Individual Income Taxation - Assignment Example

Individual Income Taxation Student’s Name: Institution: Course: Date: Introduction The income tax rates is not used the same to individuals who is either a resident or non resident of Australia. The variation is where non residents’ persons are not allowed to get tax free threshold benefits on any income which is derived from Australia (Barkoczy, 2013). The tax which is also to be paid on the first income bracket is higher and non resident’s persons are not entitled to personal tax offset and should also not pay Medicare levy like residents persons (Linda, 2012). It is therefore important to determine the individual residency and income when establishing the person to pay tax to the tax authority. Part A James is a resident of Australia because he is a person rather than a company who resides in Australia. This is because James domiciled Australia and the commissioner can prove that he intends to stay in Australia permanently (Linda, 2012). Furthermore he has been in Australia intermittently for more than one- half of the year of income. The prove that James is a resident of Australia there are some test which prove his residency and this include domicile test, ordinary concept test and 183 day test. These tests are able to determine the residency of a taxpayer. Ordinary Concept The reason why James is considered a residence of Australia is because he meets the requirement of ordinary concept and it proves that James resides in Australia for a reasonable time and this is illustrated be the case of Levene v IRC (1928). AC 217 has been a taxpayer in UK stopped doing business and sold his place of residence. For the subsequent two years he had been living in a hotel and the remaining other five years he had been in UK and abroad. During this duration he stays in UK for four or five months annually when under medical advice and when he was visiting his relatives and friends (Steven, 2010). The court held that the taxpayer was a resident of UK from the date he took a lease of the house in Monte Carlos (Woellner et al, 2013). This proves that the purpose of going a broad was temporary and could not affect his place of residence. The case of James is similar to this and is enough to justify that he is a residence of Australia since his intention is to be in Australia permanently but he only lives because of work. James case is also justified by the case between Joachim and FCT (2002) where a tax payer and all the family members moved to Australia in 1994 where the husband could not be able to continue with his work in Australia and decided to get another work in Sri Lankan Vessel and this forced him to stay outside Australia for more than 316 days (Nethercott et al, 2013). The family members remain in Australia during this duration and during this time the taxpayers claimed that he is not a resident of Australia and he has changed his place of residence permanently abode (Linda, 2012). It was passes by AAT this taxpayer is a residence of Australia because his home had not changed despite the change of place of work. This case also fully illustrates that James has only changed his place of work but his family still stay in Australia and this justify that he is still a residence of Australia (Woellner et al, 2013). There are some factors which are considered when proving individual residency and they include physical presence in Australia, the frequency of visit, the place where the family is staying, nationality and the reason for visiting Australia. All these factors had been met by James and justify that he is a residence of Australia. Main residence exemption in Subdiv 118-B A capital gain or loss that is obtained due to CGT events that is experienced by a tax payer’s main residence is not being considered particularly for subdiv 118-100 of pt3-1 of ITAA 1997. It requires the tax payer to ignore the capital gain that occurs from the CGT events that takes place to dwelling of a main residence of a taxpayer (Barkoczy, 2013). The exemption is called base case and it works in a case where the residence is the main residence during which the tax payer was in ownership of the house and it is also not being used to account for the assessable income of the tax payer (Nethercott et al, 2013). For the case of James it can apply because James is an individual and the house which he was selling was his main residence throughout the time before he sold the house. During the whole period before the house was sold, James had been staying in that house and therefore when he sells the house the capital gain or loss should be disregarded. This exemption also applies to James because he no other dwelling place a part from the house he sold (Woellner et al, 2013). It is important to note that the exemption applies to James because there is no limitation which inhibits him from using the exemption. The main residence of James is neither a piece of land nor a garage which do not apply to the exemption and they can decide to treat the house which James was living in as the main residence. Part B Accounting Method There are only two accounting methods which can be used when preparing books of accounts for tax purposes. They are recommended by the accounting bodies which regulate the use of accounting principles (Woellner et al, 2013). These are classified into two namely cash and accrual basis. All this basis of accounting can be used by tax authority to determine the amount of tax which the individual or a corporation can submit to the Government. Cash Basis This is a counting method which requires the accountants to recognize income when cash is received and expense when cash is paid. This method of accounting is very simple to use and is most appropriate for small business organizations which has few employees and have no large inventories. Accrual Basis This is accounting method where expenses are recognized immediately before cash is paid and income is received (Barkoczy, 2013). This method of accounting is appropriate for large business organization other than a sole trader. It is also more acceptable by the accounting bodies as it follows matching accounting principles. Factors that affects the choice of accounting method Type of business This is a very important factor which helps the taxpayer to decide on which accounting basis to use when preparing its books of accounts (Douglas, 2010). The type of business which requires the use of personal skills is should use cash basis method of accounting or running a sole proprietorship