Forms of Taxation in Australia - Assignment Example

Part 1 There are many forms of taxation in Australia. Individual and companies may be required to pay taxes to all levels of government, i.e. state, federal or local. However an individual is eligible to pay tax only if they are residents as far as tax law is concerned and the taxation is applied on their world wide income. Liability to tax is determined on an annual basis. Taxes collected are meant to fund public service and also for redistribution of economic wealth.. The Australian government's financial year begins on July 1 and concludes on June 30 of the following year. Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%. Residents are taxed based on income generated worldwide while non-residents are taxed on income generated within the borders of Australia, i.e. income that would be taxable in Australia. This is provided for under subsection 6 (1) of the ITAA (1936). Residency status for tax purposes is determined differently as compared to immigration issues. An individual is eligible for tax if: She/he is a permanent Australia residence and does not have a home abroad. The person relocated to Australia from another country on a permanent basis The person’s residence is not in Australia but has been in Australia for six or more months. The exception to this rule is if the person residence is outside Australia and that the person does not intend to reside in Australia or be there for more than two years been working in Australia for six continuous months on the same job or you have been living in the same place for six consecutive months. You have been in Australia for more than half a financial year and your home is outside Australia. The person gets a job abroad but his term of employment is is less than two years. For non-residence, income has to be gained within Australia for it to be taxed. This may happen in case of the following:- The income was from Australian agent authorized to accept contract on behalf of non residents, meaning the agent accepts the offer in Australia. Income from a branch of an institution/ establishment based in Australia, and the head establishment has operated in Australia for at least six months. Income from a contact by a non-resident signed in Australia, which would be performed within Australia, whose payment is made in Australian currency, one or both of the parties to the contact is an Australian residence. Brian Jones is liable to tax because of the following:- He is an Australian citizen, with a permanent resident in Austria. The medical practice is registered in his name and operated within Australia; therefore income from the practice is taxable. His income from the four months appointment is taxable since Australian law provides for taxation on residents worldwide income Brian Jones was in Australian for 71/2 months therefore liable for tax during the 1st July 2011 – 30th June 2012 financial year. Part II: Brian’s Taxable Income:- According to Australian law, an individual is taxed on the following sources of income:- personal earnings i.e salaries & wages, business income and capital gains. Income on individuals is computed on a progressive basis while that of companies is taxed at a flat rate of 30% on profit. This form of tax is imposed by the Federal government. Therefore Brian’s tax due to the government is from the following Sources: Medical Practice: This is registered in Brians name and therefore proceed are taxed as income to him. The tax rate applicable is 46.5% (highest) and includes the 1.5% Medicare levy but excluded 1% food levy. The rate applicable will be on a sliding scale and will include an initial tax-free threshold. Employment at the University of Canterbury Australian resident are taxed on their world wide income. However where an individual paid tax in another country, they may be entitled to foreign income tax offset as per Australian law. This replaced Foreign Tax Credit from1st July 2008 and provides relief from double taxation for residents. In addition, income from foreign employment might be exempt i.e not subject to Australian income tax but might be considered when assessing taxable income. Salary from the Royal Melbourne Hospital Tax rate is on prorata basis, the higher the income the higher the tax due i.e. tax rise on a progressive scale. From 1st July 2010 it was passed that every individual will get a personal allowance of AUD6, 000. Incomes above this level are subjected to tax on a progressive scale. The tax scale is as follows: 15% on income from AUD6, 001 to AUD37, 000 30% on income from AUD 37,000 to 37,001 to AUD80, 000 37% on AUD80, 001 to AUD180, 000 while 45% is applied to AAUD 180,001 and above Tax from his properties In Australian local councils charge land rent on properties. The amount payable is based on the value of the land and does not include the existing developments on the land. Brians rental income is also subject to tax. However the amount