We are not expecting students to come up with an answer as comprehensive as that attached.
We are looking for: a coherent approach to the question, quality of argument, identification of key points, absence of self-contradiction in later part of paper, familiarity with primary sources, absence of heresies (e. G. Expenditure is capital under s 8-1 because it purchases something that Is a CUT asset), original and logical analysis and engaging with the primary materials. Question 1 Receipt to van owners of $500 1. 1 Non-capital Gains Tax provisions students should consider whether the receipt is incline under ordinary concepts so-5. One view would be that the amount is not income on ordinary concepts as it is not a product (comes from) of an income- producing activity. Occupying the van in Snake Gully Pity Lad’s caravan park is not an income-producing activity.It is a holiday activity, which does not give rise to income.
Hayes and Scott are the authorities. More specifically, or another way of looking at It, he question Is whether the receipt in all the circumstances Is a product of an Income producing activity? Reference could be made to some of the factors mentioned In the cases (e. G. Receipt is unsolicited, the van owners have met all their obligations to Snake Gully Pity Ltd under the license). Better answers would raise the question as to whether receipts like this are common or ordinary incidents to van owners.Another way some students might put it Is to say that the amount is a “mere gift”. Given that Snake Gully Pity Ltd feels a moral obligation towards the van owners, It may be appropriate for students to refer to some of the mere gift cases.
In the end, It doesn’t matter much. Note that the donor’s motives (moral obligation, saving of legal costs) are relevant but not determinative. A good answer will note that just because there is no legal entitlement to receive an amount, does not automatically mean it cannot give rise to income.
Further, based on Beret’s case, a receipt can be income as a reward for services even though there is no employment relationship with the payer, and even though the recipient Is not In the business of providing relevant services. Brown’s case also supports this (politician that Is given a home unit for Introducing overseas businessman to Australian businessman). A good answer would consider whether the receipt can be characterized as being in respect of providing the service of vacating the property? The facts state that notice Is given, but do not state that the required one month’s notice was given.If one month’s notice is not given, then the receipt might be able to be characterized as return for giving up valuable rights and would not be income: Highs v Olivier, Carroll v Boasted. If one month’s notice was given, hen the van owner did not give up a valuable right. The problem then becomes, has the van owner performed a service by simply acting in accordance with his/her legal obligations. It could be argued that leaving voluntarily involves the performance of a service as it saves costs such as legal costs for Snake Gully Pity Ltd.
In practice one wow a tank Tanat ten van owners would not De assessed no totalitarians ten Brent arguments. Section 15-2 cannot apply for the reason is that occupying the caravan park is not an employment, and it does not amount to services rendered (Note the analysis above on services rendered). . 2 Capital Gains Tax Provisions The contractual occupancy rights each van owner has with Snake Gully Pity Ltd will be a CUT asset: s 108-5(1)(a) and/or s 108-5(1)(b).
These have “come to an end”, therefore CUT event CA has occurred.It is arguable that the $500 received is the capital proceeds in regard to the CUT event. Query however whether the $500 can be linked to the ending of the contractual rights. The language Offs 116-20 could be referred to (I. E.
Is the $500 in respect of the CUT event happening? ). If they can, the question would then be, what was the cost base of the contractual rights? I think the answer is nil, as there is some difficulty in saying that the $2,000 is in respect of the acquisition of those rights: s The distinction between costs of maintaining rights, as opposed to acquiring them, may be relevant here.This is the same distinction between the rent and the premium (see below).
On the other hand, the $2,000 may be in respect of the acquisition of the rights. Let us assume they are. It throws up a capital loss of $1 ,500.
If they are not, we have a capital gain of $500. As the ordinary charging provisions of the CUT regime apply (I. E. Transaction involves a dealing with a re-existing asset (contractual rights)), CUT event Del and CUT event H2O should not be considered. That is, they cannot apply.All of the above is not that important anyway as any loss/gain (if there is one) is disregarded. The contractual rights should be regarded as a personal use asset under s 108-20(2). There is no reason why an intangible asset cannot be a personal use asset.
