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Australian Taxation Law Analysis Research Paper

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Updated: May 9th, 2022

Introduction

Tax is defined as a pecuniary responsibility legislatively charged on a taxpayer. The taxpayer is an individual or an entity. The tax is authorised by the state and it is charged upon property or income. The Australian constitution has powers that guide its taxation requirements. Because of initial tax avoidance and evasion, the federal government introduced new legislations meant to improve the efficiency and equity of the remission of income tax and sustenance of the system. It is noted that taxation on income depends on the rates of taxation at any given time. The rates are set by the legislative requirements of the tax regulators. There is a separation of taxable and non-taxable earnings within the legislation of the laws governing income tax. It is not easy to understand the reason why the transactions presented by such provisions are not income.1

A tax system should be simple to understand for the common man. It should be simple in all aspects that touch on the ease of compliance, and that depend on the ability of ATO and the taxation Act to administer the requirements and collect taxes. According to the Criminal Procedure Act (2009), lack of simplicity in the Act makes it hard to interpret, even by the experts. Certainty is another feature demanded for by the Act. It calls for ease of prediction by the taxation authorities, the ability of the taxpayers to determine liability, and determination of the possibilities of tax avoidance and evasion by taxpayers, as well as the capabilities of combating such instances.2 A tax system must also contain a fiscal marksmanship for the prediction of tax collection in a fiscal year. Administrative efficiency is also vital in creating a balance between private and public resources without any possible influences on personal and business decision-making.3

There are three types of taxes. They include regressive tax, proportional tax, and progressive tax. Australia employs the progressive taxation system. One of the taxes applicable in Australia is personal income tax. Personal income tax is imposed by the federal government and acts as a significant source of revenue for the same government.4 In Australia, corporate tax is imposed on corporations and companies and it is calculated on a basis of a flat rate of 30%. Goods and service taxes are levied on supply of goods and services, such as basic foodstuffs, financial services, export of medical services, and educational services. Another type of tax is property taxes and it is charged by local governments on industrial, commercial, and residential properties. Other taxes include excise taxes, payroll taxes, fringe benefits tax, inheritance tax, superannuation taxes, and rent resources tax.

There is no specific section of the legislation that makes up for the deficiencies in the income concept, for example that found in section 21A of the Income Tax Assessment Act 1936. The section does not specify the amount falling under the criteria of assessable income.5 However, the major role of section 21A is overcoming or displacing the non-convertible property with regard to their possibility of conversion into cash obtained by a taxpayer during a business transaction. The meaning of this is that the provisions of sections 6-5 (specifications of assessable income) must be satiated so that the value of non-cash benefits can qualify for inclusion into the assessable income.6

Implications of Assessing the above Amounts as an Ordinary Income

The monthly salary that Angela earns qualifies to be assessed as an ordinary income. The reason for this is that it is the amount she receives on a regular basis as an income. Another amount to be assessed as ordinary income is what she earns from the investment property she inherited from her family. However, there are some deductions made on the property by the city council. All the expenses accrued are deducted from what she earns from the monthly collections to realise her taxable income.7 That is achieved by taking into consideration all allowable deductions, such as government and local fees, so that what remains out of the deductions is taxable. The formula below is used to compute taxable income:

Taxable income= Assessable income – Allowable deductions

Income deductibles help in enhancing fairness of a taxation system. Fairness and equitability to taxpayers is necessary. The necessity results in two types of equity. The two are horizontal equity and vertical equity. For horizontal equity, taxpayers falling under the same income bracket are charged equal amounts of tax. The scenario was evident before the introduction of capital gains tax. In Australia, horizontal equity led to the introduction of capital gains tax. The development gave rise to a situation where people without salaries have paid taxes. Tax experts are of the view that there is a social and moral responsibility to have all income taxed in the country. Marking income is the only criteria used in judging taxable people. The criteria brought about unfairness, which made it necessary to make special considerations.8 Another unfair factor is that people under the same income bracket may have differing responsibilities. The responsibilities include varying numbers of dependents, which brings about unfair taxation based on horizontal determination of taxable income.

