At Segment Outline

CPA ProgramAdvanced Taxation

Segment outline

cpaaustralia.com.au

Edition 14b

Published by Deakin University, Victoria 3217 on behalf of CPA Australia Ltd,ABN 64 008 392 452.

First published January 2010, Updated July 2010, January 2011, July 2011, January 2012, July 2012, January 2013, July 2013, January 2014, July 2014

CPA Australia Ltd 2014. This is an electronic version of the printed study material. Apart from any fair dealing (e.g. for the purposes of private study) as permitted under the Copyright Act 1968 (Cwlth), no part of this material may be copied, scanned, transmitted, distributed or reproduced in part or in whole without the permission ofCPA Australia Ltd.

Edited and designed by DeakinPrimePrinted by Blue Star Print Group

ISBN 978 1 74156 129 6

AuthorsSuzannah Andrews ConsultantWes Obst Senior lecturer, Faculty of Business and Law Deakin University, WarrnamboolTony Greco ConsultantKen Devos Monash UniversityDean Matchett Matchett Partners Pty LtdDianne Harvey Director of Accounting, Northern Metropolitan Institute

ofTAFE, MelbourneDr Robert Gregory Lecturer, Swinburne University of TechnologyStephen Marsden Lecturer, School of Accountancy, Queensland University of Technology, BrisbaneRoger Timms TaxBanterProf Robin Woellner

AcknowledgmentsRussell Clowes Director, KnowledgEquityDenis Vinen Associate Professor, Faculty of Business and Enterprise

Swinburne University of Technology

Advisory panelKen Devos Monash UniversityDean Matchett Matchett Partners Pty LtdRoger Timms TaxBanterCarolyn Sallis Australian Taxation OfficeJoanna Roach REA GroupVerina Pang National Australia BankSimon Le Maistre KPMGStephen Jones ATM Consultants Pty LtdJennifer Jobling Bristol Myers Squibb AustraliaDean Hanlon Monash University

CPA Australia Professional Programs & Pathways staffRichard Brown Katarina Buzanin Alisa StephensKristy Grady Sarah Chinnick Belinda Zohrab-McConnellDesley Ward Charlene DRosario Alexandra Wilson Elise Literski

Educational designerJan Williams DeakinPrime

AcknowledgmentLegislative material and Commonwealth data reproduced with permission of AusInfo. All legislative material herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s. 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing. Requests should be addressed to the Manager, Copyright Services, Info Access, Department of Finance and Administration, GPO Box 1920, Canberra City ACT 2601, or emailed [email protected].

The material used in this segment has been designed and prepared for the purpose of individual study and should not be used as a substitute for professional advice. The material is not, and is not intended to be, professional advice. The material may be updated and amended from time to time. Care has been taken in compiling the material but the material may not reflect the most recent developments and has been compiled to give a general overview only. Users of the material should not act on the basis of any of the material without first obtaining professional advice specific to their own situation. CPA Australia Ltd and Deakin University and the author(s) of the material expressly exclude themselves from any contractual, tortious or any other form of liability on whatever basis to any person, whether a participant in this segment or not, for any loss or damage sustained or for any consequence which may be thought to arise either directly or indirectly from reliance on statements made in this material.

Any opinions expressed in the study materials for this segment are those of the author(s) and not necessarily those of their affiliated organisations, CPA Australia Ltd or its members.

Contents

Segment outline 0.1

Module 1: Tax administration 1.1

Module 2: Principles of assessable income 2.1

Module 3: Capital gains tax (CGT) 3.1

Module 4: Principles of general and specific deductions 4.1

Module 5: Capital expenditure allowances 5.1

Module 6: Individuals 6.1

Module 7: Partnerships 7.1

Module 8: Trusts 8.1

Module 9: Companies and dividends 9.1

Module 10: Consolidations 10.1

Module 11: Transfer pricing 11.1

Module 12: Fringe benefits tax (FBT) 12.1

Module 13: Goods and services tax (GST) 13.1

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A D V A N C E D T A X A T I O N S E G M E N T O U T L I N E 0 . 1