Indeed, s 108-20(2) does contemplate this, though admittedly in regard to specific items. The reality is that the contractual rights the van owner has (had) against Snake Gully Pity Ltd are for the van wiener’s personal use and enjoyment (I. E. Right to occupy Snake Gully Pity Lad’s land when on holidays).
Note also that the contractual rights cannot be a collectible (s 108-10), hence the conclusion of a personal use asset. The van owners’ loss or gain from personal use assets will be disregarded: s 108-20(1) and s 118-10(3). Question 2: Reimbursement of Unused Annual Occupancy Fees of $2,000 Van Owners If an amount is repaid to a van owner, the amount will not give rise to assessable income or a capital gain. There is no general reimbursement principle (Rowe) and the reimbursement is in aspect of outgoings that were of a private nature and hence not deductible anyway.Also s 2035 (assessable resentment) will not apply. Question 3 Whether the gratuitous payment of $500 to the van owners is deductible to Snake Gully Pity Ltd The problem is that the payments are not really incurred in the course of carrying on the caravan park hire business.
It is more correct to say it is incurred in the process of bringing the business to a close. I also do not think that the cases dealing with expenditure incurred after the activity has ceased assist Snake Gully Pity Ltd (Placer Pacific, Brown, Jones).Those cases still require that the “occasion” of the outgoing be found in the carrying on of the business. I am not sure if this can be said here. The occasion seems to be going out of business.
Peyote v FACT provides a good factual precedent and one of high authority. Although dealing with the same business test unaware ten loss carry Toward provisions coal Developments (German creek) Is analogous as the finding there is that once a business has been sold activities relevant to completion of the contract of sale do not amount to carrying on the business but rather to selling it.Coal Developments (German Creek) is extinguishable on the basis that there the business was sold whereas here the old business is arguably wound down and the new income earning activity commences. I also do not think it is correct to say that the payments are related to the income from leasing the land to Moonrise Ltd under the development lease. As a matter of logic, they do not.
This is not because of there timing (I. E. Before that activity commences), but rather that they relate to settling the relationship with the clients of the caravan park business.On the other hand, the obligation to make the payments is a requirement of the Heads of Agreement. The pronouncement cases (as well as the child care and commuting cases) are relevant as this can be viewed as an expense of putting oneself in a position to earn income, and not an expense of earning the income. The fact the payments are voluntary, or that they arise from some kind of “moral obligation” does not prevent a deduction. Also, I do not think that the conclusion that they are “capital” as that term is understood under s 8-1 is appropriate, yet we need a capital conclusion for the comments below on s 40-880(1) (g).
The better way to put it is that it simply does not relate to income production of any activity. Griffin Coal involved a conclusion that that the pronouncement expenses were on capital account and were denied deductibility on that basis. There are conceptual problems with an analysis that suggests that someone can have expenses on capital account (in the Sun Newspapers sense) before they have commenced business. The only other deduction provision that may apply is s 40-880.
This refers to business capital expenditure that is not otherwise taken into account where the business is, was or is proposed to be carried on for a taxable purpose. It is arguable that this section applies to confer deductibility (over 5 years) Especially note 40-880(2)(b) which allows deductibility over 5 years for ‘business capital expenditure’ in relation to a business that used to be carried on. Also note (a) allows a deduction over 5 years for business capital expenditure in relation to your business.The problem with the reference to capital expenditure may be overcome by interpreting that term where used in s 40-880 to mean expenditure denied deductibility under s 8-1 on the basis either of a capital conclusion, or a lack of contemporary. This is a fair approach given the “plugging of blackball expenditure” role of s 40-880. Note also that the deduction under s 40-880 does not squire any income activity to be carried on over the four years of the deduction (after the initial year).There may be issues as to whether the expense is ‘in relation to your business’ or is ‘in relation too business that used to be carried on’. If at the time this expense is incurred the business is still being carried on so the expense is unlikely to be ‘in relation to a business that used to be carried on’.
