Income Tax Liability - Coursework Example

TAXATION LAW Thesis ment The objective is to identify the procedure on which income tax liability can be reduced in case of sole proprietorship business. Advising Peter on his Income Tax Liability for the Year Ended 30 June 2014 Income tax is charged on the total income of individuals on an annual basis. Similarly, income tax is also charged on organizations with a view of collecting revenue for the government. According to the Australia tax law, income tax is determined on the basis of advance tax, self-assessment tax, and tax deducted at source among others. Collection of tax is the technique, which ensures governments are able to generate revenue in order to meet expenses for conducting operations successfully. At the same time, taxpaying is a simple and convenient mode of paying income and other taxes through which individuals ensure responsibility towards a society. Moreover, it can be also asserted that avoid taxation is one of the most violent crimes in every countries’ constitutional law. In this context, several laws have been also enforced in order to reduce the tendency of false tax. On the other hand, tax can be reduced by incorporating income reducing measures such as investing on charitable events and government bonds among others (Thomson Reuters Australia 28-86). In this case, it has been identified that Peter Smith has started a sole proprietorship venture operation as a fast food outlet in Australia. In order to conduct this business Peter has leased a mobile kitchen and employed certain number of employees. Simultaneously, Peter has arranged all the required raw materials from Edible Food Pty Ltd under an arrangement whereby unopened packets can be returned. In this regard, Peter is required to be advised about his income tax liability for the year ended 30 June 2014 in order to minimize his income tax liability based on the expenditure list of the sole proprietorship venture operation. Identifying the Essential Issues in the Questions According to section 102-5(1) of Australian federal income tax law, it can be ascertained that by reducing the proportion of gain against losses, tax exemption can be availed on income tax by earning more tax-free income. In this regard, a taxpayer can reduce his/ her tax liability by taking some restricted measures such as investing in government bonds or through depositing money in childs education plan. At the same time, it can be more effectively conducted by opening a health savings account. Moreover, through investing on life insurance policies, income tax can be reduced (Thomson Reuters Australia 23-27). Simultaneously, it can be asserted that according to the section 36 subsection 6(1) of Australian federal income tax law, income tax can be reduced by reducing taxable income. In this regard, the tax amount can be reduced according to the taxable income and it depends on the tax rate of a taxpayer. It can be conducted by increasing the expenses on real asset or increasing charitable contributions from the business operations. Apart from this, through increasing the medical expenses, tax liability can be reduced efficiently (Thomson Reuters Australia 23-86). At the same time, income tax can be reduced by investing on the retirement scheme according to the section 97 subsection 995-1 of Australian federal income tax law. By investing on the retirement investment plan, actual or gross income can be reduced, which helps to reduce the taxable income and tax liability effectively (Thomson Reuters Australia 23-86). It can also be asserted that tax can be deducted by employing physically handicapped individuals in the workforce. It can thus be affirmed that by involving physically disable workforce, it will be possible to attain governmental exemption on tax payment according to the section of Australian federal income tax law (Thomson Reuters Australia 100-150). According to the section 6-5(1) of Australian federal income tax law, income tax can be reduced by transferring the name of the property in case of property income tax. In this regard, owner of the property can avoid massive taxation on property by transferring the name of the property to the name of Peter’s family members. Moreover, it can be suggested that by showing less profit on the sale of property, net income tax liability can be reduced appropriately (Thomson Reuters Australia 23-150). The income tax related federal law of Australia is unique from other countries with relation to different policies based on which income tax liability can be exempted. in this regard, it has been identified that all receipts are not identified for tax purposes, income tax law differentiate revenue and capital expenses, and certain income as well as expenses are excluded from income tax law due to policy reasons. In this regard, it has been recognized that the administrative and judicial policies are similar to country, whereas rates of taxation are different from other countries. In relation to this context, it can be evidently asserted that taxation has left high influence on the political domain of Australia due to the influence of financial as well as economic factors. Moreover, taxation also affects the mutual interests and activities of the political communities in Australia. Additionally, it has been also recognized that taxation law is enforced by administrative and judicial law in Australia. In this regard, Australian administrative and judicial bodies consider taxation policy as a one of the most essential constituent of the Australian federal government (Thomson Reuters Australia 23-300). 