TABL2751BUSINESSTAXATION

TUTORIAL1:INTRODUCTIONTOAUSTRALIANTAXATIONLAW
Tutorialproblemallocation:9thSeptemberwithSabrina
Answeringtutorialquestion
1. Whatistheissue?
2. Identifyingrelevantfacts
3. Identifyrelevantstatutoryprovisionsandcases
a. Provisions:sectionswithinthelegislation
b. Cases:
i. Similarities:relyoncase
ii. Differences:identifydifferencesanddistinguish
4. Applicationofthelawtothefacts
a. Makeatentativeconclusion
Analysingandansweringataxproblem
TwodocumentshavebeenplacedonMoodle:
1. Learningskillsinansweringtaxproblemsbyreadingtaxcases
2. FCTvAnstis(2010)241CLR443
Studentsshouldreadthismaterialbeforethefirsttutorial.Thelearningskills
documentcontainsanactivity,whichwillbediscussed.
Generaldiscussionquestions(OverviewofAustraliastaxationsystem)
1. WhataretheprimarysourcesoftaxationlawinAustralia?
2. WhatisthestatusofATORulings,Determinations,andGuidelines?
3. Whatistheformulaforcalculatingtaxableincome?Whichpieceoflegislation
andwhichsectionprovidesthisformula?
FCTvAnstis(2010)241CLR443
Background:
Enrolledinateachingdegree,receivedyouthallowancepayments,inhertax
returnshesaidshereceived14,000fromsalesand3,000fromyouth
allowance.
Taxreturninquestionwasform20052006.
Claimedallowabledeductionsforselfeducationexpenses.Commissionerof
taxationdisalloweddeductionsbecausetheywerenotincurredingainingor
producingincome.
Federalcourtfoundinfavourofthestudent,atFederalCourtandHighCourt.
Outcome
Attribunalshewasdeniedthededuction
Appealedtheruling:wenttoFederalCourt
o Rulingwasthatitwasanallowablededuction
CommissionerappealedtoFullFederalCourt
o Agreedthatitwasanallowablededuction

CommissionerappealedfurthertoHighCourt
o Agreedthatitwasanallowablededuction
Commissionerchangedthelawbecause

Importantcases
1. Legislation
a. 2xIncomeTaxLegislation
b. GSTAct
c. FBTAct
2. Caselaw
a. FCCvMyerEmproium
b. FCTvDixon
c. FCTvMontgomery
3. RulingCanrelyonaruling;willneverbedeniedadeduction.Howeverthis
isnotlawthereforelegislationandcaselawwilloverridetherulings.Ifthe
needarises,theyareguidelinesonly.
TUTORIALTWO:WEEK3GOODSANDSERVICESTAX
QUESTION1
FastFoodPtyLtdoperatesatakeawayfoodoutlet,withsometablesonthe
premises.
Youaregiventhefollowinginformationonsales/purchasesforthemonthof
Augustshowthefollowing:

CalculatetheGSTpayable/refundablebyFastFoodPtyLtdforthemonthof
August(youcanassumetheyaccountforGSTonacashbasis).Assumethatall
substantiationrequirementscanbemet.
(RememberthatGSTisbasedonthevalueofthetaxablesupplyyoushould
notneedtoaskwhethertheamountsshownareGSTinclusiveornot).
GSTfree(exemptions)versusinputtaxcredits(obtainrefundsfromATOifitsa
creditableacquisitionforacreditablepurpose)versusinputtaxsupplies
Facts
Takeawayfoodoutlethastablesonpremises,caneatinortakeaway
o 80,000saleofhotfood

o
o
o
o
o
o

10,000salesofsoftdrinks
20,000purchasesofingredients
6,000purchaseofsoftdrinksforresale
8,000rent(inputtaxedsupplies,Subdivision40B)
12,000wages
1,500containersandknives

Legalprinciples
S71(GSTandinputtaxcredits)
o GSTispayableontaxablesuppliesandtaxableimportations
o Entitlementstoinputtaxcreditsariseoncreditableacquisitionsand
creditableimportations
S75(Netamounts)
o AmountofGSTandamountsofinputtaxcreditsaresetoffagainst
eachothertoproduceanetamountforataxperiod

PART1Taxablesupplies
S95(Whataretaxablesupplies)
1. Supplyforconsideration
2. Madeinthecourseorfurtheranceofanenterprise
3. ConnectedwithAustralia
4. Requiredtoberegistered
1.

Salesofhotfood
1. Supplyisthesaleofhotfood,consideration:$80,000
2. Theoperationofthefastfoodoutletisabusiness
3. AssumethatthetakeawayfoodisinAustralia,andthatthesupplyoffoodisin
Australia.Assumedthatitisregisteredbecauseitsturnoverforonemonth
exceeds$75,000.

IsthesalesofhotfoodGSTfree?S382
S383(1)AsupplyoffoodisnotGSTfreeundersection382ifitisasupplyof:
1. Foodforconsumptiononthepremisesfromwhichitissupplied;or
2. Hotfoodforconsumptionawayfromthosepremises;or
ThereforethesupplyofhotfoodisnotGSTfree.
2.

Salesofsoftdrinks
1. Supplyisthesaleofsoftdrinks,consideration:$10,000
2. Theoperationofthefastfoodoutletisabusiness
3. AssumethatthetakeawayfoodisinAustralia,andthatthesupplyoffoodisin
Australia.Assumedthatitisregistered.

IsthesalesofsoftdrinksGSTfree?(Schedule2BeveragesthatareGSTfree)
BecauseitisnotincludedinthescheduleitisnotGSTfree.

PART2Inputtaxcredits(Division11)
Canonlyobtaininputtaxcreditsoncreditablesuppliesandcreditableacquisitions
Legalreasoning
S1120,S115
1. Creditablepurpose
2. Supplyisataxablesupply
3. Considerationisprovided
4. Youareregisteredorrequiredtoberegistered
1.

Purchaseoffreshingredients($20,000)
1. Definitelyforacreditablepurposeasitisfortherunningofabusiness
2. Arefreshingredientsataxablesupply?
a. Supplyisforconsideration
b. Forthefastfoodbusiness
c. ConnectedtoAustraliaandalsoregistered

However,S382statesthatfreshfoodisGSTfree.Thereforetherearenoinputtax
creditstoclaim.
2.
Purchaseofsoftdrinks
Softdrinksareataxablesupplythereforecanclaimbackinputtaxcredits.(Basedon
previousreasoning)
3.
Rent
Rulingthatsaysthatrentforcommercialpremisesiscaughtundertaxablesupply.
Thereforecanclaimbackinputtaxcreditsoncommercialrent.
ResidentialrentisaninputtaxedsupplyhowevercommercialrentissubjecttoGST
(notsubjecttoGST,andsonoinputtaxcredits).
4.
Wages
S920(2)NoGSTchargedonwages.
5.
Containers,knives,forks
Containers,knives,forksareataxablesupply.ThereforewillhaveGST.
Conclusion
GSTonhotfood=80,000*11/10*10%=$72,727.27*10%=$7,272.73
Salesofhotfood=$909.1
TotalGST=8,181.83
Softdrinksforresale=545.45
Rent(inputtax)=727.27
Containers=136.36
Wages=0
Totalinputtaxcredits=$1,409.08

NetthemofftocalculateGSTrefundable/payable=$6,772.74
WhatwouldhappenifFastFoodPtyLtdhadmistakenlyforgottentocharge
GSTonsomeoftheirsales?WouldtherebeanyliabilityforGST?
Yes,stillliableforGST.
Generaldiscussionquestions
1.Whatinputtaxcredits,ifany,areavailableinrespectofthefollowing:(You
canassumeallparties,ifrequired,areregisteredforGST).
(a)Afaxmachine,costing$1,100,purchasedbyapartnershipofaccountants
carryingonpracticeinalargecountrytown
Creditableacquisitionforacreditablepurpose.Accountantsareusingitfortheir
business.Inputtaxcredit=1100/11=$100.
(b)Amobilephonecosting$770purchasedbyadentistforusebyhisdaughter
whohasjuststartedboardingschool.
Notacreditableacquisitionforacreditablepurpose.Daughterusesphonesoitsnot
forbusiness,itsbeingusedinaprivateordomesticcapacitytheresnoenterprise.
(c)Acomputersystemcosting$11,000purchasedbyabanktorunthebanks
financialsservicesforfeepayingcustomers
Financialservicesisafinancialsupply(Subdivision48).Thereforethecomputer
systemisaninputtaxedsupply.Thereforeunabletoobtaininputtaxcrediton
computersystemwhichisusedrunningfinancialservices.
2.WhatGST,ifany,ispayableinrespectofthefollowing?(Youcanassumeall
parties,ifrequired,areregisteredforGST).
(a)Purchase,for$5,000,ofaphotocopierforuseinanaccountingpractice
Taxablegood.Usedforenterprise,assumedtobeconnectedtoAustralia.(s95).
5,000/11=$454.55
(b)Privatehealthinsurancepremiumsof$2,000
HealthinsuranceisexemptfromGSTbecauseitsabasicgood.See(SubDiv38B,
s3855(1),page1,720).
(c)Goodsworth$77,000soldtoamanufacturerinJapan

ExportsareGSTfree(Subdivision38E).Thisisassumingthattheexportshavebeen
shippedwithin60daysofwhichthesupplierreceivesanyconsiderationofthesupply.
(d)Familydaycarepaymentsof$22/dayinrespectofathreeyearoldchild.
Bothoftheparentswork.
ChildcareisGSTfreeifitisasupplyofchildcarebyaregisteredcarer.See(Sub
Div38D,38140to150,page1,722).

