derived by the taxpayer in carrying on a business for the purpose of gaining or producing assessable income (s 21A(5)).The section does not deem a non-cash business benefit to be income—it only operates where the benefit is already income derived from the carrying on of a business. If s 21A applies, the benefit is brought into account at its arm’s length value reduced by any amount contributed by the recipient (s 21A(2)(a)). ‘Arm’s length value’ means, in this context, the amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider if the parties were dealing with each other at arm’s length. Parties are generally ‘dealing with each other at arm’s length’ if they are unrelated and neither party is controlled by the other. If such an amount cannot be practically determined, the arm’s length value would be such amount as the Commissioner considers reasonable (s 21A(5)). In practice, the arm’s length value would normally be the amount which would be paid on the open market to a normal supplier of the particular goods or services (Taxation Ruling IT 2631). In determining the arm’s length value of a benefit that is not convertible to cash, any conditions that would prevent or restrict the conversion of the benefit to cash are disregarded (s 21A(2)(b)). In Case 4/2010128 a taxpayer engaged in the waste disposal business assumed a rival company’s unprofitable waste disposal contracts with local councils. As part of the agreement, the rival company paid the taxpayer a ‘subsidy’ and gave the taxpayer plant, equipment and other assets such as intellectual property and goodwill. Applying the Myer principles (¶6-440), the AAT found that the subsidy was ordinary income even though it was paid to the taxpayer as a result of entering into an unusual transaction. Because the plant and equipment were also acquired by the taxpayer as an inseverable part of the agreement and formed part of the consideration that flowed to the taxpayer, the value of these assets also had the character of income and were assessable to the taxpayer under s 21A as a non-cash business benefit.

Reduction of amount to which s 21A applies The amount that is brought into account under s 21A is reduced in two situations.

128 2010 ATC ¶1-023.

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(1) Where the cost of the benefit is non-deductible entertainment expenditure to the provider (s  21A(4)), ie entertainment expenditure which is denied a deduction by s 32-5 (¶10-600) but which would otherwise be deductible under s 8-1 (s 21A(5)), the amount that would otherwise be brought into account under s 21A(2) is reduced by the non-deductible entertainment percentage (s 21A(4)). (2) Where the otherwise deductible rule applies (ie where, if the taxpayer had incurred expenditure to provide the benefit for themselves rather than it being provided by someone else, the taxpayer would have been entitled to a once-only deduction for expenditure incurred in obtaining the benefit (s  21A(3)), the amount that would otherwise be brought into account under s  21A(2) is reduced by the deductible percentage. A once-only deduction basically means where the relevant expenditure is deductible in a particular year of income but not also in another year of income—a deduction for telephone expenses in the year the expenses were incurred would be a once-only deduction, but a deduction over a number of years for the decline in value of a depreciating asset would not be.

Benefit may be exempt income Where a taxpayer derives income consisting of non-cash business benefits in a year and the total amount that is applicable under s 21A in respect of those benefits does not exceed $300, the income is exempt income (s 23L(2) ITAA36).

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Example—Taxation of non-cash business benefits An accountant who runs an accounting and financial advice business wins a prize given by the Financial Planners Association. The prize is made up of: • a family membership package for the Western Bulldogs Football Club worth $800 • free membership of the Financial Planners Association for five years (worth $3,000), and • a free consultation on structuring his investments to optimise his future returns (worth $2,500). None of the benefits is convertible into cash. Assuming that s 21A applies because the benefits are income derived by the accountant, the three non-cash business benefits received by the accountant are treated as if they are convertible into cash. The arm’s length value of the benefits is then included in the accountant’s assessable income, but the assessable amount may be reduced to the extent that s 21A(3) or (4) apply. The consequence for the accountant from receiving the benefits would be: (1) the arm’s length value of the football membership package would not be included in the accountant’s assessable income because it would be nondeductible entertainment expenditure to the provider of the benefit (s 21A(4)) (2) the arm’s length value of the membership of the Association would not be included in the accountant’s assessable income because, if the cost had been

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incurred by the accountant, the accountant would have been entitled to a once-only deduction as a business expense (s 21A(3)), and (3) the arm’s length value of the free consultation would be included in the accountant’s assessable income because it is capital expenditure (being paid for advice on ‘structuring’ his investments) and would not entitle the accountant to a once-only deduction if he incurred the expense himself (¶10-250).

Rewards under loyalty programs Flight rewards received under consumer loyalty programs arise from a contractual relationship between the recipient and the provider, rather than from a business relationship, and s 21A does not therefore apply (Taxation Ruling TR 1999/6). Exceptions are where a person renders a service specifically on the basis that an entitlement to a flight reward will arise or where the activities associated with obtaining the benefits are business activities (¶4-150).

[¶6-490] Profit-making undertakings or plans Section 15-15 of the ITAA97 includes in assessable income a profit that arises in 1997/98 or a later income year from carrying out a profit-making undertaking or plan. The section does not apply to a profit that: (1) is assessable as ordinary income under s 6-5 of the ITAA97, or

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(2) arises in respect of the sale of property acquired on or after 20 September 1985 to which the CGT provisions would apply.

These exclusions mean that s  15-15 would only apply where the profit is not assessable under s 6-5 or, if the profit arises from a profit-making undertaking or plan that involves the sale of property, the property was acquired before 20 September 1985. Despite its limited application, s 15-15 should be considered where there is a sale of pre-CGT property that was not originally acquired with a profit-making intention, but that has since become part of a profit-making undertaking or plan. If property was acquired before 20 September 1985 with the purpose of profit-making by sale (rather than as part of a profit-making undertaking or plan), the profit arising from the sale of the property may be included in assessable income under s 25A of the ITAA36.

[¶6-495] Bounties and subsidies Most bounties and subsidies received in relation to the carrying on of a business are assessed under s 6-5 of the ITAA97 as ordinary income, and would generally be included in assessable income on an accruals basis. Bounties and subsidies that are not ordinary income because, for example, they are capital receipts are statutory income under s 15-10 of the ITAA97 if the bounty or subsidy is received in relation to carrying on a business. An example of the type of unusual payment which would fall within s 15-10 is the payment made in First Provincial Building Society v FC of T.129 First Provincial and other 129 95 ATC 4145; (1995) 56 FCR 320.

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bodies had contributed for many years to a contingency fund. Following the introduction of a national scheme for the regulation of building societies, the assets of the contingency fund were transferred into Queensland consolidated revenue, and the government made ex gratia payments to the former contributors, including a payment of $1.92 million to First Provincial. The court was satisfied that, while the payment would assist First Provincial to meet its capital adequacy requirements and was not ordinary income, the payment assisted it to carry on its building society activities, and could thus be said to have been made in relation to the carrying on of its business.

Examples of bounties or subsidies The words ‘bounty or subsidy’ refer to payments by governments, governmental authorities and the like: Case T55,130and cover payments made ‘in order to assist [taxpayers] in carrying on their businesses’.131 Bounties or subsidies have been held to include: • • •

• •

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•

cash payments to racing clubs (through the relevant branch of the TAB) to assist them in carrying on their business (Case K48132) grants designed to encourage research and development in a particular field (Reckitt & Colman Pty Ltd v FC of T133), and

a grant received under the Dairy Regional Assistance Program, designed to promote the employment of former dairy workers after the dairy industry was deregulated (Plant v FC of T134). Payments that have been held not to be bounties or subsidies include:

an encouragement payment by an oil company to a service station proprietor135

payments received in instalments as recoupment of expenditure by a farming business under a rural enterprise assistance scheme,136 and

government financial assistance to holders of groundwater bore licences to help them adjust to changes in groundwater access over the ten years of a water sharing plan.137

Where a bounty or subsidy is assessable under s 15-10, it is assessable in the income year in which it is received, but subject to amendment to exclude any amount that is 130 (1968) 18 TBRD 288. 131 Brisbane Amateur Turf Club case (1968) 10 AITR 595, 597 (Owen J). Taxation Ruling TR 2006/3 sets out the Commissioner’s views on how the tax law applies to government payments to assist the commencement, continuation or cessation of business activities. ATO ID 2010/147 states that a government payment that is received to undertake activities to develop a new product to the stage where it can be taken to market is a bounty or subsidy for the purposes of s 15-10 even if the receipt is subject to a repayment obligation that may arise upon the happening of certain subsequent events. 132 78 ATC 445. 133 74 ATC 4185. 134 2004 ATC 2364. 135 Case D14 72 ATC 74. 136 Berghofer v FC of T 2008 ATC ¶10-066. 137 Carberry v FC of T 2011 ATC ¶10-181.

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categorised as non-assessable non-exempt income (s 59-30) if it is repaid in a later year and is not deductible (¶9-010).

Industry assistance payments to taxi licence holders In response to the arrival of new ride-sourcing arrangements such as GoCatch and UberX, reforms have been announced to the regulation of the taxi and ride-sourcing industries. Some of these reforms provide industry assistance payments to taxi licence holders by State or Territory governments. According to the ATO, industry assistance payments to taxi licence holders to help their transition to new regulatory arrangements or to provide hardship or income support are generally not capital receipts because the payments do not require licence holders to give up or sell their taxi licence plate or otherwise bring their income-earning activity to an end. The payments will generally be assessable as ordinary income to the licence holder (Industry assistance payments to taxi licence holders, at ato.gov.au).

APPLYING THE ‘NORMAL PROCEEDS OF BUSINESS’ PRINCIPLE (¶6-500 – ¶6-560) [¶6-500] Introduction The general principle that the normal proceeds of business constitute assessable income (¶6-410) applies in many contexts. The following paragraphs consider the application of the principle to: •

realisation of investments by bankers (¶6-510)

•

agreements for the sale of ‘know-how’ and related items (¶6-560).

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•

realisation of investments by insurers (¶6-520), and

Exchange gains and losses, which may arise when a taxpayer enters into a contract where the price is expressed in a foreign currency, are considered at ¶22-300.

[¶6-510] Realisation of assets by bankers It was pointed out in Punjab Co-operative Bank Ltd, Amritsar v IT Commr, Lahore138 that the very essence of banking business required bankers to keep on hand sufficient cash or easily realisable securities to meet the day-to-day demands of the bank’s customers who might wish to withdraw money. While there might be loans which could quickly be called in to meet any such demands, it is often necessary for the bank to realise some of the securities it holds in order to meet these demands. Hence, where (as in the Punjab case) the bank sold securities in order to meet the day-to-day demands of its business, it was ‘quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done

138 [1940] AC 1055.

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in ‘what is truly the carrying on’ of the banking business’. Accordingly, the proceeds of sale were assessable income. That is not to say, however, that profits made on the realisation of investments by a bank will always be income. In The National Bank of Australasia Ltd v FC of T,139 the National Bank (‘National’) made a profit on the sale of shares in a Queensland pastoral company. National had acquired the shares many years before largely because the shares helped identify the bank as being concerned with rural matters, encouraging persons associated with the pastoral industry to bank with National. The High Court held that the profit made on the sale of the pastoral shares was not assessable income because National had acquired the shares for the purpose of securing its base of operations, its profit-making structure. The sale of the shares was not a step in the normal day-to-day conduct of the banking business, and the proceeds were not assessable.

[¶6-520] Realisation of investments by insurers

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Similar principles to those in ¶6-510 have been applied to insurance companies. In RAC Insurance Pty Ltd v FC of T,140 an insurance company providing cover for motor vehicle, personal injury and home contents insurance invested its surplus funds in shares, debentures, government bonds and first mortgage loans. The investments were usually readily negotiable, short or medium term, non-speculative, and were normally held to maturity. Lee J held that an insurance company will be assessable on revenue generated by sales of investments in the course of its business whether or not those sales were for the purposes of its insurance activities (eg to provide payouts to meet policyholders’ claims). The taxpayer’s investments were part of its necessary reserve for the purpose of its business, and management of those investments was part of the management of the business. The fact that investments had been held for several years did not prevent the eventual gain being ordinary income.

Close analysis of facts needed in each case Overall, each case depends on a close analysis of its own facts, and the decisions are not always easily reconcilable. In Equitable Life and General Insurance Co Ltd v FC of T,141 Equitable Life had operated a life insurance business for many years as part of the QBE group. Equitable Life retained an investment portfolio, mainly of shares, buying and selling large volumes of industrial shares from time to time, and sold all its shares when the QBE group was reorganised. The principal purpose of its investment policy was capital gain rather than dividends, and the share portfolio was part of the asset base used to satisfy the insurance regulator in relation to solvency ratio. Equitable Life was held not assessable on the profits

139 69 ATC 4042; (1969) 118 CLR 529. 140 89 ATC 4780. The taxpayer’s appeal to the Full Fed Court was dismissed (90 ATC 4737). 141 90 ATC 4438.

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from the sale of the shares because the profits were capital profits derived from an activity of investment that was not a business. By contrast, in Employers’ Mutual Indemnity Association Ltd v FC of T,142 the taxpayer’s insurance business was managed in two different sections with funds at year-end deemed surplus to immediate needs of the sections being transferred to a general fund. Income from the general fund was allocated on a proportionate basis to the two sections. The taxpayer’s articles of association permitted claims to be made ultimately against the general fund where claims against a section exceeded assets, though such a claim on the general fund had only been made once in the company’s history. The Commissioner assessed the taxpayer on profits from the sale of shares held in the general fund. The Full Federal Court noted the general fund formed an ultimate reserve against contingencies, and, as the investments were not separate from the business of the taxpayer, they should be counted in its reserve funds. Since their sale was an integral part of the conduct of the taxpayer’s business of insurance, the resulting gain was assessable as ordinary income. In AGC (Investments) Ltd v FC of T,143 the taxpayer (‘Investments’) was the investment vehicle and wholly-owned subsidiary of AGC (Insurances) Ltd (‘Insurances’). Investments held a share portfolio (managed by an independent company), and for many years had limited share sales to a small proportion of the portfolio’s value. However, in 1987, believing the sharemarket was generally over valued, Investments directed the sellingoff of the portfolio so that funds could be reinvested elsewhere. The net profit of around $45 million was assessed by the Commissioner as ordinary income of Investments. The Full Federal Court distinguished the case from the usual circumstances of an insurance company because Investments did not need to buy and sell securities on a regular basis in order to maintain the liquidity of its insurance parent, Insurances. The investments were thus made with the aim of long-term capital growth, and the profit on sale was therefore on capital account and not assessable as ordinary income. In GRE Insurance Ltd v FC of T,144 Unitraders Investments Pty Ltd was acquired by GRE as a wholly-owned subsidiary in order to hold GRE’s equity investments. The aim was to ensure the continued availability of the intercorporate dividend rebate (which would effectively free the dividends from tax), should GRE not earn taxable income, and be unable to utilise the dividend rebate itself. GRE then sold its equities to Unitraders at market value, which yielded a profit to GRE. Unitraders in turn subsequently sold some of these investments at a profit. The Full Federal Court held that the profits from the initial sale by GRE to Unitraders and subsequent sales by Unitraders were ordinary income. Although not ordinary transactions (in that the shares remained within the corporate group after their sale by GRE to Unitraders), the shares formed part of GRE’s circulating capital, and the profits from equities which had formed part of GRE’s investment portfolio were accordingly assessable as normal incidents of carrying on an insurance business. Unitraders’ role was 142 91 ATC 4850. 143 92 ATC 4239. 144 92 ATC 4089; (1992) 34 FCR 160.

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to maximise the after-tax return to GRE, and its activities formed part of the overall business in which GRE was engaged. Since the equities indirectly formed part of GRE’s reserves and were not sufficiently segregated from the ordinary and regular operations of the insurance business, the profits made by Unitraders on its sale of the equities were income at common law.

[¶6-560] Agreements for the sale of ‘know-how’ and related items A person with ‘secret’ information (such as confidential knowledge of a unique manufacturing process) may use it in their own business or sell it to other traders. Where the person discloses the information to others for a price, it is necessary to determine whether or not the amount received is assessable income. In accordance with the Californian Copper principle (¶6-410), the proceeds of the sale of information will constitute income at common law if they represent the proceeds or incidents of a business. Thus, while the isolated sale of a copyright, eg a song, is ordinarily a capital transaction, the proceeds from the sale of copyright might constitute income from business if song writing is an aspect or incident of the taxpayer’s profession or business (as might be the case with a professional musician), or the taxpayer begins to buy and sell large numbers of copyrights on a regular basis.

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Knowledge is not property at common law In relation to know-how, the position is complicated by the fact that knowledge is not recognised as property by the common law. Thus a disposal of know-how or knowledge by itself (unattached to a patent or copyright) lacks an inherent capital flavour, and may more likely be characterised as an income transaction. As Lord Denning said in Evans Medical Supplies,145 a professional person can use know-how to earn fees from clients, or teach it to pupils for reward, but ‘cannot sell it as a capital asset for a capital sum. He cannot sell his brains’. The cases in this area have caused considerable disagreement between judges. In Moriarty v Evans Medical Supplies Ltd,146 Evans Medical Supplies (‘EMS’) manufactured pharmaceutical products and traded worldwide. In 1953, the Burmese Government decided to manufacture pharmaceutical products itself. EMS undertook to supply the government with confidential information, including certain secret processes known to EMS which the government undertook not to divulge to others, relating to the manufacture of pharmaceutical products, as well as technical data, drawings, designs and plans for the erection of a factory and the installation of machinery. In return, the Burmese Government paid EMS a lump sum of £100,000. The House of Lords found the lump sum payment not to be assessable in the hands of EMS. In Viscount Simonds’ view, EMS had parted with a substantial capital asset (secret know-how) whose possession had secured for EMS a substantial share of the Burmese market and whose loss would mean that:147 145 Moriarty v Evans Medical Supplies Ltd [1957] 3 All ER 718, 735. 146 [1957] 3 All ER 718. 147 Ibid 726, Lord Tucker agreeing, Lord Morton agreeing in part.

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the company’s Burmese agency will become progressively less important, in other words … the company has parted with a [capital] asset which was the source, or one of the sources, of its profit … The whole value of the secret might conceivably not be lost at once to the original owner, but … its value must be greatly diminished … at any rate so far as the Burmese market is concerned

A similar result was reached in Kwikspan Purlin Systems Pty Ltd v FC of T,148 where the taxpayer company had been incorporated to exploit the Kwikspan Purlin industrial construction patents. For this purpose, the taxpayer granted exclusive licence and knowhow agreements to four companies, permitting the licensees to exploit the construction system within defined areas. Each licensee paid the taxpayer a lump sum ‘once and for all’ payment plus royalties at an agreed rate on future sales. The Supreme Court of Queensland held that the lump sum payments were not assessable because they were not the proceeds of a business. The taxpayer was not in the business of dealing in patents, as there was no repetition of activity in the relevant sense. The fact that separate licences were granted for different parts of Australia was treated by the court as if one exclusive licence had been granted for the whole of Australia. An interesting contrast to these decisions is Rolls-Royce Ltd v Jeffrey.149 Rolls-Royce could not, for various reasons, manufacture jet engines in certain countries. Instead, it entered into 19 agreements with the governments of those countries under which it undertook to supply the technical data, drawings and information necessary to enable a jet engine to be manufactured by local companies, to train local technicians, and to provide their own employees to supervise local manufacture. In return, Rolls-Royce received royalties and a lump sum payment for the rights granted. The House of Lords unanimously distinguished the Evans Medical Supplies case, and held that not only the royalty payment but also the lump sum payments were ordinary income of Rolls-Royce. Viscount Simonds, who had given the leading majority judgment in Evans Medical Supplies, distinguished that case on the basis that Rolls-Royce was ‘using or trading in [know-how] in the only or at least the most advantageous way that was open to them’. In Evans, EMS had been operating in the Burmese market, and had (in effect) agreed to give up that market, thus reducing its profit-making base. By contrast, RollsRoyce was not giving up an existing market, because they were unable to sell their engines in those countries. It was rather the reverse—by making agreements with the various governments, Rolls-Royce was able to exploit a new business opportunity through a series of transactions and receive large sums for its use. Thus the granting of licences was merely an extension of Rolls-Royce’s existing business, devised to meet a business difficulty. Similarly, in Case W10,150 in return for payment of $31,400, the taxpayer company agreed to provide a customer with expertise and technical knowledge on how to maintain the purity of certain uncontaminated breeding stock which the taxpayer had developed and previously sold to the customer. PM Roach (SM) held that the payment was income 148 84 ATC 4282. 149 [1962] 1 All ER 801. 150 89 ATC 182.

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at common law, distinguishing Evans Medical Supplies on the basis that in Case W10 the taxpayer had suffered not the total loss of its know-how in the market but merely a diminution in its value because the knowledge was now shared. The taxpayer continued to be able to use that know-how itself or by sale to others and the payment, though for an isolated transaction, was therefore assessable.

COMPENSATION PAYMENTS (¶6-800 – ¶6-910) [¶6-800] Compensation generally takes the character of  what it replaces At common law, a compensation receipt generally takes the character of the item it replaces.151 Thus, a compensation payment which replaces an amount that would have been ordinary income is assessable as ordinary income under s 6-5 of the ITAA97, whereas a compensation payment that replaces a capital amount is assessable as capital. Where the replaced amount would have been assessable as statutory income if received, and falls outside s 6-5, the amount may be assessable as statutory income under s 15-30 (¶6-870). Where a person receives a payment by way of insurance, indemnity or other recoupment of a deductible expense which is not otherwise assessable income, the amount will be an assessable recoupment (¶3-420).

[¶6-805] Distinguishing between income and capital compensation receipts The following cases show the complex issues that can arise in the categorisation of a compensation receipt as either income or capital.

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Sommer—lump sum from income replacement insurance policy was ordinary income

In Sommer,152a medical practitioner argued that a $140,000 lump sum was paid in consideration of the cancellation of an insurance policy, and as such was a capital amount, not assessable under either s 6-5 or 15-30. The Commissioner argued that the amount was paid in settlement of the taxpayer’s right to income under a Professional Income Replacement Policy and, being in satisfaction of an entitlement to income, was itself income. In finding in favour of the Commissioner, Merkel J made the following points. (1) In general, insurance moneys are received on revenue account where the purpose of the insurance is to fill the place of a revenue amount which is not received because of the happening of a particular event—Carapark Holdings.153

151 C of T (NSW) v Meeks (1915) 19 CLR 568, 580 (Griffith CJ); London and Thames Haven Oil Wharves Ltd v Attwooll [1967] 2 All ER 124, 134, 135–136 (Lord Diplock). 152 Sommer v FC of T 2002 ATC 4815. 153 Carapark Holdings Limited v FC of T (1967) 115 CLR 653, 663.

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(2) Thus, amounts payable under a policy that provides a monthly indemnity against income loss arising from inability to earn because of illness are of a revenue character—Smith.154 (3) The fact that monthly benefits in Sommer were paid in one lump sum does not change the revenue character of the receipt if it is essentially designed to compensate the taxpayer in respect of his income replacement claims or was a payment in substitution for those claims—Allied Mills.155

(4) Where money is received for surrendering a benefit to which a taxpayer is entitled under a contract, whether the receipt is of capital or of income requires consideration of the various rights which the taxpayer enjoyed under the contract and which were surrendered—Van den Berghs.156 (5) The substance and commercial reality of the settlement in Sommer was that it was in settlement of the taxpayer’s past and future claims to be entitled to income replacement benefits, and a payment in settlement of such claims is a payment on revenue account.

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Sydney Refractive Surgery Centre—damages for harm to business reputation was capital although calculated on basis of lost profits In Sydney Refractive Surgery Centre,157 a company that performed laser eye surgery was awarded $812,726 in damages when a television station alleged it had engaged in unethical behaviour. Although the damages were awarded for the harm done to the company’s business reputation, the amount was calculated by reference to the reduction in the number of laser procedures the company performed from the time of the defamatory statements to when it ceased business. Even though the company had claimed damages for ‘lost sales’, and the award was calculated on this basis, the Federal Court found that the $812,726 was not assessable income. The damages compensated the company for the injury to its reputation, and the fact that the award was calculated by reference to lost profits did not alter its character in the company’s hands. Damages for defamation of a trading corporation are awarded for loss of business reputation, regardless of how they are calculated. The court said:158 a damages award in favour of a trading corporation for injury to its reputation in the way of business … is not income according to ordinary concepts when received by the plaintiff corporation. The reason why this is so is that damages for defamation of a trading corporation are awarded for loss of business reputation, however they may be calculated … Thus, even if the award is assessed exclusively by reference to loss of income,

154 FC of T v Smith (1981) 147 CLR 578, 583–584. 155 Allied Mills Industries Pty Ltd v FC of T (1989) 20 FCR 288, 310–312. See also Senior v FC of T 2015 ATC ¶10-392 where a lump sum payment was ordinary income because it was a substitute, at present value, for future monthly payments from a government support scheme for disabled workers. 156 Van den Berghs Ltd v Clark [1935] AC 431, 443. 157 Sydney Refractive Surgery Centre Pty Ltd v FC of T 2008 ATC ¶20-036. 158 Ibid 8470–8471.

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the award does not constitute income in the hands of the plaintiff corporation. In this respect the award is conceptually similar to damages awarded for loss of earning capacity.

The Full Federal Court159 confirmed this decision, finding that a claim for damages by a corporation for defamation is a claim for injury to its business reputation and not assessable, as the damages are akin to an award for personal injury.160 Where the damages are based on a plaintiff ’s loss of income, the principle in British Transport Commission v Gourley161 applies and the award must take into account what would have been the plaintiff ’s liability to tax on the income if the injury had not occurred (¶6-900).

Murdoch—compensation for breaches of trust was capital

The income beneficiary of several family trusts was held by the Full Federal Court in Murdoch162 to have received a non-assessable capital amount when she was paid $85 million in compensation for breaches of trust by her son, who was effectively a fellow trustee. The payment was made after the taxpayer entered into a deed of settlement with the trustees of the trust releasing them from claims for breaches of trust. The potential claims arose from the investment policy of preferring family companies that produced capital growth but a lower level of dividend income, thereby favouring the corpus beneficiary, the taxpayer’s son, over the taxpayer. The Full Federal Court dismissed the Commissioner’s argument that the compensation replaced lost income and was therefore income itself. Instead, the court held that the taxpayer’s son had breached his fiduciary obligations by obtaining a gain in a situation where a conflict existed between his fiduciary duty and personal interests (notwithstanding, the court said, that there was no absence of good faith). The $85 million was paid to settle the taxpayer’s potential action for breach of fiduciary duty by her son.

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Apportionment of compensation into income and capital components Compensation can, in some cases, be apportioned between the part that is assessed under s  6-5 as ordinary income and the capital part that is either tax free or assessed under the capital gains tax provisions (¶6-910). The consequences if such apportionment is not possible are discussed at ¶6-880. While it is somewhat artificial to divide compensation payments into arbitrary categories (since the same basic principles apply to all), it can be helpful in developing a ‘feel’ for the area. Accordingly, the discussion at ¶6-810 to ¶6-850 considers various contexts in which compensation may be received.

159 2008 ATC ¶20-081. 160 The ATO noted in a Decision Impact Statement on the case that it did not seek special leave to appeal, as the decision of the full court was open to it on the facts of the case. In addition, the ATO noted that the application of the case to corporations needs to be considered in light of amendments subsequently made to the defamation laws in all of the states and territories. An example is to be found in s 9 of the Defamation Act 2005 (NSW) where certain corporations do not have a cause of action for defamation. 161 [1956] AC 185. 162 Murdoch v FC of T 2008 ATC ¶20-031.

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[¶6-810] Cancellation of business contracts Compensation received for cancellation of ordinary business contracts may be income in the hands of the recipient. In Short Bros Ltd v IR Commrs,163compensation received by a shipbuilding company for the cancellation of contracts for the construction of two ships was held to be assessable. Similarly, in Heavy Minerals Pty Ltd v FC of T164 the taxpayer company had obtained the right to a rutile mining lease, and entered into long-term contracts to supply overseas purchasers. Shortly after these contracts were entered into, the world rutile market collapsed, and the overseas purchasers negotiated a cancellation of their contracts and in return made various lump sum compensation payments to the taxpayer. Following cancellation of the contracts, the taxpayer decided to temporarily close down its plant, and internal difficulties soon forced the taxpayer to cease business entirely. The High Court held that the lump sum compensation payments made to Heavy Minerals were assessable. By contrast, in Federal Coke Co Pty Ltd v FC of T,165 Bellambi Coal Co Ltd, the parent company of Federal Coke Co, had contracted to supply coke to Le Nickel, a French corporation. The coke was to be produced by Federal Coke and other subsidiary companies of Bellambi. After some time, Le Nickel wished to reduce drastically the amount of coke to be purchased from Bellambi, and a settlement was negotiated under which Bellambi agreed to vary the agreement in consideration of payment to Bellambi of $1 million in two instalments. As a result of the greatly reduced requirements for coke, the Federal Coke plant was closed down, and consequently its assets were greatly reduced in value. After receiving legal advice that, if Bellambi received the payment, it would probably be taxable as compensation for the cancellation of a trading contract, Bellambi negotiated a settlement under which the $1 million was paid direct to Federal Coke to compensate it for the loss in the value of its land and assets resulting from the closure of its mine. The Federal Court held that the payments were capital in Federal Coke’s hands, and not part of its assessable income. The two payments were seen as:166 ‘part of one large and unprecedented sum … received without any consideration passing from [Federal Coke]; and … in no sense the product of any business or income producing activities which [it] carried on … Furthermore, the receipts did not constitute a compensatory equivalent for any loss suffered by [Federal Coke] in its business’ The Federal Coke case is an interesting illustration of the court’s approach to application of the relevant principles. However, it would be unwise to rely on the particular decision, because the Commissioner in Federal Coke did not consider the predecessor to the constructive receipt rule in s 6-5(4) and 6-10(3) of the ITAA97 (¶13-220) and the liability of Bellambi. If the facts were to recur now, both Bellambi’s and Federal Coke’s actions might also constitute the disposal of an asset under the CGT provisions: see further ¶7-120ff. 163 (1927) 12 TC 955. 164 (1966) 115 CLR 512. 165 77 ATC 4255. 166 Ibid 4265 (Bowen CJ), Nimmo and Brennan JJ reached similar conclusions at 4271–4272 and 4274 respectively.

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In Case Y24,167 the taxpayer company was a contract courier of newspapers, the contract being the taxpayer’s only source of income. An amount of some $32,000 described as ‘redundancy pay’ was received upon termination of the contract when the newspaper closed. The AAT held that the payment was of a capital nature, because it compensated for the cancellation of the expectation of continuance of the courier contract (or, alternatively, because it compensated for the sterilisation of a capital asset).

[¶6-820] Loss of trading stock Compensation for loss of trading stock (being a revenue asset) is inherently of an income character: FC of T v Wade.168 The compensation may be assessable as ordinary income or as statutory income under s 15-30 of the ITAA97 (¶6-870). The disposal of trading stock is disregarded for capital gains tax purposes (s 118-25 ITAA97).

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[¶6-830] Temporary disablement of income-producing assets While compensation for the permanent loss or destruction of an asset may be capital in character (¶6-840), compensation for the temporary loss or disablement of an asset will be income in the hands of the recipient. In London and Thames Haven Oil Wharves Ltd v Attwooll,169 the taxpayer received compensation of £21,404 for damage caused by a ship negligently colliding with one of its jetties, rendering the jetty unusable for just over one year. The compensation payment was characterised as being compensation for the taxpayer’s trading profits lost during the jetty’s repair, and therefore assessable. A similar result was reached in Ensign Shipping Co Ltd v IR Commrs170 (compensation paid for compulsory detention, by the government, of ships for approximately two weeks) and Burmah Steam Ship Co Ltd v IR Commrs171 (compensation paid by ship repairers for delay in completion of repairs). In Liftronic Pty Ltd v FC of T, this principle was applied to a ‘temporary setback’ to a company’s business caused by damage to its trading reputation, with amounts paid to fill the resultant ‘hole in profits’ being characterised as assessable income from business.172

‘Temporary’ loss The question of what is a ‘temporary’ loss is a matter of fact and degree, depending upon the particular facts of the case: in the Ensign Shipping case the delay was less than three weeks, while in the London and Thames Haven case the jetty was out of use for just over a year. 167 91 ATC 268. 168 (1951) 84 CLR 105, 112–114 (Dixon and Fullagar JJ). 169 [1967] 2 All ER 124. 170 (1928) 12 TC 1169. 171 (193 1) 16 TC 67. 172 96 ATC 4425; (1996) 66 FCR 175.

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[¶6-840] Cancellation of a structural agreement or permanent loss of a fixed asset Compensation for the cancellation of an agreement affecting the fundamental structure of a business, or for the permanent loss of a fixed asset, is capital in character.

‘Fundamental structure principle’ The application of this ‘fundamental structure’ principle is seen in Van den Berghs Ltd v Clark,173 in which the taxpayer (‘Van den Berghs’) manufactured and sold margarine. The taxpayer and a Dutch company entered into agreements which set out how profits and losses were to be shared and territories allocated, and settled various ancillary matters. When the parties fell out, the agreements were terminated and the Dutch company paid Van den Berghs £450,000 in consideration of its release from the agreement. The House of Lords unanimously characterised the compensation payment as capital. Lord MacMillan, in delivering the leading judgment, identified the key points as being that: • •

•

by agreeing to accept the compensation payment, Van den Berghs gave up all its rights under the agreement

the agreements cancelled were not ordinary commercial contracts made in the course of carrying on the business, but related to the basic structure of Van den Berghs’ profit-making apparatus, regulating its activities, and affecting the whole conduct of its business, and the agreements formed the fixed framework within which Van den Berghs’ circulating capital operated. They provided the means of making profits, but did not themselves yield profits—Van den Berghs’ profits were generated by actually manufacturing and dealing in margarine.

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Permanent loss of fixed asset Compensation for the permanent loss of a fixed asset is capital in character. In Glenboig Union Fireclay Co Ltd v IR Commrs,174 the taxpayer carried on a business of mining and selling raw fireclay. It held leases of land containing deposits of fireclay, with the lines of a particular railway company running over part of the land. The railway company exercised its statutory right to require the fireclay under its lines to be left unworked (to ensure that the railway lines were not undermined), and paid an amount to Glenboig as compensation. The House of Lords held that the compensation payment was capital in character, because Glenboig was permanently deprived of the opportunity to carry on its trade or business in relation to the fixed asset (the fireclay) in the affected areas. The relevant parts of the company’s trading assets were thus ‘struck with sterility’ and rendered permanently incapable of profitable employment (a capital loss), and the payment of compensation to repair the injury to the company’s undertaking following that sterilisation took the same character as the asset which it replaced, and was therefore also capital in character. 173 [1935] AC 431. 174 (1922) 12 TC 427.

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Situations of the type discussed above might now involve the disposal of an ‘asset’ (the legal rights) for CGT purposes (¶6-910).

[¶6-850] Termination of agency and management contracts Termination of business Where the cancellation of an agency contract results directly in termination of a taxpayer’s business, payment for the termination will be a capital receipt. In Californian Oil Products Ltd (in liq) v FC of T,175 the taxpayer had been appointed as exclusive distributor and agent in a particular area for an oil company’s products. The agreement was to run for a period of five years, and the agency was the taxpayer’s only business. When the taxpayer subsequently agreed to cancel the agreement, its whole business ceased and it went into liquidation. The compensation payment received was characterised as a capital receipt, even though it was paid by 10 half-yearly instalments.

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Cancellation of one of several contracts Where there is a compensation payment for cancellation of one among several agency contracts held by the recipient, the position is more difficult. The cases raise questions of degree and impression, and are not always easy to reconcile. In IR Commrs v Fleming & Co (Machinery) Ltd,176 it was said that when the cancellation of one of several agency agreements destroys or materially cripples the structure of the recipient’s profit-making apparatus, involving the serious dislocation of the normal commercial organisation, the compensation received will usually represent the price paid for the loss or sterilisation of a capital asset and therefore be a capital receipt. When the benefit surrendered on cancellation does not represent the loss of an enduring asset, the compensation will be revenue in character. In Fleming’s case, the agency terminated was only one of nine agencies held by the taxpayer, although it generated 30% to 45% of the taxpayer’s total profits. The House of Lords characterised the cancellation of an agency and receipt of a consequential lump sum compensation as simply a normal trading risk in that type of business, and held that the compensation was assessable income. Payments were also held to be assessable in Allied Mills Industries Pty Ltd v FC of T.177 There the relevant facts were that Allied Mills operated through a number of divisions, one being the Groceries and Packaging Division. In 1973, Allied Mills obtained sole rights to distribute, through its Groceries and Packaging Division, Peek Freans biscuits in Australia and certain other countries. In 1975, Arnotts took over Peek Freans, renegotiated the 1973 agreement, and gave Allied Mills an option to acquire rights to manufacture certain biscuits—though this option was never taken up. In 1977, Arnotts decided to terminate Allied Mills’ distribution rights, and Allied Mills agreed to this termination in return for a lump sum payment of $372,700. 175 (1934) 52 CLR 28. 176 (1952) 33 TC 57. 177 89 ATC 4365; (1989) 20 FCR 288.

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The Full Federal Court held that the $372,700 was assessable to Allied Mills. In a joint judgment, Bowen CJ, Lockhart and Foster JJ pointed out178 that: (1) While the biscuit distribution arrangements with Arnotts accounted for a ‘substantial percentage’ of the Groceries and Packaging Division’s turnover, that Division was not a separate entity in itself, but was merely one part of a ‘large company arranged in a divisional structure and conducted as a single corporate concern’. It was the impact of the termination on Allied Mills as a whole which was crucial. (2) From the perspective of Allied Mills as a whole, the termination did not have fundamental structural consequences: Normally in order for a contract to be regarded as a capital asset it must be a contract which is of substantial importance to the structure of the business itself … Here [Allied Mills] was not parting with a substantial part of its business or ceasing to carry on business as was the case in Californian Oil Products. Furthermore [Allied Mills] was not disposing of part of the fixed framework of its business in the sense required by Van den Berghs v Clark. The contracts here in themselves yielded profit; they did not simply provide the means of making profit.

(3) The key to characterising such payments is ‘the nature of the contract which generated the payment, and the way in which that contract related to the structure and business of the taxpayer’. Here the nature of the contract was one of providing distribution services for a fee, it being ‘in the ordinary course of the business’ of Allied Mills to offer such services. Because the termination payment was ‘essentially designed to compensate [Allied Mills] for the loss of the anticipated profits [the payment] should be regarded on the same footing as the profits themselves would have been’ and was therefore assessable.

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Loss of significant proportion of business The decisions in Fleming and Allied Mills may be contrasted with Barr, Crombie & Co Ltd v IR Commrs,179 where the taxpayer’s business included management of the vessels of a particular shipping company under an agreement from which the taxpayer had for some years derived around 97% of its operating income, and almost 90% of its total income. On termination of that agreement the taxpayer lost practically the whole of its business. The situation was thus similar to the Californian Oil case, and the compensation receipt was characterised as capital and not assessable, even though the amount of compensation was quantified by reference to remuneration payable for the unexpired portion of the agreement.

[¶6-860] Compensation for loss of wages Periodical payments received as compensation for loss of wages (eg under workers’ compensation legislation) are assessable as ordinary income. This is in line with the principle that a compensation payment generally takes the character of what it replaces (¶6-800). 178 Ibid ATC 4371–4372; FCR 311–312. 179 (1945) 26 TC 406.

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Conversion of periodic compensation payments into a lump sum If an entitlement to periodic workers’ compensation payments is converted into a lump sum payment, the lump sum may be taxed in any of the following ways. (1) Capital in nature

The lump sum amount may be treated as capital in character, although this would not be common. In Coward,180 a taxpayer, on reaching 65 years of age, exercised a statutory right to convert weekly personal injury compensation payments to a lump sum. The AAT held that, while the weekly sums had been income according to ordinary concepts, the lump sum redemption amount was capital in character because it was in respect of a loss of earning capacity, and not in respect of loss of earnings. In Barnett,181 a lump sum paid in full satisfaction of a taxpayer’s weekly workers’ compensation entitlement was capital because, in considering the application for a lump sum payment, the authority had to be satisfied that the lump sum would be used in an advantageous manner and would advance the taxpayer’s interests. The capital amount may be exempt from capital gains tax as compensation received for any wrong, injury or illness suffered personally by the taxpayer (s 118-37(1)(b) ITAA97).

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(2) Ordinary income

In Brackenreg,182 a lump sum settlement payment, which had been commuted from a weekly compensation payment, was held by the AAT to be ordinary income. The settlement payment was calculated on a formula which took account of the taxpayer’s normal weekly earnings with her former employer. The payment was compensation for loss of earnings only, there being no amount for pain and suffering, loss of amenities, permanent impairment or other non-economic loss. In Cooper,183 a lump sum payment representing arrears of invalidity payments was held to be ordinary income in the year the payment was received. In Gupta,184 an injured employee became entitled to a workers’ compensation amount of $40,000 in respect of a 16-month period of agreed incapacity. The employer’s insurer deducted $5,304 tax from the total amount when it paid the employee. The employee sought a review by the AAT of the Commissioner’s decision that the insurer had correctly treated the compensation payment as ordinary income from which tax had to be withheld. The employee unsuccessfully argued that the amount was compensation for an injury, was not a substitute for lost earnings and did not therefore constitute ordinary income.

180 Coward v FC of T 99 ATC 2166. 181 Barnett v FC of T 99 ATC 2444. 182 Brackenreg v FC of T 2003 ATC 2196. According to Taxation Determination TD 2016/18, a redemption payment received by a worker under the Return to Work Act 2014 (SA) in exchange for weekly payments is ordinary income of the worker in the income year it is received. 183 Cooper v FC of T 2003 ATC 2123. 184 Gupta v FC of T 2016 ATC ¶10-439

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The AAT found that the compensation amount received by the employee was based on an entitlement to weekly payments and this pointed to the correct characterisation of the payment as income. The fact that it was a one-off payment was of no material significance. (3) Employment termination payments

Weekly compensation payments that are redeemed into a lump sum may be taxed at concessional rates as an employment termination payment (¶4-740). This is what the AAT decided in Gillespie185 because of the connection between the taxpayer’s retirement on the ground of incapacity and the compensation payment. The AAT held that the payment was made ‘in consequence of the termination of the taxpayer’s employment’ and so was eligible for concessional tax treatment as an employment termination payment. A similar decision was reached in Pitcher.186 Even though such a lump sum may be found to be an employment termination payment, any part of the payment that compensates the taxpayer for invalidity may be exempt from tax (¶4-755). In Taxation Ruling TR 2003/13, the Commissioner stated the view that the AAT erred in Gillespie because, although the termination of employment came before the payment of the lump sum, there was no causal connection between the termination and the payment. The payment was a consequence of injury, not of termination of employment.

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[¶6-870] Insurance or indemnity for loss of assessable income Where a compensation payment is assessable income but is not caught by s 6-5 of the ITAA97 as ordinary income, s 15-30 of the ITAA97 may include the amount as statutory income in the taxpayer’s assessable income. Section 15-30 includes in assessable income amounts received ‘by way of insurance or indemnity’ for the loss of an amount if the lost amount would have been included in the taxpayer’s assessable income and the amount received is not taxed under s 6-5. Section 15-30 covers a ‘loss’ by any means, including compulsory destruction.187 As its wording indicates, s 15-30 applies where the compensation is received in respect of the loss of assessable income, eg where trading stock is lost.188

Indemnity The word ‘indemnity’ in s  15-30 has been given a wide meaning,189 and it seems that ‘indemnity’ is not restricted to payments under an express or implied contract of indemnity, but may also cover amounts received under a statutory right. This was the case where the purpose and effect of the receipt was ‘to save the taxpayer harmless from

185 Gillespie v FC of T 2002 ATC 2006. 186 FC of T v Pitcher 2005 ATC 4813. 187 FC of T v Wade (1951) 84 CLR 105, 115–116 (Kitto J). 188 See, for example, FC of T v DP Smith 81 ATC 4114; (1981) 147 CLR 578, applied in FC of T v Inkster 89 ATC 5142; (1989) 24 FCR 53. 189 FC of T v National Commercial Banking Corp of Australia Ltd 83 ATC 4715, 4722 (Full Fed Ct).

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the loss he sustained by the destruction of his cattle; in other words, to provide pro tanto indemnification in respect of the loss’.190 Payments received under an insurance policy taken out by an employer against the risk of accident or disablement to a director or employee in order to protect the employer against loss of profits may be assessable under s 15-30, but only if the amount is not also assessable as ordinary income.191

[¶6-880] Apportionment of compensation payments into income and capital components Where a compensation payment includes only income elements, the amount will clearly be assessable in full to the recipient.192 Where a lump sum payment represents compensation in part for income items and in part for capital items, the position is more complex. However, the mere fact that apportionment into the income and capital components is difficult, or involves elements of judgment, does not mean that apportionment is inappropriate.193

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Where a separate amount of income is identifiable and quantifiable Where the parties expressly agree that a certain amount is to be allocated to each ‘head’ of damage (or the parties impliedly make such an agreement, and the various items of compensation can be identified and quantified), there will be little difficulty in separating the income items and taxing them. Thus, in Case W40194 the taxpayer was an owner of certain land which was compulsorily resumed by a Regional Planning Authority. After negotiations, the taxpayer agreed to accept $185,000 in compensation for the resumption, plus interest on outstanding amounts at a stipulated rate for the period up to actual payment of the full $185,000. PM Roach (SM) rejected the taxpayer’s argument that the total amount represented a single capital sum and held that, as the interest component represented a separately identifiable and quantifiable amount inherently of an income nature, it was assessable at common law. Similarly, in Case 2/2005,195 compensation paid to a taxpayer for the compulsory acquisition of his land by the Queensland Water Resources Commission was able to be dissected into a capital amount and interest. Even though there was not a distinct capital sum and an interest payment, but rather the transfer of land and the payment of the balance of money owing, the capital and interest components were ‘ascertainable by calculation’. The AAT rejected the argument that the statute under which the compensation was paid deemed the interest to be capital, and also held that

190 FC of T v Wade (1951) 84 CLR 105, 116 (Kitto J), of 112 (Dixon and Fullagar JJ, obiter); Goldsbrough Mort & Co Ltd v FC of T 76 ATC 4343, 4348–4350. 191 Carapark Holdings Ltd v FC of T (1967) 115 CLR 653; 14 ATD 402. 192 See, for example, Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365; (1989) 20 FCR 288 (¶6-850). 193 Tilley v Wales [1943] AC 386, 398 (Lord Porter); Carter v Wadman (1946) 28 TC 41. 194 89 ATC 399. 195 2005 ATC 115.

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the principle in Whitaker v FC of T196 that pre-judgment interest constituted a capital receipt (¶9-080) did not apply to compensation for the compulsory acquisition of land.

Where a lesser sum is accepted in compromise of wholly unliquidated claims Where a taxpayer accepts by way of compromise a lesser sum as compensation for several unliquidated claims (ie where the amount of the damages cannot be foreseen or assessed by a fixed formula, but must be established by a court), the courts have declined at common law to apportion the amount into assessable and non-assessable components unless the parties themselves have agreed (expressly or impliedly) upon the apportionment.

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McLaurin

In McLaurin v FC of T,197 a fire caused by a railway engine resulted in considerable damage to both revenue and capital assets on the taxpayer’s property. The taxpayer issued a writ claiming £30,000 damages. A valuer employed by the Commissioner for Railways prepared an itemised list of damaged items and their value, and assessed the total damages at £12,350 (revenue losses of £10,590, and capital losses of £1,760). The Commissioner for Railways accordingly offered McLaurin a lump sum payment of £12,350 in full settlement of McLaurin’s claims. The valuer’s itemised list was not shown to McLaurin, who accepted the £12,350 in full settlement of his claims without knowing how the Railways Department had arrived at that amount.198 The Commissioner of Taxation attempted to assess McLaurin on the ground that at least £10,590 (the amount allocated by the valuer to revenue items) represented compensation for revenue losses. The High Court indicated that it would be prepared to contemplate apportionment where, for example, a single payment or receipt of a mixed nature could be apportioned and an income or non-income nature attributed to portions of it. But while it might be appropriate to apportion where a payment or receipt is in settlement of distinct claims of which some at least are liquidated or are otherwise ascertainable by calculation, it could not be appropriate where (as in McLaurin’s case itself ) the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole and accordingly no part of it was assessable. Allsop

A similar result was reached in Allsop v FC of T,199 where the taxpayer had paid permit fees to the New South Wales Commissioner for Motor Transport totalling over £54,850. The Act under which the permit fees had been paid was later held to be invalid, and the taxpayer

196 98 ATC 4285. 197 (1961) 104 CLR 381, 385. 198 Although he may have been in a position to make a ‘confident guess’ at the amount allowed for each item: per the High Court at 104 CLR 381, 390. 199 (1965) 113 CLR 341.

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sued the Commissioner for recovery of the amount of the fees. The matter was settled out of court under a compromise whereby Allsop accepted £37,500 in full settlement of all claims of any nature which he had or might have against the Commissioner. Even though Allsop claimed only liquidated damages for the amount of the permit fees wrongly paid, Barwick CJ and Taylor J in the High Court held that Allsop could have claimed unliquidated damages in respect of certain unlawful interference with the appellant’s vehicles and his business operations by officers of the Department of Motor Transport, and in respect of these matters he may have had valid claims for unliquidated damages against the Commissioner. It followed, in the court’s view, that the amount of £37,500 represented compensation accepted by Allsop in respect of both his liquidated claim for the £54,850 fees paid, and the claim he could have made for unliquidated damages for interference with his vehicles. The £37,500 was thus an ‘entire sum paid by way of compromise of all these claims and no part of it can be attributed solely to a refund of the fees paid by the appellant for permits’.200 In these circumstances, the High Court declined to apportion any part of the amount received by Allsop to revenue account.

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Spedley Securities

The principle was applied subsequently in FC of T v Spedley Securities Ltd.201 In that case, Spedley (a merchant bank) had been engaged by Santos Ltd to secure a loan of $65 million for Santos, at a commission of 1¼% of the loan amount. Santos subsequently terminated Spedley’s contract because legislation introduced in the interim adversely affected Santos’ position. Evidence was given that Spedley was concerned about the damage which cancellation of the mandate by Santos might cause to Spedley’s commercial reputation because Spedley was a newly formed operation, and it feared that banks which learned of the cancellation might infer that Santos had cancelled the mandate because it had lost confidence in Spedley—thus causing banks to be more wary about dealing with Spedley in future. By the time of the termination, Spedley had already done most of the work in arranging the finance, and Santos ultimately agreed to pay Spedley a lump sum of $200,000 in return for a deed of release of all rights which Spedley ‘now has or hereafter may have’ against Santos in respect of the termination. The $200,000 probably (as a matter of commercial logic) included amounts on account of Spedley’s lost commission as well as damage to reputation/goodwill, but the ingredients making up the $200,000 were in fact not identified or quantified. The Full Federal Court (Fox, Fisher and Sheppard JJ) found on the evidence that there was ‘no adequate basis for saying that the release was illusory; on the contrary it was undoubtedly meaningful and of practical importance to Santos’.202 Accordingly, Spedley had received ‘a lump sum, the ingredients of which were not identified (there may in fact

200 Ibid 351 (Barwick CJ and Taylor J). 201 88 ATC 4126. 202 Ibid 4130.

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have been no dissection made on either side)’ but which included compensation for a capital asset (loss of goodwill/reputation). Under these circumstances, there was ‘no basis for dissection or apportionment … [and] … in accordance with authority (McLaurin v FC of T …; Allsop v FC of T …) the whole receipt is to be treated as one of capital’.203 CSR Ltd

In CSR Ltd,204 the Full Federal Court held that a $100  million lump sum paid by an insurance company under a deed of settlement was not assessable as income but as a capital gain. CSR Ltd was the parent company of a subsidiary involved in mining asbestos in Australia between 1943 and 1966. Both CSR Ltd and its subsidiary were subject to personal injury claims by individuals who had been exposed to asbestos. CSR Ltd claimed indemnity under its insurance policies and, after some disputes between CSR Ltd and the insurance company, the insurance company entered into a deed of settlement with CSR Ltd. This resulted in CSR Ltd receiving $100 million and the insurance company being released from all past, present or future liability under the policies. The Commissioner claimed that the settlement amount was assessable either as ordinary income or under former s 26(j) of the ITAA36 as an amount received by way of insurance or indemnity (¶6-870). CSR Ltd argued that the settlement sum was a capital receipt. The Full Federal Court held that no part of the settlement sum was assessable as income. According to the court: (1) just because a taxpayer receives a payment from an insurer does not necessarily mean that the payment is received by way of insurance

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(2) the payment by the insurer in this case was a release of causes of action, some of which would have generated receipts of a non-income nature, and (3) the parties had not dissected the payment between the various causes of action and the case was indistinguishable from the decision in Allsop205 concerning the nonassessability of undissected capital and income lump sum settlement payments.

The Commissioner subsequently applied to the High Court for special leave to appeal against the Full Federal Court decision, arguing that the previous High Court authority in McLaurin and Allsop established principles that were wrong. CSR Ltd opposed the application on the ground that the previous authority had stood for 40  years and its overturning would have a retrospective effect because the legal basis on which taxpayers had adjusted their affairs might be taken away. The High Court accepted the submissions put forward by CSR Ltd. Although there were strong arguments in favour of revisiting the McLaurin and Allsop principles, the court was not persuaded that this was a proper case for special leave to be granted, given the longevity of these decisions and the fact that a change in the law could operate retrospectively. 203 Ibid 4131. 204 FC of T v CSR Ltd 2000 ATC 4710. 205 Allsop v FC of T (1965) 113 CLR 341.

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[¶6-900] Discounting compensation payments for tax Where a court awards damages which include compensation for loss of income which would have been assessable if received by the taxpayer, and the damages are not themselves taxable, the recipient of the damages would obtain a ‘windfall profit’ unless the damages were discounted for the tax effect. To overcome this windfall profit effect, the principle in British Transport Commission v Gourley206 requires the court to calculate damages by reference to the net loss of income, after allowing for any tax which would have been payable had the income actually been received by the taxpayer. Example—Calculation of damages award

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Ben is injured in a motorcycle accident. He is awarded $30,000 for loss of salary income. Suppose that if Ben had earned the $30,000 as ordinary salary he would have paid $2,100 tax, leaving a net amount of $27,900. If Ben received the $30,000 tax-free as a lump sum for loss of income, he would make a windfall profit of $2,100. If the damages award is discounted to take account of the tax that would have been payable if the amount had been earned as salary income, Ben will be paid $27,900.

The High Court in Cullen v Trappell207 confirmed the application of the Gourley principle in Australia. Gibbs J pointed out that the principle in Gourley is not confined to damages for personal injury. He specifically noted that in Rubber Improvements,208 where a trading corporation was awarded damages for defamation, the House of Lords had applied the principle to ‘the assessment of damages for loss of profit arising from libel’. His Honour added that:209 ‘Speaking generally, the principle will apply only where the earnings or profits lost would have been taxable if the plaintiff had received them but the damages awarded to compensate the plaintiff are not taxable.’ This principle was applied in Sydney Refractive Surgery210 to damages awarded to a company to compensate it for injury to its reputation. The damages were calculated by reference to profits lost by the company as a result of defamatory statements about its business practices and were then reduced by the amount of tax that would otherwise have been paid on that income.

[¶6-910] Impact of CGT on compensation payments generally Where an agreement or contract is breached, varied or cancelled, a right to bring an action to receive compensation may arise. In the context of the CGT provisions, the right may constitute a CGT asset under s  108-5 of the ITAA97 (¶7-500ff ), and settlement of the right to compensation will 206 [1956] AC 185. 207 80 ATC 4185; (1980) 146 CLR 1, overruling Atlas Tiles Ltd v Briers 78 ATC 4536; (1978) 144 CLR 202. 208 Rubber Improvement Ltd v Daily Telegraph Ltd [1964] AC 234. 209 Ibid 223–224. 210 Sydney Refractive Surgery Centre Pty Ltd v FC of T 2008 ATC ¶20-036 (discussed at ¶6-805).

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constitute a ‘disposal’ of the CGT asset under s 104-25(1) of the ITAA97 (¶7-510). If the cause of action (the breach, variation or cancellation) arose on or after 20 September 1985, a taxable capital gain or a capital loss may need to be taken into account (¶7-600ff ). In particular circumstances, a taxpayer may be able to claim the benefit of one of the exemptions from CGT liability, eg if the compensation was obtained for an injury caused to the taxpayer in his or her profession or vocation, such as damage to professional reputation (s 118-37 ITAA97; ¶7-715). Example—Damages for personal injury exempt Vina brings an action against her employer for damages for sexual harassment. Vina and her employer reach a settlement under which she is paid $25,000 in full settlement of her claim. This settlement constitutes a disposal of a CGT asset (ie of Vina’s right of action against the employer). Although there is a potential capital gain of $25,000, the amount received by Vina is exempt under s 118-37 because it is an amount received for a wrong or injury to Vina’s person, profession or vocation.

Alternatively, the taxpayer may be able to defer CGT liability by application of the rollover provisions, eg where the taxpayer uses the compensation to buy an eligible replacement asset within the prescribed time (¶8-200). In all cases, however, the potential application of the CGT provisions must be considered. Where compensation is also taxable under other provisions of the tax law, the taxpayer will need to determine whether s 118-20 of the ITAA97 applies to prevent double taxation (¶7-710).

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Impact of CGT on undissected lump sums Where undissected lump sum receipts are connected to rights of action accruing on or after 20 September 1985, the possible application of CGT would need to be considered. Compensation received as an undissected lump sum will be treated as received for the disposal of the right to seek compensation.211 Ironically, s  118-20 could not apply to reduce the capital gain precisely because (under the McLaurin principle: ¶6-880) no amount would be included in the taxpayer’s assessable income under the general income provisions. However, where the compensation payment relates to trading stock, it would be exempted from CGT by s 118-25 (¶7-710), and where it is for a wrong or injury to the taxpayer’s person, profession or vocation, it is exempted by s 118-37 (¶7-715). The effect of this treatment is that the advantages of the McLaurin and Allsop decisions (¶6-880) are removed for causes of action arising after 19 September 1985. In CSR Ltd v FC of T,212 a lump sum undissected amount of $100 million paid by an insurer to CSR to release it from liability for damage suffered by CSR’s employees was not assessable as ordinary income (the court being unable to distinguish the case from Allsop), but was an assessable capital gain.

211 Taxation Ruling TR 95/35. 212 2000 ATC 4710 (¶6-880).

CHAPTER 7

Capital Gains Tax: General Topics

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Overview¶7-000 History of CGT in Australia Period before 1985 1985–1998: Pt IIIA of the ITAA36 1998 onwards: The rewritten CGT

¶7-015 – ¶7-025 ¶7-015 ¶7-020 ¶7-025

Design and structure of the CGT regime Key design features of CGT Basic structure of the CGT regime

¶7-030 – ¶7-050 ¶7-030 ¶7-050

Step One: Identifying a CGT event ¶7-100 – ¶7-570 CGT events ¶7-100 Order of application of CGT events ¶7-110 Disposal of a CGT asset: CGT event A1 ¶7-120 Use and enjoyment of a CGT asset before title passes:  CGT event B1 ¶7-130 End of a CGT asset: CGT events C1 to C3 ¶7-140 – ¶7-155 Bringing into existence a CGT asset: CGT events D1 to D4 ¶7-160 – ¶7-178 Trusts: CGT events E1 to E10 ¶7-180 – ¶7-230 Leases: CGT events F1 to F5 ¶7-250 – ¶7-275 Shares: CGT events G1 to G3 ¶7-300 – ¶7-315 Special capital receipts: CGT events H1 and H2 ¶7-350 – ¶7-360 Australian residency ends: CGT events I1 and I2 ¶7-370 – ¶7-380 Reversal of rollovers: CGT events J1 to J6 ¶7-400 – ¶7-430 Other CGT events: CGT events K1 to K12 ¶7-440 – ¶7-488 Consolidated groups: CGT events L1 to L8 ¶7-490 – ¶7-498

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CGT assets: Definition and classification Timing of acquisition of assets

¶7-500 – ¶7-540 ¶7-550 – ¶7-570

Step Two: Calculating capital gain or loss arising from a CGT event ¶7-600 – ¶7-698 Introduction¶7-600 Capital proceeds ¶7-605 – ¶7-615 Cost base ¶7-620 – ¶7-625 Reduced cost base ¶7-630 – ¶7-635 General modifications to cost base and reduced cost base ¶7-640 – ¶7-660 Specific rules for modifying cost base and reduced cost base ¶7-670 – ¶7-680 Indexation of the cost base ¶7-690 – ¶7-698

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Step Three: Considering exceptions or exemptions applying to a CGT event ¶7-700 – ¶7-720 Introduction¶7-700 Exempt assets ¶7-705 Anti-overlap provisions ¶7-710 Exempt or loss-denying transactions ¶7-715 Specific exemptions: An outline ¶7-720 Step Four: Considering rollover provisions applying to a CGT event ¶7-800 – ¶7-820 Introduction¶7-800 Same-asset rollovers ¶7-810 Replacement-asset rollovers ¶7-820 Step Five: Determining net capital gain/loss for income year ¶7-900 – ¶7-960 Outline¶7-900 Stage One: Identifying gains and losses for the income year ¶7-905 Stage Two: Applying previous years’ capital losses ¶7-910 Stage Three: Applying the discount percentage ¶7-915 – ¶7-935 Stage Four: Applying the small business concessions ¶7-940 Stage Five: Determining the applicable tax rate on capital gains ¶7-950 Record-keeping requirement ¶7-960

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Entity making the gain or loss ¶7-975 – ¶7-995 Introduction¶7-975 Partnerships¶7-980 Bankruptcy and liquidation ¶7-985 Absolutely entitled beneficiaries ¶7-990 Security holders ¶7-995

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[¶7-000] Overview Chapters  3 to 6 have considered assessable income generated by personal exertion (for example as a result of employment or the rendering of services), or generated as income from property or from business. The concept of income in its broadest sense also embraces the notion of capital gains—income that derives from the disposal of property or other capital receipts. The most obvious examples of situations where capital gains (or sometimes capital losses) may arise are where a person disposes of shares in a company (whether quoted or unquoted) or interests in a trust, or where a person disposes of real estate (other than the family home) or business assets. But it may also involve less obvious situations such as where a person receives a capital sum for doing, or not doing, something, such as entering into a restrictive covenant. Chapters 7 and 8 consider this statutory extension of the ordinary meaning of income, now contained in pt 3-1 and 3-3 of the ITAA97. Chapter 7 deals with the general capital gains tax (CGT) provisions, and Chapter 8 with a number of special CGT topics. A CGT is ‘essentially a tax upon gains from the realisation of property where the realisation is not an aspect of the carrying on of a business’.1 Simply stated, a CGT aims to tax gains made on the disposal of assets and sometimes also to tax the receipt of certain other capital amounts that do not derive from the disposal of assets. Note that although we often use the term ‘capital gains tax’, or ‘CGT’, it is strictly incorrect to speak of a CGT in Australia. There is not a separate tax levied upon capital gains. In fact, where a net capital gain arises, it is included in assessable income and will bear tax at appropriate income tax rates. This contrasts with some other countries (eg the UK) where a separate tax exists. The history of CGT in Australia can be broken down into three broad periods: •

• •

the period before the introduction of CGT in 1985 (¶7-015)

the period from 1985 when CGT was introduced through to 1998. During this period the relevant legislation was pt IIIA of the ITAA36 (¶7-020), and

the period since 1998 when the CGT provisions were rewritten as pt 3-1 and 3-3 of the ITAA97 (¶7-025).

After considering the history of taxing capital gains in Australia, the chapter considers the current CGT provisions in pt 3-1 and 3-3 of the ITAA97.

1

Commonwealth Taxation Review Committee (Asprey Committee), Full Report (1975) 414.

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HISTORY OF CGT IN AUSTRALIA (¶7-015 – ¶7-025) [¶7-015] Period before 1985 While there was no general tax on capital gains before 1985, the ITAA36 did provide for limited taxation of capital gains initially through two sets of provisions: the former s 26(a) (later replaced with s 25A and now partly re-enacted as s 15-15 of the ITAA97) and the former s 26AAA. Unfortunately, both sets of provisions had major shortcomings which meant that they were not entirely successful in achieving the objectives set for them. 2 The shortcomings of these two sets of provisions led to a call for the introduction of a more general tax on capital gains. The introduction of a general tax on capital gains in Australia was first recommended by the Asprey Committee in its Preliminary Report released in 1974. This recommendation was taken up by the Whitlam Government, which proposed the introduction of such a tax in the 1974/75 Budget. In January 1975, however, the government decided to postpone the introduction of a CGT and eventually the proposal was dropped. The arguments in favour of a general tax on capital gains are set out in the Asprey Committee Report and in the Draft White Paper.3 While a CGT is invariably complex in form, the central argument in favour of such a tax is based on the ground of equity. It is stated in the Asprey Committee Report that:4

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in a taxation system in which ability to pay is a primary test of liability, capital gains, whether accrued or realised, constitute an increase in ability to pay in so much the same way as receipts of wages, salaries, interest, dividends and rents as to make it inequitable for them not to be brought to tax.

Consequently, the failure to formally include capital gains in the tax base before 1985 gave rise to both horizontal and vertical inequity. Vertical inequity was particularly emphasised in the debate as the better-off in the community are more likely to make capital gains. The Asprey Committee also accepted on balance that the case for a CGT was supported by efficiency arguments. While recognising the possible deleterious effects on the investment of risk capital (although these were offset to some extent by the allowance of capital losses), the Committee noted that the absence of a CGT may encourage investment in assets which appreciate in capital value rather than in assets which give rise to an income flow. The 1985 Draft White Paper went further, observing that not only does the absence of a CGT create a bias in favour of investment in particular assets, it encourages taxpayers to enter into arrangements designed to convert income into tax-free

2

For details of these shortcomings, refer to earlier editions of this text.

3 Treasurer, Reform of the Australian Taxation System: Draft White Paper (1985) 77, 78. 4

Asprey Committee, n 1 above, 414, 415. While the Asprey Committee Report stated that unrealised gains increase ability to pay, the impracticability of taxing capital gains on an accruals basis was recognised. Consequently, the actual design of the CGT proposed was confined to realised gains.

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capital gains. The conclusion of the Draft White Paper, therefore, was that the absence of a CGT was at the core of many tax avoidance arrangements.

