The Australia Taxation Office - Case Study Example

Supporting Report Group members: Name: ___________________ ID: __________ Name: ___________________ ID: __________ Name: ___________________ ID: __________ Name: ___________________ ID: __________ Dear Lauren, It is very important to comply with the relevant tax rules and laws in place to file tax returns. Tax compliance is very important as it avoids unnecessary and avoidable penalties. Filing tax returns will enable Lauren to maintain good records because she will have better record keeping as well as provide her with improved knowledge of her finances, how to manage and account for the finances. Besides, division 4 of ITAA 1997 indicate that it is mandatory for every person to determine income tax payable from his or her taxable income. This report provides a comprehensive report on Lauren’s finances. It provides an analysis of each item included in the information she provides. INCOME Item 1 – Salary and Wages Salary $107,100 Bonus $6,000 Commissions $25,000 Annual leave $2,410 Total income $140,510 The prize and amounts she received from the sponsors by participating in cycling activities are not taxable1; they are taxable on the giver of the prizes and gifts as provided by event A1 of CGT Act. These are gifts and they do not fall within any definition of income according to ATO. Item 2 – Allowances, earnings, tips, director’s fees and others Car $3,000 Telephone $1,000 Reportable fringe benefit amount $4,380 Total allowances $8,380 Section 104 subsection 3 of ITAA 1997 provides that allowances are separately identifiable payments made by the employer to the employee for work related conditions. They are allowable against the income of the employee. Notably, allowances are amounts paid to employee to cover the anticipated or incurred costs as compensation for employment conditions2. They are paid regardless of whether the employee has incurred expense. Allowances are assessable income on the part of the employee and therefore they are included as income in the year received. An employee may claim a deduction on the allowances. The Australia taxation office requires all individuals and persons to declare all other types of employment income including allowances such as travel, leave, meals, and car, laundry and clothing allowances (Karlin 2000). The reportable fringe benefit amount of $4,380 is reimbursements for expenses not related to work provided to Lauren by the employer during the year. The FBT Act provides that reimbursements covered by fringe benefit tax are not assessable income to the employee if they are exact compensation for the actual expenses incurred by the employee. Instead, the employer is subject to FBT. In this case, the reportable fringe benefit amounts are for expenses not related to work, as such, the amounts are taxable because ,this are personal expenses by Lauren. The amount is assessable income because it does not meet any of the requirements of FBT as provided in section 104 subsections 8 of ITAA 1997. Lauren should claim for an offset for any tax paid on the fringe benefits. In addition she should seek to increase the fringe1 benefits as the taxation is on the employer (James & Alley 2002). Item 10 – Gross interest Interest from Bendigo bank $405 Interest from Westpac bank $18 Total interest $423 The Australia taxation office provides that a person is entitled to claim account keeping fees where the account is held for purposes of investment or savings; this is in in line with the provisions of section 26 subsections 25 of ITAA 19973. Lauren has an account with two banks, Bendigo Bank and Westpac bank. The information she provides indicates that she incurs fees of $6 every month totalling to $72 for her account with the Westpac bank for the financial year under consideration. However, she is not entitled to deduction of these fees because she uses the account for receiving her salary and for her private spending, as such, the purpose of the account is not for investment purposes and therefore not entitled to claim deductions. The interest of $18 from the Westpac ban k is subject to tax and therefore included in assessable income, the interest is gross as well. She uses Bendigo bank account as the savings account; however, she has not provided information on bank fees concerning the account. The interest from this bank is much more comparing it with the interest from the Westpac bank. This indicates the purpose of each account. Importantly, Bendigo bank has deducted 46.5% withholding tax on interest payable to Lauren. As such, the interest that Lauren receives is net of withholding tax4. The ATO provides that an individual cannot be taxed twice. The tax has already been paid by the bank and therefore the interest income will not be subject to further tax as indicated in section 26-15 of ITAA 1997. Including it in the assessable income will be taxing it two times and the ATO does not allow taxing of interest tw1o times. However, she is supposed to