Tax Documentation for Individuals - Assignment Example

Task 1. 1. The following are the questions I would ask to clarify the employee’s employment status; i) Is he able to subcontract or delegate? If he is a contractor, he is able to subcontract or delegate or pay someone else to do the work something an employee cannot do. ii) How is he paid? Is he paid for a result achieved based on the quote they provided calculated hourly rate or piece rate? If so, he is a contractor. iii) Does he provide all or most of the equipment, tools and other assets required for the work and does not receive an allowance or reimbursement for the cost of tools, equipment and other assets? If so, he is likely to be a contractor. iv) Does he take commercial risks with him being legally responsible for their work and liable for the cost of rectifying any defect in their work? Then he may be a contractor. v) Does he has control over the work with freedom in the way he does the work subject to the specific items in the contract or agreement? If so, he is a contractor (Humblerstone v Northern Timber Mills (1949) 79 CLR 38. vi) Is he independent? Is he operating own business independently of the employer’s business? Does he perform work specified in the contract and is able to accept or refuse additional work? Then he is a contractor. 2. Data matching involves collection of data from a number of third party sources electronically after which the data is validated, analyzed and matched against pre-filled tax returns and hence helps in ensuring that all tax has been declared and that people are not evading taxes. Maintaining records assists the tax payer in complying with ATO requirements by ensuring that no item of income or tax is left undeclared. This ensures that the tax payer declares and actually pays all the tax they are supposed to pay thus effectively complying with ATO requirements. 3. You would gather information regarding assessable income and allowable deductions from a number of sources including the Australian Tax Office (ATO) whose website gives detailed information regarding assessable income and taxable deductions. Australian government websites such as Australia.gov.au is also a rich source of such information. The income tax act is also a source of detailed information regarding taxation of income. Such information could also be obtained from academic and tax consultants websites. 4. Retail inventory method Cost to retail percentage= cost/Retail price = ($650,000 + 850,000/1,000,000+ 2,100,000)* 100% =48.39% Beginning inventory = $850,000 Purchases = $650,000 Available for sale = $1,500,000 Sales = $1,282,335 ($2,650,000* 48.39%) Ending Inventory = $217,665 5. Responsibilities of the tax agent in regard to identifying and resolving discrepancies include going through the tax payers’ returns and ensuring that the returns have been properly filled in line with the income tax act. If there are discrepancies, the agent should explain this to the tax payer and resolve the discrepancies in line with the act. Where the discrepancies are beyond the agent’s scope, the agent should inform the tax office and have the discrepancy resolved so that the tax payer pays the correct tax amount. 6. Insurance is paid for 6 months. Thus, at the end of first month, only a sixth will have been used and the rest will be prepayment; Thus, Insurance expense = 1/6*1800= $300 Prepayment = 5/6*1,800 = $1,500 a) Journal entries Date Details Debit Credit 31/1/xx Prepaid Insurance Cash To record prepayment of insurance $1,800 $1,800 at the end of the first month 28/2/xx Insurance expense Prepaid insurance To record insurance expense $300 $300 Insurance expense account Date Details Debit Date Details Credit 28/2/xx Prepaid Insurance $300 28/2/xx Balance c/d 300 Prepaid Insurance Date Details Debit Date Details Credit 28/2/xx Balance b/d $1,800 28/2/xx Insurance expense $300 28/2/xx Balance c/d $1,500 $1,800 $1,800 b) Balance Sheet Current Assets Prepaid insurance $1,500 7. 8. Based on ATO provisions, one can claim a deduction for donations to organizations that have the status of deductible gift recipients. For one to claim a deduction for the donation, it must be made to a deductible gift recipient and has to be monetary or property. In this case, the donation qualifies as a gift. However, the issue is whether the door to door charity is a deductible gift recipient. It is, then the tax payer will successfully claim deduction on the $50 he donates. 9. The tax payer is entitled to a spouse rebate even if they have no children provided that the spouse is an Australian resident. Having a child or not is not a condition for the rebate but the spouse has to be an Australian resident. The spouse must also be a dependent on the tax payer. Thus, if this is the case, the tax payer may still be able to claim the tax rebate. 10. I would advise the client not to make the claim if he has not spent that amount since as a patriotic citizen, he should be proud and willing to pay all tax amounts. Secondly, though he does not need to substantiate, he has no support documents for the expenses which means that even if he makes the claim, he cannot support the claim with evidence. This means that if ATO discovers that the claim is not warranted, it might land him into trouble by ATO investigating him more and even issuing hefty penalties for the mistake. 