Foreign currency is defined in s 995-1 ITAA97 as a currency other than Australian currency, digital currency or anything prescribed by the regulations (s 995-1 ITAA97). Digital currency has the same meaning as it does under the GSTA. Many transactions that affect taxpayers may occur in foreign currency. To deal with situations like these, the ITAA97 has special rules for translating foreign currency into Australian currency. The aim of these rules is to ensure that transactions that occur in foreign currency are converted into Australian dollars (‘A$’) so that a standard unit of account is used for calculating a taxpayer’s Australian income tax liabilities. It is important to be aware that transactions that occur in foreign currency can also result in taxpayers making exchange gains and exchange losses as a result of currency fluctuations. A special forex regime is contained in the ITAA97 for dealing with the tax treatment of such gains and losses.

The income tax legislation contains complex accruals regimes that attribute income earned by foreign entities to Australian resident taxpayers who control them or have transferred value to them. Attribution occurs even though these taxpayers have not actually received the relevant income. This chapter outlines the basic features of the accruals regimes and the way they attribute income to certain taxpayers. The accruals regimes were introduced in the early 1990s and are based on United States measures that were originally developed in the 1960s. They are designed to prevent the deferral advantages associated with having certain kinds of income sheltered offshore in tax havens through interests held by taxpayers in foreign entities. Ordinarily, such income would be able to accumulate at low (or zero) tax rates in such entities until repatriated to Australia. The accruals measures operate to bring forward the point at which such income is taxed. Essentially, resident controllers and transferors are taxed on income earned by the relevant entities (eg companies or trusts) as those entities earn the income (ie on an accruals basis), rather than only when those entities subsequently distribute amounts (eg by way of dividends or trust distributions).

The tax law contains a number of special regimes that apply to certain kinds of entities. This chapter outlines the special rules relating to primary producers, special professionals, minors, life insurance companies, co-operative companies, listed investment companies, corporate limited partnerships, public trading trusts, managed investment trusts, corporate collective investment vehicles, foreign hybrids, and offshore banking units.

Income tax systems commonly contain a broad range of tax incentives. These incentives are tax expenditures as they are an indirect form of government spending designed to benefit targeted taxpayers. Based on the income tax formula, the principal ways that tax incentives may be provided are by granting special exemptions, deductions, tax offsets or reduced tax rates. This chapter examines a number of intricate tax incentive programs that have been established by the Australian Government to encourage certain forms of investment. In particular, it examines various programs that support investment in start-ups and other entrepreneurial ‘small and medium enterprises’ (‘SMEs’). These entities have the potential for rapid growth and play a key role in Australia’s innovation system. However, because of their risky nature, they often find it difficult to borrow money and need to rely heavily on equity finance. This form of finance is known as ‘venture capital’ and comes from two main sources: angel investors (ie wealthy entrepreneurs and business people) and venture capital funds (ie funds run by professional fund managers).

Partnerships are a common and relatively straightforward form of business structure. The general taxation rules dealing with partnerships are contained in div 5 of pt III ITAA36 (ss 90–94). Division 5 ensures that while partnership income and losses are calculated at the partnership entity level, a partnership does not actually pay any tax. Instead, the income and losses ‘flow through’ to the partners based on their respective interests in the partnership. This ensures that it is the individual partners (rather than the partnership) that are the relevant taxpayers.

This chapter examines the nature of a partnership and focuses on the way that the partnership taxation rules in div 5 operate. It also considers how the tax law deals with certain kinds of partnership dealings (eg variations in the constitution of partnerships) and how the CGT regime applies to partnership assets and assignments of interests in partnerships.

Trusts are a popular form of business and investment vehicle in Australia and are also established for a variety of other reasons (eg charitable purposes). This chapter examines the nature of a trust and discusses how trust estates are taxed. The general rules relating to the taxation of trust estates are contained in div 6 of pt III ITAA36 (ss 95AAA to 102). Division 6 calculates the ‘net income’ of a trust estate and assesses the net income in the hands of either the beneficiaries or the trustees of the estate. The operation of the assessment rules depends on whether a beneficiary is ‘presently entitled’ to a ‘share’ of the ‘income’ of the trust estate and whether the beneficiary is under a ‘legal disability’. The rules also operate subject to jurisdictional rules that take into account the concepts of residence and source. Trusts differ fundamentally from companies in that they are not treated as separate taxpayers. Although s 960-100(1) ITAA97 refers to a trust as an ‘entity’, no tax is payable by a trust.

