April 5, 2019fINAL eXAMaSSIGNMENT REPORTIt is expected to b.docx

April 5, 2019fINAL eXAM/aSSIGNMENT REPORT
It is expected to be no more than 2,500 words, or 10 pages
double-spaced, not including references, appendices and other
material. It is expected to answer the questions below and
include at least 3 additional academic sources.
To complete this assignment, please read the 2018 Case on
Headspace in My Courses. You may also reference and review
any other third-party materials or research on this company.
For the assignment, you are Head of Customer Experience
Management at Headspace. Your board is interested in how you
are delivering on Headspace goals for customer acquisition,
customer development and retention. They want to maximize
CLV and create growth for the platform.
‘
With this in mind, please write a report that is a maximum of
2500 words, or 10 pages double spaced, not counting the
appendices with graphs, charts or other reference material.
In the report, please address the following questions:
1. What customer acquisition, development and retention
strategy would be the most effective way to grow the platform?
How would you measure it’s success?
2. What are the defined target segments for Headspace? How
are they different? How would you define each segment and
it’s wants, needs, desires and the appropriate value proposition?
3. How is Headspace using personalization and profiling
techniques to improve it’s customer experience?
4. Do you think Headspace’s brand message and company
values are authentic? Be specific and provide evidence for your
answer.

I expect you to use at least 3 additional academic sources of
additional research and evidence in the answering of the
questions and in this paper. An academic source is a source of
information that includes a survey, study or research conducted
by a 3rd party or academic institution that pertains to a topic,
definition or concept that you are including in your paper.
2
MONASH
BUSINESS
SCHOOL
TOPIC 5
INCOME FROM BUSINESS
ACTIVITIES
LECTURE 5
BTF5965 TAXATION LAW | SEMESTER 1, 2019
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CONSULTATION TIMES – WEEKS 5, 6 and 7
Evan, Melchor and Drexel at BLT Consultation Rooms - Level 3
S Building

Wayne at S4.25
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ordinary
income: s 6-5, However gains made outside business activities
may
not be ordinary income:
– Receipts from hobbies or recreational activities
– Gains from disposal or ‘realisation’ of assets
a business
activity
involves a two-step process:
5.1 INCOME FROM BUSINESS ACTIVITIES:
| PoTL paragraph [8.10]
1
• Determining whether the taxpayer is carrying on
a business

2
• Consideration of whether the receipts are the
normal proceeds of that business activity
BTF5965 S1 2019 5
activity
becomes a business:
-1 ITAA97)
– “includes any profession, trade, employment, vocation or
calling,
but does not include occupation as an employee”
– How is this interpreted?
STEP 1: CARRYING ON A BUSINESS
Hobby
Indicators of a
business
starting to be
demonstrated
Business

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Courts use various indicators / characteristics that indicate the
presence
of a business, eg Ferguson v FCT (1979) - Naval officer who
planned to
breed cattle in retirement
can be used as a decisive
factor, but rather a question of
degree
a hobby and business – no
exact formula
placed on different indicators
depending on type of activity
INDICATORS OF A BUSINESS ACTIVITY

Not a
business
Business
BTF5965 S1 2019 7
-making intent (c/f actual profit)
– Lack of profit-making intention doesn’t necessarily preclude
there
being a business: Stone v FCT (2005) - Policewoman who was
an
Olympic athlete
– Small operation can still constitute a business if there are
sufficient
other characteristics: FCT v JR Walker (1985) - Real estate
agent
who wanted to breed Angora goats … unsuccessfully
– Whether the activities are more than a recreational activity:

Thomas v FCT (1972) - Barrister planted trees …
unsuccessfully
INDICATORS OF A BUSINESS ACTIVITY (COURTS)
| PoTL paragraphs [8.40] – [8.50]
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– Degree of planning and amount of time invested
– Delegation of duties: Ferguson v FCT (1979)
– Business practices consistent with industry
– Output much greater than what needed for domestic purposes:
Thomas v FCT (1972)
INDICATORS OF A BUSINESS ACTIVITY (COURTS)

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gambling business (scale, commerciality, profit-intention)
business, unless a significant degree of indicators exist:
– Gambling business: Trautwein v FCT (1936) - betting
integrated
into horse breeding and racing. Winnings were ordinary income.
– Not a business: Evans v FCT (1989) FCA 205 - Held – not
income due to lack of system and haphazard nature of betting
GAMBLING
http://www.austlii.edu.au/cgi-
bin/viewdoc/au/cases/cth/FCA/1989/205.html?context=1;query=
Evans v. Commissioner of
Taxation;mask_path=au/cases/cth/FCA
BTF5965 S1 2019 10

professional sportsperson is from a business or personal
services:
– An employee has limited deductions compared to a business
sportspeople as
being in business: Courts have tended to more likely label
professional sportspeople as being in business:
- policewoman and champion javelin
thrower
received a range of payments.
(2009) - full time professional
AFL
footballers in between contracts but still had to pay managers
fees.
SPORTSPEOPLE
BTF5965 S1 2019 11
indicators of a business:

– small number of sales but traded
regularly
and on a large scale - held to be in a business.
INVESTMENT ACTIVITIES
Not a business
• London Australia Investment Co
Ltd v FCT (1977) - aimed long
term capital growth. Shares sales
were capital in nature.
Investment business
• AGC (Investments) Ltd v FCT
(1992) – highly active in buying and
selling shares to maintain dividend
levels. In a business of investment.
BTF5965 S1 2019 12
a
recreational activity, for example:
– Pricing indicates intention to profit

– Operation may be small but business-like approach
– Level of detail, professionalism and organisation.
– Note potential taxation consequences
– income, deductions, GST liability, partial loss of CGT
exemption
– administration and collection obligations TFN, ABN, PAYG,
WHT
THE SHARING ECONOMY
Provider
(eg Uber car
owner/driver)
Internet service
facilitator
(eg Uber)
Client
(eg end
consumer)$ $
Provision of service
https://www.ato.gov.au/general/the-sharing-economy-and-tax/
https://www.ato.gov.au/general/capital-gains-tax/your-home-

and-other-real-estate/your-main-residence/using-your-home-to-
produce-income/#Whatproportionisexempt
BTF5965 S1 2019 13
commences:
ct:
Softwood Pulp and Paper Ltd v FCT (1976) - Pulp mill
feasibility study
conducted but project did not proceed. Held not a business due
to lack of
“commitment”
– leased land and prepared
soil for a
chestnut plantation but later abandoned the venture. Held a
business had
commenced.
COMMENCEMENT OF A BUSINESS
Business commencement
Preliminary expenses incurred
Not deductible under s 8-1

Operating expenses
Deductible under s 8-1
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ordinary income (s 6-5)
business requires:
it may be
ordinary
income from another general concept or statutory income
STEP 2:
THE NORMAL PROCEEDS OF A BUSINESS
1
• An investigation of the nature of the business
2
• Assessing whether the receipt has a nexus with the
identified business activity

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whether or not a receipt arises from the normal proceeds
business
and the unusual activity: Memorex Pty Ltd v FCT (1987)
Sale of ex-leased computers
STEP 2: NORMAL PROCEEDS OF A BUSINESS:
NATURE OF THE BUSINESS
Broad or narrow approach
Broad
More likely that unusual receipts
could still be business income:
GP Int’nal Pipecoaters v FCT (1990)
Subsidy for establishment of plant
Narrow
Less likely that unusual receipts will
be normal proceeds of the business:

FCT v Merv Brown Pty Ltd (1985)
Sale of import quotas
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pt constitutes the normal business proceeds when
derived as:
is
important:
– Regular sale of ex-leased equipment in a leasing of equipment
business: Memorex – ordinary income
– Infrequent sale of import quotas in a sale of imported clothing
and fabric business: FCT v Merv Brown Pty Ltd – not OI
STEP 2: NORMAL PROCEEDS OF A BUSINESS:
NATURE OF THE BUSINESS
1
• Part of the ordinary business activity; or
2
• An ordinary incident of the business.

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or
convertible to cash: FCT v Cooke and Sherden (1980)
non-cash business
benefits as
being convertible to cash (at it’s arm’s length value)
– The gain will be assessable as ordinary income provided it
arises from a business and satisfies nexus requirements
NON-CASH BUSINESS BENEFITS
Cash or
convertible to
cash
Real gain to the
taxpayer
Prerequisites of
ordinary income
satisfied

bin/viewdoc/au/legis/cth/consol_act/itaa1936240/s21a.html
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eeds of a business constitutes
ordinary income: s 6-5
5.3 EXTRAORDINARY AND ISOLATED TRANSACTIONS
1
• Extraordinary transactions
• A receipt derived by an existing business that arises
outside the normal proceeds of the business.
2
• Isolated transactions
• A receipt from a once-off transaction not undertaken by
an existing business operation.
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appear to

take a
capital characterisation, it may be ordinary income if it falls
into any
of the following categories:
OVERVIEW
Category
Isolated
Transactions
Forms a business
itself
Extraordinary
transactions
First strand of FCT
v Myer Emporium
Disposal of Right
to Future income
Second strand of
Myer Emporium
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principle, a
gain derived from an isolated transaction is distinguished
between:
(1) ISOLATED TRANSACTIONS RECOGNISED AS A
BUSINESS VENTURE IN ITSELF
1
• A “mere realisation” of a capital good, resulting in a
capital gain: see Scottish Australian Mining Co Ltd v
FCT (1950); and
2
• A gain made from carrying on a business, resulting in
ordinary income (s 6-5).
BTF5965 S1 2019 21
transaction
that has exhibited sufficient indicators of a business is
considered
ordinary income from business activity:
ISOLATED TRANSACTIONS:
FORMS A BUSINESS ITSELF

Carrying on a business
• FCT v Whitfords Beach Pty
Ltd (1982): extensive land
development amounting to a
land development business
• Stevenson v FCT (1991):
extensive land development
and sales process
undertaken by taxpayer.
“Mere realisation”
• Statham v FCT (1988):
existing farm business
ceased with subsequent land
development by the council
(not the taxpayer). Taxpayer
not directly involved in sales
process.
• Casimaty v FCT (1997):
undertook minimum land
development required to
obtain subdivision approval.
BTF5965 S1 2019 22
ordinary

income under the principle in FCT v Whitfords Beach Pty Ltd
(1982)
ISOLATED TRANSACTIONS:
FORMS A BUSINESS ITSELF
Profit
Sales
proceeds
Land value at
time isolated
transaction
commenced
Development
costs
BTF5965 S1 2019 23
FCT V MYER EMPORIUM (HCA,1987)
- whether proceeds from an extraordinary or isolated
transaction
would be be ordinary income – on appeal from Full Federal
Court.

