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Au Taxation Edition 5th

This is a draft cheat sheet. It is a work in progress and is not finished yet.

m2.9C Specific Deduction Provision

Division 25 (Misc. Ded)
s25-5
Managing Tax Affair­s/Tax Compliance (not directly related to assessable income)
 
s25-10
Repair of Non-Ca­ptial Nature
 
s25-20
Lease establ­ishment Costs (asso with CAPEX)
 
s25-25
Borrowing Cost (asso with CAPEX)
Division 28 (Car)
s.28-15
Method 1: Cents per KM
   
Method 2: Log Book
Divison 30 (Gifts­/Do­nat­ions)
s.30-15
*must be endorsed by the Commis­sioner (regis­tered charity
 
Key reqt:
(1)ded­uctible gift recipient (2) gift amt >/+$2 (3)no material benefit received in return
Division 36
> Tax Loses of Prior Yrs
s.36.10
Current year surplus deductions Less Net Exempt Income
> Future Year Deduction
s.36-15
1. Apply CY deduction first 2. Appy carry-­forward tax loses - after reducing by any Net Exempt Income from CY

m2.10C Specific Deduction Limit/Deny

Division 26
s.26-5
1.Fines and Penalties excluded
 
s.26-10
3. Employee leave deferred
 
s.26-35
2. Payments to related reduced
Division 32
s.32.5
No Deduction for Entert­ainment
Division 32
s.32-10
Ent. re: Bus Discussion ► Cannot Deduct
*Exception relating to Entert­ainment
s.32-20
Can deduct - FBT provisions
*Exception relating to Entert­ainment
subdiv 32B
Can deduct - table of Exceptions eg seminar, ent. indusry exp, employer exp (in-house dining)
Division 35
 
Non-Co­mme­rcial Business Losses
Division 820
 
Thin Capita­lis­ation
Division 328
 
Prepay­ments for Services (and s.82KZMD ITAA36)

m2.10C.H Non-Comm'l Bus Losses - Div.35

1. Assessable Income Test
s.35-30
Assessable Income­(incl. cap gains & bal. adjmnts) of atleast $20k
2. Profit Test
s.35-35
Business has a profit in 3 out of past 5 years (incl CY)
3. Real Property Test
s.35-40
Value of real property used in the business has a total reduced cost base of $500k. Excl dwelling (private use)
4. Other Assets Test
s.35-45
Value of deprec­iating assets, trading stocks, leased assets & int'l property excl. real property, car, motor cycles used on a continuity basis was at least $100k
Step 1. Look at assessable Income and Other Income
Step 2 . Losses can be offset in the CY if ANY ONE of the four test above are met:
Step 3 Commis­sioner discretion

m2.10C.H Commer­ciality Test

Assessable Income Test
sec 35-30
AI from business including capital gain and balancing adjust­ment, is at least $20k
Profit Test
sec 35-35
Bus activity resulted in profit in atleast 3 of the past 5 years incl CY
Real Property Test
sec 35-40
Real Property or Interest in RP, used in carrying on the business = Reduced Cost Base of $500k or more. Excludes dwelling and its adjacent land that is mainly used for private purpose.
Other Assets Test
sec 35 -45
Deprec­iating Assets, trading stock, leased assets and Intell­ectual property of business are valued atlease $100k. Excludes cars, motorcycle or similar vehicles.

m1.1 Other Admini­str­ative Penalty Types

m1.9 PAYG Withho­lding & Instal­lment Payment

m1.9 PAYG Instal­lment Calcul­ation

m1.10 PENALTY CATEGORY

Failure to Lodge on Time or In Approved Form
* Taxation Admini­str­ation Act 1953 s.1 div. 286
 
* Penalty Units ($222 from 01/07/­2020)
False or Misleading Statement
* Taxation Admini­str­ation Act 1953 s.1 div. 284
 