TUTORIALTHREE:TAXCALCULATIONS/INCOMEKEYCONCEPTS

Keyfacts
SandraisanAustralianresidenttaxpayer.
Taxoffset=3,700
HELPdebt=7,490
Shedoesnthaveprivatehealthinsurance
Restaurantearnings
o Assessableincome=109,000
o Deductions=45,000
Cleanerearnings
o Assessableincome=22,000
o Deductions=3,200
S415:Taxableincome=assessableincomedeductions
S410:Workoutyourtaxpayable/liability
1.Workingouttaxableincome
S415

Totalassessableincome=109,000+22,000=131,000
Totaldeductions=45,000+3,200=48,200
Totaltaxableincome=131,00048,200=82,800
S410
Taxon80,000
Taxon2,800(@37%)
Subtracttaxoffset
Medicarelevy(@1.5%)
Medicarelevysurcharge
HELPdebtrepayment(@7%)

Calculations
Givenbytaxtable:17,547
2,800*0.37=1,036
(3700)
82,800*0.015=1,242
0becauselessthan84,001
82,800*0.07=5,796

Cumulativetotal

TotalliabilityowedtoATO

21,921

Keyfacts

FYending30June2013
From1July201231January2013
o 3*5*18=$270/weekfromwaiterjob
o $200bonus
o $70bottleofwine

18,583
14,883
16,125
16,125
21,921

o Tipsapprox.$40eachshift
November2012
o $100nontransferablegiftvoucher
February2013
o $65,400annualsalaryinclusiveof9%compulsorysuperannuation
o $2,000signonbonus(timeperiodis1week)

Whatisordinaryincome?
Thereisnodefinitionofordinaryincomeinthe1997ITAAlegislation;thereis
somethingincaselawand1936ITAA.
S65Assessableincomeincludesincomeaccordingtoordinaryconcepts,whichis
calledordinaryincome.
S6(1)Incomefrompersonalexertionincludesearnings,salaries,wages,
commissions,fees,bonuses,pensions,superannuationallowances,retiring
allowances

From1July201231January2013
o 3*5*18=$270/weekfromwaiterjob
o $200bonus
o $70bottleofwine
o Tipsapprox.$40eachshift
November2012
o $100nontransferablegiftvoucher
February2013
o $65,400annualsalaryinclusiveof9%compulsorysuperannuation
o $2,000signonbonus

Income
Wagesforwaiter
$200bonus

Typeofincome
Ordinaryincome
Ordinaryincome

$70bottleofwine

Notordinaryincome

Tips

Ordinaryincome

Reasoning
Yes
LvPerry
Certaingiftvoucherswereheld
tobeincome
Easilyconvertibleintocash
Incidentaltoemployment
Isthegiftconvertibleintocash?
TennantvSmith
Accommodationcouldntbe
convertedintocashbecause
taxpayercouldntsubletoutthe
house.Thereforenotconvertible
sonotordinaryincome.
SquattingInvestment
Voluntarypaymentsthatare
relatedtoemployment/business
willbeincome.

Super
Signonbonus
$2,000

Giftvoucherfrom
university

Tipsofaverageamountand
regularity.
KellyvFCT
Gratuitiesrelatedtotheearning
activitieswillberegardedas
income.
ScottvFCT
Giftmadetosolicitorby
longstandingclientunexpected,
friendship,Scottadequately
remuneratedforservices,several
othergiftsmade.
Notordinaryincome Taxisnotpaidonsuperannuationbythe
taxpayer.Itstaxedonthesuperfund.
Mostlikelyordinary LaurenceOlivier
income
Paidalargeamountofmoneyto
notwork.
AlsosimilartoSuncase
Differencebetweenthiscaseandthe
LaurenceOliviercaseisthatPhilips
contractedperiodforthebonusisonly1
week,andheisstillrequiredtowork.
Notordinaryincome Giftvoucherisnotordinaryincome
becauseitsnottransferableandnot
relatedtoemploymentandnotregular.

Generaldiscussionquestions
1. Whatdifferencesexistintermsofthetaxationofindividualresidentsand
nonresidents?
Taxationofresidents:S65(2)
AllAustralianresidentsaretaxedonincomesourcedfromworldwide.
Taxationofnonresidents:S65(3)
Nonresidentshaveadifferenttaxschedule.
Nonresidentsdonthaveataxfreethreshold.
Dontreceivedeductionsfortheirdonations.
Nomedicarelevy.
Assessableincomeincludestheordinaryincomeyouderiveddirectlyor
directlyfromallAustraliansourcesduringtheincomeyearandother
ordinaryincomethataprovisionincludesinyourassessableincomeforthe
incomeyearonsomebasisotherthanhavinganAustraliansource

TaxedonincomethatissourcedfromAustralia.Ordinaryorstatutoryincomederived
fromaforeignsourceisnonassessablenonexemptincomehoweverthisdoesnot
includeemploymentincome.
2. Frankisanonresidentfortaxationpurposes.Youaregiventhefollowing
informationfortheyearended30June2014:

Australiansourcedincome:
o IncomefromanAustralianjob:$12,000
o InterestfromanAustralianbankaccount:$100
NonAustraliansourcedincome:
o Incomefromanoverseasjob:$26,000

(AllfiguresareinAustraliandollars).
CalculateFranksliabilitytotheATOfortheincomeyearended30June2014.
Australiansourcedincomeistaxed:12,000+100=12,100
Thereforeliability=(12,100)*32.5%=$3,923.5
3.OzCoisanAustralianresidentcompany.Fortheyearended30June2014,
thecompanyhasassessableincomeof$200,000anddeductionsof$40,000.They
haveataxoffsetof$5,000.Whatisthecompanystaxliability?
Companystaxableincome=200,00040,000=160,000
Companystaxliability=160,000*0.35,000=43,000
TUTORIALFOUR:WEEK5
Problem1
XYZEngineeringPtyLtd(anAustraliancompany)entersintomanufacturing
contractswithvariouscompanies.Itreceives$100,000compensationin
connectionwiththecancellationofacontractmadeinthecourseofthe
companysbusinesswithLogoPtyLtd.Thecontractwouldhavetakenup15%
ofXYZEngineeringsmanufacturingcapacityforthenexttwoyears,and
provideditwithrevenueof$150,000overthatperiod.
Wouldthe$100,000receivedbyXYZEngineeringbeassessableunders65(i.e.
ordinaryincome)?Youdonotneedtoconsiderthestatutoryincomeprovisions.
Keyfacts
Compensationof100,000forcancellationofcontractwithLogo

o Contractwouldhavetakenup15%ofEngineeringsmanufacturing
capacityforthenext2years.Potentialrevenuewasestimatedtobe
150,000.
Manufacturing,Australiancompany
o Companyentersintomanufacturingcontractswithvariouscompanies.
Logoisonlyonecompany.
Keyissue:Isthecompensationassessableasordinaryincomeunders65?
Cases:
HeavyMineralscompensationforcancellationofbusinesscontractwillbe
substituteforincome(ifprofitmakingstructureleftintact).
MyerEmporiumlumpsumamountthatreplacesfutureincomewillitselfbe
income.
CaliforniaCopperProductscompensationforcancellationofbusiness
contractwascapitalasitresultedinterminationoftaxpayersbusiness.
Decision
Thecontractonlytakesup15%ofcompanysrevenue.Itsacomponent,butnot
necessarilyamajorcomponentofthecompanysbusiness.Itdoesntseemlikethe
businessneedstobeadjustedtocompensateforthelossofthiscontract.Thereforeit
islikelythattheprofitmakingstructurehasbeenleftintact.Thecontractdidnot
resultintheterminationoftaxpayersbusiness.100,000isabout75%of150,000
thereforeseemslikelythatitisareplacementofincome.
Conclusion
Mostlikelythatthecompensationwillbetreatedasincomeunders65.
Problem2
SimpsonsShoppingCentresPtyLtd(SSC)wasincorporatedin1995.Itsmain
activityhasbeenthedesign,constructionandmanagementofshoppingcentres.
SSCsusualpracticeistotargetinadvanceanareawithpotentialforashopping
centreandtoacquirelandinthearea.Inrespectofonepossibledevelopmentit
purchasedlandin2008.However,whenitcametimetodevelopthatsite,the
areawasindeeprecession.SSCconsequentlysoldthelandon1Juneinthe
currentincomeyear,foraprofitof$600,000.
Willtheprofitbeconsideredordinaryincome?(Youdonotneedtoconsiderthe
capitalgainstaxprovisions).
Keyfacts
Companyaim:mainactivityisdesign,constructionandmanagementof
shoppingcentres(incorporatedin1995).
Inrespectofonepossibledevelopment,itpurchasedlandin2008howeverdid
notendofdeveloping.Intentionwasdevelopment.

