Course Code-LAW 6001 TAXATION LAW

TAXATION LAW

 

Executive Summary

 

The job has been done based on the taxation legislation of Australia. As per the given scenario, the client is a service holder who receives a handsome amount of salary, has some rented properties and also has a business. The aim of the client is to reduce the total paid value of tax for the financial year 2018-2019. All the aspects of taxation has been calculated considering the key provisions of ITAA 1936 ad 1997. After calculating total payable tax of the client, it has been observed that he belongs to a low income group. Therefore, he is going to get certain relation on the taxable amounts. Additionally some of the rent payers have fled without paying the due rent and he also wants to take legislative actions against them to recover the due amount. Therefore, he needs to consult with financial advisors who can recommend him proper financial actions.

 

 

 

Introduction

Income tax is the Australia is basically imposed on the corporations or individuals by the federal government. On the individuals, income tax is mainly levied at some specific and progressive rates. For the Australian Government, income tax is the major source of revenue within the system of Australian Taxation. It is collected from individuals, corporation and partnerships by the Australian Taxation Office on behalf of the federal government. The 3 major types of assessable income for the individual tax payers, including personal earnings, capital gains and business incomes. The individuals’ taxable income is taxed at 0 to 45% at progressive rates. The current report mainly deals with effective application of relevant taxation law based on the scenarios and circumstances of Eric Zhang, a resident taxpayer. Wide range of decisions and legislations are going to be applied based on the specific circumstances and income or deduction details.

Differences between tax treatments of various entities

In a nation like Australia, the income tax and necessary taxation laws are based on the structure of different entities. From the viewpoints of ato.gov.au (2020), the incomes of the trusts and partnerships are not taxed directly but are taxed based on the distribution to beneficiaries and partners. On the contrary, the taxable income of the Australian individuals is taxed at rates between 0 to 45% whereas the corporations’ taxable income is taxed at 27.5% and 30?sed on the annual turnover (ato.gov.au, 2020). However, the income of the corporations is subject to the dividend imputation. As per the comments of legislation.gov.au (2020), the capital gains are subject to tax only during the time when the gains are realized and diminished by 5-0% if the holding tenure of the capital asset is greater than 1 year.

On the contrary, low income tax offset (LITO) can be recognized as the tax rebate for the Australian residents having lower incomes. As commented by (), LITO reduces the tax liability of any individual although it is not refundable if the liability reaches 0(ato.gov.au, 2020). In this respect it is to be mentioned that the LITO is not used for calculating PAYG rates but is calculated by the ATO automatically when the tax returns are lodged. Income tax or the personal income of an individual is a progressive tax and in the Australia income tax is withheld from the salaries and wages which often creates refunds payable to the taxpayers. As per the provisions of Income Tax Assessment Act 1936, fringe benefits is a special benefit which directors or employees receive from the employment although are not incorporated to the wages or salaries (legislation.gov.au, 2020). These may include items like private medical insurances and company cars, private medical insurances as well as free or cheap loans.

Income and expense information of Eric

It has been found that Linda and Eric has an account at ANZ for joint term deposit and the total received interest in $500 in the year 2019. Moreover, the disability pension received by Eric’s wife Linda is from Centrelink is $9200 in 2019 and this is not a taxable income. However, these amounts are not assessable income although it needs to be declared on the tax returns. Moreover he has also paid $400 to a tax agent to prepare tax returns for the 2018 year which is a part of his personal expenses.

 

Part A: Regarding the employment

 

Particulars

AUD

Gross wages (1st of July 2018 - 30th of June 2019)

7,800

Less: PAYG withheld

200

Less: Work associated allowable deductions

300

 

7,300

add: shift allowance

2,000

add: reimbursement for the work associated  software fees

800

Net income from the employment

10,100

car from employer as a fringe benefit

60,000

 

Table 1: Income and deductions from the employment

(Source: Developed by the researcher)

Analysis:The taxpayer in the study is Eric Zhang who runs sole trading business related to selling of different imported food items. The business is registered for GST and he is also a casual employee for the company, Blue Marlin Pty Ltd as an export/import agent. It can be observed that the gross income obtained from the company is $7800 from which PAYG withheld and allowable deductions have been subtracted. In addition to that shift allowance and work associated software fees have been added to obtain the net income of worth $10,100 (assessable income).However the income is not subjected to taxation as per ATO.It can be observed that the car received from the employer is a fringe benefit hence it is not within the income amount, However, the fringe benefit values $60,000 are not exempt from FBT as per the Australian Taxation Law. The assessable income basically includes values to all the benefits, allowances and benefits (apart from fringe benefits) (ato.gov.au, 2020).

