TABL 2751

Business Taxation
TERM 2, 2023

Copyright: School of Accounting, Auditing and Taxation

 Lecture 1

Course Overview

Introduction to the Australian Taxation System

Tax Calculations
Course overview

• Welcome to TABL2751: Business Taxation

• Staff details:
• Lecturer-in-charge: Michael Walpole
[email protected]
• Lecturer: Paul Viola
• For contact information please see course outline
• Course structure:
• Week 1: 2 x 2 hr lectures
• Weeks 2-5; Week 7-10: 1 x 2 hr lecture
• Week 2-5; Week 7-10; 1 x 2 hr tutorial
Course overview

• Summary of course:
• The Australian taxation system with a focus on income taxation
• Introduction to other Australian taxes such as fringe benefits tax (FBT) and goods and
services tax (GST)
• You should leave this course having a broad understanding of how the income tax system
applies to individuals and entities (partnerships, trusts, companies)
• This course is NOT just about numbers - words are VERY important

• Course and program learning outcomes: refer to course outline

Course overview - resources
• Course website (Moodle)
• Lecture slides / notes
• Tutorial material
• Additional handouts
• Videos
• Textbook: Taylor, Walpole, Burton, Ciro and Murray, Understanding Taxation Law 2023, Lexis Nexis
Australia, (hereafter referred to as 'UTL')
• Reading list with required textbook reading for each week is on Moodle (see reading list on Moodle)
• Legislation: Paul Kenny and Michael Walpole, Concise Tax Legislation 2023, Lexis Nexis Australia
• Additional text resources: e.g. case books (Australian Tax Casebook, 15th ed, Barkoczy)
• Online resources: Austlii / CCH / ATO website
Assessment
• Assessment 1 : Online Multiple Choice quiz: 20%, Week 5 (further details to be provided closer to
the quiz 6pm 30/6/23 - 6pm 1/7/23)
• Assessment 2: Group Assignment: 25%
• The assignment is a group assignment
• Submission due: Week 8 (Wednesday 19 July 6:00 pm)

• Assessment 3 - Tutorial participation: 5% (Allocated week)

• Assessment 4 - Final exam: 50%, University Exam Period (40% component fail rule)
Course overview – policies and support
• Please review this section of the course outline.
• It contains (by way of example):
• Information about plagiarism and academic integrity
• Student responsibilities and conduct such as workload, general conduct etc
• Policy for special consideration
• Student resources and support (e.g. business student centre, educational support,
library services, UNSW counselling services, equitable learning services).
Introduction to Taxation

“In this world nothing can be

said to be certain, except death
and taxes.”
Benjamin Franklin, 1789
What is a tax?
• OECD: Defines a tax as a:
“compulsory, unrequited payments to
general government. Taxes are
unrequited in the sense that benefits
provided by government to taxpayers
are not normally in proportion to their
payments”.
Administration of Australia’s Income Tax Regime
• Australia’s income tax system is based on self-assessment

• Taxpayers, or their advisers, responsible for giving the ATO accurate and correct information in income tax
returns

• ATO assesses taxpayer on basis of information in the return

• ATO then issues taxpayer a notice of assessment (NOA)

• NOA sets out amount of tax owed by taxpayer on their taxable income
Tax Policy
• Broader context of income and other taxes important in order to understand technical
aspects

• Australia has several types of taxes

• Criteria we apply to assess if a tax is a ‘good tax’ or ‘bad tax’

• Tax is a social process – external factors will impact

Background Issues:
We will briefly consider:

• Functions and objectives of taxation

• Criteria for evaluation a tax system

Tax may be:

• Regressive:

• Proportional; or

• Progressive
Functions and objectives of taxation
• Why do governments impose taxation?
• Main purpose of taxation is to raise revenue
• Provision of social and merit goods:
• Social goods: Joint (non-rival) consumption and non-excludability. Example:
street lighting.
• Merit goods: Beneficial to the user, positive externalities (benefits to others).
Example: health, education.
• Support for those not provided for by the free market (e.g. government assistance
payments).
• Correcting other free market imperfections: e.g. accelerating economic growth
• Using tax as a form of social engineering e.g. taxes on tobacco?
Where do your taxes go?
This is a sample of a “tax receipt” that
most individual tax payers will receive
once their tax return has been lodged
and processed.

https://www.ato.gov.au/Individuals/
Your-tax-return/Check-the-progress-
of-your-tax-return/Tax-receipt/
#Understandingyourtaxreceipt
Criteria for evaluating a tax system
• What makes a ‘good’ tax? How should we evaluate a tax?
• Generally accepted that a tax should be:
• Simple: compliance and administrative costs should be low
• Compliance costs: costs taxpayers bear in complying with their taxation obligations
(e.g. accountant /legal advice/ tax agent fees/time costs/software)
• Administrative costs: government costs (e.g. cost of ATO)
• Equitable:
• Vertical equity: taxpayers in a different position should be treated differently (e.g.
progressive tax rates for individuals)
• Horizontal equity: like taxpayers should be treated alike (e.g. income taxed at the same
rate regardless of whether it is from employment, business, investment)
• Efficient – (neutrality) tax shouldn’t affect decision making
 Criteria for evaluating a tax system
• Other criteria:
• Flexibility: tax law must be able to change to alter the amount of revenue collected or
taxpayers' behaviour.
• Evidence/clear: taxpayers need to be aware of their tax liabilities.
• Fiscal adequacy: generate sufficient revenue.
• Political acceptability: not cause political problems.
• Be suited to government’s macroeconomic objectives.
Overview of the Australian Income Tax System
• Federal income tax introduced in Australia in 1915 (earlier in the various states)
• Taxation is a “concurrent power” – both State and Federal government can tax
• Section 51 of the Australian Constitution Act allows federal government to pass laws in
respect of taxation
• Commonwealth law prevails over an inconsistent State law (section 109)
• The focus of this course will be taxes imposed by the Commonwealth (federal)
government.
• E.g. income tax (direct tax) / goods and services tax (indirect tax)
• Administered by the Australian Taxation Office (ATO)
• Some examples of State taxes include (stamp) duty, land tax, payroll tax (not studied in this
course)
• Administered by the Office of State Revenue (OSR) in each state
Characteristics of tax

• It is a compulsory payment;

• the moneys are raised for government purposes;

• the collections do not constitute payment for services

rendered;

• the payments are not penalties;

• the collections are not arbitrary; and

• the collections should not be "incontestable"

Types of taxation within Australia

• Direct taxes

• Indirect taxes
 POSSIBLE DIRECT TAXES
DIRECT TAXES

income taxes property taxes

• personal income • death
tax duty
• company tax • wealth tax
• poll taxes
• capital gains tax
• donations tax
• inheritance tax
 POSSIBLE INDIRECT TAXES
INDIRECT TAXES
S A L E S T A X E S F A C T O R T A X E S
(apply to sales transactions) (focus on a sector or economy)

Pay- roll land tax

real estate
taxes
taxS T
G Turnover Tax
S t a m p duties
Customs and E xcise
profits from Govt
Industries
resource taxes
Sources of tax law:

Two sources of law

• Primary; and
• Secondary
 Primary Sources

• Statute law (legislation / regulations)

• Case law

• (NOT Rulings!)
Statute Law

• Contained in legislation / regulations

• Made by Parliament
• Examples of legislation we will be referring to throughout this course:
• Income Tax Assessment Act 1997 (Cth): ITAA97
• Income Tax Assessment Act 1936 (Cth): ITAA36
• Income Tax Rates Act 1986 (Cth)
• Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA)
• A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST
Act)
• Taxation Administration Act 1953 (Cth)
• (There is a good reason why there are so many taxation statutes)
 Scheme of Income tax Legislation

• The Income Tax Assessment Act sets out the scheme for the collection and assessment of tax

• It tells us what sort of receipts (incomings) tax is imposed on e.g. income and certain capital
gains
• Tax rates are in a separate ratings act
 2 Acts!!!

