This document provides an overview and introduction to income tax concepts for the 2012 tax year. It covers topics such as taxation policy, authority in taxation law, tax reform, an overview of the Australian tax system, income tax rates for residents and non-residents, Medicare levy, tax offsets and rebates, taxable income calculation, and taxation of other entities like companies, trusts and partnerships.

1. TAXATION:ACC3 TAX
2012

2. Week 1
• Summary of Topics – Week 1
• Introduction to Income Tax
– Taxation Policy
– Authority in Taxation Law
– Tax Reform
– Overview of the Tax system

3. Week 1
• Introduction to Income Tax – Resident Individuals
– Responsibility of individual to lodge tax return
– Income tax rates 2011/12
– Tax free threshold
– Income Tax offsets (rebates)
– Tax free threshold
– Medicare Levy
– Tax Offsets / Rebates

4. Week 1
• Other Tax Paying Entities
• Income Tax Equation
• Assessable Income
– Ordinary Income
– Statutory Income
– Status of Residence and
– Source of income

5. Introduction to Income Tax
• What is tax?
• Different things to different disciplines
– Economists
– Lawyers
– Economists

6. Introduction to Income Tax
S. 51(ii) of the Constitution refers to ability of
Commonwealth to raise taxes.
Some features of tax are -
– Compulsory payments
– Payments raised for government purposes
• Payments do not constitute fees for services
rendered
• Payments are not penalties

7. Taxation Policy
Characteristics :
– Emotive Issue
– Need for Tax
– System based on equity and simplicity
– Protect rights and liberties of individuals
– Provide economic growth &
– social infrastructure

8. Taxation Policy
– Overall goal
• Fiscal adequacy
• Political acceptability
• Achievement of Macro-level objectives
• Tax as a Social Process
– Progressive Taxation
– Proportional Taxation
– Regressive Taxation

9. Taxation Policy
• Functions and Objectives of Taxation Policy
– Need for Governments to provide social and merit
goods
– Support where free market does not exist
– Correction of other free market imperfections

10. Authority in Taxation Law
• Statute Law (legislation)
• Case law (common law)
• Practices of the A.T.O.

11. Authority in Taxation Law
Statute Law
– ITAA 36
– ITAA 97
– Taxation Administration Act 1953
– Fringe Benefits Tax Assessment Act 1986
– GST Tax Acts (1999)

12. Authority in Taxation Law
• Appeal Process
– A.A.T.
– Federal Court
– Full Federal Court
– High Court

13. Authority in Taxation Law
• Case Law – Role of the Courts
• Create law in circumstances not covered by legislation
• Interpret statutory legislation with use of
– Acts Interpretation Act 1901 – S. 15AA and S. 15AB
– Literal rule
– Golden rule
– Mischief rule

14. Authority in Taxation Law
• Practices of the A.T.O.
• ATO rulings
– Since 1 July 1992 statutorily binding
– Under self-assessment system these have
moved closer to “formal” law
• Income Tax Assessment Regulations 1997
– Empower Governor General to make
regulations

15. Authority in Taxation Law
• A.T.O.
– Tax Rulings
– Private Rulings
– Public Rulings
– Product Rulings
– Class Rulings
– Oral Rulings

16. Tax Reform
• Tax Law Improvement Project – ITAA97
• Tax Reform project
– GST
– Simplification
• Ralph Review
• Henry review of taxation

17. Tax Reform
• Creation of a Board of Taxation
• New approach to FBT
• Changes to Imputation regime
• More comprehensive and effective rulings
system
• International tax reforms

18. Overview of Tax System
• Income tax system consists of a number of Acts and is
administered by the A.T.O.
– I.T.A.A.
– Income Tax Regulations
– Ratings Acts
– International Agreements
– Taxation Administration Act and regulations
– FBT legislation

19. Overview of Tax System
• Two Income Tax Assessment Acts
currently apply
– ITAA 1936 (Original Act)
– ITAA 1997 – Commencing S. 1.1
• Commenced 1 July 1997

20. Overview of Tax System
 ITAA 1997 comprises re-written legislation and there are
six levels of provisions (Sec 2-5):
• Core provisions - checklist
• General provisions
• Specialist Groupings
• Collection of tax
• Administration
• Dictionary of terms and concepts

