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Introduction to taxation law
P R E PAR E D BY WE S OBS T AND R AMI HANE GBI F OR T HE UNI T T E AM
Contents
Introduction 1
Unit overview 1
Tax reform, tax complexity and tax simplification 1
Aims of the unit 3
Learning resources 6
Textbooks 6
Guide to studying taxation law 6
Study materials and support 6
Historical perspective and sources of income taxation law 7
Relevant legislation 8
Structure and application of the ITAA 9
Definition sections 10
Use of and/or 10
Residence of taxpayer and source of income 10


© Deakin University
P rinciples of I ncome Tax Law
Introducti on
Welcome to the study of income tax in Australia. These materials are your guide to
your study of this area.
Please note that this study guide should be your starting point in your study of the
unit Principles of Income Tax Law. It will direct you to relevant readings from the
textbook, from your booklet of readings, and from the Act, and combined with your
access to Deakin Studies Online (Cloud Deakin), will provide all the materials you
require for this unit.
Uni t overvi ew
Taxation is a particularly important area of government activity. It impacts upon the
directions and efficiency of the economy and ultimately affects the distribution of
income in society and provides parameters within which government spending
programs can be maintained. As individuals we have an obvious need to understand
the taxation laws and their implications for our personal decisions. Taxation is also
an extremely important part of business decision-making and, as a result, this unit is
a very important part of a commercially focused degree, whether in Law or
Commerce. For those planning a career as a Tax Agent or generally in accounting or
related fields, this subject is even more important as the preparation of tax returns
and giving of tax advice is one of the most important aspects of public accounting
practices and is a growing field for lawyers accredited as tax agents. We have even
seen the emergence of joint ventures between law and accounting firms that seek to
operate generally, or specifically in the specialty taxation field.
Because of its importance, the study of taxation law is required for membership of
both of the Australian accounting professional bodies (CPA Australia and ICAA).
Given that income taxation is an area with one of the largest amount of legislation
and legislative change, and a large number of reported decisions and administrative
rulings, the unit is required to provide a high level of understanding which also has to
be achieved in the short space of one semester’s study. It is therefore essential to
appreciate that a high level of commitment is required to cover the volume of
material and to begin to understand the complexities of taxation law.
On the other hand, we are mindful of these demands and are anxious not to
impose unrealistic expectations. We must also be aware that because law changes
so frequently, the key aim is not to give a static picture of the legal provisions in the
semester in which you are studying this area, but rather to use that material to
develop dynamic skills that will allow you to find, understand and utilise the
provisions that are operative whenever you have a particular issue to consider.
Tax reform, tax compl exi ty and tax si mpl i fi cati on
There was a time when Australia had a reasonably sane and credible tax system.
But that time is long gone. The system has been broken and beaten by an
avalanche of avoidance, evasion and minimisation.
(The Federal Treasurer, Mr Keating: The Age, 31 August 1985, p. 11)

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Following this statement, the then Federal Government introduced an incredible
amount of new legislation in an attempt to reduce the opportunities for tax avoidance
and evasion, and improve the equity and efficiency of our income tax system.
These changes led to a substantial increase in the size of the Income Tax
Assessment Act (ITAA) so that it soon contained over 1200 sections and over a
million words. Although these amendments were also intended to improve the
equity and fairness of the system, it was argued by many that they also made it
incomprehensible to the ordinary taxpayer. Added to this, the legislation is also
being expanded by so called ‘simplification rules’ which are aimed at reducing the
time required to comply with the legislation, but again add to the knowledge base
required to understand taxation law. Some of the changes that have been
implemented over the last 30 years include:
• taxation of capital gains
• fringe benefits tax for employee benefits
• foreign tax credits scheme to deal with the foreign income of Australian
taxpayers
• substantiation requirements before deductions are allowable
• imputation of tax paid by companies onto the liability of shareholders to tax
on company dividends when received by them
• special provisions for superannuation investments and superannuation funds
• limitation of deductions for entertainment expenditure
• thin capitalisation rules that are concerned with characterisation of debt as
equity for tax purposes
• introduction of a Goods and Services Tax
• tax consolidation of corporate groups
• small business simplification options
• simplified imputation system for companies
• special rules for the taxation personal services income
• unified capital allowance provisions
• enactment of a general anti-avoidance provision know as Part IVA
• Pay-As-You-Go and quarterly reporting of tax.
Yet in spite of these changes, disputes continue to arise and we have a continual
stream of Rulings, cases and reform proposals. You may ponder why the ITAA is
so challenged, debated and even abused despite its perennial revision. One
answer lies in the fact that the ITAAs, as a complex set of legal rules that have
significant effects on people’s financial affairs, will always be the subject of fine
scrutiny by those seeking to minimise their tax payable. The drafters may add to
the problem by failing to make their intent clear. Administrative interpretations by
the Federal Commissioner of Taxation may be questioned in terms of their
consistency with the legislation and with other Rulings on similar fact situations.
J udges may use different interpretative techniques on this complex legislation and
may indeed have vastly different philosophical views as to their role, if any, in
combating tax avoidance.

