Chapter 1
The Australian taxation
system and the tax
formula
Learning objectives
After reviewing this Chapter, you should be able to:
1.1 Describe the basic legal structure of the Australian tax
system
1.2 Explain the key sources of Australian tax law
1.3 Describe the key ethical responsibilities of tax
professionals
1.4 Describe different types of taxes
1.5 Describe different types of taxpayers
1.6 Explain the fundamental income tax formula for
calculating income tax liability.
The Australian Taxation System
Australia has well in excess of 100 different taxes across
its Commonwealth, State and local Governments.
The four main Commonwealth Government taxes are:
Income Tax
Capital Gains Tax (CGT)
Fringe Benefits Tax (FBT)
Goods and Services Tax (GST)
There are also a number of different regulatory and
professional bodies involved in administering the taxation
system and regulating tax professionals.
The Australian Taxation System
The Australian Taxation Office (ATO) is the primary
agency responsible for administering and collecting
federal (Commonwealth) taxes.
The Commissioner of Taxation (CoT) is the official vested
with the administration and collection powers and
responsibilities.
The ATO and more broadly, the tax administration system
are overseen by the independent Office of the Inspector
General of Taxation and Taxation Ombudsman (IGTO).
The Australian Taxation System
The Tax Practitioners Board (TPB) is the national body
responsible for the registration and regulation of tax
agents, BAS (‘business activity statement’) agents and tax
(financial) advisers.
Tax agents must also comply with the Tax Agent Services
Act 2009 (Cth) (TASA).
This Act contains a Code of Professional Conduct which
includes obligations to act honestly, with integrity,
confidentiality, and with independence and competency.
The Australian Taxation System
The Australian Government Treasury also plays a crucial
role in Australia’s taxation system and is responsible for
assessing and advising on the general design of the tax
system and its components.
The Board of Taxation a non-statutory advisory body,
charged with contributing a business and broader
community perspective to improve the design of the tax
system is often tasked, on the request of the Treasurer (or
independently) with providing tax policy advice to the
government on various tax, economic and government
initiatives.
Purposes of Taxes
The goals of taxation are generally to fund the important
functions of government.
For example, taxes are used to fund:
governmental welfare programs,
military and protection of our national borders
important regulators such as environmental
authorities, and
important community services such as State schools,
hospitals, and the criminal justice system.
Purposes of Taxes
Different taxes do however have different purposes.
Customs and excises for example were originally aimed at
addressing ‘sins’ or vices such as smoking and alcohol
consumption.
To some extent the very large excise duties which
continue to be imposed on cigarettes and alcohol retain
this social goal of discouraging use of these harmful
products.
Canons of a Well-Designed Tax System
Equality is the idea that taxes should be imposed relative
to an individual’s capacity to pay.
Certainty is the idea that the tax which each person is
bound to pay ought to be certain, and not arbitrary. I.e.,
the time of payment, the manner of payment, the
quantity to be paid ought all to be clear and plain to the
contributor, and to every other person.
Convenience is the idea that a tax should only be imposed
at a time and in a manner, which minimizes
inconvenience.
Legal Structure – Australian Constitution
Exclusive powers
Powers entirely transferred by the colonies to the
Commonwealth Parliament. See for example:
Constitution ss 90 and 114.
Concurrent powers
Powers shared by the States and Territories and the
Australian Parliament. Examples include taxation,
marriage and postal services.
Residual powers
Powers remaining exclusively the responsibility of the
States and Territories. Anything that isn’t expressly
mentioned in the Constitution is a residual power.
Sources of Power
The power to levy taxes is a concurrent power.
The power is contained in section 51(ii) of the
Constitution.
The main source of Australian tax law is legislation.
There are two primary pieces of legislation covering
federal income tax.
These are the Income Tax Assessment Act 1936 (Cth)
(ITAA36) and the Income Tax Assessment Act 1997 (Cth)
(ITAA97).
Doctrine of Precedent
The doctrine of precedent is the legal convention that
judges will decide cases that are factually similar in the
same way judges before them have decided those cases.
The doctrine also requires judges to only follow the
reasoning of judges in more senior courts within the same
judicial hierarchy.
At the top of the hierarchy is the High Court of Australia.
Its interpretations of the law are binding on all lower
courts subject to very few exception.
Doctrine of Precedent
Ethics and the Tax Professional
Tax practitioners may come from a range of different
professional backgrounds i.e. lawyers, accountants or
financial advisers.
These professionals will be subject to ethical
standards and practicing requirements by their
relevant professional bodies and industry regulators.
These requirements are in addition to tax-specific
legal and ethical requirements.
Tax Agent Services Act 2009 (Cth) and Code
of Conduct
The TASA ensures that tax agent services are provided to
the public in accordance with appropriate standards of
professional and ethical conduct.
The TPB is responsible for ensuring compliance with the
TASA, including the Code of Professional Conduct (Code)
and the Tax Agent Service Regulations 2009 (Regulations)
The TPB is also responsible for the registration and
regulation of tax agents, BAS agents and tax (financial)
advisers (collectively referred to as ‘tax practitioners’).
Tax Agent Services Act 2009 (Cth) and Code
of Conduct
The Code regulates a tax professionals personal and
professional conduct as a registered tax agent.
The Code sets out principles under five separate
categories (see section 30-10 TASA):
Honesty and integrity
Independence
Confidentiality
Competence
Other responsibilities
Technology, Ethics and the Tax Profession
The ATO is also relying more heavily on digital approaches
to collection and validation of taxpayer information.
For example: data-matching, tax return pre-filling and
industry benchmarking.
These advancements have enabled more timely and
accurate information collection and communication with
clients.
Potential ethical challenges? Think