Income Tax Assessment Act 1936
Encyclopedia
Income Tax Assessment Act 1936 is an act
of the Parliament of Australia
. It's one of the main statutes under which income tax is calculated. The act is gradually being rewritten into the Income Tax Assessment Act 1997
, and new matters are generally now added to the 1997 act.
The reason for rewriting the act is that amendments over the years have made it thousands of pages long, and very complex. Amendments have also created subsection upon subsection, for example 221YHAAC(2)(e)(iii)(A).
"Void against the commissioner" meant such a contract would be ignored for taxation determination, but was still enforcible by the parties against each other (the same as any other contract).
The section was present in essentially the same form in the Commonwealth Income Tax Assessment Act 1915 (and it seems in a prior act from 1895). The history of the section is principally the history of the interpretation of its wording by the courts. It will be noted how broad the wording is; as early as 1921 Chief Justice Knox remarked on that (referring to the 1915 act),
In consequence the courts, of necessity, "read down" the section so it would not apply to every transaction, that obviously not being the legislature's intention.
In Newton v FCT (1958), on appeal to the Privy Council
, a kind of "predication" test was described. Lord Denning in his judgement said "you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing ... then the arrangement does not come within the section."http://www.austlii.edu.au/au/cases/cth/high_ct/96clr577.html
A somewhat different stream of interpretation was established in Keighery v FCT (1957) where a taxpayer who made a choice between alternatives explicitly offered by the legislation (in that case a public versus private company) did not come under section 260. This was called the "choice principle" and it spawned Mullens v FCT
(1976) which extended that to allow taxpayers to deliberately put themselves into circumstances described by the act (even if by unusual transactions) without coming under section 260.
The Mullens case, and the subsequent Slutzkin
and Cridland
(1977) decided from it, were in a sense the demise of section 260. To the extent those schemes were regarded, in the mood of the time, as contrivances or outright avoidance, section 260 was failing in its apparent task. But the question of "avoidance" as opposed to taxpayers taking up concessions offered by the statute is not an easy one. Back in the Newton case (in the High Court in 1957) Justice Kitto
had given his now often quoted warning about section 260,
That invitation for analysis and reform was not taken up until, it seems, court decisions started going in favour of the taxpayer, at which point the issues discussed in the Newton case were indeed considered in constructing the new Part IVA, replacing section 260 as of 27 May 1981.
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
of the Parliament of Australia
Parliament of Australia
The Parliament of Australia, also known as the Commonwealth Parliament or Federal Parliament, is the legislative branch of the government of Australia. It is bicameral, largely modelled in the Westminster tradition, but with some influences from the United States Congress...
. It's one of the main statutes under which income tax is calculated. The act is gradually being rewritten into the Income Tax Assessment Act 1997
Income Tax Assessment Act 1997
Income Tax Assessment Act 1997 is an act of the Parliament of Australia. It's one of the main statutes under which income tax is calculated. The act is a rewrite in plain English of the prior Income Tax Assessment Act 1936...
, and new matters are generally now added to the 1997 act.
The reason for rewriting the act is that amendments over the years have made it thousands of pages long, and very complex. Amendments have also created subsection upon subsection, for example 221YHAAC(2)(e)(iii)(A).
Section 260
Section 260 was the initial general anti-avoidance provision in the act, present from its inception in 1936 and operative until 27 May 1981. The section held any contract- altering the incidence of any income tax;
- relieving any person from liability to pay any income tax or make any return;
- defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
- preventing the operation of this Act in any respect;
- to be void as against the Commissioner.
"Void against the commissioner" meant such a contract would be ignored for taxation determination, but was still enforcible by the parties against each other (the same as any other contract).
The section was present in essentially the same form in the Commonwealth Income Tax Assessment Act 1915 (and it seems in a prior act from 1895). The history of the section is principally the history of the interpretation of its wording by the courts. It will be noted how broad the wording is; as early as 1921 Chief Justice Knox remarked on that (referring to the 1915 act),
- The section, if construed literally, would extend to every transaction whether voluntary or for value which had the effect of reducing the income of any taxpayer.
In consequence the courts, of necessity, "read down" the section so it would not apply to every transaction, that obviously not being the legislature's intention.
In Newton v FCT (1958), on appeal to the Privy Council
Judicial Committee of the Privy Council
The Judicial Committee of the Privy Council is one of the highest courts in the United Kingdom. Established by the Judicial Committee Act 1833 to hear appeals formerly heard by the King in Council The Judicial Committee of the Privy Council (JCPC) is one of the highest courts in the United...
, a kind of "predication" test was described. Lord Denning in his judgement said "you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing ... then the arrangement does not come within the section."http://www.austlii.edu.au/au/cases/cth/high_ct/96clr577.html
A somewhat different stream of interpretation was established in Keighery v FCT (1957) where a taxpayer who made a choice between alternatives explicitly offered by the legislation (in that case a public versus private company) did not come under section 260. This was called the "choice principle" and it spawned Mullens v FCT
Mullens v Federal Commissioner of Taxation
Mullens v Federal Commissioner of Taxation was a 1976High Court of Australia tax case concerning arrangements where stockbrokers Mullens & Co accessed tax deductions for monies subscribed to a petroleum exploration company...
