DIPLOMA IN LAW LEGAL PROFESSION ADMISSION BOARD LAW EXTENSION COMMITTEE LAW EXTENSION COMMITTEE SUBJECT GUIDE 12 TAXATION AND REVENUE LAW SUMMER SESSION 2016-17 This Guide includes the Law Extension Committee’s course information and teaching program and the Legal Profession Admission Board’s syllabus. The syllabus is contained under the heading “Prescribed Topics and Course Outline” and has been prepared in accordance with Rule 27H(a) of the NSW Admission Board Rules 2015. Course Description and Objectives 1 Lecturer 1 Assessment 1-2 March 2017 Examination 2 Lecture Program 2-3 Weekend Schools 1 and 2 4-5 Texts and Materials 5 Compulsory Assignment 6 Assignment Question 6 List of references to Australian Taxation Law – 25th ed. 7
Transcript
DIPLOMA IN LAWLEGAL PROFESSIONADMISSION BOARD
LAW EXTENSION COMMITTEE
LAW EXTENSION COMMITTEE SUBJECT GUIDE
12 TAXATION AND REVENUE LAW SUMMER SESSION 2016-17
This Guide includes the Law Extension Committee’s course information and teaching program and the Legal Profession Admission Board’s syllabus. The syllabus is contained under the heading “Prescribed Topics and Course Outline” and has been prepared in accordance with Rule 27H(a) of the NSW Admission Board Rules 2015.
Course Description and Objectives 1Lecturer 1Assessment 1-2March 2017 Examination 2Lecture Program 2-3Weekend Schools 1 and 2 4-5Texts and Materials 5Compulsory Assignment 6Assignment Question 6List of references to Australian Taxation Law – 25th ed. 7Prescribed Topics and Course Outline 8-12Weekend School Questions (Sample Examination Questions) 13-20Course Materials 21-22
LAW EXTENSION COMMITTEE SUMMER 2016-1712 TAXATION AND REVENUE LAW
COURSE DESCRIPTION AND OBJECTIVES
The Taxation and Revenue Law course is an overview of the Income Tax Assessment Act and related legislation. General principles concerning the assessability and deductibility of different types of receipts and items of expenditure are considered, along with more recent developments in relation to the tax treatment of fringe benefits and capital gains. The differing tax consequences in respect of various legal entities, such as partnerships, trusts and companies, are also considered. The last part of the course deals with the collection and recovery of tax, and the procedures to be followed by a taxpayer in disputing a tax assessment with the Commissioner of Taxation.
The objective of the course is to provide an overview of the structure of the tax legislation which will enable students to determine, at least in broad terms, the tax consequences that flow from particular factual situations. This is achieved through a study of the legislation and decided cases, and the consideration of hypothetical factual situations that would commonly be encountered in practice.
LECTURER
Mr A J O'Brien, BEc, LLB, LLM (Syd), CA
Tony O'Brien is a member of the New South Wales Bar practising in Sydney and a chartered accountant. He holds the degrees of Bachelor of Laws, Bachelor of Economics and Master of Laws from the University of Sydney. Mr O'Brien was previously a solicitor of the Supreme Court, and has worked in the tax divisions of large law and accounting firms. He is a long-standing member of the Law Extension Committee as a nominee of the NSW Bar Association.
ASSESSMENT
To be eligible to sit for the Board’s examinations, all students must complete the LEC teaching and learning program, the first step of which is to ensure that you have registered online with the LEC in each subject for which you have enrolled with the Board. This gives you access to the full range of learning resources offered by the LEC.
To register with the LEC, go to www.sydney.edu.au/lec and click on the WEBCAMPUS link and follow the instructions. Detailed guides to the Webcampus are contained in the material distributed by the LEC, in the Course Information Handbook, and on the Webcampus.
Eligibility to Sit for Examinations
In accordance with the Legal Profession Admission Rules, the LEC must be satisfied with a student’s performance in a subject in order for the student to be eligible to sit for the examination, conducted by the Legal Profession Admission Board (LPAB). Assignments are used to assess eligibility.
Students are expected to achieve at least a pass mark of 50% in assignments to be eligible to sit for examinations. However, a category of “deemed eligible” has been introduced to offer students whose assignment mark is between 40-49% an opportunity to sit for the examination. In these circumstances students are often advised not to sit. A mark below 40% means a student is not eligible to sit for the examination.
Assignment results contribute 20% to the final mark in each subject.
The Law Extension Committee (LEC) administers the setting and marking of assignments. The LEC engages the LPAB’s Examiners to assess or supervise the assessment of assignments.
Submission
Assignments must be received by 11:59pm on the due date unless an extension has been granted. Extensions must be requested by email prior to the due date. Specific supporting evidence must be provided. Assignments that are submitted more than ten days late will not be accepted. Late assignments attract a penalty of one mark out of 20, or 5% of the total marks available, per day.
Assessment
Assignments are assessed according to the “Assignment Grading and Assessment Criteria” outlined in the Guide to the Presentation and Submission of Assignments. Prior to the examination, assignments will be returned to students and results posted on students’ individual results pages of the LEC Webcampus. Students are responsible for checking their results screen and ascertaining their eligibility to sit for the examination.
Review
Where a student’s overall mark after the examination is between 40-49%, the student’s assignment in that subject will be included in the Revising Examiner’s review. The final examination mark is determined in accordance with this review. Assignment marks will not otherwise be reviewed.
MARCH 2017 EXAMINATION
Candidates will be expected to have a detailed knowledge of the prescribed topics:
General principles; Income from personal services; Income from property; Income from a business; Capital gains tax; Allowable deductions; Taxation of companies and shareholders; Taxation of partnerships; Taxation of trusts; Returns, assessments, objections and appeals; Collection and recovery and General anti-avoidance provisions.
Candidates will be expected to have studied the prescribed materials in relation to these topics, and to have analysed the cases contained in the Law Extension Committee's course outline.
