AUSTRALIA TAXATION

CPA PROGRAM SUBJECT OUTLINE

Fo urt h e d it i on

Australia Taxation is designed to provide you with an awareness of the key provisions of the relevant taxation
legislation and enable you to apply the relevant legislative concepts to determine taxation consequences. It is
important to consider the taxation impact on individuals, partnerships, companies, trusts and superannuation funds.
A professional accountant is required to possess fundamental tax law knowledge and skills. Australia Taxation
introduces fundamental concepts of income tax law and provides an in-depth understanding of relevant Australian
tax laws and their application in the areas of income tax law for individuals and simple business structures, capital
gains tax, goods and services tax, and fringe benefits tax.
This subject also covers the tax administration system, and the ethical and professional obligations a tax (financial)
adviser and a registered tax agent must comply with under the requirements of the Tax Practitioners Board and as
a member of a professional accounting organisation.
On completion of this subject, you should be able to:
• understand the key administrative components of the Australia taxation system and the basic principles of
Australia income tax, fringe benefit tax and goods and services taxation legislation
• analyse, discuss and resolve issues relating to the determination of assessable income and allowable
deductions
• explain taxation law that relates to the taxation of individuals, companies, partnerships, trusts, and
superannuation funds
• analyse events and apply the relevant legislation to determine tax liability.

The Australian Taxation subject reflects legislation in place as at 1 January 2021. Exam questions will be based
upon the 2020–21 tax year and the FBT year ending 31 March 2021.

Exam structure
The Australia Taxation exam consists of multiple-choice questions and extended response questions.

Subject content
The "weighting" column in the following table provides an indication of the emphasis placed on each module in the
exam, while the "proportion of study time" column is a guide for you to allocate your study time for each module.
 Recommended
proportion

of study time Weighting

1. Legal, ethical and regulatory fundamentals 6 6

2. Principles of assessable income 10 10

3. Principles of general and specific deductions 8 8

4. Capital allowances 7 7

5. CGT fundamentals 15 15

6. Taxation of individuals 15 15

7. Taxation of SBEs and partnerships 6 6

8. Taxation of trusts, companies and superannuation funds 9 9

9. FBT fundamentals 7 7

10. GST fundamentals 8 8

11. Administration of the tax system 9 9

100 100

A brief outline of each module is provided below.

Module 1: Legal, ethical and regulatory fundamentals

This module starts by providing an overview of many of the important fundamentals of the Australian tax system
and principles that apply to those working in the Australian tax field. The legal framework that the Australian tax
system operates in is described, including the relevant parts of the Australian Constitution, the legislative process
of creating tax laws, and the judicial process for interpreting them. The ethical environment relevant to those
involved in the tax advice industry, including the more important principles in the FASEA code of ethics for financial
advisors and requirements under the Corporations Act are explained. The roles and responsibilities of the Tax
Practitioners Board (TPB) and a description of the services offered by those registered by the TPB (tax agents,
BAS agents and tax (financial) advisers) is provided. In addition, the code of conduct which those registered by the
TPB need to abide by is explained. This module concludes with a description of the concepts of tax planning,
avoidance and evasion. These concepts are very important for tax professionals, because they need to act in their
client’s best interests and ensure that there is compliance with the relevant laws and obligations.

Module 2: Principles of assessable income

This module introduces the key concepts of assessable income, starting with defining and determining income.
Assessable income of a taxpayer comprises both ordinary income and statutory income except when these
components are exempt income or otherwise excluded from assessable income. This module then discusses the
concepts of residence, source and derivation, which underpin the Australian income tax system. As ordinary
income also includes income derived from carrying on a business, the module also examines the criteria for
determining whether a business exists. The actual existence of a business is a question of fact and degree and
determined by decisions from the courts, through guidance in Taxation Determinations, and via rulings from the
Australian Taxation Office (ATO). The core concepts of international tax are explored in relation to the tax
obligations of non-residents. There is an emphasis on double taxation agreements (DTAs), foreign currency
translation and exchange rules and the withholding tax and transfer pricing regimes. Finally, this module covers the
core taxation concepts relating to trading stock given that a taxpayer derives ordinary income from transactions in
selling trading stock. Accounting for, and valuation of, closing trading stock are examined along with the tax
treatment on disposal of trading stock and the tax concessions available for small business entities (SBEs).