business while large business organizations in the form of a corporation should use accrual basis method of accounting (Nethercott et al, 2013). It is therefore important for Lee to use cash basis of accounting because his business is a sole proprietorship type of business organizations. This is illustrated by the case law shown below Illustration FCT v Firstenberg (1976) The resident was a sole practitioner solicitor who produced his taxable income when using cash basis method of accounting. When the commissioner was doing tax reassessment, they use accrual basis and he was considered as a person who got his income from the amount billed but had not been collected. It was held by the Supreme Court that cash basis is most preferable for solicitors who has a sole trade business as that of a medical practitioners. Ability of the accounting method to reflect the true income of the taxpayer It is important for the business to use accounting method which is able to reveal the true income of the taxpayer (Steven, 2010). This ensures that there is no tax avoidance or tax evasion by the tax payer and this is capable of increasing the Government revenues. Illustration The resident was an estate administrator for the deceased who produced invoices to clients to buy the estate immediately after his death (Douglas, 2010). The commissioner assessed the administrator’s income for tax purposes. Before the death of the owner of the estate, the doctor had filed the income tax return for the deceased using the cash basis and this took place before the 101A ITAA 1936 was adopted (Barkoczy, 2013). The professional fee which was to be submitted to the deceased after his death was taken as capital receipts and was not included in the total income of the deceased. The commissioner had to alter the method of accounting that can provide true income of the taxpayer (Linda, 2012). The executor objected the method of assessment and sued the commissioner for the change of the accounting basis. It was held that it is important for the commissioner to use the method of accounting that can produce correct reflex of the income of the taxpayer (Nethercott et al, 2013). The court further concluded that it is appropriate to recognize professional income on a cash basis not accrual basis although the commissioner can do a special assessment for the other part of the deceased income on accrual basis. Type of Income When choosing the accounting method to use it is important to consider the type of income which the business organization has. All the tax payers who derive their income from professional practices are required to use cash basis while those who have income from other sources can use accrual basis (Douglas, 2010). Illustration Barratt and Ors V FCT (1992) The resident was a medical practitioner who was specialized in pathology. In this practice there was the use of different medical equipments where some were c very costly and the services provided require serious attention of the taxpayer (Barkoczy, 2013). The company which was able to provide the same services bought the equipment and recruited people to provide the same services. There was a pathological operation during the year and the business experience an increase in size annually. In the final year there business had had 66 employees, 21 operation rooms and almost 92,000 customers (Woellner et al, 2013). The problem before the court was to determine the method of accounting to use and to decide whether the accrual basis is the best to use. It was held by the court that accrual basis can be use but incase of income that comes from personal skills cash basis is most appropriate. Lee has no choice of the accounting method to adopt but they are influenced by the factors which have been provided above (Linda, 2012). Lee has to use accounting method that corresponds to the type of business and income of the business (Barkoczy, 2013). If the income comes from a professional practice he should use cash basis and when the type of business is a sole trader he must also use cash basis which is simple to use. The Commissioner of Taxation has a right to insist on a particular basis which can allow them to get the true income reflex of the tax payer but there is instances where it is important to consider other factors when changing the deciding the basis by the commissioner (Nethercott et al, 2013). It is also necessary for lee to maintain his basis of accounting for the rest of the accounting period for consistency purposes. This is because alteration of accounting basis creates a mismatch which may give misleading information (Steven, 2010). When the tax payer uses a basis which is not able to provide true income it is appropriate for the commissioner to change the basis as shown in the case law below. Illustration Dormer V FCT (2000) The resident taxpayer was a sole trader who changed his practice in three different people’s partnerships. Before the formation of the partnership he invoiced the work of a client in progress (Nethercott et al, 2013). The payment of those invoices was made after the partnership had been fully formed. The method of accounting which they use was accrual basis and the taxpayer refused to accept that there was any income which was obtained before the formation of the partnership. Decision of the Court The court held that the previous income should be accounted for using cash basis throughout the business operation but the new income which are received after the formation of a partnership are to be accounted for using accrual basis. Conclusion It is important for the taxpayer to use appropriate accounting basis which is able to provide his true income. The commissioner can also choose the method of accounting which they feel is able to make them determine accurate income of the taxpayer to avoid incidences of tax avoidance or evasion. References Barkoczy, S (2013). Core tax legislation 2014 (17thed.). CCH Sydney. Douglas, J. (2010). College Accounting, Chapters 1-12. Cengage Learning. pp. 185–.ISBN 978- 1-4390-3878-9. Retrieved 4 March 2012. Linda, M. (2012). Cch Tax Law Editors (April 2008). Federal Tax Course (2009). CCH. p. 97. ISBN 978-0-8080-1862-9. Nethercott, L et al (2013). Australian taxation study manual (22nded) CCH Sydney. Steven, M. (2010). The Ultimate Accountants' Reference: Including GAAP, IRS and SEC Regulations, Leases, and More. John Wiley & Sons. p. 666. ISBN 978-0-470-59395-0. Retrieved 4 March 2012. Woellner et al, (2013).Australian taxation law 2014 (24th ed.) CCH Sydney Read More