Ordinarily, the income tax law treats distinct legal entities as separate taxpayers. As a result, each entity must determine its own tax liability, irrespective of the liability of any other entity that may be related to it. This principle, however, operates subject to the consolidation regime, which was introduced on 1 July 2002 and is contained in pt 3-90 ITAA97 (divs 700 to 721). This chapter outlines the basic features of the consolidation regime. Because of the complexity of the regime, it is only possible to discuss the main general rules and not the many intricate exceptions to them. The chapter commences by examining the nature of a consolidated group and how such a group is formed. It also discusses a related kind of group, known as an ‘MEC group’. The chapter then proceeds to examine some of the core rules that exist under the consolidation regime, being the single entity rule, the entry history rule and the exit history rule. Other important rules, such as the cost setting rules and loss transfer rules, are also considered. The chapter also discusses the consequences that arise where an entity leaves a consolidated group. It concludes with a discussion of the special liability rules that apply to the tax debts of a consolidated group.

A taxpayer’s assessable income includes not only amounts that are ordinary income, but also amounts that are ‘statutory income’ (s 6-10(1) ITAA97). Statutory income comprises those amounts that are deemed by the legislation to be assessable income, but are not necessarily income according to ordinary concepts. There are more than 100 statutory income provisions in the ITAA36 and ITAA97. A useful list of these provisions is contained in div 10 ITAA97. A number of other statutory income provisions are discussed in subsequent chapters. In practice, one of the most important statutory income provisions is s 102-5 ITAA97, which renders a ‘net capital gain’ assessable. Like the ordinary income rules, the statutory income provisions operate subject to jurisdictional rules. As with ordinary income, to the extent that statutory income is exempt income or non-assessable non-exempt income, it is excluded from assessable income (ss 6-1, 6-15, 6-20, 6-23 ITAA97). This means, for example, that to the extent that a taxpayer’s statutory income includes GST on a taxable supply, it is not assessable as it constitutes non-assessable non-exempt income by virtue of s 17-5 ITAA97.

Goods and services tax (‘GST’) is one of Australia’s most important and widely encountered taxes. According to the 2023 Budget Papers, GST is expected to raise approximately $88,042 billion in 2022/23, making it the second largest tax behind income tax. GST revenue is paid by the Commonwealth to the states and territories under special revenue-sharing arrangements. GST is a broad-based transactions tax which, like the value added tax (‘VAT’) that operates in many jurisdictions overseas, generally applies at each stage of the supply chain. The way it basically works is that registered entities charge GST on their supplies (ie outputs) and are entitled to credits for GST charged on their acquisitions (ie inputs). The burden of GST is designed to ultimately fall on end consumers who are not registered and are therefore not entitled to any credits for GST charged on the things they acquire. This chapter outlines the background to the introduction of GST and explains the basic principles that underpin its operation. The chapter focuses on the concepts of ‘taxable supplies’ and ‘creditable acquisitions’, which are the core building blocks of the GST system.

Like other developed countries around the world, Australia imposes a broad mix of taxes on labour, capital and consumption. The Australian tax system is, however, complicated by the fact that Australia is a federation that includes six states and two mainland territories which all have their own legislatures that impose their own taxes. In addition, Australia also has more than 500 local government authorities which levy their own council rates. In 2008, the Commonwealth Treasury’s discussion paper, Architecture of Australia’s Tax and Transfer System, identified at least 125 different taxes levied in Australia, with the 10 largest taxes accounting for more than 90% of all government revenue. Of the 125 taxes, 99 were levied by the Commonwealth Government, 25 by the state and territory governments, and 1 by local government. The Treasury’s estimate of the number of taxes was based on equivalent state and territory taxes being counted as a single tax, even though they differed in terms of rates, thresholds and exemptions, and were paid to different authorities.

