Taxation Law Notes Semester Two 2017

Taxation Law Notes

Semester Two 2017

Table of Contents

Residence and Source

Individual (3)

Company (6)

Source of Income (7)

Ordinary Concept of Income (9)

Income from personal services and Employment (13)

3

Income from business

Trading Stock & Tax Accounting (24)

18

Extraordinary and Isolated Transaction

Income from Property (37)

Principles of Compensation (43)

Compensation for business losses (46)

32

Capital Gain Tax 49

Goods and Services Tax 66

Fringe Benefit Tax 81

General Deductions

Sun Newspaper: 3 factors (101)

Entertainment Expense (104)

Reimbursed Expenditure (104)

Relocation Expense (108)

Child Care Expense (108)

Travel Expense (108)

Car Expense (111)

Self-education Expense (112)

Home Office Expense (115)

Clothing + Dry Cleaning Expense (116)

Interest Expense (118)

Legal Expense (119)

Timing – Deduction & Deductibility (121)

96

Specific Deductions

Tax Related Expense (126)

Repairs (126)

Bad Debts (128)

Gifts (129)

Prior Year Losses (130)

126

Capital Allowances & Capital Works

Depreciation Deductions (132)

Balancing Adjustment (137)

Cars (137)

Pooling of Assets (138)

Capital Works Deductions: Division 43 (140)

‘Black hole’ expenses (141)

132

Tax Offsets 143

Tax Administration 150

Week 2 - Residence and Source

S6-5(2) ITAA97: A resident of Australia for tax purposes will be taxed on income from all sources

S6-5(3) ITAA97: A foreign resident for tax purposes will be taxed on income from Australian

source only

** Only one needs to be satisfied ** 4 tests of residence (individual)

1. Ordinary concepts; resides test (where you live)

2. Domicile (Where is your home) 3. 183-day test (Where have you spent

more than half a year) 4. Superannuation test (Are you a

member of the Australia superannuation fund?)

3 test of residence (company) 1. Place of incorporation 2. Central management and control 3. Controlling shareholders

Individual

Resides test

Macquarie dictionary – to dwell permanently or for a considerable time

Miller v FCT: The determination of tax residency rests on a question of fact and degree

If a person is a visitor, the frequency, regularity and duration of visits

Residency – moved abroad: IRC v Lysaght

Taxpayer partially retired and moved from England to an inherited estate in Ireland

Sold his home in England but remained a non-exec director of family company

Travelled to England approx one week per month

Held: taxpayer was resident and ordinary resident in the UK

The person’s family, business and social ties

Residency – temporary visits abroad: Levene v IRC

Taxpayer – resident of UK, retired and sold house

Lived in hotels, both in and outside UK

Held: Still a resident due to ties in the UK and temporary nature of stays overseas

Residency – family home in Australia and intention to treat Australia as home: Joachim v FCT

Migrated to Australia with family but he was unable to find job which results in him being outside Australia for 316 days

Family remained in Australia

Held: A resident of Australia as he maintained a home for his family in Australia and

despite his absence, his intention to treat Australia as his home had not change

Factors to be considered by the court

Time physically spent in Australia (not a strong factor)

Frequency, regularity and duration of visits (whether they are merely visitors)

Purpose of visits to Australia and abroad (work or holiday)

Maintenance of a place of abode in Australia for the taxpayer’s use

Person’s family, business and social ties (strong factor)

The person’s nationality (used in borderline cases)

Domicile 住所 Test

- Generally, applies to outgoing individuals where that person moves overseas (usually as a work posting), but does not change his or her domicile

- Domicile of origin at birth; domicile of choice: country where taxpayer intends to make

their home indefinitely - Does not apply if they can demonstrate that they do not have a ‘permanent place of

abode outside of Australia’

Permanent Place of Abode: FCT (Federal Commissioner of Taxation) v Applegate

Moved to Vanuatu to establish an office with wife for 2 years, with no assets left in Australia

Returned to Sydney for medical treatment

Intention: he would return to Australia eventually

Held: Taxpayer had a place of abode outside Australia. Court concluded: permanent meant something less than everlasting where it should not be contrasted with

temporary or transitory. Taxpayer had a permanent place of abode outside Australia and was not a resident.