Segment outline

ContentsIntroduction 0.3Before you begin 0.3

Important information

Segment description 0.3Advanced Taxation: The CPA as an adviserSegment aims

Segment overview 0.3General objectivesModule descriptionsModule weightings and study time requirements

Learning materials 0.6Module structureRecommended textsSuggested textsReference to legislation, case law and ATO documentsSelf-assessmentMy Online Learning

Exam 0.9General informationExam structure

Authors 0.10

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IntroductionThe purpose of this segment outline is to: define the aims, content and structure of the segment; provide important information to assist you in your studies; outline the learning materials and resources provided to support learning; and provide information about the exam and its structure.

Before you begin

Important informationPlease refer to the CPA Australia website, cpaaustralia.com.au/professionallevel, forthe professional level dates, contacts, regulations and policies, and additional learning support options.

Segment description

Advanced Taxation: The CPA as an adviserTaxation is a key component of the overall skills base of todays professional accountant.

Business leaders appreciate there are taxation implications that flow on from most business decisions. A sound knowledge of Australian taxation law is essential to ensure quality input into the strategic decision-making process of a business, and to provide post-implementation taxation advice. Business structures may involve different types of entity (such as individuals, partnerships, trusts and companies), and it is important to consider the taxation impact on each of them.

Segment aimsThe aims of this segment are:1. to provide candidates with an awareness of the key provisions of the relevant

taxation legislation; and2. to enable candidates to apply the relevant legislative concepts to determine

taxation consequences.

Note: The Advanced Taxation segment reflects legislation in place by 15 January 2014. Exam questions will be based upon the 2013/14 tax year and the FBT year ended 31 March 2014.

Segment overview

General objectivesOn completion of this segment, candidates should be able to: demonstrate an ability to apply the relevant taxation legislation and related legal

concepts, precedents and Australian Taxation Office rulings; analyse events and apply the legislation to determine tax liability; and provide

strategic advice to stakeholders regarding the tax issues arising from common scenarios.

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Module descriptionsThe segment is divided into 13 modules. A brief outline of each module is provided below.

Module 1 Tax administrationModule 1 discusses the requirement to withhold and pay tax, to lodge a tax return and how (via assessments, objections, reviews and appeals) the final tax liability of a taxpayer is determined. The module also outlines the Taxation Rulings system and other guidance provided by the Australian Tax Office to assist taxpayers in meeting their tax obligations. The Tax Agent Services Act is discussed, focusing on the registration of taxagents and the Code of Professional Conduct.

The application of interest charges and penalties, and the operation of the general anti-avoidance provisions of Part IVA are also discussed.

Module 2 Principles of assessable incomeModule 2 considers the important core concept of assessable income. The common law principles which distinguish between an income receipt and a capital receipt are discussed in depth. This is followed by a consideration of specific legislative provisions which apply to certain receipts, such as compensation, royalties and foreign exchange gains. The treatment of trading stock and the eligibility rules to access small business entity tax concessions are also covered.

Module 3 Capital gains tax (CGT)Module 3 discusses the tax treatment of capital gains, the general concepts relating to CGT events, various exemptions, exceptions and rollover provisions and other more specific concepts and their impact on the capital gain calculation.

Module 4 Principles of general and specific deductionsModule 4 examines the core concept of general and specific deductions. The general deductibility provision together with the concept of capital outgoings are discussed in depth. There are a number of specific provisions which provide for the deductibility of expenditure in certain circumstances, including the rules relating to thin capitalisation.

Module 5 Capital expenditure allowancesModule 5 examines capital allowances, including the depreciation of assets, amortisation of buildings and deductions available for other capital expenditure. Particular rules relating to capital allowances concessions for small business entities are also covered.

Module 6 IndividualsModule 6 applies the concepts studied in earlier modules to the taxation of individuals. The module outlines and discusses the taxation of individuals, calculation of rebates and tax offsets applicable to individual taxpayers, including superannuation and termination payments, and the taxation of personal services income.

