LAWS3409 ADVANCED TAX
1. Tax and the Australian Constitution
1. The Constitution
a. Power to make laws
i. Under s 51(ii), the Commonwealth has specific power to make laws ‘with respect to taxation’.
ii. The limitation within (ii) is to ‘not discriminate between States or parts of States’.
iii. This limitation is further enforced by s 99 where the commonwealth shall not ‘by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof’.
iv. The power is non-exclusive (concurrent) therefore shared with the States. However, recall s 109 that the commonwealth legislation will override state legislation to the extent of any inconsistency.
b. What does ‘with respect to taxation’ mean?
i. Latham CJ in Matthews v Chicory Marketing Board (Vic) 1938 CLR defined tax with the following characteristics:
1. Compulsory extraction of money
2. By a public authority for public purposes
a. This is considered satisfied when tax revenue goes into consolidated government revenue to be used for public spending purposes.
3. Enforceable by law
4. Not a payment for services rendered ii. In MacCormick v FCT 1984 CLR, it was held that:
1. A tax must not be incontestable
2. The criteria for liability to pay must be provided (must clearly be able to determine whether the tax applies to you).
c. Note that under s 90, the Commonwealth is granted exclusive power to levy customs and excise (customs = imports, excise = sale of goods internally).
i. Because states relinquished their power to income tax to the commonwealth, and they have no power to tax imports/excise then they have limited ways of generating revenue. This resulted in Ha v NSW 1997 CLR, where states imposed a ‘business
franchise licencing fee’ for selling tobacco. The fee was calculated as a percentage of value of products sold. Therefore, looks like a tobacco excise – was held to be constitutionally invalid.
d. Legislative process i. S 55 Limitations
1. Under s 55, a law that imposes tax is only able to impose tax and any other dealing is of no effect. Therefore, we end up with separate legislation – one that imposes the tax and another that concerns its administration e.g., Income Tax Act and Tax Assessment Act.
2. Additionally, under s 55, there can only be one subject of tax per law.
a. Raises issues of widely defined tax bases and was a live issue for CGT and including in income tax – although ultimately considered ok because capital gains do fall within the nature of income as ordinarily understood.
ii. S 53 Limitation
1. Under s 53, taxing bills can only originate in house of representatives and not the senate (must also not be amended at senate).
iii. Remedial Power of Commissioner
1. In March 2017, under s 370-5 TAA the Commissioner was given power to effectively change the law in limited circumstances through legislative instrument. The intention is to give the ATO the effective ability to change the way a provision operates if it is producing unintended results or creating unnecessary excessive compliance costs.
2. When can this be used?
a. Under (1)(a) modification must not be inconsistent with intended purpose of the provision and (b) the modification must be reasonable having regard to (i) the intended purpose and (ii) where compliance costs are disproportionate to that purpose.
3. Note that prior to this, the ATO was limited to being able to apply the law as it stood even where there were unintended consequences and long legislative delay in amending the problems.
4. It has only been used 5 times so far and ATO has been transparent with consultations.
2. Judicial review of decisions of the Commissioner
a. Can the Taxpayer access merits review of a decision made by the Commissioner?
i. Access to merits review is not a right and must be granted by the legislation explicitly.
ii. Under s 175A 36, a TP dissatisfied with the ATOs assessment can assess Part IVC.
1. N.b. merits review is preferred because a TP is generally dissatisfied with the amount of assessment rather than the exercise of the power itself which would be a judicial review.
iii. Under Part IVC, a T will lodge an objection, ATO considers under an internal review looking at the ‘correctness’ of the decision with the TP having the burden, ATO will allows/disallow the decision and if unsatisfied can appeal that decision to FCA and then HCA.
b. Can the Taxpayer access Judicial review?
i. A TP has a right of access to judicial review of a decision through:
Parliament enacted law granting power/discretion to
the Commissioner
Legislation provides access to TAA Part IVC
merits review
Assessment decision:
Part IVC merits review and judicial review is
limited by s 175
Other decision:
Judicial review, potential ADJR Act,
and Part IVC
Legislation does not provide for merits
review
Judicial review access only; potentially ADJR
Act Under s 175A 36, a TP
dissatisfied with the ATOs assessment can assess Part IVC
E.g. the legislation granting the ATO exercise of general power of administration does not give access to Part IVC for review
Schedule 1 of the ADJR Act 1977 Cth list out what decisions are capable for statutory judicial review under it Note the potential limitation of s 175A to judicial review only applies to assessment decisions – not other decisions.