(1976) which extended that to allow taxpayers to deliberately put themselves into circumstances described by the act (even if by unusual transactions) without coming under section 260.
The Mullens case, and the subsequent Slutzkin
Slutzkin v Federal Commissioner of Taxation
Slutzkin v Federal Commissioner Of Taxation 140 CLR 314 was a High Court of Australia case concerning the tax position of company owners who sold to a dividend stripping operation...
and Cridland
Cridland v Federal Commissioner of Taxation
Cridland v Federal Commissioner of Taxation was a 1977 High Court of Australia case concerning a novel tax scheme whereby some 5,000 university students became primary producers for tax purposes, allowing them certain income averaging benefits...
(1977) decided from it, were in a sense the demise of section 260. To the extent those schemes were regarded, in the mood of the time, as contrivances or outright avoidance, section 260 was failing in its apparent task. But the question of "avoidance" as opposed to taxpayers taking up concessions offered by the statute is not an easy one. Back in the Newton case (in the High Court in 1957) Justice Kitto
Frank Kitto
Sir Frank Walters Kitto, AC, KBE, QC , Australian judge, was a Justice of the High Court of Australia.Kitto was born in Melbourne in 1903, but his family moved to Sydney, when his father James Kitto became the Deputy Director of Posts and Telegraphs in New South Wales. There he was educated at...
had given his now often quoted warning about section 260,
- Section 260 is a difficult provision, inherited from earlier legislation, and long overdue for reform by someone who will take the trouble to analyse his ideas and define his intentions with precision before putting pen to paper.
That invitation for analysis and reform was not taken up until, it seems, court decisions started going in favour of the taxpayer, at which point the issues discussed in the Newton case were indeed considered in constructing the new Part IVA, replacing section 260 as of 27 May 1981.
Other operative highlights
- Section 26AH — the "ten-year rule" for life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
policies and friendly societyFriendly societyA friendly society is a mutual association for insurance, pensions or savings and loan-like purposes, or cooperative banking. It is a mutual organization or benefit society composed of a body of people who join together for a common financial or social purpose...
investment bonds. Gains on policy surrender etc are taxed as income unless held for 10 years. Introduced in 1983.
- Sections 82KZL to 82KZO — deductibility of interestInterestInterest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
paid up to 12 months in advance on an investment loan. Lenders often promote such pre-payment (near the end of the tax year) as a tax advantage.
- Section 99A — tax on undistributed income of a trust, at the top personal rate plus medicare levy. This penal rate ensures trusts such as listed property trusts always distribute all their income.
- Division 6AA, being sections 102AA to 102AJ — tax on the unearned income of minors at penalty rates. This is an anti-avoidance provision to stop parents putting investments in the names of their children.
- Sections 160ZB(6), 26BB and 70B — taxing traditional securities, such as convertible notes (interest bearing notes convertible into shares), as income rather than capital gains.
- Part IVA, being sections 177A to 177G — general anti-avoidance measures, striking out any scheme which has as its dominant purpose the reduction of tax (as opposed to a business purpose). This part has very broad application and operates against many tax avoidance or tax minimization arrangements.
- Division 2, being sections 202B to 202BF — Tax File NumberTax File NumberTax File Number is an 8 or 9 digit number issued by the Australian Taxation Office to each taxpayer to identify that taxpayer's Australian tax dealings. When it was introduced in 1988, individuals received a 9 digit TFN and non-individuals were issued an 8 digit TFN. Now both are issued 9 digit...
s.
Other superseded highlights
- Section 52 — taxpayers obliged to advise the Commissioner each year of assets held for the purpose of making a profit, ie. trading, and therefore on which a loss would be a deduction (as opposed to investment assets, on which a loss was not deductible). This was effectively how share traders (or the like) advised they were in that business. Making a declaration stopped an investor deciding "after the fact" that a loss was "trading" but a gain was "investing" (tax-free prior to capital gains taxCapital gains tax in AustraliaCapital gains tax in the context of the Australian taxation system applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home...
). This section now applies only to pre-CGT assets (ie. acquired before 20 September 1985), for which obviously by now a declaration must have long since been made.
External links
- Income Tax Assessment Act 1936 at SCALEplus (HTML by section)
- Income Tax Assessment Act 1936 at ComLawComLawComLaw is an Australian government web site run by the Attorney-General's Department providing online copies of Commonwealth legislation and related documents. The website was redesigned and re-released early in 2011....
(each amended form of the act, as big files)
- Income Tax Assessment Act 1936 at the Australian Taxation OfficeAustralian Taxation OfficeThe Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
(HTML with annotations and hyperlinks showing where amended etc)