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Lecture 1
What is tax?
OECD (Organisation for Economic Cooperation and Development) defines
tax as: compulsory, unrequited payments to general governments. Taxes
are unrequited in the sense that benefits provided by government to
taxpayers are not normally in proportion to their payment.
Why tax?
- The overall purpose of taxation is to raise revenue
- The goods and services the government provides should affect the
amount of revenue raised. The government provides or subsidises
social goods and merit goods.
Social Goods (or Public Goods): are subject to joint consumption use
by one person does not reduce others ability to access the good. They are
non-excludable, as in you cannot effectively exclude someone from the
good. Examples include: fresh air, street lighting, knowledge, parks, open
source software.
Merit Goods: are based on need. They are goods/services that society
considers should be provided on the basis of need and not the ability to
pay. Many merit goods have positive externalities and examples include
health care, food stamps and education.
Other reasons to tax:
Social engineering the government trying to change peoples behaviour,
for example: higher taxes on Alco pops or cigarettes. This does have
problems such as undesirable side effects rather than buy Alco pops,
youngsters buy pure spirits, or people buy cigarettes and have more
health problems they can now not afford.
Correct free-market imperfections if the allocation of goods/services in
free market is not efficient.
Income Examples
Ordinary Income: Income according to ordinary concepts, for example
salary and wages, and business income.
Statutory Income: Income that is specifically included in a provision of
legislation, for example, net capital gain.
Exempt Income: Exempt from income tax by a provision of Act, for
example, certain scholarships/ compensation from personal injury.
Non-assessable non-exempt income: certain parts of employment
termination payments/ foreign non-portfolio dividend (non-portfolio =
owns less than 10%).
Lecture 2
Lecture 3
Royalties:
Royalties are compensation for use of property A royalty that is income
by ordinary concepts is assessable under ITAA97 s 6-5; otherwise a royalty
can be statutory income under s15-20.
At common law, a royalty that is ordinary income usually involves a
payment calculated by reference to the quantity taken or is linked to the
use of property in a manner proportionate to the benefits derived.
- McCauley v FCT (1994), for a payment to be considered a royalty
under the ordinary concepts, the price paid must be in relation to
the amount taken. Here the payment was for the right to cut timber
from a farmers property that met the common law definition of a
royalty, being in relation to the amount of timber cut.
- Conversely, Stanton v FCT (1995) 92 CLR 630 involves a payment
that is not considered a royalty, as it is not based on the quantity
taken. This case considered the issue of royalties and whether or
not a fixed sum payable for the right to cut timber from land with a
calculation in reference to the amount of timber left standing at the
end of an agreement was a royalty.
- FCT v Sherrit Gordon Mines Ltd (1977) 137 CLR 612 taxpayer
supplied technical information relating to the construction of a
nickel refinery. Even though the payments were expressed as a
percentage of sales over 15 years, a majority of the High Court held
that the payments were not royalties.
- s15-20 as statutory income: Assessable income includes an amount
that you receive by way of royalty within the ordinary meaning of
royalty (compensation for use of property).
- Only case to ever mention s15-20: AAT case U33 (1987): exclusive
license to manufacture and sell ledgers. Got lump sum but made no
ledgers Held that it was not assessable under s15-20 because it
did not satisfy the ordinary meaning of royalty.
Lecture 4
CGT Events: One can only make a capital gain or loss if a CGT Event
occurs: s100-20.
Where two or more CGT Events apply use the event most specific to
situation except D1 or H2: s102-25(1) always apply D1 then if not
relevant H2 where relevant.
CGT Asset
s108-5(1): (a) any kind of property; or (b) a legal or equitable right that is
not property.
Property: Everything that a person has control over. Can be tangible (land
or a building) or intangible (shares, debts owed to you, goodwill).
A right that is not property can be the right to maintain an action for
personal injury or the right to damages for breach of contract for personal
services.
Mills Pty Ltd constructs a timber mill on land it already owns. The
building is subject to a balancing adjustment on disposal, loss or
destruction. The timber mill is considered a separate CGT asset.
2. Apportionment: s116-40
s116-40(1): If payment received relates to more than one CGT event,
capital proceeds from each event are so much of the payment as is
reasonably attributable to the event
Example: Betty sells a block of land and a boat for a total of $100,000.
The transaction involves two CGT events. The $100,000 must be
divided between the two events.
How to divide? Market values? E.g. if the land had a market value
of $90,000 and the boat had a market value of $25,000, could
calculate as follows:
Land: [$90,000 (market value) / ($115,000) (market values of land
+ boat combined)] x $100,000 (amount received) = $78,261
Boat: [$25,000 (market value) / ($115,000) (market values of land +
boat combined)] x $100,000 (amount received) = $21,739
If the taxpayer does not receive (or unlikely) to receive, some or all of
the capital proceeds from the CGT event, the capital proceeds are
reduced y the amount not received
Example: Lyn sells a painting to Rhonda for $5,000. Lyn agrees to
accept monthly installments of $1,000. Lyn receives $2,000, but then
Rhonda stops making payments. Lyn is unable to get to locate or get
in touch with Rhonda. It becomes clear that Lyn is not likely to receive
the remaining $3,000. The capital proceeds are reduced to $2,000.
4. Repaid rule: s116-50
Merged assets: see s112-25(4) if two or more assets merged, cost base
is sum of cost base for the original assets.
Example: You own 2 blocks of land side by side. You merge them
onto one title and sell it as one block. You paid $50,000 for the
first block of land; and $70,000 for the second block of land. The
first element of the cost base when you sell the merged land is
$120,000.
Apportionment: s112-30
If you acquire a CGT asset and the expenditure you incurred relates
only partly relates to CGT asset, the expenditure must be apportioned.
What amount is reasonably attributable to the CGT asset?
Example: You acquire a truck for $24,000 and sell its motor for
$9,000. Suppose the market value of the remainder of the truck is
$16,000. What was the cost base of the motor? $24,000 x [($9,000 /
($9,000 + $16,000)] = $8,640. The cost base of the remainder of the
truck would be $24,000 - $8,640 = $15,360.
If you acquire a CGT asset that is subject to a liability, the first element
of cost base includes amount of liability.
NB: You will not be required to use the indexation method for CGT in this
course. The notes below are included as additional material so you can
understand how indexation was applied. (For this reason, the indexation
numbers are not included).
3. Divide step 2 by step 1. This is the indexation factor for that item of
expenditure. Work out this indexation factor to 3 decimal places: if
the value of the fourth decimal is 4 or less round it down; if it is 5 or
more, then round it up.
Facts
Issue
What is the indexation factor and what is the indexed cost base?
Analysis
The indexation factor for adjusting the cost base is calculated as shown
below:
119.7
= 1.1094 to 4 decimal places
107.9
The indexed cost base relating to the acquisition of the CGT asset is
calculated as follows:
$200,000 1.109 = $221,800