Australian . Taxation

Australian.TaxationLaw

AcknowledgmentsRobin Woellner dedicates this book to Gil, Glad, Ruth, Sally, Helen and Cheryl;Stephen Barkoczy to Mei-Ling, Stephen and ]ohnnYfShirley Murphy to Bill and Marjory; Chris Evans to Kate Co'llier; andDale Pinto to Dudley, Dagmar,]oseph and Isaac.

AustralianTaxationLawa Wolters Kluwer business

Forewordto the first editionIf two of the important criteria of a "good" taxation system are simplicity andcertainty ( 1-190. and 1-195), the Australian taxation system and particularly theIncome Tax Assessment Act 1936 fail the test miserably. The spate of ànti-avoidancelegislation, a reaction to the excesses of the tax avoidance era of the seventies, and themore recent taxation reform package have brought about legislation of almostunrivalled complexity.The legislation is in some cases unintelligible: without a commerce or law degree' théordinary taxpayer stands no chance of finding his way through the morass and evenwith these qualifications his advisers will of necessity have to struggle to make senseof language that is as convoluted as it is confusing. Nor is the tJsk of the taxationofficer any easier. Many provisions in the legislation are not applied for the simplereason that no one is able to comprehend them. The need for a work that will operateas a guide to the traveller through these mutky waters is painfully apparent.In 1946, Mr Hannan, in his "Treatise on the Principles of Income Taxation", whileadverting o the desirabilitq of enunciating a series of authoritative propositions (on s51(1», resignedly accepted the impossibility of such a task. Some 40 years on, thepossibilitY1of formulating authoritative principles on any matter relating to tax iseven more; daunting. The torrent of decisions, judicial and administrative, that hasbeen handed down over that time, together with the outpoutings of the legislature,have made the study of taxation almost unmanageable.The need for a systematic approach to the srudy of taxation is obvious enough to thestudent. If the srudent were to see taxation as involving no more than an endless seriesof individual instances no overview of the subject would be possible. But it is not onlythe student who is in need of a systematic approach to the problem. The practitionerwho is unaware of the system will have endless difficulty even finding the problem,let alone proceeding to a solution for that problem.So it is not the student alone who will benefit from the present work. Indeed there areto be foundjdiscussed in these pages many of the great taxation issues of the present,without an fPpreciation of which it would be impossible to predict the· outcbme ofparticular fattual situations.By way of lexample, no issue could be more significant in the judge-made ·law ofincome taxationthan the issue of the role of purpose in s 51(1) of the Act. The courseof authority from Ure v FC ofT 81 ATC 4100 and Ilbery v FC ofT 81 ATC 4661 tothe more recent cases of FC ofT v Just Jeans Pty Ltd 87 ATC 4373 and FC ofT v John87 ATC 4713 have been a judicial reaction to tax avoidance; yet the boundaries of thedoctrine (that putpose is relevant) are far from clear.

-Two taxpayers incurring the same ourgoings in circumstances identical save for theirsubjective motives and purposes should be treated in the same way for thephrposes ofan income tax law. To grant a taxation deduction to the taxpayer who is naive, whiledenying it to the taxpayer who is sophisticated, would be arbitrary. If n outgoing isincurred in circumstances where there is, objectively seen, a connectioh between theincurring of the outgoing and the activity which is directed towards th production ofassessable income, that outgoing should satisfy the tests of deductibil\1:Y irrespectiveof either subjective motivation or purpose.Once it is accepted (as it must presently be) that subjective purpose intrudes to sorneextent into the issue of deductibility (albeit not necessarily as a test of deductibility),there is opened up the question whether the relevant purpose is the sole purpose, thedominant purpose or sorne purpose less than the dominant purpose. For the presentthese issues ,are best discussed, in Magna Alloys & Research Pty Ltd v FC of T 80 ATC4542, in judgments in which two members of the present High Court, then sitting inthe Federal Court, participated.What, however, has not yet been the, subject of discussion is the problem thrown upwhen a deduction is disallowed on the basis, say, that it was incurred :for the solepurpose of obtaining a tax deduction, yet assessable income is in fact derived in thecourse of the scheme. Is the asses sable income to be ignored, or is the result that thedeductiononly is ta be ignored, leaving the taxpayer vertheless in receipt of theasses sable income upon which he is then to betaxed? Further in deductiort cases, whatrole does an anti-avoidance section play?!In the long run, however, it is not the "common law" of taxation that holds thegreatest significance. If there is one lesson that must be learned by anyone who wishesto understand tàxation it is this: Go back to the Stature and read idOne of the alltime great taxation advisers was once asked a question by a clientconcerning s 51(1). The adviser had undoubtedly read the section hundreds, perhapsthousands of times. Yet, perhaps to the surprise .of his lay client, he opened theStatute, perused the words and tested the issueby reference to the words he read.There is no other alternative.So it j,s, that the authors of the present work return the reader to the Statute, offeringon the way a helpful summary of its salient features.Australia has over the years been well served by its taxation literature work continues the tradition.the present23 September 1987Graham Hill, QC

