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Lecture One
Introduction to taxation law
Tax formula, tax rates and tax offsets
Administrative aspects of taxation
Readings from Australian Taxation Law 2014 CCH (referred to in this lecture as W)

Introduction to taxation law
W 1-550; W1-310 to 1-620

Tax formula, tax rates and tax offsets
W 2-000 to 2-040; W2-100 to 2-150
W2-200; W2-300 to 2-405
W2-500 to 2-520; W 2-640

Administrative aspects of taxation
Tax rulings, tax returns and assessments:W30-000 to 30-025;
W30-033 to W30-040; W30-055 to 30-104; W30-140 to 30-155
Tax appeal process: W31-300 to 31-700; W33-020 to 33-083; W33-095
What is a tax?
Principles from High Court in MacCormick v FC of T
(1983-84) 158 CLR 62 a payment is a tax where:
1. it is a compulsory payment
2. the money is raised for public purposes
3. it is not arbitrary and is not a penalty
4. it is not a payment for services, and
5. it is contestable can be challenged

Taxes are imposed at three levels in Australia:
Commonwealth, State and Local

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Types of taxes
1. Income taxes imposed by the Commonwealth on
income -- paid by individuals, companies etc
2. Property taxes death duties, wealth tax (no longer in
Australia)
3. Taxes on consumption GST and customs duties by
the Commonwealth, stamp duties by the States
4. Taxes on labour and land -- Pay-roll tax on wages and
land tax on land (unless used for residence) imposed
by the States
5. Taxes imposed by local government, eg, rates on home
owners
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Australian Taxation System
Sources of Australian income tax law
Legislation
Statutes (legislation) passed by the Federal Parliament
Federal tax legislation includes:
Income Tax Assessment Act 1997 (ITAA97) the most important tax
legislation
Income Tax Assessment Act 1936 (ITAA36)
Fringe Benefits Tax Assessment Act 1986
Tax Administration Act 1953
A New Tax System (Goods and Services Tax) Act 1999
Case law
Interpretation of tax legislation by the courts
Australian Taxation Office practice
Administration of the tax law by the ATO
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Case Law
Role of the courts is to: (1) interpret tax legislation which may be
unclear and ambiguous, and (2) fill in the gaps where the legislation
doesnt give the answer.
Doctrine of precedent requires a lower court to follow a legal principle
established in a higher court.
Tax cases usually have a name such as: FC of T v Smith FC of T
stands for Federal Commissioner of Taxation and Smith is the
taxpayer.
Hierarchy of the courts for tax cases is generally:
1. Administrative Appeals Tribunal (AAT) at the bottom,
2. then Federal Court (single judge),
3. then Full Federal Court (three judges),
4. then High Court (but only if the High Court grants leave for the case
to be heard)



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ATO practice as a source of tax law
Australian Taxation Office (ATO), headed by the
Commissioner, administers the tax system
Self-assessment system since 1992 the ATO relies on
information provided in tax returns to make an
assessment; penalties are imposed for false statements
ATO provides information in rulings about how it
interprets the tax law eg, public rulings, private rulings
Rulings are generally binding on the ATO and the
taxpayer is protected from penalty if the ruling is followed
Discretions eg, power of the Commissioner to make
decision about what is a reasonable payment


Constitutional Aspects of Taxation
Commonwealth Government can exercise the powers that are granted
to it under the Constitution the primary taxation power is set out in
sec 51(ii) which provides that:
The Commonwealth Parliament shall have power to make laws with respect to :
(ii) taxation; but not so as to discriminate between states and parts of states.

Some other provisions of the Constitution relevant to the taxing power:
-- section 51(xxxi) power to acquire property on just terms
section 90 -- duties of customs and excise
section 96 -- power to grant assistance to any State
section 109 -- Commonwealth law prevails over inconsistent state law
section 114 -- Commonwealth and the States cannot tax each others
property

Commonwealth power to impose income tax is not exclusive, but the States no
longer impose income tax
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Tax formula, tax rates and tax
offsets
Income tax is payable by individuals, companies and other entities:
sec 4-1 ITAA97.
Payable for each financial year (sec 4-10(1)) -- generally 1 J uly to 30
J une.
Payable on taxable income derived by the taxpayer during the
income year.
Amount of income tax payable is calculated by multiplying the
taxpayers taxable income by the applicable tax rate and
subtracting any tax offsets as set out in the formula in sec 4-10(3):

income tax = (taxable income x rate) tax offsets

Note: the order in the formula is important.
Tax formula, tax rates and tax
offsets

Rates of tax vary according to the nature of the taxpayer.

Taxpayers who have accumulated a higher education debt may be
required to repay that debt once taxable income reaches a certain
level: see W2-400 and 2-405.

Most resident individual taxpayers are required to pay Medicare
levy at 1.5% of taxable income: see W2-300 and 2-320.

Resident individual taxpayers who do not have private health
insurance may be required to also pay an additional Medicare levy
surcharge: see W2-350.

