Taxation Law

MONASH

BUSINESS

SCHOOL

LECTURE 2

THE INCOME TAX SYSTEM

BTF5965 TAXATION LAW | SEMESTER 1, 2019

2BTF5965 S1 2019

This week’s topics

+ Other levies and charges

Administration • How is the liability paid? • What are the consequences

of non-compliance?

Tax offsets

• Tax offsets (previously referred to as “rebates” or credits”)

reduce a taxpayer’s income tax liability:

• There are two types of tax offsets:

• Other characteristics:

• Tapering offsets (value reduces with TI)

• Refundable offsets ( where offset value > tax liability)

• Transferable offsets (to another person), or

• Carried forward to be used in future income years (same person).

• Full list of offsets in s 13-1 ITAA97.

Income Tax

Payable

Taxable Income

Rate Tax

Offsets

PoTL 2019 paragraphs [15.10] – [15.20]

Offsets to prevent double taxation (a) Dividend tax offset – s 207-20 ITAA97

• Companies as separate legal entities pay tax on their profits.

• On distribution of profits to shareholders (as dividends), tax

that has been paid may be “attached” to the dividend, which is

then called a “franked dividend”. Shareholders who receive a

franked dividend:

– Are required to “gross-up” their dividend by the attached

franking amount; and

– Receive a tax offset equal to the franking amount.

– Tax offsets for franked dividends are refundable offsets for

individual taxpayers (s 67-25 ITAA97).

• Note ALP election policy to reduce refund-ability

PoTL 2019 paragraph [15.80]

Dividend tax offsets

Illustration: operation of the dividend tax offset

Company level $

Taxable income 100

Less: income tax payable (30%) 30

= Net profit available for distribution 70

Shareholder level

Dividend 70*

Gross up by franking amount 30

= Taxable income 100

Shareholder’s tax payable

Tax on taxable income (assume 45% rate) 45

Less: tax offset equal to franking amount (30)

Income tax payable 15

PoTL 2019 paragraph [15.80]

“imputation” of coy

tax to shareholder

Assuming dividend is

fully franked (100%)

– based on current

balance in franking

account.

Offsets to prevent double taxation (b) Income subject to foreign tax

• Australian tax residents are subject to tax on world-wide

income, under the general rules – s 6-5 ITAA97.

– Consequently, income may be taxed at source as well as in

Australia.

• Prevention of double taxation:

– tax offset equal to the lesser of ‘foreign tax paid’ and

‘Australian tax payable’: s 770-10.

– See Chapter 22 for more detail.

PoTL 2019 paragraph [15.100] and [22-140]

Concessional tax offsets provided as subsidies

• Subsidies provided to particular groups of taxpayers or

taxpayers undertaking particular activities.

• Two categories of concessional tax offsets:

Concessional tax offsets

Fixed credit against tax

payable

“Cap” on tax imposed on certain types

of income

PoTL 2019 paragraph [15.110]

Common concessional offsets

• Tax Expenditures Statement (TES) lists over 300 tax

expenditures including numerous offsets. Commonly available

tax offsets available to resident individual taxpayers include:

– Dependant and Invalid Carer Tax Offset (DICTO)

– Private health insurance offset.

– Senior Australians and pensioners offset

– Zone rebate

– Overseas forces rebate

• Low income tax offset (or “LITO”)

• referred to as a “rebate” in s 159N ITAA – supplemented by new low and

middle income tax offset available from 2018-19. These two offsets will be

combined into a single new low “income tax offset” from 2022-23.

PoTL 2019 paragraph [15.140]

Common concession offsets (a) Dependant (Invalid and Carer) Tax Offset

• Non-refundable offset available in respect of a dependant

(spouse, relative, or spouse’s relative) who is broadly:

– Unable to work due to disability; or

– Unable to work because undertaking carer obligations

and is in receipt of a specified disability support, special needs

disability support or invalidity service pension (Div 61-A ITAA97).

• Claimed by taxpayers who contribute to the maintenance of the

dependant.

PoTL 2019 paragraph [15.150]

Dependant (Invalid and Carer) Tax Offset

• Eligibility:

– Taxpayer and/or spouse must not receive, or entitled to

receive the Family Tax Benefit (Part B)

– Adjusted taxable income (ATI) of the taxpayer and

taxpayer’s spouse and the dependant is $100,000 or less

(see next slide)

– Dependant must generally be an Australian resident.

