BULAW 5916 Taxation Law and Practice-Marginal Tax Rate
Jane is an eligible beneficiary of the Brown Family Discretionary Trust. The trustees decided to distribute a cash amount of $20,000 to Jane for the current tax year.
Jane also receives $20,000 fully franked dividends. Jane has a $20,000 HELP debt.
Jane received $79,000 (gross income) from employment at Company Pty Ltd for the period 1 July 2016 to 30 June 2017. The correct amount of PAYG has been withheld.
Jane reports interest income of $475.
Jane advises of investment expenses of $250.
Jane receives rental income of $35,000 from an investment property. The associated expenses are:
- Mortgage repayments: $25,000
- Repairs: $2,000
- Rates: $2,500
- Insurance: $500
Jane sold a parcel of 200 Coles Myer Group shares on 1 July 2016 for $3,500. She had purchased these shares on 1 July 2009 for $800. Her brokerage costs of buying and selling were $300 in total.
Jane made donations (for which she presents tax invoices and receipts) to the value of $900.
Jane does not wear a uniform to work.
Jane pays premiums on an income protection insurance policy equivalent to $1,000 per year.
Jane does not have Private Health Insurance.
Calculate the net tax payable/ refundable situation for Jane for the current tax year (include references, calculations & assumptions)
Green Pty Ltd is a resident gardening company registered with the following information:
TFN: 859 376 213
ABN: 79 512 647 864
ACN: 86 572 314 719
The following is the financial information for the year ended 30 June 2017.
GST (where it is applicable) has not been removed from the following amounts.
Depreciation (for tax purposes) was reported to be $5,500 for the current year.
Income:
|
Sales |
345,000 |
|
Exempt income |
10,000 |
|
Dividends (fully franked) |
10,260 |
|
Interest received |
900 |
|
Compensation from a client who failed in a legal suit to obtain damages from Green Pty td for alleged property damage. |
4,000 |
|
Net capital gain |
4,000 |
Expenses
|
Advertising (print, net, signage, flyers) |
1,000 |
|
Bad debts |
900 |
|
Bank Charges |
150 |
|
Capital expenditure (qualifies for immediate deduction) |
3,000 |
|
Cost of sales |
6,000 |
|
Sub-contractor expenses |
23,000 |
|
Depreciation expenses |
2,000 |
|
Electricity |
800 |
|
Entertainment |
2,000 |
|
Environmental protection (disposal of chemicals) |
600 |
|
Fines (speeding and parking tickets) |
500 |
|
Insurance |
600 |
|
Interest expenses within Australia |
1,200 |
|
Lease expenses within Australia |
4,000 |
|
Motor Vehicle 3rd Party insurance |
550 |
|
Motor Vehicle expenses (petrol & maintenance) |
4,000 |
|
Motor Vehicle Registration |
1,200 |
|
Rent expenses |
11,800 |
|
Stationery & Office supplies |
200 |
|
Tea, coffee, sugar & milk for staff use |
100 |
|
Telstra (Phones & Internet) |
2,000 |
|
Wages |
45,000 |
Answer:
There were variety of information about the individual Jane Brown were given and the concern was the computation of the taxability in the current year. A number of provisions were applied to compute the same are discussed below:
- As per the section 4-1, every individual, company or others have to mandatorily pay the required amount of income taxes.
- As per the section 4-10, the appropriate rate of taxes is applied for calculating the income taxable.
- As per the section 4-15, the income taxable gets subtracted with the deductions that are allowable in nature.
As per the section 6-5, the income under assessment gets divided under two heads of income that include the ordinary and the statutory incomes. The assessable income of the country Australia is determined for all the incomes and sources received as in case of non residents. Thus, the main and principle stage in computing the income taxable is the identification of the residential status of the individual paying tax. There are four rules that must be followed and applied as stated under the Income tax Assessment Act 1936 is applied for the determination of the status of taxpayer. In the given case, there is an inadequate amount of information provided and thus, it is assumed that Jane for the purpose of tax computation, he is a resident of Australia.
The income related to the trust is contained in the division 6 of the Income Tax Act. The assumption of the trustee being resident in nature is undertaken for the computation of the net income. The income of the trust is further put under distribution towards the beneficiaries or any nominees in a manner deemed fit. The Act considers the nonpayment of the taxes on the distribution of the income and the liability of tax falls on the trust that is paid on the income distributed. The trust amount distributed by family needs to be paid by the beneficiary. The special incomes and proceeds must be considered at a marginal tax rate for the inclusion in the income assessable. An amount of $2000 formed the receipt of Jane and the same was given by family members and thus, as per the above discussions, the trust income must be taxable.
As per the section 44 of the Act, dividend income must form part of the income assessable by the shareholder of the company i.e. the resident. The dividends are a part of the earnings that is accumulated in nature and thus distributed by the company as profits to attain the trust of the shareholders. As per the section 6-5 of the Act of Income taxes, the dividend income falls under the ordinary proceeds. The dividend received by Jane must form the part of income assessable. The information given is not sufficient and thus the gross dividend is assumed to be $20000.
