Not for profit income tax exemption : is there a hole in the bucket, dear Henry?

Australia’s Future Tax System Review, headed by the then head of the Australian Treasury, and the Productivity Commission’s Research Report on the not for profit sector, both examined the state of tax concessions to Australia’s not for profit sector in the light of the High Court’s decision in Commissioner of Taxation v Word Investments Ltd. Despite being unable to quantify with any certainty the pre- or post-Word Investments cost of the tax concessions, both Reports indicated their support for continuation of the income tax exemption. However, the government acted in the 2011 Budget to target the not for profit income tax concessions more precisely, mainly on competitive neutrality grounds. This article examines the income tax exemption by applying the five taxation design principles, proposed in the Australia’s Future Tax System Review, for assessing tax expenditure. The conclusion is that the exemptions can be justified and, further, that a rationale for the exemption can be consistent with the reasoning in the Word Investments case.

Incentivising private health insurance through the income tax regime : Capitalising on behavioural models

The Australian income tax regime is generally regarded as a mechanism by which the Federal Government raises revenue, with much of the revenue raised used to support public spending programs. A prime example of this type of spending program is health care. However, a government may also decide that the private sector should provide a greater share of the nation's health care. To achieve such a policy it can bring about change through positive regulation, or it can use the taxation regime, via tax expenditures, not to raise revenue but to steer or influence individuals in its desired direction. When used for this purpose, tax expenditures steer taxpayers towards or away from certain behaviour by either imposing costs on, or providing benefits to them. Within the context of the health sector, the Australian Federal Government deploys social steering via the tax system, with the Medicare Levy Surcharge and the 30 percent Private Health Insurance Rebate intended to steer taxpayer behaviour towards the Government’s policy goal of increasing the amount of health provision through the private sector. These steering mechanisms are complemented by the ‘Lifetime Health Cover Initiative’. This article, through the lens of behavioural economics, considers the ways in which these assorted mechanisms might have been expected to operate and whether they encourage individuals to purchase private health insurance.

Income Tax : Text, Materials and Essential Cases [8th ed.]

Tax law and policy is a vital part of Australian society. Australian society insists that the Federal Government provide extensive public programs, such as health services, education, social security, foreign aid, legal infra¬structure, regulation, police services, national defence and funding for sports development. These programs are costly to provide and are funded by taxation. The aim of this book is to introduce and explain the principles of tax law and tax policy in plain English. The book contains detailed commentary on tax principles together with extracts from cases and materials that illustrate the application of the principles. The book considers tax policy and the economic and social aspects of tax law. While tax students must develop technical competence in tax law, given the speed with which changes are made to the technical details of tax law, it is also important to grasp tax principles and policy to understand why tax law has changed or why it should change. The chapters are structured to direct readers to the key provisions of the tax law. Each case is introduced by an explanation of the facts, followed by the taxpayer’s arguments, the Commissioner’s assertions and the decision of the Administrative Appeals Tribunal or a court. The commentary guides readers through the issues considered in the judgments. The book contains extracts from: articles; materials dealing with tax policy; and the Commissioner’s rulings. The book also has references for further reading and medium-neutral citations (Internet citations) for cases decided since 1998.

Outsourcing income tax returns : convenient and/or controversial

This paper investigates the outsourcing of income tax return preparation by Australian accounting firms. It identifies the extent to which firms are currently outsourcing accounting services or considering outsourcing accounting services, with a focus on personal and business income tax return preparation. The motivations and barriers for outsourcing by Australian accounting firms are also considered in this paper. Privacy, security of client data, and the competence of the outsourcing provider's staff have been identified as risks associated with outsourcing. An expectation relating to confidentiality of client data is also examined in this paper. Statistical analysis of data collected from a random sample of Australian accounting firms using a survey questionnaire provided the empirical data for the paper. The results indicate that the majority of Australian accounting firms are either currently outsourcing or considering outsourcing accounting services, and firms are outsourcing taxation preparation both onshore and offshore. The results also indicate that firms expect the volume of outsourced work to increase in the future. In contrast to the literature identifying labour arbitrage as the primary driver for organisations choosing to outsource, this study found that the main factors considered by accounting firms in the decision to outsource were to expedite delivery of services to clients and to enable the firm to focus on core competencies. Data from this study also supports the literature which ndicates that not all tax practitioners are adhering to codes of conduct in relation to client confidentiality. Research identifying the extent to which accounting services are outsourced is limited, therefore significant contributions to the academic literature and the accounting profession are provided by this ndicates that not all tax practitioners are adhering to codes of conduct in relation to client confidentiality. Research identifying the extent to which accounting services are outsourced is limited, therefore significant contributions to the academic literature and the accounting profession are provided by this study.

An unrelated income tax for Australia?

