Taxation in Australia - Michele Jordans Assessable Income - Case Study Example

Taxation in Australia Name Course Tutor Institution Date Whether or not Michelle Jordan remained an Australian resident for the year 2014 depends on whether she satisfied one of the four conditions that are set in the Australian law. Michelle qualifies for the second condition where her domicile remains in Australia despite moving to the US. In addition, Michelle does not intend to relocate to America permanently. These two conditions make her qualify to remain an Australian resident for the duration she was in the United States. However, it can also be argued that Michelle Jordan ceased to be an Australian resident because she severed all ties with the country by selling all her property which included her house. However, since she did not state her intention of moving permanently to the United States, she is still eligible to be an Australian resident1. In addition, her reason for selling her property was to raise money that would facilitate her travel and stay in the United States. Michelle also came back to Australia before 2014 ended. Therefore, Michelle remained an Australian resident in the year 2014. If Michelle Jordan remains an Australian resident, she will be subject to the local tax laws. However, she must consider the effect of any double tax agreement that exists between Australia and the United States. A double tax agreement states the country that is entitled to taxes for certain types of income. The agreement sets out about which country holds the rights to exercise taxation on each type of income that one may earn2. This helps one to minimize the chances of being taxed twice on the same income. Where the agreement gives a country the right to tax an individual on a certain income, such an individual is subject to the local laws of that particular country3. It is therefore important Michelle educates herself about the tax laws in the United States. She also needs to know about the double tax agreements that exist between Australia and the United States. If Michelle Jordan remains an Australian tax resident during the period she is staying in the United States, any income she obtains while working in the US which includes wages, salary, commissions, allowances and bonuses is treated as foreign employment income. The foreign employment income is taxable under the Australian tax laws and this means that Michelle Jordan has to include such income in her Australian tax return. However, if she paid tax on the income in the United States, she is supposed to claim the foreign tax so that she avoids being double taxed. If Michelle Jordan becomes a non resident during that period, she will be required to present an income tax return for any Australian sourced income only. This income includes the sale of a property income or rental income on a property in Australia. However, if the income sourced from Australia is dividends, royalties or interest which has had non-resident withholding tax deducted from them, Michelle Jordan is not required to lodge any Australian income tax return4. All dividends, royalties and interests derived from Australian after an individual ceases to be a resident of the country are liable to withholding tax provisions for non-residents which are provided for under the Australian tax laws 5. Basically, the person paying such incomes withholds tax on behalf of the individual to whom the payment is being made. This explains why such incomes are not included in tax returns submitted by non-resident individuals. Should Michelle decide to be a non-resident in that period when she is playing in the United States, all income derived from disposing off of assets is subject to Australian CGT. However, this occurs only if the assets qualify as taxable Australian property. Such property includes certain holdings of shares and Australian real property6. In addition, when an individual becomes a non-resident, he/she is considered to have disposed off of all his/her CGT assets. This means that a person may pay tax on such property before selling them. However, such an individual may decide to defer paying the tax until he/she sells the assets or regains his/her Australian residence. Calculation of Michele Jordan’s assessable income Michelle Jordan received various types of income during her stay in the United States. Some of these incomes are assessable income while others are not assessable incomes. The assessable incomes include match payments from the L.A. Belles’ club totaling 100,000 dollars, a sign on fee received from the club worth 30,000 dollars after entering into a contract with the club where Michelle Jordan agreed to play exclusively for the club, sale proceeds worth 150,000 dollars from the sale of her apartment in Adelaide, sale proceeds worth 5,000 dollars from the sale of her household furniture, interest accrued from her money deposited in a bank account with the commonwealth bank worth 1,000 dollars, franked dividends amounting to 1,400 dollars from shares owned by Michelle in the commonwealth bank, franking credit worth 600 dollars, sale proceeds worth 25,000 dollars from the sale of her shares in the commonwealth bank, and the 20,000 dollars given to her by her parents7. Total assessable income=100,000+30,000+150,000+5,000+1,000+1,400+600+25,000+20,000 =333,000 dollars The match payments worth 100,000 dollars that Michelle earned are under assessable income because they represent foreign payment a person earns in working overseas. Under the Australian tax laws, if an individual works overseas and yet remain