Income Tax Assessment Act 1997 Review - Essay Example

Income Tax Assessment Act 1997 Review By Name Course Instructor Institution City/State Date Introduction The Income Tax assessment Act is the main source of law governing matter relating to tax in Australia. The act was formulated in 1997 as an amendment of the previous Income Tax Assessment Act of 1936. The Act comprises of 8 main sectors which govern the major aspect of the taxation. This facilitates the collection and distribution of tax within the country. This paper looks at section 8-1, which provides the manner in which deductions are to be governed in Australia. This section is of great significance to administration of taxation in Australia. This is because provisions of section 8-1 minimize instances of tax evasion. Tax evasion occurs where loopholes exist within the legislation making it easier for individuals to avoid payment of taxes all in the name of deductions. Therefore, in an attempt to ensure that tax evasion is eliminated section 8-1 was formulate. The section is the main part of the law that deals with deductions. It achieves this by stipulating instances under which deductions under the law will be accepted and instances under the law will not be accepted. This means that certain deduction that in normal instances appear to be permissible are not actually permissible under the law. Under section 8-1 all taxpayers are permitted by law to deduct all losses or outgoing income resulting from the day to day businesses for purposes of obtaining assessable income. Additionally, the section allows individuals to deduct losses and outgoings from their assessable income. Therefore, with this in mind section 8-1 should be considered one the most important sections if not the most important section under the ITAA of 1997. Therefore, in order to understand the act it is important to look at the various elements that make up the section. In doing so it becomes quite easy to understand and examine whether section 8-1 indeed important as it is commonly stated by taxation authorities. Deduction Since the section deals mainly with deductions, it then becomes quite important to understand what factors entail a deduction. A deduction is an amount of money that is deducted and exempted from taxation. Deductions normally relate to expenses that are incurred by an individual in the course of conducting their day to day to businesses. Therefore, as a result of deductions individuals pay lower tax (Avi-Yonah, Sartori & Marian, 2011, p. 200) The reason behind deductions is to encourage individuals to conduct businesses. However, if there were no deductions then it would be quite impossible for individuals to conduct businesses as they would have to pay a high rate of taxes even in instances where the expense is incurred for the normal day running of the business (Fishman 2013, p. 199). Incurred Under the ITAA of 1997 there is no clear definition of the term incurred, which has provided individuals with difficulties in interpreting the section. Therefore, in attempt to remedy the situation courts have tried to interpret the term. However, this has proved to be also quite challenging as the courts have been reluctant to exhaustively define the term. This can be attributed to the fact that taxation issues are not always similar, thus it is impossible to exhaustively define the term incurred. However, the courts have come with rules which are to be considered whenever the definition of incurred is in contention. Additionally, these rules have been adopted by the Australian Taxation Office as an attempt to ensure that taxpayers are not faced with difficulties in claiming deductions. The first provision states that the expense should be suffered within the year of income. This means that it becomes quite impossible to apply for deduction after the year of income. The second provision, on the other hand, states that a taxpayer must have a present and existing liability (Barkoczy, et al 2010, p.150) Carrying on a business Section 8-1 states that deductions are acceptable on expenses incurred for a day to day running of a business. Therefore, this poses the question as to what the term carrying on a business really means and the implications of the term. According to Australian Taxation Office it is quite important to differentiate whether a business amounts to a business or just a hobby. In doing so the office has come up with various elements which are unique to a business, thereby making it easy to determine whether an activity amounts to a business. The first factor tries to examine whether the activity is conducted for commercial purposes. This can be achieved by examining the underlying purpose of conducting an activity. If the activity is conducted with an aim of making profits then it amounts to carrying on a business. Additionally, consistency of various activities within the activity may indicate that the activity amounts to a business. (Nethercott, Richardson & Devos 2010, p.160). In addition to this other factors such as similarity to other activities conducted by other individuals may indicate that the activity is not a mere hobby but a business. However, there are instances that are quite challenging in determining whether certain instances such as sports amount to carrying on a business (Clark & Miller 2000, p.500). In such cases the courts of laws have stated that individuals in sporting activities are in the nature of carrying on a business, since they exploit their sporting prowess to earn an income. This was illustrated in the case of Spriggs v Commissioner of Taxation and Riddell v Commissioner of Taxation [2009] HCA 22, whereby players sought to have expenses incurred in their sporting activities be deducted. However, the commissioner