LAW5230 Taxation Law Assignment: Analyzing CGT and Residency, 2019

This assignment solution addresses two key parts of taxation law. Part A examines the residency status of an individual with a working holiday visa in Australia, analyzing whether her income is assessable and taxable, referencing relevant sections of the ITAA 1936 and ITAA 1997, and applying case law such as Gregory v FC of T and Nathan v FCT. The solution determines the tax implications of various income sources including salary, prize winnings, and interest. Part B delves into the small business CGT concessions, tracing their evolution from the 1999 Federal Treasurer's announcement and subsequent legislative changes. It explores the eligibility criteria, the four CGT concessions available, and the evolution of the 'simplified tax system' (STS), including the increase in revenue thresholds and the 'pick and choose' approach to concessions. The analysis compares Australian CGT provisions with those in the UK, evaluating the principles of equity, simplicity, and efficiency within the tax regime.

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

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Table of Contents
Part A:........................................................................................................................................2
Issues:.....................................................................................................................................2
Laws:......................................................................................................................................2
Application:............................................................................................................................2
Conclusion:............................................................................................................................4
Requirement (I):.....................................................................................................................5
Requirement (II):....................................................................................................................5
References:.................................................................................................................................6
Part B: Small Business CGT Concession...................................................................................7
References:...............................................................................................................................17

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Part A:
Issues:
 Whether Catherine who has arrived in Australia with a 12 month working holiday
visa will be considered as Australian resident under “section 6 (1) ITAA 1936” or a
foreign occupant under “section 6-5 (3) ITAA 1997”?
 Will the salary earned by Catherine would be included in her assessable returns and
taxable within the ordinary concept of “section 6-5, ITAA 1997”?
Laws:
 “Section 6 (1) ITAA 1997”
 “Section 6-5 (2) ITAA 1997”
 “Section 6-5 (3) ITAA 1997”
 Gregory v FC of T (1937)
 Nathan v FCT (1918)
 Moore v Griffiths (1972)
 FCT v Spotless Services (1995)
Application:
Catherine will not be considered as Australian resident even though he stayed in
Australia for 12 months. In other words, Catherine is a foreign resident under “section 6-5
(3) ITAA 1997”. Citing “Gregory v FC of T (1937)” even though Catherine stayed in
Australia for 12 months, her behaviour demonstrated that he was a visitor1. Her main
objective was to have a working holiday in Australia and fund the same with the help of
casual employment and intermittent work2. While Catherine stayed in Brisbane she did not
1 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
2 Jones, Daryl. "Complexity of tax residency attracts review." Taxation in Australia 53.6 (2018): 296.

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treated any habitation as if it were her “home” or as separate from any other place where
somebody may stay while they are on working holiday. Referring to the description made by
the ATO it should be noted that majority of the people that come to Australia for a working
holiday or visit are not treated as Australian dweller inside the ordinary sense of the “section
6 (1) ITAA 1997”3.
The main reason for treating Catherine as a non-resident because her visit is very
much consistent with her visa requirements and she does not have any intention of staying in
Australia however only has the intention of having a holiday while simultaneously working
for a short time period. Unlike majority of the people, Catherine holds the working and
holiday visas which is consistent with her requirements of visa and does not has the purpose
of residing in Australia, but only has the intention of having a holiday in Australia and work
for some time before coming back to home once she has finished travelling.
Unlike majority of the individuals, her behaviour while existent in Australia is not
constant with this purpose and hence not consistent with being an Australian dweller.
Catherine will not be considered as an Australian occupant inside the conventional concept of
“section 6 (1) ITAA 1997” simply because she rents a shared house with other working
holiday makers or stayed in another place for the extended time period4. As the working
holiday maker, the first $37,000 of Catherine income will be levied tax at a rate of 15% and
the balance is taxed at the ordinary rates.
Apart from the residency status of Catherine, the sources of income are primarily
relevant for the Non-residents. Referring to “Nathan v FCT (1918)” determining the original
3 Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).
4 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data matching." Proctor, The 37.6
(2017): 18.

