Week 1 Australia s Taxation System, Introduction to Income Tax What is a Tax A compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered. Design of a taxation system Efficiency, equitable, simplicity Support business decision making Structural Features: o Tax rates o Taxpayers o Tax base o Tax periods Constitutional Aspects Commonwealth Government s power to impose taxes is from the Australian Constitution o Section 51(ii) grants the Commonwealth Parliament to make laws for the peace, order and good government of the Commonwealth with respect to taxation. Distribution of taxing rights between Commonwealth and State Governments Different types of taxes: Commonwealth Taxes State Taxes Income Tax Payroll Tax Fringe benefits tax Land Tax Goods and services tax Stamp Duty Customer duty Income Tax Law s 3-5 ITAA97: Income tax is payable each year by each individual and company, and certain other entities. 1
Sources of Income Tax Law Legislation Two concurrent income tax assessment statutes: o Income Tax Assessment Act 1936 (Cth)(ITAA36) o Income Tax Assessment Act 1997 (Cth)(ITAA97) Case Law Doctrine of precedent: higher level court decisions binds lower level court decisions (eg Australian High Court to the Administrative Appeals Tribunal). Income Tax Formula s4-10 ITAA97: Calculation of a tapayer s income tax liability for the financial year is based on the formula ss 4-1(1) and 995-1 ITAA97: 12-month period beginning 1 July: s4-15 ITAA97: Taxable income is the fundamental component of the income tax payable formula Key provisions: Assessable Income and Deductions Assessable Income Ordinary Income: s6-5 ITAA97 Assessment of gains that have an income character as set out in the doctrines that have been developed by the courts. Referred to as ordinary concepts. Statutory Income: s6-10 ITAA97 Assessment of amounts by a specific provision in the income tax legislation Division 10 lists the statutory income provisions in the income tax legislation. Exempt Income Income that is specifically made exempt (ie non-taxable) by the income tax legislation, list in Subdivision 11- A Non-assessable non-exempt income (NANE) Not assessable even though they are not specifically exempt income, list in Subdivision 11-B. Division 10 lists the statutory income provisions in the income tax legislation. Income Tax Deductions General deductions s8-1: losses or outgoings that may be claimed provided they satisfy the general deduction rule Specific deductions: Specific provisions in the income tax legislation allowing particular losses or outgoings to be deducted. 2
Income Tax Formula: Tax Rates Applicable rate of income tax depends on the type of taxpayer set out in the Income Tax Rates Act 1986. Types include: o Companies, who are subject to a flat rate of 30%, or from 1 July 2015, 28.5% for companies that are small business entities o Individuals who are Australian residents, who are subject to progressive rates: o Individuals who are foreign residents, who are also subject to progressive rates. Levies and Charges Australian tax system is also a collection mechanism for other amounts payable by Australian tax residents. Eg. Medicare levy, Medicare levy surcharge, HELP debts. Medicare Levy Basic Levy Payable Low income earners may be fully or partially exempt. Current thresholds: Medicare levy for individuals o Whose taxable income is > threshold amount but < phase-in limit = 10 cents for every dollar above the threshold amount. Medicare Levy Surcharge Medicare levy surcharge applies to individuals who do not have private health cover and their income for surcharge purposes; exceeds a threshold. Income for surcharge purposes: o Taxable Income o Exempt Foreign Employment Income o Reportable Fringe Benefits Amount o Total Net Investment Loss o Reportable Super Contributions Surcharge rates for 2016-17 Income for Surcharge Purposes Surcharge Rates Singles Families 0 90,000 0 180,000 0% 90,001 105,000 180,001 210,000 1% 105,001 140,000 210,001 280,000 1.25% 140,001 + 280,001 + 1.5% 3
Temporary Budget Repair Levy Imposed on individuals at the rate of 2% on the part of their taxable income which exceeds $180,000 Levy applies from 1 July 2014 to 30 June 2017 HELP Debts Higher education students who defer payment of their fees through the (HELP) or Higher Education Contribution Scheme (HECS) make compulsory repayments through the tax system. Amount of repayment is based on: o The taxpayer s Repayment Income (RI); and o HELP repayment rate: progressive rate ranging from 4% when RI is $54,126 to 8% when RI is $100,900 and above. From 1 July 2017, taxpayers living overseas who earn above the minimum RI are required to make HELP repayments. RI = Taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income. HELP debts repayments rate 2016/17 Repayment Income (RI) Repayment Rate Below $54,869 Nil $54,869 - $61,119 4.0% $61,120 - $67,368 4.5% $67,369 $70,909 5.0% $70,910 - $76,222 5.5% $76,223 - $82,550 6.0% $82, 551 - $86,894 6.5% $86,895 - $95,626 7.0% $95,627 - $101,899 7.5% $101,900 and above 8.0% 4
