Foundations of Australian Taxation Law and the Income Tax Formula
Tax starts with a formula, but a good tax lawyer starts one step earlier: identify the taxpayer, the income year and the legal character of every receipt and outgoing. This chapter builds the framework that every later chapter uses.
What you should be able to do
- Recognise what counts as a tax and why governments impose taxes.
- Evaluate a tax system using equity, simplicity, efficiency, certainty and fiscal adequacy.
- Apply the Australian income tax formula in the correct statutory sequence.
- Distinguish ordinary income, statutory income, exempt income and non-assessable non-exempt income.
- Calculate taxable income, basic income tax liability, offsets and common collection adjustments.
- Use the Week 2 tutorial as a complete tax-return problem rather than a list of disconnected receipts.
Think of the income tax formula as a funnel. Start with all amounts that might be income, remove amounts the law excludes, subtract deductions, then apply rates and offsets. PAYG withholding is not the tax itself; it is a credit collected during the year.
Key language
Issue → Rule → Authority → Application
1.1 Start with the architecture: how Australian income tax actually works
Taxation Law becomes much easier once you stop treating it as a long list of sections and start seeing it as a sequence of legal questions. Almost every income-tax problem can be organised in the same order. First identify who the taxpayer is. Second identify the income year. Third ask what amounts enter assessable income. Fourth identify deductions. Fifth calculate taxable income. Sixth apply the relevant rate, levy and offsets. Finally compare the resulting liability with amounts already paid or withheld.
This sequence is reflected in the legislation. The liability framework begins with the Income Tax Assessment Act 1997 (Cth) (ITAA97), particularly ss 4-1, 4-5, 4-10 and 4-15. Section 4-10 is the bridge between taxable income and the tax payable, while s 4-15 gives the core taxable-income equation: taxable income = assessable income − deductions. A student should know this formula so well that it becomes the mental checklist used whenever a new set of facts is presented.
Do not start a problem by asking “what tax rate applies?” Start by asking: who is taxed, for what year, on what assessable income, after what deductions? A rate is applied only after the legal character of the receipts and outgoings has been resolved.
1.2 What is a tax?
The classic Australian starting point is Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263. The case is used for the proposition that a tax is, in substance, a compulsory exaction of money by a public authority for public purposes, enforceable by law, and not simply a payment for a particular service rendered to the payer. This matters because constitutional and statutory questions often depend on whether an exaction is truly a tax, fee, charge or price for a service.
MacCormick v Federal Commissioner of Taxation is important for the related requirement that a purported tax not be arbitrary in the sense relevant to the constitutional concept. In an introductory chapter, the point is not to turn this into a constitutional-law problem. It is to teach the student that “tax” is a legal category with consequences, not merely a colloquial word for money paid to government.
1.3 Why governments tax: the policy concepts behind the rules
The course identifies several reasons for taxation: funding public goods and social goods; correcting market failures; discouraging harmful consumption or environmental conduct; economic stabilisation; redistribution; and raising sufficient revenue to fund government. These purposes help explain why tax rules sometimes look different even when taxpayers appear economically similar.
When evaluating a tax system, keep seven recurring criteria in mind: equity, simplicity, efficiency/neutrality, certainty, compliance costs, fiscal adequacy and suitability for economic objectives. Horizontal equity asks whether similarly situated taxpayers are treated similarly. Vertical equity asks whether taxpayers with different capacities to pay are treated differently. Progressive individual rates are one mechanism used to pursue vertical equity, but the tax system also contains flat rates, special rates and concessions.
For assessments, policy principles usually support rather than replace statutory analysis. If a question asks whether a payment is assessable, your answer must still begin with the Act. Policy can explain the structure or support an interpretation, but it is not a substitute for the text of ss 6-5, 6-10 or a specific statutory provision.
1.4 The legislative map students must know
| Provision | What it does | How to use it |
|---|---|---|
| ITAA97 ss 4-1, 4-5 | Identify who is liable and the basic income-tax framework. | Use at the beginning of the liability analysis. |
| ITAA97 s 4-10 | Provides the basic income-tax calculation and connects taxable income with rates and offsets. | Use after taxable income has been calculated. |
| ITAA97 s 4-15 | Taxable income = assessable income − deductions. | Core formula for every income-tax problem. |
| ITAA97 s 6-5 | Includes ordinary income in assessable income, subject to jurisdictional rules. | Test salary, business receipts, rent, interest and other receipts with an ordinary-income character. |
| ITAA97 s 6-10 | Includes statutory income where another provision makes an amount assessable. | Use where a specific provision taxes an amount even if it is not ordinary income. |
| ITAA97 ss 6-15, 6-20, 6-23 | Identify amounts that are not assessable, exempt, or non-assessable non-exempt (NANE). | Always check exclusions before adding a receipt to assessable income. |
| ITAA97 s 6-25 | Coordinates overlapping income provisions. | Prevents double counting where more than one rule appears to include the same amount. |
| ITAA97 ss 8-1, 8-5, 8-10 | General deductions, specific deductions and no-double-deduction rule. | Classify each outgoing under the correct deduction provision. |
| ITAA97 s 13-1 | Index to specific deductions. | Useful research gateway when s 8-1 does not resolve the deduction. |
| ITAA97 ss 36-10, 36-15 | Calculate and deduct tax losses for relevant taxpayers. | Use where deductions exceed assessable income. |
| ITAA36 s 21 | Money-value rule for non-cash consideration. | Valuation rule only; it does not itself make an amount income. |
| ITAA97 ss 6-5(4), 6-10(3) | Constructive receipt rules. | Relevant where income is dealt with on the taxpayer's behalf rather than paid directly. |
| ITAA36 s 23L / ITAA97 exclusions | Coordinates fringe-benefit treatment and income-tax treatment. | Do not automatically include a fringe benefit in the employee's assessable income. |
| TAA53 Sch 1 Div 357 | Framework for rulings and taxpayer protection. | Use when discussing certainty, reliance and ATO advice. |
1.5 Assessable income: ordinary income and statutory income are different questions
A common exam mistake is to say that something is “income” without identifying the legal route by which it enters assessable income. The better approach is to ask two questions. First, is it ordinary income under s 6-5? If not, second, does a specific statutory provision under s 6-10 include it?