Module 7 PartnershipsModule 7 examines the nature and taxation of partnerships. Partnerships are not separate legal entities, but there are a number of taxation implications which arise fromtheir use as a structure to carry on a business.

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Module 8 TrustsModule 8 looks at the components of a trust and the different types of trusts. Tax issues including present entitlement, calculation of net income of a trust, streaming of trust income and availability of trust losses are then explored.

Module 9 Companies and dividendsModule 9 examines companies and applies the various legislative concepts to determine the tax payable by a resident company. It explains the taxation of dividends and the interrelationship with Division 7A for private companies. This module covers the dividend imputation system, with particular emphasis on maintaining a company franking account. Finally, the impact of receiving dividends by different types of taxpayers is examined.

Module 10 ConsolidationsModule 10 sets out the costs, benefits and eligibility criteria which must be considered prior to creating a consolidated group for tax purposes. It identifies the steps that must be applied in forming a consolidated group and discusses the rules concerning the costbase of assets and the utilisation of losses within a group. The module explains key ongoing tax issues which must be addressed by a consolidated group, and discusses thetax treatment of a subsidiary leaving a consolidated group.

Module 11 Transfer pricingModule 11 discusses the key features of the transfer pricing legislative regime. It outlines the four-step process used to determine the arms length price of international related-party dealings, sets out the five approved transfer pricing methodologies and provides an overview of related ATO compliance issues.

Module 12 Fringe benefits tax (FBT)Module 12 examines the rules relating to fringe benefits tax, including the 12 categories of fringe benefits including the specific valuation rules for each type of fringe benefit. It also outlines how FBT is calculated and discusses the application of the otherwise deductible rule and how employee contributions can be used to reducethetaxable value of fringe benefits. The module concludes with a discussion ofarange ofexempt fringe benefits and record keeping requirements.

Module 13 Goods and services tax (GST)Module 13 examines GST, outlining general concepts and compliance issues. Specific GST issues such as the effect on insurance and financial services are also discussed.

Module weightings and study time requirementsTotal hours of study for this segment will vary, depending on your prior knowledge and experience of the course content, your individual learning pace and style, and the degree to which your work commitments will allow you to work intensively or intermittently on the materials. You will need to work systematically through the study guide and readings, attempt all the review questions and online self-assessment questions, and revise the learning materials for the exam. The workload for this segment is the equivalent of that for a one-semester postgraduate unit. An estimated 10 to 15 hours of study per week through the semester will be required for the average candidate. Additional time may be required for revision.

Do not underestimate the amount of time it will take to complete the segment.

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The following table provides an indication of the proportion of study time to allocate to each module, which should also reflect the emphasis placed on each module in the exam.

Table 1

Module

Recommended proportion of study time (%)

Study schedule

1 Tax administration 5 Week 1

2 Principles of assessable income 9 Week 2

3 Capital gains tax (CGT) 10 Week 3

4 Principles of general and specific deductions 10 Week 4

5 Capital expenditure allowances 8 Week 5

6 Individuals 12 Weeks 5, 6

7 Partnerships 5 Week 7

8 Trusts 7 Week 7

9 Companies and dividends 11 Weeks 8, 9

10 Consolidations 5 Weeks 9, 10

11 Transfer pricing 5 Week 10

12 Fringe benefits tax (FBT) 6 Weeks 10, 11

13 Goods and services tax (GST) 7 Week 11

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Learning materials

Module structureThese study materials form your central reference in the Advanced Taxation segment.

ContentsEach module has a detailed contents list. This list indicates the sequence of the educational content in the module.

PreviewEach module begins with a preview containing the following sections.

Introduction. The introduction outlines what will be covered in the module and howitrelates to other modules in the segment.

Objectives. A set of objectives is included for each module in the study guide. Theseobjectives provide a framework for the learning materials and identify the mainfocus of the module. The objectives also describe what candidates should be ableto do after completing the module.