• Income Tax Assessment Act 1936

• Income Tax Assessment Act 1997 – effective 1 July 1997

• 1936 Act intended to be progressively repealed as more new provisions are enacted

Emphasis has shifted from this…..

Changes to our taxation system

• Tax Law Improvement Program (TLIP)

• ITAA97

• Ralph Review of Business Taxation

• Henry Review of Australia’s Future Tax System

TLIP

• In 1936 – ITAA 126 pages long and 265 sections

• 1992 – 4,200 pages

• TLIP commenced 1993

–Designed to “simplify the income tax law…rewrite the law with a better structure, and make it
easier to understand”
–Not intended to fundamentally alter the policy underpinning the Act
TLIP
• Structure – pyramid
• Dictionary – s995-1
• Terms defined are marked with an *
• Some design features:
• Signposts – point to cross references
• Format – new numbering – every provision has a unique number

• Plain language – use of “you”

General points on Tax

• Definitions:
–S6(1) 1936 Act; or
–S995-1 1997 Act

• Central concepts:
–Income: s6-5 (s25(1))
– Deductions: s8-1 (s51(1))
– Capital gains: Part 3-1, ss100-152 (Part IIIA 1936 Act)
Useful websites for tax legislation include:
• Australasian Legal Information Institute – referred to as Austlii
http://www.austlii.edu.au
• Australian Taxation Office
http://www.ato.gov.au
Case Law

• Decisions of Courts and Tribunals*, also known as common law

• Case law is needed for two reasons:
• Creation of law in situations not covered by legislation (due to the doctrine of
precedent)
• Interpretation of legislation
• Court hierarchy for taxation matters (from lowest to highest)
• Administrative Appeals Tribunal*
• Federal Court (single judge)
• Full Federal Court (3 judges)
• High Court (if special leave granted) (7 Judges)
• *NOTE: the Administrative Appeals Tribunal is not actually a court and its decisions do not
create precedent
Some resources for Case law

• Case Book – Australian Tax Casebook – provides case summaries and some extracts of
important points
• Useful websites for tax cases include:
• Australasian Legal Information Institute
http://www.austlii.edu.au
• Australian Taxation Office
http://www.ato.gov.au
• Tax cases can be found via the UNSW Library database from:
• CCH Tax Library
• Thomson Reuters
• LexisNexis (Australia)
• LexisNexis (International)
• Westlaw (International)
• https://primoa.library.unsw.edu.au/primo-explore/search?
vid=UNSWS UNSW Library Databases
 ATO Rulings

• Important guide but not the law. It is an informal source of ‘law’, followed by many practitioners and
taxpayers as safety net
• ATO rulings:
• ATO’s interpretation of the law
• Rulings are binding on the ATO
• Defacto Source of ‘law’
• Relied upon widely by taxpayers and tax professionals
• Different types of rulings: public / private / product / class
• Private ruling is advice on how a tax law applies to a taxpayer based on their specific
circumstances
• Public ruling is advice on how tax laws apply to taxpayers generally, or a class of taxpayers
• ATO discretions:
• Certain sections of the various Acts will grant the Commissioner discretion to make a decision
• AAT can review the merits of the decision
• Courts can only overturn the Commissioner’s discretion if there has been an error of Law
Secondary Sources

• Secondary sources consist of other materials that help locate and explain relevant primary
sources.