Ordinary income is a judicial concept. Courts have developed characteristics that often indicate income: periodicity, recurrence, connection with employment or services, receipts from business, and returns from property. But no single characteristic is decisive in every case. Capital receipts, gifts and windfalls can fall outside ordinary income, although another statutory provision may still apply.
Federal Coke Co Pty Ltd v FCT and Zobory v FCT are useful reminders that characterisation turns on the receipt in the hands of the taxpayer and the circumstances in which it is derived. FCT v Myer Emporium Ltd becomes especially important later because a one-off gain may nevertheless be ordinary income when made in a business operation or commercial transaction entered into with a profit-making purpose. For now, the lesson is simply that “one-off” does not automatically mean “capital”.
1.6 Amounts that do not enter assessable income
Students must actively test whether an apparent receipt is excluded. Section 6-15 directs attention to amounts that are not assessable. Section 6-20 deals with exempt income, while s 6-23 deals with NANE income. These classifications matter because they can affect deductions and losses differently.
Examples in the course include certain Defence Force or reserve payments, maintenance payments, fringe-benefit interactions, and GST components. The correct answer is not “tax-free” unless you can identify why. State whether the amount is not ordinary income, exempt income, NANE income, or excluded by a specific rule. That precision is what turns a general answer into a legal answer.
1.7 Deductions and tax losses
After assessable income is identified, deductions are subtracted to calculate taxable income. Section 8-1 is the general deduction provision and will receive detailed treatment later. Section 8-5 recognises specific deductions, and s 8-10 prevents a double deduction. A student should never write “expense = deduction”. The legal question is whether the expense satisfies a deduction-conferral provision and is not excluded by a denial provision.
If deductions exceed assessable income, the result may be a tax loss rather than a negative taxable-income figure. Sections 36-10 and 36-15 govern the calculation and later use of losses for relevant taxpayers. This is the legal foundation behind common discussion of “negative gearing”: the activity may generate deductible outgoings exceeding income, and the tax effect depends on the loss rules and the taxpayer's other income.
1.8 Rates, Medicare levy, offsets and collection: do not confuse the stages
Once taxable income is known, the rate schedule for the relevant taxpayer and income year is applied. Resident individual rates are progressive. Companies generally face a flat rate, with the course materials distinguishing the general company rate from the base-rate-entity rate under the Income Tax Rates Act 1986 (Cth), including ss 23AA and 23AB.
The Medicare levy is analytically separate from income tax. The course directs attention to ITAA36 ss 251R and 251S and the relevant thresholds. Tax offsets are then considered. A tax offset reduces tax payable; a deduction reduces taxable income. Mixing those concepts produces calculation errors.
PAYG withholding is also separate. If an employer withholds tax from salary, the gross salary is ordinarily still the amount considered for assessable-income purposes. The withholding is a credit against the ultimate liability. The student therefore calculates the liability first and applies withholding credits later when determining the balance payable or refund.
1.9 Non-cash receipts and constructive receipt
Tax problems often try to distract students by changing the form in which value is received. Section 21 ITAA36 provides a money-value rule for non-cash consideration. But remember the distinction between characterisation and valuation: s 21 does not itself turn a non-income item into assessable income. First identify a provision that makes the receipt income; then use the appropriate valuation rule.
Sections 6-5(4) and 6-10(3) address constructive receipt. Income can be treated as derived where, at the taxpayer's direction, it is applied or dealt with on the taxpayer's behalf. This is why paying an amount to a third party can still amount to derivation by the taxpayer. In an exam, write the steps separately: (1) what is the income? (2) who derived it? (3) when was it derived? (4) how is it valued?
