Understanding the Constitutional Basis of Taxation in Australia

This article explains the constitutional basis of taxation in Australia, focusing on sections 51(ii), 90, 53, 55, and 96 of the Australian constitution. It discusses the power division between the commonwealth and the states, the imposition of custom and excise duties, and the conditions for granting financial assistance to states. The article also covers the limitations on the power of the senate to amend tax-related bills and the requirements for legislation dealing with taxation and custom and excise.

Contents
QUESTION 1:..........................................................................................................................................2
PART A...............................................................................................................................................2
PART B:..............................................................................................................................................2
QUESTION 2:..........................................................................................................................................2
Business Profits..................................................................................................................................3
QUESTION 3:..........................................................................................................................................3
PART A...................................................................................................................................................3
Scenario 1..........................................................................................................................................3
Scenario 2..........................................................................................................................................4
Scenario 3..........................................................................................................................................4
QUESTION 4:..........................................................................................................................................4
QUESTION 5:..........................................................................................................................................5
QUESTION 6:..........................................................................................................................................6
QUESTION 7:..........................................................................................................................................6

QUESTION 1:
PART A: The constitutional basis of taxation in Australia is generally found in sections
51(ii),90,53,55 and 96 of the Australian constitution. According to section 51(ii), being a
federation country, the power is divided between the commonwealth and the states. This
section depicts the area were the commonwealth power are supreme.
According to section 90 which gives power to the commonwealth to impose custom duty
and excise duty. The state cannot levy any duty as will be unconstitutional. The main
purpose of this particular section was to create a free trade between all the major states
and countries.
According to section 96 which provides that on the basis of few conditions the parliament of
Australia can grant financial assistance to any particular state which the parliament thinks fit
and necessary.
Both the section 53 and section 55 prescribes the basic requirement of the legislation of tax.
Section 53 prohibits the senate to make any amendments in any bill which deals with
revenue and taxation. This section basically limits the power of the senate but this section
does not apply to imposing late fees, fine, penalty or fees. Section 55 states that the
legislation which deals with taxation shall only deal with that respective part and the
legislation dealing with custom and excise shall also deal with the same.
PART B: The constitution of Australia is a set of rules through which Australia is run. The
constitution of Australia defines three separate groups: The Parliament, the Executive and the
judiciary and the role that are played in the governance of Australia. The power is divided between
three groups. This division is based on ‘separation of power’. The power to govern the country
should be distributed among all three so that each group work according to the responsibility
allocated to them and can keep a cross check on the others. (Commonwealth of Australia, 2019)
The parliament or the legislation make and amend the law of the country and are composed of
Queen, the Senate and the House of Representatives.
The main role of the Executive is to put the law into action set up by the parliament and is composed
of Queen, Prime minister and ministers.
The main role of the judiciary is to make a judgement about the new law made or amended and is
composed of the High Court and other federal courts.
QUESTION 2:
The Double Tax Agreement is a treaty which is signed between two countries. The agreement is
signed between two countries just to make the other country an attractive platform for the NRI to
take relief from making payment of taxes multiple times. The agreement does not mean that the tax
can be completely avoided but it generally means that the NRI can avoid paying higher taxes in

multiple countries at a time. The agreement allows the NRI to cut down the taxation rate on the
income earned in the source country. It also reduces the chances of evasion of tax. The Australian
tax treaty operates to:
 Reduces the double taxation rate caused by income earned by NRI taxability twice.
 Provides a security level about the rule of tax that will apply to an international transaction
by allocation various types of income between the countries and specify rules to resolve the
dispute in relation to the residency status of the tax payer. (Commonwealth Of Australia,
2019)
 It prevents the tax evasion and avoidance of tax on the various types of income flow
between the countries
Business Profits
The main factor which is considered in taxing the business profit is the presence of permanent
establishment. This is generally referred to a place were the business is carried out. (Commonwealth
Of Australia, 2019)Under the article of most treaties, the profit which arises in one country may be
taxed on the other country if the following conditions are satisfied:
 If the firm business is carried on that other country through permanent establishment
 And to the part that the profits are imputable to the permanent establishment.
The tax treaty also allows the residence of that particular country to provide relief if the same
income has been taxed in source country.
From the fact it is clear that the non-resident manufacturer based in US derives profit from sales to
Australian customers. The US manufacturer has also got a representative in Australia to carry out the
serviced work and the sale representative was actively involved in obtaining order from the
customers of Australia. From the above fact it is clear that the US manufacturer has a permanent
establishment in Australia and is actively involved in carrying out the business, so the profit earned
from the business will be taxable in the source country as per the agreement between the US and
Australia.
QUESTION 3:
PART A
In the present case, Indiana is considering three scenarios for usage of her land which was earlier
used for producing the assessable income but now Indiana is proposing to utilise the land for
different purpose. The tax implications under different scenarios has been detailed as under:
Scenario 1
Indianna undertakes all the activities necessary and sub-divides the property into 80 lots in addition
to her 2 hectare area personal use area where the family home is situated. She then sells all 80
undeveloped blocks to a property developer
Under this case, since land falls under the definition of capital asset and is not used for residential
accommodation, the same shall be treated as capital asset and shall be subject to capital gain under
Income Tax Assessment Act. (Commonwealth of Australia, 2019)Further, the area of the land is 20

