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Taxation Law BTF3931
I. AUSTRALIAN TAX SYSTEM ................................................................................................... 10
1.1 Introduction to the Australian Tax Laws ........................................................................................ 10
1.1.1Technical differences between Tax Law and Accounting .................................................................. 10
1.2 Sources of Tax Law ....................................................................................................................... 11
1.2.1 Legislation ......................................................................................................................................... 11
Income Tax Legislation .......................................................................................................................... 11
Fringe Benefits Tax Legislation .............................................................................................................. 11
GST Legislation....................................................................................................................................... 12
1.2.2 Sources of Tax Law ........................................................................................................................... 12
Case Law ................................................................................................................................................ 12
Rulings ................................................................................................................................................... 12
1.3 Functions of the Tax System .......................................................................................................... 12
1.4 Power to Tax ................................................................................................................................ 13
II. INTRODUCTION TO INCOME TAX ......................................................................................... 14
2.1 Income Tax Equation and Income Tax Rates .................................................................................. 14
2.1.1 Income Tax Burden ........................................................................................................................... 14
2.1.2 Income Tax Formula ......................................................................................................................... 14
Taxable Income ...................................................................................................................................... 14
Tax Offsets ............................................................................................................................................. 15
Income Tax Rates ................................................................................................................................... 15
2.2 Levies and Charges ....................................................................................................................... 16
2.2.1 Medicare Levy .................................................................................................................................. 16
2.2.2 Medicare Levy Surcharge ................................................................................................................. 17
2.2.3 Repayments of Higher education debts ........................................................................................... 17
III. RESIDENCE AND SOURCE ................................................................................................. 19
3.1 Residence ..................................................................................................................................... 19
3.1.1 Individuals ......................................................................................................................................... 19
Test 1: A person who resides in Australia (Ordinary concepts) ............................................................ 19
Test 2: Domicile test .............................................................................................................................. 21
Test 3: 183-day test ............................................................................................................................... 22
Test 4: Superannuation test .................................................................................................................. 22
3.1.2 Companies ........................................................................................................................................ 23
Test 1: Place of Incorporation Test ........................................................................................................ 23
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Test 2: Central Management and Control Test ..................................................................................... 23
Test 3: Controlling Shareholders Test ................................................................................................... 23
3.1.3 Dual Residency and Tie-Breaker Provisions ..................................................................................... 23
3.2 Source .......................................................................................................................................... 24
Sale of Goods (Trading Stock) ................................................................................................................ 24
Sale of Property other than Trading Stock ............................................................................................ 24
Services .................................................................................................................................................. 24
Interest .................................................................................................................................................. 25
Dividends ............................................................................................................................................... 25
Royalties ................................................................................................................................................ 25
IV. GENERAL CONCEPTS OF INCOME ..................................................................................... 26
4.1 Ordinary Income (General) ............................................................................................................ 26
4.2 Prerequisites and Characteristics of Ordinary Income .................................................................... 26
4.2.1 Prerequisites ..................................................................................................................................... 26
Cash or Cash convertible ....................................................................................................................... 26
Real Gain ................................................................................................................................................ 27
4.2.2 Characteristics .................................................................................................................................. 28
Regular/Periodical receipts ................................................................................................................... 28
Flow ....................................................................................................................................................... 28
4.2.3 Other General Principles .................................................................................................................. 29
V. INCOME FROM PERSONAL SERVICES AND EMPLOYMENT .................................................... 31
5.1 Ordinary Income as reward for services ......................................................................................... 31
5.1.2 Does the receipt show a nexus with the service? ............................................................................ 31
Salary Sacrifice ....................................................................................................................................... 31
Tips ........................................................................................................................................................ 32
Personal gifts and voluntary payments ................................................................................................. 32
Prizes and chance winnings ................................................................................................................... 33
5.1.3 Non-Cash benefits ............................................................................................................................ 34
5.1.4 Capital receipt or personal service ................................................................................................... 34
Changes to entitlements ....................................................................................................................... 35
Receipts for entering a restrictive covenant ......................................................................................... 35
Sign-on fees ........................................................................................................................................... 36
5.2 Section 15-2: Statutory Income from Services and Employment ..................................................... 37
First Requirement .................................................................................................................................. 37
Second Requirement ............................................................................................................................. 37
Third Requirement ................................................................................................................................ 38
VI. INCOME FROM PROPERTY ............................................................................................... 39
6.1 Interest ........................................................................................................................................ 39
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6.2 Dividends ..................................................................................................................................... 40
6.3 Rental and Lease Income .............................................................................................................. 41
6.3.1 Rent .................................................................................................................................................. 41
6.3.2 Lease Premiums ................................................................................................................................ 41
6.3.3 Section 15-25 – Amount received for lease obligation to repair ..................................................... 41
6.4 Royalties ...................................................................................................................................... 41
6.5 Annuities ...................................................................................................................................... 42
VII. INCOME FROM BUSINESS ................................................................................................. 44
7.1 Step 1: Carrying on a Business ....................................................................................................... 44
