Self Education Expenses - Essay Example

1. Why did the Federal Court come to the decision to allow the deductions in this case contrary to the long-standing ATO practice of not allowing deductions in similar cases [Approx 500 words]. The Federal Court permitted a taxpayer's plea from the verdict of the AAT, and decreed that the taxpayer, as a receiver of Youth Allowance (which is assessable income), is permitted to a tax deduction under s8-1 ITAA 1997 for self education disbursements. The depiction of expenditure for the intention of s 8-1 depends on a subtle analysis of the association between meeting of the expenditure and the source of measurable income. In the present case also there is no test which can suggest that the taxpayer had met the claimed outgoings to carry on a business so as to gain or produce assessable income. Her assert for a deduction is consequently restrained to the first branch of s 8-1(1) which allows loss or outgoing deductible to the extent that; '(a) it is incurred in gaining or producing the measurable income.' It is adequate if the claimed expending is made "in the course of" gaining or giving rise to the taxpayer's measurable income (Ronpibon Tin NL v Federal Commissioner of Taxation) (www.taxmatrix.com.au) In the present case also it was proved that, what was creative of computable income was the Taxpayer's qualification to receive the Youth Allowance and having continued that qualification all through the appropriate period by fulfilling the activity test. The agreement of that trial, in turn, necessitated her to be entered in a course of education at an educational institution, to be taking on at least three-quarters of the usual amount of full-time study in value of the pertinent course for the period in question and to allow the Secretary to form the judgment that she was making acceptable progress for finishing the course. Actually in the present case, the taxpayer was not employed as a teacher nor was she employed in any other applicable capacity. These expenses were met by her in the course of qualifying for a Teacher's Higher Certificate. The tribunal stated that the applicant was required to be enrolled and make progress in full time study so that she is entitled to receive Youth Allowance. Under such circumstances the costs which she incurred in the course of her studies were allowable as a deduction. The fact that the applicant was enrolled at the Australian Catholic University was "a course of education at an educational institution" pursuant to s541B(5) of the SSA was agreed. The Federal court allowed the expenses in the present case to be deductible on the following grounds: (www.taxmatrix.com.au): a. Such expenditure was supplementary or essential to her gaining Youth Allowance. b. The Commonwealth was paying the taxpayer the Youth Allowance since she was a student; not for studying per se. c. The indispensable character of the taxpayer's expenditure lay in it been incurred in taking on her studies so as to allow her to discharge her course of study and acquire successive employment as a teacher; and d. The expenses were related to or supplementary to the taxpayer's course of study and not to the benefiting or getting of Youth Allowance income. 2. As the ATO is considering whether to appeal this decision, what legal arguments can it put forward in support of such an appeal Critically analyze whether you think these arguments will succeed if the decision is appealed. [Approx 1,000 words] Self education expenses to derive Youth Allowance income is an allowable deduction as ruled in the case of Anstis v FCT. The federal court had held that self education expenditure can be claimed by a taxpayer as deductible expenses. But such expenses had to be incurred as a necessity and also derived as an incident of computable income. In the case mentioned supra the assessable income was the Youth Allowance. In the present case the assessee claimed for a deduction of $920.00 for work-related self-education expenses. The law of Australia lays down that a taxpayer can claim deduction of self education expenses under the following circumstances: Section 540 of the SSA states that, apart from required age and residency a person will be able to receive Youth Allowance for a period if and only if throughout the period, the recipient satisfies that the clauses laid down in Section 541(1)(a) and S541B(1). In Section 541(1)(a) it is laid down that a person will satisfy the activity test if he or she throughout the period is undergoing a full-time study. What is "full-time study" is explained in s541B(1), and this section states that; A person is said to be undertaking a full time study if he or she: (i) is admitted in a course at an educational institution; or (ii) was admitted in the course and fulfils the requirements to the Secretary that he or she has the intentions, and has at all times intended, to rejoin the course when admission to the course are next accepted; or (iii) was admitted in the course and proves to the Secretary that he or she means, and has invariably meant, to