Concept of Income
“Income” has always been a difficult concept to be covered under a general definition. The Australian courts have been finding it difficult to define the constituent elements of income precisely so far. The difficulty might be the result of the inability of the legislature to include every receipt in the definition of income in the legislation covering taxation. In addition, exemptions and preferences have also contributed to the confusion on the scope of income (Clark).
In the context of Australia, the concept of income has been construed to include income based on ordinary concepts as well as income statutorily defined by the legislation. This has made the Australian tax legislation refer to a number of different types of income. For instance, the definition of assessable income is distinct from that of taxable income under section 6 of the Income Tax Assessment Act, 1936. Nevertheless, neither the 1936 Act nor the Income Tax Assessment Act 1997 carried a comprehensive definition of income (Parliament of Australia). This also has led to the objections from many people that the amounts received by them do not possess the character of income. In this connection, the judgment in Scott v Commissioner of Taxation1 is worth noting where the receipts to be included within the scope of income are to be determined based on ordinary concepts and usage of humankind. The case of Stone v FCT2 is another instance where the concept of income has been dealt with by the courts extensively.
Taxation System in Australia
Another feature of the Australian tax system is that although the system followed that of other developing countries for meeting the public revenue needs and to expend on promoting the country as a welfare state, the system did not have some of the key features of the other developed economies. In the past decades, the country had no universal social insurance scheme or associated social security taxes. There was also no system of consumption tax prevalent in the country. Australia relied on the income tax largely, supported by narrowly based sales and transaction taxes.
The Australian tax system has been determined by the Commonwealth, which is a parliamentary democracy having two lawmaking assemblies. As a result, the tax reforms have followed a traditional method either of deliberative analysis and persuasion or through the suggestions of bureaucratic advisors in the form of in-house reform packages.
According to Michael D’Ascenzo and Tony Poulakis of the Australian Tax Office, a move to a self-assessment system came into being as a result of the review of the effectiveness of the traditional system of assessment of income tax returns by the Australian Tax Office (ATO). The review of the ATO found that the assessment system lacked cost-effectiveness and it did not have much effect on the compliance of the taxpayer with the income tax law. In accordance with the findings of the review, a system of full assessment for all taxpayers was introduced since the year 1989-90. Under the system of self-assessment, the taxpayer not only calculates the total income but also calculates the amount of tax payable and remits the tax amount to the ATO. Further changes were made to the self-assessment system since 1992. One of the reforms undertaken was the introduction of shorter periods of review for individual resident taxpayers. This reform also allowed the taxpayer to have the advantage of simple tax affairs so that they are provided with greater certainty. This also reduced the taxpayers’ obligations of complex record keeping.
Complexity in the Tax Regime
During the same time, the self-assessment system was introduced, other large and complex tax reforms like Capital Gains Tax (CGT), Fringe Benefits Tax (FBT), and imputation were introduced. This has made the burden of understanding and complying with the whole tax system shifted to the shoulders of taxpayers and their advisors from the ATO. As the result, with every tax assessment completed, the authorities and officers of ATO were able to enhance their knowledge based on their own work and understanding of the complex tax laws as well as based on the presentations by the taxpayers of their cases. This enlarged the understanding as to whether the complex legislation was workable or not. However, with the introduction of the self-assessment and the other complex tax systems, the ATO was given the position of an armchair critic having the chance to choose the examination of the affairs of any taxpayer at any point in time. This has severely hit the smooth functioning of the tax system in the country.
Role of IOTA 1936 and ITAA 1997
The reforms to the tax legislation in Australia have not removed the ambiguity to the application of the provisions. Since the Income Tax Assessment Act, 1936 (ITAA 1936) was not completely rewritten, it has to be kept in vogue along with the Income Tax Assessment Act, 1997 (ITAA, 1997). While for some of the decisions, the ATO would still have to refer to the provisions of ITAA 1936, for some decisions the ATO adopts the provisions of ITAA 1997. There is widespread criticism of the tax legislation in Australia on several grounds. The first one is that the income tax legislation is unduly long. As noted by Ernst & Young, the ITAA 1936 contains approximately 3500 pages of legislation. However, in the year 2002, the legislation comprised of three pieces, namely ITAA 1936, ITAA 1997, and the Schedules to the Taxation Administration Act, 1953. These legislations together had a volume of 8,500 pages. In addition, there were approximately 3,500 general public tax rulings made by the ATO.
Another criticism is that the income tax legislation is poorly drafted that it lacks comprehensiveness and even the taxpayers are not able to comprehend some of the provisions. In addition, there are a number of lacunae in the design of the income tax legislation, which makes it more complicated than even the income tax practitioners find it difficult to apply some of the provisions to factual circumstances. The provisions of CGT are a classic example of the bad design of the legislation, which extends to more than 500 pages. This complexity has made the ATO and the practitioners alike depend on relevant tax cases, general law cases and statutes, various court rulings, and determinations for the administration of the tax system in the country. This has also necessitated retaining the provisions of ITAA 1936 also in operation along with the ITAA 1997.
Reasons for Complexity of Australian Tax System
Taxation of income in Australia is older than the formation of the nation itself. Income tax was being levied by most of the colonies. These taxes remained in place even after the federation was formed in the year 1900. After the transformation of the colonies into states, the states were given the constitutional power to share the income tax with the commonwealth government. Commonwealth income tax was put into practice in the year 1915; mainly as a wartime finance measure and the adoption of Commonwealth, income taxation was used as a measure to diffuse the intensity of the separatist movement in the country. The Commonwealth taxes operated concurrently with state income taxes. With different tax bases, the taxpayers were exposed to higher compliance costs and it led to inefficiencies in the administration of the tax system in the country. The efforts to harmonize taxes taken in the year 1922 with the introduction of a new Commonwealth Act and State Acts did not take off well. However, the efforts taken the second time around 1936 proved to help the harmonization to some extent; but the effectiveness was offset by the ongoing World War II. The need to finance the War led to the raising of the Commonwealth income tax to higher levels, where the taxpayers were unable to pay both the Commonwealth and State taxes. The Commonwealth promised transfer payments to any state that relinquished the state income tax. This move by the Commonwealth government continued to stay despite several constitutional challenges. It so happened that since the year 1940, income tax was levied only by Commonwealth government.
