Taxation Theory, Practice and Law - Desklib

This article discusses the concept of income taxes, concept of income and deduction, capital gain taxes, fringe benefit taxes and GST general anti avoidance provision and income tax administration in Australia. It also covers the principles of a good tax system and their application to real-life situations.

Taxation theory, practice in Law 1
TAXATION THEORY, PRACTICE IN LAW.
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Taxation theory, practice in Law 2
Taxation theory, practice and law
Introduction
Taxable incomes in Australia are assessed on the basis of personal incomes
during a given period and allowable deductions by the federal government. Individual
incomes are assessed on three basis as; Personal income which is mainly composed of
people salaries and wages, business income which is that source of income derived
from people owned businesses and capital gain which is a rise in value of assets. Our
discussion will focus on concept of this income taxes, concept of income and deduction,
capital gain taxes, fringe benefit taxes and GST general anti avoidance provision and
income tax administration
Australia income tax system.
The main statute underlying income tax in Australia is income tax assessment
act 1997. Income tax is levied on a progressive basis meaning that the higher the
income the higher the tax paid. Australian income tax is imposed on citizens and
companies taxable income by the federal government. Paying taxes is important to
Australia (Body, 2015, p.900) since it contributes to revenue. Though imposed by the
federal government, this form of tax is collected and administered by the Australian
taxation office. Income tax is administered under progressive rate of between 0-45%
including a Medicare levy of 2% different from corporations tax which is between 27.5%-
30%(ACOSS, 2011, pp.345-347) depending on turnover generated annually while taxes
on capital gains are only effected if a gain is realized on capital assets attracting 50%
allowance if the asset was held for more than one year. It is also important to note
taxations on partnerships and trusts which is not administered directly but through
beneficiary and tax distribution to partners.
Concept of income and deduction
As discussed previously, income tax is levied on progressive basis for personal
taxes. In Australia, there are resident individual and non-resident individual tax payers
having different rates of tax payment for example most Australia citizens are liable to
pay Medicare of 2% standard rate on taxable income, a levy that is not imposed on non-
resident individual tax payers. Existence of withholding taxes has helped employees in
several instance due to refunds that such taxes bear. It is an obligation therefore for an
employer to withhold tax from wages and salaries of an employee after provision of tax
file number. In case where this number is not available then a requirement is imposed
on taxpayers to deduct 47%(ACOSS,2011, pp.345-347). Interest earned from financial
institutions that is due to individuals is also subject to the highest marginal rate of
income tax in the absence of tax file number. Likewise, failure to provide this number by
businesses to financial institution for tax levy, they should provide an Australian
business number otherwise the highest rate of income tax will be withheld.
The tables below illustrates income tax rates for Australians residents and not residents
respectively (income tax Act 1997)
Taxable income Tax on this potion of income Effective tax rate
$1 to $18,200 Nil 0

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$18,201 to $ 37,000 19c for each 1$ above 18,200 0 to 9.65%
$37,001to $90,000 $3,572 plus 32.5c for each $1
over $37,000
9.65 to 23.11%
$90,001 to $180,000 $20,797 plus 37c for each $1
over $90,000
22.78 – 30.05%
$18,001and above $54,097 plus 45c for each $1
over $180,000
30.05 to less than 45%
Taxable income Tax on income effective tax rate
$1 - $ 90,000 32.5% for each 1$ 32.50%
$90,001-$180,000 $29,500 plus 37% above $90,000 32.5-34.8 %
$180,000 and
above
$66,550 plus 45% above $
180,000
34.8 to less than
45%
Capital gain taxes
Capital gain tax (CGT) is not separable from the overall Australian tax system.
From earlier inception by the (Huke, 2015, p.876), this form of taxation has slowly
gained route and contributes much to the total government revenues. Capital gain tax
related the cost base of particular assets to the consumer price index which then led to
easier assessment of inflations in relation to prices and currency. This taxes attract
marginal rates where capital gains adjusted after sale of an asset are applied to the total
taxpayers’ taxable income. Same to income tax, capital gains taxes applied to trusts
and partnerships are different from those applied to individual, businesses and
partnerships. For trusts, this tax is passed on to beneficiaries while for partnerships, this
tax is levied on individual partners.
In 1999the government under Prime Minister Howard eased calculation on
capital gain tax by abolishing calculation based on consumer price index. He swapped
cost based taxation with introduction of a discount allowable on gains. Discount rate
being 50% for individuals’ assets held for more than one year and 33.5 % for companies
income tax assessment act (1997) for other funds. This change in capital gain
calculation has erased benefits of doubt, attributing capital assets gains to

