This file was prepared for Semester1 2019 of CPA program Australia, the study guide is the 4th edition of Advanced Taxation (i.e. Australia Taxation - Advanced)
Highlights:
-excel format and easy to be modified
-each line item includes the page number, key concept, comprehensive knowledge points, ...
Page Concept Contents Comments Mod item
Module1 Tax theory and tax policy and reform (3% weighting)
Part A Tax theory
The principles of taxation and tax theory relevant to a tax regime
15 Fiscal adequacy Definition: 1 1
-the government's ability to meet revenue needs (The Treasury 1974)
-one of the primary objectives of the tax system (Henry Review Report)
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15 Equity Definition: 1 2
three dimensions:-
1.horizontal equity: people who are equally placed have equal tax burdens
2.vertical equity: the wealthy have greater tax burdens than those less fortunately placed
3.intergenerational equity: if investment is directed to meet anticipated future needs, then debt, to be repaid
by future generations, might be a more equitable source of finance than charges imposed on today’s users.
Defining Income for income tax purpose:
-a fair tax system is unlikely to be achieved without a comprehensive tax base which might include cash
income, in-kind income, non-cash income(e.g. imputed income), benefits, capital gains, self-produced
goods.
-Imputed income are not taxable due to practical constraints which creates horizontal inequity between
those pay for services and those avoid paying by providing the services to themselves (Example 1.1).
-individual as the income tax unit can result in horizontal inequity between two households who have the
same taxable income (Example 1.2); the Australian Government is disposed to retain the individual unit
system because it minimises distortion of the choice between paid employment and non-taxable activity (i.e.
a spouse undertaking home duties); in terms of equity, it can achieve fair treatment as between individuals
and it is consistent with the Australian Government’s policy of promoting equal employment opportunity and
of furthering the independence of women.
Progressive tax:
-the rate of tax increases as income increases.
-direct taxes on income
-tax system is gernerally progressive while some other factors might make the tax system less progressive
including indirect taxes (regressive tax), income splitting, avoidance devices, specific tax expenditures
Regressive tax:
-the rate of tax decreases as income increases
-indirect taxes are generally regressive including GST, excise, customs duties, property taxes, taxes on
gambling, tobacco & alcohol.
-example: GST is charged at a constant rate of 10% and higher income earners tend to spend less portion
of their income than lower income earners.
-adjustments include exemptions and the use of several rate classes. However, within each rate class, the
tax is proportionate to expenditure and progression cannot be applied.
Proportional tax: the rate of tax is constant as income increases
Incidence of tax:
-who finally bears the various taxes
-which taxes are wholly passed on, which are partially passed on, and which are not passed on at all.
-those least able to alter their behaviour in response to a tax change will bear a greater portion of the burden
of tax
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19 Economic Efficiency General: 1 3
-putting productive resources to their highest value use and distributing goods and services to consumers in
a way that best satisfies consumer needs and wants
-minimise tax distortions(income effects & substitution effects)
-achieve a neutral tax system
-address market imperfections
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22 Simplicity Genreal: 1 4
-easy to understand tax obligations and entitlements
-minimise compliance costs
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Weighting the tax policy criteria
Political Considerations
23 Tax expenditures Genreal: 1 5
-powerful interest groups can be afforded tax concessions and each of these special provisions involves tax
expenditure by the government.
-tax expenditures can be incurred by the government in many forms, including tax exemptions, tax
deductions, tax offsets, concessional tax rates or deferrals of tax liability.
-tax expenditures are departures from neutrality, which lead to the inefficiencies
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Part B Tax Policy
Australian tax reviews
25 Aspery report General: 1 6
-recommendations centred on broadening the tax base and cutting statutory rates of tax.
-major reforms include CGT, FBT, dividend imputation, large cuts to personal and business income tax
rates, foreign source income
-GST was introduced following the ANTS report in 1998
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Page Concept Contents Comments Mod item
25 Henry Review General: 1 7
-to deal with the demographic, social, economic and environmental challenges (see pp.26）
-proposals suggested were presented in 9 themes (see pp.26)
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25 Draft white paper General: 1 8
-introduction of CGT, FBT
-GST suggested but not implemented
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25 Tax reform: Not a new tax, General: 1 9
a new tax system -key recommendations:
1.replace wholesale sales tax with GST
2.ABN
3.simplified tax system(STS) for small businesses
4.PAYG
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26 Future tax reform General: 1 10
-the discussion paper, in a similar manner to the Henry Review report, focused on the need for tax reform to
respond to the challenges of the 21st century.
