Taxation Law

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MONASH

BUSINESS

SCHOOL

INTRODUCTION TO AUSTRALIA’S

TAXATION SYSTEM

LECTURE 1

BTF5965 TAXATION LAW | SEMESTER 1, 2019

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▪ The wealthiest 20% of Australians pay 79% of all

personal income tax? [ABC News, 2018]

▪ Australia's richest 20%​​ own almost two thirds of

country's wealth, report finds. [The Guardian, 2018]

Tax reform proposals

▪ Coalition - http://bettertax.gov.au/

▪ Labor opposition - Deloitte’s briefing

Did you know that …

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PROJECTED COMMONWEALTH GOVERNMENT EXPENDITURE 2017-18

| PoTL paragraph [3.10]

Social security & welfare - 36%

Defence - 6%

Education - 7%

Other economic affairs - 2%

General government services - 5%

Health - 16%

Other expenses - 28%

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▪ Highly relevant to all business and personal employment

and investment transactions.

▪ Supports a wide range of employment opportunities,

including:

– Government regulators – ATO, ASIC etc

– Accounting and legal profession – compulsory requirement for admission to professional practice

– Registered Tax Agent - if you wish to become an RTA a you are generally required to study 2 units of tax law.

▪ Relevant to many current political developments and

reform proposals in the news.

Why study Taxation Law?

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(1) Introduction to unit

– Key points from Unit Guide

(2) Overview of Australian tax system

– Constitutional and policy aspects

– Sources of taxation law

– Major tax bases

(2) Introduction to income tax

– The income tax formula

– Taxable entities

– Taxation rates

This week’s topics

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▪ Teaching staff – Unit leader/lecturer: Wayne Gumley (Weeks 1-5, 9-12)

– Co-lecturer: Diane Kraal (Weeks 6-8)

– Tutors: Evan Binos, Melchor Raval, Drexel Chin (Wks 2-12)

▪ BTF5965 is a six credit point unit which translates to a time

commitment of 12 hours per week. In general, you need to learn

– tax terminology,

– key principles (and sources in legislation and case law) and

– how to apply those principles to a range of typical

employment, business and investment scenarios.

▪ Prescribed text – Sadiq et al, POTL 2019 ed

▪ Other resources – Casebook – Sadiq, ATLC

– On-line/Moodle site

▪ Legislation – Austlii

▪ Tax databases – ATO legal database, Checkpoint

(Thomson-Reuters), CCH Intelliconnect

WELCOME TO BTF5965 TAXATION LAW

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TEACHING APPROACH

Pre-class

Complete readings prescribed in the Reading Guide. Make your own notes of key points.

In-class

(1) In lectures (or live streaming) - make notes to add to understanding

(2) In tutorials – be prepared and actively contribute to discussions.

Post-class

Clarify concerns: re- read materials; consultations

Application: review and complete answers to tutorial questions.

Assessment tasks

▪ Note lectures and tutes will start exactly on time (on the hour) and

finish 10 minutes before the hour (lecture recording follows this regime

as well).

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ASSESSMENT TASKS

Week 2 Tutorials commence

• an important opportunity to review and discuss issues progressively each week

Week 5

Task 1

On-line Quiz (5%)

• diagnostic test of your progress half way through semester – focus on income topics

Week 8

Task 2 Written assignment (30%)

• practice at an exam style question exam – focus on income topics (Weeks 1 to7).

Week 10

Task 3

On-line Quiz (5%)

Final exam (60%)

Weekly on-line quizzes

(not graded)

Weekly on-line quizzes

(not graded)

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▪ Weighting: 60% of final mark

▪ All topics examinable – questions will

involve interactions between topics.

▪ To be conducted as an ‘e-exam’ using

an ‘offline’ Monash laptop.

▪ Open book, no other electronic

devices permitted.

▪ Duration 2 hours and 30 minutes (no

separate reading and noting time)

▪ Hurdle requirement of 45%

FINAL EXAMINATION

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▪ Taxation receipts for 2018-19, approximately $440 billion, comprising

approximately 93% of total govt revenue:

– Individual income tax = $218B (46%), GST = $67B (14%)

▪ Main source of funding for government expenditure, used:

– To provide public / social goods

– As a redistribution function

▪ Socio-economic purposes though social engineering

▪ Tax system also used as a collection mechanism for other amounts

payable to Government – eg HELP student loans, Medicare levy (=

$17B, 3%).

INTRODUCTION TO THE AUSTRALIAN TAXATION SYSTEM

| PoTL paragraph [3.10]

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▪ Structural features of most taxation systems:

▪ Key objectives: Efficiency, equitable, simplicity (see Henry Review,

2010)

HOW TO TAX?

