LAW5230 Taxation: CGT Concessions, Residency & Income Assessment

This assignment provides a detailed analysis of various aspects of Australian taxation law. Part A addresses three scenarios: determining Kate's residency status while working in Fiji and the tax implications of her income, assessing whether free accommodation provided to Bernie is considered assessable income, and determining if compensation received by Melanie for contract termination is taxable income. These scenarios involve applying relevant sections of the ITAA 1936 and ITAA 1997, as well as relevant case law. Part B delves into CGT Small Business Concessions, discussing their policy objectives, significance, recent reforms, and recommended amendments. It highlights the complexities and challenges in interpreting and implementing these concessions, emphasizing the need for simplification and clarity. The assignment concludes by advocating for improvements to the legislation to reduce compliance costs and better support small businesses.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to Part A:.......................................................................................................................2
Answer to scenario 1:.................................................................................................................2
Issue:..........................................................................................................................................2
Laws:..........................................................................................................................................2
Application:................................................................................................................................2
Conclusion:................................................................................................................................3
Answer to Scenario 2:................................................................................................................3
Issue:..........................................................................................................................................3
Laws:..........................................................................................................................................3
Application:................................................................................................................................3
Conclusion:................................................................................................................................4
Answer to scenario 3:.................................................................................................................4
Issue:..........................................................................................................................................4
Laws:..........................................................................................................................................4
Application:................................................................................................................................4
Conclusion:................................................................................................................................5
Part B: CGT Small Business Concessions.................................................................................6
Introduction:...............................................................................................................................6
Small business CGT concessions:..............................................................................................6
Policy objectives of Small Business CGT Concessions:...........................................................7

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Significance relating to Small Business CGT Concessions:......................................................8
Recent reformation:....................................................................................................................9
Recommended further amendments in Small Business CGT Concessions:............................11
Conclusion:..............................................................................................................................12
Reference List:.........................................................................................................................14

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Answer to Part A:
Answer to scenario 1:
Issue:
 Will Kate would be held as Australian resident while she was away from Australian
when she was in Fiji for three-year time period?
 Will her part time earnings from teachings would be included in assessable income?
Laws:
a. “Subsection 6 (1) of the ITAA 1936”
b. “FCT v Applegate (1979)”
c. “FCT v Jenkins (1982)”
d. “Section 6-5 of the ITAA 1997”
Application:
The situation of Kate defines that she was born in Australia and carried the profession
of teacher in Toowoomba, following the resignation from her employment she moved with
her husband in Fiji. “Subsection 6 (1) of the ITAA 1936” ascertains the domicile of a person
along with the intention of where a person chooses to make their home indeterminately
(Barkoczy 2014). As held in “FCT v Applegate (1979)” it is necessary to consider the intent
of an individual where he or she decides to make their home indeterminately.
The situation of Kate outlines that her permanent place of abode is outside Australian
with no intent of making her home out of Australia. The court in “FCT v Jenkins (1982)”
defined that to determine a person permanent place of abode the original length of stay out of
Australia (Brokelind 2014). Likewise, referring to the view of commissioner Kate has
maintained her bank account in Australia and derived interest and rental income. She

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maintained her domicile in Australian and would be held as Australian resident in respect of
extended decision under “subsection 6 (1) of the ITAA 1936”. Additionally under section 6-
5 of the ITAA 1997 her salary from the part-time teachings will be included in her assessable
income.
Conclusion:
Kate will be held as “Resident of Australia” with respect to “subsection 6 (1)”
because her domicile is in Australia with no intention of taking up the overseas residency.
Answer to Scenario 2:
Issue:
 Will the value of free accommodation provided to Bernie from his clients will be in
his assessable as income?
Laws:
a. “Tennant v Smith (1892)”
b. “Federal Commissioner of Taxation v Cooke and Sherden (1980)”
c. “Section 21 of the ITAA 1936”
Application:
An item having a character of income which is derived would be considered as the
income based on the amount of its realisable value. The court of law in “Tennant v Smith
(1892)” stated that the value of free accommodation given to bank employee does not
constitute income (Coleman and Sadiq 2013). As evident in the situation of Bernie where one
of his client named Paul instead of paying for the delivery service, offered Bernie with free
accommodations in his rental property for six months.