The lower gross up rate for 2019 FBT is 1.8868. As a result, the grossed up amount to be reported on Eric’s payment summary is

Total taxable value *1.8868

=$60,000*1.8868

=$113208

Part B: Regarding the business

Eric runs sole trading business of imported food items where the total cash received from the accounts receivable is $85,000 whereas the cash paid to the accounts payable for purchasing is $43000. The higher accounts receivable however shows good financial health of the business organization. The inventory trading stock in the year 2018 is $7100 whereas the same in the year 2019 is much higher. Taking into account the general ledger balances as well as opening balance and closing balance it can be commented that total income from accounts receivable in 2019 is $82,800 and total payments for the same year is $42450. The net taxable income from the business is thus $40,350.Now, for the inventories, the opening balance of inventories (trading stock) on 1st July 2018 is $7100 and the food taken at the home is worth for $2500. Now the amount for inventory trading stock at cost is $8400 whereas, the paid (in-transit stock) is $5000. According to Income Tax Assessment Act 1997, the items of trading stocks can be regarded as an asset and can be counted for asset test. Thus the closing inventory amount can be calculated to be $6200 and it is shown in table 2 below:

Inventory (trading stock) on 1 July 2018

7,100

Inventory (trading stock) on 30 June 2019

 

at cost

8,400

at market selling

8,600

at replacement

8,500

Overseas paid and owned

5,000

Food items

2,500

Closing inventory

6,200

Table 2: Closing inventory

(Source: Developed by the researcher)

 

Additional cash receipts

Additional cash receipt includes

$

Volume rebate from the overseas suppliers

3500

Insurance recovery from the insurance company

 

Compensation for theincome loss

7900

Repairs made on the shop

2700

Medical costs

900

Less: Capital contributed

10000

Net amount

25000

Table 3: Additional cash receipts

(Source: Developed by the researcher)

From the table 3 presented above, it can be found that, the additional cash receipts of worth $25000 is again a part of his business income. However, as per the Australian Taxation Law, the medical expenses for the injuries is $900 and it cannot be claimed as tax deductible (legislation.gov.au, 2020).

Cash payments

 

Figure 1: Detailed and total cash payments

(Source: Developed by the researcher)

 

 

 

Figure 2: The adjustable values for mobile phones, furniture, laptops/computers and printers respectively

(Source: Developed by the researcher)

It is possible to notice that the cash payments of Eric includes cash drawings, breaching fines, PAYG withheld, superannuation for the employees, tax for fringe benefit lease payments, computer maintenance fees and other tax deductible operating expenses. In this context, it is to be mentioned that, the total payments to be made by adding the aforementioned particulars is $35390. Now according to the provisions of both ITAA 1936 and ITAA 1997, the decline in the values of the assets have to be taken into account while calculating the payments (legislation.gov.au, 2020). As per ITAA 1997, a balancing adjustment for the depreciating assets can be included in the assessable income (legislation.gov.au, 2020). According to ITAA 1997, the specific usage amount of the assets have to be taken into account for the business purpose and are to be included in the cash payments. For example, in case of the present scenario, the adjustable declined value of mobile phone is $2188 and 60% of it is used in the business purpose. Hence, $1312 is to be considered while calculating the total payments. Similarly the assets like furniture which have been fully used for the business purposes, the whole adjustable value would be taken into account as the declining costs. However the adjustable value for laptop, computer is $2666.67 and the same for printer is 150 (calculated using prime cost method). In this regard the total cash payment is $52,894 whereas the total declined value for the current year is $17,504.

The net income from the business is obtained by subtracting all the payments from income and this is $14,556 and this is the assessable and taxable income.

Part C: Regarding the rental property

In a country like Australia, the annual taxation amount is being decided and implemented by different taxation laws legal bodies like Australian Taxation Office (ATO). The rental money which is received from renting out a specific part of a property can be considered as assessable and taxable income. Rents and the associated payments can be in the form of services and goods (ato.gov.au, 2020). The tax returns holds the share and full rented amount from the rented property. According to the rental tax provision laid out by ATO, it can be assessed that the rental bond amount can be includedfor income if the owner is entitles for retaining it. For the current case scenario, the compensation from the rental bond for unpaid amounts of the tenants have to be considered as income.