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P rinciples of I ncome Tax Law
Taxation law becomes more complex as the wits of taxpayers and their advisers
are pitted against the legislature. In an attempt to reduce the complexity of the
income taxation system, the Federal Government announced in 1993 the
establishment of the Tax Law Improvement Project (TLIP). The TLIP’s task was to
restructure, re-number and simplify the Income Tax Act by rewriting it in plain
language. This process has led to the enactment of the ITAA 1997 which has partly
replaced the old ITAA 1936, but both Acts are still required as the ITAA 1936 as not
been fully rewritten. The TLIP project was abandoned in 1998 when the then
Government established a committee chaired by Mr J ohn Ralph to review the
taxation of businesses. The Ralph review was completed in 1999 and made many
recommendations for fundamental change to business taxation. Many of these
recommendations have been implemented, e.g. reductions of the company tax
rate, and the consolidation of company groups for income tax purposes. However,
the recommendations that required more structural changes, such as the Unified
Entity Taxation Regime, have been abandoned.
In 2008 the Rudd Labor Government commissioned the ‘Henry Review’ to
undertake a comprehensive review of the Australian taxation system. The objective
of the Henry Review were to examine Australia's tax and transfer system, including
state taxes, and make recommendations to best position Australia to deal with the
demographic, social, economic and environmental challenges of the 21st century.
As a result of this review (published in May 2010) the Federal Government has
implemented some changes to the taxation system and has undertaken to consider
all of the recommendations of the Review.
New legislation is constantly being introduced and this may be touched on by your
lecturer but will not normally be examinable unless stated otherwise. Nevertheless,
you need to understand that tax reform is a regular aspect of the tax landscape and
one in which serious practitioners need to take a keen interest. History shows that
taxation has always been a highly contentious area of public policy. Within political
parties there is a diversity of opinion about income tax law, and alternative methods
of collecting government revenue. Capital gains taxes, value added tax, goods and
services tax, sales tax, resources tax, bed tax and taxes on deceased estates have
all had enthusiastic proponents and equally dedicated opponents. This fact is hardly
surprising, as we are talking about a system to be imposed on all taxpayers whether
they earn $5000 per annum or $20 000 per week, whether they support ten
dependants or are independent, or whether they reside in Australia or a tax haven.
For this reason we can expect continuing changes to the taxation system.
Ai ms of the uni t
This unit is about the taxation of income. We therefore rely on the Income Tax
Assessment Acts (ITAA) and the decisions made by the courts when interpreting
these Acts. We also consider the Fringe Benefits Tax Act because it imposes tax
on employers in respect of benefits that might be seen as income in the hands of
employees, and we give a brief overview of the Goods and Services Tax (GST)
because of its impact on all business transactions and income tax. However, we do
not cover other tax areas that are more specific to certain industries (e.g. mining)
and overseas transactions as these are outside the scope of this unit.

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It is important to appreciate at this early stage that the means of determining
income tax is solely contained in legislation. Tax is not based on common law, as
the power to collect taxes from a country’s citizens will only be supported by the
courts if it is set out in legislation. Tax liability is therefore a function of legislation
and depends upon the wording of this legislation and the way it is interpreted by
the courts. While secondary sources are important study tools, you must remember
that they are only secondary sources, and are thus the authors’ own opinions. If
you examine a number of books in the tax area you will see that these opinions
can vary markedly. Opinions of judges also differ widely. Ultimately, you are trying
to develop the skills needed to analyse the primary materials relevant to any tax
question. Secondary sources will give you assistance, but not a guaranteed
accurate answer.
This means that all answers to tax problems must be referenced to the
appropriate section/s of the Acts (see Study Support Materials on Cloud
Deakin for further explanation of referencing).
The aim of this unit then, is to introduce you to, and familiarise you with, the laws
concerning income tax in Australia, giving you the tools to deal competently with
taxation problems you may be confronted with in the future. This does not mean
learning every section of the ITAAs (which is impossible and in any event is
unworthy in the context of a University level analysis). It means developing a body
of skills and an understanding of principles and techniques of analysis that can be
used in conjunction with the ITAAs. The objectives of this unit are that on
completion of this unit students should be able to:
1. Demonstrate a working knowledge of the principles that govern the operation
of the Australian income tax system, GST and FBT;
2. Demonstrate the ability to evaluate, analyse and apply selected provisions of
the Income Tax Assessment Acts, and associated Acts;
3. Demonstrate the ability to read, interpret and apply relevant judicial
decisions; and
4. Demonstrate the skills and tools necessary to successfully research the
taxation consequences of new and unfamiliar taxation law problems
.
To achieve these objectives you should work your way through the study guide,
reading the relevant sections of the ITAA, textbook and the cited cases. The cases
cited have been selected to assist your understanding of the relevant section in the
ITAA via the courts’ interpretation.
In summary, we will be concerned with the following relationships:







