ITAA97 = Income Tax Assessment Act 1997 ITAA36 = Income Tax Assessment Act 1936 TAA = Taxation Administration Act 1953 GST Act = A New Tax System (Goods and Services Tax) Act 1999 FBTAA = Fringe Benefits Tax Assessment Act 1986 Week 1 – INTRODUCTION TO TAXATION & THE AUSTRALIAN TAXATION SYSTEM Taxes – compulsory, unrequited payments to general government. Collected for the provision of social & merit goods. 1. Social goods – Joint consumption (use by 1 doesn’t reduce others) & Non-excludable (can’t effectively exclude anyone from access to good).
E. g. fresh air, street lighting, knowledge, open source software.
2. Merit goods – provided on the basis of need and not ability to pay & positive externalities to society as a whole. E. g. health care, food stamps, education. 3. Social Engineering – Reason govt. may tax. – attempt to change a person’s behaviour. E. g. higher taxes on ‘alcopops’ / tobacco / carbon tax. This may not always work & may have negative consequences. 4. Market Imperfections – tax aim to correct the allocation of free market resources. Tax Policy Objectives: 1.
Simplicity – low compliance costs and certainty of who needs to pay what. 2. Equity ie fairness – Vertical equity: those in different positions should be treated (taxed) differently i. e. progressive taxation & horizontal equity: those in similar positions should be taxed in the same way i. e. different types of ‘income’ still. 3. Neutrality – decisions should not be influenced by tax e. g. business decisions. History of Taxes: England – Modern tax system introduced in 1842, “Schedular system” – different classes of income taxed under different rules.
Australia – Income tax introduced in 1915 (due to WW1): Income Tax Act 1915 (Cth) * Did not follow English tax legislation, but did not entirely reject it * No notion of “schedules” – all income taxed under same Act and at same rate Constitutional Background: Taxation is a “concurrent power” (State and Federal govt. power) * Section 51: allows federal government to pass laws in respect of taxation * Section 55: laws imposing taxation must only deal with taxation and must only cover one subject of taxation (means we have a number of different ‘tax acts’)
Sources of tax laws: Legislation, case law, ATO rulings. * Administrative Appeals Tribunal -> Federal Court (single judge) -> Federal Court (Full Court) (3 judges) -> High Court (7 judges) (if special leave approved) Income tax payable by each individual and company (and some other entities), regardless of residency status: s4-1 ITAA97 * However: See s 6-5 & 6-10 ITAA97 * Residents: taxed on worldwide income (subject to exceptions) * Non-residents: taxed on Australian source income (subject to exceptions) s4-10 ITAA97: Income tax = (Taxable income x Tax Rate) – Tax offsets * s4-15 ITAA97: Taxable income = Assessable income – Deductions * s6-20 ITAA97: Exempt Income e. g. scholarships/compensation from personal injury * s6-23 ITAA97: Non-assessable non-exempt income – not assessable income and not exempt income. Week 2 – ORDINARY INCOME (no statutory defo. ) – s6-5 Income according to ordinary concepts * There are competing concepts of income: Accounting concept (Profits and losses) vs. Economic concept: Income = consumption + change in wealth i. e. avings (the source of the income is irrelevant) vs. Judicial concept “what comes in” * Types of income: Ordinary Income, Statutory Income, Exempt Income (not included in assessable income e. g. income made by charitable, religious and educational institutions), Non-assessable non-exempt income. * Income propositions – Negative: Amounts that are not ordinary income & Positive: Characteristics of ordinary income. * Types of ordinary income – Personal exertion; business; property S6-5 Ordinary Income – Income according to ordinary concepts. * Ordinary income: must either be money or convertible into money.
Amounts not convertible into money are not ordinary income * Tennant v Smith: Did not have to pay tax on the value of a the rent-free premises he was occupying – Income tax is on not on what saves his pocket, but on what goes into his pocket. * Cooke & Sherden: Followed on from Tennant v Smith. Non-transferable holidays – Income is what comes in, it is not what is saved from going out. * Payne v FCT: Frequent flyer points – non-transferable and, if sold, were subject to cancellation. They were not money and could not be converted into money and so were not income. * Recurrence, Regularity and Periodicity
Types of ordinary income: Income from personal exertion, Income from business, Income from property. Capital: Does not have the character of income: Different approaches * Process/Structure (Dixon’s criteria from Sun Newspapers – Amount paid to limit production of rival) – Distinction between business structure set up to earn income and process by which income is earned. Receipts relating to the loss or destruction of profit-making structure will be capital. Amounts made in loss of the profit/making structure = capital. 3 criteria: * Character of advantage sought. Lasting qualities may play a part. Manner in which it is to be used, relied upon and enjoyed. Recurrence may play a part. * Means adopted to obtain it. Periodical payment or one-off payment for future use or enjoyment? * Fruit and tree – Eisner v Macomber 252 US 189 (1920) * Mere realisation of value of asset v Carrying on a business or profit making scheme (California Copper Syndicate – it was always the intention of the Co. to make a profit from the sale of land) – Proceeds from a ‘mere realisation’ of an asset are not ordinary income. * Fixed vs. circulating capital – Memorex Pty Ltd v FCT – Non-current computer assets sold at the end of lease = income not capital. Sale of exclusive rights (patent/copyright) will be capital (but not always! ) Evans Medical Supplies (capital) vs. Rolls Royce (income). * Restrictive Covenant: Agreement to not divulge information / not to work for competitor / not to operate in set radius etc. * Can be capital or income, depends on length of restriction * Evans Medical Supplies v Moriarty – medicine manufacturer taxpayer (who sold confidential information to government and got 100,000 pounds ) was receiving the amount as capital structure because it was out of ordinary business transactions. Rolls Royce Pty v Jeffrey – Technical knowledge and training was sold to different countries to make engines. Regarded as income. Gifts / Prizes – Mere gifts are not income * Hayes v FCT (1956) – Voluntary payment made by one party to another was mere gift. Presumption will be that gift is not income (unless it relates to income-making activity). * Scott (1966) – Gift made to solicitor by longstanding client. Unexpected. Friendship. Scott adequately renumerated for services. Several other gifts also made. Not ordinary income. Stone v FCT 2003 – Stone was a police woman but also competed as a javelin thrower for which she had sponsors and made prize money for several years. This was seen as income rather than Prizes won by sportspersons a she was seen as a professional: * Is sportsperson amateur or professional? * Prizes awarded to amateurs would not normally be income. * But if professional, may be “carrying on business” as a sportsperson, and prizes will be income. Gambling and Windfall gains: * Proceeds of gambling and windfall gains are not ordinary income. * Windfall gains: Lack commercial element.
