Taxation Law

MONASH

BUSINESS

SCHOOL

TOPIC 5

INCOME FROM BUSINESS

ACTIVITIES

LECTURE 5

BTF5965 TAXATION LAW | SEMESTER 1, 2019

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CONSULTATION TIMES – WEEKS 5, 6 and 7 Evan, Melchor and Drexel at BLT Consultation Rooms - Level 3 S Building

Wayne at S4.25

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 Gains arising from carrying on a business are usually ordinary

income: s 6-5, However gains made outside business activities may

not be ordinary income:

– Receipts from hobbies or recreational activities

– Gains from disposal or ‘realisation’ of assets

 Characterising receipts as ordinary income from a business activity

involves a two-step process:

5.1 INCOME FROM BUSINESS ACTIVITIES:

| PoTL paragraph [8.10]

1

• Determining whether the taxpayer is carrying on a business

2

• Consideration of whether the receipts are the normal proceeds of that business activity

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 It is necessary to determine when a hobby or recreational activity

becomes a business:

 Legislative definition of “business” (s 995-1 ITAA97)

– “includes any profession, trade, employment, vocation or calling,

but does not include occupation as an employee”

– How is this interpreted?

STEP 1: CARRYING ON A BUSINESS

| PoTL paragraph [8.20]

Hobby

Indicators of a business

starting to be demonstrated

Business

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Courts use various indicators / characteristics that indicate the presence

of a business, eg Ferguson v FCT (1979) - Naval officer who planned to

breed cattle in retirement

 No one characteristic alone

can be used as a decisive

factor, but rather a question of

degree

 Imprecise distinction between

a hobby and business – no

exact formula

 Varying degrees of importance

placed on different indicators

depending on type of activity

STEP 1: CARRYING ON A BUSINESS

INDICATORS OF A BUSINESS ACTIVITY

| PoTL paragraph [8.30]

Not a business

Business

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 Profit-making intent (c/f actual profit)

– Lack of profit-making intention doesn’t necessarily preclude there

being a business: Stone v FCT (2005) - Policewoman who was an

Olympic athlete

 Scale of activities, capital invested, level of turnover

– Small operation can still constitute a business if there are sufficient

other characteristics: FCT v JR Walker (1985) - Real estate agent

who wanted to breed Angora goats … unsuccessfully

 Commercial approach:

– Whether the activities are more than a recreational activity:

Thomas v FCT (1972) - Barrister planted trees … unsuccessfully

STEP 1: CARRYING ON A BUSINESS

INDICATORS OF A BUSINESS ACTIVITY (COURTS)

| PoTL paragraphs [8.40] – [8.50]

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 System and organisation employed:

– Degree of planning and amount of time invested

– Delegation of duties: Ferguson v FCT (1979)

 Methods characteristic of the particular line of business

– Business practices consistent with industry

 Sustained and frequent activity

– Output much greater than what needed for domestic purposes:

Thomas v FCT (1972)

 The type of activity and the type of taxpayer

STEP 1: CARRYING ON A BUSINESS

INDICATORS OF A BUSINESS ACTIVITY (COURTS)

| PoTL paragraphs [8.40] – [8.50]

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 Professional bookmakers and casino operators carry on a

gambling business (scale, commerciality, profit-intention)

 Individuals who gamble are very unlikely to be considered a

business, unless a significant degree of indicators exist:

– Gambling business: Trautwein v FCT (1936) - betting integrated

into horse breeding and racing. Winnings were ordinary income.

– Not a business: Evans v FCT (1989) FCA 205 - Held – not

income due to lack of system and haphazard nature of betting

GAMBLING

| PoTL paragraphs [8.60] – [8.70]

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 Important to determine whether the receipts derived by a

professional sportsperson is from a business or personal services:

– An employee has limited deductions compared to a business

 Courts have tended to more likely label professional sportspeople as

being in business: Courts have tended to more likely label

professional sportspeople as being in business:

 Stone v FCT (2005) - policewoman and champion javelin thrower

received a range of payments.