-the discussion paper began by mentioning some broader issues with respect to Australia’s tax system.
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Australia's tax system
29 Australia's tax mix General: 1 11
-a substantially higher proportion of revenues from taxes on personal income, profits and gains; taxes on
corporate income and gains; payroll taxes; taxes on property; and taxes on goods and services (excluding
GST)
-a substantially lower proportion of revenues from GST
-no revenues from taxes on social security contributions.
Vertical fiscal imbalance:
-where the states and territories are reliant on the federal government to meet their revenue requirement
-the shortfall is made up by grants from the federal government which include two forms of financial
assistance:
1.general purpose grants, which are the same as block grants and are not tied to specific state expenditure
2.specific purpose grants, which are tied to specific state expenditures
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Income and capital taxes
29 Personal income taxes Four major issues (discussed in part A): 1 12
-the definition of the tax base: broad or narrow
-the degree of progressivity of the tax system
-the tax unit: choice of individual versus couple versus family
-the incidence of tax
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29 Bracket creep (fiscal drag) Definition: 1 13
-where taxpayers face higher average, and sometimes marginal, tax rates over time even if their income has
only increased as a result of inflation.
-governments respond to bracket creep by adjusting the thresholds periodically and providing tax cuts
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30 Characteristics for personal Positive: 1 14
income taxes -they are able to be imposed on a broad base, which results in significant revenue gain at tax rates that are
relatively modest.
-they are progressive in nature.
-they create minimal substitution effects, or other efficiency effects among most working people, particularly
those taxpayers engaged in full-time work.
-on a macro-economic level, they can act as a stabiliser to control the economy.
Negative:
-a flat tax rate could increase GDP by favouring entrepreneurship (a trade off between efficiency and equity)
-discourage savings as returns from savings are taxed
The trend:
-reduction of personal income tax rates and promote saving, investment, entrepreneurship and work
incentives.
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33 Tax concessions for SBEs CGT concessions: M4 1 15
-CGT 15-year asset exemption: Income Tax Assessment Act 1997 (Cwlth) (ITAA97), Subdivision 152-B
-CGT 50 per cent active asset reduction: ITAA97, Subdivision 152-C
-CGT retirement exemption: ITAA97, Subdivision 152-D
-CGT rollover: ITAA97, Subdivision 152-E
-small business restructure rollover relief provided by Subdivision 328-G
GST concessions:
-accounting for GST on a cash basis: A New Tax System (Goods and Services Tax) Act 1999
(Cwlth) (GST Act), s. 29-40
-annual apportionment of input tax credits for acquisitions and importations that are partly
creditable: GST Act, s. 131-5
-paying GST by quarterly instalments: GST Act, s. 162-5
FBT concessions：
-FBT car parking exemption: Fringe Benefits Tax Assessment Act 1986 (Cwlth) (FBTAA), s.58GA
-accessing the FBT exemption for qualifying work-related portable electronic devices, even if the additional
items have substantially similar functions as the first devices: FBTAA, s. 58X(4)(b)
Income Tax concessions：
-PAYG instalments based on GDP-adjusted notional tax: TAA Schedule 1, s. 45-130
-standard two-year period for amending assessments: ITAA36, s. 170
-PAYG instalment reduction: TAA, Schedule 1, s. 45-400
-tax cuts for small business—for the 2017–18 income year and later income years, the tax rate is 27.5 per
cent for a company carrying on a business with aggregated annual turnover of less than $25 million
-expanding ‘accelerated depreciation for small businesses by allowing small businesses … to immediately
deduct assets they start to use or install ready for use, provided the asset costs less than $20,000’ (The
Treasury 2015a) until 30 June 2018
-suspending ‘the current “lock out” laws for the simplified depreciation rules (these prevent small businesses
from re-entering the simplified depreciation regime for five years if they opt out)’ (The Treasury 2015a) until
30 June 2018
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34 Taxing fringe benefits General: 1 16
-a tax payable by employers for befefits paid to an employee in place of salary or wages
-designed to fill the perceived gap in the income tax base
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34 Company tax Objective: 1 17
-to act as a backstop to personal income taxes, preventing high-income earners sheltering savings within
the corporate structure
-if no corporate taxes in place, the business income would not be taxed until it was realised as either
dividends or capital gains.
-recent trend on corporate tax reforms: promote competition and avoid tax-induced distortions in order to
face the challenges of globalisation.
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36 The system of company How dividends are taxed in the hands of shareholders: 1 18
taxation 1.double taxation (classical system)
-separate taxation of the company and the shareholder.