get admitted in another course of education either at the same or a different institution when admission to the other course are next accepted (Section 541(1)(a) of the SSA); and (b) the person(Section 541(1)(b) of the SSA): (i) is undertaking in the particular study period (such as, for example, a semester) for which he or she is enrolled for the course; or (ii) intends to undertake in the next study period for which he or she intends to enroll for the course; either: (iii) in a case to which subsection (1A) does not apply-at least three quarters of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); or (iv) in a case to which subsection (1A) applies-at least two thirds of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); and (c) the course in question is an approved course of education or study (see subsection (5)); and (d) in the Secretary's opinion, the person is making satisfactory progress towards completing the course.' [emphasis added]' . Apart from those provisions mentioned supra Justice Ryan j mentioned the normal powers that illustrate the relationship which has to exist between an expense and certain assessable income in order to fulfill the optimistic limbs in s 8-l 1. In the present case also there was no confusion with regard to the facts and also the adherence of the rules laid down in different sections. The taxpayer proved that during the assessable year, the claimant was admitted as a full-time student and she had undertaken a teaching degree at the Australian Catholic University. In her tax return she admitted that she had received $14,946 as wages which she earned while working as a party-time sales assistant for chain Katies and in addition to this she was also in receipt of income from Youth Allowance to the tune of $3,622. The claimant did not have any income from having worked as a teacher. Thus the claimant appealed under the common grounds and claimed deduction from her income the expenses which she had incurred in the course of her job as a sales assistant. But the ATO is thinking in terms of appealing against the case. The arguments which they intend to put forward are: The ATO argues that as the claimant was in receipt of Youth Allowance as well, the question arises as to whether she is eligible for the deduction. ATO states that the present ruling in the Anstis case is: i. That the case is opposing to its present observation; ii. The verdict takes a leap from the current case law; and iii. Expresses worries that the verdict may be inferred pertaining to areas other 1. (See also) Cooper (1991) 2l ATR 1616 than self-education expenses. The decision and the arguments put forward by ATO are not correct. The present case can be compared with that of Commissioner of Taxation v Cooper (1991) 29 FCR 177 wherein his Honour HillJ observed, that; 'It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income and to determine whether the outgoings (or where relevant the losses) are incidental and relevant to those operations or activities.' Similarly, in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47, the High Court had contended that in relation to the ancestor to s8-1 of the ITAA, s51(1) of the Income Tax Assessment Act 1936 (Cth), at 57, that; ' to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the outgoing should be found in whatever is productive of the assessable income.' Thus if ATO appeals then the case will not stand as it can be further argued that the claimant's expenses were incidental to her course of study and it was relevant to the source of Youth Allowance. Also the important feature of self-education expenses established that they had been met in the course of attaining her Youth Allowance. At this point a comparison between the present case and the case of Reid v Commissioner of Inland Revenue (1983) 6 TRNZ 495, at 501, it can be seen that the case also has similar attribute like the one which QuilliamJ, put in the case of Reid v Commissioner. QuilliamJ argued in the case of New Zealand student teacher allowance, that receipt of an allowance was "income derived from an allowance paid in respect of his attendance at an educational institution." 3. The long-standing practice of the ATO to deny deductions for self-education expenses was contained in a Taxation Ruling. A criticism commonly leveled against the ATO is that it makes quasi-law via Rulings, which although they are not technically "law" nevertheless represent the ATO's position on a matter unless challenged. It is time-consuming and costly to challenge such rulings so many argue that they represent de facto law. Critically analyze this proposition, including an analysis of the status of Rulings (are they law or administrative pronouncements). Also include in your answer a critical analysis of the proposition that the ATO can make quasi-law by issuing Rulings as most people in the community have not got the resources to challenge them. [Approx 1,500 words]. The present Australian access to tax law-making is featured by a political course focused on and around varied demands from opposing