Study materialThe study material is divided into sections and subsections, which will help you to conceptualise the content and study it in manageable portions. It is also important to appreciate the cumulative nature of the segment and to follow the given sequence as closely as possible.

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Discussion in this segment encompasses both the Income Tax Assessment Act 1997 (Cwlth) (ITAA97) and Income Tax Assessment Act 1936 (Cwlth) (ITAA36). Candidates should note that in order to distinguish more clearly between the Acts, those provisions that are contained in ITAA97 appear in italics.

Recommended textsIncome Tax Assessment Act 1936 (Cwlth), Income Tax Assessment Act 1997 (Cwlth), ANewTax System (Goods and Services Tax) Act 1999 (Cwlth), Fringe Benefits Tax Assessment Act 1986 (Cwlth) and Taxation Administration Act 1953 (Cwlth).

Printed versions of the Acts are available from two publishers of tax legislationCCH and Australian Tax Practice. Legislation is also available on the internet (see below).

Suggested textsThese texts provide support to the CPA Program segment material and enable you toexplore a particular topic in more details:

CCH Australian Master Tax Guide 2014 (55th edition) or Australian Tax Practice AustralianTax Handbook 2014.

L. Nethercott, G. Richardson & K. Devos Australian Taxation Study Manual 23rd edn, CCH, Sydney.

Woellner, Barkoczy, Murphy, Evans & Pinto Australian Taxation Law 2014 24th edn, CCH, Sydney.

CCH offers a selection of reference texts that are available separately or as a combined study pack. Further information is available on My Online Learning, including a discount available to CPA Australia members.

Reference to legislation, case law and ATO documentsThe study material contains many references to legislation which can be accessed from the Australian Taxation Office (ATO) legal database or the Commonwealth Law website. These website references are: http://law.ato.gov.au/atolaw/index.htm (ATO legal database) http://www.comlaw.gov.au (the Commonwealth Law website)

Guidance issued by the ATO, including Taxation Rulings, Determinations and Practice Statements, can also be found in the ATO legal database. For case law, please refer to theATO legal database or the Australasian Legal Information Institute website at: http://www.austlii.edu.au

It is strongly recommended that you refer to the relevant legislation as you work through the Advanced Taxation segment. This will assist your understanding of key concepts and promote familiarity with the proper use of the legislation, which is vital when investigating real-life tax matters.

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Self-assessment

Review questionsThe purpose of the questions is to provide you with the opportunity, as you progress through the segment, to assess your understanding of significant points and stimulate further thinking on particular issues. The review questions are an integral part of your study and they should be fully utilised to support your learning of the module content throughout the semester. You are encouraged to spend time reviewing and analysing the module content. Completing the review questions should form one part of your revision for the exam. It is evident that candidates who achieve good results in the Program and their careers are those who are able to think, review and analyse situations, and solve problems.

Sample answers are included at the end of each module. Consider them as model answers for your reference. To assess how well you have understood and applied the material supplied in the text, it is important to write your answer before you compare itwith the suggested answer.

The answers provide immediate feedback on your performance in comprehending the material covered. Your answers to these questions do not contribute to your final result, and you are not required to submit your answers for marking.

My Online LearningCPA Australia offers additional study material through My Online Learning to assist candidates in their study. Some of the content on My Online Learning is examinable, including any study guide updates which will be posted here. You can access My Online Learning from the CPA Australia websitedetails are provided below.

How to access My Online Learning:1. Go to: cpaaustralia.com.au/myonlinelearning 2. Click Access My Online Learning3. Enter your member number in the username field and password and click Login

There is also a demonstration video to assist you in navigating the system.

To access the workshop notes:1. On the My Courses page, click the + sign next to the folder titled Workshops.2. Click View under the relevant workshop title and a link to the document

willappear.

To access the study groups function, click My Study Groups next to My Courses in the top banner, then select the relevant segment using the dropdown box next to Course.

Help Deskfor help when accessing My Online Learning either: Email [email protected]; or Telephone 1300 73 73 73 (Australia) or +613 9606 9677 (International) between

8.30 am and 5.00 pm AEST Monday to Friday during the semester.

