CLAW3201 Australian Taxation System
Contents
W1 Australian Tax System..................................................................................................................... 9
GST—Overview...................................................................................................................................... 9
GST—Interactions with Income Tax.................................................................................................... 10
GST—International Comparison.......................................................................................................... 11
Income Tax Rates: Residential Individuals..........................................................................................11
Individual Income Tax Rates: Issues.................................................................................................... 11
Income Tax Rates................................................................................................................................ 12
Tax Arbitrage—Tax Rates.................................................................................................................... 13
Criteria for a good tax system............................................................................................................. 13
Simplicity......................................................................................................................................... 13
A “Fair” tax system.......................................................................................................................... 13
Issues of “ability to pay”.............................................................................................................. 13
Issues of “vertical” equity............................................................................................................ 14
Efficiency......................................................................................................................................... 14
Efficiency: business structure......................................................................................................14
International Competitiveness: Acquired Goodwill.............................................................................14
W2 Residence and Source................................................................................................................... 15
Introduction to ITAA............................................................................................................................ 15
Definition Sections........................................................................................................................... 16
Numbering System—order.............................................................................................................. 16
ITAA 1997—Structure...................................................................................................................... 16
Charging section—s. 4-10(1) ITAA 1997......................................................................................16
Residence and Source Principles......................................................................................................... 16
Overview......................................................................................................................................... 16
Assessable Income........................................................................................................................... 17
Residence........................................................................................................................................ 17
Australian Resident...................................................................................................................... 18
Resident of Australia—Individuals...............................................................................................18
“Reside”................................................................................................................................... 18
“Reside”—case law..................................................................................................................18
“Reside”—Factors to consider (para. 20).................................................................................19
TR 98/17.................................................................................................................................. 19
Example 6: agree?................................................................................................................ 19
1
, Example 9: consistent?........................................................................................................ 19
Issues................................................................................................................................... 20
TR 98/17 – Expatriate.........................................................................................................20
“Reside”—ATO ruling..............................................................................................................20
Temporary Resident........................................................................................................................ 20
TR 98/17—student...................................................................................................................... 20
“Domicile” & “Permanent Place of Abode”.....................................................................................21
Permanent Place of Abode—Applegate......................................................................................21
Permanent Place of Abode—IT 2650 http://law.ato.gov.au/pdf/pbr/it2650.pdf........................21
Half Year Test................................................................................................................................... 22
Source.................................................................................................................................................. 22
Source—Case Law....................................................................................................................... 22
Income from real property......................................................................................................22
Source of Personal Service Income..........................................................................................22
Source of Business Income......................................................................................................23
Withholding Tax on Interest, Dividends and Royalties....................................................................23
Concepts of Income—Part 1................................................................................................................24
What is “Income”?............................................................................................................................... 24
Exempt income................................................................................................................................ 24
NANEI.............................................................................................................................................. 25
Statutory Income............................................................................................................................. 25
Ordinary Income.............................................................................................................................. 25
1985 Tax Reform.......................................................................................................................... 26
Concepts of O.I.—4 elements—what? Who? When? Amount?..................................................26
What?...................................................................................................................................... 26
Realisation Principle.............................................................................................................26
Who?....................................................................................................................................... 26
Federal Coke........................................................................................................................ 26
Macquarie Bank Limited [2013] FCAFC 13...........................................................................27
When?..................................................................................................................................... 28
Amount?.................................................................................................................................. 28
Income From Services...................................................................................................................... 29
Categories of (ordinary) Income by Source.................................................................................29
Income from provision of services—Steps of analysis.............................................................29
FBT............................................................................................................................................... 29
Reconciliation.............................................................................................................................. 30
2
, Income From Provision of Services.................................................................................................. 30
Nexus between services and receipts—Hayes............................................................................30
Nexus between services and receipts—Dixon............................................................................30
Nexus between services and receipts—Smith............................................................................31
Benefits from Non-employer—Holmes.......................................................................................31
Benefits from Non-employer—Payne..........................................................................................31
Payments for Restrictive Covenants—Higgs v Oliver..................................................................32
Concept of income—Part 2................................................................................................................. 32
Income from Property......................................................................................................................... 32
Lease Premium................................................................................................................................ 33
Loan Discount & Premium............................................................................................................... 33
Royalty............................................................................................................................................. 33
Income from Shares........................................................................................................................ 34
McNeil......................................................................................................................................... 34
Income from Business......................................................................................................................... 35
What is a “Business”?...................................................................................................................... 35
TR 97/11...................................................................................................................................... 35
Example 3 - significant commercial purpose or character.......................................................36
Example 5 - the intention of the taxpayer...............................................................................36
Example 7 - prospect of profit.................................................................................................37
Illegal Activities............................................................................................................................ 37
Business v Hobby................................................................................................................................. 37
Martin v FCT (1953) 90 CLR 470...................................................................................................... 37
Similar judgement in Evans (just hobby).........................................................................................37
Stone [2005] HCA 21....................................................................................................................... 37
Division 35 ITAA 1997...................................................................................................................... 38