1.10 Case authority map: what each case is doing
| Authority | Legal proposition | When to use it |
|---|---|---|
| Matthews v Chicory Marketing Board | Classic description of a tax as a compulsory exaction for public purposes rather than payment for services. | Definition and character of a tax. |
| MacCormick v FCT | Important constitutional authority concerning the requirement that taxation not operate as an arbitrary exaction. | Introductory nature-of-tax discussion. |
| FCT v Myer Emporium Ltd | A commercial profit from an isolated transaction may be ordinary income where the profit-making purpose and commercial character support that conclusion. | Do not assume a one-off gain is capital. |
| Zobory v FCT | Character of a receipt is determined in the taxpayer's hands and by its real legal/economic character. | Characterisation of receipts. |
| Federal Coke Co Pty Ltd v FCT | Shows the importance of identifying the derivation and character of a payment in the hands of the recipient. | Third-party payments and receipt character. |
| FCT v Cooke & Sherden | Non-cash benefits not convertible into money were not ordinary income on the facts. | Convertibility and non-cash income; later compare s 21A. |
| Payne v FCT | Frequent-flyer rewards were not assessable as ordinary income on the facts. | Non-cash rewards and connection with earning activity. |
| FCT v La Rosa | Historically illustrates the breadth of nexus concepts, now subject to statutory denial such as s 26-54. | Why a positive deduction nexus is not the end of the analysis. |
| Martin v FCT; Case K25 | Illustrate the distinction between hobby/gambling activity and business. | Whether receipts/losses arise from a business. |
| Kelly v FCT | Prize or award can be income where sufficiently connected with employment or income-producing activity. | Prize/award characterisation. |
1.11 Tutorial masterclass — Alex: turn the facts into a tax computation
The Week 2 tutorial is deliberately broad. Alex has salary, a fringe benefit, an employer gift voucher, Uber income and tips, rent, bank interest, inherited property, Army Reserve income, lottery winnings, a net capital gain, a returned club contribution, work/Uber/rental deductions, HELP debt and an earlier-year loss. The teaching purpose is to force you to classify each item independently before performing the arithmetic.
Step 1 — Build an issue table before calculating
| Fact | Question to ask | Likely legal pathway |
|---|---|---|
| Salary | Gross or net amount? What is the effect of withholding? | s 6-5; withholding is later credited. |
| Employer fringe benefit | Is it included in Alex's assessable income or dealt with under FBT? | Check s 23L and the FBT interaction. |
| Birthday gift voucher | Employment reward or genuine personal gift? | s 6-5; potentially s 15-2 depending facts. |
| Uber fares and tips | Business receipts? Is the GST component assessable? | s 6-5; GST exclusion/NANE coordination. |
| Rent and interest | Returns from property? | s 6-5. |
| Inheritance | Income or capital/windfall? | Ordinary-income characterisation; CGT consequences may arise later but are not automatically current income. |
| Army Reserve payment | Is there a specific exemption? | Check s 51-5 and relevant item. |
| Lottery winning | Windfall or proceeds of a gambling business? | Ordinary-income principles; Martin/Case K25 if business issue arises. |
| Net capital gain | Already calculated statutory income? | s 102-5. |
| Returned club contribution | Return of capital or income? | Characterisation in Alex's hands. |
Step 2 — Calculate only after classification
A high-quality answer should show a subtotal for assessable income, then a subtotal for deductions, then taxable income under s 4-15. Only after that should you apply the individual rate schedule, Medicare levy if applicable, offsets, HELP repayment rules if the problem requires them, and PAYG credits. If there is a carried-forward tax loss, apply ss 36-10 and 36-15 in the correct statutory order.
Step 3 — Explain negative gearing rather than merely using the label
If Alex's rental deductions exceed his rental income, the economic activity has generated a net rental loss. “Negative gearing” is not itself a deduction section. The legal effect arises because individual deductible outgoings are allowed under the relevant provisions and then enter the taxpayer's overall taxable-income calculation. A student should always identify the actual deduction provisions and loss rules rather than treating “negative gearing” as a freestanding rule.
1.12 How to write the IRAC answer
I — Issue
Identify each receipt and outgoing separately, then state the overall computation issue: which amounts are assessable, which deductions are available, what is Alex's taxable income, and what is the resulting liability/refund?
R — Rule
State s 4-15, then the relevant inclusion or exclusion provision for each item. Use s 6-5 for ordinary income, s 6-10 for statutory income, ss 6-15/6-20/6-23 for exclusions, the relevant deduction provisions, and ss 36-10/36-15 for losses. Cite the authority that explains any contested characterisation.
A — Application
Apply the facts item by item. Do not write one paragraph saying “most receipts are income”. Explain why salary, business receipts, rent and interest have an income character; why a genuine inheritance or lottery windfall may not; why a specific exemption or NANE provision matters; and why GST or withholding must not be double-counted. Then show the arithmetic in a separate calculation.
C — Conclusion
State the taxable income and, if all necessary rate/levy information is supplied, the final liability or refund. If an item is fact-sensitive, give the better view and the alternative consequence.
1.13 Common mistakes to avoid
- Using net salary after PAYG withholding instead of gross salary for income characterisation.
- Calling every cash receipt ordinary income without identifying the source or character.
- Ignoring statutory income because an amount is not ordinary income.
- Calling exempt income and NANE income the same thing.
- Treating a tax offset as a deduction.
- Subtracting a capital loss from ordinary income rather than applying the CGT rules.
- Using “negative gearing” as if it were a statutory provision.
- Calculating before classifying each receipt and outgoing.
1.14 Plain-English chapter summary
The tax system is a legal classification exercise followed by a calculation. Identify the taxpayer and year. Work out assessable income by asking whether each receipt is ordinary income or statutory income and whether an exclusion applies. Work out deductions under a real deduction provision. Calculate taxable income under s 4-15. Apply the rates, levies and offsets. Finally apply credits such as PAYG withholding. If you can perform those steps carefully, every later topic—residency, business income, CGT, deductions, anti-avoidance and administration—has somewhere to fit.
Deep Teaching Commentary — Learn the Doctrine, Then Learn How to Use It
Australian income tax is easiest to learn when the student separates the legal stages. The first question is not “how much tax is payable?” It is “who is the taxpayer, what is the income year, and what legal category does each receipt or outgoing fall into?” Only after those classifications are made should the arithmetic begin. This ordering prevents a common error: treating every cash inflow as income and every expense as a deduction.
