Topic 1 Case studies

Case study 1 – Answer to be completed during lectures in Week 1

Jake Bentley is an Australian resident individual. He is 34 years old and single. He has no private health cover. Jake completed a commerce degree at UQ in 2013 and went on to qualify as a chartered accountant in 2016. His HELP debt balance at the end of this income year is $6,300.

Jake has always been passionate about blues music and in 2018, he opened his own blues music and gin bar in Fortitude Valley, called Blue-gum Dry. Blue-gum Dry was an instant success and Jake used some of the money from this business as a deposit, to purchase a rental property in an exclusive unit complex in Bulimba. This property was tenanted for the entire current income year. Jake also derives bank interest on a 20-year fixed deposit savings account that was opened when he was 16 years old when he received a large inheritance from a family member.

Jake’s taxable income for this income year totals $370,000. The turnover of Blue-gum Dry for this income year totals $3,259,000. Interest on the fixed deposit savings account totals $30,000 for this income year. During the income year, Jake made voluntary tax deductible personal super contributions to a super fund totalling $15,000.

These are the relevant facts about the rental property for this income year:

	$
Rent, ordinary income, s 6-5 ITAA97, income from property	56,000
Tax deductible expenses incurred, s 8-1 ITAA97	17,500
Tax deductible capital allowances (tax depreciation) based on the construction cost of the unit of $1 million, Div 43 ITAA97	25,000
Tax deductible interest on the mortgage loan that he used to fund the remainder of the purchase price of the unit, s 8-1 ITAA97	18,500

Finally, during this income year, Jake remitted PAYG installment payments totalling $80,000 to the ATO as part payment of his tax obligations for this income year.

You are required to:

Calculate Jake’s taxes payable or refundable for the current income year. Show all your calculations, present all formulas and bases for your calculations in words, and provide reasons for your answers.

Case study 2

[Source: PoTL 2021, end of chapter question 3.2, adapted]

Gerry Hill is single and a foreign resident individual taxpayer with taxable income of $15,000 for the current income year from Australian sources. Gerry does not have private health cover but has travel insurance. Gerry does not hold a visa under class 417 or 462.

What is the value of Gerry’s basic tax payable? Show all your calculations.
What is the value of Gerry’s Medicare Levy? Why?
What is the value of Gerry’s total tax offsets? Why?
How would your answer to part a. change if Gerry earned his taxable income from employment under visa class 417 or 462? Show all your calculations.

LAWS3101

Answers:

Taxable income of $15,000 * 32.5% = $4,875.00
$0. None payable as foreign residents do not have access to Medicare benefits and as a result, are not liable for the Medicare Levy
$0. Foreign residents do not qualify for the Low income rebate and the Low and middle income offset
Taxable income of $15,000 * 15% = $2,250.00

Case study 3

Imogen Jones is 24 years old, an Australian resident individual and married. She and her spouse do not have private health cover. Her assessable income for this income year totals $50,000 and her deductions total $10,000. She has franking credits of $300.00 available for this income year. This amount is already included in her assessable income. During the income year, her employer withheld PAYG of $3,000 from her gross salary and remitted the amount to the ATO on her behalf. Her spouse’s taxable income for this income year totals $180,000. His reportable fringe benefits for the same period total $20,000 and his reportable employer super contributions total $15,000.

You are required to:

Calculate Imogen’s tax payable or refundable at the end of the income year. Show all your calculations, present all formulas and bases for your calculations in words, and provide reasons for your answers.

Answer:

Calculation of taxable income:

	$
Assessable income	50,000
Less: Deductions	(10,000)
TAXABLE INCOME	$40,000

Tax payable:

Basic income tax payable

= (Taxable income $40,000 – $18,200) * 19%

4,142.00

Low income tax offset

= $700 – [(Taxable income $40,000 – $37,500) * 0.05] = $700 – $125

(575.00)

Low and middle income tax offset

= $255 + 7.5% * (Taxable income $40,000 – $37,000) = $255 + $225

(480,00)

Medicare Levy = taxable income $40,000 * 2%

800.00

Medicare Levy Surcharge (MLS):

Step 1: ‘Income for surcharge purposes’ calculated on family income as Imogen has a spouse, showing Imogen’s values first.

= Taxable Income ($40,000 + $180,000) + Net Financial Investment Loss

($0 + $0) + Net Rental Property Loss ($0 + $0) + Reportable Fringe

Benefits ($0 + $20,000) + Reportable Superannuation contributions ($0 + $15,000) + Exempt foreign employment income ($0 + $0)

= $255,000

Step 2 = Based on family income of $255,000 the MLS rate is 1.25% Step 3 = (Imogen’s Taxable income $40,000 + Imogen’s reportable fringe benefits $0) * 1.25%	500.00
Franking credits	(300.00)
PAYG	(3,000.00)
Tax payable	$1,087.00

Case Study 4

Kyle Lovett is 24 years old, an Australian resident individual and single. His taxable income for this income year totals $20,000, and his employer withheld PAYG of $200 from his gross salary and remitted the amount to the ATO on his behalf. Kyle has sufficient private health cover.

You are required to:

Calculate Kyle’s tax payable or refundable at the end of the income year. Show all your calculations, present all formulas and bases for your calculations in words, and provide reasons for your answers.

Answer:

	$
Basic income tax payable = (Taxable income $20,000 – $18,200) x 19%	342.00
Low income tax offset. As Kyle’s taxable income is below $37,500, he has access to the full offset of $700. But, as this is not a refundable offset, the rebate can only be claimed to the extent to which it reduces basic tax payable to zero	(342.00)
Low and middle income tax offset. As Kyle’s basic income tax liability is already reduced to $0, he is unable to claim the low and middle income offset as it is not refundable	0
Medicare Levy: None payable as Kyle’s taxable income is below the threshold of $23,226	0
Medicare Levy Surcharge, none payable as Kyle has private health cover	0
PAYG	(200.00)
Tax refundable to Kyle	($200.00)

End

LAWS3101: Topic 1 Case studies – Answer to Case study 1

Topic 1 Case studies

Case study 1 – Answer

Calculation of Jake’s taxes payable or refundable:

	$
Taxable Income (given in question)	370,000
Basic income tax payable = $51,667 + (Taxable income $370,000 – $180,000) x 45%	137,167.00
Medicare Levy = Taxable income $370,000 x 2%	7,400.00
Medicare Levy Surcharge – Jake is liable as he has no private health cover. Step 1 – Income for surcharge purposes calculated for Jake = Taxable income $370,000 + Reportable Fringe Benefits $0 + Net Financial Investment Loss $0 + Net rental property losses $5,000 + Exempt foreign employment income $0 + Reportable superannuation contributions $15,000 PoTL [3.80] = $390,000 Step 2 – Therefore, the rate applicable to Jake is 1.5% Step 3 – MLS payable by Jake = (Taxable income $370,000 + Reportable fringe benefits $0) x 1.5%	5,550.00
PAYG	(80,000.00)
HELP Repayment:
Step 1 – HELP Repayment Income (HRI) = Taxable income $370,000 + Reportable Fringe Benefits $0 + Net Financial Investment Loss $0 + Net rental property losses $5,000 + Exempt foreign employment income $0 + Reportable superannuation contributions $15,000 = $390,000 Step 2 – Therefore, the rate applicable to him is 10% Step 3 – HELP Repayment = HRI $390,000 x 10% = $39,000 But Jake only has a HELP debt balance $6,300, so his payment is capped.	6,300.00
Unincorporated small business offset Jake’s business has is unincorporated and has a turnover of less than $5 million, so he is eligible for this offset. Unincorporated small business offset = (Total net small business income for the year/Taxable income) x Basic income tax x 13% = ($360,000/$370,000) x $137,167 x 13% = $17,349.77 As this total exceeds $1,000, the cap applies	(1,000.00)
Tax payable	$75,417.00

Topic 2 Case studies

Case study 1

[Source: Mid Semester Take-home, Semester 1 2020 – 10 Mark question.]

Note: The dates have not been rolled forward to the 2020–2021 income year so as to fit the COVID19 scenario of the question. Changing the dates to the 2020–2021 income year will result in the same answer.

Lillian Li was born in China. She is currently 30 years old. Lillian is not married, and she has no dependents.

On her sixteenth birthday, Lillian became a professional tennis player and she started to travel the world. Over her career, she won several Grand Slam tournaments and was consistently ranked in the top 20 of women’s professional tennis until her retirement five years ago. Lillian invested the money she earned as a professional tennis player in shares, bonds and in property. Since her retirement, she has spent most of her time in the principality of Monaco where she owns a home. She also owns homes in Hong Kong, Miami and Melbourne, and habitually and regularly travels to these homes on short visits.

Three years ago, Lillian started a tennis academy in Miami. She appointed Patrick Cashew as the managing director of the tennis academy, as she did not have sufficient business experience or expertise, and because she did not want to relocate to Miami on a permanent basis to operate this business. Patrick was born in Australia, and he is also a retired professional tennis player.

Under Patrick’s direction, the tennis academy became very successful and Lillian wanted to expand the business to other countries where she owned homes. Patrick encouraged Lillian to study a Master of Business Administration (MBA) so that she could take on more responsibilities in the business as part of this expansion plan. He explained that he had graduated with an MBA from The University of Queensland after retiring from professional tennis and that this qualification paved the way for his success in business.

Lillian took Patrick’s advice and applied for a 14-month student visa to study an MBA at The University of Queensland. This MBA is presented in intensive mode, meaning that Lillian had to be present at The University of Queensland to attend lectures in two-week blocks, before sitting her final exams over a two-week period. This schedule suited Lillian’s lifestyle, as she intended to continue travelling to her different homes while studying towards her MBA. Her visa was granted in time for the start of the next MBA intake in July 2019.

Upon receiving her visa, Lillian engaged the services of a real estate agent to find her an existing property in Brisbane that she could buy as an investment and to stay in while she was in Brisbane to attend lectures. The real estate agent informed Lillian that the process for foreign buyers to purchase property in Australia involved prior approval from the Foreign Investment Review Board, and that due to Lillian’s intended travel plans while studying in Australia, it was unlikely that she would be able to purchase a property before arriving in Brisbane. The real estate agent added that due to the large number of applications under consideration, the waiting time for approval from the Foreign Investment Review Board was around four months. As a consequence, Lillian decided to stay in a penthouse apartment in Teneriffe, on a short-stay basis, during the time she planned on being present in Brisbane for the two-week lecture blocks. To make all the booking reservations in advance, she downloaded her UQ Timetable, adding three columns: planned arrival date, planned departure date, planned days that she was going to be present in Australia. Lillian wanted to be well-rested before lectures, planning to arrive in Brisbane three days in advance of each lecture block, and she planned on leaving Australia two days after the conclusion of each lecture block. The January 2020 lecture block was to conclude before the start of the Australian Open Tennis tournament. Lillian planned to travel from Brisbane to Melbourne, staying in her home there, to attend the two-week event. She included these days and her exams in her planning. Her adapted timetable to plan her visits is set out below:

UQ Business School Student:	Lillian Li	Executive MBA program: July 2019 intake Compulsory class attendance Timetable
Lecture Block	Planned Arrival date	Planned Departure date	Planned Days in Australia
15/07/2019 – 26/07/2019	12/07/2019	28/07/2019	17 days, Brisbane
02/09/2019 – 13/09/2019	30/08/2019	15/09/2019	17 days, Brisbane
21/10/2019 – 01/11/2019	18/10/2019	03/11/2019	17 days, Brisbane
25/11/2019 – 06/12/2019	22/11/2019	08/12/2019	17 days, Brisbane
13/01/2019 – 24/01/2020	10/01/2020	25/01/2020 @ 5 am	15 days, Brisbane
Australian Open	25/01/2020	10/02/2020	17 days, Melbourne
02/03/2020 – 13/03/2020	28/02/2020	15/03/2020	17 days, Brisbane
20/04/2020 – 01/05/2020	17/04/2020	03/05/2020	17 days, Brisbane
25/05/2020 – 05/06/2020 Exams: 15/06 to 26/06/2020	22/05/2020	28/06/2020	38 days, Brisbane

Everything went according to plan, until the Australian government made an announcement on 3 March 2020 that the country would close its international borders to everyone except citizens and permanent residents at midnight on 6 March 2020, due to the COVID-19 pandemic. Lillian was a committed UQ student. She was determined to complete her MBA with a GPA of 6.52. As a result, she did not hear about the government announcement until 7 March 2020, when she realised she could not leave Australia after the end of the March 2020 lecture block as planned.

