A Essay on a Tax Dispute in Australia
FCT v Bargwanna [2012] HCA 11 (29 March 2012)1: A case on the taxation and administration of charitable trusts
Overview of income tax exemption and charitable entities What is income tax? The answer may be simple. Further, basic understanding on definition of income is capable of answering why a charitable entity has optional privileges in its income tax obligation. The main reason for this special treatment is because its 'nature of charitable purposes' arguably reflects its non-profit orientation, which means that, in its simplest term, charity entities are deliberately established not to generate income.2 Since one of the generally accepted definitions of income was the monetary payment received for goods or services, or from other sources, as rents or investments3, it should follows that all monetary activities excluded from this definition are 'substantially' not income. Now it is easy to connect the dots. Since income tax is type of tax imposed on income, it implies that a charitable entity, for not having 'income', should be exempted from income tax. However, it does not necessary mean that non-profit organisations are automatically granted as income tax exempt entities. For instance, in Australia, there are only around 7% of over 700,000 non-profit oriented organisations are income tax exempt charities.4 Further, in connection with the definition of income, it is essential to note that in Australia there is no single part of relevant tax law, either in the Income Tax Assessment Act (ITAA) 1936 or ITAA 1997, which explicitly defines the term "income". Accordingly, what constitutes income has long been argued in Australian courts.5 The lack of a formal definition in Australian tax law is totally different from Indonesian tax law which explicitly defines the word 'income' as "...any increase in economics capacity received by or accrued by a taxpayer from Indonesia as well as from offshore, which may be utilized for consumption or increasing the taxpayer’s
Overview of income tax exemption and charitable entities What is income tax? The answer may be simple. Further, basic understanding on definition of income is capable of answering why a charitable entity has optional privileges in its income tax obligation. The main reason for this special treatment is because its 'nature of charitable purposes' arguably reflects its non-profit orientation, which means that, in its simplest term, charity entities are deliberately established not to generate income.2 Since one of the generally accepted definitions of income was the monetary payment received for goods or services, or from other sources, as rents or investments3, it should follows that all monetary activities excluded from this definition are 'substantially' not income. Now it is easy to connect the dots. Since income tax is type of tax imposed on income, it implies that a charitable entity, for not having 'income', should be exempted from income tax. However, it does not necessary mean that non-profit organisations are automatically granted as income tax exempt entities. For instance, in Australia, there are only around 7% of over 700,000 non-profit oriented organisations are income tax exempt charities.4 Further, in connection with the definition of income, it is essential to note that in Australia there is no single part of relevant tax law, either in the Income Tax Assessment Act (ITAA) 1936 or ITAA 1997, which explicitly defines the term "income". Accordingly, what constitutes income has long been argued in Australian courts.5 The lack of a formal definition in Australian tax law is totally different from Indonesian tax law which explicitly defines the word 'income' as "...any increase in economics capacity received by or accrued by a taxpayer from Indonesia as well as from offshore, which may be utilized for consumption or increasing the taxpayer’s