The other type of equity, as already indicated in this paper, is vertical equity. The equity calls for the adoption of different attitudes towards people from different income groups. Individuals who have high incomes pay higher taxes than those with lower incomes. In Australia, there is a progressive system of taxation where a rise in income leads to an increase in the amount of tax paid.9 An individual earning very little may have no dependants, while someone earning a lot of money may have too many dependents. The taxation system leaves the individual with higher income (but many dependents) in an income position that is lower than that of the individual who earns less (but has less dependents). The situation makes high- income earners suffer as a result of unfairness in the taxation system.10

Cash and beneficially derived indicators are some of the factors that should be taken into consideration in the case of Angela. The reason for this is that she sells her property to get money and goes as far as advancing the mortgage to the buyer. To have a CGT asset, such as a building, it is important to lease the property and a need for capital gain on the sale of the property. It is important to note that the need for CGT assets in event A1 requires disposal without the inclusion of contractual rights. The timing of A1 provides that there can only be taxation for assets acquired before 21/09/99 and possessive of some gain. Such property is eligible for a 50% discount. Having bought his property in 2006, the benefits are beyond Angela’s ability. As a result of this, she cannot enjoy those conditions. Exemptions of ECG assets take place in cases where transaction occurs and capital proceeds are less than incidental costs. Such exemptions as the reserve exempt income are some of the sections that allow for the exemption of earnings from inclusion in assessable income. They give the opportunity for post- judgement of damages and awarding of exempt income on personal injury.11

The gain Angela receives is CGT. There are various reasons why the gain is CGT. For example, it has capital gains and she acquired her assets after 1985. The acquisition has no indexation because it comes after 21/09/99. The lack of indexation is in spite of the fact that it has the opportunity of receiving a discount of 50% with regard to its 2006 acquisition. The regime of the capital gains tax is significant in the definition of the income tax and the determination of assessable income.12 It is through the CGT regime that an amount is added into the assessable income of a taxpayer. The addition is especially important should the assessable income of a taxpayer contain a ‘net capital gain’. It is important to understand that inclusions in accessible income are only possible within the CGT regime and for a taxpayer’s income in a given year. The inclusion comes about in instances where the CGT regime quarantines the net capital losses for use in net capital gains in future transactions. Like in the case of FCT v Myer Emporium (1987) 163 CLR 199, the inclusion of a gain into assessable income under s 6-5 occurs even if instances of a transaction are out of the ordinary scope of the taxpayer’s business.13

The scenario requires classification as an isolated or extraordinary transaction. It leads to modification of the business of a taxpayer or the constitution of a new business entity. In the case of Angela’s property, the sale of the units was out of her course of business. She is an employee of a law firm that took up the business on an isolated occasion. The acquisition of her business took place in a span of only four years. It qualifies her activity under assessable income in s 6-5. Angela’s units were rented, but after having trouble with the council, she decided to sell out the property. That brings about the intent of making profit on her part. For example, she begins by selling the property and even advancing the remaining mortgage to the buyer. The intended means of profit making in the transaction drives Angela to continue looking for the best possible means of maximising her gains in the deal.

Angela has some attributes of type A taxpayer. Her business may not be an ordinary occurrence. On the contrary, it was an ongoing concern, which has existed for a span of four years.14 The incident is a transaction within the precepts of normal business transactions. In this case, Angela starts as a property owner and her interest in earning some cash triggers her involvement in business transactions. By doing this, Angela is no different from other taxpayers in the country. Many taxpayers do this and the funds they receive need inclusion as ordinary gains because in some occasions it prolongs beyond an extraordinary transaction. In some way, Angela only modified her usual earning from the property that initially earned her monthly rent. It is a situation commonly argued by commissioners as a diversification of income, which streams to existing business income earned by a taxpayer. In this case, the advancement of the remaining mortgage to the buyer can act as a means of releasing business assets.

It is an argument, which Angela could effectively use to evade any taxation on the earnings she made on her land if she chooses to make such claims. However, for a simple classification of the activity it is necessary to make Angela a Type B taxpayer, with ordinary transaction of a business which is carried out by a person and which is not directly associated with the transaction. In a way, Angela being an employee of a law firm and doing business on her property qualifies her as a wage earner who does an out of the ordinary transaction to earn some money beyond her ordinary scope of wage earning. This property was not her sole income earned and that is why she neglected it for over four years leading to multiple problems with the council.15

Angela is not a typical Type A because her initial intention after inheriting the property was not to make profit out of it. She inherited the property on 1 July 2009 and only received rent from Myer, Lees & Leech. At the same time, she realises that she can make money out of the land, and she decides to sell it to avoid any losses. However, Angela can easily claim that while collecting rent, she was waiting for a reasonable time for releasing the property to make profit and not just take advantage of circumstances to release the asset.