Ferguson...................................................................................................................................... 39
Walker: ( even one goat is enough) FCT v Walker (1985) 85 ATC 4179.......................................39
Extraordinary Transaction................................................................................................................... 39
Whitfords Beach***........................................................................................................................ 39
Myer Emporium.............................................................................................................................. 40
Westfield......................................................................................................................................... 40
Sale of Business Assets........................................................................................................................ 41
Moneymen...................................................................................................................................... 41
Capital Gain Tax................................................................................................................................... 41
Capital Gains Tax—Overview............................................................................................................... 42
3
, Net Capital Gain................................................................................................................................... 42
Method statement to calculate net capital gain..............................................................................42
Step 1: Calculating capital gains and losses.........................................................................................42
Capital Gains & Capital Losses......................................................................................................... 42
CGT Asset......................................................................................................................................... 46
Capital Proceeds.............................................................................................................................. 46
Cost Base......................................................................................................................................... 47
Cost Base Modification................................................................................................................ 48
Indexation........................................................................................................................................ 48
Reduced Cost Base.......................................................................................................................... 48
Exemptions...................................................................................................................................... 49
Main Residence Exemption............................................................................................................. 49
Main Residence Exemption—limitations.........................................................................................50
CGT & Death.................................................................................................................................... 50
Rollovers.......................................................................................................................................... 50
Step 2—Apply net capital losses from prior years...............................................................................51
Net capital loss................................................................................................................................ 51
Step 3—Reduce by the discount percentage.......................................................................................52
Discount capital gains......................................................................................................................52
Step 4—Apply the small business concessions....................................................................................52
Small business concessions: Div 152................................................................................................52
Basic Conditions: s. 152-10.............................................................................................................. 53
Small Business Concessions............................................................................................................. 53
Special rules: CGT and foreign residents.............................................................................................53
Case Study........................................................................................................................................... 54
Case Study: CB / RCB....................................................................................................................... 54
Case Study: Net capital gain............................................................................................................ 55
W7—General Deduction Part 1...........................................................................................................55
Revision and Feedback.................................................................................................................... 55
s. 8-1 ITAA 1997.............................................................................................................................. 56
Nexus............................................................................................................................................... 56
Total Holding............................................................................................................................... 56
Tax payments............................................................................................................................... 57
Theft loss—Theft loss of business proceeds?..............................................................................57
Expenses on Wrongdoing............................................................................................................ 57
Penalties and fines?................................................................................................................. 57
4
Contents
W1 Australian Tax System..................................................................................................................... 9
GST—Overview...................................................................................................................................... 9
GST—Interactions with Income Tax.................................................................................................... 10
GST—International Comparison.......................................................................................................... 11
Income Tax Rates: Residential Individuals..........................................................................................11
Individual Income Tax Rates: Issues.................................................................................................... 11
Income Tax Rates................................................................................................................................ 12
Tax Arbitrage—Tax Rates.................................................................................................................... 13
Criteria for a good tax system............................................................................................................. 13
Simplicity......................................................................................................................................... 13
A “Fair” tax system.......................................................................................................................... 13
Issues of “ability to pay”.............................................................................................................. 13
Issues of “vertical” equity............................................................................................................ 14
Efficiency......................................................................................................................................... 14
Efficiency: business structure......................................................................................................14
International Competitiveness: Acquired Goodwill.............................................................................14
W2 Residence and Source................................................................................................................... 15
Introduction to ITAA............................................................................................................................ 15
Definition Sections........................................................................................................................... 16
Numbering System—order.............................................................................................................. 16
ITAA 1997—Structure...................................................................................................................... 16
Charging section—s. 4-10(1) ITAA 1997......................................................................................16
Residence and Source Principles......................................................................................................... 16
Overview......................................................................................................................................... 16
Assessable Income........................................................................................................................... 17
Residence........................................................................................................................................ 17
Australian Resident...................................................................................................................... 18
Resident of Australia—Individuals...............................................................................................18
“Reside”................................................................................................................................... 18
“Reside”—case law..................................................................................................................18
“Reside”—Factors to consider (para. 20).................................................................................19
TR 98/17.................................................................................................................................. 19
Example 6: agree?................................................................................................................ 19
1
, Example 9: consistent?........................................................................................................ 19
Issues................................................................................................................................... 20
TR 98/17 – Expatriate.........................................................................................................20
“Reside”—ATO ruling..............................................................................................................20
Temporary Resident........................................................................................................................ 20
TR 98/17—student...................................................................................................................... 20
“Domicile” & “Permanent Place of Abode”.....................................................................................21
Permanent Place of Abode—Applegate......................................................................................21
Permanent Place of Abode—IT 2650 http://law.ato.gov.au/pdf/pbr/it2650.pdf........................21
Half Year Test................................................................................................................................... 22
Source.................................................................................................................................................. 22
Source—Case Law....................................................................................................................... 22
Income from real property......................................................................................................22
Source of Personal Service Income..........................................................................................22