• ATI differs to taxable income as TI does not necessarily reflect

economic capacity

– ATI includes other items, eg adjusted fringe benefits.

PoTL 2019 paragraph [15.150]

Eligibility for Dependant (Invalid and Carer) Tax Offset

• Adjusted taxable income

PoTL 2019 paragraph [15.150]

Less any child support

= Adjusted Taxable Income

Taxable income

Net rental property

loss

Adjusted fringe

benefits*

Net financial

invest. loss

Reportable super

contrib. Deductible personal

super.

Certain pensions / benefits

“Target foreign income”

* Adjusted fringe benefits are generally the grossed-up value of reportable fringe benefits.

Tapering mechanism

• Maximum offset allowable is $2,717 (for 2018-19), reduced by:

– $1 for every $4 by which the “adjusted taxable income” of the

dependant exceeds $282.

• Consequently, no offset available once ATI of the dependant is

$11,150.

• Example:

– Kate has her invalid father Edmond living with her and

supports him throughout the year. For the 2018-19 financial

year he has a taxable income of $1,400

– Kate will be entitled to a rebate of:

$2,717 – (($1,400 - $282) x ¼) = $2,437.50.

PoTL 2019 paragraph [15.150]

Common concession offsets

(b) Private health insurance offset

• Refundable, means-tested offset to subsidise taxpayers paying

private health insurance premiums.

• Rebate entitlements for 1 July 2018 to 31 March 2019:

PoTL 2019 paragraph [15.160]

Status Income thresholds

Base tier Tier 1 Tier 2 Tier 3

Single ≤ $90,000 $90,001- $105,000

$105,001-

$140,000

$140,001 +

Family ≤ $180,000 $180,001 - $210,000

$210,001 -

$280,000

$280,001 +

Age Private health insurance premium rebate

Base tier Tier 1 Tier 2 Tier 3

Under 65 years 25.415% 16.943% 8.471% 0%

65-69 years 29.651% 21.180% 12.707% 0%

70+ years 33.887% 25.415% 16.943% 0%

Income included for PHI offset

– Defined in Private Health Insurance Act 2007 (Cth) based on

the individual’s “income for surcharge purposes” (as used for

Medicare levy surcharge), broadly:

Income for

Surcharge Purposes

Taxable Income

Exempt Foreign

Employment Income

Reportable Fringe

Benefits Amount

Total Net Investment

Loss

Reportable Super

Contributions

PoTL 2019 paragraph [3.80]

Common concessional offsets

(c) Low income tax offset (‘rebate’)

• Tapered rebate for lower income taxpayers.

• Maximum rebate of $445.

– Reduced by 1.5 cents for every dollar of income exceeding

$37,000 (no longer eligible once taxable income is $66,667).

• Example

Jenny has a taxable income for

the 2018-19 of $40,000.

Rebate will be:

$445 – (($40,000 - $37,000) x

0.015) = $400

PoTL 2019 paragraph [15.170]

Common concessional offsets

(d) Low and middle income tax offset

• Tapered rebate for low and middle income taxpayers.

• Maximum rebate of $530. To be combined with LITO from

2022-23.

– $200 for taxpayers with income up to $37,000

– $200 + 3% of income over $37,000 where income more than

$37,000 and up to $48,000

– $530 for taxpayers with income $48,000-$90,000

– $530 reduced by 1.5 cents for every dollar of income

exceeding $90,000 for taxpayers with income of more than

$90,000 (no longer eligible once taxable income is over

$125,333).

• Previous Example: Jenny’s low and middle income tax offset

(in addition to LITO) will be: $200 + (0.03 x $3000) = $690.

PoTL 2019 paragraph [15.170]

Other offsets:

• Zone rebate - provided to taxpayers who live in remote areas.

Depends on remote zone (Zone A, Zone B, special zones).

• Overseas forces and civilian tax offsets - provided to eligible

taxpayers working for the Australian Defence Force if the member.

• Senior Australians and pensioners offset – age pensioners are

allowed to earn $$4,368 per annum in addition to their pension of up

to $23,823 pa (for single person). Offset reduces tax to zero.

