Sources of Australia’s tax laws
The study of income tax is unusual in a common law system because income tax is a statute-based subject so the primary source for tax law must be the legalisation. However, the tax statutes are supplementary by two other sources. (i) Judges have interpreted the words in the statute to mean certain things, and those judicial meaning to the words have ongoing significance. (ii) Bare words are incapable of providing in explicit detail for all the forms of commercial transactions which now occur. Meaning that the statute is supplemented by administrative guidelines indicating the approach that the Commissioner of Taxation and the ATO will take in applying the statute to the economic transaction being considered.
Note that the can be a large variety of sources from different degrees of authority to be considered on the law of a tax problem.
Australia’s income tax laws are now split into two primary sources – the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997, the second Act exists as the Government decided to rewrite the income tax laws, this project is ongoing.
The amount of income tax owed
The imposition of the income tax is strictly governed by law. In the absence of law, the tax is simply the confiscation of a citizen’s property by the State, a matter against which the Constitution provides protection.
The obligation to pay income tax is imposed by the Income Tax Act 1986 and the amount of tax that a person owes is set out in ITAA 97 division 4 of the Act.
Terms such as ‘income’, ‘assessable income’, ‘ordinary income’, ‘statutory income’, ‘exempt income’, ‘taxable income’, ‘general deductions’, ‘specific deductions’, ‘tax offsets’ and ‘tax rebates’ are used.
A matter that is a common problem is the apparent duplication and overlap of taxing provisions. Here the taxpayer is said to only consider one of the provisions.
The constitutional concept of income
Section 55 of the Constitution provides that a tax law may not deal with more than one subject of taxation. Does section 55 restrict an income tax act to income in the narrow sense of the judicial concept of ordinary income or whether a single income tax law can include both ordinary and statutory income? Defining ”income” more broadly in the constitution could allow it to impose a tax on capital gains and other receipts outside of the judicial concept of ordinary income.
For income tax law, a taxpayer’s assessable income comes from both ordinary income and statutory income. The opinions of judges interpreting the word income create the meaning of ordinary income and the elaborations in the Act create the statutory income. There is a large volume of statutory income provisions that make up the bulk of tax legislation.
The concept of income has three broad classes:
- Amounts received as a reward for performing services (usually as an employee ”income”)
- Amounts which are the proceeds from carrying on a business (income from a business)
- Amounts which are received as a return from property investments (income from property)
Two extra points added by Professor Ross Parsons:
- Amounts which are received in compensation for an amount that would have been income if it had been received instead (compensation receipts)
- Amounts which are received periodically (periodic receipts)
If an amount is not within these concepts it is not ordinary income. Examples of this income can be gifts received, inheritances, prizes, gambling winnings, ect.
One of the important exclusions from the notion of income is the proceeds of the sale of a capital asset. The distinction between an income receipt and a capital gain is fundamental to the judicial notion of income.
Benefit from use of property
Harding v FCT (1917) 23 CLR 119 (Full High Court)
Facts: An assessable income 5% of the capital value of owner-occupied housing was included as imputed income from use of one’s own property. The taxpayer argued the inclusion of an amount for the use of property was not income and the inclusion provision was therefore unconstitutional by s 55 of the Constitution as it had the effect of introducing another subject of taxation into the ITAA.
Decision: The benefit from use of one’s own property (the imputed rental value of the property) had long been subject to taxation in the UK and Australian States and had become viewed as ordinary income by most persons.
Rulling: The inclusion of this value in assessable income did not, therefore, infringe on s 55 of the Constitution.
Relevance today: The benefit of the imputed rental value of owner-occupied housing is no longer included in assessable income. While, Harding remains a useful precedent to show that the constitutional concept of income may include the value of benefits from using property even if that value is not converted to cash.
Exempt income and NANE Income
For some entities, their ordinary income and statutory income is exempt (Division 50). Certain payments received by certain individuals are also exempt (Division 51). Certain government pensions and support payments and scholarships are also exempt income (Division 52).
Non-assessable non-exempt income (NANE income) is simply disregarded for income tax purposes. For example, employee fringe benefits. However, it is not a real exemption as the benefits will be taxed to the employer instead under the Fringe Benefits Tax Assessment Act 1986.