Module 3: Principles of general and specific deductions

This module discusses the principles of general and specific deductions. It emphasises that when an expense is
only partly for a taxable purpose, the taxpayer is only entitled to a deduction for the proportion of the expense
connected with earning assessable income. This module explains section 8-1 of ITAA97 which enables a deduction
under one of the two positive limbs, provided none of the four negative limbs apply. Specific deductions available
under one of the specific provisions outlined in ITAA97 for repairs, bad debts, tax losses, and borrowing expenses
are explained. Next, circumstances where limitations of deductibility apply are discussed. For example, even
though an expense is deductible as either a general or specific deduction, the deduction may be denied or limited if
it is specifically excluded by the legislation. In addition to the general exclusions in s. 8-1(2) of ITAA97, there are
specific exclusions for entertainment, payments to related entities, prepayments, non-commercial losses, and thin
capitalisation interest expenses. Lastly, this module outlines the documents taxpayers need to retain in order to
substantiate certain employment and business-related deductions such as: work expenses, car expenses and
travel expenses. Penalties may apply if these records are not retained.

Module 4: Capital allowances

This module introduces the capital allowance regime for taxpayers. These capital allowance rules under Division 40
of ITAA97 allow taxpayers to claim a deduction for the decline in value of depreciating assets based on the
business use percentage of the asset spread over its effective life using either the prime cost or diminishing value
method. As the treatment of depreciating assets varies depending on the type of asset and whether the taxpayer is
an SBE or not, the module discusses the rules for capital allowances for both non-SBEs and SBEs. How non-SBE
taxpayers can allocate low-value assets to a low-value pool and writeoff these assets at a fixed rate is explained.
Also explained are the capital allowance provisions, in which an SBE can benefit from an immediate write-off of
depreciating assets costing less than the relevant threshold. Assets not eligible for the instant write-off are added to
a general asset pool and the pool value is written off at a fixed rate. Specific assets such as software, some
intangibles, cars and project pool expenses are dealt with separately. The final section of this module explains how
capital works deductions are calculated under Division 43 of ITAA97. The rates of capital works deduction depend
on the type of capital work, the date construction began and the purpose of the capital works.

Module 5: CGT fundamentals

This module introduces and reviews the capital gains tax (CGT) law provisions in the income tax legislation. It
starts off by discussing the core CGT concepts, including an overview of what are capital gains, capital losses and
CGT events. It then goes on to discuss CGT events in more detail. As many of these CGT events involve a CGT
asset of the taxpayer, the next part of this module explains what is considered a CGT asset. This includes an
examination of collectables and personal use assets, which are subject to specific rules. This module then explains
how to calculate the capital gain or loss resulting from a CGT event being triggered. Many of the CGT events utilise
the concepts of capital proceeds, cost base, indexed cost base and reduced cost base in determining the capital
gain or loss, so these concepts are explained in some detail. Next, when capital gains and losses are disregarded
for CGT purposes are discussed. Lastly, the module explains how to calculate the net capital gain/loss of the
taxpayer and apply the CGT discount and small business CGT concessions if applicable.

Module 6: Taxation of individuals

This module begins with a brief outline of the steps used for calculating individual taxation and highlights the
importance of the tax equation. Next, particular types of assessable income are defined, including income relating
to: employees, minors, overseas services, the sharing economy, dividends, interest, property, trusts and royalties.
This module then discusses three particular income regimes — (1) the tax treatment of employment termination
payments; (2) personal services income (PSI) including the rules for determining whether a taxpayer is conducting
a personal service business (PSB); and (3) employee-share schemes (ESS) provisions. A brief overview of the
CGT relief for individuals is provided, including the operation of the main residence exemption, marriage
breakdown rollover relief and the small business concessions. The taxation of superannuation for individuals is
illustrated, including the taxation of concessional and non-concessional contributions, and the tax treatment of
superannuation benefits. A very brief reference is made to individual allowable deductions and various
employment-related expenditure, negative gearing and income protection. This module then examines the most
common tax offsets and rebates available to individuals. Finally, in calculating the tax payable for an individual, the
tax rates for both residents and non-residents are indicated along with the application of the tax-free threshold
formula, the Medicare levy, the Medicare levy surcharge and accumulated study and training loan debts.
Module 7: Taxation of SBEs and partnerships

This module begins with a refresher of the core concepts of an SBE, including revisiting the definition of an SBE
and the core income tax concessions that apply to SBEs, such as the trading stock rules, capital allowances
provisions and CGT small business concessions. The small business income tax offset is also discussed, which
reduces the tax paid by eligible sole traders and SBEs. Next, the small business restructure rollover provisions are
discussed—these allow small businesses to transfer active assets from one entity to one or more other entities
without incurring an income tax liability. This module then turns its attention to the taxation of partnerships. As a
partnership is not a separate legal entity, it does not pay income tax in its own right. Instead, the net income of the
partnership is distributed to the partners in accordance with the profit sharing arrangements in the partnership
agreement and is included in each partner’s respective income tax return and tax is paid by each partner based on
their marginal tax rate. This module also discusses the taxation implications when a partnership derives a loss,
pays salaries and interest to partners and when partners take drawings. This module concludes with a brief
discussion of Everett assignments and CGT, the general work in progress and the general capital gains tax rules
and the taxation consequences of the dissolution or reconstitution of a partnership.

