AUSTRALIA’S TAXATION SYSTEM

Functions of the Australian tax system

 Taxation receipts for 2023-24, approximately $616.3 billion,
comprising approximately 92% of total government revenue
 Main source of funding for government expenditure, used:
– To provide public / social goods
– As a redistribution function
 Socio-economic purposes
– Social engineering – encouraging and discouraging certain
types of behaviour
Projected Commonwealth Government
expenditure 2023-24

Social security & welfare - 37%

Defence - 6%

Health - 16%

Education - 7%

General government services - 4%

Other economic affairs - 2%

Transport and communication - 3%

Other expenses - 26%

Data Source: Table 6.3, Budget Paper No 1 2023-24, Statement 6: Expenses

and Net Capital Investment
Power to tax
• Commonwealth Parliament’s power to impose taxes is from
the Australian Constitution.
– Section 51(ii) grants the Commonwealth Parliament to
“make laws for the peace, order and good government of
the Commonwealth with respect to … taxation”.
• No discrimination between States or parts of States:

– Section 51(ii) also provides that laws with respect to

taxation cannot discriminate between States or parts of
States.
Power to tax
• What is a tax?
– Generally defined as a “compulsory exaction of money by
a public authority for public purposes, enforceable by law,
and is not a payment for services rendered.”
– See, Matthews v Chicory Marketing Board (1938)
Power to tax
• Laws imposing taxation can only deal with the imposition of
taxation and deal with one subject of taxation: s 55
– Imposition Act: imposes liability for the tax
– Rates Act: specifies the applicable rate of tax
– Assessment Act: sets out the rules for working out what is
subject to tax or how to calculate the tax payable.
• Example in relation to income tax:

Type Name of Act

Imposition Act Income Tax Act 1986
Rates Act Income Tax Rates Act 1986
Assessment Act Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Power to tax
• Distribution of taxing rights between Commonwealth and
State Parliament
– For example, customs and excise duties can only be
imposed by the Commonwealth Parliament: s 90
• Different types of taxes:

Commonwealth Taxes State Taxes

• Income tax (including • Payroll tax

capital gains tax) • Land tax
• Fringe benefits tax • Stamp duty
• Goods and services tax
• Customs duty
 Australian taxes
 Projected sources of revenue in Australia for 2023-24

Individual income tax - 48%

FBT - 1%

Company income tax - 19%

Superannuation funds income tax - 2%

GST - 13%

Excise & customs duties - 7%

Other taxation - 2%

Non-tax revenue - 8%

Data Source: Table 5.6, Budget Paper No 1 2023-24, Statement 5: Revenue

 Income tax contributes approximately 76% of total taxation

revenue for 2024 income year
 Overview of Australian Tax Administration and
Regulation
• Self-assessment system
• External Scrutiny and oversight

Commissioner
Treasury
of Taxation
Tax
Government
Practitioners
Ministers
Board

Auditor-
Parliament
General

Australian Tax
Administration
System – fair Inspector-
Board of
and transparent General of
Taxation
benefitting the Taxation
community as a
whole
Oversight of the tax system
• Taxes described in this chapter are administered by the
Australian Taxation Office (ATO).
• Other key tax system oversight bodies are:
– Inspector-General of Taxation (IGT): advice to government
on tax administration, handling of complaints;
– Board of Taxation: consideration of design and operation of
substantive tax law;
– Tax Practitioners Board: regulation of tax profession.
Oversight of the tax system:
Inspector-General of Taxation
• The Inspector-General of Taxation (IGT) is an independent
officer who advises the Government on:
– Tax administration;
– Investigates systemic problems with the tax administration
system;
– From 2015, investigates specific taxpayer complaints re
administration of tax system (formerly role of the Tax
Ombudsman)
– Responsible for complaints against Tax Practitioners Board.
Other taxation authorities:
Board of Taxation
• Independent statutory body which advises the Government on
the formulation and development of tax policy.
• Commissions research into areas of difficulty.
• Arranges community consultation in the design and
development of new legislation.
• 2019-23: recent reviews into the residency rules for tax
purposes of individuals and corporations. Government has
announced proposed changes to residency rules in both cases
based on these reports, with Treasury consultation on
replacement of individual residency rules conducted in mid-
2023: see further Chapters 4 and 23.
Other taxation authorities:
Tax agents and their representative organisations
• Tax agents are professionals employed by taxpayers to assist
them in managing their tax affairs:
– Registration body: the national Tax Practitioners Board
(TPB), which replaced a State-based system.
– Registers tax agents, BAS agents, and from 1 June 2014,
tax (financial) planners in conjunction with ASIC. Civil
penalties for providing/advertising such services for fee
when not registered.
• TPB evaluates applicants for registration against requirements
to be fit and proper person, possess relevant qualifications and
experience. Decisions reviewable by AAT.
Tax agents:
Code of Professional Conduct
• All registered tax agents and BAS agents (and, 2014-2021
only, tax (financial) advisers) required to comply with Code of
Professional Conduct: s 30-5 Tax Agent Services Act 2009
(TASA).
• 14 elements of Code, including:
– Honesty and integrity
– Independence, management of conflicts of interest
– Confidentiality
– Competence
– Other, incl. maintaining professional indemnity insurance.
Tax agents:
Complaints and investigations
• TPB has power to conduct investigations into breaches of the
Code of Professional Conduct or other requirements of TASA.
• TPB’s Annual Report 2021-22 reported:
– 2,212 compliance cases resolved in the year,
– 1,296 new complaints received,
– registration of 65 practitioners terminated and a further 15
suspended.
HOW TO TAX?
DESIGN OF A TAXATION SYSTEM

Structural features (reflected in the law):

Taxpayers Tax base

Tax rates Tax periods

Structural
features
HOW TO TAX?
DESIGN OF A TAXATION SYSTEM

Law Design Objectives (reflected in the tax law):

Equity Efficiency

Simplicity Simplicity
(ATO) (Taxpayers)
Design
Objectives
HOW TO TAX?
DESIGN OF A TAXATION SYSTEM

• Law Design Objectives: Equity, Efficiency and Simplicity

• Equity
• A tax system should be fair – but how to define and how to measure extent
objective achieved
o Horizontal equity – persons earning same taxable income should pay the same
amount of tax – desirable objective but does it take account of individual overall
economic circumstances?
 consider two persons with taxable income of $60,000 per year – both pay
same amount of tax but one person is single with no dependents and the
other has a non-working spouse and 3 children
o Vertical equity – as a taxpayer earns more taxable income they should pay more
tax desirable objective but how much more is fair – views differ
HOW TO TAX?
DESIGN OF A TAXATION SYSTEM
• Law Design Objectives: Equity, Efficiency and Simplicity

• Efficiency
• Neutrality – tax consequences should not unduly influence individual or business
choices by distorting costs of alternative different activities or transactions, eg,
tax consequences should not affect choice of operating a business through a
company or some other business structure, eg, partnership.

• Simplicity
• Simpler tax laws are easier to administer (by the ATO) and reduce compliance
costs (for taxpayers)
• Simpler tax laws also promote transparency – makes it easier for taxpayers to
understand obligations.

• However, in tax system design there are trade-offs between equity, efficiency and
simplicity
o More complex tax laws are required to promote equity and efficiency
o Current income tax law is in excess of 5000 pages.