1. Peter Sublets the Caravan for Five Months During the Football Season for $600 per Month Peter sublet the caravan for five months during the football season for $600 per month. In this case, Peter has to pay $3,000 to the owner in accordance with the lease agreement. In this case, Peter has to pay a property tax on caravan, for leasing to a third party. According to the tax rules of Australian federal income tax law under section 31 C and subsection 136(1), it has been identified that Peter has to pay the income tax in relation to the profit or loss to be incurred on the entire assessment of the business and on the net total rental expense on the property. Thus, during interpretation of financial information Peter has to show minimum amount of profit on his business statement in order to reduce the property tax amount. This can be done by avoiding the amount gained from leasing the caravan to a third party. By showing lesser amount of profit, Peter can reduce the proportion of tax to be paid. On the other hand, it will also ensure his goodwill as a sole proprietor businessperson. The implication here is that Peter should exclude the $3,000 gained from leasing the caravan for five months ($600*5). By doing this, the taxable amount will decrease to $59,550. Nevertheless, most of the firms assume that the tax treatment is in relation to the surplus amount of the lease agreed property. Thus, it can be also recommended that Peter should need to meet strict conditions in this regard. Source: (Thomson Reuters Australia 500-868) 2. On New Year’s Day, several customers complained that Food they had bought from his Caravan and consumed had made them ill and demanded refunds for the money paid. Peter Refunded $500. It has been identified that Peter has refunded $500 to the customers for poor quality of food supply. In this case, Peter has made a loss of $500, which is needed to be reduced form the revenue amount of the income statement. Deduction of loss will help Peter reduce the tax liability. However, Peter will not receive any direct tax deduction in this scenario, because the tax is paid as a percentage of the trading profit. The refunds will not affect the trading profit of $62,550 because it has already been accounted for. Source: (Thomson Reuters Australia 23-500) 3. Peter’s opening and closing stock is nil It has been observed that opening and closing stock of Peter is nil. This aspects leads to the recommendation that Peter can show limited amount of gross profit in order to reduce the income tax liability in his sole proprietorship business activities. Similarly, Peter can increase expenses, which will automatically increase the surplus expenditure amount. As an effect, it will automatically reduce the net profit amount in the balance sheet, which will help Peter to reduce his income tax expenditure and liability efficiently. Source: (Thomson Reuters Australia 500-868) 4. Tender costs include accounting fees, typing and other costs of complying with the requirements of the management of the stadium Tender costs that include accounting fees, typing and other costs for meeting the requirements of the management of the stadium have increased tax liability of Peter. In this context, transferring income from one fiscal year to another fiscal year, it will be possible to minimize or reduce the current income tax liability in business operations. Similarly, by investing the money on other business operations, Peter can reduce current year’s income tax liability substantially. Source: (Thomson Reuters Australia 1500-1200) 5. The license fee is an annual levy payable to the management of the stadium for the right of entry to the ground and occupies a site. It is levied on all commercial users of the ground The license fee will increase the tax liability of Peter. Investing the profit proportion on investment policies Peter can reduce the taxable income, which will help him to reduce the expenditure on income tax liability under section 102-5(1) of Australian federal income tax law. As an example, investing on a traditional investment regulating authority and permanent life insurance will be an ideal option for Peter. Apart from this, investment on credit bond will be also beneficial for Peter. Source: (Thomson Reuters Australia 500-846) 6. Various licensing requirements of local government Peter is required to manage different licensing requirements, which would augment his tax liability towards the government. Peter can transfer some portion of the income to his family members in order to reduce the federal income taxes. In this regard, Peter can make his family members as stakeholders of the property in order to avoid high tax pay by distributing dividend income among the stakeholders. At the same time, Peter can provide gift dividends to his children, as according to the Australian court of income tax law, gift paid is considered as federal tax free dividend up to the amount of $14,000. Source: (Thomson Reuters Australia 500-846) 7. Lease payments are $900 per month. An amount of $9,900 has been paid to 30 June 2014 with one payment overdue In case of lease payments, Peter has to pay $900 per month. This implies that the yearly total due lease amount is $10,800, which is calculated as $900*12. In this regard, it can be noted that Peter has paid an amount of $9,900 for the lease purpose. Subsequently, it can be recommended that Peter will need to pay the lease amount in advance in order to reduce the tax liability as the sole proprietor. If he pays $9,900, the taxable amount will increase by $900 to $63,450. Source: (Thomson Reuters Australia 500-846) 8. Award payments amount to $29,000 but peter always pays a bonus of around 10% to his staff Peter has paid an award payments amount of $29,000 to his staff along with a bonus around 10%. In this regard, it can be asserted that by depicting higher amount of staff remuneration, it will be possible to reduce the income liability more significantly. By paying the award amount, the taxable amount reduced by the same amount. Source: (Thomson Reuters Australia 500-846) 9. Peter’s solicitor has informed him that defending an action or settling out of court could cost between $5,000 and $15,000 At the same time, due to quality issue Peter has to pay around $5,000 to $15,000 money for settlement cost. According to the provision of (97) division 54 under Australian federal taxation law, no part of the settlement money will be included in the income of taxpayers. Thus, tax liability can be reduced, by a respective rate. Source: (Thomson Reuters Australia 500-846) ADDITIONAL INFORMATION 1. On 1st January 2011, he purchased his house, which is his principal place of residence, at Mt. Lawley for $400,000 Peter has purchased a house, amounting to $400,000. In this context, Peter has paid $3,500 for stamp duty and other legal expenses. After the purchase of the house, it comes out that Peter has rented his house to his friend Jack. Finally, Peter sold the same house at $800,000 and paid legal fees of about $5,000. According to the property taxation, the governing authority charge taxes to the owners of the property. A house is always considered as a real property. Under the Australian property taxation system, the government charges tax according to the monetary value of the property. Section 6-5(1) of Australian federal income tax law requires that the amount of the tax is evaluated through actual valuation of the property with a mill rate of 20 mills. In this case, Peter has to pay $80,000 as a property tax annually. $80,000 is 10% of the house price. It can be recommended that Peter need to transfer the name of the property in order reduce his own tax liability. Peter cannot avoid tax, because according to the section 6-5(1) of Australian property taxation law, owner of a property is required to pay tax (Thomson Reuters Australia 350-846). He can only transfer the tax. Peter can shift his income by hiring a family member for his business. In this case, Peter will need to establish a family limited partnership entity in front of the federal government. In order to include family members within the business entity, Peter will need to be careful in front of tax collectors. Consequently, it can be also suggested that Peter can reduce his income tax liability by increasing business expenses through medical and miscellaneous expenses. Additionally, he can also reduce the amount of income tax liability by investing money on charitable events and donations. In this regard, Australian federal government usually provides tax exemption up to 20% of the taxable income, which will assist Peter to reduce the income tax liability for conducting sole proprietorship business (Thomson Reuters Australia 400-846). 2. On 2 august 1991, he purchased a holiday home in Albany for $150,000 Peter had brought a holiday home in Albany for $150,000. The house is exempted from CGT because it is a personal main residence according to Section 118-10=110(1). Moreover, he has also paid expenses of $10,000 for stamp duty and $1,000 for loan application purpose. Along with this, he has also paid a total amount of $50,000 for interests on the loan, rates, taxes, insurance and repairs on the property. Apart from this, he has also spent $6,000 for installing a pergola at the back of the holiday home. Simultaneously, he incurred $3,000 on legal fees preventing the Shire of Albany. Each of these funds is independently taxable. Finally, he has sold the holiday home for $950,000. According to section 104-10(1), the ale of the house is a CGT event according to Section 104-10. In this regard, it order to reduce the tax liability, Peter has to increase expense amount on the registration of the holiday home. The expenses will freeze the taxable income from the sale of the house. Apart from this, he will need to demonstrate the cost associated with rent, rates and taxes in order to reduce the gross income from that property, which will help Peter to ensure that his tax liability is reduced to a certain level (Thomson Reuters Australia 1643-1653). The net value of the house would be the sale amount less all the accumulated expenses. Typically, the Peter can apply the all the net capital losses that were unapplied from earlier income years. This would reduce the amount. Thus: 950000 (as capital proceeds according to Section 116-20(1) (a)) less cost Base (220000) =730,000 He can then reduce this amount by discounted percentage, which will settle at: 730,000*50% = 365000 Since there are no capital gains, this amount remains unchanged. The carried forward losses do not affect this amount since they are disregarded according to Section 108-20(1). Section 108-10(1) also requires that carried forward losses from collectables can only be offset against gains from collectables. In order to reduce the overall taxes, Peter will need to emphasize few aspects. In this context, during the investment tax planning, Peter is required to formulate appropriate strategies in order to reduce the income tax liability as seen in the above calculations. Further, Peter will need to make tax-conscious investment choices in his sole proprietorship business. It can be