Lillian vowed to make the best of the situation, and soon settled into life in Brisbane. She converted her short-stay bookings reservations into a six-month lease for the same penthouse apartment in Teneriffe, starting on 10 March 2020. Adhering to government social distancing rules, she made friends in Brisbane and continued with her usual fitness regime, training with a personal trainer. In-between her studies, she also spent as much time as possible on her tennis academy and the plans to expand this business, working remotely and conducting virtual meetings at least twice weekly.

Lillian successfully completed all her MBA exams, graduating in July 2020. She departed from Australia on 1 September 2020 after the Australian government re-opened the country’s international borders on 31 August 2020.

You are required to answer the following question:

Discuss if Lillian is a tax resident of Australia during the 2019–2020 income year as defined in section 6(1) ITAA36. Provide reasons for your answer, reference relevant case law and relevant rulings from the Australian Taxation Office. (10 marks)

Answer:

The definition of ‘resident’ in section 6(1) ITAA36 provides for four tests that may be applied to the circumstances of an individual. Two of these tests are relevant to Lillian’s circumstances in reference to the 2019–2020 income year which is the specific time period relevant to the question:

• Residence according to the ordinary concepts and

• The 183-day test

The two remaining tests are not relevant to Lillian’s circumstances for the following reasons:

• The domicile test: her domicile of origin is not Australia as she was not born in Australia, and she has not acquired Australia as her domicile of choice. She does not have permanent legal ties with Australia. There is no doubt that she has a permanent place of abode outside of Australia

• The superannuation test: not applicable as she is not a member of the Commonwealth superannuation fund

Residence according to the ordinary concepts:

This is a common law concept that requires an assessment of the situation of a taxpayer that may be informed using case law. The precedent in Miller v FCT considers that whether a person resides in Australia, is a question of fact and degree

TR 98/17 Income Tax: residency status of individuals entering Australia may also be useful in assessing Lillian’s situation, as this ruling applies to students studying in Australia

The courts consider a range of factor to determine if an individual is resident in Australia according to the ordinary concepts. The most common factors are discussed below:

Physical presence:

• During the 2019–2020 income year, Lillian was present in Australia:

• For 100 days until 10/02/2020, but not continuously (17 + 17 + 17 + 17 + 15 + 17 days)

• Continuously from 28/02/2020, for just over 6 months – 124 of these days in the 2019– 2020 income year, counting the period to 30/06/2020, as she arrived in Australia on

28/02/2020 and was unable to leave due to the closure of the borders

• The ATO practice is to consider a visit to Australia of less than six months as insufficient to be regarded as resident here. However, physical presence or length of time in Australia is not, by itself, decisive. Therefore, it is not possible to conclude that Lillian is tax resident because she spent more than 6 months in Australia during the 2019–2020 income year. Lillian planned on leaving and returning to Australia often, but could not do so freely after 6 March 2020 due to the closure of Australia’s international borders. Therefore, while she remained in Australia continuously for just over 6 months, her intention remained fixed

Frequency, regularity and duration of visits, relevant as she is a visitor to Australia:

• Initially, Lillian planned on, and visited Australia regularly for purposes of her studies but for short periods, that does not indicate that she was resident according to the ordinary concepts

• While it is true that she remained in Australia continuously for just over 6 months from 28/02/2020, she had no choice in the matter. This duration of her stay does not outweigh her intention. Therefore, it is important to consider the next factor

Purpose of her visits to Australia and abroad, her intention:

• Her main purpose with visiting Australia was to spend some time in Australia to study towards her MBA, only to attend lectures and to visit Melbourne to watch the Australian Open Tennis tournament. When she had no choice but to remain in Australia after 6 March 2020, that intention did not change. She continued to focus on her studies and working on her tennis academy business remotely

Maintenance of a place of abode in Australia, maintenance of assets in Australia:

• Owning a home in Melbourne and visiting this home for two weeks to watch the Australian Open Tennis tournament is insufficient to classify her as resident according to the ordinary concepts

• Her initial short stays in Teneriffe are insufficient to classify her as resident according to the ordinary concepts

• In leasing the Teneriffe property for six months from 10 March 2020, she maintained a place of abode in Australia, but it is important to consider that she was forced into securing this longer-term accommodation when Australia’s border closed after 6 March 2020 and she was unable to leave the country

• Levene v IRC – a temporary visit abroad cannot determine residency. (Note it was not necessary for students to add this case, as the facts are not entirely similar to that in the question. As a result, marks were only awarded if students appropriately explained the relevance of this case.)

Family, business and employment ties:

• No family and employment ties to Australia

• Her business is in the USA. She is only planning on expanding her business. Therefore, no relevant facts that would assist in reaching a final conclusion

Nationality: Not Australian. Therefore not determinative

Social and living arrangements:

• From early March 2020, her behaviour over time reflected a degree of continuity, routine and habits that are consistent with residing here: she had friends, continued her training regime. However, she was forced to adopt this behaviour because she had no choice but to remain in Australia after 6 March 2020. Adopting these habits does not change the fact that she never intended to stay in Australia or to live like someone who may be regarded as having a residence according to the ordinary concepts in Australia

Conclusion: Lillian is not a resident according to the ordinary concepts as her intention never changed, despite her circumstances changing.

183-day test:

• Lillian was present in Australia for more than 183 days during the 2019–2020 income year: 224 days

• However, this is insufficient to classify her as a resident, as her usual place of abode is outside of Australia and she did not intend to take up residence in Australia

Maximum 10

Knowledge check moment – Reflecting on the answer for Case study 1:

Temporary resident status not relevant. The question is only about s 6(1).
Harding is not relevant as she did not spend a long time in a leased apartment, and it was not her intention to spend a considerable time in Australia.
Applegate and Jenkins are not relevant. She was not employed by an employer in Australia and did not have to leave Australia for work purposes.
Although helpful in some arguments presented in student answers, it was not necessary to consider two separate time periods (before and after the closure of the international borders), as her intention did not change.
There is no information in the question that she has any business ties with Australia.
A convincing answer clearly explains that she never changed her intention. She did not want to settle in Australia or reside here. She was forced to remain in Australia by circumstances that cannot make her a resident.
Writing down ‘TR 98/17’ is sufficient. You do not have to add the full title of this tax ruling.

Case study 2

[Source: Mid Semester Exam, Semester 1 2017, adapted.]

Tsutomu Shimomurat was born in the United States of America and is a famous white-hat hacker. Over the past five years, he has worked in locations all over the globe to secure computer systems against hackers. His assignments usually last between two and six months. His services are in high demand.

In August 2020, he agrees to spend ten months in Australia, where he will be employed by the Australian government following successful distributed denial of service attacks against the Australian Bureau of Statistics. The Australian government agrees to pay him $3 million. He enters Australia on a short term 12-month work visa (not a working holiday-maker visa) on 1 September 2020. While working in Australia, he rents an apartment in Canberra, purchases furniture and household items for the apartment, joins a local gym and secures the services of a local cleaning company to keep the apartment neat and tidy. The Australian government withholds PAYG of $540,000 from his remuneration. During the time he spends in Australia, he only earns remuneration from the Australian government, and interest on bank accounts in various countries around the world. During the rest of the income year, he receives an equivalent of AU$1 million (Australian dollars) in remuneration earned in other countries.

At the end of his 10-month Australian assignment, he sells the furniture and household items in the apartment and he leaves for the Belgian capital Brussels, to work for three months to secure key computer systems of the European Union against ‘anti-Brexit’ hacker attacks.

YOU ARE REQUIRED TO:

Discuss whether Tsutomu is a tax resident of Australia according to the ordinary concepts during the ten months he spends in Australia. Your answer should reference relevant sections of relevant legislation, relevant case law and relevant ATO documents. You do not have to consider whether he is

a temporary resident. (8)

Answer:

Note: While this question is based on an example in TR 98/17, the answer to this question considers factors and facts wider than the focus of the relevant example and which are all provided in the question. Focus on the exam technique presented below and how you should adapt the factors from PoTL [4.80] and the tax ruling to focus on what is known about Tsutomu.

The concept ‘resident’ is defined in section 6(1) of the ITAA36, and this definition includes the position of an individual who is regarded as ‘resident according to the ordinary concepts’.

Residence according to the ordinary concepts is a common law concept which is a matter of fact and degree – Miller v FCT.

Generally, the courts consider a range of factors in determining whether an individual is a resident according to the ordinary concepts. But in this case, as Tsutomu is entering Australia on a pre-arranged employment contract, TR 98/17 is also relevant to Tsutomu’s circumstances since he entered Australia. The relevant factors are discussed below in reference to the six months he spent in Australia:

Physical presence in Australia: He was in Australia for only ten months, but spent all this time in Australia.

o While the ATO’s practice is to consider someone who spends six months in Australia as more likely resident according to the ordinary concepts, Tsutomu spends only ten

months in Australia and the practice cannot be applied to his situation without further consideration of his circumstances.

Frequency, regularity and duration of his visit to Australia: He is a visitor to Australia. Based on his visa, he cannot remain in Australia for more than 12 months. It was never Tsutomu’s intention to remain in Australia for longer than his 10-month employment. He left Australia at the end of the ten months.
Purpose of his visits to Australia and abroad: He was only in Australia for 10 months on a short work assignment. But during this time, he remained in Australia. When he left Australia, he did not have any plans to return.
Maintenance of a place of abode in Australia, location of his assets: Tsutomu has a place of abode in Australia for the ten months he spends in Canberra as he rents an apartment in that city for ten months, and bought furniture and household items for this apartment. There is

no information available about any other permanent place of abode that he may have, or which other assets he owns except for his bank accounts in various countries around the world. Having bank accounts in a number of countries around the world cannot be determinative on its own.

Nationality: As he is not an Australian citizen, this factor is not determinative on its own.
Family, business, employment and social ties: The only information known about Tsutomu is that he had a ten-month contract to work in Australia, and then leaves to work in another country for a different employer. Importantly, Tsutomu joins a local gym and secures the services of a cleaning company, indicating that he regarded Canberra as his home while living and working there. He adopted the usual habits and lifestyle of someone in his profession.
Therefore, based on the fact that he adopted the ordinary habits of someone with his lifestyle when present in Australia, Tsutomu is regarded as an Australian resident individual for the duration of his stay in Australia, based on the common law test: resident according to the ordinary concepts.

Notes:

This is a key point in the answer: But, ‘his stay in Australia is within the ordinary habits of his lifestyle as a worldwide travelling computer’ expert. Quote taken from Example 12 of TR 98/17.
This is a key point in the answer: He ‘has no particular ties to any other country’. ‘In this instance, these factors outweigh the short duration of his stay.’ Note: Quote taken from Example

12 of TR 98/17.

Knowledge check moment: He will be liable to pay tax in Australia on the salary he earned during his employment, based on the tax tables for residents, but with an adjustment for the tax-free threshold since he only spent 10 months in Australia. See the example in the Topic 1 Study guide. He will also be a temporary resident, and as such, will only include Australian sourced income into his assessable income.

Case study 3

Case study 3 consists of two questions about one taxpayer. Each question has a range of possible answers. You should select from these possibilities the single, correct or nearest correct answer to each question.

South African born Andrew Ramaphosa applied for and was granted a permanent resident visa to relocate to Australia in June 2020. He always dreamed of living in sunny Queensland and embraced the opportunity to permanently relocate to Australia. He sold all his possessions and transferred the cash to an Australian bank account. He arrived in Brisbane on 1 July 2020, applied for and was issued with a TFN and immediately started looking for permanent employment. As he had to be careful with how he spent his money after arriving in Australia, he lived in a tent in caravan parks, starting out in Logan for six weeks. Unable to find employment, he then moved to Caboolture for eight weeks, Emerald for four weeks, Rockhampton for nine weeks and Barcaldine for three weeks, eventually finding a permanent position in Boulia from 1 February 2021. During the 2020-2021 income year, his assessable income consisted of bank interest earned from his Australian bank account and his salary.

2.1 Andrew is a tax resident of Australia from 1 July 2020 because:

He held an Australian permanent resident visa.
He treated Australia as his permanent home from that date and was resident according to the ordinary concepts.
He only became a tax resident when he found permanent employment and settled in one place, Boulia.