SSCsoldlandforprofitof$600,000.

Cases
MyerEmporiumisolatedtransactiondoctrine(youcanlookatatransaction
byitselftodeterminewhetherornotisincome,evenifitmaynotbethe
companysmainbusinessactivity).
Westfield(1991)transactionwasnotassessableasordinaryincomebutwas
treatedascapital.
Decision
Initiallywhentheypurchasedtheland,theintentionwastodeveloptheland(similar
toWestfield).Theyonlydecidedtosellbecausetheycouldnotprofitfromthe
developmentoftheland.Thereforeshouldbecapitalgains.
Problem3
Victoriaholdspatentsforanewtypeofcomputerchiptobeusedinrobotic
petsandentersintoanexclusivelicensingagreementwithaJapanesecompany
forthemanufactureandsaleofsuchroboticpetsinJapan.Thelicensing
agreementprovidesforapaymentof$5foreachroboticpetsoldandforthe
paymentbytheJapanesecompanytoVictoriaofalumpsumof$50,000,
describedasanonrefundableadvanceofroyalties.TheJapanesecompanyis
entitledtocreditroyaltyentitlementspayableagainstthissum,butinfactno
roboticpetsaresoldbytheJapanesecompany,andthe$50,000istheonly
amounteverreceivedbyVictoria.
Whatamounts,ifany,willbeincludedinVictoriasassessableincome(under
eithertheordinaryorstatutoryincomeprovisions?)Youarenotrequiredto
considerthecapitalgainstaxprovisions.
Keyfacts
Victoriaholdspatentsforanewcomputerchipsforroboticpets
Entersintoalicensingagreement
$5foreachroboticpetsold,andreceivedalumpsumof$50,000
o nonrefundableadvanceofroyalties
Japanesecompanywasentitledtocreditroyaltyentitlementspayableagainst
thissum
NopetswereeversoldsoVictoriaonlyreceived$50,000
Issue
Isthe50,000goingtoberoyaltyincome?
S65andS1520
Case
StantonvFCTnotafixedpaymentforuseofpropertymeansnotroyalties.
McCauleyvFCTfixedpaymentforuseofpropertymeansroyalties/

AATcase34(1987)

Decision
Lumpsumreceivedinadvancewouldberegardlessofwhetherornotshesold
thepets.Youhaveastructureofroyalties,buttheroyaltyincomeisgoingto
be0becausenopetsweresold.Notroyaltyincomeunderordinaryorstatutory
income.
50,000isfromthepatents(licensingagreements)thereforeisnotordinary
incomeandislikelytobecapturedundercapital.
Generaldiscussionquestions
1. WhattwoprinciplescanbeextractedfromthedecisioninMyer
Emporium?
1.Anextraordinarytransactionwillbeassessableincomeifthetaxpayerenteredinto
thetransactionwiththeintentionorpurposeofmakingaprofitfromthetransaction
(firststrandofMyer)
2.Lumpsumamountreceivedascompensationforlostincomewillbetreatedas
income(secondstrandofMyer)
2. Canaroyaltythatistaxableunders65betaxableunders1520?
No,itcannotbetaxableunderbothsections.Youcannotbetaxedundertwosections.

TUTORIALFIVE:WEEK6

Keyfacts
JoeisanAustralianresident
TaxaccountantforZYXworksforAustraliancompany
Salaryof$90,000plus9%
Employerpaidforemployees$6000education(MastersofTaxation)in
August2013
Employerreimbursedemployee$1200forprivatehealthinsuranceand$900
forgymmembership
1)CalculatingaccountingfirmsFBTliability
1. Isthereafringebenefit?
Definedins136(1)
Abenefit
Providedduringyearoftax
Byanemployer,associateorthirdpartyarranger
Inrespectoftheemploymentoftheemployee
1. Salaryof$90,000plus9%notFBTunders136(1)
2. Employerpaidforemployees$6000education(MastersofTaxation)in
August2013FBbecauseitsprovidedtoJoeinrespectofhisemployment
3. Employerreimbursedemployee$1200forprivatehealthinsuranceand$900
forgymmembershipFBbecauseitsprovidedtoJoeinrespectofhis
employment
Itseemsthattheeducation,privatehealthinsuranceandgymmembershipwerepaid
inrespectoftheemploymentoftheemployeeasthereisnoindicationthatitwas
fromapersonalrelationshipbetweentheemployeeandtheemployer.

2. Isthebenefitexcluded?
No,noneofthebenefitsareexcluded.Minorfringebenefitsexclusionclausedoesnot
operateasthevalueofthebenefitsneedtobe<$300.
3. Identifycategoryofbenefit
Expensepaymentfringebenefit(Div5)
Anexpensepaymentfringebenefitmayariseineitheroftwoways:
A. whereyou(theemployer)reimburseanemployeeforexpensestheyincur
B. whereyoupayathirdpartyinsatisfactionofexpensesincurredbyan
employee.
1.Education:expensepaymentfringebenefit(Div5)S20A

2.Privatehealthinsurance:expensepaymentfringebenefit(Div5)S20B
3.Gymmembership:expensepaymentfringebenefit(Div5)S20B
4. Determinetaxablevalue
Thetaxablevalueofanexpensepaymentfringebenefitistheamountyoureimburse
orpay.
1.Education
Accordingtos23,taxablevalue$6000.
Howeverunders24,iftheselfeducationexpensesareworkrelated(asit'saMaster
ofTaxationyoucanassumethatitisrelatedtowork),thetaxablevaluecanbe
reducedbytheotherwisedeductiblerule.Taxablevaluemaybereducedbythe
amounttheemployeewouldhavebeenentitledtoclaimasanincometaxdeductionif
youhadnotreimbursedthem.
Thereforetaxablevalue=0,assumingthattheexpenditureis100%relatedto
business.
2.Privatehealthinsurance
Accordingtos23,taxableamountistheamountpaid$1200.
CannotbedeductiblebecauseitisnotconnectedtoJoesemployment.
3.Gymmembership
Accordingtos23,taxableamountistheamountpaid$900.
CannotbedeductiblebecauseitisnotconnectedtoJoesemployment.
5. Calculatefringebenefitstaxableamount(grossedupamount)
AregoodsliableunderGSTscheme?

PrivatehealthinsuranceisGSTfreesupply(type2)S5B(1C)
EducationisGSTfreesupply(type2)S5B(1C)
Gymmembershipisataxablysupply(type1)S5B(1B)

TYPE1aggregatefringebenefitsamount(GST)

Grossuprateyearending2014is2.0647
1.Gymmembership
Thereforefringebenefitsamount=2.0647*900=1,858
TYPE2aggregatefringebenefitsamount(GSTfree)

Grossuprateyearending2014is1.8692
1.Privatehealthinsurance
Fringebenefitsamount=1.8692*1200=2,243
2.Education
Fringebenefitsamount=0
6. CalculateFBTliability
AmountofFBTliability=[(Type1fringebenefitstaxableamount)+(Type2fringe
benefitstaxableamount)]xcurrentFBTrate
=(1,858+2,243)*0.465
=1,907
Q2)
FBTliabilitythatispaidisthedeductionfortheemployerbecauseitisacompany
incurredexpenseinconnectwithemploymentunders81.
Allthesebenefitscanalsobeclaimedasadeduction.
Q3)
GST(consumptiontax)isnotbornebythecompany.IncometaxandFBTisborneby
theemployer.ThereforepaymentofFBTwillhaveeffectonthecompanysaccount.

a)Asinputtaxcreditisavailable;thisisatype1FBTasset.(s23,FBTAA)
6000*2.0647=12,388
b)Asinputtaxcreditisnotavailable;thisisatype2FBTasset.(s18,FBTAA)
4000*1.8692=7,477
(12,388+7,477)*0.465=9,234.23
Calculatingloanfringebenefitsex.

a)Leasedabuilding,leaseexpired.
IsthereaCGTevent?C2event(s10425);cancellation,surrenderorsimilarendings
ofanintangibleCGTasset.
IsthereaCGTasset?Aleaseisalegalequitablerightthatisnotaproperty(s1085).
Aretherecapitalproceeds?Dontknow.Nottold.
Costbase?Dontknow.Nottold.