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source of earnings is regarded as the real, hard subject of fact5. Apportionment is considered
appropriate where the income is earned from the multiple sources. The salary from
employment in Wales earned by Catherine does not has the Australian sources and hence it is
not included in her taxable returns. While the salary paid to her for her work in café, hotel
and cattle station will be included in her assessable income since it has the Australian
sources.
Later Catherine also reports prize winnings of $250. Citing “Moore v Griffiths
(1972)”, the amount of $250 is a mere prize winnings and hence it is not taxable. While she
also reports an interest income of $50 received from Australian bank account6. Citing “FCT
v Spotless Services (1995)” the interest received from Australian bank account has an
Australian sources and will be subjected to tax in Australia for Catherine.
Catherine further reports the sale of excessive clothing, sleeping bags and other
personal items on the eBay in the month of June before leaving Australia7. As Catherine is
not carrying on the business of online selling the amount of $350 and hence it will not be
contained within in her taxable income for tax purpose.
Conclusion:
Conclusively, it can be stated that Catherine will be treated as non-resident inside the
“section 6-5 (3) ITAA 1997”. She will be held taxable on her salary pay and interest returns
that is earned from Australian sources. While the salary from Wales is not from Australian
sources and hence will not be considered taxable.
5 Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J. Australasian Tax
Tchrs. Ass'n 13 (2018): 307.
6 Taylor, John, et al. Understanding Taxation Law 2018. LexisNexis Butterworths, 2017.
7 Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian taxation law 2018.
Oxford University Press, 2018.

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Requirement (I):
If Catherine is a Resident
If Catherine is a Non-Resident
Requirement (II):

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References:
Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
Jones, Daryl. "Complexity of tax residency attracts review." Taxation in Australia 53.6
(2018): 296.
Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J.
Australasian Tax Tchrs. Ass'n 13 (2018): 307.
Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian
taxation law 2018. Oxford University Press, 2018.
Taylor, John, et al. Understanding Taxation Law 2018. LexisNexis Butterworths, 2017.
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).

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Part B: Small Business CGT Concession
Introduction:
The small business capital gains tax (CGT) concessions was announced on 21st
September 1999 by the Federal Treasurer. The requirements are based on milestone of
“Review of Business Taxation”. The main intention of federal government was to eliminate
the weaknesses to effective asset administration, improving capital movement, reducing the
complication and cost of compliance and making the CGT regime of Australia comparative
internationally (Sadiq and Marsden 2014). The “Division 152” comprised of four different
concessions for small business. To qualify for four CGT concession, the small business is
obligatory needed to satisfy the stringent tests. It is very much likely that the small business
would obtain noteworthy amount of concessional treatment given they are able to meet the
basic criteria.
Observation by several tax practitioners and academics have indicated that CGT
concession for small business is very complex. Concerns have been expressed that the
provisions have not been successful in attaining the desired purposes. This comprises of
critical assessment of “Division 152” against the traditional principles of good tax system.
The essay also includes comparative assessment of Australian and UK legislative provision
concerning the CGT concession for small business (Tapiolas 2017). The comparisons are
with the objective of highlighting the strength and weakness in the particular legislature to
better highlight the objectives of efficiency, simplicity and equity. The essay would examine
the CGT concession for small business comprised inside ITAA 1997. The enormous amount
of contribution that is made by the segment to the economy of Australia is the main
encouraging factor for this essay.