11. Tax liability calculation Taxable income Tax rate and tax payable Amount $0-$18,200 Nil 0 $18,201-$37,000 Nil +19% of excess over 18,200 $3,752 $37,001-50,000 32.5% of excess over 37,000 $4,225 $7,977 Tax amount $7,977 Deduct Low Income Tax Offset: (s 159NITAA36) 445-((50,000-37,000)*0.015) = ($250) Add Medicare Levy (ITAA36 s251(S) (1) (a), 2% ($50,000*1.5%) =$750 750 Tax Liability $8,477 12. Tax liability means the amount of tax that a tax payer whether business or individual incurs on the basis of current tax laws. Tax liability is triggered by a taxable event and tax liability is calculated through multiplying of the tax base with the tax rate. Tax liabilities arise from earning of income, gains on sales of assets or occurrence on any other taxable events. In other words, tax liability is the amount of tax the tax payer ought to pay after all the allowances have been deducted and such statutory pay as Medicare levy have been factored in. 13. The documentation required for the preparation of the tax returns in Australia include the tax file number, bank details to receive any refund owed, Medicare card number, details of income tax including details from payment summaries from employers and superfunds etc., statements from banks and financial institutions on interest received, details of foreign pensions and other foreign income received, employment termination payment summaries, receipts for gifts, donations and work related expenses, details of any child support payments made, documentation on investments and rental property income. 14. Moderation of decision making process refers to the steps taken to bring the decision makers to a common understanding of the various taxation issues and bring the client and the tax body to a common understanding. This is valuable as it results to faster and quality decision making by the concerned parties. 15. Timelines play an important role in satisfying client expectations. This is because taxes should be paid on time while returns should be made on time to ensure that the requirements of the tax man are met. Thus, if client timelines are not observed, this might lead to problems with tax authorities which might even result in penalties or legal actions. Thus, observing timelines play a great role in satisfying client expectations since tax that has not been paid on time or returns that do not observe timelines are as good as null and you don’t want to subject the customer to bad experiences of penalties. Thus, as a client, I would ensure that I plan adequately in terms of time and resources for all my clients and advise them in such a way that I will always fulfill my obligations by ensuring that their taxes are always made within the legal time lines while returns are also made within ATO timelines. 16. I would advise the client on the ATO provisions regarding deduction of business expenses. In other words, that the expenses must have been incurred in the course of business, that their character must be income producing, that there must be a link between the expenses and the assessable income, that he must substantiate through written evidenced. Since the evidence the client produces does not show the relationship between the business and the expenses, I would thus advise him to either bring more relevant evidence or to remove the photographs altogether. If he has no more evidence, I would request to forego the deduction since it will not be allowed by virtue of it not being related to his business but being a leisure expense as shown by the photograph. 17. Question not clear as to what it refers to 18. I consider this as negligence and owing to the contractual relationship that exists between the tax payer and the tax agent, the tax agent is likely to be held liable. It is to be noted that preparation of income tax returns and the furnishing of tax advice and assistance by the tax agent results in his being responsible. He has a duty to the government as well as to the tax payer and the fact that he is being paid results in a contractual relationship and must hence exercise reasonable care and skill in performing his duties. He ought to use all legal and ethical means to ensure the returns are properly made. Thus, if such mistakes result in damages, the tax payer can sue him so that he is held responsible. 19. I would advise the client that he ought to ensure that his tax returns are always made on time to avoid penalties. Furthermore, making me assume responsibility for his failure to observe timelines would not be acceptable to me at all. As such, although I would make the tax returns for him, I would make sure that he understands that he will be responsible for any consequences of his actions and I would ensure that this is put in a contract so as to ensure that he pays all the resultant penalties. 20. ATO expectations on tax payers include; a) Pay their tax on time- there are various timelines that ATO has put in place with regard to paying taxes. These timelines should be strictly adhered to failure to which attracts penalties b) Lodge their tax returns on time- ATO expects tax payers to observe timelines with regard to lodging tax returns failure to which attracts penalties. c) ATO expects the tax payers to pay the right amount of tax. As such, underpaying of tax is an offence and should be avoided at all costs. As such, taxpayers are expected to observe high levels of integrity and honesty when making their tax payments and lodging their tax returns. d) Make enquiries that will help the tax payers be better tax payers. This will ensure that tax payers are always aware of any changes regarding to tax compliance and hence be able to comply accordingly. 