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[¶7-020] 1985–1998: Pt IIIA of the ITAA36 The introduction of a CGT was recommended in the Draft White Paper in 1985. This time the recommendation was quickly implemented by the government with the incorporation of pt IIIA into the ITAA36. Part IIIA applied to the disposal of assets acquired on or after 20 September 1985. It therefore introduced a CGT on a prospective basis. The three central aspects of pt IIIA were ‘asset’, ‘acquisition’ and ‘disposal’. All three elements needed to be present. If a taxpayer both acquired and disposed of an asset on or after 20 September 1985, it was quite likely that pt IIIA would apply. The legislation was also framed to capture a series of acts, transactions or events which did not necessarily fit within the neat framework of asset, acquisition and disposal. For example, the legislators also wanted to tax certain capital proceeds that emanated from assets, even if the asset was not itself disposed of, or had never been acquired, or was not really an asset for the purposes of the legislation. As a result, the drafters indulged in a form of statutory drafting that deemed a whole host of things to be assets, or acquisitions, or disposals, even though they patently were not. The classic example of the absurdity that could arise from this deeming approach was illustrated in the case of Hepples v FC of T,5 where a taxpayer received a capital receipt of $40,000 for entering into a restrictive covenant in which he agreed not to divulge the trade secrets of his employer for a two-year period if he were to cease working for that employer. Although a majority of the High Court judges considered the sum should be caught by the provisions of pt IIIA, they could not agree under which of a variety of possible CGT provisions the transaction was actually to be caught. As a result, Hepples escaped liability and pt IIIA underwent a bout of legislative amendment in an attempt to make it work. The introduction of pt IIIA resulted in consequential amendments to s  25A (see ¶7-015) and the ultimate repeal of s 26AAA in 1994.

[¶7-025] 1998 onwards: The rewritten CGT Despite constant patchwork amendment, the statutory provisions in operation from 1985 to 1998, pt IIIA of the ITAA36, were never really successful in achieving the aims of taxing capital gains in a simple, equitable and efficient fashion. The legislation was criticised for being overly complex, for having unfair outcomes, and for distorting commercial decisions. The opportunity was therefore taken to adopt a fresh approach to taxing capital gains when the Tax Law Improvement Project (¶1-190) was established in 1994. This fresh approach is based on the identification of a series of CGT events (initially there were 36 CGT events; the number has now increased to more than 50) which are designed to capture the capital gains or capital losses that can arise in a variety of situations. Each of the CGT events has its own set of provisions which describes how a capital gain or loss

5

91 ATC 4808; 92 ATC 4013; 173 CLR 492.

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can arise, identifies the point at which that gain or loss arises, specifies how to calculate the gain or loss and identifies specific exceptions that may apply. The rewritten CGT provisions apply from 1 July 1998 and have effect from the 1998/99 and later income years. They are found in pt 3-1 and 3-3 of the ITAA97. Part 3-1 contains the general provisions which establish the ambit of the CGT scheme, as well as dealing with a wide range of commonly encountered situations. Under pt 3-1 a capital gain arises where a CGT event occurs after 19 September 1985 and the capital amount you receive (or are entitled to receive) from the CGT event exceeds the total costs associated with that event (s 100-35 ITAA97). Any net capital gain that results from a CGT event is assessable income (s  102-5(1) ITAA97). Part  3-3 deals with special scenarios which are less frequently encountered as well as providing the rules governing matters such as rollovers, leases, options and other investments, and the small business concessions. Further significant amendments were made in September 1999 to the CGT provisions as a result of the acceptance by the government of various recommendations made by the Review of Business Taxation (the so-called Ralph Review). These changes included the introduction of a 50% CGT discount for individuals and certain trusts where the asset being disposed of had been held for at least 12 months, the freezing of indexation and abolition of averaging provisions, the rationalisation and extension of the small business CGT concessions and the introduction of a scrip for scrip rollover relief.

DESIGN AND STRUCTURE OF THE CGT REGIME (¶7-030 – ¶7-050) [¶7-030] Key design features of CGT

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Australia’s CGT legislation is marked by the following features:

(1) The CGT provisions have been integrated with the legislation that taxes income (ITAA36 to 30 June 1998, and thereafter ITAA97) rather than being written as a separate taxing Act. In this way the operation of CGT differs significantly from the fringe benefits tax which was introduced at about the same time. While in many ways the CGT legislation is self-contained (eg it has its own derivation and tax accounting rules), the net capital gain for the year of income is fed back into the ‘normal’ income tax system by being included in the taxpayer’s assessable income.

(2) CGT was introduced on a prospective basis. It only applies to assets acquired or deemed to have been acquired on or after 20 September 1985. This ‘grandfathering’ of assets acquired before 20 September 1985 is unique to the Australian CGT. All other countries that have introduced a CGT have charged to tax the gains that arise after the date of introduction of the tax, regardless of whether the asset was acquired before or after that date. (3) In general, CGT only applies to realised gains. In certain cases, a taxpayer may delay the recognition of a capital gain by electing to claim rollover relief.

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(4) A number of other preferences or concessions have been built into the CGT regime. For example, in the period up to 21 September 1999 CGT only taxed ‘real gains’, in that if the CGT asset was held for 12 months or more, then the cost base of the CGT asset was indexed for inflation. (Capital losses, however, were never indexed.) After 21 September 1999, a CGT discount has been introduced for certain taxpayers, and this concession may be taken rather than indexation (where indexation is still available). For example, Australian resident individuals and trusts may, in certain circumstances, exclude 50% (the CGT discount) of the capital gain that arises from a CGT event from their assessable income. The CGT discount for qualifying superannuation funds is 33⅓%. (5) Capital losses are ‘quarantined’ in that they can only be offset against capital gains (though they may be carried forward indefinitely for offset). Consequently, they are not allowed as a deduction from assessable income. (6) For individuals, net capital gains are taxed at marginal rates in the year of income in which the CGT event happens. This means that the whole of the gain is taxed in one year even though it may have accrued over a number of years.

(7) Generally, CGT is charged on resident taxpayers in respect of all CGT events, no matter where assets involved in the CGT event may be located. Foreign residents are only likely to be within the charge to CGT where the assets involved are ‘taxable Australian property’ (eg direct or indirect interests in land situated in Australia or any other CGT assets used by the foreign resident at any time in carrying on a business through a permanent establishment in Australia).

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[¶7-050] Basic structure of the CGT regime The basic structure requires you to follow the decision process in the five-step diagram shown in Figure 7.1 in order to establish whether a capital gain or a capital loss arises from a CGT event, and in order to establish the amount of the capital gain or the capital loss (Steps 1 to 4). It is also then necessary to establish the net capital gain or the net capital loss for the income year (Step 5).

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Figure 7.1 The five-step approach to CGT Step One: ¶7-100 to ¶7-570 Identify a CGT event

Step Two: ¶7-600 to ¶7-698 Calculate the capital gain or loss

Step Three: ¶7-700 to ¶7-720 Consider any exemptions or exceptions

Step Four: ¶7-800 to ¶7-820 Consider any rollovers

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Step Five: ¶7-900 to ¶7-950 Determine the net capital gain/loss for the income year

(1) Determine whether a capital gain or a capital loss has been made from a particular situation. This step involves establishing whether an act or transaction involves a CGT event. It requires knowledge of each of the CGT events and an understanding of the situation(s) in which each event applies (¶7-100ff ). It also requires an understanding of the importance of the concept of ‘CGT asset’ for many of the events (¶7-500ff ), together with an appreciation of the rules relating to the timing of acquisition of assets (¶7-550ff ). (2) Calculate the capital gain or capital loss that arises from the happening of a CGT event. For most CGT events, a capital gain arises if the taxpayer receives, or is entitled to receive, capital amounts from the CGT event which exceed the taxpayer’s total costs associated with that event, while a capital loss is recognised if the taxpayer’s total costs associated with the CGT event exceed the capital amounts which the taxpayer receives (or is entitled to receive) from the event. For most CGT events, the capital amounts which the taxpayer in question receives (or is entitled to receive) are called capital proceeds (¶7-605ff ). In determining the costs associated with most CGT events, the concepts of cost base and reduced cost base are employed by the CGT regime (¶7-620ff ). For the purpose of determining a capital gain, the costs associated with the CGT event in question are generally referred to as the cost base of the CGT asset. In working out a capital loss, the costs are generally known as the reduced cost base. (3) Determine whether any exceptions or exemptions can apply to disregard or reduce the capital gain or loss. Most of the exceptions are found in div 104 of the ITAA97

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(¶7-100ff ) while the exemptions are generally found in div 118 of the ITAA97 (¶7700ff ). One of the most commonly encountered exceptions (so-called ‘grandfathering’) is where the asset that is disposed of was acquired before 20 September 1985 (¶7-700). An example of an exemption is the main residence exemption, which determines that a disposal of the family home will usually be exempt from taxation (¶8-050).

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(4) Determine whether a taxpayer can choose to defer the capital gain by using one of the rollover provisions (¶7-800ff ). Taxpayers may choose to apply some rollovers, while others apply automatically. A replacement-asset rollover allows a capital gain or loss to be deferred from one CGT event until a later CGT event if a CGT asset is replaced with another CGT asset (¶7-820). A same-asset rollover allows a capital gain or loss to be ignored in a case where the same CGT asset is involved, usually because an asset is transferred from one entity to another entity (¶7-810). (5) Calculate the net capital gain or net capital loss that arises from the happening of all CGT events in the income year, by aggregating all capital gains and losses, and taking into account brought forward capital losses and the CGT discount where appropriate (¶7-900ff ). The separate capital gains are not included in the taxpayer’s assessable income, nor are capital losses allowed as deductions; rather all capital gains and losses of the taxpayer for the year of income are netted off. In order to work out the net capital gain for the income year, the taxpayer must: • reduce the capital gains made from CGT events in the year by any capital losses from other CGT events that took place in the year, then • apply any unused capital losses from previous years against any remaining capital gains, then • reduce any capital gains that remain by the discount percentage (if the CGT discount is applicable to that gain), then • apply any of the small business concessions of div 152 of the ITAA97 that are applicable, and • add up the remaining capital gains, which are termed the net capital gains. This net capital gain is included in the taxpayer’s assessable income for the income year.

Once a net capital gain has been included in the assessable income of an individual taxpayer, the Income Tax Rates Act 1986 (Cth) charges that income to tax at the taxpayer’s prevailing marginal tax rates. Where the aggregation of capital gains and capital losses results in a net capital loss, that loss is carried forward to the next year of income. The material that follows adopts this decision process, commencing with the CGT event.

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STEP ONE: IDENTIFYING A CGT EVENT (¶7-100 – ¶7-570) [¶7-100] CGT events The first step in determining whether a capital gain or a capital loss has arisen is to decide whether a CGT event has taken place, and if so to identify the relevant CGT event(s). Division 104 of the ITAA97 sets out all the CGT events that may result in a capital gain or capital loss. For each CGT event, div 104 specifies the cause of the event, its timing and the amount of any capital gain or capital loss resulting from the event. The CGT events summarised in s 104-5 comprise the following 12 major categories: •

disposal of a CGT asset: CGT event A1 (¶7-120)

•

end of a CGT asset: CGT events C1 to C3 (¶7-140ff )

• • • • • • • • • •

use and enjoyment of a CGT asset before title passes: CGT event B1 (¶7-130) bringing into existence a CGT asset: CGT events D1 to D4 (¶7-160ff ) trusts: CGT events E1 to E10 (¶7-180ff ) leases: CGT events F1 to F5 (¶7-250ff )

shares: CGT events G1 to G3 (excluding G2) (¶7-300ff )

special capital receipts: CGT events H1 and H2 (¶7-350ff )

Australian residency ends: CGT events I1 and I2 (¶7-370ff )

reversal of rollovers: CGT events J1 to J6 (excluding J3) (¶7-400ff ) other CGT events: CGT events K1 to K12 (¶7-440ff ), and

consolidated groups: CGT events L1 to L8 (excluding L7) (¶7-490ff ).

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[¶7-110] Order of application of CGT events A taxpayer always needs to consider whether a particular occurrence gives rise to a CGT event that may affect income tax liability. When deciding if a CGT event has happened in relation to a taxpayer, each such occurrence must be considered in light of all of the possible CGT events. Even though an occurrence does not give rise to one CGT event, it may still give rise to another. Additionally, if an occurrence does give rise to a CGT event, it is still necessary to consider if it also gives rise to another CGT event. For example, if a taxpayer pays a premium on signing a six-month lease agreement, CGT event F1 will occur (for the landlord) when the lease is granted and CGT event C2 will occur (for the lessee) when the lease expires at the end of six months. Section 102-25 of the ITAA97 directs the taxpayer to work out if a CGT event—other than CGT events D1 (¶7-165) and H2 (¶7-360)—applies to the taxpayer’s circumstances. Where more than one CGT event can apply, the taxpayer is required to employ ‘the one

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that is the most specific’ to the taxpayer’s situation (s 102-25(1)).6 However, there are three exceptions to this—for CGT event J2, for CGT event K5, and for CGT event K12.

(1) If the circumstances that gave rise to CGT event J2 (which relate to the reversal of rollovers given under the small business concessions: ¶7-410) constitute another CGT event, then CGT event J2 applies in addition to the other event. For example, if an asset that was a replacement asset in the small business rollover provisions is subsequently moved to trading stock, then two CGT events can apply:  K4 (CGT asset starts being trading stock: ¶7-460) and J2 (change in status of a CGT asset that was a replacement asset in a rollover under the small business concessions). (2) CGT event K5 (which gives rise to a capital loss in certain circumstances where a collectable has fallen in value) is dependent on the occurrence of CGT events A1 (¶7-120), C2 (¶7-150) and E8 (¶7-220). Consequently, s 102-25(2) provides that CGT event K5 is taken to have occurred in addition to one of the other three CGT events mentioned above. (3) CGT event K12 (which gives rise to a capital loss incurred by a limited partner) is dependent on the occurrence of other CGT events. Consequently, s  102-25(2) provides that CGT event K12 is taken to have occurred in addition to any other CGT event.

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Where no previously considered CGT event applies, consider whether CGT event D1 happens and use it if it applies. If CGT event D1 does not apply, consider whether H2 happens and use it if it applies (s 102-25(3)). As each CGT event has its own timing rules for when it happens, as well as specific guidance on calculation of the gain or loss and any concessional treatment that may be available in respect of that event, selecting an inappropriate CGT event may disadvantage a taxpayer. Each of the CGT events is now considered in more detail.

[¶7-120] Disposal of a CGT asset: CGT event A1 CGT event A1 is the most common of the CGT events. It occurs where there is a disposal or part disposal of a CGT asset (defined in s 108-5 ITAA97: ¶7-500ff ) (s 10410 ITAA97). A  disposal occurs if there is a change in ownership of the CGT asset in question, whether because of some act or event or by operation of law, unless there is no change in the beneficial ownership of the asset or unless the change in ownership is simply attributable to a change of trustee (s 104-10(2)). There would also not be a change of ownership where land is subdivided or titles to land amalgamated (CGT Determinations TD 7, TD 8). Provided there is no change in beneficial ownership, CGT event A1 does not happen on a conversion from a joint tenancy into a tenancy in common in equal shares (CGT Determination TD 13, withdrawn in 2013).

6

See, for example, Healey v FC of T 2012 ATC ¶20-309; 208 FCR 300, a case that considered which of CGT events A1 and E2 was more specific in the circumstances of the case.

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The time of CGT event A1 is when the contract for the disposal is entered into or, in the absence of a contract, the time when the change of ownership took place (s 10410(3)).7 If there is more than one contract, you need to consider which is the appropriate contract (Elmslie v FC of T;8 Kiwi Brands Pty Ltd v FC of T).9 Further, the appropriate contract is not required to be specifically enforceable when made; it can be subject to subsequent conditions, such as obtaining statutory approval, and it can be an oral contract (McDonald v FC of T).10 In the case of a gift of shares, the handing over of a signed share transfer form and the share script would constitute a disposal of shares by the donor, even though the transfer is not registered (Case V156).11 Example—Time of CGT event A1

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On 1 June 2017 Lewis enters into a contract to sell land. The contract is settled on 1 October 2017 and Lewis makes a capital gain of $100,000. The gain is assessable in the 2016/17 income year (the year Lewis entered into the contract) and not the 2017/18 income year (the year that settlement took place).

If a contract falls through before completion, CGT event A1 does not happen because no change in ownership has taken place (Note 1 to s 104-10(3)). A capital gain arises if the capital proceeds from the disposal exceed the asset’s cost base, while a capital loss arises when the capital proceeds are less than the asset’s reduced cost base (s 104-10(4)). A capital gain or loss from this CGT event is disregarded if the asset was acquired before 20 September 1985 or if the asset in question is a lease which was granted, renewed or extended before that day (s 104-10(5)). Where a change in ownership of an asset occurs, there is both a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change. In other words, a disposal requires a transaction under which one person loses title to an asset and another person gains it.

Compulsory acquisition If the CGT asset in question was acquired by an entity under a power of compulsory acquisition conferred by an Australian law or foreign law, the time of CGT event A1 for the taxpayer disposing of the CGT asset is the earliest of the following (s 104-10(6)): •

when the taxpayer received compensation from the entity acquiring the asset

7

Metlife Insurance Ltd v FC of T 2008 ATC ¶20-025.

8

93 ATC 4964; (1993) 46 FCR 576.

9

99 ATC 4001; 90 FCR 64.

10 98 ATC 4306; (1998) 80 FCR 248. Also note the decision in Gardiner v FC of T 2000 ATC 2018; [2000] AATA 257 in which the AAT held that a contract to purchase land was made prior to exchange on the basis that letters of offer and acceptance had been sent and received, and the eventual contract that was exchanged did not substantially vary the terms set out in those early letters. 11 88 ATC 1005.

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•

when the entity became the asset’s owner

•

when the entity took possession under that power.

•

when the entity entered it under that power, and

The taxpayer may be able to choose a rollover relief if an asset is compulsorily acquired (sub-div 124-B ITAA97; ¶8-210).

[¶7-130] Use and enjoyment of a CGT asset before title passes: CGT event B1 CGT event B1 happens if a taxpayer enters into an agreement with another entity under which the right to the use and enjoyment of a CGT asset owned by the taxpayer passes to the other entity and title in the asset will or may pass to the other entity at or before the end of the agreement (s 104-15(1) ITAA97). The time of the event is when the other entity first obtains the use and enjoyment of the asset (s 104-15(2)). In other words, CGT event B1 has the effect of bringing forward the time of the disposal in certain circumstances. A hire purchase agreement would be an example of CGT event B1. The hirer has the use and enjoyment of the asset, but title does not pass until the agreement is completed. Another example would be where there is a terms contract for the sale of land. Taxation Ruling TR 94/29 indicates that CGT event B1 happens when possession of the land is given to the purchaser, or the purchaser becomes entitled to the rent and profits. A capital gain arises if the capital proceeds from the agreement exceed the asset’s cost base, while a capital loss results if the asset’s reduced cost base exceeds the capital proceeds (s 104-15(3)). Any capital gains or losses from this CGT event are disregarded if the title in the asset does not pass to the other entity when the agreement ends or if the taxpayer acquired the asset before 20 September 1985 (s 104-15(4)).

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Example—CGT event B1 Abbott agrees to rent a factory from Costello for five years. Under the terms of the agreement Abbott is able to acquire the factory from Costello at any time in the fiveyear period. CGT event B1 happens for Costello when Abbott first obtains the ‘use and enjoyment’ of the factory (presumably when Abbott enters into the agreement, or shortly afterwards). If Abbott did not take up the right to buy the factory from Costello by the end of the fiveyear agreement, the capital gain or capital loss for Costello under CGT event B1 would be disregarded.

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END OF A CGT ASSET: CGT EVENTS C1 TO C3 (¶7-140 – ¶7-155) [¶7-140] Introduction Subdivision 104-C of the ITAA97 (s 104-20 to 104-30) contains the rules dealing with the occurrence of a CGT event where there is an end of a CGT asset. The three occasions where this occurs are: (1) loss or destruction of a CGT asset: CGT event C1 (¶7-145)

(2) cancellation, surrender and similar ending of an intangible CGT asset: CGT event C2 (¶7-150), and (3) end of an option to acquire shares: CGT event C3 (¶7-155).

[¶7-145] CGT event C1: Loss or destruction of a CGT asset This CGT event occurs if a CGT asset owned by a taxpayer is lost or destroyed (s 10420(1) ITAA97). Given that the definition of CGT asset encompasses part of a CGT asset, CGT event C1 can also occur if part of a CGT asset is lost or destroyed. Any compensation received becomes the capital proceeds (s 116-20(1) ITAA97). It should be noted that for CGT event C1 the modification to substitute market value as the capital proceeds does not apply (s  116-25). The compensation could be either money or a replacement asset. In certain cases the rollover relief provisions in sub-div 124-B of the ITAA97 may be available and if chosen would defer the gain arising under CGT event C1 (¶8-210). The time of CGT event C1 is (s 104-20(2)): •

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•

when compensation is first received for the loss or destruction, or

if no compensation is received, when the loss is discovered or the destruction occurred.

Example—Time of CGT event C1 On 1 January, a taxpayer’s factory was destroyed by fire. Compensation was not received from the insurance company until May of the same year. CGT event C1 would have occurred in May.

A capital gain is made if the capital proceeds from the loss or destruction are more than the asset’s cost base. A capital loss is recognised if the capital proceeds are less than the asset’s reduced cost base (s 104-20(3)). As with most CGT events, a capital gain or loss made from CGT event C1 is disregarded if the asset was acquired by the taxpayer before 20 September 1985 (s 104-20(4)).

[¶7-150] CGT event C2: Cancellation, surrender and similar ending of a CGT asset Where a taxpayer’s ownership of an intangible CGT asset (¶7-510) is brought to an end as a result of the asset expiring or being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited, CGT event C2 happens (s  104-25(1) ITAA97).

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Examples of CGT event C2 include a share being redeemed, a debt being discharged or a contract expiring. In Taxation Determination TD 2001/26 the Commissioner notes that the renunciation by a beneficiary of an interest in a discretionary trust would also give rise to CGT event C2. Another example of CGT event C2 provided by the Commissioner— relating to the satisfaction of an investor’s rights under a Deferred Purchase Agreement warrant—is in Taxation Determination TD 2008/22. In the case of an option or convertible interest CGT event C2 happens when the option is exercised or the interest converted. The time of CGT event C2 is when the contract that resulted in the asset coming to an end was entered into or, if there was no contract, when the asset came to an end (s 10425(2)). A lease is taken to have expired even if it is extended or renewed (s 104-25(4)). As an asset ends when CGT event C2 happens, there is no acquisition of the asset by another person at that time. A capital gain arises if the capital proceeds from the ending of the asset exceed the asset’s cost base, while a capital loss results if the asset’s reduced cost base exceeds the capital proceeds (s 104-25(3)). Capital gains or losses arising from assets acquired before 20 September 1985 are disregarded (s 104-25(5)(a)). This exemption also applies to leases that were granted before 20 September 1985 or renewed or extended before that day (s 104-25(5)(b)). A capital loss flowing from the expiry, surrender, forfeiture or assignment of a lease (other than a lease granted for 99 years or more) is disregarded if the lease was not used solely or mainly to produce assessable income (s  118-40 ITAA97). Other exceptions include where rights to acquire shares or units are exercised (¶8-615); where shares or units are acquired by converting a convertible interest (¶8-620); and where an option is exercised (¶8-660).

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Example—Operation of CGT event C2 Benbow entered into an oral cartage agreement with Nelson. On entering into this agreement Benbow acquired the right to cart Nelson’s products. The agreement represented the whole business carried on by Benbow. After several years the agreement was terminated and an amount was paid to Benbow for the cancellation of the agreement. On accepting the payment Benbow lost his rights under the agreement. Benbow was put out of business by the cancellation of the agreement. Benbow signed a Deed of Release when he received the payment. The Deed of Release provided that the payment was ‘in full and final satisfaction of all suits, claims and/or demands whatsoever which [Benbow] now has or may hereafter have in or arising out of any arrangements under which [Benbow] carted product for [Nelson]’. On entering into the agreement with Nelson, Benbow acquired legal or equitable rights, for example, the right to enforce the resulting contractual obligations. The agreement was therefore a CGT asset under s 108-5 of the ITAA97. CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways. Benbow’s CGT asset (his rights under the agreement) was an intangible asset and his ownership of that asset ended by the asset being released or cancelled when he entered into the Deed of Release. Accordingly, CGT event C2 happens under s 104-25(1).

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The capital proceeds from the CGT event happening is the amount received for the termination of the agreement. A capital gain will arise if those proceeds are greater than the right’s cost base. From 1 July 2006, capital gains or losses arising from the cancellation or surrender of shares or units in widely held entities are calculated using the actual proceeds received (rather than the asset’s market value being substituted: s 116-30(2A) of the ITAA97).

[¶7-155] CGT event C3: End of an option to acquire shares This CGT event happens if an entity is granted an option by a company or the trustee of a unit trust to acquire shares or debentures of the company or units or debentures of the unit trust and the option comes to an end in one of the following ways (s 104-30(1) of the ITAA97): •

it is not exercised by the latest time for its exercise

•

it is released or abandoned.

•

it is cancelled, or

The time of this CGT event is when the option ends (s 104-30(2)). The company or trustee makes a capital gain if the capital proceeds from the grant of the option are more than the expenditure incurred in granting it, while a capital loss is recognised if the capital proceeds are less than the relevant expenditure (s 104-30(3)). The expenditure incurred in granting the option can include giving property, in which case the market value of the property is the amount of that expenditure (s 103-5 of the ITAA97). However, the incurred expenditure does not include any non-assessable recoupment of that expenditure (s 104-30(4)). A capital gain or loss made by the relevant taxpayer is not taken into account if the option in question was granted before 20 September 1985 (s 104-30(5)).

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Example—Operation of CGT event C3 In May 2017, Joe Brown paid Lite Ltd $200 for 1,000 options in the company. The options gave Brown the right to buy 1,000 shares in the company for $2 per share. The options expired on 1 October 2018. As the share price did not exceed $2 per share at any time before 1 October 2018, Brown decided not to exercise the options. As a result CGT event C3 happened on 1 October 2018 and Lite Ltd made a capital gain in 2018/19 of $200 less any expenditure it incurred in granting the option.

BRINGING INTO EXISTENCE A CGT ASSET: CGT EVENTS D1 TO D4 (¶7-160 – ¶7-178) [¶7-160] Introduction Subdivision 104-D of the ITAA97 (s 104-35 to 104-47) contains the rules governing the following CGT events: •

creating contractual or other rights: CGT event D1 (¶7-165)

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•

granting an option: CGT event D2 (¶7-170)

•

entering into a conservation covenant over land: CGT event D4 (¶7-178).

•

granting a right to income from mining: CGT event D3 (¶7-175), and

CGT events D1 and D2 are the reverse of CGT events C1 to C3 and bring within the scope of CGT the disposal of legal rights through their creation.

[¶7-165] CGT event D1: Creating contractual or other rights This CGT event only applies if no CGT event happens other than CGT event H2 (s 10225 ITAA97). CGT event D1 takes place if the taxpayer creates a contractual right or other legal or equitable right in another entity (s 104-35(1) ITAA97). Event D1 applies where a person enters into a contractual agreement with another entity which acquired the rights under that agreement. Example—Operation of CGT event D1

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An actor accepts $2 million from producer A in return for agreeing not to appear in a film made by a rival producer B at any time in the next five years. The actor brings into existence a CGT asset, the contractual rights under the agreement, and CGT event D1 happens. If the agreement is breached, the other party to that agreement (producer A) can enforce that right. As a result of CGT event D1, the actor will be assessed on the $2 million capital proceeds received, less the incidental costs incurred in relation to the event: s 104-35(3).

The time of this CGT event is when the contract is entered into or the other right is created (s  104-35(2)). A  capital gain arises if the capital proceeds accruing from the creation of the right exceed the incidental costs incurred by the creator of this right that relate to the CGT event. A capital loss follows if the capital proceeds are less than these incidental costs (s  104-35(3)). The market value substitution rule (¶7-610) does not apply to capital proceeds received from CGT event D1 (s  116-30(3)(b) ITAA97). The expenditure incurred in creating the right can include giving property. If so, the market value of the property is used when working out the amount of those incidental costs (s 1035 ITAA97). However, the incidental costs do not include any non-assessable recoupment of those costs nor any part of those costs that is deductible (s 104-35(4)). CGT event D1 does not take place if (s 104-35(5)): •

•

the right was created through the borrowing of money or the obtaining of credit from another entity

the right requires the taxpayer concerned to do something which constitutes another CGT event for the taxpayer; for example, where a taxpayer enters into a contract to sell land, the signing of the contract of sale constitutes the time of disposal of that land, and although the buyer has a contractual right to enforce the contract, CGT event A1 would have applied to the disposal of the land and therefore CGT event D1 does not happen (s 104-35(5))

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a company issues or allots shares, or

the trustee of a unit trust issues units in the trust.

CGT event D1 is based on the latest version of what was s 160M(6) of the ITAA36, which applied where a person created an asset that was not a form of corporeal property and, on its creation, the asset vested in another person. The following list of circumstances where s  160M(6) was intended to apply may by implication indicate situations where CGT event D1 is intended to apply:12 •

entry into an agreement not to compete

•

agreeing to play sport only with a particular club

• •

• • • • • •

• •

entry into an exclusive dealing agreement

agreeing to play only a particular sport (eg a rugby union player agreeing to play rugby league) agreeing not to appear in a film made by a rival producer

agreeing to withdraw an objection to a town planning application granting management rights over property agreeing to endorse a product

granting a right to use a trademark

agreeing to supply mining information

agreeing to vary a contract where the variation does not involve the disposal of any contractual rights, and agreeing to assign an expectancy or a right that is yet to come into existence.

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In many of the above examples the asset created will eventually expire or otherwise be extinguished. When this occurs, CGT event C2 (¶7-150) happens in relation to the asset acquired as a result of CGT event D1. Example—CGT event C2 Following on from the example above of the actor and the receipt of $2  million from producer A, CGT event C2 will apply to recognise a capital loss for producer A once the asset (the right to sue the actor if he does appear in a film by rival producer B) has expired (after five years) or otherwise come to an end (perhaps through breach of the contract).

[¶7-170] CGT event D2: Granting an option Although the creation of an option would be covered by CGT event D1, CGT event D2 specifically includes as a CGT event the granting of an option and, hence, takes precedence

12 See also Taxation Ruling TR 95/3.

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over CGT event D1. CGT event D2 happens if an option is granted, renewed or extended (s 104-40(1) ITAA97). CGT event D2 does not apply to: •

options granted, renewed or extended by a company or the trustee of a unit trust to acquire shares in the company or units in the unit trust or debentures of the company or of the unit trust (s 104-40(6)),13 or

• options relating to personal use assets (¶7-530) or collectables (¶7-525) (s 104-40(7)).

The time of this CGT event is when the option is granted, renewed or extended (s  104-40(2)). However, this event will be disregarded if the option is exercised (s 104-40(5)). Example—Grant and exercise of an option

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On 10 June 2018, Jones pays Smith $5,000 for a one-month option to buy Smith’s property for $300,000. On 1 July 2018 Jones exercises his option. On 10 June 2018, CGT event D2 happens for Smith and, assuming there are no expenses in granting the option, Smith has a capital gain of $5,000 in the 2017/18 tax year. However, when Jones exercises the option, CGT event D2 is disregarded. On the disposal of the property on 1 July 2018 CGT event A1 happens and Smith’s capital proceeds are $5,000 + $300,000 = $305,000, while Jones’s cost base is $305,000. If Smith lodges his tax return for the 2017/18 year before the option is exercised, the capital gain of $5,000 in the year of granting the option will have to be adjusted by an amended assessment, because on the exercise of the option CGT event D2 is disregarded.

A capital gain arises if the capital proceeds from the grant, renewal or extension of the option are more than the expenditure incurred in the grant, renewal or extension. A capital loss arises if the expenditure is more than the proceeds (s  104-40(3)). The expenditure incurred in granting, renewing or extending the option can include giving property. If so, the market value of the property is used when working out the amount of that expenditure (s 103-5 ITAA97). However, the incurred expenditure does not include any non-assessable recoupment of the expenditure nor any part of the expenditure that is deductible (s 10440(4)). The CGT consequences of the exercise of an option are contained in s 134-1 of the ITAA97 (¶8-660).

[¶7-175] CGT event D3: Granting a right to income from mining This CGT event happens if the owner of a prospecting or mining entitlement (or an interest in one) grants another entity a right to receive ordinary income or statutory income from operations permitted to be carried on by the entitlement (s 104-45(1) ITAA97). If CGT event D3 happens, there is no disposal of the entitlement, so that CGT event A1 (¶7-120) does not happen. The time of this CGT event is when the contract is entered

13 CGT event C3 (¶7-155) applies to this situation.

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into or, in the absence of a contract, when the right to receive ordinary or statutory income is granted (s 104-45(2)). A capital gain arises if the capital proceeds from the grant of the right are more than the expenditure incurred by the grantor in granting it. A  capital loss arises if the capital proceeds are less than the expenditure (s 104-45(3)). The expenditure incurred in granting the right to the income can include giving property. If so, the market value of the property is used when working out the amount of that expenditure (s 103-5 ITAA97). However, the incurred expenditure does not include any non-assessable recoupment of the expenditure nor any part of the expenditure that is deductible (s 104-45(4)).

[¶7-178] CGT event D4: Entering into a conservation covenant

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This CGT event happens if the owner of land enters into a conservation covenant. The time of the CGT event is when the covenant is entered into. A conservation covenant is a binding and perpetual agreement by a landowner which restricts or prohibits activities on the land that could degrade its environmental value. Such covenants have to be registered on the title to the land (where registration is possible) and must also be approved by the Minister for the Environment and Heritage. Taxpayers who enter into such covenants may be entitled to an income tax deduction (¶11-740). There may also be CGT consequences. A  capital gain will occur where the capital proceeds from entering into the covenant are greater than the part of the cost base of the land that is attributed to the covenant. If the capital proceeds are less than the attributable part of the cost base, a capital loss arises. The capital proceeds are usually the amount of the deduction given under the income tax provisions. If there are no capital proceeds and no deduction, CGT event D1 applies rather than D4. The relevant cost base is calculated by apportioning the cost base of the land by reference to the capital proceeds from entering into the covenant divided by those capital proceeds plus the market value of the land just after the taxpayer enters into the covenant. Example—CGT event D4 Giles receives $50,000 for entering into a conservation covenant. The cost base of the land is $250,000, and immediately after entering into the covenant the market value of the land is $450,000. Therefore the cost base of the land that is attributed to the restrictive covenant is: $250 ×

$50, 000 = $25, 000 $50, 000 + $450, 000

The capital gain under CGT event D4 is: $50,000 − $25,000 = $25,000. The cost base of the land for future CGT purposes will be: $250, 000 − $25, 000 = $225, 000

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TRUSTS: CGT EVENTS E1 TO E10 (¶7-180 – ¶7-230) [¶7-180] Introduction To understand CGT events E1 to E10 you need to understand the legal concept of a trust.14 In brief, a trust is a device whereby the rights of ownership of trust property are divided between: •

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•

a legal owner—the trustee, and

an equitable owner—the beneficiary.

As an equitable owner, the beneficiary may have certain rights under a deed of settlement, such as a right to use or occupy trust property or a right to a share of trust income. In the case of a discretionary trust there is no equitable owner because the trustee has the power to allocate the income and capital among the potential beneficiaries. If a beneficiary becomes absolutely entitled to trust property as against the trustee, the beneficiary can direct how the trustee deals with that property. In this case s 106-50 of the ITAA97 provides that any act done by the trustee in relation to an asset is taken to be an act done by the person who is absolutely entitled to that asset. If a CGT event occurs in relation to that asset, the person who is absolutely entitled will be subject to the CGT liability, not the trustee (¶7-990). The circumstances under which a beneficiary becomes absolutely entitled as against the trustee are not defined in the legislation. It is generally considered, however, that a beneficiary will be absolutely entitled to an asset of the trust if the beneficiary is in a position to call for an immediate transfer of the asset, regardless of legal disability.15 Where a trust makes a capital gain it is included in the calculation of net trust income (s 95 ITAA36). This may result in the net trust income being different from the distributed accounting trust income. The trustee may then be able to allocate the distribution of the capital gain to selected beneficiaries (¶17-205).16 Capital gains made by a trust will be taxed like any other trust income. The trustee will be liable for tax on the capital gain where a beneficiary is presently entitled but is under a legal disability, or where no beneficiary is presently entitled. Otherwise the beneficiary will be liable for the tax on any capital gain. Subdivision 104-E of the ITAA97 (s 104-55 to 104-105) contains the rules governing the following 10 CGT events concerning trusts: •

creating a trust over a CGT asset: CGT event E1 (¶7-185)

•

converting a trust to a unit trust: CGT event E3 (¶7-195)

•

transferring a CGT asset to a trust: CGT event E2 (¶7-190)

14 See also Chapter 17, and in particular ¶17-010 to ¶17-050 ‘Background: Some aspects of the law of trusts’. 15 Draft Taxation Ruling TR 2004/D25 provides the Commissioner’s view of the meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ as used in pt 3-1 and 3-3 ITAA97. 16 See also FC of T v Bamford (2010) 240 CLR 481; 2010 ATC ¶20-170.

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•

capital payment for an interest in a trust: CGT event E4 (¶7-200)

•

disposal to a beneficiary to end right to income from the trust:  CGT event E6 (¶7-210)

•

• • •

•

beneficiary becoming entitled to a trust asset: CGT event E5 (¶7-205)

disposal to beneficiary to end capital interest: CGT event E7 (¶7-215) disposal by beneficiary of capital interest: CGT event E8 (¶7-220)

creating a trust over future property: CGT event E9 (¶7-225), and

where the cost base reduction in relation to an attributed managed investment trust exceeds the cost base: CGT event E10 (¶7-230).

[¶7-185] CGT event E1: Creating a trust over a CGT asset This CGT event happens if a trust is created over a CGT asset by declaration or settlement (s 104-55(1) ITAA97). The effect of this event is that the trustee is taken to have acquired the asset at the time when the trust is created (s 109-5(2) ITAA97). The time of this event is when the trust over the asset is created (s 104-55(2)). A capital gain is made if the capital proceeds from the creation exceed the asset’s cost base, and a capital loss is made if the capital proceeds are less than the asset’s reduced cost base (s 104-55(3)).17 If the taxpayer is the trustee and if no beneficiary is absolutely entitled to the asset (disregarding any legal disability), the first element of the asset’s cost base and reduced cost base (¶7-620ff, ¶7630ff ) is its market value when the trust is created (s 104-55(4)). This CGT event is not taken to have occurred if there is a sole beneficiary of the trust who is absolutely entitled to the asset as against the trustee and the trust is not a unit trust (eg where a bare trust is created) (s 104-55(5)(a)). A capital gain or loss from this CGT event is disregarded if the asset was acquired before 20 September 1985 (s 104-55(6)).

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[¶7-190] CGT event E2: Transferring a CGT asset to a trust This CGT event takes place if a CGT asset is transferred to an existing trust (s 104-60(1)). The time of this event is when the asset is transferred (s 104-60(2)). A capital gain is made if the capital proceeds from the transfer exceed the asset’s cost base, while a capital loss arises if the capital proceeds are less than the asset’s reduced cost base (s 104-60(3)). If the taxpayer is the trustee and if no beneficiary is absolutely entitled to the asset, the first element of the asset’s cost base and reduced cost base (¶7-620ff, ¶7-630ff ) is its market value when the asset is transferred (s 104-60(4)). Example—CGT event E2 Thomas transfers an asset with a cost base of $2,000 to a trust, receiving consideration of $2,500. Thomas makes a capital gain of $500.

17 Taras Nominees as Trustee for the Burnley Street Trust v FC of T [2015] FCAFC 4; 228 FCR 418; 2015 ATC ¶20-483 provides an example which involved a conveyance of land to a trustee which was a ‘settlement’ giving rise to CGT event E1. Also see Taxation Determination TD 2012/21 which considers whether CGT event E1 or E2 can arise when the terms of a trust are changed pursuant to a valid exercise of power within the trust.

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This CGT event is not taken to have occurred if there is a sole beneficiary of the trust who is absolutely entitled to the asset as against the trustee and the trust is not a unit trust (s 104-60(5)(a)). A capital gain or loss from this CGT event is disregarded if the asset was acquired before 20 September 1985 (s 104-60(6)).

[¶7-195] CGT event E3: Converting a trust to a unit trust This CGT event takes place if a trust (other than a unit trust) over a CGT asset is converted to a unit trust and, just before the conversion, a beneficiary under the trust was absolutely entitled to the asset as against the trustee (s 104-65(1) ITAA97). The time of this CGT event is when the trust is converted (s 104-65(2)). Section 104-65 provides that the beneficiary is taken to have made a capital gain if the market value of the asset, when the trust is converted, is more than the asset’s cost base. A capital loss results if the market value is less than the asset’s reduced cost base. Any capital gains or losses made by the beneficiary from this CGT event are disregarded if the asset was acquired before 20 September 1985 (s 104-65(4)).

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[¶7-200] CGT event E4: Capital payment for an interest in a trust This CGT event takes place if the trustee of a trust makes a payment in respect of the taxpayer’s unit or interest in the trust—except for CGT event A1 (¶7-120), C2 (¶7-150), E1 (¶7-185), E2 (¶7-190), E6 (¶7-210) or E7 (¶7-215) happening in relation to it—and some or all of the payment (referred to as the non-assessable part) is not included in the assessable income of the recipient of the payment (s 104-70(1) ITAA97). Consequently, CGT event E4 treats as a CGT event the payment of the nonassessable part of a distribution by the trustee to a beneficiary who has an interest in the trust. The requirement that the beneficiary have an ‘interest in the trust’ suggests that CGT event E4 would not apply to a discretionary trust (Taxation Determination TD 2003/28). CGT event E4 applies where a trust distribution includes tax-deferred amounts associated with the small business 50% reduction, frozen indexation, building allowances and accounting differences in income. However, the non-assessable part does not include excluded exempt income (s 36-20(3) ITAA97), non-assessable non-exempt income (¶9005), payments from an amount that has been assessed to the trustee, assessable personal services income (¶25-480), amounts repaid by the taxpayer or compensation paid by the taxpayer which can reasonably be regarded as a repayment, and amounts exempt under the small business 15-year exemption (¶8-420). The non-assessable part is also reduced by amounts that are exempt income arising from shares in a pooled development fund (PDF) (¶21-600), exempt payments relating to infrastructure borrowings (¶9-075), and proceeds from a CGT event that happens in relation to shares in a PDF (¶7-705). CGT event E4 will not apply to: • •

a payment of a discount CGT amount made by a trustee to a beneficiary on or after 1 July 2001

a payment of a CGT discount amount made before 1 July 2001 to a beneficiary that is the trustee in a chain of trusts.

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The amount of the non-assessable part reduces the cost base of the asset. When the non-assessable part exceeds the cost base, a capital gain will arise (s 104-70(4)), and the cost base or reduced cost base of the unit or interest will be reduced to zero (s 104-70(5)). The time of this event is at the end of the income tax year or at the time another CGT event applies to the trust interest (s 104-70(3)). This CGT event may result in a capital gain or a cost base adjustment to the beneficiary’s trust interest, but does not result in a capital loss. The operation of the cost base adjustment rules is illustrated by the following examples. The first is adapted from an example provided in s 104-70(6): Examples—CGT event E4 Example 1 Mandy owns units in a unit trust that she bought three years ago for $10 each. During the current income year the trustee makes four non-assessable payments of $0.50 per unit. If at the end of the income year Mandy’s cost base for each unit would otherwise be $10, the payments require that it be reduced by $2, giving a new cost base of $8. If Mandy subsequently sells the units (CGT event A1) for more than their cost base at that time, she will make a capital gain equal to the difference. Example 2

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Sid owns units in a unit trust that currently have a cost base of $2 per unit. The trustee makes a non-assessable payment of $3 to Sid in respect of each unit. The cost base of each of Sid’s units will be reduced to zero and he will also make a capital gain of $1 on each unit (subject to the possible availability of the CGT discount).

Any capital gains or losses resulting from this CGT event are disregarded if the asset was acquired before 20 September 1985 (s 104-70(7)).

[¶7-205] CGT event E5: Beneficiary becoming entitled to a trust asset This CGT event occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust, as against the trustee. CGT event E5 does not apply to a unit trust or a deceased estate (¶8-510) (s 104-75(1) ITAA97). The time of this CGT event is when the beneficiary becomes absolutely entitled to the CGT asset (s 104-75(2)). The beneficiary is taken to have received the market value of the asset in exchange for the beneficiary’s interest in the trust. Therefore, the event can apply to both the trustee and the beneficiary. The trustee makes a capital gain if the market value of the asset at the time of this CGT event is more than the asset’s cost base. A capital loss results if the market value is less than the asset’s reduced cost base (s 104-75(3)). Any capital gains or losses made by the trustee from this CGT event are disregarded if the asset was acquired before 20 September 1985 (s 104-75(4)). The beneficiary makes a capital gain if the market value of the asset at the time of this CGT event is more than the cost base of the beneficiary’s interest in the trust capital

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to the extent that it relates to the asset (s 104-75(5)). A capital loss results if the market value is less than the reduced cost base of the beneficiary’s interest in the trust capital to the extent that it relates to the asset (s 104-75(5)). Any capital gains or losses made by the beneficiary from this CGT event are disregarded if the asset was acquired before 20 September 1985 or if the beneficiary’s interest in the CGT asset was acquired for no expenditure, such as an interest in an asset bequeathed in a will. This exemption does not apply where the beneficiary’s interest was acquired by way of an assignment from another entity (s 104-75(6)).

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[¶7-210] CGT event E6: Disposal to a beneficiary to end right to income from the trust This CGT event takes place if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in return for the beneficiary’s right, or part of it, to receive trust income. CGT event E6 does not apply to a unit trust or a deceased estate, and can only apply where the beneficiary has a right to income from the trust (s 104-80(1) ITAA97). The time of this CGT event is when the disposal occurs (s 104-80(2)). This CGT event can affect both the trustee and the beneficiary because the trustee is disposing of an asset and the beneficiary is disposing of rights under the trust. The trustee makes a capital gain if the market value of the asset at the time of the disposal is more than the asset’s cost base. A capital loss results if the market value is less than the asset’s reduced cost base (s 104-80(3)). Any capital gains or losses made by the trustee from this CGT event are disregarded if the asset was acquired before 20 September 1985 (s 104-80(4)). The beneficiary makes a capital gain if the market value of the asset at the time of the disposal is more than the cost base of the right or the part of it (s 104-80(5)). A capital loss results if the market value is less than the reduced cost base of the right or part (s 10480(5)). In working out the cost base and reduced cost base of the right to trust income, the market value substitution rule (¶7-645) does not apply if the beneficiary did not pay anything for the right (s 112-20). Any capital gains or losses made by the beneficiary from this CGT event are disregarded if the beneficiary acquired the asset that is the right before 20 September 1985 (s 104-80(6)).

[¶7-215] CGT event E7: Disposal to beneficiary to end capital interest This CGT event has a similar effect to CGT event E6. The difference is that CGT event E7 applies where the consideration for the asset is the disposal to the trustee of the beneficiary’s right to trust capital. CGT event E7 takes place if the trustee of a trust— other than a unit trust or a deceased estate (¶8-510)—disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital (s 104-85(1) ITAA97). The time of this CGT event is when the disposal occurs (s 104-85(2)). The trustee makes a capital gain if the market value of the asset at the time of the disposal is more than the asset’s cost base. A capital loss results if the market value is less

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than the asset’s reduced cost base (s 104-85(3)). Any capital gains or losses made by the trustee from this CGT event are disregarded if the asset was acquired before 20 September 1985 (s 104-85(4)). The beneficiary makes a capital gain if the market value of the asset at the time of the disposal is more than the cost base of the interest, or the part of it, being satisfied. A capital loss results if the market value is less than the reduced cost base of that interest or part (s 104-85(5)). Any capital gains or losses made by the beneficiary from this CGT event are disregarded if the beneficiary’s interest in the asset was acquired for no expenditure or acquired before 20 September 1985. The exemption does not apply where the beneficiary’s interest was acquired by way of an assignment from another entity (s 104-85(6)). For this purpose, expenditure can include giving property.

[¶7-220] CGT event E8: Disposal by beneficiary of capital interest While CGT event E7 applies to a disposal of a beneficiary’s interest in the capital of the trust to the trustee, CGT event E8 applies where a beneficiary, who did not give any money or property to acquire an interest in the capital of the trust and did not acquire it by assignment, disposes of an interest, or part interest, in the capital of the trust to a third party, other than the trustee. CGT event E8 will not apply where the trust is a unit trust or a deceased estate (s 104-90 ITAA97). The time of this CGT event is when the beneficiary entered into the contract for the disposal or, in the absence of a contract, when the beneficiary stopped owning the interest or part (s 104-90(2)). Where the taxpayer is the only beneficiary with an interest in the trust capital, a capital gain arises from this CGT event if the capital proceeds from the disposal are more than the net asset amount (s 104-95(1)). The net asset amount is found by adding (s 10495(2)):

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(1) the sum of the cost bases of the trust’s CGT assets acquired on or after 20 September 1985

(2) the sum of the market values of the trust’s CGT assets acquired before 20 September 1985, and

(3) the amount of money that formed part of the trust capital at the time of the disposal.

Any liabilities of the trust at that time are subtracted from this aggregate amount. A capital loss arises from this CGT event if the capital proceeds from the disposal are less than the reduced net asset amount (s 104-100(1) ITAA97). The reduced net asset amount is determined in the same way as the net asset amount, except that the reduced cost bases of the trust’s post-CGT assets are taken into account rather than their cost bases (s 104-100(2)). Where there is more than one beneficiary having an interest in the trust capital or a beneficiary is disposing of only a part of such an interest, capital gains and losses from this CGT event are worked out in the same way, except that the net asset amount and reduced net asset amount are reduced by reference to the proportion of the trust interest being disposed of (s 104-95(5), (6); 104-100(4), (5)). A capital gain or loss from this CGT event is ignored if the trust interest was acquired before 20 September 1985.

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Example—CGT event E8 A beneficiary of the XYZ trust disposes of his interest in trust capital for $40,000. At the time of the contract for disposal, the sum of the cost bases of the trust’s CGT assets acquired on or after 20 September 1985 was $30,000 and the market value of the trust’s pre-CGT assets was $6,000. The money that formed part of the trust capital at the time of disposal was $5,000 and the liabilities $3,000. The net asset amount is $30,000 + $6,000 + $5,000 − $3,000 = $38,000. The capital gain to the beneficiary is $40,000 − $38,000 = $2,000. If the beneficiary disposes of part of his interest in the trust capital, say 50%, then the net asset amount is 50% of $38,000 = $19,000. If the beneficiary receives $20,000 for his 50% interest in the capital of the trust, then the capital gain is $20,000 − $19,000 = $1,000.

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[¶7-225] CGT event E9: Creating a trust over future property This CGT event takes place if the taxpayer in question agrees for consideration that when property comes into existence it will be held on trust and, at the time of the agreement, no potential beneficiary under the trust has a beneficial interest in the rights created by the agreement (s 104-105(1) ITAA97). The time of this CGT event is when the agreement is made (s 104-105(2)). A capital gain arises if the market value of the property under the agreement is more than the incidental costs incurred by the taxpayer. A capital loss arises if the market value is less than the incidental costs (s 104-105(3)). In calculating these incidental costs the taxpayer cannot include an amount that has been or can be deducted, or an amount received as recoupment of these costs (s 104-105(4)). The difficulty with this event is that the calculation of the capital gain or capital loss is based on the market value of future property. The market value of property yet to come into existence may be open to speculation. This may create difficulties where a tax return needs to be prepared before the future property comes into existence.

[¶7-230] CGT event E10: Cost base reduction exceeds cost base This CGT event arises as a result of the introduction of the Attributed Managed Investment Trust (AMIT) regime in 2016. Managed Investment Trusts (MITs) are often the vehicles of choice for those in the funds management sector, the property industry and the infrastructure sector who use trusts. Like other unit trusts, an AMIT can make nonassessable payments to members (unit holders) which can affect the cost base or reduced cost base of their membership interests. CGT event E10 applies to CGT assets that are membership interests in an AMIT in much the same way as CGT event E4 applies for other trusts. If a member receives non-assessable payments from an AMIT, the cost base and reduced cost base of the membership interests will need to be adjusted both upward and downward. The reduction and the increase amounts are netted off against each other to arrive at the ‘cost base net amount’, which then is applied to the asset cost base. Where the cost base reduction amount exceeds the cost base increase amount, the resulting cost base net amount is used to reduce the asset’s cost base or reduced cost base. If the net amount

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is greater than the cost base, it will reduce the cost base to nil. Any remaining excess will give rise to a capital gain as a result of CGT event E10. Where the cost base increase amount exceeds the cost base reduction amount, the resulting cost base net amount is used to increase the asset's cost base and reduced cost base. This will not trigger a CGT event; however, it may result in a reduced capital gain or an increased capital loss in the future if there is a disposal of the member’s CGT asset.

LEASES: CGT EVENTS F1 TO F5 (¶7-250 – ¶7-275) [¶7-250] Introduction A lease is a CGT asset that confers on the lessee the rights to exclusive possession of the property, subject to native title rights. The lessor is the entity who grants the lease and is usually the owner of the property. The lessee is the entity that takes possession of the property for the duration of the lease. For the rights to exclusive possession, the lessee may pay the lessor a premium, in addition to rental. The premium that the lessee pays for obtaining the lease is the capital proceeds from the CGT event. Subdivision 104-F of the ITAA97 (s  104-110 to 104-130) contains the rules governing the following five CGT events concerning leases:18 •

granting a lease: CGT event F1 (¶7-255)

•

lessor pays lessee to get the lease changed: CGT event F3 (¶7-265)

• • •

granting a long-term lease: CGT event F2 (¶7-260)

lessee receives payment for changing the lease: CGT event F4 (¶7-270), and lessor receives payment for changing the lease: CGT event F5 (¶7-275).

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[¶7-255] CGT event F1: Granting a lease This CGT event takes place if a lessor grants, renews or extends a lease (s  104-110(1) ITAA97). The lessor may make a capital gain or loss. (Note that there may also be a number of other CGT implications for other entities. For example, as a result of this CGT event the lessee will have acquired a CGT asset. If the lessee were then to assign the rights under the lease to another party, CGT event A1 would occur. When the lease expires, CGT event C2 will take place for the lessee. Furthermore, there are special rules that apply to some lease transactions (¶8-650).) The time of this CGT event is—in relation to the grant of a lease—when the contract for the lease is entered into or, in the absence of a contract, when the lease commences (s 104-110(2)(a)). In relation to the renewal or extension of a lease, the time of this CGT event is the commencement of the renewal or extension (s 104-110(2)(b)). The lessor makes a capital gain if the capital proceeds from the grant, renewal or extension are more than the expenditure incurred by the lessor on the grant, renewal or extension. A capital loss results if the capital proceeds are less than this expenditure 18 Note that Taxation Ruling TR 2005/6 deals extensively with the tax consequences (including CGT) for lessors and lessees so far as lease surrender receipts and payments are concerned.

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(s  104-110(3)). The expenditure incurred can include giving property. If so, the market value of the property is used when working out the amount of that expenditure (s 1035 ITAA97). However, the incurred expenditure does not include any non-assessable recoupment of the expenditure nor any part of the expenditure that is deductible (s 104110(4)). Section 104-110(5) provides that ‘the lessor can choose to apply section 104-115 to certain long-term leases. If it does so, this section does not apply’ (¶7-260). Example—CGT events F1 and C2 GJP Ltd leased office space to Hightech Ltd, for a premium of $25,000. The legal costs incurred were $2,000. The capital gain for GJP Ltd that arises under CGT event F1 when the lease agreement is entered into is:

Capital proceeds Legal costs

Capital gain

 $

25,000 2,000

$23,000

Note that Hightech Ltd will have a capital loss under CGT event C2 when the lease expires (¶7-150). The capital loss will be $25,000 plus any incidental (probably legal) costs associated with the lease.

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[¶7-260] CGT event F2: Granting a long-term lease This CGT event happens if a lessor grants, renews or extends a lease over land for a duration of 50 years or more and the lessor chooses CGT event F2 to apply rather than CGT event F1. The time of this CGT event is when the lessor grants, renews or extends the lease (s 104-115(2) ITAA97). The lessor makes a capital gain if the capital proceeds from this CGT event are more than the cost base of the lessor’s interest in the land. A capital loss results if the capital proceeds are less than the reduced cost base of that interest (s 104-115(3)). Any capital gains or losses are disregarded if the lessor acquired the land, or the lease to the lessor was granted, before 20 September 1985 or, in the case of the renewal or extension of the lease to the lessor, if the last renewal or extension started before that day (s 104-115(4)).

[¶7-265] CGT event F3: Lessor pays lessee to get the lease changed This CGT event, which gives rise to a capital loss only, takes place where a lessor incurs expenditure in obtaining the lessee’s agreement to vary or waive a term of the lease. The lessor is taken to have made a capital loss equal to the amount of the expenditure it incurred (s 104-120(1) ITAA97). (The amount received by the lessee will give rise to a capital gain under CGT event F4 (s 104-125; ¶7-270).) The time of the CGT event F3 is when the term is varied or waived (s 104-120). This CGT event does not apply where the lessor has chosen to apply CGT event F2 rather than CGT event F1.

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[¶7-270] CGT event F4: Lessee receives payment for changing the lease This CGT event gives rise to a capital gain only. It is the other side to CGT event F3, in that it may treat as a capital gain the amount received by a lessee from a lessor for agreeing to vary or waive a term of the lease (s 104-125(1) ITAA97). The time of this CGT event is when the term is varied or waived (s 104-125(2)). The lessee makes a capital gain if the capital proceeds from the event exceed the lease’s cost base at the time of the event. The lease’s cost base is reduced to nil if the lessee makes a capital gain (s 104-125(3)). However, if the capital proceeds are less than the lease’s cost base, then the cost base is reduced by the amount of the proceeds at the time of the event (s 104-125(4)). The lessee cannot make a capital loss from this event.

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Example—CGT events F1, F3, F4 and C2 On 1 July 2014, Bill Mason granted Helen Marsh an eight-year lease for a premium of $20,000. On 4 May 2016, Mason pays Marsh $13,000 to have the term of the lease reduced to four years, such that it will expire in May 2018. The CGT implications of these transactions are: (1) CGT event F1 will arise for Mason on 1 July 2014. Mason will have a capital gain in the year ended 30 June 2015 of $20,000 less any costs associated with the event. (2) CGT event F3 will arise for Mason on 4 May 2016 and Mason will have a capital loss of $13,000 during the year ended 30 June 2016. (3) CGT event F4 will arise for Marsh on 4 May 2016. The cost base of Marsh’s lease will be reduced by $13,000 from $20,000 to $7,000. (4) CGT event C2 will arise for Marsh on 3 May 2018. Marsh will realise a capital loss in the year ended 30 June 2018 of $7,000 on the expiry of the lease (assuming she used the lease mainly to produce assessable income:  see s 118-40 ITAA97).

Section 104-125(5) provides an exemption for capital gains resulting from leases granted before 20 September 1985 or from lease renewals or extensions that commenced before that day.

[¶7-275] CGT event F5: Lessor receives payment for changing the lease This CGT event happens if a lessor receives a payment from the lessee for agreeing to vary or waive a term of the lease (s 104-130(1) ITAA97). The payment can include giving property. If so, the market value of the property is the capital proceeds (s 103-5 ITAA97). The time of this CGT event is when the term is varied or waived (s 104-130(2)). The lessor makes a capital gain if the capital proceeds from the event are more than the expenditure the lessor incurs in relation to the variation or waiver. The lessor makes

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a capital loss if the capital proceeds are less than this expenditure (s  104-130(3)). The expenditure incurred can include giving property. If so, the market value of the property is used when working out the amount of the expenditure (s 103-5). However, the incurred expenditure does not include any non-assessable recoupment of that expenditure (s 104130(4)). Section 104-130(5) provides an exemption for capital gains resulting from leases granted before 20 September 1985 or from lease renewals or extensions that commenced before that day.

SHARES: CGT EVENTS G1 TO G3 (¶7-300 – ¶7-315) [¶7-300] Introduction Where a non-share trader disposes of shares, CGT event A1 happens because there is a change of ownership. If shares are redeemed or cancelled CGT event C2 happens. These CGT events have priority over CGT event G1 (s 104-135(1)(a) ITAA97). CGT events G1 and G3 (CGT event G2 was repealed in 2002) are more concerned with events such as capital returns and company liquidations. Subdivision 104-G (s 104-135 to 104-145) contains the rules governing the following two CGT events concerning shares: • •

capital payments for shares: CGT event G1 (¶7-305), and

liquidator or administrator declares shares worthless: CGT event G3 (¶7-315).

[¶7-305] CGT event G1: Capital payments for shares This CGT event, which gives rise to a capital gain only, takes place if (s  104-135(1) ITAA97): Copyright © 2019. Oxford University Press. All rights reserved.

• •

a company makes a payment to a shareholder in relation to his or her ownership of shares in the company, except for CGT events A1 (¶7-120) or C2 (¶7-150) happening in relation to the share, and all or part of the amount—called the non-assessable part—is not a dividend or is not deemed to be a dividend.

This means that CGT event G1 would not apply to a dividend reinvestment plan because it is a dividend. CGT event G1 also does not apply to bonus shares issued out of a share capital account (Taxation Determination TD 2000/2). Subdivision 130-A of the ITAA97 deals with the treatment of bonus shares (¶8-610). The payment can include giving property, in which case the property is valued at its market value (s 103-5 ITAA97). The time of this CGT event is when the company makes the payment (s 104-135(2)). A capital gain arises if the amount of the non-assessable part is more than the share’s cost base. The share’s cost base and reduced cost base are reduced to nil if the shareholder makes a capital gain (s 104-135(3)). However, if the amount of the non-assessable part is less than the share’s cost base, then the cost base and the reduced cost base are reduced by the amount of the non-assessable part (s 104-135(4)).

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CGT event G1 effectively mirrors, in respect of shares, the provisions in CGT event E4 that apply to trust interests. There are three exceptions to CGT event G1. First, any gain from this CGT event is disregarded if the taxpayer acquired the share before 20 September 1985 (s 104-135(5)). Second, a payment made by a liquidator is disregarded for the purposes of CGT event G1 if the company ceases to exist within 18 months of the payment. This payment will form part of the capital proceeds from CGT event C2 (Taxation Determination TD 2001/27 and ¶7-150), which happens when the share ends (s 104-135(6)). And, finally, any payments that constitute personal services income within s  86-15 are disregarded so far as CGT event G1 is concerned (s 104-135(7)).

[¶7-315] CGT event G3: Liquidator or administrator declares shares worthless

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A CGT event arises when a company’s liquidator or administrator declares that there are reasonable grounds to believe that shareholders are unlikely to receive any further distribution in the course of winding up the company (s 104-145(1) ITAA97). The time of this CGT event is when the liquidator or administrator makes the declaration (s 104145(2)). In this situation shareholders can choose to take the benefit of a capital loss equal to the reduced cost base of their shares as at the time of the declaration (s 104-145(3)). If the shareholder chooses to make a capital loss, the cost base and reduced cost base of the shares are reduced to nil just after the liquidator or administrator makes the declaration (s 104-145(4)). CGT event G3 does not apply to shares acquired before 20 September 1985 (s 104-145(5)). The way these provisions operate can be seen by reference to the collapse of HIH Insurance Ltd in 2001. The following example is taken from Taxation Determination TD 2002/3 (now withdrawn as it has no on-going application). Example—CGT event G3 Hillary purchases shares in Global Insurance Ltd after 20 September 1985. On 10 October 2018 the liquidator makes the declaration that there is no likelihood that the shareholders of Global Insurance Ltd will receive any further distribution in the course of winding up the company. CGT event G3 happens in relation to her shares on 10 October 2018. Hillary can, and does, choose to make capital losses equal to the reduced cost bases of her shares as at 10 October 2018. The cost bases and reduced cost bases of her Global Insurance Ltd shares are reduced to nil just after the liquidator made the declaration.

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SPECIAL CAPITAL RECEIPTS: CGT EVENTS H1 AND H2 (¶7-350 – ¶7-360) [¶7-350] Introduction Subdivision 104-H of the ITAA97 (s 104-150 to 104-155) contains the rules governing the following CGT events concerning special capital receipts: • •

forfeiture of deposits: CGT event H1 (¶7-355), and

receipt for event relating to a CGT asset: CGT event H2 (¶7-360).

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[¶7-355] CGT event H1: Forfeiture of deposits This CGT event takes place if a deposit is forfeited because a prospective sale or other transaction does not proceed (s 104-150(1) ITAA97). The time of this CGT event is when the deposit is forfeited (s 104-150(2)). A capital gain results if the deposit is more than the expenditure incurred by the taxpayer in connection with the prospective sale or other transaction, while a capital loss arises if the deposit is less than the expenditure (s 104150(3)). The expenditure incurred can include giving property. If so, the property is valued at its market value (s 103-5). However, the incurred expenditure does not include any nonassessable recoupment of that expenditure (s 104-150(4)). The amount of the deposit is reduced by any part of the deposit that is repaid, or by any amount of compensation paid that can reasonably be regarded as a repayment of all or part of the deposit, so long as such payments are not otherwise deductible (s 104150(1A), (1B)). In FC of T v Guy (Guy)19 it was held that CGT event H1 did not apply to a deposit forfeited under a contract of sale, as the event only applied to a prospective sale or other transaction. This decision suggested that CGT event H1 would only apply to a deposit collected by a real estate agent (and this is usually refunded if the sale does not proceed) or to deposits paid in connection with a grant or option. The case of Brooks v FC of T (Brooks),20 however, noted that this view was ‘plainly wrong’. Contrary to the decision in Guy, the Full Federal Court in Brooks held that a forfeited deposit under a contract for the sale of land was assessable as a capital gain under CGT event H1. The Commissioner’s position is outlined in Taxation Ruling TR 1999/19, as amended by the issue of an addendum in October 2000 (Taxation Ruling TR 1999/19A).21

19 96 ATC 4520; 67 FCR 68. 20 2000 ATC 4362; 100 FCR 117. 21 See further J Dabner, ‘Guy and Brooks: More Problems for Interpreting ITAA97’ CCH, (2000) Issue 32 Tax Week ¶620 and Interpretative Decision ID 2003/346.

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[¶7-360] CGT event H2: Receipt for event relating to a CGT asset CGT event H2 is a last resort provision in that it does not apply if any other CGT event is applicable (s  102-25(3)(b) ITAA97; ¶7-110). Section 104-155(1) of the ITAA97 identifies as a CGT event the following scenario: • •

an act, transaction or event occurs in relation to a CGT asset owned by the taxpayer in question, and

the act, transaction or event does not result in an adjustment being made to the asset’s cost base or reduced cost base.

Section 104-155 provides the following example of the operation of CGT event H2. Example—CGT event H2 You own land on which you intend to construct a manufacturing facility. A  business promotion organisation pays you $50,000 as an inducement to start construction early. No contractual rights or obligations are created by the arrangement. The payment is made because of an event (the inducement to start construction early) in relation to your land.