(2) EXTRAORDINARY TRANSACTIONS:
FIRST STRAND OF MYERS CASE
Myer
Emporium
Myer
Finance
Citicorp
1. Loan - $80 million to a subsidiary for a
term of 7 years – made on 06/03/81
2. Interest at 12.5% p.a. payable to Myers
3. Sale of the “right to receive interest”
to Citicorp for a lump sum of $45m
completed on 09/03/81
4. Interest payments
paid to Citicorp after sale
of right to interest stream

bin/viewdoc/au/cases/cth/HCA/1987/18.html
BTF5965 S1 2019 24
7) – see para 14
strand of
Myer Emporium when the following requirements are met:
FIRST STRAND OF MYER EMPORIUM
1
• There was an existing business and an extraordinary
transaction occurs that is not part of the normal
proceeds of that business.
2
• There was a profit-making intention upon entering the
transaction; and
3
• The profit was made by the means consistent with the
original intention

BTF5965 S1 2019 25
1. Profit resulted from an extraordinary transaction in an
existing
“business operation”
– High Court also mentioned the “isolated transaction” principle
where there is a “commercial transaction” – as in the California
Copper Syndicate case – likely to be satisfied when the
transaction has no other purpose but profit-making, regardless
of
whether an existing business exists See Tax Ruling TR 92/3
2. Profit-making intention upon entering the transaction
– The intention must be present at the time of “entering the
transaction”: in relation to selling assets, this is the time of
asset
purchase.
– Profit need not be the taxpayer’s sole or dominant intention:
FCT
v Cooling (1990) – lease premium held to be incidental to
carrying on business and alternatively, the 1st strand applied.

BTF5965 S1 2019 26
3. Profit made by means consistent with original intention
– The way profit is eventually made must be consistent with the
original profit-making intention.
– See Westfield Ltd v FCT (1991):
operating shopping centres primarily to derive rental income.
Planned
a joint venture with AMP to develop a new shopping centre but
later
decided to sell its share to AMP:
Purchased land with the
original intention to co-
develop a shopping centre
with AMP

Sold land to AMP, rather
than developing a
shopping centre.
Profit made.
The way the taxpayer
made the profit was
not consistent with
original profit-making
intention.
= First strand of Myer
not satisfied.
BTF5965 S1 2019 27
SECOND STRAND OF MYER EMPORIUM
taxpayer
sells the right to income, without selling the underlying asset:
– the High Court also decided that the sale of a “mere right to
interest” (ie income), while retaining the loan principal (ie the
underlying asset) is simply converting future income into

present
income – regardless of payment by lump sum: CIR v Lake
(USA,1958) – see Myers case at para 36
– This principle has been applied in several later cases:
royalties
from certain brands owned by the company, while retaining
underlying property, being the trademarks. Note first strand did
not
apply due to a change in business plans after royalty
arrangements
were established.
(3) ASSIGNMENT OF FUTURE INCOME STREAMS
BTF5965 S1 2019 28
extraordinary / isolated transaction. Recall:
- proceeds on disposal of an asset disposed
of

after 19 Sept 1985 may be subject to CGT – assessable as part
of a
‘net capital gain’ under s 102-5 ITAA97.
– CGT is covered in detail in Topic 7.
STATUTORY RULES APPLICABLE TO
EXTRAORDINARY AND ISOLATED TRANSACTIONS
Assessable
Income
Ordinary
Income
Statutory
Income
Isolated and
extraordinary
transactions
Capital Gains Tax
S 15-15 ITAA97
BTF5965 S1 2019 29
-making undertaking or plan constitute
statutory

income under s 15-15 ITAA97
– Gains that are ordinary income: s 15-15(2)(a); or
– Gains that involve assets purchased on or after 20 September
1985: s 15-15(2)(b)
very limited application as gains would
often be
assessed as ordinary income due to FCT v Whitfords Beach Pty
Ltd
STATUTORY INCOME: SECTION 15-15
bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s15.15.html
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by way
of compensation or damages for a loss. In general, a
compensation
receipt or damages award takes on the character of the item it
replaces: FCT v Dixon (1952). The lump sum nature of (most)

compensation receipts does not displace this principle; see
Comm
of Tax v Phillips (1936).
5.3 COMPENSATION PAYMENTS
Compensation and
damages receipt
Income
Where indicia of ordinary income are
present for the amount being
replaced, it is considered ordinary
income (s 6-5).
Capital
Where in lieu of capital or a capital
item, it is considered capital in nature
and potentially subject to the capital
gains tax provisions.
BTF5965 S1 2019 31
– Income: replacement of amounts that would have been
ordinary

income (ie, from the normal course of business or some isolated
and extraordinary transactions)
– Capital: amounts for the loss of capital or capital item
COMPENSATION IN BUSINESS SITUATIONS
Three broad categories
Compensation for breach of
contract
(1) Ordinary trading contracts
(2) Structural contracts
Compensation for loss of an
asset
(1) Depreciating assets
(2) Trading stock
(3) Capital assets
Compensation by
way of insurance
proceeds
| PoTL paragraphs [10.150] – [10.160]
BTF5965 S1 2019 32

received for the
breach / cancellation of contracts:
s
– Heavy Minerals Pty Ltd v FCT (1966) – market for ‘rutile’
collapsed and miner
compensated for loss of forward sales contracts
– Allied Mills Industries Pty Ltd v FCT (1989) – termination of
distribution
agreement for Vita-Wheat biscuits
– California Oil Products Ltd (in Liq) v FCT (1934) – was
exclusive distributor for
a US company before contract terminated.
(1) COMPENSATION FOR BREACH OF CONTRACT
| PoTL paragraphs [10.170] – [10.190]
Ordinary trading contracts
(income)
Structural contracts
(capital)
Compensation for loss of:

(1) ordinary trading contract;
(2) sale of goods; or
(3) loss of trading profits.
Breach of contract that goes to
the fundamental structure of
business.
BTF5965 S1 2019 33
– Div 40 applies
– Disposal may trigger a balancing adjustment (see Topic 10)
– Div 70 applies
– Compensation for loss of trading stock is ordinary income
under
s 6-5, or if not ordinary income (?), covered by s 70-115
ITAA97
– depends on extent of damage
– where permanently destroyed or disabled – generally a capital
loss - Glenboig Union Fireclay v IR Commissioner (1922)
– where temporary loss or disablement – compensation will be

income in nature: Ensign Shipping Co Ltd (1928)
– calculation by reference to loss of profits does not
alter
capital character: Sydney Refractive Surgery case (2008)
(2) COMPENSATION FOR LOSS OF A BUSINESS ASSET
| PoTL paragraphs [10.200] – [10.220]
BTF5965 S1 2019 34
-30
– Amounts received by way of insurance or indemnity are still
assessable if the amount would have been included in
assessable income but not ordinary income.
– Special rules apply for recovery of losses under insurance
policies for livestock and timber: s 385-130
(3) COMPENSATION BY WAY OF INSURANCE
BTF5965 S1 2019 35

-of-court’
settlements – and courts may sometimes order payment of
‘unliquidated damages’ – including compensation for:
– Loss of income; and
– Loss of capital or capital assets
into
income and capital components:
– Where parties treat the settlement as a single undissected
amount, the whole sum is treated as capital: McLaurin v FCT
(1961) – various losses caused to farm property by fire.
– CGT provisions may apply: see Tax Ruling TR 95/35 and
CGT
events H2 and C2
COMPOSITE CLAIMS
| PoTL paragraphs [10.240] – [10.250]
5.4 TRADING STOCK
• Division 70 ITAA97 contains a statutory tax accounting

regime for “trading stock”. The Act generally adopts
accounting conventions with some statutory variations. The
key issues in this topic are as follows:
Trading
stock
(1) Meaning
of trading
stock
(2) Accounting
for trading
stock
(3) When
is TS ‘on
hand’
(4) Special
rules
PoTL 2019 paragraph [17.10]
(1) Meaning of trading stock
• “Trading stock” is defined in s 70-10 and includes:
• “Anything” can be trading stock: FCT v St Hubert’s Island Pty

Ltd (1978)
– Necessary to determine the purpose for which it is held.
• An item can be trading stock of a taxpayer even if the
taxpayer
is not its legal owner.
(a)
• Anything produced, manufactured or acquired that is
held for purposes of manufacture, sale or exchange in
the ordinary course of a business; and
(b)
• Livestock
Common items of trading stock
• Raw materials and partly finished goods constitutes trading
stock of a
manufacturer: FCT v St Hubert’s Island (1978).
o But not unbilled services (work in progress) - Henderson v
FCT (1970).
• Spare parts held for the purpose of exchange in the ordinary
course of business constitutes trading stock.

o But not an excessive stockpile (Guinea Airways case 1950)
• Intangibles (eg, shares) may constitute trading stock if held
with the
relevant purpose: Patcorp Investments Ltd v FCT (1976).
• Share trading vs passive investing.
• Consumables used by a service provider in the course of
providing
services may constitute trading stock:
• must be separately identifiable before and after the services
are provided
• Ownership of items must pass to the customer.
• Packaging materials held by a taxpayer may be trading stock
where
they are disposed of, and closely associated with “core goods”:
Ruling
TR 98/7.
PoTL 2019 paragraphs [17.30] – [17.40]
Accounting for trading stock
• A taxpayer will have tax consequences arising:
1

• From the acquisition of trading stock
2
• From disposals of trading stock
3
• At year end
(2) Accounting for trading stock:
• Generally, the tax treatment on the acquisition and disposal of
trading stock is as follows:
• The acquisition of trading stock by a taxpayer provides a
deduction under s 8-1 ITAA97, subject to conditions in s 70-15:
– (i) The trading stock must be “on hand”; or
– (ii) An amount included in assessable income in relation to
the
disposal of the trading stock
• Proceeds of disposal of trading stock in the ordinary course of
business will be ordinary business income under s 6-5 and
included in assessable income when the trading stock ceases to
be “on hand”: s 70-5(2)(b)

PoTL 2019 paragraphs [17.60], [17.80] – [17.90]
Non-arm’s length transactions – s 70-20
Eg. purchaser pays an excessive price to ‘non-arm’s length’
vendor – can only claim MV as deduction and vendor includes
MV
in assessable income.
Non-arm’s length
acquisitions
• Under s 70-20, a deduction
equal to the market value
of the trading stock should
be adopted where the:
• (i) Buyer and seller did not
deal at “arms length”; and
• (ii) The expense is greater
than the “market value”.
Non-arm’s length
disposals
• Where an adjustment to the
purchaser’s deduction
applies, the market value
is included in assessable
income of the seller:

s 70-20.
PoTL 2019 paragraphs [17.70] – [17.100]
Disposals outside ordinary course of business
• eg, disposed on sale of a business, or as gifts or donations:
– Taxpayer disposing the trading stock includes the market
value in assessable income: s 70-90.
– Purchaser is deemed to acquire the trading stock for the
same value: s 70-95.
Year-end adjustments
• An adjustment is required to ensure the taxpayer only accounts
for a deduction when there is an actual economic decline.
• Taxpayers are required under s 70-35 to compare the “value”
of
trading stock on hand at the start and at the end of the year:
Value of
trading stock
at year-end

Value of
trading stock
at start of year
Difference is
included in
assessable
income
Value of
trading stock
at year-end
Value of
trading stock
at start of year
Difference is
included in
deductions
Year-end valuation of stock
Value of trading stock at start of year:
• Equals value of trading stock at the end of the previous
income

year: s 70-40.
– Value at the end of the previous income year must have been
taken into account for tax purposes to be used as the value at
the start of the following year: see Hua Wang Bank Berhad v
FCT (No 19) (2015) – no tax return lodged so value = nil.
Year-end valuation
Value of trading stock at end of year:
• Taxpayer has three choices to determine the value of trading
stock on hand at end of the year: s 70-45:
1
• Cost
2
• Market selling value
3
• Replacement value
Choice of valuation methods