From these relationships you can see that our primary concern is to determine
what is assessable income, and what are allowable deductions under the ITAA.
The content of this unit is logically sequenced to resolve these equations and is
organised into the following topics:
Tax payable = (Taxable income × Tax rate) – Tax offsets
and
Taxable income = Assessable income – Allowable deductions
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Topi c
1 Introduction to taxation law
− An overview of the taxation process and the tax mix
− Policy considerations in the taxation system
− Attributes of the Australian income tax system
2 Assessable income
− Income in ordinary concepts
− Income made specifically assessable under the Act
− Income from employment
− Income from business
− Income from property
− Exempt income
3 Taxation of capital receipts
− Structure of the CGT legislation
− Major CGT events
− Calculation of capital gain
− CGT exemptions and concessions
4 Deductions
− General deductions
− Exclusions from deductions
− Specific deductions
5 Trading stock
6 The taxation of individuals, shareholders, beneficiaries and partners
− Relevant taxpayer, tax calculations and collection
− Taxation of individuals
− Taxation of shareholders
− Taxation of beneficiaries
− Taxation of partners
7 Other taxes
− Fringe Benefits Tax
− Goods and Services Tax

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Learni ng resources
Textbooks
Sold as a package
• Coleman et al, Principles of Taxation Law 2014, Thomson Reuters,
Pyrmont NSW.
• Deutsch, R, Fundamental tax legislation 2014, Thomson Reuters, Pyrmont,
NSW.
Gui de to studyi ng taxati on l aw
Study materi al s and support
The study guide is just that, a guide to study, it is not a complete set of notes. In
particular, it is not a textbook and should not be treated as such. The exam will
not be about testing you on your ability to regurgitate statements from this
guide. This study guide is therefore your guide to what you should understand when
you have completed the topic. Please take note of comments in your study materials
that indicate the level of knowledge required of a particular area of study as we do
not expect that you have a detailed understanding of all areas. You should also take
particular note of the comments made in your study materials and on Deakin Studies
Online (Cloud Deakin) in the Study Support Materials, which are aimed at helping
you to improve your problem solving and interpretation skills. Coleman et al, Chapter
2 also contains valuable assistance on all aspects of studying taxation law.
No page reading references are given to the ITAA in your study guide, but as the
ITAA is the basis for determining all income tax, you must read, very carefully, all
the sections that are referred to by number.
The aim in this unit is not to have you regurgitate in the exam the material contained
in the textbook and study guide but to show the ability to answer tax problems by
identifying issues, identifying relevant rules and principles, considering how they
would apply to your problem and providing a reasoned analysis of the competing
arguments and likely outcome. Your text contains invaluable support for developing
these skills and there is additional support materials provided online for this unit.
Questions are included throughout the study guide as practice to give you a guide
to how well you have understood the principles discussed in the topic. You will be
given guidance on which questions are the most appropriate for your unit.
TEXTBOOK
Please read Coleman et al, 2014, 1.10 – 1.60.
Please make good use of the materials on study technique in Chapter 2 of
Coleman et al. You can review this chapter at the start of your studies and then
use it as a resource though out the teaching period.