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The additional study materials provided on My Online Learning for Advanced Taxation candidates include: Discussion forumsthese enable you to post any questions you may have about the

technical content of the segment. Calendarkeep track of important dates and events. Web linksaccess useful online resources including legislation and standards. Workshop notesnotes for the face-to-face workshops are available on My Online

Learning for all candidates.. Webinarsif you have registered to participate in a live webinar, you can access the

relevant notes from My Online Learning.. Announcementsyou should check My Online Learning at least once a week as

important information and critical study information will be posted there. Limited PDF versions of modulesmodules covering approximately the first two

weeks of the syllabus are available to assist candidates that may not receive their study materials in time for semester commencement. The PDF modules are the same as the printed modules; however, the third-party copyright is removed. Note:The PDF modules are not available for Singapore Taxation.

Study groupscandidates who wish to participate in group discussion can join a study group through My Online Learning. Study groups provide candidates with access to a secure online list of email contact details for other candidates who are studying the same segment and who have also registered for a study group. Candidates can use these contact details to form their own study groups.

Exam

General informationCPA Program professional level exams are of three hours and 15 minutes duration.

The exam for Advanced Taxation is open book. This means that candidates may bring any printed reference material into the exam which they believe to be relevant and which may assist them in undertaking the exam. This may include, for example, thestudy guide, additional materials from My Online Learning, readings and prepared notes.

It is highly recommended that all candidates have access to a calculator in the exam. Please ensure that the calculator is compliant with CPA Australias guidelines. Thecalculator must be a silent electronic calculating device whose primary purpose is asa calculator.

Calculators with text-storing abilities are not permitted in the exam.

The exam is based on the whole segment, including the general objectives, module objectives and all related content and required readings. Where advised, relevant sections of the CPA Australia Members Handbook and legislation are also examinable.

As this exam forms part of a professional qualification, the required level of performance is high. In most cases, the pass mark is in the range of 6065 per cent.

Exam structureThe Advanced Taxation exam is comprised of 100 per cent multiple choice questions. Multiple choice questions will include knowledge, application and problem-solving questions, which are designed to assess the understanding of Advanced Taxation.

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Authors

Suzannah Andrews

Suzannah has many years experience in Australian tax as an advisor, trainer and educational consultant. She spent a number of years in the Big 4 accountancy firms working as an advisor in the corporate tax field. She has experience working with both large multinationals and middle-market clients.

In recent years, Suzannah has focused on tax training and education. She was a key member of the Tax Technical Knowledge Centre at PricewaterhouseCoopers, responsible for development of educational materials, face-to-face training of staff and partners, andknowledge management.

Suzannah worked with CPA Australia for over seven years as Technical Consultant for the Advanced Taxation segment of the CPAProgram and is currently the Chief Examiner for the CPAAustralia Advanced Taxation segment.

Dr Ken Devos

BBus, GradDipTax, MTax, PhD, CPA, is a Senior Lecturer in the Department of Business Law and Taxation, Faculty of Business and Economics, Monash University (Clayton). Ken lectures in undergraduate and graduate tax courses and has published a number of articles in both national and international taxation journals. Kenalso conducts tax training courses for accounting firmsand CPAAustralia. Ken is the author of CCHs Doing Business in Asia, and joint author of CCHs Australian Taxation Study Manual and Master Tax Examples. His doctoral thesis, Factors Influencing Individual Taxpayer Compliance Behaviour, was published by Springer, 2014.

Tony Greco

BBus, CA, has extensive experience as a senior tax consultant. Tony was previously employed as a tax trainer and tax consultant with TaxBanter, a specialist tax training organisation. Previous roles included CEO and a tax consultant with Taxpayers Australia, where he has been a joint contributor to many of the associations publications. He has over 10 years of ongoing experience as a focus session facilitator for theInstitute of Chartered Accountants CAProgram.

Tony is on a number of peak tax forums, including the National Tax Liaison Group.