Base Penalty plus Adjustment

m1.10 GIC - General Interest Charge

m1.10 SIC (Shortfall Interest Charge)

m1.10 SIZE OF PENALT­Y_F­ailure Lodge

m1.10 PENALTY IN RELATION TO STATEMENTS

m2.0A - PRINCIPLE OF TAXABLE INCOME

m2.1A Residency for Individual

m2.2A Residency for Companies

m2.3A Source of Income

m2.4B - Assessable Income

NOT Assessable Income - [ITAA97 s6.15]
1. Not Ordinary Income [ITAA97 s6-5] and Statutory Income [ITAA97 s6-10]
2. Exempt Income [ITAA97 s6-20]
3. NANE - non assessable and non-exempt income [ITAA97 s6-23]

m2.4A Charac­ter­istic of Ordinary Income

Usually connected with a source:
1. ACTIVE - e.g. Personal or Business Services
2. PASSIVE - e.g. Income as returns on property /inves­tment

m2.4B Charac­ter­istic of Ordinary Income

m2.4BC­omp­ens­ation

Questions of whether Revenue or Capital Compen­sation?
1. Affects the underlying business structure?
2. Normal trading risk for the type of business?
3. Incidental to carrying on ordinary business?

m2.5B Statutory Income Provisions

1. Specific amounts made assessable by the Act
2. ITAA97 s6-10(1) - assessable income which includes amounts that are not ordinary income
3. ITAA97 s.6-10(2) amount not ordinary income but included in AI by provision of assessable income

e.g. Net Capital Gains / Forex Gains / Insurance Bonuses

m2.6B Non Cash Business Benefits

Case 1: Not Cash or Conver­tible into Cash > Generally NOT an OI > Arise from business relati­onship [s21A applies] > No exception applies (no entert­ainment provided by the client) > ARM's LENGHT VALUE ($2,000) - INCLUDED IN ASSESSABLE INCOME

Case 2 ; Not Cash or Conver­tible into Cash > Generally NOT an OI > Arise from business relati­onship [s21A applies] > EXCEPTION applies [s.21A] - non deductible entert­ainment expense of supplier > Value of Non Cash Business Benefit is REDUCED TO NIL

m2.6B Exempt Income

m2.6B NANE

e.g GST

Quiz: A registered charity sells donated goods tru opshop for $110 incl GST.
* $100 - Exempt income (regis­tered charity) s.50-5
* $10 GST - NANE s.17-5(a)

Foreign investors will not be entitled to any franking credits on the FRANKED Dividends.
*wtax on franked dividends is Zero.

Dividends and Interest Income subject to WTAX, the net amount is now NANE [ITAA36 s128D]

m2.7B Derivation

CASH basis - Passive Income (rent, interest, dividends) & Salary and wages

ACCRUAL basis - Business Income (large scale transa­ctions & invoice issuance)

m2.8C General Deduction - Positive Limb

m2.8C - General Deduction - Negative Limb

m2.9C - Specific Deduction Provisions (sec 8-5)

m2.10C - Specific Limitation to Deduction

m2.10C. - Company Losses Key Element

m2.10C. - Synthesize Tax Loss

m2.10C. - Loss Recoupment Rules - COT Period

Tax Losses: start of loss year to end of recoupment year
Capital Losses: start of loss year to end of recoupment year
Bad debts: day the debt incurred to end of claim year

m2.10C. COT Addl Rules & Exceptions

m2.10C. - WH Company & Div 166 Company

m2.10C. COT - WH Company & Div 166 Company

m2.10C. Loss Recoupment Rules - BCT

BCT is done immedi­ately after COT FAILED, which means,it is not the business of the last year is tested, only the business carried on immedi­ately prior to the change of ownership

BCT is fulfilled if passed this 2 tests - Same & Similar Continuity Test

m2.10C. BCT SBT - Same Business Test

m2.10C. BCT - Similar Business Test

Similar business test factor:
1. Similarity between assets of former and new business.
2. Similarity between activities of former and new business.
3. Similarity of identity between old and new business
4. To what extent did a new business evolve from develo­pments in old one?

m2.10C. Utilis­ation of Available Losses

Loss recoupment satisfied [COR or BCT] > can NOW Carry forward and utilise losses
First apply against net Exempt Income > Requir­ement
Apply any Remaining Tax Losses > Choice
Loss Deduction Rules:
* Oldest available losses must be utilized first
* No deduction can be made where excess franking credits exist
* Deduction of losses cannot result in excess franking offsets.

m2.10C. Temp Loss Carry Back Tax Offset

m2.10C.Temp Loss Carry Back Tax Offset - Case

m2.10C.G Prepayment - ITAA36 Prt III Sub.H

ESP - Eligible Service Period
* A loss or outgoing from an advance payment is usually incurred for s.8-1 purposes when paid (TR 97/7).