2.2 In respect of the interest he received from his bank account held in Australia:

The interest is subject to withhold tax of 15% since Andrew does not have a permanent address in Australia.
He will be liable for income tax in Australia at a flat rate of 15%.
He will be liable for income tax in Australia based on the resident tax table.
He will be liable for income tax in Australia based on the foreign resident tax table as he is not yet a citizen of Australia.

Answer:

2.1 b 2.2 c

Knowledge check moment: Explanations relevant to each option in each question 2.1 Andrew is a tax resident of Australia from 1 July 2020 because:

He held an Australian permanent resident visa. (A visa, passport or citizenship alone is not determinant.)
He treated Australia as his permanent home from that date and was resident according to the ordinary concepts. (Although he may not have remained in one place for the first 30 weeks after arriving in Australia, the absence of one particular place of abode in Australia and the difficulty with building social ties as a result, is outweighed by his continuous physical presence in Australia, severance of ties with South Africa, the location of all his assets (cash) in Australia and overall ‘permanency’ of his purpose when moving to Australia. Note that the 183-day test would also apply to him, as he meets the three requirements of this test.)
He only became a tax resident when he found permanent employment and settled in one place, Boulia. (While his permanent settlement in one place provides additional evidence that he is resident according to the ordinary concepts, the factors related to the permanency of his stay since his arrival in Australia makes him resident according to the ordinary concepts from the date of his arrival.)

2.2 In respect of the interest he received from his bank account held in Australia:

The interest is subject to withhold tax of 15% since Andrew does not have a permanent address in Australia. (As he is tax resident, withholding tax won’t be relevant. Withholding tax is generally relevant when interest is paid to foreign residents at a foreign address outside of Australia. Andrew has a TFN and is present in Australia.)
He will be liable for income tax in Australia at a flat rate of 15%. (Progressive tax rates are applicable to the taxable income of individuals.)
He will be liable for income tax in Australia based on the resident tax table.
He will be liable for income tax in Australia based on the foreign resident tax table as he is not yet a citizen of Australia. (Citizenship alone does not determine tax residency.)

End

Topic 3 and Topic 4 Case studies

Case study 1

What is the total value of the franking credits available as a tax offset to an Australian individual resident taxpayer in their 2020–2021 income year, if they receive the following dividends during the income year from listed Australian companies with turnovers that exceed $50 million?

Fully franked dividends of $884
Unfranked dividends of $121
55% franked dividends of $73

Answer:

= [$884 x 3/7 x 100%] + $0 + [$73 x 3/7 x 55%]

= $396.06 (Note: Franking credits include cents.)

Case study 2

Lou-Ann is an overseas student who is residing at an Australian college between the end of her secondary education and the start of university. She undertakes various duties while at the college and is provided with board and lodging and a limited amount of money for personal expenses. LouAnn is a resident of Australia for income tax purposes.

You are required to: Discuss whether the money received by Lou-Ann for personal expenses while residing at a college assessable income under section 6-5 ITAA97.

Answer:

The amount is ordinary income under section 6-5 ITAA97 for the following reasons. The money meets the pre-requisites of ordinary income as she receives it in the form of cash and it is a real gain to her as she is able to use the money for her own benefit. Turning to the characteristics of ordinary income, the money has a nexus with the provision of services. She is given money as a reward for the duties that she performs.

Note: This question is about the money she receives, not the board and lodging. If we assume that an employee-employer relationship exists between Lou-Ann and the college, then we need to consider whether the board and lodging are fringe benefits. We study Fringe Benefits Tax in Topic 11.

Case study 3

Margo is a volunteer foster carer who provides both short-term (respite) and long-term care for people with disabilities. She receives regular payments from a government agency to cover the costs incurred in providing the care. The rate of payment is determined by reference to recognised benchmarks and additional costs associated with the level of disability of the person for whom care is provided. Margo is not engaged in the business of providing foster care, nor does she provide such care for the purpose of profit or gain.

You are required to: Discuss whether the amounts received by Margo are assessable income under section 6-5 ITAA97.

Answer:

No, the amounts are not ordinary income. The money is cash, but it is not a real gain, as it is not available for her own benefit and therefore does not meet the pre-requisites of ordinary income. The payments are meant to cover her expenses incurred in providing care to others. Therefore, the prerequisites of ordinary income are not satisfied.

Note: As the pre-requisites are not met, there is no need to discuss the characteristics of ordinary income. Also note: Few government allowances paid to individuals in their personal capacity are exempt income. But, while these are included in assessable income, it is likely that the recipients will have taxable income below the tax threshold, resulting in no income tax payable. The majority of government grants are means tested (means tested = you aren’t eligible for these if you have high income and/or many assets).

Case study 4 Source: TR 97/11 [53], [54]

Fay’s friends were avid growers of olive trees and were making a small profit on the sale of olive oil they produced from their olives. Fay decided to grow olive trees on her modest property. She researched the varieties and selected those best for olive oil production. Fay planted 50 olive trees on her property. She knew they were hardy trees which required minimum maintenance. She spent the minimum amount of time necessary to care for the trees. She had spoken to her friends and had calculated that after four years she would be able to make a profit on the production of olive oil from the olives she picked. The trees thrived. In the fifth year after planting, a sizeable crop was produced. Fay employed casual labour to pick the olives, borrowed a friend’s trailer and took the olives to be pressed. She sold the barrels of olive oil to friends, work colleagues and members of the public who responded to her newspaper advertisements. She derived a substantial profit in that year, which she was told by her friends in the industry was typical.

You are required to: Discuss whether Fay is carrying on a business for income tax purposes, and if so, from when.

Answer:

Yes. The activities were carried out with a purpose to make a profit, even if no income was made in the first four years of operation, she carried on a business from the commencement of these activities.

In addition:

Fay clearly had a plan to make the activity succeed. She had conducted research by consulting friends in the industry and the local growers association
Though the activity was small it was organised. By its nature the activity required minimum maintenance. It was not carried on in an ad hoc manner. Rather, it was carried on in a manner similar to that of other olive producers
There was repetition and regularity of the activity

Case study 5

Ben receives a $5,000 grant from a government agency under their Business Incentive Program for the establishment of a Business.

You are required to: Discuss whether the $5,000 is assessable income.

Answer:

The $5,000 is not assessable income for two reasons.

It is not ordinary income under section 6-5 ITAA97. Though he receives the money in the form of cash, and it constitutes a real gain as he can use the amount, the money is not connected yet to a business. He receives it to assist him with the establishment of a business and it is derived at a point in time prior to the carrying on of the business. Softwood Pulp and Paper Ltd v FCT.
It is not statutory income under section 15-10 ITAA97, as he is not yet carrying on a business. (See PoTL [8.280]).

Case study 6

Following on from Case study 5: One year later Ben received a $10,000 grant from the same agency to help expand his now successful business.

You are required to: Discuss whether the $10,000 is assessable income.

Answer:

The amount is assessable income under section 6-5 ITAA97 for the following reasons: The money meets the pre-requisites of ordinary income as it is received in the form of cash and is a real gain to him as he is able to use it. Looking at the characteristics of ordinary income, he is carrying on a business, and the grant has a nexus to his business.

Note: Since the grant constitutes ordinary income, it is not statutory income under section 15-10. Section 15-10 only operates if an amount is not ordinary income and the taxpayer is carrying on a business.

Case study 7 Source: TR 2005/1 Example 9.

Julianne completed a diploma in film-making in 2014. She works in other non-arts related employment 3 days a week, on weekends and some nights. Julianne made one short film two years ago which was accepted in competition at three international film festivals and won two international awards. She entered into an exclusive broadcast licence with XYZ TV for five years for this film. She received a small cheque of $1,500 in respect of the television broadcast licence fee covering all XYZ TV broadcasts of her film over the next five years. To date, she has not recovered all her production costs in making and exploiting her first short film.

Last year, Julianne commenced another short film project, and spent a total of $10,000 on its production. Her expenses included film supplies, facilities and equipment hire, processing and so on. Once finished, Julianne will enter her new short film into Australian and international film festivals and, if successful, will apply for a marketing grant from the Australian Film Commission to promote the film. Last year Julianne also began researching a documentary project aimed at television and is in the process of developing a script for her first feature film. She spends on average approximately 20 hours a week on her film-making. This includes work on all her current projects (short film, feature film and documentary) as well as continuing efforts to exploit her finished work.

Although Julianne has developed a number of contacts in the film and television industry, she has not been able to secure development funding for the feature film. Julianne is completing the second draft of the screenplay and is trying to secure a producer. She is confident that this will lead to increased exposure, which in turn will increase her chances of obtaining grants from the state and federal funding agencies to develop and make her films, and lead to further opportunities to work with broadcasters and film production companies on commissioned or independent projects.

You are required to: Discuss whether Julianne is carrying on a business.

Answer:

Julianne is carrying on a business for the following reasons:

Julianne’s intention is to establish a successful arts enterprise. She has the intention to make a profit from her film-making business although at this time her income is supplemented from other non-arts sources.
She is deriving some income from her art (that is grants income, prize money, licence fees), and she is actively seeking opportunities to bring her work to the public and to make a profit from her work.
She has the relevant qualifications, knowledge and expertise and she regularly engages in film making and promotional activity.
She is vigorously pursuing the marketing and screening of her work in order to increase the likelihood of gaining a commission project and royalty income from her existing films. Therefore, her activities involve a large degree of planning. Ferguson v FCT and FCT v JR Walker.
She maintains appropriately organised and detailed records of her income and expenses and other film-related activities (like competition and grant applications, licence agreements and so on).
Her work is beginning to attract some peer recognition.

Case study 8

Joan has lived in Townsville all her life and has been unsuccessful in obtaining employment for an extended period of time. During the 2020–2021 income year, her only source of income is fortnightly government unemployment benefits totalling $16,000. Joan is aged 32.

You are required to: Discuss whether the amounts she receives are assessable income and whether she will be liable to pay any taxes on the receipts, or entitled to a refund of taxes.

Answer:

The unemployment benefits will be ordinary income under section 6-5 ITAA97. Firstly, it meets the prerequisites for income, being received in cash and a real gain to her as she can use the money for her own benefit. Secondly, it meets the characteristics test as it is received regular, is expected and depended upon by the taxpayer for support, despite not flowing from services, property or business: Keily v FCT. If she has no other assessable income, her taxable income will be $16,000.

As her taxable income is below the threshold of $18,200, she will not be liable to pay any basic income tax. As her taxable income is below the income threshold for the payment of the Medicare Levy of $22,801, she will not be liable to pay the levy. She will not be liable to pay the Medicare Levy Surcharge (MLS), even if she did not have private health insurance, as her income is below the threshold for the MLS. Although she qualifies for the low income tax offset and the low and middle

income tax offset, she will not be able to claim these as she has no basic taxes due, and hence to liability against which to use these two offsets.

Case study 9

In reference to PoTL 2021 end of chapter question 5.1 (b), (d) and (e), discuss whether the receipts are likely to be ordinary income, focusing only on the characteristics of ordinary income as the prerequisites have been met. Provide reasons for your answers, referencing relevant sections of the Income Tax Assessment Acts, relevant case law and relevant Tax Rulings of the ATO.

Answer:

(b) When compensation is received, it takes on the character of what it is that is being compensated for. As salary is ordinary income from employment, it follows that compensation for the loss of salary is also ordinary income under s 6-5 ITAA97. FCT v Dixon.

The receipt does not flow from employment (personal services), property or business. On the facts provided, it is highly unlikely that the taxpayer is in the business of writing books so the receipt cannot be said to flow from a business as she wrote it over a number of years in her spare time. Furthermore, it does not flow from services because the taxpayer is being paid for their copyright rather than for her services. Lastly, it cannot be said to flow from property because the payment is for the sale of the actual property and not a reward for use of the property. In other words, the payment is likely capital in nature, using the analogy in Eisner v Macomber, it is a receipt for the tree (the copyright) rather than for any fruit flowing from the tree. Since the payment does not flow from an asset and is not regular, it is highly unlikely that it constitutes ordinary income. Receipts that are capital in nature cannot be ordinary income. (Note: As the sale constitutes the sale of a capital asset, CGT consequences may arise. We study these in Topic 7.)
The payment flows from carrying on a business, as the taxpayer is in the business of writing books and selling their copyright. The payment has a nexus to the business and is therefore severable from the business, leaving the underlying business intact. Using the fruit and tree analogy, the business is the tree and the receipt for sale of copyright is the fruit of that tree. Eisner v Macomber. As a result, this receipt would be ordinary income under the general principles of s 6-5 ITAA97.

