Lecture 3 – Income (Part 1) Tax payable = TI * Tax rate – tax offsets (s4 ...

Lecture 3 – Income (Part 1) Tax payable = TI * Tax rate – tax offsets (s4-10) Offsets listed in (s13-1) Taxable income = AI – Deductions (s4-15) Assessable Income = Ordinary + statutory but not non-assessable (s6-1) ↘included in AI when derived (accruals TP) or when received (cash TP)

Ordinary Income => Income according to ordinary concepts (Scott 1935) (s6-5) Features of ordinary income -

Sufficient nexus with an income-earning activity o Income from services, business or property NOT A CAPITAL GAIN o Eisner v Macomber (1920)

Prerequisites of ordinary income [MUST BE SEEN] 1.

2.

3.

4.

Must be money or convertible to money a. Tennant v Smith (1892): apartment not convertible to cash, because apartment unable to be sub-let. If convertible, the savings from the free-rent becomes income. b. Cooke & Sherden (1980): holidays not convertible to cash, so they were not ordinary income. c. S21A: “Not convertible business benefits” ARE convertible* Must be a realised gain a. Eisner v Macomber: capital is like the tree, something that grows in value, once you cut off the tree, unable to get anything more. Income is like the fruit, gives you continuous discrete gains on a regular basis without effecting underlying asset. Must be from an external source a. Tennant v Smith (1892): Rent free accommodation => income is what comes in, not what is saved. Must be derived by the taxpayer( i.e. there must be a real gain) a. Countess of Bective (1932): Taxpayer received money from trust, but trust was set up for daughter’s benefits. Had to use money for the daughter’s benefits. Money from the trust was deemed initially by commissioner to be ordinary income. High Court decided that she had not derived the income, in that she had to use the money for the gain/benefit of her daughter. b. Hochstrasser v Mayes (1960): reimbursement => no gain c. Zobory (1995): caught stealing, was caught and had to repay, deemed to be only holding money, no real gain. d. Constructive receipt rule (S 6-5(4)) i. Also s 6-10(3) but s 15-2(3)(d)=> OI prevails

Characteristics of ordinary income [MAKES A STRONGER CASE] 1.

Usually periodic, recurrent and regular a. Harris (1980): Retired bank employee, received a top-up payment to pension to counter inflation. Court ruled that because it was a one-off payment and related to his pension it was a gift rather than income. b. Blake (1984): Top-up done on a fortnightly basis, court deemed the top-up as ordinary income.

2.

Characterised in the hands of the taxpayer a. Federal Coke (1977): Federal Coke, subsidiary of Bellambi. Bellambi had a contract with Le Nickel, which was subsequently broken (released). Compensation was paid to Federal Coke rather than Bellambi. Courts ruled that Federal Coke had no dealings with Le Nickel and as such, the income was a gift for FC. Just because it is income for someone else, it doesn’t mean its ordinary income for taxpayer. i. Constructive Receipts Rule could have applied: directed at Bellambi’s order.

Things to Note -

Illegality => doesn’t matter Principle of mutuality => can’t pay yourself income (Membership fees that result in ownership is not income) Compensation payment => they take on the character of what they’re replacing. If replacing capital, the compensation payment is capital. If replacing income, the compensation payment is income.

Statutory Income (s 6-10) => amounts that are included through legislation (subsection 6-10(2)) -

For overlaps between ordinary and statutory income, the amount will only be included in assessable income once Usually statutory income prevails Constructive Receipt Rule Examples: royalties, dividends, allowances and net capital gain.

Non-assessable Income => 2 types: exempt income (S6-20) and non-assessable income (s6-23) 4 categories: 1. 2. 3. 4.

Entity is exempt, no matter the income. (s 11-5) a. Certain charitable institution, local governments and etc The particular income is exempt. (s 11-15) a. Social service payments, educational scholarships, Particular income is ‘non-assessable non-exempt’ (s 11-55) a. Fringe benefits (s 23L (1)); foreign branch income (s 23AH) Miscellaneous a. Exempt fringe benefit (s 23L(1A)); non-cash business benefits extremely subjective and can argue that the value of a Ferrari is $5,000. o “Associates” not included => give benefit spouse or a friend FBT introduced to remedy the problems => limited application today.

Overlaps: FBT takes precedent over s 15-2 & under 15-2(3)(d), ordinary income takes precedent over s15-2.

3 things that s 15-2 might capture: 1. 2. 3.

Capital Amounts received in a services context. Rewards for volunteer work (s 15-2 could theoretically capture rewards) rd Payment from 3 party, not cash or convertible, or organised.

SALARY & WAGES (2 sentences) -

Not a fringe benefit An amount that is a “product or incident of employment or services rendered” will be ordinary income. (Hayes 1956) Hayes (1956): Hayes formed a company, taken over by Richardson. Richardson floated company and made a lot of money and gave Hayes 12,000 shares in company. Hayes worked for Richardson for a couple of years as a financial adviser and accountant. High Court ruled that the payment was a gift, as Hayes was adequately remunerated for his services (i.e. it wasn’t a catch-up payment for work done) and Richardson had a habit of giving, his generosity gave rise to the payment, not the services rendered in the past. No nexus between receipt and service.