* Court have rarely applied the accounting principle matching princi­ples.

* Exception for finance and insurance companies issuing discounted bills [ Coles Myer Finance Ltd v FC of T]

m2.10C.G Prepayment - s. 82KZL Exclusion

82KZL ► falls under sec 8-1 (Gen. Deduction)
SBE who have NOT CHOSEN to apply s. 82KZMD
INDIVI­DUALS with non-bu­siness expend­itures

Full Deductions if: (1) Expend­iture relates to ESP =< 12 months (no greater than 12 mths); and
(2) Ends by 30 June of the ff income year

Prorata if: ESP > 12 months
► Period in a year / ESP

eg George Ind, with passive rental income

m2.10C.H Non-Commcl Bus. Loss - Div. 35

Division 35 purpose - quarantine tax losses from non-co­mme­rcial activity to prevent deduct­ibility against unrelated assessable income (indiv­idual income).

Rules: 1. Carried Forward & 2. Deducted from any future income from that activity.

Applied to: (1) Indivi­duals conducting a business (2) Sole Trader or Partner
Does Not Apply To: (1) Passive Investment Income (2) Hobbies**

m2.10C.I Thin Capital'n > Debt:E­quity Ratio

Outward investor takes priority if also an inward investor (Foreign Contro­lled)
Debt attributed to foreign permanent establ­ishment is excluded from adjusted average debt
Only Australian operations are subject to thin capita­lis­ation rules

Debt Deduction (Interest & Finance chargers) against Assessable Income in Australia

m2.10C.I Thin Capita­lis­ati­on-Safe Harbour

m2.10C.I Thin Capita­l'n­-Safe Harbour

Assets : Au Property 20x6 ($50m) 20x7 ($52m)
Au Plant 20x6 ($5m) 20x7 ($5m)

Liability: Bank loan 20x6 ($40m) 20x7 ($40m)
Leave Prov 20x6 ($1m) 20x7 ($1m)
Interest Expense - $3mil

m2.10C.I Thin Capita­lis­ati­on-­Exc­eptions

Exception means THIN CAPITA­LIS­ATION DO NOT APPLY

m2.10C.I Thin Capita­lis­ation - Definition

Inward Investor
Foreign investor with Au Branch
Inward Investor
Foreign Controlled Resident Entity
Outward investor; not Foreign Controlled
Resident Co. with single overseas branch
 

m2.11C Substa­nti­ation - Work Expenses (900-B)

m2.6C Substa­nti­ati­on-Car Expense (900-C)

m2.6C Substa­nti­ation -Car Expense (900-C)

m2.6C Substa­nti­ation - Bus Travel Exp (900-D)

NO Allowance - ALL Expense must be substa­ntiated
►If substa­nti­ation is required and no receipt is received from supplier - taxpayer can create the invoice only when: (1) Expense =<$10 and (2) Max. =<$200 p.a.
►Can use bank statement if no date in the receipt
►If nature of the expense not stated, taxpayer can enter details

m2.14D Deprec­iation Flowchart

m2.14 Rental Properties Allowable Ded.

m2.14 s.40-75(1) - Prime Cost Method-

Straight Line Deprec­iation

First Year with second element

m2.14 s.40-75(1) - Prime Cost Method - Change

Change Year
* Must adjust the formula in s.40-75(1) and it occurs in 2 situat­ions:
1. Recalc­ulate effective life; or
2. Include a 2nd element cost amount in a year after the instal­lation year..

