LWB364_Sem1_SG_13

Introduction toTaxation Law

LWB364Study Guide

Semester 1, 2013

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LWB364 Introduction to Taxation Study Guide – Semester 1, 2012

TABLE OF CONTENTS

INTRODUCTORY GUIDE 2PART A: Unit Material..........................................................................................................3

1. Unit Overview............................................................................................................32. Objectives of this Unit...............................................................................................33. Content.......................................................................................................................34. Approaches to Teaching and Learning......................................................................45. Skills Developed in Unit............................................................................................46. Graduate Capabilities.................................................................................................57. Online Information for Unit.......................................................................................68. Assessment.................................................................................................................79. External Attendance School.......................................................................................810. Texts and References.................................................................................................911. Internet Sites and Other Important Information.........................................................912. Use of Study Guide....................................................................................................913. Additional Information for your studies....................................................................914. Timetable..................................................................................................................1015. Teaching Staff..........................................................................................................11

Part B: Faculty Policies......................................................................................................12

STUDY GUIDE 14TOPIC 1: Introduction to Taxation Law..............................................................................15

TOPIC 2: Assessable Income...............................................................................................19

TOPIC 3: Deductions...........................................................................................................25

TOPIC 4: Capital Gains Tax...............................................................................................29

TOPIC 5: Goods and Services Tax (GST) and Fringe Benefits Tax (FBT).........................32

TOPIC 6: Tax Planning and Tax Avoidance.......................................................................36

TOPIC 7: Taxation of Entities.............................................................................................39

TOPIC 8: State Taxes...........................................................................................................56

© QUT Faculty of Law 2012 1


INTRODUCTORY GUIDE



PART A: Unit Material

Credit Points: 12

Prerequisite(s): NilCorequisite(s): NilIncompatible Unit(s): AYB325 Taxation Law

AYB219 Taxation Law

1. Unit Overview

Taxation law is a fundamental part of general commercial practice. Therefore, knowledge of taxation legislation and its commercial application to the business environment is required. Awareness of the incidence of Commonwealth and State taxes, including income tax, capital gains tax and stamp duty is essential in order to give advice in relation to commercial and domestic transactions.

This unit aims to provide students with an overview of the Australian taxation system with an emphasis on problem solving and application to real world scenarios. The unit also aims to assist students in development of research and analysis skills relevant to taxation law.

2. Objectives of this Unit

At the completion of this unit you should be able to:

(1) Critique the fundamental concepts relevant to the Australian taxation system, including the incidence of income, capital gains and other taxes.

(2) Resolve real world problems relating to taxation law through the application of appropriate research strategies and problem solving techniques.

(3) Explain the process by which taxation law is administered and describe the practical problems that arise in a taxation dispute.

(4) Distinguish between appropriate taxation planning mechanisms and tax evasion and avoidance.

(5) Discuss contemporary issues involved in a taxation system which operates in a volatile political, social and economic context.

(6) Effectively communicate, orally and in writing, legal concepts and solutions to real world corporate law problems.

3. Content

The material covered in this unit includes: Concepts of residence and source Basic concepts of income and capital gains tax



Deductions Tax evasion and tax planning Administrative provisions of the income tax legislation Other taxes, including State tax, Goods and Services tax (GST) and Fringe Benefits

tax (FBT)

4. Approaches to Teaching and Learning

This unit will be taught internally and externally. The unit is divided into select topics with prescribed readings and questions to focus your reading. This unit is a combination of content and skills that will develop your graduate capabilities.

The learning and teaching approach adopted in this unit combines the use of podcast mini-lectures to assist with your understanding of introductory taxation law; face-to-face (internal students) or online (external students) workshops to allow you to practise and develop your communication and legal problem solving skills; and other online materials that combine prescribed readings and questions to enable you to start evolving into an independent learner.

Study GuideThe Study Guide for the unit provides an outline of relevant content, prescribed readings and workshop exercises for each week of semester.

You are expected to be familiar with the readings for each topic and able to contribute to a meaningful discussion of relevant issues. There will be a strong emphasis on critical analysis.

Podcast LecturesThis unit will have a short (½ hour) podcast lecture from weeks 1 to 13 which will supplement the workshop material and be made available through the unit's Blackboard site.These mini-lectures provide a structure for your learning and explain the key unit concepts.

WorkshopsInternal students will attend two hour weekly workshops which are timetabled for weeks 1-13. The workshops are designed to develop your understanding of taxation law and to allow you to practise and develop your communication and legal problem solving skills. They will also assist you with your understanding of unit concepts by providing an opportunity for you to apply the law that you have learned to practical real world scenarios.

The exercises for each weekly workshop will be available via the QUT Blackboard site throughout the semester. Supplementary workshop material will be provided online for external students.

External Attendance SchoolThere is no External Attendance School in this unit.

5. Skills Developed in Unit

In this unit the following skills will be developed:



• Critical thinking and legal analysis;

• Problem solving;

• Oral and written communication; and

• Ethical orientation

The unit fosters the enhancement of these skills through the workshop program. In workshops, you will be taught a variety of approaches to legal problem solving and then practise these approaches throughout the semester. You will also have the opportunity to observe the lecturer/tutor and other students engage in oral debate on legal issues and an opportunity to practice this yourself.

6. Graduate Capabilities

What are graduate capabilities?

Graduate capabilities are the qualities, skills and understandings a university community expects its students to develop during their time at the institution and, consequently, shape the contribution they are able to make to their profession and as a citizen. QUT has identified seven generic graduate capabilities and expects that each graduate from an undergraduate or postgraduate degree will develop graduate capabilities of a kind and level appropriate to the award and discipline.

QUT recognises that capabilities are ideally articulated and assessed within a discipline context and requires each Faculty to develop and integrate within their courses discipline specific graduate capabilities. The Faculty has developed seven graduate capabilities that identify the qualities, skills and attitudes the Faculty expects its students to develop during their law degree.

Law Graduate Capabilities

GC1 Discipline Knowledge 1.1 Possess a comprehensive knowledge and understanding of Australian law,

institutional frameworks and legal policy.1.2 Understand the relationship between domestic and international law and its impact on

Australian law and policy.1.3 Understand the interaction of contextual (historical, political, socio-economic, gender,

Indigenous and culture) and policy factors on the development of the law and the resolution of legal problems.

GC2 Problem Solving, Reasoning and Research 2.1 Recognise and define legal problems.2.2 Use current technologies and effective strategies to locate and manage legal

information 2.3 Extract, evaluate and synthesise legal principles, policy considerations and contextual issues from primary and secondary sources

2.4 Analyse and critically evaluate legal issues, policy considerations and relevant contextual issues to construct arguments relevant to the legal problem



2.5 Apply relevant legal principles, contextual and policy considerations to provide practical advice for the resolution of real world legal problems.

GC3 Effective Communication3.1 Select and use the appropriate level, style and means of oral and written

communication in a variety of contexts.3.2 Present legal concepts, arguments and counter-arguments clearly and in plain English

(orally and in writing).3.3 Engage in non-adversarial dispute resolution to build legal relationships.

GC4 Life Long Learning4.1 Use a wide range of legal skills (research, problem solving, communication, legal analysis, critical thinking) in new and changing environments.

4.2 Think critically and creatively about responses to legal problems.4.3 Evaluate and reflect upon own performance to implement personal learning strategies.

GC5 Work Independently and Collaboratively5.1 Manage time effectively and prioritise activities to achieve goals.5.2 Assume responsibility for learning and working independently. 5.3 Be a cooperative and productive team member or leader.

GC6 Professional, Social and Ethical Responsibility6.1 Understand, value and promote ethical standards and professional responsibility within the law and legal profession.

6.1 Recognise and provide possible solutions for resolving ethical dilemmas.6.3 Appreciate the operation and the role of law in a wider social context, including

Indigenous, racial, cultural and gender perspectives.

GC7 Characteristics of Self-Reliance and Leadership7.1 Recognise the need for change, generate ideas and adapt innovatively to changing

environments

In the unit LWB364 Introduction to Taxation Law

Your understanding of the unit content and the further development of these skills will assist you to acquire the following law graduate capabilities:

• GC1 - Discipline Knowledge; • GC2 - Problem Solving, Reasoning and Research;• GC3 - Effective Communication;• GC4 - Life Long Learning; and• GC6 - Professional, Social and Ethical Responsibility.

7. Online Information for UnitThis unit will be taught using a combination of face-to-face and online contact. The online Blackboard site is accessible via the QUT home page.

Important Note

You will need a QUT access username and password to be able to enter the Blackboard site. Information concerning your access username and password will have been provided to you with your enrolment.



Why are we using an online site?

The objectives of offering the unit online are:• To increase your access to materials such as the study guide, powerpoint slides from

the lectures, electronic access to cases and legislation;• To allow for increased communication between yourself and staff members within the

unit through the use of announcements;• To allow you to learn and practice skills concerning the use of information

technology; and• To allow you to provide timely feedback to us in relation to the teaching of the unit,

the format of the online site and its effectiveness in enhancing your learning of the unit.

How often should I visit the site?The information within the online site will change on a regular basis. Announcements will be posted on a regular basis. You will be expected to log into the site at least once a week to read announcements. The PowerPoint slides for each of the lectures will also be up-loaded to the site on a weekly basis.

8. Assessment

In this unit there is both formative assessment (to receive feedback on your learning) and summative assessment (to receive feedback and a mark).

Summative assessment

Internal and External students

MARKS ASSESSMENT DUE DATE

40% Objection to Assessment and Memorandum of Advice

Week 7Thurs 18 April 2013

60% Open-book Examination. End of Semester

Objection to Assessment and Memorandum of Advice

This assessment relates to unit objectives 2,3 and 6. The question will be provided on the LWB364 Introduction to Taxation Law Blackboard site.

Internal and External students: You are required to complete an objection to an assessment by the Australian Tax Office (ATO) using the ATO 'Objection form (tax professionals)' and a covering Memorandum of Advice. A link to the relevant form will be provided for you on your Blackboard site.

The 'Reasons for Objection' section of the objection form should be 1,000-2,000 words in length. The remainder of the objection form must also be completed but is not included in the word count. The Memorandum of Advice should be 1,000-2,000 words in length.



The maximum word limit on the 'Reasons for Objection' and Memorandum of Advice combined is 3,000 words. So, for example, you might have included 2,000 words in your Reasons for Objection and therefore you will only have 1,000 words for your Memorandum of Advice. Or you may have 1,500 words for both documents. It is a decision for you as to how you allocate your word limit.

Examination

This assessment relates to unit objectives 1, 2, 4-6.

Internal and External students:

You are required to complete an open book on all of semesters work involving two (2) questions.

Formative feedback

Formative feedback is designed to provide you with feedback on your understanding of unit concepts and on your ability to demonstrate the graduate capabilities and skills being taught in this unit. In this unit you will receive formative feedback through:

The face-to-face workshops (internal students); The online workshop materials (external students); The individual written feedback on your assignment; The generic feedback on the assignment placed on the unit’s Blackboard site; and The option of private consultation with a member of the teaching team during student

consultation.

Self Reflection

You should reflect upon the feedback (both your individual and generic feedback as provided on Blackboard) for the purpose of identifying:

Gaps in your knowledge and understanding of the legal principles of taxation law; Strategies to improve your problem solving, legal reasoning, communication and legal

research skills in future assessment; and Areas for improvement for future studies within the LLB.

You should record your work, the feedback and your reflection, noting your strategies for improvement, in your Student ePortfolio.

9. External Attendance School

There is no External School for this unit.

10. Texts and References



Prescribed text

Kobetsky M et al, Income Tax: Text, Materials and Essential Cases (The Federation Press, Sydney: 8th ed, 2011); and

Core Tax Legislation and Study Guide CCH, (current edition).

Recommended texts

The following textbooks are highly recommended:

Deutsch RL, et al, Australian Tax Handbook, Thomson Reuters (available online through the QUT library).

Australian Master Tax Guide CCH (available online through the QUT library). Barkoczy S, Foundations of Taxation Law, CCH. Gilders F, et al, Understanding Taxation Law, LexisNexis Butterworths. Woellner RH, et al, Australian Taxation Law, CCH. Barkoczy S, Australian Tax Casebook, CCH. Kenny P, Australian Tax, LexisNexis Butterworths. Coleman C et al, Australian Tax Analysis: Cases, Commentary, Commercial

Applications and Questions, Thomson Reuters.

NOTE: Many of the above textbooks are updated on an annual basis. Therefore, be mindful when using previous editions that you may need to update the law. In addition there are numerous ‘questions and answers’ books on tax which are useful for practicing the skills you learn in this unit.

11. Internet Sites and Other Important Information

Other useful links can be located on your QUT LWB364 Blackboard site.

12. Use of Study Guide

This Guide is intended to be an overview of the law in this area and is for the use of students, not practitioners. As taxation law is a volatile area of the law please remember that changes may occur after printing, so it is important that you use this guide in conjunction with your textbook and workshop notes.