declare the interest whether tax deducted or not tax deductible. Lauren should pay tax on the interest together with the assessable income instead of paying withholding tax. This is the recommended way because it results in lower tax liability (Gleason & Mills 2002). Item 18- Capital gains According to section 104-5 of ITAA 1997, a capital gain or capital loss is the variance between the costs plus all the incremental costs of an asset and the disposable value upon the sale of the asset (consideration). Capital gains are subject to tax thereby being part of assessable income; it is not a separate tax from the income tax of an individual5. An individual cannot claim capital loss against income but the ATO allows an individual to offset the loss against capital gains in the same year of income and from the capital gains of the same category. If there are no capital gains in the year of income to offset the Capital loss, the capital loss is forwarded to the next income year to be offset. Capital gains tax is applicable to all assets acquired after 20th September 1985; this is the date CGT came to effect. Consequently, all assets acquired before 20th September 1985 are not subject to CGT. Only 50% of the capital gains are subject to CGT according to the Australia taxation office. Sale of New Town House $464,000 – 370 – 1100 = $462,530 $462,530 - $320,000 = $142,530 $142,530 x 50% = $ 71,265 Lauren makes good capital gains from the sale of the town house. Although she did not purchase the property, the cost of the house is taken to be the market price of the property when she was given the property6. As such, the cost of the house to Lauren is $320,000 when she received the house by his grandfather. To determine the capital gains, the expenses and or costs of selling the property must be deducted first. The amount to be included in Lauren’s assessable income is 50% of the capital gains from the sale of the town house. This is under the provisions of the CGT Act and the Australian taxation office. Capital gains tax is applicable to assets acquired after the introduction of the CGT Act on 20th September 1985 in Australia. Any assets acquired before this date are not subject to capital gains tax. The assets under consideration for laure3n were acquired after september2 1985 and therefore they are subject to CGT. Lord of the Rings Trilogy Costs = $350 + $290 + $450 = $1,090 Consideration = $2,400 Capital gains = consideration – cost = $2,400 - $1,090 = $1,310 = $1,310 x 50% = $655 This is the amount to be included in the assessable income Dinghy Total costs of the boat = $11,000 + $1,700 + $300 = $13,000 Consideration = $12,000 Capital loss = $12,000 - $ $13,000 = ($1000) Lauren made a capital loss from the sale of the dinghy. Event A1 of CGT Act provides that, a person can deduct capital loss from the capital gains in the same category7. The ATO allows individuals and organisations to offset capital loss from the capital gains made. If there are no capital gains in the year wog income, the losses are forwarded to the next year of income. However, it does not allow corporates or individuals to offset the capital loss from any other income; capital loss can only be offset against capital gains from the same category. For Lauren, the capital loss from the sale of dinghy will be offset against the capital gains from the sale of the other properties indicated above. This will reduce the capital gains amount to be included in the assessable income. The total capital gains to be included in the assessable income are as follows; = $ 71,265 + $655 + ($1000) = $71,920 + ($1000) = $70,920 This is the amount to be included in the assessable income. The capital loss has been deducted; this is the net capital gains. Item 21 – Rent Rental income Gross rental income $18,200 Less expense Council rates $ 2,200 Cleaning $ 280 Insurance $ 1,320 Interest on Westpac loan (for current year) $13,090 Stationery and postage $ 18 Total rental expenses $16,908 Net Rental Income $1,292 Depreciation expenses Refrigerator = 20% x $1,380 = $276 Washing machine = 20% x $750 = $150 Microwave oven = 10% x $220 = $22 Total depreciation expenses = $448 A person must declare full amount of rental income as well as all rental related payments or expenses that one receives or is entitled to when renting property. The Australian taxation office provide that a person can claim expenses relating to his or her rental properties for the period the property was available for rent. Such expenses include council rates, depreciation, borrowing costs, bank charges, cleaning, decline in value of the depreciating assets, interest expenses and agent fees and commissions8. In addition, the rental income Act provides that all expenses of revenue in nature or expenses made to the rental properties for purposes of administration of the rental property are claimable and deductible. According to the above information, Lauren is entitled to claim the expenses that she incurred on the property. These