Note you can’t use ADJR for
objections to assessment decisions
E.g. no legislative power of ATO to audit you, this is under general power of
administration. If you wanted to object to audit would need judicial review.
been formed, and therefore, that the statutory condition for the power to amend is not satisfied.”
2. Challenge through application of judicial review Chhua v C of T 2018 FCA a. Facts: Simultaneously to Part IVC proceedings, the taxpayer sought
under s 29B to quash amendment on the basis that the ATO erred in law in exercising a power that was a precondition - the ATO failed to consider relevant considerations and had taken into account
irrelevant considerations.
b. He FCA confirmed that Futuris was correct in that the only basis for invoking judicial review for an assessment decision is in cases of maladministration or bad faith – and there was no such basis in this case – therefore must wait for Part IVC proceedings.
2. Advanced Income 1. Commercial Annuities
a. Annuities are ‘periodic receipts’ i.e., when an asset is transferred, and the consideration is in the form of a stream of payments as opposed to a lump sum.
b. Annuities are considered income under ordinary concepts because it exhibits income characteristics e.g., periodicity, continued expectation, reliance on to live FCT v Dixon
c. Purchased annuities
i. Most common examples today are purchased annuities e.g., capital lump sum given which entitles one to a specified amount payable at specified intervals.
ii. Each of these payments is considered income in its entirety – no identification of part of the payment as repayment of the lump sum. This comes from the ‘flow’ concept of income but has the result of being over inclusive.
iii. To resolve this issue, s 27H ITAA 36 was enacted which allows the assessable income amount to be reduced each year on a straight-line basis by a portion of the purchase price to come up with a net income amount –the amount pre-deduction is called the ‘un-deducted purchase price’.
1. Do note this doesn’t account for interest or inflation – but does bring the amount more inline.
iv. However, because the tax rate is different under annuities than interest/loan transactions – s 27H gave rise to tax planning – and so parliament has responded under Div 6E to tax purchased annuities under that regime instead – and therefore s 27H only applies to private annuities.
d. Is the transaction an annuity or merely instalments of the capital?
i. If annuity, then the entire amount is deemed ordinary income whereas the receipts of instalments of purchase price are considered capital.
1. Note prior to CGT there was more of an advantage to have the amount considered to be instalments of capital – this incentive is lessened today.
2. Under CGT provisions today the capital proceeds are calculated by adding up all the amounts received/entitled to receive.
ii. Leading decisions are historical UK HOL decisions → main Q is whether the purchase price (capital) and interest components are able to be identified?
1. Scoble
a. Facts: Company could purchase a railway in a lump sum or by paying an annuity over 50 years with interest. Was the annuity taxable as income in full or only the interest portion?
b. Held → only the interest portions were taxable as income – receipts were apportioned
i. The court was able to identify a purchase price and identify the interest components because they could compare with the option to pay upfront.
Note that normally in merits review proceedings you wouldn’t have access to considerations such as fail to consider (as these are judicial error considerations) however Part IVC does allow these considerations – so formally Futuris is limiting but in practice not so much.
4. Tax accounting and temporal nexus for deductions
a. Temporal nexus of deductions
i. Under s 8-1, for a Taxpayer to claim a deduction against income there must be a sufficient connection between the loss/outgoing and the production of assessable income.
ii. Within this relevance test is a notion of temporal nexus whereby the expense can’t be too remote in time.
iii. The ATO in TR 2004/4 made general rulings/principles about the contemporaneity of expenses (in this case, interest) coming out of the Steele case.