The legislative structure is cumulative. The ITAA97 identifies who pays income tax and the method for working out taxable income; the ITAA36 continues to contain important definitions, integrity rules and legacy provisions; the Income Tax Rates Act supplies rates; and the Taxation Administration Act 1953 (Cth) provides much of the collection, withholding, ruling, penalty and procedural machinery. A university answer should therefore name the Act and provision rather than referring vaguely to “tax law”.
This chapter also establishes the difference between a liability rule and a collection rule. PAYG withholding is normally a credit against the ultimate liability, not a substitute for calculating the liability. Likewise, a tax offset is not a deduction: deductions reduce taxable income; offsets reduce tax after the tax on taxable income has been calculated. A tax loss is different again because it arises from the statutory loss calculation and may be carried forward subject to the applicable rules.
The source materials deliberately introduce a series of structural principles—realisation, beneficial derivation, character in the hands of the recipient, non-cash valuation, capital/revenue distinction, illegality, windfalls, gifts, compensation and mutuality. These are not isolated trivia. They are recurring filters that explain why later receipts are included or excluded.
Provision-by-provision teaching guide
| Provision / regime | What it does | How to use it in a university answer |
|---|---|---|
| ITAA97 ss 4-1, 4-5, 4-10 and 4-15 | These provisions supply the basic liability architecture. Section 4-15 gives the core taxable-income formula: assessable income less deductions. Section 4-10 then connects taxable income with the rate rules and tax offsets. | Use these provisions at the beginning of a full tax-liability problem so the marker can see that the calculation follows the statutory sequence. |
| ITAA97 ss 6-5 and 6-10 | Section 6-5 brings ordinary income into assessable income; s 6-10 brings statutory income into assessable income. The two categories overlap in everyday language but are legally distinct. | For every receipt, ask ordinary income first, then identify any specific statutory inclusion. Do not simply call everything “income”. |
| ITAA97 ss 6-15, 6-20 and 6-23 | These provisions direct attention to amounts that are not assessable, exempt income and non-assessable non-exempt (NANE) income. The distinction matters because exempt and NANE amounts can interact differently with loss and deduction rules. | Use them whenever a fact pattern includes fringe benefits, military/other statutory exemptions, GST components or a specific exclusion. |
| ITAA97 ss 8-1, 8-5 and 8-10 | Section 8-1 is the general deduction rule, s 8-5 recognises specific deductions and s 8-10 prevents double deductions. | Never write “expense = deduction”. Identify a deduction-conferral provision and then test any denial rule. |
| ITAA97 ss 36-10, 36-15 and 36-17 | These provisions deal with the calculation and use of tax losses. The source materials distinguish non-corporate and corporate loss rules. | Use after the taxable-income calculation shows deductions exceeding assessable income; do not confuse a tax loss with a capital loss or a tax offset. |
| ITAA36 s 21; ITAA97 ss 6-5(4) and 6-10(3) | Section 21 provides a money-value rule for non-cash consideration. The constructive receipt rules prevent a taxpayer avoiding derivation merely by directing payment elsewhere. | Separate characterisation from valuation: first identify why the receipt is income; only then value it. |
| ITAA97 s 17-5; ITAA36 s 23L | The source materials use these provisions to demonstrate amounts kept outside assessable income, including GST payable on a taxable supply and fringe benefits in the employee’s hands. | When a gross cash figure includes GST or an employer-provided benefit, isolate the statutory treatment rather than taxing the headline number. |
| TAA53 Sch 1 Div 357 | The ruling regime can protect a taxpayer who relies on an applicable ruling even where the law later proves less favourable. | Use this provision to distinguish administrative protection from the substantive source of the tax liability. |
Cases, rulings and authorities — proposition + exam function
| Authority | Proposition taught by the source material | When to use it |
|---|---|---|
| Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 | Classic definition of a tax as a compulsory exaction by public authority for public purposes, enforceable by law and not simply a payment for services. | Use when the legal character of an exaction matters. |
| MacCormick v FCT 84 ATC 4230 | The source materials use the case when discussing the requirement that taxation be legally contestable rather than arbitrary. | Use in the introductory constitutional/administrative understanding of taxation. |
| FCT v Myer Emporium Ltd 87 ATC 4363 | Introduces the importance of characterisation, realisation and profit-making transactions; it reappears later in the course. | Use cautiously in Chapter 1 as a structural principle, then fully in the business-income chapter. |
| FCT v Cooke & Sherden 80 ATC 4140 | Shows that a non-cash benefit may fail to be ordinary income where it is not convertible into money, subject today to statutory rules such as s 21A in business contexts. | Use when a benefit is valuable but not cash or readily realisable. |
| Payne v FCT 96 ATC 4407 | Used with Cooke & Sherden to reinforce the convertibility/value problem for non-cash receipts. | Use for non-cash receipt characterisation before applying later statutory additions. |
| Zobory v FCT 95 ATC 4251 | Supports beneficial derivation: an amount must be derived by the taxpayer beneficially rather than held for another. | Use when the taxpayer receives money subject to an obligation to account to someone else. |
| FCT v La Rosa 2003 ATC 4510 | Illustrates that illegality alone does not necessarily prevent income or deduction consequences, although Parliament may enact specific denial rules such as s 26-54. | Use to separate general characterisation from specific statutory denial. |
| Martin v FCT (1954) 90 CLR 470 and Case K25 78 ATC 243 | The materials use these authorities to contrast ordinary recreational gambling/windfalls with a genuine gambling business. | Use where repeated betting or prize activity raises the business threshold. |
Matching tutorial — fact-by-fact reasoning map
Start with the gross salary as the income figure. Treat PAYG withheld as a collection credit at the end of the liability calculation, not as a reduction of salary income.