13. Additional Information for your studies

Information regarding the writing of assignments, tips on time

management, etc can be found at:



<http://www.talss.qut.edu.au/service/sal/>.



14. Timetable

WEEK TOPICTOPIC

NO

ASSESSMENT

1 Introduction to Taxation Law 1

2 Assessable Income

2

3 Assessable Income (cont)

4 Allowable Deductions3

5 Allowable Deductions (cont)

6 Capital Gains Tax – Introduction

47 Capital Gains Tax – Special Topics

Objection to Assessment and Memo of Advice

8 Capital Gains Tax – Special Topics (cont)

Mid-Semester and Easter Break

9Goods and Services Tax (GST) and Fringe Benefits Tax (FBT)

5

10 NO WORKSHOPS

11 Taxation Planning and Taxation of Entities 6,7

12 State Taxes 8

13 Revision N/A

SWOTVAC - Exam preparation

Central Exam period



15. Teaching Staff

Catherine Brown

Unit Coordinator

(07) 3138 2733

(07) 3138 2121

<[email protected]>

Associate Professor Colin Anderson

Moderator

(07) 3138 1099

(07) 3138 2121

<[email protected]>



Part B: Faculty Policies

For all relevant faculty policies, please consult the Law Student Gateway (http://www.student.qut.edu.au/about/faculties-institutes-and-divisions/faculties/law):

‘Undergraduate student resources’ for assessment policies ‘Forms’ for:

o Application for extension of assessmento Application for exemption from external attendance schoolo Application for review of assessmento Assignment acknowledgement formo Assignment submission form

‘Publications’ for:o Law School Undergraduate Student Handbooko QUT Student Handbooko Written Assessment in the Law School: Legal citation

It is your responsibility to read and understand these policies and to ensure that you comply with them.

Academic Integrity

QUT is committed to maintaining high academic standards to protect the value of its qualifications for all graduates. This includes supporting and assuring academic integrity of assessment. Any actions or practice by a student which defeat the purpose of assessment is regarded as a failure to maintain academic integrity. A breach of academic integrity is regarded as Student Misconduct and can lead to the imposition of penalties.

A breach can include plagiarism or cheating in examinations. Plagiarism involves representing another person's ideas or work as one's own. Therefore plagiarism includes:

copying any part of another students’ work;

providing a copy of your own work to another student for the purpose of plagiarism;

collusion or collaborating with others where it is not authorised in the assessment requirements;

copying directly from books, articles or the internet without full and comprehensive acknowledgement of the source;

paraphrasing without full and comprehensive acknowledgement of the source;

resubmitting your own work for another assessment item;

giving or providing for sale one's own work to another person, company or web-site etc for copying or use by another person;

purchasing or otherwise obtaining assessment material through individuals, companies or web-based tools/services.


http://www.student.qut.edu.au/about/faculties-institutes-and-divisions/faculties/law

http://www.student.qut.edu.au/about/faculties-institutes-and-divisions/faculties/law


Failing to maintain academic integrity is regarded by QUT as student misconduct and is a serious breach of QUT Student Rules (Appendix 1C of the Manual of Policies and Procedures (MOPP). (http://www.mopp.qut.edu.au/Appendix/append01cst.jsp#Part5).

All instances of failing to maintain academic integrity in this unit will be dealt with in accordance with the University procedures as detailed in Chapter C of the MOPP and penalties may be imposed. (http://www.mopp.qut.edu.au/C/C_05_03.jsp#C_05_03.04.mdoc)

The detection and penalising of plagiarism is important for a number of reasons:

Students who plagiarise intentionally or otherwise in assessment items are not providing appropriate evidence of the learning undertaken in the degree.

Members of an academic community that plagiarise undermine the value of the knowledge generated by that community.

Allowing students to obtain degrees with plagiarised assessment items lowers the quality of the University’s graduates and so undermines the value of the qualifications offered and the achievements of the other students.

Plagiarism in academic work is detected in a number of ways:

Markers are usually subject matter experts who will recognise the contributions of previous authors if they are presented inappropriately in submitted work.

The writing style used in submitted work often provides signs where plagiarism has taken place (e.g. dramatic changes in language used from paragraph to paragraph).

Electronic detection tools are now available that identify content matches with other sources (QUT has a site licence to use a detection tool called SafeAssign). Your unit coordinator may require you to use these tools and to supply reports generated by them as part of the conditions of assessment for particular units.

You can be asked to authenticate your learning on an assessment item (eg through showing notes/drafts, resource materials used in the preparation of the item or by undertaking a viva or practical based exam).

Checking your work:

You are encouraged to make use of the support materials and services such as the QUT Cite|Write program to help you consider and check your assessment items.

Where available, use content matching software such as SafeAssign and submit generated reports as part of the conditions of assessment for this unit.

Consult with your tutor/lecturer prior to submission if you are unsure - including interpreting reports from plagiarism detection software or checking the level of collaboration is permitted.


http://www.mopp.qut.edu.au/C/C_05_03.jsp#C_05_03.04.mdoc

http://www.mopp.qut.edu.au/C/C_05_03.jsp#C_05_03.04.mdoc

http://www.mopp.qut.edu.au/Appendix/append01cst.jsp#Part5




STUDY GUIDE



TOPIC 1: Introduction to Taxation Law

ObjectivesAt the end of this chapter you should be able to explain and critically analyse:

the historical context in which the current taxation regime evolved and the criteria for evaluating tax legislation;

the overall scheme of the income tax legislation and sources of tax law;

some common terms and concepts in income tax legislation; and

the role of the Australian Taxation Office (the ATO) and the Commissioner's ability to delegate his powers under taxation legislation.

Readings

Kobetsky M et al, Income Tax: Text, Materials and Essential Cases (The Federation Press, Sydney: 8th ed, 2011) -

Historical context, evaluation criteria and sources of tax law: Chapter 1, [1.10] -[1.230];

Sources of tax law: Chapter 1, [1.320] – [1.390];

Overall scheme of legislation: Chapter 2, [2.10] - [2.140]; and

The role of the ATO: Chapter 17, [17.10] – [17.320].

Overview

When originally enacted, the Income Tax Assessment Act 1936 (Cth) (“1936 Act”) was one slim volume of material. Since then we have seen the introduction of the Income Tax Assessment Act 1997 (Cth) (“1997 Act”), which was introduced as part of the 1993 Tax Law Improvement Project (TLIP), as well as the introduction of new taxes such as capital gains, fringe benefits tax and the Goods and Services Tax (GST) regime. The result is a complex and lengthy legislative regime which is supplemented by a plethora of case law and taxation rulings.

In this topic we will be looking at the overall design of a taxation system and the history of taxation reform in Australia. You will also be introduced to the core elements of the income tax regime as they apply to individual tax payers. In later topics we discuss the ways in which other taxpayers (such as partnerships) are taxed and the ways in which other taxes (such as GST) are imposed.

Key Taxation Law Concepts

The framework for the imposition of income tax can be found in s 4-10 of the 1997 Act. This section states that:

(1) You must pay income tax for each year ending 30 June, called the financial year.

(2) Your income tax is worked out by reference to your taxable income for the income year. The income year is the same as the *financial year, except in these cases:



(a) For a company, the income year is the previous financial year;(b) If you adopt an accounting period ending on a day other than 30 june, the

income year is the accounting period adopted in place of the financial year or previous financial year, as appropriate.

(3) Work out your income tax for the *financial year as follows:

Income tax = (taxable income x rate) - tax offsets

Method statement:

Step 1: Work out your taxable income for the income year.Step 2: Work out your basic income tax liability on your taxable income using:

(a) The income tax rates or rates that apply to you for the income year; and(b) Any special provisions that apply to working out that liability.

Step 3: Work out your tax offsets for the income year. A tax offset reduces the amount of income tax you have to pay.

Step 4: Subtract your *tax offsets from your basic income tax liability. The result is how much income tax you owe for the *financial year. (If your total tax offsets exceed your basic income tax liability, you are not entitled to a refund, or to offset the excess against any other liability.)

Section 4-5 provides that the expression ‘you’ in the 1997 Act also generally applies to entities, eg companies. You should also note the use of * to indicate terms which are defined in the Dictionary in s 995-1.

Taxable Income: The taxing formula in s 4-15

It can be seen that taxable income means assessable income minus deductions. In the form of a simple formula:

Taxable Income = Assessable Income - Deductions

The short hand version of this is: TY = AY - D

Assessable income is defined in Div 6 of the 1997 Act. In short, assessable income will comprise:

Income according to ordinary concepts Statutory income

The legislation also provides that certain income is excluded from the above equation as they are either “exempt income” or “non-assessable, non-exempt income”. We will look at what is included in assessable income in Topic 2.

Deductions that are allowable for taxation purposes are defined in Div 8 of the 1997 Act and include:

General deductions Specific deductions



Again, the legislation provides for specific exclusions and / or limitations to amounts that can be included as deductions for tax purposes. We will look at deductions in Topic 3.

Tax Rates and Tax Offsets

As referred to above, once a taxpayer has calculated their taxable income they are then in a position to calculate how much tax is payable on this amount. Individual taxpayers are taxed on a graduated scale as opposed to companies, which are subject to a flat rate of tax.

Tax offsets operate to reduce the amount of taxation owing by a taxpayer. That is, the amount provided for by the tax offset results in an equal benefit to the taxpayer.

You will not be expected to calculate the final tax payable in this unit. However, you will be required to calculate taxable income and it is important to be aware of the graduated tax rates and the impact this has on the way taxpayers structure their affairs.

Administration of the Taxation Legislation

There are a number of provisions which deal with the actual administration of the income tax legislation and which relate to such things as collection and recovery of tax and taxpayer's rights to dispute their tax liability. Basically, the taxation legislation is administered by the Commissioner of Taxation: s 3A of the Taxation Administration Act (the TAA). The Commissioner heads the Australian Taxation Office (the ATO), which has been established and has offices throughout Australia in order to administer the taxation provisions.

One important area that you will come across in this subject is the use by the Commissioner of Taxation of taxation rulings. The Commissioner may make rulings, which are issued to the public and which set out the Commissioner’s view of the law and how it applies to the taxpayer’s situation. Most rulings you will be dealing with will be public rulings and, as from 1992, where these rulings are favourable to taxpayers they are binding on the Commissioner. Public rulings are rulings on matters that relate to the general public, eg the deductibility of certain expenses. The Commissioner also has power to issue private rulings. These rulings will issue where a particular taxpayer has requested the ruling for a particular situation.

The Commissioner, subject to certain limitations, may also delegate powers to a Deputy Commissioner. The proper scope of the Commissioner’s power of delegation was considered by the High Court in O’Reilly v State Bank of Victoria 82 ATC 4671, a case dealing with the powers provided to the Commissioner to require people to provide him with information. In deciding whether those particular powers could be delegated, the court stated that:

“... the Commissioner could not possibly exercise all those powers personally ... it would reduce the administration of the taxation laws to chaos if the powers conferred by (s 264 and some other sections) could be exercised only by a Commissioner or a Deputy Commissioner personally”. (at 4673-4).

History of Reform

As stated above, taxation law has been subject to numerous reform since the 1936 Act was enacted. More notable reviews of the Australian taxation system have included the Asprey Review in 1975, the Review of Business Taxation (the Ralph Report) in 1999, and the Report



on Australia’s Future Tax System (the Henry Review) in 2009. When considering taxation law reform, a number of criteria have been applied in evaluating the effectiveness of the tax system. These include criteria such as simplicity, efficiency and fairness.



TOPIC 2: Assessable Income

Objectives

At the end of this chapter you should be able to critically analyse and apply:

the importance of residence, source and derivation of income in the context of taxation of individuals;

concepts of ordinary income for taxation purposes;

the difference between ordinary income and capital;

how income is derived from personal exertion and business activities; and

the operation of the trading stock provisions.

Readings


Residence: Chapter 6, [6.30] - [6.160];

Concepts of ordinary income: Chapter 2, [2.150] - [2.410];

Income from personal exertion: Chapter 3, [3.10] - [3.320];

Income from property: Chapter 3, [3.340] - [3.350]; Chapter 5, [5.10]; [5.80] - [5.140];

Business income: Chapter 4, [4.10] - [4.340]; and

Derivation and trading stock: Chapter 12, [12.10] - [12.640].

Overview

In topic 1 we learned income tax is calculated on “taxable income” which, in turn, is defined as “assessable income” less “deductions”. The starting point for determining what is included as assessable income is s 6-1 of the 1997 Act which provides that assessable income consists of ordinary income and statutory income. “Ordinary income” refers to the amounts we ordinarily consider to be income, eg salary, the proceeds of carrying on business, etc. “Statutory income” is defined in s 6-10 as being amounts received which are income because of the effect of some provisions in the taxation legislation, eg capital gains under Part 3-1 and 3-3.

