Handbook

This course identifies and builds upon a conceptual framework (CF) for the analysis of the income tax (including capital gains tax (CGT)) implications of commercial transactions, largely in the small and medium enterprise (SME) market.

‘Commercial’ transactions are those transactions carried on by businesses, or in a business-like way.

This course examines in detail a select range of important commercial transactions, but the CF should aid the ‘tax’ examination of any commercial transaction.

The CF recognises the importance of ascertaining the correct (or best) view of the current tax law treatment of a particular transaction, but the CF is also evaluative as it embodies conventional higher level tax policy principles (such as revenue adequacy, equity, efficiency/neutrality, and simplicity) as well as asking whether the purpose of the treatment (e.g. legislative or administrative intent) has been achieved.

At first, the course examines briefly the conventional paradigm of assessable income and deductions in the ordinary course of carrying on a continuing business, whether selling stock, providing services, or both. Students should be familiar with this territory from previous studies or work experience.

The course then considers two often controversial and challenging types of ‘isolated’ commercial transactions which are not in the ordinary course of business and test the scope of the income principles enunciated by the High Court in the Myer Emporium decision (1987).  These transactions are isolated profit-making transactions (especially involving property) and transactions where the replacement principle applies (including compensation and insurance receipts).

The course moves on then to consider the way that costs of commercial transactions are allocated for income tax purposes. This can be, for example, by way of straightforward deduction, entry into the cost of trading stock, a revenue asset, or a CGT or depreciating asset, or in the case of certain ‘blackhole expenditure’, by way of as a special deduction. The course will also consider certain specific costs such as those from transactions involving financing, leasing, legal fees and repairs.

The course concludes by considering some important issues about the timing of tax recognition for transactional income and costs, including situations where tax consequences (on the cost or income side) are brought forward or deferred. For example, prepaid expenses, instalment and terms sales, and earn-out arrangements on the sale of business.  Various issues regarding the interplay and interaction of the various capital asset and deductions rules will also be considered in passing.