Principles of Taxation Law 2021/2022
Principles of Taxation Law 2021/2022
Chapter 1 - Sources of taxation law
Key
points ............................................................................................
..................... [1.00]
Introduction...................................................................................
........................... [1.10]
Understanding tax law and the doctrine of
precedent ...................................................... [1.30]
Technical differences between tax law and
accounting ..................................................... [1.70]
Not all receipts are recognised for tax
purposes ..................................................................... [1.80]
Income tax law distinguishes between capital and revenue
expenses .........................[1.110]
Income tax law excludes some income and expenses for policy
reasons .................... [1.120]
Income tax law ignores some transactions on the basis of anti-
avoidance provisions .......... [1.130]
Timing rules differ in income tax law and accounting principles
…………………………………..... [1.140]
Origins of judicial tax law
concepts .....................................................................................
[1.150]
Sources of tax
law ................................................................................................
............... [1.180]
Legislation .....................................................................................
...................................... [1.190] Income tax
legislation .....................................................................................
.................... [1.200]
FBT
legislation .....................................................................................
................................ [1.240]
Rates Act, Administration Act and International Agreements
Act ................................................. [1.245]
GST
legislation .....................................................................................
................................ [1.250]
Case
law.................................................................................................
............................... [1.270]
Rulings ..........................................................................................
....................................... [1.280]
Private
rulings ...........................................................................................
........................... [1.290]
,Principles of Taxation Law 2021/2022
Public
rulings ...........................................................................................
............................. [1.300]
Using this
chapter...........................................................................................
...................... [1.310]
,Principles of Taxation Law 2021/2022
Key points [1.00]
• The main tax legislation consists of two Income Tax Assessment Acts,
Fringe Benefits Tax Act and Goods and Services Tax Act.
• Tax legislation is interpreted using the doctrine of precedent, a process not
used in interpretation of financial accounting standards.
• There are five key differences between tax concepts and accounting
principles.
• Tax law exam problems usually involve facts that might attract two
alternative characterisations of a receipt or expense, and a good answer will
canvass both possibilities.
• The main sources of tax law are statutes and case precedents used to
interpret the provisions in tax law, but taxpayers can rely on Tax Office
rulings to avoid penalties when interpreting the law.
Introduction - [1.10]
Time and again, surveys show many commerce and business students view
taxation law as one of the most difficult subjects they encounter in their
studies. This need not be so provided, it is understood that the skills
necessary for the successful study of taxation law are fundamentally
different from other commerce subjects. If you understand the differences
and learn the essential techniques of how to study taxation law, you should
have no difficulty successfully completing the subject. [1.20] This chapter
gives valuable guidance on the skills that you need to develop to get the
most out of your study of tax law and explains how tax law differs from other
commerce subjects. The key points covered are as follows:
• The importance of the doctrine of precedent in interpreting tax law and its
absence from the interpretation of financial accounting standards: see
[1.30].
• Five technical differences between financial accounting and tax law: see
[1.70].
• Detail on how the doctrine of precedent led to different definitions of
“income” for financial accounting and tax law purposes: see [1.160].
• How to use the principal pieces of tax legislation in Australia and how the
main Acts work together: see [1.190].
• The importance of case law in the interpretation of the legislation: see
[1.270].
How you can most effectively access the hints set out in this chapter to
maximise higher grades in this subject is described at [1.310]
Understanding tax law and the doctrine of precedent [1.30]
Interpretation of the financial reporting standards is based on accounting
principles. The words in the standards are interpreted with a single aim: to
ensure amounts are recognised on a prudent and conservative basis that
reflects actual increases or decreases in a firm’s economic position.
The process of interpreting words in the tax legislation is fundamentally
different from the principle-based interpretation of financial reporting
, Principles of Taxation Law 2021/2022
standards. Terms in tax legislation are interpreted not by reference to any
commercial or economic principles, but instead on the basis of a system of
legal analysis known as the “doctrine of precedent”. The doctrine of
precedent is the foundation of the common law legal system used in English-
speaking countries. The doctrine of precedent requires judges (and, as a
result, tax officials) to interpret words in laws in a manner that is consistent
with the interpretation of those words in earlier judgments. If the facts of a
later case are the same as those in a previously decided case, a similar
result should follow in the later case. If the facts in the later case are slightly
different from the earlier case, the precedent may be distinguished and
another result might follow.