Exemptions?Mostlikelynoexemptions.
b)Forfeitsadepositpaidundercontract.
CGTevent?H1forfeitureofadeposit(specialcapitalreceipts?).
CGTasset?Contractualrighttothedepositmoneyisanasset.
Capitalproceeds?No.
Costbase?No.
Exemptions?Maybemainresidenceexemption(s118110).Howevers118110(2)
(b)specificallyexcludesforfeiteddeposits.
c)DisposaloftradingstockanddepreciatedplanttoRobert.
IsthereaCGTevent?A1(s1041)happensifyoudisposeofaCGTasset.
CGTasset?Tradingstockanddepreciatedplantisanasset.
Tradingstockispartofordinaryincomesoitshouldntbecaughtagainunderanti
overlapprovisions(s11820).
BalancingadjustmentDiv40caughtintheincometaxarena(s11824)therefore
alsodisregarddepreciatedplant.
6StepsforcalculatingCGT
1. IsthereaCGTevent?
YoucanonlymakeacapitalgainorlossifCGTeventoccurs:s10220.
S1045givesalistofCGTevents.
o A:Disposals
o B:Useandenjoymentbeforetitlepasses
o C:EndofCGTasset
o D:CreationofCGTassets
o E:Trusts
o F:Leases
o G:Shares
o H:SpecialCapitalReceipts
o I:Residencyends
o J:Eventsrelatingtorollovers
o K:Other
o L:Consolidatedgroups
2.
3.
4.
5.
6.

IsthereaCGTasset?
Aretherecapitalproceeds?
Whatisthecostbase?
Isthereacapitalgainorloss?
Doesanexemptionapply?

TUTORIALSIX:WEEK7

Key
facts:
I
n
c
o
m
e

yearis20132014(relevantrates)
Australianresidentindividual
Netcapitallossformprioryearwas5,000
Ignoreindexation
Netcapitalgainforthisincomeyear?

1.House
Datepurchased:1September1990
Purchaseprice:200,000
Salesprice:820,000
Otherfacts:
Jointownershipofhousewithwife
Purchaseandsalespriceistotalpriceofhouse
Mr/MrsSmithhavelivedinthehousesincedateofpurchase
Othercosts:advertising(2,000),stampduty(10,000),agentcommission
(20,000)

2.Vacantland
Datepurchased:1February2008
Purchaseprice:30,000
Salesprice:150,000
Otherfacts:
Completelyseparateblogoflandtothehouse
Othercosts:advertising(1,000),stampduty(2,000),agentcommission
(4,000)
3.Vintagecar
Datepurchased:1March2002
Purchaseprice:22,000
Salesprice:Nil
Otherfacts:
Mr.Smithgaveacartohisson
Marketvalueattimeofdisposalwas9,000
Vintagecarisa1924Bentley
Beforesale,Mr.Smithpaid300tohavecarservicedand200inadvertising
expenses
4.Television
Datepurchased:1July2009
Purchaseprice:1,500
Salesprice:200
5.5,000sharesinABC
Datepurchased:1July2013
Purchaseprice:7,500
Salesprice:18,000
Otherfacts:
Purchasebrokeragefees300
Salebrokeragefees500
6.2,000sharesinCAB
Datepurchased:1July2010
Purchaseprice:6,000
Salesprice:8,000
Otherfacts:
Purchasebrokeragefees200
Salebrokeragefees400
Steps
CGTevent
s1045
Listsoutallcapitalevents

CGTasset
s1085(1)ACGTassetis:
(a) anykindofproperty;or
(b) alegalorequitablerightthatisnotproperty
3specialcategories+standardCGTassets
1.Collectables
2.Personaluseassets
3.SeparateCGTassets
3.CGTassetsthatarentcollectablesorpersonaluseassets
CGTproceeds
s11620generalrules
(1) ThecapitalproceedsfromaCGTeventarethetotalof:
(a) Themoneyyouhavereceived,orareentitledtoreceive,in
respectoftheeventhappening;and
(b) Themarketvalueofanyotherpropertyyouhavereceived,or
areentitledtoreceive,inrespectoftheeventhappening
ModificationstoCGTproceeds
s11625
1.Marketvaluesubstitution:s11630
2.Apportionment:s11640
3.Nonreceiptrule:s11645
4.Repaidrule:s11650
5.Assumptionofliability:s11655
6.Misappropriationrule:s11660
Costbase
s11025
Costbaseconsistsoffiveelements:s11025(1)
1stelementmoneypaid/propertygiveninrespectofacquiring:s110
25(2)
2ndelementincidentalcosts:s11025(3)(sees11035)
3rdelementcostsofowning:s11025(4)
Onlyifassetwasacquiredafter20thAugust1991
4thelementexpendituretoincreaseorpreservevalueofassetorthat
relatestoinstallingormovingit:s11025(5)
5thelementexpendituretoestablish,preserveordefendtitle:s110
25(6)
nd
rd
2and3

element:incidentalcostsandownershipcosts
Incidentalcosts:Sees11035.
Someexamples(notexhaustivelist)are:Costofagent,accountant,
legaladviser,surveyoretc;Stampduty;Advertisingcosts;Borrowing
expenses;Costofconveyancing
Ownershipcosts:Sees11025(4)
Onlyifassetacquiredafter20August1991

 Examples:Interest;Repairs;Landtax
Exemptions
s10030
4categoriesofexemptions:
1. Exemptassets;cars
2. Exemptorlossdenyingtransactions;compensationforpersonalinjuryoryour
tenancycomestoanend
3. Antioverlapprovisions;reduceyourcapitalgainbytheamountthatis
otherwiseassessable
4. Smallbusinessrelief
House

Vacantland

CGTevent

CGTEventA1
s1041:
happensifyou
disposeofa
CGTasset.

CGTEventA1
s1041:
happensifyou
disposeofa
CGTasset.

CGTasset

Standard
CGTasset

Standard
CGTasset

Assetsthatare
notconsidered
tobepersonal
useassets
includeland,
buildingsand
shares(on
ATOwebsite
butcantfind
inlegislation)

Assetsthatare
notconsidered
tobepersonal
useassets
includeland,
buildingsand
shares(on
ATOwebsite
butcantfind
inlegislation)

Vintagecar
(1924)
CGTEventA1
s1041:
happensifyou
disposeofa
CGTasset.
Couldbea
collectableora
personaluse
asset.
Isthecaran
antique
(collectable)?
Under
TD1999/40an
assetthat
exceeds100
yearsofageis
generally
recognisedas
anantique.Car
is90yearsold.
S1082(2)
Personaluse
assetsaCGT
asset(excepta
collectable)that
isusedorkept
mainlyforyour
personaluseor

TV
CGTEvent
A1
s1041:
happensif
youdispose
ofaCGT
asset.
S1082(2)
Personaluse
assetsa
CGTasset
(excepta
collectable)
thatisusedor
keptmainly
foryour
personaluse
orenjoyment

Sharesin
ABC
CGTEvent
A1
s1041:
happensif
youdispose
ofaCGT
asset.
Standard
CGTasset

Sharesin
CAB
CGTEvent
A1
s1041:
happensif
youdispose
ofaCGT
asset.
Standard
CGTasset

Assetsthat
arenot
consideredto
bepersonal
useassets
includeland,
buildingsand
shares(on
ATOwebsite
butcantfind
inlegislation)

Assetsthat
arenot
consideredto
bepersonal
useassets
includeland,
buildingsand
shares(on
ATOwebsite
butcantfind
inlegislation)

CGT
proceeds

s11620
generalrules
Sales:820,000

s11620
generalrules
Sales:150,000

Joint
ownership
apportionment
rule(s11640):
Only410,000
relatestoMr.
Smith.

CGTcost
base

s11620
generalrules

Marketvalue
substitution:
Sales:200
s11630
Ifyoureceive
nocapital
proceedsfroma
CGTeventyou
aretakento
havereceived
themarket
valueofthe
CGTassetthat
issubjecttothe
event.

