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TABL5551/TABL5559
Announcements Don’t forget to attend tutorials! Very important. Solutions to tutorial problems are not posted on Moodle. Assignment has now been made available for you to start on. Due date: April 5,2024 by 6.00 pm(Week 8) . Submission is via the submission link on Moodle. Recap : • Income tax = (Taxable income x Rate) less Tax offsets (s 4-10 of ITAA 1997) • Taxable income is Assessable income less deductions(section 4-15 of ITAA 1997) • Assessable income: ordinary income and statutory income (s 6-1 of ITAA1997) • Ordinary income: income according to ordinary concepts (s 6-5 of ITAA1997) • Not specifically specified in legislation • Examples: salary and wages, business income, interest income; rent • Statutory income (s 6-10 of ITAA 1997) • Income that is specifically included in a provision of legislation • Example: net capital gain • Exempt income section 6-15 of ITAA 1997. • If income is both ordinary income and statutory income the statutory provisions will usually prevail. Recap : Tax Loss • Tax loss is calculated in accordance with section 36-10 of ITAA 1997 • Tax loss = Deductions less Assessable income + Net Exempt Income Recap : Calculating Tax Payable • Calculate taxpayer’s taxable income • Calculate the basic income tax liability on the taxable income according to applicable tax rates • Calculate the taxpayer’s tax offsets • Subtract offsets from basic income tax liability • Credit is given for tax withheld / tax instalments paid • Add levies and surcharges • Resulting figure is the tax payable or the tax refund (shown in “notice of assessment”) Recap: • Last week, we looked at the taxation treatment of proceeds of business • We looked at the considerations that arise when examining a continuing business vs. isolated transactions – It is not always clear if a transaction arises in the context of an existing business, or is an isolated one Recap of last week • Important to determine if the transaction is an isolated one or not because the considerations will differ accordingly – There is some overlap, e.g. profit-making intention Taxpayer in business Taxpayer not in business Receipts and profits made by a taxpayer in the ordinary course of business will be income Receipts and profits made outside the ordinary course of business, but as part of the taxpayer’s overall business activities, will be income, if the taxpayer entered the transaction with a profit-making intention Receipts or profits made by a taxpayer not in business will be income, if: a) taxpayer entered the transaction with profit-making purpose, and b) the transaction is a commercial one, or a business operation Recap of last week • Reluctance of courts to make an income finding in isolated transaction cases • Case in point: Jones v Leeming • Then we had the decision in Whitfords Beach – key point from the decision is that taxpayer can change their intention or purpose of holding an asset • Greig case in 2020 considered the terms ‘business operation’ and ‘commercial transactions’ – note facts were very extreme • Introduction to Myer case – key case on isolated transactions Recap of last week • Significance of case is that decision was made of 2 ‘strands’: – 1st strand: profit from a transaction entered into with the purpose of making a profit, and in the course of the taxpayer’s business, is income although the transaction is not within ordinary course of taxpayer’s business – 2nd strand: where taxpayer receives an amount in exchange for an income stream, the amount will take on an income nature, under compensation receipts doctrine • We also started looking at the fourth income schedule (compensation receipts principle) which we’ll complete today Plan for today • Today we’ll look at the fifth income schedule (factorial income) • We’ll also go through most of the capital gains tax (CGT) regime and continue this next week (Week 4) 3.1 Compensation Receipts Principle in Context of Returns from Property • At common law, if a taxpayer obtains a compensation receipt, the receipt will take the character of the thing it is replacing • There is no reason this principle could not apply where a taxpayer obtains returns from property • Example: landlord receives insurance payout to replace lost rental income • 2nd strand of Myer provides that an amount received in return for an income stream takes on an income nature • The taxpayer is converting future income for present income 3.2 Factorial Income Principle or Periodicity Principle • Fourth income schedule complete • There is a fifth income schedule (mentioned in your lecture program): it is a factorial approach to characterising a receipt or amount • Receipts and amounts may be income even where they don’t fit into one of the first four income schedules, based on looking at all the circumstances • Most recent application of the factorial approach was by High Court in 2010 in FCT v Anstis 3.2 Factorial Income Principle or Periodicity Principle • Anstis involved government youth allowance payments to a university student • In that case, payments held to be income because taxpayer could rely on them for living expenses and could expect to continue receiving them as long as they satisfied requirements • Keily v FC of T is another example • In that example, recurrence and regularity of old age pension payments key in finding the payments were ordinary income 3.2 Factorial Income Principle or Periodicity Principle • Relevant criteria: a) regular b) recurrent c) periodical d) expected e) paid for, paid to and used to meet living