7.1.1 Indicators of a Business Activity ....................................................................................................... 44
Gambling ............................................................................................................................................... 46
Sportspeople.......................................................................................................................................... 48
Investment Activities ............................................................................................................................. 49
Land Sales .............................................................................................................................................. 50
Share Economy ...................................................................................................................................... 51
7.1.2 Commencement and Termination of a business.............................................................................. 52
7.2 Step 2: Normal proceeds of a Business .......................................................................................... 53
7.2.1 Nature of the Business ..................................................................................................................... 53
7.2.2 Nexus of receipt with Business ......................................................................................................... 54
7.2.3 Non-cash Business Benefits .............................................................................................................. 55
VIII. TAX ACCOUNTING FOR INCOME RECEIPTS ........................................................................ 57
8.1 Derivation of Income .................................................................................................................... 57
8.1.1 Meaning of “Derive” ......................................................................................................................... 57
8.1.2 Timing of derivation ......................................................................................................................... 57
8.1.3 Cash v Accrual accounting ................................................................................................................ 57
8.1.4 Payment before earning activity has commenced ........................................................................... 58
8.1.5 Sales under a “lay-by” method ......................................................................................................... 59
8.1.6 Dividend Income ............................................................................................................................... 59
8.1.7 Derivation of Income – delay because of dispute ............................................................................ 59
IX. INCOME FROM EXTRAORDINARY AND ISOLATED TRANSACTIONS .................................... 60
9.1 Transaction forms a business in itself: FCT v Whitfords Beach ........................................................ 60
9.1.1 Principle Applied to Isolated Transactions ....................................................................................... 60
9.1.2 Principle Applied to Extraordinary Transactions .............................................................................. 62
9.1.3 Calculating Ordinary Income under the Whitfords Beach Principle ................................................ 62
9.2 Two Strands of Myer ..................................................................................................................... 62
9.2.1 First Strand of Myer .......................................................................................................................... 63
1. Profit resulted from “Business operation or commercial transaction” ............................................. 63
2. Profit-making intention upon entering the transaction .................................................................... 63
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3. Profit made by means consistent with original intention ................................................................. 64
9.2.2 Second Strand of Myer ..................................................................................................................... 65
9.3 Statutory provisions that may apply to extraordinary and isolated transactions ............................. 65
9.3.1 Capital Gains Tax .............................................................................................................................. 65
9.3.2 Section 15-15: Profit-making undertaking or plan ........................................................................... 65
X. COMPENSATION RECEIPTS IN RELATION TO A BUSINESS ......................................................... 66
10.1 Compensation for breach of contract .......................................................................................... 67
10.1.1 Ordinary Trading Contract .............................................................................................................. 67
10.1.2 Breach of contract going to fundamental structure of business .................................................... 67
10.2 Compensation for Loss of an Asset of the Business ...................................................................... 68
10.2.2 Loss of Capital Assets ...................................................................................................................... 68
10.2.3 Loss of Trading Stock Assets ........................................................................................................... 69
10.3 Compensation by way of insurance proceeds .............................................................................. 69
10.4 Composite Claims ....................................................................................................................... 69
XI. GENERAL DEDUCTIONS ......................................................................................................... 70
11.1 General Deduction Rule .............................................................................................................. 71
11.1.1 Loss or Outgoing ............................................................................................................................. 71
11.2 Timing: Deductions and Deductibility .......................................................................................... 71
11.2.1 Expenses ......................................................................................................................................... 71
Expense of an earlier income year ........................................................................................................ 72
Incurred after business ceases to operate ............................................................................................ 72
Relevant to reduction of future expenses ............................................................................................. 72
When no income is being generated..................................................................................................... 72
Prepaid expenses ................................................................................................................................... 72
11.2.2 Provisions........................................................................................................................................ 73
Long Service leave and annual leave ..................................................................................................... 73
Bad debts ............................................................................................................................................... 73
Insurance companies ............................................................................................................................. 73
11.3 The nexus test – Positive limbs of s 8-1 ........................................................................................ 73
11.3.1 Judicial Tests ................................................................................................................................... 74
11.3.2 Is the nexus sufficiently direct to satisfy the positive limbs of s 8-1? ............................................ 74
Expenses involving alleged or actual wrongdoing by taxpayer ............................................................. 75
Expenses to reduce future expenditure ................................................................................................ 76
Inventory losses or outgoings ................................................................................................................ 77
11.3.3 Is there a sufficient temporal nexus to satisfy the positive limbs of s 8-1? ................................... 77
Expenses related to the production of assessable income in future years ........................................... 77
Expenses related to the production of assessable income in prior years ............................................. 78
11.4 Non-Deductible Expenses – The negative limbs of s 8-1 ................................................................ 78
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11.4.1 First negative limb of s 8-1 - Capital or Capital in nature ............................................................... 78
Judicial Tests .......................................................................................................................................... 79
Form and Substance .............................................................................................................................. 80
11.4.2 Second Negative limb of s 8-1 – Private or Domestic .................................................................... 81
11.4.3 Third Negative limb of s 8-1 – Incurred in producing exempt or NANE Income ............................ 82
11.4.4 Fourth Negative Limb of s 8-1 – Denied Deductions ...................................................................... 82
11.5 Apportionment – Deductibility of dual purposes expenses ........................................................... 84
11.6 Amount of Deduction .................................................................................................................. 85
11.6.1 Reasonable vs Actual expense ........................................................................................................ 85
11.6.2 Tax Minimization Situations – Purpose .......................................................................................... 85
11.7 Application of s 8-1 to commonly incurred expenses .................................................................... 86
11.7.1 Expenses incurred in gaining employment .................................................................................... 86
11.7.2 Relocation expenses ....................................................................................................................... 86
11.7.3 Child Care expenses ........................................................................................................................ 86
11.7.4 Travel expenses .............................................................................................................................. 87
Travel between home and work ........................................................................................................... 87
Travel between two places of work ...................................................................................................... 88
11.7.5 Self-education expenses ................................................................................................................. 89