Prefaceto the twenty-second editionThis twenty-second edition of Australian Taxation Law incorporates major legislative,case law and administrative reforms that have taken place in taxation law up to 1 July2011, as well as various developments that have occurred since that date. There havebeen many content changes made throughout the book, to ensure that the bookremains the most up to date text available.As with prior editions, our main aim has been to explain the increasingly complex andvoluminous taxation laws in clear and simple language. In order to achieve this, wehave made extensive use of flow-charts and practical examples, to make it easier tounderstand the application of theory to practical situations.We have contimied to focus on the federal taxation system, with particular emphasison iilcome tax, capital gains tax, corporate tax, fringe benefits tax, as well assignificant analysis of the ubiguitous goods and services tax. This editio-ri also includesan analysis of the Henry Tax Review's reform proposaIs and subseguent developments.We wish to acknowledge the significant contribution by the editing and productionstaff at CCH, in particular Marcus lai, Mary Zachariah, Kenny Ng, Ahmad NublyIsahak, lai li K,uan, Mohd Ashraf Mohd Rafdzi and Beverley Kirkby.Finally, and most importantly, e must thank our families, whose ongoing support,encouragement and sacrifices make complet ion of each edition possible.December 201 fRH WoellnerS BarkoczySMurphyC EvansD Pinto

-CCH AcknowledgmentsCCH Australia Limited wishes to thank the following who contributed to andsupported this publication:Managing Director: Matthew SullivanDirector, Books: Jonathan SeifmanPublisher, Books: Andrew CampbellCommissioning Editor: Kate Aylett-GrahamSenior Editor, Books: Marcus LaiWriter: Mary ZachariahSubeditors: Kenny Ng and Ahmad Nubly IsahakProduction Editors: Lai Li Kuan and Mohd Ashraf Mohd RafdziProduction Team Leader: Helen SantiagoIndexer: Beverley KirkbyCover Designer: Mathias J ohansson

ABOUT THE AUTHORSRobin Woellner retired as Pro-Vice Chancellor (Law, Business and the Creative Arts)at James Cook University at the end of 2010, and is currently an Adjunct Professor atJames Cook University and the University of New South Wales. He has practised intaxation in the private sector and in the Australian Taxation Office, and taughtrevenue law and advanced revenue law courses to undergraduates as well as lecturingin other commercial law subjects. He is the author/co-author of numerous books,articles and conference papers.Stephen Barkoczy is a Professor of Law in the Faculty of Law at Monash Universityand a member of the Venture Capital Committee of Innovation Australia. Stephen isthe author/co-author of several books and articles on taxation law and is a formereditor of the Journal of Australian Taxation. In 2008, he received the Prime Minister'sAward for Australian University Teacher of the Year.Shirley Murphy has taught in the areas of taxation and superannuation law at anumber of tertiary institutions and has acted as a taxation and superannuationconsultant to industry groups. She has written in the areas of taxation andsuperannuation for many years, is the co-author of the Australian MasterSuperannuation Guide, and has contributed over many years to a wide range ofpublications including the CCH Australian Master T ax Guide.Chris Evdns is a Profess0.f of Taxation in the School of Taxation and Business Law(Atax) in the Australian School of Business at the University of New South Wales. Heis also an International Research Fellow at the Centre for Business Taxation at OxfordUniversity. He is the authorlco-author of numerous books, articles and conferencepapers, and is the co-editor of the Australian T ax Review.Dale Pinto is a Professor of Taxation Law at Curtin University in Western Australia.Dale has been a member of CPA Australia's Centre of Tax Excellence and is currentlyChair of the Taxation Institute's Education, Examinations and Quality AssuranceBoard (EEQAB). He is the author/co-author of numerousbooks, refereed articles andnational and international conference papers, and is on the editorial board of a numberof journals as well as being the Editor-in-Chief of several refereed journals. Dale wasappointed to the National Tax Practitioners Board in October 2009 for a three-yearterm. In March 2011, he was invited to serve on the Board of Taxation's Expert Panel.-

-CONTENTSPageForeword to the first edition .j. . . . . .VPreface to the twenty-second edition . viiAbout the authors . ;. ixList of Abbreviations . :. xiiKey tax websites . xv1Introduction to income tax Law . 12Tax formula, tax rates and tax offsets . 673Assessable incorne: general principles . 1274Income from personal exertion . 1575Income from property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996Income from business . 2337Capital gains tax: general topies .:. 3118Capital gains tax: concessions and special topies . .' . 4199Non-assessable income .10General deductions53511Specifie deductions65112Capital aUowances and capital works . . . . . . . . . . . . . . . . . . . . . . . . . 699 .49313 Tax accoun ting . 74714 Tradingstock . 80915 SmaU business entitiesand concessions . 84916 Taxation of partnership income . 87117 Taxation of trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90918 Taxation of corporate tax entities and their members . 97919Corporate tax losses, net capital losses and bad debts . 1,06920 Taxation of consolidated groups . 1,10721Special taxpayers and incentive schemes . 1,15922 Taxation of financial transactions . 1,27923Superannuation . 1,36724International aspects . 1,42725Tax evasion, avoidance and planning . 1,579