interests, and a legislative yield that establishes on the past with a sequence of corrections and modifications to existent provisions. This of course brings in change but it does not allow elementary reform. Moderately, change comes by creating on the past in tiny steps. The force to react to the demands of coordinated interests forces out thoughtfulness of more liberal issues. The additive style of decision-making omits the opening of inclusive review. The present tax ruling system in Australia misses the essential independence requisite to function fairly for taxpayers. This is because rulings are released by the Commissioner and, given his most important role as tax collector, his rulings are intrinsically partial. This unfairness is challenging because in use, rulings are inclined to achieve a 'de facto' law status and thus, the opinion of the Commissioner is incorrectly applied as if it were law. To re-establish equity in the system, an independent 'rule-maker' is indispensable. The total quantity and the always changing substance of tax legislation are weakening its capacity to direct general obedience. This is because of the practical difficulty in understanding what the law is and what it means. Distinctively, tax law growth has to be established on 5 separate stages 2. They are: 1. Planned stages which entail the progress of a financial plan, an economic policy and a 3 year returns strategy; 2. Strategic Stages which involves the growth of a 3 year work program and a yearly source plan; 3. Functional forms involves laying down of a detailed scheme, an official comprehensive discussion, and Ministerial and Cabinet endorsement of full policy recommendations; 4. Legislative stages will occur in parallel to the functional forms, and is a stage wherein the translation of the comprehensive policy testimonials into legislation are carried out; 5. Finally the Implementation and review stages and the discovery of remedial issues take place. The development of the A.T.O. as the final Authority of the Australian Taxation Office, linking the various vistas of the executive, judicial and even legislative 2 Tax Policy to Tax Law: Processes to Improve Tax Legislation roles have made it difficult to challenge and ATO. Only the biggest corporations and most affluent taxpayers can now have the funds to challenge an A.T.O. decision in court or even seek a judicial re-examine. For the majority the best resource of "legal" assurance is an A.T.O. ruling. The A.T.O. acknowledges this and promotes the approach behind it by declaring itself as the safe harbor to the taxpayer. Suggestions for change are recommended in connection to each stage of the course, and comments on propositions for change made by the RBT in its first report, A strong Foundation3. Under the system of self-assessment some kind of binding ruling process was necessary. The reason being the incapability of tax assessors to continue with the flow of rectifications and case-law for any dependable anticipations of tax liability to be possible. Helpful although it is in present circumstances, the rulings system has unfavorable effects. Actually it steps down the parting of powers. A fundamental principle of that doctrine is that it should have the inability to be change the law at the point of application. That assures the judicial function influences the citizen's rights by acknowledgment to earlier pronounced legal rules and principles and not by personal opinions or external policy conditions. The system of binding rulings allows the A.T.O. to effectively give final decisions, thereby interfering with the judicial function and thus makes the A.T.O. judge in its own grounds. Simultaneously it intersects into the legislative role and the A.T.O. lays down what look more or like statutory rules. If these parting lines become indistinct, due to the expansion of the A.T.O.'s role, 3 See A Strong Foundation, RBT, November 1998, Chapters 7 and 8. other effects will begin to show. Under such a scheme, Professor Waincymer states that, "There is also no guarantee that the administrator will be impartial, fair or would appropriately balance the interests of taxpayers against the interests of revenue collection". On the opposite, there is good cause to worry that regular government stress on the A.T.O. to make the most of accumulations will have the contradictory effect. On the other hand, to actually cure the defects of the system, a wide-ranging approach to tax change always and not just as the system breaks down too badly that there is no scope for alternative. This demands for a neat, methodical, and well-timed approach to tax alteration. The piece-meal, problem by problem approach, with a completely synchronized plan which takes into account the time required for successful consultation, the time required for efficient Parliamentary study, and the time desired for taxpayers to fine-tune with systems alterations and/or midway changes. With a wide founded political dedication to tax reform, the processes of getting tax change enforced so that the payback of