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Discussion:
Australia was regarded as the last OECD nations to levy the wide-ranging tax on
capital gains upon the institution of “Part IIIA under sec 160A to 160ZZU of the ITAA
1936” applicable from 20th September 1985 (Evans et al. 2014). The chief purpose of
publicizing the capital gains was to eliminate the one-sided benefit which was existent when
a taxpayer earned a tax free capital gain in comparison to those taxpayers that derived income
which were held for taxation. In view of that, CGT is applied when the asset is disposed that
is purchased on or following 20th September 1985. Assets which is purchased earlier that date
is usually exempted from CGT and treated as pre-CGT assets. The CGT rule do not levy any
kind of distinct tax on capital gains.
As stated under “sec 6-5 and 6-10 ITAA 1997”, a taxpayer is commonly considered
taxable on all the ordinary earnings and statutory earnings which is earned in relevant income
year (Pizzacalla 2014). Any form of net capital gains is treated as statutory earnings and taxes
are levied on the taxpayer on the basis of marginal tax rate. Majority of the OECD nations
have the CGT rules in place, the tax system of Australia like those of US and New Zealand
has the origins from UK.
Before analysing the use of small business CGT concessions, it is important to
concisely sketch the CGT system together with the applicable “superannuation
concessionary regime” that possibly correspondences with the present CGT system. For a
taxpayer to be considered qualified for small business CGT concessions, it is important that a
taxpayer should meet the basic conditions that is given in “section 152-10” (Kenny 2014).
This includes that a CGT event should arise in respect of the CGT asset to a “small business
entity” or the partners in the partnership which amounts to small business entity or when the

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taxpayer satisfies the maximum net asset value. The taxpayer should denote that the asset
should satisfy the active asset test (Norbury 2016). When a CGT asset amounts to share in
corporation or interest in the trust then there should be a CGT concession stakeholders in the
company or trust should have the contribution ratio in small business of at least 90%. On
meeting the basic eligibility criteria, a small business will be considered qualified for any one
or more of the above given CGT concession for small business.
The early purpose of “simplified tax system” (STS) provision was to enable the
qualified small business with a new policy so that they can deal with their tax. While
presenting the STS scheme in 2001, the aim of issuing the amendments was to lower the
income tax compliance burden of 95% on businesses (Toth 2014). The new STS packaged
enabled the small business with the choice of jointly adopting the package of four tax
treatments that included basic rules of depreciation, cash accounting for income tax purpose,
simplifying the rules of trading stock and the capability of claiming the immediate deduction
relating to tax for the pre-paid expenditure.
As stated previously, the added concessions relating to small business comprised of
CGT relief and GST for accounting on cash basis. Regardless of the taxpayers were provided
with CGT relief before 1999, the current regime was presented through the “New Business
Tax System” that came into effect from 1st September 1999 (Geljic, Koustas and Burke 2016).
The primary objective of introducing the amendments in 1999 was to offer the taxpayers of
small business with the straightforwardness and lowering the compliance cost by simply
rationalising and standardizing the criteria for eligibility of CGT concession for small
business. Even though the main operative provision stated under “section 328” continued to
be the same, certain significant amendments were made.

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In detail, under the eligibility test the yearly revenue threshold was increased from $1
million to $2 million, this allowed majority of the small business to gain the benefit of
concession. Another notable changes which was made under revised SBE framework
included that the small business was now permitted to “pick and choose” which individual
concession relating to tax they would prefer to accept, instead of simply being forced to adopt
the complete package of concession (Bembrick 2017). The CGT concession for small
business comprised of substantive business concessions over the last decade with the ultimate
objective of increasing the simplicity for eligible small business.
The customary tax procedure scheme necessitates the tax regime to meet certain
number of different and usually a contradictory criterion for assessing the “good policy”.
Equity, convenience, certainty and economy is commonly referred as traditional benchmarks
(Travers 2014). There are large number of different government and regulatory bodies which
usually accepts this criterion in certain form at the time of applying the new provision of
taxation regime as well as assessing the entire tax regime. Of late, Australia has undertaken
the principles of equity, sustainability, simplicity and efficiency. On introducing the
“simplified tax system” in 2001, the main objective was to enhance the transparency and
simplicity so that the compliance of small business is reduced. The CGT concessionary
packages were considered consistent with this objective.
Opposing to the statement of federal government, the literature critically evaluating
the CGT concession for small business have argued that they fail to satisfy the criterion of
“good tax policy”. The claims are mostly related to the possibility of increased complication
and cost of compliance within the system (Gaal 2016). For example, taking into account the
first claim relating to increased easiness, it is suggested that the choice of arriving into the
concessionary regime ultimately increases the intricacy by requiring a detailed personalized
evaluation, in this manner it further adds layers to an already difficult system. This type of