All enquiries in relation to examinations should be directed to the Legal Profession Admission Board.
Examination Prize
The "CCH Prize" ($100 publication voucher) has been donated by CCH Australia Ltd for the best examination mark in Taxation.
LECTURE PROGRAM
Lectures in Taxation and Revenue Law will be given by Mr O'Brien and will be held on Tuesdays commencing at 6.00pm in Seminar Room 1804 at 133 Castlereagh Street, Sydney. This building is located in the city and NOT on the main campus.
Please note that this program is a general guide and may be varied according to need. Readings are suggested to introduce you to the material to be covered in the lecture, to enhance your understanding of the topic, and to encourage further reading. You should not rely on them alone. Aside from the references below to cases, the other references are to chapters and paragraphs from the textbook Australian Tax Law.
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WEEK VENUE DATE TOPIC KEY READING
1 Castlereagh StSR1804
8 Nov General principles Chapter 3
2 Castlereagh StSR1804
15 Nov General principles Chapter 3FCT v Cooke and Sherden
3 Castlereagh StSR1804
22 NovIncome from personalServices
FCT v DixonSmith v FCT
4 Castlereagh StSR1804
29 Nov Income from propertyIRC v RamsayStanton v FCT
5 Castlereagh StSR1804
6 Nov Income from businessFCT v Whitfords BeachWestfield v FCT
6 Castlereagh StSR1804
13 Nov Income from businessFCT v Whitfords BeachWestfield v FCT
Study Break: Saturday 17 December 2016 – Sunday 8 January 2017
7 Castlereagh StSR1804
10 Jan Capital gains tax Chapter 7
8 Castlereagh StSR1804
17 Jan Capital gains tax Chapter 7
9 Castlereagh StSR1804
24 Jan Allowable deductionsHerald and Weekly Times v FCTSun Newspapers and Associated Newspapers v FCT
14 Feb ReturnsCollection and recoveryAnti-avoidance provisions
DFCT v Richard WalterFCT v Citibank30-000 – 30-46730-600 – 30-64031-300 – 31-70032-400 – 32-50025-300 – 25-34525-600 – 25-700
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WEEKEND SCHOOLS 1 AND 2
There are two weekend schools principally for external students. Lecture students may attend on the understanding that weekend school classes aim to cover the same material provided in weekly lectures and are primarily for the assistance of external students.
It may not be possible to cover the entire course at the weekend schools. These programs are a general guide and may be varied according to need. Readings are suggested to introduce you to the material to be covered in the lecture, to enhance your understanding of the topic and to encourage further reading. You should not rely on them alone.
Weekend School 1
TIME MAJOR TOPICS KEY READINGFriday 25 November 2016: 5.00pm – 9.00pm in New Law School Lecture Theatre 104 (New LSLT 104)5.10pm-6.20pm General principles Chapter 3
6.30pm-7.35pm General principles Chapter 3FCT v Cooke and Sherden
7.45pm-9.00pm Income from personalservices
FCT v DixonSmith v FCT
Saturday 26 November 2016: 4.00pm – 8.00pm in New Law School Lecture Theatre 104 (New LSLT 104)4.10pm-5.20pm Income from property IRC v Ramsay
Stanton v FCT
5.30pm-6.35pm Income from a business FCT v Whitfords BeachWestfield v FCT
6.45pm-8.00pm Capital gains tax Chapter 7
Weekend School 2
TIME MAJOR TOPICS KEY READINGFriday 27 January 2017: 5.00pm – 9.00pm in New Law School Lecture Theatre 024 (New LSLT 024)5.10pm-6.20pm Capital gains tax ATL: refer to Chapter 7
6.30pm-7.35pm Allowable deductions Herald and Weekly Times v FCTSun Newspapers and Associated Newspapers v FCT
7.45pm-9.00pm Allowable deductions Herald and Weekly Times v FCTSun Newspapers and Associated Newspapers v FCT
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Saturday 28 January 2017: 4.00pm – 8.00pm in New Law School Lecture Theatre 024 (New LSLT 024)4.10pm-5.20pm Taxation of companies and
6.45pm-8.00pm ReturnsCollective and recoveryAnti-avoidance provisions
DFCT v Richard WalterFCT v Citibank30-000 – 30-46730-600 – 30-64031-300 – 31-70032-400 – 32-50025-300 – 25-34525-600 – 25-700
TEXTS AND MATERIALS
Course Materials
Guide to the Presentation and Submission of Assignments (available on the LEC Webcampus)
Prescribed Materials
Barkoczy, Core Tax Legislation & Study Guide – most recent edition available Woellner, Barkoczy, Murphy & Evans, Australian Taxation Law – most recent edition available
Reference Materials
Income Taxation – Commentary Materials, Cooper, Krever and Vann, Australian Tax Practice, Thomson Reuters ATP Australian Tax Handbook, Thomson Reuters ATP Australian Federal Tax Reporter, CCH Australian Master Tax Guide, CCH
LEC Webcampus
Once you have registered online with the LEC, you will have full access to the facilities on the LEC Webcampus, including links to relevant cases and legislation in the Course Materials section.
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COMPULSORY ASSIGNMENT
In Taxation and Revenue Law, there is only ONE ASSIGNMENT. This assignment is compulsory and must be submitted by all students. Students must submit the assignment by the due date. A pass mark is 50%. Refer to the Guide to the Presentation and Submission of Assignments for the assignment grading and assessment criteria. Students who fail to satisfy the compulsory requirements will be notified through the Results screen on the Webcampus before the examination period of their ineligibility to sit the examination in this subject. The maximum word limit for the assignment is 1200 words (inclusive of all footnotes but not bibliography).
The rules regarding the presentation of assignments and instructions on how to submit an assignment are set out in the LEC Guide to the Presentation and Submission of Assignments which can be accessed on the LEC Webcampus. Please read this guide carefully before completing and submitting an assignment.