Ask whether it is a fringe benefit within the FBT regime and therefore excluded from the employee’s assessable income under the identified ITAA36 provision. Do not tax the taxable value again to the employee.
Characterise the voucher by asking whether the employment relationship is the real cause of the benefit or whether it is a personal gift. If employment is the source, consider the personal-exertion and fringe-benefit regimes.
Separate the GST component from the underlying business receipt. The statutory GST exclusion prevents the GST payable component being treated as assessable income.
Cash not banked can still be derived. The practical question is character, not whether the taxpayer deposited the money.
These are classic returns from property and ordinarily form part of assessable income, subject to timing rules developed in later chapters.
Do not assume a large receipt is income. Apply the ordinary-income characteristics, statutory inclusions and the windfall/capital distinction.
Include the net capital gain under s 102-5 only after the CGT method statement has been applied; do not insert gross sale proceeds into ordinary income.
Apply the deduction provisions to each outgoing and apportion mixed/private amounts where required. A loss from the rental activity can affect the taxable-income calculation subject to the loss rules.
Use ss 36-10 and 36-15 in the statutory order. State the amount carried forward and the extent to which it can be deducted in the current year.
How to write this chapter in IRAC / tax-problem form
Issue. Identify the taxpayer, income year and transaction. Break the problem into separate receipts, outgoings, CGT events or administrative decisions. Do not write one broad issue such as “what tax is payable?”.
Rule / Law. Start with the exact Act and provision. If the section contains multiple limbs, subsections, paragraphs, exceptions or a method statement, set them out in the order in which they operate. Then add the case, ruling or ATO authority for the particular proposition it explains.
Application. Apply one fact to one legal element at a time. Compare the facts with the authority and deal with the strongest alternative characterisation. Where the law requires a calculation, show the legal order and the arithmetic together.
Conclusion. State the legal tax consequence and amount where possible. Then add any associated loss, penalty, objection/review, timing or administrative consequence relevant to the chapter.
Chapter mastery — 15 questions with model answers
Source-Coverage Audit — Every Statutory Reference in the Supplied Materials
This completeness layer preserves every detected Act, Part, Division, Subdivision, section, subsection, paragraph and method-statement reference from the supplied Forum/Tutorial materials. Use the teaching chapter above for explanation; use this audit to ensure no source reference is silently omitted.
Source-Coverage Audit — Every Case, Ruling and Authority in the Supplied Materials
Every detected case or ruling from the aligned materials is retained here. The blue link opens an AustLII search so the authority can be checked and later replaced with the most direct official/public judgment link where appropriate.
Detailed Forum / Lecture Source Notes — Completeness Layer
The following is the detailed teaching layer derived from the supplied Forum material. It is kept deliberately full at draft stage so that the final editing pass can improve prose without losing doctrine, examples, calculations or statutory detail.
What Is A Tax?
and enforceable by the law. It is not a payment for services rendered:
Matthews v Chicory Marketing Board (1938) 60 CLR 263.
Why Do We Have Taxes?
difficult or undesirable).
Excises on tobacco & alcohol)
Some Introductory Points
• https://www.ato.gov.au/media-centre/2022-23-taxation-statistics-
released
• https://www.abs.gov.au/statistics/economy/government/taxation-revenue-
australia/latest-release
• Income Tax Assessment Act 1936 (ITAA36), and
• Income Tax Assessment Act 1997 (ITAA97).
• Sections: 6-5(4), 8-1(1), 15-2, 25-5, 83A-25, 102-5?
• Sections: 6(1), 21, 21A(2), 99A, 102AE, 109?
How to read Austlii in this context? How to find legislation in Austlii?
• If you see s 25(1), how should you read this?
• How do you read 51(1)?
• How do you read s 26(e)?
are compulsory reading.
Criteria For Evaluating A Tax System
(a) Horizontal equity - similarly placed taxpayers should be treated
similarly
Sarah:
Margaret:
Trevor:
other taxable income.
Do they all have the same ability to pay tax even though they each have the
same taxable income?
Issues:
their ability to pay tax?
(b) Vertical equity: differently placed taxpayers should be treated
differently
the average rate of tax increases proportionately with income) and social
security payments to lower income earners. See further below for the
current tax rates for individuals.
derived by the taxpayer that is taxed
proportionately with the income earned. Eg - the company tax rate =
30% (or 25% for some smaller companies - see below) - it is a flat
rate (no zero threshold))
Tax Rates
Rates of tax for Australian resident individuals
follows:
|Taxable Income Cohort |Marginal Rate of Tax |
| |(*) |
|$0 - $18,200 |0% |
|$18,201 - $45,000 |16% |
|$45,001 - $135,000 |30% |
|$135,001 - $190,000 |37% |
|$190,001 and above |45% |
Australian resident individuals, which can speed up your calculations is:
|TAXABLE INCOME |TAX ON COLUMN ONE |% ON EXCESS |
|$18,200 |NIL |16 |
|$45,000 |$4,288 |30 |
|$135,000 |$31,288 |37 |
|$190,000 |$51,638 |45 |
16% rate will reduce to 15% for the 2026/27 income year, and to 14% from
the 2027/28 income year. The taxable income cohort to which these changed
rates apply will still be from $18,201 to $45,000. See: Treasury Laws
Amendment (More Cost of Living Relief) Act 2025.