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The time of this CGT event is when the act, transaction or event takes place (s 104155(2)). This CGT event is a residual event and does not apply if any other CGT event applies. A capital gain results if the capital proceeds because of this CGT event exceed the incidental costs incurred by the taxpayer which relate to the event. A capital loss is made if the capital proceeds are less than the incidental costs (s 104-155(3)). The incidental costs can include the market value of any property given. However, the incidental costs do not include any non-assessable recoupment of that expenditure (s 104-155(4)). This CGT event does not extend to the following scenarios (s 104-155(5)): • • • •

the act, transaction or event consists of the borrowing of money or the obtaining of credit

the act, transaction or event requires the taxpayer to do something which is another CGT event for the taxpayer in question a company issues or allots shares (or grants an option to acquire shares or debentures in the company), or the trustee of a unit trust issues units in the trust (or grants an option to acquire units or debentures in the trust).

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AUSTRALIAN RESIDENCY ENDS: CGT EVENTS I1 AND I2 (¶7-370 – ¶7-380) [¶7-370] Introduction Where an individual, company or trust ceases to be a resident of Australia, a capital gain or a capital loss may occur for each asset owned by the taxpayer which is not taxable Australian property. Section 855-15 of the ITAA97 lists those assets that are taxable Australian property (¶8-720). Subdivision 104-I of the ITAA97 (s 104-160 to 104-170) contains the rules governing such CGT events: • •

individual or company stops being a resident: CGT event I1 (¶7-375), and trust stops being a resident trust: CGT event I2 (¶7-380).

[¶7-375] CGT event I1: Individual or company stops being a resident

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This CGT event takes place if an individual or company stops being a resident (s 104160(1) ITAA97). The time of this CGT event is when the residency comes to an end (s 104-160(2)). A capital gain is made if the market value of an asset, which is not taxable Australian property at the time of the event, is more than the asset’s cost base. The excess of the asset’s reduced cost base over that market value constitutes a capital loss (s 104160(4)). This CGT event does not encompass capital gains or losses from assets acquired before 20 September 1985 (s 104-160(5)). The capital gains or losses from assets covered by this CGT event may be disregarded by an individual in two specific sets of circumstances:

(1) Where the individual is a temporary resident (s 768-915). Where a CGT event happens on or after 1 July 2006, the capital gain or loss is disregarded where the individual is a temporary resident (¶24-214) when the event happens and the individual would not have made a capital gain or loss if she or he had been a foreign resident at that time. (2) Where the individual chooses to disregard any capital gains or losses until another CGT event happens to the relevant asset, or the taxpayer becomes resident again (s 104-165(2)).

An individual who ceases to be an Australian resident can choose to disregard making a capital gain or loss from CGT event I1. If the individual makes this choice, then all their assets will be taken to be taxable Australian property for CGT purposes (s 104-165(3)) until they dispose of the asset or again become an Australian resident.

Example—CGT event I1 Jane, an Australian resident for the last 50 years, inherited a Scottish castle. Two years later she decided to leave Australia permanently and live in the Scottish castle. She will make a capital gain, or loss, under CGT event I1, when she stops being an Australian resident.

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If she chooses, she can disregard the capital gain or loss under s 104-165(2) and (3). If she does this, the Scottish castle will henceforth be deemed to be taxable Australian property. This means that if she sells the castle in the future, even though she is not an Australian resident, CGT event A1 will apply to the disposal (though note that she may be entitled to the main residence exemption: ¶8-050).

[¶7-380] CGT event I2: Trust stops being a resident trust CGT event I2 happens if a trust stops being a resident trust for CGT purposes22 (s 104170(1) ITAA97). The time of this CGT event is when the trust stops being a resident (s 104-170(2)). Section 104-170 requires the trustee to determine if it has made a capital gain or loss for each CGT asset that it owned just before the event that was not taxable Australian property (¶8-720) (s 104-170(4)). A capital gain or loss made by the trustee is disregarded if it acquired the asset before 20 September 1985 (s 104-170(5)).

REVERSAL OF ROLLOVERS: CGT EVENTS J1 TO J6 (¶7-400 – ¶7-430) [¶7-400] Introduction Where a taxpayer chooses to use the rollover relief provisions, any capital gain is deferred until another CGT event occurs in respect of the CGT asset (¶8-100ff ). Subdivision 104-J of the ITAA97 (s 104-175 to 104-195) contains the rules covering the following reversal of rollover events:

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•

• • • •

company ceasing to be a member of a wholly owned group after rollover: CGT event J1 (¶7-405)

change of status of a replacement asset or improved asset for a small business rollover: CGT event J2 (¶7-410)

failure of a fixed trust to cease to exist after a rollover from such a trust to a company: CGT event J4 (¶7-420) failure to acquire a replacement asset and to incur fourth element expenditure after a small business rollover: CGT event J5 (¶7-425), and insufficient expenditure on replacement asset or amount of fourth element expenditure after a small business rollover: CGT event J6 (¶7-430). Note that there is no CGT event J3.

22 In relation to trusts other than unit trusts, s 995-1(1) ITAA97 provides that a trust is a resident trust for CGT purposes for an income year if, at any time during the income year, a trustee is an Australian resident or the central management and control of the trust is in Australia.

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[¶7-405] CGT event J1: Company ceasing to be a member of a wholly owned group after rollover The introduction of the consolidations regime from 1 July 2002 (Chapter  20) has had the effect of removing the CGT implications of transferring assets within wholly owned resident groups, and so CGT event J1 has lost much of its relevance as the consolidations regime has come into effect. Nonetheless it still continues to be relevant where transfers of assets involving foreign resident entities take place. CGT event J1 happens if: • •

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•

a CGT asset is rolled over between companies (one of which is not resident in Australia) in the same wholly owned group (¶8-320)

the recipient company stops being a 100% subsidiary of the group’s ultimate holding company, and

at the time of the rollover, the recipient company was a 100% subsidiary of the other company involved in the rollover event—the originating company—or of another member of the same wholly owned group (s 104-175(1) ITAA97).

The time of CGT event J1 is the breakup time (s  104-175(4)). This is when the recipient company stops being a 100% subsidiary of the group’s ultimate holding company (s 104-175(3)). A company makes a capital gain from CGT event J1 if the market value of the rollover asset at the breakup time is more than its cost base. If the market value of the rollover asset is less than its reduced cost base, a capital loss is made (s 104-175(5)). Once this CGT event has happened, the asset is taken to have been acquired at its market value by the recipient company at the breakup time (s 104-175(8), (9)). A capital gain or loss from this event is ignored if the originating company acquired the asset before 20 September 1985 (s 104-175(7)). CGT event J1 does not happen if a subgroup breakup occurs so that the asset remains within the same subgroup even if it is no longer a 100% subsidiary of the ultimate holding company (s 104-180).

[¶7-410] CGT event J2: Change of status of a replacement or improved asset after a small business rollover CGT event J2 takes place if a CGT asset that the taxpayer chooses as a replacement asset for a small business rollover under div 152 of the ITAA97 (¶8-400ff ) no longer qualifies for rollover relief. This will occur where the replacement asset: (1) stops being an active asset

(2) becomes the taxpayer’s trading stock, or

(3) is used solely to produce exempt income or non-assessable non-exempt income (s 104-185(2) ITAA97).

In addition, where the replacement asset is a share in a company or an interest in a trust, CGT event J2 is also triggered: (1) if CGT event G3 or I1 applies to the share or interest, or

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(2) if there is no longer an appropriate concession stakeholder (s 104-185(3) ITAA97).

The timing of the event is when the change in the status of the asset happens (s 104-185(4)). The taxpayer will make a capital gain equal to the amount of the capital gain that was disregarded when rollover relief was chosen. Example—Operation of CGT event J2 Tony, the owner of a small business, disposes of a business asset for $20,000, making a notional capital gain of $2,000. He buys a replacement asset for $21,000 and claims the small business rollover relief so the capital gain is disregarded in the year of disposal of the original asset. Two years later the replacement asset becomes part of Tony’s trading stock: it has now been put to a disqualified use and a capital gain of $2,000, the original capital gain, will arise as a result of the operation of CGT event J2.

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[¶7-420] CGT event J4: Trust failing to cease to exist after rollover under sub-div 124-N CGT event J4 happens if a rollover involving the transfer of assets from a fixed trust to a shelf company has occurred (¶8-297), and the trust does not cease to exist within six months of the transfer of the asset (or as soon as practicable after the end of that six-month period if there are circumstances beyond the control of the trustee, eg if the trustee is involved in litigation concerning the trust and cannot wind up the trust until the litigation is finished). In order for CGT event J4 to apply, the company must own the asset when the failure happens. CGT event J4 happens when the failure to cease to exist occurs. The company makes a capital gain if the market value of assets it acquired in the rollover (at the time of acquisition) is greater than the cost base of such assets. A capital loss will occur where the asset’s reduced cost base exceeds the market value. A capital gain or capital loss can also occur in respect of shares held in the company which have been received as a result of the rollover.

[¶7-425] CGT event J5: Failure to acquire a replacement asset after a small business rollover CGT event J5 takes place if a taxpayer who has chosen the small business rollover (¶8-400ff ) fails to acquire a replacement asset by the end of the replacement period (which is usually two years after the CGT event that gave rise to the original capital gain). It also applies where the replacement asset, being shares in a company or interests in a trust, is an active asset but there is no concession stakeholder. Where CGT event J5 applies, a capital gain is crystallised (at the end of the replacement period) equal to the amount of the capital gain on the original disposal that was disregarded.

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[¶7-430] CGT event J6: Failure to incur sufficient expenditure on a replacement asset after a small business rollover CGT event J6 takes place if a taxpayer who has chosen the small business rollover (¶8-400ff ) fails to incur sufficient expenditure on a replacement asset by the end of the replacement period (which is usually two years after the CGT event that gave rise to the original capital gain). Where CGT event J6 applies, a capital gain is crystallised (at the end of the replacement period) equal to the difference between the amount of the original (rolled-over) capital gain and the actual expenditure incurred.

OTHER CGT EVENTS: CGT EVENTS K1 TO K12 (¶7-440 – ¶7-488) [¶7-440] Introduction Subdivision 104-K of the ITAA97 (s 104-205 to 104-265) contains the rules governing a number of miscellaneous CGT events that may give rise to capital gains tax. The miscellaneous CGT events are: •

incoming international transfer of emissions units: CGT event K1 (¶7-445)

•

asset passes to a tax-advantaged entity: CGT event K3 (¶7-455)

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• • • • • •

bankrupt pays an amount in relation to a debt: CGT event K2 (¶7-450) CGT asset starts being trading stock: CGT event K4 (¶7-460) special collectables: CGT event K5 (¶7-465)

pre-CGT shares or trust interest: CGT event K6 (¶7-470)

balancing adjustment events for depreciating assets: CGT event K7 (¶7-475) direct value shifts: CGT event K8 (¶7-480) carried interests: CGT event K9 (¶7-485)

certain short term forex realisation gains: CGT event K10 (¶7-487)

certain short term forex realisation losses: CGT event K11 (¶7-487), and foreign hybrid loss exposure adjustment: CGT event K12 (¶7-488).

[¶7-445] CGT event K1: Incoming international transfer of emissions unit CGT event K1 (s 104-205) applies (in very limited circumstances) from 1 July 2014 and provides that an entity makes a capital gain or a capital loss when it starts to hold a ‘Kyoto unit’ (as defined in the Australian National Registry of Emissions Units Act 2011 (Cth)) or ‘Australian carbon credit unit’ (as defined in the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth)) as a ‘*registered emissions unit’. The unit must have been neither trading stock nor a revenue asset of the entity just before ‘importation’. In this way CGT event K1

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operates in the same manner as CGT event K4 (¶7-460) when an entity starts to hold a CGT asset as trading stock. The time of the event is when the entity starts to hold the unit as a registered emissions unit. The entity makes a capital gain if the unit’s market value (just before the entity starts to hold the unit as a registered emissions unit) is more than its cost base. The entity makes a capital loss if that market value is less than its reduced cost base.

[¶7-450] CGT event K2: Bankrupt pays an amount in relation to a debt The effect of CGT event K2 is to reinstate part of a capital loss that was denied to a bankrupt under s 102-5 of the ITAA97 where that taxpayer repays part of the debt. CGT event K2 takes place if: • • •

the taxpayer makes a net capital loss for an income year that cannot be offset against future capital gains because the taxpayer became bankrupt or was released from debts under a bankruptcy law23 the taxpayer later makes a payment in respect of a debt that was taken into account in working out that net capital loss, and the denied part of the net capital loss would otherwise have been able to be offset against capital gains in the payment year (s 104-210(1) ITAA97).

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The time of this CGT event is when the payment is made (s 104-210(2)). A taxpayer makes a capital loss from this event equal to the smallest of: (1) the amount paid; (2) that part of the payment that was taken into account in working out the denied part of the net capital loss; or (3) the denied part of the net capital loss reduced by the sum of capital losses made from CGT event K2 as a result of previous payments made in respect of the debt. A capital gain cannot be made from this event (s 104-210(3)).

[¶7-455] CGT event K3: Asset passes to a tax-advantaged entity The purpose of this CGT event is to prevent capital gains on assets going untaxed. CGT event K3 occurs if a taxpayer dies and a CGT asset passes to a beneficiary that is an exempt entity (¶9-010ff ), is the trustee of a complying superannuation entity (¶23-045ff ), or is a foreign resident (Chapter 24) (s 104-215(1) ITAA97). However, if the asset passes to a beneficiary that is a foreign resident, CGT event K3 happens only if the deceased was a resident and the asset—in the hands of the beneficiary—is not taxable Australian property (¶8-720) (s 104-215(2)). The time of this CGT event is just before the taxpayer dies (s 104-215(3)).

23 Section 102-5(2) provides that if a taxpayer becomes bankrupt or is released from debts under a law relating to bankruptcy during the income year, the taxpayer’s net capital losses carried forward from years before that income year can no longer be used to offset capital gains made by the taxpayer in the income year or a later income year. This rule applies even if the bankruptcy is annulled under s 74 Bankruptcy Act 1966 (Cth) under a composition or scheme of arrangement and the taxpayer was, will be or may be released from debts which would have been released if the taxpayer became a discharged bankrupt (s 102-5(3)).

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A capital gain arises from this CGT event if the market value of the asset on the day of death of the deceased is more than its cost base. The capital gain is taxed to the trustee of the deceased and is therefore a liability of the estate. If the market value of the asset is less than its reduced cost base, a capital loss is made (s 104-215(4)). A capital gain from this event is ignored if the asset was acquired before 20 September 1985 (s 104-215(5)). There is also an exception for certain philanthropic testamentary gifts (s 118-60 ITAA97).

[¶7-460] CGT event K4: CGT asset starts being trading stock As trading stock is exempt from CGT, to prevent a loss of revenue CGT event K4 will apply where a taxpayer chooses to treat a CGT asset as trading stock. The asset is treated as having been sold for its market value (s 104-220(1) ITAA97). The time of this event is when the taxpayer starts holding the asset as trading stock (s 104-220(2)). A taxpayer makes a capital gain if the market value of the asset just before it becomes trading stock is more than its cost base. If the market value of the asset is less than its reduced cost base, a capital loss is made (s 104-220(3)). A capital gain or loss from this event is ignored if the asset was acquired before 20 September 1985 (s 104-220(4)).

[¶7-465] CGT event K5: Special collectables

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CGT event K5 arises where there is a fall in the market value of a collectable owned by a company or trust, and that fall in market value is indirectly realised by a taxpayer when either CGT event A1, C2 or E8 occurs in relation to the taxpayer’s interest in the entity (s 104-225(1) to (4) ITAA97). The capital loss from the collectable is the difference between the market value of the shares or interest in the trust and the capital proceeds from the event. A capital gain cannot be made from CGT event K5 (s 104-225(6)). The time of this event is when the triggering CGT event A1, C2 or E8 happens (s 104-225(5)). The following example is adapted from the example in the legislation in s 104-225. Example—CGT event K5 Cleo owns 50% of the shares in a company. She purchased the shares earlier in the year for $60,000. The company owns a painting then worth $100,000 and another asset worth $20,000. The painting subsequently falls in value to $50,000. Cleo sells her shares for $35,000 (the actual capital proceeds). Normally she would otherwise make a capital loss of $25,000. However, the actual capital proceeds are replaced with $60,000 (the market value of the shares if the painting had not fallen in value), so Cleo does not make a capital loss from the sale of her shares, but rather a capital loss from a collectable. The capital loss from the collectable is equal to: $60,000 − $35,000 = $25,000. Cleo’s capital loss from a collectable can only be offset against a capital gain from a collectable.

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[¶7-470] CGT event K6: Pre-CGT shares or trust interest This CGT event aims to prevent loss of revenue through the control of a post-CGT asset changing ownership when the pre-CGT shares or units are sold, in circumstances where 75% or more of the net market value of the underlying assets is post-CGT. For CGT event K6 to happen: • •

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•

the taxpayer must own shares in a company or an interest in a trust acquired before 20 September 1985 CGT event A1 (¶7-120), C2 (¶7-150), E1 (¶7-185), E2 (¶7-190), E3 (¶7-195), E5 (¶7-205), E6 (¶7-210), E7 (¶7-215), E8 (¶7-220), J1 (¶7-405) or K3 (¶7-455) must happen in relation to the shares or trust interest, and there must not be a rollover for the other (non-K6) CGT event (s 104-230(1) ITAA97), and

just before the other (non-K6) CGT event happened, the market value of post-CGT property (other than trading stock) of the company or trust or the market value of interests the company or trust owned through interposed companies or trusts in postCGT property (other than trading stock) must be at least 75% of the net value of the company or trust (s 104-230(2)).

For this purpose, the net value of the company or trust is the amount by which the sum of the market values of the assets of the company or trust exceeds the sum of its liabilities. However, in working out this net value, the discharge or release of any liabilities and the market value of any CGT assets acquired are ignored if the discharge, release or acquisition was done for a purpose that included ensuring that the ‘75% of net value’ test would not trigger CGT event K6 (s 104-230(8)). This CGT event does not happen if the company which owns the relevant post-CGT property has had some of its shares listed on an Australian or foreign stock exchange for the five years before the other (non-K6) CGT event happened. The same exception applies if the trust which owns the relevant post-CGT property is a unit trust and has had some of its units so listed, or ordinarily available to the public for subscription or purchase, for that period (s 104-230(9)). There is also an exception from CGT event K6 in circumstances where the scrip for scrip rollover relief could have been claimed if the shares or units sold had been acquired on or after 20 September 1985 rather than before that date (s 104-230(10)). The time of CGT event K6 is when the other (non-K6) event occurs: s 104-230(5). If a share or a trust interest is acquired by a taxpayer as a result of CGT event K6, it is acquired at the time of that CGT event (s 109-5 ITAA97). A taxpayer makes a capital gain from CGT event K6 equal to that part of the capital proceeds from the disposal of the shares or units that is reasonably attributable to the amount by which the market value of post-19 September 1985 property exceeds the cost base of that property. A capital loss cannot be made from CGT event K6 (s 104-230(6)). The Commissioner has issued a ruling (Taxation Ruling TR 2004/18) dealing in some detail with CGT event K6. This provides some clarification of the meaning of key terms in the provision (such as ‘net value’, ‘asset’ and ‘property’), as well as providing guidance on

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the calculation of the gain and the interaction of the provision with indexation and the various other discounts available.

[¶7-475] CGT event K7: Balancing adjustment events for depreciating assets

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This CGT event happens if a ‘balancing adjustment event’ (effectively, a disposal) occurs for a depreciating asset and the asset was used either wholly or partially for non-taxable (ie private) purposes. A depreciating asset is defined under the capital allowances regime to be an asset that has a limited effective life that loses value over that life (¶12-130). Plant and equipment would be examples of depreciating assets, as well as many other assets. CGT event K7 only applies to disposals of depreciating assets that occur on or after 1 July 2001. Essentially the provision captures capital gains (or allows capital losses) relating to the non-business use of depreciating assets. Where a depreciating asset is used wholly for taxable purposes, there are no CGT consequences on its disposal on or after 1 July 2001. Any profit or loss that arises will either be captured as assessable income or be allowed as a deduction under the balancing adjustment provisions of s  40-285 of the ITAA97 (¶12-250). However, where a depreciating asset is used partially for non-taxable purposes, the CGT provisions capture any capital gain or allow any capital loss relating to the nonbusiness element (while the balancing adjustment provisions deal with the business element). Where a depreciating asset is used wholly for non-taxable purposes, there are no balancing adjustments under s  40-285, but all of the difference between the asset’s termination value (usually what it is sold for) and its cost may give rise to either a capital gain or a capital loss. Note, however, that if the asset is a personal use asset (¶7-530), it cannot give rise to a capital loss and—if it costs less than $10,000—it cannot give rise to a capital gain.

[¶7-480] CGT event K8: Direct value shifts This CGT event happens where there is a direct value shift (¶8-805) that affects an equity or loan interest in a company or trust. The time of the event is when the decrease in the market value of the equity or loan interest occurs. The capital gain is calculated by reference to detailed rules contained in div 725 (¶8-805). No capital loss can arise from CGT event K8. Any capital gain is disregarded if the equity or loan interest that triggered the event was acquired before 20 September 1985. CGT event K8 effectively replaces CGT event G2 in respect of value shifts that occur on or after 1 July 2002.

[¶7-485] CGT event K9: Carried interests This CGT event happens where there is an entitlement to receive a payment of a ‘carried interest’. A carried interest relates to the venture capital exemptions (¶8-090) and refers to: •

the interest of a general partner in a venture capital limited partnership (VCLP), early stage venture capital limited partnership (ESVCLP) or an Australian venture capital

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fund of funds (AFOF), where the carried interest is that partner’s entitlement to a distribution from the VCLP, ESVCLP or AFOF, to the extent that the distribution is contingent on the attainment of profits for the limited partners in the VCLP, ESVCLP or AFOF, or the interest of a limited partner in a venture capital management partnership (VCMP), where the carried interest is that partner’s entitlement to a distribution from the VCMP, to the extent that the distribution is contingent on the attainment of profits for the limited partners in the VCLP, ESVCLP or AFOF in which the VCMP is a general partner.

The time of this CGT event is when the entitlement to receive the payment arises, and the capital gain is the capital proceeds from the entitlement. No capital loss can arise. Further details on the venture capital exemptions are at ¶8-090.

[¶7-487] CGT events K10 and K11: Short term forex realisation gains and losses These two CGT events (K10 and K11) were introduced as a result of the enactment of the provisions for the taxation of financial arrangements. This legislation introduced a new statutory regime for the tax treatment of certain foreign currency gains and losses, effective from 1 July 2003 (¶22-300). Generally, such gains and losses are dealt with on revenue account. But an important exception is made for certain forex gains and losses arising under a transaction for the acquisition or disposal of a capital asset. These are dealt with under the CGT regime, provided that the due date for payment is within 12 months of acquiring the asset or disposing of it. Further details are at ¶22-500.

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[¶7-488] CGT event K12: Foreign hybrid loss exposure adjustment CGT event K12 happens where a limited partner makes a capital loss equal to an outstanding foreign hybrid net capital loss amount in accordance with s 830-50(2)(b) or (3)(b) of the ITAA97. The time of the event is just before the end of the income year.

CONSOLIDATED GROUPS: CGT EVENTS L1 TO L8 (¶7-490 – ¶7-498) [¶7-490] Introduction The progressive roll-out of the consolidations regime for corporate and related entities from 1 July 2002 (¶20-000ff ) necessitated the introduction of a series of CGT events that deal with certain CGT consequences that flow from consolidations. The CGT events relating to consolidated groups are: •

•

loss of pre-CGT status of membership interests in entity becoming subsidiary member: CGT event L1 (¶7-491)

pre-formation intra-group rollover reduction results in negative allocable cost amount: CGT event L2 (¶7-492)

Capital Gains Tax: General Topics329

• • • • •

tax cost setting amounts for retained cost base assets exceed joining allocable cost amount: CGT event L3 (¶7-493) no reset cost base assets and excess of net allocable cost amount on joining: CGT event L4 (¶7-494)

amount remaining after Step 4 of leaving allocable cost amount is negative: CGT event L5 (¶7-495) error in allocation of cost setting amount for joining entity’s assets: CGT event L6 (¶7-496), and

reduction in tax cost setting amounts for reset cost base assets cannot be allocated: CGT event L8 (¶7-498).

These complex CGT events can only be understood in the context of the legislation relating to the consolidations regime, explained in ¶20-000ff. The following brief description of the relevant CGT events therefore needs to be tackled with caution and with an understanding of the more detailed aspects of consolidations contained in Chapter 20.

[¶7-491] CGT event L1: Loss of pre-CGT status of membership interests in entity becoming subsidiary member This CGT event happens where there is a reduction in the tax cost setting amount of assets of an entity that becomes a subsidiary member of a consolidated group (¶20-070). It gives rise to a capital loss (no capital gain can arise) for the head company equal to the reduction, and occurs just after the entity becomes a subsidiary member of the group. The resultant capital loss can be offset against capital gains over a five-year period at the rate of 20% pa.

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[¶7-492] CGT event L2: Pre-formation intra-group rollover reduction results in negative allocable cost amount This CGT event happens when the impact of adjustments for intra-group asset rollovers at Step 3A of the formula to determine allocable cost amounts (¶20-070) leads to a negative amount. As a result, the group’s head company may face a capital gain equivalent to that negative amount.

[¶7-493] CGT event L3: Tax cost setting amounts for retained cost base assets exceed joining allocable cost amount This CGT event happens if, when a subsidiary joins a consolidated group, the aggregate cost setting amounts of retained cost base assets exceed the group’s allocable cost amount for the subsidiary (¶20-070). The head company faces a capital gain equivalent to the excess, and the event is deemed to occur just after the entity becomes a subsidiary of the group.

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[¶7-494] CGT event L4: No reset cost base assets against which to apply excess of net allocable cost amount on joining This CGT event can only give rise to a capital loss for the head entity. It arises where an entity becomes a subsidiary member of a consolidated group and there are no reset cost base assets against which to apply the excess of net allocable cost amount on joining (¶20070). The event is deemed to occur just after the entity becomes a subsidiary of the group.

[¶7-495] CGT event L5: Amount remaining after Step 4 of leaving allocable cost amount is negative This CGT event occurs when a subsidiary leaves a consolidated group and the amount of the allocable cost amount to be allocated to the leaving entity is negative (¶20-090). In these circumstances the head company will make a capital gain equal to the negative amount. The event is deemed to occur just after the entity ceases to be a subsidiary of the group.

[¶7-496] CGT event L6: Error in allocation of cost setting amount for joining entity’s assets This CGT event is designed to impose a capital gain, or allow a capital loss, to the head entity of a consolidated group where unintentional calculation errors affecting tax costs of reset cost base assets have occurred (¶20-070). The time of this CGT event is the start of the income year in which the Commissioner becomes aware of the error.

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[¶7-498] CGT event L8: Reduction in tax cost setting amounts for reset cost base assets cannot be allocated CGT event L8 provides for a capital loss for the head company where there is an excess of allocable cost amount on joining a consolidated group that cannot be allocated to reset cost base assets because of the restriction on the cost that can be allocated to reset cost base assets held on revenue account. This measure applies from 1 July 2002 and is dealt with in ¶20-070.

CGT ASSETS: DEFINITION AND CLASSIFICATION (¶7-500 – ¶7-540) [¶7-500] CGT assets Before there can be a capital gain or capital loss, most (but not all) of the CGT events require something to happen to a ‘CGT asset’ that was acquired on or after 20 September 1985. Understanding the concept of a CGT asset is therefore an important part of the CGT process. Section 108-5(1) of the ITAA97 defines a CGT asset in general terms to mean ‘any kind of property, or a legal or equitable right that is not property’.

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To avoid doubt s 108-5(2) provides that the following are CGT assets:

(1) part of, or an interest in, a CGT asset referred to in s 108-5(1) (2) goodwill or an interest in goodwill

(3) an interest in an asset of a partnership

(4) an interest in a partnership that is not covered by (3).

Note 1 to s 108-5 lists as examples of CGT assets: land and buildings; shares in a company and units in a unit trust; options; debts owed to a taxpayer; a right to enforce a contractual obligation; and foreign currency.24 Despite this broad definition of ‘CGT asset’, personal liberties and freedoms are not CGT assets as they are not legal or equitable rights recognised and protected by law.

[¶7-510] What is property?

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Ordinary meaning of ‘property’ As a CGT asset is defined to include any kind of property it is necessary to consider the ordinary meaning of the term ‘property’. ‘Property’ is a broad term and can be used to describe everything that a person may have control over. For example, shares, land, rights and options, and an interest in a trust are all ‘property’. Property may be tangible or intangible. When dealing with tangibles (eg land, cars, jewellery), property may denote either the physical thing itself or the rights which a person may exercise in relation to the physical thing (such as the right to use and enjoy the property, and the right to alienate).25 In the case of intangible property, the legal right itself is the ‘physical thing’ (eg intellectual property rights, such as a copyright or patent). Proprietary rights usually have the following features: the existence of the right to use and enjoy, the right to exclude others (or, to put it another way, the ability to enforce the right against third parties), and the right to alienate.26 Obviously not all of these can be present when dealing with intangible rights, and therefore the test of whether such a right is proprietary often depends upon whether the right can be ‘dealt with and assigned’, ie transferred to another person.27 In Hepples, Gummow J discussed in some detail what is meant by ‘property’. His Honour, in referring to the judgment of Mason J in R v Toohey; Ex parte Meneling Station Pty Ltd,28 stated:29

24 In Taxation Determination TD 2002/25, the Commissioner argues that Australian currency is not a CGT asset. In contrast, in Taxation Determination TD 2014/26 the Commissioner suggests that Bitcoins are CGT assets for the purposes of ss 108-5(1), citing Yanner v Eaton (1999) 201 CLR 351 that “property” refers not to a thing but to a description of a legal relationship with a thing’. 25 McCaughey v Commr of SD (1945) 46 SR (NSW) 192, 201. 26 Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141, 272. 27 EI Sykes, The Law of Securities (Law Book, 4th ed, 1986) 9. 28 (1982) 158 CLR 327. 29 90 ATC 4497, 4516; (1990) 22 FCR 1, 25–6.

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Mason J added that while in all circumstances assignability was not an essential characteristic of a right of property, by statute some forms of property being expressed to be inalienable, nonetheless it was generally correct to say that a proprietary right must be capable in its nature of assumption by third parties.

Statutory meaning of ‘asset’ Section 108-5(1)(b) of the ITAA97 extends the meaning of CGT asset to include ‘a legal or equitable right that is not property’. The extension to the definition of ‘CGT asset’ to include certain non-proprietary rights brings into the scope of CGT any right that a court of law or a court of equity would uphold, eg the right to compensation arising out of an injury or other event. If you create a patent or other industrial property over your idea or knowledge, property exists in the patent as it is transferable and may be the subject of legal action. If you sell the patent to another person, you have given up the right to use that idea and therefore you have transferred property to a new owner.

[¶7-515] Assets of joint tenants Section 108-7 of the ITAA97 provides that individuals who own a CGT asset as joint tenants are treated as if they each own a separate asset corresponding to their share in the CGT asset. In Johnson v FC of T,30 the AAT held that the transfer of a 50% interest in jointly owned shares by two brothers to each other, so that they could go their separate ways, was subject to CGT. Example—Joint tenants

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John and Delia own, as joint tenants, an investment property. Each of them is taken to own a separate asset constituting 50% of the property.

There are special rules that apply if one of the joint tenants dies—effectively the survivor is deemed to have acquired the deceased’s interest in the asset as at the date of death (¶8-540).

[¶7-520] Classification of assets For CGT purposes, each CGT asset needs to be classified into one of the following categories: •

collectables (¶7-525)

•

other assets.

•

personal use assets (¶7-530), or

This is because there are special rules that apply to each of these categories. More particularly, capital losses from collectables are quarantined (against gains from such assets), while there is no recognition of capital losses from personal use assets whatsoever. 30 2007 ATC 2161.

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In addition, there are special exemptions available for collectables and personal use assets where they were acquired for less than certain threshold figures.

[¶7-525] Collectables Subdivision 108-B of the ITAA97 (s 108-10 to 108-17) defines, and sets out a number of rules concerning, a category of CGT assets known as ‘collectables’. Before 1998, this category of assets was known as ‘listed personal use assets’. The concept of collectables encompasses the following categories of CGT assets that are used or kept mainly for the personal use31 or enjoyment of the taxpayer or an associate of the taxpayer (s 108-10(2)): •

artwork, jewellery, an antique,32 a coin or a medallion

•

a postage stamp or first day cover.

•

a rare folio, manuscript or book, or

Interests in collectables, debts that arise from collectables and options or rights to acquire collectables are also regarded as collectables (s 108-10(3)). Any gains or losses from collectables that were acquired for $500 or less are disregarded (s 118-10(1) ITAA97). Because of this monetary threshold, it is necessary to include rules to prevent articles that would normally constitute a set being disposed of separately so that the individual pieces fall below the threshold. These rules are set out in s 108-15, which provides that when three conditions are satisfied, the set of collectables is taken to be a single collectable and each article disposed of separately is treated as a disposal of part of that collectable. The three conditions referred to above are as follows: •

the taxpayer in question owns collectables that are a set

•

they are disposed of in one or more transactions for the purpose of obtaining the exemption conferred on collectables acquired for $500 or less by s 118-10.

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•

the collectables would ordinarily be disposed of as a set, and

The following example of the operation of s 108-15 is based on one provided in pt 3-1 of the ITAA97. Example—Sets of collectables You buy a set of three books for $900. You apportion the $900 among the three books (s 112-30). If the books are of equal value, you have acquired each one for $300. If you dispose of each book individually, you would ordinarily obtain the exemption in s 118-10, because you acquired each one for less than $500.

31 In Favaro v FC of T 96 ATC 4975, Branson J held that the expression ‘personal use’ was used in s 160B ITAA36 (the predecessor to sub-div 108-B) in contradistinction to use for business or profit-making purposes. 32 The Commissioner stated in Taxation Determination TD 1999/40 that an antique is an ‘object of artistic and historical significance, that is of an age exceeding 100 years’.

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However, as a result of s 108-15, the three books are taken to be a single collectable. You will not obtain the exemption in s  118-10, because you acquired the set for more than $500. You work out if you make a capital gain or loss from a disposal of part of an asset by comparing the capital proceeds from it with the cost base or reduced cost base (as appropriate) of the disposed part.

Capital losses from collectables can only reduce capital gains from collectables (s  108-10(1)). If capital losses from collectables exceed capital gains from collectables in an income year, the excess is carried forward to be applied against future gains from collectables (s 108-10(4)). Unapplied net capital losses from collectables are applied in the order in which they are made (s 108-10(5)). Section 108-17 provides that in working out the cost base of a collectable costs of ownership—the third element of the cost base of a CGT asset—must be disregarded (¶7-625).

[¶7-530] Personal use assets Subdivision 108-C of the ITAA97 (s 108-20 to 108-30) defines, and sets out a number of rules concerning, a category of CGT assets known as personal use assets. Before 1998 this category of assets was known as non-listed personal use assets. There are four categories of personal use assets (s 108-20(2)): • • •

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•

a CGT asset (other than a collectable) used or kept mainly for the personal use or enjoyment of the taxpayer in question or an associate of the taxpayer an option or right to acquire such an asset

a debt arising from a CGT event affecting such an asset, and

a debt arising other than in the course of gaining or producing assessable income or from carrying on a business.

Section 108-20(3) makes it clear that a personal use asset does not encompass land, a stratum unit or a building or structure that is taken to be a separate CGT asset because of sub-div 108-D (¶7-540). Any gains or losses from personal use assets that were acquired for $10,000 or less are disregarded (s 118-10(3) ITAA97). Because of this monetary threshold, it is necessary to include rules to prevent articles that would normally constitute a set being disposed of separately so that the individual pieces fall below the threshold. These rules are set out in s 108-25, which provides that when three conditions are satisfied, the set of personal use assets is taken to be a single personal use asset and each article disposed of separately is treated as a disposal of part of that asset. The three conditions referred to above are as follows (s 108-25(1)): •

the taxpayer in question owns personal use assets that are a set

•

they are disposed of in one or more transactions for the purpose of obtaining the exemption conferred on personal use assets acquired for $10,000 or less by s 118-10.

•

the personal use assets would ordinarily be disposed of as a set, and

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Capital losses from personal use assets are disregarded (s 108-20(1)). Section 108-30 provides that in working out the cost base of a personal use asset costs of ownership—the third element of the cost base of a CGT asset—must be disregarded (¶7-625).33

[¶7-535] Application of asset classification rules Example—Asset classification rules During the current income tax year Choo disposes of the following CGT assets, all of which were acquired after 19 September 1985. All the assets were acquired in the last 12 months. Cost  $

Antique desk

4,000

Shares

5,000

Yacht

6,000

Capital proceeds         $

Capital gain/(loss)

 3,500

          $

11,000  8,500

(500)

5,000

3,500

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As a result of these CGT events, Choo will include a capital gain of $3,500 in assessable income for the current year of income. The loss of $500 on the antique desk, a collectable, is quarantined in that it can only be offset against a gain from another collectable. As there are no gains on collectables in the current year of income, the $500 loss is carried forward to the next income year. As the yacht is a personal use asset that was acquired for $10,000 or less, any capital gain is disregarded. Only the $3,500 capital gain from the disposal of shares is taken into account for the current year of income. Note that the 50% CGT discount is not available as the shares have not been held for 12 months.

[¶7-540] Separate CGT assets Under common law when an accessory is annexed to a principal asset, such as land, the accessory becomes part of that principal asset. If the principal asset had been acquired preCGT (before 20 September 1985), the rules of common law would mean that any building on that land or any addition to that land would also be a pre-CGT asset even though the building or additional land had been acquired post-CGT. Subdivision 108-D of the ITAA97 prevents this—and other situations—happening for CGT purposes and treats an asset as being a separate CGT asset from the principal asset in a number of specified circumstances. These are as follows.

(1) Buildings/structures on post-CGT land A building or structure constructed on post-CGT land which would be subject to certain balancing adjustments if a CGT event happened is treated as a separate asset for CGT 33 See Re Applicant 6115 of 2013 v FCT [2015] AATA 244.

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purposes (s 108-55(1)). The relevant balancing adjustments that can trigger this provision are the depreciating asset provisions in sub-div 40-D of the ITAA97 (¶12-250) and the research and development deductions in div 355 of the ITAA97 (s  73B ITAA36 for income years commencing before 1 July 2011) (¶21-930ff ). The following example of the operation of s 108-55(1) is provided in pt 3-1 of the ITAA97, Example—Building separate from land You construct a timber mill building on land you own. The building is subject to a balancing adjustment on its disposal, loss or destruction. It is taken to be a separate CGT asset from the land.

(2) Building/structures on pre-CGT land A building or structure that is erected post-CGT on land acquired pre-CGT is also taken to be a separate asset for CGT purposes (s 108-55(2)). It is taken to be a separate CGT asset from the land if the contract for the construction was entered into on or after 20 September 1985 or, in the absence of a contract, if the construction commenced on or after that day. The following example of the operation of s 108-55(2) is provided in pt 3-1. Example—Building separate from land You bought a block of land with a building on it on 10 August 1984. On 1 December 1999 you construct another building on the land. The other building is taken to be a separate CGT asset from the land.

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(3) Depreciating assets that are part of a building/structure A depreciating asset that is part of a building or structure is also taken to be a separate CGT asset from the building or structure (s 108-60). The following example of a depreciating asset that would be treated as a separate CGT asset is provided in pt 3-1. Example—Depreciating asset separate from building You own a factory from which you carry on a business. You install rest rooms for your employees. The plumbing fixtures and fittings are depreciating assets. These are taken to be a separate CGT asset from the factory.

(4) Post-CGT land acquired adjacent to pre-CGT land Land acquired on or after 20 September 1985, which is adjacent to land—the original land—that was acquired before that day, is taken to be a separate CGT asset from the original land if it and the original land are amalgamated into one title (s  108-65). The following example is provided in pt 3-1.

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Example—Pre- and post-CGT land On 1 April 1984 you bought a block of land. On 1 June 1999 you bought another block of land adjacent to the first block. You amalgamate the titles to the two blocks into one title. The second block is treated as a separate CGT asset. You can make a capital gain or capital loss from it if you sell the whole area of land.

(5) Capital improvements There are two circumstances in which capital improvements will be treated as separate CGT assets. The first relates to improvements to land (whether the land was acquired before or after the introduction of CGT). The second concerns capital improvements to pre-CGT assets, where the cost base of the capital improvement exceeds two threshold amounts. These are considered in more detail following. (a) Capital improvements to land

A capital improvement to land is treated as a separate CGT asset from the land if it is subject to the depreciating asset provisions in sub-div 40-D or the research and development deductions in div 355 of the ITAA97 (s 73B for income years commencing before 1 July 2011) (s 108-70(1)). This result follows regardless of whether the land was purchased before or after 20 September 1985. An example of a capital improvement that would be treated as a separate CGT asset pursuant to s 108-70(1) is provided in pt 3-1. Example—Capital improvements

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You own land that you use for pastoral operations. You build some fences that are destroyed by fire. The fences are depreciating assets and are subject to a balancing adjustment on their destruction under div 40. The fences are taken to be a separate CGT asset from the land.

(b) Capital improvements to pre-CGT assets

A capital improvement made to a CGT asset—described as the original asset—that was acquired before 20 September 1985 is treated as a separate CGT asset if certain conditions are met. More particularly, the capital improvement will be treated as a separate asset if: (i) a CGT event happens in relation to the original asset and

(ii) the cost base of each unrelated improvement (or the total of the cost bases of all related improvements) is: –

more than the improvement threshold for the income year in which the CGT event happened, and – more than 5% of the capital proceeds from the event (s 108-70(2), (3)). The improvement threshold, which is indexed and published annually, is $150,386 for the 2018/19 income year (s 108-85; sub-div 960-M ITAA97). If the improvement is (or the improvements are) a separate asset, the capital proceeds from the CGT event must be apportioned between the original asset and the improvement(s) (s 116-40).

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In deciding whether capital improvements are related to each other, a number of factors need to be considered. These include: the nature of the CGT asset to which the improvements are made; the nature, location, size, value, quality, composition and utility of each improvement; whether an improvement depends in a physical, economic, commercial or practical sense on another improvement; whether the improvements are part of an overall project; whether the improvements are of the same kind; and whether the improvements are made within a reasonable period of time of each other (s 108-80). Example—Capital improvements In 1984 Fenella purchased a boat. In 2006 she installed a new mast (a capital improvement) for $35,000. In November 2018 she sold the boat for $140,000. The capital improvement will not be treated as being a separate asset because its cost base ($35,000) is less than the improvement threshold for the 2018/19 year of $150,386.

Capital improvements are not taken to be a separate CGT asset if they were undertaken pursuant to a contract that was entered into before 20 September 1985 or, in the absence of a contract, if they commenced or took place before that day (s 108-70(4)). Repairs to or restoration of a CGT asset that was acquired before 20 September 1985 and which is subject to rollover relief under sub-div 124-B of the ITAA97 (¶8-210) are also taken out of the ambit of s 108-70 (s 108-70(6)). Special rules can be found in s 108-75 concerning capital improvements made to pre-CGT Crown leases, mining or prospecting entitlements, statutory licences and depreciating assets to which sub-div 124-K applies (¶8-280).

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TIMING OF ACQUISITION OF ASSETS (¶7-550 – ¶7-570) [¶7-550] General acquisition rules The determination of the date of the acquisition of a CGT asset is important for a number of reasons.

(1) The CGT provisions generally do not apply to CGT assets acquired before 20 September 1985. (2) The CGT discount, which came into effect on 21 September 1999 in respect of disposals by certain taxpayers of CGT assets on or after that date, only applies where the asset has been held for at least 12 months. The date of acquisition can therefore be critical.

(3) Indexation of the cost base (which was applicable up to 21 September 1999, and may still apply in certain circumstances to CGT events happening after that date) does not apply where a CGT event happens to a CGT asset within 12 months of its acquisition. (4) The indexation factor (where relevant) is determined quarterly.

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(5) Time of acquisition is relevant for those provisions which require a determination of an asset’s market value on the date of its acquisition.

The timing of acquisition may vary depending upon the nature of the CGT event. However, as a general rule a taxpayer acquires a CGT asset when the taxpayer becomes its owner (s 109-5(1) ITAA97). For example, this rule applies if a person constructs or creates a building, painting, statue or other physical object for another person. Where the asset is constructed or created otherwise than under a contract, the time of acquisition depends on the operation of the general law, eg where a person constructs a building on another person’s pre-CGT land, the other person acquires the building when the construction commenced because the building is a fixture to the land acquired by the landowner as soon as it is attached. Specific rules apply when a taxpayer acquires an asset as a result of a CGT event happening to another taxpayer. These rules are considered in the context of each CGT event (¶7-100ff ). For example, if CGT event A1 happens then the date of acquisition (for the purchaser) is the date of the contract, and if there is no contract then the date of acquisition is the date of the change of ownership.

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[¶7-560] Acquisitions without a CGT event There are also specific rules applying for some situations where a CGT asset is acquired independently of a CGT event happening (s 109-10 ITAA97). If a taxpayer constructs or creates a CGT asset and owns it when the construction is finished or the asset is created, it is acquired when the construction, or the work that resulted in the creation, started. It makes no difference if the asset is a physical asset or an intangible asset. This rule applies, for example, to the creation of a sculpture by an artist, the construction of a factory for a manufacturer, the creation of a patented process by a chemist and the building of goodwill by a shopkeeper. If a company issues or allots shares to a taxpayer, they are acquired when the contract to acquire the shares is entered into or, if there is no contract, when the shares are issued or allotted.34 There is no disposal of the shares by the company. If the trustee of a unit trust issues units in the trust to a taxpayer, they are acquired when the contract to acquire the units is entered into or, if there is no contract, when the units are issued. There is no disposal of the units by the unit trust.

[¶7-570] Specific acquisition rules There are many other CGT acquisition rules which apply in specific situations and which are dealt with by specific provisions covering these situations (s 109-55 ITAA97). These situations include where: (1) a CGT asset devolves to a legal personal representative or a beneficiary because someone dies (¶8-520)

34 In Van v FC of T 2002 ATC 2325; [2002] AATA 1313 the AAT held that shares acquired by way of exercising an option were acquired at the time of exercising the option, and not at the time of the granting of the option.

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(2) a CGT asset passes to the taxpayer as beneficiary in the estate of a deceased individual (¶8-530) (3) a surviving joint tenant acquires a deceased joint tenant’s interest in a CGT asset (¶8-540)

(4) a taxpayer gets only a partial main residence exemption on a dwelling but would have got a full exemption if a CGT event happened to it just before the first time it became income-producing (¶8-050ff )

(5) the trustee of a deceased estate acquires a dwelling under a will for a taxpayer to occupy it and the taxpayer obtains an interest in it (¶8-060) (6) a replacement-asset rollover happens for a pre-CGT asset (¶8-200ff )

(7) a replacement-asset rollover happens for a Crown lease, or for a prospecting or mining entitlement, that is renewed or replaced and part of the new entitlement relates to a part of a pre-CGT entitlement (¶8-270, ¶8-290) (8) the taxpayer obtains a same-asset rollover for a pre-CGT asset (¶8-300ff )

(9) a company or unit trust issues bonus equities to a taxpayer and no amount is included in the taxpayer’s assessable income (¶8-610) (10) a taxpayer owns shares in a company or units in a unit trust and exercises rights to acquire new equities in the company or trust (¶8-615)

(11) a taxpayer acquires shares in a company or units in a unit trust by converting a convertible interest (¶8-620)

(12) a lessee of land acquires the reversionary interest of the lessor and there is no rollover for the acquisition (¶8-650)

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(13) the taxpayer owns a pre-CGT asset and there has been a change in the majority underlying interests in the asset (¶8-850ff ) (14) the taxpayer becomes a resident while owning a post-CGT asset that was not taxable Australian property (¶8-700ff ), and

(15) an asset is rolled over between companies in the same wholly owned group and the recipient company stops being a 100% owned subsidiary of the wholly owned group (¶7-405, ¶8-320).

STEP TWO: CALCULATING CAPITAL GAIN OR LOSS ARISING FROM A CGT EVENT (¶7-600 – ¶7-698) [¶7-600] Introduction The first step in determining the CGT consequences for a taxpayer involves, as already noted, identifying the appropriate CGT event. The next step is to actually calculate the capital gain or capital loss that arises. Most CGT events provide for calculating a capital gain or capital loss by comparing two different amounts—the capital proceeds and the

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relevant cost base. The amount of the gain or the loss is the difference between those amounts (s 102-22 ITAA97). The specific rules for calculating the gain or loss are contained within the selfcontained rules for each of the events. For all of the events that involve a CGT asset (which is most, but not all of the CGT events), a capital gain arises if the ‘capital proceeds’ from the event exceed the ‘cost base’ of the relevant asset, while a capital loss results if the ‘reduced cost base’ of the CGT asset exceeds the ‘capital proceeds’ from the CGT event. For events that do not involve a CGT asset, the rules usually compare the capital proceeds that arise from the event with the specific costs that relate to that event. CGT event C3 (end of option to acquire shares:  ¶7-155) is a typical example of this latter category. A capital gain is calculated as the capital proceeds from granting the option less any expenditure incurred in granting it, while a capital loss arises if the capital proceeds are less than the expenditure incurred. Therefore, in most circumstances, an understanding of the three concepts of capital proceeds (¶7-605ff ), cost base of a CGT asset (¶7-620ff ) and reduced cost base of a CGT asset (¶7-630ff ) is critical in determining the capital gain or capital loss from a CGT event. These concepts will now be considered.

CAPITAL PROCEEDS (¶7-605 – ¶7-615) [¶7-605] Definition Section 116-20 of the ITAA97 provides that the capital proceeds from a CGT event are the total of: •

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•

the money the taxpayer has received, or is entitled to receive, in respect of the CGT event, and the market value of any other property the taxpayer has received, or is entitled to receive, in respect of the CGT event.

The capital proceeds can include property. Where this is the case, you use the market value of the property in question when calculating the amount of the proceeds (s 1035 ITAA97). Capital proceeds can include money or property applied for the taxpayer’s benefit, and they can include an amount, or instalments, actually received at a later time (s 103-10). This means that tax can be levied on an amount that has not been received. Example—Capital proceeds received in instalments Land is sold by Macdonald to Giles for $300,000 with payments to be made by Giles in three equal annual instalments of $100,000 each. The total capital gain for Macdonald will be assessed in the year of the CGT event, even though Macdonald has only received one-third of the capital proceeds.

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[¶7-607] Impact of GST on capital proceeds The implications of GST on the capital proceeds for CGT purposes will vary depending on whether or not the CGT event happens to a registered or non-registered entity.

Disposals by GST registered entities Where the capital proceeds from a CGT event arise as a result of the provision of a GST taxable supply, then any GST that is payable on the provision of that taxable supply is excluded from the CGT capital proceeds. A  taxable supply occurs when the supply is made for consideration in the course or furtherance of an enterprise by a registered entity (or an entity that is required to be registered). The very comprehensive nature of the definition of supply provided in the GST legislation means that the disposal of most CGT assets—indeed the happening of most CGT events—by a registered entity would trigger the GST provisions and lead to a GST liability. Example—GST excluded for registered entities

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Edgar Edwards sold his business premises. He received $550,000 including $50,000 GST (which was subsequently remitted to the government after offset against any input tax credits). The premises had cost him $400,000 when he had acquired them some years earlier. The capital proceeds for this CGT event will be $500,000 and the cost base $400,000, leading to a capital gain (before the application of any other concessions such as the 50% CGT discount and the 50% business active assets reduction) of $100,000.

The definition of taxable supply is very widely drawn for GST purposes. It can clearly include sales in the ordinary course of carrying on a business. But it will also include many capital disposals (as in CGT event A1—disposal of a CGT asset), and many other CGT events. For example, CGT event D1 (creating contractual or other rights) would apply where a vendor of a business granted a restrictive covenant to the purchaser. The creation of that right is a taxable supply, and GST would be payable by the vendor of the business on the amount received for the restrictive covenant (assuming the vendor is a GST registered entity). In similar fashion, a GST registered entity granting an option to another (and thereby potentially crystallising CGT event D2) would need to account for GST on the consideration received.

Disposals by non-GST registered entity Where the person making the disposal (for CGT purposes) is not a GST registered entity, the disposal is not a taxable supply. Therefore, there is no GST payable on the capital proceeds.

[¶7-610] Modifications to the definition of capital proceeds The general definition of capital proceeds in s 116-20 of the ITAA97 (¶7-605) may be modified by any of the following rules: (1) market value substitution rule (2) apportionment rule

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(3) non-receipt rule (4) repaid rule

(5) assumption of liability rule, and (6) misappropriated amounts rule.

(1) Market value substitution rule The market value of a CGT asset is substituted for the actual capital proceeds if: •

the taxpayer received no capital proceeds from the CGT event

•

the capital proceeds are more or less than the market value of the asset and the parties are not dealing with each other at arm’s length or the CGT event is C2 (about cancellation, surrender and similar endings to an asset) (s 116-30).

•

any part of the proceeds cannot be valued, or

This rule does not apply to the creation of contractual or other rights (CGT event D1: ¶7-165); or where CGT event C2 happens (¶7-150) on the cancellation of shares or units in widely held entities (s 116-30(2A)) or because of the expiry of a CGT asset owned by the taxpayer or the cancellation of the taxpayer’s statutory licence (s 116-30(3)). Example—Market value substitution rule for capital proceeds Yasser gives a block of land, with a value of $300,000, to his daughter, Tamsin. The capital proceeds for Yasser are deemed to be $300,000.

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(2) Apportionment rule Capital proceeds are apportioned where a taxpayer receives a payment in connection with a transaction that relates to more than one CGT event or to one CGT event and something else. The capital proceeds from the relevant CGT event are so much of the payment as is reasonably attributable to that event (s 116-40). The following examples are given in the legislation. Examples—Apportionment Example 1 You sell a block of land and a boat for a total of $100,000. This transaction involves two CGT events. The $100,000 must be divided between the two events. The capital proceeds from the disposal of the land are so much of the $100,000 as is reasonably attributable to it. The rest relates to the boat. Example 2 You are an architect. You receive $70,000 for selling a block of land and giving advice to the new owner. This transaction involves one CGT event:  the disposal of the land. The capital proceeds from the disposal of the land are so much of the $70,000 as is reasonably attributable to that disposal.

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(3) Non-receipt rule Capital proceeds from a CGT event are reduced if the taxpayer is not likely to receive some or all of those proceeds, referred to as the unpaid amount. In order for this rule to apply, the non-receipt must not be attributable to anything which the taxpayer or the taxpayer’s associate did or omitted to do and the taxpayer must have taken all reasonable steps to obtain the unpaid amount. The capital proceeds are reduced by the unpaid amount. If the taxpayer acts pursuant to this rule to decrease the capital proceeds and subsequently receives a part of the unpaid amount, the proceeds must be increased by the amount received (s 116-45). The legislation contains a simple example. Example—Non-receipt rule You sell a painting to another entity for $5,000 (the capital proceeds). You agree to accept monthly instalments of $100. You receive $2,000, but then the other entity stops making payments. It becomes clear that you are not likely to receive the remaining $3,000. The capital proceeds are reduced to $2,000.

(4) Repaid rule Capital proceeds from a CGT event are reduced by any non-deductible amount the taxpayer repaid (s 116-50). Again, the legislation contains a simple example. Example—Repaid rule

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You sell a block of land for $50,000 (the capital proceeds). The purchaser later finds out that you misrepresented a term in the contract. The purchaser sues you and the court orders you to pay $10,000 in damages to the purchaser. The capital proceeds are reduced by $10,000.

(5) Assumption of liability rule Section 116-55 increases the capital proceeds from a CGT event if another entity acquires the CGT asset from the taxpayer subject to a liability by way of security over the asset. The increase is equal to the amount of the liability the other entity assumes. Example—Assumption of liability rule Chan sells land for $180,000. She receives $80,000 in cash and the buyer becomes responsible for a $100,000 liability under Chan’s outstanding mortgage. The capital proceeds are increased by $100,000 to $180,000.

(6) Misappropriated amounts rule From 1 July 2007, capital proceeds arising from CGT events A1, C1, D4, F1, K6 and K9 can be reduced by any amount that is misappropriated by the taxpayer’s agent or employee, whether by theft, embezzlement, larceny or otherwise (s 116-60).

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[¶7-615] Special rules There are a number of special rules that can vary the capital proceeds in particular circumstances.

Options

If a taxpayer grants, renews or extends an option to create or dispose of a CGT asset, and another entity exercises an option granted in relation to the asset, the capital proceeds from the creation or disposal include any payment received for granting, renewing or extending the option (s 116-65 ITAA97). The payment can include giving property. If an option granted, extended or renewed by the taxpayer requires the taxpayer to both acquire and dispose of a CGT asset, the option is treated as two separate options and half of the capital proceeds from the granting, renewal or extension of the option is attributed to each option (s 116-70).

Leases

The capital proceeds from the expiry, surrender or forfeiture of a lease include any payment, because of the lease ending, by the lessor to the lessee for expenditure of a capital nature incurred by the lessee in making improvements to the leased property (s 116-75). Section 116-20(2) contains special rules governing the capital proceeds from CGT events F1 (¶7-255) and F2 (¶7-260): •

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•

the capital proceeds from CGT event F1 are the premiums paid or payable to the taxpayer for the grant, renewal or extension of a lease

the capital proceeds from CGT event F2 (long-term leases) are the greatest of: the market value of the estate in fee simple or head lease; what would have been the market value if the taxpayer had not granted, renewed or extended the lease; and any premium paid or payable to the taxpayer for the grant, renewal or extension.

In relation to CGT event F2, when working out the market value of the property the subject of the grant, renewal or extension of a long-term lease, the market value of any building, part of a building, structure or improvement that is treated as a separate CGT asset from the property must be included. However, for these purposes, depreciating assets for whose decline in value the lessor can obtain a deduction must be ignored (s 116-20(3)). Further, when working out the amount of any premium paid or payable to the lessor for the grant, renewal or extension of a long-term lease, any part of the premium that is attributable to such depreciating assets must also be ignored for these purposes (s 116-20(4)).

Personal use assets and collectables Special rules also apply for working out the capital proceeds where there is a fall in the market value of a personal use asset (¶7-530)—other than a car, motor cycle or similar vehicle—or a collectable (¶7-525) of a company or trust and CGT event A1, C2 or E8 happens to the shares or an interest in the trust owned by the taxpayer (s  116-80). In such a case, the capital proceeds are replaced with the market value of the shares or trust interest. In working out that market value, the fall in the market value of the personal use asset or collectable is ignored. In this situation, a loss from a collectable may be made under CGT event K5 (¶7-465).

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COST BASE (¶7-620 – ¶7-625) [¶7-620] Introduction Generally, a capital gain is the difference between the cost base of an asset and the capital proceeds from a CGT event in relation to that asset. The concept of ‘cost base’ is crucial to the calculation of the capital gain or loss for most of the CGT events. Division 110 of the ITAA97 provides the rules for determining the ‘cost base’ by defining it first in general terms and then modifying these rules for certain situations. Section 110-25(1) defines ‘cost base’ as consisting of five elements, which can be summarised as follows: •

the cost of the asset

•

ownership costs

• • •

incidental costs of acquisition and disposal improvement, moving and installation expenditure, and

expenditure to establish, preserve or defend title to or rights over the asset.

The first, second, fourth and fifth elements of the cost base of a CGT asset acquired before 11.45 am on 21 September 1999 may, in certain circumstances, be indexed to take into account changes in the CPI up to 30 September 1999 (¶7-690ff ). For the CGT events where a cost base is not relevant in determining the capital gain (CGT events C3, D1, D2, D3, E8, E9, F1, F3, F5, H1, H2, J2, J5, J6, K2, K5, K7, K8, K9, K10, K12 and all of the L events), the provisions dealing with the relevant CGT event explain the amounts which are instead used for working out if there is a capital gain (if relevant).

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[¶7-622] GST implications for the cost base The GST implications for the CGT cost base will vary depending on whether the entity acquiring the asset is GST registered or not.

Where the purchaser is GST registered Where a taxpayer is a GST registered entity entitled to an input credit for GST paid on an asset acquired for the purpose of making taxable supplies, the cost of the GST will not usually be added to the cost base of the asset. This is in line with the general principle that, so far as possible, the GST is excluded from the CGT.35 The mechanism to give effect to this principle is in s 103-30 of the ITAA97. This indicates that amounts equivalent to the GST net input tax credit are not to be taken into account when calculating amounts paid or payable for the purpose of calculating the cost base of a CGT asset. The following example illustrates the point.

35 Taxation Determination TD 2004/30 (now withdrawn) confirmed that input tax credits reduce the first, second and third elements of the cost base of an asset acquired after 13 May 1997.

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Example—GST excluded for registered purchasers Betty Blue is registered for GST. She enters into a contract to buy commercial premises for $110,000, including GST of $10,000. She also incurs legal fees of $2,200 (including GST of $200) in acquiring the premises, and stamp duty of $2,340 (no GST). Her cost base for CGT purposes will be $104,340, being $110,000 plus $2,200 plus $2,340 less GST input tax credits of $10,200.

Where the purchaser is not GST registered In situations where the purchaser of a CGT asset is not GST registered, then any GST borne by that purchaser will be taken into account as part of the CGT cost base of that asset. This is entirely logical. If a taxpayer is not entitled to an input tax credit because the taxpayer is not an enterprise registered for GST or required to be registered for GST, the cost of the GST on inputs must be borne in full and so quite rightly forms part of the cost base. An example of the rule would be the case of an individual not in business who acquires a CGT asset from a business registered for GST. The GST will be included in that individual’s cost base should an event such as CGT event A1 (disposal of a CGT asset) occur. This means that the likely capital gain in the hands of an individual will be less than the capital gain in the hands of a business taxpayer entitled to a GST input credit on the acquisition of the asset. There is nothing anomalous in this. The asset will have cost the business in question less.

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Example—GST included for non-registered purchasers In the current year Charles Clue, who is not GST registered, sells (for $6,000) some BHP shares he bought in July 2000 for $5,000. When he bought the shares he paid $220 in brokerage fees, inclusive of $20 GST. His cost base is $5,220, and the capital gain will be $780 (subject to the 50% CGT discount).

GST implications for collectables and personal use assets The CGT rules exempt capital gains (or losses) on collectables that cost $500 or less, and capital gains on personal use assets that cost $10,000 or less (¶7-525, ¶7-530). Amendments to the CGT provisions make it clear that the figures of $500 or $10,000 excludes the amount of any input tax credit that the taxpayer is entitled to where the taxpayer is a GST registered entity. So, once again, the figures are exclusive of GST if the taxpayer is GST registered and entitled to an input tax credit, but will include the cost of the GST where the taxpayer is not a registered entity entitled to an input tax credit.

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[¶7-625] Elements of cost base The cost base of a CGT asset consists of the following five elements (s 110-25 ITAA97):

(1) The money paid or required to be paid, and/or the market value of any property given, to acquire the CGT asset (s 110-25(2)). This element is sometimes modified to substitute the market value of the asset (¶7-645). The money or property does not necessarily have to be paid or given to the entity that disposed of the CGT asset. However, the money or property still needs to have been paid or given in respect of the acquisition of the asset (Taxation Determination TD 2003/1). Example—Money paid to another entity

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Bill sells an asset to James for $100,000. The terms of the sale are that James must pay the $100,000 to an entity nominated by Bill. Even though James does not pay the money to Bill, the person who disposed of the asset, James, pays it ‘in respect of acquiring’ the asset and the amount therefore can be included in the first element of the asset’s cost base.

(2) The incidental costs incurred to acquire the CGT asset or that relate to a CGT event (for example, the disposal of a CGT asset under CGT event A1) (s 110-25(3)). The concept of incidental costs is specifically defined in s 110-35, and will only include: (a) remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (remuneration for professional advice about the operation of tax laws incurred after 1 July 1989 is not included unless it is provided by a recognised tax adviser) (b) costs of transfer (c) stamp duty or other similar duty (d) costs of advertising or marketing to find a seller or a buyer, as the case may be (an example of marketing expenses would be furniture hire to help sell a rental property) (e) costs relating to the making of any valuation or apportionment for CGT purposes (f ) search fees relating to a CGT asset (for example, fees payable in checking land titles and similar—not the costs of travelling to find a suitable asset for purchase) (g) costs of a conveyancing kit or similar (h) borrowing expenses (such as loan application fees and mortgage discharge fees) (i) certain expenses incurred by a head company of a consolidated group or multiple entry consolidated group (MEC group), and (j) termination or similar fees (eg an exit fee) incurred by a taxpayer as a direct result of their ownership of an asset ending, including where the termination fee is withheld from capital proceeds owed to a taxpayer. If the incidental cost is not within this exclusive list, the cost will not be part of the cost base.

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(3) The costs to the taxpayer of the ownership of the asset (if it was acquired after 20 August 1991) (s 110-25(4)).36 Note that this only refers to the costs of owning the asset—not the costs of becoming the owner. The (non-exhaustive) list of costs of ownership given in the legislation includes: (a) interest on money borrowed to acquire the asset (b) costs of maintaining, repairing or insuring the asset; these can include travel and accommodation costs in carrying out initial repairs (c) rates or land tax (if the asset is land) (d) interest on money borrowed to refinance the money borrowed to acquire the asset, and (e) interest on money borrowed to finance the capital expenditure incurred to increase the asset’s value. Where the asset is a collectable or a personal use asset, this third element is not included in its cost base (s 108-17; 108-30 ITAA97). (4) The capital expenditure incurred with the purpose or expected effect of increasing the asset’s value (s 110-25(5)). So far as CGT events happening before 1 July 2005 were concerned, the purpose of enhancement expenditure had to be to increase the asset’s value, and such enhancement expenditure had to be reflected in the state or nature of the asset at the time of the CGT event. Neither requirement applies so far as CGT events happening on or after 1 July 2005 are concerned. Moreover, capital expenditure incurred which relates to installing or moving the asset is also included in this element of the cost base for CGT events happening on or after 1 July 2005.

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(5) The capital expenditure incurred to establish, preserve or defend the taxpayer’s title to the asset or a right over the asset (s 110-25(6)).

For all CGT assets, the second and third elements of the cost base do not include expenditure for which deductions have been, or can be, claimed by the taxpayer (s 11040(2)). Furthermore, any expenditure recouped that is not included in the taxpayer’s assessable income does not form part of any element of the cost base (s 110-40(3); 11045(3)). Expenditure on entertainment, penalties and bribes, and contributions and gifts to political parties, are specifically excluded from the cost base (s 110-38).