Case study 10

In reference to PoTL 2021 end of chapter question 6.8, you are required to discuss whether the gift is assessable income. Provide reasons for your answers, referencing relevant sections of the Income Tax Assessment Acts, relevant case law and relevant Tax Rulings of the ATO.

Answer:

The gift meets the pre-requisite of ordinary income. It is a real gain for Albert, and convertible in cash. The issue that arises from these facts is whether the receipt is ordinary income under s 6-5 ITAA97 because there is a nexus with the work performed, or whether the receipt is a mere gift that does not flow from those services. In Scott v FCT the court considered a number of factors that may be applied to these facts in drawing a conclusion. First, the receipt of the watch by Albert was unexpected indicating it is less likely ordinary income. Second, it would also appear that Albert is fully paid for the services he provided to Frederick which would support the case that the receipt has no nexus with the service provided and therefore is not ordinary income. However, in Scott’s case emphasis was also placed on the fact there existed a personal relationship between Scott and Mrs Freestone prior to the receipt of the gift, and this is not the case with Albert. It can also be seen from Scott that the nature of the receipt is to be judged in the hands of the recipient and the motives of the giver, although it may be considered, are less important. This would also support the case that the receipt was motivated by the service provided and there does not appear to be any other reason for Fredrick to make such a generous gift, which could result in the gift being ordinary income.

(Note: It is not always necessary to reach a conclusion in your answers. What you should aim for is to present the entirety of the legal argument. Although either conclusion could be supported, the decisions in Brown v FCT and Laidler v Perry would support that the receipt is ordinary income as it arose from the service provided by Albert and there was no personal or other reason for the gift. Also note: s 21A ITAA36 does not apply as Albert is not carrying on a business – he is employed by a business, and he received the gift, not his employer.)

Case study 11

In reference to PoTL 2021 end of chapter question 9.2, you are required to discuss whether the amount is assessable income. Provide reasons for your answers, referencing relevant sections of the Income Tax Assessment Acts, relevant case law and relevant Tax Rulings of the ATO.

Answer:

The amount is a real gain to the taxpayer and will be received in the form of cash, thus meeting the pre-requisites of ordinary income. The rental guarantee payment is compensation for not receiving rent. The basic principle relating to a compensation receipt is that the compensation takes the form of what it replaces. As rent is ordinary income, s 6-5 ITAA97, the compensation for not receiving rent will also be ordinary income as it is received from the ownership of the real property.

Case study 12

Ashley Bartey is an Australian resident taxpayer, aged 35, who has sufficient private health cover for the duration of this income year. Ashley receives the following amounts into her bank account during the income year:

Wages. Ashley’s employer withheld, and remitted PAYG totalling $15,000 to the ATO on her behalf during the income year	$75,000
A fully franked dividend from a listed company (tax rate 30%)	$7,000
A partially franked dividend, franked to 50%, from a listed company (tax rate 30%)	$2,837
Unfranked dividends	$1,000
Unemployment benefits	$750
An insurance payment due to her, as she was off sick from work for a week, unable to earn wages during that week	$500
Lottery winnings	$5,000
A birthday gift from her grandparent	$10,000

You are required to:

Calculate Ashley’s tax payable or refundable at the end of the current income year. Show all your calculations, present all formulas and bases for your calculations in words, and provide reasons for your answer.

Note: The answer to this case study includes the mark allocation if this was a question in an assessment. It is very important to reiterate that marks can only be awarded if the relevant section numbers and division numbers are clearly included in answers, and in the case of ordinary income, that the correct characteristic that identifies the receipt as ordinary income is included in answers for each item. These requirements are in line with the course ECP. Partmarks cannot be awarded to incomplete answers to individual items. Each individual item is marked separately in assessments.

To know which specific sections, divisions, case law and ATO Rulings numbers to include in your answers, use each topic’s study guide.

Answer:

		Marks
Wages, s 6-5 ITAA97 Regular and periodic/ nexus to employment	$90,000	½
Fully franked dividend, s 44 ITAA36	$7,000	½
– Gross up, s 207-20 ITAA97 = $7,000 * 3/7 *100%	$3,000	½
Partially franked dividend, s 44 ITAA36	$2,837	½
– Gross up, s 207-20 ITAA97 = $2,837 * 3/7 *50%	$608	½
Unfranked dividend, s 44 ITAA36	$1,000	½
– No gross up, as dividends were unfranked	$0	½
Unemployment benefits, s 6-5 ITAA97 Compensation takes on the character of the loss the taxpayer is being compensated for, in this case a loss of income from employment	$750	½
FCT v Dixon		½
Insurance receipt, s 6-5 ITAA97 Compensation takes on the character of the loss the taxpayer is being compensated for, in this case a loss of income from employment	$500	½
FCT v Dixon		½
Lottery winnings, not assessable income as the element of chance/luck outweighs any skill Note: There is no case law about lottery winnings that you must study	$0	½
Birthday gift, not assessable income as the gift was for personal qualities Note: It is not necessary to add Scott v FCT as the facts here, are very different to Scott’s case	$0	½
Taxable income	$105,695

Basic income tax payable = $5,092+(taxable income $105,695 – $45,000) * 32.5%	$24,817.88
Low and middle income tax offset = $1,080 – 3% of (taxable income $105,695 – $90,000)	($609.15)
Medicare Levy = taxable income $105,695 * 2%	$2,113.90
Medicare Levy Surcharge, none payable as taxpayer has sufficient private health cover	$0.00
Less: Franking credits ($3,000.00 + $607.93 + $0)	($3,607.93)
PAYG	($15,000.00)
TAX PAYABLE	$7,714.70

End

Topic 5 Case studies

Case study 1

Note: The events in this question are dealt with as standalone events for each taxpayer. However, you should expect to see events such as these as part of a much larger question where you are required to calculate taxable income for each taxpayer. It would be important to use the section number that allows the deduction or restricts the value of the deduction, and if an amount is not deductible, to provide the specific reasons, referencing relevant section numbers and case law.

Are the following self-education expenses deductible under section 8-1 ITAA97? Provide reasons for your answer.

Kieran, a computer salesman, takes six months leave without pay to undertake a business administration course at a private provider not registered as a higher education institution. He has an agreement with his employer that, upon successful completion of the course, he will be promoted to an assistant manager position with his current employer.
Stuart wants to be the manager of a hotel. He enrols in a hotel management course at a TAFE college, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets of hotel management, including catering, housekeeping and bar work.
Shannon is undertaking a 4 year university degree in mining engineering. She takes on a job as a casual employee with a mining company during the end of year holiday. It is the company’s policy to take only students who are pursuing relevant studies.

Answer:

Even though Kieran does not earn income from his employer while studying, he is allowed a deduction for the costs of the course because it will lead to an increase in income from his current employment as he will be promoted.
A deduction is not allowable because the study is designed to get Stuart employment as a hotel manager, not to derive income from work experience. It is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.
Shannon is not entitled to a deduction for the cost of the course because the study is designed to get future employment in the mining field. It is incurred at a point too soon.

Case study 2

Note: You can expect this type of event as part of a calculation question where you are required to calculate the taxpayer’s taxable income. Then, you must show all the calculations set out in the answer below. This case study applies the ATO’s practice in reference to s 82A ITAA36. Students must apply this practice in assessments.

Jo is enrolled at the University of Queensland in a Masters of Business degree while he is employed by a firm of chartered accountants as trainee accountant, working towards obtaining his chartered accountancy qualification. He incurs the following expenses related to self-education in the current income year:

Course fees, $6,500.
Textbooks, stationary, $1,500.
Child care cost for his child while he is at university, $300.

Explain whether Jo would be able to deduct any of the expenses against his salary and how the amount would be calculated? Provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts, case law and relevant ATO Rulings.

Answer:

As Jo has embarked on his studies to qualify as a chartered accountant, he will be able to deduct the expenses related to the self-education under section 8-1 ITAA97 because it enables Jo to maintain or increase the specific knowledge required in his current position.
As Jo has enrolled in a course of formal education that leads to a qualification from a university, he is enrolled in a prescribed course of education. Therefore, section 82A ITAA36 may limit the deduction available to him as the first $250 of his eligible expenses will not be deductible.
However, ATO practice is to reduce this $250 with expenses that are not generally deductible. In this case, the childcare costs that Jo incurs won’t be deductible under s 8-1 ITAA97, as these put him in a position to take part in the self-education at university, Lodge v FCT or Martin v FCT. As the childcare costs of $300 exceeds the $250 limitation in s 82A ITAA36, there won’t be any limitation left to impose on his deduction using the ATO’s practice.
Therefore, Jo can claim the following expenses related to his self-education as a tax deduction:
- Course fees, s 8-1 ITAA97 = $6,500.
- Textbooks, stationary, s 8-1 ITAA97 = $1,500.

Case study 3 [Source: TR 98/9.]

Note: You can expect this type of event as part of a calculation question where you are required to calculate the taxpayer’s taxable income.

Glenn, a qualified architect, attends an eight-day work related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. The entire cost, flights included, was $8,000.

Which portion, if any, will he be able to deduct as an expense under section 8-1 ITAA97?

Answer:

As the main purpose for attending the conference is related to gaining or producing assessable income, the total cost of the conference (air fares, accommodation and meals) is allowable as a deduction under s 8-1 ITAA97. No apportionment is required for the costs associated with the sighseeing tour or golf game. The value of the deduction is $8,000.

Note that the cost of this work-related conference is not self-education for the purposes of the s 82A ITAA36, as this is not a prescribed course of education.

Case study 4

Alice Andrews is a bookkeeper. She is employed by Local Plumbers Pty Ltd. She has her own office at Local Plumbers Pty Ltd’s business premises that she can use at any time. To accommodate Alice’s family circumstances, her employer allows her to work from home two days a week. When she works from home, she uses her employer’s laptop computer, and she works from a study in her family home. Alice only has a record of the hours she works from home during the 2020–2021 income year – these total 800 hours.

Will Alice be able to claim a tax deduction because she is working from home? If so, which, and can you calculate the value?

Answer:

Usually, expenses associated with a taxpayer’s home are not tax deductible under s 8-1 ITAA97, as these expenses are private and domestic in nature
Alice uses her study for employment purposes to earn assessable income, but does so as a matter of convenience, as she has an office at her employer’s business premises that she can use at any time. As a result, she will only be able to claim a portion of the running costs of her home, and not her occupancy costs
As Alice only has a record of the hours she worked from home, she will not be able to calculate the actual expenses associated with her home office, and she will use the ATO’s fixed rate of 52 cents per hour to claim a deduction under s 8-1 ITAA97 for her home office expenses. The total of her deduction will be 52 c p h * 800 = $416

Case study 5

Jones Emporium Pty Ltd operates a chain of fashion outlets across Australia. The company’s Statement of Comprehensive Income for the year ending 30 June 2021 shows Profit before tax from continuing operations of $53,897,890.

The following transactions gave rise to expenses that have already been included in the calculation of Profit before tax from continuing operations:

Marketing expense, $42,000: During the income year, the company purchased cinema tickets at a cost of $42,000. Every month, 100 lucky customers got two movie tickets free, based on a random draw that included all customers who purchased items in that month.

Each month, the winners’ names were featured in advertisements to promote new clothing lines.

Staff employment and well-being expenses, $250,000: The company operates a canteen at its head office that provides staff with free cold lunches. The operating cost of the canteen totalled $250,000 during the income year.
Security expenses, $50,000: This amount represents one month’s worth of security expenses. The company made a prepayment of $600,000 on 1 June 2021 for 12 months for security guard services at all its largest branches starting on 1 June 2021.

You are required to:

Discuss the income tax treatment of each of the expense items presented in this question. Show all your calculations, provide reasons for your answers, referencing relevant sections and divisions of the Income Tax Assessment Acts, relevant case law, or rulings from the Australian Taxation Office. You may assume that there is no FBT payable.
Calculate the taxable income of Jones Emporium Pty Ltd for the 2020–2021 income year, starting with profit before tax from continuing operations of $53,897,890. Show all your calculations, provide reasons for your answers, referencing relevant sections and divisions of the Income Tax Assessment Acts, relevant case law, or rulings from the Australian Taxation Office. You may assume that there is no FBT payable.