The Australian Government has negotiated bilateral tax agreements (also known as ‘treaties’ or ‘conventions’) with the governments of more than 40 nations. These agreements are often referred to as Double Taxation Agreements (‘DTAs’) since one of their main functions is to prevent international juridical double taxation. DTAs deal with double taxation issues by allocating taxing rights in relation to cross-border transactions between Australia and the respective ‘Contracting States’. DTAs also assist with the prevention of tax evasion through the exchange of information between the relevant tax authorities. They also indirectly serve to promote trade and investment between Australia and the Contracting States, as they reduce the uncertainty of international tax treatment of cross-border transactions. International juridical double taxation essentially arises where two countries tax an entity on the same amount. This can occur due to the different kinds of conflicts. For instance, double taxation can arise because it is common for countries to tax residents on their worldwide income and non-residents on income sourced within their territories.

International taxation is a broad concept that covers the taxation of transactions with jurisdictional links to more than one country. These transactions, sometimes referred to as ‘cross-border transactions’, pose particular challenges and problems for taxpayers and taxation authorities. For instance, there is the obvious potential for double taxation to arise (ie the same income being taxed in more than one jurisdiction). The potential also exists for income to be diverted and sheltered in low-tax jurisdictions (ie tax havens), which raises concerns about tax evasion and tax avoidance. It is important to realise that as taxation is a sovereign right, there is no general overarching body of international law that deals with the taxation of cross-border transactions. In other words, there is no ‘supernational’ taxation law. Instead, each country must develop its own set of rules to deal with cross-border transactions and any jurisdictional conflicts that may arise. In order to protect their revenue bases, it is natural for countries to want to adopt broad-based international taxation rules to ensure that they collect as much tax as possible.

The Australian income tax system is considered to be among the most complex tax systems in the world. In order to properly understand how the income tax system works, it is necessary to adopt a structured approach that starts with the most basic elements of the regime. At the centre of every tax system are the statutes that govern their operation and contain the rules for calculating tax liability. This chapter introduces Australia’s income tax legislation and focuses on how a taxpayer’s income tax liability is calculated. It discusses the concept of taxable income and how income tax interacts with GST and FBT. The chapter outlines a number of speical concepts related to calculating a taxpayer’s tax liability as well as the special rules that apply to SBEs. It also examines the rates of income tax payable by different entities and focuses on the marginal tax rates and additional levies that apply to individuals (eg Medicare levy and Medicare levy surcharge). It also discusses tax offsets, the Higher Education Loans Program (‘HELP’) and the basic assessment, payment and collection rules. The chapter concludes with a detailed example showing the steps involved in calculating a taxpayer’s income tax liability.

It is common for income tax systems around the world to contain a broad range of exemptions. From a policy perspective, there are many reasons why governments provide exemptions. The most obvious is to grant concessional treatment to certain ‘deserving’ entities. Tax exemptions may be total or partial and are usually provided because the relevant entities serve some social, community or philanthropic purpose that the government wishes to support. By providing particular entities with tax exemptions, the government delivers support to them indirectly (ie via tax expenditures) rather than directly (ie via grants or subsidies). Clearly, providing tax exemptions comes at a cost, since governments do not collect revenue from the benefiting entities. However, this needs to be balanced against the fact that many of these entities provide important services to the community, which governments might otherwise feel they would have to provide themselves. By supporting such entities under their tax systems, governments can relieve themselves (either wholly or partly) from having to directly provide certain services that may, in any case, be best delivered through the private sector.

To promote compliance with the tax laws and discourage tax avoidance and tax evasion, the Australian tax system is supported by various administrative and criminal penalty regimes. These regimes contain important sanctions and integrity measures that underpin the operation of the whole tax system. This chapter focuses on the following regimes: the administrative penalty regime contained in pt 4-25 of sch 1 TAA, the tax offences regime contained in div 2 of pt III TAA, and the promoter penalty regime contained in div 290 of sch 1 TAA. Penalties imposed under these regimes vary considerably depending on the nature of the offence. Where financial penalties are imposed, they are usually set by reference to penalty units. A penalty unit is $313 from 1 July 2023 and is subject to indexation every three years (s 4AA Crimes Act 1914 (Cth)). A general administrative penalty regime is located in pt 4-25 of sch 1 TAA. This regime contains standardised administrative penalties that the Commissioner can impose for breaches of the tax laws, including the income tax, GST and FBT laws.