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Citing the reference of “Federal Commissioner of Taxation v Cooke and Sherden
(1980)” the federal court in its verdict stated that the value of free overseas holidays that is
provided to the retailers based on the sales incentives scheme would not be considered as
income. However, in case of Bernie “section 21A of the ITAA 1936” would be bought into
action as the value of benefit received is a non-cash business benefits and will be included in
his assessable income (Grange et al. 2014).
Conclusion:
Noting the legislative response of “section 21A of the ITAA 1936” the non-cash
business benefits received by Bernie will be considered in taxable income in respect of arm’s
length and will be included in assessable income.
Answer to scenario 3:
Issue:
 Will the compensation payment received by the Melanie from her termination
contract would be included in the taxable income under section 6-5 of the ITAA
1997?
Laws:
a) “FCT v Californian Oil Products (1934)”
b) “Section 6-5 of the ITAA 1997”
Application:
As stated under “section 6-5 of the ITAA 1997” income generated from the ordinary
concept would be considered as the taxable income (James 2014). The situation of Melanie
provides that she carried on the business of cleaning and generated an income of $500,000.
Nevertheless, Melanie biggest customer that accounted 95% of the sales undertook the

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decision of terminating the contract and paid Melanie with a compensation of $200,000 for
termination of contract. It is worth mentioning that the agreement represented whole of the
business which the taxpayer carried on.
Citing the reference of “FCT v Californian Oil Products (1934)” the court of law
stated that the termination payment constituted capital account (Kenny 2013). Hence the
amount received by Bernie is identical to the situation of the above stated case and therefore
it would not be considered as assessable income. Melanie upon agreeing to accept the
termination payment lost the right of giving service to other party and constituted that she is
out of business (Krever 2013). Therefore, the sum received by Melanie is a capital receipt.
Conclusion:
The compensation payment received following the termination of contract represented
the loss of service with loss of making profit as well. Hence the compensation receipts will be
considered as capital receipts and would not be considered assessable income.

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Part B: CGT Small Business Concessions
Introduction:
The current study is based towards the advance viewers with discussion on the small
business capital gains tax concessions. The discussion would include the critical discussion of
the overall policy objectives of the Small Business CGT concessions (Morgan, Mortimer and
Pinto 2013). Additionally, the report will be highlighting whether the current regimes that has
been stated in the Small Business CGT concessions are sufficient to meet the current
objectives or they require reformation with further amendments.
The small business concession that are contained under the Division 150 of the ITAA
1997 aims at improving the capital gains tax relief that are obtainable to the small business in
order to help them in funding of the business expansion and providing for the retirement as
well (Sadiq et al. 2014). Ever since the institution of the concessions in small business the
theme has been the matter of main evaluations by the taxation board and subsequently law
making amendments has also been made. Even though the reviews have been sought to make
the operations easy for the CGT concession in small business, though the taxpayers and the
practitioners are presently facing with the countless and definitional based rules that are
challenging to implement and interpret.
Small business CGT concessions:
The present CGT concessions in small business were adopted to streamline and widen
the concessions of CGT that are accessible to the small business. The policy aims at
identifying the capital proceeds originating from the sale of CGT assets that are held by the
taxpayers in executing their business activities (Woellner 2013). The businesses were
regularly dependent upon by the small and medium size business to either fund the business

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or their retirement. Subdivision 152-A defines the necessary criteria for the CGT concessions
of small business. There are some concessions that requires specific conditions to be met.
There are generally four main concessions that are obtainable to the small business taxpayers;
a. Under Subdivision 152-B small business are provided 15-year exemptions
b. With respect to subdivision 152-D a 50% reduction in active asset is provided to the
small business taxpayers
c. Under subdivision 152-D taxpayers are provided with retirement concessions
d. The subdivision 152-E defines that the small business are provided with the roll over
relief.
An important consideration of the CGT concessions of small business is that a capital
gain would be considered for 15-year exemption is overlooked completely and is applicable
in urgency basis to the other concession (Woellner et al. 2013).
Policy objectives of Small Business CGT Concessions:
The conditions include that there should be a CGT concession in respect to the CGT
assets during the tax year. The CGT event must result in capital gains that would be
considered for assessment under the general provisions of the CGT (Geljic, Koustas and
Burke 2016). Another policy objective of the CGT concessions is that the tax payer must
satisfy either the maximum net asset value conditions or should meet the test of small
business entity. The subdivision 152-A sets out the conditions that the CGT asset meet the
test of active asset test.
After the adoption of tax laws amendments act 2009, admission of CGT concession
for small business was extended upon the introduction of the new business rules (West and
Lam 2016). The taxpayers that owns the CGT asset for carrying on of the business activities
by the associate or the associated unit of the taxpayer might be able to gain an access on the