The property has been purchased by Eric on 1st July 2018 at $300,000 which includes the cost for buildings and land along with depreciable assets. However, Eric has found that, the actual construction cost of the house in the year 1990 is $100,000. The total receipt as well as payments for the tax year 2018 to 2019 has been stated below:

Rent received by 28 June 2019

23,750

Compensation from Rental bond board

1,300

Advance rent from the new tenants on 29th June (1 July to 30 July 2019)

3,000

Insurance recovery for the storm damage

2,100

Total receipts

30,150

 

Table 4: Additional cash receipts

(Source: Developed by the researcher)

 

Figure 3: Net rental income

(Source: Developed by the researcher)

The above table highlights that, Australian tax system and taxation laws (ITAA 1997) on rental income from any Australian Property is Australian source of Income. Hence, it can be mentioned that the rent is taxable. However, in the present case, the tax is to be imposed on the net income which means rental income minus the rental deductions. Moreover, it seems that the property is less than 20 years old hence, depreciation reports might be applicable.It can be seen that total income receipt is $30,150 although the total payments (mortgage repayments to the Westpac Bank and payments to the solicitors) equal to $42,775. As a result, the net income has been calculated to be $-12,625. As per ITAA 1936 and 1997, negative taxable income means that the income earned has no tax liability.

Recommendation of suitable strategies

Below are certain recommendations regarding taxation strategies have to be put forward to the client, Eric for reducing the income tax in 2018/2019:

  • ATO states that tax offset of approximately $2160 is available for the low income earners like Eric (budget.gov.au, 2020).
  • Moreover, Eric needs to consult a tax consultant or agent most essentially, in order to understand different provisions and laws related to tax deductions related to his business (budget.gov.au, 2020)
  • Specific legal means have to be pursued by Eric for recovering the outstanding amount of $650 from the tenants. In this case, remedies for handling breaches in the tenancy agreement have to be followed. Legislations like Real Property Act 1886 (RPA) and Landlord and Tenant Act 1936 (LTA) can be implied.

Conclusion

From the above discussion and analysis, a strong and sound conclusion is going to be drawn at the final part of the study, by summarizing all the necessary contents from the above. The Australian business framework is highly complex and are subject to several tax and other associated deduction, breaching of which may lead to the generation of legal issues. It is observed that individuals from lower income group need to seek strategies for reducing income tax with the assistance of consultant. The study has taken into account all necessary income and deductions where applicable in order to evaluate the tax implications, and different issues.

 

 

Reference list

ato.gov.au (2020), Cost of managing tax affairs, Retrieved on 18th March 2020 from: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Cost-of-managing-tax-affairs/

ato.gov.au (2020), Income and deductions, Retrieved on 17th March 2020 from: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Cost-of-managing-tax-affairs/

ato.gov.au (2020), Rental income, Retrieved on 17th March 2020 from: https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Rent/?page=3

budget.gov.au (2020), Lower taxes, Retrieved on 15th March 2020 from: https://budget.gov.au/2019-20/content/tax.html

legislation.gov.au (2020), Income Tax Assessment Act 1936, Retrieved on 15th March 2020 from: https://www.legislation.gov.au/Details/C2017C00242/Html/Volume_1#_Toc488142866

legislation.gov.au (2020), Income Tax Assessment Act 1997, Retrieved on 19th March 2020 from: https://www.legislation.gov.au/Details/C2017C00336/Controls/

 

 

 

 

Bibliography

Arnold, B. J., Ault, H. J., & Cooper, G. (Eds.). (2019). Comparative income taxation: a structural analysis. Kluwer Law International BV. Retrieved on 19th March 2020 from: http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1026&context=lsfp

Burkhauser, R. V., Hahn, M. H., & Wilkins, R. (2015).Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality13(2), 181-205. Retrieved on 17th March 2020 from: https://www.nber.org/papers/w19121.pdf

Dixon, J., &Nassios, J. (2016). Modelling the impacts of a cut to company tax in Australia.Centre of Policy Studies (CoPS), Victoria University.Retrieved on 24th March 2020 from: http://vuir.vu.edu.au/38869/1/g-260.pdf

McGee, R. W., Devos, K., &Benk, S. (2016). Attitudes towards tax evasion in Turkey and Australia: A comparative study. Social Sciences5(1), 10.Retrieved on 20th March 2020 from: https://www.mdpi.com/2076-0760/5/1/10/pdf

 

 

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