Australian Taxation Laws - Assignment Example

Name : xxxxxx Tutor : xxxxxxx Title: Australian taxation laws Institution : xxxxxxx @2010 Australian taxation laws (1) Taxation being an important part of the growth of a country’s economy, it is important to offer efficient and reliable advice to members of the public for the purposes of enabling them understand tax payment. Mr. Lawrence Grabbit’s idea is great since sports people (especially professional sports people) are many and as well earn from a range of activities. These activities are not limited to sports. They sometimes include sponsorships and advertisements. Despite these earnings, sports people have a wide range of expenses in relation to their health, fitness and training (when charged for the services). A professional sports person’s taxes vary with the conditions set by law since they could be natives of a country or foreigners and thus they are taxed differently. The information given here details the earnings of sportspersons living in Australia. There is need to consider what could be referred to as price money and what could be referred to as income for such sports people. It is very important that companies offering information about tax give information that can be trusted. This seeks to alleviate the problems that could arise like in the ruling of the high court in a case between FCT and a sports woman in Australia.1 The lady, then working as a policewoman, counted her being a policewoman as her main job and thus the source of her taxable income. However, the taxation commission in her country found it necessary to tax her even on the amount of money she made on sports activities which she referred to as her hobby. She had however received more from her hobby in terms of prize money, grants, appearance fees, sponsorships and awards. All these were supposed to be taxed; an issue she did not agree with thus prompting the misunderstanding between her and the taxation commission. This is a misunderstanding that could easily be solved if there was a clear outlay of the differences between taxable income of the individual athlete and the gifts given to them by various organizations. In the case of a professional athlete, income should be the amounts associated with the exploitation of the talent or hobby of the athlete with the intention of making money or generating the particular income. In situations where an award or a prize is awarded to the athlete as an appreciation for excellence, then there is need to consider it prize money which should not be part of the athlete’s taxable income. This includes the amount granted by sports clubs, individuals and even the nation as an appreciation of the skill. This mainly involves individuals who do not involve effort in trying to get the money, that is, individuals who do not exploit their talents with the intention of getting money. Money earned by means of a sports contract is what is referred to as income for the professional athletes while that which is granted without it necessarily being part of their contract agreements is much like a gift.2 Below is a sample of earnings for an athlete who has enrolled at a sports club and practicing as a sports person. Any wages paid as part of their being members of the club, allowances, advertisement involvements, participation fees, sponsorships and payments for representing the nation is considered the income of the individual. In the event that an individual or a company gets interested and rewards the athlete outside his or her sporting activity contracts with the club and the nation is considered as an award which is like a gift and should thus not be taxed. The information given here shall then be put to use to analyze the situation of those residing within Australia and those from outside the country but working within the country. Their taxation rates should be different not only in Australia but also in other countries.3 Considering an athlete with the following breakdown of money will allows us to get the concept. Income 1. $3,300.00 per week in form of salaries and wages from the club together with participation fees paid to the athlete for participation in the sports. 2. $2,000.00 per month of allowances granted to sports people by the club and the nation for upkeep and bills. 3. $300.00 per week for involvement in company advertisements while posing the company model 4. $300.00 per week of sponsorships by well-wishers and companies promoting talents as laid down at the beginning every year. 5. $ 50,000.00 per year to Australian citizens for representing the nation in competition with other nations Prize income $20,000.00 per year in form of rewards by the club and its sponsors to the athlete for successful completion of a season and excellent sports performance among other forms of sports related gifts Payments: 1. $150.00 per week to the trainer or the coach assisting the athlete at a personal level before participation at club or national level. 