REDUCED COST BASE (¶7-630 – ¶7-635) [¶7-630] Introduction While a capital gain is generally determined by comparing the capital proceeds with the asset’s cost base (and sometimes indexed if the asset was acquired before 21 September 36 In Karapanagiotidis v FC of T 2007 ATC 2746, the tribunal concluded that a property was acquired in 1989 notwithstanding a term of contract which stated that the actual transfer was in 1995. As a result, the taxpayer was not able to include interest costs, rates and maintenance in the cost base of the property as it was acquired before 20 August 1991.

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1999 and held for at least 12 months before the CGT event), a capital loss is usually the difference between the capital proceeds and the asset’s reduced cost base. In essence, the definition of reduced cost base in s 110-55 of the ITAA97 is similar to the definition of ‘cost base’, but the reduced cost base is never indexed and any expenditure allowed or allowable as a deduction does not form part of the reduced cost base. However, for certain CGT events (C3, D1, D2, D3, E8, E9, F1, F3, F5, H1, H2, K2, K5, K7, K11, L1, L4, L6 and L8) the reduced cost base is not relevant in determining the capital loss. In these cases, the provisions dealing with the relevant CGT event explain the amounts which are instead used for working out if there is a capital loss. And for another 13 CGT events (E4, F4, G1, J2, J5, J6, K6, K8, K9, K10, L2, L3 and L5) no capital loss can arise in any case, so the ‘reduced cost base’ is totally irrelevant.

[¶7-635] Elements of reduced cost base The reduced cost base of a CGT asset has five elements. Elements 1, 2, 4 and 5 are the same as for the cost base. The third element for the reduced cost base is any amount that is assessable because of a balancing adjustment for the asset or would be assessable if certain balancing adjustment relief was not available (s 110-55).37 Expenditure is not included in the reduced cost base if it is deductible or if a nonassessable recoupment is receivable in respect of the expenditure (s 110-55(4), (6)). No element in the reduced cost base is indexed. Example—Capital loss

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On 1 October 2013, Jennifer bought a new property for $200,000 for the purpose of deriving rental income. Jennifer sold the property on 1 October 2018 for $180,000. Her acquisition and disposal costs were $10,000, and she had claimed the 2.5% capital allowance write-off in respect of the property. Cost of property

Incidental costs of acquisition and disposal Less: capital allowance claimed as a deduction Reduced cost base Capital proceeds

  Capital loss

$

200,000

10,000

210,000 25,000

185,000 180,000 $5,000

37 The provisions in question are div 58; s 40-365; former ss 42-285, 42-290, and 42-293 ITAA97; and s 59(2A) or (2D) ITAA36.

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GENERAL MODIFICATIONS TO COST BASE AND REDUCED COST BASE (¶7-640 – ¶7-660) [¶7-640] Introduction The general rules for determining the cost base and the reduced cost base of a CGT asset sometimes have to be modified. Modifications can be required at any time from when a CGT asset is acquired to when a CGT event happens in relation to that CGT asset (s  112-5 ITAA97). Most modifications replace the first element of the cost base and reduced cost base of a CGT asset, namely, the amount paid for the CGT asset. The general rule is that if a cost base modification replaces an element of the cost base of a CGT asset, that replaced amount is taken to be the amount paid by the taxpayer (s 112-15). For example, if a taxpayer paid $50,000 for an asset which had a market value of $30,000, and acquired that asset from a connected entity, the cost base modification rules may operate to restrict the first element of the cost base to the market value of the asset rather than the inflated price that was actually paid. The most important of these modifications relate to: •

the replacement of the actual cost with market value (¶7-645)

•

apportionment rules (¶7-655), and

• •

split, changed or merged assets (¶7-650) assumption of liability (¶7-660).

These modifications are now discussed.

[¶7-645] Market value substitution rule

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The first element of the cost base and the reduced cost base of a CGT asset acquired from another entity is its market value—at the time of the acquisition—if: (1) the taxpayer did not incur any expenditure to acquire it (except where the acquisition was a result of either CGT event D1 happening, or another entity did something that did not constitute a CGT event happening) (2) some or all of the expenditure incurred to acquire it cannot be valued, or

(3) the taxpayer did not deal at arm’s length with the other entity in connection with the acquisition (s 112-20 ITAA97). Example—Market value substitution rule for cost base Richard gave his daughter, Sarah, shares as a gift. The cost base of those shares for Sarah would be the market value of the shares at the date of the gift.

In two cases where the taxpayer did not deal at arm’s length with the other entity, the market value is substituted only if the amount paid for the CGT asset is more than its market value at the time of acquisition. The two situations are:

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(1) the CGT asset is a share in a company that was issued or allotted to the taxpayer by the company, and (2) the CGT asset is a unit in a unit trust issued to the taxpayer by the trustee of the unit trust (s 112-20(2)).

Section 112-20 is not a test of whether two parties are at arm’s length, but whether the parties are dealing at arm’s length. The test of an arm’s length transaction is whether the agreed price is similar to the market price. In Granby Pty Ltd v FC of T, Lee J stated:38 What is asked is whether the parties behaved in the manner in which parties at arm’s length would be expected to behave in conducting their affairs.

Additionally, s 112-20(3) provides that the market value substitution rule does not generally apply to a CGT asset that is acquired for no consideration, where the CGT asset is: (1) a right to income from a trust—other than a unit trust or deceased estate (2) a decoration awarded for valour or brave conduct (3) a contractual or other legal or equitable right

(4) a right to acquire shares or options in a company or units or options in a unit trust that is exercised (5) a share in a company issued to the taxpayer by the company, and (6) a unit in a trust issued to the taxpayer by the unit trust.

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[¶7-650] Split, changed or merged assets Special cost base rules apply if a CGT asset is split into two or more assets or if it changes in whole or in part into an asset of a different nature, but only if the taxpayer remains the beneficial owner of the new assets after the change (s 112-25 ITAA97). The splitting, changing or merging of a CGT asset is not a CGT event. Each element in the cost base and the reduced cost base is simply added if assets are merged and apportioned in a reasonable way where the asset is split into two or more assets (s 112-25). Example—Split assets Kate subdivides a block of land into three separate blocks of equal size and value. The original block of land cost Kate $120,000, and she spent $15,000 on subdividing. Each of the three blocks is a new asset, and the first element of the cost base of each asset will be $45,000.

38 95 ATC 4240, 4243.

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[¶7-655] Apportionment rules Apportionment may be necessary where an asset is acquired and only part of the expenditure involved in the transaction relates to the acquisition of that asset. In this case, the relevant element of the cost base and reduced cost base of the asset only includes that part of the expenditure that is reasonably attributable to the acquisition of the asset (s 11230 ITAA97). Example—Apportionment Rod pays an architect $70,000 for a block of land and for her advice on the appropriate building to put on the block. This transaction involves one CGT event: the acquisition of the land. The first element of Rod’s cost base for the acquisition of the land is so much of the $70,000 as is reasonably attributable to that acquisition.

If a CGT event happens to some part of a CGT asset but not to the remainder of it, the cost base and reduced cost base of that part are generally worked out using the formula:

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Cost base of the asset ×

Capital proceeds for the CGT event happening to the part Those capital proceeds plus the mark ket value of the remainder of the asset

The remainder of the cost base and reduced cost base of the asset is attributed to the part of the asset that remains. However, if an amount of the cost base and reduced cost base (or part of it) is wholly identifiable with the part of the asset to which the CGT event happened or to the remaining part, no apportionment is made. In such a case, the amount is allocated wholly to the relevant part of the asset. The apportionment rule applies where, for example, a taxpayer disposes of three of 10 hectares of land. Other examples include where a taxpayer who owns a 40% interest in an asset disposes of a 20% interest or where the owner of an asset disposes of an interest (eg by contributing the asset to a partnership). Example—Apportionment Jane holds an asset with a cost base of $100,000. She sells a 25% interest in the asset to Fritz for $300,000. The market value of the 75% interest in the asset she retains is $900,000. The cost base attributable to the 25% interest she has sold will be: $100, 000 ×

$300, 000 = $25, 000 $300, 000 + $900, 000

Jane therefore makes a capital gain (CGT event A1) of $275,000 (ie capital proceeds of $300,000 less cost base of $25,000). The cost base of the 75% interest she retains is $75,000 (ie $100,000 less $25,000).

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[¶7-660] Assumption of liability rule If a CGT asset is acquired from another entity and it is subject to a liability, the first element of the cost base and reduced cost base of the asset includes the amount of the assumed liability (s 112-35 ITAA97). The following example is based on one given in the legislation. Example—Assumption of liability Shirley acquires land for $150,000. She pays $50,000 in cash and becomes responsible for an outstanding mortgage of $100,000. The first element of Shirley’s cost base and reduced cost base will be $150,000.

SPECIFIC RULES FOR MODIFYING COST BASE AND REDUCED COST BASE (¶7-670 – ¶7-680) [¶7-670] Overview There are many other specific situations that may require the cost base and reduced cost base of a CGT asset to be modified: sub-div 112-B of the ITAA97 (s 112-40 to 112-97). These are: • •

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• • • • •

• • • • • •

• •

when CGT event D4 (¶7-178), E1 (¶7-185), E4 (¶7-200), F4 (¶7-270), G1 (¶7305), G3 (¶7-315), J4 (¶7-420) or K8 (¶7-480) takes place in relation to a CGT asset

when an exemption is given for a gift of property and the property is later acquired by an associate for less than market value (s 112-48) when the CGT asset is a main residence (¶8-050ff )

when scrip for scrip rollover relief is involved (¶8-295ff ) when a demerger occurs (¶8-298) when a taxpayer dies (¶8-500ff )

when the CGT asset is a bonus share or unit (¶8-610)

when the CGT asset is a right in relation to a share in a company or a unit in a unit trust (¶8-615) when the CGT asset is a convertible interest (¶8-620)

when the CGT asset is an exchangeable interest (related to traditional securities) when the CGT asset relates to a lease (¶8-650)

when the CGT asset relates to an option (¶8-660)

when an individual, company or trust becomes an Australian resident for tax purposes (¶8-700ff ) when the CGT asset stops being a pre-CGT asset (¶8-850ff )

on the demutualisation of certain entities (s 118-550 ITAA97), and

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•

when net capital losses are transferred within a wholly owned group of companies (¶8-320).

Special cost base and reduced cost base modifications may also be required by provisions other than the CGT provisions, as, for instance, where an item stops being held as trading stock (s 112-97; ¶14-230ff ).

[¶7-675] Replacement-asset rollover modifications A replacement-asset rollover (¶8-200ff ) allows a taxpayer to defer the making of a capital gain or loss from one CGT event until a later CGT event happens (s 112-105 ITAA97). It involves the taxpayer’s ownership of one CGT asset ending and the acquisition of a replacement asset. If the original CGT asset was a post-CGT asset, the first element of the replacement asset’s cost base is replaced by the original asset’s cost base at the time the taxpayer acquired the replacement asset (s 112-110). The same rules apply to reduced cost base. In addition, some replacement-asset rollovers involve other rules that affect the cost base or reduced cost base of a replacement asset (s 112-115). If the original CGT asset was a pre-CGT asset, the replacement asset is also taken to be a pre-CGT asset.

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[¶7-680] Same-asset rollover modifications A same-asset rollover (¶8-300ff ) allows one entity (the transferor) to choose to disregard a capital gain or loss it makes from disposing of a CGT asset to, or from creating a CGT asset in, another entity (the transferee). Any capital gain or loss is deferred until another CGT event happens in relation to the asset in the hands of the transferee (s 112-140 ITAA97). If the CGT asset was a post-CGT asset in the hands of the transferor, the first element of the asset’s cost base and reduced cost base in the hands of the transferee is replaced by the asset’s cost base and reduced cost base in the hands of the transferor at the time the transferee acquired it (s 112-145). If the asset was a pre-CGT asset in the hands of the transferor, it continues to be a pre-CGT asset in the hands of the transferee.

INDEXATION OF THE COST BASE (¶7-690 – ¶7-698) [¶7-690] Introduction Where an asset was acquired before 11.45 am on 21 September 1999, and where certain further conditions are satisfied, a taxpayer can increase four of the five elements of the cost base of an asset in line with quarterly movements in the Australian Bureau of Statistics CPI. The uplift in the cost base produces the ‘indexed cost base’. This indexation has the broad effect of inflation-proofing the CGT regime. However, indexation has been frozen as at 30 September 1999. As a result:

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Capital Gains Tax: General Topics

taxpayers may not index the cost base of any assets acquired on or after 21 September 1999

taxpayers who acquired assets prior to 21 September 1999 and who satisfy the other relevant conditions for indexation may still index the relevant elements of the cost base of the asset through to 30 September 1999 and calculate the capital gain on the difference between the capital proceeds and the indexed cost base of the asset where the taxpayer is an individual, trust or complying superannuation entity, and the asset was acquired before 21 September 1999 and the CGT event occurred after that date, the taxpayer may choose to forgo indexation (where it is available) and instead exclude a portion of the capital gain by applying the CGT discount (¶7-915). For most qualifying taxpayers this choice is likely to be the preferred option.

The following paragraphs (to ¶7-698) provide details of the indexation rules that can still apply to give indexation up to 30 September 1999 for all taxpayers in respect of CGT events that happen, whether before or after 21 September 1999, to CGT assets acquired before 21 September 1999. The indexed cost base is used to determine the capital gain from a CGT event where the CGT asset was acquired before 21 September and held for at least 12 months before the CGT event happened in relation to the asset (s  114-10(1) ITAA97). The indexed cost base is the sum of the first, second, fourth and fifth elements of the cost base inflated by the all groups Consumer Price Index and indexed in accordance with s  960-275 of the ITAA97, plus the unindexed third element (the costs of ownership). Indexation is only relevant if the cost base of the CGT asset is relevant to a CGT event (s 114-5). The reduced cost base of a CGT asset is not indexed. The indexed amount of a component of the cost base of an asset is calculated by multiplying the amount of the component by the indexation factor (s 960-270(1)). The indexation factor is the number—calculated to three decimal places—obtained by dividing the consumer price index figure (the index number) for the quarter of the year in which the relevant CGT event happened to the asset (or 30 September 1999, if earlier), by the index number for the quarter in which the expenditure was incurred (s 960-275(2)). No indexation takes place if the indexation factor is 1 or less (s 960-270(2)). This means that the indexed cost base of an asset can never be less than the cost base. The following index numbers have been extracted from official publications of the Australian Bureau of Statistics (ABS) together with the ATO website. Note that the ABS changed the index reference base in September 2012 from 1989/90 to 2011/12. The CPI figures in the following table are the current figures and should be used for all current and future calculations of indexation. Year 1985 1986 1987

Quarterly CPI number 31 March

30 June

30 September

31 December

–

–

39.7

40.5

46.0

46.8

47.6

41.4 45.3

42.1

43.2

44.4

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Year

Quarterly CPI number 31 March

30 June

30 September

31 December

1988

48.4

49.3

50.2

51.2

1990

56.2

57.1

57.5

59.0

1989 1991 1992 1993 1994 1995 1996 1997 1998 1999

51.7 58.9 59.9 60.6 61.5 63.8 66.2 67.1 67.0 67.8

53.0 59.0 59.7 60.8 61.9 64.7 66.7 66.9 67.4 68.1

54.2 59.3 59.8 61.1 62.3 65.5 66.9 66.6 67.5 68.7

55.2 59.9 60.1 61.2 62.8 66.0 67.0 66.8 67.8 –

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[¶7-692] Requirement for 12 months’ ownership The cost base of a CGT asset is only indexed if the CGT asset was acquired by the taxpayer at least 12  months before the time of the relevant CGT event (s  114-10 ITAA97). Generally, expenditure is indexed from the quarter in which the expenditure was incurred (s 960-275(2) ITAA97). The exception is when there is an acquisition of a CGT asset that did not result from a CGT event, such as the issue of shares by a company. In this case, the first element of the cost base of the CGT asset is indexed from when the expenditure was paid (s 960-275(3)). There are five exceptions to the 12-month rule which are contained in s 114-10, relating specifically to: CGT event E8, rollovers, deceased estates, surviving joint tenants and CGT event J1. Broadly, these exceptions allow a look through or aggregation approach so that ownership by different parties can still satisfy the 12-months rule.

[¶7-695] Effect of cost modifications The general rule is that, if a cost base modification replaces an element of the cost base of a CGT asset, the element is indexed from the quarter when the modification occurred (s 114-15 ITAA97). If the modification only adds an amount to the existing amount of the element, only the amount of the modification is indexed from that quarter. However, if a cost base modification reduces the total cost base of a CGT asset, the total of all the elements as reduced forms a new first element which is then indexed from the quarter when the modification happened (s 114-15(3)).

[¶7-697] Expenditure incurred for rollovers If there is a replacement-asset rollover in relation to a CGT asset and the first element of its cost base is the whole of the cost base of the original asset, the amount of that

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element—including indexation—at the time of the CGT event giving rise to the rollover is indexed from the quarter in which the CGT event happened to the original asset (s 114-20 ITAA97). If there is a same-asset rollover in relation to a CGT asset and the first element of its cost base is the whole of its cost base, the amount of that element—including indexation— at the time of the CGT event giving rise to the rollover is indexed from the quarter in which the CGT event happened.

[¶7-698] Examples of the calculation of relevant cost bases The following examples are adapted from the ATO website39 and illustrate the calculation of the cost base and ensuing capital gain using the indexation method. Note that in both examples the taxpayer would also wish to calculate the capital gain by reference to the discount method (if applicable) in order to establish which of the two methods produced the lower capital gain – see ¶7-915ff.

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Example 1—Indexation of the cost base Val bought an investment property for $150,000 under a contract dated 24 June 1991. The contract provided for the payment of a deposit of $15,000 on that date, with the balance of $135,000 to be paid on settlement on 5 August 1991. She paid stamp duty of $5,000 on 20 July 1991. On 5 August 1991, she received an account for solicitor’s fees of $2,000, which she paid as part of the settlement process. She sold the property on 15  October 2018 (the day the contracts were exchanged) for $600,000. She incurred costs of $1,500 in solicitor’s fees and $15,000 in agent’s commission. The indexation factor is the CPI for the September 1999 quarter divided by the CPI for the quarter in which the expenditure was incurred: • for the June 1991 quarter this is 68.7 ÷ 59.0 = 1.164 • for the September 1991 quarter this is 68.7 ÷ 59.3 = 1.159. Val works out her indexed cost base as follows: Deposit × indexation factor $15,000 × 1.164

Balance × indexation factor $135,000 × 1.164

Stamp duty × indexation factor $5,000 × 1.159

Solicitors’ fees for purchase of property × indexation factor $2,000 × 1.159

Solicitor’s fees for sale of property (indexation does not apply)

=

$17,460

=

$157,140

=

$5,795

=

$2,318

 

$1,500

39 www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capitalgain/Choosing-the-indexation-or-discount-methods/ accessed 13 August 2018.

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Agent’s commission for sale of property (indexation does not apply)

Cost base (total)

 

$15,000

 

$199,213

Val works out her capital gain as follows: Capital proceeds

$600,000

Capital gain

$400,787

less cost base

$199,213

Assuming Val has not made any other capital losses or capital gains in the 2018–19 income year and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is $400,787.

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Example 2—Indexation of the cost base In May 1999 Andrew bought 1,200 units in Share Trust for $1,275. This amount included brokerage fees. He gave the units to his brother in August 2018. A CGT event happened when Andrew made the gift. At the time of this CGT event, the units were worth $1,595. As the market value of the units was greater than their cost base, Andrew made a capital gain. As Andrew bought the units before 21 September 1999 and owned them for more than 12  months, he can use the indexation or discount method to calculate his capital gain, whichever gives him the better result. If Andrew calculates his capital gain using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows: The indexation factor is the CPI for September 1999 quarter divided by the CPI for June 1999 quarter. In this example, that is 68.7 ÷ 68.1 = 1.009 His indexed cost base is his cost ($1,275) multiplied by the indexation factor (1.009), which is $1,286.48.   So, Andrew’s capital gain using the indexation method is: Capital proceeds

Less indexed cost base Capital gain

 

Rounded down

$1,595.00 $1,286.48

$308.52 $308.00

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STEP THREE: CONSIDERING EXCEPTIONS OR EXEMPTIONS APPLYING TO A CGT EVENT (¶7-700 – ¶7-720) [¶7-700] Introduction Once it has been established that there is a CGT event which applies (which may or may not involve a CGT asset), and the quantum of the gain or loss from that event has been calculated, the next step is to establish whether any exceptions or exemptions apply to the capital gain or capital loss. Where exceptions or exemptions do apply, the capital gain or loss may be disregarded or, in certain circumstances, it may be reduced. Exceptions that may exist are identified within the provisions dealing with each of the CGT events (¶7-100ff ). The most obvious exception that applies for most of the CGT events is where the asset was acquired before 20 September 1985—in those circumstances the capital gain or capital loss is disregarded. Most of the exceptions are contained within div 104 of the ITAA97. There are four broad categories of exemption, most of which have the effect of entirely disregarding the recognition of a capital gain or capital loss made from a CGT event. Note that sometimes the capital gain or loss may only be partially exempt, in which case the capital gain or loss is appropriately reduced. The four broad categories of exemption are: • •

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• •

exempt assets, such as cars or decorations for valour (¶7-705); the main residence exemption also falls into the category of exempt assets (¶8-050ff ) anti-overlap provisions designed to prevent double taxation where a capital gain may also be taxable under other provisions (¶7-710)

exempt or loss-denying transactions, such as the expiry of a lease or compensation for any wrong or injury (¶7-715), and small business exemptions, such as the 15-year exemption of sub-div 152-B of the ITAA97 (¶8-400ff ).

The first three categories are discussed in ¶7-705 to ¶7-715. Detailed discussion of the fourth category (the small business exemptions), as well as the main residence exemption and insurance and superannuation exemptions, is contained in Chapter 8.

[¶7-705] Exempt assets Capital gains and losses from the following assets are disregarded: •

• • •

cars, motorcycles or similar vehicles designed to carry less than one tonne or fewer than nine passengers (s 118-5(a) ITAA97)

valour and brave conduct decorations, unless the recipient paid money or gave any other property for them (s 118-5(b))

collectables (¶7-525) or interests in collectables acquired for $500 or less (s  11810(1), (2)) personal use assets (¶7-530) acquired for $10,000 or less (s 118-10(3))

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• •

•

CGT assets employed solely to produce exempt income. The exemption does not apply if the assets were used to produce non-assessable non-exempt income (¶9-005) (s 118-12) shares in a PDF (¶21-600) (s 118-13), and

registered emissions units and rights to receive a free carbon unit or an Australian carbon unit (¶7-445) (s 118-15).

[¶7-710] Anti-overlap provisions A CGT event which gives rise to a capital gain under pt 3-1 of the ITAA97 may also be assessable under other provisions of the tax law, such as s 6-5 of the ITAA97. In such circumstances, s  118-20(1) of the ITAA97 is designed to prevent double taxation by effectively reducing the amount of the capital gain by the amount included in assessable income under the other provision(s). Section 118-20(1) applies where: (1) a capital gain has accrued to a taxpayer in respect of a CGT event, and

(2) as a result of this event, an amount has been included in the taxpayer’s assessable income or exempt income—or, in the case of a partner in a partnership, in the partnership’s assessable income or exempt income—of any year of income under a tax provision other than a CGT provision.

The capital gain is reduced to zero if it is not more than the assessable amount included in the taxpayer’s income because of the non-CGT provision (s 118-20(2)). If the capital gain is more than that assessable amount, it is reduced by that assessable amount (s 118-20(3)).

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Example—Operation of the anti-overlap rules LittleBankCo, a financial institution, acquires shares which, although not trading stock, are a revenue asset of LittleBankCo (¶6-510). The shares were acquired on 1 January 1990 for $100,000 and were disposed of on 30 September 2003 for $200,000. Assume that the disposal of the shares gives rise to a profit taxable under s  6-5 of $100,000. There is no provision for indexation under s 6-5. The shares are also taxable under the CGT provisions. Indexation will be available, though frozen as at 21 September 1999. (Note that the CGT discount is not available to companies.) CGT calculation:

Capital proceeds

Indexed cost base

$

 

200,000

122,300

 123.4  $100,000 × 1.223    100.9  Capital gain

77,700

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The disposal of the shares by LittleBankCo gives rise to a taxable profit under s 6-5 of $100,000, and also a capital gain under pt 3-1 of $77,700. As the capital gain is less than the s 6-5 ordinary income, the effect of s 118-20 is that no capital gain is taken to accrue in respect of CGT event A1.

However, the capital gain is not reduced if an amount is included in assessable income because of a balancing adjustment (s 118-20(5)). A capital gain or loss is disregarded if an amount is included in a taxpayer’s assessable income under a provision relating to: •

carried interests (s 118-21; ¶7-485)

•

depreciating assets (s 118-24) (this applies to disposals on or after 21 September 1999)

• • • • •

superannuation lump sums or employment termination payments (s 118-22) trading stock (s 118-25)

various financial arrangements (s 118-27) film copyright (s 118-30), and

research and development (s 118-35).

In each case, the amount included in a taxpayer’s assessable income under these provisions does not have to equate to the notional capital gain for the exemption to apply. Under s  118-20(1B), there is no reduction of the capital gain insofar as it relates either to an amount that is taken to be a dividend under s 159GZZZP of the ITAA36 (which relates to buy-back of shares) or to an amount included in assessable income under s 207-20 of the ITAA97 (which relates to franked dividends).

[¶7-715] Exempt or loss-denying transactions

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A capital gain or capital loss is disregarded if the CGT event relates directly to various events relating to compensation and gambling, including: • • • •

•

• •

compensation or damages received for any wrong or injury suffered in the recipient’s occupation (s 118-37(1)(a)(i) ITAA97) compensation or damages received for any wrong, injury or illness suffered personally by the recipient or the recipient’s relative (s 118-37(1)(a)(ii)) gambling, a game or a competition with prizes (s 118-37(1)(c)) tobacco industry exit grants (s 118-37(1)(g)), and

amounts of compensation received under the firearms surrender arrangements (s 118-37(3)). The following events are also disregarded for CGT purposes:

a capital loss made by a lessee from the expiry, surrender, forfeiture or assignment of a lease—except one granted for 99 years or more—if the lessee did not use the lease solely or mainly for income-producing purposes (s 118-40)

a capital gain or loss made by a taxpayer who owns land on which there is a building where the gain or loss is made by subdividing the building into stratum units and

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• • • •

• •

•

transferring each unit to the entity having the right to occupy it just before the subdivision (s 118-42)

a capital gain or loss made by a genuine prospector from the sale, transfer or assignment of rights to mine in a particular area in Australia if the income from the sale, transfer or assignment is exempt under the former s 330-60 (s 118-45) a capital gain or loss from a hedging contract entered into to reduce the financial risk from currency exchange rate fluctuations (s 118-55) a capital gain or loss from certain testamentary gifts of property (s 118-60)

a capital loss from any payment of personal services income included in an individual’s assessable income under s 86-15 (s 118-65) a capital loss made by an exempt entity (s 118-70)

a capital gain or loss made under CGT event C2 in certain circumstances relating to a marriage or relationship breakdown settlement (s 118-75), and a capital gain or loss made by an indigenous person or holding entity in relation to native title and rights to native title benefits (s 118-77).

As a result of legislative amendments made in 2015, the CGT exemption for compensation and damages (items (1)  and (2)  above) was extended to trustees and beneficiaries in receipt of compensation or damages for CGT events occurring from 1 July 2005 (s  118-37(1)(b) and (ba)). The Explanatory Memorandum to the Taxation and Superannuation Laws Amendment (2014 Measures No 7) Act 2015 (Cth) provides the following example to illustrate how the amended provisions would apply:

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Example—Exemption for compensation received by trustee or beneficiary Robert is the beneficiary of ABC trust, which was established after Robert fell off a roof while working for Roofing Inc and suffered serious injuries. Patrick, as trustee of ABC trust, seeks compensation on behalf of Robert from Roofing Inc’s insurance company, and receives compensation for the accident. The capital gain made by Patrick in relation to the compensation received is disregarded. Assume Robert recovers from his injuries, but requires substantial further medical and other support. Patrick, as trustee of ABC trust, distributes the compensation to Robert to assist in paying his hospital bills. Any capital gain made by Robert in relation to the compensation received is disregarded.

[¶7-720] Specific exemptions: An outline In addition to the general exemptions outlined above, div 118 of the ITAA97 contains a number of specific exemptions. There is also an important exemption contained in div 855 of the ITAA97. The main specific exemptions (and the paragraphs in which they are considered in detail) are: •

an individual’s main residence, usually to the extent that it has not been used for income-producing activities (sub-div 118-B; ¶8-050ff ). Note that proposed

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• • • •

• • •

•

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legislation is currently before Parliament to remove the main residence exemption for foreign residents (¶8-050).

a small business taxpayer’s active assets. Up to three exemptions (the 15-year exemption under sub-div 152-B of the ITAA97, the 50% reduction under sub-div 152-C and the retirement exemption under sub-div 152-D) may be available (¶8400ff ). Note that sub-div 152-E also contains a small business rollover relief (¶8450).

any gains by tax-exempt bodies (as distinct from those deriving ‘mutual income’ from dealings with the bodies’ members)

interest in rights under a general insurance policy, a life insurance policy or an annuity instrument (s 118-300; ¶8-080) or, from 2015, under a policy of insurance against an individual suffering an illness of injury

an amount payable out of a superannuation fund or approved deposit fund (s 118-305; ¶8-080) a right to a retirement savings account (s 118-310; ¶8-080)

an entity’s gain or loss from units in a pooled superannuation trust (s  118-350; ¶8-080) venture capital investments by foreign residents (s 118-400; ¶8-090)

venture capital investments by foreign superannuation funds (s 118-500; ¶8-090), and

certain gains by foreign residents in respect of assets which do not constitute taxable Australian property (s 855-10; ¶8-700ff ).

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Note that a CGT concession on the disposal of certain interests in active foreign companies held by Australian resident companies or CFCs has also been enacted. Division 768 of the ITAA97 is dealt with in detail in Chapter 24.

STEP FOUR: CONSIDERING ROLLOVER PROVISIONS APPLYING TO A CGT EVENT (¶7-800 – ¶7-820) [¶7-800] Introduction The previous sections have identified whether an exception or an exemption may apply to the capital gain or the capital loss. Where they do, the capital gain or loss is usually disregarded completely. If an exception or an exemption does not apply, the taxpayer may nonetheless be concessionally treated by virtue of one of the many rollover provisions that exist in the CGT regime. A rollover provision has the effect of deferring or postponing the capital gain or capital loss that arises under the CGT event. There are reasonable grounds, based on both equity and efficiency criteria, for including some rollover provisions within the CGT provisions. On equitable grounds, rollover provisions may need to exist where involuntary disposals occur (compulsory

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acquisitions, corporate takeovers and mergers or demergers, destruction of assets through natural disasters, marital breakdown disposals, etc). Some such rollovers have thus been incorporated in the Australian CGT. On efficiency grounds, a case can be made for deferral of the capital gain where taxpayers are rolling the proceeds of the disposal of one asset into a bigger asset, in order to grow a business. A case can also be made for a rollover or deferral in situations where there is a legal change in ownership but no real economic change in ownership (eg where an asset is being transferred between different companies in a wholly owned corporate group, or where a sole trader transfers a business to a wholly owned company). Again, the Australian CGT contains some such rollovers. In some cases, rollover relief is available only where the taxpayer specifically chooses that the rollover provision apply. For example, relief is available under sub-div 122-A of the ITAA97 (transfer of assets from a sole trader business to a wholly owned company) (¶8-105ff ) only if the taxpayer chooses that that section apply to the disposal of the asset concerned. Choice rollover provisions invariably prescribe that choices are to be made on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the relevant CGT event happened, or within such further period as the Commissioner allows. If no valid choice is made, pt 3-1 and 3-3 of the ITAA97 may apply to the transactions in question in the usual manner. In the remaining cases, rollover relief is automatic; no election is necessary. For example, sub-div 124-J of the ITAA97 confers rollover relief upon the renewal or freeholding of a Crown lease (¶8-270). The taxpayer has no choice in the matter. Rollovers can be grouped into two main categories: (1) same-asset rollovers, and

(2) replacement-asset rollovers.

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Each of these is considered in the following paragraphs.

[¶7-810] Same-asset rollovers Under a same-asset rollover, there will typically be more than one entity involved, and the rollover works to disregard the disposal and to pass on the CGT attributes of the asset(s) being disposed of by one entity (the transferor) to another entity (the transferee). More particularly: (1) the transferor is exempted from the CGT consequences of disposing of an asset (or series of assets), and (2) either:

(a) if the original asset was acquired by the transferor before 20 September 1985, the transferee is also taken to have acquired the asset before that date, or (b) if the original asset was acquired by the transferor on or after 20 September 1985, the transferee is taken to have acquired it for whatever was the cost base for the transferor at the time of the transfer.

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The same-asset rollover provision applies to a number of situations. These include: rollovers on marital breakdown (sub-div 126-A ITAA97) (¶8-310) and

changes to trust deeds (sub-div 126-C), and (subject to certain refinements). In addition there are variations on the theme where the assets of a business are transferred from one entity to another. For example small business restructures (div 328-G) (¶8-150 – ¶8-180), and

transfers of assets from a sole trader or partnership business to a wholly owned company (div 122 ITAA97) (¶8-105 and ¶8-120).

Example—Same-asset rollover Alan acquired two assets, one in 1984 and the second in 1994. As a result of a court order on the breakdown of his marriage to Belinda, he is required to transfer both assets to Belinda in the current year. First asset There is no capital gain on the disposal of the asset from Alan to Belinda in the current year, and Belinda is taken to have acquired a pre-1985 asset in the current year (and so will have no CGT liability on its ultimate disposal). Second asset

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Alan’s capital gain on the disposal of this asset to Belinda in the current year is disregarded. Belinda’s first element of the cost base of the asset in the current year is taken to be whatever the asset’s cost base (or reduced cost base) is for Alan in the current year. Belinda will have to calculate a capital gain or loss on this second asset when she disposes of it.

[¶7-820] Replacement-asset rollovers This category of rollover does not involve different entities. Rather, it involves one entity that disposes of an asset and replaces it with another asset, which may or may not be a similar asset, depending on the particular provisions involved. Replacement-asset rollover provisions include: •

assets compulsorily acquired, lost or destroyed (sub-div 124-B ITAA97) (¶8-210)

•

strata title conversions (sub-div 124-D) (¶8-230)

• • •

• •

renewal or surrender of statutory licences (sub-div 124-C) (¶8-220) exchange of shares or units (sub-div 124-E) (¶8-240)

exchange of rights or options (sub-div 124-F) (¶8-245)

exchange of shares in one company or units in a unit trust for shares in another company (div 615) (¶8-250) conversion of a body to an incorporated company (sub-div 124-I) (¶8-260)

Capital Gains Tax: General Topics367

•

•

renewal, extension or conversion of Crown leases (sub-div 124-J) (¶8-270)

expiry, termination or surrender of certain rights relating to depreciating assets (sub-div 124-K) (¶8-280)

• expiry, surrender or replacement of prospecting and mining entitlements (sub-div 124-L) (¶8-290) • scrip for scrip exchanges, involving post-CGT shares or interests in trusts (sub-div 124-M) (¶8-295)

• trust restructures (sub-div 124-N) (¶8-297), Medical Defence Organisation exchanges (sub-div 124-P), exchange of stapled ownership interests for ownership interests in a unit trust (sub-div 124-Q), replacement water entitlements (sub-div 124-R) and interest realignment arrangements (sub-div 124-S), and •

the small business replacement rollover (sub-div 152-E ITAA97) (¶8-450).

The general principles that underpin replacement-asset rollovers are as follows:

(1) the capital gain or capital loss that derives from the original asset(s) is disregarded, and (2) either:

(a) if the original asset was acquired before 20 September 1985, the new (replacement) asset is also taken to be acquired before that date, or (b) if the original asset was acquired on or after 20 September 1985, the first element of the cost base (or reduced cost base) of the new asset is the original asset’s cost base as at the time when the ownership of that original asset ended.

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Example—Replacement-asset rollover Chan acquired a fishing licence in 2008 for $5,000. It expired in 2018 and was renewed in that year. The expiry of the licence does not lead to any capital gain or loss in 2018 (CGT event C2 would otherwise have applied). The new licence will include, in the first element of its cost base, the original cost of $5,000.

STEP FIVE: DETERMINING NET CAPITAL GAIN/LOSS FOR INCOME YEAR (¶7-900 – ¶7-960) [¶7-900] Outline The preceding four steps have determined whether a CGT event has happened, calculated the relevant capital gain or capital loss from the CGT event, and identified exceptions, exemptions and rollovers. The final step is to bring together the gains and losses from all CGT events in the income year, combine them with net capital losses from previous income years (if applicable), and apply any CGT discounts that may be available. Once this has been done, any net capital gains can be included in assessable income and taxed

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accordingly, or any capital losses can be carried forward to a future income year when the taxpayer has sufficient taxable income (in the form of net capital gains) to be able to use the losses. The stages involved in this final step in determining a net capital gain for an income year can be summarised as follows: •

• •

• •

Stage 1: reduce capital gains for the income year by capital losses for the same income year, subject to special rules for collectables and personal use assets (¶7-905) Stage 2: apply net capital losses from previous years (¶7-910)

Stage 3: reduce any capital gains that qualify by the discount percentage (¶7-915ff )

Stage 4:  apply any of the small business concessions that may be available under sub-div 152-C, 152-D or 152-E of the ITAA97 to the remaining amount (if any) (¶7-940, ¶8-400ff ), and

Stage 5: calculate the net capital gain for the income year, which will be included in the assessable income of the year (¶7-950).

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The procedure for determining a capital loss follows a somewhat different path. Effectively, capital gains for the year are subtracted from capital losses for the year and, where the outcome is greater than zero, that amount represents the capital loss for the income year. It is added to any net capital loss that has been brought forward from earlier years, and carried forward to be available for set off against future capital gains. The following paragraphs (¶7-905 – ¶7-950) provide greater detail on these processes. The five stages involved are summarised in Figure 7.2.

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Figure 7.2 Determining net capital gain or loss for the year Identify each capital gain and each capital loss that happened from CGT events in the income year

Stage 1 Apply capital losses against capital gains, usually in the following order: first against capital gains not attracting either the CGT discount or indexation; then against capital gains not attracting the CGT discount; finally against capital gains that attract the CGT discount. If the result is positive

If the result is negative

Stage 2 Apply net capital losses from previous income years against capital gains, usually in the same order as in stage 1 above

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If the result is positive

If the result is negative

Stage 3 Reduce any discount capital gains by the discount percentage

This is your capital loss for the income year

Add it to your net capital losses available from previous years

Stage 4 Apply any small business concessions that may be available to relevant capital gains

Stage 5 Add up any capital gains remaining after stage 4. This is your net capital gain for the income year, and will be charged at your marginal rate of tax

Carry forward this capital loss to apply against capital gains from future income years

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[¶7-905] Stage One: Identifying gains and losses for the income year A taxpayer is required to make a separate CGT calculation for each capital gain or capital loss arising from CGT events. At the end of the income year, the taxpayer’s capital losses are applied against capital gains for that income year, subject to the rules relating to collectables and personal use assets. Where the capital gains exceed the capital losses, the balances on each gain are carried forward to the next stage in the process. If the capital losses for the income year exceed the capital gains, the difference is the taxpayer’s net capital loss for the year. Note that the net capital loss cannot be deducted from the taxpayer’s assessable income—it can only be available (indefinitely) for set-off against future capital gains. A taxpayer can choose which capital gains to apply capital losses against. This can be a crucial decision, because a taxpayer will wish to ensure that losses are applied in such a way as to maximise their value. In this connection, it should be noted that losses must be used against the full amount of a capital gain, even if the CGT discount will be available for that gain.

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Example—Allocating capital losses Lotti has made a capital gain on the sale of some shares of $1,000, and the CGT discount is available to reduce that capital gain to $500. She also has a capital loss of $750 from another CGT event in the same year. It might be thought that Lotti would be able to reduce the capital gain on the sale of the shares to $500 by applying the CGT discount, and then use $500 worth of the capital loss to reduce the capital gain to zero (and carry forward the balance of losses of $250). This is not the case. The loss must be applied to the capital gain before the CGT discount. Hence the capital gain is reduced to $250 (utilising all of the loss), and the 50% discount is then applied, leaving $125 as the net capital gain for the year.

It follows from this that capital losses should be applied against capital gains in the following order so as to maximise their value: •

first against capital gains that do not attract either the CGT discount or indexation

•

only finally against capital gains that attract the CGT discount.

•

second against capital gains that attract indexation, and

The following rules governing collectables (¶7-525) and personal use assets (¶7-530) must also be taken into account: •

• •

any gains or losses from collectables that were acquired for $500 or less are disregarded (s 118-10(1) ITAA97) any gains from personal use assets that were acquired for $10,000 or less are disregarded (s 118-10(3)) capital losses from personal use assets are disregarded (s 108-20(1) ITAA97), and

Capital Gains Tax: General Topics371

•

capital losses from collectables can only reduce capital gains from collectables (s 10810(1)). If the capital losses from collectables exceed capital gains from collectables in a given income year, this net capital loss may only be applied against future net gains from collectables, although it may be carried forward indefinitely (s 108-10(4)).

Examples—Determining net capital gain or loss 2016/17 During the 2016/17 income year, Xanthe made the following gains and losses on the disposal of assets:   gain/   (loss) Land

Ming Dynasty vase

Personalised number plate Shares

Stamps

   $

100,000 20,000 5,000

(200,000) (25,000)

2017/18 During the 2017/18 income year, Xanthe made the following gains on the disposal of assets:

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Shares (held less than one year)

Real estate (held more than one year)

$

110,000 100,000

The vase and stamps sold during the 2016/17 income year are collectables. The gain and loss respectively for these assets are separately netted off under s 108-10, giving rise to a capital loss from collectables of $5,000. This loss is quarantined under s 108-10 and carried forward for deduction against future gains from collectables. As there are no gains from collectables in the 2017/18 income year, the capital loss from collectables from the 2016/17 income year is carried forward to 2018/19. This is despite the fact that Xanthe has accrued capital gains from CGT assets other than collectables during the 2017/18 income year. The gains and losses on disposal of the other assets in 2016/17 are netted off, giving rise to a capital loss of $95,000 ($200,000  − $105,000). This loss is carried forward for deduction against future capital gains. Note that Xanthe has not been able to access the CGT discount on any of the capital gains. In the 2017/18 income year there is a total capital gain of $210,000. The net capital loss available from 2016/17 of $95,000 should be set off against the $110,000 gain on the shares, leaving $15,000 capital gain on the shares. The CGT discount can be given

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against the gain on the real estate, reducing that gain to $50,000. There is therefore a net capital gain for the 2017/18 year of income of $65,000 which is included in the taxpayer’s assessable income (s 102-5 ITAA97).

[¶7-910] Stage Two: Applying previous years’ capital losses Assuming there is still a positive figure of capital gains after the netting process outlined above, the next stage involves applying net capital losses available from earlier years to reduce the capital gains. Once again, the taxpayer can choose the order in which any previously unapplied net capital losses from earlier years are to be applied. Naturally, they should usually be applied against gains in the same order identified in ¶7-905 in order to maximise the value of the losses. The capital losses may themselves derive from a number of earlier years. An example in s 102-15 of the ITAA97 shows how losses are to be applied, and suggests that the losses are applied on a ‘first in first out’ basis, in that earlier years’ losses are applied first. Example—Applying prior year capital losses

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You have capital gains for the income year of $1,000, and capital losses for the income year of $600. Your capital losses are subtracted from your capital gains to leave a balance of $400. You have available net capital losses of $300 (for last year) and $200 (for the year before that). The $400 is reduced to zero by applying the available net capital losses in the order in which you made them. This leaves $100 of the $300 to be carried forward and extinguishes the $200.

STAGE THREE: APPLYING THE DISCOUNT PERCENTAGE (¶7-915 – ¶7-935) [¶7-915] Introduction The CGT discount applies to capital gains that arise to specified types of taxpayer from certain CGT events that happen on or after 11.45 am on 21 September 1999 (‘the start time’). The CGT discount is one-half of the capital gain for individuals and trusts, and one-third of the gain for complying superannuation entities. With effect from 8 May 2012 the discount is no longer available for gains on assets held by foreign residents which are subject to CGT (taxable Australian property, refer ¶8-720). Any gains which have accrued prior to this date will remain eligible for the discount for those foreign residents who obtain a valuation of the affected asset as at 8 May 2012. Note also that proposed legislation is currently before the Parliament to provide an additional 10% CGT discount

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for dwellings used to provide affordable housing (ie specified residential premises used as rental property and managed by an eligible community housing provider).40 The CGT discount applies to certain capital gains arising from CGT events happening after the start time, so long as the asset involved has been held for at least 12 months.41 It does not matter whether the asset was acquired before or after the start time, although where the asset was acquired before the start time taxpayers who are individuals, trusts or complying superannuation entities can choose whether to use the CGT discount or to use the indexed cost base of the asset (with indexation only calculated to 30 September 1999 and frozen thereafter). In addition to these basic conditions for accessing the CGT discount, there are further specific rules relating to: •

the CGT events that can attract the CGT discount (¶7-920)

•

the way that the 50% exclusion applies to trusts (¶7-930).

•

the 12-month holding period requirement (¶7-925), and

These are dealt with separately further on in the chapter. The following example, adapted from the Explanatory Memorandum accompanying the New Business Tax System (Integrity and Other Measures) Bill 1999, show how the provisions for the CGT discount work in practice (and interact with the indexation provisions) in the simplest situations.

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Example—CGT discount or indexation? Sandra acquired shares in a listed public company in 1995 for $20 each, and sells them in May 2001 for $38 each. The indexed cost base of each share as at 30 September 1999 is $22. Sandra can choose to calculate the capital gain on each share in either of the following ways: • the indexation method: the excess of disposal proceeds ($38) over indexed cost base ($22), giving a capital gain of $16, or • the discount method:  half of the realised nominal gain (ie $38 less $20 divided by two) giving a capital gain of $9. Clearly Sandra would choose to claim the CGT discount. If Sandra had acquired the shares for $25 in November 1999, and sold them for $38 in May 2000, neither indexation nor the CGT discount would be available. Indexation is not available in respect of assets acquired after 21 September 1999 (and in any case the asset

40 Treasury Laws Amendment (Reducing Pressure on Housing Affordability) Bill 2018, Sch 3.F. 41 In Taxation Determination TD 2002/10 the Commissioner notes that ‘The use of the words “at least” in s 115-25(1) requires a clear period of 12 months (that is a clear year) to expire between the acquisition of the CGT asset and the happening of the CGT event: Carapanavoti & Co Ltd v Comptoir Commercial Andre & Cie SA [1972] Lloyd’s Rep 139 (cited with approval in Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421), Ex parte McCance: Re Hobbs (1926) 27 SR NSW 35 and Halsbury’s Laws of England 4th ed reissue, vol 45(2) 202 [234]. In our view, both the day of acquisition and the day on which the CGT event happens must be excluded in reckoning the 12 month period. So, a period of 365 whole days (or in a leap year 366 whole days) must elapse between the day on which the CGT asset was acquired and the day on which the CGT event happens’.

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was held for less than 12 months), and the CGT discount only applies if the asset has been held for at least 12 months. If Sandra had acquired the shares for $25 in November 1999, and sold them for $38 in December 2000, the CGT discount would be available as the asset would have been held for at least 12 months. The capital gain would be $6.50 per share.

[¶7-920] CGT events that can attract the CGT discount Certain CGT events do not qualify for the CGT discount (s 115-25 ITAA97). Generally, this is because the particular events involved create a new CGT asset and so the 12-month rule will not be satisfied. The CGT events that do not qualify for the CGT discount include CGT events D1, D2, D3, E9, F1, F2, F5, H2, J2, J5, J6 and K10. Thus the CGT discount is confined to capital gains that arise from CGT events that happen on or after 21 September 1999 to individuals, trusts and complying superannuation entities from the other CGT events.

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[¶7-925] The 12-month holding period requirement Normally, to be able to access the CGT discount, the CGT asset must have been owned by the taxpayer concerned for at least 12 months at the time the CGT event happens (s 11525 ITAA97). In certain circumstances this rule is relaxed, and a taxpayer is permitted to ‘look through’ an earlier acquisition. This happens where the taxpayer has acquired the asset as a result of a same-asset or replacement-asset rollover provision (eg under the provisions in div 122 to 124 ITAA97), or as a result of the death provisions (div 128 ITAA97). In these circumstances (and for the purposes of the CGT discount only), the asset will be deemed to have been owned by the taxpayer for at least 12 months if the collective period of ownership is at least 12 months (s 115-30). The legislation also permits a taxpayer seeking the CGT discount to ‘undo’ an earlier calculation which has involved indexation of the cost base (eg on a same-asset rollover). This is because a discount capital gain must be worked out without reference to indexation at any time (the CGT discount is always an alternative to indexation). However, where an asset has been transferred under one of the involuntary disposal provisions, its cost base in the hands of the transferee may already reflect the inclusion of some indexation in the transferor’s hands. Section 115-20 therefore permits the cost base to be recalculated without reference to indexation, so that the CGT discount can be given. The legislation provides the following example. Example—CGT discount rather than indexation In 1995 Elizabeth acquired land from her ex-husband under an order made by a court under the Family Law Act 1975 (Cth). Former s  160ZZM of the ITAA36 treated her as having paid $56,000 for the land, equal to her ex-husband’s indexed cost base for it. His cost base for the land was $40,000. In 2009 she sold the land for capital proceeds of $150,000. Her capital gain on the land is $110,000 (equal to the capital proceeds less the cost base for the land without indexation). The 50% CGT discount can be applied

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to this ‘raw’ capital gain (as she has chosen not to use indexation), leaving her with a discounted capital gain of $55,000.

In addition to the relaxation of the rules noted above, there are also two sets of antiavoidance provisions that can have an impact on the 12-month rule.

(1) Agreements within 12 months of acquisition The first anti-avoidance provision operates to prevent taxpayers inappropriately taking advantage of the CGT discount by seeking to extend artificially the period of ownership of the asset that produces the capital gain. Section 115-40 provides as follows: Your capital gain on a CGT asset from a CGT event is not a discount capital gain … if the CGT event occurred under an agreement you made within 12 months of acquiring the CGT asset.

In other words, a taxpayer will be denied the CGT discount if the CGT event that gives rise to the capital gain takes place as a result of an agreement that was entered into at any time within 12 months of the acquisition of the asset. Example—Denial of CGT discount

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Kate acquires an asset in November 2017 and in January 2018 agrees to sell it to Chris in December 2018. When Kate actually sells it to Chris in December 2018, she will be denied the 50% CGT discount, even though she has held the asset for more than 12 months. Also note that the agreement does not have to be in writing—an oral agreement would suffice to prevent access to the discount.

Case law indicates that an ‘agreement’ is something less than a ‘contract’.42 Under an agreement, the terms agreed upon do not necessarily have any binding effect in their own right. In order to become binding, something more formal may need to take place. In contrast, a contract implies a degree of binding finality (which may or may not be subject to performance of some condition). It is likely that an option would be capable of being construed as an agreement in the sense that this term is used in s 115-40.

(2) Disposals of equity where underlying value recently acquired The second anti-avoidance provision denies the CGT discount to disposals of equity in companies and trusts in situations where the CGT discount would not have been available if the taxpayer had owned the underlying assets of the company or trust directly, and a CGT event had happened to those directly held CGT assets. Section 115-45 is therefore an integrity measure that ensures that the 12-month ownership test under the CGT discount rules is not undermined if a capital gain is made from a CGT event happening to an equity interest in a company or a trust. The provisions stipulate that a capital gain that is made from a CGT event happening to a share in a company or interest in a trust will not be a discount capital gain if three

42 See the joint judgment of Dixon CJ, McTiernan and Kitto JJ in Masters v Cameron (1954) 91 CLR 353.

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conditions are met. Note that all three conditions must be met before a taxpayer’s capital gain is denied the CGT discount. If the taxpayer fails to satisfy one of the conditions, the capital gain can still be a discount capital gain even though it involves the disposal of an equity interest. The three conditions (s 115-45(3) to (5)) are: • ‘the de minimis condition’: the taxpayer and associates beneficially owned at least 10% by value of the shares in the company, or at least 10% of the trust voting interests, or issued units or other fixed interests just before the CGT event •

•

‘the cost base condition’:  the total of the cost bases of the CGT assets that the company or trust owned at the time of the CGT event and had acquired less than 12 months before then is more than half of the total of the cost bases of the CGT assets the company or trust owned at the time of the event, and ‘the notional capital gain condition’: the net capital gain that would arise if all assets acquired within the previous 12 months were disposed of for their current market values would be more than half of the net capital gains that would arise, on a similar basis, on all the entity’s assets.

The following examples from the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 7) 2000 illustrates the operation of this integrity measure. Examples—CGT discount anti-avoidance measure Example 1

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Kate sold her 8% shareholding in Autumn Leaves Ltd (a non-widely held entity), making a capital gain of $10,000. Kate had owned the shares for three years. The de minimis condition in s 115-45(3) precludes s 115-45 from applying (Kate owned less than 10% of the equity in Autumn Leaves Ltd). This means that Kate has access to the CGT discount. Example 2 Fred sold his 20% shareholding in Prestige Property Rentals Ltd (a non-widely held entity) making a capital gain of $25,000. Fred had owned the shares for four years. At the time of the sale Prestige Property Rentals Ltd owned the following assets: Asset

Period owned

1

>12 months

3

12 months

8,000

13,000

14 Budget Savings (Measures No 1)  Act 2015 2-100, 2-400, 21-990 Legislative Instruments Act 2003 21-270 Life Insurance Act 1995 21-410 Loan (Income Equalization Deposits) Act 1976 21-160 Medicare Levy Act 1986 2-100, 21-050 s 3(5) 2-350 s 7 2-320 s 8 2-320 s 8B-8D 2-350 s 10 2-300, 21-050 Migration Act 1958 9-015, 24-214 Military Rehabilitation And Compensation Act 2004 9-120 Minerals Resource Rent Tax Act 2012 21-270 Minerals Resource Rent Tax (Imposition–Customs) Act 2012 21-270 Minerals Resource Rent Tax (Imposition–Excise) Act 2012 21-270 Minerals Resource Rent Tax (Imposition–General) Act 2012 21-270 Minerals Resource Rent Tax Repeal and Other Measures Act 2014 21-270 Sch 5 21-215 Multilateral Competent Authority Agreement (MCAA) 24-020 National Rental Affordability Scheme (Consequential Amendments) Act 2008 21-850, 21-860 Nation-Building Funds Act 25-835 New Business Tax System (Capital Allowances) Act 2001 12-100 New Business Tax System (Former Subsidiary Tax Imposition) Act 1999 22-710 New Business Tax System (Franking Deficit Tax) Act 2002 s 5 18-380 New Business Tax System (Over-Franking Tax) Act 2002 s 4 18-350 New Business Tax System (Untainting Tax) Act 2006

s 3 18-580 New International Tax Arrangements Act 2004 24-245 New International Tax Arrangements (Foreignowned Branches and Other Measures) Act 2005 24-020, 24-210,   24-245, 24-620 New International Tax Arrangements (Managed Funds and Other Measures) Act 2005 24-100, 24-610 New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 24-200, 24-222,   24-245, 24-250 Pay As You Go Withholding Non-Compliance Tax Act 2012 32-447 Payroll Tax Assessment Act 1941 32-127 Petroleum Resource Rent Tax Act 1987 21-260 Petroleum Resource Rent Tax Assessment Act 1987 21-260 s 19(1) 21-260 s 19(4) 21-260 s 24 21-260 s 37 21-260 s 37(1) 21-260 s 114 21-260 Petroleum Resource Rent Tax Assessment Amendment Act 2011 21-260 Petroleum Resource Rent Tax Assessment Regulation 2015 21-260 Petroleum Resource Rent Tax Assessment Regulations 2005 21-260 Petroleum Resource Rent Tax (Imposition–Customs) Act 2011 21-260 Petroleum Resource Rent Tax (Imposition–Excise) Act 2011 21-260 Petroleum Resource Rent Tax (Imposition–General) Act 2011 21-260 Pooled Development Fund Regulations r 4 21-602 Pooled Development Funds Act 1992 21-600, 21-605 Pt 3 21-600 Pt 4 21-600 Pt 5 21-600 Pt 6 21-600 Pt 7 21-600 s 4 21-602 s 20 21-602 s 20A 21-602 s 20B 21-602 s 24 21-602 s 25 21-602 s 27 21-602 s 29 21-602

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2072 Pooled Development Funds Act 1992 (cont) s 31 21-602 s 32 21-602 Privacy Act 1988 29-070, 32-370 Private Health Insurance Act 2007 2-350, 2-660 Private Health Insurance (Prudential Supervision) Act 2015 9-060 Proceeds of Crime Act 2002 32-240 Product Grants and Benefits Administration Act 2000 21-990 Public Service Act 1922 10-180 Racial Discrimination Act 1975 1-540 Resale Royalty Right for Visual Artists Act 2009 5-540 Retirement Savings Accounts Act 1997 23-065, 32-330 Sales Tax Assessment Act 1992 s 74 32-130 Sea Installations Act 1987 s 4(1) 24-030 Shipping Reform (Tax Incentives) Act 2012 21-995, 24-630 s 5(1) 21-995 s 6 21-995 s 10(5) 21-995 Shipping Reform (Tax Incentives) Regulation 2012 Pt 1 21-995 Pt 2 21-995 Social Security Act 1991 2-570, 2-730, 9-015, 9-120,   10-440, 24-214, 32-335 Pt 2.13A 9-100 s 7(2) 24-214 s 125A(1) 32-330 s 125A(2) 32-330 s 1209L 17-040 s 1209M(1) 17-040 States Grants (Income Tax Reimbursement) Act 1942 1-600 Steel Transformation Plan Act 2011 21-990 Student Assistance Act 1973 27-139 Student Loans (Overseas Debtors Repayment Levy) Act 2015 2-405 Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 23-580 Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act 2016 2-125 Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act (No 2) 2016 2-125 Superannuation (Excess Concessional Contributions Tax) Act 2007 23-125 Superannuation (Excess NonConcessional Contributions Tax) Act 2007 23-125

Table of Legislation

Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 23-135 Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 23-600 Superannuation (Government Co-Contribution For Low Income Earners) Act 2003 23-150 ss 6 to 8 23-150 s 10 23-150 ss 12B to 12E 23-155 s 12C 23-155 Superannuation Act 1976 24-058 Superannuation Act 1990 24-058 Superannuation Contributions Tax Imposition Act 1997 32-330 Superannuation Guarantee (Administration) Act 1992 23-800, 25-485, 25-490 s 6(1) 23-830 s 6A(1) 23-830 s 11(1) 23-820 s 11(2) 23-820 s 11(3) 23-820 s 12 23-110, 23-120, 23-810 s 12(2) 23-810 s 12(3) 23-810 s 12(4) 23-810 s 12(8) 23-810 s 12(9) 23-810 s 12(9A) 23-815 s 12(10) 23-815 s 12(11) 23-815 s 16 23-800, 23-830 s 17 23-820 s 19 23-820 s 19(2) 23-830 s 19(3) 23-820 s 19(4) 23-815 s 19A 23-850 s 22 23-830 s 23 23-830 ss 23(6) to (8) 23-830 s 23A 2-520, 23-840 s 27(1) 23-815 s 27(2) 23-815 s 28 23-815 s 29 23-815 s 31 23-820 s 32 23-820 ss 32A to 32ZA (Pt 3A) 23-850 s 33 23-840 s 46 23-820, 23-840 s 49 23-840 s 65 23-840 Superannuation Guarantee (Administration) Regulations 1993 r 7A 23-820 r 7AD 23-815

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Table of Legislation2073

Superannuation Guarantee Charge Act 1992 s 5 23-800, 23-820 s 6 23-820 Superannuation Industry (Supervision) Act 1993  23-000, 24-078, 32-330 s 10 23-030, 23-060, 23-110 s 19 23-070 s 31 23-070 s 40 23-045, 23-050 s 41 23-045, 23-050 s 42 23-045 s 42A 23-045 s 45 19-045, 23-045 s 47 23-050 s 52 23-070 s 55 23-070 s 62 23-070 s 65 23-070 s 66 23-070 s 67 23-070 s 67A 23-070 s 67B 23-070 ss 69 to 85 23-070 Superannuation Industry (Supervision) Regulations 1994 r 1.04(5) 23-060 r 4.09(2) 23-070 r 6.01 23-070 r 6.21(2A) 23-550 r 6.21(2B) 23-550 r 6.44(1) 23-145 r 7.04 23-070 r 7.04(2) 23-120 Sch 1 23-070 Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Act 2015 24-020 Tax (Transitional Provisions) Act 1997 s 40-72 21-220 Tax Administration Regulations 1976 rr 12A to 12F 29-162 r 35 32-345 r 40 24-620 r 41 24-610 r 42 24-630 r 44E 24-640 Tax Agent Services Act 2009 33-305 Div 20 s 20-5(1) 33-315, 33-320, 33-375, 33-496 ss 20-5(1) to (3) 33-315 s 20-5(2) 33-315, 33-375 s 20-5(3) 33-315, 33-375 s 20-5(4) 33-320 s 20-15 33-320 s 20-20 33-315 s 20-25(5) 33-315 ss 20-25(5) to (7) 33-495 s 20-25(6) 33-315

s 20-25(7) 33-315 s 20-30(1) 33-315 s 20-35 33-315 s 20-40 33-315 s 20-45 33-315, 33-320, 33-500 s 20-50 33-315 Div 30 33-600 s 30-5 33-600 s 30-10 33-496, 33-600 ss 30-10(1) to (14) 33-600 s 30-10(13) 33-315, 33-375 ss 30-15 to 30-30 (30-B) 33-500 s 30-15(2) 33-600 ss 30-20(1) to (2) 33-600 s 30-25 33-600 s 30-30 33-600 s 30-35 33-500 ss 30-35(1) to (3) 33-315 s 30-35(4) 33-315 Div 40 s 40-5(1) 33-500 s 40-5(2) 33-500 s 40-5(3) 33-500 s 40-10(2A) 33-500 s 40-15(2A) 33-500 s 40-20 33-500 ss 40-20 to 40-25 (40-B) 33-600 s 40-25 33-500 Div 50 s 50-5 33-570 ss 50-5 to 50-15 (50-A) 33-315, 33-570 s 50-10 33-570 s 50-15 33-570 s 50-20 33-570 s 50-25 33-570 ss 50-25 to 50-30 (50-B) 33-570 s 50-25(2) 33-570 s 50-30 33-570 s 50-35 33-570 s 50-40 33-570 Div 60 33-310 s 60-15 33-310 ss 60-95 to 60-125 (60-E) 33-600 s 60-125(2) 33-500 Div 70 s 70-5 33-570 s 70-10 33-500 s 70-15 33-315 Div 90 s 90-5 33-315, 33-325 s 90-10 33-315, 33-325 s 90-15 33-315, 33-325 Tax Agent Services Regulations 2009 r 101 33-325 r 103 33-325 r 202 33-320 r 204 33-325 r 205 33-325

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2074 Tax Agent Services Regulations 2009 (cont) r 206 33-325 r 207 33-325 r 301 33-320 r 302 33-320 r 305 33-325 Sch 1 33-320 Sch 2 Ptss 1 to 3 33-320, 33-325 Tax and Superannuation Laws Amendment (2013 Measures No 2) Act 2013 21-910, 22-800,   22-820, 22-825 Tax and Superannuation Laws Amendment (2014 Measures No 1)  Act 2014 2-650 Tax and Superannuation Laws Amendment (2014 Measures No 3)  Act 2014 21-215 Tax and Superannuation Laws Amendment (2014 Measures No 4) Act 2014 20-060, 20-070,   24-120, 24-220, 24-860 Sch 2 24-860 Tax and Superannuation Laws Amendment (2014 Measures No 6) Act 2014 Sch 2 24-640 Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015 21-235 Tax and Superannuation Laws Amendment (2015 Measures No 1) Act 2015 2-620, 2-630, 21-070,   24-219, 24-900 Tax and Superannuation Laws Amendment (2015 Measures No 2) Act 2015 21-215 s 40-455 12-220 Tax and Superannuation Laws Amendment (2015 Measures No 4) Act 2015 24-210 Tax and Superannuation Laws Amendment (2015 Measures No 5) Act 2015 2-670 Sch 4 29-270 Tax and Superannuation Laws Amendment (2015  Measures No 6) Act 2016 24-120, 24-635 Tax and Superannuation Laws Amendment (2016 Measures No 1) Act 2016 21-160, 27-167 Tax and Superannuation Laws Amendment (2016 Measures No 2) Act 2016 21-130 Sch 1 29-010 Tax and Superannuation Laws Amendment (Employee Share Schemes) Act 2015 4-460

Table of Legislation

Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 2-100, 24-030 Tax Assessment Act 1986 9-040 Tax Laws Amendment (2004 Measures No 1)  Act 2004 24-022 Tax Laws Amendment (2006 Measures No 4)  Act 2006 24-214 Tax Laws Amendment (2007 Measures No 3) Act 2007 s 152-220 8-440 Tax Laws Amendment (2007  Measures No 4)  Act 2007 24-200, 24-250, 24-320, 24-360,   24-380, 24-470, 24-690 Tax Laws Amendment (2007  Measures No 5) Act 2007 21-910 Sch 8 28-560 Tax Laws Amendment (2008  Measures No 5) Act 2008 24-024 Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 24-210 Tax Laws Amendment (2009 Measures No 3) Act 2009 32-500 Tax Laws Amendment (2009  Measures No 4) Act 2009 21-440, 24-320 Tax Laws Amendment (2009  Measures No 5) Act 2009 22-895 Tax Laws Amendment (2010  Measures No 1)  Act 2010 20-000, 20-010, 20-030,   20-070, 20-090 Tax Laws Amendment (2010 Measures No 3) Act 2010 24-860 Tax Laws Amendment (2010 Measures No 5) Act 2011 21-910, 22-670, 32-505 Tax Laws Amendment (2011 Measures No 2) Act 2011 32-330 Tax Laws Amendment (2011 Measures No 5) Act 2011 17-205, 17-207 Sch 1 21-160 Tax Laws Amendment (2011 Measures No 7) Act 2011 21-160, 21-910, 22-800,   22-895, 32-445 Tax Laws Amendment (2011 Measures No 8)  Act 2011 21-260 Tax Laws Amendment (2011 Measures No 9)  Act 2012 24-380 Tax Laws Amendment (2012 Measures No 2)  Act 2012 22-825, 32-445, 32-447