21. I would advise him regarding my responsibility as far as the audit is concerned. There is need for the client to know that owing to the fact that I was not involved in making of the prior returns, then I cannot be held responsible for any mistakes that would arise from the audits. As such, I would make the client understand that I am only responsible for the latest returns out of the five years that need auditing. However, I would also suggest that we contact the agents who did the previous audit and hence plan the audit jointly since there would be need for documents that I might currently hold. As such, cooperation between me and the previous audit would be of paramount importance to ensure that the intentions of the audit are achieved. Thus, the four years audit would be conducted with bearing in mind that the returns were made by a different agent with I taking responsibility for the fifth year. Thus, the client should understand that the success of the audit would also be dependent on the level of cooperation we are accorded by the first agent. Task 2: Legislative requirements differ from professional standards in that legislative requirements are the set of rules enacted by the government with participation from professional bodies to govern how a certain profession will function or to govern how the body will carry out its mandate and which must be adhered to while on the other hand, professional standards refer to the ethical guidelines or code of practice that are developed by a certain professional body to guide how the profession will be carried on. For instance, accounting standards guide how accounting is conducted everywhere in the world but the application of the standards are not mandatory. 2. The part of the legislation that provides details of how much income tax must be paid is the income tax act 1997. The act details out what income tax one is to pay depending on the type of income one earns. The act also details out what deductions may be allowable on income and how the tax is to be paid. In other words, the act details out all the rules governing taxation in Australia while detailing out the consequences of non-compliance. 3. The potential consequences of failing to submit an income tax return on time include a penalty being imposed on you. ATO will impose a failure to lodge on time penalty. However, this will depend on the reason for failure to comply since ATO recognizes that people may fail to meet lodgment obligations on time even with best intentions. In such a case, penalty may not be applied. However, ATO will first warn you through the phone or in writing and it the penalty is applied, ATO will send you a penalty notice with the amount and due date for the penalty. 4. Tax offsets differ from tax deductions in that a deduction is a reduction on a person’s taxable income and unlike a tax offset, it is not a direct decrease in tax owed. On the other hand, a tax offset or a rebate is a direct reduction in the tax owed. A tax deduction refers to the items that are allowed to be deducted in the income before the tax is calculated and hence reduces the assessable income. Tax deductions are applied when one has incurred expenses in producing the taxable income and include such expenses as cost of sales or work related expenses. On the other hand, tax offsets are applied in a bid to reduce the tax liability or burden one has and include such offsets as spouse rebate. 5. Maintaining records is an integral part of satisfying income tax obligations since accurate and reliable records form the basis on which the income sources are identified. They also serve as a basis of identifying deductible expenses. Thus, the records are an integral part of taxation in that they support the income, expenses and credits reported on the tax returns. In other words, they support the items reported on the tax returns and hence at as the evidence of the tax amounts that you pay. 6. You an find the current tax tables and description of fees and charges in the Australian Tax Office Website. In the website, ATO has laid down the tax tables for different years including the 2016/17 year. It has also included a description of various charges and fees to be paid by the tax payer. These includes the Medicare levy at 2% and the temporary budget repair levy that is payable at a rate of 2% for taxable incomes over $180,000. 7. The Medicare Levy Surcharge (MLS) is a certain percentage of taxable income that is levied on Australian Tax payers who do not have an appropriate level of private hospital insurance and who earn above a certain level of income. This is aimed at encouraging individuals to take out private hospital cover and where possible use the private hospital system in a bid to reduce demand on the public Medicare system. The MLS is paid in addition to the Medicare levy. 8. A deduction is a business expense or losses that are legally permitted to be subtracted from the gross profit or revenue of a firm in computing the net profit and hence its taxable income. For an individual, deductions include the expenses that are incurred in the course of earning their salary and which are legally allowed to be subtracted from the salary in determining the individual’s taxable income. Whether an expense is deductible or not is determined by the law. However, for a business expense to be deductible, the expense must be ordinary and necessary for the conducting of the business. In other words, you cannot earn the income unless you incur the expenses. Capital expenses or expenses that are tied up in the business such as the startup costs are also not taxable. At the personal level, the expenses will be allowable deductions if they are necessary for the income generation for instance travel expenses. 9. Key features of organizational policy and procedures relating to the preparation of tax documentation for individual tax payers include payment of pay as you earn taxes on time, paying the right amount of tax, paying the tax on time, keeping the right tax records and making the tax returns on time to ensure that both the individual tax payers as well as the company does comply with the ATO provisions on taxation and hence avoid unnecessary policies. 