Answer:

Part a:

Cinema tickets – marketing expenses:

Meets the positive limbs of s 8-1 ITAA97, incurred to produce assessable income
But this is entertainment as defined in s 32-10 ITAA97, as the cinema tickets are classified as recreation
Deductions for entertainment are denied, 32-5 ITAA97
But, an exception exists in s 32-45 ITAA97, for entertainment costs associated with advertising and promotion, as the winners’ names were featured in advertisements to promote new clothing lines. Therefore, the amount will be deductible under s 8-1 ITAA97

Costs to operate the canteen:

Meets the positive limbs of s 8-1 ITAA97, incurred as part of staff costs
But this is entertainment as defined in s 32-10 ITAA97 being the provision of lunches
Deductions for entertainment are denied, 32-5 ITAA97
But, an exception exists in s 32-30 ITAA97, for entertainment provided in in-house dining facility. Therefore, the cost to operate the canteen is deductible under s 8-1 ITAA97

Security expenses:

Security expenses are generally deductible under s 8-1 ITAA97, as it meets the positive limbs
But this is a prepayment. Therefore, the legal question is whether the full amount of $600,000 will be allowed as a deduction in the 2020–2021 income year under s 8-1 As the taxpayer has a turnover greater than $10 million, none of the exceptions in s 82KZM ITAA36 apply and it is also not an excluded amount in s 82KZL ITAA36. As a result, the full loss or outgoing will not be deductible when it is incurred
A deduction of $49,315 [$600,000 *30/365 days] will be allowed in the 2020–2021 income year under s 8-1 ITAA97 [Note: except for s 40-880 ITAA97 that we study in Topic 6, you must always use days, not months. This is different to accounting, where you will commonly apply months. Therefore, expect to have a difference between tax and accounting in these circumstances.]

Part b:

Profit before tax from continuing operations

$53,897,890

Cinema tickets:

• Meets the positive limbs of s 8-1 ITAA97, incurred to produce assessable income

• But this is entertainment as defined in s 32-10 ITAA97, as the cinema tickets are classified as recreation

• Deductions for entertainment are denied, 32-5 ITAA97

• But, an exception exists in s 32-45 ITAA97, for entertainment costs associated with advertising and promotion, as the winners’ names were featured in advertisements to promote new clothing lines. Therefore, the amount will be deductible under s 8-1 ITAA97

Therefore, the full cost is deductible under s 8-1, and as the expense has already been accounted for in the profit before tax, no adjustment needs to be made to calculate taxable income.

Canteen – staff employment:

• Meets the positive limbs of s 8-1 ITAA97, incurred as part of staff costs

• But this is entertainment as defined in s 32-10 ITAA97 being the provision of lunches

• Deductions for entertainment are denied, 32-5 ITAA97

• But, an exception exists in s 32-30 ITAA97, for entertainment provided in inhouse dining facility. Therefore, the cost to operate the canteen is deductible under s 8-1 ITAA97

Therefore, the full cost is deductible under s 8-1, and as the expense has already been accounted for in the profit before tax, no adjustment needs to be made to calculate taxable income.

Security expenses, add back the expense calculated for accounting purposes as this is based on months, not days

$50,000

Security:

• Security expenses are generally deductible under s 8-1 ITAA97, as it meets the positive limbs

• But this is a prepayment. Therefore, the legal question is whether the full amount of $600,000 will be allowed as a deduction in the 2020–2021 income year under s 8-1 ITAA97. As the taxpayer has a turnover greater than $10 million, none of the exceptions in s 82KZM ITAA36 applies and it is also not an excluded amount in s 82KZL ITAA36. As a result, the full loss or outgoing will not be deductible when it is incurred

• A deduction of $49,315 [$600,000 *30/365 days] will be allowed in the 2020–

2021 income year under s 8-1 ITAA97

($49,315)

Taxable income

$53,898,575

End

Topic 6 Case studies

The Topic 6 Case studies comprise a series of questions built around different assets. While you must be able to answer discussion questions about capital allowances, the costs associated with capital assets and the capital allowances that taxpayers can claim as part of deductions feature in most questions that require you to calculate taxable income.

It is important to know whether a taxpayer uses their capital asset to produce income from employment, income from property or income from business.

The general rules described in PoTL Chapter 14 applies to capital assets used to produce income from employment and income from property.
In the case of taxpayers who carry on a business, the following special provisions apply in the ranking order below, which is explained in detail in the Topic 6 Study guide. These special provisions apply before the taxpayer can use the general rules that apply to capital allowances for moveable assets:
1. Temporary full expensing incentive.
2. Instant asset write-off rules.
3. Accelerated rate of depreciation.

Case studies about fixed property

Background information to help you to understand the case studies:

If you purchase a property, you’ll pay one purchase price for it, but we have to treat the component parts of the purchase price separately for purposes of income tax law. This means you need information that tells you how much of the purchase price:

Relates to land, as there are no capital allowances available for the price of land.
Relates to the original construction costs and the cost of any additions, as Div 43 capital works deductions must be based on the original construction costs and/or the cost of additions, not what the current taxpayer paid for the property based on its market value at the time of the purchase. If there is no record of the original construction costs, then the taxpayer who owns the building now can’t claim capital works deductions.
Relates to the moveable items in the property. For example, if you purchase a unit in a unit complex and rent it out, it is likely that you’ll purchase the unit with a microwave oven, a stove and a dishwasher in the property. These items are not usually part of the construction costs – they are moveable assets. As a result, these assets can’t qualify for Div 43 capital works deductions. But, even though the microwave oven, stove and dishwasher are moveable items, a taxpayer still can’t claim capital allowances on these assets using Div 40 as the items are used or installed in residential rental premises and aren’t new – they were used by the previous person that lived in the unit! See PoTL [14.20]. The implication is that unless the unit is new (purchased ‘off-plan’), or unless the assets are used to carry on a business, the taxpayer is denied the deductions under Div 40.

If a taxpayer purchases a unit in a unit complex or a freestanding home, there are different ways that the taxpayer can use the property with different income tax implications:

Use it to live in with their family: no income tax implications. They do not use the home to produce assessable income.
Use the entire property to produce assessable income from business: claim all running expenses and occupancy expenses, and claim Div 43 capital works deductions if the original construction costs are known, and Div 40 capital allowances on second hand and new assets in the property.
Use a part of the property (one room or a few rooms) to produce assessable income: claim the relevant portion of running expenses; the relevant portion of occupancy expenses unless the property is used for this purpose for convenience; and claim Div 43 capital works deductions if the original construction costs are known to the extent that the property is used to produce assessable income; and Div 40 capital allowances on second hand and new assets in the property to the extent they are used to produce assessable income
Rent it out: claim all the running and occupancy expenses, and capital allowances taking into account the constraints described above.

Information about the fixed property used in the case studies:

This is the unit complex that we use in the case studies about fixed property. Assume the unit in the complex is spacious enough to use the property in the manner described below in each of the case studies:

These are the facts about this unit:

You purchase this unit in a unit complex in St Lucia for $295,000
You finance the purchase through a 20-year mortgage loan
Your purchase date is 1 February 2021 and all associated costs are incurred on that date, being:

o Legal fees incurred to purchase the property: $12,000 o ‘Transfer’ duties to register the property onto your name: $3,000 o Mortgage establishment fee: $600.

The unit was originally built in 2005. The original owner paid $85,000 for the unit when they purchased it ‘off plan’. Of this price, the construction costs totalled $80,000. As the unit is on a top floor, there was no price paid for any land. The original owner provides you with documentary proof of the original construction costs. The remainder of the price was paid for a stove and split-level air conditioner
Interest paid on the mortgage during the 2020–2021 income year: $25,000 In each of the case study questions below, you are required to:

Present the income tax consequences in the 2020–2021 income year in reference to the calculation of taxable income for the taxpayer. Show all your calculations, provide reasons for your answers, referencing relevant sections and divisions from the Income Tax Assessment Acts, relevant case law and ATO documents.

Case study 1

You move into the unit when you purchase it, and this is where you and your family live. This is your sanctuary where you never do any work.

Answer:

	$
Purchase of unit, not deductible under s 8-1 ITAA97, capital in nature	0
Legal fees, not deductible under s 8-1 ITAA97, capital in nature	0
Transfer duties, not deductible under s 8-1 ITAA97, capital in nature	0
Mortgage establishment fee, not deducible under s 25-25 ITAA97 as the property is not used to produce assessable income
Interest, not deductible under s 8-1 ITAA97, as the property is not used to produce assessable income	0

Note that when this taxpayer eventually sells their home, no CGT will arise due to the exemption for a primary residence.

Case study 2

You move into the unit when you purchase it, and this is where you and your family live. You are a chartered accountant, employed at an accounting firm in Brisbane that has offices in the CBD which is your usual place where you work and have an office. Because you are very busy at work, one room in your home is a dedicated study where you work over weekends and at night. The study takes up 15% of the floor space of the home. You spend 100 hours in this income year working in the study. You don’t have detailed records of the running expenses associated with the study.

Answer:

	$
Purchase of unit, not deductible under s 8-1 ITAA97, capital in nature	0
Legal fees, not deductible under s 8-1 ITAA97, capital in nature	0
Transfer duties, not deductible under s 8-1 ITAA97, capital in nature	0
Mortgage establishment fee, not deducible under s 25-25 ITAA97 as the property is not used to produce assessable income, but only for convenience to perform work related to employment. Also not deductible under s 8-1 ITAA97 as the expense is capital in nature	0
Interest, not deductible under s 8-1 ITAA97 as the property is not used to produce assessable income, but only for convenience to perform work for employment. The interest on the mortgage loan are part of occupancy costs	0
Running costs of using the study for convenience to perform work for employment, deductible under s 8-1 ITAA97, using the ATO’s method statement = 100 hours * 52 cents per hour	(52)

Note: In these circumstances, taxpayers will choose not to claim Div 43 capital works deductions as this means they will have a capital gain to the extent they claim Div 43 capital works deductions when they sell their home.

Case study 3

You move into the unit when you purchase it, and this is where you and your family live. You also own your own accounting practice in St Lucia that operates from offices in your home new. These dedicated work offices take up 25% of the floor space of the home, and were ready for use when you moved into the home. This is the only business premises for your accounting practice.

Answer:

	$
Purchase of unit, not deductible under s 8-1 ITAA97, capital in nature	0
Legal fees, not deductible under s 8-1 ITAA97, capital in nature	0
Transfer duties, not deductible under s 8-1 ITAA97, capital in nature	0
Mortgage establishment fees, not deductible under s 8-1 ITAA97 as the expense is capital in nature	0
Mortgage establishment fees, borrowing costs, deductible under s 25-25 ITAA97 over the shorter of the loan period or five years = $600 * (28+31+30+31+30 days)/(4365 + 366 days) extent to which home is used to produce assessable income being 25% = $600 * 150/1826 days * 25%	(12)
Interest, s 8-1 ITAA97 = $25,000 x 25%	(6,250)
Div 43 ITAA97 capital works deduction = ($80,000 * 2.5% 150/365) 25%	(205)
Div 40 ITAA97 capital allowances on stove and microwave: likely no capital allowances available as the effective useful life of these assets would be shorter than the number of years since the unit was built in 2005	0

Note: This taxpayer can claim the running expenses associated with the business use of their home if they kept records of these.

Case study 4

You purchased the property as an investment property. You rent the property out. You never live in it.

You find a tenant that moves in on 1 March 2021. You receive rent totalling $3,000 in this income year.

Your rental expenses total:

Landlord’s insurance, $120
Repairs to a broken window pane, $80.

The tenant complains because there is no dishwasher in the home. You purchase and install a new dishwasher on 1 April 2021 at a cost totalling $1,250. The effective useful life of a dishwasher is 5 years. You have adopted the prime cost method.