During the past several decades, the income tax Act doubled every seven years. The pace of such changes has shown an increasing trend in the past three decades. With the increase in the volumes, the complexity of the Act has also enlarged. The 1936 Act is still in operation alongside the 1997 Act and several other legislations governing specific tax issues like tax administration and fringe benefits taxation. The 1936 Act has enlarged manifold in the past years. There are several factors and agencies responsible for the presence of complexity in the Australian income taxation system. They are (i) the judiciary, (ii) the advisors, (iii) the drafters, (iv) the Treasury, and (v) the legislature.
Complexity and Role of Judiciary
The judiciary is considered to have contributed to the complexity of the Australian income tax system through (i) misappropriation of doctrine by using concepts from other categories of law to solve income tax issues, (ii) misapplication of precedent by relying almost reverentially on judgments of UK courts and (iii) abdication of judicial responsibility through reliance on principles of strict liberalism. While fairness is considered to flow from the application of the most appropriate precedent on hand, the judges of Australian courts failed to find the most appropriate precedents to decide on the cases (Cooper). This fallacy has been found in the area of income tax also. With remarkable regularity, the Australian judges make misapplications of precedents in deciding several issues relating to income tax. For instance, inappropriate precedents were drawn to decide which gains constitute assessable income for income tax purposes based on trust law precedents, which distinguish income gains from capital gains (Parsons). The objectives for the development of these doctrines were to decide on the competing claims between income and capital beneficiaries to realize gains and to categorize the gains appropriately for purposes of levy of income tax. Several decisions can be cited where the judges have turned to property law doctrines3. Similarly, for distinguishing employees for independent contractors courts turn to industrial law precedents4.
Simplification of Australian Tax System
The Australian tax system has placed higher compliance costs on taxpayers (Pope, Fayle, and Duncanson) and the tax system has been considered a complex one. Australian tax legislation is the largest in volume in the world and is also the most difficult to read and comprehend. A government review of the Australian taxation system noted that a point has been reached in the reforms in the tax system to stop the piecemeal improvements and make fundamental reforms (Treasury). In order to simplify the taxation system government introduced the ‘Simplified Tax System’ providing for optional depreciation regime for qualifying small businesses. There has been a complete overhauling of the Australian tax system in the year 2000 with the introduction of the ‘New Tax System’. One salient feature of the new tax system is the replacement of the Wholesale Sales Tax with a 10% Goods and Services Tax (GST). The new tax system was introduced mainly to assist the individuals (about 80% of them would pay tax at a rate of 30 cents in the dollar); small businesses (obligated to pay taxes once a quarter using a single form); pensioners (enjoying a four percent rise in the pension and allowances); and the country as a whole (with increased transportation facilities in rural and regional areas with a reduction in the cost of diesel). The system of collecting income tax from employees under Pay-As-You-Go (PAYG) makes the payment of installments of income tax and withholding the obligations as one system, which provides for a single due date for business obligations in respect of income tax payments.
There are several issues interconnected with the reforms to be made to the income tax system in the country like bringing discipline to fiscal issues, tax neutralitpoliciesiring polices, responding to changes in technology, social needs, economic competition and globalization. Therefore, the reform measures should take into account the policy adaptation that considers the global economic recession and enhancement in the economic income of the individuals and institutions. At the same time, the changes should also bring the complexities in the legislation down to make the Acts comprehensible to individual citizens. The reforms to the systems should address improvements in the application of GST and other indirect taxes, which also contributes to the growth of the economy. Reduction of the burden of administrative costs on the taxpayers is another significant issue that needs consideration in the reforms. Concerns about economic growth in the form of investment attraction, reconstructing economic infrastructure and rising employment potential depend on the revamping of the taxation systems and building social infrastructure in the form of providing affordable housing, increasing availability of housing finance and provision of pensions and other ageing benefits also depends on the revised taxation systems.
References
- Cooper, Graeme. Tax Avoidance and the Rule of Law. 1997.
- Clark, Braedon. The Meaning of Income: The Implications of Stone v FCT. 2009.
- ParliamentofAustralia. Bills Digest No 73 – A New Tax System (Personal Income Tax Cuts) Bills 1998.
- Parsons, Ross. “ncome Taxation: An Institution in Decay?” Australian Tax Forum (18986): 233.
- Pope, Jeff, Richard Fayle and Mik Duncanson. The Compliance Costs of Personal Income Taxation in Australia, 1986/87. Sydney: Australian Tax Research Foundation, 1990.
- Treasury. Reform of the Australian Tax System: Draft White Paper. White paper. Canberra: AGPS, 1985.
Footnotes
- Scott v. Commissioner of Taxation [2006] AATA 542 VS2005/31-33
- Stone v. FC of T 2003 ATC 4584; (2003) 53 ATR 214
- For Example Norman v. FCT [1963] HCA 21; (1963) 109 CLR 9 Shepherd v. FCT [1963] HCA 70; (1965) 113 CLR 385 FCT v. Everett [1980] HCA 6; (1980) 143 CLR 440
- World Book (Australia) pty Ltd v. FCT (1992) 23 ATR 412 placing reliance on Stevens v Brodribb Sawmillng Co pty Ltd [1986] HCA 1; (1986) 160 CLR 16