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Table of Legislation2075

Tax Laws Amendment (2012 Measures No 6)  Act 2012 21-215, 22-730, 24-640 Tax Laws Amendment (2013 Measures No 2) Act 2013 21-260, 21-997, 22-840,   22-850, 24-020, 24-120,   24-214, 24-219, 24-550, 32-495 Tax Laws Amendment (2013 Measures No 3) Act 2013 33-500 Tax Laws Amendment (2014 Measures No 1) Act 2014 21-160 Tax Laws Amendment (Clean Building Managed Investment Trust) Act 2012 24-640 Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 1-237, 24-700, 24-910,   25-600, 25-677 Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 24-700, 24-910, 25-600 Tax Laws Amendment (Foreign Source Income Deferral) Act (No 1) 2010 24-200, 24-285 Tax Laws Amendment (Implementation of the Common Reporting Standard) Act) 2016 24-020 Tax Laws Amendment (Investment Manager Regime) Act 2012 24-219 Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 24-640 Tax Laws Amendment (Research and Development) Act 2011 21-930 Tax Laws Amendment (Research and Development) Act 2015 21-950 Tax Laws Amendment (Shipping Reform) Act 2012 2-790, 21-995, 24-630 Tax Laws Amendment (Small Business) Act 2007 15-000 Tax Laws Amendment (Small Business Measures No 2) Act 2015 21-150 Tax Laws Amendment (Small Business Measures No 3) Act 2015 12-310 Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 2-580, 2-590 Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 21-998

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 22-800, 22-825, 22-895 Sch 1 item 104(5) 22-800 Sch 1 item 104(13) 22-825 Sch 1 item 104(14) 22-825 Sch 1 item 104(15) 22-825 Tax Laws Amendment (Transfer of Provisions) Act 2010 22-660, 32-440 Taxation (Interest on Overpayments and Early Payments) Act 1983 Pts IIA to IIIA 30-160 s 8C 32-110 ss 12AA to 12AF 27-189 s 12AF 27-189 Taxation Administration Act 19531-320, 21-270, 24-620, 27-187, 29-040, 30-000, 32-420, see also Taxation Administration Act 1953 Sch 1 Pt I s 2 32-380 s 2(1) 33-065 Pt IA s 3A 29-010 s 3C 21-260, 29-265 s 3C(1) 29-265 s 3C(2) 29-265 s 3C(3) 29-265 s 3C(6) 29-265 s 3CA 29-265 s 3E 21-260 s 3E(3) 29-265 Pt II s 4 29-010 s 6D 29-010 s 7(1) 29-010 s 8 29-145 ss 8(1) to (6) 29-010 Pt IIA 26-000 s 8AAB(2) 33-040 s 8AAB(4) 33-040 s 8AAB(5) 33-040 s 8AAC 33-040 s 8AAC(3) 33-040 s 8AAC(4) 33-040 s 8AAD 33-050 ss 8AAD(1) to (4) 33-040 ss 8AAD(2) to (4) 33-050 s 8AAE 33-040 s 8AAF 33-040 s 8AAF(1) 33-040 s 8AAF(4) 33-040 s 8AAG 32-110 s 8AAG(1) 33-040 s 8AAG(2) 33-040 s 8AAG(3) 33-040 s 8AAG(4) 33-040 s 8AAG(5) 33-040

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2076 Taxation Administration Act 1953 (cont) s 8AAGA 33-040 Pt IIB Div 1 s 8AAZA 32-505 Pt IIB Div 2 ss 8AAZC(1) to (5) 32-505 s 8AAZC(4) 32-505 s 8AAZC(5) 32-505 s 8AAZD(1) 32-505 s 8AAZD(1A) 32-505 Pt IIB Div 3 ss 8AAZL to 8AAZLB 27-115 s 8AAZL(1) 32-505 s 8AAZL(2) 32-505 s 8AAZLA(1) 32-505 s 8AAZLB(1) 32-505 s 8AAZLB(4) 32-505 s 8AAZLC 32-505 Pt IIB Div 3A s 8AAZLF 32-510 s 8AAZLF(2) 32-510 s 8AAZLF(3) 32-510 s 8AAZLG 27-189, 32-510 s 8AAZLG(1) 27-189 s 8AAZLGA 27-189 ss 8AAZLGA(1) to (8) 27-189 s 8AAZLH(2) 32-510 s 8AAZLH(3) 32-510 Pt IIB Div 4 s 8AAZM 33-040 s 8AAZN(1) 27-189 Pt III 33-020, 33-030, 33-100 Pt III Div 1 s 8A(1) 33-190 s 8A(2) 33-030, 33-190 Pt III Div 2 33-100 s 8B 33-135 s 8B(1) 33-135 s 8C 29-160, 32-385, 33-030,   33-120, 33-124, 33-135 s 8C(1) 30-065, 32-360 s 8C(1A) 32-360, 33-120 s 8C(1B) 32-360, 33-120, 33-124 s 8C(2) 33-120 s 8D 29-160, 33-120, 33-124, 33-135 s 8D(1) 33-030, 33-120 s 8D(1A) 33-120 s 8D(1B) 33-124 s 8D(2) 33-030, 33-120 s 8E 33-135 s 8E(1) 33-030, 33-135 ss 8E(1) to (3) 30-065 s 8E(2) 33-135 s 8E(3) 33-135 s 8F 33-135 s 8F(1) 33-030 s 8G 33-135 s 8H 33-135

Table of Legislation

s 8H(1) s 8HA(1) s 8J(1) s 8J(2) s 8J(3) s 8J(4) ss 8J(9) to (11) s 8K s 8K(1) s 8K(1A) s 8K(1B) s 8K(1C) s 8K(2) s 8K(3) s 8L s 8L(1) s 8L(1A) s 8L(2) s 8M s 8N s 8Q s 8R s 8R(1) s 8R(2) s 8S s 8S(1) s 8T s 8T(1) s 8U s 8U(1) s 8V(1) s 8V(2) s 8W(1) s 8W(2) s 8WA s 8WA(1AA) s 8WB s 8WC s 8XA s 8XB s 8Y(1) s 8Y(2) s 8Y(3) s 8Z Pt III Div 3 ss 8ZA to 87N s 8ZE Pt IIIB Div 2 Pt IIIB Div 3 Pt IVA ss 14Q to 14ZA ss 14T to 14Y Pt IVA Div 2 s 14R s 14S s 14S(1) ss 14S(2) to (5) s 14T

33-030 33-135 33-150 33-150 33-150, 33-170, 33-180 33-150, 33-180 33-150 33-150, 33-570 33-150 33-150 33-150 33-150 33-150, 33-160 32-360, 33-150 29-120, 33-160 33-160 33-160 33-160 33-150, 33-160 33-030, 33-170, 33-570 29-120, 33-170 33-170 33-170 33-170 33-170 33-030 29-120, 33-180, 33-210 33-180 27-167, 33-180, 33-210 33-180 33-180 33-180 33-150, 33-160 33-180 32-360 32-360 32-360 32-360 29-060, 32-360 32-360 33-190 32-385, 33-190 33-190 33-150 33-200 33-030 32-505 32-505 32-150, 33-066 10-330 32-150 32-150 32-150 32-150 32-150 32-150

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Table of Legislation2077

s 14T(1) 32-150 s 14T(2) 32-150 s 14U 32-150 s 14U(1) 32-150 Pt IVA Div 3 s 14V(1) 32-150 s 14X 32-150 s 14Y 32-150 Pt IVA Div 4 s 14Z(1) 32-150 s 14Z(2) 32-150 s 14Z(3) 32-150 s 14ZA 32-150 Pt IVC 9-005, 9-020, 25-695, 31-500,   32-102, 33-040 Pt IVC Div 1 s 14ZL(1) 31-530 s 14ZL(2) 31-530 Pt IVC Div 2 s 14ZQ 31-500, 31-530 s 14ZS 31-500, 31-530, 32-110 Pt IVC Div 3 s 14ZU 31-350, 31-360 s 14ZV 30-033, 31-410 s 14ZVA 30-033, 31-410 s 14ZW 30-033, 31-355 s 14ZW(1) 27-189, 27-192, 30-028, 30-033 s 14ZW(1) to (4) 31-350 s 14ZW(1AAA) 27-192, 31-350 s 14ZW(1AAB) 31-350 s 14ZW(1AAC) 30-033 s 14ZW(1A) 30-033, 31-350 s 14ZW(1BA) 30-033 s 14ZW(1BB) 31-350 s 14ZW(4) 27-189 ss 14ZX(1) to (4) 31-350 s 14ZY 25-680 s 14ZY(1A) 30-028 s 14ZY(2) 31-530 s 14ZY(3) 31-420 s 14ZYA(1) 31-420 s 14ZYA(2) 31-420 s 14ZYA(3) 31-420 s 14ZZ 30-033, 31-500, 31-522,   31-530, 32-110 Pt IVC Div 4 ss 14ZZA to 14ZZJ 31-535 s 14ZZB(1) 31-536 s 14ZZB(2) 31-430 s 14ZZC 31-530 s 14ZZE 31-535 s 14ZZF(1) 31-560 s 14ZZG 31-560 s 14ZZJ(2D) 31-535 s 14ZZK 25-695, 30-095, 31-300,   31-375, 31-521 s 14ZZL 31-700 s 14ZZM 32-120

Pt IVC Div 5 s 14ZZN 31-522 s 14ZZO 25-695, 27-192, 30-095, 31-300,   31-375, 31-521 s 14ZZQ 31-700 s 14ZZR 32-120 s 14ZZS(1) 31-523 s 14ZZS(2) 31-523 Pt V s 17A 32-370 Taxation Administration Act 1953 Sch 19-005, 9-020, 10-605, 24-028,   26-140, 27-169, 27-187 Pt 2-5 32-405 Pt 2-10 32-405, 32-470 Div 4 s 4-15 26-000 s 4-25 26-000 Div 6 s 6-1 32-405 s 6-5(2) 32-405 s 6-5(3) 32-405 s 6-10 32-405 Div 9 s 9-13C 33-200 Div 10 s 10-5(1) 32-410 Div 11 s 11-5(1) 32-410 Div 12 24-210, 32-420, 32-425,   32-440, 32-450 s 12-1(1) 32-420 s 12-1(2) 32-420 s 12-1(3) 32-420 s 12-5(1) 32-410 s 12-5(2) 32-410 s 12-5(3) 32-410 s 12-7 32-420 s 12-10 32-420 s 12-15 32-410, 32-420 s 12-17 32-420 s 12-20 32-420 s 12-35 26-140, 32-410, 32-420, 32-425 ss 12-35 to 12-60 (12-B) 32-420 ss 12-35 to 12-120 32-435 ss 12-35 to 12-335 32-420 s 12-40 26-140, 32-420 s 12-45 26-140, 32-420 s 12-47 32-420 s 12-50 32-420 s 12-55 32-420 s 12-55(1) 32-390 s 12-60 32-410, 32-420 s 12-60(1) 32-420 s 12-60(2) 32-420 s 12-80 32-420 ss 12-80 to 12-90 (12-C) 10-690, 32-420 s 12-90 32-420

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2078 Taxation Administration Act 1953 Sch 1 (cont) ss 12-110 to 12-120 (12-D) 10-690, 32-420 s 12-115 26-140 s 12-120 26-140, 32-420 s 12-140 32-345, 32-435 ss 12-140 to 12-170 32-420 ss 12-140 to 12-190 (12-E) 32-420 ss 12-140 to 12-335 32-435 s 12-145 32-345, 32-430 ss 12-175 to 12-185 17-315 s 12-190 32-390, 32-410, 32-420 ss 12-190(1) to (6) 32-420 s 12-210 24-620 ss 12-210 to 12-300 (12-F) 18-200, 24-600, 32-420 s 12-215 24-620, 32-430 s 12-220 24-620 s 12-225 24-620 s 12-245 24-610 s 12-250 24-610, 32-430 s 12-255 24-610 s 12-260 24-610 s 12-280 24-630 s 12-285 24-630, 32-430 s 12-300 24-600 ss 12-305 to 12-310 (12-FA) 32-420 ss 12-312 to 12-313 (12-FAA) 32-420 s 12-315 32-420 ss 12-315 to 12-319 (12-FB) 32-420 s 12-320 21-250 ss 12-320 to 12-335 (12-G) 32-420 s 12-335(1) 32-455 s 12-335(3) 32-455 s 12-385 24-640 ss 12-385 to 12-420 (12-H) 24-640, 32-420 s 12-390(6) 24-640 s 12-400 24-640 s 12-401 24-640 s 12-403 24-640 s 12-425 24-640 s 12-430 24-640 Div 13 25-450, 32-425, 32-435,   32-440, 32-450 s 13-1 32-425 s 13-5(1) 32-425 s 13-5(3) 32-425 s 13-5(4) 32-425 s 13-5(5) 32-425 s 13-10 32-425 s 13-15 32-425 Div 14 8-700, 32-440 s 14-5 32-410, 32-420 s 14-5(3) 32-410 s 14-10 32-410 ss 14-15(1) to (3) 32-410 s 14-15(2) 32-410 s 14-15(3) 32-410

Table of Legislation

ss 14-50 to 14-75 (14-B) s 14-155 s 14-165 s 14-175 s 14-250(2) s 14-250(3) s 14-250(4) s 14-250(5) s 14-250(6) s 14-255(1) s 14-255(3) s 14-255(4) s 14-255(5) s 14-250(6) s 14-255(7) s 14-250(8) Div 15 s 15-10 s 15-10(2) s 15-15(2) s 15-15(3) s 15-25 s 15-25(1) s 15-25(3) s 15-25(4) s 15-25(5) s 15-30 s 15-35 Div 16 s 16-5 s 16-20 s 16-25 s 16-25(1) s 16-25(4) s 16-30 s 16-30(1)-(3) s 16-30(2) s 16-30(3) s 16-35 s 16-40 s 16-43 s 16-45(1) s 16-50 s 16-70 ss 16-70 to 16-115 (16-B) s 16-70(1) s 16-80 s 16-85 s 16-85(1) s 16-110 s 16-115 s 16-150 s 16-150(2) s 16-153 s 16-155 s 16-182 Div 18 ss 18-65 to 18-80

32-340 4-490 4-490 4-490 27-117 27-117 27-117 27-117 27-117 27-117 27-117 27-117 27-117 27-117 27-117 27-117 32-435 32-435 32-435 32-435 32-435 32-425 32-435 32-435 32-435 32-435 32-435 24-620, 32-430 32-430 32-450 32-450 32-450 32-450 27-117 27-117 27-117 32-450 32-450 32-450 32-450 32-450 4-490 32-445 32-450 4-490, 32-450 4-490 32-450, 32-475 32-455 32-455 32-450 27-117 2-050 2-050 2-050, 23-120 32-440

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Table of Legislation2079

ss 18-65(1) to (7) 32-440 s 18-70 32-440, 32-455 s 18-70(1) 32-440 s 18-70(2) 32-440 s 18-75 32-440 s 18-80 32-440, 32-455 Div 20 s 20-35 32-450 s 20-40(1) 32-450 s 20-40(3) 32-450 s 20-40(4) 32-450 s 20-45(2) 32-450 s 20-80 32-455 Div 34 ss 34-5(1) to (3) 10-605 Div 45 32-500 s 45-5 32-460, 32-495 s 45-10 32-470 s 45-15 32-490 s 45-15(2) 32-470 s 45-20 32-475, 32-495 s 45-20(3) 32-475 ss 45-30(1) to (4) 32-470 s 45-50 32-495 s 45-60 32-490 s 45-61 32-490 s 45-61(2) 32-490 s 45-65 32-495 ss 45-70(1) to (3) 32-500 s 45-70(2) 32-500 s 45-75 32-485 s 45-80 32-485 s 45-90 32-470 s 45-110 32-490 s 45-110(1) 32-490 s 45-110(2) 32-490 s 45-112 32-490 s 45-114 32-495 s 45-114(1) 32-495 s 45-114(2) 32-495 s 45-114(3) 32-495 s 45-115(1) 32-475, 32-500 s 45-115(3) 32-500 s 45-120 22-895, 32-490, 32-495 ss 45-120(1) to (5) 32-490 s 45-120(2B) 22-895 s 45-120(3) 32-465 s 45-125 32-490 s 45-130 32-490 s 45-130(1) 32-490 s 45-132 32-490 s 45-134 32-490 s 45-136 32-495 ss 45-136 to 45-138 (45-DA) 32-495 s 45-138 32-495 s 45-140 32-470, 32-500 s 45-140(1) 32-500 s 45-140(2) 32-500

s 45-140(3) 32-500 s 45-145(1) 32-500 s 45-145(2) 32-500 s 45-150 32-500 ss 45-155(1) to (4) 32-500 s 45-155(1A) 32-500 s 45-160 32-500 s 45-175 32-500 s 45-180(1) 32-500 s 45-180(2) 32-500 s 45-180(3) 32-500 s 45-200 32-495 s 45-205 32-490 ss 45-205(1) to (4) 32-490 s 45-210 32-490 s 45-215 32-490 s 45-225 32-495 s 45-230 32-485 ss 45-230 to 45-240 32-490 s 45-230(2) 32-485 s 45-232 32-485 s 45-232(2) 32-485 s 45-232(3) 32-485 s 45-233 32-485 s 45-235 32-485 s 45-235(1) 32-500 s 45-235(2) 32-500 s 45-240 32-485 s 45-260 32-490 s 45-270 32-500 s 45-280 2-050 ss 45-280 to 45-290 32-490 ss 45-320 to 45-340 (45-J) 32-490 s 45-320(2) 32-495 s 45-320(5) 32-500 s 45-325(2) 32-465 s 45-325(3) 32-465 s 45-330 2-050 s 45-365 32-500 ss 45-700 to 45-775 (45-Q) 20-040, 32-500 s 45-720 32-500 Div 95 s 95-10 23-125 Div 105 s 105-40(1) 27-192 s 105-40(2) 27-192 s 105-50(4) 27-189 s 105-55(6) 27-189 s 105-80 27-189 Div 110 s 110-50(2) 27-192 Div 136 23-135 Div 142 s 142-1 27-189 s 142-5 27-189 s 142-10 27-189 s 142-15 27-189 s 142-20 27-189

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2080 Taxation Administration Act 1953 Sch 1 (cont) Div 142 (repealed) 27-189 s 142-25 27-189 Div 145 25-679 s 145-15 25-679 s 145-25 25-679 Div 155 25-679 s 155-5 27-187 s 155-5(2) 27-187 s 155-10 27-187 ss 155-15(1) to (3) 27-187 s 155-15(5) 27-187 s 155-20(1) 27-187 s 155-20(4) 27-187 s 155-25 27-187 s 155-30(1) 27-187 s 155-30(2) 27-187 s 155-35 27-187 ss 155-35(1) to (5) 27-187 s 155-40 27-187 s 155-50 27-187 s 155-55 27-187 s 155-60 27-187 s 155-70 27-187 s 155-75 27-189 s 155-75(1) 27-189 s 155-80 27-187 s 155-85 27-192 s 155-90 27-192 Div 175 s 175 30-120 Div 177 s 177 30-120 s 177(1) 30-120 Div 250 s 250-5 32-101 s 250-10 32-101, 33-067 s 250-10(1) 32-000 s 250-10(2) 32-000 Div 255 s 255-1 32-101, 33-067 s 255-5 32-485 s 255-5(1) 32-000 s 255-5(2) 32-000, 32-100, 33-040 s 255-10 32-100 ss 255-10(1) to (3) 32-480 s 255-15 32-100 s 255-100(1) 32-101 s 255-100(2) 32-101 s 255-100(3) 32-101 s 255-105(1) 32-101 s 255-105(2) 32-101 s 255-105(5) 32-101 s 255-110 32-101 Div 260 32-010, 32-130 s 260-5 32-130 s 260-5(3) 32-130

Table of Legislation

s 260-5(6) 32-130 s 260-5(7) 32-130 s 260-15 32-130 s 260-20(1) 32-130 s 260-40 32-130 ss 260-40 to 260-60 (260-B) 32-130 ss 260-75 to 260-90 (260-C) 32-130 ss 260-105 to 260-120 (260-D) 32-130 ss 260-140 to 260-150 (260-E) 32-130 s 265-40 32-130 s 265-45 32-130 s 265-65 32-125 Div 263 24-550 Div 265 s 265-65 33-067 Div 268 32-440, 32-445 s 268-20(2) 32-440 s 268-40(1) 32-440 s 268-90 32-440 Div 269 32-445 s 269-5 32-445 s 269-15 32-445 s 269-15(2) 32-445 s 269-20 32-445 s 269-20(1) 32-445 s 269-20(2) 32-445 s 269-20(3) 32-445 s 269-25(1) 32-445 s 269-25(4) 32-445 s 269-35 32-445 ss 269-35(1) to (5) 32-445 s 269-45 32-445 s 269-50 32-445 Div 280 s 280-100 33-050 s 280-100(1) 33-050 s 280-102 33-050 s 280-102A 33-050 s 280-102B 33-050 s 280-103(1) 33-050 s 280-103(2) 33-050 s 280-105 33-050 s 280-105(1) 33-050 s 280-110 33-050 s 280-160(1) 33-050 s 280-160(2) 33-050 s 280-165 33-040 s 280-170 33-050 Div 284 33-061, 33-063, 33-065, 33-078,   33-080, 33-085, 33-086 s 284-15 33-097 s 284-15(1) 33-066, 33-069 s 284-15(2) 33-066 s 284-15(3) 33-066 s 284-20 33-066 s 284-25 33-063, 33-065, 33-066, 33-078 s 284-30 33-078 s 284-35 33-069, 33-078

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Table of Legislation2081

s 284-39 33-069 s 284-70 33-065 s 284-75(1) 33-065 s 284-75(2) 33-066, 33-069 s 284-75(3) 32-450, 33-067, 33-080 s 284-75(4) 27-167, 27-169, 33-065 s 284-75(5) 33-065 s 284-75(6) 33-065 s 284-75(7) 33-065 s 284-80(1) 33-069 s 284-90 33-080 s 284-90(1) 33-062, 33-066, 33-078 s 284-90(2) 33-063 s 284-90(3C) 33-078 s 284-90(4) 33-078 s 284-90(5) 33-078 s 284-90(6) 33-078 s 284-95 33-065 ss 284-140 to 284-165  (284-C) 25-710, 33-066 s 284-145(1) 33-068 s 284-145(2) 33-068 s 284-150 33-097 ss 284-155 to 284-160 32-450 s 284-160 33-066 s 284-220(1) 33-080 s 284-220(2) 33-080 s 284-224(1) 33-070 ss 284-225(1) to (5) 33-082 s 284-235 33-080 s 284-250 33-066 ss 284-250 to 284-255  (284-E) 24-685, 24-700 Div 285 s 285-75(6) 33-090 Div 286 33-061, 33-067, 33-090 s 286-75 27-198 s 286-75(1) 30-065, 32-450 s 286-75(1) to (2A) 33-090 s 286-75(1A) 30-065 ss 286-75(2)(a) to (c) 33-090 ss 286-75(2A) to (6) 33-090 s 286-80 32-450, 33-090 ss 286-80(1) to (4) 32-475 s 286-80(3) 33-090 s 286-80(4) 33-090 Div 287 s 287-80 33-092 Div 288 27-194, 33-061, 33-095 s 288-5 27-187 s 288-10 27-187, 33-095 s 288-20 32-450, 32-475, 33-095 s 288-25(1) 29-120, 33-095 s 288-25(2) 33-095 s 288-30 33-095 s 288-35 33-095 s 288-40 27-198, 33-095 s 288-45 27-198, 33-095

s 288-50 27-198, 33-095 s 288-70 33-095 s 288-75 33-095 s 288-80 33-095 s 288-90 33-095 s 288-95 33-095 s 288-100 33-095 s 288-105 33-095 Div 290 22-660, 25-755, 33-097 s 290-5 25-755 s 290-50(1) 33-097 s 290-50(2) 33-097 s 290-50(2A) 33-097 s 290-50(4) 25-755, 33-097 s 290-50(5) 25-755, 33-097 ss 290-55(1) to (5) 33-097 s 290-55(7) 33-097 s 290-55(8) 33-097 s 290-60 33-097 ss 290-60 to 290-100 (290-B) 25-755 s 290-60(1) 25-755, 33-097 s 290-60(2) 33-097 s 290-60(3) 33-097 s 290-65 33-097 s 290-65(1) 33-097 ss 290-120 to 290-150  (290-C) 25-755, 33-097 s 290-200(1) 33-097 s 290-200(3) 33-097 s 290-200(4) 33-097 ss 290-230 to 290-240 (290-D) 25-755 s 298-20 33-083, 33-084, 33-090, 33-095 s 298-30(1) 33-085 s 298-30(2) 33-086 s 298-30(3) 33-085 s 298-30(4) 33-085 Div 293 33-050 Div 298 s 298-20 27-198, 32-450 s 298-20(2) 32-450 Div 340 32-102 ss 340-5(1) to (3) 32-102 s 340-5(7) 32-102 s 340-10 32-102 Div 350 s 350-10 30-120 s 350-10(1) 27-192, 30-080 s 350-10(3) 27-192 s 350-10(4) 27-192 s 350-15 27-192 s 350-50(2) 30-028 Div 352 s 352-5 29-010 Div 353 S 353-5 29-165 s 353-10 27-194, 29-100, 29-130, 29-160,   29-162, 29-176, 29-210, 29-215, 33-080,   33-082, 33-135

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2082 Taxation Administration Act 1953 Sch 1 (cont) s 353-10(1) 29-162, 29-165, 29-170,   29-175, 29-176, 30-120 s 353-10(2) 29-170 s 353-10(3A) 30-065 s 353-15 27-194, 29-114, 29-130, 29-140,   29-145, 29-160, 29-162, 29-210,  29-215 s 353-15(1) 29-140 s 353-15(2) 29-145 s 353-15(3) 29-145 s 353-25 29-180 s 353-30 29-180 Div 355 29-040 s 355-10 29-040 s 355-15 29-040 s 355-25 29-040 s 355-25(1) 29-040 s 355-30 29-040 s 355-30(1) 29-040 s 355-35 29-040 s 355-45 29-040 s 355-55(1) 29-040 s 355-55(2) 29-040 s 355-60(1) 29-040 s 355-65 29-040 s 355-70 29-040 s 355-70(1) 29-040 s 355-155 29-040 s 355-160 29-040 s 355-165 29-040 s 355-170 29-040 s 355-175 29-040 s 355-185 29-040 s 355-190 29-040 s 355-195 29-040 s 355-200 29-040 s 355-275 29-040 ss 355-325 to 355-335 (355-E) 29-040 Div 356 s 356-5 27-187, 29-010 Div 357 s 357-5(2) 30-010 ss 357-50 to 357-125 (357-B) 30-015 s 357-55 30-015 s 357-60 30-015 s 357-60(1) 30-015, 30-018, 30-025 s 357-60(2) 30-015 s 357-60(5) 27-190, 30-018, 30-025 s 357-60(6) 27-190, 30-018, 30-025 ss 357-65(1) to (3) 30-015 s 357-70(1) 30-015 s 357-70(2) 30-015 s 357-75 27-190 s 357-75(1) 30-015 s 357-75(1A) 30-015 s 357-75(1B) 30-015, 30-025

Table of Legislation

s 357-75(2) s 357-85 s 357-90 s 357-95 s 357-100 s 357-105 s 357-105(1) s 357-105(2) s 357-110 s 357-115 s 357-120 s 357-125 Div 358 ss 358-5(1) to (4) s 358-10(1) s 358-10(2) s 358-15(1) s 358-15(2) ss 358-20(1) to (4) Div 359 s 359-5(1) s 359-5(2) s 359-10 s 359-10(1) s 359-10(2) s 359-10(3) s 359-15 s 359-20(1) s 359-20(2) ss 359-25(1) to (4) s 359-30 s 359-35(2) s 359-35(3) s 359-35(4) ss 359-40(1) to (3) s 359-45 s 359-50 s 359-50(1) s 359-50(2) s 359-50(3) s 359-50(4) s 359-55(1) ss 359-55(1) to (5) s 359-55(3) s 359-55(5) s 359-55(10) s 359-60(1) s 359-60(2) s 359-60(3) s 359-65 s 359-65(1) s 359-65(2) s 359-65(3) s 359-70 s 359-110(1) Div 360 s 360-5(1) s 360-5(2)

30-015 30-015 30-018 30-015 30-015 30-015, 30-028, 30-040 30-015 30-015 30-015, 30-028, 30-040 30-015 30-015, 30-028 30-015 30-015 30-018 30-018 30-015, 30-018 30-018 30-018 30-018 30-015, 30-155 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025 30-025, 30-028 30-033 30-028 30-028, 30-033 30-028 27-190 30-025 27-190 27-190 30-025 30-025, 30-033 30-033 30-033 30-033 30-033 30-033 30-033 30-033 30-025 30-015, 30-040 30-040 30-040

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Table of Legislation2083

s 360-5(2A) 30-040 s 360-5(3) 30-040 s 360-5(4) 30-040 s 360-15 30-040 Div 361 30-015, 30-053 s 361-5(1) 30-053 s 361-5(2) 30-053 Div 370 29-010 s 370-5(1) 29-010 s 370-5(4) 29-010 s 370-10 29-010 Div 388 s 388-50 27-115, 32-420 ss 388-50 to 388-85 (388-B) 16-800, 30-065 s 388-50(1) 30-055, 30-065, 31-360,   33-082, 33-092 s 388-50(1A) 31-360 s 388-50(3) 30-065 s 388-55(1) 30-058 ss 388-60 to 338-75 30-065 s 388-75(3) 30-055 s 388-75(4) 30-055 Div 392 s 392-5 4-490 s 392-10 4-490 Div 405 32-405 s 405-5 32-405 Div 426 ss 426-5 to 426-10 (426-A) 11-695 ss 426-15 to 426-60 (426-B) 11-695 s 426-65 11-695 Div 444 s 444-30 16-800 s 444-80(1) 27-155 ss 444-80(1A) to (1D) 27-155 s 444-80(2) 27-155 s 444-80(3) 27-155 ss 444-90(1) to (1D) 27-155 s 444-90(2) 27-155 s 444-90(3) 27-155 Divss 284 to 288 33-020, 33-030 r 12A to 12F(1) 30-115 r 20 30-150 Taxation Administration Amendment Regulation 2012 (No 1) 32-405 Taxation Administration Amendment Regulations 2004 (No 1) 24-635 Taxation Administration Regulations 1976 r 4 32-127 r 18(1) 32-130 r 18(2) 32-040 r 18(3) 32-040 r 19 32-040 r 20(1) 32-040 r 24 2-640

Taxation and Superannuation Laws Amendment (2014 Measures No 7)  Act 2015 7-715 Taxation and Superannuation Laws Amendment (2016 Measures No 1)  Act 2016 27-060 Taxation Laws Amendment (Foreign Source Income Deferral) Act (No 1) 2010 24-290 Taxation of Alternative Fuels Legislation Amendment Act 2011 21-990 Taxpayers’ Charter 29-25 Telecommunications Act 1997 12-130 Trade Practices Act 1974 10-470, 10-550 s 52 33-800 Treasury Laws Amendment (2018 Measures No. 1) Act 2018 27-117 Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 24-910, 25-600, 33-092 Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 15-200, 18-020 Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 23-120 Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 24-120, 24-635 Treasury Laws Amendment (GST Low Value Goods) Act 2017 27-142, 27-169 Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018 20-000, 20-170 Treasury Laws Amendment (OECD Multilateral Instrument) Act 2018 24-020 Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 2-110 Treasury Laws Amendment (Tax Integrity & Other Measures No. 2)  Act 2018 21-900, 24-022, 24-910 Treasury Laws Amendment (Working Holiday Maker Reform) Act 2016 2-125 Trust Recoupment Tax Assessment Act 1985 17-330 Trust Recoupment Tax (Consequential Amendments) Act 1985 17-330 Venture Capital Act 2002 s 9-1 21-770 s 9-3 21-770

2084 Venture Capital Act 2002 (cont) s 9-5 Veterans’ Entitlements Act 1986 9-120, 32-345 s 52ZZZWA(1)

Table of Legislation

21-770 2-570, 2-730, 17-040

States and Territories 28-500

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ACT Duties Act 1999 (ACT) 28-500, 28-560 s 230 28-570 Duties Amendment Act 2006 (ACT) 28-560 Land Tax Act 2004 (ACT) 28-100 Partnership Act 1963 (ACT) 16-025 Pt 6 16-025, 21-770 Payroll Tax Act 2011 (ACT) 28-300 Taxation Administration Act 1999 (ACT) 28-300, 28-500 NSW Co-operative Act 1992 (NSW) 9-255 Defamation Act 2005 (NSW) 6-805 Duties Act 1997 (NSW) 28-500, 28-550 Ch 2 28-560 Ch 8 ss 229 to 260 28-560 Ch 9 ss 261 to 270 28-560 s 9 28-560 s 274 28-570 s 304 28-590 Land Tax Act 1956 (NSW) 28-100 s 7(1) 28-130 s 8(1) 28-110 s 9AA) 28-140 s 10(1) 28-130 s 10AA 28-130 s 21C 28-130 Land Tax Act 1956 (NSW) Sch 1A 28-130 cl 2(2) 28-130 cl 5 28-130 cl 7 to 9 28-130 cl 11 28-130 Land Tax Management Act 1956 (NSW) s 3 28-110 s 3A 28-170 ss 3A(1) to (4) 28-170 s 4 28-100 s 10A 28-170 s 21 28-110 s 24 28-110 s 25 28-170 s 25(3) 28-170 s 26(1) 28-110 s 27(2) 28-160 s 27(4) 28-160 s 30) 28-110 ss 57 to 62 28-140

Medical Practitioners Act 1938 (NSW) 13-350 Partnership Act 1892 (NSW) 16-025, 21-720 Pt 3 16-025, 21-770 Pay-roll Tax Act 1971 (NSW) 28-362 Payroll Tax Act 2007 (NSW) 28-300, 28-362 s 10 28-361 s 11 28-361 s 11A 28-361 s 11B 28-361 s 11C 28-361 s 47 28-375 Sale of Goods Act 1923 (NSW) 11-700 Stamp Duties Act 1920 (NSW) 14-190 State Revenue Legislation Amendment Act 2009 (NSW) 28-550 State Revenue Legislation Further Amendment Act 2009 (NSW) 28-560 State Revenue Legislation Further Amendment Act 2010 (NSW) 28-550 Taxation Administration Act 1996 (NSW) 28-100, 28-180, 28-300, 28-500 Pt 4 ss 12 to 34 28-100 Pt 6 ss 39 to 73 28-100 Pt 8 28-375 Valuation of Land Act 1916 (NSW) 28-140

NT Partnership Act 1997 (NT) Pt 3 Pay-roll Tax Act 2009 (NT) Stamp Duty Act 1978 (NT) Div 8A ss 56C to 56T s 121 Sch 1 item 5 Sch 1 item 17 to 18 Sch 2 Taxation Administration Act 2007 (NT)

16-025 16-025 28-300 28-500 28-560 28-590 28-560 28-560 28-570 28-300, 28-500

QLD Building Units and Group Titles Act 1980 (Qld) s 27 21-530 Land Tax Act 2010 (Qld) 28-100 s 6(2) 28-140 s 7 28-120 s 8 28-110 ss 35 to 45 28-130 ss 46 to 48 28-130 s 52 28-130 Partnership (Limited Liability) Act 1988 (Qld) 16-025 Partnership Act 1891 (Qld) 16-025, 21-720 Ch 4 16-025, 21-770 Pay-roll Tax Act 1971 (Qld) 28-300

Table of Legislation2085

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Queensland Duties Act 2001 (Qld) 28-500 Revenue and Other Legislation Amendment Act 2010 (Qld) 28-361 Surrogacy Act 2010 (Qld) 28-362 Taxation Administration Act 2001 (Qld) 28-300, 28-500 Pt 3 to Pt 5 28-100 Pt 6 28-180 Pt 7 28-100

SA Land Tax Act 1936 (SA) 28-100 s 4 28-130 s 4(1) 28-130 s 4(1)(1) 28-130 s 12 28-160 s 14(1) 28-110 s 14(2) 28-110 Partnership Act 1891 (SA) 16-025, 21-720 Pt 3 21-770 Payroll Tax Act 2009 (SA) 28-300, 28-362 Payroll Tax (Nexus) Amendment Act 2010 (SA) 28-361 Return to Work Act 2014 (SA) 6-860 Stamp Duties Act 1923 (SA) 28-500 Div 6 28-560 Div 8 ss 71E to 71F 28-560 Pt 3 Div 1 28-560 Pt 3 Div 4 s 42A 28-560 s 4 28-500 ss 29 to 31A 28-560 ss 60 to 71DA 28-560 ss 91 to 102 28-560 s 108(1) 28-600 s 225 28-570 Taxation Administration Act 1996 (SA) 28-300, 28-500 TAS Duties Act 2001 (Tas) 28-500 Land Tax Act 2000 (Tas) s 10(1) 28-110 s 10(2) 28-110 s 18(1) 28-130 s 19 28-130 Land Tax Rating Act 2000 (Tas) 28-100 Partnership Act 1891 (Tas) 16-025, 21-720 Pt 3 16-025 Pay-roll Tax Act 1971 (Tas) 28-362 Payroll Tax Act 2008 (Tas) 28-300, 28-362 Tasmania Land Tax Act 2000 (Tas) 28-100 Taxation Administration Act 1997 (Tas) 28-300, 28-500 VIC Duties Act 2000 (Vic)

28-500, 28-560

Duties Amendment (Landholder) Act 2012 (Vic) 28-560 Electricity Industry Act 1993 (Vic) 10-280 Land and Income Tax Assessment Act 1895 (Vic) 1-050 Land Tax Act 2005 (Vic) 28-100 s 8 28-120 s 9 28-130 s 9(1) 28-130 ss 13AA to 13L 28-130 ss 38A to 54 28-100 s 45 28-160 Partnership Act 1958 (Vic) 16-025, 21-720 Pt 5 16-025, 21-770 Payroll Tax Act 1971 (Vic) s 10(1) 9-040 Payroll Tax Act 2007 (Vic) 28-300 s 10 28-361 s 11 28-361 s 11A 28-361 s 11B 28-361 s 11C 28-361 s 26 28-361 Taxation Administration Act 1997 (Vic) 28-300, 28-500 Pt IV s 38A 28-100

WA Dividend Duties Act 1902 (WA) 22-020 Duties Act 2008 (WA) 28-500 Duties Legislation Amendment Act 2013 (WA) 28-700 Land Tax Act 2002 (WA) 28-100 s 10 28-120 s 12 28-160 s 21 28-130 ss 22 to 28 28-130 ss 26 to 30 28-100 s 27 28-130 s 29 28-130 s 31 28-130 s 32 28-130 s 33 28-130 s 34 28-130 s 37 28-130 s 38(2) 28-130 s 39 28-130 Land Tax Assessment Act 2002 (WA) 28-100 Limited Partnerships Act 1909 (WA) 16-025, 21-720 Metropolitan Region Improvement Tax Act 1959 (WA) 28-100 Partnership Act 1895 (WA) 16-025 Pay-roll Tax Act 2002 (WA) 28-300 Pay-roll Tax Assessment Act 2002 (WA) 28-300 Taxation Administration Act 2003 (WA) 28-300, 28-500

2086 Taxation Administration Act 2003 (WA) (cont) s 26 ss 32 to 42 ss 60 to 86 ss 92 to 95 s 96 ss 98 to 101 s 103 s 108(1) s 108(2)

Table of Legislation

28-100 28-180 28-100 28-100 28-100 28-100 28-100 28-100 28-100

Overseas and International Instruments 24-630

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Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, 28 April 2014. Australia–Canada DTA Art 12(7) Australia–Switzerland DTA Art 9 Australia–UK DTA Art 10(2) Australia–United States DTA Art 12 Art 12(4) Art 27(1) Commonwealth of Australia Constitution Act 1900 (UK) Criminal Finances Act 2016 (UK)

24-635 24-630 24-690 24-620 24-630 24-630 24-100 27-000 33-221

Criminal Finances Act 2017 (UK) 1-050 Foreign Account Tax Compliance Act (FATCA) (US) 24-635 Income Tax Act 1799 (UK) 1-040 Income Tax Act 1803 (UK) 1-040 Internal Revenue Code (US) s 1503 24-090 International Convention on Civil and Political Rights Art 18 32-040 Money-Lenders Act 1900 (UK) 11-455 Multinational Anti-Avoidance Law Legislation, see Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 OECD Convention on Mutual Administrative Assistance in Tax Matters 24-020 OECD Model Tax Convention on Income and Capital (OECD MC) 24-020, 24-700 Art 5 24-020 Art 5(4.1) 24-020 Art 5(5) 24-020 Art 7 24-020, 24-022, 24-575, 24-700 Art 14 24-575 Partnership Act 1890 (UK) 16-025 Statute of Charitable Uses 1601 43  Elizabeth 1 c.4. (UK) 9-040 Swiss Treaty Art 12(3) 24-630

2087

TABLE OF RULINGS

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Taxation Rulings (IT Series) IT 33 IT 88 IT 167 IT 200 IT 2050 IT 2072 IT 2141 IT 2146 IT 2157 IT 2163 IT 2167 IT 2218 IT 2234 IT 2246 IT 2285 IT 2289 IT 2350 IT 2356 IT 2455 IT 2472 IT 2489 IT 2499 IT 2501 IT 2507 IT 2526 IT 2540 IT 2543 IT 2544 IT 2546 IT 2593 IT 2606 IT 2607 IT 2608 IT 2622 IT 2629 IT 2631 IT 2634 IT 2648 IT 2650 IT 2655 IT 2663 IT 2668 IT 2670 IT 2681 IT 2682

14-020 14-020 3-210 11-585 13-430 29-175 33-030, 33-065 2-650 5-320 6-420 5-410 16-260 6-060 33-015 13-420, 18-210 14-145 14-090 17-070 31-355 14-020 21-030 2-760 16-460 24-360 21-130 16-090, 16-480 10-475 24-580 13-220 30-065 10-170, 10-460 24-052 16-460 17-230, 17-250 21-900 6-448, 6-480 32-330 13-500, 13-543 24-054 6-060 13-500, 13-542 3-230, 13-200 14-070 24-052, 24-056 13-430

Taxation Rulings (TR Series) TR 92/3 TR 92/15 TR 92/17 TR 92/18 TR 93/4

6-445, 6-455 4-025, 4-140, 26-500 9-045 11-450, 11-455 24-360

TR 93/12 TR 93/17 TR 93/20 TR 93/21 TR 93/26 TR 93/27 TR 93/30 TR 93/32 TR 93/33 TR 93/38 TR 93/39 TR 94/1 TR 94/4 TR 94/8 TR 94/13 TR 94/14 TR 94/26 TR 94/27 TR 94/29 TR 94/32 TR 95/3 TR 95/5 TR 95/6 TR 95/7 TR 95/8 to TR 95/22 TR 95/9 TR 95/24 TR 95/25 TR 95/29 TR 95/34 TR 95/35 TR 95/36 TR 96/3 TR 96/4 TR 96/7 TR 96/11 TR 96/14 TR 96/15 TR 96/20 TR 96/26 TR 97/7 TR 97/9 TR 97/11   TR 97/15 TR 97/17 TR 97/20 TR 97/21 TR 97/22 TR 97/23 TR 97/25 TR 98/1 TR 98/2 TR 98/4

14-020 23-092 14-020 13-541 14-020 13-430, 22-570 10-430 16-030, 16-250 14-040 26-150 9-070, 9-100 26-540 33-065 16-080 14-070 24-690 13-541 2-700 7-130 13-430 7-165 13-542 14-020, 14-040 14-020 10-310 10-450 26-300 10-460 21-130, 21-160 10-475 6-910 21-220 22-610 14-020 29-110 29-110 22-620 24-210 13-325 26-549 13-510, 13-520 14-020, 14-070 6-010, 6-070, 6-090, 9-250, 21-110, 27-059 14-070 26-542 24-690 29-114 9-070 11-030, 11-080 12-510 13-120, 13-150, 13-430 14-020, 14-090 21-040

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2088 TR 98/8 TR 98/9 TR 98/11 TR 98/14 TR 98/16 TR 98/17 TR 98/22 TR 98/23 TR 1999/1 TR 1999/6 TR 1999/8 TR 1999/9 TR 1999/11 TR 1999/14 TR 1999/17 TR 1999/19 TR 1999/19A TR 2000/3 TR 2000/4 TR 2000/11 TR 2000/12 TR 2000/16 TR 2001/2     TR 2001/7 TR 2001/8 TR 2001/10 TR 2001/11 TR 2001/12 TR 2001/13 TR 2001/14 TR 2002/4 TR 2002/5 TR 2002/10 TR 2002/15 TR 2003/3 TR 2003/4 TR 2003/5 TR 2003/6 TR 2003/8 TR 2003/10 TR 2003/11 TR 2003/13 TR 2004/7 TR 2004/11 TR 2004/13 TR 2004/14 TR 2004/15 TR 2004/16 TR 2004/18 TR 2005/1 TR 2005/6 TR 2005/7 TR 2005/9 TR 2005/10 TR 2005/13 TR 2005/14

Table of Rulings

14-020 10-440 24-690 10-602 24-690 24-052 25-660, 25-665 21-210 24-690 4-150, 6-480 24-690 19-030 13-330 21-420 4-046 7-355 7-355 33-069 26-650 9-073 11-695 24-690 26-300, 26-340, 26-405, 26-505, 26-544, 26-547, 26-549, 26-555, 27-047 25-460 25-475 4-070, 26-360 24-570, 24-690 24-020, 24-570 24-020, 24-690, 24-695 11-550, 11-558 24-610 24-020, 24-570 7-960 22-010 11-550 6-090, 10-580 9-040 25-470, 25-480 13-200 25-490 24-130 4-750, 6-860 8-855 20-040 20-070 20-070 24-064 12-130 7-470 6-100 5-410, 7-250, 8-650 16-260 7-960, 29-114 20-070 11-685 24-040

TR 2005/16 TR 2005/19 TR 2005/20 TR 2005/22 TR 2005/23 TR 2006/2 TR 2006/3 TR 2006/8 TR 2006/10 TR 2006/11 TR 2007/1 TR 2007/2 TR 2007/6 TR 2007/9 TR 2007/12 TR 2008/6 TR 2009/5 TR 2010/1 TR 2011/4 TR 2011/5   TR 2011/6 TR 2012/6 TR 2012/8 TR 2012/10 TR 2013/1 TR 2014/1 TR 2014/5 TR 2014/6 TR 2014/8 TR 2014/9 TR 2015/1 TR 2016/3 TR 2017/2 TR 2017/7 TR 2018/2 TR 2018/3

32-420 8-295 12-140 9-060, 9-070 7-935 10-225, 25-440 6-495 14-090 30-015, 30-018 30-015, 30-025 24-690 19-030 11-558 12-130 26-110 21-230, 21-980 14-095 23-110 9-040 30-080, 31-350, 31-360, 31-410, 31-415, 31-420, 31-500 12-310 23-092 3-420 17-063, 17-110, 17-116 24-100, 24-120 13-330 30-015 24-700 24-700 21-260 9-043 12-220 12-180 14-020 7-960, 30-015 13-460, 14-020

Draft Rulings (TR Series) TR 2004/D25 TR 2008/D5 TR 2014/D4 TR 2017/D1 TR 2017/D2 TR 2017/D5 TR 2018/D1

7-180, 7-990 24-078 33-066 12-130, 12-140 24-064 4-046 9-073, 11-695

Miscellaneous Taxation Rulings (MT Series) MT 2000/1 MT 2006/1 MT 2007/1 MT 2008/1 MT 2008/2 MT 2009/1 MT 2010/1

27-059 27-059 33-080 33-065, 33-078 33-066 27-189 27-189

Table of Rulings2089

MT 2011/1 MT 2012/3 MT 2016 MT 2021 MT 2024 MT 2030 MT 2034 MT 2050

33-063 33-082 26-160 26-400, 26-405, 26-430 26-400 4-025 26-650 13-040

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Taxation Determinations TD 7 TD 8 TD 13 TD 92/106 TD 92/158 TD 92/182 TD 92/185 TD 93/71 TD 93/107 TD 93/174 TD 93/185 TD 93/194 TD 93/234 TD 93/242 TD 94/5 TD 94/10 TD 94/14 TD 94/95 TD 95/10 TD 95/48 TD 95/60 TD 96/1 TD 96/2 TD 97/2 TD 97/14 TD 1999/38 TD 1999/40 TD 1999/67 TD 1999/73 TD 2000/2 TD 2000/3 TD 2000/5 TD 2000/12 TD 2000/15 TD 2000/37 TD 2000/38 TD 2000/39 TD 2000/40 TD 2000/41 TD 2000/42 TD 2000/44 TD 2000/47 TD 2000/48 TD 2000/49 TD 2000/50 TD 2000/51 TD 2000/53

7-120 7-120 7-120 5-200, 16-030 8-050 5-200 32-330 26-548 26-548 10-475 11-685 9-255 13-200 13-220, 13-400 2-650 14-080 26-520 22-610 18-560 14-020 33-305 14-270 14-270 17-050 13-500 9-255 7-525 8-050 8-050 7-305 18-535 18-560 24-213 8-050 8-210 8-210 8-210 8-210 8-210 8-210 8-210 32-420 32-420 32-420 8-295 8-295 32-490

TD 2001/26 TD 2001/27 TD 2002/3 TD 2002/4 TD 2002/4A TD 2002/10 TD 2002/16 TD 2002/22 TD 2002/25 TD 2003/1 TD 2003/16 TD 2003/28 TD 2004/3 TD 2004/22 TD 2004/30 TD 2005/29 TD 2005/34 TD 2006/2 TD 2006/3 TD 2006/31 TD 2006/33 TD 2006/40 TD 2006/46 TD 2006/61 TD 2006/75 TD 2006/76 TD 2007/2 TD 2007/4 TD 2007/5 TD 2008/9 TD 2008/16 TD 2008/22 TD 2008/26 TD 2009/21 TD 2010/20 TD 2010/21 TD 2011/19 TD 2011/25 TD 2012/1 TD 2012/2 TD 2012/8 TD 2012/11 TD 2012/13 TD 2012/21 TD 2012/22 TD 2013/1 TD 2013/14 TD 2014/10 TD 2014/13 TD 2014/26 TD 2014/27 TD 2016/14 TD 2016/17 TD 2016/18 TD 2016/19 TD 2017/2 TD 2017/7 TD 2017/8

7-150 7-305 7-315 8-295 8-295 7-915 29-114 8-295 7-500 7-625 22-720 7-200 8-530 18-550 7-622 25-475 17-320 21-910 21-910 3-420 12-120 12-230 21-150 11-555 20-110 20-110 7-960, 29-118 8-080 12-150 9-010 21-130 7-150 14-020 11-625 24-020, 25-000 24-020 30-053, 33-070 24-022 27-058 33-050 24-210 17-207 22-870 7-185, 17-025 17-116 22-670 24-210 25-675 24-620 7-500 14-020 11-680 4-460 6-860 11-450 26-303 14-020, 14-280 11-560

2090 TD 2017/17 TD 2017/18 TD 2017/19 TD 2017/20 TD 2017/24 TD 2017/26 TD 2018/7 TD 2018/10 TD 2018/19

Table of Rulings

18-510 4-025, 12-230 4-025 17-319 17-210 4-460 26-548 14-250 18-250

Taxation Draft Determinations TD 2009/D17 TD 2009/D18 TD 2010/D7 TD 2017/D2

24-020 24-020 24-120 4-460

Class Rulings CR 2001/1 CR 2006/76 CR 2013/1 CR 2013/41 CR 2016/62

30-018 18-550 27-142 27-142 30-018

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GST Rulings GSTR 2000/2 GSTR 2000/5 GSTR 2000/8 GSTR 2000/10 GSTR 2000/11 GSTR 2000/16 GSTR 2000/17 GSTR 2000/19 GSTR 2000/22 GSTR 2000/24 GSTR 2000/27 GSTR 2000/30 GSTR 2000/31 GSTR 2000/34 GSTR 2001/1 GSTR 2001/2 GSTR 2001/3 GSTR 2001/4 GSTR 2001/6 GSTR 2001/7 GSTR 2001/8 GSTR 2002/1 GSTR 2002/2 GSTR 2002/5 GSTR 2002/6 GSTR 2002/24 GSTR 2003/1 GSTR 2003/3 GSTR 2003/4 GSTR 2003/5 GSTR 2003/7 GSTR 2003/8

27-095, 27-146 27-058 27-142 27-125 27-056, 27-058 27-000 27-125 27-095 27-085 27-095 27-139 27-139 27-060 27-125 27-139 27-058 26-340, 27-047 27-056 27-058 27-065 27-056, 27-075 27-139 27-140, 27-146 27-059, 27-141 27-140 27-095 27-139 27-147 27-140 27-175 27-140, 27-171 27-056, 27-140

GSTR 2003/9 GSTR 2003/10 GSTR 2003/12 GSTR 2003/14 GSTR 2003/16 GSTR 2004/1 GSTR 2004/2 GSTR 2004/3 GSTR 2004/7 GSTR 2004/8 GSTR 2004/9 GSTR 2005/3 GSTR 2005/4 GSTR 2005/6 GSTR 2006/3 GSTR 2006/4 GSTR 2006/7 GSTR 2006/8 GSTR 2006/9 GSTR 2006/10 GSTR 2007/1 GSTR 2007/2 GSTR 2008/1 GSTR 2008/3 GSTR 2009/1 GSTR 2009/2 GSTR 2009/3 GSTR 2009/4 GSTR 2010/1 GSTR 2011/1 GSTR 2012/1 GSTR 2012/2 GSTR 2012/3 GSTR 2012/4 GSTR 2012/5 GSTR 2012/6 GSTR 2012/7 GSTR 2013/1 GSTR 2013/2 GSTR 2014/2 GSTR 2014/3 GSTR 2015/1 GSTR 2015/2 GSTR 2017/1

27-146 27-142, 27-148 27-058 27-058 27-058 27-146 27-155 27-155 27-060, 27-140, 27-171 27-058, 27-100 27-095 25-750, 27-133 27-147 27-140, 27-171 27-085, 27-095 27-085, 27-095 27-100 27-100 27-055, 27-056 27-056 27-146 27-140, 27-171 27-085, 27-165 17-040, 27-056 27-100 27-056 27-056 27-095, 27-147 25-750, 27-196 27-095 27-056, 27-058 27-058 27-138 27-138 27-147 27-147 27-147 27-085, 27-125 27-095 27-146 27-146 27-189 27-056, 27-147 27-167

GST Draft Rulings GSTR 2013/D2

27-147

GST Determinations GSTD 2000/2 GSTD 2000/4 GSTD 2000/5 GSTD 2000/6 GSTD 2000/8 GSTD 2000/11 GSTD 2004/1 GSTD 2004/3

27-142 27-137 27-137 27-137 27-059 27-139 27-095 27-060

Table of Rulings2091

GSTD 2004/8 GSTD 2005/1 GSTD 2005/2 GSTD 2005/3 GSTD 2005/5 GSTD 2005/6 GSTD 2009/2 GSTD 2011/3 GSTD 2012/1 GSTD 2012/2 GSTD 2012/3 GSTD 2012/5 GSTD 2012/6 GSTD 2012/7 GSTD 2012/8 GSTD 2012/11 GSTD 2013/1 GSTD 2013/2 GSTD 2013/3 GSTD 2014/2 GSTD 2014/3 GSTD 2015/2 GSTD 2016/1 GSTD 2016/2

27-095 27-125 27-085, 27-125 27-146 27-056 27-056 27-056 27-146 27-147 27-147 27-095 27-085 27-085 27-140 27-140 27-147 27-058 27-085, 27-142 27-146 27-058 27-095 27-142 27-085 27-189

GST Draft Determinations GSTD 2014/D1 GSTD 2014/D2 GSTD 2017/D1

27-140 27-095 27-142

Product Rulings PR 2007/71 PR 2017/8

30-018 30-018

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Superannuation Guarantee Rulings SGR 2005/1 SGR 2009/1 SGR 2009/2

23-810, 32-420 23-810 23-820

Revenue Rulings (NSW) PTA 037

28-362

ATO Interpretative Decisions ID 2001/44 ID 2001/381 ID 2002/237 ID 2002/691 ID 2003/150 ID 2003/195 ID 2003/346 ID 2003/356 ID 2003/726 ID 2003/909 ID 2004/44 ID 2004/272

4-140 5-410 27-141 8-050 14-090 8-295 7-355 7-130 21-135 9-020 21-980 2-650

ID 2004/273 ID 2004/526 ID 2004/582 ID 2004/831 ID 2007/41 ID 2007/59 ID 2008/39 ID 2008/55 ID 2008/130 ID 2009/25 ID 2009/42 ID 2009/59 ID 2009/60 ID 2009/97 ID 2009/135 ID 2009/137 ID 2009/146 ID 2009/MEI/051 ID 2010/78 ID 2010/79 ID 2010/89 ID 2010/126 ID 2010/147 ID 2011/1 ID 2011/37 ID 2011/38 ID 2011/39 ID 2011/40 ID 2013/21 ID 2013/56 ID 2013/63 ID 2013/MEI/0035 ID 2014/3 ID 2014/16 ID 2014/19 ID 2014/36 ID 2014/44 ID 2016/1

2-650 14-020 21-980 33-050 21-411 17-318 13-240 12-120 14-020 14-020 12-310 14-020 12-400 14-020 12-140 12-120 21-860 24-210 24-210 24-210 24-630 8-410 6-495 12-140 8-410 8-410 8-410 8-410 17-318 27-189 24-640 32-495 17-318 12-220 27-147 27-189 4-140 27-045

ATO Statements PS LA 2001/4 PS LA 2001/5 PS LA 2001/8 PS LA 2001/9 PS LA 2002/10 PS LA 2002/11 PS LA 2002/20 PS LA 2003/4 PS LA 2003/7 PS LA 2003/11 PS LA 2003/13 PS LA 2004/2 PS LA 2004/3 PS LA 2004/11 PS LA 2004/14 PS LA 2005/2 PS LA 2005/17

30-005 30-005 30-005 26-300 29-010 17-318 30-018 29-005 31-355 32-450 14-090 27-155 14-250 27-095 29-217, 29-220 27-100, 29-120, 33-095 32-460, 32-490

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2092 PS LA 2005/19 PS LA 2005/24 PS LA 2006/7 PS LA 2006/8   PS LA 2006/16 PS LA 2007/3 PS LA 2007/4 PS LA 2007/5 PS LA 2007/9 PS LA 2007/21 PS LA 2007/24 PS LA 2008/1 PS LA 2008/3   PS LA 2008/4 PS LA 2008/6 PS LA 2008/9 PS LA 2008/11 PS LA 2008/13 PS LA 2009/2 PS LA 2009/9 PS LA 2010/1 PS LA 2011/1 PS LA 2011/3 PS LA 2011/5 PS LA 2011/6 PS LA 2011/9 PS LA 2011/12 PS LA 2011/14 PS LA 2011/15 PS LA 2011/16 PS LA 2011/17 PS LA 2011/18 PS LA 2011/19 PS LA 2011/25 PS LA 2011/27 PS LA 2011/30 PS LA 2012/4   PS LA 2012/5

Table of Rulings

30-055 25-600, 27-196 30-080 33-038, 33-040, 33-050, 33-083 27-140 27-198 27-198 31-500 18-550 13-030 30-095 27-085, 30-010 30-000, 30-010, 30-018, 30-025, 30-040, 30-065 30-025 30-150, 33-050, 33-213 27-198 30-065, 33-213 33-050 30-028 31-505 17-205 24-700 32-100 27-189 29-240 33-090, 33-092 33-040 32-010, 32-100 30-055 32-010 32-102, 32-103 32-010, 32-160 33-090 30-095 33-070 33-068, 33-083 33-065, 33-070, 33-078, 33-080, 33-082, 33-083 33-064, 33-065, 33-067,

    PS LA 2012/6 PS LA 2013/1 PS LA 2013/2 PS LA 2013/3 PS LA 2013/6 PS LA 2014/2 PS LA 2014/3 PS LA 2014/4 PS LA 2015/1 PS LA 2015/2 PS LA 2015/4

33-069, 33-070, 33-078, 33-080, 33-082, 33-083 27-189 31-150, 31-165, 31-180 27-142 31-505, 31-545 27-155 24-700 24-700, 29-110 33-067 31-500 30-075, 30-110, 30-150 24-700, 29-265

Draft ATO Statements PS LA 3672 PS LA 3673

33-066 33-066

ATO Media Releases NAT 72935 NAT 73759 NAT 73779

25-845 25-845 25-845

Taxpayer Alerts TA 2004/6 TA 2004/7 TA 2004/8 TA 2008/09 TA 2008/10 TA 2009/5 TA 2012/5 TA 2013/1 TA 2013/3 TA 2014/1 TA 2016/12

27-147 27-147 27-147 25-755 25-430 27-196 27-058 17-040, 17-320 17-320 6-150 17-320

Tax Practitioners Board (TPB) Practice Notes and Information Sheets

33-600

2093

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INDEX All references are to paragraph (¶) numbers. 353-10 TAA — see also Access to information; Investigations appointment of Commissioner 29.010 basic requirements for tax returns 30.060 challenging a 353-10(1) notice 29.176 delegation29.010 excluded proceedings 29.160 general principles 29.162 GST27.194 obligation to attend and give evidence 29.170 obligation to produce books, documents and papers 29.175 obligation to provide required information29.165 overview29.130 penalties33.020 power to require lodgment of further returns30.060 powers to obtain information, documents and evidence 29.160 privilege 29.210, 29.215 responsibilities29.010 review 29.010, 29.130 353-15 TAA access to documents, goods and property29.140 authority for lodging 30.065 general principles relating to access 29.145 GST27.194 overview29.130  A A Tax System Redesigned (Ralph Review) 1.185, 1.190, 1.195,   7.025, 8.296, 19.250,   20.000, 22.000 AAT — see Administrative Appeals Tribunal ABN (Australian Business Number)32.375–32.397 Australian Business Register 32.380 change by Registrar 32.390 eligibility, application and registration 32.385 offence to misuse 32.395 quotation 32.390, 32.420 refusal to register, cancellation and rights of review 32.390 reinstatement32.390 reviews of the ABN and ABR systems 32.375, 32.397 Abolished stamp duties 28.800 Aboriginal people

mining payments to 21.250 native title CGT exemption 7.715 Above-average special professional income21.320 ACA (allocable cost amount) for the joining entity 20.070 for the leaving entity 20.090 Access to information — see also 353-10 TAA; Information; Legal professional privilege access to documents, goods and property29.140 Commissioner’s powers 29.130–29.190 particulars of Commissioner’s case 31.560 taxpayer’s right 31.020–31.230 Access to premises — see 353-15 TAA Accounts — see also Information; Records; Tax accounting ATO access to 29.110–29.120 CGT7.960 challenging a 353-10(1) notice 29.176 civil penalties 33.095 Commissioner’s powers to access 29.140, 29.145 completed contracts basis 13.460 confidentiality of tax records 29.060 failure to keep 29.120 form29.114 GST audits 27.194 keeping incorrect accounts 33.160 offences — see Offences recklessly incorrectly keeping records 33.170 requirement to produce 29.175 retention period 29.118 search warrants 29.190 service and proper purpose of a sec 353-10 TAA 29.162 substantiation of expenses 10.705 tax planning 25.900 Accruals basis accounting 13.100–13.160 ‘amount uncertainty’ 13.370 deposits and warranties 13.335 discounts13.325 disputed income 13.345 future goods or services 13.340 incapacity to enforce payment 13.350 income ‘derived’/income ‘receivable’ 13.300 ‘incurred’ expenses 13.510–13.530 no invoice issued 13.360 potential refund 13.330 time of earning 13.320 time of payment 13.310 work in progress 13.380

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2094 Accruals basis of accounting 13.300–13.380 Accruals taxation 24.225–24.300 proposed reforms 24.300 Accrued leave entitlements — see Leave payments and provisions Accumulation trusts — see Trusts ACNC — see Australian Charities and Not-forProfits Commission Additional tax 21.130 — see also Penalty tax Additions — see Repairs ADFs — see Approved deposit funds ADIs — see Authorised deposit-taking institutions ADJR Act — see Administrative Decisions ( Judicial Review) Act Adjusted fringe benefits total 2.050 Adjusted taxable income 2.050 Adjustments, balancing — see Balancing adjustments Administration of taxation system — see Australian Taxation Office Administrative Appeals Tribunal (AAT) alternative dispute resolution 31.545 amendment of assessments 30.150 appeal to Federal Court on question of law 31.600–31.605 appeal to Full Federal Court or High Court31.620 application31.530 choosing between AAT and Federal Court31.515 Commercial and Taxation Division 31.524 constitution and conduct of hearings 31.535 implementation of decisions 31.700 particulars of Commissioner’s case 31.560 powers on review 31.570 preliminary conferences and directions hearings 31.545 procedure31.540 remission of penalty tax 33.083 review of Commissioner’s discretions 1.320 review of FOIA decisions 31.130 reviews31.524–31.570 rights to reasons for decision 31.430 Taxation Appeals Division 31.524 Administrative concessions, small businesses 15.800–15.810 Administrative Decisions ( Judicial Review) Act31.150–31.185 application for statement of reasons 31.180 bases for review 31.175 excluded decisions 31.165 remedies31.185 role of the Federal Court 31.182

Index

Administrators (of businesses) — see Liquidators Administrators (of estates) — see Legal personal representatives Adopted children 2.650, 23.550 — see also Children Adoption leave, payroll tax 28.362 Advance payments — see Prepayments Advertising expenses, entertainment 10.600 After-tax superannuation contributions — see Non-concessional superannuation contributions AFTS Report (Henry Tax Review) 1.110, 1.180, 1.185,   1.190, 1.250, 21.990,   26.405, 28.000 Agency contracts, termination compensation6.850 Agents — see BAS agents; Tax agents Aiding and abetting 33.215 Airline transport fringe benefits 26.530 calculating taxable value 26.535 Alienation of income from property 25.445 Alienation of personal services income — see Personal services income Allocable cost amount (ACA) for the joining entity 20.070 for the leaving entity 20.090 Allowances4.025 employment and services 4.110 full-time students, exempt income 9.100 nexus with employment or services rendered4.150 payroll tax 28.362 reporting on employee’s payment summary4.025 Alternative dispute resolution — see Dispute resolution Alternative fuels, taxation 21.990 Amendment of assessments 30.140–30.155 ATO amendment 30.145 Commissioner’s power 30.150 extension of time 30.155 GST27.187 objections31.410 schemes to reduce income tax 25.700 self-amendment30.143 subsequent amendments 30.150 time limits 30.150–30.155 ‘Angel investors’, CGT treatment 8.095 Annual leave accrued leave payments 10.540 unused4.820 Annuities5.000