21. Introduction to Income Tax -
Resident Individuals
 Residents of Australia are required to lodge a tax return to
ATO at end of financial year disclosing their ‘taxable
income’
 Liability to tax is determined on a year to year basis
 Australia’s financial year commences 1 July and ends
30 June

22. Introduction to Income Tax -
Resident Individuals
• Need to determine :
– What is assessable income? (See over)
– What is an allowable deduction?
– What is a tax offset? (See over)
• Allowable deductions
• These will be covered later

23. Income Tax Rates 2011/12
• Income Tax Rates – Resident of
Australia
-Income tax is levied on a progressive basis
(Sec 12-1 Income Tax Rates Act Schedule 7 –
Part 1)
– Medicare levy - 1.5% of taxable income
_ Individuals entitled to tax offsets (rebates)

24. Tax rates 2011/12
• Taxable income Tax % excess:
• $6000 Nil 15%
• $37000 $ 4650 30%
• $80000 $17550 37%
• $180000 $54550 45%
– Medicare levy - 1.5% of taxable income
_ Individuals entitled to tax offsets (rebates)

25. Tax Free Threshold
 Individual residents are entitled to $6,000 tax-free
threshold
 Tax-free threshold is reduced in certain
circumstances - Rates Act – Sec 16:
• When you become or cease to be a resident of
Australia Tax-free threshold is adjusted - $500 per
month ($6,000 / 12 = $500)

26. Medicare Levy
 Resident individuals are liable to pay a
Medicare levy at the rate of 1.5% of
individual’s taxable income Sec 251S(1)(a)
ITAA36
 No Medicare levy is payable if taxable
income less than $18839…. 2010/11
 Shading in provisions apply where taxable
income is between…. $22164)

27. Medicare Levy
 A 1% Medicare levy surcharge is imposed if
taxpayer does not have private hospital insurance.
Surcharge applies to:
• Single individuals with taxable income above
$77,000 pa for 2010/11
• Couples and families with taxable income
above $154,000 pa plus $1,500 for the second
and every subsequent dependent child

28. Tax Offsets / Rebates
 Tax offsets are deducted from the net tax payable on ‘taxable income’
 Resident individuals are entitled to tax offsets (rebates)
 Examples:
• Low income tax offset ( Maximum offset $1500 from 1 July 2011 for
income of $30 000 or less.. BUT It is reduced by 4 cents for every
dollar of income over $ 30 000) ( from 1 July reduces to4 445)
• Dependant tax offsets: spouse $ 2355 ( 2011/12)
• Franking credit (dividend imputation credit)
• ‘Spouse superannuation contributions tax offset’ (Max $540 if spouse
contributes $3,000 and spouse’s assessable income < $10,800 – offset
reduces if above $10,800)

29. Dependant tax offsets
• An Australian resident is entitled to claim a dependant tax offset
(rebate) provided:
1. Taxpayer contributes to the maintenance of a dependant – sec
159J(1)
2. Both taxpayer and dependant are residents of Australia – sec
159J(1)
3. Separate net income of dependant is below statutory amount – sec
159J(4)

30. Dependant Tax Offsets
• Dependant tax offsets adjusted annually for inflation - sec
159HA
Table of rebates – sec 159J(2)2011/12
Class
4. Spouse of the taxpayer $ 2355
5. Child-housekeeper $ 2299
6. Invalid relative $ 864
• NB: Student offset/ dependants notionally retained to
calculate entitlement to other rebates – sec 159J(1A)

31. Calculation of tax payable 2011/12
Joe Brown has a Taxable income of $47,000 for 2011/12 –
he is a resident of Australia
Tax payable – ITAA 97 Sec 4-10(3):
$6,000 X 0% = Nil
$31,000 X 15% = $4,650
$10,000 X 30% = $3,000
$47,000 $7 650
Less
Tax offsets Nil
Net tax payable $7650

32. Calculation of tax payable 2011/12
Net tax payable $7650
Plus
Medicare levy
($47,000 X 1.5%) $705
Tax payable $8,355

33. Non-Residents - Rates of tax 2011/12
Non resident of Australia
Income tax is levied on a progressive basis
(Sec 12-1 Income Tax Rates Act – Schedule 7 Part 2)
Taxable income Tax %Marginal rate of tax
Nil Nil 29%
$37,000 - $80,000 $ 10730 + 30%
$80,001 - $180,000 $23 630 + 37%
Over - $180,000 $60630 + 45%