In this topic we will be looking at what constitutes “ordinary income” under s 6-5 of the 1997 Act, including income that flows from personal exertion, property and business activities. We then look briefly at some of the legislative provisions which specifically define certain amounts as income, referred to as “statutory income”.

Income According to Ordinary Concepts

Section 6-5 of the 1997 Act defines ordinary income as follows:



(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

(3) If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are 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.

There are a number of terms in this section that require further examination – namely “resident”, “income according to ordinary concepts”, “derived” and “Australian source”.

Residence

According to s 6-5, the assessable income of a taxpayer is different depending on whether the taxpayer is a resident or not. A resident taxpayer includes the gross income they have derived from all sources, whether in Australia or elsewhere. On the other hand, the assessable income of a foreign resident taxpayer includes only so much of their gross income as is derived from sources within Australia. The determination of the taxpayer’s residence is, therefore, the first step in ascertaining their ordinary income.

The term “resident” is defined by s 6(1) of the 1936 Act, which applies both to individuals and companies. For individuals, a resident is someone who either ordinarily resides in Australia or who is deemed a resident by virtue of one of the statutory tests of residence. These statutory tests are the domicile test, the 183 day test and the superannuation fund test. Only one of these tests (ie a residence according to ordinary concepts or one of the three statutory tests) needs to be satisfied for a person to be a resident.

Source

Having determined that a taxpayer is an Australian resident, the identification of the source of income is not necessary in order to calculate the taxpayer’s taxable income; income from any and all sources is assessable. Where, however, the taxpayer is a foreign resident, it becomes necessary to identify that income which is derived from sources within Australia.

Unlike the case of residence, there is no general statutory definition to assist us with the determination of the source of income and resort must therefore be had to the leading decisions on point. In Nathan v FCT (1918) 25 CLR 183, Isaacs J said:

‘The Legislature in using the word ‘source’ meant, not a legal concept, but something which a practical man (or woman) would regard as a real source of



income. Legal concepts, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact. The Act, on examination, so treats it.’

The dicta of Jordan CJ in CT (NSW) v Cam and Sons Ltd (1936) 36 SR (NSW) 544 provides some guidance. His Honour indicated that a source may consist of several factors the character of the source will depend on which of the factors is dominant. So, for example, if the source of the income consists substantially in the making of contracts, then the place where the contracts are made may be regarded as the only significant factor.

As a general rule, the simplest way to determine where income is sources is to look at the various categories of income and the manner in which the courts have resolved the issue for each category. For example, the source of income for remuneration for services rendered may be the place where the contract is made, the place where the contract is performed, or the place where payment is made, or some combination of all of these factors depending on the circumstances. By contrast, the source of business income is where the trading activities take place.

The Meaning of “Ordinary Income”

An amount is included in the assessable income of a taxpayer under s 6-5 of the 1997 Act if it is “income according to the ordinary concepts”, a term which is not defined by legislation. Over the years, there has been a large volume of case law that has provided indicators of what amounts can be considered “income according to the ordinary concepts”. A number of propositions have been extracted from this body case law, including:

(a) Income, generally speaking, is what ‘comes in’.

(b) Income must be either a receipt of money or some item capable of being converted to money.

(c) A receipt of a capital or of capital nature is not income according to ordinary concepts – though it may be assessable under some specific provision (for example the CGT provisions) and the distinction between the notions of income and capital is less than perfect.

(d) It is the character of the receipt in the hands of the recipient, which is decisive.

(e) Regular receipts are more likely to be of an income nature, though one off commercial transactions can give rise to income.

(f) Characterisation of an amount as profit does not determine conclusively the income / capital issue.

(g) Where the receipt is the product of any employment of or services rendered by the recipient or of any business or other revenue-earning activity carried on by him/her, the amount is likely to be ordinary income.

Another useful guide to the determination of the character of a particular amount is the classification of income into the three categories of personal exertion, business and property.

Income from Personal Exertion



Receipts from remuneration for services rendered in the form of salaries and wages give rise to the most common form of ordinary income as they demonstrate a number of the common indicia of income. For example, in FCT v Dixon the taxpayer’s employer agreed to pay to staff who enlisted the difference between their wages and what they would receive from serving in the armed forces. The employer was not legally obliged to make the payments. The Court found the payments assessable as income as the payments were regular and periodic and the taxpayer relied on them for his livelihood.

Not all receipts will fit neatly into the category of salaries and wages. For example, voluntary payments such as Christmas bonuses by an employer, tips to service staff and prizes to sportsperson who is considered to be carrying on a sports business may be considered ordinary income on the basis that the payments are a recognised incident of employment or work. Examples of payments not sufficiently linked to services or employment, and therefore not income, are amounts received by way of gift or prize money that is one off in nature. However, once again, the distinction as to whether an amount received from personal exertion is ordinary income or not is less than perfect.

Income from Property

The idea of income from property is perhaps better understood if we read it as ‘income from ownership of capital as distinct from income from using capital’. If a taxpayer gains interest on money invested in a bank, the receipt is generated simply by virtue of his/her ownership of that property; the interest is therefore a receipt of income from property. Rent from a rental property is another example.

On the other hand, if, instead of investing the money in the bank, the taxpayer ventured it into the business of money lending, the interest would be generated by personal exertion or by the operation of that business.

Income from Carrying on a Business

Receipts received in the course of carrying on a business are generally ordinary income. Once again, a number of propositions have emerged from case law as to what constitutes carrying on business. The following points can be made:

(a) A person may carry on a business though he/she does so in a small way.

(b) There must be some significant commercial purpose or character in the activities to distinguish them from a hobby or recreation.

(c) Lack of production of income does not prevent a finding that the taxpayer is carrying on a business, although a profit motive is significant.

(d) Lack of business efficiency is not decisive since many inexperienced people are in business.

(e) Repetition and regularity are important; but every business must begin and end and therefore an isolated activity can be the commencement of a business.

(f) Organisation, the maintenance of a system of record keeping and use of systems all serve to indicate a business.

Having established that a taxpayer carries on a business, it then becomes necessary to determine whether amounts received by the taxpayer in the course of carrying on that



business are income. Clearly, where the business of the taxpayer involves rendering services, for example trades persons, consultants and professional persons, there is no doubt that remuneration for services rendered in the course of carrying on that business is income. But what of the case where the taxpayer’s business does not involve the rendering of services, such as a manufacturer? His/her business involves the processing of raw materials into a finished product, which is then sold. The process will involve the utilisation of plant, equipment and premises and the employment of staff. The gains made by him/her result from the employment of these resources rather than their consumption. Such gains arising from the sale of trading stock are clearly of an income or revenue nature whereas the sale of the business itself would result in a capital receipt. Trading stock is discussed below.

By far the most common problems are those of characterising a receipt or amount generated by the sale of assets. Such problems have generally been resolved judicially by identifying the scope of the business. What is its nature, how is it carried on, how does it generate gains and was the particular sale one in the course of carrying on the business? These issues became prominent in the mid 1980s in a number of cases involving sales of land. In particular, in cases such as FCT v Whitford’s Beach Pty Ltd and Myer Emporium Ltd v FCT the High Court was required to consider whether receipts from one off transactions could be considered income in circumstances where it could be inferred that the taxpayer’s intention was to make a profit or gain. As you will see in topic 4, many of these issues are now resolved by the introduction of the CGT regime.

What is trading stock?

To remove any doubt, there are provisions in the 1997 Act which specifically set out the manner in which trading stock is included as assessable income. Trading stock is therefore “statutory income”. Trading stock is very broadly defined by s 70-10 of the 1997 Act as including:

“(a) Anything produced, manufactured, or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business; and

(b) Live stock.”

Whether or not an item is trading stock depends on the use to which it is put. For example spare parts held for maintenance of plant are not trading stock as they are not 'acquired or purchased for purposes of manufacture, sale or exchange': Guinea Airways Ltd v FCT (1949) 83 CLR 584. Also goods acquired for hire to customers are not trading stock: Cyclone Scaffolding Pty Ltd v FCT 87 ATC 4021.

Section 70-35 of the 1997 Act provides that where a taxpayer carries on any business and holds trading stock at the start or end of the income year, that trading stock is taken into account in working out the taxpayer’s assessable income and deductions. This is because the cost of stock sold during the year and also increases in stock over the year are relevant in determining a taxpayer’s taxable income.

Where there is an excess of the value of trading stock at the end of the year over the beginning this difference is included in assessable income s 70-35(2). Conversely, where the excess is of the value of the trading stock at the beginning of the year over the end of the year the difference is an allowable deduction: s 70-35(3).



Three methods of valuing each article of trading stock:

(a) Cost price - Philip Morris Ltd v FCT 10 ATR 44 at 51 (manufacture - absorption cost)(b) Market selling price - Australasian Jam Co Pty Ltd v FCT (1953) 88 CLR 23 at 31(c) Replacement price

There are special valuation rules:

Special circumstances or obsolescence - a fair and reasonable value in the Commissioner’s discretion: s 70-50 1997 Act

Non-arm’s length transaction. If the value is higher than the market value the amount of the outgoing is instead the market value: s 70-20 1997 Act .

The relevance of derivation

Finally, it has to be noted that “assessable income” has a temporal element to it; that is it is necessary to assign the assessable income of a taxpayer to a particular tax period to determine when the amount should be included in the taxpayer’s taxable income. See for example ss 6-5(2) and (3). This placing of income (and deductions) in the correct time period is important for a number of reasons in a practical sense as well. For example tax rates may change. Also money has a time value so it is often best to have income recognised in later periods whilst deductions are claimed as soon as possible.

Consider the following example: In May 2012, an architect completes her contract with a builder in respect of the design of a range of houses. An account for the work is prepared and forwarded to the builder in June 2012 but is not paid until July 2013. Does the architect include the amount of her fee in her return for the 2012 financial year? Or the 2013 financial year? To put it another way, was the income derived when it was earned, billed or received?

Thus, the issue of when income can be said to have been derived by a taxpayer is crucial to the accurate determination of the amount of his or her taxable income in any one-year. Income is not assessable in a particular year of income unless it is derived in that year.



TOPIC 3: Deductions

Objectives:At the end of this chapter you should be able to critically analyse and apply:

when an expense is deductible under the general deduction provision in the 1997 Act;

whether an expense is of a capital, private or domestic nature and therefore not deductible; and

whether an expense is deductible under one of the specific provisions of the taxation legislation.

Readings


General deductions: Chapter 10, [10.10] - [10.630]; and

Specific deductions: Chapter 11, [11.10] - [11.570].

Overview

Looking back at the taxing formula in s 4-15, you will recall that taxable income is calculated by reference to assessable income less deductions. In topic 2 we considered what is included in “assessable income”. In this topic we examine what is meant by “deductions”.

Like assessable income, deductions include amounts that are considered to be “general deductions” and amounts which are specifically provided for by the legislation referred to as “specific deductions”. The legislation also limits or disallows certain deductions. In this topic we examine the elements of the general deduction provision in s 8-1 of the 1997 Act. We then look at some of the specific deduction provisions, such as repairs, travel and the capital allowance regime.

General deductions

The starting place for discussion of deductions is Div 8 of the 1997 Act. Section 8-1 provides:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.



(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12-5.

(3) A loss or outgoing that you can deduct under this section is called a general deduction .

From this section we can see a number of elements:

There must be a loss or outgoing which falls within either of the 2 positive limbs in s 8-1(1) – ie that it is incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Therefore there must be a nexus or connection between the deduction and the assessable income it generates. In establishing a nexus you are showing that the reason the outgoing has been incurred is for the purposes of generating assessable income. You only need to establish that a nexus exists by using one test. However, in practice when it is difficult to establish a nexus a taxpayer will argue in the alternative. This is there is a nexus under the incidental and relevant test, but if this is not correct, in the alternative there is a nexus under the essential nature and character test.

If there is a dual or multiple purpose of the taxpayer when the loss or outgoing is incurred then you must determine which purpose is for income producing, therefore satisfying s 8-1 and which is not. For example, you own a car, which you use for work related activities and for private use. In order to obtain a deduction under s8-1 there must be an apportionment on the basis of the percentage used for income producing purposes as opposed to private usage.

The loss or outgoing must not be excluded by one of the 4 negative limbs in s 8-1(2) – namely that loss or outgoing is of a capital nature, private or domestic nature, incurred in gaining or producing exempt income or prevented from being deductible by a provision of the taxation legislation.

Over the years a number of principles have emerged in relation to specific types of losses or outgoings. So for example, where a section of a home is used for a home office for reasons of personal convenience, only running costs such as a portion of electricity are deductible. Fixed expenses such as rates and interest on the mortgage are not deductible. Self education expenses which are likely to lead to a promotion or improve earnings are more likely to be deductible than self education expenses which lead to a qualification necessary to enter a new field of employment.