The completed assignment should be lodged through the LEC Webcampus, arriving by 11:59pm on the following date:
Compulsory Assignment Monday 9 January 2017 (Week 7)
ASSIGNMENT QUESTION
To obtain the Taxation and Revenue Law assignment question for the Summer Session 2016-17, please follow the instructions below:
1. Register online with the LEC (see page 24 of the Course Information Handbook for detailed instructions). Once you have registered, you will have full access to all the facilities on the LEC Webcampus.
2. Then go into the Webcampus, select the Course Materials section and click on the link to the assignment question for this subject.
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LIST OF REFERENCES TO AUSTRALIAN TAXATION LAW – 25TH EDITION
TOPICS REFERENCES
General Principles:- Legislation framework- Concept of income- Residence- Source- Derivation
(c) Inter-relationship between Fringe Benefits Tax Assessment Act and Income Tax Assessment Act
3. INCOME FROM PROPERTY
(1) Annuities
Income Tax Assessment Act 1997, s 10-5Income Tax Assessment Act 1936, s 27H
(a) What constitutes an annuity?
(b) Significance of "a fixed gross sum"
Egerton Warburton v DFCT (1934) 51 CLR 578Just v FCT (1949) 8 ATD 419IRC v Ramsay [1935] 1 All ER 847
(2) Royalties
Income Tax Assessment Act 1997, ss 10-5, 15-20Income Tax Assessment Act, ss 6, 6C
(a) Common law meaning of "royalty"
McCauley v FCT (1944) 69 CLR 235Stanton v FCT (1955) 92 CLR 235 FCT v Sherritt Gordon Mines (1977) 137 CLR 612
(b) Extended definition of "royalty"
Murray v Imperial Chemical Industries [1967] 2 All ER 980
(c) Deemed source of certain royalty payments
(3) Interest
Income Tax Assessment Act 1997, s 6-5
(a) Nature of interest payments
(b) Disguised interest payments
Lomax v Peter Dixon and Son [1943] 1 KB 671
(c) Deemed source of interest payments
(4) Lease and rental income
Income Tax Assessment Act 1997, ss 6-5, 10-5
(a) Nature of lease/rental payments
(b) Premiums
4. INCOME FROM A BUSINESS
(1) Concept of a business
Thomas v FCT (1972) 72 ATC 4094Ferguson v FCT (1979) 79 ATC 4261FCT v Walker (1985) 85 ATC 4179 Evans v FCT (1989) 89 ATC 4540
(2) Taxation of business income
Income Tax Assessment Act 1997, ss 6-5, 10-5, 15-15Income Tax Assessment Act 1936, s 21A
(a) Normal proceeds of business
Kosciusko Thredbo v FCT (1984) 84 ATC 4043Memorex v FCT (1987) 87 ATC 5034FCT v Cyclone Scaffolding (1987) 87 ATC 5083GP International Pipecoaters v FCT (1990) 170 CLR 124
(b) Isolated transaction or undertaking
Scottish Australian Mining Co v FCT (1950) 81 CLR 188 FCT v Whitfords Beach (1982) 82 ATC 4031
(c) "Extraordinary" transactions
FCT v Myer Emporium (1987) 87 ATC 4363FCT v Spedley Securities (1988) 88 ATC 4126 Westfield v FCT (1991) 91 ATC 4234
(d) Realisation of investments by investment/ insurance companies
London Australia Investment Co v FCT (1977) 138 CLR 106
(e) Non-cash business benefits
FCT v Cooke and Sherden (1980) 80 ATC 4140
(3) Trading stock
Income Tax Assessment Act 1997, Division 70
(a) Definition of "trading stock"
(b) Tax accounting for trading stock
(c) Value of trading stock
Australasian Jam Co v FCT (1953) 88 CLR 23
(4) Compensation
Income Tax Assessment Act 1997, ss 15-30, 20-20(2), 70-115
(a) Cancellation of a "structural" agreement
Van den Berghs v Clark [1935] AC 431Californian Oil Products Ltd v FCT (1934) 52 CLR 28
(b) Restriction on ability to carry on a business
Dickenson v FCT (1958) 98 CLR 460
(c) Cancellation of business contracts
Heavy Minerals v FCT (1966) 115 CLR 512
(d) Termination of agency and management contracts
Allied Mills Industries v FCT (1989) 89 ATC 4365
(e) Reimbursement of previously deducted expense
H R Sinclair v FCT (1966) 14 ATD 194
(f) Apportionment of compensation payments
McLaurin v FCT (1961) 104 CLR 381 Allsop v FCT (1965) 113 CLR 341FCT v Spedley Securities (1988) 88 ATC 4126
5. CAPITAL GAINS TAX
(1) Structure of Income Tax Assessment Act 1997
Income Tax Assessment Act 1997, Part 3-1
(2) CGT events
Income Tax Assessment Act 1997, Divisions 103 and 104
(3) Meaning of "CGT assets"
Income Tax Assessment Act 1997, Division 108
(4) Cost base
Income Tax Assessment Act 1997, Divisions 110, 112 and 114
(5) Capital proceeds
Income Tax Assessment Act 1997, Division 116
(6) Calculation of capital gain/loss
Income Tax Assessment Act 1997, Division 102
(7) Exemptions
Income Tax Assessment Act 1997, Division 118
(8) Anti-avoidance provisions
Income Tax Assessment Act 1997, Division 149
(9) Other provisions
Income Tax Assessment Act 1997, Division 109 and 128
6. ALLOWABLE DEDUCTIONS
(1) General deductions
Income Tax Assessment Act 1997, s 8-1(a) Determinative tests of deductibility
Ronpibon Tin v FCT (1949) 78 CLR 47