for part of the income year, their tax-free threshold is apportioned for
the number of months they are a resident (including the month they
become, or cease to be, a resident) using the following formula (s 20(1)
Income Tax Rates Act 1986 (Cth) (ITRA86)):
$13,464 + [$4,736 × (number of months taxpayer was a resident for the
year ÷ 12)]
Rates of tax for Australian non-resident individuals for the entire year
income year, the following rates apply to their taxable income:
|TAXABLE INCOME |TAX ON COLUMN ONE |% ON EXCESS |
|$0 |NIL |30 |
|$135,000 |$40,500 |37 |
|$190,000 |$60,850 |45 |
Special tax rates for eligible income of minors
resident child (aged under age 18 on 30 June 2026) under Div 6AA ITAA36:
|Eligible Taxable Income |Tax payable |
|$0 - $416 |Nil |
|$417 - $1,307 |66% of the excess over |
| |$416 |
|$1,308 and above |45% of the entire amount |
Broadly speaking, eligible taxable income includes unearned income such
as bank interest, rent and dividends.
However, if the child’s income is “excepted” taxable income, then the
ordinary resident individual tax rates apply to that part of income.
• employment income
• business income
• bank interest derived from the investment of a damages payment the
child received for a personal injury
• income that arose from a deceased person’s trust estate from their
property
• income derived from the property of a testamentary trust.
Company tax rate
company is a “base rate entity” in which case a 25% rate applies instead.
A company is a base rate entity for an income year if (s 23AA ITRA86):
i) 80% or less of its assessable income for the year is “base rate
entity passive income”, and
ii) its annual aggregated turnover is under $50m (calculated at the end
of the year).
for the complete list):
• dividends and any franking credits attached
• interest income (some exceptions apply)
• rent
• royalties
• a net capital gain
Update
that it intends to introduce:
• a minimum tax rate of 30% on net capital gains accruing from 1 July
2027, and
• from 1 July 2028, trustees of discretionary trusts will pay a minimum
30% tax on the trust’s net income, with beneficiaries eligible for a
non-refundable tax offset for tax paid by the trustee.
We will consider proposed negative gearing and CGT discount changes in
subsequent Forums.
Medicare Levy
are liable to pay the Medicare Levy: s251S ITAA 36.
individual (including minors) for an income year.
not, they must apply for an exemption.
Australian resident who was single had:
• taxable income of $27,222 or less, their levy was nil.
• taxable income exceeding $27,222 but was $34,027 or less, then they
paid the levy at 10% for every dollar above $27,222.
• taxable income of $34,028 or above, then the full Medicare levy is
payable at 2% of taxable income.
individual, married, senior citizens, and the number of children. Only
the thresholds for single individuals (non seniors) are considered in
this course.
thresholds following the 2026 Budget.
is only a part-year resident, there is a proportionate reduction in the
levy otherwise payable on a ‘days basis’ so the levy only applies to the
residency period in the income year.
Medicare Levy Surcharge
income”, resident individual (who is entitled to Medicare benefits) does
not have the required level of private patient hospital insurance cover
with a registered health fund.
insurance to alleviate the pressure on the public health system. This is
because the MLS is not payable by them if they have such cover.
who are: unmarried; do not have dependents; and who do not have private
patient hospital health insurance; is as follows:
|TAXABLE INCOME FOR MLS |MLS RATE (%) |
|NIL - $101,000 |NIL |
|$101,001 - $118,000 |1.0 |
|$118,001 - $158,000 |1.25 |
|$158,001 and above |1.50 |
such as reportable fringe benefits and reportable superannuation
contributions. Different MLS thresholds apply for families, and for
single taxpayers with dependents.
taxpayer’s taxable income (plus reportable fringe benefits).
Activity
dependents. He does not have private health insurance. Andrew’s taxable
income for the 2025/26 income year is $200,000. Answer the following
i) How much tax will he pay?
ii) What is Andrew’s average rate of tax?
iii) What is Andrew’s marginal rate of tax?
Low Income Tax Offset
(see Subdiv 61-D ITAA97). It is an important tax offset to know because
of its wide application.
individuals as follows:
|TAXABLE INCOME (TI) |TAX OFFSET |
|$0 - $37,500 |$700 |
|$37,501 - $45,000 |$700 - ([TI - $37,500] x 5%) |
|$45,001 - $66,667 |$325 - ([TI - $45,000] x 1.5%) |
|$66,668 or more |NIL |
taxable income of a resident minor.
apportioned for the residency period.
permanent Working Australians Tax Offset (WATO) of $250 from the 2027/28
income year. It will apply to income derived from work (eg salaries,
wages and the business income of sole traders).
income derived from work will increase to $19,985, and to $24,985 for
those entitled to the full LITO.
Study and trade support debts
their tuition fees at university or other higher education institution.
Other types of loans are available for certain apprenticeship costs or
vocational training student loans.
repay their loan until their “repayment income” (i.e. taxable income,
plus amounts such as net investment losses, reportable fringe benefits,
and reportable superannuation contributions) reaches a certain threshold.