 Spriggs v FCT; Riddell v FCT (2009) - full time professional AFL

footballers in between contracts but still had to pay managers fees.

SPORTSPEOPLE

| PoTL paragraph [8.80]

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 A business of investment can exist where there is sufficient

indicators of a business:

 Individuals trading shares?

 See AAT Case 4083 – small number of sales but traded regularly

and on a large scale - held to be in a business.

INVESTMENT ACTIVITIES

| PoTL paragraph [8.90]

Not a business

• London Australia Investment Co Ltd v FCT (1977) - aimed long term capital growth. Shares sales were capital in nature.

Investment business

• AGC (Investments) Ltd v FCT (1992) – highly active in buying and selling shares to maintain dividend levels. In a business of investment.

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 Sharing economy concept:

 Difficult to argue that the provider’s actions are in pursuit of a

recreational activity, for example:

– Pricing indicates intention to profit

– Operation may be small but business-like approach

– Level of detail, professionalism and organisation.

– Note potential taxation consequences

– income, deductions, GST liability, partial loss of CGT exemption

– administration and collection obligations TFN, ABN, PAYG, WHT

THE SHARING ECONOMY

| PoTL paragraph [8.105]

Provider

(eg Uber car owner/driver)

Internet service facilitator

(eg Uber)

Client

(eg end consumer)$ $

Provision of service

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 It is necessary to identify the time when the business commences:

 Time of commencement of a business is a question of fact:

Softwood Pulp and Paper Ltd v FCT (1976) - Pulp mill feasibility study

conducted but project did not proceed. Held not a business due to lack of

“commitment”

 Contrast, FCT v Osborne (1990) – leased land and prepared soil for a

chestnut plantation but later abandoned the venture. Held a business had

commenced.

COMMENCEMENT OF A BUSINESS

| PoTL paragraphs [8.110] – [8.120]

Business commencement

Preliminary expenses incurred

Not deductible under s 8-1 Operating expenses

Deductible under s 8-1

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 A receipt from the normal proceeds of a business constitutes

ordinary income (s 6-5)

 Characterising a receipt as part of the normal proceeds of the

business requires:

 If a receipt is not within the normal proceeds, it may be ordinary

income from another general concept or statutory income

STEP 2:

THE NORMAL PROCEEDS OF A BUSINESS

| PoTL paragraph [8.130]

1 • An investigation of the nature of the business

2

• Assessing whether the receipt has a nexus with the identified business activity

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 A broad or narrow view of the business activities determines

whether or not a receipt arises from the normal proceeds

 Broad approach requires a strong nexus between the core business

and the unusual activity: Memorex Pty Ltd v FCT (1987)

Sale of ex-leased computers

STEP 2: NORMAL PROCEEDS OF A BUSINESS:

NATURE OF THE BUSINESS

| PoTL paragraph [8.140]

Broad or narrow approach

Broad

More likely that unusual receipts could still be business income:

GP Int’nal Pipecoaters v FCT (1990)

Subsidy for establishment of plant

Narrow

Less likely that unusual receipts will be normal proceeds of the business:

FCT v Merv Brown Pty Ltd (1985)

Sale of import quotas

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 Receipt constitutes the normal business proceeds when derived as:

 In relation to (2), the frequency and magnitude of the activity is

important:

– Regular sale of ex-leased equipment in a leasing of equipment

business: Memorex – ordinary income

– Infrequent sale of import quotas in a sale of imported clothing

and fabric business: FCT v Merv Brown Pty Ltd – not OI

STEP 2: NORMAL PROCEEDS OF A BUSINESS:

NATURE OF THE BUSINESS

| PoTL paragraph [8.150]

1 • Part of the ordinary business activity; or

2 • An ordinary incident of the business.