• [DHS link]

Terminating offsets

Governments have reduced “spending” by reducing number of

concessional tax offsets. These include:

– Education tax offset (available from mid-2008 to mid-2011)

– Mature age worker offset (terminated after 30 June 2014)

– Net medical expenses offset. (terminating 30 June 2019)

PoTL 2019 paragraph [15.180]

Order of taking offsets

• Section 63-10 contains a table of all offsets and states that

taxpayers must apply offsets in the order set out.

• Broadly, taxpayers must apply offsets:

1. First, that are neither refundable nor entitled to be carried

forward to future years.

2. Second, that can be refunded or carried forward.

PoTL 2019 paragraph [15.210]

20BTF5965 S1 2019

 Australian tax system is also a collection mechanism for various

other amounts payable by Australian tax residents. Examples:

– Medicare levy

– Medicare levy surcharge

– Repayment of higher education debts (HELP)

 Note employers may also be responsible for super contributions to a

qualifying fund for employees at a minimumof 9.5% of the salary or

wages paid, under the Superannuation Guarantee (Administration)

Act 1992 (Cth).

OTHER LEVIES AND CHARGES

| PoTL paragraph [3.40]

Other levies and charges

(a) The Medicare Levy (MCL)

• Used to fund Australia’s universal health care system.

• Basic levy payable:

• Certain individuals are exempt from the Medicare levy,

examples include:

– Non-residents

– Persons not entitled to Medicare benefits in respect of

services, treatment or care (exemption certificate required).

Medicare Levy

Taxable Income 2%

PoTL 2019 paragraphs [3.50], [3.70]

Medicare levy

• Low income earners may be fully or partially exempt

• Thresholds for 2017-18* income year:

* 2018-19 ‘threshold amount’ and ‘phase-in’ limit not announced at time of writing

• Where taxable income is between the “threshold amount” and

“phase-in limit” partial MCL = 10 cents for every dollar above

the “threshold amount”

Situation Threshold amount Phase-in limit

Individuals entitled to

Seniors & Pensioners Tax

Offset

$34,758 $43,447

All other taxpayers $21,980 $27,475

PoTL 2019 paragraph [3.60]

Other levies and charges

(b) The Medicare Levy Surcharge

• Medicare levy surcharge applies to individuals who do not

have private health cover and their income exceeds a

threshold. Determination of whether the surcharge is payable is

based on the individual’s “income for surcharge purposes”,

which includes:

Income for

Surcharge Purposes

Taxable Income

Exempt Foreign

Employment Income

Reportable Fringe

Benefits Amount

Total Net Investment

Loss

Reportable Super

Contributions

PoTL 2019 paragraph [3.80]

Medicare levy surcharge rates and calculation

• Surcharge rates for 2018-19:

• When applicable, the surcharge payable is calculated on a

‘modified’ taxable income amount as follows:

“Income for Surcharge Purposes” Surcharge Rate

Singles Families

0 – 90,000 0 – 180,000 0%

90,001 – 105,000 180,001 – 210,000 1%

105,001 – 140,000 210,001 – 280,000 1.25%

140,001 + 280,001 + 1.5%

Medicare Levy

Surcharge

Taxable Income (including net amount on which family trust distribution tax has

been paid + total reportable fringe benefits)

Surcharge Rate

PoTL 2019 paragraph [3.80]

Other levies and charges

(c) Repayments of higher education debts

• Higher education students who defer payment of their fees

through the (HELP) or Higher Education Contribution Scheme

(HECS) make compulsory repayments through the tax system.

• Amount of repayment is based on:

– The taxpayer’s “Repayment Income” (RI similar to Income

for surcharge purposes); and

– HELP repayment rate for 2018-19 income year:

progressive rate ranging from 2% when RI is $51,957 to

8% when RI is $107,214 and above.

• Taxpayers living overseas with an outstanding loan required

to make repayments similar to if they were living in Australia –

obligation to provide ATO with contact details.

PoTL 2019 paragraph [3.90]

TAX ADMINISTRATION

Overview  Annual returns and assessments

 Liability to pay tax

 Offences and penalties

 Tax collection systems (PAYG, WHT)

 Objections, reviews and appeals

PoTL [24.10] 26

ANNUAL RETURNS AND ASSESSMENTS

 Every person must lodge an annual return, in “approved form”: ss

161 and 161A(1) ITAA36.  Note MyTax for online returns – using a MyGov account (https://my.gov.au)

 Tax File Number (TFN) and Australian Business Number (ABN) required to

identify taxpayers.

 s 166 - the Commissioner shall make an assessment ...

