The Australian Taxation System - Assignment Example

Tax Law The Australian taxation system is similar to the United Kingdom tax system. The system is based on statue law and case law. Australia is a member of the OECD. The first tax treaty Australia signed was with the United Kingdom. There are several trading structures available for use in Australia including sole traders, partnerships, companies, and trusts. The issue of special allocations of the partnership income is related to the question of the character of the partnership income in the hands of the partners. Almost all income tax laws classify various types of income in different ways and may have many special rules and limitations depending on the character of the income. When partnership income is allocated to the partners, there are four main possibilities that stand in correspondence to the average and to the entity views of partnership and points in between1. Under the pure aggregate approach, each of the income or deduction is treated as if it has been received or incurred by the partner directly. This would mean in turn that in certain cases a receipt or expenditure of the partnership would be treated in different manners in the hand of the different variables that are involved in the partnership equation. These will ultimately also depend on the activities of the partners like the place where the partner is a trader in the type of property, service or goods being disposed by the partnership. The second approach is a hybrid-entity aggregate approach where the character of items of income and deduction is determined at the partnership level and each item is allocated to the partners who in turn retain the same characters in their hands as it had in the hands of the partnership. Thus, partners may receive their shares of the total partnership income as business income, dividends, interests or rental income, as the case may be. Third under the pure entity approach, taxable income is determined at the level of the partnership itself, with the net amount being allocated among the partners as a single category. The definitional rules in Australia go as far as to treat jointly owned property that generates income as a partnership though the possibility of joint ventures that are not classified as partnerships allows certain operations. Partnerships that arise from joint ventures or joint ownership of property in practice are not generally required to file partnership tax returns. Limited partnerships are excluded from pass-through treatment except in certain cases of venture capital activities and foreign hybrids. Partnerships are not distinct entities known to law (Rose v FCT (1951) 84 CLR 118). There partnerships are based on the contractual relationships that exist between partners-Pooley v Driver (1876) 5 Ch D 458. while the Income Tax Assessment Act 1936 (Cth) at times recognizes this business structure, the absence of a separate legal entity is reflected in the taxation of partnership income in so far as the partnership itself is not assessed on partnership profits and gains. Rather, under s92 ITAA and s 105-5(1) of the Income Tax Assessment Act, 1997 (Cth) the partners are taxed on their respective shares of the partnership income and capital gains. The definition of a partnership for taxation purposes differs and is more expansive than the one that is usually contained in much of the partnership Acts. Under the Partnership Acts, a partnership is defined as the relationship that exists so that it can help survive a trade off between people carrying on businesses in common with a view to achieving profit. In contrast, s995-1 ITAA 1997 (formerly s6(1) ITAA) defines the term partnership as: An association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly but does not include a company. The definition that has been expressed in s995-1is extensive in as much as it goes well beyond the traditional definitions of the term partnership in commercial contexts. The definition achieved this by ensuring that people who are in receipt of the income jointly, whether or not they are carrying on business or their purpose is that of profit making are defined as partners2. As a result, an association may be called a partnership solely for taxation purposes where the relationship of the parties does not meet the criteria under the Partnerships Act3. Joint bank accounts have been held insufficient to be the grounding basis for the formation of a partnership. The definition of partnership in s995-1 only refers to the derivation of joint incomes. Thus, it may be thought that the definition would exclude associations for the joint derivations of capital gains. As the definition of assessable income and statutory income in s6(1) ITAA 1997, now expressly includes both ordinary incomes and statutory incomes, the inclusion of capital gains falls in the latter category. For all traditional aims and purposes, the definition of a partnership is an association of people that carry on business together or work so that they receive a joint income. A partnership by this definition could therefore consist of individuals, companies and trustee4s. In the context of out case, Rosie and her husband would therefore work so that they share a joint income from a joint commercial activity. They would therefore have a common law partnership venture. The company might not have assets in the tangible or quantifiable capacity at the beginning but the idea is to ensure a sale of services. The first point of concern for the major part would be arriving at a decision regarding whether or not Rosie and her husband actually have a partnership. Going by the definition that has been provided in ITAA 1997, a partnership is an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly but does not include a company5. This would therefore mean that an understanding of the two attached terms, ordinary and statutory income becomes essential. The concept of income as embedded in s25(1) of the ITAA is not for show and its meaning depends on ordinary concepts and usages of mankind except to the extent that the ITAA states or indicates to the contrary6. To concept of income as embedded in s25(1) o the ITAA is often known as ordinary income. Income by this definition then is not just confined to the fruits or produce of personal exertion from repeated or recurrent transaction or activities7. The concept is therefore inclusive of amounts received as gifts and which flow from the carrying on of business which is wider than the usual connotation of the tem8. Statutory income on the other hand is defined by S6-10 of the act9. While ordinary income is income according to ordinary concepts, s5(1) ITAA 997, statutory income consists of some amounts that are not ordinary income but would still be included in Rosie and her husband’s tax deductible income by reasons specific to statutory provisions. S10-5 ITAA 1997, provides a list of the provisions; many include in their reach incomes that would fall under the purview of ordinary incomes as it is but are placed under this bracket just for the sake of certainty. Personal services income is income that is a reward for the personal skills or efforts that the partner puts in to the profit production of the company (s85-5(1) ITAA 1997. examples of this income would include