Explanatory Memorandum(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 2 - Proposed Structure of the new Income Tax Assessment Act
This chapter explains the new structure in the Income Tax Assessment Bill 1996.
This chapter discusses the structure of the proposed new Income Tax Assessment Act.
The new structure will make the law easier to follow and use. Readers will find it easier to:
- understand what the law requires;
- identify the general principles of the law; and
- follow a path to the provisions they need to read.
The new structure will be flexible enough not to be distorted by the future addition of substantial amounts of new law.
The pyramid shape helps explain the proposed conceptual structure of the income tax law. It illustrates the way the law will be organised, moving from the central or core concepts at the top of the pyramid to the more specialised topics near the base.
The reader can enter the Act at the beginning, the top of the pyramid, and read the basic concepts of income tax law.
The most basic statement of how much income tax a person must pay can be put as an equation:
IT = (AI - D) * TR - O
That is, income tax equals ( assessable income minus deductions ) multiplied by the tax rate(s) , minus offsets .
All the rest is detail. The law details what is assessable income, what is deductible, and what are offsets. Sometimes that detail applies to all or most taxpayers, sometimes only to specialist groups or in particular circumstances.
In the new law, all the concepts relating to that core equation at its most basic level will be in the top layer of the pyramid. They will be known as the core provisions of the Act.
The core provisions will operate at different levels of detail. At a conceptual level, it will lead you to:
- what the Income Tax Assessment Act is about, and how to use it;
- who must pay income tax, and when and how they have to pay it;
- how to work out how much income tax a person must pay;
- what happens if a person's income tax is more, or less, than the instalments they have to pay;
- what other obligations a taxpayer has besides paying income tax; and
- how a dispute is resolved between a taxpayer and the Commissioner of Taxation.
At a more direct level, the core will explain:
- how to work out taxable income;
- the relationship between assessable income and exempt income;
- how assessable income consists of ordinary income and statutory income, how these concepts depend on whether a taxpayer is an Australian resident or not, and on the source of the income;
- what makes an amount exempt income;
- about deductions - both general deductions and specific ones;
- what a taxpayer can deduct under the general deduction provision; and
- that there are lists of all the provisions that affect income, exempt income and deductions.
The core provisions will contain the general income and general deduction provisions, which determine whether amounts are assessable income or allowable deductions in the majority of cases.
The core (and the new law generally) will retain concepts that have been developed by an extensive body of court decisions over time. These include the ordinary concepts of income, and the meaning of such key notions as when income is derived and when an expense is incurred.
There will be no general explanation or statement of the purpose of the Act but the new provisions will provide a conceptual and practical framework for the way the Act works.
The lists are checklists of, and signposts to, the provisions that specifically affect what is income, exempt income, deductions and offsets. They will help readers quickly find their way to the operative provisions they need. These provisions may be in either the second layer of the pyramid - the general provisions - or the third layer - the specialist provisions.
The general provisions are provisions that apply to a wide group of taxpayers and some that don't fit into any specialist grouping. They will specify how the law deals with particular kinds of income, deductions and offsets. For example, they will include the rules about depreciation and trading stock (when these are rewritten) because they affect most businesses.
The specialist groupings will bring together provisions that relate to specific groups of taxpayers or special tax obligations. For example, they will eventually include these topics:
- capital gains tax;
- corporate taxpayers and corporate distributions;
- partnerships and partnership distributions;
- trusts and trust distributions;
- co-operative and mutual societies;
- financial transactions;
- life insurance;
- rules for particular industries and occupations (such as general mining, quarrying and petroleum mining, Australian films, primary production, and research and development);
- international aspects of income taxation;
- attribution of income; and
- anti-avoidance provisions.
Other specialist topics may be added to this list.
The collection and recovery provisions will cover such topics as:
- the various income tax instalment systems (such as pay-as-you-earn, the prescribed payments and reportable payments systems, provisional tax and company tax instalments);
- withholding tax liability and collection;
- returns and assessments;
- Medicare levy and HECS collection; and
- how unpaid tax is recovered.
The collection and recovery provisions do not directly affect liability to tax. However, they are important aspects of the tax system that can apply to any taxpayer.
They will appear in the Act after the third layer, that is, after the specialist provisions.
The administration provisions will come next. These include such topics as:
- general administration
- tax file numbers
- tax agents
- prosecutions and offences
- record keeping and other obligations.
Like the collection and recovery provisions, the administration provisions do not directly affect liability to tax.