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Liability to income tax
Sec 4-10(1) Pay tax each year
Sec 4-10(3) Income tax = (taxable income x rate) tax offsets
Sec 4-15 Taxable income = assessable income deductions
Sec 6-1 Assessable income = ordinary income + statutory
income
Sec 6-5 Ordinary income = income according to ordinary
concepts
Sec 6-10 Statutory income = amounts that arent ordinary
income but are included in assessable income by a
section of ITAA97 or ITAA36 list in sec 10-5
Non-assessable income:
(a) exempt income: sec 6-20, lists in sec 11-1 to 11-15
(b) non-assessable non-exempt income: sec 6-23, list in s 11-55
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Deductions are taken into account in calculating taxable income
Two types of deductions: general sec 8-1
specific sec 8-5, list in s 12-5
Rates: Income Tax Rates Act 1986

Tax offsets, including low income offset -- may reduce tax liability after
primary tax is calculated -- list in s 13-1

Levies and charges may be added: Medicare levy
Medicare levy surcharge
Flood levy (2011/12 only)
Individuals are exempt from Medicare levy and Medicare levy
surcharge if they are not resident for any day of the year.
Liability to income tax
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Tax offsets
Tax offset is a set amount that reduces a resident taxpayers tax liability is
applied after the taxpayers primary tax liability has been calculated

Should be distinguished from a tax deduction

Most tax offsets cannot exceed the amount of income tax otherwise payable
by the taxpayer so the excess amount is generally lost -- tax offsets
cannot generally be applied to reduce a Medicare levy liability

Excess amounts of a few offsets are refundable, most importantly excess
franking credits on dividends -- order of applying the tax offsets in s 63-10
ITAA97 refundable offsets are applied last

Low income tax offset for resident individuals with low taxable incomes --
for 2013/14, the maximum offset is $445, reduced by 1.5c for every $1 of
taxable income over $37,000 (no offset after $66,667): see W2-640

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When are individuals liable to tax?

Residents include in their assessable income ordinary and statutory
income derived directly or indirectly from all sources, whether in or
out of Australia, during the income year (sec 6-5(2) and 6-10(4))
Foreign residents (non-residents) only include in their assessable
income amounts that are sourced or deemed to be sourced in
Australia (sec 6-5(3) and 6-10(5))
Temporary residents only include in their assessable income
amounts that are sourced or deemed to be sourced in Australia and
capital gains on taxable Australian property: See W24-214
A double tax agreement between Australia and another country
may override the tax rules in the ITAA97 or ITAA36: see W24-020
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Tax rates 2013/14















An individual is taxed at resident rates if they are a resident at any time during the year. Part year
residents need to apportion the tax free threshold see W2-200
Taxable income Tax on this income
0 $18,200 Nil
$18,201 $37,000 19c for each $1 over $18,200
$37,001 $80,000 $3,572 plus 32.5c for each $1
over $37,000
$80,001 $180,000 $17,547 plus 37c for each $1
over $80,000
$180,001 and over $54,547 plus 45c for each $1
over $180,000


Tax rates 2013/14
Non- Resident individual






* An individual is taxed as a prescribed non-resident if they are a non-resident at all times during the
year, but at resident rates if they are a resident at any time during the year. Part year residents
need to apportion the tax free threshold.

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Taxable income Tax on this income
0 $80,000 32.5c for each $1
$80,001 $180,000 $26,000 plus 37c for each $1 over
$80,000
$180,001 and over $63,000 plus 45c for each $1 over
$180,000


Tax rates
May need to add:
-- 1.5% Medicare levy -- if taxable income exceeds the low income
threshold of $20,542 (2014)
-- Medicare levy surcharge if income exceeds $88,000 ($176,000 for a
family) and no private health insurance rate is generally 1%, but
higher for individuals on high incomes (2014)
Company tax rate is 30% regardless of income.
Key terms:
-- progressive tax (tax rate increases as taxable income is higher)
-- marginal tax rate (rate of tax on top dollar of taxable income)
-- tax-free threshold (for resident individuals, no tax payable on income
below the threshold -- $18,200 for 2013/14)
-- part tax-free threshold if a resident for only part of the year.
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Example
Ricky, a resident, has a taxable income in 2013/14 of $90,000. His tax
payable is calculated as follows:

Tax on $18,200 $0
Plus ($37,000 - $18,200) x 19% $3,572
Plus ($80,000 - $37,000) x 32.5% $13,975
Plus ($90,000 - $80,000) x 37% $3,700
Tax payable $21,247

Plus: Medicare levy: 1.5% x (taxable income) $90,000 = $1,350
Medicare levy surcharge (if is single and doesnt have private
health insurance): 1% x $90,000 = $900
No low income offset as taxable income exceeds $66,667