[1.40]
The first step in solving a tax law problem is to find the relevant rules in the
tax legislation. Rarely, however, will only one rule be relevant. More likely,
two or more provisions might potentially apply to the transaction described
in the problem, with the borderline between competing rules unclear. To
determine on which side of the borderline a given transaction will fall, the
tax accountant must proceed to the second step in solving a tax law
problem, which is to interpret the words in the different rules. This, as
mentioned at [1.30], is completed by looking at the judicial precedents in
earlier tax cases. The process is perhaps best explained with an illustration.
Example 1.1: Using precedents
A tax accountant is asked to advise a client who makes pottery whether
there is any tax liability when she gives a piece of pottery to a friend. First,
the accountant will turn to the tax legislation to find the relevant tax rules.
They are very clear. If the client’s activities amount to a business, the item of
pottery is trading stock and a tax liability is triggered when a taxpayer
disposes of trading stock outside the ordinary course of business. If the
client’s activities are merely a hobby, the pottery is a personal asset, not
trading stock, and there is no tax liability when a personal asset is given
away. The law is obvious – there is one legal consequence if the client’s
activities amount to a hobby and another if they amount to a business.
The tax legislation is silent, however, as to when activities cross the
threshold from being a hobby to becoming a business. To answer the crucial
question as to whether the client’s activities constitute a hobby or a
business, the accountant will look outside the legislation to the precedents of
previously decided court cases and try to find a case that closely resembles
the client’s situation. The outcomes in those precedents will provide a good
indication as to whether the client’s activities will amount to carrying on a
business as a matter of tax law. To the extent that the client’s situation is
similar to the situations of taxpayers described in the precedents, the same
characterisation is likely to apply to the client’s activities. To the extent that
the client’s situation differs from the situations of taxpayers described in the
precedents, a different characterisation may apply. The tax accountant must
decide whether the precedents will apply to the client and yield the same
Principles of Taxation Law 2021/2022
Chapter 1 - Sources of taxation law
Key
points ............................................................................................
..................... [1.00]
Introduction...................................................................................
........................... [1.10]
Understanding tax law and the doctrine of
precedent ...................................................... [1.30]
Technical differences between tax law and
accounting ..................................................... [1.70]
Not all receipts are recognised for tax
purposes ..................................................................... [1.80]
Income tax law distinguishes between capital and revenue
expenses .........................[1.110]
Income tax law excludes some income and expenses for policy
reasons .................... [1.120]
Income tax law ignores some transactions on the basis of anti-
avoidance provisions .......... [1.130]
Timing rules differ in income tax law and accounting principles
…………………………………..... [1.140]
Origins of judicial tax law
concepts .....................................................................................
[1.150]
Sources of tax
law ................................................................................................
............... [1.180]
Legislation .....................................................................................
...................................... [1.190] Income tax
legislation .....................................................................................
.................... [1.200]
FBT
legislation .....................................................................................
................................ [1.240]
Rates Act, Administration Act and International Agreements
Act ................................................. [1.245]
GST
legislation .....................................................................................
................................ [1.250]
Case
law.................................................................................................
............................... [1.270]
Rulings ..........................................................................................
....................................... [1.280]
Private
rulings ...........................................................................................
........................... [1.290]
,Principles of Taxation Law 2021/2022
Public
rulings ...........................................................................................
............................. [1.300]
Using this
chapter...........................................................................................
...................... [1.310]
,Principles of Taxation Law 2021/2022
Key points [1.00]
• The main tax legislation consists of two Income Tax Assessment Acts,
Fringe Benefits Tax Act and Goods and Services Tax Act.
• Tax legislation is interpreted using the doctrine of precedent, a process not
used in interpretation of financial accounting standards.
• There are five key differences between tax concepts and accounting
principles.
• Tax law exam problems usually involve facts that might attract two
alternative characterisations of a receipt or expense, and a good answer will
canvass both possibilities.
