CLAW 3201 Australian Taxation System What is tax??

A tax is compulsory, no goods or services in return, liability imposed according to general criteria, does not have to go into consolidated revenue. (a) income tax imposed by the Income Tax Act 1986, as assessed under this Act (b) income tax imposed as such by any other Act, as assessed under this Act There are two primary tax acts in Australia, the Income Tax Assessment Act 1936 which supplements the Income Tax Assessment Act 1997. The Income Tax Assessment Act 1997 was enacted in an attempt to rewrite the ITAA 1936 in simpler form. In order to put into effect the reforms from the review of business tax, the rewrite was abandoned. Who taxes? The government of the day decides whom to tax. Under the constitution, the federal government was given the power to levy income tax under s 51(ii). Who to tax? Income Tax Assessment Tax Act 1997, s6-5 (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income (2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly and indirectly from all sources, whether in or out of Australia during the income year. (3) If you are a foreign resident, your assessable income includes: a. The ordinary income you derived directly or indirectly from all Australian sources during the income year 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 (4) In your working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf as you direct. Income Tax Assessment Tax Act 1997, s6-10 (1) Your assessable income also includes some amounts that are not ordinary income (2) Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income (3) If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf as you direct. (4) If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia (5) If you are a foreign resident, your assessable income includes:

as nearly as possible. Your statutory income from all Australian sources. in proportion to the revenue which they respectively enjoy under the protection of the state. If you have an accounting period that is not the same as the financial year. each previous accounting period is an income year. the manner of payment and the quantity to be paid should be clear and plain to the contributor. s4-15 (1) Work out your taxable income for the income year like this: Taxable Income = Assessable income – Deductions When to tax? Income Tax Assessment Act 1997 s3-5 (1) Income ax is payable for each year by each individual and company. the income year is the previous financial year.a. . and not arbitrary. that is. exept in these cases: a. with those more favorably placed being able to pay more. s4-10 (1) You must pay income tax for each financial year. The inome year is the same as the financial year. What makes a “good” tax system? (1) Equality – the subjects of every state ought to contribute towards the support of the government. For a company. (3) Work out your income tax for the financial year as follows: Income Tax = (taxable income*Rate) – Tax offsets Income Tax Assessment Act 1997. and to every other person. for a company. Uncertainty can cause insolence and corruption. in proportion to their respective abilities. and by some other entities. each such accounting period or. and b. (4) Economy of Collection – Every tax should be so contrived as both to take out and to keep out of the pockets of the people as little as possible. The time of payment. (3) Convenience of Payment – Every tax should levied at the time or in the manner in which it was most likely to be convenient for the contributor to pay it. Other statutory income that a provision includes in your assessable income on some basis other than having an Australian source How much to tax? Income Tax Assessment Act 1997. over and above what it brings into the public treasury of the state. (2) Certainty – The tax that each individual was bound to pay ought to be certain. (2) Your income tax is worked out by reference to your taxable income for the income year. b. Tax should not be more burdensome to the people than they are beneficial to the government (1) Equity – Person in the same situation should be treated equally and those in different situations be treated differently.

Common Law Cases from the federal court in the High Courts of Australia. ITAA 1936 and ITAA 1997. There are other tax legislation that supplement these in:  Fringe benefits tax assessment act 1986  A new tax system act (GST) 1999  Income tax rates act 1986  Taxation administration act 1953  International tax agreements act 1953 . The cost of administering and complying with the tax law is a “dead weight” cost to the community and should be minimized. such as flexibility may also be desirable. Rulings where they are more favourable to the tax payer than the general law. while other features. After 1 July 1992.(2) Simplicity – A tax is simple if for each dollar raised by it the cost of the official administration is small and if the compliance costs. These were determined to be the dominant tests of merit for the tax system as a whole. the costs in money and effort of all kinds to the taxpayer are also small. (3) Efficiency – Efficiency requires that the resources available to the public use be as nearly as possible equal to the resources withdrawn from the private sector. Prevention of tax avoidance and international competitiveness are also desirable. There are three sources of Tax Law.