Specific deductions



There are numerous provisions which specifically provide an amount is deductible. For example s 25-10 of the 1997 Act allows for repairs which are repairs to premises and depreciable assets which are held or used solely for the purpose of producing assessable income. For a deduction to be allowed, it must be shown that the repairs are incurred, that they are incurred in relation to premises for income producing purposes, and that they are not of a capital nature. If the property repaired is only partly used for income producing purposes then a taxpayer can apportion the deduction on the basis of what is reasonable in the circumstances: s 25-10(2).

There are also provisions which limit the deductibility of certain losses and outgoings. So for example, Div 28 sets out the rules for deducting car expenses and Div 34 establishes the circumstances in which expenses for clothing that are incurred in gaining assessable income may be deductible.

The Capital Works Regime

The capital works regime is an example of a specific deduction. Recall from the above discussion that amounts of a capital nature would not be deductible under the general deduction provision. Div 40 of the 1997 Act provides a mechanism for the deductibility of the “decline in value” for an income year of a “depreciating asset” that the entity “held” at any time during the year: s 40-25.

A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time that it is used: s 40-30. Land is excluded from the definition of depreciating asset as are items of trading stock.

The deduction is calculated by reference to two methods: the diminishing value and prime cost methods: s 40-65. With the diminishing value method the rate is multiplied by the depreciated value of the item of plant in the owner’s books at the start of the year. In the prime cost method, the amount of the deduction is the same in each year (except the first and last). The specific formula for calculating the deductions are:

Section 40-70 – Diminishing value method (pre 10/05/06 assets)Base Value cost x Days held x 150%

365 Asset’s effective life (in years)

Section 40-72 – Diminishing value method (post 09/05/06 assets)Base Value cost x Days held x 200%


Section 40-75 –Prime cost methodCost x Days held x 100%


No Double Deductions

It may be that in some situations, a loss or outgoing may be deductible under both the general deduction provision and a specific deduction provision. Section 8-10 provides that only one



deduction is allowable, and that the provision that is most appropriate to the amount is applied.



TOPIC 4: Capital Gains Tax

ObjectivesAt the end of this chapter you should be able to critically analyse and apply:

the basic provisions of the CGT provisions of the 1997 Act;

the CGT provisions to the acquisition and disposal of CGT assets; and

specific CGT exemptions, including main residences and deceased estates.

Readings


Capital Gains Tax: Chapter 8, [8.10] - [8.800].

Overview

You will recall from Topic 2 that income according to ordinary concepts does not include amounts that are capital in nature. Likewise, expenses that are incurred in gaining capital amounts would not be deductable under the general deduction provision as there is no assessable income to which the expense could be attributed. This means that prior to 1985, amounts that were capital in nature were not subject to income tax.

The Capital Gains Tax (CGT) regime was introduced on 20 September 1985 following recommendations of the 1975 Asprey Committee and then later the 1985 Draft White Paper on Reform of the Australian Tax System. The regime was originally introduced in the 1936 Act and then later redrafted in the 1997 Act, so that now the net capital gain received by a taxpayer will be subject to income tax.

CGT generally

The core CGT provisions are located in Parts 3-1 and 3.3 of the 1997 Act. In short, the CGT regime provides a mechanism under which a taxpayer’s net capital gain (or loss) is calculated. In the event of a net capital gain, the amount is included in the taxpayer’s assessable income as “statutory income”. Net capital losses are offset against current or future capital gains (see s 102-5 of the 1997 Act). The taxation payable on capital gains are then determined in the usual manner; that is the tax payable is calculated on the taxpayers taxable income, which in turn is a product of assessable income (including capital gains) less deductions.

The CGT regime is somewhat mechanical and largely located in legislation, and therefore in this topic we work through a step by step approach to applying the CGT provisions. We also examine some specific of the exemptions to the CGT provisions (such as maintaining a main residence) and some applications of the CGT regime (such as what CGT liability arises on a person’s death).



At a basic level, the capital gain is calculated for taxation purposes as the difference between what you sold the asset for and what you paid for it. Some of the key provisions in the scheme are as follows:

Division 102 tells how to work out whether they have a net capital gain or a net capital loss and the consequences;

Division 104 sets out all the CGT Events for which you can make a capital gain or loss and it deals with the timing of each event;

Division 108 deals with 3 broad groups of assets relevant to working out capital gains and capital losses;

Division 109 contains rules about how and when a CGT asset is acquired; Divisions 110 to 114 have rules regarding calculation of the cost of a CGT asset

known broadly as the cost base; Division 116 has rules for calculating the capital proceeds from a disposal of a CGT

asset; and Division 118 sets out various exemptions and exceptions whilst Division 121 sets

out the record keeping requirements.

Steps in Calculating CGT

The following example gives an example of how a CGT liability might be calculated.

Example of the steps used in determining whether CGT liability exists

1. Is there a CGT Event?See list s 104-5.

2 What is the timing of the event?Again see s 104-5 list and s 109-5.

3. Is there a CGT asset?Definition - s 108-5Main exemptions - s 118- Cars s 118-5- Trading stock s 118- 25- Assets pre 20-9-85 s 104-10- Main residence s 118-110\

4. Calculation of the gain or lossCost base / indexed cost base / reduced cost base- Elements s 110-25; s 110-55- Indexation s 114-5; s 960-275- Reduced cost base; s 110-55- Capital proceeds; s 116-20- Calculation; Div 104

5. Is an amount assessable under other Parts of the Act in relation to the disposal? Consider the applicability of other sections especially s 6-5. If so, reduce capital gain by amount assessable by the other sections: s 118-20.



6. Calculate the net capital gain or loss for the year- Calculate s 102-5; s 102-10- Include in assessable income s 102-5(1) if a net capital gain

From 21 September 1999 a discount of 50% applies to capital gains incurred by individual taxpayers where the asset has been held for at least 12 months. Prior to this the cost base of the asset was indexed to take into account inflation if the asset had been held for at least 12 months.

Specific types of assets are excluded from CGT. Amongst the more important are:

Motor vehicles (s 118-5(a))

A taxpayer’s main residence (sub-div 118-b)

Depreciating assets (s118-24)

Trading stock (s 118-25); and

Compensation for personal injury (s118-37(1))

Due to the complexity of the CGT provisions, you will be provided more detailed notes in your workshops.



TOPIC 5: Goods and Services Tax (GST) and Fringe Benefits Tax (FBT)


the general provisions of the Goods and Services Tax (GST) and Fringe Benefits Tax (FBT) regimes; and

the interaction between GST, FBT and income tax rules.

Readings


Goods and Services Tax: Chapter 18, [18.10] - [18.310]; and

Fringe Benefits Tax: Chapter 7, [7.10] - [7.370].

Overview

Up until now we have confined our discussion to income tax. In this topic we consider two additional types of taxation – namely the Goods and Services Tax (GST) and the Fringe Benefits Tax regime (FBT). In this unit we look briefly at how these regimes operate and consider some practical examples in which they arise.

Goods and Services Tax (GST)

The GST is a broad based indirect tax which was introduced by the Government as part of its tax reform package. The GST replaced the wholesale sales tax system and should eventually replace a number of state indirect taxes.

A GST is a consumption tax which is very broadly aimed at taxing the supply of goods and services in Australia. It is therefore a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including imports; however the GST does not generally apply to consumption outside Australia, which is why the GST does not apply to exports.

The general approach of the legislation is to: Impose tax on a supply of goods or services by a GST registered entity; and Allow the entity to offset the GST it is liable to pay on supplies it makes, against input

tax credits for the GST that was included in the price it paid for its business inputs.

The GST is basically a value added tax. Tax is paid at each step along the chain of transactions involving the goods or services, until the end-user is reached, and tax is paid on the value added along the chain. It is the consumer who will ultimately bear the tax. Entities making taxable supplies will receive a credit for the GST paid on inputs. This is termed an input tax credit. If the GST charged by an entity on the goods and services it supplies (“the output tax”) exceeds the input tax, then it only pays the net amount. If the output tax is less than the input tax, then the entity will be entitled to a refund.



The tax will be imposed on “taxable supplies”. This term covers nearly all activities involving the supply of goods or services. There are, however, two important categories of exemptions. The supply of goods or services that are GST-free and those that are input taxed. The entity making the supply is the one liable to pay the GST, which is 10% of the value of the supply: s 9-40 and s 9-70. The end sale price will be a GST inclusive price. Therefore to determine how much GST has been paid on this end price we take 1/11

th and this will be the GST.

Example:

I pay $440 (GST inclusive) for a widget.The GST I paid is 1/11

th of $440 = $40.The value of the supply was $400 and 10% of that = $40 so the GST inclusive price = $440.

The following is a table that shows the chain of GST and input tax credits:TIMBER MERCHANT

Sells timber for $220 (inc $20 GST)GST paid to ATO by merchant = $20

FURNITURE MANUFACTUREBuys timber for $220

Makes and sells table for $440 (inc $40 GST)GST paid to ATO by manufacturer = $20 (ie $40 -$20)

FURNITURE RETAILERBuys table for $440

Sells table for $550 (inc $50 GST)GST paid to ATO by retailer = $10 (ie $50-$40)

CONSUMERBuys table for $550

Total GST on sale = $50The sum of the amounts paid to the ATO for GST on supply of the table is ultimately borne

by the consumer.



Fringe Benefits Tax (FBT)

A fringe benefit could be described as a benefit received by an employee which is not “salary and wages” but which results from the relationship of employment. Generally cash payments received by an employee in relation to their employment would be assessable under the normal income provisions, for example, ss 6-5 or 15-2. However many employers provide non-cash benefits to their employees in addition to cash payments of salary and wages. One common example is an executive in a company who receives a company car to undertake work duties but who also uses that car for private purposes during weekends and holidays.

Prior to the introduction of tax on fringe benefits the Commissioner of Taxation mainly relied on s 15-2 (formerly 26(e)) to tax such non-cash benefits. This section applied to tax the employee on the value of the benefit received. Application of this section presented some difficulties particularly relating to benefits given to associates of employees and also in relation to the valuation of these benefits. Section 26(e) was amended in conjunction with the introduction of Fringe Benefits Tax (FBT) to exempt benefits which fall within the scope of FBT from the ambit of s 26(e). Thus employees do not pay tax under s 26(e) on benefits subject to FBT and under the FBT regime it is the employer who is liable for tax on these benefits.

The FBT legislation received Royal Assent on 24 June 1986 and is operative from 1 July 1986. The four acts imposing FBT are:

The Fringe Benefits Tax Assessment Act 1986 (FBTAA), the main Act which provides for the assessment and collection of tax;

The Fringe Benefits Tax Act 1986 (FBTA), which sets the rate of tax; The Fringe Benefits Tax (Application to the Commonwealth) Act 1986 which subjects

Commonwealth departments and authorities to the payment of fringe benefits tax, as if they were separate corporate employers; and

The Fringe Benefits Tax (Miscellaneous Provisions) Act 1986 which makes various amendments to the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 and other relevant Acts.

The FBTAA is divided into 12 Parts, with some parts broken into divisions and subdivisions. Part III deals with individual fringe benefits (for example, car fringe benefits) and has 15 divisions. Part XII provides the main interpretation provisions of the FBTAA and includes s 136, which contains definitions for terms used throughout the Act. Part V provides for the lodgement of returns and issuing assessments which Part VII provides for the collection and recovery of tax.

Section 136 defines a fringe benefit for the purposes of the legislation to be a benefit provided:

At any time during the year;



To an employee or associate of an employee; By the employer, an associate of the employer or a person (arranger) other than the

employer or associate of the employer under an arrangement; and In respect of the employment of an employee.

To clarify the concept of a fringe benefit s 136 defines benefit as including a right, privilege, service or facility provided. An employee is defined as including a current, past or future employee, whilst an employer is defined in a similar manner to include a current, past or future employer. An associate includes a relative, partner, spouse or child of a partner. An arrangement is defined in general terms and will include most transactions or undertakings.

Fringe benefits tax is separate to income tax and is payable by employers in addition to income tax that may be levied on them. Fringe Benefits Tax is payable regardless of the employer’s income tax position and applies equally to loss companies and companies in receivership as well as non-profit organisations and government departments. Irrespective of who provides the benefit it is the employer who is liable to the FBT (s 66 of the FBTAA). The legislation applies to all benefits provided to resident employees and to non-resident employees whose source of income is within Australia. Some benefits are specifically exempted and many of the exempted benefits are contained in Division 13 of the FBTAA.

The FBT year is from 1 April to 31 March and the rate of tax is generally the rate of tax applicable to the top marginal individual rate of tax plus the Medicare levy. The current FBT tax rate is 46.5%. (Prior to the FBT year commencing 1 April 2006 the rate was 48.5%).

Since the introduction of the GST there are 2 methods of calculating the tax payable under FBT depending on whether or not the employer can claim an input tax credit. To calculate the amount of FBT payable, the taxable value of individual fringe benefits (for example, car benefit, loan, expense, etc) should be determined and these values should then be added together to get the aggregate amount of all fringe benefits provided. There are 2 types of fringe benefits:

Type 1 = value of all benefits that employer can claim GST input tax credit for Gross up by 2.0647 (Prior to the FBT year commencing 1 April 2006 - 2.1292).