Week 2 - Income Tax: Ordinary concepts, income from personal exertion What is ordinary income? s6-5: Ordinary income is income according to ordinary concepts. o Gains require characteristation by the courts to determine if the gain has an income character. Case Jordan CJ in Scott v Commissioner of Taxation (1935) o Interpreted income to be determine in accordance with the ordinary concepts and usages of mankind. Prerequisites of ordinary income A receipt cannot be ordinary income unless it fulfils both prerequisites o If a gain fulfils all of these requirements, then that gain might or might not be ordinary income. o If a gain does not fulfil these requirements, then it will not be ordinary income. Cash or Cash Convertible A gain cannot be ordinary income if it is not cash or not cash convertible. o Case Tennant v Smith (1892), FCT v Cooke and Sherden (1980) Cash Convertible The item bust be readily convertible to cash, it must not be illegal to sell the good. o Case Payne v FCT (1996) s15-2 ITAA97, s21a ITAA36 Statutory Provisions Real Gain If a receipt is not a genuine gain, it is not ordinary income Reimbursement of a work-related expense held not to be a real gain o Case Hochstrasser v Mayes (1960) Characteristics of Ordinary Income Provided both prerequisites of income are satisfied, a gain will be ordinary income if it shows sufficient characteristics of income. The characteristics are only indicia as to what constitutes ordinary income. Courts can widen their views to reflect modern day practices. Case FCT v Myer Emporium (1987). 5
Regular/Periodical receipts A gain that is regular or periodic is more likely to be ordinary income than a gain that is paid as a lump sum. When regular, exceed and depended upon for support, a gain can constitute ordinary income, even if they do not flow from an earnings source. o Government aged pension: Case Keily v FCT (1983) o Youth Allowance payments: Case Anstis v FCT (2010) o Certain top-up payments: Case FCT v Dixon (1952) Flow the Concept The flow concept is expressed in terms of fruit and tree o Case Eisner v Macomber 252 US 189 (1920). Eg. Investment property and rental income Flow Important Traits For a gain to be considered ordinary income where it is likened to fruit from the tree, it will have: Commonly recognized categories of ordinary income 6
Other general principles of ordinary income Compensation takes on the character of the loss being compensated. Legality of receipts does not affect their assessability o Case Partridge v Mallandaine (1886) Whether a receipt is ordinary income is to be characterized in the tax payer s hands o Case Federal Coke Co Pty Ltd v FCT (1977) Constructive receipt rule the taxpayer who is entitled to receive the income is the person who will be assessable on it, even if the actual gain is directed to someone else. Mutuality If the taxpayer makes a payment to himself or herself, there is no gain and the payment will not be income. o Refund of fess to a club/association s members is not assessable as it was not a real gain o Case Bohemians Club v Acting FCT (1918) Income from personal services and employment Receipts from personal services and employment A receipt from employment and providing personal services may be subject to income tax or fringe benefits tax Fringe Benefit Non-Cash benefit Ordinary Income: Reward for services Nexus A connection or nexus with a receipt resulting from a taxpayer s personal service constitutes ordinary income. Courts have used a two-step approach to determine if an amount is ordinary income for personal services: 1. Identification of the activity undertaken, and 2. Determining whether it is a reward for services provided. Ordinary Income: Reward for services Nexus clearly established Nexus clearly established for common items of personal exertion, including: o Salary and wages o Commissions o Bonuses o Fees charged for services rendered o Ancillary payments that are an incident of labour 7
Nexus not impacted by lump-sum or one-off receipts for the performance of a specific task o Case Brent v FCT It is irrelevant who pays or when it is paid o Case Kelly v FCT Ordinary Income: Reward for services Nexus uncertain (voluntary payments) Unexpected or voluntary payments received as an incidence of employment constitutes ordinary income. o Christmas bonuses paid to employees paid in the form of redeemable gift vouchers Case Laidler v Perry (1965) o Tips received by a taxi driver Case Calvert v Wainwright (1947) Ordinary Income: Reward for services Nexus uncertain (gifts) Necessary to distinguish between where a gift is made and there is an employment or commercial connection. o Importance of a personal relationship between the parties Case Scott v FCT (1966) Non-determinative factors to consider in borderline cases Gifts are not assessable o Expectation of gift Case Scott v FCT o Lump sum or regular payments Case FCT v Blake (1984) o Motive of the donor Case Scott v FCT o Whether the recipient has been fully remunerated for services provided Case Scott v FCT, Hayes v FCT (1956) o Personal relationship Case Scott v FCT, Hayes v FCT Ordinary Income: Reward for services Nexus uncertain (prizes) Prizes and chance winnings are non-assessable if the windfall gain is derived by luck o Winnings of a casual participant on a TV show Case Case 37 (1966), Ruling IT 167 Alternatively, ordinary income if derived by exercising a degree of skill that sufficiently outweighs luck o Professional sporting people Case Kelly v FCT 8