34. Rates of tax 2011 – Non-residents
• Not liable to pay Medicare levy -Sec 251U(d)
• Not entitled to tax offsets
• Not entitled to tax free threshold - $6,000

35. Introduction – rates of tax: other entities
• Companies
– Rate of tax – 30%
• Complying superannuation funds
– Rate of tax – 15%
• Non complying superannuation funds
– Rate of tax – 45%

36. Partnerships
• Partnerships are not taxed
• Each partner is taxed on his/her share of
Partnership Income…
• eg Tom and Mary are equal partners in a
newsagency partnership which has a taxable
income of $ 100 000 in 2010/11
• Tom will therefore have $ 50,000 taxable
income from the partnership

37. Trusts
• A trustee does not normally pay tax where
the income is distributed to the beneficiaries
• Where a beneficiary receives income from
a trust they are taxed on their share at their
own personal rate
• If income is not distributed the trustee may
be liable to pay tax on the undistributed
income at the top marginal rate of tax

38. The Income Tax Equation
• Assessable income minus allowable deductions
equals Taxable income ( sec. 4-15 ITAA97)
 ITAA defines ‘taxable income’ - Sec 4-15
‘assessable income less deductions’
• Tax is levied on taxable income ( sec 4-10(3)
ITAA97)
• 1.5% Medicare levy levied on taxable income
• Tax offsets are deducted from tax payable

39. The Income Tax Equation
 Some income is exempt from tax - Sec
6-1(2) …. See later
 Therefore need to understand what is
assessable income and allowable
deductions

40. Assessable Income
• ITAA 97 - comprised of
• Ordinary income S 6-5 which is based on case
law and
• Statutory income S6-10 which is based on
specific legislation
• See Guide in S 6-1
• but excludes exempt income S 6-20

41. Assessable Income
Includes:
2. Ordinary income – Sec 6-5:
• Income from personal exertion
• Income from property
• Carrying on a business
3. Statutory income – Sec 6-10:
• Income under specific provisions of ITAA
• Sec 10-5 – summary list

42. Assessable Income
Some Examples :
• Income from personal exertion:
• Salary & wages
• Income from property:
• Interest
• Dividends
• Rent
• Annuities
• Royalties
• Carrying on a business:
• Proceeds from carrying on business (e.g. profits)

43. Ordinary income: section 6-5
• Need to know what is…
• Ordinary income
• Residence of taxpayer
• Derivation of income
• Source of income
• Exempt income

44. Ordinary income
• Is a common law concept
• See defn.Section 6(1) of the 1936 ITAA of
income from personal exertion
• Based on case law

45. Ordinary Income - Principles
• Ordinary income comes in to the taxpayer
• Nexus (link) with income earning activity
• Convertible into money, regular recurrent and
periodic
• Must be a gain
• Includes illegal activities
• Does not include capital gains
• Non cash benefits 26 (e) & S 21A

46. Ordinary income
• Determined according to ordinary concepts
and usages of mankind
• Look at all the circumstances
• Is an objective test
• Determine whether payment is for services
or employment
• Character of receipt in hands of recipient
• Motive of person making the payment

47. Residence
Sec 6-5(2) – Resident
• If you are an Australian resident, your assessable income
includes the ordinary income you derived directly or
indirectly from all sources whether in or out of Australia,
during the year of income
Sec 6-10(4) – Resident
• If you are an Australian resident, your assessable income
includes your statutory income from all sources whether in
or out of Australia.

48. Residence
Foreign Source Income –
Withholding tax
• If Australian resident derives income such as dividends and interest
from overseas sources and withholding tax had been deducted:
• Australian resident must include both the income and withholding
tax as part of assessable income (sec 6AC)
and
• Withholding tax will be allow as a foreign tax credit offset (sec
160AO)
• Maximum permitted limited to Australian tax payable on that
income

49. Residence and Source: ordinary income
Section 6-5(3) – Non-resident
If you are not an Australian resident, your
assessable income includes:
• the ordinary income you derived directly or indirectly
from all Australian sources during the year of income;
and
f) other ordinary income that a provision includes in your
assessable income for the income year on some basis
other than having an Australian source

50. Residence and Source: Statutory income
Section 6-10(5) – Non resident
If you are not an Australian resident, your
assessable income includes:
• Your statutory income from all Australian
sources; and
• other statutory income that a provision
includes in your assessable income on
some basis other than having an
Australian source.