Purchase
price:200,000

Marketvalue:
9,000
Purchaseprice: Purchaseprice: Purchase
30,000
22,000
price:1,500

Incidental
costss11035
Advertising:
2,000
Stampduty:
10,000
Agent
commission:
20,000

Incidental
costss11035
Advertising:
1,000
Stampduty:
2,000
Agent
commission:
4,000

Ownershipcost
Carservice:
300
Costof
ownershipare
disregarded
s11025(4)for
personaluse
assets

Costbase=
232,000

Costbase=
37,000

Incidentalcost
Advertising
costs:200

Apportionmen
trule(s112
30)

Capital
gainor
loss?

enjoyment
Sales:Nil

Thereforenew
costbaseis
116,000.
410,000
116,000=
294,000

s11620
generalrules

s11620
generalrules

Sales:18,000
Sale
brokerage
fees:500

Sales:8,000
Sale
brokerage
fees:400

Capital
proceeds=
17,500

Capital
proceeds=
7,600

Purchase
price:7,500

Purchase
price:6,000

Incidental
costs
Purchase
brokerage
fees:300

Incidental
costs
Purchase
brokerage
fees:200

Costbase=
7,800

Costbase=
6,200

17,500
7,800=9,700

7,6006,200
=1,400

Costbase=
22,200

150,000
37,000=
113,000

9,00022,200
=13,200

2001,500=
1,300

s1025:CGT
discount

(50%)

Exemption
?

YES

NO

s118110
Main
residence
exemption
CGTassetthat
isadwellingif
youarean
individualand
thedwelling
wasyourmain
residence
throughout
ownership
period.

YES

YES

s1185
Acapitalgain/
lossmadefrom
acaris
disregarded.

s11810(2)
Personaluse
assetswitha
1stelement
costbaseof
$10,000or
lessare
exempt.

NO

Car
Capitalgains
Land=113,000(discountable)
Shares(ABC)=9,700(notdiscountable)
Shares(CAB)=1,400(discountable)
Capitalloss
Prioryearcapitalloss=5000
Offsetprioryearlosswithshares(ABC)thereforeABCnetcapitalgain=4,700
Netlandcapitalgains=0.5*788,000=394,000
Netshares(CAB)capitalgains=0.5*1,400=700
TUTORIALSEVEN:WEEK8GENERALDEDUCTIONS
S81(2):Negativelimb
Cannotdeductalossoroutgoingtotheextentthatitis:
Expenditureofacapitalnature
Lossoroutgoingthatisprivateordomesticnature
Relatedtogainingorproducingyourexemptincome
AprovisionoftheActpreventsyoufromdeductingit
S810:Nodoublededuction

1,400/2=
700
NO

Toxical
GroupofchemicalengineersincorporatedacompanycalledToxical
Expresspurposeofcarryingonabusinessoftreatingtoxicchemicals
Cameacrossanewbusinessopportunityofdevelopingtoxicchemical
processingplant
Deductions
4,000,000purchaseoflandincurredinDec2012
200,000cleanupexpenses
250,000inlegalfeesfordefendingtheproceedingsbroughtbyenvironmental
group
40,000todefendacriminalprosecutionactionagainstoneofToxicals
directorswhoassaultedoneoftheenvironmentalprotestorsatarallyonthe
siteinNov2013
AdviseToxicalonwhetheranyoftheaboveamountswillbedeductibleunder
ITAA97s81.
Is4,000,000deductible?
S81yesdeductible.
S81(2)no,becauseitislikelytobecapital.

1.200,000cleanupexpensesforpreexistingpollutiononthesite
S81(1):The200,000neededtobespenttocleanupthesite.Withoutcleaning
upthesite,itcouldnotbepreparedforbusinessusethereforethisexpense
isnecessarilyincurredinproducingassessableincome.
Steele:Boughtlandforpurposesofproducingassessableincomeshe
intendedtoproduceassessableincomebybuildingamotel,eventhoughshe
decidedtodosomethingelsewiththeland.Therewasnootherpurposein
incurringtheexpenseotherthenforproducingassessableincome.
SoftwoodPulpandPaper:Companyconductedfeasibilitystudiesonland
beforetheypurchased.Couldnotdeductbecausetheassessmentexpenses
werepreliminary.Costswereincurredbeforetheprojecthappenedtherefore
heldtobecapitalinnature.
o CandistinguishToxicalbecausethecleanupexpenseswereincurred
aspartoftheproject.Theyhadalreadyboughtthelandwasnota
feasibilitystudy,wasforthepreparationoflandthatwouldproduce
income.
S81(2):DixonstestfromSunNewspaper
o Distinguishbetweenbusinessstructure(capital)orbusinessprocess
(income)
o Characterofadvantagewhatarethebenefits
o Mannerinwhichitisrelieduponorenjoyeddurationofthe
benefit
o Characteristicsofpaymenthowfrequentlyisthepaymentmade
Thepaymentismostlikelytobecapitalbecauseitisalumpsumpaymentthatwill
procurealongtermbenefit.Itsnotpartoftheprocess,itsaffectingthestructureof
thebusiness.Withouttheexpensethereisnowayforthebusinesstocontinue.
2.250,000inlegalfeesfordefendingtheproceedingsbroughtbyenvironmental
group
HeraldAndWeeklyTimes(1932)48CLR113
Newspaperpublisherhadtodefendthemselvesagainstalibelcase.Judgesaidthatit
wasanunavoidableaspectoftheirjob.
Itishighlyforeseeablethatachemicalprocessingcompanywillclashheadswith
environmentalactivistsbecauseofthenatureoftheirbusiness.Itwasnecessary
expenditureforthemtocontinuetheirdevelopment.
S81(2):Lookatthenegativelimbs
Isitcapital?
Dixonstest:
YESITISCAPITAL:Legalfeesareaboutwhetherornottheplanning
permitsarevalid.Legalfeesareaprettysubstantial.Anordinarypartofthe

chemicalcleaningbusinessisseekingplanningpermits.Itisalsoverylikely
thatenvironmentalactivistswouldcomeafterthem.
NOITISNOTCAPITAL:expenditurerelatestoplanningpermits,whichare
crucialtotherunningofthebusiness.

3.40,000todefendacriminalprosecutionactionagainstoneofToxicals
directorswhoassaultedoneoftheenvironmentalprotestorsatarallyonthesite
inNov2013.
Withouthim,thereisnobusinessandbydefaultheisthebusinessstructure.
Ifhesnotintegraltothebusinessisthe40,000relevanttothebusiness?Hisactions
arenottheretoaidtheproductionofassessableincome.Thereforeitisnotdeductible
becauseitdoesnotfitintos81(1).

Travelexpensesandhomeofficeexpenses
Ruling/determinationdeterminationismorespecifictoaparticulararea,andisofa
lowerhierarchythanruling.

Homeofficeexpenses
Runningexpensesvsstayingattheplace
Doesthepractisehavethecharacteroftheplaceofbusiness
1. Identifiable
2.
Notportable,canbesetasideclearlyidentifiable(doesitmeanasignordefined
floorspace).
Canonlyclaim20%of41,600taxrulingTR93/30saysthatyoucanclaim
deductionsbasedonfloorarea.
Travelcosts
Travelfromhometoofficearenotdeductible.ThisexpenseisnotincurredIN
GAININGincome.Travellingisjusttohelpyoutogettoaplaceofwork.
Payne:Youcannotclaimfortravellingexpensesbetweenjob1andjob2.After
Paynescase,s25100wasintroduced.Commissionerputinanewsectiontosaythat
travellingbetweenjob1tojob2ISDEDUCTIBLE.
S25100(3)travelbetweentwoplaceswhereoneoftheplacesiswhereyoureside,
cannotbeclaimed.

1. Travelexpenses:500notdeductiblebecauseofLooneycase.160intaxi
faresshouldbedeductiblebecauseofs25100(3).

2. Restaurantuniform:uniformhastobeuniqueanddistinctiveandspecificto
thejob.Theuniformhasalogo(generaldeduction)andalsos3415(specific
deduction).
3. Suit:isnotdeductiblebecausethesuitcanbewornwhereverhewants
expenseismoreprivateinnature.
4. Textbooks:notdeductibleselfeducationexpenseswerenotincurredaspart
ofhisjob.Hewashiredaftereducationexpenses.