Apportionment ...................................................................................................................................... 92
11.7.6 Home Office expenses .................................................................................................................... 92
11.7.7 Clothing and dry-cleaning expenses ............................................................................................... 93
11.7.8 Interest Expenses ........................................................................................................................... 95
11.7.9 Legal Expenses ................................................................................................................................ 96
XII. SPECIFIC DEDUCTIONS .......................................................................................................... 98
12.1 Repairs ....................................................................................................................................... 99
12.1.1 Meaning of “repair” ........................................................................................................................ 99
12.1.2 Income-producing purpose ............................................................................................................ 99
12.1.3 Capital Expenses ............................................................................................................................. 99
Initial Repairs ......................................................................................................................................... 99
Improvements ..................................................................................................................................... 100
Replacements ...................................................................................................................................... 101
12.2 Tax-related expenses ................................................................................................................ 101
12.3 Bad debts ................................................................................................................................. 102
12.4 Travel between workplaces ....................................................................................................... 102
12.5 Gifts ......................................................................................................................................... 103
Limitations on deductions for gifts or donations ................................................................................ 103
Political contributions and gifts ........................................................................................................... 103
Deductibility of gifts or donations under s 8-1. ................................................................................... 103
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12.6 Borrowing expenses .................................................................................................................. 104
12.7 Prior year losses ........................................................................................................................ 104
XIII. CAPITAL ALLOWANCES ...................................................................................................... 104
13.1 Depreciation deductions ........................................................................................................... 105
13.1.1 Depreciating asset ........................................................................................................................ 105
Composite items .................................................................................................................................. 106
13.1.2 Claiming a deduction .................................................................................................................... 106
13.1.3 Balancing Adjustments ................................................................................................................. 109
Depreciating asset used for non-taxable purpose .............................................................................. 110
Interaction with capital gains provisions ............................................................................................. 110
13.1.4 Pooling of Assets........................................................................................................................... 110
Low-value pool .................................................................................................................................... 110
13.2 Capital Works deductions.......................................................................................................... 111
13.3 “Blackhole” Expenses ................................................................................................................ 112
13.3.1 Project Pools ................................................................................................................................. 112
13.3.2 Business-related costs .................................................................................................................. 112
XIV. PROVISIONS LIMITING DEDUCTIBILITY .............................................................................. 113
14.1 Non-arm’s length prices between associated parties.................................................................. 113
14.2 Non-commercial losses ............................................................................................................. 114
14.3 Substantiation of deductions..................................................................................................... 114
XV. TAX OFFSETS ...................................................................................................................... 115
15.1 Types of Offsets ........................................................................................................................ 115
15.1.1 Tapered offsets ............................................................................................................................. 116
15.1.2 Refundable offsets ........................................................................................................................ 116
15.1.3 Carried forward offsets ................................................................................................................ 116
15.2 Tax offsets to recognize taxes already paid ................................................................................ 116
15.2.1 Dividend tax offsets ...................................................................................................................... 116
15.3 Concessional tax offsets provided as subsidies ........................................................................... 117
15.4 Common concessional offsets ................................................................................................... 118
Dependant offset ................................................................................................................................. 118
Private health insurance offset ........................................................................................................... 118
Low income rebate .............................................................................................................................. 118
15.5 Order of taking offsets .............................................................................................................. 118
XVI. CAPITAL GAINS TAX .......................................................................................................... 118
16.1 Step 1: Have you made a capital gain or loss? ............................................................................ 119
16.1.1 Question 1: Has a CGT event happened to the TP? ..................................................................... 119
Subdivision 104-A: Disposals ............................................................................................................... 119
Subdivision 104-B: Use and enjoyment before title passes ................................................................ 120
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Subdivision 104-C: End of a CGT asset ................................................................................................ 120
Subdivision 104-D: Bringing into existence a CGT asset ...................................................................... 120
16.1.2 Question 2: Is the asset a CGT asset? ........................................................................................... 120
Collectables ......................................................................................................................................... 121
Personal use assets .............................................................................................................................. 121
Separate CGT assets ............................................................................................................................ 122
Time of acquisition of CGT asset ......................................................................................................... 122
16.1.3 Does an exception or exemption apply? ...................................................................................... 123
Disregarded capital gains and losses on certain assets ....................................................................... 123
Exempt or loss denying transactions ................................................................................................... 123
Anti-overlap provisions........................................................................................................................ 124
Main Residence Exemption ................................................................................................................. 124
16.2 Step 2: Work out amount of capital gain or loss ......................................................................... 125
16.2.1 What is a capital loss? .................................................................................................................. 125
16.2.2 What factors come into calculating a capital gain or loss? .......................................................... 126
Capital Proceeds .................................................................................................................................. 126
Cost base ............................................................................................................................................. 127
Reduced Cost Base .............................................................................................................................. 128
16.3 Step 3: Work out your net capital gain or loss ............................................................................ 128
16.3.1 Capital Gains ................................................................................................................................. 128
16.3.2 Capital losses ................................................................................................................................ 129
XVII. GOODS AND SERVICES TAX .............................................................................................. 130
17.1 Registration .............................................................................................................................. 131