For 2025/26, the threshold is $67,000.
levels of repayment income for the 2025/26 income year:
|Repayment income |Repayment required |
|$0 - $67,000 |Nil |
|$67,001 - $125,000 |Nil, plus 15% of the excess over $67,000 |
| | |
|$125,001 - $179,285|$8,700, plus 17% of the excess over |
| |$125,000 |
|$179,286 and over |10% of total repayment income |
Summary: Calculating liability to the ATO or refund due
To calculate a taxpayer’s liability to the ATO or refund due (once taxable
income has been determined), the following steps may generally be followed
for the income year:
taxable income
- noting that any resulting excess is not refunded)
tax offset, franking credit tax offset for individuals)
amounts)
Rose, aged 23 and single, has a taxable income of $136,000 for the 2025/26
income year. This taxable income figure includes $100,000 in gross salary
Rose derived from her employment, and her employer withheld $27,000 in tax
from her salary under the Pay-As-You-Go (PAYG) withholding system for the
year.
Rose does not have private patient hospital health insurance. Rose does
however have a HELP debt of $58,250 as at 30 June 2015. Rose has a tax
offset of $2,800 for the 2025/26 income year.
Calculate Rose’s liability to the ATO for the 2025/26 income year.
Tax
Tax on $135,000 = $31,288
Tax on $1,000 [37% x ($136,000 - $135,000)] = $370 $31,658
Subtract Tax Offsets ($2,800)
$28,858
Add Medicare Levy
Levy on $136,000 (2% x $136,000) $2,720
Add Medicare Levy Surcharge
Surcharge on $136,000 (1.25% x $136,000) $1,700
Add HELP repayment
Repayment on $136,000 [$8,700 + (17% x ($136,000 - $125,000)] $10,570
Less PAYG Withholding
PAYG Withholding tax credit ($27,000)
Liability to ATO ($28,858 + $2,720 + $1,700 + $10,570 - $27,000) $16,848
Rose’s accumulated HELP debt will be reduced to $47,680 (i.e. $58,250 -
$10,570).
$10,000?
The Tax Formula
Levy of income tax
Calculation of income tax
Income tax = (Taxable Income x Tax Rates) - Tax Offsets
sections 251R and 251S of the ITAA 36.
capacities and is taken to be a different entity in each of those
capacities: s 960-100(3) ITAA97. For example, an individual can act in
their personal capacity, as well as in the capacity as trustee of a
trust.
Taxable income
Assessable Income
• Exempt fringe benefits: s 23L(1A) ITAA36
• Army, navy airforce reserve income (provided it is not for continuous
full-time service): s 51-5 ITAA97 (item 1.4)
• Maintenance payments to a spouse or child: s 51-30 (item 5.1), and 51-
50 Itaa97.
Review Divisions 50, 51 and 52 of the ITAA 97 for some more examples of
exempt income.
• GST payable on a taxable supply (s 17-5 of the ITAA 97);
• fringe benefits (s23L(1) of the ITAA 36); and
• others (see Subdivision 11-B of the ITAA 97).
[The non-Australian source income of individuals who are regarded as
temporary residents of Australia for tax purposes is also regarded as
NANE income.[1] This point is only made for your awareness. You will not
be tested on this point.]
statutory income generally [emphasis added] prevails over ordinary
income. Read this section very closely! We will discover an important
exception to this rule in the context of CGT in a later Forum.
Deductions
Tax Offsets
taxpayer of a deduction? What is the value to a taxpayer of a tax offset?
sum of personal tax offsets is limited to the amount of income tax
(excluding Medicare levy and surcharge) otherwise payable by the
taxpayer. Excess tax offsets are generally not refunded, unless they are
subject to the refundable tax offset rules (see Division 67 ITAA 97 -
e.g. imputation credits for individuals are refundable). Refundable tax
offsets can be applied against the Medicare levy and surcharge.
subtracting non-refundable tax offsets but before subtracting refundable
tax offsets.
from the salary or wages earned by an employee under the Pay-As-You-Go
(PAYG) Withholding system. This is one example of how the PAYG
withholding system operates. The machinery of the PAYG system is provided
for in the Taxation Administration Act 1953 (Cth) (TAA53), Sch 1.
Assuming the taxpayer has a taxable income for the year, once the ATO
performs an assessment in respect of their taxable income and the tax
payable on their taxable income for the income year (i.e. applying the
formula in s 4-10(3) ITAA 97), a credit is available for the tax that
their employer has withheld from their pay under the PAYG withholding
system (and reported on their ATO income statement for the year). In
other words, this PAYG credit is technically not regarded as a tax
offset.
Tax losses
entities
Divisions 165 and 166 of the ITAA 97) - You will consider this in
Taxation of Business Entities. For now, just be aware that special rules
apply to companies.
distinguished from a capital loss.
The Administration Of Australia’S Income Tax Regime
▪ Overview of the appeal process.
A tax ruling binds the Commissioner if it applies to the taxpayer and
they follow it. If the taxpayer follow the ruling, and the law turns out
to be less favourable than the ruling, the taxpayer is protected by the
ruling from any adverse consequences: Div 357 TAA53, Sch 1.
