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ACCY328
International Taxation
Report
Exempt Income - Cases
Aishwarya Weslin, Alvina Anis, Darren Alemao, Mattaa Farooq, Mariam Aziz
4595221, 4371367, 4646290, 4385457, 4347766
0508238240
aishu267@hotmail.com
Dr. Munir Lutfi
Tuesday, 22 March 2016
Tuesday, 22 March 2016

PLAGIARISM:

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Plagiarism is cheating by using the written ideas or submitted
work of someone else. UOWD has a strong policy against
plagiarism.
The University of Wollongong in Dubai also endorses a policy of
non-discriminatory language practice and presentation.

PLEASE NOTE: STUDENTS MUST RETAIN A COPY OF ANY

WORK SUBMITTED

DECLARATION:

I/We certify that this is entirely my/our own work, except where
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previously been submitted for assessment in any formal course
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Lecturer Assignment Receipt (To be filled in by student and retained by Lecturer upon return of assignment)
Subject: ACCY328
Student Name: Aishwarya Weslin
Due Date: Tuesday, 22 March 2016
Signature of Student:

Assignment Title: Exempt Income - Cases

Student Number: 4595221
Date Submitted: Tuesday, 22 March 2016

Student Assignment Receipt (To be filled in and retained by Student upon submission of assignment)
Subject: ACCY328

Assignment Title: Exempt Income - Cases

Student Name: Aishwarya Weslin

Due Date: Tuesday, 22 March 2016
Signature of Lecturer

Student Number: 4595221

Date Submitted: Tuesday, 22 March 2016

ACCY328
Spring 2016
Group Project - Contributions Sheet
This sheet must be attached (electronically scanned) to your weekly group
report submission.
There have been a number of instances where particular group members
have not engaged in the project to an adequate level (sometimes making
no contribution).
To take account of this, each group is required to list the percentage
contribution of each group member (totaling 100%).
Each group member must sign this sheet in acknowledgment that they
accept the contributions listed against them.
In the case where there are differences in the level of contribution by group
members, the final individual group mark will be adjusted up or down
based on the procedure explained on page 2 of this document.
Group number:

Aishwarya Weslin

Percentag
e
Contributi
on
22%

Alvina Anis

19.5%

Darren Alemao

22.5%

Mattaa Farooq

17.5%

Mariam Aziz

18.5%

Group Member Name

Signature

1
2
3
4
5

Exempt Income Cases

ACCY 328- INTERNATIONAL TAXATION
DR. MUNIR LUTFI
WEEKLY PRACTICAL ASSIGNMENT (ESSAY)
SPRING 2016
UOWD

Presented By: Aishwarya Weslin 4595221

Alvina Anis 4371367
Darren Alemao 4646290
Mariam Aziz- 4347766
Mattaa Farooq - 4385457
2

TABLE OF CONTENTS
Introduction:......................................................................................................... 4
Commissioner of Taxation v Wentworth District Capital Limited [2011]
FCAFC 42: (Federal Court of Australia, Full Court, Emmett, Gilmour and Gordon JJ,
28 March 2011)....................................................................................................... 4
ATO ID 2010/118:................................................................................................. 5
Commissioner of Taxation v. Bargwanna (2012):...........................................6
AID/WATCH v Commissioner of Taxation..........................................................7
References:........................................................................................................... 9

INTRODUCTION:
Income that is not subject to taxation is called Tax Exempt Income. Examples of exempt income
are income from municipal bonds, social security benefits, veteran and welfare benefits, most
gifts received, child support etc. The income derived from these sources is considered to have
been previously taxed and is therefore, not subject to further taxation. (Businessdictionary.com,
2016)
COMMISSIONER OF TAXATION V WENTWORTH DISTRICT
CAPITAL LIMITED [2011] FCAFC 42: ( FEDERAL COURT OF AUSTRALIA,
FULL COURT, EMMETT, GILMOUR AND GORDON JJ, 28 MARCH 2011)