17.1.1 Enterprise ..................................................................................................................................... 131
17.1.2 Registration turnover threshold ................................................................................................... 131
17.1.3 Choosing to register ..................................................................................................................... 132
17.2 Taxable supply .......................................................................................................................... 132
Supply .................................................................................................................................................. 132
Consideration ...................................................................................................................................... 133
In the course of furtherance of an enterprise ..................................................................................... 133
17.3 GST-free supply ........................................................................................................................ 133
Food ..................................................................................................................................................... 134
Health .................................................................................................................................................. 134
Education ............................................................................................................................................. 135
Child Care ............................................................................................................................................. 135
Exports ................................................................................................................................................. 135
Going concern ...................................................................................................................................... 135
Consequences of making a GST-free supply ....................................................................................... 135
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17.4 Input Taxed Supply ................................................................................................................... 136
Financial supplies ................................................................................................................................. 136
Residential rent ................................................................................................................................... 136
Residential premises ............................................................................................................................ 136
Consequences of making an input taxed supply ................................................................................. 137
17.5 Mixed or composite supply ....................................................................................................... 137
17.7 Creditable Acquisition ............................................................................................................... 137
17.7.1 Acquisition .................................................................................................................................... 138
17.7.2 Creditable Purpose ....................................................................................................................... 138
Acquisitions related to input taxed supplies ....................................................................................... 138
Solely or partly ..................................................................................................................................... 138
17.7.3 Supply to the entity was a taxable supply .................................................................................... 139
17.7.4 Consequences of making a creditable acquisition ....................................................................... 139
17.7.5 Special Rules ................................................................................................................................. 139
Non-deductible expenses .................................................................................................................... 139
17.8 Importation .............................................................................................................................. 139
17.8.1 Taxable Importation ..................................................................................................................... 139
Consequences of making a taxable importation ................................................................................. 140
17.8.2 Creditable Importation ................................................................................................................. 140
Consequences of making a creditable importation ............................................................................ 140
17.8.3 Digital products and low value goods .......................................................................................... 140
17.9 Administration .......................................................................................................................... 141
17.9.1 Timing ........................................................................................................................................... 141
17.9.2 Tax Invoice .................................................................................................................................... 141
17.9.3 Adjustments.................................................................................................................................. 142
17.10 Interaction with other taxes .................................................................................................... 142
17.10.1 Income tax .................................................................................................................................. 142
17.10.2 Fringe Benefits Tax ..................................................................................................................... 142
XVIII. FRINGE BENEFITS TAX ..................................................................................................... 142
18.1 Definition of Fringe Benefit ....................................................................................................... 143
18.1.1 Benefit .......................................................................................................................................... 143
18.1.2 Provided during the year of tax .................................................................................................... 144
18.1.3 Employer, associate or third-party arranger ................................................................................ 144
18.1.4 Employee or associate .................................................................................................................. 144
18.1.5 In respect of the employment of the employee .......................................................................... 145
18.2 Exclusions ................................................................................................................................. 146
18.3 Categories of Fringe Benefits ..................................................................................................... 146
18.3.1 Car fringe benefits ........................................................................................................................ 146
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18.3.2 Debt waiver fringe benefits .......................................................................................................... 147
18.3.3 Loan fringe benefits ...................................................................................................................... 148
18.3.4 Expense payment fringe benefits ................................................................................................. 148
18.3.5 Meal entertainment fringe benefits ............................................................................................. 149
18.3.6 Property fringe benefits ............................................................................................................... 150
18.4 Exempt fringe benefits .............................................................................................................. 150
18.4.1 Minor benefits .............................................................................................................................. 150
18.4.2 Work-related items ...................................................................................................................... 150
18.4.3 Membership fees and subscriptions ............................................................................................ 151
18.4.4 Single-trip taxi travel .................................................................................................................... 151
18.5 Reductions in taxable value ....................................................................................................... 151
18.5.1 Recipient’s contribution ............................................................................................................... 151
18.5.2 Otherwise deductible rule ............................................................................................................ 151
18.6 Type of fringe benefit ................................................................................................................ 152
18.7 Fringe benefits taxable amount ................................................................................................. 152
18.8 Fringe benefits tax liability ........................................................................................................ 152
18.9 Interaction with other taxes ...................................................................................................... 153
18.9.1 Income Tax ................................................................................................................................... 153
18.9.2 Interaction with GST ..................................................................................................................... 154
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I. AUSTRALIAN TAX SYSTEM
1.1 Introduction to the Australian Tax Laws
1.1.1Technical differences between Tax Law and Accounting
(1) Not all receipts are recognized for tax purposes
Accounting must recognize all receipts, whatever their character. In contrast, some receipts are not
recognized at all for tax law purposes while others are recognized but partially excluded from tax
accounts. Receipts that are recognized for tax purposes are known as ����������� �������.
Since Income Tax was first adopted by the Commonwealth Government in 1915, many sections have
been added to the income tax Acts to bring into assessable income various types of receipts which
had been excluded from the ju������ ������� �� ��������� �������� S���� ����� ��� �������� ���� ����
been brought into assessable income by specific inclusion provisions have been known as ����������
�������.
A����������� ����� ������ � O������� I����� � S�������� I����� � Other receipts
- Statutory Income is now included in assessable income, but often subject to concessional treatment or partial
exclusion.
- Other receipts still fall completely outside the scope of income tax law, though of course they are recognized
for financial accounting purposes.