Herald and Weekly Times v FCT (1932) 48 CLR 113Nevill v FCT (1937) 56 CLR 290
(b) Relevance of purpose
Magna Alloys and Research v FCT (1980) 80 ATC 4542FCT v Total Holdings (Aust) (1979) 79 ATC 4279Ure v FCT (1981) 81 ATC 4100
(c) Apportionment
Ronpibon Tin v FCT (1949) 78 CLR 47Ure v FCT (1981) 81 ATC 4100
(d) Meaning of "incurred"
FCT v James Flood (1953) 88 CLR 492FCT v A G C (Advances) (1984) 84 ATC 4776
(e) Negative limbs: capital outgoings
Sun Newspapers and Associated Newspapers v FCT (1938) 61CLR 645B P Australia v FCT (1965) 112 CLR 386
(f) Negative limbs: private outgoings
Lunney and Hayley v FCT (1958) 100 CLR 478FCT v Payne [2001] HCA 3FCT v Finn (1961) 106 CLR 60 Handley v FCT (1981) 81 ATC 4165Forsyth v FCT (1981) 81 ATC 4157Lodge v FCT (1972) 72 ATC 4174
(2) Repairs
Income Tax Assessment Act 1997, s 25-10
FCT v Western Suburbs Cinemas (1952) 86 CLR 102W Thomas and Co v FCT (1965) 115 CLR 58Lindsay v FCT (1960-1961) 106 CLR 377Law Shipping Co v IRC (1924) 12 TC 621Odeon Associated Theatres v Jones [1972] 1 All ER 681
(3) Capital allowances
Income Tax Assessment Act 1997, Divisions 40 and 43
Wangaratta Woollen Mills v FCT (1969) 119 CLR 1
(4) Bad debts
Income Tax Assessment Act 1997, ss 20-20, 20-30, 20-35, 25-35
(5) Losses
Income Tax Assessment Act 1997, Divisions 36, 165, 166
Avondale Motors (Parts) v FCT (1971) 71 ATC 4101
7. TAXATION OF COMPANIES AND SHAREHOLDERS
(1) Definition of "dividend"
Income Tax Assessment Act 1936, s 6(1)
(2) Taxation of shareholders
Income Tax Assessment Act 1936, s 44(1)
(3) Deemed dividends
Income Tax Assessment Act 1936, ss 108, 109, Division 7A
(4) Operation of imputation
Income Tax Assessment Act 1997, Division 200 to 205
(a) Franking a dividend
(b) Maintaining a franking account: debit/credit entries
[See also Income Tax Assessment Act 1997, s 10-5]
8. PARTNERSHIPS
(1) Definition of "partnership"
Income Tax Assessment Act 1936, s 6(1)
(2) Taxation of partnership income
Income Tax Assessment Act 1936, ss 90-93
(3) Overview of the application of capital gains tax to partnerships
[See also Income Tax Assessment Act 1997, s 10-5]
9. TRUSTS AND THE TAXATION OF CHILDREN
(1) Concept of a trust
(2) Taxation of trust income
Income Tax Assessment Act 1936, ss 95-101
FCT v Whiting (1943) 68 CLR 199 Taylor v FCT (1969) 119 CLR 444
(3) Revocable trusts and trusts for minors
Income Tax Assessment Act 1936, s 102
Truesdale v FCT (1970) 120 CLR 353Hobbs v FCT (1957) 98 CLR 151
(4) Taxation of income of children
Income Tax Assessment Act 1936, pt III, div 6AA
[See also Income Tax Assessment Act 1997, s 10-5]
10. RETURNS, ASSESSMENTS, OBJECTIONS AND APPEALS
(1) Obligation to lodge tax return
Income Tax Assessment Act 1936, ss 161-164
(2) Assessment/amended assessment
Income Tax Assessment Act 1936, ss 166-170
Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146
(3) Objections
Taxation Administration Act, pt IVCDFCT v Richard Walter (1995) 183 CLR 168
(4) Appeals to the Administrative Appeals Tribunal or Federal Court
Taxation Administration Act, pt IVC
11. COLLECTION AND RECOVERY
(1) Powers of the Commissioner
Taxation Administration Act 1953, Schedule 1, s 353-10, 353-15
FCT v Citibank (1989) 89 ATC 4268
(2) Recovery of unpaid tax
Taxation Administration Act, ss 14ZZM, 14ZZRTaxation Administration Act 1953, Schedule 1, s 255-5, s350-10(1)
Southgate Investment Funds Limited v DCT [2013] FCAFC 10
(3) Pay-as-you-go (PAYG)
Taxation Administration Act, Schedule 1 pt 2-5 and 2-10
12. GENERAL ANTI-AVOIDANCE PROVISIONS
(1) Form versus substance in interpreting legislation
(2) Income Tax Assessment Act 1936 , pt IVA
(a) Scheme
(b) Tax benefit
(c) Dominant purpose of obtaining a tax benefit
Peabody v FCT (1994) 94 ATC 4663FCT v Spotless Services Ltd (1996) 186 CLR 404
WEEKEND SCHOOL QUESTIONS (SAMPLE EXAMINATION QUESTIONS)
FIRST WEEKEND SCHOOL
1. Micron Pty Ltd is a manufacturer and supplier of computer software. In July 1987 Micron Pty Ltd enters into a contract with Logic Ltd under which for a flat fee of $10,000 per year, Micron Pty Ltd will supply Logic Ltd with certain technical information relating to computer software. The contract was for 10 years. A second contract is entered into under which Logic Ltd agreed to sell to Micron Pty Ltd some of its own computer software for a total price of $100,000 (the "purchase price") payable by five annual instalments, each one being equivalent to five percent of the annual sales revenue derived by Micron Pty Ltd. If, after the fifth instalment, the total amount paid is less than or exceeds the purchase price, then the purchase price is to be adjusted accordingly.
Advise both Micron Pty Ltd and Logic Ltd of the taxation consequences of these arrangements.