who has actually been in Australia. unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia. of a person covered by sub-subparagraph (b) a company which is incorporated in Australia. as (a) a person. ii. or its voting power controlled by shareholders who are residents of Australia. carries on business in Australia. or which. or C. an eligible employee for the purposes of the superannuation act 1976. or a child under 16.Residence and Source Resident is defined in ITAA 1936 s6. whose domicile is in Australia. other than a company. not being incorporated in Australia. or iii. continuously or intermittently. Residents are assessable on their derived worldwide ordinary income (ITAA s65 (4)) and statutory income (ITAA s6-10 (3)). a member of the superannuation scheme established by deed under the superannuation act 1990. . who is A. or B. the spouse. who resides in Australia and includes a person: i. and has either its central management and control in Australia. during more than one-half of the year of income. unless the Commissioner is statisfied that the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

The issues of either gaining or losing residence. IRC v Lysaght [1928] AC 217 The taxpayer was held to be a resident even though he was physically present in England for only about a week each month. family and business/employment ties. social and living arrangements. Foreign residents are assessable only on their Australian sourced income under ITAA 1997 s6-5 (3) and ITAA 1997 s6-10 (5). his giving as much or more attention to his business in Darwin. TR 98/17 covers person’s entering Australia for work. Gregory v FCT [1937] 57 CLR 774 A person may reside in more than one country at the same time. Once the taxpayer took a lease on a flat in Monte Carlo. the tax payer was still deemed to be a resident. because he did not set up a new fixed place of living. The tests for indicidual residence may be summarized as follows:  reside test  domicile test  183 day test  commonwealth superannuation fund test Reside Test Reside test is very broad and most difficult to apply. The tax payer had business interest in Darwin as well as a lease. maintenance and location of assets. . Australian Resident is defined in ITAA 1997 s995-1 as: A person who is a resident of Australia for the purposes of the ITAA 1936. Resident is defined in ITAA 1936 in s6(1) as is written above. thereby setting up a new place of residence. Need to consider: intention or purpose of presence. It was held that even though he was a resident of Broome.Individual Residence Foreign Resident is defined in ITAA 1997 s995-1 as: A person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936. It illustrates the ATO’s position on the application of the reside test. as well as the social and living arrangements he made in Darwin. Residence comes with two issues. he was no longer deemed to be a resident of England. It means literally “person who resides in Australia” according to the everyday meaning of the term “resides”. Levene v IRC [1928] AC 217 The taxpayer was held to be a resident of England: Even though the tax payer was out of United Kingdoms for more than half the year (7 months per year). He also had a place of abode in Broome. study and holidays.

The taxpayer went to Vila in 8 November 1971. . The concept of “domicile” comprises physical residence and an intention to remain permanently or indefinitely in the place of residence. Factors to consider when determining domicile are:  the length of absence from Australia  Whether a dwelling was maintained in Australia while the taxpayer was absent  Whether the taxpayer took out long-term accommodation outside Australia  The location of the taxpayer’s economic interests  The location of the taxpayer’s social connections FCT v Applegate (1979) 9 ATR 899 The taxpayer was not held to be a resident. and to not hold a permanent place of abode for the year ended June 1972. it is known as a “domicile of choice”. if a taxpayer is overseas for two or more years. Domicile of origin is the domicile acquired at birth. The weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive. and since the taxpayer was outside of Australia for more than 183 days. If domicile is then changed. As a rule of thumb under IT 2650. Jenkins v FCT (1982) 12 ATR 745 Court regarded the period of three years as significant and held that the taxpayer had a permanent place of abode outside of Australia. had a permanent place of abode outside of Australia. Ruling IT 2650 Ruling IT 2650 deals with the interpretation of “permanent place of abode outside Australia”. The criteria for losing resident status is:  the intended and actual length of the individual’s stay in the overseas country  any intention either to return to Australia at some definite point in time or to travel to another country  the establishment of a home outside Australia  the abandonment of any residence or place of abode the individual may have had in Australia  the duration and continuity of the individual’s presence in overseas country  the durability of association that the individual has with a particular place in Australia. retaining no assets in Australia. unless it can be established that the permanent place of abode is outside Australia. it was held that the tax payer. This has basis of 183 day rule. He took up a lease for 12 months in Vila with an option to renew for another 12 months. His family accompanied him. giving up tenancy of his Sydney flat.Domicile Test A person is a resident of Australia If domiciled in Australia. they are said to have a permanent place of abode outside Australia. for that year.