(2) Income tax law distinguishes between capital and revenue expenses
Accounting principles recognize outgoings as expenses in the P&L statement unless the expenditure
yields an asset. In contrast, tax law distinguishes between two broad categories of expenditures:
�������� ��������� and �������� ���������. Revenue expenses are deducted when they are incurred.
Capital expenses are deducted over a period under a �������� ���������� or a �������� ������ system.
How long ago a benefit acquired as the result of an expense will last is one factor used in the judicial
doctrines. Others such as the frequency of similar expenses and the relationship between the expense
��� � ��������� ������ ������� ��������� and income earning ����������� are more important factors
in the judicial tests. As a result, income tax law permits immediate deductions for some expenses that
would be depreciated over a period of years for accounting purposes while it requires deductions over
many years for some expenses that would be expensed immediately on a P&L statement in accounting
practice.
(3) Income tax law excludes some income and expenses for policy reasons
While an accountant will record all income and receipts for financial accounting purposes, the tax law
explicitly exempts some types of otherwise assessable receipts for policy reasons.
(4) Income tax law ignores some transactions on the basis of anti-avoidance provisions
Financial accounting measures net profits on an entity-by-entity basis. If one entity pays an excessive
amount to another related entity, accounting will ignore the relationship between the entities. Tax
law may ignore the transfer, however, if it falls afoul of anti-avoidance rule that seeks to prevent
taxpayers shifting profits from one entity to another with lower tax rates.
(5) Timing rules differ in income tax and accounting principles
Financial accounting records receipts encumbered by future obligations into the P&L only as the
offsetting obligations are satisfied; and Investments in assets are brought into P&L after the offsetting
������ ��� ��������� I� ��������� ������ ��� ��� �������� �������� ���� ���� ��� ��������� ���
��������� �������� ���� ���� ��� �����������
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1.2 Sources of Tax Law
1.2.1 Legislation
Income Tax Legislation
T�� ����� C����������� ������ ��� �� A�������� ��� ������� �� ����� ������� �� �������� ���� ���� �������
laws.
→ They had to deal with two sets of laws and had to divide revenues between states.
In 1936 the Sates and Cth agreed on a fully harmonized model to replace the differing laws � the Income Tax
Assessment Act 1936. The parallel State and Cth income taxes remained in effect until 1942, when the Cth
appropriated the exclusive power to levy tax income tax, instituting a system of transfer payments to the
States to replace their lost revenue.
→ T�� ���� �� ��� ������ ��� ������ �� � ������ ��� ���� ������������ ��������� �������� ��� �� �������
opportunities for avoidance. The legislature responded to costly avoidance with narrow and ad hoc
rules. This led to extraordinary complex tax system.
In 1997 the Gvmt rewrote the income tax using plain-English style � Income Tax Assessment Act 1997.
→ Shifting rules from ITAA 1936 to ITAA 1997 has proceeded more slowly than expected. As a result,
both laws remain in effect.
→ From 1915 to 1985, the broadening of the tax base was achieved by a continual stream of new
inclusion narrow amendments targeted at particular types of receipts, matched on the deduction side
by provisions to recognized expenses previously labelled capex by courts.
In 1985 adopted a more comprehensive solution, with the adoption of broad-based capital gains measures
designed to sweep up most gains and losses that remained outside the tax base (the provisions were complex
and unintuitive). The original capital gains rules were replaced in 1998 by a revised capital gains regime �
Capital Gains Tax, or CGT.
*The CGT rules are discrete in the sense of matching gains and losses to determine a net capital gain included
in assessable income subject to ITAA 1997. The CGT is not a separate tax.
Fringe Benefits Tax Legislation
→ T�� �������� ������� �� ��������� ������� ���� �������� ���� �������� ��� ���-cash benefits that could
be converted to cash). The effect of this restriction was to exclude from the tax base many types of
fringe benefits (non-cash benefits) provided by employers to employees.
The Gvmt decided to move most employment fringe benefits into a separate assessment Act � Fringe Benefits
Tax Assessment Act 1986 (Cth) (FBTAA).
*Fringe benefits tax (FBT) is collected from employers, rather than the employees receiving them. The Income
T�� ��� ���������� �������� ���� �� ���������� ������ ��� ��� �������� ��� ������ ��������� T���� ��� FBTAA
is the starting point for problems involving a benefit to an employee other than salary and wages, and if the
benefit satisfies the definition of a fringe benefit under FBTAA, it is not necessary to consider other tax laws.
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GST Legislation
While the Goods and Services Tax (GST) is intended to be a tax on final consumption only, it is levied at entry
level of the supply chain and then reimbursed by way of credits or refunds to registered businesses in the
chain, leaving the full burden to be borne by the final consumer.
*The GST system operates independently of income tax and FBT systems. However, for practical reasons, the
two must be viewed in parallel, as both GST liability (and credits) and certain income tax payments (in
���������� ��� ���������� ��������� ��� ������ ��� �������� ���� ���������� ������ ��� �������� �� ��� ����
tax interim return known as Business Activity Statement (BAS).
In most cases, businesses paying GST on its purchases will be entitled to credit or a refund. Thus, the income
tax contains a provision denying a deduction for GST that will be retuned back to the taxpayer. In the cases
where the taxpayer is not entitled to a refund of GST, the tax is deductible as a cost of doing business.
1.2.2 Sources of Tax Law
Case Law
The meaning of the words in tax laws derives from judicial precedents or decisions of courts interpreting the
provisions in past cases. How binding the precedents will be depends on the level of the court.