reform are accomplished, and such benefits should be enduring. To help taxpayers and practicians in voyaging their way through the complexness of tax law, the Commissioner of Taxation ('Commissioner') brings out public and private rulings, which give his opinion as to the understanding and relevance of the law. The dependence on these tax rulings has augmented noticeably in recent years, mainly since the beginning of self assessment in 1986-874. For example the case of tax practitioners, public rulings now position just after tax legislation in regularity of use and in front of private sector publications, other ATO publications, explanatory memoranda 4 Acknowledged by, for example: Institute of Chartered Accountants in Australia, ROSA Submission No 23, 26 May 2004, p11; R Woellner, 'Private Tax Rulings: some practical problems' Speech delivered at the 50th Anniversary Conference Australasian Law Teachers' Association, 1995. and decisions of courts and tribunals 5. The outcome is that the tax arrangement can now barely be called "law" at all but to a certain extent direct self-important rule. At the same time as the law does keep hold of remnants of its role--judicial reassessment would still put off completely random behavior, such as not allowing deduction of actual self education expenses. It must be understood that for the majority of the citizens the legal system and the conventional examination of legal rights in the tax arena are immaterial. Professor Graeme Cooper, speculates "whether the rule of law is still important in the tax context. For example, the rule of law might be a value that should be given absolute primacy in cases where the curtailment of personal freedoms, or the expropriation, the taking of private property for public use or in the public interest. The taking of U.S. industry situated in a foreign country, by a foreign government etc". It would be a perilous step to vest more and more powers in the hands of the ATO. The constitutional significance of tax law as a model for the association between government and citizen is extensively accepted. Even Justice Murphy admonished that robbing tax officials with more and more judgment "may well lead to tax laws capable, if unchecked, of great oppression". Further, governments may employ tax laws as the medium for the broader attrition of civil liberties. The Hawke government subjugated a suspected "crisis" of tax avoidance which is a "process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income." 5 Auditor-General (Australian National Audit Office) 2001, 'The Australian Taxation Office's Administration of Taxation Rulings' Audit Report Number 3 of 2001/02, Commonwealth of Australia, Canberra, para 3.53. Conclusion It is obvious that the on hand method to get from tax policy to tax law are definitely very source concentrated. But still even though there is a large commitment of resources, the tax law is not easy to deal with. The reason is that it imposes a lot of administration costs. Much of the breakdown of the system is because of the policy decisions that are made, and then the procedure to change those decisions into tax law. The key of the problem has 3 major effects: 1. Changes in Tax is almost always created on a piece-meal basis, with no fundamental approach or suggestion to basic principles and goals; 2. Reference frequently is brought about too late such that any logical and sensible changes cannot be welcomed for everyone to agree; 3. Consultation takes place always in the incorrect forum, or it is not sufficiently synchronized for any sensible impact to be made. Considerable meliorations can be created by following a more prearranged and holistic advancement to the growth of tax policy and tax law. Such growth and changes can be adopted along the lines of the Generic Tax Policy Process enforced in New Zealand. Reference: 1. Taxation Ruling IT2500 2. www.igt.gov.au - inspector journal 3. www.taxmatrix.com.au 4. http://www.ato.gov.au/content/downloads/mei172086nat71156.pdf 5. CCH Australia, Master Tax Guide (2009) - 16-450 p 925 ff. 6. http://law.ato.gov.au/pdf/tr1998-009.pdf 7. http://www.austlii.edu.au/au/cases/cth/FCA/2009/286.txt. 8. http://www.thefreelibrary.com/The+tax+wilderness:+how+to+restore+the+rule+of+law-a0121208077 9. http://www.rbt.treasury.gov.au/submissions/subsdownload/sub076.pdf 10. Arnold, Brian J (1990), 'The Process of Tax Policy Formulation in Australia, Canada and New Zealand', Australian Tax Forum, 7(4), 379-94. 11. Lynch, Anthony & Ziegler, Peter (1987) 'Graphical Analysis of Amendments to the Income Tax Assessment Act (1936-87)', Australian Tax Forum, 4(4), 529-46. 12. Review of Business Taxation (Ralph Report) (1998), A Strong Foundation. Discussion Paper:Establishing objectives, principles and processes, AGPS, November. 13. Sandford, Cedric (1993), Successful Tax Reform. Lessons from an Analysis of Tax Reform in Six Countries, Perrymead, UK: Fiscal Publications. 14. Smith, Julie P (1993), Taxing Popularity: The Story of Taxation in Australia, Canberra: Federalism Research Centre Read More