Concept of the Australian Tax Office - Assignment Example

Name: Institution: Course: Tutor: Date: Assignment 20422/01 Preparing Income tax returns Q1. Description of terms a) Direct tax revenue is the tax that is directly paid directly to the government by individuals, to whom tax is imposed. Examples include the income tax, corporate tax and the capital gains tax (CGT). Therefore, these persons should file a tax return. In Australia, the Australian tax office (ATO) collects these taxes on behalf of the government. b) Assessable income is the income on which tax is to be levied (Cassidy 349). There are deductions to be made on the assessable income before tax in calculated. These deductions involve money that is spent to earn that income. Therefore, gross assessable income can be defined as the income on which tax is levied excluding the associated deductions. c) Taxable income is the net assessable income. That is the assessable income less all the associated deductions. In Australia the principle of the more you earn, the more tax you pay prevails. In most cases this is not true because the level of deductions varies from an individual to another or the source of income is also a factor because there are exemptions. d) Income year refers to the year in which income is obtained. In Australia the income year of the financial year starts from 1st July to 30th June the following year (Cassidy 349). e) The marginal tax rate is the rate that is applied when one’s tax obligation changes as a result of the rising income. It is illustrated by the formulae below: m = ∆t / ∆i Where m is the marginal tax, t is the change in tax and i is the change in income. On the other hand, the average tax rate is the ratio of the payable tax to the taxable income or spending as shown by the formulae below: a = t / i Where a is the average tax, t the amount of tax paid and i the taxable income. Q2. Calculation of tax payable and Average rate tax a) Tax payable = 2,652 + 30% (25,000-21,600) = 3,672 Average rate tax = 3,672/25,000 = 14.68% b) Tax payable = 2,652 + 30% (45,000-21,600) = 9,672 Average tax rates = 9,672/45,000 = 21.5% Q3. Calculation of situations a) There will be no tax payable on the amount of income amounting to $4,500. In Australia the current tax free threshold is set at $6,000. Since the amount of gross tax payable is nil, the average tax rate will also be nil. The standard rate currently on Medicare levy is set at 1.5% of the taxable income in Australia (Chris. Et.al 86). Therefore, on amount of 4,500 the Medicare levy will be $67.5. b) The gross tax payable = 0 + 17% (8,000 – 6,000) = 340 The average tax = 340/8000 = 4.25% Medical levy = 1.5%*8,000 = 120 c) The gross tax payable = 0 + 17 %( 13,000-6,000) = 1,190 The average tax = 1,190/13,000 = 9.2% Medicare levy = 1.5%*13,000 = 195 d) The gross tax payable = 2,652 + 30 %( 45,000-21,600) = 9,672 Average tax rate = 9,672/45,000 = 21.5% Medicare levy = 1.5%*45,000 = 675 e) The gross tax payable= 11,772+ 42% (60,000-52,000) =15, 132 Average tax rate = 15, 132/60,000 =25.2% Medicare levy =1.5%*60000=900 Q4. Calculation of situations for a single individual taxpayer                 Taxable income= assessable income less deductions Tax payable Medicare levy(1.5% of taxable income) Total tax payable tax paid Net tax payable or (refundable)   $ $ $ $ $ $ a) 5,350 - - - (200) (200) b) 14,600 1,462 219 1,681 (1,200) 481 c) 26,650 4,167 400 4,567 (5,800) (1,233) d) 42,000 8,772 630 9,402 (7,000) 2,402 e) 65,500 16,722 983 17,705 (15,000) 2,705 Workings for tax income and tax payable are shown below: a) Taxable income = 5,600 – 250 = 5,350 Tax payable is nil. b) Taxable income = 15,000-400 =14,600 Tax payable = 0 + 17% (14,600-6,000) =. Medicare levy = 1.5%*14,600 =219 c) Taxable income = 27,000 – 350 = 26,650 Tax payable = 2,652 + 30 %( 26,650-21,600) =4,167. d) Taxable income = 45,000-3,000 = 42,000 Tax payable = 2,652 + 30 %( 42,000-21,600) = 8,772 e) Taxable income = 70,000 – 4,500 = 65,500 Tax payable = 13,572 + 42 %( 65,500- 58,000) = 16,722 Q5. Calculation of terms for Parker a) To begin with, parker is a student and a student fall under the category of minors. In Australia the taxation of minors is very different from that of other ages. The taxable income for the current year will be: 1,100 + 250 + 350 + 1,600 +8,000 = 11,300 b) The tax free threshold 6,000 * 8/12 = 4,000 Add income before 30th November: Part time wages 1,100 Interest earned to 30th November 250 Tax free threshold $5,350 c) Tax payable = 45 %( 11,300-3,333) =3,585 Assignment 20422/02 Q1. Explanation of terms a) Substitute accounting period In Australia the income year is set from 1st July to 30th June the following year. Therefore according to the ITAA 1997section 4-10(2), any period ending on another date other than 30th June is referred to as the substitute accounting period. b) Assessable income