 Self assessment was introduced in 1986 – onus is upon a

taxpayer to correctly state their taxable income.

 Partial SA for individuals - ATO issues NOA based on taxpayer’s info

 Full SA for companies and other entities, simply lodging a tax return is deemed

to be an assessment under s 166A ITAA36

 ATO relies upon post assessment data matching and audits,

and heavy penalties when errors are discovered.

PoTL 2016 paragraph [24.20] 27

LIABILITY TO PAY TAX

• Under ITAA97 s 5-5(5), tax is due and payable either:

• 21 days after the day on which the taxpayer was required to

lodge their return; or

• If return lodged before the due date, 21 days after the issue of

the Notice of Assessment (NOA).

• Commissioner can exercise discretion in serious hardship

cases: s 340-5, Taxation Administration Act 1953 (Schedule 1).

• A tax liability is a debt due to the Commonwealth:

• Commissioner may sue and recover in court of competent

jurisdiction: s 255-5(1), TAA Sch 1.

• Commissioner may recover income tax notwithstanding that a

review or appeal is pending – ss 14ZZM and s 14ZZR TAA53

PoTL [24.150] 28

LATE PAYMENT OF TAX

• A general interest charge (GIC) is levied on the late payment

of certain taxes, eg, income tax:

– rate set under s 8AC TAA53 (8.72% for March 2018)

– to compensate loss of revenue caused by the late payment

• GIC is deductible: s 25-5.

• Commissioner has the power to remit the GIC in specified

circumstances, eg, delay in making timely payment was not

caused by the taxpayer.

PoTL [24.150] 29

ATO AUDIT POWERS

Under self-assessment, the ATO now focuses on audits and

systematic reviews of taxpayers tax affairs using data matching, 3rd

party reports, access powers, requests for information etc. Some ATO

investigation powers exceed police powers, for example:

Power ATO Police

Access to

premises

• Immediate – at all reasonable times

for the purpose of tax law: s 353-15

of TAA Sch 1 (formerly s 263

ITAA36)

Need a search warrant: Pt 1AA,

Crimes (Search Warrants and

Powers of Arrest) Amendment

Act 1994 (Cth)

Obligation to

provide

assistance and/or

information

• Taxpayers must provide reasonable

assistance to ATO: s 353-10 of TAA

Sch 1, (formerly s 263(3) ITAA36)

• Commissioner may issue a notice to

attend and provide evidence:

Section 353-10 of TAA Sch 1

(formerly section 264(1) ITAA36)

None

PoTL [24.510] 30

RECORD KEEPING OBLIGATIONS

– Taxpayers must keep sufficient records in the English language

to substantiate income and expenditure - s 262A ITAA36

– Document retention periods:

– Storage: the general requirement is that documents must be in

writing and in English, or able to be converted into English

• Electronic records acceptable: see, Ruling TR 2005/9.

Taxpayer Retention period

Business taxpayer 5 years

Non-business taxpayer Must keep documents for a sufficient period to substantiate deductions

PoTL [24.520] 31

TAXATION OFFENCES

Criminal offences that are prosecuted by courts may apply

under Div 2, Part III TAA53 – some common offences include:

• Failure to comply with requirements of taxation law: s 8C

• Failure to answer questions or produce documents when

attending before a taxation officer: s 8N.

• Failure to remit tax withheld under PAYG rules

• The decision to take prosecution action depends upon a range

of factors such as the nature of the non-compliance, the need

for deterrent, seriousness of the office, taxpayer’s compliance

record, co-operation, and the evidentiary burden of proof. See

Practice Statement LA 2011/18.