Angela’s profit out of the sale of her property was not ordinary profit under section s 6-5. She can be at the task of clarifying her intention for selling the property unless she can make clarifications of having earlier intentions of selling the land. That is possible because there were no contracts indicating intentions for not selling the land. Her advantage is that the decision she made for selling the property were personal and no records kept for proving otherwise.16 It becomes unrecorded that the council problem is the one making Angela to sell her property to make profit. A determination of her objective for making profit out of the land as an ordinary income and that the later intentions only supplemented the project is formidable. This is so because she had initially earned some income through rent. Based on Westfield, it is easy for Angela to argue that when she initially inherited the land, the sole intention was not to make profit out of the land. She had it for other intentions, but she had the idea of making some profit out of it in the future. Having an idea of selling a property in the future is not possible to verify because of lack of proof and Angela remains as the sole person with the truth in her hands.17

There was a contemplation of profit-making from the time as Angela decided to earn rent from her property. She can argue that the profit gained started from the initial acquisition of the property. However, being an employee and not fully dependent on the income from the land, there is some disqualification of such a claim because the property did not earn much and that is why her intentions had to change later. On the contrary, acting as a Type B taxpayer, like in the case of Westfield v McCurry (1999), Mark can maintain that the making profit of her land was not intentional. That gets her off the Mayers’ principle because she will be maintaining that she only intended to sell her land without the thought of making any profits and any profits the transaction brought were not her ordinary intentions of earning some income from the land Her efforts starting with renting the property can be evidence of her trying to put the land into good use. After failing to make it productive, she just wanted to dispose of it without necessarily focusing on any profits that it may earn in the process.

As a type-A taxpayer, the argument Angela can put forward is that she never intended to conduct any commercial operation or a business operation. She can ascertain that any profit realised during the process was a mere realisation without initial intentions. This may present very complicated requirements for Angela to convince the courts about her unintended business or commercial operation given the profit she realised from the transaction of selling the land Scottish Mining There is much evidence in the actions of Angela pointing to the transaction as being a commercial transaction given the amount of profit she made. Her sudden efforts to do an extension and add a garage then eventually sell the property are obviously pointing to the fact that she was looking for a means of making a reasonable earning out of the land. The initial efforts for maintaining the property were a trial towards making a business venture and that leaves the operation as either business or commercial operations.

Implications of Assessing the above Amounts as a Statutory Income

The Statutory Interpretation Act states that a federal interpretation statute of an object must promote the object’s purpose. It also has extrinsic materials that confirm original meaning. Statutory incomes are unordinary incomes included in assessing income of a taxpayer. Nathan v FCT (1918) explains sources of income and this is seen as a term used to indicate a practicality of the means that man uses to get income. These are personal exertion incomes found in places where people work, as indicated in FCT v French (1957) case. Business income generates from business transactions and the source is the place of the transaction. There are other sources such as mortgages, royalties and dividends.

Statutory income is defined in section 6-10 Assessable income is not found specifically in ITAA 97, but is represented in s 6-1 listing all components that make up assessable income.18 Assessable income can be in three forms, being ordinary statutory or exempt income. Failure of income to fall under statutory income makes it not possible to tax. The money paid to Angela to have her going back to work is part of income. The prize won by Angela for skating becomes an assessable income. This also applies to the bonus she received in December 2001It however does not apply to the sign on fee paid to Angela on returning to work These are authorised under s 6-5 because they make part of ordinary concepts as in s 15-2 though they may be considered as property fringe benefits not assessable under s 23L. There would be a need for invoking section 21A to convert the tickets she gets and holiday stays into cash.

