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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 107
o
This prevents property investors trying to claim deducons prior to selling the property by relying on the
trading stock rules
MATCHING RULES FOR PREPAYMENTS
Prepayments are about situaons where someone will make a payment, and an element of the payment relates to a
future income tax year
EA 3
Prepayments
(1)
This secon applies when—
(a)
[a taxpayer has been allowed a deducon]; and
…
(c)
some or all of the expenditure is unexpired … at the end of the … income year.
(2)
This secon does not apply to expenditure incurred on—
(a)
revenue account property …
(b)
trading stock …
…
(3)
The unexpired poron of a person’s expenditure at the end of an income year—
(a)
[counts as income for that year]; and
(b)
[is allowed as a deducon in the following year].
If the payment is deducble (i.e. sasfied the general permission and is not limited by other provisions) but some of it
relates to a future income tax year, then it is deducble in that future income tax year
o
For example:
An expense of $1000 is incurred in February 2020, but $200 of it relates to the 2019-20 income tax
year (which ends on 31 March 2020) and $800 of it relates to the 2020-21 income tax year
$800 is unexpired at the end of the current income tax year
You claim the full $1000 in deducons, but you add back the unexpired expenditure as income ($800)
and so you get a net deducon of $200
You get a full deducon for the $800 in the next year
DEDUCTIONS FOR FINANCIAL ARRANGEMENTS
In most instances, the Income Tax Act does not operate on Simons’ definion of “income” – but in the case of financial
arrangements, it largely does (i.e. these rules capture the economic gain concept in Simons’ definion)
o
Prior to the financial arrangement rules, one company with X amount of profit wants to be matched with
another company with X amount of losses – the two companies would do transacons where they would
prepay their interest or do major transacons that result in instantaneous transfer of profit, but then is
transferred back over a longer period of me, the result being that the companies could arbitrage between
profit and loss companies
o
The basic aim of the financial arrangements rules is to address this issue and provide for the taxaon of
transacons (and other arrangements) providing for deferred payment
More parcularly, their aim is to provide, in the case of such transacons, for both income and
expenditure to be spread over the term of the arrangement. Such spreading is appropriate in
principle. Perhaps more importantly, it is also necessary to prevent avoidance.
Where you have financial instruments, you need to fairly ascribe the economic gain over the period of
the financial arrangement – you spread income and expenditure over the term
Examples of financial arrangements include:
o
the issue of a non-interest-bearing debt instrument at a discount
o
a sale of real estate providing for (a) immediate transfer of tle, (b) payment of the price in five years’ me, (c)
no provision for interest, but (d) the price adjusted upwards to compensate for the delayed payment
X purchased a house for $700,000, and its market value now is $1,000,000
X sells it to Z now for $1.1 million, but Z makes the payment in 2 years
The pares are trying to convert the me value of money (the difference between being paid now and
being paid in 2 years) into a non-taxable capital gain rather than sele the property now and loan the
$1 million upon which you charge taxable interest
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School:
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Course:
Great resource for chem class. Had all the past labs and assignments
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Santa Clara University
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