the taxpayer needs to have presence in Australia of more than half the year. Exception: an individual would not be a temporary resident if either: (a) the individual or his/her spouse is an Austraian resident within the meaning of the Social Security Act 1991 (b) before becoming a temporary resident. Temporary Individual Resident Temporary individual residents is a separate category of resident with individualized tax treatment. the taxpayer will be considered to be a resident for the whole year. unless the income is related to his employment. It does not apply to retirees. A temporary resident is defined as an individual who holds a temporary visa granted under the Migration Act 1958: s995-1 of ITAA 1997. so exactly half the year does not qualify. as they are former members. continuously or intermittently. except for employment related income. Under s6-(1) of the ITAA 1936.183 days test A person will be a resident of Australia if he or she has actually been in Australia. The individual would be taxed only on ordinary income and statutory income sourced in Australia. . Under the 183 tests. the individual has been an Australian resident for income tax purposes ITAA 1997 s768-910 A temporary resident is taxed as a non-resident. Commonwealth Superannuation Fund Test This test has a limited scope and applies to members of Commonwealth superannuation funds and their families. during more than one half of the year of income. unless the Commissioner is satisfied that their usual place of abode is outside Australia and that they do not intend to take up residence in Australia.

it carries on business in Australia and either: o has its central management and control in Australia. Control of voting power in general means at least greater than 50 per cent control of voting shares. Under the Corporations Act 2001. is taken to be located where the directors’ meetings take place. The company argued that they were not carrying on business in Australia. TR 2004/15 This states that for a company to be a resident the two requirements are that the company must be carrying on business in Australia. who was the managing director. In practice. trading activities must take place in Australia and central management and control must be in Australia Voting power and carrying on business test The third test applies where a company. was also residing in Australia. not incorporated in Australia. or o its voting power is controlled by shareholders who are residents of Australia Incorporation Test This refers to incorporation under the relevant company law of Australia. Whether or not this test is satisfied is a question of fact under the Corporations Act 2001. managing agent and majority shareholder. has its voting power controlled by shareholders who are residents of Australia and carries on business in Australia. . central management and control. financing policy and business strategies made at directors meetings.Company Residence Company residence is pursuant to s 6(1) of the ITAA 1936. the issue of a certificate of incorporation is conclusive evidence of the fact of incorporation. Advent of technology. therefore. irrespective of any incorporation defects in registering the company. which states that a company is a resident of Australia if:  it is incorporated in Australia  if it is not incorporated in Australia. This refers to decisions on board company policy. the relevance of the place of where directors’ meetings are held may need to be reconsidered. Central Management and Control Test Central management and control test looks to see where the real control of the company is located. however since the preparation and execution of the documents occurred in Australia this was overruled. with cyber communications. Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156 It was held that the company was a resident of Australia and the source of income was also in Australia. Further Mr Sleigh.