51. Residence
There will be a need to determine:
 Whether taxpayer is a resident of Australia
• If a resident, source will generally not be
an issue, as you will need to bring to
account income derived from all sources
whether in or out of Australia
 If taxpayer is not a resident of Australia, the
issue is whether income derived is sourced
in Australia

52. Residence
Three statutory tests of residence: S 6(1) ITAA 36:
3. Domicile / permanent place of abode test
4. 183 day test
5. Commonwealth superannuation test

53. Residence
Individuals –
Domicile / permanent place of abode test
 Taxpayer lives in Australia:
• Physical presence in Australia
• Business and family ties in Australia
• Family home maintained in Australia
• Personal assets in Australia
 Tax Ruling TR 2650 sets out ATO views on tests associated
with residency of Australia

54. Residence
 Individuals –
 183 day test
• Treated as resident of Australia if in Australia for more than 183
days,
• unless ATO is satisfied,
• that the taxpayer’s usual place of abode is outside Australia,
and
• taxpayer has no intention to take up residence in Australia
 Test is predominantly concerned with residency status of people who
visit Australia (e.g students, visitors on holidays)

55. Residence
183 day test
This test determines when a person is
considered to have commenced to be a
resident of Australia
ATO considers ‘a migrant who comes to
Australia intending to reside here
permanently is a resident from arrival’
(Tax ruling TR 98/17 paragraph 16)

56. Residence
Permanent place of Abode
Leading cases
Levene v IRC – (1928) AC 217
 A British subject who on medical advice spent the
summers in England and the winters abroad
 He had no fixed residence in either the UK or abroad
Held:
• The person was a resident of the UK

57. Permanent place of abode
In Levene’s case it was pointed out:
• A person continues to reside where he has his settled or usual
abode, though from time to time he leaves it for the purpose
of business or pleasure
• A person who has his home abroad and visits the United
Kingdom from time to time for temporary purposes without
setting up an establishment in that country is not considered
to be a resident there
• A man may reside in more than one place

58. Permanent place of abode
FCT v Applegate – 79 ATC 4307
 Taxpayer was sent overseas to Villa to establish an office for his employer
 Taxpayer’s intention was to remain overseas for an ‘indefinite period’
 Taxpayer was accompanied by his wife and he left no assets in Australia
Held:
• Not a resident of Australia
• Important factors such as work, family and location of home were located in
Villa
• Taxpayer’s place of abode was outside Australia

59. Permanent place of abode
Key principles – Applegate’s case:
• Where a taxpayer’s permanent place of abode is located
must be determined annually
• Permanent place of abode does not mean that there should
not be an intention to return in the foreseeable future
• Permanent should be contrasted with temporary or
transitory and it did not mean everlasting
 Commissioner’s views on permanent place of abode set out
in Tax Ruling – IT 2650

60. Permanent place of abode
FCT v Jenkins - 82 ATC 4098
 A bank officer was transferred to the New Hebrides for 3
years
 Returned to Australia after 18 months due to ill health
Held:
• Although taxpayer’s stay overseas was for a fixed term, the
taxpayer was a non-resident, as his permanent place of abode
was outside of Australia (3 year term was considered
significant)
• A taxpayer’s intention to reside outside of Australia does not
have to be for an indefinite period

61. Residence of companies
Statutory test – Sec 6(1) ITAA 1936:
Company is a resident of Australia if:
 Incorporated in Australia
 If not incorporated in Australia:
 Carries on business in Australia and:
• Company’s central management and control in Australia
or
• Voting power controlled by shareholders who are
residents of Australia

62. Residence of companies
De Beers Consolidated Mines v Howe
• A company is normally a resident in the country
or place where its central management and control
are situated
• That place will usually be where the directors
meet to do the business of the company
• This is a question of fact and degree

63. Residence of companies
Esquire Nominees case - 72 ATC 4076
 Company was incorporated in Norfolk Island with voting
shares and directorships in Norfolk Island hands
Held:
• As company’s central management and control was in
Norfolk Island it was not a resident of Australia