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Index2095

CGT exemption 8.080 deductible amount 5.320 definition5.300 fixed gross sum 5.380 fixed term, life, joint life and variable 5.300 income arrears rebate 2.690 income from property 5.300 instalment sale transactions 5.380 nature of payment 5.380 non-superannuation annuities 5.320 purchase price 5.320 purchased annuities 5.300 ‘recovery of capital’ exclusion 5.320 structured settlement payments 9.200 undeducted purchase price 5.320 Anti-avoidance provisions 25.600–25.750 — see also Avoidance of tax alternative postulates 25.622, 25.687 amendment of assessments 25.700 application of Pt IVA to ‘schemes’25.610–25.617 ‘blatant, artificial and contrived’ arrangements 25.600, 27.196 cancellation of tax benefits 25.680–25.695 civil penalty regime for tax scheme promoters 25.755, 33.097 consolidated groups, franking credit schemes25.678 corporate carry forward losses, company maintaining same owners 19.020 criminal offences legislation 25.760, 25.765 definition of scheme 25.615 Diverted Profits Tax 24.910, 25.679 dividend stripping 18.428, 25.672 entertainment expenses 10.600 excessive payments to associates 18.520 exempt income, required connection to Australia 9.073 exempting entities and former exempting entities 18.435 foreign residents withholding tax 24.600 franking credit schemes 25.675 general provisions 25.600–25.710 GST 25.750, 27.196 identification of a tax benefit 25.620–25.695 identification of scheme 25.617 increased penalties for SGEs 33.092 interaction with other tax provisions 25.605 judicial barriers to avoidance 25.310–25.345 lease assignments 22.710 leisure facility and boat expenses 10.580 loans to associates 18.510 loss duplication and other schemes19.050–19.060 minors’ income 21.030, 21.040 multinational companies 24.900, 25.677 net capital losses and capital losses 19.095 other legislation 25.755–25.767

overview 25.000, 25.300, 25.600 payroll tax 28.375 penalties25.710 phoenix companies 32.447, 33.098 private companies 18.500, 18.520, 29.265 Pt IVA 25.600–25.710 purpose test 25.650–25.670, 25.677, 27.196 relevant circumstances 25.678 reporting obligations 32.230 revocable trusts and trusts for minors 17.225 schemes 25.610–25.617, 25.672, 27.196 share capital tainting and streaming18.565–18.590 specific provisions 25.400–25.445 statutory barriers 25.400–25.750,   25.425–25.490 tax benefits, existence of 25.620–25.695 tax shortfall penalties 33.068 thin capitalisation rules 24.860 transfer pricing 24.690–24.700 trusts17.315–17.330 UK33.221 US Foreign Account Tax Compliance Act requirements 24.635 Anti-duplication rules 2.030 Appeals — see also Dispute resolution; Review AAT to Federal Court on questions of law 31.600–31.605 administrative appeal route 31.524–31.700 alternative paths 31.510 amendment of assessments and 30.150 centralised appeal path 31.350–31.430 challenging assessments 31.300 challenging objection decision31.500–31.521 common law rights 31.030 Family Court or Federal Circuit Court, transfer to 31.523 Federal Court, choosing between AAT and 31.515 Federal Court, initial appeal to 31.522 Freedom of Information Act 31.130 Full Federal Court or High Court 31.620 implementation of decisions 31.700 Inspector-General of Taxation31.220–31.230 judicial appeal route 31.522–31.523 litigation by ATO 31.505 payroll tax 28.370 pending, recovery of tax 32.120 questions of law or questions of fact 31.600–31.605 review by AAT 31.524–31.605 review under ADJRA 31.150–31.185 reviewing the Commissioner’s determination31.500 statutory rights 31.040 tax liability 31.000, 31.300–31.700

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2096 Appeals (cont) taxpayer’s burden of proof 31.521 Apportionment apportionment rule, CGT 7.610, 7.655 compensation payments 6.880 expenditure11.560 Apprentices, education and training payments9.100 Approved deposit funds (ADFs) CGT23.087 complying and non-complying 23.050 full self-assessments, deemed 30.090 jurisdiction to tax 24.026 rates of tax 2.150, 23.095 taxation23.075–23.098 Arrears of income rebate 2.690 Art businesses 6.100 non-commercial business losses 11.558 Artists, averaging of income 21.300–21.340 — see also Copyright; Resale royalty scheme Asprey Committee Report 1.185, 1.190 CGT7.015 Assessable income 3.000–3.420 — see also Non-assessable income accounting — see Tax accounting annuities5.300–5.380 assessable recoupments 3.420 assignment of right to receive income 5.600, 6.455 attribution of personal services income25.480 bounties and subsidies 6.495 business — see Income from business car expenses, reimbursement 4.190 car lease profits 5.470, 5.475 CGT and 7.000, 7.050 — see also Capital gains tax co-operative companies 21.420 compensation payments 6.800–6.910 competing concepts of income 3.020.050 deceased estates 17.240–17.250 employee share schemes 4.400.490 employment and services-related allowances4.110 foreign residents 24.550–24.580 income conversions 6.455 ‘income’, meaning 3.080 insurance or indemnity for loss of assessable income 6.870 interaction with GST 3.120 interest5.200–5.275 jurisdictional limits 24.020 lease and rental income 5.400–5.475 lease incentives 6.448 life insurance companies 21.411 mutual insurance associations 21.430 net capital gains 7.000, 7.050

Index

— see also Capital gains tax non-cash business benefits 6.480 ordinary — see Ordinary income overview3.000 personal exertion — see Income from personal exertion profit-making undertakings or plans 6.490 profits on disposal, isolated transactions6.430 property — see Income from property realisation of investments 6.510–6.520 recoupment of deductible expenses 3.400.420 residents and non-residents 2.100 royalties5.500–5.540 shareholders18.205 sources of — see Sources of income special professionals 21.320 statutory — see Statutory income superannuation entities 23.077 taxable income general principle 2.030 trusts — see Income from trust estate; Trusts valuation rule 4.150 Assessments30.070–30.165 — see also Returns amendment — see Amendment of assessments ancillary provisions 30.110–30.120 appeals against — see Appeals challenging31.000–31.700 Commissioner’s change of original grounds31.400 consolidated 30.098, 32.130 default30.095 definitive and bona fide 30.080, 30.130 div 284 penalties, notice of 33.085 ‘excessive’30.130 foreign residents 24.560–24.580 full self-assessment, deemed assessments30.090 GST27.187 identification30.075 introduction30.070 making30.087–30.098 nature of 30.073 nil assessments 30.075, 30.150 no valid assessment 30.130 objections — see Objections ordinary30.087 other30.098 part year 30.098 payroll tax 28.365 process30.073 roles of s 175 of the ITAA36 and s 39B of the Judiciary Act30.130 self-assessment — see Self-assessment service of notice 30.115, 32.020 special30.098 tentative or provisional 30.080, 30.130

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Index2097

time for issuing 30.110 validity and conclusive effect 30.120, 30.130 Asset financing 22.760 enhanced access proposed 22.700, 22.705 Asset freezing orders — see Mareva injunctions Asset registers (CGT) 7.960 Assets — see also Capital gains tax; Property churning20.070 compensation for permanent loss 6.840 compensation for temporary disablement6.830 depreciating — see Depreciating assets disposal of — see Capital gains tax (CGT), disposal of assets former temporary investment allowance12.460 intangible — see Intangible assets payment for services or for disposal of capital asset 4.050 personal use — see Personal use assets Assignment partnership income 16.460–16.490 right to receive income 6.455 right to receive property income 5.600, 25.445 Assistance to students — see Allowances Associated person, definition 18.520 — see also Related entities Associations membership payments 11.590 non-profit — see Non-profit associations Assumption of liability rule, CGT 7.610, 7.660 ATO — see Australian Taxation Office ATSR — see Ralph Review of Business Taxation Attributed Managed Investment Trusts (AMITs) — see Managed investment trusts Audits, taxation — see also Avoidance of tax ATO targeting activity 29.270 GST27.194 individuals, small businesses, private groups, high wealth individuals 29.255 public groups and international 29.265 types of 29.245 voluntary compliance 29.245 Voluntary Tax Transparency Code 29.265 AUSkey32.390 AUSTRAC 32.230, 32.240 Australia departure from 23.580, 32.150 indirect tax zone 27.060 required connection to 8.720, 9.073, 27.060,   27.140, 27.169 tax ruling on meaning 9.073, 11.695

Australian Business Number (ABN) — see ABN Australian Business Register (ABR) 32.380 reviews of the ABN and ABR systems 32.375, 32.397 Australian Charities and Not-for-Profits Commission 9.040, 21.530 Australian currency — see Currency Australian films — see Films, Australian Australian National Audit Office (ANAO), reviews of the ABN and ABR systems 32.375, 32.397 Australian source income, non-residents 24.010, 24.020, 24.050 Australian Taxation Office (ATO) 29.000–29.270 access, general principles relating to 29.145 access to documents, goods and property29.140 access to tax records, prohibition on unauthorised29.060 access to taxation information 29.100–29.120 administration objectives 29.005 administrative concession for accountants’ tax advice 29.217 administrative concession for corporate board documents 29.220 advice30.005 amendment of assessments — see Amendment of assessments assessments — see Assessments ATO Receivables Policy 32.010 attitude to tax planning 25.845 audits — see Audits, taxation Board of Taxation — see Board of Taxation claiming compensation 29.008 Client Engagement Group 29.250 Commissioner — see Commissioner confidentiality29.040–29.070 conscious maladministration 30.080, 30.130 consolidation regime compliance assurance20.070 delegation29.010 garnishee notices, review of ATO practice32.100 GST assessments and amendments 27.187 IGT — see Inspector-General of Taxation investigations by — see Audits, taxation; Investigations investigations by IGT of actions of 31.220 litigation practices 31.505 model litigant obligations 31.505 non-ruling advice and general administrative practice 30.053 online delivery of services 29.005 performance monitoring 29.005 powers to obtain information, documents and evidence 29.160

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2098 Australian Taxation Office (ATO) (cont) practice, as source of law 1.320 practice, Taxation Rulings on 1.320, 25.845 privacy legislation 29.070 Private Ruling, declining to make 30.025, 30.040 records 29.110–29.120, 29.114 recovery of tax — see Recovery of unpaid tax retention period 29.118 rulings 1.320, 30.000–30.053 — see also Rulings; Taxation Rulings self-assessment process 30.000 Small Business Debt Collection Practices, reviews of 32.100 ‘statutory remedial power’ 29.010 structure29.010 targeting tax evasion 25.105 tax administration 29.000–29.270 tax transparency reports 29.265 Taxpayers’ Charter 29.005 Test Case Litigation Program 31.505 view on working holiday makers 2.125 Australian Transaction Reports and Analysis Centre — see AUSTRAC Authorised deposit-taking institutions, thin capitalisation rules 24.860 Authors, averaging of income 21.300–21.340 — see also Copyright Averaging of income above-average special professional income21.320 average taxable professional income 21.320 example of tax calculation 21.340 primary producers 21.130 special professionals 21.300–21.340 Avoidance of tax 25.000, 25.300–25.345 — see also Anti-avoidance provisions alienation of income from property 25.445 alienation of personal services income 4.000, 25.450–25.490,   32.425 amendment of assessments 30.150 ATO attitudes 25.845 ‘blatant, artificial and contrived’ arrangements25.600 community attitudes and government responses 25.835 Diverted Profits Tax 24.910, 25.679 expenditure recoupment schemes 25.435 legal effect 25.340 mass marketed schemes 25.855 multinational companies 24.900, 25.677 net capital losses and capital losses, use of 19.095 partnership assignment of income 16.460 payments to related entities 25.440 prepayment schemes 25.425

Index

R&D tax avoidance schemes 21.950 reporting obligations 32.230 ‘sham’ transactions 25.330 specific provisions 25.400–25.445 tax deferral schemes 25.430 tax effect 25.345, 25.624 tax evasion/tax avoidance distinguished25.600 tax evasion/tax planning distinguished25.025 tax planning 25.800–25.900 tax resistance 1.045 trusts, use of 17.315–17.330 

B Baby bonus 2.600 ‘Backpacker tax’ proposal 2.125 — see also Working holiday makers Bad debts 19.140 affected by other provisions 11.460 CGT consequences 11.450 commercial debt forgiveness 11.460, 22.660 corporate 11.460, 19.140–19.150 creation of losses 19.150 deductions 11.440–11.460, 11.450, 11.460 elements11.450 GST adjustments 27.095 money lent in course of moneylending business 11.455 proposed changes 19.140 recovery11.460 Balancing adjustments CGT assets 7.540 CGT events 7.475 contribution to partnership 16.090 depreciating assets 12.250 financial arrangements 22.890 on destruction of capital works 12.540 rollover relief 12.270 Bankruptcy bankrupt’s payment as CGT event 7.450 CGT provisions 7.985 Banks — see also Moneylending CGT implications of transfer of losses19.130 FATCA requirements 24.635 realisation of assets 6.510 tax losses 19.110 transfer of capital losses and net capital losses 19.100–19.130 Bare trusts 17.040 Barter — see Non-cash receipts BAS (Business Activity Statements) 32.505 — see also Lodgment of returns BAS agents

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Index2099

— see also Tax agents breach of contract 33.750 breach of statutory provisions 33.750 circumstances justifying deregistration33.500 civil penalties 33.095, 33.570 conditional registration 33.495 CPE requirements 33.496 education and experience requirements33.323 ethical responsibilities 33.600 fit and proper person requirement 33.320 other restrictions on tax work 33.720 penalties for breach of obligations 33.498 professional indemnity insurance 33.375 professional negligence 33.750–33.800 registration and re-registration 33.315, 33.320–33.720 requirement of ‘relevant work experience’33.325 ‘safe harbour’ protection 33.065 Tax Practitioners Board 33.310 termination of registration 33.498 Base rate entities — see Companies BCT — see Business continuity test (BCT), proposed Beneficiaries absolutely entitled 7.205, 7.990 CGT events, asset passing to taxadvantaged entity 7.455 CGT exemption 7.715 closely held trusts 17.315 deceased estates 8.500–8.530 disposal of capital interest 7.220 disposal to end capital interest 7.215 disposal to end right to income 7.210 distributions out of corpus 17.300 entitlement to trust income 17.063 exempt income 17.063 foreign income 24.024 GST adjustments 27.095 infant34.030 legal disability 17.063, 17.105 no beneficiary presently entitled 17.063 non-resident beneficiary 24.024, 34.030 non-resident trusts 24.024 present entitlement 17.063, 17.070–17.100 primary production business 21.130 receipt of income not previously taxed 17.210 social security — see Social security benefits and allowances TFN quotation 32.335 trust estate — see Income from trust estate trust reimbursement agreements 17.320 trust streaming 17.205–17.207 trustees, rates of tax 2.140, 34.030 trusts — see Trusts Benefits

— see also Tax benefits child care 2.410, 2.680 employment and services 4.110 fringe benefits — see Fringe benefits nature of income 4.105 non-cash business benefits 10.610 — see also Non-cash business benefits payroll tax 28.362 provided to taxpayer 4.140 social security — see Social security benefits and allowances superannuation — see Superannuation benefits valuation rule 4.150 Betting — see Gambling Binding Rulings 30.015 — see also Taxation Rulings Oral Rulings 30.040 Bitcoin — see Digital currencies Black economy 32.230 Blackhole expenditure 12.300–12.320 business ‘proposed to be’ carried on 12.310 deductible12.310 MEC groups 20.030 non-deductible12.320 Board fringe benefits 26.540 calculating taxable value 26.541 Board of Taxation 29.010 — see also Australian Taxation Office permanent establishments review 24.020 residency rules for individuals review 24.050 thin capitalisation reviews 24.860 Boats, deductibility of expenses 10.580 Bonus shares 18.535 anti-streaming rules 18.425 CGT rules 8.610 streaming of capital benefits 18.590 Bonuses accrued liability 13.545 entitlement to 3.180 life assurance policies 2.760 repaid amounts 9.010 Books — see Documents Borrowings amount of deduction 11.565 capital protected 22.670 employers’ superannuation contributions23.160 expenses11.565 interest on — see Interest Bottom-of-the-harbour schemes 25.300, 25.760, 25.850 Bounties and subsidies 6.495 industry assistance payments to taxi licence holders 6.495

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2100 Breach of contract 33.750 Bribes to public officials 10.585 Budget repair levy — see Temporary budget repair levy Building and construction services, reportable supplies 32.405 — see also Construction contracts; Construction expenditure Buildings — see also Property; Strata title conversions capital works 12.500–12.540 CGT separate assets 7.540 Commissioner’s powers to access 29.140, 29.145 concessional withholding rate on clean building MITs 24.640 depreciating assets 12.130 income-producing — see Capital works repairs — see Repairs ‘Burden’ of taxation — see ‘Incidence’ of taxation Bursaries, exempt income 9.100 Business — see also Income from business; Small businesses AUSkey use by 32.390 Australian Business Register 32.375, 32.380,   32.397 blackhole expenditure 12.300–12.320 ‘business entity’ test 10.270 business premises vs home office 10.330 commencement and termination 6.000, 6.250–6.280, 6.850 definition 6.000, 6.050 entertainment expenses 10.600 gambling as a business 6.060 loss of significant proportion of 6.850 losses or outgoings 10.040, 10.160 non-deductible non-cash benefits 10.610 online portal 32.390 online trading site dealings 6.120 period of inactivity 6.280 prepayment of expenditure 13.530 primary producers — see Primary producers ‘proposed to be carried on’ 12.310 standard business reporting 32.390 travel expenses — see Travel expenses Business Activity Statement (BAS) — see BAS; Lodgment of returns Business continuity test (BCT), proposed19.035 Business identifiers — see ABN Buy-backs — see Share buy-backs  C

Index

Calculation of tax payable — see Tax payable, calculation Call options 8.660 Canteens, school, input taxed supply 27.148 Capital allowances 12.000–12.460 blackhole capital expenditure 12.300–12.320, 20.030 calculating closing pool balance 15.324 calculating pool deduction 15.322 capital works — see Capital works deduction for capital expenditure on trees 12.400, 21.150, 21.980 depreciating assets — see Depreciating assets effect on pool where taxpayer ceases to be eligible 15.340 establishment of trees in carbon sink forests 12.400 former temporary investment allowance12.460 immediate write-off for low total pool value 12.200, 15.325 leasing transactions 22.700 low cost assets 15.310 motor vehicles 15.315 pooling15.320 small business entities 15.300–15.340 uniform capital allowance system12.100–12.270 Capital expenditure accounting methods for equipment 13.120 Australian film investment, pre-1 July 2007 21.900 blackhole expenditure 12.300–12.320, 20.030 deductibility 10.260–10.280, 11.565 deduction for capital expenditure on trees 12.400, 21.150, 21.980 ‘enduring benefit’ test 10.260 environmental protection 21.980 establishment of trees in carbon sink forests 12.400 fixed v circulating capital 10.260 interest10.460 mining companies 21.200 no deduction for repairs 11.050–11.080 ‘once and for all’ test 10.260 primary producers 21.150 project pooling 21.220 R&D tax offsets 21.950 Capital gains or losses — see also Foreign currency exchange gains and losses; Losses or outgoings carry forward losses 7.910, 19.090–19.095 entities making gain or loss 7.975–7.995 financial arrangements, tax-timing regime 22.800–22.900

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Index2101

foreign capital gains 24.360 foreign hybrid loss exposure adjustment7.488 identification7.905 loss duplication and other schemes19.050–19.060 net capital gain/loss for income year 7.050, 7.900–7.960 not ordinary income 3.280 previous years’ capital losses 7.910 proposed changes 19.090 sale of PDF shares 21.610 tax benefit 25.620 temporary residents 7.375 transfer of net capital losses 19.100 Capital gains tax (CGT) 7.000–7.995, 8.000–8.855 12-month holding period 7.925 12-month ownership 7.692 acquisitions without a CGT event 7.560 ‘angel investors’ 8.095 anti-overlap provisions 7.710 apportionment rule 7.610, 7.655 assets — see Capital gains tax (CGT), assets assignment of interests 16.480 assumption of liability rule 7.610, 7.660 Australian residence ends 7.370–7.380 bad debts 11.450 balancing adjustment rules 12.250 bankruptcy and liquidation 7.985 bankrupt’s payment 7.450 basic structure of regime 7.050 beneficiaries absolutely entitled 7.205, 7.990 between 1985 and 1998 7.020 bonus shares and units 8.610 calculation of gain or loss 7.600–7.698 cancellation, surrender and similar ending7.150 capital gains, tax rate 7.950 capital payment for interest in trust 7.200 capital payments for shares 7.305 capital proceeds 7.605–7.615 carried interests 7.485, 21.775 CGT events 7.100–7.570, 7.920 CGT events, order of application of 7.110 classification rules 7.535 collectables7.525 compensation payments 6.910 concessions and special topics 8.000–8.855 conditions for small business relief 8.410 consolidated groups 7.490–7.498 convertible interests 8.620 deceased estates 8.500–8.540 definitions and classification 7.500, 7.605, 8.852 demutualisations21.440 discount34.225 discount percentages 7.915–7.935

effect of cost modifications 7.695 effect of death 8.510 effect on legal personal representative or beneficiary 8.520 elements7.625 end of option to acquire shares 7.155 entities making gain or loss 7.975–7.995 environmental benefit preservation incentives exemption 21.980 exceptions or exemptions  7.700–7.720, 8.050–8.090, 21.980 exchangeable interests 8.630 exempt or loss-denying transactions 7.715 forex realisation events 22.380–22.565 forfeiture of deposits 7.355 general topics 7.000–7.995 GST implications 7.607, 7.622 history of CGT in Australia 7.015–7.025 innovation investment tax incentives 21.998 insurance and superannuation 8.080 international transfer of emissions unit 7.445 Investment Manager Regime 24.219 investments8.600–8.660 jurisdiction to tax 24.024 key design features 7.030 listed investment companies 7.935 main residence exemption 8.050–8.090 market value substitution rule 7.610, 7.645 misappropriated amounts rule 7.610 miscellaneous events 7.440–7.488 modifications7.640–7.660 modifications to definition of capital proceeds7.610 money paid to another entity 7.625 National Rental Affordability Scheme21.860 non-receipt rule 7.610 non-resident companies 24.020 non-resident partners 24.022 non-residents8.700–8.730 options8.660 overview7.000 partnerships 7.980, 24.022 payment for giving up rights 4.060 post-19987.025 pre-19857.015 pre-admission Everett assignments 16.490 pre-CGT shares or trust interest 7.470 pre-CGT status of membership interests20.100 public and non-public entities 8.855 record-keeping7.960 renewable resources incentives exemptions21.980 repaid rule 7.610 rights8.615 rollovers — see Capital gains tax, rollovers security holders 7.995

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2102 Capital gains tax (CGT) (cont) small business concessions 7.940,  8.400–8.450,  15.500–15.510 special capital receipts 7.350–7.360 special collectables 7.465 special rules 7.615 specific exemptions 7.720 specific modification rules 7.670–7.680 superannuation entities 23.087 Tables34.225–34.240 tax rate on capital gains 7.950 temporary residents 24.214 timing of acquisition 7.550–7.570 traditional securities, convertible or exchangeable interests 22.620 transfer of corporate losses 19.130 trust streaming 17.207 value shifting — see Value shifting rules VCMPs21.775 venture capital exemption 8.090 Capital gains tax (CGT), assets asset becomes trading stock 7.460 asset ceases to be pre-CGT asset 8.850–8.855 asset passes to beneficiary 8.530 asset passes to tax-advantaged entity 7.455 asset register 7.960 balancing adjustment events for depreciating assets 7.475 bringing into existence 7.160–7.178 classification of assets 7.520 conservation covenant 7.178 contractual or other rights 7.165 contribution of CGT assets 16.090 creating trust over CGT asset 7.185 creating trust over future property 7.225 debt securities 22.570 defined 7.500, 7.510 disposal of — see Capital gains tax (CGT), disposal of assets exempt assets 7.705 granting option 7.170 improvements to pre-CGT assets 34.240 mining, granting right to income 7.175 money received for original asset 8.210 personal use assets 7.530 pre-CGT asset capital improvements 7.540 principal asset test 24.120 property defined 7.510 receipt for event re CGT asset 7.360 relief for superannuation asset transfers before 1 July 2017 23.135 rollover relief on transfer or creation of asset 8.105 separate CGT assets 7.540 share buy-backs 18.550

Index

share capital reductions 18.540 shares7.300–7.315 shares in active foreign companies 24.222 split, changed or merged assets 7.650 taxable Australian property 8.720, 24.120 transferring CGT asset to trust 7.190 use and enjoyment of asset before title passes 7.130 Capital gains tax (CGT), cost base 7.620–7.625 bonus shares and units 8.610 calculation examples 7.698 cost base and reduced cost base modifications7.670–7.680 cost base reduction exceeds cost base 7.230 CPI index numbers 7.690 indexation 7.690–7.698, 34.230 leases8.650 reduced cost base 7.630–7.635 reduced cost base, modifications7.640–7.660 Capital gains tax (CGT), disposal of assets 7.120 — see also Capital gains tax (CGT), assets consequences for the transferee (company)8.110 disposal by beneficiary of capital interest7.220 disposal of interest in CFC 24.257 disposal to beneficiary to end capital interest7.215 disposal to beneficiary to end right to income7.210 end of CGT asset 7.140–7.155 liquidation distributions 18.560 liquidator declares shares worthless 7.315 loss or destruction 7.145 rollovers — see Capital gains tax (CGT), rollovers Capital gains tax (CGT), foreign residents 8.050, 24.550 foreign resident CGT withholding tax 24.120, 24.635 Capital gains tax (CGT), leases 7.250.275, 8.650 CGT events 7.250 CGT exemption 7.715 changing lease 7.265.275 granting lease 7.255 granting long-term lease 7.260 joint tenants 7.515, 8.540 lease premiums 5.420 leased plant, disposal 22.710 variation by lessee 7.275 variation by lessor 7.265, 7.270 Capital gains tax (CGT), rollovers 7.800, 8.100–8.320

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Index2103

— see also Capital gains tax (CGT), assets asset compulsorily acquired, lost or destroyed8.210 asset created 8.110 balancing adjustments 12.270 change of status 7.410 company ceasing to be member of wholly owned group 7.405 contribution of depreciating assets to partnership16.090 conversion of body to incorporated company8.260 cost base and reduced cost base modifications7.670–7.680 cost base indexation 7.697 Crown leases 8.270 demergers8.298 depreciating assets 8.280 exchange of membership interests in Medical Defence Organisation 7.820, 8.297 exchange of rights or options 8.245 exchange of shares in another company8.250 exchange of shares or units 8.240 exchange of stapled ownership interests for ownership interests in a unit trust 8.297 exchange of units for shares 8.250 facility agreements 22.520 failure to acquire replacement asset 7.425 failure to incur sufficient expenditure 7.430 financial services reform transitions 8.297 ineligible proceeds in partial rollovers 8.295 interest in mining right disposed of under interest realignment scheme 8.297 marriage breakdown 8.310 non-widely held entities 8.295 pre-formation intra-group rollover reduction7.492 prospecting or mining entitlement 8.290 replacement-asset rollover modifications7.675 replacement-asset rollovers 7.820, 8.200–8.298 replacement or improved asset 7.410 reversal7.400–7.430 rollover expenditure 7.697 same-asset rollover modifications 7.680 same-asset rollovers 7.810, 8.300–8.320, 8.320 scrip for scrip 8.295 small businesses 7.410, 8.150–8.180, 8.450 statutory licence, renewal or extension 8.220 strata title conversions 8.230 superannuation entities 23.087 transfer by individuals and trusts 8.110 transfer by partners 8.120

transfer of assets between group companies8.320 transfer of assets to wholly-owned company8.105 transitions8.296 trust failing to cease to exist 7.420 trust restructures 8.296 water entitlements 8.297 Capital gains tax (CGT), trusts 7.180–7.230 capital payment for interest in trust 7.200 CGT discount 7.930 converting trust to unit trust 7.195 cost base reduction exceeds cost base 7.230 creating trust over CGT asset 7.185 creating trust over future property 7.225 disposal by beneficiary of capital interest 7.220 disposal to beneficiary to end capital interest7.215 disposal to beneficiary to end right to income7.210 exchange of stapled ownership interests for ownership interests in 8.297 GST rollovers 8.296 pre-CGT shares or trust interest 7.470 transfer by individuals and trusts 8.110 transfer of assets to wholly-owned company8.110 transferring CGT asset to trust 7.190 trust failing to cease to exist after rollover7.420 trust restructures 8.296 trust stops being a resident trust 7.380 trust streaming 17.207 trusts7.930 Capital improvements, CGT separate assets 7.540 Capital losses — see Capital gains or losses Capital proceeds, CGT events 7.605 GST, effect 7.607 liquidation distributions 18.550 modification to definition of 7.610 special rules 7.615 Capital protected products acquisition of securities 22.670 interest deductibility 10.460 Capital, return of — see Return of capital Capital works 12.000, 12.500–12.540 — see also Construction expenditure 50% deduction for ‘green’ capital works21.980 balancing deduction on destruction 12.540 calculating deductions 12.530 definitions12.510 entitlement to deductions 12.520 expenditure on 12.510 rates12.520

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2104 Car depreciation limit 12.230 Car expenses — see also Travel expenses deductions10.475 reimbursements 4.190, 10.607 small business entities 15.315 stamp duty on registration 28.560 Car fringe benefits 26.400 calculating taxable value 26.405 personal services entity deductions 25.485 ‘private use’ 26.400 Car leases, assessable profit 5.470, 5.475 Car parking benefits, disabled persons 26.548 expenses10.602 fringe benefits 26.548, 26.549 Car purchases, balancing adjustment rules 12.250 Carbon farming initiative 21.990 Carbon pricing scheme 21.990 Carbon sink forests, establishment, deduction for capital expenditure on trees 12.400, 21.150, 21.980 Carers, dependant rebate 2.570 Carry forward expenditure, petroleum resource rent tax 21.260 Carry forward losses calculating tax losses 11.520 change in ownership and failed same business test 19.040 continuity of ownership test 19.010 converting excess franking offsets into tax losses 19.260 corporate tax losses 11.500–11.530, 19.000–19.040 deductions11.500–11.530 limit11.530 maintaining same owners 19.020 net capital losses 7.910, 19.090–19.095 non-commercial business activities11.550–11.558 restrictions on net capital losses 19.090–19.095 restrictions on tax losses to deduct in income year 19.270 same business test 19.010, 19.030, 19.040 tax loss incentives for designated infrastructure projects 21.997 trust losses, restrictions 17.140 Case law — see Common law Cash accounting 13.100–13.160 constructive receipt 13.220 delay in payment on request 13.230 ‘incurred’ expenses 13.510–13.530

Index

instalment sales and emerging profits accounting 13.240 non-cash receipt 13.200 receipt of cheque 13.210 small businesses 15.255 Cash-basis accounting 13.200–13.240 Cash dealers administrative provisions 32.270 financial transaction reports 32.230 suspect transactions 32.240–32.260 Cash economy 1.040 Cash management trusts, consolidated groups 20.070 Cash transaction reports — see Financial transaction reports Celebrities — see High profile individuals CFCs — see Controlled foreign companies CGT — see Capital gains tax Charges — see Levies and surcharges; Penalties Charitable institutions 21.530 — see also Non-profit associations charity, definition 9.040 close connection with government 9.040 commercial activities 9.040 exempt income 9.040 fundraising, input taxed supply 27.148 gifts to 11.680–11.700 GST-free supply 27.142 political activities 9.040 registered charity 9.040 Child care benefit 2.410, 2.680 family assistance 2.410 GST-free supply 27.139 Children — see also Baby bonus; Minors’ income dependant tax offset 2.570 isolated, educational assistance 9.100 maintenance payments 9.090 of same sex relationships, death benefits dependents 4.780, 23.550 partnerships16.080 trusts17.225 Christmas Island 24.030 Civil penalties — see also Penalties appropriate penalty for breach of s 50-2033.570 categories under administrative penalty regime 33.061 injunctions33.570 obtaining a civil penalty order 33.570 Private Rulings 33.095 tax and BAS agents 33.095, 33.570 tax scheme promoters 25.755, 33.097

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Index2105

Class Rulings 30.018 — see also Taxation Rulings second-hand goods 27.142 share buy-backs 18.550 Clean buildings, definition 24.640 Client Engagement Group, ATO 29.250 Closely held trusts 17.315 Clothing non-compulsory uniforms 10.605 ‘private or domestic nature’ 10.310 Clubs distribution of surplus on winding up 9.255 exempt income 9.070 mutuality principle 9.250, 9.255 recreational club expenses 10.575 ‘trade’ with members and non-members9.255 Co-operative companies 21.420 Cocos (Keeling) Islands 24.030 Code of Professional Conduct, TASA 33.720 sanctions for non-compliance with 33.720 Collectables — see also Personal use assets capital proceeds 7.615 CGT assets 7.525 exempt assets 7.705 GST implications 7.622 special collectables 7.465 Collecting societies, royalties collected by 5.540 Collection of tax 32.400–32.510 — see also Recovery of unpaid tax ancillary provisions 32.230–32.397 ATO procedures 32.010 background32.400 BAS and running balance accounts 32.505 PAYG system 32.400–32.510 refunds of surpluses and credits 32.510 under Pt 4-15 32.127–32.170 College — see Education and training payments Commencement of business 6.000, 6.250 blackhole expenditure 12.310–12.320 deduction for enterprise start-up expenses15.265 pre-commencement expenditure 10.160 Commercial debt forgiveness — see Debts Commercial finance — see Asset financing Commissioner — see also Objections access to information 29.100–29.120,   29.210–29.235 alteration to original grounds 31.400 appointment29.010 ATO structure 29.010 conduct of investigations 29.240–29.270

examination powers 29.170, 29.175 general principles of access 29.145 legal professional privilege and access to information 29.210–29.235 not generally ‘estopped’ from recovering tax 32.125 particulars of Commissioner’s case 31.560 power to amend assessments 30.150 powers to obtain information 29.130–29.190 requirement to issue Private Ruling 30.028 responsibilities29.010 responsible for GST 27.186 reviewing determination of 31.500 view of residence according to ordinary concepts 24.052 Commissioner’s discretion 1.320 cancellation of tax benefits  25.685, 25.687, 25.690, 25.695 effective life of asset 12.180 non-commercial business losses 11.558 remission of penalty taxes 33.083, 33.090 review of by AAT and courts 1.320 Common law (case law) 1.320 — see also Legal system business income 6.000, 6.410–6.455 compensation payments 6.880 general deductions 10.280 income — see Ordinary income legal professional privilege 29.205 liquidation distributions 18.560 nature of compensation payments 6.800 negligence33.800 personal exertion — see Income from personal exertion rationale for privilege 29.210 realisation of investments 6.510–6.520 repairs11.030 residence according to ordinary concepts24.052 sale of information 6.560 scope of common law privilege 29.215 taxpayer’s rights to information 31.030 Commonwealth pensions and payments 9.120 Commonwealth scholarships, foreign students9.100 Commonwealth taxation powers 1.540–1.620, 1.570 Commonwealth law prevails 1.595, 32.105 effective scope 1.580 income tax 1.060 overview of tax system 1.232 prohibition against discrimination between states or parts of states 1.560 recovery provisions 32.105 Uniform Tax Scheme 1.600 Commonwealth Trade Learning 9.100

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2106 Community service entities, exempt income 9.070 Companies 18.000, 18.010 administrative concession for tax compliance risk documents 29.220 anti-loss duplication measures 19.060 bad debts 11.460, 19.140–19.150 base rate entities 2.130, 18.020, 34. 025 capital and other returns to shareholders18.530–18.560 carry forward losses 11.500–11.530, 19.000–19.040 carry forward net capital losses19.090–19.095 central management and control test 24.064 CGT discount and trusts 7.930 CGT events 7.490–7.498 CGT relief for shares in active foreign companies 24.222 CGT rollover relief, exchange of shares8.240–8.250 classification under Corporations Act18.010 concessional tracing rules 19.045, 19.047, 19.049 consolidation regime 20.000–20.170 continuity of ownership — see Continuity of ownership conversion of body to incorporated company8.260 converting excess franking offsets into tax losses 19.260 corporate board documents relating to tax compliance risk 29.220 corporate losses, offset refund 18.385 corporate management 18.010 corporate tax rate 18.020, 34.025 creation of losses 19.150 debt and equity rules 22.010–22.020 designated infrastructure project entity concessions 19.048 direct value shifting 7.480, 8.805 directors — see Directors disallowed losses 19.050 distributions on winding up 18.560 dividends — see Dividends double taxing system, former 18.110 dual residence 24.080, 24.090 effect of lower corporate tax rates 18.020, 34.025 full self-assessments, deemed 30.090 group — see Group companies imputation system — see Imputation system income year 13.025 incorporation in Australia test 24.062 integrating corporate and shareholder tax 18.120 inter-entity loss duplication 19.060, 20.115 key terms 18.210

Index

loss duplication and other schemes19.050–19.060 members’ interests 18.010 net capital losses 19.090–19.095, 19.100–19.130 non-profit — see Non-profit associations partnership mutually exclusive 16.030 PAYG withholding, director personal liability 32.445, 32.447 private company, definition 18.010 proposed business continuity test 19.035 public company, definition 18.010 public officer 18.010 rates of tax 2.130, 18.000, 34.025 residence24.060–24.066 restrictions on tax losses to deduct in income year 19.270 separate entity status 18.010 share buy-backs 18.550 share capital reductions 18.540 share capital tainting rules 18.565–18.580 shareholders — see Shareholders small — see Small businesses; Small companies streaming of capital benefits 18.590 substituted income years 13.030 tax accounting — see Tax accounting tax audits 29.265 tax losses and franked distributions19.250–19.270 tax offences 33.190 tax rates 18.020, 34.025 taxation of corporate distributions18.200–18.210 taxation rules 18.100–18.130 transfer of capital losses and net capital losses 19.100–19.130 transfer of losses involving Australian branches of foreign banks 19.100–19.130 unrealised net loss 19.060 use of net capital losses and capital losses to avoid tax 19.095 vicarious liability 32.250 voting power test 24.066 widely held companies and eligible Div 166 companies 19.045 with unequal share structures 19.049 write-off of bad debts 11.460 Company directors — see Directors Compensation business income 6.000 cancellation of a structural agreement 6.840 cancellation of business contracts 6.810 CGT exemption 7.715 CGT, generally 6.910 claiming compensation from ATO 29.008 discounting for tax 6.900

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Index2107

income and capital components, apportionment into 6.880 income and capital components, distinguishing between 6.805 insurance or indemnity for loss of assessable income 6.870 insurance recovery for primary producer’s loss 21.135 ‘interest’ component 5.210 interest on judgment debt 9.080 loss of trading stock 6.820 loss of wages 6.860 nature of assessable payments 6.800, 6.805 ordinary income 3.250 permanent loss of fixed asset 6.840 personal injury judgment debt 9.080 structured settlement payments 9.200 temporary disablement of incomeproducing assets 6.830 termination of agency and management contracts 6.850 Competitions3.210 Completed contracts, as accounting basis 13.460 Compliance — see Tax compliance Complying ADFs 23.050 — see also Approved deposit funds Complying superannuation funds 20.050, 23.045 CGT23.087 death benefits 23.550 member benefits 23.500–23.520 rates of tax 23.095 Composers, averaging of income 21.300–21.340 Compulsory acquisition, CGT events 7.120 Computer software, development pools 12.220 Concessional contributions 23.100 excess contributions 23.000, 23.100, 23.125 high income earners 23.105 Concessional tracing rules companies owned by certain trusts 19.047 companies with unequal share structures19.049 widely held companies and eligible div 166 companies 19.045 Concessions — see Small businesses, concessions for; Tax concessions Conditional contracts, derivation of income 13.370 Conduit foreign income 24.218 Investment Manager Regime 24.219 Confidentiality — see also Legal professional privilege; Privacy ATO’s obligations 29.040–29.070

Australian Business Register 32.380 public interest immunity 29.235 tax records 29.040 TFNs32.370 unauthorised disclosure by taxation officers29.040 Conservation covenants 11.740, 21.980 CGT events 7.178 Consolidated assessments 30.098, 32.130 Consolidation regime 20.000–20.170 ACA for the joining entity 20.070 ACA for the leaving entity, allocation20.090 ACA for the leaving entity, calculation 20.090 ATO compliance assurance 20.070 asset churning 20.070 attribution and attributed tax accounts20.140 capping rules for certain reset cost base assets 20.070 cash management trusts 20.070 CGT events 7.490–7.498 choice to consolidate 20.010 core rules 20.035–20.060 cost setting rules 20.070–20.210 cost setting rules, asset churning 20-070 cost setting rules, interests of departing subsidiary 20.090 cost setting rules, joining entity’s assets20.070 deductible liabilities 20.070 deferred tax liabilities 2.070 entities joining a group 20.050 entry/exit history rule 20.060 error in allocation of cost setting amount7.496 excess of allocable cost amount 7.498 existing consolidated group joins 20.070 foreign income tax payments 20.130 franking account 20.120 group restructures 20.030 improvements20.000 income tax liability 20.150 inherited deductions 20.070 inter-entity loss duplication 20.115 international tax 24.900 leaving time liabilities 20.090 ‘linked entities’ 20.070 loss multiplication rules for widely held companies 20.115 loss of pre-CGT status of membership interests 7.491 MEC group 20.030 members of group 20.020 negative allocable cost amount 7.495 no reset cost base assets 7.494 pre-CGT status of interests 20.100 pre-formation intra-group rollover reduction7.492

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2108 Consolidation regime (cont) reductions for accelerated depreciated assets20.070 reductions for over-depreciated assets 20.070 reset cost base assets 20.070 retained cost base assets 20.070 rights to future income 20.070 same-asset rollovers between group companies8.320 securitisation liabilities 20.070 significance20.160 single entity rule 20.040, 20.070, 25.687 tax cost setting amounts exceed joining allocable cost amount 7.493 tax cost setting rules 20.070 terminating value of assets 20.070 thin capitalisation rules 24.860 TOFA rules interaction 20.160 transfer of losses 20.110 transfer of losses, transitional methods20.115 transitional cost setting rules 20.080 trusts, partnerships and life insurance companies20.070 value shifting 2.070 Conspiracy33.219 Constitution concept of ‘tax’ 1.550 grants power 1.570 GST constitutional challenges 27.000 limits on laws imposing taxation 1.570 other provisions 1.570 power to acquire property 1.570 prohibited discrimination between States1.560 prohibition on tax preferences 1.570 Senate may not introduce or amend taxation laws 1.570 tax on state/Commonwealth property1.570 taxation powers 1.530–1.620 Constitutionally protected funds, exempt income 9.035 Construction contracts long-term, derivation of income 13.460 reportable supplies 32.405 Construction expenditure — see also Buildings; Capital works construction expenditure area, definition12.510 construction expenditure, definition 12.510 Consumers Australian consumer definition 27.167, 27.169 importation of digital products 27.167 Consumption tax — see Goods and services tax

Index

Continuity of business test — see Same business test Continuity of ownership (COT) bad debts 19.140 change in ownership 19.040 concessional tracing rules 19.045 consolidated groups 20.110 corporate carry forward losses 19.010, 19.020 corporate change 19.045 disallowed losses 19.050 family and non-fixed trusts 19.047 substantial19.045 widely held and eligible Div 166 companies19.045 Contractors — see Employees Contracts cancellation6.810 effect of GST 27.000 liability in contract 33.800 long-term construction, derivation of income13.460 payroll tax 28.362 reportable supplies 32.405 tax agents’ breach of contract 33.750 termination of agency and management contracts 6.850 Controlled foreign companies 24.235 accruals taxation 24.230, 24.240 anti-avoidance provisions 24.258 attributable income 24.200, 24.230, 24.245 attributable taxpayers 24.240, 24.350 attribution and foreign income taxes 24.250 attribution percentage 24.248 capital gains on disposal of interest 24.257 CGT relief for shares in active companies24.222 consolidated group 20.140 control tests 24.235 dividends24.255 foreign hybrid loss exposure adjustment7.488 operation of rules 24.230 Conversion rules — see Foreign currency translation rules Convertible interests 22.620 CGT rules 8.620 Convertible notes 22.015, 22.570 — see also Debt securities Copyright — see also Intellectual property collecting societies 5.540 films, CGT exemption 7.710 royalties5.500 Corporate funds 23.030 — see also Superannuation funds Corporate limited partnerships 21.720 — see also Limited partnerships

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Index2109

excluded limited partnerships 21.720 residence test 24.072 Corporate tax entities 18.000–18.590 companies — see Companies corporate limited partnerships — see Corporate limited partnerships distinct taxpayers 18.000 overview18.000 public trading trusts — see Public trading trusts tax audits 29.265 Corporate tax rate 18.020, 34. 025 Corporate unit trusts head company 20.020 residence test 24.075 special rules repealed 21.740 Cost base — see Capital gains tax (CGT), cost base Cost setting rules  — see Consolidation regime Courts — see also Federal Court of Australia; Prosecutions; Review amendment of assessments and 30.150 approach to imposition of penalties for TAA offences 33.110 implementation of decisions 31.700 judicial attitudes to tax planning 25.850 Part III div 2 TAA, offences dealt with by 33.100 review of Commissioner’s discretions by 1.320 role in recovery of money from third party32.130 role over Mareva injunctions 32.160, 32.170 roles in tax system 1.320 taxpayer’s rights to information 31.030 Credits — see Rebates; Tax offsets Criminal offences aiding and abetting 33.215 attempting to commit an offence 33.217 avoidance of tax 25.760, 25.765 conspiracy33.219 fraud and conspiracy to defraud 33.213 liability of members of GST groups/ joint ventures 27.155 obstructing Commonwealth public official33.210 other offences 33.221 penalties 25.760, 25.765, 33.020 procedural provisions and general criminal offences 33.200 unauthorised disclosure by taxation officers29.040 Crown leases, CGT replacement-asset rollover8.270 Crypto-currencies — see Digital currencies

Currency currency exchange gains — see Foreign currency exchange gains and losses currency translation rules — see Foreign currency translation rules digital — see Digital currencies forex regime 22.495 GST on financial supplies 27.146 Customs duties, Constitutional provisions 1.570 — see also Excise duties  D Damages — see Compensation Data matching 32.300 De facto relationships, spouse defined 9.090 — see also Spouses Death benefits dependants23.550 non-dependants23.550 taxation23.550 Death of taxpayer — see also Deceased estates death of partner 16.420 transfer of trading stock 14.210 Debenture-holders’ rights 18.010 Debt defeasance 5.275 Debt/equity rules 22.010–22.020 — see also Debt securities converting interests 22.015 debt interest 11.625 distinction between interests 22.015 examples of the operation of the debt and equity tests 22.015 financing arrangements 22.015 meaning of debt interests 22.015 meaning of equity interests 22.015 non-equity shares 22.020 non-share equity interests 22.020 relevance of 22.010 tax treatment of payments 22.020 thin capitalisation 24.860 traditional approach 22.010 withholding tax 24.620 Debt securities 22.570–22.670 — see also Debt/equity rules capital protected borrowings 22.670 commercial debt forgiveness 22.660 eligible returns 22.610 qualifying securities 22.610 securities lending arrangements 22.630 traditional securities, convertible or exchangeable interests 22.620 treatment of eligible return 22.610 Debt waiver fringe benefits 26.430 calculating taxable value 26.440 definition26.430

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2110 Debts bad — see Bad debts commercial debt forgiveness 11.460, 22.660 consolidated groups 20.070 debt collection by ATO — see Recovery of unpaid tax deductibility 11.450, 11.460 discounted, accruing interest liability 13.541 loan fringe benefit 26.450, 26.455 net forgiven amount 22.660 tax debt — see Recovery of unpaid tax thin capitalisation rules 24.860 trusts17.140 Deceased estates asset passing to beneficiary 8.530 asset passing to tax-advantaged entity 7.455 CGT 7.455, 8.500–8.540 distribution out of corpus to income beneficiary17.300 GST adjustments 27.095 income accrued at death, received after death 17.240 income derived after death 17.250 joint tenants 8.540 legal personal representative or beneficiary8.520 main residence 8.060 superannuation death benefits 23.550 taxation17.230–17.300 trust income 17.230 trust losses 17.318 Deceased taxpayers — see Death of taxpayer Deception33.180 — see also False or misleading statements Deductible expenses, recoupment of 3.400.420 Deductible gift recipients 11.695 — see also Charitable institutions gifts to environmental organisations 21.980 Deductions — see also Losses or outgoings apportionment10.200 Australian film expenditure, pre-1 July 2007 21.900 bad debts 11.440–11.460 blackhole expenditure 12.300–12.320 borrowing expenses 11.565 bribes to public officials 10.585 business travel expenses 10.700 capital allowances — see Capital allowances capital expenditure 11.000, 12.400 capital or capital nature 10.260–10.280 capital works 12.500–12.540 car expenses 10.475, 10.695 car parking expenses 10.602 characterising10.210–10.240 commercial debt forgiveness 11.460, 22.660 company losses, loss duplication schemes19.050

Index

connection with income earning activities10.180 conservation covenants 11.740 contributions to political parties and candidates 10.558, 11.710 corporate bad debts 19.140–19.150 debt securities 22.620 deductible payments to related entity 10.565 deferral of 11.555 depreciating assets 12.110 depreciating assets, decline in value 12.130–12.270 double deductions 11.000 ‘double dipping’ 24.090 election expenses 11.600 employer contributions 23.110 employer’s financing costs 23.160 enterprise start up expenses 15.265 entertainment expenses 10.600 environmental protection 21.980 establishment of trees in carbon sink forests12.400 excess concessional contributions charge not deductible 23.125 family maintenance payments 10.570 Farm Management Deposits 21.160 financial institution RSA provider 23.098 fines and penalties 10.550 foreign exempt income losses 11.625 former temporary investment allowance12.460 gaining or producing ‘your’ assessable income10.170 general deductions 10.000–10.705 gifts11.680–11.740 GST input tax credits, increasing adjustments10.535 home office expenses 10.430 inherited deductions 20.070 insurance premiums 10.450 interaction with GST 11.000 interest expenses 10.460 lease document expenses 11.567 leases22.700–22.710 leave payments and provisions 10.540, 13.544 legal and other professional expenses 10.470 leisure facility and boat expenses 10.580 life insurance companies 21.412 loss by theft by employee or agent 11.580 loss from profit-making undertaking or plan 11.575 losses and outgoings — see Losses or outgoings luxury car leases 5.475 mining companies 21.200 miscellaneous expenses 11.567–11.635 mortgage discharge expenses 11.570 negative limbs 10.250–10.330

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Index2111

net position 10.000 non-assessable income and 16.210 non-cash business benefits 10.610 non-compulsory uniforms 10.310, 10.605 non-deductible losses or outgoings 10.330 non-resident business losses, etc 24.570 partnerships 16.210, 16.250 PAYG non-compliant entities 10.615 payments to associations 11.590 payments to related entities 25.440 pensions paid to employees 11.585 personal services entity 25.485, 25.490 personal superannuation contributions 23.120 pooled development funds 21.605 positive limbs 10.040–10.240 prepaid business expenses 15.260 primary producers 21.150 private or domestic expenditure 10.310 property, gifts of 11.700 provisions that limit deductions10.535–10.610 rates and land taxes 11.610 recovery of bad debts 11.460 recreational club expenses 10.575 refund of deductible contributions 23.110 reimbursements10.607 related entities, reduced payments 10.565 relative’s travel expenses 10.560 repairs11.020–11.080 research and development 21.920–21.960 residential rental property travel expenses10.562 self-education expenses 10.440 small business start-up costs 12.310 small businesses, rules 15.250–15.265 specific deductions 11.000–11.740 substantiation of expenses 10.680–10.705 sufficient nexus 10.050 superannuation charges and levies 10.555 superannuation contributions 23.120 superannuation funds 23.092 tax benefit 25.620 tax benefits from accelerating 25.627 tax loss incentives for designated infrastructure projects 21.997 tax losses of earlier years 11.500–11.530 tax-related expenses 11.560 taxable income general principle 2.030 trading stock 14.000, 14.070 transport expenses between workplaces11.635 travel expenses 10.475, 10.562 trees, capital expenditure on 12.400 trust deduction (‘income injection’) schemes17.318 trust income 17.116 trust losses 17.130 types of allowable deductions 10.420–10.475 vacant land, holding expenses 10.620

value of, compared to offsets 2.500 work expenses 10.690 work in progress payments 11.630 written evidence and record-keeping 10.705 Deemed assessments 30.090 Deemed dividends — see Dividends Default assessments 30.095 burden of proof 30.095 Defence Force, overseas service rebate 2.710 Deferral of tax schemes 25.430 Deferred interest loans 26.450, 26.455 Deferred interest securities, accruing obligations 13.541 Definitions accrued leave transfer payment 10.540 annual turnover 27.065 annuity 5.000, 5.300 arrangements32.420 assessable income 3.000 assessment30.075 associate26.140 associated person 18.520 Australia 24.030, 24.040 Australian consumer 27.167, 27.169 Australian entity 24.235 Australian resident 24.040 Australian superannuation fund 24.078 benefit4.140 beverages27.137 business 6.000, 6.050 business percentage 26.405 business ‘proposed to be carried on’ 12.310 by way of indemnity 3.420 capital proceeds 7.605, 7.610 capital protected borrowings 22.670 capital works 12.510 car26.400 car benefit 26.400 cash dealer 32.230 cash settlable 22.810 cash transaction 32.230 CGT assets 7.500, 7.510 charity, charitable institution, institution9.040 clean buildings 24.640 co-operative companies 21.420 company 18.010, 18.210 conscious maladministration 30.080 consideration27.058 construction expenditure 12.510 construction expenditure area 12.510 contract28.350 control26.400 cost base 7.620 credit absorption tax 24.360 creditable acquisition 27.085 currency32.230

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2112 Definitions (cont) current employee 26.150 current employer 26.140 custody26.400 debt interest 22.015 debt waiver fringe benefit 26.430 decision31.150 dependant2.570 deployed24.210 depreciating asset 12.130 derivation3.160 derive 13.020, 13.100 director33.190 discretionary trust 28.170 dividend 5.000, 18.210 documentary film 21.910 DPT tax benefit 25.679 dutiable property, dutiable transaction28.560 dwelling8.050 eligible Division 166 company 19.045 eligible investment business 21.740 eligible start-up companies 4.480 eligible venture capital investment 21.770 employee 23.810, 26.150, 28.340 employer 23.810, 26.140 entertainment 10.600, 26.546 entity32.385 environmental protection 21.980 environmentally related tax 21.990 equity interest 22.015 excluded proceeding 29.160 exempt income 17.110 explain29.110 false or misleading statement 33.065 financial arrangement 22.810 financial supply 27.146 food27.137 foreign earnings 24.210 foreign income tax 24.360 foreign resident 24.040 foreign service 24.210 foreign superannuation fund 24.078 former employee 26.150 former employer 26.140 fringe benefit 26.000, 26.100–26.170 full self-assessment taxpayer 32.000 future employee 26.150 future employer 26.140 gateway review 32.397 head company 20.020 hinder33.210 hire purchase agreement 22.720 housing right 26.510 implementation33.097 in respect of 26.160 in the retirement phase 23.135 incidence of taxation 1.110 incidental financial supply 27.146 income 3.080, 18.560

Index

income from personal exertion 4.000 income from property 5.000 income of the trust estate/trust law income 17.063, 17.116 income properly applied to replace loss of paid-up share capital 18.560 incurred13.500 indemnity6.870 information29.165 input taxed supply 27.145 interdependency relationship 4.780 interest 5.000, 5.200, 24.610, 27.146 international agreements, property 24.690 investor32.330 joint tenant 7.515 land rich corporation 28.560 legal advice 29.215 legal personal representative 8.500 leisure facility 10.580 life insurance company 21.410 loan26.450 long-term lease 27.147 majority underlying interests 8.852 managed investment trust 24.640 medical expense 2.650 mining operations 21.210 money (including digital currency) 27.171 mutual insurance company 21.440 MySuper23.850 necessarily incurred 10.160 net income of the trust estate/tax law income 17.063, 17.116 non-deductible exempt entertainment expenditure 26.546 non-profit company 21.530 non-resident superannuation fund 24.078 non-resident trust estate 24.265 normal taxable income 2.690 officer33.190 operating cost 26.405 ordinary income 3.000 outward investing entity 24.860 owner28.110 particulars31.410 partnership16.030 partnership: exempt income, net income, partnership loss, nonassessable non-exempt income 16.210 permanent establishment 24.020 person aggrieved 31.150 personal services entity 25.452 pool of construction expenditure 12.510 pre-CGT asset 8.852 prescribed (minor) person 21.020 prescribed non-resident 2.120 primary production business 21.110 private company 18.010 private use 26.400 production expenditure 21.910

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Index2113

promoter33.097 property 7.510, 24.690, 26.550 provide26.110 public authority 9.035 public company 18.010 public trading trust 21.740 public unit trust 21.740 qualifying Australian production expenditure21.910 qualifying security 22.610 R&D activities 21.950 RBA interest day 27.189 real property 27.100 reasonable care 33.065 reasonable times 29.140 recoupment3.420 recreational club 10.575 registered charity 9.040 registered organisation 21.540 rehabilitation21.230 reimbursement agreement 17.320 related entity 10.565, 25.440 relative 10.560, 25.440 relevant authority 33.066 religious institution 9.045 rent 5.000, 5.410 repair11.030 repayment income (HELP) 2.400 reside24.052 residence of companies 24.060–24.066 residence of individuals 24.050–24.059, 24.052 resident of Australia 24.040 resident trust estate 24.074, 24.265 resident unit trust 24.076 residential premises 27.147 right to occupy 27.147 royalty 5.000, 5.500 salary or wages 26.140 same business 19.030 scheme 25.615, 27.196, 30.018 scheme benefit 33.097 second-hand good 27.142 self-assessment30.073 self-managed superannuation fund 23.045 serious hardship 32.102 shareholder18.210 special professional 21.310 special trust 28.170 spouse9.090 statement [shortfall] 33.065 statutory income 3.000 structured settlement 9.200 subsidiary member 20.020 superannuation benefit 23.110 superannuation entity 23.030 supply27.056 T account method 30.095 tax 1.000, 1.550, 11.560

tax audit 29.245 tax avoidance agreement 25.425 tax benefit 25.605 tax exploitation scheme 33.097 tax invoice 27.125 tax-preferred amount 17.315 tax-related liability 32.101, 33.067 taxable Australian property 24.550 taxable importation 27.165 taxable purpose 12.120 taxable supply 27.056 taxable wages 28.310 taxation law 27.187, 29.160 taxpayer25.605 temporary resident 9.015, 24.214 tentative assessment 30.080 thing27.058 trading stock 14.020–14.050 trading trust 21.740 trial year 20.110 trust17.010 trust estate 17.050 trustee 17.050, 17.230 trustee beneficiary 17.315 ultimate owner 8.852 unit trust 21.740 unit trust dividend 21.740 unitary tax 24.360 vouchers27.175 wages28.320 wealthy individual and high wealth individual29.255 widely held company 19.045 windfall3.210 withholding tax 24.600 Demergers tax relief CGT rollover relief 8.298 streaming of capital benefits 18.590 Demutualisations friendly societies 21.440 mutual insurance companies 21.440 mutual non-insurance organisations 21.440 Departure from Australia departing Australia superannuation payments23.580 Departure Authorisation Certificate (s 14U) 32.150 departure prohibition orders 32.150 Dependants death benefits 4.780 definition2.650 dependant spouse tax offset for pre2014/15 income years 2.570 medical expenses 2.650 pensions paid by employer 11.585 sole parent (notional) 2.620 superannuation death benefits 23.550 tax offsets 2.570

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2114 Deposits derivation of income 13.335 forfeiture7.355 Depreciating assets accelerated depreciation 15.310–15.315 assets used for ‘taxable purpose’ 12.120 balancing adjustment events 7.475, 12.250 balancing adjustment rollover relief 12.270 buildings12.130 calculation example 12.190 car depreciation limit 12.230 CGT assets, separate 7.540 CGT exemption 7.710 CGT replacement-asset rollover 8.280 choice of calculation methods 12.150 composite items 12.130 consolidated groups 20.070 contribution to partnership 16.090 cost of depreciating asset 12.170 decline in value from the ‘start time’ 12.150 deducting amounts 12.110, 12.130 deductions for decline in value12.130–12.270 definition12.130 diminishing value or prime cost method 12.160, 12.190 disposals15.330 ‘double dipping’ 24.090 effective life of asset 12.180 eligible work-related items 12.130 exceptions to the general rule 12.185 exploration or prospecting immediate deduction21.215 holder of depreciating assets 12.140, 22.700 immediate deduction for low cost assets12.200 intangible assets 12.130 interaction with GST 12.160, 12.170 jointly held depreciating assets 12.140 land12.130 leased plant, disposal 22.710 low cost assets 12.200 low-value pools 12.120, 12.210 mining rights and information, changes21.215 modifications 12.120, 12.130 no choice as to method 12.185 partnership assets 12.140 partnership change 16.440 plant12.130 pooling15.320–15.325 primary producers 21.150 quasi-ownership rights 12.140 small business entities 15.310–15.315 software development pools 12.220 substantiation of expenses 10.690 termination value 12.250 theft, losses 11.580 trading stock 12.130

Index

uniform capital allowance system12.100–12.270 Depreciation — see Depreciating assets Derivation of income accrual basis of accounting 13.300–13.380 cash-basis accounting 13.200–13.240 dividends13.420 interest13.430 long-term construction contracts 13.460 ordinary income 3.160.190 rent13.410 salary or wages 13.400 tax accounting 13.020, 13.100–13.160 Designated infrastructure project entity definition19.048 special concessions 19.048 Designs — see Intellectual property Digital currencies bitcoin3.210 double taxation relief 27.058 non-taxable importations 27.171 trading stock 14.020 stock on hand, year end 14.060 Digital products and services — see also E-commerce GST on imports 27.167 taxing supplies made to Australian consumers by non-residents 27.167 Directors18.010 Director Identification Number (‘DIN’)33.098 PAYG withholding, penalty regime 32.447 PAYG withholding, personal liability 32.445 payroll tax on allowances 28.362 penalty regime extended 33.098 personal liability for company offences33.190 Disabled persons — see also Special disability trusts car parking benefits 26.548 GST on cars 12.230 taxation of minors 21.020, 21.050 Discount capital gains 7.915–7.935 12-month holding period 7.925 anti-avoidance measure 7.925 CGT discount or indexation 7.915, 7.925 CGT events 7.920 denial7.925 disposals of equity where underlying value recently acquired 7.925 listed investment companies 7.935 net capital gain/loss for income year 7.915–7.935 trusts and 7.930 VCMPs21.775 Discounts compensation payments: effect of tax 6.900

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Index2115

debt securities 22.570 debts13.541 derivation of income 13.325 loan discounts 5.200, 5.215 trading stock 14.095 Discretionary trusts 17.040 closely held trusts 17.315 connected entities 15.110 deemed present entitlement 17.100 definition28.170 Disposal of assets — see Capital gains tax (CGT), disposal of assets Disposal of trading stock — see Trading stock Dispute resolution — see also Appeals alternative dispute resolution 31.545 appeal process 31.000 preliminary conferences and directions hearings 31.545 Diverted Profits Tax (DPT) 24.910, 25.679 Dividend stripping rule 18.428 schemes25.672 Dividends assessable income 18.205 bonus shares, CGT rules 8.610 CFC rules 24.255 deemed 18.210, 18.500–18.520, 18.550 definition 5.000, 18.210 demergers8.298 derivation of income 13.420 distribution18.010 franking — see Imputation system liquidation distributions 18.560 non-portfolio exemption 24.220, 24.625 non-share dividends 18.205–18.210 out of profits 18.210 paid18.210 PDF shareholders 21.610 share buy-backs 18.550 share capital tainting and streaming 18.590 source of income 24.150 tax benefit stripping schemes 25.672 unit trusts 21.740 venture capital franking credits 21.620 washing18.440 withholding tax 24.620 Division 353 notices — see 353-10 TAA Doctrine of constructive receipt 3.180 employee remuneration paid to a private company 3.180 entitlement to bonuses 3.180 entitlement under a profit participation plan 3.180 Documents — see also Records Commissioner’s power to access 29.140–29.175

failure to provide 33.067 publication under freedom of information31.050–31.130 requirement to produce 29.175 transfer pricing 24.700 Domicile — see Residence Double taxation agreements (DTA) 24.010, 24.020 business profits 24.570 double taxation relief 24.210–24.222 dual residency 24.080, 24.090 international tax 24.010 permanent establishment 24.020, 24.110 residence24.040 services income 24.575 transfer pricing rules 24.685–24.695 withholding tax rates 24.605 Double taxation relief digital currencies 27.058 exemption method 24.210–24.222 foreign branch income 24.215 foreign service 24.210–24.213 GST on vouchers 27.175 non-portfolio dividends 24.220, 24.625 temporary residents 24.214 DPT — see Diverted Profits Tax ‘Drive-in drive-out’ (DIDO) arrangements, livingaway-from-home allowance 26.525 Dual residents 24.080, 24.090 grouping losses 24.090 Duplication, anti-duplication rules 2.030 Dwelling, defined 8.050 — see also Main residence  E E-commerce — see also Digital products and services; Importation of goods challenges for tax reform 1.237 GST on online purchases (from 1 July 2018) 27.142, 27.169 online trading site dealings 6.120 tax evasion 25.102 Early retirement scheme 4.800, 34.320 Early stage innovation companies (ESIC), CGT treatment 8.095 Economic owners, depreciating assets 12.140 Education and training payments exempt income 9.100 isolated children 9.100 Education expenses — see also Higher Education Loan Programme GST-free27.139

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2116 Education expenses (cont) self-education10.440 Education tax offset 2.580 Schoolkids Bonus 2.580 Educational institutions — see Public educational institutions Election expenses 11.600 — see also Political parties/ independent candidates Elections car fringe benefits taxable value 26.405 family trusts 17.318, 18.420 GST returns 27.187 hedging financial arrangements 22.870 limited balance 22.540 non-use of short term forex rules 22.500 partnerships contributed trading stock 16.090 primary producers averaging of income 21.130 retranslation 22.560, 22.565, 22.860 self-assessment30.165 Electronic distribution platforms 27.167 — see also Online trading site dealings Electronic record-keeping 29.114 AUSkey32.390 tax administration 29.005 Eligible start-up companies, employee share schemes 4.480 Eligible termination payments, pre-1 July 2007 rules 8.430, 23.400 — see also Termination payments Emission reduction projects — see Carbon farming initiative; Carbon pricing scheme; Carbon sink forests, establishment; International emissions units Employee associations, exempt income 9.065, 21.540 Employee share schemes (ESS) assessable income 4.400.490 issued by eligible start-up companies 4.480 payroll tax 28.362 reporting, payment and withholding obligations4.490 specific rules override general principles 4.400 taxation before 1 July 2009 4.420 taxation from 1 July 2009 to 30 June 2015 4.440, 4.460 taxation from 1 July 2015 4.460 taxation from 30 June 2015 4.460 Employees accounting methods 13.120 adjusted fringe benefits 2.050 benefits4.140 bonus payments 13.545