10. Ethical considerations and legislative requirements relevant to the preparation of tax documentation for individual tax payers include ensuring honesty and integrity in making the tax returns. This entails ensuring that all relevant information is truthfully declared and no tax cheating happens. Legislative requirements include ensuring that the low is followed in making the returns with the right documentation being maintained at all times while the relevant timelines are strictly adhered to. In addition, all the deductions should be backed by the necessary evidence to ensure that the right amount of tax is declared and actually paid. 11. Residence refers to where the tax payer resides. This is important since all Australian residents are required to pay tax. Thus, residence refers to where the income is generated and whether the tax payer has been residing in Australia in producing the income. Thus, if you are an Australian resident, you will be taxed on all your income regardless of where it is produced. On the other hand, source refers to where the tax is earned. If tax is deducted at source, it means that the tax payer will only get the net after taxation while the tax is remitted to the government by the employer. Related elements of international tax refers to features of taxation systems that are common for various international taxation systems. For instance, they are those features that are common between the Australian tax system and the US tax system. Tax rebates refers to a refund on taxes when the tax liability is less than the tax paid and are similar to tax rebates although tax offsets are given to specific classes of people. If for instance one has disability, they may be eligible for certain tax offsets and this has the effect of reducing the amount of tax payable on the taxable income. However, one cannot get a tax return on tax offset but it can only reduce the amount of tax to be paid. Tax accounting refers to the process of determining how much tax a tax payer be it an organization or an individual is to pay while tax principles are the rules that guide the setting up of a tax system. For instance the principle of equity. GST- This is a goods and services tax and is a broad based tax at the rate of 10% on most goods, services and other items sold or consumed in Australia. Task 3: 1. Interaction with a new client report a) The following are the questions that I would ask the new client i) Give me a brief description of your business entity. Is it a for profit entity, a sole proprietorship, a company or a partnership? ii) Do you have current tax returns? When did you last file your tax returns? iii) How many bank accounts do you have and how often do you use them and for what purpose? iv) What are the sources of income for your company? What are your sources of income as an individual? v) What are the expenses you incur in conducting your business and how do you pay your bills? Who are your clients and how do they pay you? vi) Do you report your sales tax vii) Why are you changing your tax agent and what are your expectations on us? viii) Give me your personal details ix) What are your possible adjustments to income x) Do you qualify for any tax credits? Are you into charity? xi) Have you ever heard of tax planning? Answers to the questions 1. My Business is White Trading Limited. This is a private limited company and it is also a for profit company. The company is a general merchandise trader. 2. The company does not have current tax returns. We last filled returns three years ago. I don’t know what happened with the previous management but this is something I want to correct hence the reason I thought of hiring you. 3. The company has two accounts. One is held at Bank of Australia while the other one is at Commercial Bank of Australia. We use the banks for receiving payments from our clients as well as making payments to our suppliers. However, we also bank whatever we receive from clients and at times withdraw for our normal operating expenses. 4. The company mainly gets its income from trading in merchandise as stated above. However, we also receive dividends from our investments in various companies. As an individual, I am employed on a full time basis for the company. However, I also do some farming at home. All other directors are also employed in various companies. 5. We incur a lot of expenses in conducting the company’s business. Some of them includes wages and salaries, cost incurred in acquiring merchandise among others. However, I will give you a detailed analysis of our expenses as contained in our income statements. We have a lot of clients and as stated above, they pay us through the bank. I will also give you a detailed debtors and creditors list if it will be of help. 6. No. we do not report on sales tax but we pay tax on our corporate income. 7. We are changing our tax agent owing to many incidences where we have been forced to pay a lot of penalties owing to non-compliance. For instance, the former tax agent was paid his fees yet no tax returns were made. As such, I thought it wise to change the tax agent as the new manager in order to improve compliance. In this regard, we expect nothing less than compliance from you. We will also expect you to advise us on all matters pertaining to tax. 8. My name is Jared Wrong and I am the company’s chairman. 9. We will avail to you our detailed list of all the deductions we make to arrive at our net and taxable income. 10. I am not aware of what tax credits are. However, we spend $50,000 per year on charitable donations. 