hectares which is greater than 2 hectare residence exemption criteria. Also, the land has been used
to generate assessable income.
Further, the asset acquired on or after 20 September, 1985 is subject to capital gain tax thus, there
shall be no tax in case the asset was acquired 1st November, 1976 and the property shall be subject
to Capital Gain Tax if the acquisition date is 1st November, 1986. (Commonwealth Of Australia, 2019)
Scenario 2
Indianna undertakes the same activities as above and holds an auction day to auction off all 80
blocks as separate packages to the highest bidders
In the second case since the land falls under the definition of capital asset and is not used for
residential accommodation, the same shall be treated as capital asset and shall be subject to capital
gain under Income Tax Assessment Act. Further, the area of the land is 20 hectares which is greater
than 2 hectare residence exemption criteria. Also, the land has been used to generate assessable
income.
Further, the asset acquired on or after 20 September, 1985 is subject to capital gain tax thus, there
shall be no tax in case the asset was acquired 1st November, 1976 and the property shall be subject
to Capital Gain Tax if the acquisition date is 1st November, 1986.
Scenario 3
Indianna does not subdivide the land and sells the land as an entirety to a development company,
and pays a fee to the development company of 65% of the total sale proceeds for carrying out the
entire development on her behalf. All of the balance is to be paid to Indianna on the sale of the last
block.
In the present case, since Indianna entered into an collaboration agreement for building a residential
housing whereby 65% of the proceeds shall pass on to the building company and balance 35% shall
be passed on to Indianna. The same may be treated as business income of Indianna as she has
entered into an agreement to build and sell house. Thus, the proceeds shall be taxed as business
income rather than capital gain. Further, the intention of constructing was to sale the property thus
the same may be taxable as business income.
PART B
Scenario 1
Under Scenario 1, Indianna is not engaged in land development, thus capital gain shall be realised in
the year of sale of Land to the developer.
Scenario 2
Under Scenario 2, Indianna is not engaged in land development, thus capital gain shall be realised in
the year of sale of Land to the different highest bidders.
Scenario 3
Under Scenario 3, Indianna is engaged in land development, thus business income shall be realised
in the year of sale of blocks to the third parties i.e atleast after two financial years.

QUESTION 4:
In the present case, Amity was acquiring land for the purpose of changing his lifestyle post disposing
off his catering business. For the change, she found the accommodation at Adelaide hills to be quite
suitable. The land was to be used particularly for the purpose of construction of house to be used for
residential accommodation and there was no intent of renting out the property. (Commonwealth of
Australia, 2019)
In terms of Australian Income Tax Assessment Act, 1997 Section 8-1, only those expenses shall be
allowed to be deducted from assessable income which has been incurred for producing assessable
income to the individual. Further, Section 25-5 of Income Tax Assessment Act, 1997 allows
deduction for certain expenditure incurred on managing tax affairs. Also in terms of Section 25-25 of
the Act it has been stated that:
You can deduct expenditure you incur for * borrowing money, to the extent that you use the money
for the * purpose of producing assessable income. In most cases the deduction is spread over the *
period of the loan.
Thus, in the present case Amity always had an intention to generate income form the land ,though
the income cannot be generated due to various reasons .Thus the condition stated is satisfied in the
section 8-1 of the act. Amity shall be eligible to claim the same.
QUESTION 5:
The computation of net capital gain or loss as applicable to Maurice has been presented as under:
Computation of Net Gain/ Loss
for Maurice
Income Year 2017-18
Sl. No Particulars Amount Reason
1 Sale of Home Nil
Residential House Exemption and never
used for business purpose
2 Shares in Full Pty Limited Nil
Acquired before 20th September, 1985, the
date of introduction of Capital Gain Tax law
in Australia
3 Sale of Furniture -4500 Assuming not a depreciating asset
4 Vacant Land -10000 Taxable
5 Net Capital Loss -14500
6 Carry forward capital loss -17500 Assuming eligible
7 Total loss carry forward -32000
(Commonwealth of Australia, 2019)
The loss has been computed by taking difference between purchase price and selling price.