Index

contractor or employee payroll tax 28.340, 28.350, 28.362 definition23.810 excluded from superannuation guarantee calculations 23.815 foreign service income 24.028 income tax exemptions for government employees 24.210 inducement payments 4.060 payments for the surrender of rights 4.060 pensions paid to employees or dependants11.585 personal superannuation contributions, government co-contributions23.150 reimbursement of car expenses 4.190, 10.607 relative’s travel expenses 10.560 remuneration paid to private company 3.180 restrictive covenants 4.060 salary sacrifice arrangements 4.000, 4.070 share schemes — see Employee share schemes substantiation of work expenses 10.690 superannuation contributions — see Superannuation contributions termination compensation for loss of wages6.860 termination of employment — see Termination payments Employer associations, exempt income 9.065 Employers definition23.810 employment agents 28.350, 28.362 entertainment expenses 10.600 financing costs on loans to fund contributions23.160 fringe benefits — see Fringe benefits tax grouping of, for payroll tax 28.360 payroll tax registration requirements 28.363 pensions paid to employees or dependants11.585 superannuation contributions — see Superannuation contributions; Superannuation guarantee scheme taxation of employee share schemes 4.400 Employment remuneration trusts 4.046 Employment termination payments — see also Termination payments 1 July 2007 onwards 4.740 compensation for loss of wages 6.860 death benefits 4.780 exclusions4.740 ‘in consequence of ‘ termination of employment4.750 life benefits 4.750.755 payroll tax 28.362 small businesses 8.430 Tables34.320

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Index2117

taxation 4.755, 4.780, 34.320 transitional4.760 Endorsement rules, deductible gift recipient status11.695 Energy, geothermal — see Geothermal energy Entertainment expenses 10.600 — see also Meal entertainment fringe benefits election expenditure 11.600 fringe benefits tax 26.547 tax-exempt body entertainment benefit26.546 Entertainment industry expenses 10.600 Entities reasonable deductions 25.440 related — see Related entities Entrepreneurs’ tax offset, former 2.590 Environmental protection 21.970 — see also Emission reduction projects concessional withholding rate on clean building MITs 24.640 concessions for 21.970–21.998 environmental protection activities 21.980 environmentally related taxes or measures21.990 gifts to environmental organisations 21.980 Equity interests — see also Debt/equity rules CGT7.480 direct value shifting 8.805 distinction between interests 22.015 meaning22.015 non-equity shares 22.020 non-share equity interests 22.020 Equity, of tax system 1.185 ESICs — see Early stage innovation companies ESS — see Employee share schemes Estates — see Deceased estates; Income from trust estate; Trust estate income, taxation Estoppel, recovery of tax 32.125 ETPs — see Employment termination payments Evasion of tax — see Tax evasion Everett assignments, partnership income 16.460–16.490 Evidence admissibility of unstamped instruments28.590 Australian Business Register 32.380 Commissioner’s power to compel 29.170 Commissioner’s power to obtain 29.160 legal professional privilege 29.205–29.215 notice of assessment 30.120 notice of penalty tax assessment 33.085 notices to attend 29.175

prohibition on leading evidence of suspect transaction report 32.240 substantiation of expenses 10.705 suspect transactions report 32.240 taxpayer’s burden of proof 30.095 taxpayer’s burden of proof in appeals 31.521 Examination production of books, documents and papers29.175 requirement to attend and give evidence29.170 sec 353-10, obligation to attend 29.170 sec 353-10(1) notices, challenging 29.176 Excess superannuation contributions 23.000, 23.100, 23.125 Exchange gains and losses — see Foreign currency exchange gains and losses Exchangeable interests 8.630, 22.620 Excise duties Constitutional provisions 1.570 rulings30.015 small business concessions 15.600 Executors — see Legal personal representatives Exempt benefits — see Fringe benefits tax Exempt entities 9.030–9.073 — see also Exempt income CGT exemption 7.715 franked distribution adjustments 18.410 fringe benefits tax rebate 26.310 imputation system 18.410 Exempt income 9.020 beneficiaries17.063 categories9.025–9.200 constitutionally protected funds 9.035 deductibility rules 10.320 earnings tax exemption 23.080, 23.135 education and training payments 9.100 employer or employee associations 9.065 entertainment fringe benefit 26.546, 26.547 exemption with progression 24.213 family assistance 2.410 foreign service income 24.210–24.215 foreign superannuation funds 23.095, 23.570,   24.026, 24.078 franked distribution adjustments 18.410 franked distributions 18.435 ‘in Australia’ special conditions changes put on hold 9.073 interest on personal injury judgment debt9.080 life insurance companies 21.413 limits9.255 local government 9.035 maintenance payments 9.090 mining21.240 mutuality principle 9.250, 9.255

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2118 Exempt income (cont) non-assessable income 3.100 non-assessable non-exempt income distinguished9.000 non-cash business benefits 6.480 non-profit entities 9.043, 9.070 ordinary or statutory exempt income9.075–9.200 partnerships16.210 pensions and benefits 9.120 public and non-profit hospitals 9.060 public authorities 9.035 public educational institutions 9.055 registered charity 9.040 religious institutions 9.045 required connection to Australia 9.073 scientific institutions 9.050 segregated current pension income 23.080 special conditions for not-for-profit entities9.043 structured settlement payments 9.200 trade unions 9.065 transfer balance cap 23.080, 23.135 trust estate 17.110, 17.130 Exemptions — see also Tax concessions CGT7.700–7.720 effect of tax expenditures 1.115 land tax 28.130 VCLP and ESVCLP programs 21.775 Expenditure recoupment schemes 25.435 Expense payment fringe benefits 26.500 calculating taxable value 26.505 Expenses — see Deductions; Losses or outgoings Exploration Development Incentive (EDI) 21.235 Exploration expenditure — see Mining companies Exports, GST-free supplies 27.140 Extensions of time AAT review application 31.530 amendment of assessments 30.155 lodgment of objections 31.350, 31.355 lodgment of returns 30.058 PAYG instalment 32.480 payment of tax 32.000, 32.100 Taxation Rulings 31.350, 31.355  F FAF (foreign accumulation funds) regime 24.295 Failure to lodge penalties — see Late lodgment penalties Fairness, of tax system 1.185 False or misleading statements 33.065, 33.150, 33.170 — see also Deception

Index

Families — see also Children; Marriage breakdowns; Sole parent rebate; Spouses medical expenses rebate 2.650 Medicare levy 2.320 related entities, reduced payments 10.565 relative’s travel expenses 10.560 Family assistance 2.410 Family Court, transfer from Federal Court 31.523 Family maintenance payments — see Maintenance payments Family Tax Benefit 2.410 Family trusts concessional tracing rules 19.047 distribution tax 17.319 losses17.318 qualified person rule 18.420 Farm household support payments, CGT exemption7.715 Farm Management Deposits 21.160 income accrued at death 17.240 FATCA — see Foreign Account Tax Compliance Act FBT — see Fringe benefits tax Federal Circuit Court, transfer from Federal Court 31.523 Federal Court of Australia — see also Courts appeals to Full Federal Court or High Court 31.620 choosing between AAT and Federal Court31.515 initial appeal direct to Court 31.522 questions of law from AAT 31.600–31.605 role in ADJR Act 31.182 transfer to Family Court or Federal Circuit Court 31.523 Fees, appeals and reviews 31.500 — see also Levies and surcharges; Penalties FHSAs — see Former first home saver accounts FIFs — see Foreign investment funds Film copyright, CGT exemption 7.710 Films, Australian location offset, from 1 July 2007 21.910 PDV offset, from 1 July 2007 21.910 pre-1 July 2007 concessions 21.900 producer offset, from 1 July 2007 21.910 Finance companies, accruing interest and discount expense obligations 13.541 Financial arrangements 22.810 — see also TOFA rules hedging financial arrangements rules 7.715, 22.830, 22.870

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Index2119

Financial institutions — see also Banks FATCA requirements 24.635 interest withholding tax 24.610 RSA provider 23.098 thin capitalisation rules 24.860 Financial transaction reports 32.230–32.270 administrative provisions 32.270 AML/CTF Act 32.230 FTRA Act 32.230 International Currency Transfer Reports32.230 offences32.250 reporting obligations 32.230 Serious Financial Crime Taskforce 32.230 suspect transactions 32.240 Tax Avoidance Taskforce 32.230 TOFA financial reports method 22.880 verification procedures 32.260 Financial transactions 22.000–22.900 — see also Hedging financial arrangements rules asset financing, enhanced access proposed22.700 asset financing, tax-preferred entities 22.760 commercial debt forgiveness 11.460, 22.660 debt and equity rules — see Debt/equity rules debt securities — see Debt securities financial instruments 22.570 foreign currency exchange gains and losses — see Foreign currency exchange gains and losses foreign currency translation rules — see Foreign currency translation rules GST categories of financial supplies 27.146 GST input taxed supplies 27.146 leasing transactions — see Leasing transactions Taxation of Financial Arrangements — see TOFA rules Financial year — see Income year Fines — see Penalties Firearms surrender arrangements, CGT exemption7.715 First home saver accounts — see Former first home saver accounts FITOs — see Foreign income tax offsets Fixed term annuities 5.300 Fixed trusts 17.040 losses17.318 ‘Fly-in fly-out’ (FIFO) arrangements 26.525 Food GST-free supply 27.137 tuckshops, GST taxed supply 27.148 Forage storage assets 21.150

Foreign Account Tax Compliance Act, US 24.635 Foreign accumulation funds (FAF) regime 24.295 Foreign branch income 24.215 Foreign branch profits 24.215 Foreign companies — see also Non-residents CGT 24.020, 24.222 controlled — see Controlled foreign companies MEC groups 20.030 multinational anti-avoidance law 25.677 non-portfolio dividends 24.625 royalty withholding tax 24.630 shares in active companies 24.222 Foreign currency exchange gains and losses 22.300–22.565 application to currency and fungible events22.495 eligible contracts pre-forex regime 22.360 foreign hybrid loss exposure adjustment7.488 forex realisation events  22.400–22.565, 22.520, 22.540 forex regime 22.300, 22.380–22.565 general provisions, capital or revenue 22.340 limited balance 22.540 multiple events 22.490 nature22.320 no foreign currency conversion 22.320 pre-forex regime 22.300, 22.330–22.360 Private Rulings 22.300 retranslation — see Foreign currency translation rules rollover relief for facility agreements 22.520 short term gains and losses 7.487, 22.500 translation — see Foreign currency translation rules Foreign currency translation rules 22.240–22.280 application of rules 22.240 functional currency rules 22.280 general translation rule 22.260 GST27.075 retranslation 22.560, 22.565, 22.860 special two-stage translation rules 22.280 taxable income 2.030 Foreign income accruals taxation — see Foreign income accruals taxation attributable taxpayers under accruals rules24.020 bad debts from foreign branches 11.460 conduit foreign income 24.218, 24.219 consolidated group payments 20.130 double taxation relief 24.210–24.220 FBT24.028

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2120 Foreign income (cont) foreign exempt income losses 11.625 foreign income tax offset — see Foreign income tax offsets fringe benefits tax 24.028 individuals24.059 international tax, overview 24.000 jurisdiction to tax 24.020–24.030 multinational concessions and incentives24.900 partnerships24.022 quarantining foreign losses 24.470 residence of companies 24.060–24.066 residence of individuals 24.050–24.059 residents24.200 source of income 24.100 superannuation entities 24.026 taxation24.550–24.580 temporary residents 9.015, 24.214 triangular taxation and unfranked dividend payments 24.625 trusts24.024 withholding regime for distributions from Australian MITs 24.640 Foreign income accruals taxation 24.225 attributable taxpayers under accruals rules24.020 CFC rules 24.230–24.258 other assessing provisions 24.258 transferor trusts 24.260–24.300 Foreign income tax offsets (FITO) 24.320–24.380 accruals rules 24.350 attributable income 24.250 background24.200 calculation24.380 credit absorption or unitary taxes 24.360 eligible foreign income taxes 24.360 entitlement24.330 residence of taxpayer 24.340 tax benefit 25.620 treatment as paid 24.370 Foreign investment funds (FIF), former regime 24.200, 24.225, 24.285 consolidated groups 20.140 ‘deemed present entitlement’ rules 24.290 replaced by FAF rule 24.295 Foreign losses — see Foreign income Foreign non-portfolio investments 24.219 dividend exemption 24.220, 24.625 Foreign pension funds, MIT withholding tax 24.640 Foreign residents — see also Non-residents; Residence assessment24.560–24.580 asset passing to beneficiary 7.455

Index

Australian source income 24.010, 24.020, 24.050 becoming Australian resident 8.730 business profits 24.570 capital gain or loss 8.710 CGT 8.050, 8.700–8.730, 24.120, 24.550, 24.635 collection of tax 24.580 Commonwealth scholarships 9.100 entitlement to foreign income tax credits24.340 jurisdiction to tax 24.010, 24.020 liability to temporary budget repair levy 2.250 necessary connection with Australia 8.720 permanent establishment, technical correction24.120 rates of tax 24.550 recovery of tax 24.550 rules8.700 same-asset rollovers 8.320 services income 24.130, 24.575 supplies made to Australian consumers by 27.167 taxable Australian property 8.720, 24.120, 24.550 taxation24.620 venture capital investments CGT exemption8.090 withholding tax 24.120, 24.600–24.640 working holiday makers 24.020 Foreign service definitions24.210 exemption method of relief 24.210–24.213 income 24.028, 24.210–24.215 Foreign superannuation funds definition24.078 jurisdiction to tax 24.026 member benefits 23.570 residence test 24.078 taxation 23.095, 23.570 venture capital investments 23.095 Forestry roads, capital expenditure 21.150 Forex regime 22.300, 22.380–22.565 — see also Foreign currency exchange gains and losses; Foreign currency translation rules application to currency and fungible events22.495 forex realisation event 1  (disposal of foreign currency) 22.400, 22.540 forex realisation event 2  (ceasing to have right to receive foreign currency) 22.420, 22.540 forex realisation event 3  (ceasing to have obligation to receive foreign currency) 22.440

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Index2121

forex realisation event 4  (ceasing to have obligation to pay foreign currency) 22.460, 22.540 forex realisation event 5 (ceasing to have right to pay foreign currency) 22.480 forex realisation event 6 (discharge of obligations)22.520 multiple events 22.490 realisation events 22.400–22.565 rollover relief for facility agreements 22.520 short-term rules 22.500 Forfeited deposits 7.355 Former first home saver accounts (FHSAs)21.070 superannuation/FHSA class of income21.410 TFN production 32.335 Former foreign investment funds (FIF) regime 24.200, 24.225, 24.285 consolidated groups 20.140 ‘deemed present entitlement’ rules 24.290 replaced by FAF rule 24.295 Former superannuation contributions surcharge23.895 abolition23.895 deductibility10.555 Former temporary investment allowance 12.460 Franking of dividends — see Imputation system Fraud33.213 — see also Avoidance of tax amendment of assessments 30.150 directors of phoenix companies 32.447, 33.098 fraud and conspiracy to defraud 33.213 Freedom of Information Act 31.050–31.130 aims of legislation 31.050 exempt documents and information 31.080 impact31.130 method of publication and access 31.065 ‘public interest’ test for conditionally exempt documents 31.090 publication of documents and information31.060 restrictions on publication 31.070 Freezing orders — see Mareva injunctions Friendly societies demutualisations21.440 life insurance business 21.540 Fringe benefits adjusted fringe benefits total 2.050 assessable income 4.110 categories26.040 definition26.100–26.170 employee’s employment, re 26.160 entertainment expenses 10.600 establishing26.100–26.170

‘in-house’ 26.360, 26.505, 26.530 not-for-profit exemption 26.310 payroll tax on 28.330 personal services entity deductions 25.485 provided to employee or associate 26.150 recording reportable amounts 26.350 reimbursement of car expenses 4.190 specific fringe benefits 26.400–26.660 structure of legislation 26.040 taxable value 26.200–26.250 Fringe benefits tax (FBT) 26.000–26.660 airline transport benefits 26.530, 26.535 alternative method for calculating 26.303 arrangements26.140 board benefits 26.540, 26.541 by employer or associate 26.140 car fringe benefits 26.400 car parking benefits 26.548, 26.549 debt waiver fringe benefits 26.430, 26.440 employer’s liability 26.300–26.310 employment relationship 26.160 exclusions26.170 exempt benefits 26.170, 26.200 expense payment benefits 26.500, 26.505 foreign employment income 24.210 GST interaction with 26.300, 27.047 GST law and 26.340 housing benefits 26.510, 26.515 in year of tax 26.110 income tax law and 26.330 jurisdiction to tax 24.028 living-away-from-home allowance benefit 26.520, 26.525 loan fringe benefit 26.450, 26.455 meal entertainment benefits 26.542, 26.544 non-exempt amounts 26.300 ‘otherwise deductible’ rule 26.220 overview26.000 PAYG payment summaries 26.350 payroll tax 28.362 property benefits 26.550, 26.555 rates of tax 34.340 rebate for non-profit employers 26.310 reconciliation rules 26.170 records26.303 recreational club expenses 10.575 reductions26.250 remote area housing benefits 26.510 residual benefits 26.650, 26.660 salary sacrifice arrangements 26.360 small businesses 15.700 structure of legislation 26.040 superannuation contributions 23.110 superannuation law and 26.335 Tables34.340 tax-exempt body entertainment benefit 26.546, 26.547 taxable value of fringe benefit 26.200–26.250 to employee or associate 26.150

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2122 FTL penalties — see Late lodgment penalties Fulbright Scholarships 9.100 Fundraising events charitable, input taxed supply 27.148 deductible contributions 11.690 Fungible rights and obligations, forex regime 22.495  G Gambling as a business 6.060 CGT exemption 7.715 GST 27.075, 27.085, 27.167 General administrative practice (GAP) 33.070 General interest charge 33.040 late payment penalties 32.110 General partnerships 16.025 — see also Partnerships Geological sequestration 21.230, 21.980 Geothermal energy, abolition of concessions21.215 GIC — see General interest charge Gifts CGT exemption 7.715 contributions to fundraising events 11.690 contributions to political parties and candidates 10.558, 11.710 cultural and heritage gifts 11.685 deductions11.680–11.740 gifts of property 11.700 income exceptions 3.210 nature of gift 11.685 no gift of ‘unascertained goods’ 11.700 payroll tax 28.362 to deductible gift recipients 11.695 to environmental organisations 21.980 trading stock 14.270 Global operations — see Foreign companies; Multinational operations Going concerns, GST free supply 27.141 Gold mining — see Mining companies Goods and services accrued liability 13.540 ‘expenses incurred’ 13.520–13.530 prepayments13.530 quantities of goods purchased 6.110 reportable supplies in building and construction services 32.405 year of income 13.520 Goods and services tax (GST) 27.000–27.198 — see also GST Rulings accounting for 27.125 adjustments27.095 administration27.185–27.198

Index

annual turnover threshold 27.045, 27.065 anti-avoidance provisions 25.750, 27.196 assessments27.187 ATO investigation powers 27.194 attributing to tax periods 27.075 basic provisions 27.050 calculating and remitting 27.065–27.198 cancellation27.065 capital proceeds, impact on 7.607 car depreciation limit 12.230 CGT cost base 7.622 charging27.075 commencing or ceasing business operations27.095 Commissioner’s responsibility 27.186 Commonwealth/State tax relations 1.620 compliance costs 27.185 connection with Australia 27.060, 27.140, 27.169 consideration for the supply 27.058 constitutional challenges 27.000 creditable acquisitions 27.085 creditable purpose 27.045, 27.095 deductions 10.535, 11.000 depreciating assets 12.160, 12.170 digital currencies 27.058 effect on contracts 27.000 exempt supplies 27.062, 27.133–27.142 FBT interaction with 26.300, 26.340, 27.047 FBT law, reconciliation with 26.340 financial acquisitions threshold 27.145, 27.146 foreign currency conversions 27.075 groups, branches and joint ventures 27.155 GST base 27.055 GST-free supply 27.062, 27.133–27.142 importation of goods 27.165 increasing adjustments 10.535 indirect tax sharing agreements 27.155 indirect tax zone 27.060 input tax credits 10.535, 27.085,   27.095, 27.100, 27.146 input taxed supplies 27.062, 27.135, 27.145 interaction with assessable income 3.120 interaction with other taxes 27.047 interpreting as a practical business tax 27.046 liability, no limitation period 27.189 meal entertainment benefits 26.544 mixed and composite supplies 27.056 no GST payable 27.062, 27.133–27.142 objection and review 27.192 offences and penalties 27.198, 33.095, 33.570 overview 27.000, 27.045 payments27.187 payments to related entities 27.115 payroll tax 28.362 personal services income, attribution 25.470 real estate margin scheme adjustment 27.100

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Index2123

recipient created tax invoices 27.125 recovery27.189 refunds 27.115, 27.189 registration27.065 residential property payment obligations27.117 retailers27.125 retention or delay of refunds 27.189 returns27.187 reverse charge system 27.173 Rulings, nature of 27.190 small businesses 15.600 small enterprise entities 27.125 software development pools 12.220 special categories of supply 27.145–27.175 stamp duty 28.500 supplies made to Australian consumers by non-residents 27.167 supply by an entity which is registered or required to be registered27.061 supply by supplier 27.056 supply in the course or furtherance of an enterprise 27.059 supply must be liable to GST 27.062 tax audits 27.194 tax invoices 27.125 tax periods 27.115 taxable income general principle 2.030 taxable supply, elements of 27.055–27.061 taxable supply, exceptions 27.056 taxation reform 1.250 third party payments 27.095 trading stock adjustments 27.095 vouchers27.175 Goods, importation of — see Importation of goods ‘Google Tax’ — see Diverted Profits Tax Grants, employment and services 4.110 Grapevines, capital expenditure 21.150 Gratuities, for employees 11.585 Group certificates — see PAYG payment summaries Group companies after rollover 7.405 CGT events 7.490–7.498 choice to consolidate 20.010 company ceasing to be member 20.090 consolidation regime — see Consolidation regime error in allocation of cost setting amount 7.496 excess of allocable cost amount 7.498 forming groups 20.010–20.030 franking credit schemes 25.678 group restructures 20.030 GST27.155

head company 20.020 leased plant, disposal 22.710 leaving entities 20.090 loss of pre-CGT status of membership interests 7.491 MEC group 20.030 members of group 20.020 negative allocable cost amount 7.495 no reset cost base assets 7.494 non-portfolio dividends 24.220, 24.625 non-resident, liquidation distributions18.560 pre-formation intra-group rollover reduction7.492 same-asset rollovers 8.320 tax cost setting amounts exceed joining allocable cost amount 7.493 thin capitalisation rules 24.860 transfer of assets by individuals or trusts 8.110 transfer of assets by partners 8.120 transfer of assets to wholly-owned company8.100–8.120 Group employers, payroll tax 28.360 GST — see Goods and services tax GST Rulings — see also Taxation Rulings apportionment rule, GST 27.075 creditable acquisitions 27.085 definition of ‘thing’ 27.060 div 165 application 25.750 education course expenses 27.139 exempt items 27.142 financial supplies 27.146 going concern exemption 27.141 GST adjustments 27.095 GST and FBT Taxation Rulings26.340,   26.360, 26.405, 26.544,   26.547, 26.549, 26.555, 26.650 GST on exports 27.140 GST refunds 27.189 intangible property 27.167 issue of an invoice on a website 27.125 nature of 27.190 precious metals 27.148 residential premises 27.147 residual benefits 26.650 second-hand goods 27.142 time of supply 27.058 vouchers27.175  H Hardship relief 32.102 Health goods and services, GST-free 27.138 Health insurance — see Medicare levy; Private health insurance

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2124 Hearings — see Administrative Appeals Tribunal Hedging financial arrangements rules 22.830, 22.870 CGT exemption 7.715 HELP — see Higher Education Loan Programme Henry Tax Review (AFTS Report) 1.110, 1.180, 1.185,   1.190, 1.250, 21.990,   26.405, 28.000 High Court constitutional decisions 1.580 special leave to appeal 31.620 High income earners life benefit, taxation 4.755 taxable superannuation contributions 23.105 High profile individuals 6.080 High wealth individuals, tax audits 29.255 Higher Education Loan Programme (HELP) 2.400 deductible payments 10.440 exempt income 9.100 recovering debts from non-resident Australians2.405 reduced repayment threshold from 2018/192.405 relief2.405 repayment thresholds and rates 2.400, 2.405 TFN quotation 32.335 Hire purchase arrangements 22.720 holder of depreciating assets 12.140 Hobbies, vs business 6.010 — see also Gambling no GST payable 27.133 Holiday makers — see Working holiday makers Holiday pay, payroll tax 28.362 Home office expenses 10.430 business premises vs home office 10.330 Commissioner’s views on 10.330 ‘occupancy expenses’ vs ‘running expenses’10.330 Home purchase former FHSAs 21.070 proposed superannuation rules and 21.070, 23.120 Horticultural plants 21.150 Hospitals, exempt income 9.060 Housekeepers, rebate 2.630 Housing fringe benefits 26.510 calculating taxable value 26.515 living-away-from-home allowance 26.520, 26.525 remote area 26.510

Index

Hybrid tax mismatch rules 24.910  I IAS — see Instalment Activity Statements IGT — see Inspector-General of Taxation Illegal receipts 3.270, 10.160 business income 6.130 Immoral receipts 3.270 Importation of goods — see also Digital products and services; Online trading site dealings GST 27.095, 27.165 GST on online purchases (from 1 July 2018) 27.142, 27.169 low-value goods 27.142, 27.169 non-taxable importations 27.171 reverse charge system 27.173 Improvements holder of depreciating assets 12.140 pre-CGT assets 34.240 repairs11.070 Imputation system adjustments 18.405, 18.410 allocating18.340 anti-streaming rules 18.425 benchmark franking percentage 18.350 cessation18.385 co-operatives21.420 Commissioner’s power to permit a departure from the benchmark rule 18.350 consolidated groups 20.120, 25.678 converting excess franking offsets into tax losses 19.260 corporate and member tax rules 18.130 corporate tax losses 19.250–19.270 direct distributions 18.390 distribution washing 18.440 distributions18.389 dividend stripping rule 18.428 dividend withholding tax 24.620 duty to notify Commissioner of benchmark franking percentage 18.350 example of basic entries 18.387 excess franking credit refunds 18.130 exempt institutions and superannuation entities 18.410 exempting entities and former exempting entities 18.435 franked distributions 18.340, 18.389,   18.390, 18.400 franking accounts 18.130, 18.370 franking credit entries 18.380 franking credit schemes 25.675 franking debit entries 18.385 franking deficits tax 18.380

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Index2125

franking distributions 18.340, 18.385 franking entity 18.340 franking period 18.010, 18.350 gross-up and credit mechanism 18.130, 18.390–18.405 imputation benefit rule 18.422 indirect distributions 18.394 international distributions, TransTasman (triangular) imputation 18.492 life insurance companies 21.415 liquidation distributions 18.560 manipulation18.415 maximum franking credit 18.340 overview18.130 pooled development funds 21.605–21.610 qualified person rule 18.420 refunds, debits for 18.385 residence requirements 18.400 restrictions on tax losses to deduct in income year 19.270 share capital tainting and streaming 18.580 simplified18.330–18.492 trust streaming 17.207 unfranked distributions 18.340 unit trusts 21.740 venture capital credit 21.620 Incentives, trading stock 14.095 — see also Discounts ‘Incidence’ of taxation 1.110 Income assessable — see Assessable income definition3.080 economic perspective—income as a ‘gain’ 3.030, 3.050 judicial perspective—income as a ‘flow’3.040.050 non-assessable — see Non-assessable income ordinary — see Ordinary income passive, small business income test 15.200 personal services — see Personal services income small businesses, rules 15.250–15.265 — see also Small businesses sources of — see Sources of income statutory — see Statutory income taxable — see Taxable income Income arrears rebate 2.690 Income equalization deposits 21.160 averaging of income 21.160 Income from business 6.000.910 — see also Business agreements for sale of know-how, etc 6.560 art businesses 6.100, 11.558 assessable income 6.400–6.560 assignment of partnership income16.460–16.490 bounties and subsidies 6.495

business indicators 6.050 business methods and a business-like manner6.060 business proceeds 6.400–6.560 calculation of ‘profit’ 6.445 commencement of business — see Commencement of business commercial character of transactions 6.100 common law principle 6.410–6.455 compensation payments 6.800–6.910 extraordinary transactions 6.440–6.455 gambling as a business 6.060 hobby or business 6.010 identifying a business 6.010–6.150 identifying the taxpayer 6.010 income conversions 6.455 initial questions 6.010 isolated or one-off transactions 6.430 lease incentives 6.448 ‘mere realisation’ doctrine 6.410, 6.430, 6.440–6.455 nexus between business and amount received6.420 non-cash business benefits 6.480 non-resident24.570 normal proceeds  6.000, 6.010, 6.410, 6.420, 6.500–6.560 not all amounts are income 6.445 ordinary income 3.210 other matters 6.130 passive investments 5.000 profit-making undertakings or plans 6.490 property, characteristics and quantities 6.110 prospect of making a profit 6.090 realisation of investments 6.520 right to receive income 6.455 scale of activities 6.070 scope of the taxpayer’s business 6.420 share trading 6.080 statutory expansion 6.480–6.495 substance, rather than form 6.150 sustained, regular and frequent transactions6.080 system and organisation 6.060 takeovers6.430 termination of business 6.000, 6.280 turning talent to account for profit 6.085 weighing up factors 6.150 Income from personal exertion 4.000–4.820 allowances, benefits, grants etc 4.110 death benefits 4.780 employee share schemes 4.400.490 employment and services-related allowances4.110 employment termination 4.700 — see also Termination payments genuine redundancy and early retirement scheme 4.800 life benefits 4.750.755

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2126 Income from personal exertion (cont) nexus between amount and earning activity4.020 ordinary income 3.210, 4.000.070 overview4.000 payment for services or for disposal of capital asset 4.050 personal services — see Personal services income redundancy and early retirement scheme34.320 reimbursement of car expenses 4.190 salary sacrifice arrangements 4.070 statutory income 4.000, 4.100.190 surrender of valuable rights 4.060 unused annual and long service leave 4.820 Income from property 5.000–5.600 — see also Property annuities5.300–5.380 assignment of right to receive 5.000, 5.600, 25.445 car lease profit 5.475 definitions5.000 interest5.200–5.275 lease and rental income 5.400–5.475 location of property 24.120 overview5.000 passive investments 5.000 royalties5.500–5.540 travel expenses 10.562 Income from trust estate — see also Trust estate income, taxation exempt income 17.110, 17.130 income/trust law income 17.063 net income/tax law income 17.063, 17.110 source17.114 streaming17.205–17.207 tax law and trust law differences 17.060, 17.063,   17.110, 17.116 taxation rules 17.120 trust losses 17.130 trust losses, restrictions on carry forward of 17.140 Income-producing buildings — see also Buildings capital works 12.500–12.540 repairs — see Repairs Income splitting, partnerships 16.320 Income streams, termination of employment, tables 34.290 Income tax collection — see Collection of tax FBT reconciliation rules 26.170 GST interaction with 27.047 history of in Australia 1.050–1.070 introduction of 1.040 payment — see Payment of tax

Index

recovery — see Recovery of unpaid tax removal of states from field 1.600 rulings provisions 30.015 — see also Rulings Income year 2.000, 13.025 assessable income 3.150 ‘expenses incurred’ 13.520 Medicare levy 2.300 substituted income years 13.030 tax rates 2.110, 2.120, 2.200 Incorporated limited partnerships 16.025 Indemnity payments 6.870 Indexation capital gains and losses indexed cost base 7.690–7.698, 34.230 CGT discount or indexation 7.915, 7.925 Indigenous people mining payments to 21.250 native title CGT exemption 7.715 Indirect tax sharing, GST 27.155 Indirect tax zone, GST 27.060 Indirect taxes, rulings 30.015 Individuals — see also Income from personal exertion 183-day rule 24.056 amendment of assessments 30.150 attribution of personal services income25.480 car expenses 10.475 domicile test 24.054 dual residence 24.080 personal tax offsets and rebates 34.165 rates of tax 34.000, 34.005 residence24.050 residency rules review 24.050 superannuation funds residence test 24.058 tax audits 29.255 temporary residents 24.059 transfer of assets to wholly-owned company8.110 Inducement payments 4.060 Industrial property — see Intellectual property Industry assistance payments, taxi licence holders 6.495 Industry superannuation funds 23.030 — see also Superannuation funds Information — see also Access to information; Records ATO targeting activity 29.270 Commissioner’s powers to obtain29.130–29.190 confidentiality29.040–29.070 mining, quarrying or prospecting information 21.200, 21.210 taxpayer’s obligation to provide 29.165

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Index2127

taxpayer’s right to access under FOIA31.050–31.130 Infrastructure — see also Designated infrastructure project entity capital expenditure, project pool rules 21.220 environmental impact studies/ assessments21.980 tax loss incentives 21.997 Injunctions33.570 Innovation companies, early stage (ESIC), CGT treatment 8.095 Innovation investment tax incentives 21.998 Input tax credits — see Goods and services tax Inspector-General of Taxation (IGT) 29.010 — see also Australian Taxation Office ‘matter of administration’ 31.220 reports and recommendations 31.230 role31.220 Instalment Activity Statements (IAS) 32.505 Instalment sales arrangements cash-basis accounting 13.240 distinguishing annuities payments 5.380 Instalment system — see PAYG instalment system Institutions exempt income 9.060, 9.065 public authorities 9.035, 9.040,   9.043, 9.045, 9.050, 9.055 public educational institutions 9.055 registered charity 9.040 religious institutions 9.045 scientific institutions 9.050 Insurance — see also Compensation; Life insurance policies; Private health insurance bonuses2.760 policies, CGT exemption 8.080 premiums, deductibility 10.450 stamp duty 28.560 Insurance companies accruing claims liability 13.542 demutualisations — see Demutualisations realisation of investments 6.520 tax accounting for claims 13.542 Intangible assets depreciating assets 12.130, 21.215 proposed change to depreciation reduction limits 12.180 supplies made to Australian consumers by non-residents 27.167 transfer pricing 24.690 Intellectual property — see also Copyright collecting societies 5.540

royalties 5.500–5.540, 24.160, 24.630 source of income 24.120 Intentional disregard test 33.078 Interdependency — see Dependants Interest — see also Borrowings; Loans accruing obligations 13.541 assessable income 5.200–5.275 assignment of right to receive 5.600, 6.455 ‘but for’ test 10.460 capital expenditure 10.460 capital nature 10.460 cash or accruals basis 13.430 compensation payments 5.210 debt defeasance arrangements 5.275 debt securities 22.570 deductibility10.460 deferred interest loans 26.450, 26.455 definition 5.000, 5.200, 24.610, 27.146 derivation of income 13.430 discounts and premiums 5.200, 5.215 early payments of tax 32.110 expenses10.460 inflation and 5.200 late or underpayments of tax 30.160 loans to fund superannuation contributions23.160 overpayments of tax 32.110 personal injury judgment debt 9.080 refinancing principle 10.460 tax shortfall 33.050 source of income 24.140 split loans 10.460 ‘use test’ 10.460 withholding tax 24.610 International Currency Transfer Reports 32.230 international emissions units, CGT events 7.445 International tax 24.000–24.910 — see also Jurisdiction to tax CGT assets 24.020 double tax agreements — see Double taxation agreements dual residents 24.080–24.090 evasion and avoidance 25.000 foreign source income of residents 24.200 international funds transfer instructions32.230 jurisdiction to tax 24.010–24.030 multilateral instruments 24.020 multinational concessions and incentives24.900 — see also Multinational operations OECD Model Tax Convention 24.020 offshore banking regime 24.900 overview24.000 permanent establishment 24.020, 24.110,   24.219, 24.700

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2128 International tax (cont) permanent establishment, technical correction 24.120 residence24.040–24.090 source of income 24.100–24.160 tax audits 29.265 thin capitalisation 24.860 Trans-Tasman (triangular) imputation18.492 transfer pricing — see Transfer pricing transparency and information exchange24.020 treaty shopping and the application of Pt IVA 24.020 Internet trading — see E-commerce; Online trading site dealings Interposed entities alienation of personal services income 25.455 attribution of income of personal services entity 25.470 exchange of shares 8.250 income25.455 Invalid relatives, dependant rebate 2.570 Inventors, averaging of income 21.300–21.340 Investigations — see also 353-10 TAA ATO audit — see Audits, taxation balancing policy factors in applying 29.130 Commissioner’s powers to obtain information29.130–29.190 conduct by ATO 27.194, 29.240–29.270 GST27.194 individuals, small businesses, private groups and high wealth individuals29.255 Inspector-General of Taxation31.220–31.230 public groups and international 29.265 role29.245 search warrants 29.190 sources of information 29.270 targeting activity 29.270 Investment Manager Regime 24.219 Investments ‘angel investors’ 8.095 CGT8.600–8.660 convertible interests 8.620 dual resident investment company 24.090 eligible investment business 21.740 ESICs8.095 exchangeable interests 8.630 foreign investment funds — see Foreign investment funds former temporary investment allowance12.460 innovation investment tax incentives 21.998 interest on borrowings — see Interest

Index

‘mere realisation’ doctrine 6.410, 6.430 passive — see Passive investments PDF investment activities 21.602 realisation of assets by bankers 6.510 rights8.615 shares — see Shares sophisticated investors 8.095 total net investment losses 2.050 — see also Total net investment losses unit trusts — see Unit trusts unsophisticated investors 8.095 Investors, TFNs 32.330  J Joint ownership depreciating assets 12.140 land tax 28.160 Joint tenants CGT assets 7.515 deceased estates 8.540 Joint ventures/syndicates GST groups 27.155 whether partnerships 16.030 Journal entries 13.040 Judicial review — see Courts; Review Jurisdiction to tax 2.030, 24.010–24.030 ‘Australia’ defined 24.030 non-residents24.550–24.580 residence24.040–24.090 source of income 24.100–24.160  K Know-how agreements for sale 6.560 payment for the use of 5.520 source of income 24.160  L Labour hire arrangements 32.420 Land CGT separate assets 7.540 conservation covenants 7.178, 11.740, 21.980 depreciating assets 12.130 GST and 27.147 ‘land rich’ corporations 28.560 real estate margin scheme adjustment 27.100 stamp duty 28.560 Land tax 28.100–28.180 calculation28.120 deductions11.610 exempt land 28.130 joint owners of land 28.160 liability28.110 objections and appeals 28.180 rates of tax 28.150

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Index2129

special trusts 28.170 taxable value 28.140 Land transport offset 2.770 Landcare, deductible expenditure 21.150, 21.980 Late lodgment penalties Commissioner discretion to remit 33.090 self-assessment33.090 Late payment penalties general interest charge 33.040 PAYG instalment system 32.485 recovery of tax 32.110 Laundry expenses, substantiation 10.690 Law — see Legal system Leases acquisition of reversionary interest by lessee8.650 capital proceeds 7.615 CGT impact — see Capital gains tax (CGT), leases cost base rules 8.650 expiry7.150 granting lease 7.255 granting long-term lease 7.260 holder of depreciating asset 12.140 lease document expenses 11.567 lease incentives 6.448 lease surrender receipts 5.410 luxury cars 5.475 motor vehicles 5.470, 5.475 nature of payment 5.420 non-cash lease incentives 6.448 non-compliance with covenant to repair 5.410 premiums5.400–5.475 profit on sale 5.470 real estate margin scheme adjustment 27.100 ‘rent’ received by lessor 5.410 rental income 5.400–5.475 residential premises, input taxed 27.147 shipping vessels 24.630 stamp duty 28.560 variation by lessee 7.275 variation by lessor 7.265, 7.270 Leasing transactions 22.700–22.760 asset financing, enhanced access proposed22.700 asset financing, tax-preferred entities 22.760 assignments22.710 hire purchase arrangements 12.140, 22.720 limited recourse finance arrangements22.730 special rules 22.705 Leave payments and provisions 28.362 — see also Annual leave; Long service leave accrued liability 13.544 deductibility10.540 parental leave payments 3.260

payroll tax 28.362 Legal expenses 10.470 Legal personal representatives deceased estate, CGT rules 8.520 deceased estate, trusts 17.230 definition8.500 Legal professional privilege 29.205–29.235 Commissioner’s access and information gathering powers 29.210–29.235 common law privilege 29.205–29.215 determination of applicability 29.230 express and implied (or ‘imputed’) waiver29.215 interaction with statutory regime 29.205 offences against TAA 33.124 opportunity to claim 29.225 rationale29.210 scope of common law privilege 29.215 Legal system 1.310–1.520 — see also Courts; Taxation Rulings ATO practice 1.320 case law 1.320 legislative powers 1.530 sources and principles 1.310 sources of Australian tax law 1.320 statute law 1.320 taxation regulations, role 1.520 two main roles of courts 1.320 Legality of business — see Illegal receipts Legislation — see Statute law Leisure facilities, deductibility of expenses10.580 Lending — see Loans Lessors and lessees — see Joint tenants; Leases Levies and surcharges — see also Medicare levy; Medicare levy surcharge; Temporary budget repair levy calculation of tax payable 2.000 example2.040 Liability — see Assumption of liability rule, CGT; Professional negligence Life annuities 5.300 Life assurance policies — see Life insurance policies Life insurance companies assessable income 21.411 consolidated groups 20.070 deductions21.412 definition21.410 friendly societies 21.540 imputation rules 21.415 non-assessable income 21.413 segregated exempt assets 8.080

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2130 Life insurance companies (cont) superannuation/FHSA class of income 21.410 tax regime 21.400–21.440 taxable income 21.410 Life insurance policies benefits paid on termination of employment 4.750.755, 4.755 bonuses2.760 CGT exemption 8.080 death benefits paid on termination of employment4.780 RSA providers, taxation 23.098 superannuation funds, taxation 23.092 Limited partnerships 16.025 — see also Partnerships jurisdiction to tax 24.022 residence test 24.072 tax rules 21.720 venture capital — see Venture capital limited partnerships Limited recourse finance arrangements 22.730 Liquidators capital gains and losses 7.985 distributions18.560 ‘income which has been properly applied to replace a loss of paidup share capital’ 18.550 worthless shares 7.315 Listed investment companies, discount CGT 7.935 Listed public companies, benchmark franking percentage 18.350 Livestock forced disposal or death 21.135 spreading or deferring income recognition21.135 trading stock 14.020, 14.280 Living-away-from-home allowance fringe benefits26.520 calculating taxable value 26.525 Loans — see also Borrowings; Interest; Moneylending calculating taxable value 26.455 consolidated groups 20.070 direct value shifting 8.805 discounts and premiums 5.200, 5.215 fringe benefits 26.450, 26.455 land transport offset 2.770 partners and partnerships 16.260 private company associates 18.510 securities lending arrangements 22.630 Local government, exempt income 9.035 Lodgment of returns 30.054 categories30.055

Index

Commissioner’s additional powers 30.060 extensions of time 30.058 further and special returns 30.060 general requirements 30.065 GST 27.115, 27.187 late lodgment penalty 33.090 ordinary returns 30.055, 30.058 Log book records 10.475, 10.695 Long service leave accrued leave payments 10.540 payroll tax 28.362 unused4.820 Losses or outgoings — see also Deductions allocation16.250 apportionment of deductions 10.200 bad debts — see Bad debts business entity test 10.270 capital or capital nature 10.260–10.280 changes in partnership composition 16.420 characterising10.210–10.240 connection with income earning activities10.180 consolidated groups 20.070 corporate losses, offset refund 18.385 debt securities 22.620 deferral exceptions, tests to be satisfied 11.558 deferral of deductions 11.555 ‘exempt income’ 10.320 foreign currency — see Foreign currency exchange gains and losses foreign income — see Foreign losses foreign income deductions 11.625 gaining or producing ‘your’ assessable income10.170 general deduction provision 10.000 grossly excessive expenditure 10.225 impaired debts 20.070 ‘incurred’13.500–13.545 leading Australian decisions 10.280 legal rights approach 10.220 legality of business activities 10.160 life insurance companies 21.410 loss duplication and other schemes19.050–19.060 losses of prior years — see Carry forward losses ‘necessarily incurred in carrying on business’10.160 negative limbs 10.250–10.330 ‘non-assessable non-exempt income’ 10.320 non-commercial business losses11.550–11.558 non-deductible10.330 non-membership equity interests 20.070 non-resident business 24.570 partnerships16.210 pooled development funds 21.605

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Index2131

positive limbs 10.040–10.240 post-cessation expenditure 10.160 pre-commencement expenditure 10.160 private or domestic expenditure 10.310 profit-making undertaking or plan 11.575 purposive approach 10.230 recoupment for 3.420 related party arrangements 10.235 restrictions on carry forward 17.140 tax loss incentives for designated infrastructure projects 21.997 tax losses of earlier years — see Carry forward losses tax minimisation 17.318 theft by employee or agent 11.580 ‘to the extent that’ 10.200 total net investment losses 2.050 transfer of — see Transfer of losses trusts 17.116, 17.130 types of allowable deductions 10.420–10.475 Low and middle income earners child care benefit 2.410, 2.680 government co-contribution for superannuation23.150 Medicare levy relief 2.320 minors 2.640, 21.050 superannuation tax offset 23.155 tax offset 2.200, 2.640, 21.050 Low-value goods, importation 27.142, 27.169 Loyalty programs, rewards under 6.480 Lump sum payments ordinary income 4.020 structured settlement payments 9.200 termination of employment, tables 34.290 Luxury car leases 5.475  M Main residence absence from 8.052 accidental destruction 8.052 acquisition from deceased estates 8.060 building, repairing or renovating 8.052 CGT exemption 8.050 change of 8.052 extension of exemption 8.052 income-producing use 8.057 land tax exempt 28.130 moving into dwelling 8.052 one residence per family 8.055 partial exemption 8.057 Mains electricity connection costs, primary producers21.150 Maintenance payments deductibility10.570 exempt income 9.090 Managed investment trusts (MITs) 7.230, 17.040

attribution regime 17.040 changes to tax system for 24.640 concessional withholding rate on clean building MITs 24.640 foreign pension funds and 24.640 withholding tax regime 24.640 Management contracts, compensation for termination6.850 Manufacturers accruing warranty claims 13.543 sale of goods 24.110 Mareva injunctions 32.160 breach32.170 Market value substitution rule, CGT 7.610, 7.645 Marriage breakdowns — see also Spouses CGT exemption 7.715 CGT same-asset rollovers 8.310 Mass-marketed investment schemes 25.855 Maternity leave, payroll tax 28.362 Maternity payment — see Baby bonus Mature age worker tax offset 2.670 abolition of 2.670 Meal allowance, substantiation of expenses 10.690 Meal entertainment fringe benefits 26.542 calculating taxable value 26.544 MEC groups — see Multiple entry consolidated groups Media — see Copyright; Films, Australian; Intellectual property Medical Defence Organisations (MDO) 8.297 Medical expenses, rebate 2.650 Medical services, GST-free 27.138 Medicare levy 2.300–2.350 amount and collection 2.320 applying offsets against 2.510 liability 2.300, 2.320 proposal for increase in from 1 July 2019 2.320 rate and thresholds 34.010 relief2.320 residents and non-residents 2.100, 2.110,   2.120, 2.140, 2.250 Medicare levy surcharge 2.350 applying offsets against 2.510 complying health insurance policies 2.350 income for purposes of 2.350 liability to 2.350 lump sum in arrears offset 2.350, 2.610 thresholds and rates 2.350, 34.010 Meetings, entertainment expenses 10.600

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2132 Members of Parliament — see Election expenses; Political parties/independent candidates Membership fees 11.590 Mere realisation, not business 6.410, 6.430 Metals, precious — see Precious metals Minerals resource rent tax, former 21.270 Minimisation of tax — see Avoidance of tax Mining companies — see also Quarrying industry capital expenditure, project pool rules 21.220 depreciating assets first used 21.215 environmental impact studies/ assessments21.980 exempt income 21.240 exploration development incentive 21.235 exploration or prospecting 21.210 former minerals resource rent tax 21.270 granting right to income 7.175 immediate deduction 21.210, 21.215 interest in mining right disposed of under interest realignment scheme 8.297 mining rights and information, changes21.215 payments to Aborigines 21.250 petroleum resource rent tax 21.260 prospecting or mining entitlement replacement-asset CGT rollovers 8.290 sale, transfer or assignment of rights 7.715 site rehabilitation 21.230, 21.980 tax concessions 21.200–21.270 Minors’ income 21.010–21.050 — see also Children calculation of tax on eligible taxation income21.050 eligible assessable income 21.030 infant beneficiaries 34.030 low and middle income tax offset 2.200, 2.640 persons affected 21.020 rates of tax 34.020 TFN exemption 32.345 trusts 17.225, 21.040 unearned and earned income 21.050 Misappropriated amounts rule, CGT 7.610 Miscellaneous expenses deductions11.567–11.635 election expenses 11.600 foreign exempt income losses 11.625 lease documents 11.567 loss caused by theft etc 11.580 loss from profit-making 11.575 mortgage discharge 11.570 payments of pensions etc 11.585 payments to associations 11.590 rates and land taxes 11.610 transport expenses 11.635

Index

work in progress payments 11.630 Mitigation of tax — see Tax planning Money laundering, AML/CTF Act 32.230 Moneylending — see also Banks; Loans bad debt write-off 11.450, 11.455 bad debts from foreign branches 11.460 interest income 13.430 Mortgages discharge expenses 11.570 stamp duty 28.560 Motor vehicles — see also terms starting with Car ... small business entities 15.315 stamp duty on registration 28.560 Multilateral instruments 24.020 Multinational anti-avoidance law (MAAL) 24.910, 25.677 Multinational operations 24.900–24.901 avoidance of tax 24.900 concessions and incentives 24.900 hybrid tax mismatch rules 24.910 increased penalties for SGEs 33.092 OBU concessions 24.900 OECD BEPS initiatives 24.910 offshore banking regime 24.900 penalties24.910 profit shifting and tax base erosion 24.910 transfer pricing — see Transfer pricing Multiple entry consolidated (MEC) groups 20.030 blackhole expenditure 20.030 tripartite review 20.030 Mutual insurance associations 21.430 demutualisation21.440 Mutuality principle 9.250–9.255 co-operative companies 21.420 deductible rates and land tax 11.610 limits9.255 non-assessable non-exempt income 9.005  N National Rental Affordability Scheme (NRAS) 21.850–21.860 tax incentives 21.860 Native title, CGT exemption 7.715 Negligence33.800 ‘Netflix tax’ — see Digital products and services New Zealand, Trans-Tasman (triangular) imputation18.492 Non-arm’s length transactions, cost of trading stock 14.100 Non-assessable income 3.100, 9.000–9.255

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Index2133

— see also Assessable income; Exempt income; Non-assessable non-exempt income Non-assessable nonexempt income 3.000, 3.100, 9.005–9.015 categories9.010 deductibility rules 10.320 exempt income distinguished 9.000 family trust distribution tax 17.319 foreign branch profits 24.215 foreign dividends 18.205 foreign income 24.020, 24.200 foreign income of temporary residents 9.015, 24.214 fringe benefits 26.330 life insurance companies 21.413 managed investment trusts distributions24.640 mining payments to Aborigines 21.250 non-portfolio dividends 24.220 NRAS incentive 21.860 partnerships16.210–16.250 termination payments 34.320 Non-cash business benefits 6.480, 10.610 lease incentives 6.448 Non-cash receipts barter transactions 3.230 bitcoin3.230 cash accounting 13.200 ordinary income 3.230 PAYG withholding system 32.415 Non-commercial business activities, tax losses 11.550–11.558 Non-complying entities — see also Approved deposit funds ADFs23.050 member benefits 23.570 PAYG withholding 10.615 rates of tax 23.095 superannuation funds 20.050, 23.045 Non-concessional superannuation contributions 23.100, 23.120, 23.470 excess contributions 23.125 personal contribution rules 23.120 Non-corporate intermediaries 24.070–24.076 — see also Partnerships; Trusts Non-depreciating assets, direct value shifting8.805 Non-exempt income — see Non-assessable nonexempt income Non-fixed trusts, concessional tracing rules 19.047 Non-profit associations 21.500–21.540 — see also Charitable institutions

apportioning income to calculate exemption9.070 exempt income 9.043, 9.060, 9.070 fringe benefits tax rebate 26.310 tax payable 21.530 Non-receipt rule, CGT 7.610 Non-resident shareholders assessable income 18.205 pooled development funds 21.610 Non-resident superannuation funds definition24.078 jurisdiction to tax 24.026 residence test 24.078 Non-resident trusts jurisdiction to tax 24.024 previously non-taxable income 17.210 transferor trust rules 24.260–24.300 Non-residents — see also Foreign residents; Residence allocation of tax liability 16.250 Australian source income 24.050 beneficiaries 24.024, 34.030 CGT8.700–8.730 dividend income 24.150 family trust distribution tax 17.319 FBT24.028 franked dividends, Trans-Tasman (triangular) imputation 18.492 jurisdiction to tax 24.022 liquidation distributions 18.560 non-portfolio dividends 24.220 permanent establishment — see Permanent establishment prescribed non-resident individuals 2.120 prescribed persons 21.050 rates of tax 2.100, 2.110, 2.120, 34.005 recovering HELP debts from 2.405 recovery of money from third party 32.130 services income 24.130 source of income 24.100 supplies made to Australian consumers by 27.167 tax-free threshold and 2.200 taxation 24.550–24.580, 24.620 TFN exemption 32.345 trust income 17.063 trustees, rates of tax 34.030 withholding tax — see Withholding tax Non-share dividends 18.205–18.210 frankable distribution 18.340 Non-superannuation annuities, tax treatment5.320 Norfolk Island 2.100, 24.030 TFN exemption 32.345 Normal proceeds of a business 6.400 Not-for-profit entities — see Non-profit associations

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2134 Notices assessment of penalties 33.085 books, documents and papers to be produced29.175 evidence 29.175, 30.120, 33.085 offshore information notices 29.180 PAYG withholding, directors’ personal liability 32.445 permissible breadth 29.175 recovery of money from third party 32.130 request for assessment 30.110 self-assessment30.165 service 30.115, 32.020 tax receipts with 30.115 validity of sec 353-10(1) notice 29.176  O Objections against amended assessments 31.410 alternative paths 31.510 amendment of assessments as a result of 30.150 application to amend grounds 31.375 challenging objection decision 31.500–31.521, 31.505,  31.524–31.700 choosing between AAT and Federal Court31.515 Commissioner’s change of original grounds31.400 Commissioner’s consideration 31.420 Commissioner’s determination, reviewing31.500 drafting valid objection 31.360 extensions of time 31.350, 31.355 GST assessment 27.192 judicial appeal route 31.522–31.523 land tax 28.180 lodgment 31.350, 31.355 multiple31.350 no ‘double dipping’ 30.033, 31.410 PAYG withholding system 32.455 payroll tax 28.370 pending, recovery of tax 32.120 Private Rulings 30.033 retention of GST refunds 27.189 review by AAT 31.524–31.605 rights to reasons for decision 31.430 Rulings, no right of 30.018 statement of grounds 31.360 time limits 30.033, 31.350, 31.355 withdrawal of an objection application 31.415 Offences — see also Penalties; Prosecutions ABN misuse 32.395 aiding and abetting 33.215 attempting to commit an offence 33.217 avoidance of tax — see Avoidance of tax company tax offences 33.190

Index

conspiracy33.219 Crimes Act and Criminal Code offences25.765 Crimes (Taxation Offences) Act25.760 criminal — see Criminal offences financial transaction reports 32.250 fraud and conspiracy to defraud 33.213 GST27.198 obstructing Commonwealth public official33.210 PAYG withholding system 32.450 payroll tax 28.375 penalties and 33.000–33.219 TFNs32.360 unauthorised access to tax records 29.060 unauthorised disclosure by taxation officers29.040 under TAA 33.120–33.219 verification procedures 32.260 Offsets — see Tax offsets Offshore banking unit (OBU) concessions24.900 Offshore information notices 29.180 Offshore vendors, GST on online purchases (from 1  July 2018) 27.142, 27.169 — see also Importation of goods Ombudsman, role taken over by IGT 31.220 Online trading site dealings 6.120 — see also Digital products and services; E-commerce electronic distribution platforms 27.167 GST on purchases (from 1 July 2018) 27.142, 27.169 Options (shares) capital proceeds 7.615 CGT rollover relief exchange of rights or option 8.245 CGT rules 8.660 end of option 7.155 granting option 7.170 Oral Rulings 30.015 — see also Taxation Rulings binding30.040 suggestions to abolish 30.040 Ordinary assessments 30.087 Ordinary income 3.150.290, 4.000.070 amount subject to a condition 3.160 assignment of right to receive income 5.600, 6.455 barter transactions 3.230 bitcoin3.230 business income 6.000 capital gains not 3.280 characterised at the moment of derivation3.190

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Index2135

characterised in the hands of the person who derived it 3.170 characterising an amount 4.020 ‘comes in’ to recipient 3.160 compensation payments 3.250 competing concepts 3.020.050 definition3.000 doctrine of constructive receipt 3.180 exempt income 9.075 extraordinary transactions 6.440–6.455 gain derived by taxpayer 3.290 illegal, immoral or ultra vires receipts 3.270, 10.160 lease and rental income 5.410–5.420 lease premium 5.420 lump sum payment 4.020 money or convertible into money 3.230 nexus with earning activity 3.210 non-superannuation annuities 5.320 parental leave payments 3.260 periodicity, recurrence and regularity 3.260 personal exertion — see Income from personal exertion recoupment of deductible expenses 3.400.420 reduction in the amount of a liability 3.160 royalties5.500–5.540 tax accounting 13.020 taxed as a reward for services even though paid to another entity 4.020 taxpayer is beneficially entitled to the amount3.160 treatment of non-cash benefits 3.230 ‘Ordinary’ tax returns 30.058 Outgoings — see Losses or outgoings Overdue debts — see Bad debts Overpayments of tax, interest 32.110 Overseas... — see Foreign... Overseas Defence Force rebate 2.710 Ownership — see Continuity of ownership; Joint ownership  P Parental leave payments 3.260 Parking — see Car parking Parliamentary election expenses — see Election expenses Partnerships16.000–16.800 — see also Venture capital limited partnerships allocation of net income, partnership loss and non-assessable income 16.250 allocation of tax liability 16.250 assets16.440 assignment of income 16.460–16.490 assignment of interests 16.480 assignment of retiring partner 16.460

capital gains and losses 7.980 changes in composition 16.400–16.440, 16.420 commencement16.080 companies mutually exclusive 16.030 consolidated groups 20.070 contribution of CGT assets 16.090 contribution of depreciating assets 16.090 contribution of trading stock 16.090 contributions by partners 16.090 creation16.080–16.090 death of partner 16.420 deductible payments to related entity 10.565 definition for tax purposes 16.030 depreciating assets 12.140 disposal of items 16.090 foreign income 24.022 general law 16.025 general partnerships 16.025 general principles 16.080, 16.400 GST groups 27.155 holder of depreciating assets 12.140 incorporated limited partnerships 16.025 indirect franked distributions 18.394 internal transactions 16.260 joint ventures 16.030 kinds of partnerships 16.025 large professional partnerships 16.420 leased plant, disposal 22.710 limited partnerships — see Corporate limited partnerships; Limited partnerships loans to partners 16.260 lodgment of returns 16.800 net income or loss 16.210, 16.420 non-assessable income 16.210–16.250 non-resident partners 24.022 overview16.000 payments to related entities 25.440 pre-admission Everett assignments 16.490 professional income — see Professional practices income related entity, definition 10.565 residence test 24.070–24.076 salaries paid to partners 16.260 spouses16.080 tax audits 29.265 tax consequences 16.090 taxation of income 16.200–16.320 testamentary transfer 14.220 trading stock 16.090 transfer of assets to wholly-owned company8.120 transfer pricing rules 24.700 uncontrolled partnership income penalty tax 16.320 work in progress 16.435 Passive investments 5.000 Passive trusts — see Bare trusts Patents — see Intellectual property

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2136 Paternity leave, payroll tax 28.362 PAYG (Pay As You Go) system 2.000 — see also BAS agents background32.400 BAS and running balance accounts 32.505 instalment system — see PAYG instalment system non-compliant entities 10.615 overview32.405 refunds of surpluses and credits 32.505 Single Touch Payroll 32.405 tax-free threshold and 2.200 withholding system — see PAYG withholding system PAYG instalment system 32.460–32.510 administrative changes to instalment thresholds32.470 amendments under TOFA rules 22.895 annual instalment tax payers 32.500 base assessment instalment income 32.495 entities liable 32.470 extension of time for payment 32.480 franking credit entries 18.380 franking debit entries 18.385 instalment based on GDP-adjusted notional tax 32.490 late payment penalties 32.485 monthly instalment tax payers 32.495 overview 32.405, 32.410 quarterly instalment tax payers 32.490 recovery of unpaid instalments 32.485 refunds of surpluses and credits 32.510 relationship with withholding system 32.465 taxpayers’ obligations 32.475 threshold32.495 PAYG payment summaries reportable fringe benefits amounts 26.350 reporting allowances on 4.025 PAYG withholding system 32.410–32.455 ABN quotation 32.420 alienated personal service payments 32.425 directors’ personal liability 32.445 Farm Management Deposits 21.160 foreign employment income 24.210 HELP repayments 2.405 indemnity for withholder 32.430 labour hire arrangements 32.420 mining payments to Aborigines 21.250 non-cash benefits 32.415 non-residents24.600 objections32.455 offences and penalties 32.450 overview32.405 ‘payment’32.415 payment categories 32.420 prescribed payments 32.420 prompt recovery of PAYG amounts 32.440 refund of excess amounts 32.440

Index

relationship with instalment system 32.465 Single Touch Payroll 32.405 TFN quotation 32.330 time of withholding 32.430 voluntary agreements to withhold 32.420 withholding rates 32.435 Payment of tax 2.000, 32.040 ABN system 32.375–32.397 collection under Pt 4-15 32.127–32.170 Commissioner not estopped 32.125 GST27.187 hardship relief 32.102 interest and penalties 32.110 liability for interest on late or underpayments30.160 objections or appeals pending 32.120 owing, deferrals and extensions of time 32.000, 32.100 PAYG instalment regime 32.460–32.510 PAYG withholding regime 32.400–32.455 security for payment 32.101 state judgment debt recovery provisions32.105 suspect financial transactions 32.230–32.270 TFN regime 32.300–32.370 waivers of tax debt 32.103 Payment summaries — see PAYG payment summaries Payments — see also Termination payments after the relationship ends 4.040 by party to employment/services relationship4.040 by third party 4.046, 28.362 education and training 9.100 maintenance 9.090, 10.570 mere gift rather than payment for services4.040 regular periodic 4.040 voluntary payments 4.040 Payroll tax 28.300–28.375 assessable and exempt items 28.362 employee, meaning 28.340 employment agents 28.350, 28.362 exempt wages 28.335 fringe benefits 28.330 grouping of employers 28.360 jurisdiction issues 28.361 liability28.310 nexus provisions from 1 July 2009 28.361 non-cash benefits 28.330 objections and appeals 28.370 offences, penalties and anti-avoidance28.375 payments to contractors 28.350 rates and annual thresholds 28.305 registration requirements for employers28.363

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Index2137

returns and assessment 28.365 third party payments 28.362 wages, meaning 28.320 Penalties — see also Civil penalties acts done with intent to deceive 33.180 administrative penalties 33.020 appropriate penalty for breach of s 50-2033.570 categories under administrative penalty regime 33.061 companies’ breach of franking distributions benchmark rule 18.350 court prosecutions for TAA offences 33.110 criminal offences 25.760, 25.765, 33.020 failure to comply with notice to recover tax 32.130 failure to keep records 29.120 false or misleading statements 33.065, 33.150, 33.170 general features of penalty provisions 33.010 GST27.198 increased penalties for SGEs 33.092 injunctions33.570 keeping incorrect accounts 33.160 key points on penalty provisions 33.030 liability for company offences 33.190 misuse of confidential information29.040–29.070 multinational operations 24.910 multinational profit shifting and tax base erosion 24.910 no offence where no capability of compliance33.124 notice of assessment 33.085 overview33.000 PAYG withholding system 32.445, 32.447, 32.450 payroll tax 28.375 protection against 30.010 recklessly making false or incorrect statements33.170 refusing or failing to do certain acts 33.120 reparation orders 33.185 review33.086 ‘safe harbour’ protection 33.065, 33.090 sanctions for non-compliance with TASA Code of Professional Conduct33.720 schemes to reduce income tax 25.710 self-assessment system 33.060–33.098 tax and BAS agents 33.570 tax exploitation scheme promoters 33.097 transfer pricing 24.700 uncontrolled partnership income 16.320 Uniform Administrative Penalty regime 33.020, 33.030,   33.038, 33.061 use of publicity as a sanction 33.015

Penalty tax AAT remission of 33.083 aggravating circumstances’ increasing base penalty 33.080 amended assessments; shortfall interest charge 33.050 ‘automatic remission’ reducing base penalty33.082 calculation33.084 Commissioner’s discretion to remit 33.083 deductibility of fines and penalties 10.550 determination of base penalty 33.078 determination of shortfall amount 33.069 Diverted Profits Tax 24.910, 25.679 exempt shortfalls, reliance on advice 33.070 general features of penalty provisions33.010 general interest charge 32.110, 33.040 imposition33.030 imposition of the SG charge 23.840 increased penalties for SGEs 33.092 late lodgment of documents 33.090 late payment of PAYG instalments 32.485 late payment penalty — see Late payment penalties prescribed penalties 33.135 recovery of tax 32.110 remission of 33.095 shortfall interest charge 33.050 tax shortfall system 33.062–33.098 Pensioners — see also Seniors Medicare levy relief 2.320 seniors and pensioners tax offset 2.730 Pensions exempt income 9.120 payments to employees or dependants11.585 social security — see Social security benefits and allowances superannuation income stream benefits (pensions) 23.080, 23.135 Performers, averaging of income21.300–21.340 Permanent departure from Australia — see Departure from Australia Permanent establishment 24.020, 24.110, 24.219, 24.700 technical correction 24.120 Personal exertion — see Income from personal exertion Personal injury compensation — see Compensation Personal services business existence of 25.475 rules25.460 superannuation contributions 25.485