• The main sources of tax law are statutes and case precedents used to
interpret the provisions in tax law, but taxpayers can rely on Tax Office
rulings to avoid penalties when interpreting the law.
Introduction - [1.10]
Time and again, surveys show many commerce and business students view
taxation law as one of the most difficult subjects they encounter in their
studies. This need not be so provided, it is understood that the skills
necessary for the successful study of taxation law are fundamentally
different from other commerce subjects. If you understand the differences
and learn the essential techniques of how to study taxation law, you should
have no difficulty successfully completing the subject. [1.20] This chapter
gives valuable guidance on the skills that you need to develop to get the
most out of your study of tax law and explains how tax law differs from other
commerce subjects. The key points covered are as follows:
• The importance of the doctrine of precedent in interpreting tax law and its
absence from the interpretation of financial accounting standards: see
[1.30].
• Five technical differences between financial accounting and tax law: see
[1.70].
• Detail on how the doctrine of precedent led to different definitions of
“income” for financial accounting and tax law purposes: see [1.160].
• How to use the principal pieces of tax legislation in Australia and how the
main Acts work together: see [1.190].
• The importance of case law in the interpretation of the legislation: see
[1.270].
How you can most effectively access the hints set out in this chapter to
maximise higher grades in this subject is described at [1.310]
Understanding tax law and the doctrine of precedent [1.30]
Interpretation of the financial reporting standards is based on accounting
principles. The words in the standards are interpreted with a single aim: to
ensure amounts are recognised on a prudent and conservative basis that
reflects actual increases or decreases in a firm’s economic position.
The process of interpreting words in the tax legislation is fundamentally
different from the principle-based interpretation of financial reporting
, Principles of Taxation Law 2021/2022
standards. Terms in tax legislation are interpreted not by reference to any
commercial or economic principles, but instead on the basis of a system of
legal analysis known as the “doctrine of precedent”. The doctrine of
precedent is the foundation of the common law legal system used in English-
speaking countries. The doctrine of precedent requires judges (and, as a
result, tax officials) to interpret words in laws in a manner that is consistent
with the interpretation of those words in earlier judgments. If the facts of a
later case are the same as those in a previously decided case, a similar
result should follow in the later case. If the facts in the later case are slightly
different from the earlier case, the precedent may be distinguished and
another result might follow.
[1.40]
The first step in solving a tax law problem is to find the relevant rules in the
tax legislation. Rarely, however, will only one rule be relevant. More likely,
two or more provisions might potentially apply to the transaction described
in the problem, with the borderline between competing rules unclear. To
determine on which side of the borderline a given transaction will fall, the
tax accountant must proceed to the second step in solving a tax law
problem, which is to interpret the words in the different rules. This, as
mentioned at [1.30], is completed by looking at the judicial precedents in
earlier tax cases. The process is perhaps best explained with an illustration.
Example 1.1: Using precedents
A tax accountant is asked to advise a client who makes pottery whether
there is any tax liability when she gives a piece of pottery to a friend. First,
the accountant will turn to the tax legislation to find the relevant tax rules.
They are very clear. If the client’s activities amount to a business, the item of
pottery is trading stock and a tax liability is triggered when a taxpayer
disposes of trading stock outside the ordinary course of business. If the
client’s activities are merely a hobby, the pottery is a personal asset, not
trading stock, and there is no tax liability when a personal asset is given
away. The law is obvious – there is one legal consequence if the client’s
activities amount to a hobby and another if they amount to a business.
The tax legislation is silent, however, as to when activities cross the
threshold from being a hobby to becoming a business. To answer the crucial
question as to whether the client’s activities constitute a hobby or a
business, the accountant will look outside the legislation to the precedents of
previously decided court cases and try to find a case that closely resembles
the client’s situation. The outcomes in those precedents will provide a good
indication as to whether the client’s activities will amount to carrying on a
business as a matter of tax law. To the extent that the client’s situation is
similar to the situations of taxpayers described in the precedents, the same
characterisation is likely to apply to the client’s activities. To the extent that
the client’s situation differs from the situations of taxpayers described in the
precedents, a different characterisation may apply. The tax accountant must
decide whether the precedents will apply to the client and yield the same