expenses are council rates, cleaning, insurance, Interest on Westpac loan (for current year), depreciation and stationary and postage. These expenses were incurred on the property and they are revenue in nature. The expense that should not be deducted from the gross rental income is the costs of replacing retaining wall. This expense is of capital nature, it is not a recurrent expense as it is incurred once and therefore it is not deductible. The Rental Income Act does not provide for deduction of capital expenses on rental properties (Rohatgi 2002). The net rental income to be included in the assessable income is $1,292. This will be included together with the other incomes and tax calculated on the graduated scale rate of tax for individuals. The best way to manage and reduce capital gains tax is to ensure that she claims as much deductions as possible. She should ensure that she presents receipts of all the expenses and costs she has incurred on the assets in order to claim for deductions. Such deductions reduce the taxable amount of the capital gains (Rohatgi 2002). Total Taxable Income Salary and wages $140,510 Gross interest $423 Capital gains $70,920 Rental income $1,292 Total assessable income $ 213,145 Less deductions and allowances Allowances $8,380 Car expenses $3411 Travel expenses $1,564 Work related clothing $1,470 Gifts and donations $581 Lunch $1,690 Other work related expenses $4,233 Depreciation $448 Total deductions and allowances $21,777 Taxable income = assessable income – allowances and deductions = $ 213,145 - $21,777 = $191,368 Tax payable Tax on income = $59,864.20 Medicare levy = $2,877.24 Total tax = $62741.44 Tax offsets Withholding tax = $352 PAYG tax withheld = $40,270 Total tax offsets = $40,622 Tax liability = $62741.44 - $40,622 = $22,119.44 DEDUCTIONS Division 8 of The Income Tax Assessment Act provides for deductions. They are also provided in section 8 of ITAA 1997. Item D1 – Work Related Car Expenses Kilometres Travel from workplace to client properties 720 km Travel between client properties 576 km Travel from client properties to workplace 200 km Travel from client properties to home 158 km Total business kilometres 1,654km Total kilometres = 2,890km Percentage of business kilome1tres = (1,654km/2,890km)*100 = 57.23% Fuel consumption = 57.23% x $4,160 = $2,381 Maintenance = 57.23% x $1,380 = $780 RACT membership = $ 249 Total deductible care expenses = $2,381+$780 +$ 249 = $3,410 Lauren is only entitled to deduct car expenses that are related to her work as provided by section 8(1) (b) of ITAA 1997. These expenses include the fuel expense for kilometres covered while on work related travel. The other expenses are for car wash and maintenance. The information that Lauren provided indicate that she uses the vehicle both for work related and for private purpose. The percentage basis have been used to determine the proportion relating to work, this is by use of the total kilometres covered and the kilometres covered for private purposes. The total care expenses deductible from the assessable income is $341. Lauren should claim for all work related expenses on the car, she is entitled for reimbursement from the employer. Item D2 – Work Related Travel Expenses Mileage expenses $1,564 This is the travel expenses that Lauren incurs in coursed of the employers work. The amount totals to $1,564 and will be deducted from the assessable income. Item D3 – Work related uniform, occupation specific or protective clothing, laundry and dry cleaning expenses Purchase of three non-compulsory suits = 3 x $370 = $1,110 Purchase of four non-compulsory green shirts = 4 x $90 = $360 Total Non-compulsory suits and green shirts $1,470 The ATO provides that an employee is entitled to claim for expenses for uniform / work related clothing either compulsory or non-compulsory. The clothing is distinctive and unique to Lauren’s employer because they are designed specifically for Better Realty with its logo embroidered on the pockets of the suit and shirt, they are also design registered9. In addition, the clothing improve her confidence and professional image and therefore very important. The clothing is not compulsory but they are work related. She incurs the costs because of the work otherwise she would not have incurred the expenses as indicated in section 8(2) (b) of ITAA 1997. The clothing subject to deduction is the suits and shirts. The tan stocking, sunscreen, designer stiletto shoes and the haircuts items do not qualify for deductions under the work related clothing because they does not necessarily work related, the ATO provides that such items as shoes, socks and stockings can never form part of non-compulsory work uniform. As such the amount deductible from the assessable income is 1,470. Lauren should ensure that all the work related clothing and or uniform are registered. She should claim for deduction on the work related clothing as well (Fane & Richardson 2005). Item D 5 – Other Work Related Expenses