possible to identify tax exemption ways through the help of potential strategies, which will help Peter to increase his capital assets for the maximum time tenure. According to the Australian income tax law, it has been recognized that income is generally taxable. Thus, in order to reduce the taxation amount or income tax liability, Australian individuals should need to generate income, which is exempted from the tax according to Australian federal taxation council. As an example, it can be asserted that by buying governmental bond tax exemption can be attained. Apart from this, by investing money on investment policies or life insurance policies tax can be exempted. Moreover, education purpose investment along with pension policy related investment plans are exempted from federal income taxation policies, income tax can be reduced identically (Thomson Reuters Australia 1870-1896). 3. Peter acquired shares Peter acquired the shares at a price of around $5,000 per share and sold all of those shares at various prices at different times making different profits/loss. Shares are not exempted from tax according to Section 108-5(1). The taxable income from shares is therefore calculated as shown below: Profits/loss =Capital Proceeds less Reduced Cost Based Shares in A Ltd. = $6000 -$5000 = $1000 (a discount capital gain) Shares in B Ltd. =$7000 -$5000 =$2000 (a discount capital gain) Shares in C Ltd. = $4000 -$5000 =$-1000 (not a discount capital gain) Taxable Gain = $2000 According to Section 108-10(1), carried forward losses from the sale of the shares can be offset against the gains from the sales of shares. Gains of $3000 have been made in two cases while a loss of $1000 was incurred in one of the three cases. In this regard, Peter has earned a total profit of $2,000 from the sale of the shares. In this context, it can be recommended that Peter can reduce taxable income by increasing the cost of expenses in security and bond related instruments. The cost of expenses will reduce the taxable gain by an equivalent amount. Holding the governmental bonds can make Peter reduce taxable income, which will help him to reduce his income tax liability in a financial year. Source: (Thomson Reuters Australia 1660-1868) 4. He also purchased a first day cover entitled “Rhodesia running” for $450 on 3 July 2000 Peter has an abnormal profit based on the Income Tax Assessment Act as identified under section 405-15. Peter has to hide abnormal profit margin regarding stamp auctioneers related issues in order to reduce the amount of income tax. In this regard, he has to remain conscious regarding such issues and invest a proportion of the profit in charities and relief funds. Source: (Thomson Reuters Australia 1660-1868) 5. Peter has unapplied carried forward losses It has been ascertained that unapplied losses that are carried forward would help Peter to reduce his income tax during the financial years. Source: (Thomson Reuters Australia 1660-1868) Calculation of income tax liability of peter for the year ended 30 June 2014 Step 1: Assessable Income Calculation Assessable income 220,000 + 3,000 =223,000 Step 2: Calculate deductions The deduction includes all the expenses, costs, and other deduction likely to reduce the profit. The calculation is done as follow: Deductions 95,000 +750 +6,500 +1,200 +10,800 +3,700 +32,000 +10,000 +500 =160,450 Step 3: Calculating taxable income under section 4-15(1) The taxable income is calculated as the difference between the assessable income and the deductions. (223,000 -160,450) = AUD 62,550 Step 4: Multiply taxable income by 2013/14 tax rates under section 4-10(3) This is done as follow: 62,550*32.5% =20,328.75 Add 3,572.00 Less 37,000*32.5% 12,025.00 Tax Amount AUD 11875.75 Step 5: Calculate tax offsets Tax offsets = Nil Step 6: Calculate income tax liability (including Medicare levy) The income tax liability is calculated as the tax amount less tax offsets plus Medicare levy. Medicare levy is calculated from the taxable income: Thus: (11,875.75 – 0) = AUD 11,875.75 Add: Medical levy (62,550*2%) = AUD 1,251 Total Tax Payable (11,875.75 + 1,251) = AUD 13,126.75 This tax payable amount is achieved without consideration of the various ways in which Peter could reduce the taxable amount. After consideration of the various ways to minimize the tax burden, the taxable income would reduce significantly. Without expense like investment on charity, expenses investment on policies, and the distribution of debentures and bonds, the net profits would be $135,600, implying that the trading profit is far much higher than this amount. By including these expenses, the taxable income is reduced thus leading to low tax burden. This is clarified further in table 1 below: Table 1: Profit and Loss A/c of Peter’s Sole Proprietorship Venture as on at 30 June, 2014 Fig. 1: Profit and Loss A/c of Peter’s Sole Proprietorship Venture Based on the above calculation, it can be apparently asserted that by investing on charitable events, investment policies and through distributing dividends and bonus to the staff Peter can reduce his taxable income more adequately. In this regard, hypothetically it can be asserted that by investing $20,000 on charitable events, $50,000 on investment policies and $15,000 on debentures and bonds Peter can reduce the taxable income. Thus, it can be suggested that Peter should adopt prescribed methods in order to reduce income tax liability in his sole proprietorship venture. Work Cited Thomson Reuters Australia. Principles of Taxation Law 2014. Australia: Thomson Reuters Australia, 2013. Print. Read More