1. Function and objective of taxation (1-130 1-170) p.

.16-21 Aim: to provide the revenue necessary to fund government functions (to pay benefits pensions, debts cost of living & public infrastructure) Also used for broader socio-economic purposes. The need for government to provide social (street lights) and merit (education) goods The need for government to support those for whom a free market would not otherwise provide (the poor)

2. Criteria for evaluating tax system (1-180 1-230) p.21-30 - Fairness or equity expectation for taxation system to be fair; fairness is hard to define and measure; - Simplicity a tax may be described as simple if the cost of official administration and collection and compliance costs (in money, effort and stress involved meeting tax obligations) are low; example: if the assessor and taxpayer can easily establish the tax payable; the Henry Tax Review observed the cost of complexity, it makes harder for people to understand their taxation rights and obligations - Compliance costs include costs of collecting tax revenue, accounting for tax owing and remitting it to the collecting authority; example: monetary (fees for advice or assistance paid to professional advisers), time (in keeping records or completing returns), or psychological (anxiety caused by inability to understand complex laws) - Certainty taxation laws should be clear and concise, and provide as much certainty as possible; four aspects of certainty: certainty of incidence (the degree of certainty who will actually bear the burden of tax), certainty of liability (the ease and accuracy with which liability to tax can be assessed), evasion ratio (the extent of evasion and avoidance techniques, and extract the intended revenue from taxpayers), fiscal marksmanship (certainty to predict revenue in particular year) - Efficiency/neutrality important aspect of efficiency is administrative efficiency, ie minimisation of administrative and compliance costs; neutrality is another key aspect (it should not influence individual or business choices by altering the cost (tax should not affect the choice of operating as partnership or company) - Flexibility for taxation system to be effective in achieving non-fiscal objectives, then the tax structure and rates need to be easily adjustable, if too flexible, people might get concern about the future - Evidence is the extent to which taxpayers know about or are made aware of their tax liabilities - Fiscal adequacy tax should generate requisite amount of revenue needed by the government - Political acceptability tax should not provoke political difficulties (within Australia or with other tax jurisdictions) - Suitability for achieving macro-level objectives tax should promote macro-level economic objectives which government is seeking to achieve (eg raising of employment levels, lowering of inflation, redistribution of income or wealth)

Conflict and compromise between objectives there is potential for tension or conflict between ideal criteria

4. Concept of income Assessable income comprises of 2 categories of income: ordinary income and statutory income. Assessable income is defined in s.6-5 and 6-10 ITAA97, in terms of those amounts which are income at ordinary concept (as determined by the courts), and those amount specifically included by statutory provision. Statutory income a receipt, amount or gain must be so deemed by a specific provision of the 1936 or 1997 Act. Ordinary income is judicial income; statutory income is legislated income. The guidelines: Income according to ordinary concepts and usage: It is a receipt which comes in to the taxpayer realised Beneficially does not have to be actually paid to TP illegality or immorality does not prevent it from being income The amount must be money or convertible into money (FCT v Cooke & Sherden; Payne v FCT frequent flyer points not assessable benefit not from business relationship

Income must be received as income must be characterised as income in hands of the recipient at the time receipt is derived, regardless of character. Reward for services rendered/carrying on a business/derived from property (FCT v Harris) Income amounts may feature a periodic, recurring and regular nature, but this is not conclusive (FCT v Dixon) Compensation receipts are income if they are paid to replace an item of income (Dickenson v FCT) A mere windfall gain or gift is not income / gambling (Scott v FCT) A series of gifts can be considered as income (Dixon) A gain derived from property has a character of income Income is classified into: income from personal exertion; income from business; income from property

Income from business (6-050) p.226 Main factor to determine the activity is a business:

To extent to which the taxpayers activity is characterised by system and organisation (procedures) The scale on which the taxpayer conducts the activity (pattern) The extent to which the taxpayers activities involve sustained, regular and frequent transactions Whether talent has been turned to account for profit Whether the taxpayer conducted the operations with a profit motive / intention to make profit The commercial character of the transactions themselves Characteristic or quantities of the property dealt in Inherent characteristics of the taxpayer