1. The ATO finds that contemporaneity is not essential i.e. won’t preclude the deductions but it is relevant:
a. Interest must not be incurred too soon prior to the commencement of income earning activity
b. Interest must not be private
c. Period between interest and outgoings and production of income must not be so long that the connection is lost
d. Interest must be incurred with only the view in mind of producing assessable income
e. Continuing efforts in pursuit of that end should be shown iv. Leading case Steele v DCT (1999) HCA
1. Held that contemporaneity is not legally essential because the relevance test is not tied to it – but it might be factually important – it depends on the totality of the circumstances.
2. Facts: Significant interest expenses incurred on buying a property with the intention to convert it into a motel. TP already in hospitality/hotel business and knew area had potential. Made continuous efforts to pursue the venture, drawing plans, rezoning costs, buying partner out etc. Project ultimately abandoned so never made income but always had intention of making income i.e. never used for domestic purposes.
3. Here → the TP continued throughout the period to pursue the development, she was committed and there was no suggestion it was contemplated for domestic/private use.
v. Post-cessation expenses → where a TP wants to deduct expenses from a previous business venture off income from a different activity in the current period.
1. Traditionally, the HCA took the strict approach from the UK in Amalgamated Zinc HCA 1935 where it held a connection was lacking entirely because the activities were not continuing, and no deduction was allowed. A company was making contributions to a fund for compensating workers from previous operations.
2. In AGC 1975, the HCA distinguished from AZ on the basis that the present case was a loss rather than an expense and allowed a deduction for a prior business activity that saw a loss from a hire-purchase arrangement. The business was run by new owners and under a different name post being suspended. The hire purchase happened from the old business.
3. In Placer Pacific 1995, the Full Fed Court were bound by the AZ decision but spoke favourably of the AGC approach – although they commented that there was no
distinction between losses and outgoings like the court in AGC had made. The deduction was allowed when a company who continued to remain liable post selling their business for work conducted prior and they had to settle a claim – they were currently engaged in unrelated business activities.
b. Methods of Tax Accounting i. Receipts & outgoings
1. Cash accounting → income recognised when cash received
a. Note that this method can’t be used to redirect income and therefore avoiding recognising it for tax purposes.
i. E.g. re-directing payments to taxpayer’s associates or creditors would be picked up by constructive receipt in s 6-5(4)
ii. Or selling/assigning future income or the right to future income is not tax effective because it’ll still be picked up in CGT or held on trust
2. Accruals accounting → income recognised when right to recover debt begins, deduction recognised when liability to pay arises
ii. Net profit accounting
1. Approach that calculates the profit or loss from a transaction and declares the ‘profits’ as income and the ‘loss’ as a deduction.
2. It is often referred to in the ITAA when to use this method through the words ‘the profit/gain arising from’ or ‘the loss arising from’ and is required for revenue assets (other than trading stock).
3. In other cases where a choice is given, it may be more appropriate to use this method instead of receipts and outgoings. For example:
a. Whitford’s Beach HCA 1982
i. An isolated business venture – individuals developed land and sold to property developers when it wasn’t the original intention – a one off. The sale of the land took a long time to happen. More appropriate to wait until they sold the lots and work out profit/loss and use that in return because this is a truer representation – rather than deduct all the expenditure for years before.
b. Myer Emporium HCA 1987
i. Myer sold the right to receive interest on a loan to its subsidiary to a
company – the company would then shelter some of its income on the loss from its loan. Treated the profit off selling this right as income – appropriate to use profit accounting to disclose profit.
iii. Which one do we use?
1. It is often given in the legislation but if it isn’t then we use the test from Carden’s to decide
‘which system gives the most correct indication of their true income’:
a. Size of the business
i. Smaller business is more likely to use cash basis b. Level of overheads
i. Less overheads is more appropriate to use cash basis c. Existence of inventory/trading stock
i. If there is inventory/trading stock always use accruals because of the way we tax/recognise trading stock
d. Level of bad debts
i. If you have more bad debts then use cash basis so you don’t have to write them all off.
e. Other circumstances
iv. Examples: where the business relies on skill and expertise of individuals
1. Carden HCA 30 → A doctor preparing accounts – cash basis was best for the professional income. Case suggested that most appropriate to use cash when dealing with personal services income.