2. Reginald works for Supa-Nova Ltd ("SN") as an employee electrician. He also works on weekends in his own business for a number of different companies, including Cosmo Pty Ltd, which is manufacturer of small electric products. He is married to Beatrice, and they have a 19 year old daughter, Penelope.
Advise generally as to the taxation implications of the following arrangements:
(a) In November 2009 SN makes an ex gratia payment of $1,000 to Penelope to help her defray her costs of studying at university. SN makes similar payments to the children of a number of other people who work for them.
(b) Cosmo is so pleased that Reginald is able to do emergency electrical repairs for them one weekend that, in addition to his cash remuneration, they allow him to choose two electric products which they will give to him for free – Reginald chooses an electric razor for himself and an electric kettle for Beatrice.
(c) Reginald leaves SN in January 2010 to work permanently for Cosmo. In appreciation of his services in the past, SN gives Reginald, in June 2010, an interest free loan of $500.
3. The Astaire Dance Company offers a special deal if a student signs up for a series of 100 dancing lessons. These lessons may be taken over a period of six years. The special deal is only available if a student pays for the 100 lessons before taking the second lesson.
Anne pays for 100 lessons in advance in a lump sum. In the first year (1 July to June 30) she takes 20 lessons, in the second year 45 lessons and, in the third and fourth (the present) year, she has taken no lessons. Thus she still has available 35 lessons. When will the Astaire Dance Company have to bring the lump sum payment to account for tax purposes?
4. Nicole is an electrician employed by International Electronics Ltd ("IE"). In September 2010 IE, in recognition of Nicole's marvellous abilities as an electrician, grant her a loan for 13 months at an interest rate of one percent per annum.
In November 2010, Nicole retires from her employment with IE. In December 2010, IE gives her a further loan of $5,000 for a period of two years, interest free, to provide her with some assistance in her retirement.
In January 2011, Nicole, to help pass her time during her retirement, gives her next door neighbour, Fred, some assistance in installing new electrical wiring in his fruit and vegetable shop. In return for this assistance, Fred gives Nicole a box of fruit and vegetables which he has grown on his land. Unfortunately, in February 2011, there is a short circuit in the wiring, and Fred's shop is damaged by fire. Nicole gives Fred, by way of recompense, a lump sum payment to cover the damage caused to the shop, together with profits which are lost to Fred by reason of the shop being closed for repairs.
Explain the taxation implications of the loan and gift made to Nicole and the payment made to Fred.
5. Until 30 April 2010, Robin carried on the business of selling lawn mowers in shop premises at Liverpool, and employed four persons. On that day she sold her business to Sharon. Robin now carries on business on her own account as a lawn mower repairer. She has no business premises, but travels from her home to the premises of customers with faulty lawn mowers, and carries out the repairs there.
(a) Advise Robin as to the proper basis of accounting for the preparation of her income tax returns for the year ending 30 June 2010.
(b) What are the consequences for Robin of a change in her basis of accounting? What would be the tax implications of Robin offering her clients one year lawn mower servicing contracts which are paid for by the clients in advance?
6. Veronica, in December 2010, left her job as cosmetic consultant with a department store, and became a distributor of women's cosmetics manufactured by Nova Pty Ltd ("Nova"). Nova entered into an agreement with Veronica under which she was granted the right to distribute cosmetics from Nova at wholesale prices and sold those cosmetics on a door-to-door basis at prices recommended by Nova. Veronica did exceptionally well in selling cosmetics and, in June 2011, Nova gave her a ticket for an all expenses paid holiday in Tasmania. Veronica, unfortunately, hates Tasmania and asked Nova whether she could have cash in lieu of the ticket, but Nova would not agree. Veronica thought that she should take the holiday anyway as a sign of good faith. As she expected, she did not enjoy the holiday at all.
Advise Veronica as to the tax consequences, if any, of having taken the holiday.
7. Jim has a one man business cleaning office building windows as an independent contractor. He has a five year contract to spend one day a week (either by himself or his agent) cleaning the windows of Office Ltd's four storey building for a fee of $20,000 per year. Jim has similar contracts with four other building owners. When the contract with Office Ltd has four years to run, Jim falls from the building and suffers injuries which prevent his ever working again as a window cleaner. Office Ltd immediately terminates Jim's contract and engages another window cleaner.
Jim threatens legal proceedings against Office Ltd for termination of his contract and for the injuries he has suffered which are due, he alleges, to Office Ltd's negligence. Office Ltd offers Jim $100,000 for his injuries, and four annual payments of $18,000 each in respect of his contract.
Jim is disposed to accept Office Ltd's offer, and seeks your advice as to the taxation consequences of doing so.
8. Advise as to the capital gains tax consequences in respect of the following (referring to the provisions in the ITAA 97):
(a) Ben acquired shares in Acme Pty Ltd in 1980. At that time the company's assets consisted of a $100 deposit in a bank account. In 2010, Acme acquired a block of land for $100,000, which is now the major asset by the company. Ben has decided to sell his shares in Acme to Ken for a substantial profit.
(b) Anne is the managing director of Frazzle Ltd, a company which manufactures cutlery. Frazzle is successfully taken over in September 2010, and an agreement is reached with Anne under which she is paid $100,000 in return for her resigning from the office of managing director and entering into a restrictive covenant in which she agrees not to be engaged in any capacity in the business of manufacturing cutlery in Sydney for a period of five years.
(c) Penny, an avid stamp collector, acquired, in October 1986, a rare stamp for $50. She sold the stamp in February 2010 for $1,000. In the same month she sold a block of land for $50,000. She had acquired this land in January 2009 for $55,000.
(d) Brian acquired a cottage in 1980 for $20,000, which he rents to other persons. In 2010, Brian expended $100,000 in building an additional storey on to the cottage. He has now received an offer of $200,000 to sell the cottage.