5. Income from personal exertion (4-000) p.148 Income from personal exertion, as defined in s.6 (1) ITAA36, means salaries, wages, commissions, allowances, bonuses, pensions and retiring gratuities and allowances. An amount (in money or kind) derived from personal exertion may be included in assessable income as either ordinary income or statutory income. Ordinary income from personal exertion an amount will be ordinary personal exertion income if it is a product or incident of the employment of the person or a reward for services rendered by a person. Statutory income from personal exertion - if an amount is both ordinary income and statutory income, the statutory income rules will apply unless the contrary intention is stated. Income from personal exertion principle: requires sufficient nexus between the amount and an activity. The nexus test is satisfied if the amount is characterised as a product or incident of employment or a reward for services rendered, it may be for past or future services, is paid by a 3rd party, or is the product of an isolated act or service. The ordinary/judicial concept excludes windfall gains from income because generally they lack the commercial element evident in other income-producing activities. Windfalls are the products of luck or good fortune. Seldom are they recurrent and regular, they are not seriously expected or relied upon, they are not the product of employment, service or business and the character they possess in the hands of the winners is evidently distinguishable from an income amount. Exception, in particular circumstances, example: Kelly v FCT prizes that are normal incident of income-producing activities, such as in this case of professional athletes. Statutory income: s.15-2 ITAA97 includes in taxpayers assessable income the value to them of allowances, gratuities, etc., provided to them in respect of employment or services rendered. To apply s.15-2 ITAA97 there must be an allowance, gratuity, compensation, benefit, bonus or premium. These words must be constructed in their context, but are clearly intended to cover a broad area.

Nexus test in s.15-2 ITAA97 requires the benefit to be provided in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. There must be an employment or service relationship.

6. Fringe Benefit Tax S.26 (e) failed to deal effectively with fringe benefits so the FBT Assessment Act 1986 was introduced.

Non-cash benefits provided by employers or associates to employee or associate in respect of employment Subject to tax under FBT Assessment Act 1986 FBT is paid by employer but tax paid on behalf of employee Tax rate is equal to highest marginal individual rate 46.5% FBT year is April March, employers lodge return There are 13 different categories of fringe benefits, and each has its valuation rules The taxable values of fringe benefit are reduced by contributions made by the recipient of the benefit There are reconciliation rules with the income tax law to prevent double taxation

Xxxxxxxxxxxxxxxxxxxxxxx some FBT exemptions: 1. Benefits provided by benevolent institutions 2. benefits provided to employees by certain public and non -profit hospitals and benefits provided by employers who provide public ambulance services 3.Car parking not at a commercial parking station provided by small employers 4. Heath care benefits provided by an in house heath care facility 5. Minor benefits of less than $300. 6. The provision of accommodation to a person providing live in help for an elderly person

7. Guideline relation to residency (24-050 24-050) p.1,410-1,412 & companies p.1,419 Resident includes ordinary and statutory income derived from all sources Foreign Resident includes ordinary and statutory income derived from Australian sources Test of resident (individual) an individual is considered a resident for tax purpose if it satisfies one of the 4 criteria:

The residence according to common law or ordinary concepts test intention or purpose of presence; family and business/employment ties; maintenance and location of assets, and social and living arrangements The domicile test domicile is considered by law to be your permanent home (FC v Applegate); domicile by origin/birth, domicile by choice, domicile by operation of law The 183-day rule in Australia continuously or intermittently for more than one half of the income year The superannuation test a member of certain superannuation schemes (or the spouse or child under 16 of such a member)

Test of resident (companies) a company is a resident of Australia if it satisfies one of the 3 criteria: Is incorporated in Australia Carries on a business in Australia, with central management and control in Australia Carries on a business in Australia, and has its voting power controlled by Australian residents

Elements of s.51 and s.55 Australian Constitution p.49 & p.54 Section 51 of the Constitution gives the Commonwealth Government the power to make laws Section 51 (ii) The concept of tax: It is a compulsory payment The money are raised for government purposes The money do not constitute fees for services rendered The payments are not penalties The exaction should be incontestable Prohibition against discrimination between states

Section 55 Law has to be with respect to one type of taxation, and has to relate to tax only