Aus High Court � Full Federal Court / State Supreme Courts � Administrative Appeals Tribunal
Rulings
The tax laws empower the Commissioner of Taxation to administer the tax laws. The Australian Tax Office
(ATO) is the agency that carries out the actual administration but in theory it is doing so on behalf of the
Commissioner. Thus, it is common to refer to actions and advice from the ATO as acts of the Commissioner.
A���������� I����� T�� ���� FBT ��� GST ��� ��� ������� �� � �����-����������� ������� T�������� ���
responsible for interpreting the law and applying it to their transactions. There are severe penalties for
incorrect reporting of tax liability.
• Private Rulings
Taxpayers who are unsure how the law will apply to a particular transaction can protect themselves
from any penalty by asking the C����������� ��� � �P������ ������� �� ��� ��� ATO ����� ����� ���
law to that transaction. The ATO often produces anonymous rulings describing the question asked and
the answer. These are known as ATO IDs (Interpretative Decisions).
• Public Rulings
The com��������� ���� ������ ������ ������� ����� ��� ��� ���� ��������� ��� ATO�� ����� �� ��� ���
in which a provision of an Act should be applied to determine the extent of tax liability.
1.3 Functions of the Tax System Government revenue is required to:
(1) Fund the provision of goods and services which ��� ���������� ������� ������ ��� ������� ������
(2) Redistribution function.
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(3) Broader socio-economic purposes (i.e. encouraging certain behavior and discouraging other types of
behavior).
(4) Collection Mechanism (i.e. Medicare Levy)
1.4 Power to Tax S������ ������ �� ��� C����������� ������ ��� C�� P��������� ��� ����� �� ����� ���� ��� ��� ������ ����� ���
���� G��� �� ��� C�� ���� ������� �� � ���������� It also provides the Cth Gvmt with the power to impose
laws regarding the collection and administration of taxes.
Taxation� ����������� �������� �� ����� �� � ������ ��������� ��� ������ ��������� ����������� �� ���� ���
�� ��� � ������� ��� �������� ���������� Matthews v Chicory Marketing Board (1938) 60 CLR 263 at 270. Tax
is not a penalty and it cannot be arbitrary (i.e. a tax liability must be capable of being determined in accordance
with specific criteria): MacCormick v FCT (1984) 15 ATR 437 at 446.
Section 52(ii) also specifies that any laws with respect to taxation cannot discriminate between the States.
S������ ��� �������� ��� C�� G��� ���� �������� ��� ��� �������� �� ��� ���� ��������� �� ��� S������
When passing taxation laws, the Cth Parliament must ensure that the laws imposing taxation deal only with
the imposition of taxation and deal with one subject of taxation only: s 55 of the Constitution. Taxation
revenue is raised through a number of different taxes (such as income tax, FBT, GST, etc.), each of which is
imposed in a separate Act. For each type of tax, we generally have:
− Imposition Act (which imposes the liability of the tax) *Usually very short*
− Rates Act (which specifies the applicable rate of tax) and
− Assessment Act (which sets out the rules for working out what is subject to tax or how to calculate the tax
payable).
14
II. INTRODUCTION TO INCOME TAX
2.1 Income Tax Equation and Income Tax Rates
2.1.1 Income Tax Burden
S 3-5 of ITAA 1997 provides that income tax is payable for each year by each individual and company and
certain other entities. *Partnerships and trusts are not included in s 3-5. Rather, the liability to pay income tax
on net gains gained or produced thru partnerships and trusts is borne by the partners in the partnership and
trustees and beneficiaries of the trust.
A company is treated as a separate taxpayer and pays income tax. However, company tax is in effect a pre-
������� �� ��� ���������� ������ ��� �� ��� ��������� �������������
2.1.2 Income Tax Formula
Income Tax = (Taxable Income x Rate) � Tax Offsets *s 4-10 of ITAA 1997
T�� ���������� ����� �� ������� �� ��� ��-month period beginning on 1 July: ss 4-10(1) and 995-1 of ITAA 1997.
Taxable Income
Taxable Income = Assessable Income � Deductions *s 4-15 of ITAA 1997
o Assessable Income
Assessable Income = Ordinary Income + Statutory Income, but not Exempt Income or NANE Income
Ordinary Income: Essentially refers to amounts which have been held to be assessable by the courts
because they demonstrate certain characteristics, s 6-5 of ITAA 1997.
(1) Your assessable income includes income according to ordinary concepts (receipts that
have an income character determined by the courts).
(2) If you are an Australian resident, your assessable income includes the ordinary income
derived directly or indirectly from all sources (in or out of Australia).
(3) If you are a foreign resident, your assessable income includes:
a. Ordinary Income derived directly or indirectly from all Australian sources
b. Other ordinary income that a provision includes in your assessable income on
some basis other than having an Australian source.
(4) Constructive Receipt Rule: Ensures that taxpayers cannot avoid paying income tax by
directing that the income be paid to a different person and not receiving the money
themselves.
i.e. Someone directs his employer to pay half of his salary to his parents. He is deemed
to have derived the salary under s 6-5(4), even though he did not physically receive
the money, as it has been dealt with per his directions.