• While not having the same authority as primary sources, such information may actually be of
more use to the researcher’s understanding of the law than the law itself and may lead to the
discovery of other relevant legal information related to the area under investigation.
 Examples of Secondary Sources
• General or specialised textbooks
• legal journals and current awareness services,
Examples of Journals:
Through the Tax Institute
Australian Tax Forum, The Tax Specialist, Taxation in Australia
Other Journals
Australian Tax Review,Journal of the Australasian Tax Teachers Association,
Journal of Australian Taxation, E-Journal of Tax Research (UNSW), Revenue Law
Journal (Bond)
• legal dictionaries and encyclopaedias
• digests
• case citators
• consolidated indices, and
• a wide range of electronic resources available on the Internet or by subscription
Legal Problem Solving
The acronym, MIRAT, represents:

• M - material facts
• I - issues of law and “policy”.
• R - rules, research and resources.
• A - arguments or application.
• T - tentative conclusion.
 MIRAT

• M - material facts, either present or absent. This equates to analysis of the problem and
determination of whether or not sufficient information has been provided;
• I - issues of law and “policy”. This can be viewed as equivalent to identifying the
information required for solution.
• R - rules, research and resources. Students need to ask themselves relevant questions in
order to research the appropriate legal rules and resources and then study their research in
order to come to some form of conclusion;
• A - arguments or application. This is where you apply the legal rules that you have
researched and formulate answers; and
• T - tentative conclusion. This aspect of legal problem solving equates to the final step of
applying newly acquired knowledge to the problem.
 The Australian Taxation System

Our objectives in taking an overview of Australia’s taxation regime are to:

• consider the nature of Australia’s taxation system, including its regulatory structure;
• examine the component parts of the taxation system essential to our
understanding of how individual taxpayers are assessed;
• understand the path or process which we will follow in gaining an insight into the law
of taxation and its application for problem solving purposes.

Why do we care about these things?

Who must pay income tax?
• Income tax payable by each individual and company
(and some other entities), regardless of residence
status: s 4-1 ITAA97
• In relation to individuals, Australia does not have
“joint” or “family” filing.
• Income tax is payable each year: Tax year: 1 July – 30
June
• E.g. 2022 tax year is 1 July 2021 to 30
June 2022
 Jurisdictional Issues

• Residents: taxed on worldwide income (subject to exceptions)

• Non-residents: taxed on Australian source income (subject to
exceptions)
• See s 6-5 & 6-10 ITAA97 (we will look at these in Lecture 2)
• Different tax rates apply to residents and non-residents
(individuals)
• Residence for tax purposes is NOT the same as citizenship /
permanent residence for immigration purposes
 Administration of Australia’s Income Tax Regime

• Australia’s income tax system is based on self-assessment

• Taxpayers, or their advisers, responsible for giving the ATO accurate and correct information in income tax
returns

• ATO assesses taxpayer on basis of information in the return

• ATO then issues taxpayer a notice of assessment (NOA)

• NOA sets out amount of tax owed by taxpayer on their taxable income
 Tax Policy
• Broader context of income and other taxes important in order to understand technical aspects

• Australia has several types of taxes

• Criteria we apply to assess if a tax is a ‘good tax’ or ‘bad tax’

• Tax is a social process – external factors will impact

 Overview of income tax
Taxable income = Assessable income - allowable deductions s4-15 ITAA97

Is it a receipt?

Is it derived in the current financial year?

Is it income?

Ordinary income? Statutory income? Exempt

income?

Are there any allowable deductions? Are there any relevant expenses (e.g. deductions, cost base)?

Were they incurred in Do they come within the particular provisions?

in the current financial year?
Tax Formula: calculating tax payable
• Income tax = (Taxable income x Rate) less Tax offsets (s 4-10)
• Taxable income = Assessable income less Deductions (s 4-15)
• Tax Loss = (Deductions – Assessable income) – net exempt income (if any)
• Assessable income: ordinary income and statutory income (s 6-1)
• Ordinary income: income according to ordinary concepts (s 6-5)
• Not specifically specified in legislation
• Examples: salary and wages, business income, interest income; rent
• Statutory income (s 6-10)
• Income that is specifically included in a provision of legislation (guide in s10-5)
• Example: net capital gain
• We will look at the concepts of ordinary and statutory income further in Lectures 2 & 3
Tax Formula: calculating tax payable
• Deductions: general deductions (s 8-1) and specific deductions (s
8-5)
• Reduce taxable income