Type 2 = value of all benefits that employer can’t claim input tax credit for, eg GST-free, input taxed or employer not registered for GST

Gross up by 1.8962 (Prior to the FBT year commencing 1 April 2006 - 1.9417).

Some amounts are specifically exempt from the FBT regime. Paragraph (g) of the definition of “fringe benefit” in s 136 exempts certain benefits from the definition of a fringe benefit for the purpose of the FBTAA. Exempt benefits may be found primarily in two places. First, a specific section may provide for an exemption. For example, s 41 provides for exempt property benefits while s 47(3) provides for exempt residual benefits. The second primary location of exempt fringe benefits is Division 13 of the FBTAA. Some of the more common exempt benefits relate to expenses paid or reimbursed by an employer in relation to an employee who has to relocate as a result of their work. Other exempt benefits in Division 13 include minor benefits and health care benefits provided to employees. Section 62 provides a general exemption for the first $500 in the taxable value of fringe benefits, if provided as in-house or airline fringe benefits.



TOPIC 6: Tax Planning and Tax Avoidance

ObjectivesAt the end of this chapter you should be able to explain and critically analyse:

what is meant by the terms sham and tax evasion under taxation law;

the difference between tax avoidance and tax planning; and

the relevance of Part IVA of the 1936 Act.

Readings


Tax planning and tax avoidance: Chapter 16, [16.10] - [16.400].

Overview

In previous topics, we have examined the operation or potential operation of the more important provisions of the Act. The knowledge which you have gained by this process can be applied in a far more potent manner than merely advising clients upon the tax consequences flowing from their transactions. That knowledge also enables you to advise clients upon the way in which those transactions should be structured from the outset. Thus, instead of applying that knowledge retrospectively - to transactions or circumstances which have occurred - you can apply it prospectively to avoid or minimise, where possible, adverse taxation consequences. This prospective application of knowledge of taxation law is known as tax planning. In this topic we contrast tax planning, which is an acceptable practice, with tax avoidance and tax evasion.

Tax planning

Tax planning is a lawful activity. It involves structuring transactions in such a way that the provisions of the Act either do not apply or apply in a different manner. Tax planning is clearly distinguishable from tax evasion; that expression means an unlawful activity designed to avoid tax. An example of tax evasion is the understating of income or the overstating of deductions by a taxpayer in his tax return. Putting it crudely, tax evasion is cheating and is therefore unlawful. Even in those cases in which tax planning is proscribed by the Act because Parliament considered that it defeated the object of the legislation, the taxpayers concerned commit no offence; they may, however, incur significant penalties by way of additional tax.

Tax evasion

Tax evasion, put simply, is an unlawful activity which results in criminal penalties being imposed. It is an intentional act or omission by which taxpayers choose not to comply with their obligations. The Australian Government established Project Wickenby in 2006 to tackle the increasing burden that tax evasion has on government revenue. The project is led by the ATO in partnership with a number of other government agencies, such as Australian Crime Commission, the Australian Securities and Investments Commission, the Australian Federal Police and the Commonwealth Director of Public Prosecutions, supported by AUSTRAC, the



Attorney-General’s Department and the Australian Government Solicitor. The aims of Project Wickenby are to:

reduce international tax avoidance and evasion in the Australian tax system enhance the strategies and capabilities of Australian and international agencies to

collectively deter, detect and deal with international tax avoidance and evasion improve community confidence in Australian regulatory systems, particularly

confidence that the Australian Government addresses serious non-compliance with tax laws, and

reform administrative practice, policy and legislation.

Tax avoidance

The difficulty with the concept of ‘tax planning’, which we understand to be a lawful and accepted activity, is that it is more readily defined in the context of tax avoidance. That is, if the planned activity is not within the spirit of the law, it is considered to be tax avoidance. The steps in considering whether an activity one that is legitimate or effective tax planning vs one that constitutes tax avoidance can be set out in the form of the following questions.

1. Is the transaction one that is effective in law or in equity? If not, then there is no need for anti-avoidance provisions to be applied. The transaction may either be considered a ‘sham’ or alternatively the transactions does not have any effect at law or in equity and therefore will have no effect for tax purposes.

2. Assuming that the transaction is one which achieves its legal effect, then the next question is does the relevant provision of the Act (ie the provision sought to be exploited by the taxpayer) apply to the transaction? So, for example, if the transaction is an outgoing which does not satisfy the tests of deductibility under s 8-1 (or other relevant section of the tax legislation) then there will be no need to consider whether the transaction does not need to be considered any further. The amount claimed would simply be not deductible.

3. Assuming that the transaction does fall within a relevant section of law, the next question is, are they any specific anti-avoidance sections which might apply? So for example, in considering the distribution of trust income, s 99A would apply if the net income of the trust estate is not effectively distributed to a beneficiary. Alternatively, the transaction might a loan under which Div 7A applies, resulting in the amount being deemed a dividend for tax purposes.

4. Finally, in the absence of any specific anti-avoidance measures applying, the next question is does the general anti-avoidance provisions in Part IVA of the 1936 Act apply? If so, then the Commissioner has a discretionary power to cancel all or part of the tax benefit received by the tax payer under the transaction. The operation of Part IVA is often termed a provision of last resort. That is, it has no operation until all the other steps have been considered.

General anti-avoidance provisions

Part IVA comprises ss 177A-177H of the 1936 Act and was enacted in 1981 to replace the former general anti-avoidance provision, s 260. For some time prior to the enactment of the Part IVA, it was widely believed that the scope of s 260 had been so limited by decisions of the High Court that it was virtually useless to prevent taxpayers from entering into tax avoidance transactions. Section 260 rendered void for taxation purposes:



…every contract, agreement, or arrangement made or entered into … [which] has or purports to have the purpose or effect of in any way, directly or indirectly –

altering the incidence of any income tax;

relieving any person from liability to pay income tax or make any return;

defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or

preventing the operation of this Act in any respect …

In Newton & Ors v FCT (1958) 98 CLR 1, Lord Denning referred to the High Court decision in DFCT v Purcell (1921) 29 CLR 464 when considering the application of the s 260. It was held that:

“In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax.

Given the limitations placed by the courts on interpreting s 260, a new general anti-avoidance provision was introduced in the form of Part IVA of the 1936 Act. The parameters of Part IVA are set by s 177B. In effect, that section provides that the Part is paramount over anything contained in the Act, save and except for those provisions of the Act relating to Farm Management Deposits.

The conditions precedent to the operation of the Part are contained in s 177D. That section provides that the Part applies to any scheme entered into or carried out after 27 May 1981 where a taxpayer has obtained a tax benefit in connection with the scheme and, having regard to eight stated matters, “it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme”. Section 177D basically provides that:

1. where there is a scheme (defined in s 177A(1));2. the taxpayer has obtained a tax benefit (as defined in s 177C);3. the tax benefit consists of either:

a. reducing the amount of assessable income of the taxpayer; orb. increasing the allowable deductions of the taxpayer (s 177C generally); and

4. the purpose of obtaining the tax benefit must either be the sole purpose of the scheme or if there is more than one purpose it must be the dominant purpose (s 177A(5)).

Then Part IVA will apply to the scheme. However, the provisions of Part IVA are not self-enforcing. This means that the Commissioner must make a determination to cancel any tax benefit gained by the scheme (s 177F).



TOPIC 7: Taxation of Entities


the definition of partnership for taxation purposes; and

the provisions of the 1936 Act which apply to taxation of partnerships;

the provisions of taxation legislation which apply to taxation of trusts;

the concept of ‘present entitlement’;

the separate legal nature of companies in the context of taxation; and

the general manner in which companies and shareholders are subject to taxation.

Readings


Taxation of partnerships: Chapter 13, [13.10] - [13.120]; and

Taxation of trusts: Chapter 14, [14.10] - [14.240]; and

Taxation of companies: Chapter 15, [15.10] - [15.35]; [15.155] - [15.170]; [15.190] - [15.220]; [15.230] - [15.250].

Overview

To this point, your studies of income tax have concentrated on the operation of particular provisions of the Act and the manner in which the Act deals with individual taxpayers. In this topic we look at how various other entities are subject to taxation. The three types of taxpayers we will look at are partnerships, trusts and companies.

Taxation of Partnerships

Division 5 of Part III of the 1936 Act comprising ss 90 to 94 is concerned with the taxation of partnerships. At law a partnership is not an entity distinct from the partners, and while it is necessary that a partnership return be provided - s 91 - the partners individually and not the partnership pay income tax: see ss 91 and 92.

Section 995-1 defines “partnership” for the purposes of taxation as an association of persons:(a) Carrying on business as partners; or(b) In receipt of income jointly.

The latter expression broadens the notion of a partnership for the purposes of the Income Tax Legislation broader in scope than that of the relevant state Partnership Acts. Companies and partnerships are mutually exclusive notions, according to the definition provisions of the 1997 Act.

To determine the tax liability of partnerships, the profits or losses of the partnership are first



calculated as if the income and expenses were those of one resident taxpayer: s 90. Each partner’s share of those profits or losses is then included in his or her individual return. Let's now examine the legislative provisions. By virtue of s 91, a partnership is under an obligation to file a partnership return but the partnership does not pay tax on it. From that return, the partnership "net income" or "partnership loss" is ascertained. Those terms are defined in s 90 and effectively require that the partnership return disclose the assessable income derived by the partnership calculated as if the partnership were a taxpayer who was a resident , less all allowable deductions claimed from such income. If assessable income exceeds the sum of the allowable deductions, the surplus is "net income" of the partnership; s 90. If the converse is the case, the deficiency constitutes the "partnership loss"; s 90.

Applying this scheme to the facts of the example above, a fictitious taxpayer - the partnership - is required to lodge a return; s 91. That fictitious taxpayer is deemed a resident by the definitions of "net income" and "partnership loss" in s 90.

Example:

Assessable Income s 6-5 $100 000Allowable Deductions

s 8-1 allowable deductions $ 40 000 Net Income of Partnership $ 60 000

When a net income or partnership loss is ascertained, each partner's share is calculated, and this is shown in the statement provided in the form of return. Such shares in gain or loss are then transferred to the partner's individual returns. It is at this point in time that the question of the residence of individual partners becomes relevant; see, for example, ss 92(1)(b) and (2)(b).

Section 92(1) provides that the assessable income of a partner shall include his/her individual interest in the net income of the partnership of the year of income. Section 92(2), on the other hand, provides that a partner's individual interest in a partnership loss incurred in the year of income shall be an allowable deduction. The existence of s 92(2) explains the exclusion from the calculation of "net income of the partnership" and "partnership loss" of losses from previous years; see the definitions of those terms in s 90. The partners obtain the benefit of such losses in the form of an allowable deduction under s 92(2) in the year in which they are incurred by the partnership.

If in the above example, there are two taxpayers who are equal partners, the assessable income disclosed in each taxpayer’s personal return would include the following item:

Section 92(1) share of net income of partnership $30 000

The artificial nature of a partnership gives rise to some specific taxation issues, such as accounting for partnership salaries and drawings. Specific CGT issues also arise in taxation of partnerships but this is beyond the scope of this unit.

Taxation of Trusts

Trusts are specifically brought to account for taxation purposes by Division 6 of Part III - ss 95-102. Those provisions are designed to tax the income of a trust estate, either in the hands of a beneficiary or in the hands of the trustee. The expressions, 'trust estate', 'trustee'



and 'beneficiary', are not the subject of special definition in Division 6; but it is well-settled that the Act operates in a wide range of situations where a person occupying some fiduciary position for the benefit or protection of others holds an interest in property by which income is generated. ‘Trustee’, in fact, is defined in s 6(1) in very broad terms so as to include persons not trustees in the ordinary sense of the term, such as receivers or liquidators, as well as every person having administration or control of income affected by a trust or acting in any fiduciary capacity or having the possession, control or management of the income of a person under any legal or other disability. A ‘trustee’ may be a natural person or company.

There are certain elements to the creation of a trust:

(1) Trustee who holds legal title in the trust property but has an obligation to deal with the property in accordance with the trust deed;

(2) Trust property which is provided to the trust estate by the ‘settlor’;

(3) Beneficiaries who hold the beneficial or equitable interest in the trust property. Trustee can also be a beneficiary but not the sole beneficiary.

(4) Personal obligation on the trustee to deal with trust property for the benefit of beneficiaries.

Trusts may be created inter vivos (ie during the lifetime of the person who creates the trust) or testamentary (ie trusts created by will). A trust may also be created by operation of law. There are a number of types of trusts, including:

(1) Fixed trusts – in which the beneficiaries' shares in the trust estate are predetermined and spelled out in the trust instrument - for example, the trust deed might direct that the income of the trust be paid to "A, B, C and D in equal shares".