taxed is the net proceed afer deducting all expenses paid out. They include rates, interest in case of mortgage, insurance, real estate agent fees, depreciation and capital works. Capital Gains On capital gains, special consideration is given on the individual’s main residence and other assets (real estate), unit trust gains & other managed funds. Capital gains are only subject to tax at the time the gain is realized. Dividend Dividends are considered as part of taxable income unless they are franked under the dividend imputation system of Australia, whereby companies pass 30% credit to their shareholders. Australia’s tax system is based on self assessment; therefore government expects its resident to declare all taxable income whether local or foreign. This applies even if the foreign income was subject to tax in the country it was earned. Under the self assessment, the Australian Tax office accepts the claims made on tax returns, sometimes without any adjustment and issues notice of assessment. The Tax office has powers to subject the returns to further reviews. Salary & wages is taxed. PART II Capital Gain Tax is tax payable when an individual or institution disposes an asset such as real estate, shares or managed funds investment. The income Tax Assessment Act of 936, Part IIIA provides for capital gains tax legislation, it calls for all legal advisers to ensure their clients are well informed on the tax implications of disposing interests in land. The act expects the property owners to keep proper property records to facilitate accurate determination of tax liability. The sale of any asset acquired after 19th August 1985 is liable to pay tax. The property in question was acquired via inheritance in July 1997 and therefore its disposal attracts Capital Gain Tax. A property owner is liable for CAPITAL Gain tax if their proceeds are more than capital loss during the financial year in question. The most critical point to consider when determining Capital Gain is the date the property purchase and sale contract are executed and not the date the payments are made. In addition, the property owner is entitled to 50% discount if they were in possession of the property for one year excluding the date of either sale or purchase. The property must also be registered in the name of an individual, a company compliant with superannuation or trust. Discussion In Australia inheritance taxes were abolished in 1979. Inherited assets are only subjected to tax when they are disposed at a profit. Therefore the Jimmy’s inheritance from his father didn’t attract any Capital Gain Tax. Capital Gain tax arises when the inherited asset is disposed. Owner occupied properties don’t attract any tax; therefore Jimmy occupation of the house for seven months didn’t attract any Capital Gain tax. The sale of the house & the adjoining 0.25 ha of land is subject to tax. This is because the sale realized a profit as follows: Value of house as at July 1997 was $70,000/= Value of 0.25 ha of land was ($330,000/ 20ha) * 0.25 ha = $4,125 Therefore initial value of the disposed assets was $ 74,125 Since the assets were sold at $220,000, Jimmy realized a profit of $145,875. The Australia’s tax law provides that in case of capital gains from the sale of a property which had been held for at least 12 months, the owner is entitled to 50% reduction in the capital gain since, therefore Jimmy is entitled to 50% reduction on capital gains since he held the house and the 0.25 ha for twenty one months. Vacant land in Australia does not attract CGT; however Jimmy renting the remaining 19.75ha made him liable for Capital Gain Tax on the proceeds. The CGT was payable between March 1999 to July 2011 when Jimmy signed a sale contract for the sale of the land. The disposal of the 19.75 ha for $1,200,000 attracted CGT since Jimmy realized a profit of $ 875,125 from the transaction Just like in the first transaction, Jimmy is entitled to 50% tax reduction on capital gain since he held the property for over 14years. References Commonwealth of Australia., (1996). Time for Business: Report of the small business deregulation task force, Commonwealth of Australia, Canberra. Commonwealth of Australia Joint Committee of Public Accounts., (1993). An Assessment of Tax, Report 326, 1993, Commonwealth of Australia, Canberra, p.63 citing Commissioner of Taxation’s 1984 Annual Report, at p.8. Humphreys, J. (2005). ‘Reform 30/30: Rebuilding Australia’s tax and welfare systems’, Perspectives on Tax Reform,Centre for Independent Studies Pagone, G. T. (2005). The general Anti-Avoidance Provision in Australian Taxation Law: Part IVA: Melbourne University Law Review Parsons, RW. (2001). Income Taxation in Australia : Law Book Co., Page. 11 Peter Groenewegen, (2004). Progressive personal income tax –An historical perspective: in John Head and Richard Krever, (eds) Flattening the tax rate scales:Alternative scenarios and methodologies, Melbourne:Longman Professional, pg. 5. Read More