Answer:

	$
Purchase of unit, not deductible under s 8-1 ITAA97, capital in nature	0
Legal fees, not deductible under s 8-1 ITAA97, capital in nature	0
Transfer duties, not deductible under s 8-1 ITAA97, capital in nature	0
Mortgage establishment fees, not deductible under s 8-1 ITAA97 as the expense is capital in nature	0
Mortgage establishment fees, borrowing costs, deductible under s 25-25 ITAA97 over the shorter of the loan period or five years = $600 * (28+31+30+31+30 days)/(4365 + 366 days) = $600 150/1826 days	(49)
Interest, s 8-1 ITAA97	(25,000)
Div 43 ITAA97 capital works deduction = ($80,000 * 2.5% *150/365)	(822)
Div 40 ITAA97 capital allowances on stove and microwave: denied deductions as these are second hand moveable assets in a residential unit	0
Rent, s 6-5 ITAA97 income from property	3,000
Landlord’s insurance, s 8-1 ITAA97	(120)
Repairs, s 25-10 ITAA97	(80)
Dishwasher, not deductible under s 8-1 ITAA97, capital in nature	0
Dishwasher, Div 40 ITAA97 capital allowances = $1250 * 100%/5 * (30+31+30 days)/365	(62)

Note: Accelerated tax depreciation is not applicable. Not carrying on a business

Case study 5

How would your answer for Case study 4 change if you adopt the diminishing value method?

Answer:

Dishwasher, Div 40 ITAA97 capital allowances = $1250 * 200%/5 * (30+31+30 days)/365

(125)

Case study 6

How would your answer to Case study 4 change if the dishwasher cost you $800 and you already have a low value pool for other assets, and the opening balance of your pool is $3,890?

Answer:

	$
Div 40 ITAA97 capital allowances on the opening balance of the low value pool = $3,890 * 37.5%	(1,459)
Dishwasher, Div 40 ITAA97 capital allowances: As the cost of the dishwasher is below $1,000 and because the taxpayer uses a low value pool = $800 * 18.75%	(150)
Note: The closing balance of the low value pool is greater than $1,000 and thus no further capital allowances are available in this income year. Closing balance of low value pool that becomes the opening balance of the low value pool in the next income year: = $3,890 – 1,459 + 800 – 150 = $3,081

Case study 7

What if you the tenant complains because there is no coffee maker in the unit and you purchase a Nespresso coffee maker on 1 April 2021 that costs you $250?

Answer:

Coffee maker, not deductible under s 8-1 ITAA97, capital in nature

Coffee maker, Div 40 ITAA97 capital allowances:

As the cost of the item is less than $300 and because the taxpayer produces income from property and not income from business with this asset, the full cost is deductible

(250)

Case studies about moveable property

These are the facts upon which the following case studies are based:

A business buys these assets, and have these ready and in use from the purchase date:

A computer screen for $650 on 1 September 2020
An iPad for $290 on 1 February 2021
A manufacturing machine for $18,000 on 15 August 2020
A car for $22,000 on 1 January 2021
A 3D printer for $180,000 on 1 April 2021

In each of the case study questions below, you are required to:

Case study 8

The business is a company with a turnover greater than $500 million. The effective life of all assets is 4 years. The company adopts prime cost if applicable. The company does not have a low value asset pool.

Answer:

	$0
Purchase cost of computer screen, not deductible under s 8-1 ITAA97, capital in nature	0
Computer screen, Div 40 ITAA97 capital allowance: = $650 x 100%/4 x 303/365	(135)
Note: • Turnover over $500 million so instant asset write-off rules and accelerated rate of depreciation do not apply. • Purchased before 6 October 2020, temporary full expensing incentive does not apply
Note: Calculating the days from 1 September 2020 = 30+31+30+31+31+28+31+30+31+30 = 303
Purchase cost of iPad, not deductible under s 8-1 ITAA97, capital in nature	0
iPad, Div 40 ITAA97 capital allowance, purchased after 6 October 2020, eligible for temporary full expensing incentive as turnover is below $5 billion	(290)
Purchase cost of manufacturing machine, not deductible under s 8-1 ITAA97, capital in nature	0
Manufacturing machine, Div 40 ITAA97 capital allowances = $18,000 x 100%/4 x 320/365	(3,945)
Note: • Turnover over $500 million, therefore instant asset write-off rules and accelerated rate of depreciation do not apply • Purchased before 6 October 2020, temporary full expensing incentive does not apply
Note: Calculating the days from 15 August 2020 = 17+30+31+30+31+31+28+31+30+31+30 = 320
Purchase cost of car, not deductible under s 8-1 ITAA97, capital in nature	0
Car, Div 40 capital allowances ITAA97, purchased after 6 October 2020 – eligible for temporary full expensing incentive as turnover is below $5 billion	(22,000)
Purchase cost of printer, not deductible under s 8-1 ITAA97, capital in nature	0
Printer, Div 40 capital allowances, purchased after 6 October 2020 – eligible for temporary full expensing incentive as turnover is below $5 billion	(180,000)

Case study 9:

In this case study, assume the business is a company, it has a turnover greater than $50 million, but lower than $500 million. The effective life of all assets is 4 years. The company adopts prime cost if applicable. The company does not have a low value asset pool.

Answer:

	$0
Purchase cost of computer screen, not deductible under s 8-1 ITAA97, capital in nature	0
Computer screen, Div 40 ITAA97 capital allowance: asset was purchased in the current income year and put into use after 12/3/2020 and the purchase cost is below $150,000, and turnover is less than $500 million. Therefore, the asset qualifies for instant asset write-off.	(650)
Note: Not eligible for temporary full expensing as purchased before 6 October 2020
Purchase cost of iPad, not deductible under s 8-1 ITAA97, capital in nature	0
iPad, Div 40 ITAA97 capital allowance, purchased after 6 October 2020, eligible for temporary full expensing incentive as turnover is below $5 billion	(290)
Purchase cost of manufacturing machine, not deductible under s 8-1 ITAA97, capital in nature	0
Manufacturing machine, Div 40 ITAA97 capital allowance: asset was purchased in the current income year and put into use after 12/3/2020 and the purchase cost is below $150,000, and turnover is less than $500 million. Therefore, the asset qualifies for instant asset write-off.	(18,000)
Note: Not eligible for temporary full expensing as purchased before 6 October 2020
Purchase cost of car, not deductible under s 8-1 ITAA97, capital in nature	0
Car, Div 40 capital allowances ITAA97, purchased after 6 October 2020 – eligible for temporary full expensing incentive as turnover is below $5 billion	(22,000)
Purchase cost of printer, not deductible under s 8-1 ITAA97, capital in nature	0
Printer, Div 40 capital allowances, purchased after 6 October 2020 – eligible for temporary full expensing incentive as turnover is below $5 billion	(180,000)

Case study 10

How will your answer to Case study 9 change if the company has a low value pool with an opening balance of $7,890, and the company sells an asset in the low value pool for $300?

Answer:

	$0
Low value pool, Div 40 ITAA97 capital allowances on opening balance: = $7,890 * 37.5%	(2,959)
Purchase cost of computer screen, not deductible under s 8-1 ITAA97, capital in nature	0
Computer screen, Div 40 ITAA97 capital allowance: as the cost of the asset is below $1,000, its taxable value use of 100% of the cost of the asset will be added to the low value pool, and then qualifies for capital allowances in the pool as follows: = $650 x 18.75%	(122)
Purchase cost of iPad, not deductible under s 8-1 ITAA97, capital in nature	0
iPad, Div 40 ITAA97 capital allowance: as the cost of the asset is below $1,000, its taxable value use of 100% of the cost of the asset will be added to the low value pool, and then qualifies for capital allowances in the pool as follows: = $290 x 18.75%	(54)
Sale of asset in low value pool, not ordinary income under s 6-5 ITAA97, capital in nature	0
Note: Balance of low value pool at end of income year = $7890-2959+650-122+290-54-300 = $5,395

Case study 11

How will your answer to Case study 10 change if the business is operated by a sole trader and they use the iPad 60% of the time for business purposes?

Answer:

	$0
Low value pool, Div 40 ITAA97 capital allowances on opening balance: = $7,890 * 37.5%	(2,959)
Purchase cost of computer screen, not deductible under s 8-1 ITAA97, capital in nature	0
Computer screen, Div 40 ITAA97 capital allowance: as the cost of the asset is below $1,000, its taxable value use of 100% of the cost of the asset will be added to the low value pool, and then qualifies for capital allowances in the pool as follows: = $650 x 18.75%	(122)
Purchase cost of iPad, not deductible under s 8-1 ITAA97, capital in nature	0
iPad, Div 40 ITAA97 capital allowance: as the cost of the asset is below $1,000, its taxable value use of 60% of the cost of the asset will be added to the low value pool, and then qualifies for capital allowances in the pool as follows: = ($290 * 60%) x 18.75%	(33)
Sale of asset in low value pool, not ordinary income under s 6-5 ITAA97, capital in nature	0
Note: Balance of low value pool at end of income year = $7890-2959+650-122+(29060%)-33-300 = $5,300*

Case study 12

In this case study, assume the business is not a company but is operated by a sole trader. It has a turnover lower than $50 million. The effective useful life of all assets is 4 years if applicable. The opening balance of the small business pool is $300,000.

Answer:

	$
Purchase cost of computer screen, not deductible under s 8-1 ITAA97, capital in nature	0
Computer screen, Div 40 ITAA97 capital allowance: asset was purchased in the current income year and put into use after 12/3/2020 and the purchase cost is below $150,000, and turnover is less than $500 million. Therefore, the asset qualifies for instant asset write-off.	(650)
Note: Not eligible for temporary full expensing as purchased before 6 October 2020
Purchase cost of iPad, not deductible under s 8-1 ITAA97, capital in nature	0
iPad, Div 40 ITAA97 capital allowance, asset was purchased after 6 October 2020, eligible for temporary full expensing incentive as the turnover is less than $5 billion	(290)
Purchase cost of the manufacturing machine, not deductible under s 8-1 ITAA97, capital in nature	0
Manufacturing machine, Div 40 ITAA97 capital allowance, asset was purchased in the current income year and put into use after 12/3/2020 and the purchase cost is below $150,000, and turnover is below $500 million. Therefore, the asset qualifies for instant asset write-off.	(18,000)
Note: Not eligible for temporary full expensing as purchased before 6 October 2020
Purchase cost of the car, not deductible under s 8-1 ITAA97, capital in nature	0
Car, Div 40 ITAA97 capital allowances, purchased after 6 October 2020, eligible for temporary full expensing incentive as turnover is less than $5 billion	(22,000)
Purchase cost of the printer, not deductible under s 8-1 ITAA97, capital in nature	0
Printer, Div 40 capital allowances, purchased after 6 October 2020 – eligible for temporary full expensing incentive as turnover is less than $5 billion	(180,000)
Closing balance of Div 328 small business pool to be expensed under temporary full expensing incentive under Div 40. As no assets in the pool were sold and none were added to the pool, the closing balance is the same as the opening balance	(300,000)

Case study 13

How will your answer to Case study 12 change if the purchase cost of the manufacturing machine was $218,000 and it was purchased on 1 July 2020.

Answer:

Purchase cost of the manufacturing machine, not deductible under s 8-1 ITAA97, capital in nature

Manufacturing machine, Div 40 ITAA97 capital allowances:

• Qualifies for accelerated rate of depreciation as the turnover is less than $500 million, the asset was purchased before 6/10/2020 and the purchase cost of the asset exceeds $150,000

• On that basis, the value of the Div 40 capital allowance is 50% * cost of $218,000 = $109,000

(109,000)

The remainder of the cost is added to the small business pool under Div 328:

• The closing balance of the small business pool qualifies for the temporary full expensing incentive under Div 40 that effectively applies to all businesses with a turnover of less than $5 billion

• The closing balance for purposes of the temporary full expensing incentive under Div 40 = opening balance $300,000 + taxable balance of new asset added to the pool, being the remainder of the cost of the manufacturing machine $109,000 – termination value of assets in the pool $0 = $409,000

(409,000)

Case studies about cars

These are the facts upon which the following case studies are based:

This asset is purchased on 1 April 2021 for $80,000 (GST inclusive). Effective useful live is 5 years. Use diminishing value if applicable.

Running costs (GST exclusive) in 2020–2021 income year:

Fuel, $2,800
Insurance, $2,000

Case study 14

Purchased by a company with a turnover of > $50 million, but lower than $500 million. The CEO uses the car 40% of the time to drive to work and over weekends.