salaries and wages, incomes of a professional person that is practicing in his or her own account without professional assistance, incomes that are payable under a contract; and those incomes that are derivatives by a professional sports person and those derived by consultants10. Taxation Ruling TR 2001/07 states that the legislation primarily means that the income that falls under the bracket of assailable or taxable income must principally, chiefly, or primarily be a reward for the personal services that have been rendered by the taxpayer. For all these counts, Rosie and her husband’s incomes fall under the purview of taxable income according to ITAA 1997 and ITAA, 1936. There might also be a case here for an accounting for the income not as personal services rendered but receipts from other sources. It was noted that the proceeds on revenue account of any business carried on by a taxpayer is one form of income receipts of that kind fall within the understanding of income according to ordinary concepts and usages11 Div 85 limits the ability of individuals who are not employees but derive personal service incomes to claim certain tax deductions. The division however does not apply in cases where the individual is conducting a personal services business or receives the income as an employee or office holder. The deductions laid out in s85 include 1. Deductions for non‑employees relating to personal services income 2. Deductions for rent, mortgage interest, rates and land tax (85-15) 3. Deductions for payments to associates. 4. superannuation for associates 5. Exception personal services businesses 6. Exception: employees, office holders and religious practitioners 7. Application of Subdivision 900‑B to individuals who are not employees Division 86 on the other hand provides the key aspects of Pt 2-42, ITAA 1997. This division has as its purpose yje attributing off personal services income or losses to the individual performing the services rather than any interposed entity, unless the income is paid to the individual in question in the form of a salary12. A personal services entity is therefore a company whose ordinary or statutory income includes personal services income of one or more individuals13. The measures are not applicable to personal business services; equally only implies interposed entity rather than the person who provides the services and derives the personal services income. S85-15 is the operative provision that includes in an individuals assessable income that income that is derived by a personal services entity but which is in fact the individual’s personal services income. Deductions of the personal services income aimed at the reduction I the attributed amount can therefore be made. The four tests that an accounting of the assessable income needs to ensure are the results test, the unrelated clients test, the employment test and the business premises test. Unless test results are satisfied even if one is dissatisfied, an individual or personal services entity will still be treated as not conducting a personal services business. The Advise for Rosie Rosie role has been that she has been a financial planner donning the role of advisor and that can be termed in pure technical terms as a consultant.Looking at the history of her work she has been earning $100,000 a year and she has been terminated of her job and she had started a partnership on model of 65% and 35%.The income has been split but If Rosie has been doing a partnership that is having an individual’s personal services income (‘a personal services entity’), and this income could be taxed as personal earnings. For overcoming this Rosie could change her business style of not depending purely on the bank recommendations and she can earn business of her own and transform her company into personal service business. The advise that would be given to Rosie would be that You have personal services income if the income results from the labor or skills of one or more individuals. The income from the consultancy business . Personal services income has been defined in Section 84-5 of the ITAA 1997 as: 'Your ordinary income or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income). The income from the consultancy business is mainly a reward for an individual's personal efforts or skills and is therefore personal services income. That means Rosie should be generating more personal income.She has to advertise more get a business consultant and that has to be done faster. Question 2: The role reversal and the participation of Rosie’s husband in the capacity of a simple employer of the company rather than a partner rendering personal services would be good for the company’s overall taxation related finances given the fact that A partnership does not pay tax on its income, but it does complete a partnership tax return showing all income earned by the partnership and all deductible expenses. In the partnership, each partner pays tax on their share of the partnership's net income and this must include the whole of their individual share of the net profit or loss in their individual tax return, whether the income has been distributed to them or not. The company in its present state would be entitled to a goods and services tax of about 10% per annum and this tax would be levied not on the company in a direct manner but on the participants of the venture. In case, therefore that the husband, who is part of the venture in a purely administrative capacity was moved from being a partner to being an employee with a big salary, the situation would be a more favorable on for the company’s finances given the fact that this would mean that the company would no longer have to pay taxes twice in the form of 10% tax on Rosie’s personal services income of 65% and 10% GST on her husband’s 35% of share in the net profit. Instead duo would have to pay a direct tax of 10% thereby making them come away from the burden of dual taxation. A sole trader is a single person running a business under their own name. Taxation advantages exist when profits are low .Other than the Income Tax Assessment Act and contract law, no specific legislation applies. As a sole trader, Rosie would bee required to include a declaration of income earned from the business as a part of your personal tax return. Some traders pay income tax at personal tax rates, though they may also have to pay provisional tax. Reference: Thurnoyl V, 1998, Tax law design and drafting, Vol.2, pub, A1 Books, pp941-943 Income Tax Assessment Act, S85, accessed, September 21, 2009, < http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s85.1.html> Income Tax, Sporting Income & Joanna Stone – High Court Decides, accessed September 21, 2009, < http://74.125.153.132/search?q=cache:MgxCCNpwUL8J:www.qwa.org/news/files/SimonRofearticle%2BATOSportsIncomeTaxRuling56.doc+Distinguishing+Personal+Services+Receipts+From+Other+Receipts,+ITAA,+1997&cd=4&hl=en&ct=clnk&gl=in> McFarlene P and Fisher S, 1996, Churches, Clergy and the law, pub, The Federation Press, p105 Barkoczy S, Australian Tax Case Book (8th ed) CCH Australia Ltd Barenfeld J, Taxation of cross border partnerships, pub, A1 Books, pp72-75 Cassidy J, 2007, Concise income Tax, pub, The Federation Press, pp24-39 Income from a partnership, accessed September 21, 2009, Read More