• Offsets reduce tax liability:

• Referred to as ‘offsets’ in ITAA97
• Referred to as ‘rebates’ and ‘credits’ in ITAA36
• Reduce a taxpayer’s tax liability
• Non-refundable (can only reduce tax liability to zero) vs. refundable
• More valuable than a tax deduction
Rates of tax
• Resident individuals – 2023 tax
year
Taxable Income Tax on this income
0-$18,200 Nil
$18,201 - $45,000 19 cents for each $1 over $18,200
$45,001 - $120,000 $5,092 plus 32.5 cents for each $1 over $45,000
$120,001 - $180,000 $29,467 plus 37 cents for each $1 over $120,000
$180,001 and over $51,667 plus 45 cents for each $1 over $180,000

Source: ATO
Rates of tax - Offsets / levies / surcharges
• Refer to handout on Moodle
• Offsets: See handout for calculation of Low Income Offset and Low & Middle Income Tax Offset
(ceased in FY 21/22)
• Levies/Surcharges: Medicare
• Medicare levy, payable by resident individuals, normally 2% of taxable income but may be
reduced for low-income earners
• Medicare levy surcharge: imposed on top of the Medicare levy, for individuals who don’t have
private hospital insurance and earn over certain amounts.
• Full or partial exemption available if taxable income below certain threshold.
• High Education Loan Programme Repayment: payable by individuals with a HELP debt who earn
over a certain amount.
Income Tax Formula and Calculation of Liability to ATO

• Medicare levy surcharge (MLS)

• 1%, 1.25% or 1.5% depending on income for surcharge purposes

• Separate to, and paid on top of, Medicare levy

• Incentive for taxpayers to take out private patient hospital cover

• Amount of MLS depends on taxable income

• Family/single different thresholds

Income Tax Formula and Calculation of Liability to ATO

Medicare levy surcharge thresholds – 2023-2024

(Family income threshold is increased by $1,500 for each MLS dependent child after the first child)

Singles – Income for Families – Income for

surcharge purposes surcharge purposes Medicare levy surcharge
($) ($)
0 – 93,000 0 – 186,000 Nil

93,001 – 108,000 186,001 – 216,000 1%

108,001 – 144,000 216,001 – 288,000 1.25%

Over 144,000 Over 280,000 1.5%

Income Tax Formula and Calculation of Liability to ATO
• Pay As You Go (PAYG) overview

• Under PAYG scheme income tax can be paid during the income year

• Can be paid either:

– in installments (usually 3 months/6months)
– by tax being withheld from payments (e.g. salary)

• Tax already paid or withheld during year recognised as credit at time of lodging income
tax return
Income Tax Formula and Calculation of Liability to ATO

• Tax offsets, or sometimes called rebates or credits – ITAA 1936 and ITAA 1997 use different
terms

• Reduce amount of income tax

• Distinguish from a deduction

Income Tax Formula and Calculation of Liability to ATO
• Australian resident may be eligible for low income tax offset (‘LITO’), low and middle income tax
offset (‘LMITO’) if taxable income below thresholds

Low income tax offset for 2021 –22 : NO LONGER AVAILABLE 2022-23

Taxable income Offset

$37,500 or less $700

$37,501 – $45,000 $700 minus 5 cents for every $1 above $37,500

$45,001 – $66,667 $325 minus 1.5 cents for every $1 above $45,000

Source: ATO Website

Income Tax Formula and Calculation of Liability to ATO
Low and Middle Income tax offset for 2021 –22: NO LONGER AVAILABLE 2022-23