The Australian tax regime for not for profit organisations is notable because of its tolerance of such organisations generating untaxed trading income, unlike the United States and United Kingdom tax regimes. In 2011, the Australian government announced new arrangements for untaxed trading income after a High Court case drew attention to it. This chapter identifies issues experienced on a practical level in the US and the UK, where unrelated business income is taxed, and offers directions for any future Australian attempt to tax this income.

Double tax agreements and the international allocation of business income in Australia

Increasingly, the effectiveness of the present system of taxation of international businesses is being questioned. The problem associated with the taxation of such businesses is twofold. A system of international taxation must be a fair and equitable system, distributing profits between the relevant jurisdictions and, in doing so, avoiding double taxation. At the same time, the prevention of fiscal evasion must be secured. In an attempt to achieve a fair and equitable system Australia adopts unilateral, bilateral and multilateral measures to avoid double taxation and restrict the avoidance of tax. The first step in ascertaining the international allocation of business income is to consider the taxation of business income according to domestic law, that is, the unilateral measures. The treatment of international business income under the Australian domestic law, that is, the Income Tax Assessment Act 1936 (Cth) and Income Tax Assessment Act 1997 (Cth), will depend on two concepts, first, whether the taxpayer is a resident of Australia and secondly, whether the income is sourced in Australia. After the taxation of business profits has been determined according to domestic law it is necessary to consider the applicability of the bilateral measures, that is, the Double Tax Agreements (DTAs) to which Australia is a party, as the DTAs will override the domestic law where there is any conflict. Australia is a party to 40 DTAs with another seven presently being negotiated. The preamble to Australia's DTAs provides that the purpose of such agreements is 'to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income'. Both purposes, for different reasons, are equally important. It has been said that: The taxpayer hopes the treaty will prevent the double taxation of his income; the tax gatherer hopes the treaty will prevent fiscal evasion; and the politician just hopes. The first purpose, the avoidance of double taxation, is achieved through the provision of rules whereby the Contracting States agree to the classification of income and the allocation of that income to a particular State. In this sense DTAs do not allocate jurisdiction to tax but rather provide an arrangement whereby the States agree to restrict their substantive law. The restriction is either through the non-taxing of the income or via the provision of a tax credit.

An examination of tax-deductible donations made by individual Australian taxpayers in 2007-08

Each year, The Australian Centre for Philanthropy and Nonprofit Studies (CPNS) at Queensland University of Technology (QUT) collects and analyses statistics on the amount and extent of tax-deductible donations made and claimed by Australians in their individual income tax returns to deductible gift recipients (DGRs). The information presented below is based on the amount and type of tax-deductible donations made and claimed by Australian individual taxpayers to DGRs for the period 1 July 2006 to 30 June 2007. This information has been extracted mainly from the Australian Taxation Office's (ATO) publication Taxation Statistics 2006-07. The 2006-07 report is the latest report that has been made publicly available. It represents information in tax returns for the 2006-07 year processed by the ATO as at 31 October 2008. This study uses information based on published ATO material and represents only the extent of tax-deductible donations made and claimed by Australian taxpayers to DGRs at Item D9 Gifts or Donations in their individual income tax returns for the 2006-07 income year. The data does not include corporate taxpayers. Expenses such as raffles, sponsorships, fundraising purchases (e.g., sweets, tea towels, special events) or volunteering are generally not deductible as „gifts‟. The Giving Australia Report used a more liberal definition of gift to arrive at an estimated total of giving at $11 billion for 2005 (excluding Tsunami giving of $300 million). The $11 billion total comprised $5.7 billion from adult Australians, $2 billion from charity gambling or special events and $3.3 billion from business sources.

An examination of tax-deductible donations made by individual Australian taxpayers in 2008-09, ACPNS Working Paper 54

Each year, The Australian Centre for Philanthropy and Nonprofit Studies (CPNS) at Queensland University of Technology (QUT) collects and analyses statistics on the amount and extent of tax-deductible donations made and claimed by Australians in their individual income tax returns to deductible gift recipients (DGRs). The information presented below is based on the amount and type of tax-deductible donations made and claimed by Australian individual taxpayers to DGRs for the period 1 July 2008 to 30 June 2009. This information has been extracted mainly from the Australian Taxation Office's (ATO) publication Taxation Statistics 2008-09. The 2008-09 report is the latest report that has been made publicly available. It represents information in tax returns for the 2008-09 year processed by the ATO as at 31 October 2010.