FACTS:
Bendigo Bank Branch was opened in Wentworth after the closure of Westpac Branch, which was
the only bank in that time. The community decided to open up an association to open Bendigo
Branch in their town as well, for full service banking facilities, and also pledged some amount in
the work of establishing the branch. Wentworth District capital (Taxpayer Corporation) provided
staff, buildings and other facilities whereas Bendigo catered the banking services. Consumers
were charged normally by the bank for the services provided while some income was going to
the taxpayer.
Banks charter delivered that profits may be circulated to various community groups. However
the taxpayer argued that this banking facility was actually a community service for the purposes
of s 50-10 of ITAA 1997 and therefore lodged tax returns for financial years ended 30 June 2006
and 30 June 2007 on the basis of income tax exempt entity.
The commissioner decided that in both the years its an assessable income, however the taxpayer
objected this assessment on the basis that the bank had a community service purpose because it
promotes, provides or carries out activities, facilities or projects for the benefit or welfare of
members of the community who benefit and who need the services provided by reason of their
youth, age, infirmity, disablement, poverty or social or economic circumstances, including living
in a remote area" (ATO Legal Database, 2011).
The commissioner disallowed the objection completely and hence the taxpayer appealed to the
Federal Court.
ISSUE:
The main question here was whether Wentworth District Capital Association was established
only as a business or a community service provider in accordance to 2.1 of s. 50-10 of the
ITAA97 during the corresponding year
DECISION:
1st Appeal: Perram J found that Wentworth District Capital was an establishment for the primary
and main purpose of providing face-to-face banking services in the corresponding years. The
Full Federal Court agreed to this.
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2nd Appeal: The Full Federal Court, on request, concurred with Perram J that on the specific
certainties of the case and the circumstances of the group of Wentworth, the help of face-to-face
banking services in the pertinent years amounted to community service purposes inside of the
importance of Item 2.1 of segment 50-10 of ITAA 1997. His Honour decided that the purpose
was not to provide but to facilitate banking services in the town. Therefore, Wentworth was
exempt from income tax in the taxation years of 2006 and 2007.
OPINION:
In my opinion, the taxpayer, Wentworth District Capital has assessable income and should be
liable to pay tax as the taxpayer provided the premises, staff and other facilities and received
income from the bank for these services provided which is in the nature of normal business
activity and is taxable. I believe the facilitation of a particular service for the community without
receiving any income should be considered as community service as banking face to face
services are normal activity in any area.

ATO ID 2010/118:
INTRODUCTION & FACTS:
The taxpayer is an employee of the APS (Australian Public Service) working under the
Department of Defence and is considered to be an Australian resident for income tax purposes.
In order to execute an operational role the employee was deployed outside of Australia and
during this period the employee was under the regulations of the ADF command and control. A
contract was raised and it was agreed upon that the employee would act within the Defence
Force discipline and held status of a defence civilian based on the DFDA 1982.
(Law.ato.gov.au, 2010) Section 3 of this same act defines a defence civilian as an individual
(other than a defence member) who under the authority of an authorized officer accompanies the
Defence Force that is either outside of Australia or on operations against the rival, additionally
the individual must have consented themselves in writing to be behave under the Defence Force
Discipline while accompanying the Defence Force. Section 3 further goes on to explain a
defence member as a an individual who is a representative of the Permanent Navy, Regular
Army or Permanent Air Force or a representative working full-time for the Reserves or is on duty
or in uniform. (Law.ato.gov.au, 2010)
Subsequently the individual had received a salary as well as an operational support allowance for
the services rendered by the Department for defence during the period of the deployment.
(Law.ato.gov.au, 2010)
ISSUE:
5