Is it ‘in relation to your business’. We have concluded that the occasion of the expense is the closing down rather than the carrying on of the business. To obtain a sis-880 deduction we would have to conclude that an expense n closing down the business is ‘in relation to your business’.The phrase ‘in relation to’ NAS oaten Eden Interpreted as Dealing a wee pancreas AT connection Ana It would contrary to the clear object of this Sub-division to deny deductibility because an expense falls into the limbo of being between when a business is carried on and when it used to be carried on. We need to make sure that sis-880(3) does not deny a deduction. The business has to be carried on or ‘used to be carried on’ for a taxable purpose.
Taxable purpose is defined in asses(7) and includes the purpose of producing assessable income’.Clearly at some point the business was carried on for that purpose but a good student might question whether it is being carried on for that purpose at the time the payment of $500 is made. The use of the present tense ‘a business that you carry on’ might imply that the reference is to the business as carried on at the time the payment is made or at least in the income year in which the payment is made.
There will not be a deduction under Division 30 (gifts to certain bodies) for the $500. Further, one really has to strain things (credibility) to try and get recognition under the CUT regime for the $500.Students should briefly consider whether the amount can get into the cost base of any CUT asset but should not devote too much space to this. Question 4: Whether the reimbursements of occupancy fees paid in advance will be deductible to Snake Gully Pity Ltd If an amount is repaid, the tax treatment of the repayment would depend on the how the receipt was handled for tax purposes. If the “pre-received income”/”pre-received receipt” was not derived (because Snake Gully Pity Ltd was on the accruals basis of income derivation), then the refund should not be deductible.
It is more than likely that the many is on the accruals basis and that income is derived, in a similar fashion to Arthur Murray, on the expiry of time of occupation of the site. If in the unlikely event that Snake Gully Pity Ltd is on the cash basis, one view is that receipt would have been derived when received and be deductible on payout as it is in the ordinary course of a business that obtains pre-earned receipts that sometimes a refund will have to be made. In financial accounting deferral of recognition would normally be confined to accruals basis taxpayers.
However, the emphasis in the High Court Judgment was on he refund being an inherent characteristic of the receipt as a key factor in concluding that the advance receipts had not been derived. There is a view that the Arthur Murray principle might apply to cash basis taxpayers for this reason. See, for example, R W Parsons, Income Taxation In Australia, [1 1. 202] and [1 1. 203]. If Arthur Murray does apply to cash basis taxpayers then the result would be the same as discussed in the previous paragraph.Question 5: Will the premium on the development lease be included in Snake Gully Pity Lad’s assessable income? 5. 1 Non-Capital Gains Tax Provisions The receipt will not give rise to income.
It is a genuine lease premium receipt in the sense of being in return for granting the lease. The presence of competitors for the lease supports this. Further, there is no evidence that the lease premium is disguised rent, or a usage of land payment, which is what rent is.
Cuckoos Throbbed is clearly distinguishable; they entered into numerous leases thereby receiving numerous “lease premiums”.Case EYE is clearly distinguishable. There is no other non-CUT assessable income provision that would capture the receipt. Section 84 of the IOTA AY does not apply: s AAA. Nor does s 2 36 apply.
5 2 capital Gains Tax Provisions CUT event AY in s 104-10 will not apply, as the transaction does not involve the realization of a pre-existing asset: Gray. The premium receipt is clearly caught by CUT event Fl in s 104110. It will be a capital gain. There is no expenditure in granting the lease so the whole $200,000 will be a capital gain.
If, as appears to be the case, Snake Gully Pity Ltd has no other capital gains or capital losses, then the whole amount will enter assessable income Note, it will not be a discount capital gain as companies (that are not trustees) cannot make discount capital gains: s 115-10. It is not a discount capital gain anyway: s 115-25(3)(e). Question 7: Advise Moonrise of the income tax consequences (if any) of its obligations under the development lease It is better to do Question 7 before Question 6.
7. 1 Lease Payments – $300,000 Per Year This is clearly deductible under s 8-1 as it is for use of an asset used in the business . Would not be penalized in any way for not raising this point, but if a student does raise it, extra marks should be awarded. There is a fairly weak argument that any expense associated with the lease, to the lessee, is on revenue account as part of the usage cost of the land for he business. This will not be accepted. Accordingly, the focus of the tax rules is on an item-per-item basis. 7. 2 Lease Premium – $200,000 This is on capital account under s 8-1 .