Luck and good fortune Characterisation in the Hands Of The Recipient * Just v FCT – Income is to be judged from character it has in the hands of the recipient, NOT by the character of the expenditure. * Federal Coke Co Pty Ltd – One subsidiary of coke contracted with another Co. which failed and so instead paid only $1mil of total bill to a different subsidiary. The $1mil was seen as a gift or capital because it was not owed to this subsidiary. * Constructive receipt: s6-5(4) – taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct”.
Amounts received as substitutes for or compensation for lost income are themselves income * Californian Oil Products Ltd (in liq) v FCT – The taxpayer was appointed as agent for another company in order to sell petroleum jelly. There was a falling out between the company and the contract was terminated. The taxpayer did not have to pay tax on the termination payments as the ‘contract was the structure’ by which income was earned and its termination was not income. * HR Sinclair & Son Pty Ltd v FCT (1966) 114 CLR 537 – Taxpayer was a timber merchant who paid royalties in exchange for timber. After paying too much it was provided a refund.
Refund was taken to be income as it was incurred in the normal course of the business. * Liftronic Pty Ltd v FCT 96 ATC 4425 – Taxpayer was awarded damages because Hyundai sold it faulty lift making products. Taxpayer had to pay tax on these damages as it was seen as income not capital. It related to profit making and not profit-yielding structure. * FCT v Rowe (1997) 187 CLR 266 – Compensation for income is not income in all cases. * Amounts derived from carrying on a business are income * London Australia Investment Co Ltd v FCT : Is there a business? What is the nature of the business? Does the transaction fall within that business? What is a business? ITAA97 s995-1: “business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee”. Characteristics which may indicate a business: > Profit-making purpose Stone v FCT 2005 ATC 4234 > Repetition and regularity – FCT v Dixon – Taxpayer’s employer agreed to pay him money if he enlisted in the army on a regular basis – this was taken as income as the taxpayer relied upon this amount and due to its regularity. However, in FCT v Harris – Taxpayer was a retiree who’s old company paid him $450 due to high inflation rates, this went on for five years.
This was not income as it was unexpected, not relied upon by the taxpayer, not periodic per se and also not incidental to employment. > Organisation and system – Kelly v FCT – Kelly was not under a contract but was paid by club each match. He wont a competition and prize money was held as income as it was directly related to his performance as an employee of the club. > Size and scale of operations > Other factors – nature of activities * What is the scope of the business? * Role of asset in the business: Californian Copper Syndicate v Harris: Is the gain a mere enhancement of value? Capital) * Isolated business ventures * Extraordinary transactions * G P International Pipecoaters Pty Ltd v FCT (1990) 170 CLR 124 * Ferguson v FCT – Taxpayer was able to claim deductions for his business of herding cattle. Business was established on the basis of recurrence of transactions and the commercial nature. * Montgomery v FCT (1999) 198 CLR 639 – Post Myer case – A premium on a lease for premises was considered income rather than capital as although it was one-off it could not be considered as an increment in profit yielding structure. * FCT v Myer Emporium (1987) 163 CLR 199 Scottish Australian Mining Co Ltd v FCT (1950) – Mining Co. had to sell land as they were moving sites, realizing a capital asset to the best advantage and not income (even though subdivision). * Westfield Ltd v FCT 91 ATC 4234 – Post Myer case * FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355 * Amounts derived from property are income: rent, interest, dividends, royalties (paid to owner of property for the right to use property or to take a commodity) Week 3: Statutory Income * No Double taxation: If an amount is both ordinary and stat. income: s6-25 – use more specific rule. (i. e. Statutory income prevails).
S6-10 – Statutory Income: FCT v Sheritt Gordon Mines – Taxpayer provided technical knowledge to nickel refinery for a % of sales over 15 yrs = assessable under s6-5. Capital Gains Tax: Assessable income includes net capital gain: s100-10 / s102-5 * > In Australia, CGT introduced with effect from 21 September 1985 ITAA97 S100-10- Net capital gains are included in your assessable income and capital losses are rolled forward and deducted from gains. s100-15 – the flow chart above. s100-45 – the step by step of the flow chart above. Exemptions – s118-20 – CGT reduced if any amount of CGT already included in your assessable income.
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Notes for Midsem. (2016, Oct 13). Retrieved from https://graduateway.com/notes-for-midsem/