Statutory Income: Consis�� �� ������� ���� ��� �������� �� ��� ���������� ���������� ������ �� �
specific provision in the income tax legislation: s 6-10(2) of ITAA 1997. Most types of statutory income
are amounts that the legislature wished to include in the income tax base but which fell outside the
concept of ordinary income (i.e. non-convertible benefits provided to employees or Capital gains).
Where an amount income constitutes both ordinary and statutory income, s 6-25(1) ensures that the
amount is only included in the taxp������ ���������� ������ ����� T�� ������ ���� ���������
161
50 ACG Investments Ltd v FCT (1992)
67 Allied Mills Industries Pty Ltd v FCT (1989)
58 Arthur Murray Pty Ltd v FCT (1965)
63 August v FCT (2013)
47 Babka v FCT (1989)
58 Barrat v FCT (1992)
35 Bennet v FCT (1947)
59 BHP Biliton Petroleum v FCT (2002)
30 Bohemians Club v Acting FCT (1918)
80 BP Australia v FCT (1965)
48 Brajkovich v FCT (1989)
88 Brandon v FCT (2010)
34 Brent v FCT (1971)
97 Broken Hill Theatres Pty Ltd v FCT (1952)
53 Californian Copper Syndicate v Harris (1904)
60 Californian Copper Syndicate v Harris (1904)
68 Californian Oil Products Ltd (in liq) v FCT (1934)
92 Carlos Sanchez v FCT (2008)
94 Case U80 (1987)
62 Casimity v FCT (1997)
74 Charles Moore & Co Ltd Pty v FCT (1956)
81 Colonial Mutual Life Assurance Society Ltd v FCT (1953)
42 Egerton-Warburton v DCT (1934)
47 Evans v FCT (1989)
92 FCT v Anstis (2010)
21 FCT v Applegate (1979)
28 FCT v Blake (1984)
88 FCT v Collings (1976)
98 FCT v Consolidated Fertilizers Ltd (1991)
27 FCT v Cooke and Sherden (1980)
64 FCT v Cooling (1990)
82 FCT v Cooper (1991)
75 FCT v Day (2008)
95 FCT v Edwards (1994)
24 FCT v Efstathakis (1979)
94 FCT v Faichney (1972)
91 FCT v Finn (1961)
94 FCT v Forsyth (1981)
24 FCT v French (1957)
28 FCT v Harris (1980)
90 FCT v Hatchett (1971)
54 FCT v Hyteco Hiring Pty Ltd (1992)
21 FCT v Jenkins (1982)
45 FCT v JR Walker (1985)
76 FCT v La Rosa (2003)
142 FCT v Luxottica Retail Australia Pty Ltd (2011)
86 FCT v Maddalena (1971)
104 FCT v McPhail (1968)
54 FCT v Merv Brown Pty Ltd (1985)
24 FCT v Mitchum (1965)
62 FCT v Myer Emporium Ltd (1987)
162
52 FCT v Osborne (1990)
89 FCT v Payne (2001)
137 FCT v Qantas Airways Ltd (2012)
137 FCT v Reliance Carpet Co Pty Ltd (2008)
76 FCT v Snowden & Wilson Pty Ltd (1958)
51 FCT � S� H������� I����� P�� L�� ������
81 FCT v Star City Pty Ltd (2009)
90 FCT v Studdert (1991)
102 FCT v Western Suburbs Cinemas Ltd (1952)
61 FCT v Whitfords Beach Pty Ltd (1982)
88 FCT v Wiener (1978)
36 FCT v Woite (1982)
45 Ferguson v FCT (1979)
85 Fletcher v FCT (1991)
87 Fullerton v FCT (1991)
68 Glenboig Union Fireclay v IR CIR (1922)
54 GP International Pipecoaters Pty Ltd v FCT (1990)
97 Hallstroms Pty Ltd v FCT (1946)
94 Handley v FCT (1981)
32 Hayes v FCT (1956)
67 Heavy Minerals Pty Ltd v FCT (1966)
58 Henderson v FCT (1970)
65 Henry Jones (IXL) Ltd v FCT (1991)
75 Herald and Weekly Times Ltd v FCT (1932)
36 Higgs v Oliver (1952)
27 Hochstrasser v Mayes (1960)
20 IRC v Lysaght (1928)
150 J & G Knowles & Associates Pty Ltd v FCT (2000)
37 Jarrold v Boustead (1963)
20 Joachim v FCT (2002)
98 John Fairfax & Sons Pty Ltd v FCT (1959)
87 John Holland Group Pty Ltd v FCT (2015)
29 Keily v FCT (1983)
33 Kelly v FCT (1985)
101 Law Shipping Co Ltd v Inland Revenue Commissioners (1923)
19 Levene v IRC (1928)
102 Lindsay v FCT (1960)
39 Lomax v Peter Dixon & Son Ltd (1943)
50 London Australia Investment Co Ltd v FCT (1977)
87 Lunney v FCT (1958)
76 Magna Alloys & Research v FCT (1980)
96 Mansfield v FCT (1995)
47 Martin v FCT (1953)
64 McCurry v FCT (1998)
69 McLaurin v FCT (1961)
55 Memorex Pty Ltd v FCT (1987)
96 Morris v FCT (2002)
80 National Australia Ltd v FCT (1997)
26 Payne v FCT (1996)
91 Peter Lenten v FCT (2008)
78 Placer Pacific Management Pty Ltd v FCT (1995)
163
104 Point v FCT (1970)
36 Reuter v FCT (1993)
49 Riddell v FCT (2009)
84 Ronpibon Tin No Liability v FCT (1949)
32 Scott v FCT (1966)
60 Scottish Australian Mining Co Ltd v FCT (1950)
150 Slade Bloodstock Pty Ltd v FCT (2007)
52 Softwood Pulp and Paper Ltd v FCT (1976)
49 Spriggs v FCT (2009)
42 Stanton v FCT (1955)
150 Starrim Pty Ltd v FCT (2000)
61 Statham v FCT (1988)
77 Steele v DCT (1999)
61 Stevenson v FCT (1991)
49 Stone v FCT (2005)
80 Strick v Regent Oil Co Ltd (1966)
79 Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938)