(1) Cost: should be determined in accordance with accounting
principles: Phillip Morris Ltd v FCT (1979):
• Manufacturers, retailers and wholesalers should use the
accounting “absorption cost method”.
• The first-in-first-out method should be used where it is not
possible to track individual items: Australasian Jam v FCT.
(2) Market selling value: is the amount for which the taxpayer
could sell the stock in the ordinary course of business.
(3) Replacement value: is the amount the taxpayer would have
to
spend to replace the stock.
Note
• GST input credits are excluded in all three methods
• taxpayer may value obsolete stock at a value lower if truly
obsolete and the value used is reasonable: s 70-50.
PoTL 2019 paragraphs [17.150] – [17.190]
(3) When is trading stock ‘on hand’

• Concept of trading stock “on hand” determines:
• General guidance on what constitutes “on hand”, includes:
– Taxpayer must retain dispositive power: Farnsworth v FCT
(1949) – fruit grower had delivered fruit to a packing house
– Dispositive power may not include legal ownership: FCT v
Sutton Motors (Chullora) Wholesale Pty Ltd (1985) – car
dealer only took ownership when a buyer signed up.
– Dispositive power does not require physical possession of
the goods: All States Frozen Foods v FCT (1990) – goods at
buyers risk once loaded onto ships, & had power of disposal.
1
• When gross receipts is included in assessable income
2
• When a deduction is claimed for acquisitions
3
• Value of trading stock at year-end
PoTL 2019 paragraphs [17.220] – [17.230]
(4) Special rules
The characterisation of an item as trading stock depends on the

taxpayer’s purpose in holding the asset. Special rules may apply
when the taxpayer’s purpose changes. Special rules include:
1
• Asset of taxpayer becomes trading stock
2
• Item ceases to be trading stock but continues
to be owned by taxpayer
3
• Lost or destroyed stock
Special rules:
(1) Asset of taxpayer becomes trading stock
• Where an asset that is owned by the taxpayer becomes
trading stock:
– Taxpayer is deemed to have disposed the item; and
– Re-acquired the item: s 70-30.
• The taxpayer has a choice as to whether the deemed disposal
and re-acquisition is done at “cost” or at “market value”: s 70-
30(3).

• Other tax considerations:
– Balancing adjustment if the asset was a depreciating asset
– CGT event K4 if the asset was a CGT asset and disposal
and re-acquisition done at “market value”.
Special rules:
(2) Item ceases to be trading stock
• Where a taxpayer ceases to hold an item as trading stock, but
continues to own it:
– Taxpayer is deemed to have disposed the item; and
– Re-acquired it for “cost”: s 70-110.
• The cost on re-acquisition becomes the asset’s cost base (for
a CGT asset) or cost (for a depreciable asset).
• Commissioner provides reasonable estimates of the value of
goods taken from trading stock for private use for certain
businesses: TD 2018/10.

Special rules:
(3) Lost or destroyed stock
• Any lost or destroyed stock taken into account through the
year-end adjustment as stock is not “on hand”.
• Any compensation received for lost or destroyed stock is
included in the taxpayer’s assessable income under s 70-115.
(4) Small business entities
• Definition of a small business entity (SBE):
– A sole trader, partnership, company or trust that operates
business, for whole or part year, and has an aggregated
turnover over less than $10m: s 328-110.
• Concession for SBE:
– If the difference between opening and closing stock value is
less than $5,000, the taxpayer may choose not to account
for changes: s 328-285(1).

(5) Interaction with other income tax rules
• Where trading stock also qualifies as a CGT asset:
– Any capital gain or loss is disregarded if, at the time of the
CGT event, the CGT asset is classified as trading stock:
s 118-25.
• Where trading stock also qualifies as a depreciating asset
subject to the capital allowances regime:
– Trading stock is excluded from the definition of a
“depreciating asset”: s 40-30(1)(b).
BTF5965 S1 2019 54
WEEK 6
– Fringe Benefits Tax
WEEK 7
– Capital Gains Tax (lectures by Diane Kraal)
EASTER BREAK---------------------

WEEK 8
– General deduction (Diane Kraal)
– Task 2 - Written Assignment due Sunday 5th May
WEEK 9
– Specific deductions (Diane Kraal)
WEEK 10
– Capital allowances (Diane Kraal)
Next few weeks
MONASH
BUSINESS
SCHOOL
TYPES OF ASSESSABLE INCOME
LECTURE 4
BTF5965 S1 2019 2

BTF5965 S1 2019 3
-line Quiz – Friday 5 April 11am-11pm
– Another practice quiz available this Thursday
-Exam guidance
– A general knowledge mock exam available at: https://student-
eassessment.monash.edu/enrol/index.php?id=210
– times and places to be advised soon.
WEEK 4 ANNOUNCEMENTS
https://student-eassessment.monash.edu/enrol/index.php?id=210
BTF5965 S1 2019 4
Ordinary income (s 6-5 ITAA97)
accordance
with principles developed by the courts. Referred to as “income
according to ordinary concepts” or “ordinary income”
Statutory income (s 6-10 ITAA97)

tax
legislation: see list at s 10-5.
covers gaps in the ordinary income concept – eg. capital gains.
ASSESSABLE INCOME:
ORDINARY AND STATUTORY INCOME
Assessable
Income
Ordinary
Income
Statutory
Income
BTF5965 S1 2019 5
whether
they have an income character “… in accordance with the
ordinary

concepts and usages of mankind”
– Jordan CJ in Scott v Commissioner of Taxation (1935)
NSWSR
– but
economists
might use a more holistic concept (all aspects of welfare) and
lawyers tend to take a property law approach (from the law of
trusts).
– Three broad sources of income (i) services, (ii) business and
(iii) property
– A fundamental distinction between ‘income’ and ‘capital’
receipts
– Two prerequisites – ‘convertible to cash’ and a ‘real gain’
– Various key characteristics of income:
Recipient’s hands,
Constructive receipt, Avoided expenditure, Mutuality
WHAT IS ORDINARY INCOME?

| PoTL paragraph [5.20] – [5.30]
bin/viewdoc/au/cases/nsw/NSWStRp/1935/9.html
BTF5965 S1 2019
INCOME FROM
PERSONAL SERVICES
NOT ORDINARY
INCOME
Capital receipts
Gifts
Prizes and windfall
gains
Reimbursements
BTF5965 S1 2019 7
prerequisites:
itself

sufficient for the gain to be ordinary income (see later,
characteristics of ordinary income)
STEP 1:
PREREQUISITES OF ORDINARY INCOME
Cash or
convertible
to cash
Real gain
to the
taxpayer
Prerequisites of
ordinary income
satisfied
BTF5965 S1 2019 8
convertible.
– Tennant v Smith [1892] : bank employee’s free house
– FCT v Cooke and Sherden [1980]; door to door sales/free
holiday

vertible?
– The item must be readily convertible to cash
– not illegal to sell the good: Payne v FCT (1996): frequent
flyer points
– s 21A ITAA36 – deems non-cash business benefits to be
convertible
– s 15-2 ITAA97 – includes the value of some employment
related benefits
– FBT – employers taxed on ‘fringe benefits’ provided to
employees (Week 5)
PREREQUISITES OF ORDINARY INCOME:
(1) CASH OR CASH CONVERTIBLE
bin/viewdoc/au/cases/cth/FCA/1980/37.html
BTF5965 S1 2019 9
financially), it is not ordinary income

– Hochstrasser v Mayes (1960) – reimbursement of loss on sale
of
home due to relocation of work not a real gain.
PREREQUISITES OF ORDINARY INCOME:
(2) REAL GAIN
BTF5965 S1 2019 10
will be
ordinary income if it shows sufficient characteristics of income:
constitutes ordinary income:
– Courts can widen their views to reflect modern day practices,
eg
FCT v Myer Emporium (1987)
STEP 2:
CHARACTERISTICS OF ORDINARY INCOME

1
• Regular / periodical receipts; or
2
• The flow concept.
BTF5965 S1 2019 11
ordinary income
than a gain that is paid as a lump sum
– eg instalments of capital Foley v
Fletcher 1843
gain can
constitute ordinary income, even if they do not flow from an
earnings
source:
– Government aged pension: Keily v FCT (1983)
– Youth Allowance payments: Anstis v FCT (2010)
– Certain “top-up” payments: FCT v Dixon (1952)
CHARACTERISTICS OF ORDINARY INCOME:

(1) REGULAR / PERIODICAL RECEIPTS
| PoTL paragraph [5.90], [5.130]
BTF5965 S1 2019 12
Eisner v
Macomber 252 US 189 (1920) by Pitney J:
(2) THE FLOW CONCEPT
‘Tree’
represents:
capital
‘Fruit’
represents:
income
BTF5965 S1 2019 13
likened to

the fruit from the tree, it will have the following two related
traits:
the value of bonus shares issued
to a
shareholder was not income (not severable from the source).
FLOW – IMPORTANT TRAITS
1
• Nexus (a connection) with the earning source
2
• Severable from its earning source
• ie the gain can be extracted without the affecting the
underlying earnings
BTF5965 S1 2019 14
‘sources’
of income:
FLOW - COMMONLY RECOGNISED SOURCES

1
• Income from property
2
• Income personal services and employment
3
• Income from business (including extraordinary and
isolated transactions
BTF5965 S1 2019 15
What is interest?
the return that flows from the lending of money
and is the
compensation for the loss of use of that money. Capital sum lent
is
not affected by the payment of interest,
– Riches v Westminster Bank Ltd (1947) Bank repaid a debt and
deducted a sum
for income tax payable on the ‘interest’ component of the
amount.
– A higher interest rate (premium) may be paid due to risk of

non-repayment. A
discount or premium may be applied to the amount repayable.
See Lomax v
Peter Dixon (1943)
– Deferred interest arrangements - Timing of interest payments
may be
determined by Div 16E etc.
INCOME FROM PROPERTY:
(1) INTEREST
BTF5965 S1 2019 16
– Any distribution to shareholders in the form of money or
property and
any amount credited to shareholders …
– Note – Div 7A ITAA36 – deemed dividends include loans,
excessive
remuneration, forgiven debts etc
system which
– for resident taxpayers - includes a grossed up value of the
dividend in

assessable income plus a franking offset (refundable)
– for foreign taxpayers – no gross up and no offset but WHT
applies at
0% for franked amount of the dividend and for unfranked
amount either
30% (non-DTA countries) or 15% (DTA countries) – ITAA36
Div 11A
(2) DIVIDENDS
| PoTL paragraph [9.150] and [22-290]
Company Shareholder
Dividend
Dividend assessed as
statutory income:
s 44 ITAA36
bin/viewdoc/au/legis/cth/consol_act/itaa1936240/s44.html
BTF5965 S1 2019 17
DIVIDEND IMPUTATION:
GROSS UP AND TAX OFFSET MECHANISM

| PoTL paragraph [15.80] – see also [21.210] and [22.280]
Illustration: operation of the dividend tax offset where
shareholder is a resident individual:
Company level $
Taxable income 100
Less: income tax payable (assume 30%) 30
= Net profit available for distribution 70
Shareholder level
Dividend 70
Gross up by franking amount 30
= Taxable income 100
Shareholder’s tax payable
Tax on taxable income 45
Less: tax offset equal to franking amount (30)
Income tax payable 15
Where
shareholder
a resident

company
70
30
100
30
(30)
0
Where
shareholder
has TI
<$18,200
70
30
100
0
(30)
(30)
refund