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taxation is time taking and expensive as well, based on whether any specialized advice was
sought. The mystifying explanation relating to the criterion, demonstrated the need for ATO
interpretation in successive taxation rulings further compounded the issue.
The lowered cost of compliance is the second claimed benefits under the
concessionary regime of CGT has also attracted further scrutiny. The institution of simplified
tax regime during 2001 was viewed as deliberate act of federal government to address the
rising amount of tax compliance cost burden that was faced by the small companies and offer
them with some relief. In an attempt to sell the “simplified tax system”, the federal treasurer
in a press release endorsed the “STS” because of benefits relating to compliance cost.
Nevertheless, in spite of the frequent claims that the application of STS may lessen the cost
of compliance that is faced by the small business, the writings which was soon released
following the publication established otherwise. An argument stated by Festa (2018) noticed
that small business has noticed that “STS” contained the similar cost of compliance or even
more than the present system.
There are some scholars that have assessed the perceptions of taxpayers regarding the
CGT concessions. Taking into the account the above given issue of tax increasing cost of tax
compliance. It is fact that all the businesses are faced with cost in conforming with several
laws relating to taxation and principles. Empirical lessons conducted by Bembrick (2019)
have revealed that the cost of tax compliance is very relapsing in nature, which means that
the small business have to bear an uneven share of tax compliance cost in comparison to the
larger businesses. There are other researchers such as Hicks and Tran (2014) have discovered
that the differences in cost of compliance amongst the Australian small, medium and large
businesses was very much noteworthy with large businesses having negative cost of
compliance following the accounting for tax offsets. While medium businesses had the

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compliance cost of approximately 0.01% of their total turnover and the small businesses had
the compliance cost of approximately 2.5% of the overall turnover.
According to scholars such as Kenny and Blissenden (2014) they have evaluated the
burden of compliance on the small business by performing a survey on the taxpayers. The
researchers have concluded that from the perspective of taxpayers, the compliance cost of
small business have come worse. The researchers have additionally stated that the either the
taxpayers were misled or they fail to understand the concessions which led to a opinion that
concessions were difficult and probably not worthy of the effort.
According to Tucker (2016) there are problems with the “Division 152”. Attention is
now shifted towards detailed problems which the practitioners and the taxpayers may meet
while dealing with the “Division 152”. A large number of problems have raised from
complexity in legislation. As per Slegers and Marateo (2019) there are challenging areas
inside the “Maximum Net Asset Value Test”. Initially, drafted legislation was applicable on
the discretionary trust which was confusing and problematic. As per the press release, there
were certain measures which were taken to make sure that the challenging areas inside the
terms of discretionary trust were now suppressed. Within the actual legislature, when the tax
Deductible Gift Recipients (DGRs) or the tax free entities were considered possible
beneficiaries of the trust, the assets of beneficiary that were taken belong to small business. If
the total assets which were controlled by businesses goes past $5 million, then it cannot gain
the access to CGT concession for small business.
The new measures assured that the distributions to tax free entities and the DGRs will
be overlooked for imposing the new control test for discretionary trusts. As per “section 152-
30”, it means that an entity would control the discretionary trust if the first entity or the small
business CGT affiliates are regarded as the trustee of trust or possess the power of