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The following abbreviations are used in these materials:
AAT Administrative Appeals Tribunal
AITR Australian Income Tax Reports
ALJ R Australian Law J ournal Reports
All ER All England Law Reports
ATC Australian Tax Cases
ATD Australian Tax Decisions
ATO Australian Taxation Office
ATR Australian Tax Reports
CGT Capital Gains Tax
CLR Commonwealth Law Reports
CTBR(NS) Commonwealth Taxation Board of Review Decision (New Series)
FBT Fringe Benefits Tax
FBTAA Fringe Benefits Tax Assessment Act
FCT/FC of T Federal Commissioner of Taxation (Aust.)
FTR CCH Australian Federal Tax Reporter
GST Good and Services Tax
IRC Inland Revenue Commissioner (UK)
ITAA 36 Income Tax Assessment Act 1936
ITAA 97 Income Tax Assessment Act 1997
s. or ss. section/s
TBRD Taxation Board of Review Decisions (New Series)
TC Tax Cases
TLIP Tax Law Improvement Project
Hi stori cal perspecti ve and sources of i ncome taxati on l aw
It was not until 1936 that a uniform system of taxation was achieved with the
enactment of the Commonwealth Income Tax Assessment Act. This Act
consolidated Commonwealth legislation in respect of the imposition, assessment
and collection of income tax. During World War II, the Commonwealth enacted
legislation to make it the sole income taxing authority in Australia. A number of
States challenged the validity of the legislation after it was enacted (South Australia
& ors v. Commonwealth & ors (1942) 65 CLR 373, 2 ATIR 273, 7 ATD 1). This
challenge failed. In a later case (Victoria & anor v. Commonwealth (1957), 99 CLR
575, 6 AITR 440, 11 ATD 317), the States partly succeeded in their attack on the
Commonwealth’s uniform tax legislation, but they were unable to prevent the
Commonwealth from being the sole body responsible for levying income tax.
Despite continued challenges to the validity of the ITAA, no court decisions have as
yet seriously affected the ability of the Commonwealth to impose income tax.
Understanding the sources of taxation law is important in this unit as you will be
required to use a number of different Acts. For example, in 1993 the Federal
Government announced the establishment of the Tax Law Improvement Project
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(TLIP) whose task was to restructure, renumber and simplify the Income Tax Act by
rewriting it in stages in plain language. The difficulty that this staged introduction
produces for students is that both the ITAA 97 and the ITAA 36 must be used
together. It is therefore very important to develop an understanding of which areas
of taxation law are contained in the separate Acts.
TEXTBOOK
Please read Coleman et al, 2014, 3.10 – 3.40.
In most cases throughout this study guide we indicate at the start of discussion
whether the relevant sections are from the 1936 or 1997 Acts. However, if you are
in doubt a simple method of distinguishing sections from each Act is to note that all
sections from the ITAA 97 include a dash, e.g. s. 6-5. Sections from the ITAA 36 do
not include a dash.
Substantial amendments were also made to the ITAA 36 and 97 as a result of the
Ralph Committee Review of Business Taxation with respect to depreciation rates,
taxation of capital gains, and tax accounting for deductions.
Rel evant l egi sl ati on
Today, the income tax system is governed by a variety of Acts and Regulations.
The most important of these are as follows:
• Income Tax Assessment Act 1936 (ITAA 36) – This is the original Act that
is now gradually being replaced by the Income Tax Assessment Act 1997.
This Act does not impose an income tax, but determines taxable income.
• Income Tax Assessment Act 1997 (ITAA 97) – This Act is gradually
replacing the ITAA 36 in a restructured and simplified form.
• A New Tax System (Goods and Services Tax) Act 1999 – This Act deals
with the GST.
• Income Tax Regulations – These prescribe how certain parts of the
principal Act are to be implemented.
• Rating Acts – These Acts are re-enacted each financial year, or as required.
They impose the actual tax on taxable income as determined by the ITAA.
• Income Tax (International Agreements) Act 1953 – This Act deals with tax
treaties aimed at preventing double taxation and encouraging cooperation
between Australia and overseas tax authorities in enforcing their respective
tax laws.
• Tax Administration Act 1953 and Tax Administration Regulations.
• Crimes (Taxation Offences) Act 1980.
• Taxation (Unpaid Company Tax) Assessment Act 1982 and other
related acts.
• Fringe Benefits Tax Assessment Act 1986 and other related acts.
These acts all relate to income taxation. However, in this unit it is only possible to
cover the major provisions of the ITAA, with only some minor reference to the other
acts where appropriate. The most important Act and our starting point is the ITAA
97 (see your text Fundamental tax legislation).
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Structure and appl i cati on of the ITAA
ITAA 97, Divs 2, 3 and 4 provide an overview of the structure of the new Act and
explain the core purpose of the Act as the determination of taxable income. Like all
relevant sections of the Act, it is critical that you read these provisions as they
provide a general overview of how the Act is structured.
The following steps describe the basic procedure for determining the income tax
due on taxable income as set out in the ITAA 97:
1 Section 4-1: Who must pay tax
2 Section 4-10: Tax is paid each year ending 30 J une
Tax is based on taxable income less tax offsets
3 Section 4-15: Taxable income is calculated from assessable income and deductions
4 Section 6-1: Assessable income is classified into ordinary income (s. 6-5), statutory
income (s. 6-10), amounts that are neither ordinary or statutory income
(s. 6-15) and exempt income (s. 6-20).
5 Division 8: Deductions are classified into general deductions (s. 8-1)
and specific deductions (s. 8-5)