Taxation theory, practice in Law 4
inflationwithout any contribution achieved by gains in purchasing power. There are
points to note about capital gain tax; firstly, the gains realized by companies are not
discounted, trustees are taxed on capital gains with regard to exceptions and that
capital assets before 1985 are exempt from capital gain taxes.
Fringe benefits tax
Employees are always entitled to certain benefits which are provided by the
employer in exception to the salary and wages paid. This benefits may also be
associated to family members. Tax on this benefits are separated from income taxes
and calculated on the value of that fringe benefits provided. Examples of fringe benefits
are private health cares and cars benefits.
In Australia, all this benefits are provided by an employer for the benefit of an
employee or a representative and this benefits may be enjoyed depending on whether
this employee is current, former or future employee. However it is important to note that
these benefits are not related whatsoever when contractors are considered.
Fringe benefits considered in the tax regulations are an example of housing
fringe benefits, care fringe benefits, benefits on work related items, benefits on
relocations and loan fringe benefits. There are only some fringe benefits that are subject
to taxation, some are exempt from taxation and others are tax free benefits for example
living away work related expenses, salary and wages and remote area housing. There
are also other benefits provided by charitable and public benevolent institutions that are
exempt from this taxes up to a certain amount on the ground of being provide by such
institutions. Notably, on 13th may 2008 exemption related to laptops and other
technological items were scraped since employees could purchase these items by
themselves and as well save on taxes.
Some employers always give and advance salary in form of fringe benefits to
employees as salary packaging to reduce income tax paid by such employees.
However, these benefits may be recovered back. The law requires employers to also
include on employees paymentsummary the benefits received due to fringe benefits tax
however, these taxes are paid by the latter as reported as fringe benefits with a value
above $2,000. FBT are only included as a means of income testing and are not in any
other reasons included in employees paymentsummary.
Below summary shows the rates applicable for fringe benefits tax rates,
From 2014 to 2018
Mar-14 46.50%
Mar-15 47%
Mar-16 49%
Mar-17 49%
Mar-18 47%

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GST General anti avoidance provision
Australian tax system is compose of several anti-avoidance provisions since they
support primary underlying provision of this taxes when such provisions fail to achieve
their objectives.
IVA of the Income Tax Assessment Act 1936 (Cth) (‘ITAA’) stipulate the
provisions that are available for tax payers so that they can discover ideas to pay lesser
taxes. IVA seeks to discover those part of income that would otherwise be left out
during taxation through partial assessment to achieve facts rather that total assessment
of facts to achieve partial facts.
Anti-avoidance provision in Australia
This provisions are contained in the income tax assessment act and may be
applied by taxation office of Australia to deny a tax payer some benefits that would be
otherwise due to him under certain circumstances. The key features of Part IVA would
seek to come to a conclusion as to; if there is actually a scheme designed, if an
appropriate tax system has been achieved, the taxpayers sole purpose, and effect of its
application. Away from the influence of Part IVA relating to “reverse” the effect of some
schemes, if it is pragmatic, the ATO can also levy consequences of up to 50% of the tax
outstanding in reverence of tax advantages other than the ones that arise from MAAL.
Application of amendments to Part IVA can be challenging to come to terms with
and usedue to lack of appropriate guidance on application except Practice Statement
PSLA 2005/24, that has been simplified to temporarily discuss 2013 amendments,
which are yet to be given judicial meaning.
Taxation issues
The following factors are considered to analyze tax issues;
The radical changing world which can be viewed in terms of technology and
mobility of capital, corporate income has experienced diverse changes in technology
due to the increased use of digital platforms. Use of such platforms has given
challenges to tax authorities in ascertaining and advancing technologies to levy taxes
calling for more advanced tax reforms (Murphay, 2014, p.76). Since Multinational firms
function across different jurisdictions, finding the value of this investments may also be
difficult to determine amount of tax for the country. The digital economy allows
individuals to import goods for personal use thus affecting indirect tax bases. Australia
has a high corporate tax rate and as capital mobility increase investments will be
deterred leading to lower wages and prosperity.
Australia is facing a period of below average growth in income due to the
continued reduction in global economic growth and in respect to the periods leading to
financial crisis. Continued legislative tax reforms in relation to this therefore offera great
opportunity to increase output creates more jobs opportunity, growth and development
and to further increase taxes.