2. However, in Henderson 70 HCA, despite it still being personal services income, the
partnership was very large with 300 employees so other contributors to the income aside from partner’s skill, large overheads – therefore ultimately court determined it is more appropriate to use accruals basis.
3. Following given that professional firms should use an accruals basis, but in Firstenberg it was confirmed that cash may still be best for some professional services e.g. a solicitor who only has one admin employee so their contribution is minimal and accruals would be overly burdensome.
c. Statutory prepayment (prepaid expenses) rules
Note that which method is used is assessed against each income earning activity rather than applying to all activities
engaged in by TP
6. Advanced Tax Administration a. Tax rulings
i. Why the ATO releases helpful information
1. In 1985 the Australian income tax system shifted to self-assessment. This shifts the risk for incorrect lodgement onto the taxpayer because they will be liable for extra tax if they get it wrong and potentially liable for penalties and interest. Therefore, the ATO releases a lot of guidance to assist taxpayers on completing their self-assessments.
ii. Binding v non-binding
1. The ruling system is binding and therefore the ATO will be bound by rulings (although TP won’t be so they can choose not to follow).
2. The ATO is not bound by non-binding rulings such as draft rulings, Its, decision impact statements, practical compliance guidelines etc. However, if a taxpayer relies on these in a reasonable way while completing their return they will be protected from penalties and interest (although may still be liable for extra tax).
iii. Public Rulings Div 358
1. What is a public ruling?
a. Under TAA s 358-5(3), a ruling will be a public ruling if it is (a) published and (b) states that it is a public ruling. Under (1), the ruling will be on the way in which the Commissioner considers a relevant position applies/would apply to: (a) entities generally or class of entities, (b) entities/class in relation to a class of schemes, or (c) particular schemes.
b. A public ruling will be written by the initiative of the ATO when they identify an issue.
c. There will be a binding part of the ruling – but the instrument might also contain an additional section which the ATO will not be bound by,
2. Application of public rulings s 358-10
a. (1) The ruling applies form the time it is published or retrospectively if the ruling states so.
b. (2) The ruling that relates to a scheme does not apply to you if the scheme is carried out when the ruling is published and (a) the ruling changes the ATO’s general administrative practice and (b) the ruling is less favourable to you than the practice.
3. Public ruling ceasing to apply s 358-15
a. (1) the time the ruling specifies or (2) when the public ruling is withdrawn 4. Appeals process?
a. Note that there is
iv. Private Rulings Div 359
1. What is a private ruling?
a. Under s 359-5(1), a private ruling is a written ruling the commissioner makes which considers the way in which a relevant provision applies or would apply to you in relation to a specified scheme.
2. What is the process?
a. As a practical matter, if you wish to seek a private ruling you would contact ATO requesting guidance more informally to resolve the issue. However, the TP may wish for a binding ruling.
b. If the TP wants a private ruling, they (or their agent) must make an application in the approved form under s 359-10.
i. Note that the application must contain enough detail for the ATO to make a proper ruling and if not all/material details are divulged that could impact the ruling then it may not be binding.
3. What must the ATO do? S 359-35 n.b. you
usually seek a ruling prior tro engaging in a scheme to get clarification on how it would be taxed
ii. PAYG withholding – employee impact
1. Under s 18-15, an entity (the individual) is entitled to a credit equal to the total of the amounts withheld from their payments (PAYG) during an income year if an assessment has been made of the income tax payable.
a. Therefore, when the individual submits their tax return, they will be entitled to a credit for amounts already paid.
iii. PAYG withholding – employer obligation Div 12 1. Employers are required to:
a. Withhold the correct amount of PAYG required; and
i. If they fail to withhold these amounts then they can lose the deduction for the amounts paid in income and wages.
b. Remit the amounts withheld to the ATO; and
c. Report on these amounts via single touch payroll system iv. PAYG instalments
1. As opposed to mandatory withholding amounts, taxpayers can make payments in advance in relation to their own tax liabilities.
2. An obligation to do so may be triggered if the commissioner gives you an instalment rate under s 45-15
a. A commissioner ‘may do this’ and it sets thresholds for individuals, trusts and business income.