Where
shareholder
a non-
resident
70
na
70
0
na
0
BTF5965 S1 2019 18
Rent
party’s
property for an agreed amount of time.
come under the flow concept, even if received as a
lump
sum, still constitutes ordinary income

Lease premiums
agreement.
Generally a capital receipt but CGT applies as it is regarded as
a
proceeds of disposal an interest in the asset itself. Exceptions:
– The taxpayer is in the business of receiving lease premiums:
Kosciusko Thredbo
Pty Ltd v FCT (1983)
– The lease premium is in reality a substitute for rent:
Dickenson v FCT (1958)
(3) RENTAL AND LEASE INCOME
BTF5965 S1 2019 19
-25 states that amounts received by a lessor from
the
lessee due to failing to comply with a lease obligation to repair
the
premises is assessable income, provided:

– The lessee has used the premises for producing assessable
income; and
– The payment is not ordinary income
PAYMENT FOR NOT FULFILLING LEASE OBLIGATIONS
BTF5965 S1 2019 20
payment that is calculated based on
the usage
of intellectual property or quantity/value of a substance taken.
Common examples:
– Taxpayer is paid for physical resources (eg. minerals, coal,
oil)
based on quantity of resources taken (eg barrels of oil)
– Taxpayer is paid for the use of intellectual property, eg a
publisher
pays an author of a book a specified amount per book sold
on
quantity and Stanton case (1955) where payment was a

predetermined lump sum.
-20 ITAA97 deems royalties to be assessable as
statutory
income, except where royalties constitute ordinary income
(4) ROYALTIES
BTF5965 S1 2019 21
intervals
(eg monthly or quarterly pension). Types of annuities:
nt is treated as
ordinary
income: Egerton-Warbuton v DCT (1934)
the
annuity’s return of capital component tax free

(5) ANNUITIES
Fixed-term
Payments made for a
pre-determined
amount of time
Life
Payments made for
the rest of the
recipient’s life
BTF5965 S1 2019 22
may be
subject to income tax for the employee (or entity providing
services),
or fringe benefits tax:
2. INCOME FROM PERSONAL SERVICES
Receipt from personal services and
employment
Is it a Fringe Benefit? – see ITAA36 s 23L

non-assessable non-exempt income but
taxable for employer (Topic 5)
Ordinary income
(assessable under s 6-5)
Other non-cash benefits & allowances
(assessable under s 15-2)
bin/viewdoc/au/legis/cth/consol_act/itaa1936240/s23l.html
BTF5965 S1 2019 23
with a receipt resulting from a
taxpayer’s
personal service constitutes ordinary income
------- WAGES [clear nexus]
<------ GIFT [unclear nexus]
-step approach to determine if an
amount
is ordinary income from personal services:
1. Identification of the activity undertaken; and
2. Determining whether the receipt is a reward for performing
that particular activity

FLOW CONCEPT: NEXUS WITH SERVICES:
| PoTL paragraphs [6.20] – [6.30], [6.60]
BTF5965 S1 2019 24
services,
including:
– Salary and wages
– Commissions
– Bonuses
– Fees charged for services rendered
– Ancillary payments that are an incident of labour
ump-sum or one-off receipts for the
performance of a specific task, see Brent v FCT (1971) – wife
of the
Ronald Biggs – the ‘Great Train Robber’ - link
(1985)
NEXUS WITH SERVICES:

http://home.bt.com/news/on-this-day/july-8-1965-great-train-
robber-ronnie-biggs-escapes-from-wandsworth-prison-
11363991024314
BTF5965 S1 2019 25
of
employment constitutes ordinary income. For example:
– Christmas bonuses paid to employees paid in the form of
redeemable gift vouchers: Laidler v Perry (1965)
– Tips received by a taxi driver: Calvert v Wainwright (1947)
income based on
the
nature of payment (income characteristics), rather than nexus:
– Additional periodic payments as a substitute for wages that
were
relied upon by the taxpayer: FCT v Dixon (1952)
VOLUNTARY PAYMENTS
BTF5965 S1 2019 26

regarded as
ordinary income.
employment or
commercial connection
– importance of a personal relationship between the parties: see
Scott v
FCT (1966) at POTL p 144 and Hayes v FCT (1956) at p 145
-determinative’ factors to consider in borderline
cases:
– Expectation of the gift: Scott v FCT
– Lump sum or regular payments: FCT v Blake (1984)
– Motive of the donor (note, weight placed on the nature of
receipt in the
hands of the recipient): Scott v FCT
– Whether the recipient has been fully remunerated for services
provided:
Scott v FCT; Hayes v FCT (1956)
– Personal relationship: Scott v FCT; Hayes v FCT
GIFTS

BTF5965 S1 2019 27
-assessable if derived by
“luck”
or ‘windfall gains’ – eg lottery prizes
show not
ordinary income: Ruling IT 167
degree of skill
(personal services) that sufficiently outweighs “luck”
– Gambling cases – Babka, Evans - could be business income
– Professional sporting people: Kelly v FCT (1985) p 148
– Irrelevant that the payment does not come from employer
PRIZES
BTF5965 S1 2019 28

outweigh
“luck”. Relevant factors include:
PRIZES
1
• Degree of professionalism
2
• Whether the reward is for services rather than
personal qualities
3
• Whether the reward is paid before or after service
4
• Whether the reward is related to the taxpayer’s
contract
BTF5965 S1 2019 29
-cash benefit may have a nexus with personal services,
however if not ‘convertible to cash’ it is not ordinary income:
– frequent flyer points accrued from work-related travel: Payne

v
FCT (1996) POTL p 150. Held - Not convertible to cash and not
within former s 26(e) ITAA36 as they arose form a private
arrangement.
-2 ITAA97
(see
below) – which replaced s 26(e) or subject to fringe benefits tax
NON-CASH BENEFITS
Cash or
convertible
to cash
Real gain
to the
taxpayer
Prerequisites of
ordinary income
satisfied
BTF5965 S1 2019 30

receipts
connected with services and capital receipts (not ordinary
income)
DISTINGUISHING CAPITAL RECEIPTS
Gain from
personal
services
Income
Reward for
services
Capital
Giving up a
valuable right
BTF5965 S1 2019 31
service
contracts takes the character of what it replaces:
– Relinquishing employment rights (eg rights to control a
company

as managing director): Bennett v FCT (1947) p 152
– Loss of employee entitlements: AAT Case 7,752 (1992)
CHANGES TO ENTITLEMENTS
BTF5965 S1 2019 32
Ordinary income if connected with the current employment
agreement (ie payment of future services)
– Separate agreement to give up valuable rights: Higgs v Olivier
(1952); FCT v Woite (1982)
– No nexus with earning activity (eg payment made at end of
contract): Hepples v FCT (1991) - early CGT case
– Note, capital gains tax may apply (CGT events C2 and D1)
RESTRICTIVE COVENANTS
On
entering a
contract

During the
contract’s
operation
On
conclusion of
a contract
BTF5965 S1 2019 33
-on (enticement) fees as part of normal practices of
attracting
people into a new employment contract:
– Characterised as a payment for future services (ordinary
income): Pickford v FCT (1998); Ruling TR 1999/17
THE COMPENSATION PRINCIPLE
– See Comm of Tax v Phillips (1936) - A company directed got
retrenched but company agreed to continue paying his salary at
same rate for remainder of his original contract period. Held to
be income.
SIGN-ON FEES

BTF5965 S1 2019 34
labour
into assessable income, including non-cash benefits that are not
convertible to cash under ordinary concepts
– Consider application of s 15-2 only if s 6-5 does not apply
– see Smith and Holmes cases re former s
26(e)
STATUTORY INCOME: s 15-2 ITAA97
1
• There is an “allowance, gratuity, compensation, benefit,
bonus or premium”
2
• The above is “provided to you” (being the taxpayer)
3
• There is a nexus with employment or services rendered

BTF5965 S1 2019 35
– Section 15-2 will not apply under certain circumstances. Key
exclusions include:
OTHER STATUTORY INCOME CATEGORIES
-3 Return to work payments
– Employment termination payments
– Genuine redundancy payments
STATUTORY INCOME: s 15-2 ITAA97
1
• Amount is assessable under ordinary income
(s 6-5)
2
• The gain is a fringe benefit (not assessable
under income tax: s 23L(1) ITAA36)

BTF5965 S1 2019 36
Topic 5: Business Income
– What is a business
– Normal proceeds of a business
– Treatment of trading stock
– Fringe Benefits Tax
NEXT TOPIC
MONASH
BUSINESS
SCHOOL
KEY CONCEPTS: DERIVATION,
RESIDENCE AND SOURCE.
LECTURE 3
MONASH
BUSINESS

SCHOOL
Reading list
BTF5965 S1 2019 3
-5 ITAA97:
KEY CONCEPTS:
Australian residents
Assessed on income derived
from all sources
Medicare levy (ML) and
Medicare levy surcharge (MLS)
applies
Foreign residents
Assessed on income derived
from Australian sources only
ML and MLS do not apply;
limited access to tax offsets;
tax rate scale has no tax-free
threshold

BTF5965 S1 2019 4
– link
– A US Senate investigation in 2013 found that
two of Apple’s Irish subsidiaries were
structured so that, for tax purposes, they
weren’t “residents” of either Ireland or the
U.S., allowing them to pay almost nothing to
either country
– EC penalties – following EC intervention
Ireland has now collected more than €14bn in
back-taxes and interest from Apple but both
Ireland and Apple have lodged appeals against
the EC ruling – link
– Apple pays about $85 mil tax on $8 billion
revenue (ca 1% tax) - link
A case of international tax avoidance
https://itep.org/fact-sheet-apple-and-tax-avoidance/
https://www.theguardian.com/world/2018/sep/18/ireland-
collects-more-than-14bn-disputed-taxes-from-apple
https://lms.monash.edu/pluginfile.php/8675499/mod_resource/c
ontent/1/Khadem 2016 Apples $85 mil tax bill.pdf

BTF5965 S1 2019 5
– Restructure to use foreign resident entities & foreign source
income
– Locate entities in tax havens
– Dedns)
– Restructure to increase deductions, including:
– Transactions with affiliated foreign entities (‘transfer
pricing’)
– POTL [2.165]
– Borrow funds at high interest from related entities (‘thin
capitalisation’)
– Pay affiliates for use of intellectual property (at high rates)
Iphone
– OECD/G20 Base Erosion and Profit Sharing Project (‘BEPS’)
– POTL [22.517]
HOW DOES TAX INTERNATIONAL TAX AVOIDANCE
OCCUR?
http://comparecamp.com/how-where-iphone-is-made-
comparison-of-apples-manufacturing-process/
BTF5965 S1 2019 6

accounting.
in each
“income year”: s 4-10 ITAA97. Taxable income includes:
- only counted when it is ‘derived’.
- only allowed when they have been
‘incurred’.
KEY CONCEPTS:
1. DERIVATION OF INCOME
Tax accounting
Derivation of income
When is a gain “derived”?
(this lecture)
Timing of deductions
When is a loss or outgoing
deductible?
(Topic 8)