Taxable income Offset

$37,000 or less $675

$675 plus 7.5 cents for every $1 above $37,000, up to a maximum

$37,001 – $48,000
of $1,500

$48,001 – $90,000 $1,500

$90,001 – $126,000 $1,500 minus 3cts for every dollar of he amount above $90,000

Note: if your taxable income is $126,000 or more, you will not receive the LMITO Source: ATO Website
Calculating tax payable
1) Calculate taxpayer’s taxable income
2) Calculate the basic income tax liability on the taxable income according to applicable
tax rates
3) Calculate the taxpayer’s tax offsets
4) Subtract offsets from basic income tax liability
5) Credit is given for tax withheld / tax instalments paid
6) Add levies and surcharges
7) Resulting figure is the tax payable or the tax refund (shown in
“notice of assessment”)
Income Tax Formula and Calculation of Liability to ATO

• Higher Education Loan Program (HELP)

• Loans for approved higher education courses

• Repayment deferred until taxable income reaches threshold

• HELP debt collected through PAYG as additional tax withheld (on top of income tax payable)

• 2022–23 repayment income thresholds and rates on next slide

Source: ATO Website
Jurisdictional Aspects of Australia’s Income Tax
• Australia’s right to tax arises:
– Australian tax resident
– Australian sourced income

• Taxpayers resident for tax purposes include income derived from all sources (in or out of
Australia)

• Foreign residents generally only include income derived from Australian sources
Example tax calculation
• You are given the following information in relation to an Australian
resident individual for the 2021 income tax year:
• Assessable income: $103,000
• Deductions: $9,200
• Franking/imputation credits of $850 (refundable tax offset)
• She does not have private hospital cover
• A HELP debt of $11,450
• Her employer withheld tax of $22,500 during the year
Steps in calculating tax payable:
Step 1: Calculate Taxpayers taxable income
• Assessable income less deductions
• $103,000 less $9,200 = $93,800

Step 2: Calculate basic income tax liability

• Tax rate applicable: $5,092 + 32.5c for each dollar over $45,000
• $93,800 less $45,000 = $48,800
• $48,800 x 32.5c = $15,860
• $5,092 + $15,860 = $20,952
Step 3: Calculate tax offsets
• We are told she has franking credits of $850 (refundable tax offset)
• We also need to consider the low & middle income tax offset
• She does not qualify for the low income tax offset
• She does qualify for the low & middle income tax offset
• Her taxable income is $93,800
• Her offset is calculated as $1,500 less 3c in each dollar that her
income exceeds $90,000.
• Her offset is will be reduced by $3,800 x 3% = $114.
• She will be entitled to an offset of $1,500 less $114 = $1,386
• Her total offsets are: $850 + $1,386 = $2,236
Step 4: Subtract tax offsets from the basic income tax liability

• $20,952 less $2,236 = $18,716

Step 5: Credit is given for tax withheld (or instalments made during the year)
• Her employer withheld $22,500 of tax during the year
• $18,716 less $22,500 = -$3,784
• A negative figure means that the taxpayer would be entitled to a tax refund.
• HOWEVER, we still need to add levies and other charges.
Step 6: Levies and other charges

• Medicare levy: 2% of taxable income

• $93,800 x 2% = $1,876
• Medicare levy surcharge: she does not have private health
insurance and her taxable income exceeds $90,000. She will have to
pay the Medicare levy surcharge.
• $93,800 x 1% = $938
• HELP repayment: She has a HELP debt and has taxable
income above the threshold.
• Based on her income, her repayment rate is 6.5%
• $93,800 x 6.5% = $6,097
 Step 7: Tax payable (or refundable) for the income year

• -$3,784 + $1,876 + $938 + $6,097 = $5,127

Tax calculation – questions for next lecture
• How would the answer to the example tax calculation change if:
• Scenario 1: The taxpayer had private health insurance
• Scenario 2: The taxpayer’s HELP liability was $4,700
• Scenario 3: The taxpayer’s employer had withheld $29,000 of tax during the
year

• We will briefly work through the answers to these questions at the start of
the Next lecture.

• Next lecture: Income - general concepts