64. Residence of companies
Malaysian Shipping Co Ltd v FCT
(1946) 71 CLR 156
• In Malaysian Shipping case it was held
if a company’s central management
and control is in Australia, then it must
be carrying on business in Australia

65. Source of Income
 No statutory definition of ‘source’ in ITAA
 Tests to determine ‘source of income’
1. Place where taxpayer performs services
– Place where contract signed
– Place of payment

66. Source of income – salary & wages
FCT v French – (1957) 98 CLR 398
 An Australian resident was employed as an engineer by an
Australian company carrying on business in Australia and
New Zealand
 During the year ended 30 June 1951 taxpayer was in New
Zealand for 17 days on his employer’s business and earned
110 pounds during this period (being income from
personal exertion)

67. Source of income
Salary & Wages –
FCT v French
Held:
• Source of 110 pounds was where work was
performed and income was derived from
sources out of Australia
• In the case of wages the source of income is
where the place of employment is performed

68. Source of income – Salary and Wages
FCT v Efstathakis – 79 ATC 4256
Salary paid by the Greek Government
to a Greek national working in Sydney
at the Greek Press and Information
service was taken to have an
Australian source

69. Source of income
FCT v Mitchum – (1965) 113 CLR 401
 A film actor normally resides in USA
 He entered into an agreement in Switzerland and came to
Australia to act in a film which was partly shot in Australia
 He was present in Australia for approx 3 months
 The remuneration was paid to him in the USA

70. Source of income
FCT v Mitchum
Held:
• Source of income was outside Australia
• Mitchum was using his creative powers or special
knowledge to such a high degree that the place where those
powers or knowledge was utilised was relatively
unimportant
• Other factors such as where the contact was made
(Switzerland) and place where payment was made (USA)
may be significant for determining the source

71. Source of income
Thorpe Nominees
• If performance is found to be more
important than the making of the contract,
under these circumstances, the place where
the contract is performed may be the only
relevant factor in determining source
• END LECTURES WEEK 1

72. Studying tax!!!
• Expect to
• Attend all lectures and tutorials
• Take good lecture notes!
• Own study time min 5 hours per
week….which involves……
• Reviewing lecture notes
• Reading, highlighting and tabbing
legislation

73. Studying tax
• Reading the reference material from
Foundations of Tax
• Prepare Pre tax questions
• Prepare tax tutorial questions for class
• See your tutor if you need help!
• Anything less you are at RISK!!!!!

74. Assessment
• Two tutorial questions x 5% 10%
• Group assignment 20%
• Closed book exam 70%

75. Useful Reference!!!!!!
Communication Skills Handbook, third edition authored by Jane Summers and Brett Smith 2010 published by John Wiley
& Sons Australia Ltd.
The topics covered include the following:
● Guidelines for Assessment (how to prepare/complete assignments in accordance with what the lecturer requires)
● Referencing and Plagiarism/Collusion (uses Harvard referencing – the Faculty of Law and Management standard)
● Report writing and Case Study Analysis
● Essay Writing
● Oral Presentations
● Examination Techniques
● Job Applications and CV writing
There are five copies on Reserve and two copies available for 3–day borrowing at Bundoora.

76. oasis
• Oasis - Tutorial Enrolments will open at
• 6:00 Thursday 23 Feb
• For help contact the Study Hall:
• studyhall@latrobe.edu.au or 9479 3694.
• Students are to enrol for their semester 1, 2011 tutorials via OASIS
• (Online Automated Scheduling Information Software)
• To enrol into a tutorial
• NOTE: You must have a confirmed enrolment in order to access OASIS.
• Go to the OASIS web page https://www.latrobe.edu.au/oasis
• Select Campus
• Select Student
• Log in by entering your username and password, then click Submit (Same username and password that you use for StudentOnLine).
• Click Select Class
• Select the appropriate School from the drop down menu (Make sure you are selecting the correct School from the drop-down list (e.g. School
of Law for LST2BSL).
• Click Submit
• Select the appropriate Subject
• Click Submit
• Select the tutorial time you wish to enrol in
• Click Submit
• You are now successfully enrolled into the tutorial for that subject
• Click on Student and repeat the above steps for the rest of your subjects
• To see your tutorial timetable, click on View Timetable
• To print your tutorial timetable, click on Print