BTF5965 S1 2019 7
statutory
income that is “derived” within the relevant tax period: s 6-5
ITAA97
(HCA,
1971), Gibbs J comments that it should be determined by:
MEANING OF “DERIVE”
| PoTL paragraphs [16.20] - [16.30]
1
• Application of ordinary business and
commercial principles
2
• Method of accounting that reflects the
taxpayer’s true income
BTF5965 S1 2019 8

be
adopted
- Carden’s case (1938), Firstenberg (1976)
Professional fees of sole practitioners closely connected with
services –
cash method provides the most ‘substantially correct reflex of
true
income’.
- Henderson v FCT (1970) fees
attributable to
extensive business organisation, not individual partners.
Accruals or
earnings method is more appropriate. (POTL p 554)
CASH VS ACCRUALS METHODS
Derivation of income
Recognition of when income is received:
Accruals basis Cash basis

BTF5965 S1 2019 9
Question
vices for a
fee of
$10,000 - in which income tax year would the $10,000 be
“derived”
under the:
– Accruals method?
– Cash method?
June
2019?
DERIVATION OF INCOME:
CASH VS ACCRUALS METHODS
Invoice issued
$10,000
30 June 2019
Payment
received

30 June 2020
Services
provided
BTF5965 S1 2019 10
supplied,
may not yet be “derived”
– See, Arthur Murray (NSW) Pty Ltd v FCT (1965) where
prepaid
dance lessons were not “derived” until provided (POTL p 555)
– In the above illustration, when would income be derived using
the Arthur Murray principle?
-by” sales where
derivation
occurs when title to the goods passes to the customer.
PREPAYMENTS AND “LAY-BY” SALES
Prepayment by
customer

30 June 20X1
Services
rendered
BTF5965 S1 2019 11
ers that:
– Account on an accruals basis; and
– Are owed money at the end of the income year that has not
been
paid due to bona fide dispute
goods or
services were sold/provided: BHP Billiton Petroleum v FCT
(2002)
– customers disputed passing on of PRRT by gas supplier
(POTL p 557)
DELAYS BECAUSE OF A DISPUTE

BTF5965 S1 2019 12
ry
from net profit shown in a business profit and loss
account. There will be temporary (timing) differences and
permanent differences. See ATO Tax Reconciliation
Worksheet
Practical impact
https://www.ato.gov.au/Forms/Company-tax-return-instructions-
2016/?anchor=worksheet2#worksheet2
BTF5965 S1 2019 13
KEY CONCEPTS:
2. RESIDENT OF AUSTRALIA
| PoTL paragraphs [4.10], [4.40]
Is the taxpayer a resident of
Australia? – See s 6(1) ITAA36
Individual
Four ITAA tests of
residence:
1. Ordinary concepts;
2. Domicile;

3. 183-day test; or
4. Superannuation test.
Subject to any relevant DTA rules
Company
Three ITAA tests of residence:
1. Place of incorporation;
2. Central management
and control; or
3. Controlling shareholders
Subject to any relevant DTA rules
BTF5965 S1 2019 14
meaning
is ascertained from a dictionary, for example:
– “to dwell permanently or for a considerable time” (Macquarie
Dictionary)
question of

fact and degree: Miller v FCT (1946)
INDIVIDUALS:
(1) Ordinary concept of residence
BTF5965 S1 2019 15
of
Inland Revenue (1957)
duration of
visits: IRC v Lysaght (1928) AC 234
taxpayer’s use
(1928)
r habit:
TR 98/17
INDIVIDUALS:

Ordinary Concept – Key Factors
BTF5965 S1 2019 16
Australia if his
or her domicile is in Australia, unless the Commissioner is
satisfied
that the person has a permanent place of abode outside Australia
(a) ‘domicile is in Australia’
Domicile
Act 1982:
– Domicile of origin at birth
– Domicile of choice: country where the taxpayer intends to
make
their home indefinitely
INDIVIDUALS:
(2) The domicile test

BTF5965 S1 2019 17
(b) Permanent place of abode outside Australia
“permanent place of abode outside Australia”
– “Permanent” does not mean forever and is objectively
assessed
each year: FCT v Applegate (POTL p 97)
permanent
place of abode is outside Australia. These factors include:
– Intended and actual length of stay in the overseas country
– Permanent / temporary intentions to stay in the overseas
country
– Place of established home & durability of Australian
associations
INDIVIDUALS:
Domicile Test - cont

BTF5965 S1 2019 18
-day test, an individual is a tax resident of
Australia
when his or her physical presence in Australia, continuously or
intermittently, is for more than one-half of the income year
– If the Commissioner is satisfied that the individual’s usual
place
of abode is outside Australia; and
– The individual does not intend to take up residence in
Australia
ore
than 183
days was not a resident as their “usual place of abode was
outside
Australia”: Re Koustrup v FCT (2015) AATA 126
– Special rules now apply to working holiday makers (see #23)
INDIVIDUALS:
(3) 183-day Test
http://www7.austlii.edu.au/cgi-

bin/viewdoc/au/cases/cth/AATA/2015/126.html
BTF5965 S1 2019 19
Commonwealth
superannuation fund (ie Commonwealth public servants) and the
member’s family are deemed to be tax residents of Australia
(5) Effect of Double Tax Agreements
In the event of ‘dual residence’ DTAs generally provide a tie-
breaker
test to ensure taxpayer is treated as a resident in only one
country,
based on location of a ‘permanent home’, ‘centre of vital
interests’
‘habitual abode’ or by mutual agreement - see Article 4 in the
OECD
Model Tax Convention on Income and Capital 2017 – link
(Contents at p 25)
INDIVIDUALS:
(4) The Superannuation Test

http://www.oecd.org/ctp/treaties/model-tax-convention-on-
income-and-on-capital-condensed-version-20745419.htm
Other relevant DTA rules
• Special rules for services income of individuals, in particular:
• Specific rules exist, eg, for teachers, entertainers,
sportspeople.
• Annuities / pensions: taxed in taxpayer’s country of residence
• Dividends, interest, royalties have rate limits (15%, 10%,
10%-5%)
Art 15 - Dependent services
• Income from employment.
• Taxed in the country where
performed, unless:
• (i) Taxpayer is in that country
for < 183 days; and
• (ii) Paid by a person not a
resident of the country where
services are performed.
Independent services
• Generally subject to tax in
the taxpayer’s country of
residence, unless taxpayer

has a fixed base, in the
country where the services
are performed.
• Or treated as ‘profits of an
enterprise’ under Art 7
BTF5965 S1 2019 21
ole or part year, depending
on the
residency test used:
rates is
pro-rated for the residency period
PART YEAR RESIDENCE
Test Residency period
Resides (ordinary
concepts)
Commences from the date when the
person first resides in Australia

Domicile Resident for the days when in Australia
183-day test Taken to be a resident for the whole year
BTF5965 S1 2019 22
ign income and
capital
gains if taxpayer a resident of Australia but holding a temporary
migration visa – under Subdivision 768-R ITAA97.
income but
not entitled to 50% discount on capital gains or main residence
exemption.
(1) must hold a temporary visa granted under the Migration Act
1958
(2) must not be an Australian resident within the meaning of the
Social Security
Act 1991, and
(3) must not have a spouse who is an Australian resident within
the meaning of

the Social Security Act 1991
TEMPORARY RESIDENTS
BTF5965 S1 2019 23
in
Australia under the following visa categories:
– 417 (working holiday)
– 562 (work and holiday)
WORKING HOLIDAY VISAS
Threshold Rate
$0 - $37,000 15%
$37,000 + Ordinary rates
BTF5965 S1 2019 24

1936
company to be
considered a tax resident of Australia:
RESIDENCE TESTS FOR COMPANIES
1
• Incorporated in Australia
2
• Central management and control test
3
• Controlling shareholders test
BTF5965 S1 2019 25
Corporations
Act 2001 (Cth) is automatically a tax resident of Australia,
regardless
of any other factors.

Double
Tax Agreements.
COMPANIES:
(1) PLACE OF INCORPORATION TEST
BTF5965 S1 2019 26
Commissioner of
Taxation (2017 HCA 45)
– Location of a company’s central management and control is a
question of fact and degree
– No general presumption that the location is where the
directors
meet or where the board meetings take place
COMPANIES:
(2) CENTRAL MANAGEMENT AND CONTROL TEST

Carries on
business in
Australia
Central
management &
control in
Australia
Resident of
Australia
(s 6(1) ITAA36)
http://www7.austlii.edu.au/cgi-
https://www.pwc.com.au/tax/taxtalk/assets/alerts/taxalert-
31mar17-tax-residency-of-a-company-has-the-status-quo-been-
change.pdf
BTF5965 S1 2019 27
relevant factual matters for consideration are as follows:
COMPANIES:
Central Management and Control Test - cont

1
• Does the company carry on business in Australia?
• If a business has its central management and control in
Australia, it will
be carrying on a business in Australia
2
• What does central management and control mean?
• Determine location of where high-level decisions that set the
company’s
policies, direction of its operations and type of transactions it
will enter.
3
• Who exercises central management and control?
• Determine in reality who controls and directs the company
(not the legal
power or authority to control)
4
• Where is central management control exercised?
• Determine in reality where decisions are made (not where
merely
recorded or formalised)

BTF5965 S1 2019 28
1. Voting power is controlled by shareholders who are residents
of
Australia (that is, more than 50% of the voting power at general
meetings); and
2. The company is carrying on business in Australia (same as
the
first limb of the central management and control test).
Anti-avoidance rules – controlled foreign entities
– Where a group of 5 or fewer Australian residents indirectly
control at
least 50% of a foreign company income may be ‘attributed’ to
Australian
controllers (Part X of ITAA36).
– Similar rules apply to Foreign Trusts and (formerly) to
Foreign
Investment Funds. See POTL [22.160]
COMPANIES:
(3) CONTROLLING SHAREHOLDERS TEST

BTF5965 S1 2019 29
OVERVIEW
taxed
on ordinary and statutory income sourced in Australia, unless
deemed assessable income on some other basis
practical man would regard as a real source of income” and a
“practical, hard matter of fact”: Nathan v FCT (1918)
classes
to determine source
3. SOURCE OF INCOME
BTF5965 S1 2019 30
SOURCE OF INCOME:

RULES GENERALLY DEPEND ON TYPE OF INCOME
Category Source principle
Sale of goods Generally, the place where the trading activities
take place.
Sale of property other
than trading stock
For real property, the place where the property is located.
Services Generally, the place where the performance of services
occurs:
FCT v French (1957); FCT v Efstathakis (1979). Is there an
exception?
Interest Emphasis on the place where the contract for the loan
was
made and where the money was advanced: Spotless Services
v FCT (1993).
Dividends The place where the company derived its profits:
Esquire
Nominees Ltd v FCT (1973).
Royalties The place where the location of the industrial or
intellectual

property from which the royalty flows.
BTF5965 S1 2019 31
Business profits (OECD Model Art 5 and 7) – link (Contents at
p 25)
Profits of an enterprise of a Contracting State may be taxed only
in that State
unless:
– The enterprise carries on business in the other Contracting
State
through a permanent establishment (PE) situated therein; and
– the profits are attributable to the PE.
– A PE is defined in Article 5 - broadly means a fixed place of
business: see
Thiel v FCT (1990).
ITAA36 s 23AH – exempt foreign branch income
– business income (‘active income’) earned through a permanent
establishment in a listed country may be exempt (avoids double
taxation).
Other rules on business profits
http://www.oecd.org/ctp/treaties/model-tax-convention-on-
income-and-on-capital-condensed-version-20745419.htm

BTF5965 S1 2019 32
Topic 4 – What is included in Assessable Income?
NEXT WEEK
MONASH
BUSINESS
SCHOOL
LECTURE 2
THE INCOME TAX SYSTEM
2BTF5965 S1 2019
This week’s topics
+ Other levies and charges
Administration

• How is the liability paid?
• What are the consequences
of non-compliance?
Tax offsets
• Tax offsets (previously referred to as “rebates” or credits”)
reduce a taxpayer’s income tax liability:
• There are two types of tax offsets:
• Other characteristics:
• Tapering offsets (value reduces with TI)
• Refundable offsets ( where offset value > tax liability)
• Transferable offsets (to another person), or
• Carried forward to be used in future income years (same
person).
• Full list of offsets in s 13-1 ITAA97.
Income
Tax
Payable
Taxable
Income

Rate
Tax
Offsets
PoTL 2019 paragraphs [15.10] – [15.20]
Offsets to prevent double taxation
(a) Dividend tax offset – s 207-20 ITAA97
• Companies as separate legal entities pay tax on their profits.
• On distribution of profits to shareholders (as dividends), tax
that has been paid may be “attached” to the dividend, which is
then called a “franked dividend”. Shareholders who receive a
franked dividend:
– Are required to “gross-up” their dividend by the attached
franking amount; and
– Receive a tax offset equal to the franking amount.
– Tax offsets for franked dividends are refundable offsets for
individual taxpayers (s 67-25 ITAA97).
• Note ALP election policy to reduce refund-ability

Dividend tax offsets
Illustration: operation of the dividend tax offset
Company level $
Taxable income 100
Less: income tax payable (30%) 30
= Net profit available for distribution 70
Shareholder level
Dividend 70*
Gross up by franking amount 30
= Taxable income 100
Shareholder’s tax payable
Tax on taxable income (assume 45% rate) 45
Less: tax offset equal to franking amount (30)
Income tax payable 15

“imputation” of coy
tax to shareholder
Assuming dividend is
fully franked (100%)
– based on current
balance in franking
account.
Offsets to prevent double taxation
(b) Income subject to foreign tax
• Australian tax residents are subject to tax on world-wide
income, under the general rules – s 6-5 ITAA97.
– Consequently, income may be taxed at source as well as in
Australia.
• Prevention of double taxation:
– tax offset equal to the lesser of ‘foreign tax paid’ and
‘Australian tax payable’: s 770-10.
– See Chapter 22 for more detail.
PoTL 2019 paragraph [15.100] and [22-140]

Concessional tax offsets provided as subsidies
• Subsidies provided to particular groups of taxpayers or
taxpayers undertaking particular activities.
• Two categories of concessional tax offsets:
Concessional
tax offsets
Fixed credit
against tax
payable
“Cap” on tax
imposed on
certain types
of income
Common concessional offsets
• Tax Expenditures Statement (TES) lists over 300 tax

expenditures including numerous offsets. Commonly available
tax offsets available to resident individual taxpayers include:
– Dependant and Invalid Carer Tax Offset (DICTO)
– Private health insurance offset.
– Senior Australians and pensioners offset
– Zone rebate
– Overseas forces rebate
• Low income tax offset (or “LITO”)
• referred to as a “rebate” in s 159N ITAA – supplemented by
new low and
middle income tax offset available from 2018-19. These two
offsets will be
combined into a single new low “income tax offset” from 2022-
23.
Common concession offsets
(a) Dependant (Invalid and Carer) Tax Offset
• Non-refundable offset available in respect of a dependant
(spouse, relative, or spouse’s relative) who is broadly:

– Unable to work due to disability; or
– Unable to work because undertaking carer obligations
and is in receipt of a specified disability support, special needs
disability support or invalidity service pension (Div 61-A
ITAA97).
• Claimed by taxpayers who contribute to the maintenance of
the
dependant.
Dependant (Invalid and Carer) Tax Offset
• Eligibility:
– Taxpayer and/or spouse must not receive, or entitled to
receive the Family Tax Benefit (Part B)
– Adjusted taxable income (ATI) of the taxpayer and
taxpayer’s spouse and the dependant is $100,000 or less
(see next slide)
– Dependant must generally be an Australian resident.
• ATI differs to taxable income as TI does not necessarily

reflect
economic capacity
– ATI includes other items, eg adjusted fringe benefits.
https://www.humanservices.gov.au/individuals/services/centreli
nk/family-tax-benefit
Eligibility for Dependant (Invalid and Carer) Tax Offset
• Adjusted taxable income
Less any
child support
= Adjusted
Taxable
Income
Taxable
income
Net rental
property
loss
Adjusted
fringe

benefits*
Net
financial
invest. loss
Reportable
super
contrib.
Deductible
personal
super.
Certain
pensions /
benefits
“Target
foreign
income”
* Adjusted fringe benefits are generally the grossed-up value of
reportable fringe benefits.
Tapering mechanism
• Maximum offset allowable is $2,717 (for 2018-19), reduced
by:
– $1 for every $4 by which the “adjusted taxable income” of the

dependant exceeds $282.
• Consequently, no offset available once ATI of the dependant
is
$11,150.
• Example:
– Kate has her invalid father Edmond living with her and
supports him throughout the year. For the 2018-19 financial
year he has a taxable income of $1,400
– Kate will be entitled to a rebate of:
$2,717 – (($1,400 - $282) x ¼) = $2,437.50.
Common concession offsets
(b) Private health insurance offset
• Refundable, means-tested offset to subsidise taxpayers paying
private health insurance premiums.
• Rebate entitlements for 1 July 2018 to 31 March 2019:
Status Income thresholds

Base tier Tier 1 Tier 2 Tier 3
Single ≤ $90,000 $90,001-
$105,000
$105,001-
$140,000
$140,001 +
Family ≤ $180,000 $180,001 -
$210,000
$210,001 -
$280,000
$280,001 +
Age Private health insurance premium rebate
Base tier Tier 1 Tier 2 Tier 3
Under 65 years 25.415% 16.943% 8.471% 0%
65-69 years 29.651% 21.180% 12.707% 0%
70+ years 33.887% 25.415% 16.943% 0%
Income included for PHI offset
– Defined in Private Health Insurance Act 2007 (Cth) based on

the individual’s “income for surcharge purposes” (as used for
Medicare levy surcharge), broadly:
Income
for
Surcharge
Purposes
Taxable
Income
Exempt
Foreign
Employment
Income
Reportable
Fringe
Benefits
Amount
Total Net
Investment
Loss
Reportable
Super
Contributions

(c) Low income tax offset (‘rebate’)
• Tapered rebate for lower income taxpayers.
• Maximum rebate of $445.
– Reduced by 1.5 cents for every dollar of income exceeding
$37,000 (no longer eligible once taxable income is $66,667).
• Example
Jenny has a taxable income for
the 2018-19 of $40,000.
Rebate will be:
$445 – (($40,000 - $37,000) x
0.015) = $400
(d) Low and middle income tax offset

• Tapered rebate for low and middle income taxpayers.
• Maximum rebate of $530. To be combined with LITO from
2022-23.
– $200 for taxpayers with income up to $37,000
– $200 + 3% of income over $37,000 where income more than
$37,000 and up to $48,000
– $530 for taxpayers with income $48,000-$90,000
– $530 reduced by 1.5 cents for every dollar of income
exceeding $90,000 for taxpayers with income of more than
$90,000 (no longer eligible once taxable income is over
$125,333).
• Previous Example: Jenny’s low and middle income tax offset
(in addition to LITO) will be: $200 + (0.03 x $3000) = $690.
Other offsets:
• Zone rebate - provided to taxpayers who live in remote areas.

Depends on remote zone (Zone A, Zone B, special zones).
• Overseas forces and civilian tax offsets - provided to eligible
taxpayers working for the Australian Defence Force if the
member.
• Senior Australians and pensioners offset – age pensioners are
allowed to earn $$4,368 per annum in addition to their pension
of up
to $23,823 pa (for single person). Offset reduces tax to zero.
• [DHS link]
Terminating offsets
Governments have reduced “spending” by reducing number of
concessional tax offsets. These include:
– Education tax offset (available from mid-2008 to mid-2011)
– Mature age worker offset (terminated after 30 June 2014)
– Net medical expenses offset. (terminating 30 June 2019)
https://www.humanservices.gov.au/individuals/enablers/income-
test-pensions/30406
Order of taking offsets

• Section 63-10 contains a table of all offsets and states that
taxpayers must apply offsets in the order set out.
• Broadly, taxpayers must apply offsets:
1. First, that are neither refundable nor entitled to be carried
forward to future years.
2. Second, that can be refunded or carried forward.
20BTF5965 S1 2019
various
other amounts payable by Australian tax residents. Examples:
– Medicare levy
– Medicare levy surcharge
– Repayment of higher education debts (HELP)
ers may also be responsible for super
contributions to a
qualifying fund for employees at a minimumof 9.5% of the
salary or
wages paid, under the Superannuation Guarantee

(Administration)
Act 1992 (Cth).
OTHER LEVIES AND CHARGES
Other levies and charges
(a) The Medicare Levy (MCL)
• Used to fund Australia’s universal health care system.
• Basic levy payable:
• Certain individuals are exempt from the Medicare levy,
examples include:
– Non-residents
– Persons not entitled to Medicare benefits in respect of
services, treatment or care (exemption certificate required).
Medicare
Levy
Taxable
Income 2%
PoTL 2019 paragraphs [3.50], [3.70]

Medicare levy
• Low income earners may be fully or partially exempt
• Thresholds for 2017-18* income year:
* 2018-19 ‘threshold amount’ and ‘phase-in’ limit not
announced at time of writing
• Where taxable income is between the “threshold amount” and
“phase-in limit” partial MCL = 10 cents for every dollar above
the “threshold amount”
Situation Threshold amount Phase-in limit
Individuals entitled to
Seniors & Pensioners Tax
Offset
$34,758 $43,447
All other taxpayers $21,980 $27,475
(b) The Medicare Levy Surcharge

• Medicare levy surcharge applies to individuals who do not
have private health cover and their income exceeds a
threshold. Determination of whether the surcharge is payable is
based on the individual’s “income for surcharge purposes”,
which includes:
Income
for
Surcharge
Purposes
Taxable
Income
Exempt
Foreign
Employment
Income
Reportable
Fringe
Benefits
Amount
Total Net
Investment
Loss