(2) Unit trusts - Where it is desired to define the interests of beneficiaries precisely while retaining a certain amount of flexibility, a more sophisticated version of the fixed trust may be used - the unit trust. A unit trust is a form of fixed trust. The percentage interest of the beneficiaries in the trust property is determined by the allocation of units. The “unit” is the fixed interest of each beneficiary. The essence of such trusts is that the rights to benefit under the trust are represented by discrete "units", which are similar to shares in a company. For example, a unit trust may be constituted with 100 units each having equal income and capital rights. The relevant deed may provide that units of different classes, carrying different rights, may be created, that additional units may be issued, and that units may be sold or redeemed. The unit trust thus combines certainty and flexibility, the major attributes of the fixed and discretionary trusts respectively.

(3) Bare trusts - or "passive" or "simple" trust where X holds a particular item of property, eg a parcel of shares or a piece of real estate, simply as a "nominee" for one or more specifically identified beneficiaries; ie. X is a trustee but X has no active duties to perform beyond disposing of the property to the beneficiaries when instructed to do so.

(4) Discretionary trusts - where the trustee is given a ‘discretion’ to choose the share or amount of income which any one or more particular beneficiaries, chosen from a wide class, are to receive in a particular year. For example, a deed may provide that the trustee may distribute the trust income “to such of A, B, C or D as the trustee shall in his unfettered discretion select”, or “to A, B, C and D in such proportions as the



Trustee shall in her unfettered discretion determine”. These are discussed in more detail below. It may be appropriate to vest such a discretion in the trustee when, for example, the needs of the beneficiaries may vary from time to time. Such flexibility may be necessary in order to enable the trustee to distribute the trust income in such a way (ie to those beneficiaries and in those amounts) as to minimise the overall tax liability on the total trust income or on the total income of a family group from year to year. As the beneficiaries of a discretionary trust are normally members of one family, this type of trust is often called a “family trust”.

(5) Superannuation funds - for example, in the case of an employer-sponsored fund where the first contribution made by the employer establishes the trust and subsequent contributions add to the trust funds. These funds are held by a trustee (who may be the employer itself) for the benefit of beneficiaries, namely present and future employees of the employer. Superannuation funds are not taxed under Division 6 of the Act (which applies to all other trusts) but are normally given concessional tax treatment.

Under a discretionary trust, the settlor gives the trustee discretion in relation to one or more matters relating to the trust property. The discretion may be in relation to:

investment of trust property;

other profit generating activities of the trust;

the distribution of income to the nominated range of beneficiaries;

the distribution of corpus of the trust; and

when the trust will vest.

These discretions fall within two broad categories of discretionary trusts: The non-exhaustive discretionary trust – the trustee has the discretion whether to

distribute some or all of the income, and has the power to accumulate income.

The exhaustive discretionary trust – the trustee must distribute the income, but has a discretion as to the choice of beneficiary and the amount each beneficiary receives.

It is possible to include in the trustee's powers some discretion in relation to distributions. This generally creates a hybrid trust, which seeks to obtain the benefits of both discretionary and unit trusts.

There are also charitable trusts in which the trustee is obliged by the trust deed to apply the income of the trust for a charitable purpose. The ITAA 1936 also contains special provisions which tax some types of trusts as companies. Divisions 6B and 6C treat corporate unit trusts and public trading trusts as companies for taxation purposes. The effect of these provisions is that:• the net income of the trust is taxed at the company rate of tax;• distributions to beneficiaries (unit holders) are assessable as dividends.

Taxation of trust income

By way of an overview - the general steps in taxation of trust income are as follows:(a) Calculate the "net income of the trust estate".(b) Identify the beneficiaries who are presently entitled to a share of the income of the

trust estate. Present entitlement may arise:(i) under s 95A(2);



(ii) under s 101; or(iii) because the circumstances are such that the beneficiary is “presently entitled”

by operation of law.(d) Where a beneficiary is presently entitled and is not under a legal disability, the

beneficiary (and not the trustee) will be assessed upon his/her share of the net income, ie his/her assessable income will include his/her share; s 97(1)(a).

(e) Where a beneficiary is presently entitled and is under a legal disability, then:(i) the trustee pays tax upon that share of the net income as if it were the income

of an individual; s 98(1); and(ii) the beneficiary may, in some circumstances, be assessed on the same income

by virtue of s 100(1), though he/she will obtain, pursuant to s 100(2), a credit for any tax paid by the trustee under s 98(1).

(f) Where there is a part of the net income to which no beneficiary is presently entitled, the trustee is assessed to tax upon that share under either ss 99 or 99A.

(g) Finally, consider again the application of any anti-avoidance provisions (see 3.10). As a general rule where the anti-avoidance provisions apply, the trustee pays tax at the top marginal rate.

There are special provisions applicable to two classes of beneficiary, namely those who are presently entitled by virtue of the operation of s 95A(2) and those who are non-residents at the end of the year of income. Section 97(2) excludes the operation of s 97(1) to those classes of beneficiary. The trustee is taxed under s 98(2) in the former case and s 98(3) in the latter case. Where the trustee is taxed under either s 98(3), ie where the beneficiary is a non-resident, the beneficiary will be assessed on the same income by virtue of s 98A, though he/she will obtain, under s 98A(2), a credit for any tax paid by the trustee under ss 98(3).Finally, you should note that where the beneficiary is taxable, provision is made for an amount to be included in his/her assessable income. Thus, ss 97(1)(a) and 100(a) are assessing provisions, ie they operate to include an amount in the beneficiary's assessable income. Where, on the other hand, the trustee is taxed, there is no necessity for the provision to include an amount in the trustee's return as the trustee has already filed a return of the income and deductions of the trust estate. Accordingly, the legislation provides merely that the trustee shall pay tax upon the relevant amount.

The scheme is, therefore, to tax the income in the hands of either the beneficiary or the trustee. Where the income is taxed in the hands of the trustee and the beneficiary, the beneficiary receives credit for the tax paid by the trustee.

Pursuant to section 96, the trustee is not generally liable to pay tax upon the income of trust estate (exceptions in s 98, 99 and 99A - but met out of trust funds). However, every trust must lodge a separate tax return. This enables the calculation of the taxable income of a trust as a whole, and the identification of persons who are entitled to the various portions of that income. A resident trustee or agent in Australia for trustees responsible for lodgement. The trust income is assessed in the year the income is derived by the trust and not when the income is distributed to the beneficiaries.

Determining net income of the trust estate

The object of Division 6 is to “secure payment of tax upon the whole of the net income of a trust estate, either from a beneficiary or the trustee, whether or not the income is paid over to or on account of the beneficiary” (Tindal v FCT (1946) 8 ATD 152 at 155). When income is actually paid over to the beneficiaries, the tax liability is with the beneficiaries unless the



trustee is specifically made liable by the provisions of Division 6 (s 96). In general terms the trustee is liable when the beneficiary is not presently entitled to income or is under a legal disability.

The net income of a trust estate for income tax purposes is the total assessable income of the trust, calculated as if the trustee were a resident taxpayer, less all allowable deductions. That is, while the trust estate is not to be taxed as a separate entity, the net income of the trust estate is calculated as if it were a separate entity. The assumption is made that the trust estate is a resident individual, and its net income is ascertained in the same way as an individual's taxable income.

In assuming the trustee to be a taxpayer, for the purposes of calculating the net income of the trust estate, the Act also attaches the trustee with the status of resident. The result is that all the income of the trust estate, whether Australian or outside Australia in source, is brought to account for calculation of trust income. Therefore any portion of the trust net income which is not Australian sourced and to which a non-resident is entitled is not subject to Australian tax.Residence of the trust estate and beneficiaries does, however, become relevant when taxing the relevant recipient of trust income in terms of determining the tax liability of the beneficiary.

A beneficiary may be assessable in respect of a share of the trust income even though he or she has not received any payment from the trustee.

Present Entitlement

Present entitlement is a concept of considerable importance in the scheme of Division 6. It is not defined - yet it is the link between taxpayer and income. We have to look to the cases for an understanding of the notion, but first note that it is distinct from that notion we have become accustomed to using in tying income to a taxpayer in other sections of the Act. Elsewhere, we have dealt with the idea of derivation of income. Derivation plays only a subsidiary role in the taxation of trust income. A beneficiary will be obliged to include part of the net income of a trust estate in his/her assessable income solely on the basis of present entitlement and he/she need not have derived it. However, derivation is still relevant in the sense that s 95 defines net income of the trust estate in terms of the hypothetical “assessable income” of the trust.

However, for our purposes, we need to recognise that derivation and present entitlement are distinct concepts. Leading cases on present entitlement are FCT v Whiting (1943) 68 CLR 199, Taylor v FCT (1970) 119 CLR 444 and Harmer v FCT 91 ATC 5000.

In Whiting's case it was held that the meaning of present entitlement is clearly revealed by contrast between an interest in possession and an interest in futuro; a beneficiary is not presently entitled unless he/she has an immediate right to payment of a share of the income of the trust estate. In the words of Latham CJ and Williams: "the words "presently entitled to share of income" refer to a right to income presently existing". The emphasis there is on the word "presently". That is, there must be income presently existing, and there must be a right in the beneficiaries to demand the relevant share of that income.

In Taylor v FCT (1970) 119 CLR 444, the case concerned a trust instrument which conferred an interest in income which was indefeasibly vested, although postponed as to enjoyment



until the beneficiary attained the age of twenty-one years. The beneficiary was at all material times under that age. The question was whether he was presently entitled. The Commissioner pointed to passages in Whiting's case to the effect that a right to receive income was the crucial determinant of present entitlement. As the Commissioner saw it, the infancy of the beneficiary, and his subsequent inability to give a valid discharge to the trustee, meant that there was no right to receive and therefore no present entitlement. That argument did not succeed; the trustee prevailed in arguing that infancy did not affect present entitlement, but went only to the question of legal disability.

In upholding the trustee's contention, Kitto J interpreted the tenor of the judgments in Whiting's case as referring to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he/she were not under a disability. That is, Kitto J saw legal disability as a matter entirely distinct from present entitlement. Kitto J gave three reasons for holding that the beneficiary was presently entitled to the relevant income:

1. It was legally available for distribution;2. As to the whole of it, the beneficiary had an absolutely vested beneficial interest in

possession; and3. But for his legal disability he would have succeeded in an action to recover it from the

trustees.

The High Court in Harmer v FCT expressed present entitlement as the situation where:(a) the beneficiary has an interest in the income which is both vested in interest and

vested in possession; and(b) the beneficiary has a present legal right to demand and receive payment of the

income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

In addition to the common law concept of “present entitlement”, a beneficiary can be said to be presently entitled by virtue of the operation of the deeming provision in s 101. The section is concerned with discretionary trusts under which the trustee has discretion to pay or apply income to or for the benefit of specified beneficiaries. If the trustee in fact exercises his/her discretion so as to make an advance in favour of a beneficiary, s 101 deems the beneficiary to be presently entitled to the amount paid to him/her or applied for their benefit. For example, where a trustee applies funds of the trust estate so as to pay the school fees of an infant beneficiary, such beneficiary would to that extent be deemed by s 101 to have become presently entitled to that sum. In this context, you should read Commrs of IR (NZ) v Ward (1969) 69 ATC 6050.

Section 95A(2) provides a further provision deeming a beneficiary presently entitled, for example, where a trustee accumulated income which was then held for the capital beneficiaries who had vested and indefeasible interests, but who could not legally demand it.

Where no beneficiary presently entitled

The importance of the present entitlement status lies in the distinction which the Act lays down between income to which a beneficiary is presently entitled, and income to which no beneficiary is presently entitled. The presently entitled beneficiaries fall again into two



classes, those who are not under any legal disability, and those who are under legal disability. Where a beneficiary is presently entitled and not under a legal disability, s 97 applies so as to assess such individual - the beneficiary -on his or her share of the net income of the trust estate as to the full amount of such share that can be attributed to Australian sources, and in addition as to so much of such share that can be attributed to sources outside Australia but generated within the period of residence of the beneficiary.

The plan of the Act is that if a beneficiary is presently entitled but is under a legal disability, then s 98 raises an assessment against the trustee in respect of each such beneficiary. The trustee is similarly assessed even where a beneficiary is not under a disability, but is deemed by s 95A(2) to be presently entitled to the income - s 98(2). In the situation where the trustee is being brought to account, for tax purposes, for either a presently-entitled beneficiary who is under a legal disability, or for a deemed presently-entitled beneficiary as provided for in ss 95A(2) and 98(2), then the trustee is assessed again on the full amount of the share of such beneficiary in the net income of the trust estate which is attributable to sources in Australia plus such share of ex-Australian income as is attributable to the period when the beneficiary in question was an Australian resident. As regards income to which no one is presently entitled, it falls to be considered in the first instance under s 99A. That provision subjects such income to tax at penalty rates: ss 99A(4)(A), (B) and (C). By penalty rates, it is not additional tax which is imposed by s 99, rather tax is imposed on the trustee to the relevant extent at a flat rate equal to the maximum marginal rate of the individual rate scale.