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 Prerequisites of ordinary income:

 Ordinary income does not include receipts that are not cash or

convertible to cash: FCT v Cooke and Sherden (1980)

 Section 21A ITAA36 enacted to deem non-cash business benefits as

being convertible to cash (at it’s arm’s length value)

– The gain will be assessable as ordinary income provided it

arises from a business and satisfies nexus requirements

NON-CASH BUSINESS BENEFITS

| PoTL paragraph [8.160]

Cash or convertible to

cash

Real gain to the taxpayer

Prerequisites of ordinary income

satisfied

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 A receipt from the normal proceeds of a business constitutes

ordinary income: s 6-5

 Alternatively, transactions may be categorised as:

5.3 EXTRAORDINARY AND ISOLATED TRANSACTIONS

| PoTL paragraph [8.170]

1

• Extraordinary transactions

• A receipt derived by an existing business that arises outside the normal proceeds of the business.

2

• Isolated transactions

• A receipt from a once-off transaction not undertaken by an existing business operation.

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 While extraordinary and isolated transactions may appear to take a

capital characterisation, it may be ordinary income if it falls into any

of the following categories:

OVERVIEW

| PoTL paragraph [8.170]

Category

Isolated Transactions

Forms a business itself

Extraordinary transactions

First strand of FCT v Myer Emporium

Disposal of Right to Future income

Second strand of Myer Emporium

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 Under the California Copper Syndicate v Harris (1904) principle, a

gain derived from an isolated transaction is distinguished between:

(1) ISOLATED TRANSACTIONS RECOGNISED AS A BUSINESS VENTURE IN ITSELF

| PoTL paragraph [8.180]

1

• A “mere realisation” of a capital good, resulting in a capital gain: see Scottish Australian Mining Co Ltd v FCT (1950); and

2

• A gain made from carrying on a business, resulting in ordinary income (s 6-5).

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 Profit from an isolated (and potentially an extraordinary) transaction

that has exhibited sufficient indicators of a business is considered

ordinary income from business activity:

ISOLATED TRANSACTIONS:

FORMS A BUSINESS ITSELF

| PoTL paragraphs [8.180] – [8.190]

Carrying on a business

• FCT v Whitfords Beach Pty Ltd (1982): extensive land development amounting to a land development business

• Stevenson v FCT (1991): extensive land development and sales process undertaken by taxpayer.

“Mere realisation”

• Statham v FCT (1988): existing farm business ceased with subsequent land development by the council (not the taxpayer). Taxpayer not directly involved in sales process.

• Casimaty v FCT (1997): undertook minimum land development required to obtain subdivision approval.

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 Only the profit (not total sales proceeds) is assessable as ordinary

income under the principle in FCT v Whitfords Beach Pty Ltd (1982)

 Gain is calculated as:

ISOLATED TRANSACTIONS:

FORMS A BUSINESS ITSELF

| PoTL paragraph [8.200]

Profit Sales

proceeds

Land value at time isolated transaction commenced

Development costs

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FCT V MYER EMPORIUM (HCA,1987)

 Issue - whether proceeds from an extraordinary or isolated transaction

would be be ordinary income – on appeal from Full Federal Court.

 Facts of Myer Emporium:

(2) EXTRAORDINARY TRANSACTIONS:

FIRST STRAND OF MYERS CASE

| PoTL paragraph [8.210]

Myer

Emporium

Myer

Finance

Citicorp

1. Loan - $80 million to a subsidiary for a

term of 7 years – made on 06/03/81

2. Interest at 12.5% p.a. payable to Myers

3. Sale of the “right to receive interest”

to Citicorp for a lump sum of $45m

completed on 09/03/81

4. Interest payments

paid to Citicorp after sale

of right to interest stream

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 FCT V MYER EMPORIUM (HCA,1987) – see para 14

 An extraordinary or isolated transaction will satisfy the first strand of

Myer Emporium when the following requirements are met:

FIRST STRAND OF MYER EMPORIUM

| PoTL paragraph [8.220]

1

• There was an existing business and an extraordinary transaction occurs that is not part of the normal proceeds of that business.

2 • There was a profit-making intention upon entering the

transaction; and

3 • The profit was made by the means consistent with the

original intention

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1. Profit resulted from an extraordinary transaction in an existing

“business operation”

– High Court also mentioned the “isolated transaction” principle

where there is a “commercial transaction” – as in the California

Copper Syndicate case – likely to be satisfied when the

transaction has no other purpose but profit-making, regardless of

whether an existing business exists See Tax Ruling TR 92/3

2. Profit-making intention upon entering the transaction

– The intention must be present at the time of “entering the

transaction”: in relation to selling assets, this is the time of asset

purchase.

