Income Tax Tutorial Review

Tute 1 

Question 1

1. Individual

• s995-1: a natural person and thus an individual. Can be an adult or a minor
• Taxpayer entity under s 4-1
• s9-1 has a list of entities which must pay tax
• No separate common law interpretation
• If an individual is carrying on a business, does it mean it becomes a company? No, it could be a sole trader or sole proprietorship.

1. Company

• Under ITAA1997 - S995-1: a body corporate or any other unincorporated body or association of persons but does not include a partnership or non-entity joint ventures.
• Corporations act – anything which is registered under the corporations act.
• Tax definition is broader – includes more than the corporations act does
• A company is a taxpaying entity; s 4-1 Item 3.
• S995-1”Company” Excludes partnerships and joint ventures.

1. Partnership

• S 995-1: an association of persons other than a company carrying on a business as partners or in receipt of ordinary income or statutory income jointly or a limited partnership.
• Tax definition is broad definition, whereas the partnership act is narrower.
• “the relation which subsists between persons carrying on a business in common with a view to profit”: s 1 –Partnership Act 1891 (SA)
• S4-1 not a taxpaying entity. Also, not a taxpaying entity in s9-1.
• However corporate limited partnerships are listed.

1. Trust

• Entity or person holding property for the benefit of someone else (beneficiary)
• No definition in the Tax Act – derives its meaning through law
• Definition under common law – a trustee has an equitable right to hold property for the right of someone else
• Not a taxpaying entity – assessed to trustee, and in some cases the beneficiary

1. Small business entity

• s 995-1: refers to s 328-110

• an entity that carries on business in an income year and has an aggregated turnover for that year, or the previous year, of less than $2 million (excluding GST)

• Entities which have turnover of $2m or less are small business entities.
• no common law definition
• not specifically defined as a taxpaying entity however it encompasses individuals, partnerships, companies and trusts provided they don’t earn over $2 million (so yes)

Question 2 – legislation interpretation

• legal professional privilege – any correspondence which is about advice or in relation to litigation between a lawyer and a client is protected.
• s 264(1) – the commissioner may by notice in writing require any person, whether a taxpayer or not, to furnish him with any information he may require

• very broad: “any person”
• gives the commissioner a lot of power

• 3 main rules of statutory interpretation

• Literal rule – words are to be given their ordinary and natural meaning: Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920)

• Intention of parliament was to include everyone
• ATO would argue that Allan needs to give them information upon request whether or not it’s covered by legal professional privilege or not, and if he doesn’t, he will have a penalty
• Don’t care about the consequence (less than 7 days to do so) with this approach

• Golden rule –  court takes into account the consequences of a particular interpretation of the provision to the individual or taxpayer which may be concerned: Grey v Pearson (1857)

• If absurdity or inconsistency results, Court will modify meaning or read in words to the meaning to overcome this
• Perhaps the court may add in “in a reasonable time”

• Mischief rule – Heydon’s case (1584)

• Only applies if there is an ambiguity
• Is there ambiguity here?  Arguments for yes and no
• If there is ambiguity – the court will consider the underlying purpose for passing this act. Look to extrinsic materials (second reading speech, Hansard, explanatory memorandum) – why was this section introduced?
• Infer the purpose was to give the commissioner power

Is Allan obliged to disclose the documents?

• ATO will argue the literal interpretation – that is, Allan needs to hand them over
• ATO will argue the doctrine of professional privilege won’t apply – no insertion of it into the section
• Allan will argue – legislation is presumed not to alter common law doctrine
• Conclude that the section is subject to common law doctrines. This means that Allan will only need to hand in those documents not covered by legal professional privilege.
• FCT v Citibank and Baker v Campbell – s 264 is subject to legal professional privilege

Question 3 – research and anti-avoidance

• Trying to advise her there may be a scheme available where she may be able to get away with not paying tax – part 4A (anti-avoidance)
• Ways in which you can obtain an answer to whether you have good advice or not:

• A textbook on the interpretation of tax law – note up cases**
• ATO releases taxation rulings – look to these. It may have an interpretation which is binding on the commissioner. IT Ruling 21/21
• Speak to a tax lawyer or accountant
• Read part 4A of the Act
• Case law
• Extrinsic material – Hansard, explanatory memoranda
• Tax pronouncements – not so binding, give a general gist of what the section means
• Tax commentaries
• Journal articles – may target the use of anti-avoidance provisions here

Is the information provided by the accountant correct?

• Taxable income = assessable income – deductions

• AI = salary + interest = 206 000 (180 000 + 26 000)
• D = 0
• Taxable income = 206 000

• Basic Income Tax Liability = taxable income x tax rate

• when use table, she pays $66 250 (pays almost ¼ in tax)

• Actual income tax liability = basic income tax liability – tax offsets + credits

• = $66 250

• AFTER THE TRUST
• Taxable income

• Assessable income = 180K
• D = 0
• TI = 180 000

• Basic Income Tax Liability

• = $54 550

• Actual income tax liability

• $54 550

• 26 000 → trust

• 10 000 – 3 children
• 3333 x 45% = 1500
• If earn less than 30 000 – get a 1500 tax offset (reduces the tax dollar by dollar)
• Tax is therefore nil

• $16 000 → spouse

• He was eligible for a tax free threshold  of 6000 (don’t pay tax on the first 6000 you earn)
• (16 000 – 6000 tax free threshold) x tax rate = 1500 tax
• Taxpayer earned less than 30 000 – applicable for low income tax offset
• Nil

• Tax is $54 550 – great saving in tax

Tute No. 2 Jurisdiction to Tax - Residency

Problem Methodology

1. Tax entity

1. Identify Type
2. Tax treatment – see step 7.

1. Jurisdiction to Tax

1. Residence
2. Source

1. Assessable Income

1. Statutory Income
2. Ordinary Income

Question 1

Alice – Australia resident, total salary = $85000 y/e 30 June 2011. PAYG Instalments. Expenses incurred =$2000, Dependent spouse rebate $2286. Alice is a natural person and is therefore an individual; s4-1 – individuals and companies and some other entities must pay income tax. S9-1 → individual is in item 1 of s9-1.