Koitaki Para Rubber Estates Ltd v FCT It was found that the company was exclusively a resident of Australia. the board of directors resided in Sydney and always met there. Preferably. Even though an officer in Papua under power of attorney managed the company. Dual Residency Company A company may have dual residency on the basis that it may be incorporated in one jurisdiction but have its central management and control in another jurisdiction. It is a question of balance. There must be a division of central management and control before a company can be found to have residence in two places.Carrying on business requires that some business activities must be conducted in Australia. . This overrides domestic law according to the International Tax Agreements Act 1953 s4(1) Residence concluded Residence is a test of fact and a matter of degree. North Australian Pastoral Co Ltd v FCT (1946) 71 CLR 623 It was held that the company had dual residence in both Queensland and Northern territories as central management and control was exercised in both jurisdictions. Because of dual residencies. Australia has double tax treaties with over 40 countires. the core activities of the company must have some connection with Australia as opposed to some minor connection.

FCT v French (1957) 98 CLR 398 It was held that French’s source of income was outside of Australia. it was held that the taxpayer’s income was sourced in Australia. but bulk of the services were done outside NSW water. major factors include: (1) the place where the contract is entered into (2) where the performance occurs (3) where the payment is made Nathan v FCT (1918) 25 CLR The legislature in using the word ‘source’ meant. Even though she was employed by a Greek company and got sent by . and were paid in NSW when their ships returned. Legislation for the source is mainly found in ITAA 1936: S 25(2): Interest on a loan secured by the mortgage if any property in Australia in general is deemed to be derived from a source in Australia. of course. unless the income tax law stipulates otherwise. S 6C: Royalties derived by a non-resident that are paid by a resident are generally deemed to have an Australian source Source of Personal Exertion Source is a question of fact and the courts look to a number of factors to determine this. He was a resident of Australia and got contracted and paid in Australia. Legal concepts must. This is saying that French does not say income from personal services is always sourced from where it is performed. the work was carried out in New Zealand. enter into the question when we have to consider to whom a given source belongs. FCT v Mitchum (1965) 113 CLR 401 Mitchum’s income was said to not be from an Australian source as the most important factor was the actor. however.Source Source is defined by [p6szzNon residents in general are assessable only on ordinary and statutory income which is derived from an Australian source. not a legal concept . CT (NSW) v Cam & Sons Ltd (1936) 36 SR (NSW) 544 Some of the men’s income was derived in New South Wales and some was derived outside New South Wales according to the working time spent in and out of the jurisdiction. rather than the place of service. The weight given to each factor varies according to he type of income: For income from personal exertion. but something which a practical man would regard as a real source of income. The men were employed in NSW at dockside. FCT v Efstathakis (1979) 9 ATR 867 Opposite of above.

Esquire Nominees Ltd v FCT (1973) 4 ATR 75 It was held that the source of the dividends was Norfolk Island since this is where the taxpayer made its decision to invest and this was the location of the fund from which the dividend was paid. as it was a relatively simple task. Sources of Dividends The source of dividends cannot always be determined by the location of the share register. . while the sales were negotiated and concluded with overseas clients. Source of Business Income The source of business income is more difficult to determine. The taxpayer was an American resident company. the source was outside of Australia since the taxpayer’s solicitor had flown to the Cook Islands. the interest is deemed to have derived from an Australian source. however in terms of source of interest. The rulings of United Aircraft Corp was overturned by the enactment of s 6C of the ITAA 1936 and the expanded definition of “royalty” in s 6(1) of the ITAA 1936 Cliffs International Inc v FCT (1985) 16 ATR 601 It was held that the commission on the overseas sales agreements did not have an Australian source.the Greek Ministry. The high court held that there was a case of tax avoidance. Instead the source in general is the location where the funds enabling the payments of the dividend arise. Even though there was a long chain. while the royalties payments did have an Australian source by virtue of s 6C of the ITAA 1936. which entered into an agreement to license an Australian company to use its plans to manufacture certain aircraft engines. the contact of loan had been negotiated there and the money made available there. Spotless Services Ltd v FCT (1993) 25 ATR 344 It was held that the source of the loan was outside of Australia. Source of Interest Section 25(2) of the ITAA 1936 provides that where a loan is secured by a mortgage on property in Australia. the court would not trace through the chain of companies. FCT v United Aircraft Corp (1943) 68 CLR 525 It was held that the income did not have an Australian source. the place of performance was the most important factor in this case. The royalties were for iron ore produced and sold by the joint venture in Australia.