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determining how the trustee exercise their power. As stated by Chung (2016) the
consequences that arises for taxpayers that does not controls the trust implies that the asset
will sidestep the maximum net asset test and the taxpayers can escape having the asset of
trust counted under the maximum net asset test along with the assets under trust might not be
related with the taxpayer and ultimately fails to fulfil the “active asset test”.
As per Norbury (2015) a taxpayer is required to be mindful regarding the timing of
CGT assets sale. On finding that the market value of the CGT assets rises on the day of CGT
event, this may result the taxpayer to fail “maximum net asset test”. It is noteworthy for the
taxpayer to note that at this point there is hardly any provision for indexation of $5 million
threshold within the legislature with no modification for inflation. As per Crossingham
(2018) if the tax system is found to be demanding severely on a number of taxpayer and
casually on the others with the similar tax payment capacity, then this erodes the fairness
system of tax. A taxpayer that has CGT assets of greater than $5 million would have the
identical paying capacity with those tax payers that has more than $5 million of CGT asset.
This ultimately strikes directly to the issue of fairness.
To gain a better understanding of Australian CGT concession a comparative study
with UK CGT concession regime has been undertaken. Comparing the present CGT
concession for small business of Australia with UK would provide the basis for considering
the policy recommendation given under “sub-division 152-A”. The CGT concession for
small business of UK has been selected since the Australian regime is fundamentally based
on UK (Ioannou 2016). Unlike several countries the UK imposes tax on capital gains on the
preferential basis. For instance, when the assets are sold for a gain however the profits are
used in purchasing the new assets for using in business, then a relief from CGT is given.
Individual taxpayer which carries on the business and decides to incorporate are generally
entitled to relief. Concessions that are directed completely in the direction of small business

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is not regarded as the feature of UK CGT regime. Instead, concessions are accessible to all
the businesses irrespective of their size. Even though the proportion of CGT within the tax
mix is roughly 2% in both UK and Australia. 1172400
The chief CGT concession that are accessible to small business in UK are “taper
relief” and “retirement relief”. The “taper relief” lowers the chargeable gains that happens
on or after the 6th April 1998. The relief is provided after all other reliefs and permissible
losses. The overall value of reduction is dependent on the time span when the asset was held
for sale and whether the asset is business or non-business in nature (Dabner 2014). Upon
presenting the “taper relief” in 1998 the objective of the policy was to promote the long-term
view of holding investment. The “taper relief” signalled the removal of complex CGT
feature which is considered as chief amid those that are considered for indexation allowance.
As per “UK Finance Act 1998”, the chargeable gains are reduced on the basis of
period held within the preferential management of business assets. For assets held in
business, the chargeable gains are reduced by 7.5% for every 12 months held with maximum
amount of reduction going 75% following 10 years (Crossingham 2018). A taxpayer with
higher tax rate can possibly lower the taxable gains to 10% in relation to the business assets.
The “taper relief” is implemented following the allowance of capital losses.
Apart from the taper relief another CGT concession is the “retirement relief”.
Usually, the CGT concession in UK for business have been accessible to all size of business.
Nevertheless, the maximum or the ceiling limit applied to “retirement relief” efficiently
creates a restriction on the availability of this exemption to small business segment. The
retirement relief is given to those individuals that has attained the age of 60 or those that has
retired from pursuing their earlier job below that age due to ill health (Slegers and Marateo
2019). In case certain deposits of assets, the individual should retire from the concerned

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business but are free to pursue some other type of occupation. As per the explanatory
memorandum, the changes proposed by the government was mainly to promote the long-term
investment, encourage the business activity and introducing a fairer tax system. The CGT
concession of UK is mainly designed to provide simplification in the CGT system.
Preceding from above given paragraph it is promising to inspect the details of UK
“retirement relief” legislation in more detail, however from the perspective of comparison,
the principles that is discussed already is enough for comparison with present CGT
concession for small business in Australia and for supervision in forming the suggestion for
modifications to “Sub-division 152-A” which will be addressed in the later part of the essay.
Preceding from the above given critical evaluation, a proposed amendment should be
made to active asset test. In respect of equity, fairness and social justice proposes that several
assets that are dropping out of the present description of “active asset” must be afforded with
identical allowances (West and Lam 2016). While the efficiency or objectivity issues
proposes that business must be treated correspondingly, irrespective of whether they are
small or large or used by the employee or in respect of the work context. The rollover
concession as well as retirement concession is considered important for the small businesses.
To simplify the “active asset test”, it should be broadened to include majority of business
assets. This would result in rise of supplementary need to keep the policy changes revenue
neutral. It is proposed that removal of 50% small business reduction and 15-year exemption
must be considered. Validation of small business CGT concession in this way would assist in
improving the efficiency, equity and simplicity.
Conclusion:
In the face of the complexity and inborn costs linked with the usage of CGT small
business concession, several researchers perceive this concession as the highly valued