The essence of this unit is therefore to enable you to apply the Act to determine
taxable income. Therefore, an understanding the structure of the Act is a very
important tool as it is the first step towards becoming familiar with the Act and
gaining confidence in its use. The structure of how ITAA 97 determines tax liability
is shown in Figure 1.1. You should also note that this study guide also follows the
basic structure of the Act although the later topics diverge to some extent to cover
Fringe Benefits, the Taxation Entity and Taxation Administration.
Note: As explained previously in this topic the emphasis of this study guide is to
develop a solid understanding of the principles behind the operation of the ITAA,
because it is from these principles that you can develop the skills and knowledge to
expand your understanding in income tax law.
Fi gur e 1. 1 St ruct ure of I TAA 97

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TEXTBOOK
Please read Coleman et al, 2014, 3.100 – 3.220.
Depending of your course of study and the units that you have taken previously,
you may or may not have had to deal with complex legislation. As a result it is
important to understand the role that the legislation plays in determining taxation
law and also the differences between taxation law and accounting principles.
TEXTBOOK
Please read Coleman et al, 2014, 1.150 – 1.300.
Defi ni ti on secti ons
Section 995-1(1), ITAA 97 is a general definition provision that should be used if
you require a definition of any word used in the Act (in the ITAA 97 all defined
words are identified with and ‘*’, see s. 6-1). Because the TLIP is still in progress
some of the definitions contained in s. 995-1(1) simply refer back to ITAA 36,
s. 6(1) which is the general definition section for the old Act.
The basic rule followed in ITAA 97 is that the word will be defined in the body of the
Act if it is important to that part of the legislation. In this case s. 995-1(1) simply
refers the reader back to the section where the word is defined. Words that have
general usage are defined directly in s. 995-1(1).
When reading any definition you must establish whether the definition is either
inclusive or exclusive. Any definition using words like includes is an inclusive
definition. This means that the definition given adds to the meaning of the word in
ordinary concepts (ordinary usage and meaning as interpreted by the courts). An
example of an inclusive definition is the definition of Australian resident. When using
inclusive definitions remember that you must also consider the meaning of the word in
ordinary concepts before you consider the statutory extension.
An exclusive definition uses words like means without using and includes. This
type of definition is concise and is not extended by the meaning in ordinary
concepts. An example of an exclusive definition is the definition of relative.
Use of and/or
When reading definitions or other legislation that requires a number of steps and
alternative actions, it is imperative that you clearly understand whether the
requirements of the section are all included (i.e. and) or whether only one is
required (i.e. or). The approach used in ITAA 36 varies in relation to how ‘and/or’
provisions are expressed, but as a general rule, where there is a series of steps,
you should look at the end of the second last step to determine if each step is
required or not, see for example the definition of eligible termination payment in
ITAA 36, s. 160AAB(1). Less confusion is likely with the ITAA 97 and the ‘and/or’ is
stated at the end of each paragraph so that the reader is always aware of the
relationship with other requirements of the section.
Resi dence of taxpayer and source of i ncome
Central to the operation of the Australian income tax system is an understanding of
who the Australian Government can legitimately levy tax on. Clearly, the Australian
Government has no jurisdiction over people that have no connection with Australia,
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but they could legitimately claim that it is entitled to collect tax from residents of
Australia, and Australian source income earned by non-residents. Our first step in
understanding the operation of the income tax system is therefore to understand to
whom it applies.
Sections 6-5 and 6-10 of the ITAA 1997 are the principal provisions that determine
what income a taxpayer is liable to pay tax on. These sections require that an
Australian resident is taxable on all income whether earned in Australia or
overseas. In contrast, a non-resident is only taxable on income that is earned in
Australia. The wording of these two sections makes it necessary to be able to
distinguish between a resident and a non-resident for Australian tax purposes, and
to determine the source of the income.
The issue of the residence of a taxpayer and the jurisdictional powers to tax the
taxpayer need to be considered on a global basis. In an international taxation
concept it would be a disadvantage to trade if Australia sought to collect tax on
income that had already been taxed in other countries. Nevertheless, the
Australian taxation system initially seeks to tax the international income of
Australian residents and the Australian income of non-residents.
The potential double taxation that may arise from this approach is redressed
through exemption provisions and double tax agreements with various trading
partners. However, the study of international taxation is beyond the scope of this
unit and it is sufficient to understand the basic concepts of residence and source as
they apply to Div. 6.
TEXTBOOK
Please read Coleman et al, 2014, 4.00 – 4.60, 4.230.
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