TUTORIALEIGHT:WEEK9SPECIFICDEDUCTIONS
Briefoverviewofdeductions
Taxableincome:assessableincomeallowabledeductions
Allowabledeductions:generalandspecificdeductions
S81:
Positivelimbswhatcanbededucted
1. Incurredingainingorproducingassessableincome
2. Necessarilyincurredintermsofthebusiness
Negativelimbswhatcantbededucted
1. Capital
2. Privateordomestic
3. Producingexemptincome
4. Specificprohibitions
S810:Nodoubledeductionsallowed

Backgroundinformation
Purchasedahousefor600,000on1Sep2013
Investmentproperty
Expensesincurredin20132014
o Loanof500,000for20yearstopurchasethehouse
o Interestpaidonhouse28,000
o Borrowingexpenseswere3,000
o Roofofhousewasdamagedandreplacedattimeofpurchase:18,000
o WindowswerebrokeninNov2013bysometeenagerscostof
replacementof300
o 1,800forrealestatepropertyfeesforrentalpropertymanagement
Whatcanbedeductedunders810,2510,2525,foryearending30June2014?
S81:Generaldeductions
S2510:Repairs
S2525:Borrowingexpenses
Unders65,rentalincomeisassessableincome.Thereforeexpensesrelatingtorental
incomemaybedeductible.
Typeof
expense
Interest
expense

Amount

Isitdeductible?

28,000

S81(1)
relatestotheproductionofassessable

Deductible
amount
28,000

Borrowing
expenses

3,000

income,intheformofrentalincome
interestfromtheloanisnecessaryto
acquiretheproperty
itisnotcapitalinnature(Dixonstest)
1.Frequencyofpaymentongoing
2.Doesntchangeprofitmaking
structure,justapartofthebusiness
expenses
CofTvMunro(1926)
S81(1)
borrowingexpensesarenecessaryin
acquiringtheloan,toproduceassessable
income
Morespecificsection:s2525
borrowingexpensesaredeductible
Thedeductionwillbeover5years
becausethelengthoftheloanisover5
years

Roof
replacemen
t

18,000

Whatisinitialrepair(capital)versus
normalrepair?
LawShippingComoneyspentcantbe
morethatheactualassetitself.
Consideredanimprovementbecauseit
addsfunctionalcapacityandinitial
repairsarenotconsideredas
maintenance.

5years=1825
days
1Sep14to30
June2014=
303days
Therefore
deductible
amount=
3000/1825*30
3
=498
0not
deductible
becauseitis
capital

WThomasinitialrepairswerenot
consideredasrepaircostsbecausethey
arecapitalinnature.Costsofputting
somethingintogoodorder,ispartofthe
acquisitioncosts,andiscapitalinnature.

Window
replacemen
t

300

S81(1)>deductible
S82(2)>capital,thereforeincludedas
costofacquisition(initialrepair)
S81(1)>deductible
S81(2)>capitalinnature
S2510>repairwasdonetopartofthe
premise,whichwasbeproduce
assessableincome

300

Arethewindowsaseparateassetoftheir
own,orpartofalargerstructure?

Realestate
fees

1800

Lindsay/TR97/23:windowsarepartof
anentirety,notofitsown
BPcase:nothingtoindicatethatthe
materialusedforreplacingwindowsis
better
S81(1)>lossoroutgoing
S81(2)>isitcapitalinnature?
NO:recurringpayments,theyrejust
partoftheprocessofproducingrental
incomesimilartorunningcosts

1800

Giveasummaryintheassignmentoftheconclusion
Expenditure
Interestexpenses
Borrowingcosts
Roofreplacement
Windows
Realestatefees
Total

Section
S81
S2525
S4310
S2510
S81

Deductibleamountfor2013FY
28,000
498
374
300
1800

Keyfacts
Pandapays20,000toapotentialcompetitor,inreturnforcompetitornotto
openwithinnext6months(outletinNSWcompetingwithPandasbusiness)
2000incurredspeedingandparkingfinesfromdeliverydrivers
9500forentertainmentexpenses
o 8000inrespectofprovidingfoodanddrinksformembersofthepublic
attendinganopenexhibition
Areanyoftheamountsdeductible?
S81(1)
Isitexpenditurerelatingtogainingandproducingassessableincome

S81(2)

20,000to
potential
competitor

Penalties

Entertainmen
tfees(8000)

Entertainmen
texpenses
(1500)

Isitcapitalinnature?
Legalprinciple
DixonscriteriaSun
Newspaper
1.Characterofadvantage
2.Lengthofbenefit
3.Mannerofpayment
BrokenHillTheatreonly
cinemainthesuburb,therewasa
competitorthatwantedtoopen
anothertheatre.BrokenHillpaid
anamounttotheothercinema
nottoopen.
S81incurredindelivering
products
Unders81(2)(d)ifthereisa
specificdeductionthendeduction
isnotdeductible
S265notdeductiblebecause
imposedbythecourts(specific
deduction)
S81(1)deductible
S81(2)(d)willnotbe
deductibleifthereisaspecific
negativedeductionlimb
Div32preventsdeductionof
entertainmentexpensesevenif
businessdiscussionsoccur
S3245ifitrelatestopromotion
andadvertisingthenitisexempt
fromDiv32THEREFORE
DEDUCTIBLE
S81(1)deductible
S81(2)specificprovisionin
Div32meansthat1500isnot
deductible

Reasoning
Donetoseekanadvantage
Paidasalumpsum
Howeverlengthofbenefitisonly
6months
Thereforedoesnthavelasting
qualitieslikeinSunNewspaper

Q1)
S81isitrelatedtoassessableincome?Noitisnotitsjustadonation.
HoweverunderDiv30:allowsadeductionformoneyorproperty(incl.tradingstock)
of$2ormorethataremadetooneofthebodieslistedins30315(alsoseeATO
website):Deductiblegiftrecipient
TR2005/13$20isdeductiblegiftmeansthatyoudonotgetanythinginreturn.
Div30allowsadeduction.
$100notdeductiblebecause
Q2)
S81,notdeductiblebecausetheexpenseisnotincurredINproducingassessable
incomePaynescase
Ifyouretravellingbetweenhomeandworknotdeductible
S25100
Ifyouretravellingbetweenoneworkplaceandanotherplacenotdeductible
TUTORIALEIGHT:DEDUCTIONSCAPITALALLOWANCESAND
CAPITALWORKS
Div43:2.5%(1992onwards)or4%(hotels,motels)lookatlegislationasinmost
cases2.5%isapplicable,howeverinspecificcases4%willapply.
Div40:

Fact

Jackhasaqualificationincomputerelectronics
Purchasedashopfor385k.Completionofconstructionofpurchasesfrom
previousownerJillwasdoneinJune2002.
Aimistooperateatv/dvdrepairbusiness
o Busystreet,inParramatta.
ConstructionofpremiseswascompletedbypreviousownerinJune2012,cost
Jill160ktoconstructpremises

Jackborrowed300kfromanAustralianbanktofinancepurchase
Interestpriortocommencementofbusinesswas2800and11,100from1
November2012to30June2013.
WhenJackboughttheshop,heneededtoreplacetheflooring(cheapestquote
was$3,000inordertosaveonflooringcostsheremovedithimselfanddidit
withhisbrother).
Newfloorwasinstalledat$11,500bylocalcontractorscompletedon15th
October2012.
15thOctoberspent$15,000onworkbenches(deliveredon31stOctober
2012)alsospends$1,000tohaveworkbenchesboltedtothefloor.Work
bencheshaveaneffectivelifeof15years.
Businesscommencedon1November2012.