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How is tax paid?
PAYG (Pay as you go) withholding
Employees: the employer withholds tax at the appropriate rate from an
employees salary (or at the rate of 46.5% if the employee hasnt provided a
tax file number) and sends it to the ATO
Investors: a bank will withhold 46.5% tax from interest if the depositor has not
provided a tax file number
Contractors: if a contractor doesnt provide an Australian Business Number
(ABN) to the payer, 46.5% tax must be withheld
PAYG instalments
Business, whether individual contractor or large entity, pays tax during the year
(monthly or quarterly) when they lodge a Business Activity Statement (BAS)
Lodging a tax return
When these taxpayers lodge their annual tax return, they are given credit for
the tax withheld or paid during the year -- may then be required to pay more
tax or be entitled to a refund

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Administrative aspects of taxation
TAX RETURNS
Ordinary tax returns: sec 161 ITAA36
Commissioner publishes a notice each year stating the categories of
persons who are required to lodge a return, eg, individuals who derive
taxable income in excess of the threshold, superannuation funds and
companies
Annual tax return required to be lodged by 31 October each year unless
the taxpayer lodges through a registered tax agent . Registered tax
agents lodge returns based on a lodgement program.
Commissioner has the power to require further tax returns under sec
162 where the original has been misplaced, the Commissioner is
dissatisfied with the original or the person had not lodged a return.
Different tax returns for companies, partnerships, trusts,
superannuation funds etc.

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Administrative aspects of taxation
ASSESSMENTS

Under the self-assessment system, returns are largely accepted at face
value and the Commissioner issues assessments on the basis of the
information in the return: sec 166

Assessment is basically the amount of tax payable (sec 6 ITAA36)

An assessment must be bona fide and definitive burden on the
taxpayer to prove otherwise

Deemed assessment: sec 166A when a full self-assessment taxpayer
(eg, a company) lodges a return both the taxable income and tax
payable are determined by the taxpayer

Default assessment: sec 167 eg, after investigation La Rosa

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Administrative aspects of taxation
Under the self-assessment system, the return lodged by the taxpayer is
accepted without technical review generally, a tax officer only
looks at a return if there is an objection.

Accordingly under the self-assessment system the onus is on the
taxpayer to determine taxable income and if ultimately there is an
adjustment to taxable income the taxpayer will be exposed to
penalties.

Key elements of the self assessment system;
ATO advice and rulings
Self-amendment
Penalties


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Administrative aspects of taxation
Public rulings issued to be public, binding on the Commissioner
Can be relied on by any taxpayer who falls within its terms.
No right of objection against a public ruling
Includes product rulings apply only to taxpayers who want tax
benefits from a product, eg from buying shares in a property trust
Private rulings
An application must be made by the taxpayer in the approved form
Commissioner can choose not to make a ruling
Commissioner is bound by the ruling
The rulee (the entity that applied for the ruling) can rely on a private
ruling -- protection against penalty
The rulee can object against a private ruling but time limits
Oral rulings simple matters, only for individuals


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Administrative aspects of taxation

SELF-AMENDMENT BY THE TAXPAYER

Taxpayer can self-amend their assessment -- ask the
Commissioner for their assessment to be amended: sec 169A(1)
-- for example, to claim a forgotten deduction or to disclose income
that was previously left off a return


Commissioner may decide not to accept the statements made in an
amendment request and not make the amendment requested, eg if
the Commissioner has already started an audit of the taxpayer

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Administrative aspects of taxation
AMENDMENT BY THE COMMISSIONER

Commissioner has general power of amendment: sec 170 ITAA36

Time limits on Commissioners power to amend an assessment:
1. Individuals and small business entities: basic two-year period (from
assessment date).
2. Taxpayers excluded from scenario 1, eg taxpayers with complex
affairs: four-year period
3. Fraud or evasion: unlimited time for the ATO to amend (there must
have been an avoidance of tax as a result of fraud or evasion).
Extension of time to amend in some instances.
General interest charge is payable where, as a result of an amendment, a
taxpayers liability to tax increases.

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Administrative aspects of taxation
A taxpayer dissatisfied with an assessment initiates the formal review
process by lodging an objection -- within 2 or 4 years must state
fully the grounds of the objection
A taxpayer dissatisfied with the Commissioners decision on the
objection can seek further review via the ADMINISTRATIVE PATH
(AAT) or the J UDICIAL PATH (single judge of Federal Court).
General process: (1) return (2) assessment (3) objection (4) objection
decision taxpayer dissatisfied, (5) apply to AAT or single judge of
Federal Court (generally within 60 days, or extended time), (6)
appeal from AAT to single judge of Federal Court (only on question
of law), (7) appeal from single judge of Federal Court to Full Federal
Court, (8) appeal to High Court only if High Court grants leave to
appeal, eg because is matter of public importance
Diagrammatic overview of appeal paths at W31-305

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Tax Offences and Penalties
Types of penalties
Administrative including the Uniform Penalty Regime (UAP), the
general interest charge and the shortfall interest charge.
J udicial
Under the UAP there are three general categories of penalty
including:
DIV284 tax shortfall and related penalties
DIV286 failure to lodge documents on time
DIV288 miscellaneous civil penalties
Shortfall penalties
False or misleading statements
Taking a position that is not reasonably arguable in relation to a large tax
shortfall
Failure to provide document when required
Application of general anti-avoidance provisions


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