Professional membership fee $1,320 Annual subscription to Tasmania real estate monthly $330 Annual subscription to examiner $600 Conference $1,363 Mobile telephone expenses $620 Total $4,233 Lauren is entitled to claim deduction for professional membership fee, Annual subscription to Tasmania real estate monthly, annual subscription to examiner, Conference and mobile telephone expenses. The employer should bear the subscription fee as they enhance the work. The amount to be deducted from the assessable income is $4,233. Lauren should subscribe to as many memberships as possible, however she must ensure than the organisations are related to her profession and that they enhance her knowledge and skills. The employer bears the subscription fee. Although it does not necessarily reduce the taxable amount, it enhances her knowledge and professional growth and skills. Item D7 – Interest and dividend deductions There are no dividend deductions because she does not have any dividend income. For interest, she is entitled to the withholding tax deduction that the Bendigo bank deducted on the interest income. The withholding tax deducted is $352 and it will deduct in order to avoid double taxing Lauren. As such, the whole 1interest amount of $757 will be included in the assessable income. The withholding tax paid will help avoid double taxing10 by reducing the tax Lauren’s liability (Givati 2009). Item D9 – Gifts or Donations Guide dogs Tasmania $150 RSPCA Tasmania $250 Skin and cancer foundation $1 RSL art union $180 Total $581 Gifts in kind are not table in Australia as ATO points out. She should give more gifts and donations in kind and not in cash as provided in event A1 of CGT Act. Item D10 – Cost of Managing Tax Affairs The cost of managing tax affairs for Lauren is $500. This amount is not deductible. It is important for Lauren to maintain and have a specific person or organisation manage her tax affairs. This will ensure consistency in managing the tax affairs as well as provide her with value for money management of her tax affairs. Item D15- Other deductions Takeaway lunches $1,690 Lauren incurs the cost of the take away lunch; she admits that she would be able to save up to $650 if she had more of an office job. Therefore, the employer will bear the $1,690 that she incurs as it related directly to the work. Work related lunches provided at the employers premises are one of the fringe benefits (Harmer et al., 2010). TAX OFFSETS There are items that apply for tax offset as provided by subdivision 11A of ITAA 1997; these items are the withholding tax paid on the interest from the Bendigo bank. The withholding tax paid is a tax offset. The other tax offset is the PAYG tax withheld by the employer as indicated by section 6(1) of ITAA 1997; Lauren is entitled to tax offset to reduce her tax liability as she has already paid this tax. It would also avoid taxing her more than one time. (Manzon & Plesko 2001) INCOME TESTS Lauren does not have an income tests MEDICARE ITEMS The Medicare item available to Lauren is the medical cover and the compulsory Medicare levy. She has a full private health insurance with an excess of $250. She has a private health insurance offset upfront. She uses the offset upfront to reduce the amount of fortnight premiums with a rebate of 30%. LIST OF REFERENCES Aid/Watch Case, 2010 H.C.A. 42, 241 C.L.R. 539 (2010). Commissioner v. Sunnen, 333 U.S. 591, 68 S. Ct. 715, 92 L. Ed. 898 (1948). Everson v. Board of Ed. of Ewing, 330 U.S. 1, 67 S. Ct. 504, 91 L. Ed. 711 (1947). Fane, G., & Richardson, M. (2005). Negative Gearing and the Taxation of Capital Gains in Australia*. Economic Record, 81(254), 249-261. Gibbons v. Ogden, 22 U.S. 1, 6 L. Ed. 23, 6 L. Ed. 2d 23 (1824). Givati, Y. (2009). RESOLVING LEGAL UNCERTAINTY: THE UNFULFILLED PROMISE OF ADVANCE TAX RULINGS. Virginia Tax Review, 29(1). Gleason, C. A., & Mills, L. F. (2002). Materiality and contingent tax liability reporting. The Accounting Review, 77(2), 317-342. Graham, J. R., & Rogers, D. A. (2002). Do firms hedge in response to tax incentive Harmer, J., Piggott, J., Ridout, H., & Smith, G. (2010). Australia's future tax system. Commonwealth of Australia, Department of Treasury. James, S., & Alley, C. (2002). Tax compliance, self-assessment and tax administration. Karlin, B. H. (2000). Tax research. Prentice Hall. Manzon Jr, G. B., & Plesko, G. A. (2001). Relation between Financial and Tax Reporting Measures of Income, The. Tax L. Rev., 55, 175. McCulloch v. Maryland, 17 U.S. 316, 4 L. Ed. 579, 4 L. Ed. 2d 579 (1819). Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869, 561 U.S. 247, 177 L. Ed. 2d 535 (2010). National Australia Bank v. US, 452 F.3d 1321 (Fed. Cir. 2006). Permanent Trustee Australia Ltd v. Commissioner of State Revenue (Vic), 220 C.L.R. 388 (2004). Rohatgi, R. (2002). Basic international taxation (Vol. 412). Kluwer Law International. San Antonio Independent School Dist. v. Rodriguez, 411 U.S. 1, 93 S. Ct. 1278, 36 L. Ed. 2d 16 (1973). Read More