Answer:

	$
Purchase cost of car, not deductible under s 8-1 ITAA97, capital in nature	0
Div 40 capital allowances on the car: • is limited in value due to the car limit of $59,136 as the vehicle is a car as defined • As the turnover of the company is less than $5 billion, and because the asset was purchased on or after 6/10/2020, it qualifies for the temporary full expensing incentive	(59,136)
Fuel, s 8-1 ITAA97	(2,800)
Insurance, s 8-1 ITAA97	(2,000)

Case study 15

Purchased by a sales representative employed by a company. He keeps a logbook. Total travel is 12,000 km during the current income year and he keeps a logbook that indicates he uses the car 20% for private purposes. He sells the car on 30 June 2021 for $70,000 Answer:

	$
Purchase cost of car, not deductible under s 8-1 ITAA97, capital in nature	0
Deduction for the costs of the car that are associated with its use to produce assessable income is deductible under s 8-1 ITAA97 • The deduction is based on the provisions of Div 28 ITAA97 as the taxpayer is an individual who uses the car as defined less than 100% of the time to produce assessable income
Div 28 ITAA97 has two methods to claim the deduction:
Option 1: Cents per kilometre method
Business km’s = 12000 x 80% = 9,600 km
The cap on the number of business kilometres apply, being 5,000 km
Therefore, the deduction = 72 c p km x 5000 = $3600
Options 2: Logbook method
Fuel, s 8-1 ITAA97 $2,800
Insurance, s 8-1 ITAA97 $2,000
Div 40 ITAA97 capital allowance, car as defined, car limit applies
= $59,136 x 200%/5 x 91 days/365 = $5,897
Total $10,697
x 80% ‘business’ use as per logbook
Deduction under logbook method = $8,558
Select logbook method, as it results in a larger deduction	(8,558)
Sale of car, not ordinary income, s 6-5 ITAA97, capital in nature	$0
Div 40 ITAA97: Balancing adjustment arising on the sale of the car
TV = Termination value adjusted as the car limit applies to the purchase cost
= Selling price $70,000 x $59,136/$80,000
= $51,744

Adjustable value = car limit of $59,136 – reduction in value based on Div 40 ITAA97 $5,897
= $53239

TV of $51,744 is < Adjustable value of $53,239, therefore a balancing adjustment loss arises of $1,495
As a result, additional Div 40 ITAA97 capital allowances may be claimed in relation to the ‘business’ use of the car = $1,495 x 80%	(1,196)
20% private purposes use of the car to be taken into account under CGT event K7. However, as cars are exempt for CGT purposes, disregard any gain or loss that arises from the K7 event
*Car exempt for CGT purposes, disregard the gain or loss

Other case studies

Case Study 16

Source: ATO ID 2003/223 which was withdrawn on 24 October 2014.

Note for student self-directed learning: You can expect this type of event as part of a calculation question where you are required to calculate the taxpayer’s taxable income.

The taxpayer has owned and rented out a residential property for many years. While the property was tenanted during the current income year, the taxpayer replaced the old kitchen fittings, including the cupboards. The old cupboards had deteriorated through water damage and wear and tear. The new fittings are of a similar size, design and quality as the originals. The new cupboards are of the same type and standard of material (or the modern equivalent of that material) as the old ones. The layout and design of the kitchen did not alter substantially from that of the original.

The differences are:

the old sink was replaced with a smaller sink and, as a consequence, provided more bench top space; and
a removable cupboard replaced the space previously available for a dishwasher.

Show the effect of the above in the taxpayer’s calculation of taxable income. The total cost to the taxpayer was $20,000. The replacement was completed on 1 October of the current income year.

Answer:

Replacement of kitchen fittings and cupboards:
Not deductible under s 25-10 ITAA97 The cupboards are a separately identifiable asset, representing an entirety in themselves and the expenditure on replacing the kitchen cupboards results in an improvement or a renewal or reconstruction of an entirety.	$0
Not immediately deductible under section 8-1 ITAA97, capital in nature	$0
Capital works deductions, Div 43 ITAA97 = $20,000 x 2.5% x 273/365	($374)

Case study 17

Jo Jones is employed as a university lecturer. He purchases the following equipment during the current income:

A webcam on 1 August that he uses to lecture online, at a purchase cost totaling $285
A printer on 1 February that he uses 40% of the time for work purposes, at a purchase cost totaling $420
A new portable computer screen on 1 September that he uses 80% of the time for work purposes, at a purchase cost totaling $1100

Assume all assets have an effective useful life of two years, and that Jo applies the diminishing value method if applicable.

What are the income tax implications if Jo has a low value pool with an opening balance of $1,789?

Answer:

	$
Webcam, capital in nature, not immediately deductible under s 8-1 ITAA97	0
Webcam, Div 40 ITAA97 capital allowances: As the taxpayer doesn’t use the webcam to conduct a business, and because the cost of the asset is below $300, it qualifies for an instant asset write-off	(285)
Printer, capital in nature, not immediately deductible under s 8-1 ITAA97	0
Printer, Div 40 capital allowances: As the taxpayer has a low value pool, and because the cost of the asset is below $1,000, the taxable value use of the asset is added to the low value pool, and then qualify for capital allowances as follows: = ($420 * 40%) * 18.75%	(32)
Screen, capital in nature, not immediately deductible under s 8-1 ITAA97	0
Div 40 ITAA97 capital allowances: (Note: Asset can’t be added to the low value pool as its cost exceeds $1,000) = ($1100 * 200%/2 years * 303 days/365) * 80%	(731)
Div 40 ITAA97 capital allowances on opening balance of low value pool: = $1,789 * 37.5%	(671)

End

Topic 7 Case studies

Case study 1

Ben pays Sarah $5,000 to enter into an option agreement to purchase her business. The option is granted on 1 January 2020 when they enter into the agreement. Ben may exercise the option any time before 30 September 2020.

What are the income tax consequences if:

Ben does not exercise the option and it lapses?
If Ben exercises the option on 29/9/2020?

Answer:

If Ben decides not the exercise the option and it lapses on 30 September 2020:

Event C2 occurs for Ben. It is triggered by the option lapsing. The timing of the C2 event is the date on which the option ends (as no separate contract was entered into to end the asset). Therefore, on 30 September 2020. Ben returns a CGT loss of $5,000 on event C2 in his 2020–2021 income year. Proceeds are $0. Cost base, Element E1 total $5,000.

If Ben decides to exercise the option and buys the business on 29 September 2020:

Initially, event C2 occurs for Ben. It is triggered by him exercising the option. The timing of the

C2 event is the date on which the option ends when he exercises it, therefore, on 29 September 2020. But, as Ben exercised this option, his capital loss will be disregarded in the sense that the C2 event is combined (‘rolled into’) his acquisition of the business. Therefore, Ben’s cost base (and reduced cost base if later relevant) for the business will include the cost of the option of $5,000 in element E1. There is no CGT event until he sells his interest in the business at a later date.

Case study 2

In January 2021, Joe Satriani paid Light Ltd $200 for 1,000 options to acquire shares in the company under an option contract. The options gave Joe the right to buy 1,000 shares in the company for $2 per share. The options expire on 31 May 2021. What are the income tax consequences if the share price does not exceed $2 per share at any time before 31 May 2021, and as a result, Joe does not exercise the options?

Answer:

CGT event C3 occurs on 31 May 2021 for Light Ltd. The company returns a capital gain calculated as follows: Proceeds of $200, less any expenditure incurred in granting the option (such as legal fees that are included in cost base element E2). The timing of this event is 31 May 2021 when the option ends.

Note: This is different to other options, for example those relevant to event D2, and only applies to company issued options.

Joe Satriani will return a $200 capital loss as a result of not exercising the option. This will be a C2 event. The timing of this event is 31 May 2021 when the option contract ends (as no other contract

was entered into to end the option contract). The loss is calculated as follows: Proceeds = $0. Cost base element E1 = $200.

tudy 3

What are the income tax implications when you enter into a contract with the purchaser of your business and agree not to operate a similar business in the same town for 5 years, if the contract states that $20,000 was paid to you to agree to this contract term?

Answer:

You have created a contractual right in favour of the purchaser. If you breach the contract, the purchaser can enforce that right.

This is a D1 event for you when you enter into the contract. You return a capital gain as follows: Proceeds = $20,000. Cost base = $0.
This is a C2 event for the purchaser. The timing of the C2 event is when the contract was entered into, not at the end of the 5-year period. But the purchaser will only know the outcome of this contract term at the end of the 5-year period and would have to re-open their tax return for year 1 to reflect a capital loss if you kept to your part of the deal.
Note: The timing of this event for the holder is different to an option contract. With an option contract the holder has a choice to exercise the option or not. In this case, the holder has an enforceable right that will end on a particular date.

Case study 4

On 10 June 2021, Jones pays Smith $5,000 for a one-month option to buy Smith’s property for $300,000. On 1 July 2021, Jones exercises this option and they enter into a sale agreement for the property on that date. What are the income tax consequences?

Answer:

On 10 June 2021, CGT event D2 happens for Smith and, assuming there are no expenses in granting the option, Smith has a capital gain of $5,000 in the 2020–2021 income year that consists of proceeds of $5,000.
However, when Jones exercises the option, CGT event D2 is disregarded for Smith. On the disposal of the property on 1 July 2021, CGT event A1 happens and Smith’s capital proceeds are $305,000, while Jones’ cost base for the property will be established that is also $305,000 in element E1. Event A1 occurs when the contract for the disposal is entered into in July 2021. Smith will include this CGT event in his 2021–2022 tax return. This would be different if the option contract also included the provisions related to the sale of the property, hence the date of disposal would be 10 June 2021 if that is what the option contract stipulated.

tudy 5

Samantha purchased a new residential rental property. She immediately rents out the property to a tenant. She paid the following amounts in respect of the property over her ownership period:

•	Purchase Price	$350,000
•	Duties payable on purchase	$5,000
•	Legal fees to transfer title	$2,000
•	Interest paid on loan to purchase the property	$15,000
•	Rates paid to local council	$2,000
•	Extension to property to add a new bedroom	$14,000

How do we treat each of these elements from a CGT perspective?

Answer:

E1, Purchase price forms part of the first element of the cost base of the property. This element will be reduced by the cumulative Div 43 capital works deductions claimed every income year until the property is sold, as the property is used to produce assessable income. As the property is a residential property, the percentage deduction for Div 43 is 2.5%. The Div 43 capital works deduction excludes the cost of the land and must be based on the original construction costs of the building.
E2, $5,000 for duties on the purchase that are included in the second element of the cost base, incidental costs.
E2, $2,000 of legal fees incurred to transfer the title are also contained in the second element of the cost base, incidental costs.
The interest expense does not form part of the cost base, as the interest will be deductible each year under s 8-1 ITAA97 while the property is used to produce assessable income.
Rates paid to the local council will be deductible under s 8-1 ITAA97 as a ‘normal’ or ‘usual’ expense of the property as it is used to produce assessable income. Therefore, the rates will not form part of the cost base of the asset.
E4: The extension to the main bedroom will fall within the fourth element of the cost base as it is capital expenditure that was incurred to increase the asset’s value. The extension will also qualify for a capital works deduction under Division 43 and will only form part of the cost base to the extent that the cost of the extension has not yet been claimed as capital works under Div 43 at the time of the disposal of the property. For example, if at the time of the sale of the property, Samantha has claimed $4,000 of capital allowances in total under Division 43 for the extension, the fourth element of cost base will be $10,000.

tudy 6

An accounting firm sells a painting that hung in its foyer. Will CGT consequences arise at the time of disposal?

Answer:

As the painting is used in producing assessable income, it will qualify for capital allowances under Div 40 or under Division 328. Therefore, at the time of disposal, a balancing adjustment will arise under these divisions. As there is no private use in relation to the painting, there won’t be any CGT that arises under event K7, as all of the consequences of the sale of the painting would be reflected in the Div 40 or Div 328 balancing adjustment.

Case study 7

Your client is a retired engineer who provides the following information in respect of various assets they dispose of during the 2020–2021 income year.