Reportable
Super
Contributions
Medicare levy surcharge rates and calculation
• Surcharge rates for 2018-19:
• When applicable, the surcharge payable is calculated on a
‘modified’ taxable income amount as follows:
“Income for Surcharge Purposes” Surcharge Rate
Singles Families
0 – 90,000 0 – 180,000 0%
90,001 – 105,000 180,001 – 210,000 1%
105,001 – 140,000 210,001 – 280,000 1.25%
140,001 + 280,001 + 1.5%
Medicare
Levy
Surcharge
Taxable Income

(including net amount on which
family trust distribution tax has
been paid + total reportable
fringe benefits)
Surcharge
Rate
(c) Repayments of higher education debts
• Higher education students who defer payment of their fees
through the (HELP) or Higher Education Contribution Scheme
(HECS) make compulsory repayments through the tax system.
• Amount of repayment is based on:
– The taxpayer’s “Repayment Income” (RI similar to Income
for surcharge purposes); and
– HELP repayment rate for 2018-19 income year:
progressive rate ranging from 2% when RI is $51,957 to
8% when RI is $107,214 and above.
• Taxpayers living overseas with an outstanding loan required

to make repayments similar to if they were living in Australia –
obligation to provide ATO with contact details.
TAX ADMINISTRATION
Overview
PoTL [24.10] 26
ANNUAL RETURNS AND ASSESSMENTS
ust lodge an annual return, in “approved
form”: ss
161 and 161A(1) ITAA36.
– using a MyGov account
(https://my.gov.au)

(ABN) required to
identify taxpayers.
- the Commissioner shall make an assessment ...
– onus is upon a
taxpayer to correctly state their taxable income.
- ATO issues NOA based on
taxpayer’s info
es and other entities, simply lodging a
tax return is deemed
to be an assessment under s 166A ITAA36
and heavy penalties when errors are discovered.
PoTL 2016 paragraph [24.20] 27
https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/
Tax-return-for-individuals-2017.pdf
https://my.gov.au/
LIABILITY TO PAY TAX
• Under ITAA97 s 5-5(5), tax is due and payable either:
• 21 days after the day on which the taxpayer was required to
lodge their return; or

• If return lodged before the due date, 21 days after the issue of
the Notice of Assessment (NOA).
• Commissioner can exercise discretion in serious hardship
cases: s 340-5, Taxation Administration Act 1953 (Schedule 1).
• A tax liability is a debt due to the Commonwealth:
• Commissioner may sue and recover in court of competent
jurisdiction: s 255-5(1), TAA Sch 1.
• Commissioner may recover income tax notwithstanding that a
review or appeal is pending – ss 14ZZM and s 14ZZR TAA53
PoTL [24.150]
28
bin/viewdb/au/legis/cth/consol_act/taa1953269/
LATE PAYMENT OF TAX
• A general interest charge (GIC) is levied on the late payment
of certain taxes, eg, income tax:
– rate set under s 8AC TAA53 (8.72% for March 2018)
– to compensate loss of revenue caused by the late payment

• GIC is deductible: s 25-5.
• Commissioner has the power to remit the GIC in specified
circumstances, eg, delay in making timely payment was not
caused by the taxpayer.
PoTL [24.150] 29
ATO AUDIT POWERS
Under self-assessment, the ATO now focuses on audits and
systematic reviews of taxpayers tax affairs using data matching,
3rd
party reports, access powers, requests for information etc. Some
ATO
investigation powers exceed police powers, for example:
Power ATO Police
Access to
premises
• Immediate – at all reasonable times
for the purpose of tax law: s 353-15
of TAA Sch 1 (formerly s 263

ITAA36)
Need a search warrant: Pt 1AA,
Crimes (Search Warrants and
Powers of Arrest) Amendment
Act 1994 (Cth)
Obligation to
provide
assistance and/or
information
• Taxpayers must provide reasonable
assistance to ATO: s 353-10 of TAA
Sch 1, (formerly s 263(3) ITAA36)
• Commissioner may issue a notice to
attend and provide evidence:
Section 353-10 of TAA Sch 1
(formerly section 264(1) ITAA36)
None
PoTL [24.510] 30

RECORD KEEPING OBLIGATIONS
– Taxpayers must keep sufficient records in the English
language
to substantiate income and expenditure - s 262A ITAA36
– Document retention periods:
– Storage: the general requirement is that documents must be in
writing and in English, or able to be converted into English
• Electronic records acceptable: see, Ruling TR 2005/9.
Taxpayer Retention period
Business taxpayer 5 years
Non-business taxpayer Must keep documents for a
sufficient period to substantiate
deductions
PoTL [24.520]
31
TAXATION OFFENCES
Criminal offences that are prosecuted by courts may apply
under Div 2, Part III TAA53 – some common offences include:

• Failure to comply with requirements of taxation law: s 8C
• Failure to answer questions or produce documents when
attending before a taxation officer: s 8N.
• Failure to remit tax withheld under PAYG rules
• The decision to take prosecution action depends upon a range
of factors such as the nature of the non-compliance, the need
for deterrent, seriousness of the office, taxpayer’s compliance
record, co-operation, and the evidentiary burden of proof. See
Practice Statement LA 2011/18.
• Examples of recent serious tax crimes - see ATO News
PoTL [24.200] 32
https://www.ato.gov.au/General/The-fight-against-tax-
crime/News-and-results/Latest-serious-tax-crime-investigation-
results/
ADMINISTRATIVE PENALTIES
A ``shortfall amount'' is the difference between the
tax properly payable and the tax payable on the
basis of taxation statements'' made by the taxpayer
(TAA sec 284-80). Where a tax shortfall exists the

Commissioner may impose:
1) a base penalty based on degree of culpability:
- 20% adjustments for voluntary disclosure
etc
2) a shortfall interest charge (SIC) is levied, set at
a rate 4% lower than the GIC (4.72%)
0
10
20
30
40
50
60
70
80

90
100
Tax payable
Tax shortfall
PoTL [24.150] 33
SIC @4.72%pa
Base [email protected]%
Self assessed tax
COLLECTION DIRECTLY FROM PAYMENT SOURCES
• In practice most tax is collected directly from paying entities
such
as employers, companies, banks etc. Four main systems:
1
• PAYG withholding Tax deducted from payments to others and
remitted to ATO – most employment income (salary or wages).
2
•PAYG instalments Taxpayers with business and/or investment
income
(individuals, companies, super funds) report to the
Commissioner and

pay their own tax by instalments – via Business Activity
Statement (BAS)
or Instalment Activity Statements (IAS) see ATO link
3
• TFN withholding - If payee does not quote TFN, payer may be
required
to withhold tax at max personal rate, eg, on dividends and
interest.
4
• Non resident WHT - interest dividends or royalties paid to
non-
residents. Rates prescribed under ITAA36 and Double Tax
Treaties.
PoTL [24.150] 34
See also new WHT for GST on new buildings (Phoenix
Taskforce)
https://www.ato.gov.au/uploadedFiles/Content/CAS/downloads/
BUS25191Nat4195s.pdf
https://www.ato.gov.au/General/PAYG-instalments/Who-needs-
to-pay-PAYG-instalments/
https://tax.thomsonreuters.com.au/blog/phoenix-falling-new-
gst-measure-to-fight-tax-avoidance-in-the-property-sector
Non-resident WHT
Taxation of foreign residents on Australian sourced income
Dividends

• Withholding tax applies to dividends paid to a foreign resident
under s 128B ITAA36, unless specifically exempted:
– Main exemption: a fully franked dividend, or to the extent
that
the dividend has been franked: s 128D.
• Dividends re-invested, accumulated or capitalised are deemed
to be paid at time of declaration:
– See, ABB Australia Pty Ltd v FCT (2007).
• Rates of withholding:
– Domestic provisions: 30%
– Tax treaty country where Australia is a party: generally 15%.
Non-resident WHT
Interest
• Withholding tax applies to interest where the recipient is:
– A foreign resident; or
– An Australian resident and incurred in a business carried on

outside Australia through a permanent establishment (PE).
• Rate of withholding: 10% under domestic provisions.
Non-resident WHT
Royalties
• Withholding tax applies to royalties paid by an Australian
resident to a foreign resident, where the payment is not
incurred by the resident in carrying on business via a PE.
• A ‘royalty’ is defined in s 6(1) ITAA36 and includes for
example,
use of, or right to use certain forms of intellectual property.
– Payments for broadcasting rights by Channel 7 to the
International
Olympic Committee not royalties under the Australia-
Switzerland
DTA: CoT v Seven Network (2016).
• Rates of withholding:
– Domestic provisions: 30%;
– Tax treaty country where Australia is a party: generally by

10% or
5%.
Capital gains tax for foreign residents:
• Five categories of ‘taxable Australian property’ of foreign
residents (see CGT Events in Topic 7):
• Note also a WHT of 12.5% applies to disposals of taxable
Australian
property valued at > $750,000. The buyer must pay the amount
to the
ATO and seller can claim a credit. – TAA Sch 1 - s 14-200
1
• Taxable Australian real property;
2
• An indirect interest in Australian real property;
3
• Business assets used in an Australian PE of a foreign resident;
4
• Options or rights to acquire assets in any of the above
categories; and
5

• Assets where the capital gain or loss is deferred under an
election when
an entity ceases to be an Australian resident
PoTL 2019 paragraphs [22.320] – [22.330]
OBJECTIONS, REVIEWS AND APPEALS
Assessment
Taxation objection
Commissioner’s objection decision
Administrative Appeals
Tribunal
Federal Court (if a point of
law is involved
Federal Court
Full Federal Court
Full High Court
(if special leave is granted)PoTL [24.210] 39
Anything wrong here?
If a taxpayer is unhappy with a tax assessment or penalty – both
internal and external
reviews are possible:

Internal review
External review
OTHER TAXPAYER REMEDIES
• Requests under Freedom of Information Act
1982 (Cth)
• Make complaint to the Inspector General of
Taxation or Commonwealth Ombudsman
• Application for judicial review under the
Administrative Decisions (Judicial Review) Act
1977 (Cth)
– allows review of ATO decisions outside the tax
assessment process on administrative law principles
(natural justice, ultra vires)
40PoTL [24.630]
LOOKING AHEAD TO WEEK 3
Key income tax concepts
– derivation
– residence
– source

41
MONASH
BUSINESS
SCHOOL
TOPIC 6
FRINGE BENEFITS TAX
BTF5965 S1 2019 2
– Available Wednesday 10 April
– released Friday 12 April
WEEK 6 UPDATE
BTF5965 S1 2019 3

may be
subject to income tax or fringe benefits tax:
Employee liable Employer liable
HOW ARE RECEIPTS FROM PERSONAL SERVICES
AND EMPLOYMENT TAXED?
Receipt from personal services and employment
Ordinary income
(s 6-5)
(Topic 3)
Non-cash benefits &
other allowances
s 15-2 ITAA97
s 23L ITAA36
(Topic 3)
Is it a Fringe Benefit?
(this lecture)
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s15.2.html
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/
s23l.html