Key Income Tax Principles
The following principles are a starting point only. We will expand on these
principles and add to them in subsequent Forums.
ability to pay tax (eg Medicare levy low income thresholds; MLS rate).
year.
for the year ending 30 June). See sections 4-1, 4-5 and 4-10 of the 1997
Act.
and does not use economic valuation concepts such as present value.
that is payable in two years, the full face value of $1,000 is included
in assessable income today, rather than a discounted present value.
the consideration is used.
income if it is not already characterised as income.
to pay income tax on the income of a trust estate (note, there are
exceptions to this which you will consider in the Taxation of Business
Entities subject).
reflects this principle.
receipt principle.
of the 1997 Act, and the interaction with the FBT Act, must be considered
in this context. We will discuss this in future Forums.
unfair for taxpayers to pay tax on a benefit in situations where funds
can not be accessed from the benefit in order to meet a tax obligation.
income to the fruit.
gains tax) have reduced the importance of the income vs capital
distinction in relation to assessable income, the distinction is still
important.
of expenditure on illegal activities where the requirements of the
provision are satisfied).
income producing activities. Eg Martin v FCT (1954) 90 CLR 470
ATC 243
Eg Kelly v FCT 85 ATC 4283
usually not regarded as ordinary income.
him/her self)
club or association, and refunds to members are not assessable, as there
is no real gain.
-----------------------
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úñññææßßÛ×ÍÆÍ×ß××Í׿ß浨 ¨ ¨ ™™•™™™™•™™™™•™™™™™™™™™™™™™™hÛ-k
hë0RhÛ-khÛ-khÛ-k\? hÛ-k\?hThere are some exceptions for foreign source
personal exertion income and capital gains on shares and rights acquired
under employee share schemes. Also note that although many capital gains
and losses derived by temporary residents are now disregarded, their net
capital gains are not regarded as NANE income (see sections 768-910 and 768-
915 of the ITAA 97).
Matching Tutorial — Full Problem Source and Teaching Integration
The tutorial is part of the chapter, not an afterthought. Read the facts by turning each receipt, outgoing, event or procedural step into a separate issue. Write the relevant provision beside each issue before applying the cases.
Tutorial 1 - Week 2
In this subject:
The Current Income Year (CIY) is the 2025/26 income year.
The Prior Income Year (CIY) is the 2024/25 income year.
The Future Income Year (FIY) is the 2026/27 income year.
Question 1
Alex Chen lives on the Gold Coast and is an Australian tax resident for the entire CIY. Alex is single, with no dependants, and he does not have private health insurance. Alex’s receipts and related expenses for the CIY are set out below.
Receipts
Alex derived salary from his employment of $100,000 for the CIY. Alex’s employer withheld $25,000 from this amount under the PAYG withholding system, so the net salary Alex received in his bank account was $75,000.
Received a fringe benefit from his employer with a taxable value of $1,500. If relevant, assume this is not a reportable fringe benefit.
Received a $100 Westfield gift voucher from his employer for his 30th birthday.
Alex is an Uber driver in his spare time. He received $11,000 during the CIY from his customers (which includes $1,000 in GST as Alex is GST registered).
Received tips from customers as an Uber driver totaling $440 (including GST). Assume $110 of these tips were in cash that Alex did not bank.
Alex received rent of $35,000 from a residential investment property he owns in Brisbane that he purchased 2 years ago.
Derived bank interest of $3,000.
Alex inherited an antique dining table from the estate of his late aunt during the CIY. The dining table is convertible into cash and has a money value of $3,000.
Alex joined the Army Reserve in the CIY and he derived $4,000 in army reserve income for the CIY.
Alex won $500 in lottery winnings from Powerball.
Alex had a net capital gain for the CIY of $5,000 (see s 102-5 ITAA97).
Alex is a member of tennis club in his local area. Two years ago, Alex contributed $1,000 to the club to help finance renovations to the club house. The works ended up being less extensive than originally planned, and the club returned $400 of these funds to Alex during the CIY.
Expenses
Alex had work-related deductions for the CIY of $4,000.
Deductions related to his Uber driving were $3,000.
Deductions related to his Brisbane rental property were $43,000.
Other information
Alex has an accumulated HELP debt of $20,000 as at 30 June CIY.
Advise Alex whether the above receipts are assessable income for the CIY. Provide a reason to support your answer for each receipt. (This will be a key part of the discussion so please prepare a considered answer).
Calculate Alex’s taxable income for the CIY. What does your answer show about negative gearing?
Calculate Alex’s liability to the ATO, or refund due, on lodgment of his income tax return for the CIY. Ignore the small business income tax offset.
Assume Alex had a poorly performing, passive investment in the PIY that resulted in his total assessable income for the PIY being $100,000 and his total deductions for the PIY being $110,000. Alex disposed of that investment towards the end of the PIY. Would these additional facts change your answer to question 2 at all for the CIY, and if so, how? (Consider s 36-10 and 36-15 ITAA97).
(Only if time permits) - How would your answer to question 3 change if Alex was a New Zealand resident who migrated to Australia and became an Australian tax resident on 8 September CIY? Assume Alex is entitled to Medicare benefits from the time he arrived in Australia and that all income above is Australian sourced.
Question 2
Explain why the receipts in FCT v Cooke & Sherden 80 ATC 4140 and FCT v Payne 96 ATC 4407 were not assessed to the taxpayers as ordinary income.
In your answer:
identify the key facts of each case
explain the relevant court’s reasoning, and
consider whether s 21A ITAA 1936 would alter the outcome if the facts happened today.