of Taxation rejected their request stating that the expenses were not deductible. The players appealed to federal court which overturned the decision of the Commissioner of Taxation. The Commissioner of Taxation then appealed to the court of appeal, which upheld the Federal’s court decision. The court of appeal stated that section8-1 allowed deductions in relation to expenses incurred in the normal course of a business. With this in mind, the court stated that the players were within the regulations set out in section 8-1 as their activities amounted to carrying on a business. As earlier stated section 8-1 has been able to seal off some of the loopholes that existed in the previous legislation. This has been achieved by provision which indicate some of the instances where deductions are not allowable in relation to expenses. Therefore, this minimizes instances of tax evasion. Capital Capital can be described as the goods and services which when put into use help in realization of income. Therefore, capital assets refer to the goods that facilitate the smooth running of any business (Morgan, Mortimer & Pinto 2013, p. 170). According to section 8-1 expenses incurred on capital assets are not deductible. However, there are certain instances where the expenses are deductible. Such situations arise whereby capital items make up the sources of income. However, generally expenses involving capital assets are not deductible and this can be attributed to the fact that capital items attract capital allowance (Murphy & Higgins 2010, p. 300). When dealing with capital incomes the courts have find it difficult when dealing with legal expenses. This is attributed to the fact that legal expenses are of a capital nature and under section 8-1 expenses in relation to capital gains are not deductible. However, the courts have stated that in dealing with such matter there has to be a requisite connection between earning of income and the legal expense. In the case of Commissioner of Taxation v Shane Day, the court applied a broad interpretation of section 8-1 and allowed legal expenses to be deducted. The public employee was involved in a case of misconduct in the course of his duties, and sought to have his legal expenses be deducted for taxation purposes. He argued that the legal expenses were sufficiently connected to his employment. The courts accepted this argument and allowed the public servant have the legal expenses deducted. Therefore, legal expenses though capital in nature can be deducted where it is shown that there exist a close connection between earning an income and the legal expenses. Exempt income Income for taxation purposes is normally classified into four main groups. These classifications are; ordinary income, statutory income, capital gain and exempt income. Each of the classification suffers a different rate of taxation (Whittenburg & Altus-Buller 2009, 227). Therefore, it is always important that a taxpayer understands under which category their income lies. Under Section 8-1(2), a loss or an outgoing in relation to obtaining an exempt income is not deductible. Exempt income are incomes which under the law are not subjected to taxation. Therefore, losses incurred in the realization of such incomes is not deductible (Popkin, 2008, p.400). Conclusion In conclusion, section 8-1 of the Income Tax Assessment Act of 1997 is indeed quite an important part of the Act in relation to matter touching on deductions. The section has exhaustively explained instances that can be subjected to deduction and under what conditions. It has gone further to list instances under which deductions for expenses incurred are rejected. Therefore, this has minimized instances of tax avoidance, which was quite rampant before the formulation of the Act in 1997. Additionally, the Act has sealed any loopholes that might have existed prior to it formulation, thereby making it easy for Australian Taxation Office conduct its operations of tax collection. References ATO, 2013, Starting and running your small business, viewed 24 March 2014 https://www.ato.gov.au/Business/Starting-and-running-your-small-business/Starting-your-business/Are-you-operating-a-business-/ Avi-Yonah, R, Sartori, N & Marian, O, 2011, Global Perspectives on Income Taxation Law, Oxford University Press, Oxford. Barkoczy, S, Rider, C, Baring, J & Bellamy, N, 2010, Australian Tax Casebook, CCH Australia Limited, Sydney. Baxter, S, Biti, L, McCouat, P & Peters, S, 2009, Small Business Tax Concessions Guide, CCH Australia Limited, Sydney. CCH, 2009, Australian Master Accountants Guide, CCH Australia Limited, Sydney. Clark, BC & Miller, LG 2000, Taxation and Sport in Australia, Federation Press, Annandale. Commissioner of Taxation v Day [2008] HCA 53, Viewed 24 March 2014 www.hcourt.gov.au/assets/publications/.../hca53-2008-11-12.pdf Fishman, S, 2013, Tax Deductions for Professionals, 5th edn, Nolo, California. Income Tax Assessment Act 1997, Viewed 24 March 2014 www.comlaw.gov.au/.../ActCompilation1.../ITA97Vol03_58-122_WD02.pdf Morgan, A, Mortimer, C & Pinto, D 2013, A Practical Introduction to Australian Taxation Law: 2013, CCH Australia Limited, Sydney. Murphy, K & Higgins, M 2010, Concepts in Federal Taxation 2011, 18th edn, Cemgange Learning, New York. Nethercott, L, Richardson, GA & Devos, K 2010, Australian Taxation Study Manual: Questions and Suggested Solutions, CCH Australia Limited, Sydney. Popkin, WD 2008, Introduction to taxation, 5th edn, LexisNexis, Ohio. Spriggs v Commissioner of Taxation and Riddell v Commissioner of Taxation [2009] HCA 22, Viewed 24 March 2014 www.hcourt.gov.au/assets/.../judgment.../2009/hca22-2009-06-18.pdf Whittenburg, GE & Altus-Buller, M 2009, Income Tax Fundamentals 2010, Cengange Learning, New York. Read More