385kforashop
Notdeductibleundergeneraldeductionsbecausecapitalinnatures81(2).
JustbecauseitsonabusyroadinParramattadoesntmatterthatitsaplant
(WoolenMills).
S4045:Div40doesntapplytocapitalworksifDiv43applies.
S4320:Div43appliestobuildingsorstructuralimprovementwhichbegan
after21stAugust1979
o S4310:Youcandeductanamountforcapitalworksforanincome
yearyoucanonlydeductanamountifthecapitalworkshas:
Constructionexpenditurearea
Poolofconstructionarea
Useyourarea
Constructionexpenditurerelevanttoyourarea(s43
115)
S43160maintainedreadyforuse.
Buildingisdeductible3,320.54
Diminishingvalue
Floorremoval
NodeductioncanbeclaimedFCTvWesternSuburbsCinema
Nodeductionfornotionalrepairsifyoudontactuallyspendthemoney,
thereisnoclaimondeduction.
Flooraddition
$11,500on15thOctoberfornewfloor
Notdeductibleundergeneraldeductionsbecauseitscapitalinnature.
S2510repairs
o Itisaninitialrepairthereforeitiscapitalinnature

TUTORIALELEVEN:TAXATIONOFPARTNERSHIPS;TAX
ACCOUNTIGNANDTRADINGSTOCK
Whatisapartnership?
Taxlawhasanextendedmeaningpartnershipsthatareinreceiptof
ordinaryincomeorstatutoryincomejointly
Facts
WHOLESALEBUSINESS
FredandWilmaareamarriedcouple
Runasuccessfulbookwholesalingbusinessasapartnership(started8years)
Operatebusinessthoughalargefactor,employ12staffwhodomajorityofthe
work(workinsalesandinthefactory)
30June2014
o Sales:2.6M(madeoncashandcredit)
0.4Mhasnotyetbeenreceived
o Additional0.18Min2014relatestosalesin2013taxyear
o Wroteofdebtof20,000relatingtoasalemadein2013saleswas
madetoacoachingcentre,whichwentbankruptmightbebaddebt
deduction
DetailsoftradingstockCOGS

Businesspaid0.43Mpaidinsalariesduringtheyear,including50kpaidto
Fred(Wilmahasanunrelatedjoboutsidethepartnership)
Otherdeductibleexpensesforbusinessinclude90k(assumedeductibleunder
s81)
PartnershipagreementstipulatesthatafterpaymentofFreds50k,profitsand
lossesaresplit60%toFredand40%toWilma

RENTALPROPERTY
FredandWilmaownarentalproperty.
Expensesandincomeinclude:

Wilmaalsoearns80kfromemploymentunrelatedtothebusiness

CalculateFredandWilmasincomefortheyearended30June2014.

SALES
Mustconsiderwhetheritiscashoraccrualbasisforsales:
Cashincomeiscalculatedashowmuchcashyouhavereceived.
Accrualincomeiscalculatedaswhenyouhaveearnedthecome.
Cardenscasenoonefactorisgoingtobedecisive
Cash
Receiptsaproductofprofessionalskills/personalwork
Fewemployees,levelofprofitattributabletoemployeeslow
Accruals
Tradingstockhavetradingstock
Creditsaleshavecreditsales(salesfortheyearis2.6M,businessis
relativelylarge)
Capitalequipmenthaveawarehouse
Employeesimportantpartofincomeearningprocesshave12staffwhich
haveworkedfor8years
Canmatchincomeandexpenditure
Basedonaccrualsmethod,totalsalesare2.6M.0.18Mwasconsideredinprevious
yearsoisnotincludedin2014taxyear.
BADDEBT
S2535
1. Mustbeadebtdebtis20,000
2. Debtmustbebadunabletorecoverbecausethecompanyhasgone
bankrupt,musthaveshownevidencethatyouhavetriedtochasethedebt
3. Debtmusthavebeenwrittenoffduringtheyearofincomethishasbeen
donebyFredandWilma
4. Debtmustbeformallyincludedinassessableincomesalesmadein
previousyear,sowouldhavebeenaccountedinassessableincomeinthe
previousyear(accrualsbasis)
Debtisgoingtobebad,thereforeallowablededuction.
TRADINGSTOCK(2M)
Unders81,tradingstockpurchasesaredeductible(2M)
S7035,para2ifclosingstockminusopeningstock<0,thenthisisassessable
income.Ifclosingstockminusopeningstock>0,thenallowablededuction.
Closingstockopeningstock=600k400k=200kassessableincome.
S7010definitionoftradingstock

SALARIES(0.38Mtootheremployees+0.05MtoFredwhoisapartner)
Normallydeductibleunders81(0.38Mforotheremployees).
TR2005/7whenasalaryhasbeenpaidtoapartnerinapartnership,itissupposed
tobetreatedasanentitlementtoprofit.Therefore50Kisnotanallowablededuction.
OTHERDEDUCTIBLEEXPENSES
Theyaredeductibleunders81.
Sales
TS
Totalincome

2.6M
0.2M
2.8M

Debtwriteoff
TSpurchases
Salaries
Otherdeductible
Totaldeductions
Netincome

0.02M
2M
0.38M
0.09M
0.249M
0.31M

50,000mustgotoFred
Remainder260,000willbegeneraldistributionaccordingto60:40split.
Fred156K
Wilma104K
RENTALPROPERTY
Partnershipagreementisnotpartoftheirbusinessagreement
Lookattaxlawdefinitionofpartnership(McDonaldscase)
(a) Unders9951anassociationofpersons(otherthanacompanyoralimited
partnership)carryingonbusinessaspartnersorinreceiptofordinary
incomeorstatutoryincomejointly;or

Rentalincome=28,600ordinaryincomeunders65
Interestonmortgage=14,000allowabledeductionunders81(Steele)
Rentalagentfees=2,800allowabledeductionunders81
Council/waterrates=1,000allowabledeductionunders81
Minorrepairs=400allowabledeductionunderspecificrepairsdeduction(s2510)
Netincome=10,400

Fred5,200taxableincome
Wilma5,200taxableincome
Conclusion
Fred
Netincomefrombusiness=160,000+50,000
Netincomefromrentalproperty=5,200
Total=211,200
Wilma
Netincomefrombusiness=104,000
Employmentsalary=80,000
Netincomefromrentalproperty=5,200
Total=189,200
Generaldiscussionquestions
1. Whyisitimportanttodeterminewhethertradingstockisonhand?What
isthemostsignificantfactorindeterminingwhethertradingstockison
hand?
Adjustmentsunders7035
s7040:Valueoftradingstockonhandatbeginningofyear=valueoftradingstockat
endofpreviousyear
Whatdoesonhandmean?FarnsworthvCofT(1949)
Todeterminewhethertradingstockisonhand,taxpayermusthavedispositivepower.
TR2670dispositivepowerisdefinedinAllStatesFrozenFoodsP/LvCofT
Taxpayerisawholesalerthathasfrozenfoods
Hastaxyearendof30June.Onthatday,atmidnight,therewasahuge
shipmentthatwasinthemiddleofthewater.Thefactofphysicalpossession
isonlyoneunderlyingfactor.Propertythatisnotphysicallyheldmaystillbe
onhand.
AmIabletoselltheproduct,doIhavethepowertodisposeofit?
2. ABCElectronicsPtyLtdisaretailerofvariouspersonalelectronicgoods.
Aspartoftheirtradingoperations,theysellpersonalcomputers.
Technologicaladvanceshaveleftthecompanywithastockofoutdated
computerswhichhavetobediscountedbelowcostpriceorusualmarket
pricestosell.Isthereanyreliefavailabletothetaxpayerindeterminingthe
valueofclosingstockforthisrangeofcomputers?
s7045(1)Youmustelecttovalueeachitemoftradingstockonhandattheendof
anincomeyearat:

(a)itscost
(b)itsmarketsellingvalue;or
(c)itsreplacementvalue

s7050Youmayelecttovalueanitemofyourtradingstockbelowallthevaluesin
section7045if:

(a)thatiswarrantedbecauseofobsolescenceoranyotherspecial
circumstancesrelatingtothatitemand
(b)thevalueyouelectisreasonable.
Eachitemcanbevaluedusingdifferentmethod
Canchangemethodduringincomeyear

3. Assumethatahusbandandwifeownarentalproperty(inequalshares).
Theysignapartnershipagreementstatingthatanyprofitswillbesplit
80/20.Isthisvalidfortaxpurposes?Whyorwhynot?
No,basedonMcDonaldscase.
TUTORIALELEVEN:TAXATIONOFTRUSTS

Div6,ITAA1936Act.
TrusteehasalegalrelationshipwiththeTrusteeholdstrustpropertyforthebenefitfor
somebodyelse(beneficiary).
Keyfacts:
Discretionarytrustabletochangeallocationsofincome
TrusteeJohn
o Receives$20,000
o Incomeof$70,000fromothersources
Beneficiaries
o Jane(wife)(R)Incomeof180,000
Receives$20,000
o Sophie(15)(R)Noincome
Receives$5,000
o Harry(19)(NR)Incomeof$50,000fromnoneAustraliasources
Receives$10,000
o Henry(22)(R)Incomeof$20,000
Receives$15,000
Incomefromtrustestate=$80,000
Netincomefromthetrustestate=$100,000
Foreachoftheabovedistributions,advisewhetherthebeneficiaryortrusteewill
beliablefortax,theamountthatwillbetaxed,andwhattaxrateswillapply.
Ensureyourefertotherelevantlegislativeprovisions.
Harry
$50,000isnonAustraliansourcedincome.
Casesforpresententitlement
1. HarmervFCT(1991)173CLR264
2. FCTvWhiting(1943)68CLR199
3. FCTvTotledgePtyLtd(1982)12ATR830
4. DwightvFCT(1992)92ATC4192
5. TaylorvFCT(1970)119CLR444
Keytopresententitlementiswhetherthebeneficiaryhasapresentlinktothemoney.
Inadiscretionarytrust,thetrusteehasthediscretiontoallocatetheincome.AsJohn
hasallocatedthemoneytoJane,Sophie,HarryandHenry
Bamford
Proportionatemethodisthecorrectwayforallocatingtaxes
Distribution%
John

