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Week 1
• Summary of Topics – Week 1• Introduction to Income Tax
– Taxation Policy
– Authority in Taxation Law – Tax Reform– Overview of the Tax system
Week 1
• Introduction to Income Tax – Resident Individuals
– Responsibility of individual to lodge tax return
– Income tax rates 2011/12
– Tax free threshold
– Income Tax offsets (rebates)
– Tax free threshold
– Medicare Levy
– Tax Offsets / Rebates
Week 1
• Other Tax Paying Entities• Income Tax Equation• Assessable Income
– Ordinary Income– Statutory Income– Status of Residence and – Source of income
Introduction to Income Tax
• What is tax?
• Different things to different disciplines
– Economists
– Lawyers
– Economists
Introduction to Income Tax
S. 51(ii) of the Constitution refers to ability of Commonwealth to raise taxes.
Some features of tax are -
– Compulsory payments
– Payments raised for government purposes
• Payments do not constitute fees for services rendered
• Payments are not penalties
Taxation Policy
Characteristics :– Emotive Issue– Need for Tax– System based on equity and simplicity– Protect rights and liberties of individuals– Provide economic growth &– social infrastructure
Taxation Policy
– Overall goal• Fiscal adequacy
• Political acceptability
• Achievement of Macro-level objectives
• Tax as a Social Process
– Progressive Taxation
– Proportional Taxation
– Regressive Taxation
Taxation Policy
• Functions and Objectives of Taxation Policy
– Need for Governments to provide social and merit goods
– Support where free market does not exist
– Correction of other free market imperfections
Authority in Taxation Law
• Statute Law (legislation)
• Case law (common law)
• Practices of the A.T.O.
Authority in Taxation Law
Statute Law– ITAA 36 – ITAA 97– Taxation Administration Act 1953– Fringe Benefits Tax Assessment Act 1986– GST Tax Acts (1999)
Authority in Taxation Law
• Appeal Process– A.A.T.– Federal Court– Full Federal Court– High Court
Authority in Taxation Law
• Case Law – Role of the Courts
• Create law in circumstances not covered by legislation
• Interpret statutory legislation with use of \
– Acts Interpretation Act 1901 – S. 15AA and S. 15AB
– Literal rule
– Golden rule
– Mischief rule
Authority in Taxation Law
• Practices of the A.T.O.
• ATO rulings– Since 1 July 1992 statutorily binding – Under self-assessment system these have
moved closer to “formal” law
• Income Tax Assessment Regulations 1997– Empower Governor General to make
regulations
Authority in Taxation Law
• A.T.O.– Tax Rulings– Private Rulings– Public Rulings– Product Rulings– Class Rulings– Oral Rulings
Tax Reform
• Tax Law Improvement Project – ITAA97 • Tax Reform project
– GST– Simplification
• Ralph Review• Henry review of taxation
Tax Reform
• Creation of a Board of Taxation
• New approach to FBT
• Changes to Imputation regime
• More comprehensive and effective rulings system
• International tax reforms
Overview of Tax System
• Income tax system consists of a number of Acts and is administered by the A.T.O.
– I.T.A.A.
– Income Tax Regulations
– Ratings Acts
– International Agreements
– Taxation Administration Act and regulations
– FBT legislation
Overview of Tax System
• Two Income Tax Assessment Acts currently apply– ITAA 1936 (Original Act)– ITAA 1997 – Commencing S. 1.1
• Commenced 1 July 1997
Overview of Tax System
ITAA 1997 comprises re-written legislation and there are six levels of provisions (Sec 2-5):
• Core provisions - checklist
• General provisions
• Specialist Groupings
• Collection of tax
• Administration
• Dictionary of terms and concepts
Introduction to Income Tax - Resident Individuals
Residents of Australia are required to lodge a tax return to ATO at end of financial year disclosing their ‘taxable income’
Liability to tax is determined on a year to year basis Australia’s financial year commences 1 July and ends
30 June
Introduction to Income Tax - Resident Individuals
• Need to determine :
– What is assessable income? (See over)
– What is an allowable deduction?