In the new Act, all defined terms will be listed in the Dictionary in clause 995-1. However, not all definitions will be located there, many definitions ( just-in-time definitions ) will be located where they can best help to understand the material.
All defined terms (except some frequently used basic terms - see clause 2-15) will be identified by an asterisk appearing at the start of the term. However, defined terms will only be asterisked the first time they occur in each subsection. Any subsequent occurrences in that subsection will not generally be asterisked. The footnote that goes with the asterisk will appear at the bottom of each page and will refer you to the Dictionary starting at clause 995-1.
Definitions in the Bill will only apply to the Bill and not to the 1936 Act unless the 1936 Act expressly adopts them.
A defined term will be used in one sense only throughout the new law. If a different meaning is intended, another term will be used. This has prompted some standardising of terms.
While the conceptual structure of the new law can be explained in terms of a pyramid, all the material in it will be presented in a normal publishing format. This will allow for a convenient presentation and grouping of information for use in written or screen based form.
The existing tax law breaks material down into sections, which are the basic unit of information. Each section deals with one main idea only. Related sections are then grouped into Divisions. In turn, related Divisions are grouped together as Parts.
The new law will maintain sections, Divisions and Parts. However, to better support the structure, it will introduce a higher level of grouping of material at the chapter level. There will be six chapters in the new law:
- Chap 1:
- Introduction and core provisions
- Chap 2:
- Further liability rules of general application
- Chap 3:
- Specialist rules affecting liability for income tax
- Chap 4:
- Collection and recovery of income tax
- Chap 5:
- Chap 6:
- The Dictionary.
Plain language alone will not make the law sufficiently accessible and understandable to readers. The new Act will use additional features to help communicate its messages and requirements.
Special orientation material will help give readers (particularly new readers) an overview of important parts of the new law and direct them to their location. The material will help readers identify, accurately and quickly, provisions relevant to them. More experienced readers can by-pass introductory material.
This material will complement the operative provisions of the law, but will have a very limited legal status.
Orientation material falls into 2 main categories: Guides and Signposts .
Guides consist of sections under a heading which makes clear that those sections are there to guide readers about what is contained in the following Subdivision, Division etc. This helps readers to decide whether that part of the law is relevant to them.
Theme statements will be brief statements expressing the essence of the provisions that follow them. Theme statements will be easily found, as they will be boxed and appear under headings such as What this Division is about.
Theme statements are intended to be meaningful without requiring reference to the text of the law. Considered in isolation, they will make sense, but the law will not rely on them for their operation.
They will be accurate statements, but it will not be their function to explain the law fully. Nor will they include material which is repeated in the ensuing text. Their purpose is to put readers in the picture sufficiently for them to decide whether to read on.
Theme statements will be useful in other ways:
- they will be stepping stones which readers can use to build up an overall picture of the law;
- they will help reveal the structure of an area of law; and
- they will help show the relationship between the purpose or object of the law and its operative provisions.
Guides may, but will not always, include the following features:
- purpose or object statements, particularly if there is one in the existing law;
- a table of contents, comprising descriptive section headings;
- flow charts and other diagrams ; and
- additional narrative text , to help bridge any cognitive gap between a theme statement and any significant concepts and operative provisions.
Many areas of the law will not need all these features. The extent of each guide will reflect factors such as the degree of difficulty of the area and how widely it applies.
Guides will be part of the Act, but are separated from the operative provisions. In interpreting an operative provision, a Guide may be considered only:
- in determining its underlying purpose or object;
- to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision;
- in determining the provision's meaning if it is ambiguous or obscure; or
- in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in the Act and the underlying purpose or object underlying the provision, would lead to a result that is manifestly absurd or unreasonable.
As part of the Act, Guides can be amended by the legislature. If they were not part of the Act, they would in certain circumstances still be referred to in interpreting the operative provisions to which they relate. Under section 15AB of the Acts Interpretation Act 1901 , consideration may be given to certain kinds of extrinsic material that is capable of helping to ascertain the meaning of a provision. However, if the Guides were not part of the Act, the Parliament could not readily amend them.
The Bill is organised in layers to reflect the principle of moving from the general to the particular. There are signposts to help the reader move from one area of the law to relevant provisions at other levels. The signposts help the reader to navigate through the rules.
Signposts will be part of the Act. For example:
4-1 Who must pay income tax
Income tax is payable by each individual and company, and by some other entities.
A more specialised kind of signposting is the various checklists described in Chapter 4 of this Explanatory Memorandum.