QUESTION 6:
Uber faces proposed 'IPO tax' in bid to share wealth
The first article chosen is one of the hottest topic in the current era is the IPO tax on listing of UBER,
one of the biggest IPO of the World. The Article has been published in financial review and talks of
possible payroll tax that shall have to be paid on account of stock based compensation to
employees. The said tax is under proposal and reflects the uneasiness in a city and constantly
reminds of the income gap from buses of google to drivers of uber sleeping in their car. It is also
estimated that the benefit to the city shall be less and shall drive upward the houses in the city. The
said tax is assumed to be used for building affordable houses. (The Australian Financial Review,
2019)
How Labor's super changes will hit you
The second article chosen is of high tax levied by the government surreptiously on account of
increasing inflation in the economy without corresponding change in the tax slab. Thus, the labour
forces are moving into higher tax brackets and paying larger portion of their earning as tax to
government. The same is happening in case of superannuation which goes by the name of 293 tax
which was earlier set at $3,00,000 when introduces. Further, now if labour party wins the polls it
shall result in decreasing the threshold to $2,00,000. Further, the division 293 tax threshold is not
taxed. Thus, more taxes fall in the pocket of government leaving little in the hands of masses. ( The
Australian Financial Review, 2019)
QUESTION 7:
The code of conduct regulates the personal and professional conduct of all registered tax agents, tax
advisors and other agents. The code defines the principles under five categories which are as
follows:
Honesty and Integrity
 One must act honestly and with integrity
 One must comply with the taxation rules in the conduct of personal affairs.
 If money or property is received from the client one must account for the money or property
to the client. (Coammonwealth of Australi, 2019)
Independence
 One must act lawfully to the best interest in their client.
 One must have proper arrangement for the management of conflict of interest that may
arise in relation to service provided in the capacity of a registered tax agent or tax advisors.
(Coammonwealth of Australi, 2019)
Confidentiality

 One must not disclose the confidential and legal information of the client to any other party
without information from the client unless it is the duty of tax agent or the practitioner.
(Coammonwealth of Australi, 2019)
Competence
 One must ensure that the tax agent service is provided to the client competently.
 One must have the proper knowledge and skills relation to the tax agent service.
 One must ensure that all the taxation laws and rules are applied correctly while providing
advice to the client or submitting the return of the client on behalf of them.
(Coammonwealth of Australi, 2019)
 One must take proper and reasonable care in ascertainment of client’s state of affairs.
Other responsibilities
 One must advise the client regarding his/her rights and liability under the taxation laws that
directly relate to the tax service that are provided. (Coammonwealth of Australi, 2019)
 One must properly maintain the Professional indemnity insurance.
 One must properly respond to all communication properly received from the Board.

References
The Australian Financial Review. (2019, April 27). How Labor's super changes will hit you. Retrieved
from www.afr.com:
https://www.afr.com/personal-finance/superannuation-and-smsfs/how-labor-s-super-
changes-will-hit-you-20190424-p51grq
Coammonwealth of Australi. (2019, April 26). Code of Professional Conduct (Code). Retrieved from
www.tpb.gov.au: https://www.tpb.gov.au/comply-code-professional-conduct-tax-agents
Commonwealth Of Australia. (2019, April 27). Capital gains tax. Retrieved from www.ato.gov.au:
https://www.ato.gov.au/General/Capital-gains-tax/
Commonwealth of Australia. (2019, April 27). CGT assets and exemptions. Retrieved from
www.ato.gov.au: https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-
exemptions/
Commonwealth of Australia. (2019, April 27). INCOME TAX ASSESSMENT ACT 1997 - SECT 25.25.
Retrieved from classic.austlii.edu.au:
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.25.html
Commonwealth of Australia. (2019, April 26). Separation of Powers: Parliament, Executive and
Judiciary. Retrieved from www.peo.gov.au:
https://www.peo.gov.au/learning/fact-sheets/separation-of-powers.html
Commonwealth Of Australia. (2019, April 26). What are tax treaties? Retrieved from
www.ato.gov.au: https://www.ato.gov.au/General/International-tax-agreements/In-
detail/What-are-tax-treaties-/
The Australian Financial Review. (2019, April 27). Uber faces proposed 'IPO tax' in bid to share
wealth. Retrieved from www.afr.com: https://www.afr.com/personal-finance/tax/uber-
faces-proposed-ipo-tax-in-bid-to-share-wealth-20190425-p51h93