3. The amount of the instalment is calculated as instalment income or COI-adjusted basis 4. Under s 45-20, a taxpayer is then entitled to a credit when the commissioner assesses
income tax for that year.
v. Gig workers
7. State taxes Transfer duties (stamp duty)
a. Under s 8 of the Duties Act NSW, a duty is charged on:
i. (1)(a) a transfer of dutiable property, and ii. (1)(b)
1. (i) an agreement for the sale or transfer of dutiable property 2. (ii) a declaration of trust over dutiable property,
3. (iii) a surrender of an interest in land in New South Wales,
4. (viii) a lease in respect of which a premium is paid or agreed to be paid.
5. What is a transfer?
a. A transaction that isn’t a ‘transfer’ may be deemed a transfer for these purposes under s 9
Table Source s 9 Duties Act NSW 6. What is dutiable property? S 11
a. (a) land in New South Wales,
b. Others not tested include: (c) a land use entitlement,(d) shares— (e) units in a unit trust scheme (g) a business asset (h) a statutory licence or permission under a New South Wales law, (h1) a gaming machine entitlement within the meaning of
the Gaming Machines Act 2001, (i) a partnership interest, iii. Writing requirements?
1. Under s 10 there is no need for the document to be in writing for the duty to be payable – however if the transfer is not in writing you will need to lodge a statement under s 15 with Revenue NSW.
b. Who pays?
i. Under s 13, the duty is payable by the transferee (the purchaser) c. How much stamp (transfer) duty is payable?
i. Under s 19, the rate of the duty is charged on the ‘dutiable value’ of the property ii. What is the dutiable value of the property?
1. S21(1) the dutiable value is the greater of:
a. (a) the consideration for the transaction, and
b. (b) the unencumbered value of the dutiable property (value)
i. Unencumbered value is the value determined without regard to any encumbrance on the property (s 23)
iii. What is the rate of duty calculated on the dutiable value?
1. General rate s 32
a. Base amount + rate x amount dutiable value exceeds minimum threshold (n.b.
these thresholds are indexed annually) Minimum threshold
amount Maximum
threshold amount
Base amount Fixed rate
$81,000 $304,000 $1,307 $3.50 for every $100 (or
part) by which the dutiable value exceeds the minimum threshold amount
$304,000 $1,064,000 $9,112 $4.50 for every $100 (or
part) by which the dutiable value exceeds the minimum threshold amount
$1,064,000 — $41,017 $5.50 for every $100 (or
part) by which the dutiable value exceeds the minimum threshold amount
2. Does the dutiable value exceed $3,194,000?
a. If it exceeds this amount, then will be subject to an extra premium rate under s 32A where there will be 7% for all dollars that exceed this threshold.
i. This is for residential land only
d. Is there an exemption?
i. Part 7 of the Duties Act details exemptions from transfer duty including divorce and de-facto relationship break downs, lower rates for deceased estates, first home buyer scheme etc.
e. Does the foreign purchaser surcharge apply?
i. If a person is a ‘foreign person’ they have an additional duty of 8% (this is on top of the general rate of 5.5. above) under Ch 2A s 104L.
ii. A person is a foreign person unless they are ‘not foreign’ which is defined in s 104J as:
1. Australian citizen This ensures arms-
length integrity and to avoid
manipulation of prices
vii. This is different to the 90-day exemption, which focuses on the contractor and the number of days they provide their services. The 180-day exemption does not extend the 90 day exemption.
viii. Services provided for 90 days or less in a financial year s 32(2)(b)(iii)
ix. This exemption applies if the contractor provides the same or similar services for 90 days or less in a financial year. If the services are provided for more than 90 days, the wages paid for the entire period become liable for payroll tax.
x. Services approved by the Commissioner as exempt
xi. You can request an exemption if none of the others applies. Factors that will be considered include: the clients serviced by the contractor, how long the contractor spent with clients, the extent and nature of the contractor's advertising, the nature of the contractor's business.
xii. Services performed by two or more people s 32(2)(c)
xiii. This exemption applies if a contractor engages two or more workers to provide the contracted services.
xiv. If the contractor is a partnership or sole trader, this exemption will only apply if one or more workers provide the services in addition to the partner or sole trader xv. Services provided by an owner driver s 32(2)(d)
xvi. This exemption applies if the services provided by the contractor are incidental to the transportation and delivery of goods in a vehicle provided by the
contractor. The vehicle provided by the contractor must not be owned or leased by the employer and the employer must not contribute to the capital or running expenses of the vehicle.
xvii. Courier cyclists are not regarded as owner-drivers.
