Lecture 1: What Is the Study of Tax Based On?
Welcome to the basic introduction of taxation. We are now going to ask ourselves - if we study tax, what are the fundamentals of tax? What are we going to be basing this study on?
But before we get there, I just want to share with you that tax is really a very interesting subject. It's one of those very practical subjects, and it is a subject you can immediately utilise to provide tax advice. If you learn some of the basics, you could probably sell that knowledge to assist someone with a tax problem. So remember, tax is practical and certainly very rewarding to study.
Let's look at the fundamental principles of tax. In order to do that, we need to ask ourselves, “Why do we pay tax? What is tax based on?” Well, if we ask the question, “Why do we pay tax?", then some people may say, "Well, we pay tax because we want nice roads and we want electricity etc.” But that is not the reason why we pay tax.
If it was, I'm sure that there would be people who are going to say, “Well, I don't care about roads; I don't care about electricity; I'm not going to pay tax.” So it can't be that easy. Surely there has to be rules and tax is based on exactly that.
Tax is based on rules, and those rules are effectively encapsulated or written into a document that we refer to as the Act. So we've got a Tax Act, and the Tax Act contains rules in order to determine who pays tax, how much tax is paid, when is tax paid and how it is calculated.
But the problem with the rules would be that there might be some uncertainty. Some words may not be very clear. The meaning of a word is not very clear. Therefore, what we find is the Tax Act generally gives rise to disputes. Let me give an example:
I borrow money from a bank, and it's deposited into my bank account. The question is, would I be subject to tax on that amount that I borrowed from the bank? The revenue authorities may argue that it is income; it's taxable income, and I will disagree. We will then proceed and take that difference in opinion to a tax court. And the tax court will make a decision, and we refer to that decision as a tax judgment.
So we've got the Tax Act, and we've got tax judgments or decisions. Those two fundamental principles form what we refer to as Tax Law. So Tax Law is based on the Tax Act, and it's based on decisions made by a tax court.
You will find that as we proceed into our studies, we will learn about these rules but we’re also going to be learning about tax judgments and why do we look at judgments? Because judgments help us to understand and to clarify the uncertainty in the Act.
Therefore, to conclude, the study of tax is based on a study of the Act, and it's based on a study of the decisions made by courts where there were disputes.