– Profit need not be the taxpayer’s sole or dominant intention: FCT

v Cooling (1990) – lease premium held to be incidental to

carrying on business and alternatively, the 1st strand applied.

FIRST STRAND OF MYER EMPORIUM

| PoTL paragraphs [8.230] – [8.240]

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3. Profit made by means consistent with original intention

– The way profit is eventually made must be consistent with the

original profit-making intention.

– See Westfield Ltd v FCT (1991):

 Taxpayer was in the business of designing, constructing and

operating shopping centres primarily to derive rental income. Planned

a joint venture with AMP to develop a new shopping centre but later

decided to sell its share to AMP:

FIRST STRAND OF MYER EMPORIUM

| PoTL paragraph [8.250]

Purchased land with the original intention to co-

develop a shopping centre with AMP

Sold land to AMP, rather than developing a shopping centre.

Profit made.

The way the taxpayer

made the profit was

not consistent with

original profit-making

intention.

= First strand of Myer

not satisfied.

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SECOND STRAND OF MYER EMPORIUM

 Proceeds from a transaction will be ordinary income if the taxpayer

sells the right to income, without selling the underlying asset:

– the High Court also decided that the sale of a “mere right to

interest” (ie income), while retaining the loan principal (ie the

underlying asset) is simply converting future income into present

income – regardless of payment by lump sum: CIR v Lake

(USA,1958) – see Myers case at para 36

– This principle has been applied in several later cases:

 Eg. Henry Jones (IXL) Ltd v FCT (1991). Sale of right to royalties

from certain brands owned by the company, while retaining

underlying property, being the trademarks. Note first strand did not

apply due to a change in business plans after royalty arrangements

were established.

(3) ASSIGNMENT OF FUTURE INCOME STREAMS

| PoTL paragraph [8.260]

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 Statutory provisions may apply to a receipt arising from an

extraordinary / isolated transaction. Recall:

 Capital Gains Tax - proceeds on disposal of an asset disposed of

after 19 Sept 1985 may be subject to CGT – assessable as part of a

‘net capital gain’ under s 102-5 ITAA97.

– CGT is covered in detail in Topic 7.

STATUTORY RULES APPLICABLE TO EXTRAORDINARY AND ISOLATED TRANSACTIONS

| PoTL paragraph [8.265]

Assessable Income

Ordinary Income

Statutory Income

Isolated and extraordinary transactions

Capital Gains Tax

S 15-15 ITAA97

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 Profits from a profit-making undertaking or plan constitute statutory

income under s 15-15 ITAA97

 Exclusions:

– Gains that are ordinary income: s 15-15(2)(a); or

– Gains that involve assets purchased on or after 20 September

1985: s 15-15(2)(b)

 In practice, this has very limited application as gains would often be

assessed as ordinary income due to FCT v Whitfords Beach Pty Ltd

STATUTORY INCOME: SECTION 15-15

| PoTL paragraph [8.290]

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 Taxpayers often received isolated or extraordinary payments by way

of compensation or damages for a loss. In general, a compensation

receipt or damages award takes on the character of the item it

replaces: FCT v Dixon (1952). The lump sum nature of (most)

compensation receipts does not displace this principle; see Comm

of Tax v Phillips (1936).

5.3 COMPENSATION PAYMENTS

| PoTL paragraph [10.20]

Compensation and damages receipt

Income

Where indicia of ordinary income are present for the amount being

replaced, it is considered ordinary income (s 6-5).

Capital

Where in lieu of capital or a capital item, it is considered capital in nature and potentially subject to the capital

gains tax provisions.