This brought about the idea of the fruit and the tree. One of the reasons is because the payments were periodical and were added onto the original income. that the company paid the taxpayer for enlisting in the army.Income Income From Labour ITAA 1997 s6-5(2) says that an Auustralian resident’s assessable income includes the ordinary income you derived directly or indirectly from all sources. The shareholder received no other cash or property. Even if its third party. and retained the same portion of the corporation. Dixon v FCT (1952) 86 CLR 540 It was held that the extra remunerations. Services are provided for the purpose of obtaining a gain Scott v DCT (NSW) It was held that the extra money received by the taxpayer was an unsolicited gift and therefore not income. This also holds that gifts from third parties can be considered income. your assessable income includes the ordinary income you derived directly or indirectly from all Australian sources ITAA 1997 s6-10 says that assessable income includes some amounts that are not ordinary incomes. The money was not given for the service. Payment is linked to the provision of employment or services 2. . in employment or for personal services. These are called statutory incomes such as:  return to work payments  accrued leave transfer payments  bounties and subsidies  profits from a profit-making undertaking or plan  royalties  insurance or indemnity for loss of assessable income  interest on overpayments and early payments of tax. ITAA 1997 s6-5 (3) states that if you are not an Australian resident. as in Dixon. Generally for income: 1. is income under ordinary concepts. Eisner v Macomber 252 US 182 (1920) It was held that the increase in wealth due to a pro rate stock dividend was not income. The payment is often recurrent 3. The payments were incidental to the taxpayer’s employment as a soldier. Income on ordinary concepts The general principle here is a gain from a person’s labour. Sufficient Nexus The payment has to be sufficiently connected to the employment or services. Must be income according to the ordinary concepts and usages of mankind. was indeed income.

rather a gift. it is still assessable income under s26 (e) of the ITAA 1936 Payne v FCT (1996) 32 ATR 516 It was held that the frequent flyer points were not ordinary income since its not able to convert it to cash. however after a year with the devaluation of sterling. rather than income. FCT v Cooke and Sherden (1980) 10 ATR 696 It was held that the prizes were not income on general principles since the taxpayer did not provide a service and the benefits were not convertible to cash. and gave gifts to others as well. . This is because the money was capital. This shows that the motive of the donor was to give a gift. Even though the service was outside of employment. If these benefits had been convertible to cash they would have been income on ordinary concepts. and it didn’t amount to allowing. the taxpayer paid a lesser amount in Australian dollars. The purchase price was fixed in sterling. Saved outgoing can be income International Nickel Australia Ltd v FCT (1977) 137 CLR 347 The company made an exchange gain which was held to be assessable income. This was deemed to be a trading profit. the payment was definitely a result of the employment relationship. Constable v FCT (1952) 86 CLR 402 It was held that the money taken out of the superannuation was not assessable under s 26(e) of the ITAA 1936. Warner Music Australia Pty Ltd v FCT (1996) 34 ATR 171 It was held that the refund of an amount previously deducted should not necessarily be included in assessable income. Brent v FCT (1971) 125 CLR 418 It was held that there was no sale of an asset as the taxpayer was not an original owner of the copyright. The employer did very with the floats. not just employees. giving or granting him the benefit FCT v Holmes It was held that the reward gotten for the successful salvage was income because the payment was for the provision of a service. the third party wasn’t aware of the relationship. Since it was not property it was deemed to have ben a provision of services for reward and therefore the payment was accordingly income.Hayes v FCT (1956) It was held that the shares received was not income. Since there were no other connections. It was held that there was not sufficient nexus. Facts show that the taxpayer was fully remunerated for his services. Smith v FCT (1987) 19 ATR 274 It was held that the payments for further study were assessable.