The lump sum amount that was paid to Angela to prevent her from suing the company also makes part of her income. All income earned out of a service that can be identified is a part of ordinary income. There are also prima facie payments that come from third parties such as gifts, tips, and prizes not necessarily for services having connections to employment. Any gain in cash form or convertible to cash becomes ordinary income. There is also the money paid to Angela after her injury They agree on a sum of $ 20, 000 out of court settlement and through the assessment of s 6-5, this is unallocated sum that would be expressed as gross income under ITAA36 s 25(1) since this is like an income for the injury she wants to be paid and her this is her right to sue the company.19

The CGT Implications for the Disposal of the Rental Property

Ownership of proper property can be a source of income under the concepts of ordinary income. Payments from rentals form income from capital assets and it is part of ordinary assets because it forms part of employment capital.20 Overall capital income comprises proceeds of the business, compensation receipt, proceeds of personal exertion and return from property Exemptions for CGT occur when there are legislative decisions that are not possible for taxation within an earning. These remove some aspects, which could be taxed under (s 6-5) sections of assessable income. Getting capital gain or capital loss requires the occurrence of a CGT event. These involve sale and cessation of pre-existing properties. Some transactions are capable of fitting within several CGT events. In occasions when a transaction fits within more than just a single CGT event, and there is no preclusion of double counting by the ordering rule, it is permissible to use the CGT event that emerges as the most specific one.21

Taxable Income = Assessable Income – Allowable Deductions

Taxable Income = Assessable Income – Allowable Deductions

Reasons as to why Albert is Carrying a Business

Albert is doing business because his first intention was to take a year off and go to the farm to make some profit. This intention for making business makes any earnings from the firm to produce assessable income. His other income is from the farm that he earns weekly from milk and collected eggs. The farm had a clear recording of a dozen chickens and 3 milking cows meaning that transactions within the farm have clear recordings targeted towards profit-making. It is out of the good performance of the farm that Albert makes a decision to work harder at the farm. His barter trade has a good organisation and since his supply of eggs and milk is consistent, he is sure of making an earning from the farm. This is assessable income because other than the choice Albert makes for engaging in barter trade for the farm produce, they are convertible into money.22 However, the agreement between Albert and Alfred is for bartering products. This engages a business relationship between the two people and under s 21A; the proceeds qualify as non-cash business benefits and are still inclusive into assessable income.

Number of receipts applicable to Albert’s assessable income

The receipts that can be included in the assessable income are The box of fresh fruit and vegetables he receives each week, the half butchered cow, 2 butchered lambs and a butchered pig and the Handmade clothing. This is so because they make sources of income to Albert.23

Conclusion

The transaction of income tax occurs in the sense of occurrence of a taxable event where there can be application of tax rules for a taxpayer’s transaction. It involves the inclusion of earnings into assessable income and inclusion amounts for deduction and other costs and provisions transacted by the taxpayer. The overall effort is to coordinate between the CGT regime and the non-CGT income not assessable. This also pertains to the treatment of expenses, losses and outgoings. The challenge is adopting tax rules relevant for accounting the multiplicity of sections applicable to transactions. It must conform to the particulars that apply to a transaction and accommodate different approaches to the coordination of the sections of the regimes. It is the only means for maximization of the possibility of correct basis with legislative intent for the correct calculation of a taxpayer.

The transaction of income tax occurs in the sense of the occurrence of taxable events where there can be the application of tax rules for a taxpayer’s transaction. It involves the inclusion of earnings into assessable income and inclusion amounts for deduction and other costs and provisions transacted by the taxpayer. The overall effort is to coordinate between the CGT regime and the non-CGT income not assessable. This also pertains to the treatment of expenses, losses and outgoings. The challenge is adopting tax rules relevant for accounting for the multiplicity of sections applicable to transactions. It must conform to the particulars that are applicable to a transaction and accommodate different approaches for the coordination of the sections of the regimes. It is the only means for maximization of the possibility of correct basis with legislative intent for the correct calculation of a taxpayer.

References

Books

Andrew Byrnes, Hilary Charlesworth and Gabrielle McKinnon, Bills of Rights in Australia: History, Politics and Law (UNSW Press, 2009) 112.

Blissenden, (2006) 35 Australian Tax Review 262 at 267.

Burgess et al, Income Taxation Commentary and materials (Thomson Reuters, 2012) 94.

Carling, R, A state income tax for Australia? Paper 9 for A tax UNSW Personal Income Tax Reform Symposium (UNSW Press, April 2007).

Christopher Corns and Steven Tudor, Criminal Investigation and Procedure: The Law in Victoria (Thomson Reuters, 2009) 377

Cnossen, P, Excise taxation in Australia, draft paper prepared for Australia’s Future Tax System Review, Tax and Transfer Policy Conference (University of Melbourne, 2009).

Gilders et al, Understanding Taxation Law (LexisNexis Butterworth’s, 2012) 79.

KPMG Econtech, Analysis of the Current Australian Tax System (Canberra Publishing, 2009) 77.