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 Follows the replacement principle where:

– Income: replacement of amounts that would have been ordinary

income (ie, from the normal course of business or some isolated

and extraordinary transactions)

– Capital: amounts for the loss of capital or capital item

COMPENSATION IN BUSINESS SITUATIONS

Three broad categories

Compensation for breach of contract

(1) Ordinary trading contracts

(2) Structural contracts

Compensation for loss of an asset

(1) Depreciating assets

(2) Trading stock (3) Capital assets

Compensation by way of insurance

proceeds

| PoTL paragraphs [10.150] – [10.160]

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 Application of the replacement principle to payments received for the

breach / cancellation of contracts:

 Cases

– Heavy Minerals Pty Ltd v FCT (1966) – market for ‘rutile’ collapsed and miner

compensated for loss of forward sales contracts

– Allied Mills Industries Pty Ltd v FCT (1989) – termination of distribution

agreement for Vita-Wheat biscuits

– California Oil Products Ltd (in Liq) v FCT (1934) – was exclusive distributor for

a US company before contract terminated.

(1) COMPENSATION FOR BREACH OF CONTRACT

| PoTL paragraphs [10.170] – [10.190]

Ordinary trading contracts

(income)

Structural contracts

(capital)

Compensation for loss of:

(1) ordinary trading contract;

(2) sale of goods; or

(3) loss of trading profits.

Breach of contract that goes to

the fundamental structure of

business.

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 Loss of depreciable assets – Div 40 applies

– Disposal may trigger a balancing adjustment (see Topic 10)

 Loss of trading stock – Div 70 applies

– Compensation for loss of trading stock is ordinary income under

s 6-5, or if not ordinary income (?), covered by s 70-115 ITAA97

 Loss of a capital asset – depends on extent of damage

– where permanently destroyed or disabled – generally a capital

loss - Glenboig Union Fireclay v IR Commissioner (1922)

– where temporary loss or disablement – compensation will be

income in nature: Ensign Shipping Co Ltd (1928)

 Note – calculation by reference to loss of profits does not alter

capital character: Sydney Refractive Surgery case (2008)

(2) COMPENSATION FOR LOSS OF A BUSINESS ASSET

| PoTL paragraphs [10.200] – [10.220]

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 Statutory inclusion: s 15-30

– Amounts received by way of insurance or indemnity are still

assessable if the amount would have been included in

assessable income but not ordinary income.

– Special rules apply for recovery of losses under insurance

policies for livestock and timber: s 385-130

(3) COMPENSATION BY WAY OF INSURANCE

| PoTL paragraph [10.230]

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 Undissected lump sums may be received in ‘out-of-court’

settlements – and courts may sometimes order payment of

‘unliquidated damages’ – including compensation for:

– Loss of income; and

– Loss of capital or capital assets

 For tax purposes, courts are reluctant to apportion the sum into

income and capital components:

– Where parties treat the settlement as a single undissected

amount, the whole sum is treated as capital: McLaurin v FCT

(1961) – various losses caused to farm property by fire.

– CGT provisions may apply: see Tax Ruling TR 95/35 and CGT

events H2 and C2

COMPOSITE CLAIMS

| PoTL paragraphs [10.240] – [10.250]

5.4 TRADING STOCK

• Division 70 ITAA97 contains a statutory tax accounting

regime for “trading stock”. The Act generally adopts

accounting conventions with some statutory variations. The

key issues in this topic are as follows:

Trading stock

(1) Meaning of trading

stock

(2) Accounting for trading

stock

(3) When is TS ‘on

hand’

(4) Special rules

PoTL 2019 paragraph [17.10]

(1) Meaning of trading stock

• “Trading stock” is defined in s 70-10 and includes:

• “Anything” can be trading stock: FCT v St Hubert’s Island Pty

Ltd (1978)

– Necessary to determine the purpose for which it is held.

• An item can be trading stock of a taxpayer even if the taxpayer

is not its legal owner.

(a)

• Anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) • Livestock

PoTL 2019 paragraph [17.20]

Common items of trading stock • Raw materials and partly finished goods constitutes trading stock of a

manufacturer: FCT v St Hubert’s Island (1978).

o But not unbilled services (work in progress) - Henderson v FCT (1970).