10,000 shares in Whitfords Mining Exploration Ltd. These shares were acquired on 15 June 2012 for $1.00 a share and sold on 20 May 2021 for $13.00 a share. Your client incurs $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchasing the shares.
30,000 shares in Invest Long Term Pty Ltd. These shares were acquired in March 1986 for $2.50 a share and sold on 14 April 2021 for $4.20 a share. Your client incurs $1,500 in brokerage fees on the sale and $1,000 in stamp duty costs on purchasing the shares.
Your client owns the patent to a device used in computing and communications industries. In March 2021, your client is approached by a Korean manufacturing company with a proposal to purchase this patent from your client. The proposal requires the Korean company to test the relevant device to determine if it can be successfully integrated into their mobile communication products. To allow this testing to proceed, your client agrees to accept an option to sell the patent to the Korean company. This agreement was signed on 28 March 2021 and the option price is $50,000, with an agreed sale price of $500,000 if the patent is purchased after testing. The $50,000 is paid to your client on 29 March 2021. As at 30 June 2021, testing is still being undertaken by the Korean company. Your client incurs $5,000 in legal costs in relation to the option agreement.
As at 1 July 2020, your client has $63,000 in unapplied capital losses relating to the sale of shares during the year ended 30 June 2008.

You are required to:

Calculate which amount(s), if any, must be returned as assessable income for the 2020–2021 income year. Show all calculations and provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts.

Answer:

Shares, Whitfords Mining Exploration Ltd

Event A1 occurs on 20 May 2021, when the change in ownership occurs The shares are classified as CGT assets

Capital Proceeds = $13.00 * 10,000 = $130,000

Cost Base = $12,000 • E1, acquisition cost = $1.00 * 10,000 = $10,000 • E2, incidental cost, stamp duty = $1,100 • E2, incidental cost, brokerage fee = $900 Capital Gain = Capital Proceeds > Cost Base $118,000 = $130,000 – $12,000 The gain is a discount gain and it qualifies for the 50% general discount
Shares, Long Term Pty Ltd Event A1 occurs on 14 April 2021, when the change in ownership occurs The shares are classified as CGT assets Capital Proceeds = $4.20 * 30,000 = $126,000 As the shares were acquired before 21 September 1999, the disposal will result in a discount gain and indexed gain. Discount gain: Cost Base = $77,500 • E1, acquisition cost = $2.50 * 30,000 = $75,000 • E2, incidental cost, stamp duty = $1,000 • E2, incidental cost, brokerage fee = $1,500 Discount Gain = Capital Proceeds > Cost Base $48,500 = $126,000 – $77,500 Indexed gain: The indexation factor that applies to the acquisition cost and stamp duty that were incurred before 21 September 1999 is calculated as follows: = 68.7 ÷ 41.4 = 1.659, rounded to 3 decimals Indexed Cost Base = $127,584 • E1 acquisition cost = $75,000 * 1.659 = $124,425 • E2, incidental cost, stamp duty 2 = $1,000 * 1.659 = $1,659 • E2 = incidental cost, brokerage fee = $1,500. Brokerage costs are not indexed as it was incurred at the date of sale, which is after 21 September 1999 As the Indexed Cost Base of $127,584 exceeds proceeds, a capital loss will not arise, as indexation cannot create a capital loss. Therefore, indexation merely reduces the capital loss to $0.
Patent CGT event D2 occurs when option agreement is entered into on 28 March 2021. Option is a CGT asset Capital proceeds = $50,000 Cost Base = $5,000, E2 incidental cost, legal fees
Capital Gain = Capital Proceeds > Cost Base = 45,000 = $50,000 – $5,000 The 50% general discount does not apply to D Events.
Aggregation of all gains and losses The CGT events give rise to the following capital gains and losses: • Discount gain on sale of Whitfords Mining Exploration Ltd Shares = $118,000 • Discount gain on sale of Long Term Pty Ltd Shares = $48,500 • Indexed gain on sale of Long Term Pty Ltd Shares = $0 • Gain on Patent Option = $45,000
There are no current year losses to apply again the gains
Apply unapplied losses of $63,000 from previous years against the gains. The most effective approach is to first apply the losses against gains that are not indexed gains or discount gains. The gain on the option is neither. Therefore, as the unapplied losses exceed the gain on the option, no gain remains on the option, leaving $63,000 – $45,000 = $18,000 of the unapplied losses
Next, it is most effective to apply the remaining losses from previous years against gains that have both indexed and discount gains. In the case of the Long Term Pty Ltd shares, it is better to choose the indexed gain, as it results in no gain or loss, rather than to apply the remaining capital losses against the discount gain and then to apply the 50% general discount, as it will result in a larger gain. = $48,500 – $18,000 = $30,500 x 50% = $15,250
Therefore, the remaining losses from previous years can be applied against the discount gain from sale of Whitfords Mining Exploration Ltd Shares = $118,000 – $18,000 = $100 000 x 50% general discount = $50,000
Net capital gain, s 102-5, assessable income	$50,000

Note: If testing is successful and patent is sold, the D Event will be replaced by CGT Event A1 and the $500,000 and $50,000 will then become capital proceeds for that Event. But the outcome of the testing is not known at the end of the current income year.

Case study 8

On 1 April 1992, Eric purchased 2,000 shares in KLS Ltd for $4.25 per share. On 1 June 1993, he also purchased 1,000 shares in BES at a cost of $14 per share. In order to buy a new yacht, he sold some of his shares on 2 December 2020 at the following prices:

1,000 KLS 6.00 per share
500 BES 18.00 per share
250 BES 20.00 per share

You are required to:

Answer:

1000 KLS shares:

Event A1 occurs on 2 December 2020, when the change in ownership occurs The shares are classified as CGT assets

As the shares were acquired before 21 September 1999, the disposal will result in a discount gain and indexed gain.

Proceeds = 1000 * $6 = $6,000

Discount gain:

Cost Base = $4,250

• E1, acquisition cost = $4.25 * 1000 = $4,250

Discount Capital Gain = Capital Proceeds > Cost Base

$1,750 = $6,000 – $4,250

Indexed gain:

The indexation factor that applies to the acquisition cost and stamp duty that were incurred before 21 September 1999 is calculated as follows:

= 68.7 ÷ 59.7

= 1.151, rounded to 3 decimals

Indexed Cost Base = $4,892

• E1 acquisition cost = $4,250 * 1.151

Indexed Capital Gain = Capital Proceeds > Cost Base $1,108 = $6,000 – $4,892

500 BES shares:

Event A1 occurs on 2 December 2020, when the change in ownership occurs The shares are classified as CGT assets

As the shares were acquired before 21 September 1999, the disposal will result in a discount gain and indexed gain.

Proceeds = 500 * $18 = $9,000

Discount gain:

Cost Base = $7,000

• E1, acquisition cost = $14 * 500 = $7,000

Discount Capital Gain = Capital Proceeds > Cost Base

$2,000 = $9,000 – $7,000

Indexed gain:

The indexation factor that applies to the acquisition cost and stamp duty that were incurred before 21 September 1999 is calculated as follows: = 68.7 ÷ 60.8

= 1.130, rounded to 3 decimals

Indexed Cost Base = $7,910 • E1 acquisition cost = $7,000 * 1.130 Indexed Capital Gain = Capital Proceeds > Cost Base $1,090 = $9,000 – $7,910
250 BES shares: Event A1 occurs on 2 December 2020, when the change in ownership occurs The shares are classified as CGT assets As the shares were acquired before 21 September 1999, the disposal will result in a discount gain and indexed gain. Proceeds = 250 * $20 = $5,000 Discount gain: Cost Base = $3,500 • E1, acquisition cost = $14 * 250 = $3,500 Discount Capital Gain = Capital Proceeds > Cost Base $1,500 = $5,000 – $3,500 Indexed gain: The indexation factor that applies to the acquisition cost and stamp duty that were incurred before 21 September 1999 is calculated as follows: = 68.7 ÷ 60.8 = 1.130, rounded to 3 decimals Indexed Cost Base = $3,955 • E1 acquisition cost = $3,500 * 1.130 Indexed Capital Gain = Capital Proceeds > Cost Base $1,045 = $5,000 – $3,955
Aggregation of all gains and losses There are no current year losses or unapplied losses from previous years to apply again the gains. Therefore, in respect of each disposal, the choice is between the discount gain and indexed gain:
KLS shares: • Discount gain $1,750 x 50% general discount = $875 • Indexed gain of $1,108 • Select the discount gain
500 BES shares: • Discount gain $2,000 x 50% general discount = $1,000 • Indexed gain of $1,090 • Select the discount gain
250 BES shares: • Discount gain $1,500 x 50% general discount = $750 • Indexed gain of $1,045 • Select the discount gain
Net capital gain, s 102-5, assessable income = $875 + $1,000 + $750	$2,625

Case study 9

On 10 September 2005, Lee purchased a block of shares in a mining venture for $174,000. He incurred $1,600 brokerage costs and financial advice fees on the purchase. He borrowed monies to fund the share purchase and during his period of ownership of the shares, he paid $6,000 in interest on the loan. Assume that the interest could not be claimed as a tax deduction under section 8-1 ITAA97 as the mining venture never paid dividends. On 17 October 2020, he sold the shares for $180,000. He incurred $1,400 in brokerage on the sale. He has no unapplied capital losses carried forward.

You are required to:

Answer:

CGT Event A1 occurs on 17 October 2020. The shares are CGT assets.

Proceeds = $180,000

Cost base of the shares is $183,000

E1, acquisition cost: $174,000
E2 incidental costs, brokerage costs and financial advice fees: $1,600 + $1,400
E3 ownership costs, interest, incurred after 20 August 1991: $6,000 Therefore, a potential loss arises, and the Reduced Cost Base must be calculated

The reduced cost base of the shares is $177,000.

E1, acquisition cost: $174,000
E2 incidental costs, brokerage costs: $1,600 + $1,400

There is no E3 ownership costs included in reduced cost base.

The capital proceeds of $180,000 now falls between the reduced cost base of $177,000 and the cost base of $183,000. Therefore, there is no capital gain or capital loss. This is due to the operation of section 100-45 ITAA97, point 7, which reads: ‘If the capital proceeds are less than the cost base but more than the reduced cost base, you have neither a capital gain nor a capital loss.’

Case study 10

Jacob purchased an option to acquire a yacht on 1 April 2020 for $5,000. The option gave him the right to acquire a yacht for $250,000, by latest 1 December 2021. Jacob was made redundant from his job on 20 May 2021 and sold the option for $7,000 on that day.

You are required to:

Determine how much Jacob will include in his assessable income for the 2020–2021 income year in relation to the sale of the option, showing all calculations and providing reasons for your answer.

Answer:

Event A1 occurs on 20 May 2021.

As the option is the right to acquire a personal use asset, the option is also treated as a personal use asset. As the option was acquired for less than $10,000, any gain or loss arising is disregarded.

Case study 11

Barnaby Jones purchased 2000 Telstra Ltd shares on 1 August 2020 for $200,000, incurring brokerage fees of $1,200. On 7 December 2020, he gifts the shares to his son John, on John’s 18^th birthday, incurring a brokerage fee of $800 to transfer the shares to John. On that day, 1 Telstra share would have cost $120 on the open market.

You are required to:

Advise Barnaby of any net capital gain arising from the gift, providing reasons for your answer and showing all calculations.

Answer:

CGT event A1 occurs on 7 December 2020 when ownership is transferred. The shares are CGT assets.

Proceeds are deemed to be the market value of the shares, 2000 x $120 = $240,000 due to the application of the market value substitution rule as Barnaby received no proceeds.

Cost base totals $202,000

E1, acquisition cost of $200,000
E2, incidental costs, brokerage fees of $1,200 and $800

Therefore, a capital gain arises: Proceeds of $240,000 less cost base of $202,000. The resulting gain of $38,000 is not a discount gain as Barnaby did not own the shares for more than 12 months.

Topic 1 Case studies

Case study 1 – Answer to be completed during lectures in Week 1

Case study 2

Case study 3

Case Study 4

Topic 1 Case studies

Case study 1 – Answer

Topic 2 Case studies

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Case study 2

Case study 3

Topic 3 and Topic 4 Case studies

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Case study 3

Case study 5

Case study 6

Case study 8

Case study 9

Case study 10

Case study 11

Case study 12

Topic 5 Case studies

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Case study 4

Case study 5

Topic 6 Case studies

Case studies about fixed property

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Case study 5

Case study 6

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Case studies about moveable property

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Case study 13

Case studies about cars

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Other case studies

Case Study 16

Case study 17

Topic 7 Case studies

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