– What is a tax offset? (See over)
• Allowable deductions
• These will be covered later
Income Tax Rates 2011/12• Income Tax Rates – Resident of
Australia-Income tax is levied on a progressive basis
(Sec 12-1 Income Tax Rates Act Schedule 7 – Part 1)
– Medicare levy - 1.5% of taxable income
_ Individuals entitled to tax offsets (rebates)
Tax rates 2011/12
• Taxable income Tax % excess:
• $6000 Nil 15%
• $37000 $ 4650 30%
• $80000 $17550 37%
• $180000 $54550 45%– Medicare levy - 1.5% of taxable income
_ Individuals entitled to tax offsets (rebates)
Tax Free Threshold
Individual residents are entitled to $6,000 tax-free threshold
Tax-free threshold is reduced in certain circumstances - Rates Act – Sec 16:
• When you become or cease to be a resident of Australia Tax-free threshold is adjusted - $500 per month ($6,000 / 12 = $500)
Medicare Levy
Resident individuals are liable to pay a Medicare levy at the rate of 1.5% of individual’s taxable income Sec 251S(1)(a) ITAA36
No Medicare levy is payable if taxable income less than $18839…. 2010/11
Shading in provisions apply where taxable income is between…. $22164)
Medicare Levy
A 1% Medicare levy surcharge is imposed if taxpayer does not have private hospital insurance. Surcharge applies to:• Single individuals with taxable income above
$77,000 pa for 2010/11• Couples and families with taxable income
above $154,000 pa plus $1,500 for the second and every subsequent dependent child
Tax Offsets / Rebates
Tax offsets are deducted from the net tax payable on ‘taxable income’ Resident individuals are entitled to tax offsets (rebates) Examples:
• Low income tax offset ( Maximum offset $1500 from 1 July 2011 for income of $30 000 or less.. BUT It is reduced by 4 cents for every dollar of income over $ 30 000) ( from 1 July reduces to4 445)
• Dependant tax offsets: spouse $ 2355 ( 2011/12)
• Franking credit (dividend imputation credit)
• ‘Spouse superannuation contributions tax offset’ (Max $540 if spouse contributes $3,000 and spouse’s assessable income < $10,800 – offset
reduces if above $10,800)
Dependant tax offsets
• An Australian resident is entitled to claim a dependant tax offset (rebate) provided:
1. Taxpayer contributes to the maintenance of a dependant – sec 159J(1)
2. Both taxpayer and dependant are residents of Australia – sec 159J(1)
3. Separate net income of dependant is below statutory amount – sec 159J(4)
Dependant Tax Offsets
• Dependant tax offsets adjusted annually for inflation - sec 159HA
Table of rebates – sec 159J(2)2011/12Class1. Spouse of the taxpayer $ 23552. Child-housekeeper $ 22993. Invalid relative $ 864
• NB: Student offset/ dependants notionally retained to calculate entitlement to other rebates – sec 159J(1A)
Calculation of tax payable 2011/12
Joe Brown has a Taxable income of $47,000 for 2011/12 – he is a resident of Australia
Tax payable – ITAA 97 Sec 4-10(3): $6,000 X 0% = Nil$31,000 X 15% = $4,650$10,000 X 30% = $3,000$47,000 $7 650LessTax offsets NilNet tax payable $7650
Calculation of tax payable 2011/12
Net tax payable $7650
Plus
Medicare levy
($47,000 X 1.5%) $705
Tax payable $8,355
Non-Residents - Rates of tax 2011/12
Non resident of AustraliaIncome tax is levied on a progressive basis(Sec 12-1 Income Tax Rates Act – Schedule 7 Part 2)Taxable income Tax %Marginal rate of tax
Nil Nil 29% $37,000 - $80,000 $ 10730 + 30% $80,001 - $180,000 $23 630 + 37% Over - $180,000 $60630 + 45%
Rates of tax 2011 – Non-residents
• Not liable to pay Medicare levy -Sec 251U(d)• Not entitled to tax offsets• Not entitled to tax free threshold - $6,000
Introduction – rates of tax: other entities
• Companies– Rate of tax – 30%
• Complying superannuation funds– Rate of tax – 15%
• Non complying superannuation funds– Rate of tax – 45%
Partnerships
• Partnerships are not taxed• Each partner is taxed on his/her share of
Partnership Income…• eg Tom and Mary are equal partners in a