Melbourne Institute, Families, incomes and jobs: A statistical report on waves 1 to 6 of the HILDA survey, Department of Families, Housing, Community Service and Indigenous Affairs,(Canberra Publishing, 4th ed, 2009) 63.

Paul, Kenny, LexisNexis Concise Tax Legislation (LexisNexis Butterworth’s, 2012) 162.

Smith, C, Taxing popularity: the story of taxation in Australia, Sydney, Australian Tax Research Foundation (UNSW Press, 2004) 131.

Cases

Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 80 ALJR 1282 at 1287 [12].

HP Mercantile Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2006] HCATrans 320 at 9 (lines 325-332).

R v Portelli.(2004) 10 VR 259, 268.

Conferences

The conference, 2006, Old Taxes in a New World, Melbourne, (2006) at 2 (hereafter “C Coleman, Reflections”).

Journals

Gallagher, (2005) 3 eJournal of Tax Research 147 at 149

Blissenden, M, “Taxation of trust income under Div 6: A reflection on Justice Hill’s contribution” (2006) 35 Australian Tax Review 262 at 269.

Freedman, J, “Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament” (2007) 123 Law Quarterly Review 53.

Legislations

Criminal Procedure Act, 2009 (Vic) s 128.

D G Hill & S Economides (eds), Australian Sales Tax Law & Practice (1991) at vi.

Internet Materials

Judicial College of Victoria, Victorian Sentencing Manual (2005) [10.13.2]. Web.

Voiceless,WhatisAnimalLaw?(2009)[3]. Web.

Footnotes

  1. Burgess et al, Income Taxation Commentary and materials (Thomson Reuters, 2012) 94.
  2. Criminal Procedure Act, 2009 (Vic) s 128.
  3. Burgess et al, Income Taxation Commentary and materials (Thomson Reuters, 2012) 94.
  4. HP Mercantile Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2006] HCATrans 320 at 9 (lines 325-332).
  5. Gilders et al, Understanding Taxation Law (LexisNexis Butterworth’s, 2012) 79.
  6. Carling, R, State Income Tax for Australia? Paper 9 for a tax UNSW Personal Income Tax Reform Symposium (UNSW Press, 2007).
  7. Melbourne Institute, Families, Incomes and Jobs: A statistical Report on Waves 1 to 6 of the HILDA survey, Department of Families, Housing, Community Service and Indigenous Affairs,(Canberra Publishing, 4th ed, 2009) 63.
  8. D G Hill & S Economides (eds), Australian Sales Tax Law & Practice (1991) at vi.
  9. Voiceless, What is Animal Law? (2009) [3]. Web.
  10. Gallagher, (2005) 3 eJournal of Tax Research 147 at 149.
  11. Smith, C, Taxing Popularity: The Story of Taxation in Australia, Sydney, Australian Tax Research Foundation (UNSW Press, 2004) 131.
  12. Blissenden, M, “Taxation of Trust Income under Div 6: A reflection on Justice Hill’s contribution” (2006) 35 Australian Tax Review 262 at 269.
  13. KPMG Econtech, Analysis of the Current Australian Tax System (Canberra Publishing, 2009) 77.
  14. Freedman, J, “Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament” (2007) 123 Law Quarterly Review 53.
  15. Paul, Kenny, LexisNexis Concise Tax Legislation (Butterworth’s, 2012) 162.
  16. Judicial College of Victoria, Victorian Sentencing Manual (2005) [10.13.2]. Web.
  17. Cnossen, P, Excise Taxation in Australia, draft paper prepared for Australia’s Future Tax System Review, Tax and Transfer Policy Conference (University of Melbourne, 2009).
  18. Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 80 ALJR 1282 at 1287 [12].
  19. HP Mercantile Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2006] HCATrans 320 at 9 (lines 325-332).
  20. Conference, 2006, Old Taxes in a New World, Melbourne, (30 January 2006 – 1 February 2006) at 2 (hereafter “C Coleman, Reflections”).
  21. R v Portelli (2004) 10 VR 259, 268
  22. Christopher Corns and Steven Tudor, Criminal Investigation and Procedure: The Law in Victoria (Thomson Reuters, 2009) 377
  23. Andrew Byrnes, Hilary Charlesworth and Gabrielle McKinnon, Bills of Rights in Australia: History, Politics and Law (UNSW Press, 2009) 112
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