1 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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1
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
1.2.2 Sources of Tax Law ........................................................................................................................... 12
Case Law ................................................................................................................................................ 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
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
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
Cash or Cash convertible ....................................................................................................................... 26
Real Gain ................................................................................................................................................ 27
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
Land Sales .............................................................................................................................................. 50
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
4
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
10.1.2 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
XI. GENERAL DEDUCTIONS ......................................................................................................... 70
11.1 General Deduction Rule .............................................................................................................. 71
11.1.1 Loss or Outgoing ............................................................................................................................. 71
11.2 Timing: Deductions and Deductibility .......................................................................................... 71
Long Service leave and annual leave ..................................................................................................... 73
Bad debts ............................................................................................................................................... 73
12.1.3 Capital Expenses ............................................................................................................................. 99
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
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
Health .................................................................................................................................................. 134
Child Care ............................................................................................................................................. 135
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
17.10 Interaction with other taxes .................................................................................................... 142
17.10.1 Income tax .................................................................................................................................. 142
18.4.1 Minor benefits .............................................................................................................................. 150
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 ����������
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
− 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