newsagency partnership which has a taxable income of $ 100 000 in 2010/11
• Tom will therefore have $ 50,000 taxable income from the partnership
Trusts
• A trustee does not normally pay tax where the income is distributed to the beneficiaries
• Where a beneficiary receives income from a trust they are taxed on their share at their own personal rate
• If income is not distributed the trustee may be liable to pay tax on the undistributed income at the top marginal rate of tax
The Income Tax Equation
• Assessable income minus allowable deductions equals Taxable income ( sec. 4-15 ITAA97)
ITAA defines ‘taxable income’ - Sec 4-15
‘assessable income less deductions’• Tax is levied on taxable income ( sec 4-10(3)
ITAA97)• 1.5% Medicare levy levied on taxable income• Tax offsets are deducted from tax payable
The Income Tax Equation
Some income is exempt from tax - Sec 6-1(2) …. See later
Therefore need to understand what is assessable income and allowable deductions
Assessable Income
• ITAA 97 - comprised of• Ordinary income S 6-5 which is based on case
law and• Statutory income S6-10 which is based on
specific legislation• See Guide in S 6-1• but excludes exempt income S 6-20
Assessable Income
Includes:1. Ordinary income – Sec 6-5:
• Income from personal exertion• Income from property• Carrying on a business
2. Statutory income – Sec 6-10:• Income under specific provisions of ITAA• Sec 10-5 – summary list
Assessable Income Some Examples :• Income from personal exertion:
• Salary & wages• Income from property:
• Interest • Dividends• Rent• Annuities• Royalties
• Carrying on a business:• Proceeds from carrying on business (e.g. profits)
Ordinary income: section 6-5
• Need to know what is…
• Ordinary income
• Residence of taxpayer
• Derivation of income
• Source of income
• Exempt income
Ordinary income
• Is a common law concept
• See defn.Section 6(1) of the 1936 ITAA of income from personal exertion
• Based on case law
Ordinary Income - Principles
• Ordinary income comes in to the taxpayer• Nexus (link) with income earning activity• Convertible into money, regular recurrent and
periodic• Must be a gain• Includes illegal activities• Does not include capital gains• Non cash benefits 26 (e) & S 21A
Ordinary income
• Determined according to ordinary concepts and usages of mankind
• Look at all the circumstances• Is an objective test• Determine whether payment is for services
or employment• Character of receipt in hands of recipient• Motive of person making the payment
Residence
Sec 6-5(2) – Resident • 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 year of income
Sec 6-10(4) – Resident • If you are an Australian resident, your assessable income
includes your statutory income from all sources whether in or out of Australia.
Residence
Foreign Source Income –
Withholding tax• If Australian resident derives income such as dividends and interest
from overseas sources and withholding tax had been deducted:
• Australian resident must include both the income and withholding tax as part of assessable income (sec 6AC)
and
• Withholding tax will be allow as a foreign tax credit offset (sec 160AO)
• Maximum permitted limited to Australian tax payable on that income
Residence and Source: ordinary income
Section 6-5(3) – Non-resident
If you are not an Australian resident, your assessable income includes:a) the ordinary income you derived directly or indirectly
from all Australian sources during the year of income; 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
Residence and Source: Statutory income
Section 6-10(5) – Non resident
If you are not an Australian resident, your assessable income includes:a) Your statutory income from all Australian
sources; andb) other statutory income that a provision
includes in your assessable income on some basis other than having an Australian source.