There is a power in the Commissioner to not apply s 99A, so laid down in s 99A(2), and in such case s 99 would be applied. Section 99 taxes accumulated trust income - that is, income with respect to which there is no presently-entitled beneficiary - at rates applicable to individuals, subject to "shading-in" provisions. The usual threshold benefit available to individuals - by which they do not pay tax if their income is below a certain level - is reduced to $416 by the provisions of the Rates Act.

However, the discretion of the Commissioner to apply s 99 instead of s 99A is limited to the categories of estates set out in s 99A(2). Note that it is not all such estates which will escape the s 99A rate: it is simply that the Commissioner may exclude those estates - and only those estates - from the operation of s 99A. The section while still giving the Commissioner a broad discretion is nonetheless cut back considerably from its former operation. The most common situation where s 99 applies is deceased estates.

Section 100 requires that the assessable income of a beneficiary who is under a legal disability and is a beneficiary in more than one trust estate, or derives income from any other source, must include his/her individual interest in the net income of the trust estate or estates. In the case of a resident beneficiary the amount to be assessed will be the income derived from all sources. In the case of a non-resident beneficiary, the income to be assessed will be limited to that which has been derived from sources in Australia. Section 100(2) operates against double taxation where the trustee has been assessed under s 98 with respect to the income which is to flow to the beneficiary. The section provides that there shall be deducted from the income tax assessed against such beneficiary the tax paid or payable by the trustee in respect of that beneficiary's interest in the net income of the trust estate.

Where in the income year the trustee of the estate of a deceased person receives any amount that would have been assessable income in the hands of the deceased person if it had been received by him/her during his/her lifetime, that amount must be included in the assessable



income of the trust estate of the year in which the amount was received. Such income is deemed to be income to which no beneficiary is presently entitled.

Net income or trust income

The provisions which impose a tax liability where there is a beneficiary of a trust who is presently entitled need to be considered in the context of the specific wording used in these sections, as well as the definition of ‘net income’ in s 95. By way of example, the assessing provision in s 97 provides that where a beneficiary is:

presently entitled to a share of the income of the trust estate

then the beneficiary’s assessable income of a beneficiary includes:

so much of that share of the net income of the trust estate

Net income is defined as being:...the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

Thus net income of the trust estate provides a definition for tax purposes. By contrast, income of the trust estate is an accounting concept.

Just as business accounting need not produce the same sorts of consequences from transactions as does tax accounting, similarly the net income of the trust for accounting purposes will sometimes be different to the notion of net income of the trust estate as allowed under the Act. That is, the internal book-keeping of the trust is not the determinant of net income of the trust estate for the purposes of the Act. For example, the trustee may in his/her financial accounts charge certain expenses against revenue that are not be allowable deductions for tax purposes. This gives rise to an interpretation issue. Does “so much of that share” refer to the actual dollar amount that the beneficiary is presently entitled? Or does the term refer to a percentage or portion of the trust income to which the beneficiary is presently entitled? Prior to the 2010 High Court decision in Commissioner of Taxation v Bamford 240 CLR 482, the courts adopted two approaches:

The “quantum” approach under which the beneficiary’s assessable income would be the actual amount calculated in accordance with trust law (or accounting) principles.

The “proportionate” approach under which the beneficiary’s assessable income would be calculated as a proportion of net income, and that proportion would be the same proportion of trust income as calculated in accordance with trust law (or accounting) principles.

Say, for example, X Trust has one beneficiary (Y) and at the end of the financial year the trust has an accounting income of $5,000 and a net income (per s 95) of $10,000. Under the



quantum approach, Y would have an assessable income of $5,000. However, under the proportionate approach, Y would be entitled to 100% of the trust income, and therefore would have an assessable income of $10,000, despite not having actually received this amount. However, under the quantum approach, when the net income (tax law calculation) is greater than the trust income the problem is that the excess of net income would be taxed by the trustee at the top marginal rate if the quantum approach is adopted. This is because the beneficiary is assessable only on the presently entitled amount which is calculated for trust law purposes.

Ultimately, the High Court in Bamford held that the expression in s 97(1)(a)(i) “that share of the net income of the trust estate” referred to the proportion of the distributable income of the trust estate ascertained by the trustee according to appropriate accounting principles and the trust instrument. In other words, the proportionate approach was adopted.

Companies

Prima facie, companies are treated for tax purposes in a similar manner as individuals. You should recall that s 4-10(2) of the ITAA 1997 essentially provides that “you” must pay income tax (at the rates declared by Parliament) on taxable income derived during the year. Section 4-5 of the ITAA 1997 explains the meaning of “you” and states that the expression applies to entities generally unless its application is expressly limited. Section 4-1 of the ITAA 1997 also states that “income tax is payable by each individual and company, and by some other entities.” Various provisions in the taxation legislation also refer to the term “person.” "Person" is defined in s 995-1 of the ITAA 1997 to include a company.

We can therefore determine that, like individuals, companies must pay tax on their taxable income. Because of that it is necessary to calculate the assessable income and allowable deductions of a company in the same manner as for an individual. Accordingly, assessing provisions such as s 6-1 of the ITAA 1997, amongst others, also apply to companies.

There are, however, several ways in which the taxation of companies varies from that of individuals. Possibly the most significant difference is that the taxable income of a company is subject to a flat rate of tax. Until 30 June 2000 the rate was 36%. The company tax rate was then reduced to 34% for the 2000-2001 income year and 30% for the 2001 and subsequent income years.

The progressive rates of income tax applicable to individuals do not apply to companies, and many tax offsets available to individuals are not available to companies (for example, the dependant parent tax offset and net medical expenses tax offset). Companies also do not receive the principal place of residence exemption available to individual in the capital gains tax provisions.

As stated above, the taxable income of a company is subject to tax at a flat rate of tax. Subsequently, when the company distributes profits to its shareholders in the form of dividends, those dividends will form part of the assessable income of the shareholders under s 44(1) of the ITAA 1936 (the taxation of company shareholders will be addressed later in the semester). Until several years ago, both the company and its shareholders paid income tax on what was, in reality, the same income. This meant that company income was often taxed twice and is referred to as the classical system of company taxation.



Among the proposals for taxation reform announced by the Federal Treasurer, Mr Keating, in his September 1985 statement "Reform of the Australian Taxation System", was the recommendation to eliminate double taxation of company income by introducing the "dividend imputation system". The legislation implementing the system was enacted in June 1987.

Residence

The taxation legislation draws an important distinction between residents of Australia and non-residents of Australia. The distinction between residents and non-residents also applies in relation to companies. A resident company is taxed on its ordinary and statutory income from sources both in and out of Australia (ss 6-5(2) and 6-5(4) ITAA 1997). In contrast, a non-resident company is only taxed on its Australian-sourced ordinary and statutory income (ss 6-5(3) and 6-5(5) ITAA 1997). The distinction between a resident and non-resident company is also important as the imputation system, most of the consolidation rules and various capital gains provisions only applies to resident companies.

Pursuant to s 6(1) of the ITAA 1936, a company is considered to be a resident of Australia if it is:

(1) incorporated in Australia; or(2) not incorporated in Australia, but carries on business in Australia and has its central

management and control in Australia; or(3) not incorporated in Australia, but carries on business in Australia and has its voting

power controlled by shareholders who are residents of Australia.

Calculating Taxable Income of Companies

In practice, determining a company’s taxable income often requires preparing a statement to reconcile the accounting profit / loss to taxable income. This process involves adding back or subtracting items, as appropriate, where the accounting and tax treatment of a transaction differ. For accounting purposes a company’s net profit equals income less expenses. For tax purposes however, a company’s taxable income equals assessable income less allowable deductions (s 4-15 of the ITAA 1997).

Examples of differences in tax and accounting treatment of items include the following: For accounting purposes, a business will recognise an accrued expense, whereas a

deduction cannot be claimed for tax purposes until the expense has been incurred. Borrowing costs that are capital in nature (such as loan establishment fees) may be

capitalised for accounting purposes and added to the capital costs of the asset to which the borrowing relates, but can be deducted over five years for taxation purposes (s 25-25 of the ITAA1997).

Depreciation of capital assets can differ

Taxation of companies

A company’s taxable income is determined by including its assessable income and deducting its allowable deductions on the basis that it is a resident taxpayer.

Although a company's taxable income is calculated in the same manner as an individual taxpayer's taxable income, the ITAA 1936 and 1997 treats companies differently from



individuals in many respects. Examples of the different taxation treatment of companies compared to individuals include:

companies pay tax at a flat rate of 30%; companies do not receive a tax-free threshold; companies do not pay the Medicare levy or the Medicare levy surcharge; companies are not entitled to many of the offsets that individuals can receive (e.g.

dependant parent offset, invalid relative offset, net medical expense offset); rules restrict the ability for companies to carry forward tax losses and bad debts; specific debt/equity rules (see Division 974 of the ITAA 1997); the substantiation rules for car, travel and other expenses do not apply to companies; companies are not eligible for the CGT discount method (c/f individuals receive a

50% discount if the asset has been held for more than 12 months); and companies have access to a wide range of CGT rollover relief provisions.

Distinction between private companies and public companies

The Corporations Act 2001 (Cth) (“Corporations Act”) distinguishes between public companies and private (referred to as proprietary) companies. Taxation legislation also distinguishes between public companies and private companies; however the distinction for tax purposes is different from the distinction under the Corporations Act.

Under the Corporations Act a proprietary company can have no more than 50 non-employee shareholders (s 113 of the Corporations Act) and cannot undertake fundraising activities that require the issue of a prospectus. A proprietary company can also operate with only one director, compared to a public company that must have a minimum of three directors (s 201A(1) of the Corporations Act). A public company is defined in s 9 of the Corporations Act as a company other than a proprietary company. Public companies would generally be those companies listed on the ASX.

A company’s status for tax purposes is determined each year and it does not depend upon its status under the Corporations Act. A private (or proprietary) company under company law can be a public company for taxation purposes and vice versa.

Section 103A(1) of the ITAA 1936 states that a private company is one that is not a public company in relation to the year of income. Section 103A(2) of the ITAA 1936 goes on to deem a company to be considered public company if in the year of income:

its shares were listed on a stock exchange (anywhere in the world) on the last day of the income year;

it is a mutual life assurance company; it is a friendly society; it is a subsidiary of a listed public company; it is a non-profit company; it is a registered organisation; or it is a statutory body established for public purposes (and is not a company within

State or Territory laws).

Despite being listed, a company will not be a public company where, at any time during the income year, 20 or fewer persons held 75% or more of the company's capital, voting or



dividend rights: s 103A(3) of the ITAA 1936. This exception is often referred to the 20/75 rule and is designed to exclude from public company status companies in which have a high concentration of shares held by a small number of people.

The distinction between a public and a private is important in taxation for a number of reasons, including the fact that certain excessive payments and loans made by private companies to their shareholders, directors or associated persons may be treated as deemed dividends and disallowed as a deduction to the company (see for eg Div 7A of the ITAA 1936).

Taxation of Dividends

Generally a distribution by a company is the payment of a dividend by that company to its shareholders. A dividend represents a return by the company of a share of its profits to the owners of the company - the shareholders. As such, from the shareholders' point of view, the dividend receipt is not a return of the capital invested in the company, but a return generated by that invested capital.

Section 44(1) of the ITAA 1936 provides that the assessable income of a shareholder in a company (whether the company is a resident or non-resident) includes:

(a) if he/she is a resident – dividends paid to him/her by the company out of profits derived by it from any source; and

(b) if he/she is non-resident – dividends paid to him/her by the company to the extent to which they are paid out of profits derived by it from sources in Australia.

By reading s 44(1) it is evident that attention has been concentrated on payments of dividends to shareholders out of profits derived by the company. The residency status of the shareholder determines whether one must enquire into the source of the profits derived by the company, out of which it has paid the dividend. If the shareholder is not resident, the payment is assessable only to the extent that it is Australian-sourced. The similarity between s 6-5 of the ITAA 1997 and s 44(1) of the ITAA 1936 should be plain; s 44(1) is repeating the principles underlying s 6-5 in the particular context of a company distribution as the source of a receipt.

For an amount to be included as assessable income under s 44(1) of the ITAA 1936 the amount must be:

(1) a dividend;(2) paid;(3) to a shareholder; (4) out of the company’s profits.

The legislation includes provisions that specifically deem certain payments to be dividends paid to shareholders (and also to be paid out of profits) for the purpose of expressly making them assessable to the recipient. However, most of the deemed dividend provisions only apply to private companies for taxation purposes, as described above.

How does a company treat franked dividends?