• Spare parts held for the purpose of exchange in the ordinary

course of business constitutes trading stock.

o But not an excessive stockpile (Guinea Airways case 1950)

• Intangibles (eg, shares) may constitute trading stock if held with the

relevant purpose: Patcorp Investments Ltd v FCT (1976).

• Share trading vs passive investing.

• Consumables used by a service provider in the course of providing

services may constitute trading stock:

• must be separately identifiable before and after the services are provided

• Ownership of items must pass to the customer.

• Packaging materials held by a taxpayer may be trading stock where

they are disposed of, and closely associated with “core goods”: Ruling

TR 98/7.

PoTL 2019 paragraphs [17.30] – [17.40]

Accounting for trading stock

• A taxpayer will have tax consequences arising:

1 • From the acquisition of trading stock

2 • From disposals of trading stock

3 • At year end

PoTL 2019 paragraph [17.50]

(2) Accounting for trading stock:

• Generally, the tax treatment on the acquisition and disposal of

trading stock is as follows:

• The acquisition of trading stock by a taxpayer provides a

deduction under s 8-1 ITAA97, subject to conditions in s 70-15:

– (i) The trading stock must be “on hand”; or

– (ii) An amount included in assessable income in relation to the

disposal of the trading stock

• Proceeds of disposal of trading stock in the ordinary course of

business will be ordinary business income under s 6-5 and

included in assessable income when the trading stock ceases to

be “on hand”: s 70-5(2)(b)

PoTL 2019 paragraphs [17.60], [17.80] – [17.90]

Non-arm’s length transactions – s 70-20

Eg. purchaser pays an excessive price to ‘non-arm’s length’

vendor – can only claim MV as deduction and vendor includes MV

in assessable income.

Non-arm’s length acquisitions

• Under s 70-20, a deduction equal to the market value of the trading stock should be adopted where the:

• (i) Buyer and seller did not deal at “arms length”; and

• (ii) The expense is greater than the “market value”.

Non-arm’s length disposals

• Where an adjustment to the purchaser’s deduction applies, the market value is included in assessable income of the seller: s 70-20.

PoTL 2019 paragraphs [17.70] – [17.100]

Disposals outside ordinary course of business

• eg, disposed on sale of a business, or as gifts or donations:

– Taxpayer disposing the trading stock includes the market

value in assessable income: s 70-90.

– Purchaser is deemed to acquire the trading stock for the

same value: s 70-95.

PoTL 2019 paragraph [17.110]

Year-end adjustments

• An adjustment is required to ensure the taxpayer only accounts

for a deduction when there is an actual economic decline.

• Taxpayers are required under s 70-35 to compare the “value” of

trading stock on hand at the start and at the end of the year:

Value of trading stock at year-end

Value of trading stock

at start of year

Difference is included in assessable

income

Value of trading stock at year-end

Value of trading stock

at start of year

Difference is included in deductions

PoTL 2019 paragraph [17.120]

Year-end valuation of stock

Value of trading stock at start of year:

• Equals value of trading stock at the end of the previous income

year: s 70-40.

– Value at the end of the previous income year must have been

taken into account for tax purposes to be used as the value at

the start of the following year: see Hua Wang Bank Berhad v

FCT (No 19) (2015) – no tax return lodged so value = nil.

PoTL 2019 paragraph [17.130]

Year-end valuation

Value of trading stock at end of year:

• Taxpayer has three choices to determine the value of trading

stock on hand at end of the year: s 70-45:

1 • Cost

2 • Market selling value

3 • Replacement value

PoTL 2019 paragraph [17.140]

Choice of valuation methods

(1) Cost: should be determined in accordance with accounting

principles: Phillip Morris Ltd v FCT (1979):

• Manufacturers, retailers and wholesalers should use the

accounting “absorption cost method”.

• The first-in-first-out method should be used where it is not

possible to track individual items: Australasian Jam v FCT.

(2) Market selling value: is the amount for which the taxpayer

could sell the stock in the ordinary course of business.

(3) Replacement value: is the amount the taxpayer would have to

spend to replace the stock.