2. $ 50.00 per week paid in for training at the gymnasium 3. $150.00 per week paid to the personal spokesperson who handles deals for contracts and gives statements on behalf of the athlete 4. $30.00 per week paid to a local sports massage therapist for massage services 5. $50.00 per week paid to a physiotherapist for treatment of injuries In our analysis we shall use a period of fifty two (52) weeks as one year and Twelve (12) months still as one year. In evaluation of the above given information, the total income per year of such an athlete is given as the sum of all the incomes throughout the year; (3300 x 52) + (2000x12) + (300x52) + (300x52) + (50000) = $276, 800.00 The Prize income per year is already given as $20,000.00. The payment made by the sportsperson to those offering services to him or her is given as; (150x52) + (50x52) + (150x52) + (30x52) + (50X52) = $22,350.00 The information given above can be put to use in determining the taxable income of the individual athlete and the eventual tax for both Australian citizens and non-citizens. To be able to obtain the tax for such individuals, we need to evaluate the assessable income, that is, income from which tax can be deducted. In our case it is $276,800.00. The amount involved in generating this income is the costs and payments amounting to $22,350.00. This amount of money is what has been referred to as the allowable deductions. Therefore, we deduct this amount from the assessable value to obtain an amount we call the net taxable amount. $276,800.00 - $22,350.00 = $254, 450.00 Medical levy fee will be 1.5% of $254, 450.00 = $3,816.75 Income tax is; $0 to $6,000: 0% of $6,000 =$0.00 $6,001 to $35,000: 15% of $29,000 = $4,350.00 $35,001 to $80,000: 30% of $45,000 =$13,500.00 $80,001 to $180,000: 38% of $100,000 =$38,000.00 Over $180,000: 45% of $74,450 =$33,502.50 Total tax for the athlete is; $89,352.50 This is separate from a medical levy of $3,816.75 (2) (a)To have the necessary financial freedom by an individual, company or even family, there is the need to ensure that the amount paid as tax is kept within the manageable range. For families with various sources of income and as well with a number of expenses like that of Mr. Luthor, there is need for advice on the mode of action that enables them save as much as possible. Considering the given case of Mr. Luthor, we encounter an assessable income given as; $198,000.00 from his job of electrical contracting together with the sale of fittings which is not part of the family trust. $24,000.00 collected as rent from a unit he owns at Surfers Paradise which is taxed at the rate of 45% since he is the sole trustee. $4,500.00 from interest he got depositing in the banks $16,000.00 from shares he possesses in a local bank called Westpac Bank (fully-franked dividend) which means that all the tax related to it is already paid for by the company issuing to eliminate the possibility of double taxation. This totals to; $198,000.00 + $24,000.00 + $4,500.00 + $16,000.00 = $242, 500.00 In the process of generating all the above income, he incurs expenses which are his allowable deductions before he could be taxed. These are; $15,000.00 as salary which he pays to his Wife, referred to as Margot $8,000.00 payments in body corporate fees for the unit which he owns at Surfers Paradise $15,000.00, that is, his incurred interest on the money borrowed for the purchase of the unit. $4,000.00 expenses incurred in borrowing a new loan to re-finance the already bought unit $2,300.00 for new tools to be used in electrical installation work Giving a total of; $8,000.00 + $15,000.00 + $15,000.00 + $4,000.00 + $2,300.00 = $44,300.00 Some payments however cannot be deducted from his assessable income since they are not related to the income generating activities. They are more related to his personal life than they are related to the businesses he has in this case, the non-deductible payments are; $500.00 fees paid to a service provider by ‘Break Even’ send to advice him $17,500.00 that bought new fittings and fixtures Totaling to; $500.00 + $17,500.00 = $18,000.00 Normally, each individual is taxed as a separate entity from the family they belong to.Mr. Luthor’s family has two sixteen year old daughters for whom they receive some $1,945 considering the format of Family Tax Benefits. The total amount to Luthor’s family is; $1,945 x 2 = $3,890.00 which reduces by 30% since he earns above $95,000.00 to 70% of $3,890.00 = $2,723.00 From the developments above, it can be seen that Mr. Luthor has an assessable income given by; $198, 000.00 + $4,500.00 + $2,723.00 = $205,223.00 In relation to the unit purchased under the family trust; he being the sole trustee is charged at 45%. The taxable amount on the unit is $24,000.00 – ($8,000.00 + $4,000.00) = $12,000 hence. Income tax of the individual shall be evaluated after making the necessary deductions givens as; $205, 223.00 – ($ 8,000.00 + $15,000.00 + $2,300.00) = $179,923.00 Income tax is; $0 to $6,000: 0% of $6,000 =$0.00 $6,001 to $35,000: 15% of $29,000 = $4,350.00 $35,001 to $80,000: 30% of $45,000 =$13,500.00 $80,001 to $179,923: 38% of $99,923 = $37,970.74 this is then put together with $8000.00 body corporate fee and 45% of $12,000.00 = $5,400.00 totaling to; $63,820.74 There is also the medical levy which is charged at 1.5% of the net income. For the case of Luthor and his wife, it is; $2,733.35. Together with the taxes, the total charged on him is; $66,554.09. All this while little attention has been paid to the wife who earns $15,000.00 from Luthor and thus paying a tax given by; 15% of ($15,000 – 6,000) = $1,350.00. This together with the husband’s salary amounts to; $67,904.09 Goods and services meant for selling are subject to Goods and Services Tax. This is starting July 2010 and thus this did interfere with Mr. Luthor in the previous year since at the particular time the requirement was yet to be effected. This tax will therefore not be put to consideration relation to the commodities he supplied. The reason for not considering this in the financial year 2009/2010 is because the year terminated on 30th June, 2010. (b)Considering the case of Mr. Luthor as it appears here, there is need to state that such a mode of tax payment considering the fact that the other members of the family also pay tax, is too heavy on the family as a whole. This calls for an advice that could save this client and his family from the costs. Here are the considerations to be made before advising Luthor to take a step and review his business plan and the personal life. First of all making the wife a partner in the business will eliminate the issue of paying her and instead allow for sharing of the business taxable income. The trust fund also becomes sharable income hence making the assessable income given as; $198,000.00 + $4,500.00 +$2,723.00 = $205,223.00 Allowable deductions becomes; $15,000.00 + $4,000.00 + $2,300.00 = $21,300.00. The taxable amount is; $205,223.00 - $21,300.00. = $183,923.00 which is $91,961.50 per individual. However, in the event that he sells the family house it will be exempted from a tax called capital gains tax and thus he will clear his debts. This will in the process eradicate a number of expenses he previously incurred, that is, $15,000.00 interest on money he borrowed to buy the unit and $4,000.00 expenses incurred in borrowing a new loan to re-finance the already bought unit. The allowable deduction will remain; $2,300.00. This however favors taxable money by increasing it to $205,223.00 - $2,300.00 = $202,923.00 which is $101,461.50 per person. It is therefore better to pay using the agreed scheme and avoid selling the family house as taxation will remain high. This way, body corporate fee is given as; $ 8,000.00 Tax per person $0 to $6,000: of $6,000 = $0.00 $6,001 to $35,000: 15% of $29,000 = $4,350.00 $35,001 to $80,000: 30% of $45,000 = $13,500.00 $80,001 to $91,961.50: 38% of $11,961 = $4,545.37 Medical levy: 1.5% of $91,961 = $1,379.42 For goods sold, taking a projection of $25,000 charged since July 2010 on goods and service at 10%, we obtain a tax amount of $2,500.00 results in a figure of $23,774.00 per person and $50,057.58 for both of them. In the event, the save tax is calculated as: $67,904.09 - $50,057.58 = $17,846.51 per year. Along with these important steps, Mr. Luthor should ensure that both his wife and himself have tax fine numbers as they reduce the amount of tax retained at the banks and allows them to get their tax refunds for every of their financial periods leading to reduced rates. Their daughters being minors should not be trustees as it could lead to penalties.4 To retrieve tax related information from a client may be difficult and challenging if there is no clear modality of how to do it. Therefore, it is important to ensure that there is a better way of retrieving the information. This necessitates the questionnaire designed here. It seeks to retrieve information pertaining to the individual whose taxes are to be evaluated. There is need to reassure the clients that the information given in the forms or questionnaires is private and confidential and will thus not be disclosed to any other person apart from the staff member handling the case of the client. The necessary details of the client should be obtained in a neat manner and thus the questionnaire needs to be clear to eradicate any chance of mistakes in the process of filling. Explanations should be provided for those filling the form to ensure that there is sufficient understanding of the information contained therein. The information to be obtained can be categorized as personal details, income and expenditure information or property information. A sample questionnaire that could be put to use by Grabbit and Runn is as shown below. It seeks details from the client in a systematic way thus reducing the time spent in obtaining the details. Grabbit & Runn information form Declaration Information given in this form will be confidential and will not be disclosed or used other than by the staff of Grabbit & Runn to perform a check of your tax situation and make the necessary recommendations Part A1. Personal details (for individuals) 1. What is your name (surname first) ……………….. 