Tennant v Smith (1892) AC 150 It was held that paying for the man’s accommodation was not income. The restrictive covenant in this case involved substantial sterilization of rights to trade. Dickenson v FCT (1958) 90 CLR 460 It was held that the payments made were capital. Higgs v Olivier (1951) Ch 899 It was held that the payment for not act in anything else was capital amount. as it was not convertible to cash. The service for acting in the film was fully performed. FCT v Woite (1982) 13 ATR 579 It was held that the payment for signing an agreement to not play football for any other team was a non-assessable capital receipt. It was held that it was not assessable. Perhaps if agreement was made while he was still acting for the film. Reuter v FCT (1993) 24 ATR 527 It was held that the payment was assessable income as a reward for services. . it would have been considered income.

The taxpayer carried on activities such as reading periodicals. Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 It was held that the proceeds from the sale of land were not assessable income. Western Goldmines (NL) v DCT (1938) 59 CLR 729 It was held that the profit from selling the mines was not held as assessable income because they had intention to and did work the mines. FCT v Stone All the extra amounts were held to be income. Similar to above. The court decided that the taxpayer intended at the time of acquisition to resell the mine at a profit rather than work the mine. . Watson v DCT (2010) 75 ATR 225 It was held that the taxpayer could not deduct the losses against the insurance payments since the payments were not “from” the business Evans v FCT (1989) 20 ATR 922 It was held that the taxpayer’s gambling was not business rather a hobby since it was lacking organization and no attempt was made at maximizing profit. FCT v Walker It was held that the taxpayer was carrying on a business. even if unsolicited Californian Copper Syndicate v Harris (1904) 5 TC 159 The profit from selling the mines were held to be assessable income. Today under Div 35 of the ITAA 1997 his losses would be quarantined to the farming business due to its small scale. This is because the company used the land for mining for a long period. The court looked available capital to work the mine. This is because the income was part of the business she was carrying on. the taxpayer did a series of things to prove that he was carrying on business. maintaining a card system.Income from Business There are a number of factors in determining whether a business is being carried on:  System and organization  Profit motive  Size and scale of activity  Frequency of transactions  Nature of property  Supplementary work done on the property  Circumstances responsible for the realization Ferguson v FCT (1979) 9 ATR 873 It was held that the taxpayer was carrying on business and the expenditures were deductible.

Westfields Ltd v FCT (1991) It was held that the profit made from the selling the property was not assessable income. since the trustees were not carrying on a business of subdivision. . The purchaser agreed to keep it confidential. Rolls-Royce Ltd v Jeffrey As opposed to Evans Medical Supplies. Moana Sand Pty Ltd v FCT It was held that the payment received for the resumption of land by the government was assessable income. FCT v Cooling The payment for allowing the other company becoming a tenant was held to be assessable income. This is because of his extensive commercial knowledge and his strategy. since the taxpayer had intention of selling for profit. This is because when the new owners came in their intention was to sell the property. which it went on doing as a tenant of the person who they sold it to. It doesn’t Shields v DCT It was held that the losses were part of the business. This is because the taxpayer’s intentions was to run a shopping mall when it bought the property.FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355 It was held that the income from the sale of land was income. The plant had no further use after the services performed. FCT v Montgomery It was held that the lease incentive is assessable income. Statham v FCT It was held that the receipts were on capital account. FCT v Myer Emporium Ltd (1987) 163 CLR 199 The high court held that the funds from selling the right to receive interest income was assessable income even though it was outside the scope of the business. the payments received from the selling of the intangible assets was held to be income. Subdivision was done by the council. Evans Medical Supplies Ltd v Moriarty (1958) It was held that the confidential information was capital. The right to receive income from a property was a revenue asset and its sale price accordingly is income. otherwise may have been able to be consider as capital. GP International Pipecoaters Pty ltd v FCT (1988) It was held that the price used to build the plant was income.