Sources of taxation law

 2017 Thomson Reuters (Professional) Australia Ltd. All Rights Reserved.

Jonathan Teoh, Monash University
Understanding tax law:
Accounting standards vs tax legislation
• Interpretation of financial accounting standards is different to
tax legislation:

Financial accounting Taxation law

standards legislation

• Interpreted with the aim • Interpreted based on the

to ensure the firm’s “doctrine of precedent”
economic position is
recognised on a prudent
and conservative basis

PoTL 2017 paragraphs [1.30] – [1.40]

Understanding tax law:
Accounting vs taxation law advice
• The level of certainty providing financial accounting advice is
different to taxation law advice:

Financial accounting Taxation law

advice advice

• Advice is provided with • Answer is based on how

confidence that an
outcome does or does
not comply with
accounting standards
• By definition, always a
correct answer
the law is likely to apply
based on interpretation
of precedents and
extrinsic materials

PoTL 2017 paragraphs [1.50] – [1.60]

Technical differences between tax law and
accounting
1. Not all receipts are recognised for tax purposes

Financial accounting Taxation law

• Measures net gains and • Some receipts not

losses over a period recognised for tax law
• Recognition of all gains, purposes, eg, gifts, one-
including gifts and off or unusual receipts
windfall gains

PoTL 2017 paragraphs [1.80] – [1.100]

Technical differences between tax law and
accounting
2. Income tax law distinguishes between capital and
revenue expenses

Financial accounting Taxation law

• Distinguishes between • Distinguishes between

assets or expenses
based on the Statement
of Accounting Concepts
• Assets are capitalised on
the balance sheet while • Expenses are
expenses impact the
profit and loss account
revenue expenses and
capital outgoings based
on judicial doctrines
derived from case law
immediately deductible
while capital outgoings
are deductible over time
using the capital
allowances or capital
works system

PoTL 2017 paragraph [1.110]

Technical differences between tax law and
accounting
3. Income tax law excludes some income and expenses
for policy reasons
• Used by politicians to achieve a variety of social and
economic objectives.

Financial accounting Taxation law

• Objective to measure net • Not all receipts subject to

gains in the accounting income tax, eg,
period donations received by a
• All receipts recorded as hospital that is endorsed
“revenue”, eg, donations as a “deductible gift
received by a hospital recipient”
• All expenses recorded • Some receipts not
deductible, eg, fines

PoTL 2017 paragraph [1.120]

Technical differences between tax law and
accounting
• Accounting income can be categorised into three boxes for
income tax purposes:

Accounting
income

Ordinary Statutory Other

income income gains

Recognised by the Not recognised by Amounts received

courts as income, the courts as that are neither
eg, salary, income but subject ordinary or
proceeds from sale to tax by legislation, statutory income,
of trading stock. eg, capital gain. eg, gifts.

PoTL 2017 paragraphs [1.150] – [1.160]

Technical differences between tax law and
accounting
• Judicial tests to characterise a gain as ordinary income:

• Flow from a source that generates income

• eg, product of labour, business or through the exploitation
1 or use of property.

• Income-like characteristics
• Receipts that are periodic in nature and expected by the
2 recipient, eg, gift in the form of regular annuity payments.

• Amounts received as compensation for lost income or

substitution for income
3 • eg, compensation receipt for loss of trading stock.

PoTL 2017 paragraph [1.170]

Technical differences between tax law and
accounting
4. Income tax law ignores some transactions on the basis
of anti-avoidance provisions
• Accounting measures net profits on an entity-by-entity basis.
• Taxation law has tax avoidance provisions that can negate
the tax benefit derived from some transactions.