ALLOWANCES & REIMBURSEMENTS s 15-2 -

Allowance => predetermined amount made to cover an estimated expense, which is paid regardless if the expense is incurred: (Roads & Traffic Authority of NSW) and ATO TR 92/15 Reimbursements => compensation for exact amount of expenses incurred=> FB Tax Treatment o Allowance => Assessable income: OI or s 15-2 o Reimbursement => FBT

Lecture 4 – Fringe Benefits Tax -

Note that all references are to the Fringe Benefits Tax Assessment Act 1986 unless otherwise stated FBT year = 1 April to 31 March Imposed on employer not employee Relevant legislation is the Fringe Benefits Tax Assessment Act 1986 (FBTAA)

1. IS THERE A FRINGE BENEFIT? Must include => Definition of FB Section 136 (1) FBTAA Required: -

A benefit s.136 Provided during the year rd By an employer, associate (related co.) or 3 party arranger To an employee or an associate In respect of employment of the employee o Doesn’t have to be current employer => can be past employer o J & G Knowles (2000): “Sufficient and material relationship” o Would the person have received the benefit if they weren’t employee=> if unclear, income vs gift

2. IS IT EXCLUDED? Examples -

Salary or Wages (broad => bonuses included) textbook 7.85 bonuses allowances Superannuation contributions Payments from superannuation funds Benefits under an employee share scheme Payments on termination of employment

3. WHICH CATEGORY? -

-

Car Fringe Benefits – Div 2: provides with a car Debt Waiver Fringe Benefits – Div 3: employer waives some debt employee owes Loan Fringe Benefits – Div 4: provides employee with loan Expense payment Fringe Benefits – Div 5: pays an expense of a employee (directly pays expense or reimbursement) Meal entertainment Fringe Benefits – Div 9A: food or drink as entertainment, can include travel and accommodation as long as food or drink are involved as entertainment. Issue is whether the food or drink is provided as entertainment => purpose of the function has to be looked at: 1. Social or business purpose => social more likely to be entertainment 2. When was the food or drinks provided => after work is more likely to be entertainment 3. Type of food => light meals suggests not entertainment Employer can choose whether they want to classify it as meal entertainment or property or residual. Property Fringe Benefits - Div 11: provides with property => laptop computer Residual Fringe Benefits – Div 12: anything that isn’t captured by any of the other categories

4. IS IT EXEMPT? Under Categories -

Loans made in the ordinary course of business on arms-length terms: s 17(1) & (2) Loans to meet employment-related expenses in the next 6 months: s 17 (3) Property supplied to employees and consumed on work premises - : s 41 “Business operation facilities” such as toilets, tea and biscuits on business premises: s 47 Private use of business property provided wholly/principally for work purposes: s 47(3)

Listed in Division 13 -

Fringe benefit related to the provision of a car fringe benefit: s 53 – petrol and etc are exempt. “Minor benefits” (< $300): s 58P (not available for in-house fringe benefits and cannot apply on a frequent and regular basis) Work-related items: s 58X (READ) Membership fees and subscriptions: s 58Y Single trip taxi travel beginning or ending at employees place of work: s 58Z

5. CALCULATE TAXABLE VALUE Car fringe benefit -

-

Statutory formula o Taxable Value = ((Base Value)*(statutory fraction) * (no. of days provided)/ (no. of days in tax year)) – amount of recipients contribution (paid for petrol costs themselves) Operating cost method o Taxable Value = (operating costs * (100%- (business use %))) – recipients contribution

Debt Waiver fringe benefit -

Amount of the debt that is waived during the year

Loan fringe benefit -

(Benchmark interest rate published by commissioner – Actual interest rate) * Loan Amount * (No. of days loan provided during year / no. of days in tax year) 1 April 2013 – 31 March 2014 Benchmark interest rate = 6.45%

Expense payment fringe benefit -

In-house => look at property/residual benefit (s 22A) External => amount of the expense (s 23)

Meal entertainment fringe benefit -

50/50 method: 50% of the employer’s meal entertainment expense is treated as FB. (s 37B) Register method: Choose any 12-week period and maintain a register and record meal expenses as a percentage. (s 37C)

Property fringe benefit -

In-house => 75% of lowest price charged to customers or lowest price or; lower of arm’s length cost and arms length price. (s 42) External => cost to employer (s 43)

Residual fringe benefit -

In-house => 75% of lowest price charged to customers or 75% cost to acquire benefits from the provider. External => cost to employer (ss 50 & 51)

6. IS THERE A REDUCTION IN TAXABLE VALUE? -

-

-

In-house fringe benefits o The first $1000 for each employee is exempt. $1000 per year. Cannot be carried forward and transferred to different employees. Recipients Contribution o Note: don’t do it at this stage for car fringe benefits (already done) o Not relevant to debt waiver and loan fringe benefits “Otherwise deductible rule”

o o

Employer reduces taxable value by any amount that would have been deductible to the employee if the employee had paid the expense rather than get the fringe benefit. Car and debt waiver don’t apply

7. TYPE 1 OR 2 FRINGE BENEFIT -

Type 1 => employer entitled to GST input tax credits Type 2 => employer not entitled to GST input tax credits (loan and debt waiver always type 2)

8. CALCULATE FRINGE BENEFIT TAXABLE AMOUNT -

Type 1 => FBT amount = taxable value * 2.0647 Type 2 => FBT amount = taxable value * 1.8692

9. FBT LIABILITY -

Always the top marginal tax rate + medicare levy FBT amount * FBT rate ( 46.5%)