an Australian resident for tax purposes, the foreign income such an individual obtains are part of the assessable income that is taxable 8. The sign on money worth 30,000 dollars that Michelle received from the club by signing a contract that would keep her at the club is assessable because it is part of income derived from working overseas. The money was given as an agreement for Michelle to commit herself to the club. The money is also coming from Michelle’s employer which is the L.A. Belles’ club. This is therefore an income earned from working overseas for Michelle making it to be eligible as assessable income. The best on court award of 8000 dollars is not part of the assessable income because it is not part of the salary that Michelle is entitled to. It is also not awarded by the club but by the sponsors. The Australian tax law also states that awards and prizes are not considered as part of the assessable income. However, there is an exception. The exception is that if an individual receives prizes in game shows that he/she receives regular game show winnings or appearance fees. In Michelle’s case, she does not receive any appearance fees or game show winnings. In addition, she won the prize money only once. This makes this income to become ineligible as assessable income9. The reimbursement money received by Michelle Jordan as compensation for the cost she incurred in travelling to the United States is not part of the assessable income. This is because reimbursement funds are not a source of income for Michelle. This money was not earned through offering of services or selling of item. This is expenditure and is therefore not eligible as assessable income. In addition, under the Australian tax law, fringe benefits are exempted from income tax when such benefits are in the employees’ hands. This is because reimbursements are normally made when income tax has already been paid. The sale proceeds amounting to 150,000 dollars obtained from the sale of Michelle’s apartment in Adelaide is also part of the assessable income. Michelle Jordan bought her house for 150,000 dollars and sold it at 300,000 dollars. The assessable income from the sale is only 150,000 dollars because, under the Australian law, profit earned from the sale of the main home is exempted from taxes. However, the condition for such exemption is that one must have lived in the house for more than two years. Since Michelle Jordan had lived in that house since 2008, the profit she made from the sale of her house is exempted from income tax. The profit is therefore not part of assessable income10. However, since the tax laws in the country provide that income derived from sale of property be taxed, the remaining amount, after deducting the profit obtained, is an assessable income. The interest Michelle earned on the money deposited in the commonwealth bank is also part of the assessable income. This is because interest on the money deposited in the bank is under the investment income category which, according to Australian tax laws, is also an assessable income. Franked dividends totaling 1,400 dollars earned from shares owned by Michelle Jordan is also part of the assessable income. This is because franked dividends are part of investment income which includes income from interest, life insurance bonuses, children’s savings accounts, rent and rent-related payments, and income from trust investment product11. The franking credit of 600 dollars provided on the dividends makes the franked dividends taxable. This is because the franking credit is given to individuals by companies as part of the tax that is payable on the dividends. Companies provide franking credit because each individual in Australia is subject to different rates of tax. Sale proceeds of 25,000 dollars from the sale of shares are also an assessable income because income obtained from the sale of shares is part of capital gains obtained by an individual. Since capital gains are taxable under the Australian tax laws, the sale proceeds from shares form part of the assessable income that Michelle Jordan obtained in the income year ended on 30th June 2014. The 20,000 dollars Michelle Jordan received from her parents is part of assessable income because of the amount. Under the tax laws in Australia, gifts one receives from other people are included in the assessable income or exempted depending on the amount. If the amount of the gift is substantial, it is subject to tax 12(Johnson et al 2008, p.48). However, if the value of the gift is small, it is not liable to taxation. Since 20,000 dollars is a good amount of money, this cash becomes part of the assessable income that Michelle Jordan had in the income year ended 30th June 2014. Generally, whether Michelle Jordan remained an Australian resident or not depends on whether she severed her contact with Australia or not. If Michelle remained in Australia, the assessable income that she obtained in the income year include the foreign income she earned while playing in America, sale proceeds from sale of shares and her house, interest on her banked money, franked dividends on her shares and sale of her furniture. Bibliography Ault, H. J., & Arnold, B. J. (2010). Comparative income taxation a structural analysis. S.l, Kluwer Law International. Barkoczy, S., Rider, C., Baring, J., & Bellamy, N. (2010). Australian tax casebook. North Ryde, N.S.W., CCH Australia. CCH Australia (2011). Australian income tax legislation 2011. 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Australian tax legislation 2013. Pyrmont, N.S.W., Thomson Reuters. Read More