Tax avoidance
provisions

Specific anti- General anti-

avoidance avoidance
provisions provisions

PoTL 2017 paragraph [1.130]

Technical differences between tax law and
accounting
5. Timing rules differ in income tax law and accounting
principles

Financial accounting Taxation law

• Roughly align with a • Receipts are subject to

business’ economic income tax when they
position are “derived”
• Cash and accrual basis • Outgoings are deductible
for receipts and when they are “incurred”
expenses • “Derived” and “incurred”
have unique judicial
meanings

PoTL 2017 paragraph [1.140]

Sources of tax law
• The main sources of tax law are:

• Legislation
1

• Case law
2

• Practice of tax law by rulings issued

3 by the Commissioner of Taxation

PoTL 2017 paragraph [1.180]

Sources of tax law:
Legislation
Income tax
•Two concurrent statutes that measures taxable income:
– Income Tax Assessment Act 1936 (Cth) (“ITAA36”)
– Income Tax Assessment Act 1997 (Cth) (“ITAA97”)
•Statute that sets the rate of tax to be applied to taxable income to
determine quantum of income tax liability:
– Income Tax Rates Act 1986 (Cth)
•Imposition statute that imposes income tax liability:
– Income Tax Act 1986 (Cth)

PoTL 2017 paragraphs [1.190] – [1.230], [1.245]

Sources of tax law:
Legislation
Income tax (continued)
•Statute containing administration rules for tax collection and
penalties to ensure compliance:
– Tax Administration Act 1953 (Cth)
•Statute giving effect to double tax treaties:
– International Tax Agreements Act 1953 (Cth)

PoTL 2017 paragraph [1.245]

Sources of tax law:
Legislation
Employment fringe benefits
•Broadly, a tax imposed on an employer providing fringe benefits to
an employee.
– Fringe Benefits Tax Assessment Act 1986 (Cth) (“FBTAA”)
Goods and services tax
•Consumption tax:
– A New Tax System (Goods and Services Tax) Act 1999 (Cth)

PoTL 2017 paragraphs [1.240], [1.250] – [1.260]

Sources of tax law:
Case law
• Meaning of words in tax law is derived from judicial precedent or
decisions of courts interpreting past cases.
• How binding the precedent will be depends on the level of the
court:
– Ranges from the Australian High Court to decisions of the
Administrative Appeals Tribunal (administrative body with
less authority than a court).

PoTL 2017 paragraph [1.270]

Sources of tax law:
Rulings
• The statutory officer administering the tax laws, being the
Commissioner of Taxation, issues “Rulings”.
• Various types of rulings include:

• Private rulings
• Taxpayers can obtain a private ruling to determine
how the Commissioner would apply the tax laws to
1 a particular transaction.

• Public rulings
• Broadly set out the Commissioner’s views on the
way in which a provision of an Act should be applied
2 to determine extent of tax liability.

PoTL 2017 paragraphs [1.280] – [1.300]

History of Taxation

Commonwealth Government introduced

Income tax in 1915
Prior to that date - States levied taxation on
income from individuals, companies and
property beginning during 1890’s. Between
1915 and 1942 both States and Cth levied
income tax (like the US still does).
Commonwealth needed to raise revenue for
World War II and passed legislation to
exclude the states from levying income tax.
State Taxes
These differ in each State
These are taxes collected for the particular state
In Victoria examples are:
Pay-roll tax - differs between States
Victoria – 4.90% if pay-roll over $550,000
Land Tax – based on value of land other than family
home if above $250,000
Stamp Duty - tax on documents, Transfer of Land,
Mortgage, Hire of equipment.
 Local Government

Tax based on land value of property owned in Municipality

Tax called “Rates” - average cost $2,500 pa (affected by
the value of the land)
Services such as rubbish collection, street lighting, street
cleaning, public libraries, services to the elderly and
handicapped
No Taxes for the following currently
Death duty - but capital gains tax applies in certain
circumstances as a result of death
Gift duty (replaced by CGT)
Inheritance tax
Sales tax – now replaced by GST (consumption tax
on goods and services)
Access Tax Databases
Legal Data Base on ATO Site –
(Lecturer/Tutor will show you)
Austlii database(Lecturer/Tutor will show you)
The CCH Database – free access in library –
get access to Master Tax Guide, Case
Summary book by S Barkoczy and
Australian Taxation Study Manual – a
question and answer book (lecturer/Tutor
will show you)
21