11. I have never heard of tax of tax planning and hence I would appreciate your shedding more light on this. Reasons for the above questions 1. It is important for I to know and understand the nature of the business the new client is involved in . This is because different types of businesses are taxed differently. This way, I will better understand the business taxation requirements and this is important being able to comply with ATO requirements. 2. I would want to understand whether the company has been making tax returns appropriately so as to understand whether there are issues we need to settle with ATO before I start the assignment. This will enable us to settle all non-compliance issues hence ensuring that I start on a clear plate. 3. Bank accounts details are important for me since this is where receipts and payments are made. These affect the amount of tax to be paid and hence they would be important in identifying areas of non-compliance. 4. It is important for me to understand the various sources of income that the new client has since different income sources are taxed differently. Hence, having this understanding will help us ensure increased compliance. 5. Understanding the kind of expenses that the company incurs is important since it will help me understand whether the expenses are allowable deductions or not and hence improve compliance. 6. Understanding whether the company reports on sales tax is important since this is a compliance issue and having its understanding will help me improve compliance. 7. Understanding why the new client changed the former tax agent is important since I will understand whether there are any compliance issues that need to be addressed while understanding the client’s expectations on us. 8. Understanding the client’s personal details is important so as to know whether there are any taxation issues that need my attention. I also need to understand whether they mix business matters with personal matters which would reduce compliance. 9. Understanding the kind of deductions the company makes is important since some deductions are allowable while others are not and this affects compliance. 10. Understanding what tax credits are is important since it affects the amount of tax paid. Charitable donations are tax exempt provided they meet the set criteria by ATO and hence I need to understand whether they have been claiming such deductions. 11. It is important for the client to understand that through tax planning, he can legally reduce the amount of tax he is to pay. Thus, it is important for the client to understand tax planning and how to go about it. Advice I might give the client It is important for the client to ensure that they maintain proper accounting records at all times. Whether these relates to financial reports or a small receipt, it is important that all documents used in various transactions be kept. The right accounts also need to be kept with all relevant support documents. Proper record keeping is an integral part of tax compliance as it will ensure that the right deductions are made, the right declarations are made and that all relevant information is included in the returns. This will ensure that the company pays the right amount of tax while reducing issues of noncompliance. Proper record keeping is also important as they will help me in tax planning for the company hence ensuring the company pays the least amount of tax legally and this is important for the company. In addition, the company must always avail all information that I ask on time. Timelines are important and should always be adhered to as part of compliance. Thus, this will help me in improving compliance hence putting the company at the right side of the law. Whether it is necessary to liaise with someone else In deciding whether to accept the new client, I will need to liaise with the former agent in order to determine whether there are any issues that might make me not accept the client that the client did not disclose. I would also need to get his view of the client and any cooperation I would need as the new agent if I accept the new client. In addition, I would also need to discuss with ATO whether there are any compliance issues with the client so that such issues are cleared before I accept the offer so that I accept a clean client. Computation of taxable income Gross salary + Interest from term deposits+ Dry cleaning of work clothing+ Allowance for logo clothing = $87,500+ $1,250 + $400 + 150 = $89,300 Taxable income Tax rate and tax payable Amount $0-$18,200 Nil 0 $18,201-$37,000 Nil +19% of excess over 18,200 $3,752 $37,001-80,000 32.5% of excess over 37,000 $13,975 $80,000-89,300 37% of excess over 80,000 $3,441 $21,168 Tax amount $21,168 Deduct Low Income Tax Offset: (s 159NITAA36) 445-((89,300-37,000)*0.015) = - Add Medicare Levy (ITAA36 s251(S) (1) (a), 2% ($89,300* 2%) $1,786 Tax Liability $22,954 Less PAYE -$20,325 Tax to be paid $2,629 Report The other information I would require to gather would be the tax payer’s residency. This is important since it will be used to determine the rate of tax to be applied on the tax payer. I would verify the data to ensure compliance by go through relevant legislation and checking the documentary evidence provided by the tax payer. This would help me determine if all the income has been declared and whether the deductions are all allowable or not. In other words, this will help me determine whether some taxable items have been left out. I don’t think there are any extra client related taxation matters that might need to be addressed. However, I will need to know whether appropriate tax returns have been made and whether the client has any compliance matters at hand. References: ato.gov.au, 2017, Tax time checklist, Retrieved on 16th April 2016, from; https://www.ato.gov.au/Individuals/Tax-Return/2013/Completing-your-return/Helpful- information-about-tax-returns/Tax-time-checklist/ Read More