The issue at hand was to assess whether an defence civilian working for the Department of
Defence who is deployed outside of Australia and abides by the Defence Force Discipline Act
1982 (DFDA 1982) is considered to be exempt from tax on the pay and allowance given to
defence force members performing certain duties outside of Australia as per the section 23AD of
the ITAA 1936. (Law.ato.gov.au, 2010)
CONCLUSION:
While assessing this case there was difficulty in clearly defining what the phrase member of the
defence force meant as per section 23AD of ITAA 1936 however it was come to a conclusion
that the definition would be consistent with the Defence Act 1903 (DA 1903) which states that
the defence force includes the Australian Navy, Australian Army and the Australian Air Force.
The court held that this definition was more fitting and in unison with the definition of a defence
member rather than the definition of a defence civilian given in the ITAA 1936. The term
accompanying which was used to define a defence civilian distinguishes a defence civilian
from the defence force highlighting that the two are not one and the same rather distinct in
nature. Further this tax payer was not a member of any of the three categories mentioned as
under the defence force rather was working as an APS employee therefore settled that the
individual was not serving as a member of the defence force and thus would not be eligible for
the exemption of tax as per section 23AD ITAA 1936. (Law.ato.gov.au, 2010)
OPINION:
In my opinion, a defence civilian called upon to defend the country should fall under the same
class as Navy, Army and Air Force as they are providing all logistics support to these defence
forces and should be exempt from tax due to same national duties he is called upon to serve the
country. He has no choice in the matter and hence I feel he should get the tax exemption.

COMMISSIONER OF TAXATION V. BARGWANNA (2012):

The case took place in 2012 between the tax payer, Bargawanna, and the Commissioner of
taxation. Mr and Mrs. Bargawanna are the trustees of a charitable trust fund. The case revolves
around the response of the Australian Taxation Office regarding the income of a public charitable
trust being exempt from being taxable or not. Keeping in mind that part of the fund is used for
charitable purposes while some part for other purposes. (Ato.gov.au, 2013)
FACTS:
Mr and Mrs Bargawanna were appointed as the trustees of a trust fund on 14 th October 1997. The
trust ran on the term that from time to time the charitable purposes will be decided by the trustees
themselves. Under Income Tax Assessment Act 1997 Item 1.5B of the Table in s.50-5, it was
stated that a trust or a public charitable trust established in Australia will be exempted from
6

income tax. The Bargawannas applied to endorse it in 2004 for exemption for the years 30 June
2001 to 30 June 2004. (Ato.gov.au, 2013)
The accountant father of the one the trustees gave money for the trust in 2002. These funds were
mixed with the accountants trust account and other accountants from which others gained
interest. The interest incomes were thus inseparable. This provided the trustees to make use of
the trust fund to make personal loan payments. (Ato.gov.au, 2013)
Considering the state of the accounts, the Commissioner rejected the endorsement made in 2002.
On the grounds that section 50-60 that the funds available were used according to the purposes it
was created for. The case was then appealed to the High Court. (Ato.gov.au, 2013)
DECISION:
The High court had a joint judgment by judges; French CJ, Hayne, Gummow, Crennan JJ. They
agreed to the decision taken by the ATO on the basis that the public charitable trust fund did not
fulfill the purposes it was established for. The misapplication of the funds was a direct violation
of the section 50 of Item 1.5B under ITAA of 1997. Thus, the income made the trust fund was
not exempt from tax. (Ato.gov.au, 2013)
OPINION:
One may argue that the law under ITAA of 1997 for charitable organizations regarding income
being tax exempted is a very ethical and motivational rule to aid those who are running an
organization for a good cause. The purpose behind the organization is what makes it charitable
according to the Australian Law. Keeping that in mind, the trust cannot claim exemption as an
exempt entity as the trust was set up for charitable purposes but was subsequently used to take
funds from private individual and mixed up with trust funds. Hence, it was not possible to
segregate interest income of the trust fund and the private individual. Misuse of trust money was
also done as the trustees used trust funds for their personal use which raised issue of breach of
trust. Thus the trust run by the couple was not working on the purposes it was established for
which defies the basics of a charitable fund. Hence, the decision takes by both the courts was just
and called upon.