According to the ITAA 1997 section 6(1) assessable income is that income that is subject to tax. c) Cash v. accruals’ basis The cash basis method requires that all money received as income be included as assessable income. On the other hand, accrual basis recognizes income when earned and not when received. Therefore, all income earned should be included as part of the assessable income. d) Constructive receipt Incomes such as interests, rent and dividend normally requires receipt. Therefore, a tax payer may give out instructions that such incomes be credited or dealt with on his/her behalf. Thus such assessable income is a constructive receipt under ITAA 1997 s.6-5. e) Income from personal exertion This is income earned when an individual provides personal services to an employer. Such incomes may include salary, wages, commissions and overtime payments. In addition, a personal business can also yield income from personal exertion. Q2. Assessable income a) This amount received by the accountant for negotiating with the bank is an assessable income under section 6-5 0F ITAA 1997. b) The amount received by the cricketer will depend on whether is expected or unexpected. It will only be an assessable income if it is expected. On the other hand, if unexpected, the amount will be considered to be of capital nature, not an income. c) The amount received as compensation for damages is considered as an income therefore it is fully assessable under ITAA 1997 S.6-5(1) d) Interest received and reinvested in a bank term deposit is an income therefore it is fully assessable under section 6-5(4) ITAA 1997. e) Interest charged on overdue accounts on the accounts receivable is considered as a business income therefore it is fully assessable under section 6-5(1) ITAA 1997. f) The amount of lump sum received as a compensation for wrongful dismissal is considered as an income as it replaces loss earnings. Therefore, it is fully assessable. In circumstances where the amount was not meant to replace the earnings, then it would have been considered to be of a capital nature and not as an income. g) Normally, wages are considered as assessable when they are received. That is on a cash basis. In this case, they are on an accrual basis but they are going to to fully assessed ignoring the aspect of timing. h) Under contract law, an agreement takes effect when it has been signed, sealed or if it’s breached by the other party. In our case non-refundable deposits for meeting to be held in the next financial year has only been received. No agreement has arose, it will be established when the meeting is held. Therefore, the non-refundable deposit has not been earned yet thus it’s not an assessable income. i) The value of free accommodation by the employer to the employees is considered to be a fridge benefit. Therefore, it is not an assessable income except when it has been provided in carrying out the employment duties as it will be an allowance.ITAA97 s.15-45. j) The wedding gift received by an employee from the employer does not form part of the employment duties it is merely based on friendship thus not an assessable income. Q3. Calculation of Taxable income a) The amount of $3,500 received as a foreign exchange gain from stock is an assessable income. b) The amount of $35,000 received as compensation is an assessable income as it replaces the lost income under ITAA 1997 s.6-5. c) $100,000 received from sale of a patent is fully assessable as this is a trade, ITAA 1997 s.6-5 d) The reimbursement of $10,000 is fully assessable as it replaces the assessable income. e) Royalties received of $50,000 are fully assessable under section15-20 ITAA 1997. Therefore, the taxable income for the individual will be 3,500 + 35,000 + 100,000 + 10,000 +50,000 = 198,500. Q4. Calculation of taxable income and tax refundable for Smith a) Jo Smith’s taxable income Assessable Income   $ Gross wages   25,000 Franked dividends   10,000 unfranked dividend   4,300 interest reinvested   1,500 royalties received   2,500 Taxable income   43,300 Note that when calculating the taxable income, we use gross amounts. That is why the amount of wages and franked dividend are at gross. Therefore, for the franked dividends the gross amount will be given by 7,000 plus 3,000 to give 10,000. The amount of wages is already at gross. b) Tax payable or refundable       $ Tax on taxable income 2,652 + 30%(43,300 - 21,600)     9,162 Medicare levy 1.5% 43,300     650       9,812 less: tax off credits deducted tax on wages 4,500     imputation credits 3,000 (7,500) tax payable     2,312         Work Cited Cassidy, Julie, (2007). Concise Income Tax. The federation press. Pg 349 McCourt, Philip, (2009).. Australian master guide. CCH Australian limited. Pg 113 Woellner Rob, Barkoczy Stephen, Murphy Shirley, Evans Chris, (2009). Australian taxation law. CCH Australia limited.pg 86 Read More