Effective Life = 9.17years
= 10 years -0.83 years (304/365)

m2.14 s.40-72 - Dimini­shing Value Method

Can be used on Assets held post 9th May 2006
Dimini­shing Value Method Not Eligible for intangible assets (except for Copyright)

First Year ► Base Value = Asset's Cost
Sub Years ► Base Value = Opening Adjustable Value + New Second Element Costs

m2.14 s.40-72 Dimini­shi­ng-­Value Method

Most intangible assets are not eligible for DVM.
Tangible Asset (not acquired from associate) second­-hand auction subject to DVM.
Tangible Asset (acquired from associate) so long that taxpayer is using DVM - continue using same method.
Second element costs are not deprec­iated separately but form part of the base value.
Any changes to the effective life during a year affects the calcul­ation for that entire year onwards – that is, that there is no pro-rata decline calcul­ation for part of the year.
Key Notes

m2.14 s40-72 Dimini­shing Value - Change

Sub Year ► Base Value = Opening Adjustable Value + New Second Element Costs
= $83,343 + $5,000
= $88,343

For a Change of Effective Life = Calculated for the Entire Year,
No prorata decline calcul­ation for part of the year

m2.14 Deprec­iation Choice of Method

m2.14D Non-SBEs - Assets of $300< s.40-80

m2.14 Non-SBEs Low Value Asset Pool

Low-Cost Assets (addon)
s. 40-425(2)
cost < $1,000.00
(18.75%) 1st yr of availa­ble­-fo­r-use
Low-Value Assets
s. 40-425(5)
opening ajustable value (OAV) <$1­,000; more than $300.00
(37.50%) previously deprec­iated while the opening ajustable value (OAV)
*Low-Value Assets - assets subjected to Dimini­shing Value and later on the balance is <$1­,000.00

Pool Decline in Value (opening adjusted value) + Allocated Asset Decline in Value (newly add-on)

Balancing Adjustment -(sec 40-445) subtract the taxable used % of the termin­ation value from the closing balance. Pool Value cannot go below ZERO and the balance goes to Assessable Income.

m2.14D Non-SBEs Low Value Pool - Exercise

Case:
Pool opening adjustable value (OAV) is $20,000.
$800 low-cost asset and low-value asset with OAV of $800 added to pool, both with 80% taxable purpose.
No second element costs incurred in the year.
One pooled asset used 50% for a taxable purpose sold this year for $200.

m2.14D Non-SBEs Low-Value Asset Pool

 
Key Notes:
Remember that low-cost or low-value assets can be allocated to the pool.
In the year in which they are added, the decline in value is calculated using a rate of 18.75% for low-cost assets and 37.5% for low-value assets.
Any second element costs to either of these assets declines at 18.75% in that year of entry. In subsequent years, the pool decline is calculated using a rate of 37.5% on the opening pool balance.

m2.14D Software Develo­pment Pool

Intang­ibles Effective Life
* In-house software = 5 years
* Registered design = 15 years

Acquired asset from associates - use the same

m2.14D Non-SBEs Balancing Adjustment

(Subd 40-D)
Assessable Income = Termin­ation Value > Adjustable Value
Deduction = Termin­ation Value < Adjustable Value

*Reduced for any non -taxable use of asset

Termin­ation Value s40-300
1. Generally, what you receive in respect of the event (sales proceed or insurance claim)
2. Can be deemed market value (when not dealing at arm's length)

m2.14D Non-SBE- Relief Involu­ntary Disposal

Rollover Relief
* Available where deprec­iating assets are transf­erred bet certain related entities (and CGT rollover relief is available)
* Rollover relief simply ignores a balancing adjustment (deferred)
* The tax attributes are transf­erred to another entity along with the asset.

m2.14D Non-SBEs Rollover Relief

m2.15D Temporary Full Expensing - Covid19

m2.16D Project Pool Expend­iture

m2.17D Non-SBE Blackhole Expend­iture

s40-880(2)

m2.17D SBEs - Blackhole Expend­itures

Normally Blackhole Expend­itures is spread over 5 years.