Permanent Place of Abode: FCT v Jenkins

Transferred to Vanuatu for a fixed 3 years’ period, failed to sell home, cancelled health

insurance but maintained bank account in Australia

Repatriated back to Australia earlier

Held: Applied the decision in FCT v Applegate – held a permanent place of abode in Vanuatu

Ruling IT 2650 factors based on the cases above:

1. Intended and actual length of stay in the overseas country

2. Intention to stay overseas permanently or temporarily 3. Whether a home is established outside Australia

4. Whether the place of abode in Australia has been abandon 5. Durability of Australian Associations (bank account, family ties, children’s education)

6. Emphasis: Length of stay overseas (Rule of thumb: x > 2 years)

183-day test

- Requires physical presence in Australia for more than one-half of the year

- 2 limbs to the exception:

Taxpayer has a usual place of abode outside Australia

He or she did not intend to take up residence in Australia

Working holiday visa: Re Koustrup v FCT

Despite being in Australia for more than 183 days, she held a usual place of abode outside Australia and was therefore not entitled to the tax few thresholds

under the residency tax rates

19% income tax rate for taxable income up to $37,000 from 1 July 2017

Superannuation test

- Member of Commonwealth Superannuation fund is a tax resident of Australia

Company

Place of incorporation test

A company incorporated in Australia is automatically a resident of Australia

Central management and control test

Two limbs:

1. Company must carry on business in Australia

2. Company’s central management and control must be located in Australia

First limb: Carrying on business in Australia

Operational activities: where the activities take place.

Passive dealings: where the decisions are made.

Second limb: Central Management and Control

Where actual high level decision-making processes are made/developed.

Where the monitoring of overall corporate performance occurs.

Malayan Shipping Co Ltd v FCT: The central management and control of the company will be the

location of the actual decision making, rather than the formal execution of the director’s resolutions

Central management and Control: Koitaki Para Rubber Estates Ltd v FCT

Mere day-to-day control when there is a head office does not meet central management & control of company

Bywater Investments Ltd v FCT: CM&C in Australia where company Directors carried out the wishes

of their Sydney based accountant without independent judgment. (Directors have no idea, the

accountant was making all the decisions. He was based in Sydney, directors were overseas. Central management + control is in Australia.

Controlling shareholders test

Two limbs:

1. Necessary to demonstrate that the voting power is controlled by Australian residence

> 50% of voting power at general meetings

Patcorp Investments Ltd v FCT: It does not look through to the ultimate beneficial owner of the shares

2. Company carrying on business in Australia

Same as first limb in the central management and control test

Source of income

S6-5 and S6-10 of ITAA 1997: Resident of Australia is taxed on ordinary and statutory income from all

sources, while a foreign resident is taxed only on ordinary income and statutory income sourced in

Australia or deemed to be assessable income on some other basis.

Nathan v FCT (1918): Question of source has been described as “something which a practical man would regard as a real source of income” and a “practical, hard matter of fact”.

Categories of income:

Sale of goods (trading stock):

- The place where the trading activities take place

Sale of property other than trading stock:

- Real property: location of the property

- Other property: various factors needs to be considered

Source of income overseas: Rhodesia Metal Ltd (Liquidator) v Taxes Commissioner (1940)

A company incorporated in England with its central management and control in England.

In the business of purchasing and developing immoveable property in Rhodesia and the sale of that property

Went into liquidation, sold its undertaking to another company that is incorporated in England.

Held: Profits were derived from sources in Rhodesia

Source of income in Australia: Thrope Nominees Pty Ltd v FCT (1988)

Sale of land in Australia but contracts signed overseas

Profits were sourced in Australia

Services:

- Generally, the place of performance of the services. Alternatively, the place of contract.

Source of services income: FCT v French (1957)

An engineer employed by Australian company to work in New Zealand

Claimed that he was exempt from Australian income tax because the income was sourced in New Zealand

Held: Payment was for services performed in NZ, source of payment also from NZ.

Source of service income: FCT v Efstathakis (1979)

Greek national, moved to Australia to work as Greek Government public employee

Has been paid by cheques drawn on a Greek bank was subject to income tax in Greece

Claimed that the salary was exempt (free) from Australian tax

Held: Performance of the services in Australia and the receipt of payment in

Australia

Source of service income: FCT v Mitchum

US actor contracted through the various subsidiaries (UK, Swiss) and ended up performing in Australia

Source is not necessarily the place of performance. No conclusive decision

Interest:

- Place where the contract is made or the money is advanced (Spotless Services v FCT)

Dividends:

- The location of the profits out of which the dividend is paid

Esquire Nominees Ltd v FCT (Important case for non-residence)

“To the extent to which they are paid out of profits derived from sourced in

Australia”

A company incorporate in Norfolk and received dividends paid on shares held in

another Norfolk company

Dividend paid later flow to other two companies which originated from the

activities of a company resident in Australia

Held: The source of the dividends was the holding of the shares in the Norfolk Island Company. Not liable to Australian tax on the dividends pay.

Royalties:

- The place where the location of the industrial or intellectual property from which the royalty flows

- S6C of IRAA 1936: Deems the royalty to be sourced in Australia - E.g. Where the book was written (royalties)