20/80=25%

Taxbase(additional
assessableincome)
100,000*25%=$25,000

Otherincome

Taxrate

$70,000

S97Nolegaldisability,

residentatendfoyear,
presentlyentitled.
Jane

20/80=25%

Sophie

5/80=6.25%

100,000*25%=$25,000

100,000*6.25%=$6,250

$180,000

$5,000

32.537%
S97Nolegaldisability,
residentatendfoyear,
presentlyentitled.
45%
S98(1)Trusteeisliable
topaytaxifbeneficiary
isunderlegaldisability.
Div6AAAntisplitting
provisionsapplicableto
minors.
Between$0and$417
0%.
Between$417and
$1,30766%

Harry

10/80=12.5%

Henry

15/80
=18.75%

Undistributed

10

Total

87.5%

100,000*12.5%=$12,500

100,000*18.75%=$18,750

$10,000

$15,000

Anythingabove$1,307
istaxedat45%.
ss98(2A)/(3)Trusteeis
liabletopaytaxon
Harrysshare.
Nonresident,taxedat
nonresidentrate.Thisis
32.5%.
S97Nolegaldisability,
residentatendfoyear,
presentlyentitled.
Trusteepayshighesttax
45%.

$100,000(nettrustincome)

Taxminimisationplanning
ReducetheamountsdistributedtoSophietoHarryandHenry.
Distributetheundistributedamount.
GeneralDiscussionQuestions
ComparethedefinitionofnetincomeofthepartnershipinITAA36s90withthe
definitionofnetincomeofthetrustestateinITAA36s95.Whatdifferencesdo

younotebetweenthesedefinitions?Whydoyouthinkthosedifferencesexist?
Trustincomeislockedatthetrustlevel.Lossesinthetrustareusedtodeducttrust
incomeatthetrustlevel.
Partnershiplossescanbeusedtooffsetagainstotherassessableincome.
Whatisthedifferencebetweenthequantumandproportionateapproachto
allocatingtrustincome?
Quantumapproachonlytaxedonthedistributedamountsinsteadofthenetincome
ofthetrust.

Australianresidentcompany
$1,500,000profit
o $500,000onsaleofpreCGTassetnonassessableincome
o $1,600,000ordinaryincomeassessableincome
o Deductionsof$700,00081allowabledeductions
o Tradingprofitof$900,000
o Dividendof$100,000frankedto50%
S441talksaboutdividendincome
Grossupdividend=amountofcreditsErniereceivess207
20
30/70*50%*100=21,429taxoffset
Bumpdividendupby21,429
Assessabledividendincome=121,429

Assessableincome=1,600,000+100,000+21,429
Deductions=700,000
Taxableincome=1,021,429
Taxliability=1,021,429*30%(306,429)21,429=285,000
S65Ordinaryincome
S81Deductions
S410Taxableincome*taxrateoffset
S415Taxableincome=assessableincomedeductions
Tutorialproblem
Duringthe2013taxyear,WestLtdprovidesyouwiththefollowinginformation
concerningitsfrankingaccount:
1.30.06.2012balanceoffrankingaccount:$50,000
2.28.07.2012paymentofJune2011PAYGinstalment:$90,000
3.30.09.2012receivedadistributionfromanAustralianresidentpublic
companyof$280,000.Thedistributionhadafrankingpercentageof70%.
4.28.10.2012paymentofSeptember2011PAYGinstalment:$90,000
5.15.11.2012taxrefundof$40,000relatingtothe2010/11taxyear
6.28.2.2013paymentofDecember2011PAYGinstalment:$90,000
7.01.03.2013receivedanunfrankeddistributionfromanAustralianresident
privatecompanyof$40,000
8.28.04.2013paymentofMarch2012PAYGinstalmentof$90,000.Required:
(1)Preparethecompanysfrankingaccountfortheyearended30June2013.
Companysfrankingaccountoverview
S20510:Eachcompanyhasafrankingaccount.
S215purposeoffrankingaccountistokeeptrackoftaxpaidbythecompany
S20515:Listsoutcreditsanddebitsthatcangointoafrankingaccount.
Frankingaccountisseparatefromcompanysfinancialconditionitdoesntaffect
incomestatementorbalancesheet.Allowspaymentofdividendswhichhavetax
creditsattachedtoit.

WhenIpaytaxcreditbalance.
WhenIreceivetaxrefunddebitbalance.
Generallyyouwantacreditbalancebecauseyoucanprovidefranked
dividendstotheshareholders.
Foryearending30June2013.
Taxyear:1/7/1230/6/13
Date
Transaction
O/B
50,000
28.7.12
Credit:90,000
30.09.201 Credit:84,000
2
280,000*(0.7)*(0.3/0.7)=84,000
28.10.201 Credit:90,000
2
15.11.201 Debit:40,000
2
28.2.2013 Credit:90,000
01.03.201 Unfrankeddistributionfroman
3
Australianresidentprivatecompany
of$40,000notaxcreditsattached
tounfrankeddistribution.
28.04.201 Credit:90,000
3

Closingbalance

Legislation

CR:140,000
CR:224,000

s20515(item1)
s20515(item3)

CR:314,00

Formulaisfroms20260.
s20515(item1)

CR:274,000

s20530(Item2)

CR:364,000

s20515(item1)

CR:454,000

s20515(item1)

Dosomethingwiththefrankingbalanceexamquestion.
(2)Assumetherearenofurthertransactionsthatrelatetothefrankingaccount
between29Apriland28June,andthaton29June2013,WestLtddeclaresand
paysadividendof$1,400,000.WestLtdseeksyouradviceastowhatpercentageof
thedividendshouldbefranked.I.e:Wouldyouadvisetheyfullyfrankedthe
dividend?Orshoulditonlybepartiallyfranked?Ensureyoufullyexplainyour
reasoning.
%dividendfranking?
S20260creditfordistribution=1.4M*0.3/0.7=600,000
Youneed600,000inthefrankingaccounttopayafullyfrankeddividendof1.4M.
Thereforeifthecompanywantstopayafullyfrankedaccounttheyneedtheiraccount
togointoadeficit.Howeveryouwillbepenalisedbythefrankingdeficittax.
S20335454,000/600,000=75.67%maximumfrankingpercentage.
Orfollowingcalculations:454,000/(0.3/0.7)/1,400,000=75.6%.

Therefrankingdistributionshouldbe75%.
0.75*0.3/0.7*1.4M=450,000frankingcreditsrequiredfora75%frankeddividend
of1.4M.
S20530(item1)Debit450,000C/Bof454,000sothatyouwouldhaveaO/Bof
4,000followingyear.
Fullyfrankedorpartiallyfranked+reasoning?
Shouldnotbefullyfrankedbecauseyouwouldhavetopaytax.Recommenda75%
frankeddividendof1.4Msothatalittlebalanceof4,000wouldbeleftover.(454,000
450,000)

Question1:
s20215:Maximumfrankingcredit:120,000*30/70=51,428
Frankingcreditexceedsmaximumfrankingcreditnotallowed.
Totheshareholders,themaximumamountthatcanbeclaimedbythemis51,428.
Only51,428canbededucteds20515.
Question2:
S441dividendsarepartofassessableincome.
2,000*0.3/0.7=857.14
Thereforetotalassessableincome=2,857.14
Taxableincome=2,857.14
Taxpayable=0becauseitisbelowtheminimumtaxthreshold.
S20722:youwouldget857.14back.

Question3:
S128B(1)
S128B(4)
Thereisnodoubletaxagreementinplace.
ThereforeaccordingtothetaxtablePaulineisrequiredtopay30%tax.
S128B(3)Ifthedividendisfranked,theportionthatthedividendisfrankedwillbe
exemptfromtax.
WHTcompanyholdsbackthetaxandpaysittothetaxofficeonyourbehalf.The
portionthatisfrankedisexemptfromwithholdingtax.Portionthatisunfranked
needstohavetaxpaidonit.
$2,500isfrankedtaxhasbeenpaid.
$2,500isunfrankedneedstobereducedbywithholdingtax.
Witholdingtax=$2,500*0.3=$750.
AmountthatPaulinephysicallygetsis$5,000$750=$4,250.
Iftheamountisfullyfranked,theyouwouldnothavetopayanywithholdingtax.