An analysis of tax expenditure versus direct expenditure

Each financial year concessions, benefits and incentives are delivered to taxpayers via the tax system. These concessions, benefits and incentives, referred to as tax expenditure, differ from direct expenditure because of the recurring fiscal impact without regular scrutiny through the federal budget process. There are approximately 270 different tax expenditures existing within the current tax regime with total measured tax expenditures in the 2005-06 financial year estimated to be around $42.1 billion, increasing to $52.7 billion by 2009-10. Each year, new tax expenditures are introduced, while existing tax expenditures are modified and deleted. In recognition of some of the problems associated with tax expenditure, a Tax Expenditure Statement, as required by the Charter of Budget Honesty Act 1988, is produced annually by the Australian Federal Treasury. The Statement details the various expenditures and measures in the form of concessions, benefits and incentives provided to taxpayers by the Australian Government and calculates the tax expenditure in terms of revenue forgone. A similar approach to reporting tax expenditure, with such a report being a legal requirement, is followed by most OECD countries. The current Tax Expenditure Statement lists 270 tax expenditures and where it is able to, reports on the estimated pecuniary value of those expenditures. Apart from the annual Tax Expenditure Statement, there is very little other scrutiny of Australia’s Federal tax expenditure program. While there has been various academic analysis of tax expenditure in Australia, when compared to the North American literature, it is suggested that the Australian literature is still in its infancy. In fact, one academic author who has contributed to tax expenditure analysis recently noted that there is ‘remarkably little secondary literature which deals at any length with tax expenditures in the Australian context.’ Given this perceived gap in the secondary literature, this paper examines fundamental concept of tax expenditure and considers the role it plays in to the current tax regime as a whole, along with the effects of the introduction of new tax expenditures. In doing so, tax expenditure is contrasted with direct expenditure. An analysis of tax expenditure versus direct expenditure is already a sophisticated and comprehensive body of work stemming from the US over the last three decades. As such, the title of this paper is rather misleading. However, given the lack of analysis in Australia, it is appropriate that this paper undertakes a consideration of tax expenditure versus direct expenditure in an Australian context. Given this proposition, rather than purport to undertake a comprehensive analysis of tax expenditure which has already been done, this paper discusses the substantive considerations of any such analysis to enable further investigation into the tax expenditure regime both as a whole and into individual tax expenditure initiatives. While none of the propositions in this paper are new in a ‘tax expenditure analysis’ sense, this debate is a relatively new contribution to the Australian literature on the tax policy. Before the issues relating to tax expenditure can be determined, it is necessary to consider what is meant by ‘tax expenditure’. As such, part two if this paper defines ‘tax expenditure’. Part three determines the framework in which tax expenditure can be analysed. It is suggested that an analysis of tax expenditure must be evaluated within the framework of the design criteria of an income tax system with the key features of equity, efficiency, and simplicity. Tax expenditure analysis can then be applied to deviations from the ideal tax base. Once it is established what is meant by tax expenditure and the framework for evaluation is determined, it is possible to establish the substantive issues to be evaluated. This paper suggests that there are four broad areas worthy of investigation; economic efficiency, administrative efficiency, whether tax expenditure initiatives achieve their policy intent, and the impact on stakeholders. Given these areas of investigation, part four of this paper considers the issues relating to the economic efficiency of the tax expenditure regime, in particular, the effect on resource allocation, incentives for taxpayer behaviour and distortions created by tax expenditures. Part five examines the notion of administrative efficiency in light of the fact that most tax expenditures could simply be delivered as direct expenditures. Part six explores the notion of policy intent and considers the two questions that need to be asked; whether any tax expenditure initiative reaches its target group and whether the financial incentives are appropriate. Part seven examines the impact on stakeholders. Finally, part eight considers the future of tax expenditure analysis in Australia.

Advance pricing arrangements : an Australian Tax Office success or a legislative failure?

Australia’s domestic income tax legislation and double tax agreements contain transfer pricing rules which are designed to counter the underpayment of tax by businesses engaged in international dealings between related parties. The current legislation and agreements require that related party transactions take place at a value which reflects an arm’s length price, that is, a price which would be charged between unrelated parties. For a host of reasons, it is increasingly difficult for multinational entities to demonstrate that they are transferring goods and services at a price which is reflective of the behaviour of independent parties, thereby making it difficult to demonstrate compliance with the relevant legislation. Further, where an Australian business undertakes cross-border related party transactions there is the risk of an audit by the Australian Tax Office (ATO). If a business wishes to avoid the risk of an audit, and any ensuing penalties, there is one option: an advance pricing arrangement (APA). An APA is an agreement whereby the future transfer pricing methodology to be used to determine the arm’s length price is agreed to by the taxpayer and the relevant tax authority or authorities. The ATO views the APA process as an important part of its international tax strategy and believes that there are complementary benefits provided to both the taxpayer and the ATO. The ATO promotes the APA process on the basis of creating greater certainty for all parties while reducing compliance costs and the risk of audit and penalty. While the ATO regards the APA system as a success, it may be argued that the implementation of such a system is simply a practical solution to an ongoing problem of an inherent failure in both the legislation and ATO interpretation and application of this legislation to provide certainty to the taxpayer. This paper investigates the use of APAs as a solution to the problem of transfer pricing and considers whether they are the success the ATO claims. It is argued that there is no doubt that APAs provide a valuable practical tool for multinational entities facing the challenges of the taxation of global trading under the current transfer pricing regime. It does not, however, provide a long term solution. Rather, the long term solution may be in the form of legislative amendment.