expenses • Factorial approach could extend to unemployment benefits, scholarships and other income support payments from the government • Note provisions in income tax legislation which may make certain government payments exempt income (won’t make its way into taxpayer’s assessable income) • Must look at all the factors; regularity and recurrence are significant factors, but not decisive alone 3.3 History of Capital Gains Taxation in Australia • Taxpayer could have an amount under the capital gains tax (CGT) regime that is included in their assessable income • Before 1985, capital gains generally not taxed, outside of a few limited provisions – Problem: not effective and had many shortcomings • On 20 September 1985, Australia introduced a comprehensive regime to tax capital gains • CGT regime was introduced on a prospective basis, i.e. it applies to the disposal of assets acquired on or after 20 September 1985 3.4 Role of Capital Gains Taxation within the Income Tax Assessment Act 1997 • CGT is not a separate tax; you don’t pay CGT • Net capital gain is included in taxpayer’s assessable income • Net capital loss is quarantined; can only be applied against capital gains: 3.4 Role of Capital Gains Taxation within the Income Tax Assessment Act 1997 • Objective of CGT regime: tax gains that were not taxed prior to 20 September 1985 • CGT is the last resort, after you have considered the income tax provisions • Start with the income tax provisions; do not go straight to CGT because you might miss key provisions 3.5 Broad Outline of Australia’s Capital Gains Tax (CGT) • Key features of Australia’s CGT regime: a. CGT is not a separate tax from income tax b. The tax base is generally ‘assets’ (some exceptions to this) c. CGT regime only applies to assets acquired after 19 September 1985 d. Generally, the CGT regime is a realisation-based tax e. The CGT regime contains numerous ‘deeming’ provisions f. There are numerous exemptions and exceptions built into the CGT regime 3.5 Broad Outline of Australia’s Capital Gains Tax (CGT) • Key features of Australia’s CGT regime (continued): g. There are a number of rules directed at coordinating the CGT regime with the non-CGT income tax regime 3.6 Paradigm/Model CGT Framework: Essential Elements of First Charging Provision of CGT • Topic we’ll spend most of our time on today • Understanding the fundamental structure of the CGT regime will help when we’re looking at each aspect of the regime more closely in later topics • The reference to ‘first charging provision’ is not a reference to a particular section in the legislation • It refers to the various rules that apply to the situation where a taxpayer sells or relinquishes a pre-existing asset • This is the most common type of CGT transaction 3.6 Paradigm/Model CGT Framework: Essential Elements of First Charging Provision of CGT • Parliament also intended for the CGT regime to tax certain capital receipts that do not involve a taxpayer selling or relinquishing a pre-existing asset • Example: restrictive covenants (agreeing not to do something) • This is what we call the ‘second charging provision’ – we will deal with this in topic 3.11 3.6 Paradigm/Model CGT Framework: Essential Elements of First Charging Provision of CGT • There are 7 key aspects of the first charging provision: 1. Existence of a CGT asset 2. Taxpayer has acquired the CGT asset 3. Taxpayer acquired the CGT asset on or after 20 September 1985 4. Taxpayer has disposed of the CGT asset (a CGT event occurred to the CGT asset) 5. Taxpayer disposed of the asset on or after 20 September 1985 3.6 Paradigm/Model CGT Framework: Essential Elements of First Charging Provision of CGT • There are 7 key aspects of the first charging provision (continued): 6. The taxpayer’s cost base or reduced cost base for the CGT asset needs to be determined 7. The capital proceeds received from the CGT event needs to be determined • Capital gain or capital loss only arises if a CGT event occurs, e.g. there has been a disposal of a CGT asset (CGT event A1) • There are numerous CGT events under the CGT regime 3.7 Assets, Exempt Assets and Asset Classification • CGT asset is defined to mean: – Any kind of property, or – A legal or equitable right that is not property • Key features attached to property are: a) right to exclude others from it b) right to use and enjoy it c) right to sell it • Note property can be tangible or intangible • Many CGT assets easy to recognise, e.g. real estate, land, shares in a company, units in a unit trust 3.7 Assets, Exempt Assets and Asset Classification • Legal or equitable rights would cover contractual rights, which are not property • Examples: restrictive covenants and leases • Personal freedoms and personal liberties are not rights that are covered by the definition (see Hepples v FCT) • A business is not a CGT asset – it is the assets that make up the business that are the CGT assets • Part of an asset can be a CGT asset, e.g. taxpayer sells half of a block of land 3.7 Assets, Exempt Assets and Asset Classification • The notion of an asset can be modified under the CGT regime • The common law principle is that everything on land forms part of the land • The CGT regime contains modifications to this common law principle, including in the 2 scenarios below: – Construction of a building post-CGT on pre-CGT land: the building will be a CGT asset (section 108-55) – Buildings or structures on land purchased post-CGT that are depreciating assets: assets are subject to the uniform capital allowance system (section 108-60) 3.7 Assets, Exempt Assets and Asset