It is not a payment for use of the land. It is clearly to obtain the lease from Snake Gully Pity Ltd. It is a once and for all expense.It provides a long lasting advantage, provided of course Moonrise Ltd continues to make the lease payments, which in the normal course of things will happen. Sun Newspapers should be referred to. It goes to the structure of Moonrise Lad’s business. Sub-sections 40-880 Anton apply because of sis-880(5)(d) as it is in relation to a lease or other legal or equitable right, also sis-880(5)(f) will exclude deductibility as it will be included in the cost base of the lease for CUT purposes (see below).
Further, s 40-25(1) (depreciable assets), or s 43-10 (capital works) do not apply.Section 88 of the IOTA 1936 does not apply: s AAA. The lease (or contractual rights in the lease) is a CUT asset: s 108-5(1)(a) and/or s 108-5(1)(b). The amount paid is clearly the acquisition cost of the lease: Event Number Fl in s 109-5 and s 110-25(2). Therefore, it is included n the first element of the cost base of the lease. The lease will expire on 31 October 2023.
This will trigger CUT event CA. The TAT agrees with this: paragraph 5 of Taxation Determination AD 98/23. There will be no capital proceeds for the CUT event. Therefore, a capital loss is expected.
The amount of the loss depends on whether other amounts can be included in the cost base (see 5. 3 and 5. 4 below). The following, students must, among other things, grapple with the “problem” that the payer of expenses (Moonrise Ltd) may not be the owner of the things that it has paid for.
Snake Gully Pity Ltd will be the owner, because at least two f the items appear to be fixtures (I. E. They become part of the land owned by Snake Gully Pity). There is clearly nothing in the facts that gives Moonrise Ltd the contractual right to take away the new office and manager’s residence and the upgraded road.The problem is that the incurred of expenditure, and the owner of the things obtained from that expenditure, is not the one (same) taxpayer.
The law in relation to tenant’s fixtures (I. E. A thing that becomes part of the land but may be removed by ten tenant Walton a reasonable time rater exploration AT ten lease) need not De mentioned here. 7. Upgrading Roads This expenditure is capital under s 8-1 as the expenditure provides a long lasting advantage. Note, it does not say that the expenditure is remedying defects; it says upgrading the roads.
Accordingly, the repair section also cannot apply: s 25-10. Putting aside the problem of “ownership” for now, the key question is whether s 40-25 (depreciating asset) or s 43-10 (capital works) applies? The answer depends on whether the expenditure involves an item of plant as defined in s 45-40. If the item is “plant”, then s 40-25 applies: s 43-70(2)(e) and s 45-40. This is in spite of the fact that the expenditure might give rise to an improvement or a fixture on the land: s 40-30(3). The cases are clear that an item can be plant even if it is a fixture.If the item is not plant, then it is likely to come within s 43-10, provided of course it meets the requirements in that section (e. G. Construction expenditure area).
In short, I cannot see how a road (upgraded road) comes within the definition of “plant” under the ordinary meaning. The roads, like the land generally, would only provide the “setting” (or to use another’s word, “venue”) on which Moonrise Ltd may carry out its income activity: Wanting Woolen Mills case, Imperial Chemical Industries case. Further, the upgrading of roads would not come within as 45-40(1)(c), (d), (e), etc, because of the land usage requirement therein.
In any event, it is more than arguable that the upgraded roads are “land” rather within s 4030(1)(a) rather than an “improvement to land”. If they are “land”, they cannot be a depreciating asset: s 40-30(1)(a). Further, note that if Division 43 applies to the item, Division 40 cannot apply: s 40-45(2)). Accordingly, the expenditure might be caught by s 43-10 (deduction conferral section).
We seem to have capital works because the upgrading of roads is probably thin the definition of a “structural improvement”. Certainly, sealing a road is within the definition of structural works: s 43-20(2) and (3).If sealing a road is within the definition, other ways of upgrading a road are also likely to come within the definition. We have a “construction expenditure area”: s 43-70 and s 43-75(1). The key here is that s 43-75(1) contemplates that a non-owner (I. E.