BTF5965 S1 2019 4
e:
– Fringe Benefits Tax Assessment Act 1986 (Cth) (“FBTAA”)
– Fringe Benefits Tax Act 1986 (Cth)
FEATURES OF THE FBT REGIME
1
• Tax is levied on the employer, not employee on the provision
of fringe
benefits – see s 66 FBTAA
• Tax is levied on the employer’s “fringe benefits taxable
amount” (s 5B)
2
• FBT year is from 1 April to 31 March, being the “year of tax”
Rate of tax is
47%, comprising of the top individual tax rate of 45%, plus
Medicare levy
of 2% for the FBT year ended 31 March 2018
bin/viewdb/au/legis/cth/consol_act/fbtaa1986312/
BTF5965 S1 2019 5

as
defined in s 136(1) FBTAA
DEFINITION OF A FRINGE BENEFIT
1
• A benefit
2
• Provided during the year of tax
3
• By an employer, associate or third party arranger
4
• To an employee or an associate
5
• In respect of the employment of the employee.
bin/viewdoc/au/legis/cth/consol_act/fbtaa1986312/s136.html
BTF5965 S1 2019 6

– Includes any right, privilege, service or facility provided
under an
arrangement in relation to the performance of work: s 136(1)
– Specific categories of fringe benefits exist
– In relation to a benefit: includes “allow, confer, give, grant or
perform”
– In relation to property: disposal of a beneficial interest in or
legal
ownership of the property
– Provided” also includes where provision of the benefit is
prohibited but the prohibition is not consistently enforced: s
148(3)
DEFINITION OF A FRINGE BENEFIT:
‘BENEFIT’ AND ‘PROVIDED DURING THE YEAR OF TAX’
BTF5965 S1 2019 7

DEFINITION OF A FRINGE BENEFIT:
BY AN EMPLOYER, ASSOCIATE OR THIRD PARTY
Employee
or
associate
(future, current or
former)
Associate of
employer
(eg related party)
Employer
(future, current or
former)
Third party
arranger
(under an
arrangement with the
employer)
BTF5965 S1 2019 8

– “In respect of” means the benefit must be provided “by reason
of,
by virtue of, or for or in relation directly or indirectly to, that
employment”: s 136
Nexus requirement subject to judicial consideration:
– “Sufficient and material relationship”: J & G Knowles &
Associates Pty Ltd v FCT (2000)
– Loan to company directors and shareholders not “in respect of
employment”: Starrim Pty Ltd v FCT (2000)
DEFINITION OF A FRINGE BENEFIT: ‘IN RESPECT OF
THE EMPLOYMENT OF THE EMPLOYEE’
BTF5965 S1 2019 9
certain items
from being a fringe benefit, including (s 136(1)):
EXCLUSIONS

1
• Salary or wages
2
• Superannuation contributions
3
• Payments from superannuation funds
4
• Benefits under an employee share scheme
5
• Payments on termination of employment
BTF5965 S1 2019 10
constitutes an
allowance or reimbursement:
Contrast
membership fees.
EXCLUSIONS:
ALLOWANCE VS. REIMBURSEMENT

Allowance
• Constitutes “salary and
wages” and hence excluded
from being a fringe benefit
Reimbursement
• Does not constitute “salary
and wages”
• “Reimburse” defined as “any
act having the effect or result,
direct or indirect, or a
reimbursement”: s 136(1)
MONASH
BUSINESS
SCHOOL
DETERMINING THE TAXABLE VALUE
OF A FRINGE BENEFIT
BTF5965 S1 2019 12

those shown in yellow
CATEGORIES OF FRINGE BENEFITS
Examinable categories
• Car fringe benefits
• Loan fringe benefits
• Debt waiver fringe benefits
• Expense payment fringe
benefits
• Property fringe benefits
• Meal entertainment fringe
benefits
Other categories
• Housing fringe benefits
• Living-away-from-home
allowance fringe benefits
• Airline transport fringe benefits
• Board fringe benefits
• Tax-exempt body
entertainment fringe benefits

• Car parking fringe benefits
• Residual fringe benefits
BTF5965 S1 2019 13
fringe
benefit
employer
elects to use the cost basis: s 10(1)
mployer can choose either method for a car that gives
rise to a
fringe benefit
maintained: ss 10A and 10B
– any related ‘car expenses’ are exempt benefits – s 53
CATEGORIES OF FRINGE BENEFITS:
1. CAR FRINGE BENEFITS
| PoTL paragraphs [7.120]
Statutory formula

method: s 9
Cost
basis: s 10
BTF5965 S1 2019 14
Statutory formula method: s 9
axable value for FBT years starting 1 April 2011:
– Cost (if purchased) or leased car value (if leased)
– Note - base value is reduced by 1/3rd if the relevant FBT year
commences at least four years after the car is first held
CAR FRINGE BENEFITS
0.2
Base value
of
the car
No. of days during

the year where car
FBs are provided by
the employer
Number of days in
that year of tax
Amount
(if any)
of the recipient’s
payment, eg
petrol costs not
reimbursed
BTF5965 S1 2019 15
– GST registered entity provides a car to an employee
– The car was purchased by employer on 1 April 2018 for
$20,000 (including GST) and travels a total of 10,000km, of
which 8,000km was for work
– The employee contributed $100 towards the car
– The taxable value of the car will be calculated as follows
= $3,900

Note – actual business related travel irrelevant under statutory
formula.
CAR FRINGE BENEFITS
0.2 20,000
365
365
100
BTF5965 S1 2019 16
Cost basis: s 10
CAR FRINGE BENEFITS
Taxable
value
C (100% - BP) R

Where Explanation
“C” Is the operating cost of the car during the period
Any costs relating to the car that was incurred, eg repairs.
If the car is owned, “C” includes deemed depreciation and
deemed interest: s 11.
“BP” Is the “business use percentage”
“R” Is the amount is the amount of the recipient’s payment
BTF5965 S1 2019 17
– GST registered entity provides a car to an employee for the
full
FBT year, incurring the following costs:
Calculate the taxable value under cost method:
– (i) if the car was purchased (within last 4 years);
– (ii) if the car was leased with annual lease payments of $6,000
CAR FRINGE BENEFITS

Item Amount
Repairs and maintenance $750
Fuel and oil expenses $1,500
Registration and insurance expenses $1,400
Base value of car $20,000
Log book business percentage 60%
NB: Employee paid $100 for car washes from post-tax income
which was not reimbursed
BTF5965 S1 2019 18
car, calculated as follows:
CAR FRINGE BENEFITS
Item Purchased Leased
Repairs and maintenance $750 $750
Fuel and oil expenses $1,500 $1,500
Registration and insurance expenses $1,400 $1,400

Deemed depreciation ($20,000 x 25% x 365/365) $5,000 -
Deemed interest ($20,000 x 5.20% x 365/365) $1,040 -
Lease Charges - $6,000
Total for C = $9,690 $9,650
Less Business % = 60% ($5,814) ($5,790)
Less Recipient’s contribution ($100) ($100)
= Taxable value $3,776 $3,760
Suppose BP = 10% $8,585
Suppose BP = 90% $865
BTF5965 S1 2019 19
provides
an employee (or associate) with a loan: s 16
– Benefit is essentially the interest “saved” by the employee
from a
loan with a low interest rate

2018/2)
by the
‘notional deduction’ - see [12.810] re interest deductions (‘use
of
funds’ rule in Munro’s case).
1. LOAN FRINGE BENEFITS
Loan
amount
(Statutory interest
rate less Actual
interest rate)
No. of days loan provided
during the year
No. of days in FBT year
BTF5965 S1 2019 20

– On 1 April 2017, Mick received a loan from his employer in
the
amount of $150,000 at 3% per annum
– Repayments are interest only
= $3,300
– Munro’s case
waived?
- Westpac Banking
Corp v FCT (1996)
LOAN FRINGE BENEFITS
$150,000 5.20% - 3.00%
365
365
BTF5965 S1 2019 21

efit arises under s 45 when:
not for
some other reason, eg. an irrecoverable debt
DEBT WAIVER FRINGE BENEFITS
1
• An employee (or associate) owes an amount to an
employer
2
• The employee (or associate) is released from his / her
obligation to repay all or some of that amount
Taxable
value
Amount of the loan that no
longer needs to be repaid
BTF5965 S1 2019 22

-house’
expense
payment fringe benefit
– External: taxable value is the amount reimbursed by the
employer
(s 23), subject to the otherwise deductible rule
– a “no private use declaration” can exempt all benefits
of a
particular type that would have zero TV: s 20A
– In house: taxable value = 75% of arm’s length cost (ss 48, 49)
EXPENSE PAYMENT FRINGE BENEFITS
1
• An employer pays an expense incurred by the
employee; or
2
• An employer reimburses an employee for expenditure
incurred by the employee.

BTF5965 S1 2019 23
rty fringe benefit arises where an employer provides
an
employee (or associate) with property: s 40
– Title or ownership passes
– Defined to mean tangible and intangible property: s 136
– Where property is consumed on a working day and on the
employer’s business premises by the employee: s 41
employer, or
expenditure incurred by the employer to provide the property
- If an employer provides services rather than property
that
would be a residual benefit.
PROPERTY FRINGE BENEFITS
BTF5965 S1 2019 24

fringe
benefit can be reduced by one of the following methods:
REDUCTIONS IN TAXABLE VALUE
1
• It is an in-house fringe benefit
2
• There is a recipient’s contribution
3
• The otherwise deductible rule applies
BTF5965 S1 2019 25
• The taxable value of all in-house fringe benefits (namely,
expense,
property or residual) for each particular employee is reduced by
$1,000:
– Where the taxable value of in-house fringe benefits is
< $1,000, the taxable value is reduced to nil.
– Reduction relates to each particular employee separately and

cannot be done on an aggregate basis.
REDUCTIONS IN TAXABLE VALUE:
IN-HOUSE FRINGE BENEFITS
BTF5965 S1 2019 26
payment)
is reduced by the amount the recipient contributes
– Does not apply to car, debt waiver and loan fringe benefits
• For example:
benefit of
$1,000.
nge benefit, the
taxable
value will be reduced to $500.
RECIPIENT’S CONTRIBUTION

BTF5965 S1 2019 27
the
“otherwise deductible rule”:
– Taxable value is reduced to the extent the amount would have
been deductible to the employee, had the employee incurred the
expense directly – see Topics 8-10
– Only applies in relation to the employee (not associates)
– Expense must give rise to a one-time-only deduction (eg
capital
allowance deduction would not qualify)
– Where a benefit is provided to an employee and their
associate
jointly, it is applied on a proportionate basis
OTHERWISE DEDUCTIBLE RULE

MONASH
BUSINESS
SCHOOL
EXEMPT FRINGE BENEFITS
BTF5965 S1 2019 29
No FBT
liability arises in relation to an exempt fringe benefit.
in Div 13 include:
EXEMPT FRINGE BENEFITS
Common exemptions
• Minor benefits
• Work-related items
• Membership fees and
subscriptions
• Single-trip taxi travel
• Various job relocation expenses

Other exemptions
(not discussed)
• Reimbursements for costs of
travelling to an interview or
selection tests for certain future
and current employees
• Certain medical benefits
• Costs of providing newspapers
and periodicals for business
purposes
BTF5965 S1 2019 30
MINOR BENEFITS
and (f)):
exemption
connected benefits) taken into consideration
EXEMPT FRINGE BENEFITS:
“Notional taxable

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