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concession. This should be understood based on the pure size of tax minimisation benefit
which can be obtained by using the CGT small business concessions, which is a fact that is
not lost by the small businesses. The outcome obtained suggest that CGT concession for
small business is very complex, complicated to interpret and finally results in significant cost
of compliance for clients. The small businesses are required to spend substantial amount of
time in determining their admissibility for one or more concessions. The inherent cost linked
with concessions complexity, some competent small business may not use this concession
since they cannot afford to bear the cost without any benefits. This ultimately violates the
principle of equity. conclusively, the CGT concession for small business is of greater benefit
however the complexity associated with rules and cost requires an extensive review.

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References:
Bembrick, P., 2017. Mid market focus: CGT concessions when selling business
premises. Taxation in Australia, 51(11), p.600.
Bembrick, P., 2019. Think you're selling shares in a small business? Guess again. Taxation in
Australia, 54(5), p.241.
Chung, E., 2016. Tax tips on selling your real estate agency business. REIQ Journal, (Feb
2016), p.34.
Crossingham, D., 2018. Business sale contracts: CGT and timing issues. Taxation in
Australia, 52(9), p.497.
Dabner, J., 2014. CGT planning for business sale (gone wrong). CCH Tax Week, 2014, pp.1-
4.
Evans, C., Hansford, A., Hasseldine, J., Lignier, P., Smulders, S. and Vaillancourt, F., 2014.
Small business and tax compliance costs: A cross-country study of managerial benefits and
tax concessions. eJTR, 12, p.453.
Festa, D., 2018. CGT amendments: Unnecessary complications for small business. Taxation
in Australia, 53(1), p.18.
Gaal, J., 2016. Small business 50% reduction. CGT Small Business Reliefs: The
Comprehensive Practitioner's Handbook, p.215.
Geljic, S., Koustas, H. and Burke, D., 2016. Small business restructure roll-over. Taxation in
Australia, 50(7), p.404.
Hicks, A. and Tran, A., 2014. Small business concessions. Taxation in Australia, 48(7),
p.367.

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Ioannou, J., 2016. Small business restructure. Taxation in Australia, 51(1), p.33.
Kenny, P. and Blissenden, M., 2014. The $6 million net asset value test for small business.
Kenny, P., 2014. Small business CGT concessions: The SBE and $6 m net asset value basic
conditions. Tax Specialist, 17(4), p.157.
Norbury, M., 2015. Track and the CGT small business concessions. Taxation in
Australia, 49(10), p.622.
Norbury, M., 2016. Tax cases: Dividend access shares and the small business CGT
concessions. Taxation in Australia, 50(7), p.410.
Pizzacalla, M., 2014. Mid market focus: Small business CGT concessions-out of
control. Taxation in Australia, 48(8), p.410.
Sadiq, K. and Marsden, S., 2014. The small business CGT concessions: Evidence from the
perspective of the tax practitioner.
Slegers, P. and Marateo, D., 2019. Small business restructure roll-over: Planning
issues. Taxation in Australia, 53(8), p.424.
Tapiolas, L., 2017. Restructuring: Rollovers, Small business restructure rollovers and small
business CGT concessions.
Toth, S., 2014. Small business CGT and deceased estates. Taxation in Australia, 49(5), p.249.
Travers, G., 2014. CGT small business concessions. Tax Adviser's Guide to Part IVA: A
Practical Guide to the Application of the General Anti-avoidance Rule, The, p.69.
Tucker, J., 2016. Draft legislation to enhance flexibility for small business to
restructure. Bulletin (Law Society of South Australia), 38(1), p.28.

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West, M. and Lam, D., 2016. Small business restructure roll-over-Opportunities and
traps. Taxation in Australia, 50(9), p.521.