Lessee) can have a “construction expenditure area”. This is the case here as Moonrise Ltd is only a lessee of the land. Snake Gully Pity Ltd is the owner of the land, and therefore items that come fixtures on the land are owned by Snake Gully Pity Ltd (Ignore “tenant’s fixtures” here. It would not fit that anyway).The upgraded roads become a fixture or part of the land. The reason is the road upgrade work is attached/annexed to the land in such a way as to become part of the land. The degree of annexation or assimilation with the land cannot be greater, and the upgraded road cannot readily be removed without causing damage to the road/land and the upgrade work itself.
Thus, even though Moonrise Ltd has spent the $50,000, the thing that arises from the expenditure is owned by Snake Gully Pity Ltd. Section 43-120 clearly contemplates that a lessee can satisfy the requirement of having “an area”.And, the construction expenditure of the lessee is the amount spent: s 43-120(3). Further, Moonrise Ltd uses its area for the required Division 43 purpose (I. E. Purpose of producing assessable income). The upgraded roads are used by Moonrise Ltd, for example, by permitting its customers to travel on them, and its employees to use. Note also that Wendell ten lessee (Moonrise L 0) Is entitled to seductions, ten owner (Snake Gully Ltd) is not entitled to deductions: s 43-125(1)(b).
It looks like the rate of deduction is 2. % per year, on a daily basis: s 43-25(1) and first entry in box in s 43-140.Let us assume that deductions are claimed over 18 years and only full years (I.
E. Took two years into the lease to upgrade the roads). Note also that deductions do not commence until the construction of the capital works is complete and the works are used in the required manner (I. E. Income activity): s 43-30 and s 43-210.
Deduction: $capital works expenditure on roads x 2. 5% x 18. At this rate it would take 40 years to fully recoup the expenditure on capital works. Hence there will be undetected expenditure at the end of the development lease.At the end of the lease when Moonrise Ltd vacates the land, Moonrise Ltd will not be able to continue to claim deductions because the company has ceased to use its area in the required manner: s 43-140. This leaves the undetected expenditure that has not been claimed by Moonrise Ltd under s 43-10.
Unlike Division 40, there is no balancing deduction under Division 43 in these circumstances for the undetected expenditure. The question is, can Moonrise Ltd get recognition for this expenditure somewhere? Moonrise Ltd does not own the roads that were improved.Accordingly, it cannot include the undetected costs in this asset (I. . Road). The only hope is the 4th element of the cost base of the “lease” (CUT asset): s 110-25(5).
The expenditure incurred by Moonrise Ltd objectively increases the value of the lease (I. E. Commercially more desirable than one without upgraded roads). Secondly, the expenditure seems to be reflected in the lease at the time the lease expires (CUT event CA). It is arguable that the 4th element has tangible assets in its focus, not intangible assets like a lease.The Scottish case of Aberdeen Construction Group however, where inclusion in cost base of shares was only disallowed because the origin the debt was not reflected in the state or nature of the asset [a consideration that is no longer relevant under the Australian legislation], suggests that the equivalent UK provision could apply where the value of an intangible asset was increased. On balance, it appears to be included in the cost base of the lease. In any event, the TAT agrees with this: paragraph 4 of Taxation Determination AD 98/23.
Strictly, the amount of the initial capital expenditure is included but then the amount deductible over the term of the lease is excluded by, it seems, by s 110-45(2). 7. 4 New Office and Manager’s Residence The analysis here is basically the same as that above in regard to the road upgrade. There are a few points to note. The capital works will be a building, and not a structural improvement: s 43-20(1).
There is an argument that some part of the building will be “plant” under the definition in s 45-40(2) (I. E. Plumbing fixtures and fittings).Not a lot should be made of this. Section 43-170(1) will not apply to deny deductions attributable to the manager’s residence.
