Capital Gains and Others
Transcript of Capital Gains and Others
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CAPITAL GAINS
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Continued from Myer emporiumcaseWhat is capital
Fruit & Tree
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The Fruit And Tree Concept
Turnover
Fixed
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Fixed capital is what an owner turns toprofit by keeping it in his possession(eg. fixed asset) while circulating
capital is what he makes profit byparting with and letting it changemasters (eg. stock-in-trade)
Reference:John Smith & Son vMoore(12TC266)(HL)p282
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Cancellation of business contracts
These are generally construed ascompensation for loss of business
profits and so assume the character ofincome.
However caution must be exercised.
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Heavy metals Pty Ltd (HMP) vFCT Companys business was mining/selling
rutile( a mineral composed primarily oftitanium dioxide)
The products were sold through
established contracts. When clients did not need any further
supply, they terminated the contract andgave a compensation in consideration
The company then ceased miningQ Is the compensation capital or
revenue(income)
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Held
MINE
Machinery
TREE
FRUIT
rutile
Compensation was for Nottaking Fruit. Nothing to do withmine or machinery. They wereintact and company couldcontinue mining
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Glenboing Union Fireclay Co. ltd v IRC(1921)
The Company was lessee of fireclay
fields. It worked these fields to earn its income.
A railway company took out a statutory
order preventing the lessee from workingon some part of the land.
A compensation was paid as aconsideration.
The amount of the compensation paidwas computed based on damages forloss of profits
Q: Is the compensation Capital or revenue(income)
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Held
Fireclay field
bricks
tree fruit
Not able to work a part ofthe land was the loss of acapital asset
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STATUTORY INCOME
Income which is NOT ordinary incomeBUT is specifically included asassessable income.
Examples: Non cash business benefits
Trading stock
Net capital gains
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Exempt Income
Division 11
3 main categories:
SS11-5
Entities exempt from tax regardless ofthe nature of income they receive egpublic educational entities listed under
charity, education, religion or science
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Exempt Income
Ss11-10
Income that is exempt regardless ofthe income tax status of the entity
receiving it. Ss 11-15
Exempt income if derived by certain
entities.
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Non assessable Non exemptincome Sect 6-23
Ensures that not all income are taxable
Eg it excludes winnings and gifts.
Sect 11-55
Excludes the GST portion of sales.
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DERIVATION OF INCOME
To be taxable, income must be derived derive is relatively defined in s995-
1(1)
Some cases:FCT v Clarke(1927) 40 CLR246-
Derived only means obtained, gotor acquired
FCT v Thorogood (1927)40 CLR454-Derived is not necessarily actuallyreceived but ordinarily that is the
mode of derivation.
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Why is derivation important
Income tax is payable on a taxpayerstaxable income for an income year
To determine in which income yearordinary income and general deductionsare brought to account, it is necessary toexamine the terms:
derived (which appears in s 6-5 ITAA97)
incurred (which appears in s 8-1 ITAA97)
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When is income derived? When income is derived is determined by
the application of ordinary business andcommercial principles
Methods of accounting for income:
The cash basis (when cash or equivalent isreceived): Employment income (eg salary and wages)
Income of sole traders (Firstenberg, Dunn)
The accruals basis (when income is earned i.e.when there is an enforceable debt): Income from professional partnerships (Henderson)
Income from trading business (J Rowe & Son)
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Which method of accounting?
The method to be adopted by a taxpayeris that which is calculated to give asubstantially correct reflex of thetaxpayers true income (Cardens case)
The method to be used is the one thatmost accurately represents the truth and
reality of the situation (Ballarat Brewing
Co)
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When is a loss or outgoingdeductible?
Whether a loss or outgoing has beenincurred depends on the existence of aliability rather than whether or not it hasbeen discharged
For a loss or outgoing to have beenincurred: The taxpayer must have completely subjected
itself to the loss or outgoing (James Flood)
A presently existing liability must exist (NilsenDevelopment Laboratories)
There must be more that a mere impending,threatened, or expected liability (New Zealand
Flax Investments)
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Particular Receipts
Conditional ContractsIncome is not earned until the
contracts become unconditionalPre payments or receipt beforeearningGenerally not income earnedCase: Arthur Murray(NSW)Pty Ltd vFCT(1965)114CLR 314
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Case: Arthur Murray(NSW)PtyLtd v FCT(1965)114CLR 314
The Company ran a dance schoolThe courses ranged from basic ones
of 5 hours to 30 hours through tolifetime courses of 1,200 hours
costing 3,300 reductible to 3,000 for
immediate payment in advance. Therewas no contractual obligation to refund(although sometimes done in practice)
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Case: Arthur Murray(NSW)Pty Ltd vFCT(1965)114CLR 314 In the Companys accounts, advance
payments were treated as unearneddeposits-untaught lesson account
Thereafter they were transferred toearned tuition account in line withaccepted accounting practice. Thesewere recognized as income
The Commissioner disagreed and saidpayments (income) should berecognized when received
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HELD
..according to established accountingand commercial principles, in the caseof a business either selling goods or
supplying services, amounts receivedin advance of the goods beingdelivered or the services being
supplied are not regarded as income
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DERIVATION-Income(checklist) Trading income-accrual basis when the
right to receive results in a debt due. Salary & wages- cash receipt basis Brent
v FCT ATC 4195
Personal services - cash receipt basisBrent v FCT ATC 4195
Work in progress of professional person-not assessable until billed Henderson v
FCT 70 ATC4016. But a paymentreceived for unbilled work in progressmaybe regarded as assessable income-Stapelton V FCT89ATC4818; FCT v
Grant 91ATC4608
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Derivation-Income
Leave payments-assessable in year ofreceipt as with normal salary orwages- Case V161.88ACT1071
Interest- when received Rent-when received Case
A63,69ATC359
-prepaid rent-caseB47,70ATC236 and B51,70 ATC253
Dividends-when paid or credited to
shareholder
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Derivation-Income
Payments by cheque- received on thedate the cheque is received ortendered-case: Ullrich V
CIR(NZ)13ATD321 Advance fees- accounting basis
:Arthur Murray
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Matching principle
In determining when an outgoing isdeductible there is a two stepapproach (Coles Myer Finance):
Step 1: Determine whether a loss oroutgoing has been incurred(jurisprudential principle)
Step 2: Determine to which period theloss or outgoing is properly referable(matching principle)
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Estimated liabilities
The fact that the amount of a liabilitycannot be precisely ascertained doesnot necessarily mean that the liability
is contingent and therefore notdeductible (RACV Insurance,Commercial Union Assurance)