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Today, developed countries like Australia’s, have increasingly opened their
borders to trade and investments. Increasingdigitization of worldwide digital
platformshave also recently opened the Australian economy to the world changes that
have enormously changed the jurisdiction of tax system.
Australia’s population is expected to have an upward trends in the coming years.
An increase in population translates to more taxes to the government and demand for
adjustments into the tax reforms to accommodate this increase and advance new tax
products for the population. Reports illustrate that Australians aged above 65 years are
expected to increase in the coming years. This is an incentive to assist the government
in advancing tax reforms.
Possible increase in production due to more advanced tax system is expected
from economies sectors. Therefore, reforms should be aligned accordingly to achieve
this objective.
Interpretation of relevant taxation legislations and case laws
We can elucidate the constitution taxation basis in Australia from sections 51, 90,
53, 55 and 96 of the Australian constitution. Evolution of this constitution has been due
to several interpretations by the courts. Both the commonwealth and the state have
contributed to formation of this constitution that governs taxation. Section 96 states that
commonwealth has the power to collect taxes and latter distribute these taxes to state in
exercising its jurisdiction. Sec 51 enumerates authorities of commonwealth. These
influences are passed from period to period with limited check from the state for
example in section 53, the states cannot check on federal public service and in cases of
inconsistency, then commonwealth laws prevail.
Section 51(ii) state that commonwealth can enact laws in relation to;
All these laws must be assented to by the queen after passing through a rigorous
referendum
The broad Commonwealth power is also considered in broad when before this taxes are
imposed on tax payers. Since 1942, all powers to levy income taxes were monopolized
to commonwealth and state were only given this funds later on. This powers were held
in section 90
Tax of goods of a particular country is referred to as Custom duty. From The High Court
interpretation, all taxes that increases prices of goods are also regarded as Custom
duty. For example, in Ha v New South Wales (1997) a State tobacco license fee, which
consisted of a fixed amount plus an amount calculated by reference to the value of
tobacco sold, was struck down as custom duty.
It is not within the law for commonwealth to task state property and neither is the vice
versa (section 114 of income tax act).This exemption only relate to those
commonwealth or state properties and not any property controlled. For example, if a
state controls a construction, it does not necessarily own that construction. The courts
have had to deal with cases as to whether a tax is levied on property or something else.