9. Brainstorm Ltd is a company incorporated in Singapore. A group of Australian resident companies control 49 percent of the voting power of Brainstorm. Brainstorm's business activities consist of constructing, for profit, high rise buildings in Singapore and other Asian cities. Brainstorm is taxed on its profits in the various Asian countries in which it carries on its construction business. Its activities are managed by three directors, Brown, Smith and Jones, none of whom is a resident of Australia. Brown is a resident of Singapore, Smith lives in Hong Kong, and Jones lives in Papua New Guinea. The directors make decisions and resolutions concerning the company by sending telexes to one another from the locations in which they live. Brown, Smith and Jones, although very expert in matters concerning the construction of buildings, do not have great expertise in the financial and other commercial affairs of the company. They rely on the expertise of Blanco White, who is retired, lives in Sydney, and was formerly the managing director of a large Australian company. White receives all the information concerning the business activities of the company, and advises each of Brown, Smith and Jones via telex concerning the business affairs of Brainstorm. Brown, Smith and Jones invariably rely on the expertise of White, and make directors' resolutions according to his recommendations. White owns one percent of the shares of Brainstorm, and is paid a yearly fee of $200,000 for his services.
(a) Advise whether Brainstorm is a resident of Australia for the purposes of the Income Tax Assessment Act.
(b) Irrespective of your answer to (a), assume that Brainstorm is treated as a resident for Australian tax purposes. Explain the Australian taxation treatment of Brainstorm's profits from construction projects.
10. Advise as to the capital gains tax consequences in respect of the following (referring to the provisions in the ITAA 97):
(a) In September 2010, Raymond borrowed funds from Big Bank Ltd to buy an undeveloped block of land as an investment. The cost of the land was $30,000. He pays interest to Big Bank in respect of the borrowings, as well as council rates in respect of the land. He has spent $200 in fixing the fences on the perimeter of the land, which were falling down. He has also been spending $100 per year to keep the land clear of refuse and long grass, which could otherwise be a fire hazard. He now plans to sell the land for $60,000.
(b) Beth is in partnership with Jan. The interests of each in the assets of the partnership are equal, and Beth and Jan agree to share profits and losses equally. In 2008, the partnership assets comprise 3,000 shares in A Ltd, which were acquired for $6,000. In 2010, the partners admit Sue to the partnership in consideration of her paying to each of them an amount of $6,000. It is agreed that each partner will have equal entitlements to assets, profits and losses of the partnership. The partnership now plans to sell the shares in A Ltd for $18,000. Jan is in need of money, and plans to sell a painting she bought for herself in 1989 for $10,000. She expects however that she will only receive $8,000 from the sale.
(c) Bob was interested in sailing and, in July 2010, acquired a yacht for $8,000 which he sails on weekends.
(ca) Bob sold the yacht in 2010 for $6,000; alternatively(cb) Bob sold the yacht in 2010 for $9,000; alternatively(cc) Bob used the yacht extensively during the week to entertain and hold business
negotiations with persons with whom he did business, before selling it in 2010 for $9,000.
11. Advise as to the capital gains tax consequences in respect of the following (referring to the ITAA 97):
(a) In 1986, Sally acquired an eighteenth century wooden cabinet for $5,000. She died in 2010, and in her will left the cabinet to Tom. At the date of her death, the market value of the cabinet was $8,000. Tom sells the cabinet in 2010 for $10,000.
(b) April was told by her employer, Apex Ltd, that her employment would be terminated. She commenced an action against Apex claiming inter alia wrongful dismissal. The action was
settled by Apex paying April $50,000 in settlement of all actions which April may have had against Apex.
(c) Ben bought a block of land as an investment in 2008 for $50,000. In 2009, Ben's son, Bill, was married. In 2010, Ben, in an effort to assist Bill in starting a home, sold the land to Bill for $50,000, notwithstanding the rise in land values since Ben originally bought the block which valued the land at $70,000. Bill built a house on the land at a cost of $100,000 and lived in the house with his wife. In 2011, Bill sold the house for $250,000.
12. In March 1984, Felicity acquired an old motel on the beach at Byron Bay. Soon after commencing operations at the motel, she noticed that the beach front occasionally suffered from pollution. Upon making further investigation, she discovered that the cause of the pollution was an adjacent dwelling owned by William, which had been converted into a guesthouse without Council approval. The septic tank system of this dwelling was not able to cope with the additional effluent resulting from the use of the dwelling as a guesthouse, and as a result, sewage was seeping onto the beach near Felicity's motel. William was advised that he could cure the illegality by applying to the Council for a rezoning of the land, and accordingly did so. Felicity learnt of his application, and opposed the rezoning on the basis of the sewerage system on William's premises. Felicity was not only concerned about the health risk caused by the pollution, but also the adverse affect it might have on her business. She incurred legal expenses $3,000 in contesting the rezoning application, and was successful.
In January 1989, Felicity learnt that a block of land adjoining her motel, on which was located an old grass tennis court, was to be auctioned. She thought the tennis court might improve the business of her motel, and successfully bid for the land. In March 1989, she replaced the grass court with a cement tennis court at a cost of $40,000, and in February 1990 replaced the dilapidated wooden fence surrounding the tennis court with one constructed of steel mesh. The steel mesh fence cost $5,000 and was, in fact, cheaper that a replacement wooden fence. She did not know if the steel mesh would last any longer than a wooden fence.
Felicity, in March 1991, had health problems and so sold, at a substantial profit, the motel and adjoining block of land containing the tennis court to Raelene Ramanda.
Advise Felicity of the implications under the Income Tax Assessment Act of her dealings involving the motel, the adjoining land and the $3,000 tennis court.
13. Mr Fu is currently a resident of Hong Kong, but decides to apply for Australian nationality under the Business Migration Program established by the Australian Government. Under the Program, an applicant and his immediate family are granted Australian nationality on condition that a certain sum of money is invested by the applicant in an Australian business. Mr Fu, in compliance with the Program, invests the requisite money in an Australian business. He and his family are thereafter granted Australian nationality. Mr Fu proposes to buy a house in Sydney, and to send his wife and children to live in Sydney. However Mr Fu owns a substantial business in Hong Kong and, because of adverse Australian tax consequences, does not want to become a resident of Australia.