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CGT concessions given that the business meets the small business enterprise test.
Furthermore, one or more partners that owns the CGT asset for carrying on the partnership
business should meet the test of small business enterprise.
Significance relating to Small Business CGT Concessions:
As stated in the above explanation the study focuses on criteria to gain the access to
the concessions in small business CGT that are stated under the “Subdivision 152-A”. When
it is noticed that the taxpayer meets the conditions the subdivision of 152-A might allow the
access to the CGT relief to reduce the capital gains is lowered by one or more of the four
concessions (Yuan 2017). Notably, CGT is regarded as the most noteworthy possible
advantage to those that satisfies the necessities. Nevertheless, the CGT test recently has
attracted wide range of disapproval relating to difficulty and apparent absence of equality.
According to Evans et al. (2014) in current years the sector of small business is of
vital importance to Australia. Governments are intensely helping the small business to
flourish by providing taxation incentives. Survey conducted by Sanderson (2015) stated that
the taxpayer in relation to the CGT concessions for small business and assessed the effect of
related cost of compliance. The researchers have founded that a large number of respondents
have bought forward their agreement that it is difficult to understand the CGT concessions.
Furthermore, the ATO has agreeably acknowledged that the interpretation and problems of
compliance is related to the small business CGT.
The problems of agreement and supervision that are related with the CGT concessions
of small business are acknowledged universally. Nevertheless, they cannot be regarded as the
problems that can be dismissed but also significantly contributed to the Australian economy
strength (Hicks and Tran 2014). These assist the taxpayers of the small business to prosper in
the small business and deliver for their superannuation. It would be of substantial advantage

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for the small business if an improvement to the legislation is made in order to reduce the cost
that are related with the compliance and administration. Several parties have documented
their response that the CGT concessions of small business are extremely complex.
There are speculations that the provision of the CGT is not attaining the desired
outcomes. According to Chung (2016) there is a wide range of acknowledgement that the
load of corporate levies generally falls largely on the small businesses and this ultimately
depresses reserves and investment with damaging impacts to the entire economy of Australia.
Widespread attention is directed towards the specific problems faced by the tax consultants
and taxpayers experienced in dealing with Division 152 and demanded for reformation.
Recent reformation:
The division 152 was created with the objective of reducing the compliance cost.
Recent reformation includes rationalisation of small business CGT Concessions and provider
higher amount of flexibility in measuring the concession (Ma 2015). The Tax Laws
Amendment Act was enacted in 2007. These amendments were completely concessional in
character and targets are improving the access to the concessions. The recent reformations in
the CGT measures have placed emphasis on the overall objective of economic growth. The
reformation is in agreement with the economic case of promoting investment by small
business. By offering an attractive environment of tax, the concession promotes investment
and reinvestment by the persons as this would help in bolstering the overall growth of
economy.
The Tax Laws Amendment Act 2007 introduced a 20% significant individual test that
enables the taxpayers for a period of eight years to directly gain access of the CGT
concession stakeholders in lieu of previously controlling 50% individual test. Under this test
only two individuals could be directly benefit from the CGT concessions that are in relation

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to the sale of directly or held shares or trusts interest (Kenny and Blissenden 2014).
Introducing a supplementary test permits a significant individual to indirectly gain the access
of concessions where there are CGT concession stakeholders in the organization or trust.
Importantly these stakeholders possess at least 90% participations in the small business that
holds share in business or interest in trust.
The reformations made allows an affiliated and associated business to include the
negative values of the net assets in computing the maximum net asset value test (Long,
Campbell and Kelshaw 2016). The recent reformation that is made restricts the partnership
firms from including the net worth of the CGT assets under the test of net asset value where it
is noticed that partnership is an associated company. This is because the taxpayers are
granted to receive a minimum of 40% of the partnership net income.
The recent reformation states that restricting the addition of the market value of a
person’s residence in the computation of maximum net asset test value up to the extent that it
is employed with the objective of making income (Somers and Eynaud 2015). Reformation in
the active asset helps in making sure that the asset can still be considered as the active asset
where the business creases is operations before twelve months of the CGT event. The recent
reformation in the CGT asset has simplified the exemption relating to retirement where the
company or the trust claimed the exemption since it is not obligatory that a CGT concession
stakeholders should retire to access the exemption. This is because the exempted sum will be
considered as the employment termination payment.
The reformation made to the CGT concession broadens the small business rollover
relief as this allows the taxpayer to select a rollover of the capital gain prior to acquiring the
replacement of the active asset or making a capital improvement to the asset (Stewart and
Thomas 2016). There is an increased flexibility of the small business rollover by making sure