68 Sydney Refractive Surgery Centre Pty Ltd v FCT (2008)
27 Tennant v Smith (Surveyor of Taxes) (1892)
46 Thomas v FCT (1972)
46 Trautwein v FCT (1936)
85 Ure v FCT (1981)
77 W Nevill & Co Ltd v FCT (1937)
101 W Thomas & Co Pty Ltd v FCT (1965)
95 Westcott v FCT (1997)
64 Westfield Ltd v FCT (1991)
149 Westpac Banking Corporation v FCT (1996)
SOURCES OF TAX LAW Structural Features:
Tax Rate Tax Payers
Tax Base Tax Periods
Functions:
• F��� �� ������� �� ������� ����� ��� ��������
• Redistribution function
• Broader socio-economic purposes (encouraging and discouraging behaviors)
• Collection Mechanisms for specific purposes Power to Tax: S 51(ii) of the Constitution grants the Cth Parliament ��� ����� �� ����� ���� ��� ��� ������ ����� ��� ���� ���� ������� �� ���������� Taxation �� � ����������� �������� �� ����� �� � public authority for public purposes, enforceable by law, and is not a payment ��� �������� ���������� Matthews v Chicory Marketing Board (1938). Sources:
(1) Legislation: who and what is taxed, tax rates, tax collection and administration, enforcement and recovery of tax.
(2) Case Law: Interpreting Tax legislation (3) Taxation Rulings: Guidelines by the ATO
Legislation
− Income Tax Assessment Act 1936 (ITAA36): C������ ��� �� ��������� ������� ����������
− Income Tax Assessment Act 1997 (ITAA97): Aimed to be simple and in plain-English. Due �� ���������� �� ����� ������ ��� �� ��� ��� evasion.
S 3-5 ITAA97: Income tax is payable each year by each individual and company, and certain other entities. S 4-10 ITAA97� C���������� �� ���������� ������ ��� liability for the financial year (12-month period beg 1st July (s 4-10(1)).
Income Tax Payable = (Taxable Income x Rate) � Tax Offsets
S 4-15 ITAA97: Taxable Income = Assessable Income - Deductions
S 6-1(1) ITAA97: Assessable Income = Ordinary Income + Statutory Income but not Exempt Income or NANE Income
• Ordinary Income (s 6-5 ITAA97): Income
according to ordinary concepts.
• Statutory Income (s 6-10 ITAA97): Receipts
included in assessable income by specific
provision in legislation. (see Div 10)
*When an amount is both Ordinary and Statutory
Income, s 6-25(1) and (2) states that it will generally be
Statutory Income unless a specific provision indicates
otherwise.
• Non-Assessable Income (s 6-1 (1-4)):
Amounts that are neither Ordinary nor
Statutory Income.
o Exempt Income (Sub 11-A):
Assessable income made non-
assessable by legislation.
▪ Entity Exempt (s 11-15)
▪ Receipt Exempt (s 11-15)
o NANE Income (Sub 11-B): Non-
assessable Income not Exempt
Income (such as GST payable on
supply, or FBT received by employee).
Levies and Charges (1) Medicare Levy (s 251S(1)(a) ITAA36)
Medicare Levy = Taxable Income x 2% Exempt from Medicare Levy (s 251T and U):
− Non-Residents
− Persons not Entitled to Medicare Benefits
− Military, Veterans, Blind pensioners, diplomats in Aus.
(2) Medicare Levy Surcharge Applies to individuals who do not have private health ����� ��� ����� ������� ��� ���������� �������� exceeds a threshold. Income for Surcharge purposes:
− Taxable Income (Including Family trusts)
− Exempt Foreign Income
− Reportable Fringe Benefits amount
− Total Net Investment Loss
− Reportable Super Contributions
(3) Higher Education debts repayments Students deferring the uni payment through HELP, are expected to repay once they earn income on a progressive rate.
RESIDENCE AND SOURCE S 6-5 (2-3) of ITAA97 states that: (2) A��������� ���������� ���������� ������ �������� income derived from all sources. ��� F������ ���������� ������ �������� �������� income derived directly or indirectly from Australian sources. *S 6-10 and s 6-10(5) has similar provisions for statutory income.
Australian Resident Foreign Resident
Tax free threshold Medicare levy and surcharge (in some circ)
No tax-free threshold Limited tax offsets ML ��� MS ����� �����
RESIDENCE � INDIVIDUALS S 6(1) of ITAA36 ��� ���������� �� ���������� �������� 4 separate and exhaustive tests for determining whether an individual is a resident of Australia for taxation purposes:
(1) Resides in Australia (ordinary concepts) (2) Domicile is in Australia (unless court satisfied
that his place of abode is outside Australia) (3) Who has been in Australia, continuously or
intermittently, during more than 183 days of the income year. (unless place of abode