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The High Court of Australia has strived to interpret this provisions in broad perspectives
to inhibit any clash in controls. For example In South Australia v Commonwealth (1942)
65 CLR 373 (the First Uniform Tax case) , the scheme by Commonwealth to take over
the income tax field was upheld and commonwealth has continually been involve to levy
this taxes to increase government revenue.
Requirement by section 55 is that Legislation dealing with imposing taxes be involved
only with those duties. This requirement is dominant over other provisions of taxation.
Non tax provisions are rendered useless if they are found within the operative of tax
provisions since they are not contained in the mentioned section. Say a tax is
introduced for amendment, then only the amending instrument is considered
inoperative. This is what occurred in Air Caledonie International v Commonwealth.
Application of taxation principles to real life situation
Taxation legislations and tax laws that we will take into consideration for our discussion
are those related to income tax systems, capital gain taxes and fringe benefits taxes.
There are several principles of a good tax system according to latest scholars such as
Equity, ability to pay, benefits, and economic efficiency however; these principles are an
advancement of four major principles that were developed by Adam Smith (1776) that
will form the basis of our discussion. These principles are;
Equality principle. Every person should only pay to the government whatever they are
able to pay. In reality, people can only live according to their means and purchase only
what the can afford. Therefore if there are to pay taxes, then this should directly be
related to ability
Certaintyprinciple. To achieve results, an economy should require people especially
those involved in businessto be certain about the amount of tax they have to pay since
practically they are aware of the income they receive and therefore theyshould be given
this information to help them with economic planning.
Principle of convenience.The time and manner of taxpayment should be clear just like
structures are available in other sectors and in personalorganization.
Principle of economy. Revenue collected should be morethan costs used to collect
them for the system to be economical. Similarly, Corporations and businesses that
continually make losses may be forced to run down and dissolve.
Individual assessment tasks
Capital gain tax consequences
cost in $ capital gain
12,000-4,000 8,000

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6,000-5,500 500
13,000-14,000 -1,000
5,000-470 4,530
Net capital gain 12,030
Applicable discount rate 50%
chargeable capital gain 6,015
Antique jewelry piece purchase on October 1987 attracted a capital loss thereby
reducing net capital gains.
All the other assets attracted a capital gain. The discount rate applicable for this asset is
50 % since they are held for more than one year.
Therefore taxable income will increase by $ 6,015.
Discussion of transaction consequences
13,000. The amount she has signed in the contract for the book being her income
13,400 since she does not want to claim ownership of the book, this amount signifies
that the ownership is transferred and is regarded as personal efforts
4350. This is the hand written copy amount that she receives due to personal efforts
3200. Amount received due to interview manuscript. This manuscript is necessary for
conducting questionnaires and is due to personal efforts
Yes, Barbara will not receive the total amount she received due to contract from the Eco
books limited. Amount she will receive in this case will be a little lesser since she will
sell the whole pack at a go.
Effect of loan arrangement on Patrick’s income
Amount due to Patrick is;
Amount in $
Loan amount 52000
Additional interest 5% *52,000

Taxation theory, practice in Law 9
Additional amount 2600
Total amount received =
Total amount received
52,000+2600
$54,600
Since this amount is paid through the bank, then it may be subject to taxations if the
source is justified.
Interest earned from this arrangement may be subject to taxation by the Australian tax
authority which requires this income to be declared.
The amount paid as tax on this interest will depend on the graduated scale applicable
on the overall income earned.

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References
Australian council of social services ACOSS 2011
Body, J., 2015. Design in the Australian taxation office. Design Issues, 24(1), pp.55-67.
Braithwaite, V.A., 2009. Defiance in taxation and governance: Resisting and dismissing
authority in a democracy. Edward Elgar Publishing.
Huke 2011, Lobar Government.
Job, J. and Honaker, D., 2016. Short-term experience with responsive regulation in the
Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, the Australian National University.
Murphy, K., 2014. Moving towards a more effective model of regulatory
enforcement in the Australian Taxation Office.
Murphy K. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre forTax System Integrity; 2002 Oct.
Oats, L. ed., 2012. Taxation: a fieldwork research handbook. Routledge.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian
taxation law. CCH Australia.
1 See G T Pagone, ‘Tax Planning or Tax Avoidance’ (2010) 29 Australian Tax Review
96
South Australia v Commonwealth (1942) 65 CLR 373 (the First Uniform Tax case).