AID/WATCH V COMMISSIONER OF TAXATION

INTRODUCTION AND FACTS:
AID/WATCH is a corporation that explores and regulates and campaigns the sending of aid
oversees and promotes the usefulness of Australian and foreign aid system through programs and
policies. It does not directly provide AID to a person, but it makes reports and arranges certain
events to increase public awareness about such AID. AID/WATCH is registered as a charitable
institution which is exempt from income tax liability under Income Tax Assessment Act 1997)
7

since 2000 and as exempt from FBT and GST since 2005. In 2006, the commissioner repelled
these ratifications and AID/WATCH expressed an objection to it. On the Commissioners
disapproval of the objection, AID/WATCH put in an application to the AAT for a review.
(Overell, 2010)
THE AAT DECISION:
After reviewing the commissioners decision, AAT established that AID/WATCH qualified for
the status for a charitable institution on the ground that its main purpose was to help eliminate
poverty and many of its activities contributed to a growth and progress of education. However, if
any of its activities extensively tried to exert influence on the government, AID/WATCH would
not be entitled to the status of a charitable institution. On this decision, the commissioner
appealed to the Full Federal Court. (Overell, 2010)
THE DECISION OF THE FULL FEDERAL COURT:
The Full Federal Court found that the main objectives of AID/WATCH were not to eliminate
poverty or improve education as many of its research reports and publication did not indicate an
education element. Moreover, the Federal Court also established that AID/WATCH had a
political motive behind its political activities and that was to be considered as its main purpose.
Hence, AID/WATCH was to be disqualified from the status of a charitable institution.
AID/WATCH made an appeal to the High court after this decision. (Overell, 2010)
THE DECISION OF THE HIGH COURT:
The High Court analyzed the law applicable to the situation and its history and considered a
couple of UK cases relative to this case, for example, McGovern n Attorney General 1982. The
Court also examined the issue in US. (Overell, 2010)
The High Court reviewed the case and found that the publications of AID/WATCH were actually
made to increase public welfare and they were to be considered charitable in the fourth head of
Pemsel. It also decided that the activities that were conducted by AID/WATCH involved
sending aid oversees for relieving poverty and that objective is favorable for the community. The
court also held that the UK cases were not to be applied here There were also no such specific
laws or a doctrine that stated that political objects are to be excluded from charitable purposes.
However, majority of the court also mentioned that the corporations purposes and activities
were such that they did not benefit the public, then they would be disqualified from the status of
a charitable institution. (Overell, 2010)
OPINION:
In my opinion, Aid Watch falls within the definition of a charitable entity and should be exempt
from tax as it monitors Australian aid effectiveness which construes to relief of poverty as it
ensures relief reaches the poor people and charity funds are properly utilized. Its activities surely
contributed to public welfare and hence fall within the definition of charitable work. I feel the
8

political purpose just happens to be another focus area for Aid Watch but the main focus is on
charitable work and hence should be a tax-exempt entity.

REFERENCES:

ATO Legal Database, 2011, Decision Impact Statement Wentworth District Capital Ltd, accessed
on 19/3/2016, available URL http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~
%22exempt%20income
%22~basic~exact&target=CY&style=java&sdocid=LIT/ICD/NSD1144of2010/00001&recStart=
861&PiT=99991231235958&Archived=false&recnum=879&tot=879&pn=C:::C
Ato.gov.au. (2013). [online] Available at: https://www.ato.gov.au/law/view/document?
docid=LIT/ICD/S284-2011/00001 [Accessed 19 Mar. 2016].
BusinessDictionary.com. (2016). What is tax-exempt income? definition and meaning. [online]
Available at: http://www.businessdictionary.com/definition/tax-exempt-income.html [Accessed
21 Mar. 2016].
Law.ato.gov.au. (2010). ATO ID 2010/118 - Exempt income: 'defence civilian' deployed outside
Australia. [online] Available at: http://law.ato.gov.au/atolaw/view.htm?
rank=find&criteria=AND~exempt~basic~exact:::AND~income~basic~exact&target=JA&style=j
ava&sdocid=AID/AID2010118/00001&recStart=441&PiT=99991231235958&Archived=false&
recnum=445&tot=8664&pn=ALL:::ALL [Accessed 19 Mar. 2016]
Overell, A. (2010). AidWatch Incorporated v Commissioner of Taxation - Australian Centre for
Philanthropy and Nonprofit Studies - Confluence. [online] Wiki.qut.edu.au. Available
at:https://wiki.qut.edu.au/display/CPNS/AidWatch+Incorporated+v+Commissioner+of+Taxation
[Accessed 21 Mar. 2016].

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