Residence
There will be a need to determine:
Whether taxpayer is a resident of Australia• If a resident, source will generally not be an
issue, as you will need to bring to account income derived from all sources whether in or out of Australia
If taxpayer is not a resident of Australia, the issue is whether income derived is sourced in Australia
Residence
Three statutory tests of residence: S 6(1) ITAA 36:
1. Domicile / permanent place of abode test
2. 183 day test
3. Commonwealth superannuation test
Residence
Individuals –Domicile / permanent place of abode test
Taxpayer lives in Australia:• Physical presence in Australia• Business and family ties in Australia• Family home maintained in Australia• Personal assets in Australia
Tax Ruling TR 2650 sets out ATO views on tests associated with residency of Australia
Residence
Individuals – 183 day test
• Treated as resident of Australia if in Australia for more than 183 days,
• unless ATO is satisfied,• that the taxpayer’s usual place of abode is outside Australia,
and• taxpayer has no intention to take up residence in Australia
Test is predominantly concerned with residency status of people who visit Australia (e.g students, visitors on holidays)
Residence
183 day test
This test determines when a person is considered to have commenced to be a resident of Australia
ATO considers ‘a migrant who comes to Australia intending to reside here permanently is a resident from arrival’ (Tax ruling TR 98/17 paragraph 16)
Residence
Permanent place of AbodeLeading cases
Levene v IRC – (1928) AC 217 A British subject who on medical advice spent the
summers in England and the winters abroad He had no fixed residence in either the UK or abroadHeld:• The person was a resident of the UK
Permanent place of abode
In Levene’s case it was pointed out:
• A person continues to reside where he has his settled or usual abode, though from time to time he leaves it for the purpose of business or pleasure
• A person who has his home abroad and visits the United Kingdom from time to time for temporary purposes without setting up an establishment in that country is not considered to be a resident there
• A man may reside in more than one place
Permanent place of abode
FCT v Applegate – 79 ATC 4307 Taxpayer was sent overseas to Villa to establish an office for his employer
Taxpayer’s intention was to remain overseas for an ‘indefinite period’
Taxpayer was accompanied by his wife and he left no assets in Australia
Held:• Not a resident of Australia• Important factors such as work, family and location of home were located in
Villa• Taxpayer’s place of abode was outside Australia
Permanent place of abode
Key principles – Applegate’s case:
• Where a taxpayer’s permanent place of abode is located must be determined annually
• Permanent place of abode does not mean that there should not be an intention to return in the foreseeable future
• Permanent should be contrasted with temporary or transitory and it did not mean everlasting
Commissioner’s views on permanent place of abode set out in Tax Ruling – IT 2650
Permanent place of abode
FCT v Jenkins - 82 ATC 4098
A bank officer was transferred to the New Hebrides for 3 years
Returned to Australia after 18 months due to ill healthHeld:• Although taxpayer’s stay overseas was for a fixed term, the
taxpayer was a non-resident, as his permanent place of abode was outside of Australia (3 year term was considered significant)
• A taxpayer’s intention to reside outside of Australia does not have to be for an indefinite period
Residence of companies
Statutory test – Sec 6(1) ITAA 1936:
Company is a resident of Australia if:
Incorporated in Australia
If not incorporated in Australia: Carries on business in Australia and:
• Company’s central management and control in Australia or• Voting power controlled by shareholders who are
residents of Australia
Residence of companies
De Beers Consolidated Mines v Howe
• A company is normally a resident in the country or place where its central management and control are situated
• That place will usually be where the directors meet to do the business of the company
• This is a question of fact and degree
Residence of companies
Esquire Nominees case - 72 ATC 4076 Company was incorporated in Norfolk Island with voting
shares and directorships in Norfolk Island hands
Held:• As company’s central management and control was in
Norfolk Island it was not a resident of Australia
Residence of companies