The reason is that Moonrise Ltd does not occupy the residence, and the manager will not be an associate of Moonrise Ltd. The manager will, most likely, be an employee or independent contractor of Moonrise Ltd: see definition of associate of a company in s 318(2) of IOTA 1936. There could be an issue if the manager was a controlling shareholder in Moonrise Ltd, but does not look like it as it appears to be a widely- none company.It snouts also De noted Tanat Moonrise Alt Is using ten Dulling (including the residence part) for the purpose of producing its assessable income even though the building is actually used by its employees and manager. There is an argument that the result of the application of the “convenient setting’ test of plant is sees obvious than the roads above.
This needs a discussion of the meaning of plant in cases like Wanting Woolen Mills and Imperial Chemical Industries and cases in the text. This includes references to “tools of trade” and “apparatus”.As implied above, the better view is that it would fail the plant conclusion.
It looks like the rate of deduction is 2. 5% per year, on a daily basis: s 43-25(1) and first entry in box in s 43-140. None of the entries in the first three boxes in s 43-145 apply as the designated use is not satisfied (e.
G. Hotel, motel, apartments, units, flats). Again at a . 5% rate it will take 40 years to fully deduct Moonrise Pity Lad’s expenditure. Hence at the end of the development lease there will again be undetected expenditure.The question is, can Moonrise Ltd get recognition for this expenditure somewhere? In short, everything said above in regard to the road upgrade and CUT cost base applies here, with the result that the amount spent on the new office and manager’s residence less Diva 43 deductions claimable should be included in the cost base of the lease.
5. 5 Demountable Units This expenditure is capital under s 8-1 (e. G. Long lasting advantage).
The question is whether the demountable units fall within Division 43 or Division 40? Different rates of deduction apply depending on the Division that applies.The better view is that Division 40 will apply. One starting point is whether the units amount to a structural improvement or a building in s 43-20. This in turn raises the question as to whether they are fixtures attached to land? The intent with which they were “attached”/”annexed” to the land is the key. They are unlikely to be fixtures as Moonrise Ltd did not intend to attach/annex the units to the land in such a way that they would become part of the land. The degree of attachment/ annexation is merely a pointer to what the intention was.The degree of annexation here is only slight (only for purpose of accessing utilities), and the units can readily be removed without causing damage to the land or the water and sewer connections and the units themselves. Accordingly, they retain the description of being a chattel.
There is an argument that these units were intended to remain on the land permanently, and therefore are fixtures. We probably need more facts. If they are fixtures, the only way to get out of Division 43 is to establish whether the units are plant within s 45-40. This requires a discussion of the notion of plant from the cases (I.
. Tools of trade of taxpayer’s activity). There would be no other way of getting out of Division 43. However, the better view is that they are not fixtures, and would remain chattels. Accordingly, one never gets into Division 43. It should be noted that caravans mounted on concrete blocks but that retained their wheels and which were capable of being moved from site to site were held or assumed to be “plant or articles” in the High Court decision in Tarpaper Pity Ltd v FACT 82 TACT 4105 at 4106 and 4110.
The units come within the meaning of a depreciating asset: s 40-30(1).Moonrise Ltd will be the holder of the units by operation of Item 10 in Table in s 40-40. That is, Moonrise Ltd is the owner of the asset. Moonrise Ltd uses the units for a taxable purpose (I. E. Producing assessed Income) even tong customers physically use the units: s 40-25(7). It will claim depreciation deductions over the effective life of the units.
The depreciation cost base will be $50,000: s 40180 and s 40-185. Moonrise Ltd can choose to use the prime cost rate or the diminishing value rate of depreciation in “regard to each unit”: s 40-65(1).It cannot be argued that the 10 units are “one” depreciating asset: s 40-30(4). On the other hand, it might be that Items 2 or 3 in the Table in s 40-40 applies.
If the units are fixed to the land and Moonrise Ltd has quasi-ownership rights over the units (e. G. A lease: s 995-1(1) definition of “quasi-ownership right”)), which it has, Moonrise Ltd will be the holder while it has the right to remove the units. If the units are an improvement to land (whether a fixture or not) and Moonrise Ltd does not have the right to remove the units, Moonrise Ltd will be the holder for the term of the lease.