What are the adverse Australian tax consequences if Mr Fu becomes a resident of Australia? By reference to the statutory definition of resident and case law, advise Mr Fu whether he will be a resident of Australia and, in particular, what steps he may take to reduce the risk of becoming a resident.
SECOND WEEKEND SCHOOL
1. Sam Spade is employed by Dinkertons, a private detective agency engaged in private investigations and protective security work. Sam becomes concerned about his personal safety and future career, so Dinkertons pay for him to undertake a self-defence course conducted by the Bruce Lee Martial Arts Centre. Dinkertons buys a pistol for Sam, which he can use in his work, and Sam himself pays to take an automatic weapons course run by a pistol club, to improve his experience and accuracy with automatic pistols. Dinkertons encourage employees to take such courses, and associate course experience with their more successful employees. One consequence is that more specialist and more highly paid work can be assigned to the employee. Sam acquires, at his own expense, a bulletproof vest for use on dangerous assignments.
Dinkertons acquire a house at Burwood for use as office premises. Shortly after the purchase it is decided that the colour the house is painted is not suitable. The whole house is repainted in a more appropriate colour at a cost of $5,000.
Discuss the deductibility of the expenditures incurred by Dinkertons and Sam.
2. Narelle receives the following statement from Nova Pty Ltd together with a dividend cheque for $60.00:
Shareholder dividend statement
Name of company: Nova Pty LtdDate of payment: 9 June 2010Name of shareholder: Narelle PappasNumber of shares: 1200Cents per share: 5.00 cents
Note: you will need to retain the above information to assist you in preparing your tax return.
Narelle seeks your advice as to the tax treatment of the $60.00 dividend.[Assume a company tax rate of 39 percent and individual rate of 50%.]
3. Tom owns a large property on the south coast of New South Wales. Tom has experience in the forestry industry, and he acquired the land in 1984 because it had several fine stands of timber. The stands of timber are a long way from Tom's house on the property and so, in 1986, he acquired a caravan for $3,000 which he uses as a base camp when he is involved in logging. Tom uses the caravan to store equipment, prepare meals, shelter during bad weather and, on occasions, sleep in overnight. Tom drives a four-wheel drive vehicle from his home to the base camp and then drives from the base camp to the various stands of timber on his property. He spends approximately $150 per week on petrol. Tom has also entered into an agreement with Bob. Under the agreement Tom sold Bob 5,000 metres of timber for $20,000, payable in advance. Bob has the right to enter Tom's property to cut and remove the timber as he requires it.
During 1988 Tom had difficulty with persons protesting about the environmental damage caused by his logging operations. On occasions the protesters actually entered his property and obstructed him in the cutting of timber. As a result, Tom spent amounts on erecting fences around his property and, from time to time, hired security guards to prevent protesters entering his property. By 1989, Tom had cut most of the timber on the property, and was facing increasing opposition from environmental groups. He therefore decided to sell the property. In expectation of the sale he spent $5,000 on upgrading several of the roads on the property. In 1989, he sold the property at a substantial profit and also sold the caravan for $5,000.
Advise Tom generally as to the income tax ramifications of these facts.
4. On 1 July 2010, Bob Brown borrows $100,000 from Big Bank Ltd. The annual interest rate is 14 percent. Bob then lends this amount to Brown Pty Ltd at an interest rate of three percent per annum. Brown Pty Ltd is Bob's family company, and it uses the money to buy a house which it then rents to Bob for $20.00 per week. In his return for the year ending 30 June 2011, Bob declares as income the interest payments he has received from Brown Pty Ltd and claims deductions for the amount of interest he has paid to Big Bank Ltd and the amount of rent paid to Brown Pty Ltd. On 1 October 2011, Bob receives a Notice of Assessment and an Adjustment Sheet indicating that the deductions claimed have been disallowed.
(a) Bob wishes to object to the assessment. Advise him of how he should do this, what arguments he may use in support of an objection and the issues involved.
(ii) Discuss the possible application of pt IVA of the Income Tax Assessment Act to the transactions entered into by Bob.
5. Shoppers Ltd carries on the business of designing, constructing, letting and managing shopping centres. Its method of business generally involves identifying a suitable area for shopping centre development, acquiring land in the area, designing and constructing a shopping centre, leasing shops to retailers, and managing the general operation of the centre. Shoppers has been in business for 20 years, and currently manages 35 shopping centres in New South Wales and Victoria. Shoppers has only ever sold one shopping centre, when the returns fell below profitable levels and improvement in returns was expected due to changing demographics in the area where the centre was located.
In 1986 Shoppers identified the outer north-west region of Sydney as a suitable area for a shopping centre development. It acquired substantial vacant land in the area with a view to constructing its largest shopping centre, North-West Plaza, with space to be leased to major department stores, electrical goods retailers and grocery chains. As Shoppers had some difficulties raising finance, construction did not start immediately. In the meantime, Shoppers arranged for the connection to the site of electricity, gas, water and sewerage, and for the construction of roads into and out of the site.
In 1991, due to the recession, Shoppers decided not to go ahead with the construction of North-West Plaza. After receiving real estate advice as to the means of obtaining the best price for the land, Shoppers decided to sell it as a subdivision of residential blocks. As utilities had already been connected to the land, Shoppers did no more than "peg" out the lots for sale. The lots were sold for a substantial profit.
When Shoppers has excess funds, it lends those funds to its wholly owned subsidiary, Finance Ltd. This company is an investment company, and uses the funds to acquire shares on the stock exchange. The investment policy of Finance is to purchase shares which yield a certain rate on the funds invested. However, under that policy, if the market price of the shares increases by more that 10 percent from their original purchase price, Finance sells the shares and reinvests the proceeds in other shares yielding the same rate of return.