Module 8: Taxation of trusts, companies and superannuation

This module covers many of the important concepts regarding how income tax law applies to trusts, companies
and superannuation funds. First, the taxation of trusts is covered, including the different types of trusts, and the
parties involved in a trust structure. Next, the relevant provisions of Division 6 of ITAA36 is discussed, including its
application to deceased estates. The calculation of the net income of a trust and how it is assessed is
demonstrated using a seven-step process. How to deal with discrepancies and capital gains is also explained. This
is followed by an overview of the trust streaming rules and a description of the rules and advantages of family
trusts. Next, an overview of the core concepts relating to the taxation of companies is provided. This is followed
with a description regarding how companies are taxed. The dividend imputation system is discussed in detail.
Some of the specifics of the imputation system covered in this part, include the circumstances in which
shareholders are entitled to franking credits, the maximum number of franking credits that companies can
distribute, the benchmark rule, and some of the other aspects of the franking system. The final section of this
module examines the taxation laws relating to superannuation funds. This starts off with a discussion of the types
of superannuation contributions and their taxation treatment. This module describes how the investment earnings
made on contributions are taxed. Lastly, this module discusses the important principle that, in most instances,
withdrawals made by superannuation members of at least 60 years of age will be tax-free.

Module 9: FBT fundamentals

This module examines the principles of FBT, starting with an explanation of the core concepts. Next, how FBT is
calculated is explained. As an essential feature of the Australian FBT regime, FBT is a tax that is payable by
employers on certain non-salary/wages benefits that they provide to their employees or their employees’
associates in respect of employment. For income tax purposes, the amount of the FBT payable is generally tax
deductible to the employer, as is the value of the benefit provided. The next sections of the module explains the
specific fringe benefits, exempt fringe benefits and salary packaging. There are 13 types of fringe benefits covered
by the FBT legislation, which interacts with the income tax legislation, GST and PSI rules. There are a number of
benefits that are excluded fringe benefits and are not included in the reporting requirements, and there are also a
number of miscellaneous exempt benefits contained in the legislation that are not subject to FBT. The FBT
implications of salary packaging is explained including a discussion on exempt benefits and salary sacrificing
superannuation contributions. This module concludes with a discussion of an employee’s reportable fringe benefits
and the PAYG payment summary. Included in this section is an explanation of exempt and excluded fringe benefits
which are not reported on an employee’s PAYG payment summary.

Module 10: GST fundamentals

This module covers the fundamentals of GST, starting with a summary of the core concepts including the
registration and tax invoice requirements. This module explains that even though GST is collected through each
step of the supply process it is generally only borne by the final consumer as GST-registered suppliers can claim
an input tax credit for the GST paid on the inputs. Taxable importations also give rise to a liability for GST, but in
this case the purchaser rather than the seller is liable. Also discussed are the methods of accounting for GST (cash
or accruals) that determine which period the liability and input tax credit are attributed to. To simplify the reporting
process, group entities can be treated as one entity if they meet the requirements of the grouping provisions.
Finally, anti-avoidance provisions included in the legislation to penalise taxpayers that undertake a scheme with a
dominant purpose of artificially reducing their GST liability or increasing input tax credits are discussed.

Module 11: Administration of the tax system

The final module focuses on the administration of the tax system and the interaction between taxpayers and the tax
authority. In particular, the module covers the process by which taxpayers are to operate under the self-
assessment system that applies in Australia. The ATO guidance documents and rulings available to assist
taxpayers under the self-assessment system are outlined, including public and private rulings, law companion
guidelines, practice statements and interpretative decisions. Next, the module discusses the audit process which
may follow the issue of an assessment—a method used by the Commission of Taxation to ascertain the
correctness of these assessments. The audit may result in penalties and/or interest charges being imposed. If the
taxpayer does not agree with the Commissioner’s treatment of a certain tax issue, they may request a review,
lodge a formal objection or further appeal the decision. The next section of the module discusses the tax reporting
and payment obligations of taxpayers. This includes the operation of the PAYG withholding and instalment systems
the lodgement of BASs and IASs, and maintaining a running balance account. Next, the penalties and interest
charges imposed on taxpayers who fail to comply with the law and meet their tax obligations are discussed. Lastly,
the application of the Part IVA anti avoidance laws and the operation of the promoter penalty regime are examined.