DESIGN OF A TAXATION SYSTEM

Structural features

Tax rates

Taxpayers Tax base

Tax periods

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▪ Two concurrent statutes determine taxable income:

– Income Tax Assessment Act 1936 (Cth) (“ITAA36”)

– Income Tax Assessment Act 1997 (Cth) (“ITAA97”)

▪ Separate statutes impose income tax liability, set rates of tax and

provide administration rules for tax collection and penalties:

– Income Tax Act 1986 (Cth)

– Income Tax Rates Act 1986 (Cth)

– Tax Administration Act 1953 (Cth) (“TAA53”)

▪ Note numerous admin provisions contained in TAA53 Schedule 1

▪ Separate statutes cover GST and FBT:

– A New Tax System (Goods and Services Tax) Act 1999 (Cth)

– Fringe Benefits Tax Assessment Act 1986 (Cth)

SOURCES OF LAW:

COMMONWEALTH TAXATION LEGISLATION

| PoTL paragraphs [1.190] – [1.230], [1.245]

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▪ The main sources of tax law are:

SOURCES OF TAXATION LAW

| PoTL paragraph [1.180]

1 • Legislation (Parliament)

2 • Case law (Court decisions)

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• Rulings issued by the Commissioner of Taxation – not binding on courts.

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Case law

▪ Meaning of words in tax law is derived from judicial precedent or

decisions of courts interpreting past cases

▪ Doctrine of precedent: higher level court decisions binds lower level

court decisions (eg Australian High Court to the AAT)

Rulings

▪ Rulings (eg private and public) are issued by the Commissioner of

Taxation, being the Head of the Australian Taxation Office

– Bind the Commissioner when the a taxpayer acts, or fails to act

in accordance with that ruling, provided the taxpayer’s situation

falls within scope of that ruling

SOURCES OF LAW:

CASE LAW & RULINGS

| PoTL paragraphs [1.270] – [1.300]

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▪ Commonwealth Government’s power to impose taxes is from the

Australian Constitution

– Section 51(ii) grants the Commonwealth Parliament to “make

laws for the peace, order and good government of the

Commonwealth with respect to … taxation”

▪ What is ‘taxation’? – a general definition:

– a “compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered”

▪ see, Matthews v Chicory Marketing Board (1938) HCA 38

– and not a penalty, and not arbitrary - MacCormick’s case

CONSTITUTIONAL ASPECTS:

THE POWER TO IMPOSE TAXATION

| PoTL paragraph [3.20]

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▪ s 55: Laws imposing taxation can only deal with the imposition of

taxation and deal with one subject of taxation – thus we have:

▪ Imposition Act: imposes liability for the tax

▪ Rates Act: specifies the applicable rate of tax

▪ Assessment Act: sets out the rules for working out what is subject to

tax or how to calculate the tax payable

▪ s 90: only the Commonwealth may impose duties of ‘customs’ or

‘excise’. What is an excise?

– See Matthews v Chicory Marketing Board (1938) HCA 38 - a tax upon

commodities produced or distributed ‘inland’, to complement ‘customs

duties’ on goods imported into a country.

▪ s 51(ii): cannot discriminate between States or parts of States

– See Fortescue Metals Group Limited v The Commonwealth [2013] HCA

34 (re validity of Mineral Resources Rent Tax Act 2012 (Cth))

CONSTITUTIONAL ASPECTS:

RESTRICTIONS ON TAXING RIGHTS

| PoTL paragraph [3.20]

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▪ Types of Commonwealth taxes:

– See Federal Budget 2018-19, Statement 5 Revenue (See Table 7, Cash Receipts, at 5-17) – Note also tax expenditures – estimates of ‘revenue foregone’ due to tax concessions – (see

Table 4.1 Cwth Treasury, Jan 2018)

▪ Types of state taxes:

– And more See Victorian State Budget 2018-19 Statement of Finances (at pp 149)

MAJOR TAX BASES

Income tax

• Tax on income and capital gains

• Weeks 1 to 7

Goods and services tax

• Tax on consumption of goods and services

• Week 10

Fringe benefits tax

• Tax on non-cash benefits imposed on employers.

• Week 11

Stamp duty

• Tax on transfer of dutiable property

Land tax

• Tax on owning taxable land

Payroll tax

• Tax on taxable wages

| PoTL paragraph [3.30]

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FOCUS OF THIS UNIT

Income Tax

Employment and contracting

for services

Business activities

Investment activities

Goods and Services Tax

Fringe Benefits Tax

Including Capital Gains Tax

Stamp dutyStamp duty

Land taxLand tax

Payroll taxPayroll tax

Main Commonwealth taxesMain State taxes Taxable activities

Super contributions

(SGC)

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▪ Income tax is payable each year by each individual and company,

and certain other entities: s 3-5 ITAA97

▪ Calculation of a taxpayer’s income tax liability for the financial year

is based on the formula in s 4-10 ITAA97:

▪ Financial year means a 12 month-period beginning 1 July

(substituted accounting periods may be allowed)

INCOME TAX LIABILITY:

THE INCOME TAX FORMULA

Income Tax Payable

Taxable Income

Rate Tax

Offsets

| PoTL paragraphs [3.110] – [3.130]

Assessable Income (Div 6)

Allowable Deductions

(Div 8)

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Ordinary income (s 6-5 ITAA97)

▪ Assessment of gains that have an income character as set out in the

doctrines developed by the courts

▪ Referred to as “income according to ordinary concepts” or “ordinary

income”

Statutory income (s 6-10 ITAA97)

▪ Assessment of amounts by a specific provision in the income tax

legislation: see Div 10.