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that it is available when the part of the capital gains is rolled over. The recent reformation
made also extends the small business rollover as it enables its applications or a portion of the
deferred gain in improving the existing active asset. Reformation in the CGT concession
ensures that the lawful representative of the deceased or the beneficiary of the deceased estate
can access the concessions upon the occurrence of the CGT event inside the span of two
years of the deceased death.
Recommended further amendments in Small Business CGT Concessions:
There has long been identified that the compliance cost imposes a higher burden on
the small business. It is not surprising that reduction in the compliance cost as the purpose for
introducing the Division 152 (Trad and Freudenberg 2017). The objective of reducing the
cost of compliance can be viewed as the most noble and undouble the politically popular
means of further recommendations to the CGT concessions of small business. The so called
scheme of simplified taxation system for the small business is believed to have failed
considerably in this respect and doubts have been raised that whether the division 152 is any
better on this ground. Reduction in the compliance costs and capital gains tax can be
considered equally exclusive.
On the other hand, one of the most dubious and impleaded aspects of the concession
of small business concession is the taxpayer’s capacity to meet the $6 million maximum be
asset value test. In real scenario several small business taxpayers whose eligibility in
satisfying the criteria of $6 million maximum net asset value test fail to take into the account
the net value of the CGT assets of the associated entities (Somers and Eynaud 2015). These
small entities erroneously omit the pre-CGT acquired assets or post acquisition of the asset
namely the depreciating assets or trading stocks that does not produce capital gains but
however must be accounted in the computation. It is recommended that the individual $6
million maximum net asset value test must be substituted by some alternative unprejudiced

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eligibility test. This can be done through the revised aggregate turnover test that can include
the concession to progressively reduce the above stated threshold limit.
In terms of the equity and criteria of efficiency there is a reasonable grounds for
extending the concession to the small business. In respect of fairness the rollover respite must
be made accessible for the purpose of spontaneous disposals. This includes obligatory
acquisition, corporation takeover and destruction of assets through natural disaster (Ma
2015). Based on the grounds of competence, recommendations is made for the rearrangement
of capital gain where the taxpayers are rolling down their profits of the sale of an asset to the
bigger asset so that a business can grow. Additionally a case must be sought for rollover of
CGT asset or deferral whenever there is a lawful alteration in the ownership nonetheless no
actual monetary variation such as the asset is being transported inside the solely owned
business group.
The concession for rollover and the retirement concession are regarded vital to the
small business. To make the active asset test easy to understand it is necessary to include
most of the commercial CGT assets (Chung 2016). With that being stated, there is a need for
removal of 50% small business reduction and 15-year exemption must be taken into account.
Rationalising the small business CGT concessions might help in improving the fairness,
competence and straightforwardness.
Conclusion:
In agreement with the strong influence made by the small business CGT in the
economy of Australia, the provision of reasonable concession in this sector would help in
thriving and promoting the broader community. The capital requirement of the small business
can necessitate an owner to make a large contribution of cash so that the business remains

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solvent. The small business CGT concession has always been considered as the generous and
the recent reformation in the rules has made the rule impressively substantial.
The current reformation has widened the taxpayer’s scope regarding the eligibility for
concession and there is a general perception that no taxpayers suffers from the changes.
However, the amendments that has been made recently have increased the small business
CGT concessions for the CGT assets that are held passively. The alternative usage of
turnover test is more likely to raise the number of taxpayers that are eligible for concessions
and may represent that the capital gain that are up to $16 million can be lowered to nil if the
CGT asset concession shareholders are entitled for reduction. Despite the recent changes
there is a need for equity and efficiency in the small business CGT as the active assets test
requires to be reduced in order to promote more equal results.

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