Note

• GST input credits are excluded in all three methods

• taxpayer may value obsolete stock at a value lower if truly

obsolete and the value used is reasonable: s 70-50.

PoTL 2019 paragraphs [17.150] – [17.190]

(3) When is trading stock ‘on hand’

• Concept of trading stock “on hand” determines:

• General guidance on what constitutes “on hand”, includes:

– Taxpayer must retain dispositive power: Farnsworth v FCT

(1949) – fruit grower had delivered fruit to a packing house

– Dispositive power may not include legal ownership: FCT v

Sutton Motors (Chullora) Wholesale Pty Ltd (1985) – car

dealer only took ownership when a buyer signed up.

– Dispositive power does not require physical possession of

the goods: All States Frozen Foods v FCT (1990) – goods at

buyers risk once loaded onto ships, & had power of disposal.

1 • When gross receipts is included in assessable income

2 • When a deduction is claimed for acquisitions

3 • Value of trading stock at year-end

PoTL 2019 paragraphs [17.220] – [17.230]

(4) Special rules

The characterisation of an item as trading stock depends on the

taxpayer’s purpose in holding the asset. Special rules may apply

when the taxpayer’s purpose changes. Special rules include:

1 • Asset of taxpayer becomes trading stock

2

• Item ceases to be trading stock but continues to be owned by taxpayer

3 • Lost or destroyed stock

PoTL 2019 paragraph [17.240]

Special rules: (1) Asset of taxpayer becomes trading stock

• Where an asset that is owned by the taxpayer becomes

trading stock:

– Taxpayer is deemed to have disposed the item; and

– Re-acquired the item: s 70-30.

• The taxpayer has a choice as to whether the deemed disposal

and re-acquisition is done at “cost” or at “market value”: s 70-

30(3).

• Other tax considerations:

– Balancing adjustment if the asset was a depreciating asset

– CGT event K4 if the asset was a CGT asset and disposal

and re-acquisition done at “market value”.

PoTL 2019 paragraph [17.250]

Special rules: (2) Item ceases to be trading stock

• Where a taxpayer ceases to hold an item as trading stock, but

continues to own it:

– Taxpayer is deemed to have disposed the item; and

– Re-acquired it for “cost”: s 70-110.

• The cost on re-acquisition becomes the asset’s cost base (for

a CGT asset) or cost (for a depreciable asset).

• Commissioner provides reasonable estimates of the value of

goods taken from trading stock for private use for certain

businesses: TD 2018/10.

PoTL 2019 paragraph [17.260]

Special rules: (3) Lost or destroyed stock

• Any lost or destroyed stock taken into account through the

year-end adjustment as stock is not “on hand”.

• Any compensation received for lost or destroyed stock is

included in the taxpayer’s assessable income under s 70-115.

PoTL 2019 paragraph [17.270]

(4) Small business entities

• Definition of a small business entity (SBE):

– A sole trader, partnership, company or trust that operates

business, for whole or part year, and has an aggregated

turnover over less than $10m: s 328-110.

• Concession for SBE:

– If the difference between opening and closing stock value is

less than $5,000, the taxpayer may choose not to account

for changes: s 328-285(1).

PoTL 2019 paragraph [17.280]

(5) Interaction with other income tax rules

• Where trading stock also qualifies as a CGT asset:

– Any capital gain or loss is disregarded if, at the time of the

CGT event, the CGT asset is classified as trading stock:

s 118-25.

• Where trading stock also qualifies as a depreciating asset

subject to the capital allowances regime:

– Trading stock is excluded from the definition of a

“depreciating asset”: s 40-30(1)(b).

PoTL 2019 paragraph [17.290]

BTF5965 S1 2019 54

WEEK 6

– Fringe Benefits Tax

WEEK 7

– Capital Gains Tax (lectures by Diane Kraal)

EASTER BREAK---------------------

WEEK 8

– General deduction (Diane Kraal)

– Task 2 - Written Assignment due Sunday 5th May

WEEK 9

– Specific deductions (Diane Kraal)

WEEK 10

– Capital allowances (Diane Kraal)

Next few weeks