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A D V A N C E D T A X A T I O N S E G M E N T O U T L I N E 0 . 1 1

Dr Robert Gregory

BSc Leeds, MSc UMIST, PhD Manchester, GradCertMgt Monash, MPASUT, currently is a sessional lecturer in postgraduate TaxationLaw at Swinburne University of Technology. He is also a Technical ConsultantTaxation at KnowledgEquity. Roberthasworked in R&D and manufacturing export for multinational companies, andnow focuses on education andinvestment.

Dianne Harvey

BBus La Trobe, MAcc UNE, FCPA, FTIA, RTA, is continuing in her role as a registered tax agent and a CPA accountant. Until December 2012, Dianne was Head of Program, Accounting at NMIT (NorthernMelbourne Institute of TAFE). Prior to this, Dianne was employed by La Trobe University as a senior lecturer in the School of Business where she was Course Coordinator for the Bachelor of Accounting and the Graduate Diploma of Accounting.

Diannes research interests are in sustainability and the environment. She has co-authored papers in the Australian Tax Forum on the impact of Australias Fringe Benefits Tax (using the Statutory method) on cars petrol consumption and greenhouse emissions. She also wrote a follow-up paper, in the same journal, titled Fringe Benefits Tax for cars: Some further considerations for policy change and reform.

Stephen Marsden

BBus (Acc) QUT, MBus (Acc) QUT, CPA, FCTA, MAICD, RTA is a full-time lecturer employed in the School of Accountancy at the Queensland University of Technology in Brisbane where he is responsible for lecturing and tutoring a wide range of undergraduate and postgraduate financial accounting and taxation law subjects.

Stephen has presented numerous professional development seminars and workshops over the past 20 years for CPA Australia inthe areas of income tax, FBT, GST and financial accounting.

Dean Matchett

BBus Deakin, GradDipTaxLaw Monash, is a tax consultant and business adviser. He was previously a taxation consultant with both PricewaterhouseCoopers and Deloitte. Dean has produced many taxation seminars and published numerous articles on taxation matters over the years. His compliance and consulting practice combines both skills to allow him to see taxation issues from bothtechnical and commercial points of view.

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Wes Obst

DipAgSc Longerenong, BBus Vic. I.C., GradDipTax CQU, CPA, MTIA, is a Senior Lecturer in the Faculty of Business and Law at Deakin University (Warrnambool). Wes has also published: W. Obst and R. Hanegbi, Successful Tax Study, Thomson, Sydney 2008; andW. Obst, R. Graham and G. Christie, Financial Management forAgribusiness, Landlinks, Melbourne, 2009.

Roger Timms

MCorpLaw, GradDipCommLaw, FCA, CTA, currently conducts a tax consulting practice and also provides services to Tax Banter Pty Ltd the leading tax training organisation in Australia.

Roger was previously the Head of Tax & Superannuation at Taxpayers Australia and therefore responsible for the technical content of all publications and the delivery of all seminars nationally. He was also a member of the National Tax Liaison Group and various subcommittees of that group.

Prior to joining Taxpayers Australia, Roger was the national manager of the Webb Martin tax training business operated by Kaplan Professional, being responsible for the writing of all tax technical materials and delivering training sessions to a diverse client base.

During his 30-year career in taxation, Roger has also been a tax consulting partner at a Big 4 accounting practice and held the position of general editor of the Lawyers Tax Manual published by Lexis Nexis.

Robin Woellner

CPA Australia would also like to acknowledge the significant contribution of Robin (lead author of CCHs Australian Taxation Law) to the Tax Administration materials in Module 1.

Title pageMT-Segment outlineIntroductionBefore you beginImportant information

Segment descriptionAdvanced Taxation: The CPA as an adviserSegment aims

Segment overviewGeneral objectivesModule descriptionsModule weightings and study time require

Learning materialsModule structureRecommended textsSuggested textsReference to legislation, case law and ASelf-assessmentMy Online Learning

ExamGeneral informationExam structure

Authors

At Segment Outline

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