2. Which age bracket are you in? (Tick as appropriate) [1 to 17 years] [18 and above] 3. Are you married? (Tick as appropriate) [Yes], [No] 4. How many children do you have? (If any)....................... 5. Do you have a tax file number? (Tick as appropriate) [Yes], [No] 6. What is the name of your state? .................................. 7. Are you a citizen of Australia? (Tick as appropriate) [Yes], [No] 8. Are you a family trust trustee? (Tick as appropriate) [Yes], [No], if [yes], how many trustees are you……………… 9. Do you get any tax return? (Tick as appropriate) [Yes], [No] Part A2 Company information Name of the company…………………….. Owners of the company……………………. (Australians or foreigners; specify) Part B. Income information If are married, kindly indicate the value of your spouse’s earning (only if you have children)? (Specify)…………………. Do you get any old age benefits? (Tick as appropriate) [Yes], [No], if [yes], please specify and give the amount…………………… You should be keen enough to fill in details of your income generating activities together with the amount they contribute to your earnings. The space provided below is for listing of all the money earning activities you engage in for a period of one year. Alongside the activities indicate the details of the activities that need money and are involved in the running of the income generating activity (the costs involves all purchases related to the activity like medication for sports people, fees paid for training, costs of inputs to a business and the operation costs of the specified business). ………………………………………………………… In the table shown below is a space for you to list the income generating activities and indicate its estimated generation of money in a period of one year. On the right hand side is a space for indication of the total amount incurred in specified activity. (Use capital letters only). You can also indicate all the entitlements you have in partnerships with other individuals. Activity Estimated amount received in one year costs incurred in the activity In case you deal in goods or services, what is the value of the commodities you transact within one year? ........................... Part C. Property details Do you have any property purchased earlier than August1989? (Tick as appropriate) [Yes], [No], if [yes], specify the property and the buying price. ……………………. Do you have any family assets? (Tick as appropriate) [Yes], [No], if [yes], please specify and give their buying prices and current valuations. …………………….. Are there interests you receive from various sources like through banking or any other way? (Tick as appropriate) [Yes], [No], if [yes], specify the amount(s) involved. Are there dividends that you receive from other companies in which you are a shareholder? (Tick as appropriate) [Yes], [No] If [yes], indicate in the table given below the franking percentage of the shares. [Franking percentage refers to the percentage of the shares for which the company pays the tax before distribution to the shareholders.] Company shareholding Dividend amount received per year Franking percentage Thank you; your information will be processed with professionalism. The questionnaire is satisfactory because it has laid down the steps for a performance of taxation as the case should be in Australia where the rates are progressive depending on the individuals’ annual earnings. This means that individuals with a large sum of money in earnings and with less deduction pay more than those with less. It has also obtained information pertaining to property owned by the individual and thus it is possible to estimate the capital gain tax involved. Knowledge of family details in ownership enables one to gather information pertaining to the exemptions in capital gains tax. Taxation of corporate entities is performed at a flat rate which is 30% and thus it is important to know the type of taxpayer.5 Individuals trading in goods and services are charged 10% on the commodities they deal in thus it is important to get the detail of the information on the goods. Property taxes are also paid to local authorities thus the knowledge of the value of commodities. Finally, much as the client is taxed and the details are given, the questionnaire looks into tax rebates which are reductions in the liabilities associated with taxation. All these questions constitute a clear way of handling client problems in a short period of time and in a systematic way with minimal mistakes. Bibliography 1. ‎‎Books Barkoczy, S 2008, Australian tax casebook, CCH Australia Limited, Sydney. Evans, C and Krever, R 2009, Australian Business Tax Reform, Thomson, Sydney. Lehmann, G and Coleman, C 1989, Taxation law in Australia, Butterworths Pty Ltd, Sydney. Woellner, R, Barkoczy, S, Murphy, S and Evans, C 2009, Australian Taxation Law, 19th edition, CCH Australia limited, Sydney. 2. Case law Commissioner of Taxation v Stone (2005) 215 ALR, 61. Read More