Advise Shoppers of the tax consequences of selling the land, and Finance on the tax consequences in respect of the sale of shares. In your advice do not deal with capital gains tax.
6. Transport International Ltd ("TI") is a publicly listed company. TI pays a dividend to its shareholders, and declares that the dividend is franked to the extent of 60 percent. Payments are made as follows:
(a) a dividend of $1,000 to Sue;
(b) a dividend of $10,000 to XYZ Ltd, another public company; and
(c) a dividend of $5,000 to Brown Pty Ltd, a private company owned by the Brown family.
Explain the tax consequences to each of the above shareholders, and the relevant entries in the franking accounts of the companies.
7. David is the residuary beneficiary under his mother's will, of which his father is the sole executor and trustee. David's mother died on 1 January 2008, and the administration of the estate was completed on 30 June 2008. The residuary estate comprises an investment of $1,000,000 which yields an annual income of $120,000.
David is left the income from the residuary estate which is to be paid to him by quarterly instalments commencing on his eighteenth birthday, and upon his twenty-first birthday he is to have the benefit of the residuary estate absolutely. In addition to this, his father as trustee is given a discretion to make advances from time to time for his maintenance, education and advancement.
On 1 October 2008, David's father pays $12,000 from the income of the estate to finance a trip by David to Paris to undertake a holiday course in French at the Sorbonne. David returns in February 2009 to commence his final year at high school. He attains the age of 18 on 1 October 2010. In what manner and by whom should the income from the investment be returned for the years ending on 30 June 2008, 2009, 2010 and 2011?
8. Magna Pty Ltd ("Magna) is the trustee of the Smith family trust. The beneficiaries of the trust are the children of Sue Smith; John who is 19 years old, a paraplegic and living in the United States; James who is 14 years old; and Margaret who is 20 years old and married.
For many years the property of the trust has consisted of a factory which had originally been acquired in 1965 and rented to various people. In July 1990, Magna sells the factory to Eva Pty Ltd ("Eva"). Under the terms of the sale, Eva will pay Magna an initial amount of $200,000 and thereafter will pay Magna $20,000 each year during the lifetime of John.
Magna has complete discretion under the terms of the deed as to the distribution of the trust income. On 30 June 2010, Magna pays $5,000 to meet the medical costs of John; $4,000 to James; and $1,000 to Margaret.
Advise Magna and the beneficiaries of the Smith family trust as to their liability under the Income Tax Assessment Act in respect of the year ended 30 June 2010.
9. Max Martin forms a partnership with his wife, Jean, and their son, Jack, aged 13, to conduct a grocery business. Max also decides to employ his other son, Bill, aged 15, on a part-time basis in the business. Both Jack and Bill are still at school. The profits and losses of business are to be divided equally between Max, Jean and Jack. In addition, Jack and Jean are each paid a salary of $150 per week. Bill is to be paid a salary of $200 per week. Max spends about 60 hours per week working in the business. Jean spends approximately 30 hours per week. Bill and Jack assist in the business after school, and each spends about 10 hours per week doing so. Max wishes to encourage his sons to make provision for their future, and so requires Jack to put 75 percent of his share of the partnership profits into a savings account in Jack's name, and Bill to put 50 percent of his salary into a savings account in Bill's name.
Max decides that the taxation position of his family can be further improved if he assigns 50 percent of his interest in the partnership to Bill.
Advise Max, Jean, Jack and Bill generally as in their taxation positions.
10. Sam owns 60 percent of the shares of Nostra Pty Ltd ("N"), the remaining 40 percent being held by Jill. During the year, Sam sells all of his shares in N to Jill. N, a company engaged in manufacturing gearboxes for cars, has in prior years made a number of losses which it has been carrying forward. Jill hopes to make N's business more profitable by involving the company in the manufacture of carburettors.
During the year of income ending 30 June 2010, N sells a property which was acquired by it prior to September 1985. It is not expected that N will be subject to tax on the profit it derives from that sale. For the year ending 30 June 2010, although N will derive a small amount of income, it is anticipated by the company's directors that the prior year losses will offset such amount.
N desires to pay Jill a dividend out of the profit from the sale of the land.
Advise Jill and N as to the tax consequences of the above facts.
11. Steel Company Ltd carries on business as a manufacturer and supplier of concrete and concrete products, including block and reinforced support columns. It owns and uses several old buildings which are in need of maintenance and painting. It also operates a railway to transport material and products to and from port facilities. The railway is functional, but 20 years old. Some sleepers need replacement and some rails are rusted. The company's electrical equipment is in good condition. As business is booming the company decides to expand its production and resolves to do the following:
(a) to repair a leaking roof in an old building, replace some old dangerous awnings and paint all existing buildings to prevent further damage to timber;
(b) to build a new production plant factory at the rear of the present buildings;
(c) either to make necessary repairs to the existing railway and extend it to the new buildings, or to scrap the old one and start again;
(d) to buy some additional rundown locomotives and, after repairing them, to use them on its railway to transport materials;
(e) to mechanise fully by installing computerised manufacturing equipment.
Advise Steel Company Ltd of the deductibility of money spent in connection with items referred to above.
COURSE MATERIALS
TAXATION OF TRUSTS
Net IncomeTrust Estate
Presently entitled
No legal disability
s95A(2) deemed natural person not trustee
Legal disability
not presently entitled
s98(1)trustee assessed on beneficiary's share
resident
Non -resident
s98(2)trustee assessed on beneficiary's share
s97(1) included in beneficiary's income
company not trustee
person not trustee
s98(3)trustee assessed
s98Abeneficiary assessed
s98(3)trustee assessed
s98Abeneficiary assessed
deceased estate s101Atrustee assessed
s99trustee assessed on normal rates on aggregate
s99Atrustee assessed on aggregate and highest marginal tax
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