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2138 Personal services business (cont) Taxation Rulings 25.475 Personal services income — see also Services income alienation of 4.000, 25.450–25.490, 32.425 application in relation to other income 24.213 attribution of income 25.470, 25.480 calculation of income 25.480 capital loss 7.715 deductions of entity 25.485 deductions of individual 25.490 definition25.452 determinations25.475 foreign residents assessable income 24.575 foreign service income 24.210–24.213 PAYG withholding system 32.425 personal exertion 4.000 salary or wages 25.480, 25.485 source of income 24.130 Taxation Rulings 25.480, 25.490 through interposed entity 25.455, 25.470 Personal superannuation funds 23.030 — see also Self-managed superannuation funds Personal use assets capital proceeds 7.615 CGT asset 7.530 exempt assets 7.705 GST implications 7.622 Petroleum mining environmental impact studies/ assessments21.980 immediate deduction 21.210 site rehabilitation 21.230, 21.980 tax concessions 21.200 Petroleum resource rent tax 21.260 ‘assessable receipts’ 21.260 ‘deductible expenditure’ 21.260 review and recommendations 21.260 tax rate 21.260 taxing point 21.260 Phoenix companies, anti-fraud measures against directors 32.447, 33.098 Pilot projects 6.250 Planning — see Tax planning Plant, depreciating assets 12.130 Political parties/independent candidates contributions and gifts to 10.558, 11.710 election expenses 11.600 Pool of construction expenditure, definition12.510 Pooled development funds 21.600–21.620 consolidation not allowed 21.600–21.620 exempt CGT assets 7.705

Index

financing costs on loans to fund contributions21.610 imputation21.605–21.610 PDF investment activities 21.602 PDF program 21.600 shareholders21.610 SME income component 21.605 tax treatment 21.605 unregulated investment income component21.605 venture capital franking sub-accounts 21.620 Pooled superannuation trusts 23.060 CGT23.087 full self-assessments, deemed 30.090 jurisdiction to tax 24.026 rates of tax 2.150, 23.095 taxation23.075–23.098 Precious metals GST input tax supply 27.148 reverse charge system 27.173 Preliminary issues regime 33.030, 33.038 Premiums insurance, deductibility 10.450 leases5.420 loan premium 5.200, 5.215 Prepayments ‘expenses incurred’ 13.530 tax avoidance schemes 25.425 Prescribed person, definition 21.020 — see also Minors’ income Primary producers averaging of income 21.130 basic taxable income 21.130 double wool clips 21.135 farm management deposits scheme 21.160 forced disposal 14.280 livestock as trading stock 14.020 natural disasters 21.160 non-commercial business losses 11.558 pilot projects 6.250 primary production business 21.110 special deductions 21.150 spreading or deferring recognition of income21.135 system and organisation 6.060 tax incentives 21.100–21.160 trading stock valuation 14.280 Principal residence — see Main residence Prior year losses — see Carry forward losses Privacy of tax records 29.070 — see also Confidentiality Private companies anti-avoidance provisions 18.500, 18.520, 29.265 classification18.010 employee’s remuneration paid to 3.180

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Index2139

Private health insurance Medicare levy surcharge 2.350 tax offset 2.660 Private or domestic expenditure 10.310 Private Rulings 15.105, 30.015, 30.025 — see also Taxation Rulings AAT procedure 31.540 binding Oral Rulings 30.040 categories33.061 making and declining to make 30.025, 30.040 objections 30.033, 31.410 only rulee can rely on 30.025 possible avenues for reform 30.050 requiring Commissioner to issue 30.028 withdrawal of an objection application31.415 withdrawing applications 30.025, 30.040 Privilege — see Legal professional privilege Prizes3.210 CGT exemption 7.715 payroll tax 28.362 Product Rulings 30.018 — see also Taxation Rulings Production associates, averaging of income 21.300–21.340 Professional arts businesses — see Art businesses Professional athletes — see Sportspersons Professional expenses, deductability 10.470 Professional indemnity insurance, BAS and tax agents requirement 33.375 Professional negligence, tax agents and advisers 33.750–33.800 Professional practices income tax accounting method 13.130, 13.140 work in progress 13.380 Profit-making sales, undertakings or plans deductible loss 11.575 income from business 6.490 pre-1985 acquisition 7.015 Profit participation plans, entitlements under 3.180 Profits Diverted Profits Tax 24.910, 25.679 non-resident businesses 24.570 profit-emerging accounting 13.240 prospect of making, from business activities6.090 Progressive taxes 1.110 Project Wickenby 25.105 Promotion and advertising expenses 10.600 Property — see also Buildings; Income from property CGT assets 7.510

gifts to deductible gift recipients 11.700 income producing purposes 11.560 instalment sales and profit-emerging accounting13.240 knowledge not recognised as 6.560 no gift of ‘unascertained goods’ 11.700 real estate margin scheme adjustment 27.100 residential premises, input taxed 27.147 right to receive property income 5.600 stamp duty on ‘dutiable property’ or ‘dutiable transactions’ 28.560 taxable supply of residential property 27.125 travel expenses relating to residential rental property 10.562 Property fringe benefits 26.550 calculating taxable value 26.555 in-house/external26.555 Proportional taxes 1.110 Proportioning rule, superannuation benefits 23.450 Prosecutions 33.030, 33.100–33.219 — see also Courts; Offences Commonwealth DPP 33.100 Part III div 2 TAA, offences dealt with by court action 33.100 procedural provisions and general criminal offences 33.200 TAA offences, courts’ approach to imposition of penalties for 33.110 Prospecting entitlement — see Mining companies PSTs — see Pooled superannuation trusts Public authorities, exempt income 9.035 Public companies, classification 18.010 — see also Listed public companies Public educational institutions, exempt income 9.055 Public groups, tax audits 29.265 Public hospitals, exempt income 9.060 Public interest immunity 29.235 Public interest test 31.090 Public offer of shares — see Listed public companies Public officers bribes made to, deductibility 10.585 companies18.010 Public Rulings 30.015 — see also Rulings; Taxation Rulings categories30.015 provisions relating to 30.018 withdrawal 30.015, 30.018 Public sector superannuation schemes 23.030 — see also Superannuation funds Public trading trusts 21.740

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2140 Public trading trusts (cont) — see also Corporate unit trusts head company 20.020 jurisdiction to tax 24.024 rates of tax 2.140, 34.030 residence test 24.076 tax treatment 21.740 Public unit trusts 21.740 Publicity, use of as a sanction 33.015 Purchased annuities — see Annuities ‘Push-up’ and ‘push-down’ principles 20.070, 20.090 Put options 8.660  Q Quarantining of foreign losses 24.470 Quarrying industry — see also Mining companies capital expenditure, project pool rules 21.220 depreciating assets 21.215 environmental impact studies/ assessments21.980 exploration development incentive 21.235 immediate deduction 21.210, 21.215 interest in quarrying right disposed of under interest realignment scheme 8.297 site rehabilitation 21.230, 21.980 tax concessions 21.200 Questions of fact and law, appeal to Federal Court 31.600–31.605  R R&D — see Research and development Ralph Review of Business Taxation 1.185, 1.190, 1.195,   7.025, 8.296, 19.250,   20.000, 22.000 Rates (land), deductions 11.610 — see also Land tax Rates of tax — see also Tax payable, calculation base rate entities 18.020, 34. 025 CGT7.950 companies 2.130, 18.000, 18.020, 34.025 cost base index numbers 34.230 deceased estates income accrued at death17.240 Diverted Profits Tax 25.679 dividend withholding tax 24.620 example2.040 excess superannuation contributions 23.125 FBT34.340 HELP — see Higher Education Loan Programme improvements to pre-CGT assets 34.240

Index

land tax 28.120, 28.150 marginal and average rates 1.110 Medicare levy 2.300.350, 34.010 Medicare levy surcharge 2.350, 34.010 minors34.020 monthly instalment tax payers 32.495 non-profit companies 21.530 non-residents 2.100, 2.110, 2.120, 34.005 PAYG withholding 32.435 pooled development funds 21.605 primary producers’ averaging of income21.130 quarterly instalment tax payers 32.490 registered organisations 21.540 residents 2.100, 2.110, 2.120, 34.000 small companies 15.200 stamp duty 28.580 superannuation entities 2.150, 23.075–23.098, 23.095 tables of 34.000–34.030 tax-free threshold 2.200 temporary budget repair levy 2.250 trustees 2.140, 34.030 withholding tax royalties 24.630 Raw materials, trading stock vs. 14.050 Real estate — see Income from property; Rent Real estate investment trusts (REITs) 24.024 Real estate margin scheme adjustment 27.100 Real property — see Property Reasonable care test 33.078 Rebates — see also Tax offsets assessable recoupments 3.420 civilians serving overseas with UN 2.720 FBT, non-profit employers 26.310 housekeeper2.630 income arrears 2.690 individuals34.165 life assurance bonuses 2.760 medical expenses 2.650 overseas Defence Force 2.710 overview2.500 social security beneficiary rebate 2.740 sole parent (notional) 2.620 trading stock 14.095 zone allowance 2.700 Recklessness test 33.078 Records — see also Accounts; Electronic record-keeping; Information ATO access to 29.110–29.120 CGT7.960 challenging a sec 353-10(1) notice 29.176 civil penalties 33.095 Commissioner’s powers to access 29.140, 29.145 confidentiality of tax records 29.060

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Index2141

failure to keep 29.120 form29.114 form, written or electronic 29.114 GST audits 27.194 keeping incorrect accounts 33.160 offences — see Offences recklessly incorrectly keeping records 33.170 requirement to produce 29.175 retention period 29.118 search warrants 29.190 service and proper purpose of a sec 353-10 TAA 29.162 substantiation of expenses 10.705 tax planning 25.900 Recoupment of deductible expenses ‘by way of insurance or indemnity’ 3.420 character of the reimbursement 3.400 ordinary income 3.400.420 statutory recoupment rules 3.420 Recovery of bad debts 11.460 Recovery of unpaid tax 32.100–32.170 — see also Collection of tax ABN system 32.375–32.397 ancillary provisions 32.230–32.397 ATO procedures 32.010 breaches32.170 collection under Pt 4-15 32.127–32.170 Commissioner not estopped 32.125 departure prohibition orders 32.150 financial transaction reports 32.230–32.270 ‘garnishee’ notice 32.130 general interest charge 33.040 hardship relief 32.102 interest on refunds 32.110 Mareva injunctions 32.160 non-residents 24.550, 24.580 notice to third parties 32.130 owing, deferrals and extensions of time 32.100 PAYG system 32.400–32.510 payment of tax 32.040 penalty on unpaid tax 32.110 pending objections or appeals 32.120 prompt recovery of PAYG amounts 32.440 recovery of unpaid PAYG instalments32.485 review of ATO use of garnishee notices32.101 security for payment 32.101 service of assessment 32.020 shortfall interest charge 33.050 state judgment debt recovery Act, Commonwealth recovery provisions32.105 tax compliance 32.050 TFN regime 32.300–32.370 time for payment 32.000 waiver of tax debt 32.103

Recreational club expenses 10.575 Redundancy 4.800, 34.320 Refinancing interest, deductibility 10.460 partnerships16.210 Reform proposals 1.235–1.250, 26.000 accruals taxation 24.300 asset backed financing arrangements 22.705 business continuity test 19.035 challenges of e-commerce 1.237 criticisms of current system 1.235 draft white paper 26.000 economic rents 1.250 guidelines for effective reform 1.240 options for further tax reform 1.250 Private Rulings system 30.050 Re:think tax discussion paper 1.250 royalty withholding tax exemption 24.630 taxes related to roads and transport 21.990 transferor trust rules 24.300 trusts17.060 wealth tax 1.250 Refunds overpaid tax 32.110 potential13.330 Registered charities — see Charitable institutions Registered organisations 21.540 Registered tax agents — see Tax agents Regressive taxes 1.110 Regulations, role of 1.520 Reimbursements allowances distinguished 4.025 car expenses 4.190 deductions10.607 expense payment fringe benefits 26.500, 26.505 of deducted expenses 3.400 Related entities excessive payments 18.520, 25.440 fringe benefits 26.140 loans18.510 payroll tax treatment 28.360 Relationship breakdowns CGT exemption 7.715 CGT same-asset rollovers 8.310 Relatives, definition 25.440 Religious institutions, exempt income 9.045 — see also Charitable institutions Remedies31.185 — see also Review Remission of penalties 32.110 Remote area housing fringe benefits 26.510 Renewable resources, CGT exemption for incentives related to 21.980

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2142 Rent5.400–5.475 definition 5.000, 5.410 derivation of income 13.410 lease premiums 5.420 leasing transactions 22.700 received by lessor 5.410 source of income 24.120 travel expenses relating to residential rental property 10.562 Repaid rule, CGT 7.610 Repairs additions11.060 capital expenditure 11.050 concept of ‘repair’ 11.030 deductions11.020–11.080 identifying an ‘entirety’ 11.030 improvements11.070 initial repairs 11.080 ‘notional’ repairs 11.040 Reparation orders 33.185 Replacement-asset rollovers 8.200–8.298 Reportable payments system extension 32.405 Reportable superannuation contributions 2.050 Reporting obligations — see Financial transaction reports Required connection to Australia 9.073 Resale royalty scheme 5.540 Research and development amount of offsets 21.950 capital works deductible expenditure12.500–12.540 CGT exemption 7.710 conducted overseas 21.950 core and supporting activities 21.950 eligible R&D entities 21.950 examples21.960 feedstock rule 21.950 proposed incentive changes 21.950 R&D expenditure 21.950 R&D tax avoidance schemes 21.950 tax incentive scheme 21.920–21.960 Residence — see also Foreign residents; Nonresidents; Residents; Temporary residents 183-day rule 24.056 ‘Australia’ defined 24.030, 24.040 case examples 24.052 companies 7.375, 24.060–24.066 definition24.050–24.059 domicile test 24.054 dual residence 24.080, 24.090 end of Australian residency, CGT events 7.370–7.380 entitlement to foreign income tax credits24.340 franked distributions 18.340, 18.400, 18.492

Index

individuals24.050–24.059 jurisdiction to tax 24.040–24.090 non-corporate intermediaries 24.070–24.078 non-resident under ITAA36 is foreign resident under ITAA97 24.050 ordinary concepts 24.052 partnerships and trusts 24.070–24.076 superannuation funds 23.045, 24.058, 24.078 trusts17.114 Resident companies, non-portfolio dividends24.625 Resident unit trusts 21.740 — see also Pooled superannuation trusts; Public trading trusts Residential premises commercial27.147 GST input taxed supply 27.147 rental properties, second-hand goods 12.120 rental properties, travel expenses 10.562 Residents — see also Temporary residents eligible foreign income taxes 24.360 entitlement to foreign income tax credits24.340 foreign income 24.210–24.220 jurisdiction to tax 24.010, 24.020 liability to temporary budget repair levy 2.250 rates of tax 2.100, 2.110, 2.120, 34.000 residency rules for individuals review 24.050 source of income 24.100 special payment obligations on taxable supply 27.117 tax-free threshold 2.200 tax offsets 2.500 Residual fringe benefits 26.650 calculating taxable value 26.660 in-house/external residual fringe benefits26.660 Restoration — see Repairs Restrictive covenants 4.060 Retail funds 23.030 — see also Superannuation funds Re:think tax discussion paper 1.250 Retirement allowances deductible payment 11.585 payroll tax 28.362 Retirement income — see also Superannuation benefits; Termination payments early retirement scheme 4.800, 34.320 retirement incomes policy 23.000 small business CGT exemption 8.440 Retirement savings accounts (RSAs) 23.065 deductions for personal contributions 2 government co-contributions 23.150

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Index2143

jurisdiction to tax 24.026 RSA holders’ TFNs 32.330 taxable income 23.098 taxation of RSA business 23.075–23.098 Retirement villages, land tax exemption 28.130 Return of capital 18.010, 18.530–18.560, 18.565 anti-avoidance provisions 18.565–18.590 share capital reductions 18.540 share capital tainting rules 18.580 streaming of capital benefits 18.590 Returns approved form 30.065 assessment — see Assessments GST27.187 lodgment — see Lodgment of returns payroll tax 28.365 preparing30.054–30.065 Revenue Rulings 28.362 Review — see also Administrative Appeals Tribunal; Courts ABN decisions 32.390 alternative appeal paths 31.510–31.515 alternative dispute resolution 31.545 amendment of assessments and 30.150 application31.530 application for statement of reasons 31.180 bases for review 31.175 constitution and conduct of hearings 31.535 ‘decision’ of administrative nature 31.150 decisions31.182 excluded decisions 31.165 Federal Court orders 31.185 GST assessment 27.192 objection decision 30.033 particulars of Commissioner’s case 31.560 PAYG withholding system 32.455 powers31.570 preliminary conferences and directions hearings 31.545 required elements 31.150 review by AAT 31.524–31.605 tax shortfall penalties 33.086 TPB deregistration decisions 33.500 Review of Business Taxation — see Ralph Review of Business Taxation Revocable trusts 17.225 Ride-sourcing industries, industry assistance payments to taxi licence holders6.495 Rights, CGT rules 8.615 Road usage, proposed reform of taxes related to 21.990 Rollover superannuation benefits 23.600 Rollovers, CGT — see Capital gains tax, rollovers

Royalties5.500–5.540 amounts similar to 5.525 characterising receipts 5.525 collected by collecting societies 5.540 definition 5.000, 5.500 ordinary usage 5.510 payment for the use of know-how 5.520 shipping reforms, royalty withholding tax exemption 24.630 statutory income not ordinary income 5.515 statutory royalties as ordinary income 5.520 statutory source of income 24.160 withholding tax 24.630 RSAs — see Retirement savings accounts Rulings30.000–30.053 — see also Taxation Rulings acting or omitting to act in accordance with rulings 30.015 ATO ruling system 30.010 basic aspects 30.015 binding Oral Rulings 30.040 binding rulings 30.015 Class Rulings 30.018 evaluation and possible alternatives 30.050 GST27.190 — see also GST Rulings inconsistent rulings 30.015 multiple inconsistent rulings 30.015 no right of objection 30.018 objections30.033 priority ruling process 30.028 Private Rulings 30.025 — see also Private Rulings Product Rulings 30.018 protection from 30.018 Public Rulings 30.018 — see also Public Rulings requiring Commissioner to issue 30.028 Superannuation Guarantee — see Superannuation Guarantee Rulings withdrawal of an objection application31.415 withdrawing applications 30.015, 30.025 Running balance accounts (RBAs) 32.505 refunds of surpluses and credits 32.510  S ‘Safe harbour’ protection 33.065 shortfall penalties for late lodgement 33.090 Salary or wages apprentices’ wages 28.362 deferred salary payment 13.400 definition26.140 derivation of income 13.400 excluded from superannuation guarantee calculations 23.815 income arrears rebate 2.690 paid to partners 16.260

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2144 Salary or wages (cont) payroll tax 28.300–28.375 — see also Payroll tax personal services entity deductions 25.485 personal services income 25.480 Salary sacrifice arrangements 4.070 effective or ineffective 4.070 fringe benefits 26.360 personal exertion 4.000 superannuation contributions 23.105 tax consequences 4.070 Sale of goods, source of income 24.110 Sale of property, source of income 24.120 Same asset rollovers — see Capital gains tax, rollovers Same business test (SBT) bad debts 19.140 ‘business continuity test’ proposed 19.035 consolidated groups 20.110 corporate carry forward tax losses 19.010, 19.030 failed business test 19.040 new business 19.030 new transactions 19.030 Same sex relationships — see also Spouses death benefits dependants 4.780, 23.550 spouse defined 9.090 Sanctions — see Penalties SBE — see Small businesses Schemes, not covered by rulings 30.015 Scholarships, exempt income 9.100 School — see Education and training payments School tuckshops or canteens, input taxed supply 27.148 Schoolkids Bonus — see Education tax offset Scientific institutions, exempt income 9.050 Screen media industry — see Films, Australian Scrip for scrip takeovers 8.295 Seafarer tax offset 2.790 Search warrants 29.190 Second-hand goods — see Used goods Secrecy — see Confidentiality; Privacy Securities debt — see Debt securities deferred interest securities accruing obligations13.541 security holders, CGT 7.995 securitisation liabilities, in consolidation 20.070 Security for payment 32.101 Self-assessment30.073 — see also Assessments

Index

AAT remission of 33.083 amendments30.140 — see also Amendment of assessments ATO advice 30.005 ATO amendment 30.145 calculation of penalty tax 33.084 Commissioner’s power to remit 33.083 deemed self-assessment of companies and funds 30.090 elections and notifications 30.165 full self-assessment taxpayer, definition32.000 GST27.187 late lodgment of documents 33.090 liability for interest on late or underpayments30.160 penalties33.060–33.098 role and responsibilities of tax agents33.300 rulings and other advice 30.000–30.053 self-amendment30.143 SG charge 23.840 tax shortfalls 33.062–33.098 uniform administrative penalty regime 33.063 Self-education expenses 10.440 limitations10.440 nexus with income-earning activities 10.440 Self-funded retirees 9.120 — see also Seniors Self-incrimination33.124 Self-managed superannuation funds 23.030 — see also Superannuation funds complying funds 23.045 definition23.045 Seminars, expenses 10.600 Seniors — see also Pensioners Medicare levy relief 2.300, 2.320 seniors and pensioners tax offset 2.730 Serious Financial Crime Taskforce (SFCT) 25.105, 32.230 Service contracts, payroll tax 28.362 Service of notices 30.115, 32.020, 32.445 Services income — see also Personal services income application in relation to other income 24.213 foreign residents’ assessable income 24.575 foreign service income 24.210–24.213 payment by party to employment/ services relationship 4.040 source of income 24.130 Sham transactions 25.330 Share buy-backs 18.550 capital component 18.550

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Index2145

dividend component 18.550 on-market/off-market buy-backs 18.550 Share capital accounts18.210 reductions18.540 tainting rules 18.565–18.580 untainting tax 18.580 Share trading businesses 6.080 Shareholders assessable income 18.205 bonus shares 18.535 buy-backs of shares 18.550 capital reductions 18.540 definition18.210 distributions on winding up 18.560 imputation system — see Imputation system integrated tax system 18.120 nature of interests 18.010 pooled development funds 21.610 private company loans 18.510 residence of companies test 24.066 return of capital 18.530–18.560 Shares bonus shares — see Bonus shares buy-backs18.550 cancellation/non-cancellation of 18.540 capital payments 7.305 CGT events 7.300–7.315 CGT rollover relief 8.240–8.250 companies with unequal share structures19.049 convertible interests 8.620 employee acquisition — see Employee share schemes end of option 7.155 exchange for shares in another company8.250 exchange for shares in same company 8.240 exchange of rights or options 8.245 exchange of units in unit trust for 8.250 exchangeable interests 8.630 leased plant, disposal 22.710 liquidator declares shares worthless 7.315 members’ rights 18.010 paid-up share capital 18.560 payroll tax 28.362 PDF investment activities 21.602 pooled development funds 21.610 pre-CGT shares 7.470 replacement-asset rollovers 8.240–8.250 rights to acquire 8.615 share capital account 18.580 source of profit 24.120 stamp duty on transfers 28.560 streaming of capital benefits 18.590 worthless7.315 Shipping tax incentives 21.995 royalty withholding tax exemption 24.630

seafarer training requirement 21.995 Short term forex realisation gains and losses 7.487 Shortfall — see Tax shortfall Sick leave, accrued 10.540 Significant global entities (SGEs), increased penalties for 24.910, 33.092 Simple trusts — see Bare trusts Simplified imputation system 18.330–18.492 — see also Imputation system Site rehabilitation 21.230 Small and medium enterprises investments by PDF 21.605–21.620 venture capital investment 21.760–21.780 Small businesses — see also Small and medium enterprises; Small companies amendment of assessments 30.150 cash accounting 15.255 CGT — see Small businesses, CGT concessions — see Small businesses, concessions for deduction for enterprise start up expenses15.265 exempt FBT car parking benefits 26.548 immediate deduction for start-up costs 12.310 in-house software expenditure 12.220 income or deductions 15.250–15.265 PAYG instalments 15.800 prepaid business expenses 15.260 prepayment of expenditure 13.530 reduced tax rate and tax offset15.200–15.210 replacement assets, failure to acquire 7.425 replacement assets, failure to incur sufficient expenditure 7.430 retirement exemption 8.440 tax audits 29.255 tax collection methods 32.100 two year amending period 15.810 unincorporated, tax offset 15.210 Small businesses, CGT 15-year exemption 8.420 50% reduction 8.430 active asset rollovers 8.450 CGT concessions 7.940, 8.400–8.450,   15.500–15.510 CGT rollover reversal 7.410 conditions for CGT relief 8.410 improved assets rollover 7.410 replacement assets rollover 7.410, 7.425 rollover relief for restructures 8.150–8.180, 15.550 Small businesses, concessions for 2.100, 15.000–15.810

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2146 Small businesses, concessions for (cont) administrative concessions 15.800–15.810 affiliates15.110 aggregated annual turnover test 15.105 calculating closing pool balance 15.324 calculating pool deduction 15.322 capital allowances 15.300–15.340 CGT concessions 7.940, 8.400–8.450,   15.500–15.510 conditions to be satisfied 15.100 connected entities 15.110 disposal of depreciating assets 15.330 effect on pool where taxpayer ceases to be eligible 15.340 eligibility15.100 FBT concessions 15.700 GST concessions 15.600 immediate write-off for low total pool value 15.325 low cost assets 15.310 motor vehicles 15.315 pooling15.320 primary producers 21.100 reduced tax rate 2.130, 18.020, 34. 025 relevant entities 15.110 trading stock 14.300, 15.400 Small companies — see also Small businesses cash accounting 15.255 reduced tax rate 15.200 tax offset for unincorporated 15.200–15.210 Social security benefits and allowances beneficiary rebate 2.740 exempt pensions and benefits 9.120 seniors and pensioners tax offset 2.730 TFN quotation 32.330, 32.335 TFN quotation exemption 32.345 Societies, exempt income 9.070 Software, development pools 12.220 Sole or principal residence — see Main residence Sole parent rebate (notional) 2.620 Sole traders, testamentary transfer of trading stock 14.210 Solicitors, financial transaction reports 32.230, 32.270 Sources of income 24.100–24.160 apportionment where sources mixed 24.110 dividends24.150 interest24.140 jurisdiction to tax 24.010–24.030 non-residents24.550–24.580 royalties24.160 sale of property other than trading stock24.120 sale of trading stock 24.110 services income 24.130

Index

trusts17.114 Special assessments 30.098 Special collec­tables — see Collectables Special concessions companies owned by certain trusts 19.047 companies with unequal share structures19.049 designated infrastructure project entities19.048 widely held companies and eligible div 166 companies 19.045 Special disability trusts (SDTs) 17.040 Special professionals above-average special professional income21.320 averaging concessions 21.320 averaging of income 21.300–21.340 Sport associations — see Clubs Sportspersons averaging of income 21.300–21.340 payments by third parties 4.046 turning talent to account for profit 6.085 Spouses — see also Families; Marriage breakdowns definition9.090 dependant tax offset for pre-2014/15 income years 2.570 maintenance payments, deductibility 10.570 maintenance payments, exempt income 9.090 Medicare levy surcharge tax offset 2.610 partnerships16.080 superannuation contributions 23.145 superannuation death benefits 23.550 Stamp duty 28.500–28.800 abolished duties 28-800 administrative provisions 28.600 admissibility of unstamped instruments28.590 conveyance duty 28.580 exemptions and concessional rates 28.570 history28.500 legislation, operation of 28.550–28.700 liability28.560 overview28.550 rates of duty 28.580 schedule for the abolition of some duties28.700 Standard Business Reporting (SBR) 32.390 Start-up expenses — see Commencement of business State tax relations — see also State taxes Commonwealth law prevailing 1.595, 32.105 Constitutional provisions 1.560, 1.570 impact of GST 1.620

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Index2147

judgment debt recovery 32.105 prohibition against discrimination between states or parts of states 1.560 Uniform Tax Scheme 1.600 State taxes 28.000–28.700 — see also State tax relations land — see Land tax payroll — see Payroll tax removal from income tax field 1.600 stamp duty — see Stamp duty Statute law (legislation) 1.320 — see also Legal system Statutory income — see also Capital gains or losses; Imputation system; Insurance bonuses; Lump sum payments; Non-cash receipts; Recovery of bad debts; Royalties; Termination payments allowances, benefits, grants etc 4.110 business income 6.000 capital gains 3.280 competing concepts 3.020.050 debt securities 22.570 definition3.000 exempt income 9.075 income from employment or services relationship 4.100.190 personal exertion 4.000 recoupment rules 3.420 royalties 5.515, 5.520 tax accounting 13.020 Statutory liability 33.800 Statutory licences, CGT rollover relief 8.220 Stay of recovery proceedings 32.120 Step-children 2.650, 23.550 — see also Children Stock — see Livestock; Trading stock Strata title conversions CGT exemption 7.715 CGT rollover relief 8.230 replacement-asset rollovers 7.820 Streaming of capital benefits 18.590 Streaming of trust estate tax distributions17.205–17.207 example17.207 Streaming rules, franking credits 18.425 Structured settlements, payments 9.200 Structures — see Buildings Students — see also Averaging of income; Education expenses ceasing full-time education tax-free threshold2.200 education and training payments 9.100

HELP — see Higher Education Loan Programme TFN quotation 32.335 Subscriptions to associations 11.590 Subsidiaries — see Consolidation regime; Group companies Subsidies and bounties 6.495 Substantiation of expenses 10.680–10.705 business travel expenses 10.700 car expenses 10.475, 10.695, 25.485 work expenses 10.690 written evidence and record-keeping 10.705 Superannuation benefits 1 July 2007 onwards 23.400 age of member 23.510, 23.520 benefits paid from element taxed in fund23.510 benefits paid from element untaxed in fund 23.520 components23.450 contributions and crystallised segments23.470 death benefits 23.550 definition23.110 departing Australia payments 23.580 income stream benefits (pensions) 23.080, 23.135 income streams commenced before 1 July 2007 23.450 income streams ‘in the retirement phase’23.135 lump sums and income streams 34.290 member benefits from complying plans 23.500–23.520 member with terminal medical condition 23.510, 23.520 paid by non-complying funds 23.570 payment of 23.000 portability23.070 preservation23.070 preservation age 23.520, 34.290 proposed access to for home deposits 21.070 rollovers23.600 Tables34.290 tax free component 23.470 taxable component 23.480 taxation 23.000, 23.400–23.600 value of a superannuation interest 23.450 withholding tax 23.580 Superannuation contributions age of employee 23.110 concessional 23.100, 23.105, 23.125 deductions 23.110, 23.120 employers23.110 employment termination payments table34.320 excess contributions 23.000, 23.100, 23.125

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2148 Superannuation contributions (cont) financing costs on loans to fund contributions23.160 former superannuation contributions surcharge 10.555, 23.895 fringe benefits 26.335 government co-contributions 23.150 low income earners tax offset 23.155 non-concessional 23.100, 23.120,   23.125, 23.470 partners16.210 payroll tax 28.362 personal services entity deductions 25.485 reportable employer superannuation contributions2.050 reportable superannuation contributions2.050 salary sacrifice arrangements 23.110 spouse tax offsets 23.145 standards23.070 superannuation guarantee charge23.820–23.850 tax concessions 23.100–23.160 taxable contributions 23.077, 23.100, 23.105 taxation of contributions 23.000 total superannuation balance 23-115 Superannuation entities 23.030–23.070 — see also Approved deposit funds; Pooled superannuation trusts; Retirement savings accounts; Superannuation funds taxation of 23.075–23.098 Superannuation funds 23.030–23.070 accumulation funds 23.030, 23.135 assessment, deemed 30.090 benefits — see Superannuation benefits CGT23.087 CGT exemption 8.080 CGT relief for asset transfers 23.135 choice of fund rules 23.850 complying — see Complying superannuation funds contributions — see Superannuation contributions deductions23.092 defined benefit funds 23.030, 23.135 earnings tax exemption 23.080, 23.135 excess transfer balance tax 23.135 foreign funds — see Foreign superannuation funds franked distribution adjustments 18.410 in-house asset rules 23.070 individual’s residence test 24.058 investment rules 23.070 jurisdiction to tax 24.026 losses17.318 members to quote TFN 32.330 MySuper products 23.850 no-TFN contributions income 23.090

Index

non-complying — see Noncomplying superannuation funds non-resident — see Non-resident superannuation funds overview23.000 portability of benefits 23.070 preservation of benefits 23.070 rates of tax 2.150, 23.095 registrable superannuation entities 8.300 regulatory provision 23.070 regulatory regime 23.000 related party acquisitions 23.070 residence test 24.078 segregated current pension income 23.080 self-managed 23.030, 23.045 sole purpose test 23.070 special rules for certain defined benefit superannuation income streams23.135 superannuation entities 23.030 superannuation guarantee scheme — see Superannuation guarantee scheme taxable contributions 23.077 taxation 23.000, 23.075–23.098 transfer balance cap 23.080, 23.135 trustees23.070 trusts17.040 types of 23.030 venture capital franking concession 21.620 Superannuation Guarantee Rulings 23.810, 23.820 Superannuation guarantee scheme 23.000, 23.800–23.850 administration component 23.820 calculation of SG charge 23.830 charge percentage 23.830 choice of fund rules 23.850 deductibility10.555 employer/employee, definition 23.810 employer’s individual shortfall 23.820 exclusions23.815 liability to SG charge 23.820 maximum contribution base 23.830 non-compliant employer amnesty 23.820 nominal interest component 23.820 ordinary time earnings 23.830 overview23.800 payment of SG charge 23.840 penalties under SG scheme 23.840 redistribution of SG charge 23.840 salary or wages 23.820 self-assessment23.840 superannuation guarantee charge23.820–23.850 Supply, taxable — see Goods and services tax Surcharges — see Levies and surcharges Surrogacy leave, payroll tax 28.362 Syndicates — see Joint ventures/syndicates

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Index2149

 T Tables 2017/18 rates 34.000–34.030 capital gains tax 34.225–34.240 FBT rates 34.340 superannuation and termination of employment34.290–34.320 tax offsets 34.165 Takeovers ‘mere realisation’ doctrine 6.410; 6.430 scrip for scrip rollover relief 8.295 TASA Code of Professional Conduct 33.720 sanctions for non-compliance with 33.720 Tax accounting 13.000–13.545 — see also Tax agents; Tax planning accruals basis 13.100–13.160,   13.300–13.380, 27.125 accruing liability 13.540 administrative concession for accountants’ tax advice 29.217 administrative concession for corporate board documents relating to tax compliance risk 29.220 cash basis 13.100–13.160,   13.200–13.240, 27.125 changing accounting practice 13.160 changing accounting systems 13.150 dividends13.420 employee bonus payments 13.545 ‘expenses incurred’ 13.500–13.545 GST27.125 income year 13.025 insurance claims 13.542 interest13.430 interest and discount expenses 13.541 journal entries 13.040 leave entitlements of employees 13.544 long-term construction contracts 13.460 most appropriate method 13.110 obligations13.541 overview13.000 prepayments13.530 professional practice income 13.130, 13.140 reconciling accounting and income tax 13.035 rental income 13.410 rules13.020 salary or wages 13.400 substituted income years 13.030 TOFA rules 22.830, 22.880 trading stock 14.060–14.070 valuing closing stock on hand 14.080–14.160 warranty claims 13.543 working example 13.140 Tax administration — see Australian Taxation Office

Tax advice, duty of advisers to take account of and advise on tax issues 33.750 Tax agents — see also BAS agents; Tax accounting; Tax (financial) advisers breach of contract 33.750 breach of statutory provisions 33.750 circumstances justifying deregistration33.500 civil penalties 33.095, 33.570 conditional registration 33.495 CPE requirements 33.496 education and experience requirements33.323 ethical responsibilities 33.600 ‘fit and proper’ person 33.320 national system for regulation 33.307 need for regulation 33.305 other restrictions on tax work 33.720 penalties for breach of obligations 33.498 professional indemnity insurance 33.375 professional negligence 33.750–33.800 proposed mandated professional standards33.315 reasonable care 33.065 registration and re-registration 33.315 registration requirements, standard33.320–33.720 regulation33.300–33.800 requirement of ‘relevant work experience’33.325 role and responsibilities 33.000, 33.300 ‘safe harbour’ protection 33.065, 33.090 Tax Practitioners Board 33.310 termination of registration 33.498 Tax audits — see Audits, taxation Tax avoidance — see Avoidance of tax Tax Avoidance Taskforce 32.230 Tax benefits amount included in assessable income 25.685 annihilation or reconstruction 25.624 application for determination 25.695 bases for identifying 25.624 cancellation25.680–25.695 compensating adjustments 25.690 definition of scheme 25.615 Diverted Profits Tax 24.910, 25.679 establishing dominant purpose 25.670 exempted benefits 25.630 existence of 25.620 GST anti-avoidance provisions 27.196 identification of scheme 25.617 matters for consideration 25.665 multinational anti-avoidance law 25.677 obtained in connection with scheme 25.620–25.695 ordinary business or family dealings 25.660

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2150 Tax benefits (cont) purpose in obtaining 25.650–25.670, 25.677, 27.196 salary sacrifice arrangements 4.070 schemes deferring income/ accelerating deductions 25.627 Tax collection — see Collection of tax Tax compliance 32.050 compliance costs 1.193 reportable payments system extended 32.405 reportable supplies in building and construction services 32.405 use of publicity as a sanction 33.015 Tax concessions 2.100 — see also Exemptions; Offsets; Rebates; Small businesses, concessions for; Special concessions abolition of geothermal energy concessions21.215 activities, environmental protection 21.980 artists, composers, inventors, performers, sportspersons 21.300–21.340 corporate tax entities 21.720–21.740 demutualisations21.440 designated infrastructure projects 21.997 environmental protection 21.970–21.998 former first home saver accounts 21.070 ‘in-house’ fringe benefits 26.360 innovation investment tax incentives 21.998 investment in Australian films21.900–21.910 life insurance companies 21.400–21.440 mining companies 21.200–21.270 minors’ income 21.010–21.050 National Rental Affordability Scheme21.860 non-profit organisations 21.500–21.540 pooled development funds 21.605–21.620 primary producers 21.100–21.160 R&D21.920–21.960 shipping tax incentives 21.995 small business — see Small businesses, concessions for special professionals 21.300–21.340 special taxpayers and incentive schemes21.000–21.998 stamp duty 28.570 superannuation contributions 23.100–23.160 superannuation funds 23.000–23.160 tax expenditures 1.115 transitional20.080 VCLP and ESVCLP programs 21.775 Tax credits — see Goods and services tax; Rebates; Tax offsets Tax, definition 1.000, 11.560 Tax evasion 25.100–25.105 — see also Avoidance of tax amendment of assessments 30.150

Index

‘black economy’ measures 32.230 civil penalty regime for tax scheme promoters 25.755, 33.097 criminal offences 25.760 e-commerce, challenge 25.102 offences, UK 33.221 overview25.000 phoenix companies 32.447, 33.098 targeting25.105 tax avoidance/tax planning distinguished 25.025, 25.600 Tax-exempt entities — see Exempt income; Non-profit associations Tax file numbers 32.300–32.370 application procedure 32.310 confidentiality32.370 incorrect quotation 32.340 offences32.360 ‘option’ to quote 32.320 quotation necessary 32.335 quotation not necessary 32.345 should be quoted 32.330 superannuation funds, no-TFN contributions income 23.090 TFN withholding tax 32.340 Tax (financial) advisers (TFA) — see also BAS agents; Tax accounting; Tax agents administrative concession for accountants tax advice 29.217 breach of contract 33.750 breach of statutory provisions 33.750 circumstances justifying deregistration33.500 civil penalties 33.095, 33.570 conditional registration 33.495 CPE requirements 33.496 education and experience requirements33.323 ethical responsibilities 33.600 ‘fit and proper’ person 33.320 national system for regulation 33.307 need for regulation 33.305 other restrictions on tax work 33.720 penalties for breach of obligations 33.498 professional indemnity insurance 33.375 professional negligence 33.750–33.800 proposed mandated professional standards33.315 reasonable care 33.065 registration and re-registration 33.315 registration requirements, standard33.320–33.720 regulation33.300–33.800 requirement of ‘relevant work experience’33.325 role and responsibilities 33.000, 33.300 ‘safe harbour’ protection 33.065, 33.090 Tax Practitioners Board 33.310

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Index2151

termination of registration 33.498 Tax-free threshold 2.200 Tax Information Exchange Agreements 24.020 Tax investigations — see Investigations Tax invoices — see Goods and services tax Tax losses — see Capital gains or losses; Carry forward losses; Losses or outgoings Tax minimisation — see Tax planning Tax mitigation — see Tax planning Tax offsets — see also Imputation system; Rebates applying against Medicare levy surcharge2.510 Australian film production 21.900, 21.910 averaging of income 21.130 baby bonus 2.600 calculation of tax payable 2.000 corporate losses, offset refund 18.385 dependants2.570 disposal of livestock 14.280 education tax offset 2.580 entrepreneurs’ tax offset, former 2.590 environmental protection 21.980 example2.040 exploration development incentive 21.235 foreign income — see Foreign income tax offsets franked distributions 18.380, 18.390–18.405 individuals34.165 innovation investment tax incentives 21.998 invalid and carer, dependant 2.570 land transport 2.770 limit on amount 2.510 limited partners in ESVCLPs 21.780 list2.520 low and middle income earners 2.640 low income earners superannuation 23.155 mature age worker 2.670 Medicare levy surcharge lump sum in arrears 2.350, 2.610 National Rental Affordability Scheme21.860 overview2.500 primary producers 21.100, 21.130 priority rules 2.510 private health insurance 2.660 R&D activities 21.920–21.960 refund of excess rules 2.510 seafarer2.790 seniors and pensioners 2.730 small businesses 2.100 superannuation contributions 23.145 Tables34.165 unincorporated small businesses 15.210 value of, compared to deductions 2.500 Tax payable, calculation 2.000 — see also Rates of tax

adjusted taxable income 2.050 death benefit termination payments 4.780 early retirement scheme 4.800 example2.040 FBT 26.300, 26.303 formula for calculating tax liability 2.000 GST27.065–27.198 land tax 28.120 levies, charges and surcharges 2.000 minors’ income 21.050 penalty tax 33.084 redundancy 4.800, 34.320 special professionals 21.340 taxable component, death benefits 4.755 taxable component, life benefit termination payment 4.755 temporary budget repair levy 2.250 unused annual and long service leave 4.820 variations to general principle 2.030 Tax planning 25.000, 25.800–25.900 — see also Tax accounting advice25.900 ATO attitudes 25.845 community attitudes and government responses 25.835 duty of advisers to take account of and advise on tax issues 33.750 judicial attitudes 25.850 mass marketed schemes 25.855 personal superannuation contributions23.120 records25.900 tax evasion/tax avoidance distinguished 25.025, 25.600 Tax Practitioners Board 33.310 review of deregistration decisions 33.500 Tax practitioners, regulation 33.300–33.800 — see also BAS agents; Tax agents; Tax (financial) advisers Tax rates — see Rates of tax Tax receipts 30.115 Tax records — see Records Tax reform — see Reform proposals Tax-related expenses 11.560 Tax resistance — see Avoidance of tax Tax returns — see Returns Tax shelter arrangements, prepayments 13.530 Tax shortfall AAT remission of 33.083 administrative offences 33.064–33.68 ‘aggravating circumstances’ increasing base penalty 33.080 anti-avoidance provisions 33.068 ‘automatic remission’ reducing base penalty33.082 base penalty 33.078

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2152 Tax shortfall (cont) Commissioner’s discretion to remit 33.083 determination of base penalty 33.078 determination of shortfall amount 33.069 div 284 penalties 33.062 exemptions, reliance on advice 33.070 failure to provide document 33.067 false or misleading statements 33.065 interest charge 33.050 key elements of penalty system 33.063 not reasonably arguable 33.066, 33.078 notice of assessment 33.085 offences33.120–33.219 penalties33.062–33.098 ‘relevant authorities’ 33.066 review of penalties 33.086 scheme shortfall amount 33.068 shortfall interest charge 33.050 shortfall interest charge, calculation of 33.084 Tax system 1.000–1.620 — see also Legal system; Rulings beginnings of the modern tax system 1.040 between World Wars 1.070 capital gains tax 7.015–7.025 certainty1.195 CGT — see Capital gains tax Commonwealth tax system, overview 1.232 compliance costs 1.193 conflict and compromise 1.230 conventional view 1.130 correction of free market imperfections1.160 criteria for evaluating 1.180–1.232 early developments 1.030 efficiency/neutrality 1.200, 7.015 environmentally-related taxes and measures21.990 evidence (taxpayer knowledge) 1.210 fairness or equity 1.185, 7.015 federal government and income tax 1.060 flexibility1.205 functions and objectives 1.130–1.170 historical background 1.000–1.045 historical tax data 1.232 history of CGT in Australia 7.015–7.025 history of income tax in Australia1.050–1.070 in Australia 1.100–1.115 ‘incidence’ of taxation 1.110 international comparisons 1.232 introduction of income tax 1.040 liability for other taxes 2.000 limitation as social engineering tool 1.170 overview 1.000, 1.020 provision of social and merit goods 1.140 simplicity1.190 support for those excluded by free market1.150

Index

tax, definition 1.000, 11.560 tax expenditures 1.115 tax reform initiatives — see Reform proposals tax resistance 1.045 taxation and social process 1.100 A Tax System Redesigned — see Ralph Review of Business Taxation Tax transfers 1.110 Taxable income 2.030 — see also Assessable income adjusted taxable income 2.050 calculation of tax payable — see Tax payable, calculation company change of ownership and failed same business test 19.040 example2.040 foreign superannuation funds 23.095 fringe benefits 26.200–26.250 international tax 24.020 life insurance companies 21.410 Medicare levy 2.300 other income concepts 2.050 partnerships16.200–16.320 pooled development funds 21.605 repeal of 2015/16 changes 2.100 RSA business 23.098 special professional income 21.320 superannuation entities 23.075–23.098 Taxable supply — see Goods and services tax Taxation concessions — see Tax concessions Taxation of financial arrangements rules — see TOFA rules Taxation Office — see ATO Taxation officers, making false or misleading statements to 33.150, 33.170 Taxation Ombudsman, role taken over by IGT 31.220 Taxation Rulings — see also Rulings accounting methods 13.110, 13.120, 13.150 accruing insurance claims liability 13.542 accruing interest expense obligations 13.541 accruing warranty claims 13.543 allocation of net income or loss 16.250 allowances 4.025, 4.140 anti-avoidance rules 25.460 antiques7.525 assessable receipt of pre-paid interest 13.330 asset register 7.960 assignment of interests 16.460 ATO practice 1.320, 25.845 attribution25.470 Australia, ‘in’ 9.073; 11.695 Australian film investment, pre-1 July 2007 21.900 Australian superannuation fund 24.078 bad debts 11.450, 11.455

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Index2153

barter transactions 3.230 board fringe benefits 26.540 bounties or subsidies 6.495 breach of the special conditions 9.043 business activities 6.060, 6.090, 6.100 business income 6.445, 6.455 business profits of non-resident 24.570 calculation of cost 14.090 calculation of liability 26.300 capital protected borrowings 22.670 capital works, deduction 12.510 car depreciation limit 12.230 car fringe benefits 26.400, 26.405 car parking benefits 26.548 car parking expenses 10.602 car parking fringe benefits 26.549 carrying on business in Australia 24.064 CGT events 7.130, 7.470, 16.480 challenging objection decision 31.500 charitable institutions, meaning 9.040 co-operative companies 21.420 Commissioner’s consideration 31.420 compensation payments 6.860 competitions and prizes 3.210 constructive receipt 13.220 creating contractual or other rights 7.165 debt waiver fringe benefits 26.430 deductible capital expenditure 12.310 deductible service fees 10.225 deductions 23.092, 25.490 depreciating assets 12.130, 12.180, 12.220, 12.230 derivation of interest income 13.430 distribution of capital gain 7.180 dividend and interest reinvestment plans13.420 dividends paid 18.210 domicile test 24.054 double tax agreements 24.020 education and training payments 9.100 electronic records 29.114 employer superannuation contributions23.110 employment allowances and reimbursements4.150 employment relationship 26.160 exempt income non-profit hospital 9.060 expense payment fringe benefit 26.500 explain, meaning of 29.110 exploration or prospecting expenditure21.210 extensions of time 31.350, 31.355 false or misleading statements 33.065 FBT 26.110, 26.150, 26.160, 26.300,   26.400, 26.405, 26.430, 26.500,   26.505, 26.540, 26.542, 26.544 FBT and GST 26.340, 26.360, 26.405,   26.544, 26.547, 26.549,   26.555, 26.650

foreign residents, collection of tax 24.580 foreign source capital gains 24.360 forfeiture of deposits 7.355 geological sequestration expenditure 21.230, 21.980 gratuitous payments 4.750 GST and FBT 26.340, 26.360, 26.405,   26.544, 26.547, 26.549,   26.555, 26.650 GST Rulings — see GST Rulings hobbies6.010 holder of depreciating assets 12.140 home office expenses 10.430 income averaging and FMDs 21.160 income of deceased estates 17.250 incurred expenses 13.500, 13.510, 13.520 interest deductibility 10.170, 10.460 interest income 22.570 investors, TFN quotation 32.330 joining entity’s assets 20.070 journal entries 13.040 lease premiums 5.420 lease surrender receipts 5.410 leases 7.250, 8.650 life assurance bonuses 2.760 listed investment companies 7.935 livestock14.280 long-term construction contracts 13.460 making and retaining tax-related records 29.110, 29.114 meal entertainment fringe benefits 26.542 meaning of ‘deployed’ 24.210 medical expenses 2.650 mining and quarrying industries capital expenditure 21.220 minors’ income 21.030, 21.040 mutual organisations 9.250 nature of gifts 11.685 non-cash business benefits 6.480 non-cash lease incentives 6.448 non-cash receipt 13.200 non-commercial business losses 11.550, 11.555, 11.558 non-profit societies 9.070 normal proceeds 6.420 not reasonably arguable 33.066 objection to assessment too low (or nil) 31.355 partners’ salaries 16.260 partnerships16.080 PAYG withholding payments to employees32.420 payments6.448 payments to related entities 25.440 pensions paid to employees 11.585 permanent establishment 24.020 personal services business 25.475 personal services income 25.480, 25.490 petroleum resource rent tax 21.260

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2154 Taxation Rulings (cont) primary production business 21.110 Private Rulings — see Private Rulings Private Rulings, Rulings on 30.025 production of records 29.175 professional indemnity insurance 10.450 prompt payment discount 13.325 Public Rulings — see Public Rulings qualifying securities 22.610 rebates 2.650, 2.700, 2.760 reliance30.010 religious institutions, meaning 9.045 repairs 11.030, 11.080 replacement asset rollover 8.295 residence of trusts and trustees 24.040 resident according to ordinary concepts 24.052, 24.056 residual benefits 26.650 ‘retained cost base asset’ 20.070 return of capital 5.320 s 353-15 powers 29.114 salary sacrifice arrangements 4.070, 26.360 same business test 19.030 scale of activities 6.070 schemes to reduce income tax 25.665 self-education expenses 10.440 single entity rule 20.040, 20.070 software development pools 12.220 sole parent 2.620 source of income 24.100, 24.120 sportspersons4.046 spouses16.080 statutory recoupment rules 3.420 structure and types of rulings 30.010–30.050 substituted accounting period 13.030 superannuation funds 23.092 tax shortfall penalties 33.063, 33.065,   33.066, 33.069,   33.070–33.078, 33.082 trade incentives 14.095 trading stock 14.020, 14.040, 14.070 traditional securities 22.620 transfer pricing 24.690, 24.695, 24.700 travel expenses 10.475 treaty shopping and the application of Pt IVA 24.020 trust law income 17.063 trust reimbursement agreements 17.320 trusts, averaging of income 21.130 valid objection 31.360 views on on home office expenses 10.330 voting power 24.620 withdrawal of an objection application31.415 work-related expenses 10.310 zone allowance 2.700 Taxation system, administration — see Australian Taxation Office

Index

Taxi licence holders, industry assistance payments to 6.495 Taxpayers — see also Records; Rulings attributable taxpayer 24.240, 24.270, 24.350 benefits4.140 evidence (taxpayer knowledge) 1.210 identifying the person in business 6.010 improving compliance 29.245, 29.250, 29.255 making and retaining tax-related records 29.110–29.120 need for Rulings reform 30.050 onus of proof in default assessments 30.095 reasonable care 33.065 right to information 31.020–31.230 Taxpayers’ Charter 29.005 Technology CGT exemption 8.090 venture capital eligibility 21.770 Telephone line installations, primary producers 21.150 Temporary budget repair levy calculating the levy 2.250 liability2.250 reflected in other tax rates 2.250 Temporary loss, income-producing assets 6.830 Temporary residents CGT events 7.375 CGT exemption 24.214 definition 9.015, 24.214 departing Australia payments 23.580 foreign income 9.015, 24.020 foreign source income exemption 24.214 individuals24.059 interest withholding tax exemption 24.214 non-assessable non-exempt income 24.214 Tenants — see Joint tenants; Lessors and lessees Terminating value of assets, consolidation regime 20.070 Termination of business 6.000, 6.280 compensation payments 6.000 period of inactivity 6.280 post-cessation expenditure 10.160 Termination payments 4.700–4.820 — see also Employment termination payments 1 July 2007 onwards 4.740 CGT exemption 7.710 compensation for loss of wages 6.860 exempt resident foreign termination payment24.212 former surcharge (abolished 2005) 10.555 ordinary income 4.060 payroll tax 28.362

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Index2155

redundancy and early retirement scheme 4.800, 34.320 taxation 4.800, 4.820 taxation of before 1 July 2007 4.700 unused annual and long service leave 4.820 Territorial limitations — see Foreign residents; Jurisdiction to tax; Non-residents; Residence Tertiary education — see Education and training payments; Higher Education Loan Programme Testamentary gifts, CGT exemption 7.715 Testamentary transfers of trading stock death of partner 14.220 death of sole trader 14.210 Testamentary trusts 17.040 TFNs — see Tax file numbers Theft, losses due to 11.580 amounts included in the termination value of depreciating asset 11.580 loss of money that has been included in assessable income 11.580 Thin capitalisation rules 24.860 average values 24.860 non-ADI entities 24.860 proposed tightening 24.700 TIEAs — see Tax Information Exchange Agreements Timber operations forestry roads and timber mill buildings21.150 primary producers 21.150 right to fell standing timber 21.150 Time limits AAT review application 31.530 amendment of assessments 30.150–30.155 assessments30.110 lodgment of objection 31.350, 31.355 lodgment of returns 30.058 objections30.033 PAYG instalment 32.480 payment of tax 32.000, 32.100 Timing of tax events — see Tax accounting Tobacco industry exit grants 7.715 TOFA rules 22.800–22.900 — see also Debt/equity rules; Forex regime accruals and realisation method 22.840 assessability of gains, deductibility of losses 22.820 balancing adjustment method 22.890 cash settlable, meaning 22.810 consolidation regime 20.160; 22.825 exclusions22.810 fair value method 22.850 financial arrangement, meaning 22.810

foreign exchange retranslation method22.860 hedging financial arrangement method 22.830, 22.870 PAYG amendments 22.895 reliance on financial reports method 22.880 review of regime 22.900 tax timing methods 22.830 Total net investment losses 2.050 Trade incentives — see Incentives Trade unions, exempt income 9.065, 21.540 Trademarks — see Intellectual property Trading stock 14.000–14.300 — see also Livestock accounting methods 13.120 alternative values 14.080 business use only 14.030 ceasing to hold item as trading stock 14.250 CGT assets 7.460 CGT exemption 7.710 changes in partnership composition 16.440 changes in status 14.200, 14.230–14.270 compensation for loss 6.820 contributed trading stock 16.090 ‘cost’14.090 death of partner 14.220 death of sole trader 14.210 deductible cost 14.070 deemed disposal at market value 16.090 deemed disposal election 14.242 deemed disposal of pre-owned item 14.240 depreciating assets 12.130 determining remaining stock 14.145 discounts, rebates and incentives 14.095 disposals of trading stock outside the ordinary course of business 14.190 example of trading stock provisions 14.160 extraordinary disposals 14.180–14.300 gifts to trust 14.270 GST adjustments 27.095 market selling value 14.120 meaning14.020–14.050 no cost property conversions 14.243 non-arm’s length transactions 14.100 obsolescence or special circumstances 14.140 part interests 14.260 particular issues with 14.180–14.300 partnerships16.090 primary producers 14.280 raw materials and work in progress 14.050 replacement value 14.130 sale of goods 24.110 significance of taxpayer’s purpose 14.035 small businesses 14.300, 15.400 tax accounting 14.060–14.070 tax and accounting differences14.150–14.160 valuing stock on hand 14.080–14.160

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2156 Trading stock (cont) work in progress 13.380 yielding trading stock, distinguished 14.040 Trading trusts — see Public trading trusts Traditional securities 8.630, 22.620 — see also Debt securities Trans-Tasman (triangular) imputation 18.492 Transfer of assets — see Capital gains tax Transfer of losses Australian branches of foreign banks 19.100–19.130 available fraction method 20.115 bundles of losses 20.115 consolidated group 20.110, 20.115 transitional methods 20.115 utilisation of losses 20.115 Transfer pricing 24.680–24.700, 24.690–24.700 arm’s length rule 24.690, 24.700 country-by-country reporting 24.700 documentation24.700 methods24.690 penalties24.700 permanent establishments 24.700 pricing methods 24.690 review of rules 24.700 sources of rules 24.685 transfer pricing rules: phase 1 24.690 transfer pricing rules: phase 2 24.695 transfer pricing rules: phase 3 24.700 Transferor trust rules 24.260–24.300 attributable income 24.275 attributable taxpayer 24.270 background24.200 former deemed present entitlement trust provisions 24.290 former foreign investment fund rules 24.285 non-resident trust estate 24.265 proposed reforms 24.300 realisation of attributed income 24.280 Transitional termination payments 4.760 Translation rules — see Foreign currency translation rules Transport — see also terms starting with Car ... airline transport fringe benefits 26.530, 26.535 capital expenditure on, for mining or quarrying21.220 industry assistance payments to taxi licence holders 6.495 land transport offset 2.770 proposed reform of taxes related to roads and transport 21.990 substantiation of expenses 10.690 Travel expenses — see also Car expenses

Index

accompanying relative’s expenses 10.560 business expenses 10.700 ‘itinerant work’ travel 10.475 relating to residential rental property 10.562 self-education10.440 substantiation10.700 transport between workplaces 11.635 travel between workplaces (where one is home) 10.475 work expenses 10.690 Trees in carbon sink forests, establishment12.400 Tribunals — see Administrative Appeals Tribunal Trust estate income, taxation 17.000–17.330 — see also Income from trust estate closely held trusts 17.315 complexities 17.005, 17.060 deceased estates 17.230–17.300 distribution out of corpus to income beneficiary 17.300 Div 6, language, key elements and operation17.063 family trust distribution tax 17.319 fundamental principle, no separate legal entity 17.005 income accrued at the date of death, received after death 17.240 income derived after the date of death 17.250 legal disability 17.063, 17.105 net income — see Income from trust estate outline17.060–17.210 prescribed persons 21.040, 21.050 present entitlement of beneficiaries17.070–17.100 primary production income 21.130 receipt of income not previously taxed 17.210 revocable trusts and trusts for minors 17.225 source and residence 17.114 tax law and trust law differences 17.116 tax minimisation through use of trusts 17.315–17.330 taxation rules 17.120 trust deduction (‘income injection’) schemes17.318 trust losses 17.130, 17.318 trust losses, restrictions on carry forward of 17.140 trust recoupment legislation 17.330 trust reimbursement agreements 17.320 trusts reform options paper 17.060 Trust stripping 17.320, 17.330 Trustees acts of bankrupt 7.985 CGT exemption 7.715 deceased estates — see Deceased estates

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Index2157

definition17.050 income accrued at death 17.240 income after death 17.250 liability to tax 17.063 Medicare levy liability 2.300 rates of tax 2.140, 34.030 receipt of trust income not previously taxed 17.210 recovery of money from third party 32.130 residence24.074 revocable trusts and trusts for minors 17.225 superannuation funds 23.070 trustee beneficiary non-disclosure tax 17.315 Trusts accumulation trusts 24.074 Australian residence ends 7.380 bare trusts (simple trusts) 17.040 beneficiaries — see Beneficiaries cash management trusts 20.070 CGT and — see Trusts, CGT events closely held trusts 17.315 connected entities 15.110 consolidated groups 20.070 corporate unit trusts — see Corporate unit trusts creation17.020 direct value shifting 7.480, 8.805 discretionary — see Discretionary trusts elements17.010 exchange of stapled ownership interests for ownership interests in a unit trust 8.297 family — see Family trusts fixed trusts 17.040, 17.318 fundamental principle, no separate legal entity 17.005 gift of trading stock 14.270 GST groups 27.155 ‘has created a trust’, meaning 17.225 income — see Income from trust estate income from — see Income from trust estate indirect franked distributions 18.394 jurisdiction to tax 24.024 land tax 28.170 losses17.130 MITs — see Managed investment trusts non-fixed trusts 19.047 non-resident — see Non-resident trusts payroll tax 28.362 public trading trusts — see Public trading trusts real estate investment trusts 24.024 residence test 24.070–24.076 resident unit trusts — see Resident unit trusts restructures 7.420, 8.296 reversal of rollovers 7.420 revocable trusts 17.225 special disability trusts 17.040 special trust 28.170

tax audits 29.265 tax minimisation 17.315–17.330 taxation — see Trust estate income, taxation termination17.025 testamentary trusts 17.040 TFN quotation 32.335 transfer pricing rules 24.700 transferor trust rules 24.200, 24.260–24.300 trust estate definition 17.050 trust streaming 17.207 trustee, definition 17.050 types17.040 unit — see Unit trusts Trusts, CGT events 7.180–7.230 capital payment for interest in trust 7.200 CGT discount 7.930 converting trust to unit trust 7.195 cost base reduction exceeds cost base 7.230 creating trust over CGT asset 7.185 creating trust over future property 7.225 disposal by beneficiary of capital interest7.220 disposal to beneficiary to end capital interest7.215 disposal to beneficiary to end right to income7.210 exchange of stapled ownership interests for ownership interests in a unit trust 8.297 GST rollovers 8.296 pre-CGT shares or trust interest 7.470 pre-CGT trust interest 7.470 transfer by individuals and trusts 8.110 transferring CGT asset to trust 7.190 trust failing to cease to exist after rollover7.420 trust stops being a resident trust 7.380 trust streaming 17.207  U Ultra vires receipts 3.270 ‘Unascertained goods’, no gift of 11.700 Undeducted purchase price — see Annuities Undeducted superannuation contributions — see Non-concessional superannuation contributions Unfranked dividends — see Dividends Uniform administrative penalty (UAP) regime 33.020, 33.030,   33.038 categories33.061 Uniform capital allowance system12.100–12.270 Uniform Tax Scheme 1.600 Uniforms non-compulsory10.605

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2158 Uniforms (cont) ‘private or domestic nature’ 10.310 Unincorporated associations 21.500 body corporate status 18.010 Unincorporated small businesses — see Small businesses Unit trusts 17.040 — see also Corporate unit trusts; Pooled superannuation trusts; Public trading trusts bonus units 8.610 convertible interests 8.620 exchange for shares 8.250 exchange of rights or options 8.245 exchange of stapled ownership interests for ownership interests in 8.297 exchange of units 8.240 public unit trusts 21.740 rights to acquire 8.615 stamp duty on transfers 28.560 trading trusts 21.740 United Nations service, civilians serving overseas 2.720 United States, Foreign Account Tax Compliance Act reporting and withholding requirements 24.635 University — see Education and training payments; Higher Education Loan Programme Unpaid tax — see Assessments; Payment of tax; Recovery of unpaid tax Untainting tax 18.580 Used goods GST-free supply 27.142 rental properties 12.120  V Vacant land, holding expenses 10.620 Valour and brave conduct decorations, exempt CGT assets 7.705 Valuable metals — see Precious metals Value added tax (VAT) 27.045 — see also Goods and services tax Value shifting rules consolidation regime 20.070 direct value shifting 7.480, 8.805 general value shifting 8.800 indirect value shifting 8.810 Variable price contracts, derivation of income 13.370 VAT (value added tax) 27.045 — see also Goods and services tax Vehicles — see terms starting with Car ...

Index

Venture capital franking concessions, PDFs 21.620 Venture capital investments — see also Venture capital limited partnerships carried interests 7.485, 21.775 CGT exemption 8.090 superannuation funds 23.095 Venture capital limited partnerships21.760–21.780 AFOFs 21.770, 21.775 eligible venture capital investment, definition21.770 ESVCLPs 21.770, 21.775, 21.780 flow-through tax treatment 21.770 registration requirements 21.770 tax concessions 21.775 tax offsets 21.780 VCLPs 21.770, 21.775 VCMPs 21.770, 21.775 Vertical fiscal imbalance (VFI) 1.620 Visual artists, resale royalty scheme 5.540 Volunteers, payroll tax 28.362 Vouchers, GST on 27.175 Wages — see Salary or wages Waivers debt — see Debt waiver fringe benefits express and implied (or ‘imputed’) 29.215 tax debt 32.103  W Warranties accruing claims 13.543 derivation of income 13.335 Water entitlements, CGT rollover relief 8.297 Water facilities deductible expenditure 21.150, 21.980 primary producer tax concessions 21.200 urban water tax offset 21.980 Water rates 11.610 Wealth taxes 1.250 Wealthy individuals, tax audits 29.255 Website trading — see E-commerce; Online trading site dealings Websites, commercial, depreciating assets12.220 Wholly-owned subsidiaries — see Group companies Widely held companies concessional rules for tracing ownership19.045 loss multiplication rules 20.115 Windfalls, income exceptions 3.210

Index2159

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Winding up distributions to club members 9.255 distributions to company members 18.010 liquidators’ distributions 18.560 Withholding tax Australian withholding tax agreement rates 24.605 concessional withholding rate on clean building MITs 24.640 departing Australia payments 23.580 distributions from Australian managed investment trusts 24.640 dividends24.620 Foreign Account Tax Compliance Act requirements 24.635 foreign resident CGT withholding tax 24.120, 24.635 foreign residents 24.120, 24.600–24.640 interest withholding tax 24.610 interest withholding tax, temporary residents24.214 non-residents24.600–24.640 PAYG system — see PAYG withholding system royalties 24.160, 24.630 tax benefit 25.620 TFN withholding tax 32.340 Work in progress derivation of income 13.380 partnership variation or dissolution 16.435 payments11.630 trading stock 14.050 Work-related expenses

allowable deductions 10.310, 10.420–10.475 depreciating assets 12.130 substantiation10.690 travel between workplaces 11.635 travel between workplaces (where one is home) 10.475 work expenses definition 10.690 Workers compensation, payroll tax 28.362 Working holiday makers 2.125, 24.020 as foreign residents 24.550 ATO view 2.125 departing Australia payments 23.580 Write-off, immediate, for low total pool value 15.325 — see also Depreciating assets Write-off of bad debts 11.450, 11.455 limitation on companies 11.460 Writers, averaging of income 21.300–21.340 — see also Copyright  Y Year of income — see Income year Youth Allowance, self-education expenses10.440  Z Zone rebates 2.700 fly-in fly-out workers not eligible 2.700 overseas Defence Force 2.710