2.partial double taxation (some shareholder relief and also referred to as the ‘split rate’ system)
-uses two different rates of tax, one for profits distributed to shareholders and the other for retained profits.
3.imputation system (no double taxation)
-allows a tax credit to the shareholder in recognition that company tax has been paid on the profits now
distributed.
-Australia introduced the full imputation credit system for resident shareholders in 1987–88 when it switched
from separate taxation of the company and shareholder.
4.exemption
-shareholders do not pay tax on dividends.
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37 Death and gift taxes General: 1 19
-inherited wealth is not currently taxed in Australia
-the only taxes that are imposed on the transfer of real property are conveyance duties.
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38 Land taxes General: 1 20
-significant source of revenue for state and local governments
-narrow tax base due to tax-free thresholds and principal residence exemption
-originally designed to break up large landholdings but now are seen a convenient source of revenue for
state governments
-justifications including undertaxed land due to no tax on principal home and imputed rent
-the fluctuations in the value of land with the economic cycle make a tax on accrued values uneven in its
application
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38 Stamp duties on property General: 1 21
transfers -revenue for state governments
-imposed on transactions involving land or landholding entities
-is normally paid by the buyer and has to be paid within 61 days of the signed sale written agreement
-impose high long-term costs on living standards and discourage housing investment
-advantage: more investments put into other higher return activities
-disadvantage: discourage productive use of housing such as impeding people moving to areas where there
is higher demand for labour or unduly influence a business owner's location choice.
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Domestic consumption and production taxes
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39 GST Advantages: 1 22
-tax rate is relatively low
-consumption taxes can affect labour supply; they do not substantially affect saving and investment. They
also do not adversely affect firms that produce internationally traded goods because they are usually applied
to imports, while exports are exempt. This is particularly attractive to governments who have significant
revenue-raising demands in a highly competitive global market environment.
-low rates of avoidance when adopting the tax invoice method of administration, the ability to
comprehensively tax services, and the ability to provide full and immediate tax credit on input
Disadvantages:
-less progressive or even regressive
-a shift away from corporate taxes to consumption taxes leads to an increase in share prices.
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41 Excise duties General: 1 23
-indirect taxes on specific commodities including alcohol, tobacco and petrol.
-they pass the social and economic cost of the activities associated with these commodities on to the
consumer. The economic role of an excise duty is to compensate for negative externalities.
-excise duties in Australia are indexed every six months to CPI (except in the case of petroleum excises);
the increase with CPI ensures that the real value of excise duty is maintained overtime.
A GST differs from an excise tax in the following ways:
-GST operates as a broad-based tax, whereas an excise tax is levied on specific goods
and services.
-GST is levied on the value of goods and services, whereas an excise tax is levied on units
of a good (e.g. stick of cigarette or concentration of alcohol).
-excise taxes are generally applied to goods with relatively high inelasticity of demand, which means
revenue can be raised with little economic distortion. GST is applied broadly, including on those goods
where there is high elasticity, which can create economic distortions.
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42 Payroll tax General: 1 24
-significant source of state revenue(same as land tax)
-issues related:
1.whether capital can be substituted for labour. If so, a payroll tax may result in taxpayers substituting
capital for labour
2.whether unemployment is caused by the costs of labour or falls in demand
3.the international context in which the labour market operates
4.the comparable impact of substitutes for payroll tax, like a broad-based consumption tax,which may be
either more or less
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Tax-related social and economic policies
43 Tax expenditures General: 1 25
-SAPTO
-R&D tax incentive
-NDIS and medicare levy increase*
-NISA tax incentives*
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43 *NDIS and medicare levy General: 1 26
increase -National Disability Insurance Scheme
-Medicare levy rate to increse from 2 to 2.5 per cent in 2020 tax year
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44 *NISA tax incentives General: 1 27
-National Innovation and Science Agenda tax incentives
-aimed at driving innovative ideas to create business growth, local jobs and success on a global scale.
-there are three areas that will result in a change to the tax law:
1.Same business test
2. Intangible assets depreciation
3. Tax incentives for investment in early-stage innovation companies
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International tax
45 Tax issues in an open General: 1 28
economy -what principle to apply: source or residency?
-how to give relief from double taxation
-how to attract and retain highly mobile international capital
-how to tax trade flows of goods and services
-how to tax income streams generated in different jurisdictions
-how to coordinate communication between revenue authorities
-how to prevent transfer pricing associated with commodity flows and how to limit tax avoidance and evasion
arising from electronic commerce and new technologies
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