ASSESSABLE INCOME:

ORDINARY AND STATUTORY INCOME

| PoTL paragraphs [3.150] – [3.160]

Assessable Income

Ordinary Income

Statutory Income

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Exempt income

▪ Income that is specifically made exempt (ie non-taxable) by the

income tax legislation (see Subdivision 11-A)

▪ Two classes of exemption:

1. Exempt entities: s 11-5, eg charitable organisations

2. Income of a kind that is exempt: s 11-15, eg certain

scholarships

Non-assessable non-exempt income

▪ specific items that are not “exempt income” but also not assessable

(see list of NANA at s 11-55)

EXEMPT INCOME AND NON-ASSESSABLE NON-EXEMPT INCOME

| PoTL paragraph [3.170]

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General deductions

▪ Losses or outgoings that may be claimed provided they satisfy the

general deduction rule in s 8-1 ITAA97

Specific deductions

▪ Specific provisions in the income tax legislation allowing particular

losses or outgoings to be deducted

DEDUCTIONS:

GENERAL AND SPECIFIC DEDUCTIONS

| PoTL paragraph [3.180]

Deductions General

Deductions Specific

Deductions

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▪ Individuals (our main focus) – tax levied on

‘taxable income’. Spouses and dependants

are generally taxed separately but may be

treated collectively for some purposes (eg.

offsets, other levies and charges).

▪ Partnerships – an association of persons

carrying on business as partners or receiving

income jointly (s 995-1 ITAA97). Individual

partners have assessable income or

deductions according to their individual

interest in either the net income or net loss of

the partnership (Div 5, ITAA36 - s 92 ).

TAXABLE ENTITIES

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▪ Companies – vary from small closely held private

companies to public listed corporations. Income tax

paid as a separate taxpayer at company rate.

Shareholders receiving franked dividends are entitled

to a ‘franking offset’ based on coy tax paid as

reflected in company franking account (Div 205, 207

ITAA97).

▪ Trusts – a fiduciary relationship between a trustee

and a class of beneficiaries – eg. family trusts,

deceased estates. Beneficiaries may be assessable

on trust income if there is ‘present entitlement’.

Trustee assessable if no beneficiary is presently

entitled (Div 6 ITAA36).

▪ Superannuation Funds – a type of trust set up

to provide retirement benefits for employees.

Tax on fund income differs between

accumulation phase and pension phase (Div

301 ITAA97).

TAXABLE ENTITIES

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Income Tax Formula: Tax rates

Applicable tax rates

– determined by the Income Tax Rates Act 1986

– depends on the type of taxpayer:

1. Individuals who are Australian residents

2. Individuals who are foreign residents

3. Individuals who are working holiday makers

4. Companies (above and below $50 mil threshold)

5. Superannuation funds

PoTL 2019 paragraph [3.190]

Income Tax Formula: Tax rates

1. Australian resident Individuals – Progressive tax rate structure – Marginal tax rate increases as taxable income increases – known as ‘tax brackets’

Rates for 2018-19 for resident individuals:

Taxable income Tax on this income

0 – $18,200 Nil

$18,201 – $37,000 19c for each $1 over $18,200

$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000

$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000

$180,001 and over $54,097 plus 45c for each $1 over $180,000

PoTL 2019 paragraph [3.200]

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Income Tax Formula: Tax rates

2. Foreign Resident Individuals

Rates for 2018-19 for foreign resident individuals:

3. Individuals on a “Working Holiday” or Work and Holiday” visas

Rates for 2017-18 on Australian source income.

Taxable income Tax on this income

0 – $90,000 32.5c for each $1

$90,001 – $180,000 $29,250 plus 37c for each $1 over $87,000

$180,001 and over $62,550 plus 45c for each $1 over $180,000

PoTL 2019 paragraph [3.200]

Income Tax Formula: Tax rates

4. Companies

– Flat rate 30% applies

– 27.5% if entity’s turnover is less than $50 million (reducing further after 2019-20):

5. Superannuation funds

– Flat rate of 15% applies, may reduce to 0% on tax free component in pension phase after retirement.

PoTL 2019 paragraph [3.210]

Income year* Turnover threshold

Under the threshold tax rate

Over the threshold tax rate

2018-19 to 2019-20 $50m 27.5% 30%

2020-21 $50m 27.0% 30%

2021-22 $50m 26.0% 30%

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LOOKING AHEAD TO WEEK 2

What to do next?

• Complete readings prescribed in the Reading Guide

• Prepare responses to Tutorial Questions on Topic 1

(for first tute in Week 2)

• Enjoy the tute!

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