8. International tax – residence and offshore income of residents
a. Is the taxpayer a resident for tax purposes?
i. Individuals - Is the individual a resident for tax purposes? ITAA 36 s 6
1. A person is a resident of Australia if they satisfy ANY of the tests in s 6:
a. Ordinary concepts → A resident is a person who resides in Australia
i. A person who is a resident according to the ordinary concepts and principles.
ii. In Harding, the plurality of the Full Court opined that the ‘primary’ test is the ordinary concepts test and is largely directed at where physically a person ordinarily lives regardless of citizenship or domicile.
1. To reside has it’s Oxford English dictionary meaning ‘to dwell
permanently or for a considerable time to have one’s settle or usual abode, to live at a particular place.’
iii. Factors generally considered by the Court include: where you work, type of residence living in (Rent v own), where your family is placed, what your behaviour is in the area, personal/economic factors (Where your money is etc.)
iv. Note the way we apply the factors is slightly different if we are looking at whether a person has established residency or if they are extinguishing residency.
v. Addy v Commissioner of Taxation test case
1. The case was testing whether ATO was breaching non-
discrimination parts of tax treaties – but did consider on a side note whether the TP was a resident.
2. Discussed the relevant factors for resident under ordinary concepts test → what is her subjective intention? It was clear from her amount of time and behaviour e.g. staying on friend’s couches, share housing, travelling Aus, waitress work, all stuff back in UK – there was no intention to move permanently to Aus.
b. Domicile test → A person whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.
i. International law – concepts of domicile.
ii. Harding v FCT [2019] FCAFC
1. Harding had conceded he had domicile in Australia – but did he satisfy the exception that his permanent place of abode was outside Australia?
2. Facts: Harding lived in Australia (from the Middle East) with his family for a few years. After not being able to find work, he left Aus in 2009 to live ‘permanently’ in Bahrain but his family stayed in Aus. He moved between rental apartments and therefore different dwellings.
3. Court found that although he did not reside in Australia, he had made a permanent place of abode outside Aus.
4. Court found that a ‘permanent place of abode’ doesn’t have to mean a singular place of residence – therefore it didn’t matter he moved between rentals – it just has to be within the same town or country.
5. Found not to be a resident of Australia while living in temporary accommodation overseas and despite maintaining many personal and financial connections with Australia, because he abandoned his Australian residence in a permanent way.
6. “The Full Federal Court rejected the proposition that it does not matter if the person is not permanently in one country, but moves between foreign countries. The words permanent place require identification of a country in which the person is living in
permanently.”
a. Therefore a person must be able to identify a new country that they are living in for them to cease residency – they can’t just live in different countries.
c. 183-day rule → A person who has been in Australia for more than 183 days, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia d. Super funds → not examined but includes people who are members of
superannuation schemes.
2. If not a resident:
a. The individual will be taxed on their Australian-sourced income only (s ITAA 97 ss 6- 5(2), (3) and s 6-10(4), (5)
b. Additional consequences → taxed at a different rate than residents and this different rate does not give them access to the tax-free threshold/progressive rate scale. The lowest bracket is 32.5%.
3. Alternative: proposed reform
a. The current four-part test is very reliant on the factors and circumstances of each case and these all lead to uncertainty and risk and there is a lack of predictability.
b. Issue of residency is litigated much more post 2009 because at this time reform means that you are taxed on foreign-sourced income if you are an Australian resident.
c. The Board of Tax is recommending reform with a more objective/bright-line test which significantly relies on physical presence in the jurisdiction. It is evident under these proposed tests that residence is ‘sticky’ in that it is easy to fall into and hard to get out of.
It is likely that the new test will change behaviour as people will be watching whether they have been in Aus for the 45 day and 183 day thresholds.