Malaysian Shipping Co Ltd v FCT
(1946) 71 CLR 156
• In Malaysian Shipping case it was held if a company’s central management and control is in Australia, then it must be carrying on business in Australia
Source of Income
No statutory definition of ‘source’ in ITAA
Tests to determine ‘source of income’
1. Place where taxpayer performs services
1. Place where contract signed
2. Place of payment
Source of income – salary & wages
FCT v French – (1957) 98 CLR 398
An Australian resident was employed as an engineer by an Australian company carrying on business in Australia and New Zealand
During the year ended 30 June 1951 taxpayer was in New Zealand for 17 days on his employer’s business and earned 110 pounds during this period (being income from personal exertion)
Source of income
Salary & Wages –
FCT v French
Held:
• Source of 110 pounds was where work was performed and income was derived from sources out of Australia
• In the case of wages the source of income is where the place of employment is performed
Source of income – Salary and Wages
FCT v Efstathakis – 79 ATC 4256
Salary paid by the Greek Government to a Greek national working in Sydney at the Greek Press and Information service was taken to have an Australian source
Source of income
FCT v Mitchum – (1965) 113 CLR 401
A film actor normally resides in USA
He entered into an agreement in Switzerland and came to Australia to act in a film which was partly shot in Australia
He was present in Australia for approx 3 months
The remuneration was paid to him in the USA
Source of income
FCT v MitchumHeld:• Source of income was outside Australia
• Mitchum was using his creative powers or special knowledge to such a high degree that the place where those powers or knowledge was utilised was relatively unimportant
• Other factors such as where the contact was made (Switzerland) and place where payment was made (USA) may be significant for determining the source
Source of income
Thorpe Nominees• If performance is found to be more
important than the making of the contract, under these circumstances, the place where the contract is performed may be the only relevant factor in determining source
• END LECTURES WEEK 1
Studying tax!!!
• Expect to • Attend all lectures and tutorials• Take good lecture notes!• Own study time min 5 hours per
week….which involves……• Reviewing lecture notes• Reading, highlighting and tabbing
legislation
Studying tax
• Reading the reference material from Foundations of Tax
• Prepare Pre tax questions
• Prepare tax tutorial questions for class
• See your tutor if you need help!
• Anything less you are at RISK!!!!!
Assessment
• Two tutorial questions x 5% 10%
• Group assignment 20%
• Closed book exam 70%
Useful Reference!!!!!!
Communication Skills Handbook, third edition authored by Jane Summers and Brett Smith 2010 published by John Wiley & Sons Australia Ltd. The topics covered include the following:● Guidelines for Assessment (how to prepare/complete assignments in accordance with what the lecturer requires) ● Referencing and Plagiarism/Collusion (uses Harvard referencing – the Faculty of Law and Management standard)● Report writing and Case Study Analysis● Essay Writing● Oral Presentations● Examination Techniques● Job Applications and CV writing
There are five copies on Reserve and two copies available for 3–day borrowing at Bundoora.
oasis• Oasis - Tutorial Enrolments will open at • 6:00 Thursday 23 Feb• For help contact the Study Hall:• [email protected] or 9479 3694.• Students are to enrol for their semester 1, 2011 tutorials via OASIS • (Online Automated Scheduling Information Software)• To enrol into a tutorial• NOTE: You must have a confirmed enrolment in order to access OASIS.• Go to the OASIS web page https://www.latrobe.edu.au/oasis • Select Campus• Select Student• Log in by entering your username and password, then click Submit (Same username and password that you use for StudentOnLine).• Click Select Class• Select the appropriate School from the drop down menu (Make sure you are selecting the correct School from the drop-down list (e.g. School
of Law for LST2BSL).• Click Submit• Select the appropriate Subject• Click Submit• Select the tutorial time you wish to enrol in• Click Submit• You are now successfully enrolled into the tutorial for that subject• Click on Student and repeat the above steps for the rest of your subjects• To see your tutorial timetable, click on View Timetable• To print your tutorial timetable, click on Print