Where an Australian resident company receives a franked dividend, it must include not only the amount of the dividend in its assessable income (s 44(1)(a) of the ITAA 1936), but also the franking (or imputation) credit in accordance with s 207-20(1) of the ITAA 1997. Unfranked dividends do not carry any franking (or imputation) credits. The company is then entitled to a credit in respect of the franking (or imputation credits). It is important to note however, that unlike other shareholders (such as individuals, partnerships, trusts and superannuation funds), excess imputation credits are not refundable to companies (s 67-25 of the ITAA 1997), however may be able to be converted into a tax loss under s 36-55.

For franked distributions, you can calculate the amount of franking credit attached to the dividend by the following equation:

Dividend paid x company tax rate ÷ (1 – company tax rate) x franking percentage

For 100% franked dividends received after June 2001 (since the company tax rate has been 30%) the equation would be:

Dividend paid x 30 ÷ 70 x 100%

Consolidation

From 1 July 2002 the consolidated group regime has been available. This regime allows wholly owned groups of companies to consolidate for income tax purposes. Once a group is consolidated it will consist of a head company and subsidiary members of the group. The group is then treated as a single entity for income tax purposes only. Each member within the group must continue to report separately on all non-income tax matters (such as GST and FBT). Withholding obligations (PAYG W) also fall outside the consolidation regime because the obligations relates to income tax payable by a third party (often the employees of the consolidated group member).

The ATO has published the “Consolidation Reference Manual” which comprehensively details the requirement and consequences of consolidation (available online at <http://www.ato.gov.au>). The current version of the manual is 1,446 pages in length. For the purposes of this unit we will very briefly look at some of the basic concepts to consolidation.

Section 703-10 of the ITAA 1997 outlines the requirements to determining whether a group is entitled to consolidate, and which members of a group can be included in the consolidated group for tax purposes. Generally, a consolidated group must consist of:

1. an Australian resident head company; and2. at least one wholly owned Australian resident subsidiary member.

There are exceptions to the above requirements for a foreign-owned group of Australian-resident subsidiary companies. In that circumstance the consolidations provisions allow the group for form a multiple entry consolidated (MEC) group.

The head company of a consolidated group has the option of whether it wants to consolidate. Therefore, participation in the consolidation regime is voluntary – no group is forced to partake in the system. However, if the head company elects (in writing) to be treated as a consolidated group then all of the head company’s eligible wholly-owned Australian subsidiaries will be treated as a consolidated group for income tax purposes. Each of the



subsidiaries does not have a separate option or election to fall within the consolidation regime. Generally the option to consolidate is irrevocable and the consolidated group will remain until the head company ceases to be a head company. It is also important to note that the existence of a consolidated group is not affected by changes in the subsidiary membership from time to time.

The key principle underlying the consolidation regime is the single entity rule outlined in s 701-1 of the ITAA 1997. This rule seeks to apply the income tax laws to a consolidated group as if it were a single entity. Consolidation simplifies the taxation of wholly-owned groups and reduces compliance costs by:

ignoring intragroup transactions for tax purposes; losses, franking credits and foreign tax credits are pooled;

o This is particularly advantageous for franking credits that have been trapped in a loss-making subsidiary member that did not have sufficient retained profits to pay a dividend and be in a position to use franking credits.

aligning PAYG instalments with annual income tax obligations; and replacing multiple reporting requirements by only lodging one income tax return and

making one PAYG instalment for the entire group.

These consequences and other consequences are discussed in detail in Taxation Ruling TR 2004/11 – see particularly at paragraph 8.

Consolidation also reduces opportunities for tax avoidance through loss creation and value shifting.

We will not be looking into the mechanics of forming a consolidated group in this subject.

The purpose of the imputation system

Before Australia introduced a dividend imputation system it operated under the "classical" system of taxing company profits. Under the classical system income tax was levied when income was earned by the company and again in the hands of its shareholders when it was distributed to them in the form of dividends. Australia moved to an imputation system of taxing company profits on 1 July 1987. From that date, companies have been able to pay three types of dividends, fully franked dividends, partially franked dividends, and unfranked dividends. The imputation system was designed to prevent double taxation of income earned and distributed by companies. The imputation system provides a means by which a company can pass on franking credits, for income tax that it has paid, to its shareholders. In order to frank (that is, allocate franking credits to a distribution), a company is required to maintain a franking account.

The ‘new’ imputation system

In 2002 the ‘new’, ‘simplified’ imputation system was introduced by the passing of the New Business Tax System (Imputation) Act 2002 (Cth). The new system commenced from 1 July 2002 and involves rather different recording and administrative mechanisms to be used in the system, but achieves largely similar outcomes to the system introduced on 1 July 1987. The rules for the new system are contained in Part 3-6 of the ITAA 1997, comprising of



Divisions 200 to 207 inclusive and Divisions 214 and 215. The dictionary in s 995-1 was also amended.

Application of the imputation system

The dividend imputation system applies to corporate tax entities that are not mutual life insurance companies. Corporate tax entities are:

companies (remembering a company is a body corporate or any unincorporated association or body of persons, but does not include a partnership: s 995-1 of the ITAA 1997);

corporate limited partnerships (Division 5A of Part III of the ITAA 1936); corporate unit trusts (Division 6B of Part III of the ITAA 1936); and public trading trusts (Division 6C of Part III of the ITAA 1936).

These entities are taxed separately from their shareholders and are taxed at the company tax rate. Franked distributions can only be made by Australian resident franking entities (s 202-5 of the ITAA 1997) and can only be made to a member of the corporate tax entity. A member of a corporate entity is defined in s 960-130 of the ITAA 1997 to include:

a member (such as a shareholder) of a company; a partner of a corporate limited partnership; or a unitholder in a corporate unit trust or public trading trust.

Generally, the rules regarding the tax effects of receiving a franked distribution apply to all types of shareholders, including individuals, trusts, partnerships, companies and superannuation entities.

Comparison to the former system

A visual example of the practical difference between the classic system and the dividend imputation system is outlined below. Assume for the purpose of this example that the company tax rate is 30% and that the shareholder is being taxed at a marginal rate of 45%. The impact of the Medicare levy is not being considered in this illustration.

Classical SYSTEM - Prior to imputation

COMPANY

Taxable income 1,000.00Tax at 30% (300.00) Distributable income $700.00

INDIVIDUAL SHAREHOLDER

Dividend 700.00Tax at 45% (315.00) Disposable income $385.00



Total tax paid ($300 + $315) $615.00 or 61.5%

Double taxation at both the company and the shareholder levels.

Current system

COMPANY

Taxable income 1,000.00Tax at 30% (300.00) Distributable income 700.00

INDIVIDUAL SHAREHOLDER

Dividend 700.00Gross up ($700 x 30/70) 300.00

1,000.00

Tax at 45% 450.00Less: franking rebate (300.00) Tax payable 150.00

Disposable income ($700 - $150) $ 550.00

Total tax paid ($300 + $150) $ 450.00 or 45%

45% is individual's marginal tax rate therefore there is no double tax.



TOPIC 8: State Taxes

ObjectivesAt the end of this chapter and related reading you should be able to:

appreciate the various types of taxation imposed by States, including Land Tax, Payroll tax and Stamp Duties; and

explain generally the operation of stamp duty and land tax in Queensland.

Readings

RL Deutsch et al, Australian Tax Handbook (Thomson Reuters, 2013): Chapter 62 (available online via Westlaw).

CCH Australia Limited, Australian Premium Master Tax Guide: Chapters 37 and 38 (available online via CCH Online).

Overview

In this part of your studies, we introduce some important state taxes. There are approximately 125 taxes which are levied on Australians, and the majority of those taxes are imposed by the Commonwealth. The reduction of various state taxes was considered as part of the reforms which saw the introduction of the GST. However, States continue to impose several key taxes of which a tax advisor should be aware, particularly in relation to stamp duty and land tax. Payroll tax is also a significant form of state taxation, however, will not be covered in this unit.

Land Tax

Land tax is primarily imposed by the States and the Australian Capital Territory (ACT) on the value of land. In Queensland, the relevant legislation is the Land Tax Act 2010 (Qld). Liability for land tax rests with the owner of the land at a particular point in time. The rate of land tax is different for individuals and companies/trustees.

Land tax is assessed on the taxable value of an owner's total land-holdings. In that sense, land tax is similar to the capital gains regime in that it is levied on the relative ‘wealth’ or capital owned by the tax payer, rather than income. Land-holdings include:

Vacant land Land that is built on Lots in building unit plans Lots in group title plans Lots in a time share scheme Lots owned by a home unit company.

In short, the value of all land that owned by the taxpayer at 30 June is calculated, and the taxable value will be the total value of that land, less any exemptions or deductions that the



taxpayer is entitled to claim. The owner of that land is usually the person named on the Certificate of Title. This includes every person who is entitled to be registered as the owner on the title. The legislation in each state varies as to who is liable for land tax where there are more than one owner of the land. In Queensland, provided there are less than five joint owners, the general rule is that joint owners of the land are assessed separately.

In Queensland, an individual may be required to pay land tax if the total relevant unimproved value of the freehold land owned is $600,000 or more. The unimproved value of land is determined by the Department of Environment and Resource Management (DERM). The assessment for land tax is issued pursuant to the Land Valuation Act 2010 (Qld). Land tax is generally payable within 30 days after the date of issue of an assessment. Where the land is sold during the year, the tax is not apportioned between the buyer and seller—the owner as stated on the Certificate of Title on 30 June is liable. This has important consequences for the purchaser, as the matter will need to be negotiated between the buyer and the seller if the buyer wishes to have the land tax to be apportioned. For this reason it is important that the buyer, or mortgagee, of freehold land obtain a land tax clearance certificate, which confirms that there is no land tax owing on the land.

Resident land owners (individuals) and trustees of trusts may be eligible for a principal place of residence (PPR) exemption/deduction. In Queensland, residential owners are entitled to an exemption if the land, and no other land, has been continuously used for residential purposes for the preceding six months. For further information, see the Queensland Office of State Revenue ruling LTA003E.1.2—“When land is used as a principal place of residence”. Land used for primary production is also exempt from land tax. In Queensland, this includes land used for a business of agriculture, dairying or pasturage, unless owned by a public company or absentee owner. Hobby farms are excluded from this exemption.

Stamp Duties

Historically, stamp duty has been one of the more significant state taxes and was traditionally imposed on instruments. That is, the tax was imposed on the execution of transactions related to certain legal documents. However, following a major rewrite of the duties legislation in NSW, Victoria, Queensland, Tasmania, Western Australia and the ACT, stamp duty is now generally imposed on “dutiable transactions”. A dutiable transaction is on which is defined by legislation – the most common type being the transfer of certain types of property. In Queensland, stamp duty also applies to acquiring a majority interest in a land rich corporation, acquiring shares in corporations that hold property on trust, registration of vehicles and entering into contracts of general, life and accident insurance. Stamp duty was also historically imposed on a wide range of transactions, such as charges for hiring goods, credit card transactions, leases of land, mortgages over property etc. However, these duties were gradually abolished following an agreement between the Commonwealth and the States on the introduction of GST on 1 July 2000.

The legislation governing the stamp duties regime in Queensland comprised the Duties Act 2001 (Qld) and Taxation Administration Act 2001 (Qld). The duty is charged at an ‘ad valorem’ rate, meaning that the tax is charged at percentage rate of value of dutiable item. The legislation describes the dutiable value for each time.

So, for example, the dutiable value for a transfer of land is defined by s 11 of the Duties Act 2001 (Qld) as either the consideration or the unencumbered value of the dutiable property. Dutiable property includes:



Land in Queensland; A transferable site area; An existing right; A Queensland business asset; A chattel in Queensland. s 10.

Section 9 provides for a wide range of dutiable transactions, including:

A transfer of dutiable property; An agreement for the transfer of dutiable property whether conditional or not; A surrender of dutiable property that is land in Queensland or a transferable site area; A partnership acquisition; The creation or termination of a trust of dutiable property; A trust acquisition or trust surrender; A foreclosure of a mortgage over dutiable property; and An acquisition of a new right on its creation, grant or issue.

Therefore, transfers of interests in a partnership, or acquisition of a trust, or creation of a trust of dutiable property are also subject to transfer duty.

Liability for transfer duty arises regardless of whether transfer is in writing or oral agreement, and at the time the property is transferred or instrument signed by parties to the transaction, whichever is earlier. Generally all parties to a transaction are liable to pay transfer duty, however, in practice the transfer duty is paid by the purchaser.

As with land tax, stamp duty is subject to exemptions, the main being for home, first home, and first home vacant land.


Key Administrative Dates

Key dates for students include the dates of supplementary and deferred examinations, QTAC offers, and closing dates for lodging various enrolment and admissions forms. Due dates and deadlines are listed for each month of the year in Key Administrative Dates.


Legal Citation Guide

The Legal Referencing Style Guidelines below are to be used by students for all formal legal writing in the Law School’s undergraduate program, eg for the citation of cases, articles, books and legislation.

http://www.law.qut.edu.au/files/Legal_Reference_Style_Guide.pdf

http://www.law.qut.edu.au/files/Legal_Reference_Style_Guide.pdf



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