• Examples of recent serious tax crimes - see ATO News

PoTL [24.200] 32

ADMINISTRATIVE PENALTIES

A ``shortfall amount'' is the difference between the

tax properly payable and the tax payable on the

basis of taxation statements'' made by the taxpayer

(TAA sec 284-80). Where a tax shortfall exists the

Commissioner may impose:

1) a base penalty based on degree of culpability:

 Lack of reasonable care (+ 25% of shortfall)

 Recklessness (50%)

 Intentional disregard (75%)

 +/- 20% adjustments for voluntary disclosure

etc

2) a shortfall interest charge (SIC) is levied, set at

a rate 4% lower than the GIC (4.72%) 0

10

20

30

40

50

60

70

80

90

100

Tax payable

Tax shortfall

PoTL [24.150] 33

SIC @4.72%pa

Base penalty@50%

Self assessed tax

COLLECTION DIRECTLY FROM PAYMENT SOURCES

• In practice most tax is collected directly from paying entities such

as employers, companies, banks etc. Four main systems:

1

• PAYG withholding Tax deducted from payments to others and remitted to ATO – most employment income (salary or wages).

2

•PAYG instalments Taxpayers with business and/or investment income (individuals, companies, super funds) report to the Commissioner and pay their own tax by instalments – via Business Activity Statement (BAS) or Instalment Activity Statements (IAS) see ATO link

3

• TFN withholding - If payee does not quote TFN, payer may be required to withhold tax at max personal rate, eg, on dividends and interest.

4

• Non resident WHT - interest dividends or royalties paid to non- residents. Rates prescribed under ITAA36 and Double Tax Treaties.

PoTL [24.150] 34

See also new WHT for GST on new buildings (Phoenix Taskforce)

Non-resident WHT

Taxation of foreign residents on Australian sourced income

Dividends

• Withholding tax applies to dividends paid to a foreign resident

under s 128B ITAA36, unless specifically exempted:

– Main exemption: a fully franked dividend, or to the extent that

the dividend has been franked: s 128D.

• Dividends re-invested, accumulated or capitalised are deemed

to be paid at time of declaration:

– See, ABB Australia Pty Ltd v FCT (2007).

• Rates of withholding:

– Domestic provisions: 30%

– Tax treaty country where Australia is a party: generally 15%.

PoTL 2019 paragraph [22.290]

Non-resident WHT

Interest

• Withholding tax applies to interest where the recipient is:

– A foreign resident; or

– An Australian resident and incurred in a business carried on

outside Australia through a permanent establishment (PE).

• Rate of withholding: 10% under domestic provisions.

PoTL 2019 paragraph [22.300]

Non-resident WHT

Royalties

• Withholding tax applies to royalties paid by an Australian

resident to a foreign resident, where the payment is not

incurred by the resident in carrying on business via a PE.

• A ‘royalty’ is defined in s 6(1) ITAA36 and includes for example,

use of, or right to use certain forms of intellectual property.

– Payments for broadcasting rights by Channel 7 to the International

Olympic Committee not royalties under the Australia-Switzerland

DTA: CoT v Seven Network (2016).

• Rates of withholding:

– Domestic provisions: 30%;

– Tax treaty country where Australia is a party: generally by 10% or

5%.

PoTL 2019 paragraph [22.310]

Capital gains tax for foreign residents:

• Five categories of ‘taxable Australian property’ of foreign

residents (see CGT Events in Topic 7):

• Note also a WHT of 12.5% applies to disposals of taxable Australian

property valued at > $750,000. The buyer must pay the amount to the

ATO and seller can claim a credit. – TAA Sch 1 - s 14-200

1 • Taxable Australian real property;

2 • An indirect interest in Australian real property;

3 • Business assets used in an Australian PE of a foreign resident;

4 • Options or rights to acquire assets in any of the above categories; and

5

• Assets where the capital gain or loss is deferred under an election when an entity ceases to be an Australian resident

PoTL 2019 paragraphs [22.320] – [22.330]

OBJECTIONS, REVIEWS AND APPEALS

Assessment

Taxation objection

Commissioner’s objection decision

Administrative Appeals Tribunal

Federal Court (if a point of law is involved

Federal Court

Full Federal Court

Full High Court (if special leave is granted)PoTL [24.210] 39

Anything wrong here?

If a taxpayer is unhappy with a tax assessment or penalty – both internal and external reviews are possible:

Internal review

External review

OTHER TAXPAYER REMEDIES

• Requests under Freedom of Information Act 1982 (Cth)

• Make complaint to the Inspector General of Taxation or Commonwealth Ombudsman

• Application for judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth)

– allows review of ATO decisions outside the tax assessment process on administrative law principles (natural justice, ultra vires)

40PoTL [24.630]

LOOKING AHEAD TO WEEK 3

Key income tax concepts

– derivation

– residence

– source

41