An examination of tax-deductible donations made by individual taxpayers in Australia for 1997/98

This paper analyses the amount and type of tax-deductible donations made by Australian taxpayers to charities for the period 1 July 1997 to 30 June 1998. The information has been extracted from the Australian Taxation Office's publication Taxation Statistics 1997-98 which provides an overview and profile of the income and taxation status of Australian taxpayers using information extracted from their income tax returns for the period 1 July 1997 to 30 June 1998. This report is the latest publicly available summary. At the time of writing.

Does charity begin and end at home for tax exemptions?

Charitable organisations have remained exempt from income tax in Australia since the first comprehensive state income tax legislation in 18841 through to the current Income Tax Assessment Act 1977. The charitable exemption was also part of the English income tax legislation from its inception in 1799. The Federal Treasurer has released exposure draft legislation which seeks to remove taxation exemptions from some tax exempt organisations that perform any of their activities outside Australia or make trust distributions overseas. The proposed legislation is in response to alleged tax avoidance arrangements which involve tax exempt organisations and charitable trusts. The paper begins by describing the current charity tax exemption provisions under the Income Tax Assessment Act (ITAA). It then turns to tracing the background policy history of the amendments which appear to be at odds with the form and intent of the proposed provisions. The proposed amendments and their practical consequences are then closely scrutinised and found wanting in a number of respects. Alternative strategies are suggested to arrive at an equitable solution to the avoidance mischief.

Small business entity tax concessions : through the eyes of the practitioner

The often competing imperatives of equity, simplicity and efficiency in the income tax regime, particularly the notion of simplicity, has been most evident within Australia’s small business sector over the last decade. In an attempt to provide tax simplification and reduce the tax compliance burden faced by Australian small businesses, provisions collectively referred to as the ‘simplified tax system’ or STS were introduced. The STS was designed to provide eligible small businesses with the option of adopting a range of ‘simplified’ tax measures designed to simplify their tax affairs whilst at the same time, reducing their tax compliance costs. Ultimately, a low take-up rate and accompanying criticisms led to a remodelled and rebadged concessionary regime known as the ‘Small Business Entity’ (SBE) regime which came into effect from 1 July 2007. This paper, through a pilot study, investigates the SBE regime though the eyes of the practitioner. In line the Australian Federal Government’s objective of simplification and reduced compliance costs, the purpose of the study was to (1) determine the extent to which the SBE concessions are being adopted by tax practitioners on behalf of their clients, (2) gain an understanding as to which individual SBE tax concessions are most favoured by practitioners, (3) determine the primary motivation as to why tax practitioners recommend particular SBE concessions to their clients, and (4) canvass the opinions of practitioners as to whether they believed that the introduction of the SBE concessions had met their stated objective of reducing tax compliance costs for small businesses. The findings of this research indicate that, while there is a perception that the SBE concessions are worth embracing, contrary to the policy intent, the reasons behind adopting the concessions was the opportunity to minimise a clients’ tax liability. It was revealed that adopting particular concessions had nothing to do with compliance costs savings and, in fact, the SBE concessions merely added another layer of complexity to an already cumbersome and complex tax code, which resulted in increased compliance costs for their small businesses clients. Further, the SBE concessions allowed tax practitioners the opportunity to engage in effective tax minimisation, thereby fulfilling the client advocacy role of the tax practitioner in maximising their clients’ tax preferences.

The inherent international tax regime and its constraints on Australia's sovereignty

On 1 November 2011 the Minister for Financial Services and Superannuation, the Honourable Bill Shorten MP, announced that Australia would be undertaking a reform of the ‘transfer pricing rules in the income tax law and Australia’s future tax treaties to bring them into line with international best practice, improving the integrity and efficiency of the tax system.’ Mr Shorten stated that the reason for the reform was that ‘recent court decisions suggest our existing transfer pricing rules may be interpreted in a way that is out-of-kilter with international norms.’ Further, he stated that ‘the Government has asked the Treasury to review how the transfer pricing rules can be improved, including but not limited to how to be more in line with international best practice.’ He urged all interested parties to participate in this consultation process. On 16 March 2012, an Exposure Draft and accompanying Explanatory Memorandum outlining the proposed amendments to implement the first stage of the transfer pricing reforms were released. Within the proposed changes is the explicit embedding of the use of the OECD’s Model Tax Convention on Income and on Capital and Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations to help determine the arm’s length price. Does this mean that Australia engages in an international tax regime?