As per the section 6-5, the salary is considered as an assessable income and thus, the receipt of salary in the hands of Jane is a taxable income. The gross salary must constitute the PAYG amount to arrive at the net amount of salary. The interests also form a part of the ordinary proceeds and thus the income of $475 must be a part of the income assessable.
As per the section 6-5 of the Income tax act, the investment incomes and proceeds must be a part of the income assessable. Thus, in the given case the income received from the property as rental income will form a part of the income assessable. As per the section 8-1of the Income tax act, it is stated that the deductions can be made from the assessable income and thus in the case the income incurred from the property invested must be deducted. Thus, the amount of expenses incurred from the investment property to gain income and proceeds and the same must be considered for the purposes of deductions. The net income derived will form the part of the income assessable (Borowski 2013).
As per the section 102-5 of the income tax act the net amount of capital gains arising in the current year must be a part of the income assessable. The shares in the given case were attained in the year 2009 and application off the discount method was done. The section 115-10 of the act is related with the discounted capital gains. The premium on insurance falls under the deduction head as the received amount of the insurance money is taxable in nature (Brownet al. 2015).
The income taxable is computed and the calculation states that the taxable amount comes out to be $34,715 and the same is shown below:
It is assumed that an interest amount of $15000 was included in the mortgage repayment amount.
The company Green Pty Ltd has a resident status and the concern include the computation of the taxable income after proper and accurate determination of the same.
As per the Act of Income Tax, the income from business has a taxable nature. Further, as per section 8-1 of the Act, the expenses or costs that have been incurred towards earning of the income that is assessable are considered for the deduction purposes. The GST must be applied as the acts state that the credit of input tax can be deducted in nature of losses. The dividend amount is gross in nature and the tax rate of the company is taken as 30% and for small business is 28.5%. In the case given, the business has a turnover that is less than 2 million and thus rate of 28.5% will be applied and the computation is as below:
|
Computation of Net Tax Payable | |
|
Taxpayer: Green Pty. Ltd. | |
|
ABN: 79 512 647 864 | |
|
Taxation Period: 1/7/2016 to 30/06/2017 | |
|
Particulars |
Amount |
|
Sales |
$313,636.36 |
|
Franking Credit |
$14,657.14 |
|
Interest Received |
$900.00 |
|
Compensation from Client |
$4,000.00 |
|
Net Capital Gain |
$4,000.00 |
|
Total Assessable Income |
$337,193.51 |
|
Advertising |
$909.09 |
|
Bad Debts |
$900.00 |
|
Bank Charges |
$150.00 |
|
Capital Expenditure |
$2,727.27 |
|
Cost of Sales |
$54,545.45 |
|
Sub-Contractor Expenses |
$20,909.09 |
|
Depreciation Expenses |
$5,500.00 |
|
Electricity |
$727.27 |
|
Environmental Protection |
$600.00 |
|
Insurance |
$545.45 |
|
Interest Expenses within Australia |
$1,200.00 |
|
Lease Expenses Within Australia |
$3,636.36 |
|
Motor Vehicle 3rd Party Insurance |
$550.00 |
|
Motor Vehicle Expenses |
$3,636.36 |
|
Motor Vehicle Registration |
$1,090.91 |
|
Rent Expenses |
$10,727.27 |
|
Stationery & Office Supplies |
$181.82 |
|
Staff Amenities |
$100.00 |
|
Phone & Internet |
$1,818.18 |
|
Wages |
$45,000.00 |
|
Total Allowable Deduction |
$155,454.55 |
|
Taxable Income |
$181,738.96 |
|
Tax Rate |
27.50% |
|
Gross Tax Payable |
$49,978.21 |
|
Less: Tax Offset for Franking Credit |
($4,397.14) |
|
Net Tax Payable |
$45,581.07 |
Taxable income
(Source: Created by Author)
Notes 1:
The section 6-5 of the Income tax Assessment Act 1997 provides that the assessable income should include the income received from the sales.
Note 2:
The total gross dividend includes the franking credit that have been deducted under section 44 of the Income Tax Assessment Act 1936. The dividend shall be included in the income under section 6-5 of the Income tax Assessment Act 1997.
Note 3:
The interest income is an ordinary income as per section 6-5 of the Income Tax Assessment Act 1997 and should be included in the assessable income.
Note 4:
The compensation from client is an ordinary income as per section 6-5 of the Income Tax Assessment Act 1997 and should be included in the assessable income.
Note 5:
The capital gain of the company is calculated and included in the assessable income as per section 102-5 and section 115-10 of the Income tax Assessment act 1997.
Note 6:
The section 8-1 of the Income tax Assessment Act 1997 provides that the expenses that are necessary for producing the assessable income are allowed as deduction. The total allowable deduction is $155454.55
Note 7:
The franking credit on dividend income is deducted from the gross tax payable under section 205-15 of the Income tax Assessment Act 1997.
Reference
Borowski, A., 2013. Risky by design: The mandatory private pillar of Australia's retirement income system. Social Policy & Administration, 47(6), pp.749-764.
Brown, C., Handley, J. and O'Day, J., 2015. The dividend substitution hypothesis: Australian evidence. Abacus, 51(1), pp.37-62.
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