SBE start-up costs can deduct in year incurred.

m2.18 SBEs - Capital Allowances (optional)

Simplified Asset Pooling
Small Business Asset Pool
Immediate Write-Off for Low-Cost Assets
cost threshold - asset costing less than $150k
Temporary Full Expensing (TFE) - 06 Oct 2020 7:30pm
Covid19 temporary measure- to be fully written off irresp­ective of its balance (2020-21, 2021-22 & 2022-23)
Requir­ements:
* it carries on a business that year; and
* its aggregated turnover is less than $10 million.
Relevant Consid­era­tions:
* What is the taxable use percentage for the relevant assets?
* Does the taxpayer have existing assets that have previously been deprec­iated?
* Are new assets at or below the threshold for immediate write-off
* What are the permitted rates of decline for pooled assets?

m2.18D SBE Cap Allow - Diagram

m2.18 SBE Capital Allowances

m2.18 SBE Capital Allowance - Close Pool Balance

* if the Terminated Value puts the Closing balance to Zero = the excess will be included in Assessable Income
 
* If the Closing Pool Balance is < the instant asset write-off threshold ($150k) ► Immediate Deduction

m2.18 SBE Capital Allow - First Elect for SBE Pool

Rates:

15% - used for assets in the first year they are allocated
30% - decline rate for pool opening balance
18.75% - low-value pool decline rate when low-cost assets are initially pooled.
37.5% -30% - low value pool rate applied to the previous year's closing pool

m2.18D Capital Allow - SBE First Elect

m2.19 Capital Works (ITAA97 Div 43)

Buildings or extensions including altera­tions or improv­ements to the building
Altera­tions and improv­ements to leased buildings including shop fittings
Driveways, fences and retaining walls
Earthworks
Div 43 - Capital Works - Generally - SUBJECT from CGT

Div 40 - Capital Allowances ► EXEMPT from CGT (if fully used for taxable purposes)

m2.19 Capital Works - Formula

Deduction Rate is based on the date constr­uction commenced but

Deductions are only available from the *Date Constr­uction was completed (assuming the asset is used for income producing or R&D)

m2.19D Rate of Deduct - Capital Works

m2.21E Trading Stock - Adjustment s.70-35

Stock Closing > Opening ► Adjusted to Assessable Income
Stock Closing < Opening ► Adjusted to Deductions

Stock On Hand Valuation on each item/per item:
1. at cost
2. at market selling value
3. at replac­ement value

m2.21E Trading Stock - Exercise

m2.24E Trading Stock - Special Rule

m2.24E Trading Stock - SBE Concession

m2.25E Intern­ational Transa­ctions Process

if there's a transfer price benefit, the Commis­sioner will substitute the arm's length price for tax purposes:
1. taxable income - income tax
2. capital gains/­losses - that attracts CGT

m2.26 Double Tax Arrang­ement - DTA

m2.27E Withho­lding Tax Regime

m2.27E Foreign Resident CGT Withho­lding - Exercise

Rates Applied:

*Capital Gains = 12.5% (contract price >= $750k) if foreign resident seller

m2.29E Foreign Currency Conversion

m2.29E Forex REalis­ation Event (s.775)

5 MAIN TYPE OF FRE (FOREX REALIS­ATION EVENTS):
1. FRE 1 – when you dispose of FX, or a right to receive FX, to another entity.
2. FRE 2 – when you cease to have a right to receive FX (otherwise than through disposal to another entity).
3. FRE 3 – when you cease to have an obligation to receive FX.
4. FRE 4 – when you cease to have an obligation to pay FX.
5. FRE 5 – when you cease to have a right to pay FX.
s775 - Forex Realis­ation is under a Revenue Account:
1. Forex GainAssessable Income
2. Forex LossDeductions

m2.29E Forex Tax Treatment - FRE

m2.29E Forex Realis­ation Event - #02

Events arise from:
1. the Right expires - e.g., withdrawal from the foreign curren­cy-­den­omi­nated account
2. the Right to Receive is exting­uished. cash is received from overseas debtor under sales contract denomi­nated in foreign currency.

m2.29E Forex Realis­ation Event - #04

Event Sample:
1. the Obligation expires
2. the Forex currency is Paid e.g. Obligation to pay is exting­uished.

m2.29E Exception to Div 775

 
Short-term forex gains and losses on the acquis­ition of capital assets are an exception to the Division 775 rules and the gain instead will reduce the cost base (and reduced cost base) of the capital asset. For non-de­pre­ciating capital assets, this is the case when the time between the date of acquis­ition and the due date for payment is less than 12 months.