Source of Business Income......................................................................................................23
Withholding Tax on Interest, Dividends and Royalties....................................................................23
Concepts of Income—Part 1................................................................................................................24
What is “Income”?............................................................................................................................... 24
Exempt income................................................................................................................................ 24
NANEI.............................................................................................................................................. 25
Statutory Income............................................................................................................................. 25
Ordinary Income.............................................................................................................................. 25
1985 Tax Reform.......................................................................................................................... 26
Concepts of O.I.—4 elements—what? Who? When? Amount?..................................................26
What?...................................................................................................................................... 26
Realisation Principle.............................................................................................................26
Who?....................................................................................................................................... 26
Federal Coke........................................................................................................................ 26
Macquarie Bank Limited [2013] FCAFC 13...........................................................................27
When?..................................................................................................................................... 28
Amount?.................................................................................................................................. 28
Income From Services...................................................................................................................... 29
Categories of (ordinary) Income by Source.................................................................................29
Income from provision of services—Steps of analysis.............................................................29
FBT............................................................................................................................................... 29
Reconciliation.............................................................................................................................. 30
2
, Income From Provision of Services.................................................................................................. 30
Nexus between services and receipts—Hayes............................................................................30
Nexus between services and receipts—Dixon............................................................................30
Nexus between services and receipts—Smith............................................................................31
Benefits from Non-employer—Holmes.......................................................................................31
Benefits from Non-employer—Payne..........................................................................................31
Payments for Restrictive Covenants—Higgs v Oliver..................................................................32
Concept of income—Part 2................................................................................................................. 32
Income from Property......................................................................................................................... 32
Lease Premium................................................................................................................................ 33
Loan Discount & Premium............................................................................................................... 33
Royalty............................................................................................................................................. 33
Income from Shares........................................................................................................................ 34
McNeil......................................................................................................................................... 34
Income from Business......................................................................................................................... 35
What is a “Business”?...................................................................................................................... 35
TR 97/11...................................................................................................................................... 35
Example 3 - significant commercial purpose or character.......................................................36
Example 5 - the intention of the taxpayer...............................................................................36
Example 7 - prospect of profit.................................................................................................37
Illegal Activities............................................................................................................................ 37
Business v Hobby................................................................................................................................. 37
Martin v FCT (1953) 90 CLR 470...................................................................................................... 37
Similar judgement in Evans (just hobby).........................................................................................37
Stone [2005] HCA 21....................................................................................................................... 37
Division 35 ITAA 1997...................................................................................................................... 38
Ferguson...................................................................................................................................... 39
Walker: ( even one goat is enough) FCT v Walker (1985) 85 ATC 4179.......................................39
Extraordinary Transaction................................................................................................................... 39
Whitfords Beach***........................................................................................................................ 39
Myer Emporium.............................................................................................................................. 40
Westfield......................................................................................................................................... 40
Sale of Business Assets........................................................................................................................ 41
Moneymen...................................................................................................................................... 41
Capital Gain Tax................................................................................................................................... 41
Capital Gains Tax—Overview............................................................................................................... 42
3
, Net Capital Gain................................................................................................................................... 42
Method statement to calculate net capital gain..............................................................................42
Step 1: Calculating capital gains and losses.........................................................................................42
Capital Gains & Capital Losses......................................................................................................... 42
CGT Asset......................................................................................................................................... 46
Capital Proceeds.............................................................................................................................. 46
Cost Base......................................................................................................................................... 47
Cost Base Modification................................................................................................................ 48
Indexation........................................................................................................................................ 48
Reduced Cost Base.......................................................................................................................... 48
Exemptions...................................................................................................................................... 49
Main Residence Exemption............................................................................................................. 49
Main Residence Exemption—limitations.........................................................................................50
CGT & Death.................................................................................................................................... 50
Rollovers.......................................................................................................................................... 50
Step 2—Apply net capital losses from prior years...............................................................................51
Net capital loss................................................................................................................................ 51
Step 3—Reduce by the discount percentage.......................................................................................52
Discount capital gains......................................................................................................................52
Step 4—Apply the small business concessions....................................................................................52
Small business concessions: Div 152................................................................................................52
Basic Conditions: s. 152-10.............................................................................................................. 53
Small Business Concessions............................................................................................................. 53
Special rules: CGT and foreign residents.............................................................................................53
Case Study........................................................................................................................................... 54
Case Study: CB / RCB....................................................................................................................... 54
Case Study: Net capital gain............................................................................................................ 55
W7—General Deduction Part 1...........................................................................................................55
Revision and Feedback.................................................................................................................... 55
s. 8-1 ITAA 1997.............................................................................................................................. 56
Nexus............................................................................................................................................... 56
Total Holding............................................................................................................................... 56
Tax payments............................................................................................................................... 57
Theft loss—Theft loss of business proceeds?..............................................................................57
Expenses on Wrongdoing............................................................................................................ 57
Penalties and fines?................................................................................................................. 57
4
