Taxable Income and Rollover Provisions - Assignment Example

Name: Course: Institution: Tutor: Date: Assignment 20422/03 Q1 Taxable income is given by the difference between the assessable income and the deductible expenses. The assessable income is defined as the income on which tax is levied while the allowable deductions are the amounts that have been used to earn the assessable income. The computations below show Mr. Sinclair’s taxable income regarding the amount of lump sum received upon retirement at the age of 60 years after a long service of 25 years in employment. Mr. Sinclair Taxable Income $ Tax rate Annual leave for the current year 1,500 marginal rate LSL: Pre as at 16/8/1978 (900*5%) 45 marginal rate 6/8/1978 - 17/8/1993 11,000 30% Post 17/8/1993 1,000 marginal rate ETP from Superannuation fund: Pre July 1983 (75000*5%) 3,750 marginal rate post June 1983 (already taxed) - 15% Gross wages 25,000 marginal rate Interest Income 570 marginal rate Gross franked dividends (Imp.cr.3000) 10,000 Taxable income 52,865 Note that the bona fide redundancy payment of $50,000 is tax-free since it is below the required threshold. The other thing is that the ETP post June 1983 of $114,348 is tax-free since Mr. Sinclair is more than 55 years of age. When calculating the tax payable we usually calculate the marginal tax first then add back the Medicare levy of 1.5% of the taxable income. The Medicare levy is imposed separately on the taxpayers so that they can pay for the public health. There are circumstances on which the Medicare levy is exempt from payment and this only applies to the low-income earners. Q2 a) Roll over provisions When it comes to roll over provisions, the taxpayer can elect to roll over part or all the ETP payment into a superannuation fund or to a registered ADF or purchase an annuity. This act is only subject to certain restrictions or requirements. You find out that the taxpayer is not liable to pay taxes at the rollover time but when withdrawn. Also, for the taxpayer to qualify for the roll over he or she must be below the age of 65 years and the ETP amount must be withdrawn before the 65th date of birth. The amount received upon retirement must be paid to the rollover fund with immediate effect and the taxpayer must fill in an approved form. The only part of the ETP form that the taxpayer is supposed to elect is that that has the roll over component only. For instance, the taxpayer cannot choose to rollover a different component into a different fund. Incases where the taxpayer chooses to roll over a portion of the ETP, It is prudent for the taxpayer to calculate the amount to be taxed and the one not to be taxed relating to the post-1983 and pre July 83 components. b) Ways of minimizing tax payable for Mrs. Alison In this question, Mrs. Alison wants to minimize her tax payable and at the same time retain as much cash as much as possible. Therefore, the best way to minimize tax payable is by keeping the amounts of the undeducted contributions since such amounts are tax-free plus they are retained separately from other ETP components. The other alternative that Mrs. Alison can minimize tax payable is by rolling the amount of the ETP that is taxable since after the age of 55 years, that amount is tax-free. In case she fails to roll over the taxable component, she will have to pay 20% tax and in addition the Medicare levy. The only disadvantage she will experience is that she has to subject the pre July 83 ETP component of up to 5% to the marginal rates regardless of the rollover. As for the post June 83 taxed component, the whole amount can be rolled over and when it is rolled over, it is considered to be tax-free. The payments by her employer cannot be rolled over thus; she has to keep them, as they do not qualify for the ETP. Finally, the bona fide redundancy payments are below the threshold of $68,134 therefore they are totally exempt and are not part of the ETP. Q3 Mr. Atkins wants to sell his assets so as to return permanently to England, therefore the sale of asset swill realize a capital gain and in Australia the gains are subject to the capital gains tax (CGT) except in a certain circumstances. The business car belonging to Mr. Atkins is fully exempt from CGT according to section118-5; 995-1. His sale of the private company shares is fully exempt since they were bought before 20th September 1985. According to ITAA 1997, assets that are pre-CGT meaning that they were bought before 20the September 1985 are not considered for CGT. The painting is subject to CGT since it is a post- CGT because it was bought on 15th June 1988 and sold on 3rd February 2006, section 108-10(2). The vacant land that was bought on 15th June 1988 and sold on 27th January 2006 is subject to CGT since it is a normal asset, section 108-5. Q4 The capital gains are calculated by the difference between the sale proceeds and the cost base. There are three methods used to calculate the cost base. One, we have the reduced cost base which excludes certain costs. Then, there is the cost base being money paid including associated expenses of the transaction plus legal expenses or capital costs of additions. Finally, there is the indexed cost base, which takes into account the consumer price index. The calculations below show sally’s capital gains or loss using the indexed cost base. The first step to calculation of the capital gains is by determining the cost base and in our case; we are directed to use the indexed cost base. The index method takes the difference between sale proceeds and the indexed cost base and it only applies for the assets that were acquired before 20th September 1999. With the indexed cost base, each cost element is indexed according to the date of occurrence. cost index factor indexed cost $ Purchase price 161,000 123.4/92=-1.341 215,901 Renovations 55,000 123.4/107.4 =-1.148 63,140 Selling costs 8,500 123.4/123.4 =1 8,500 224,500 287,541 Note that the purchase price is inclusive of the legal costs and the stamp duty. The adjusted council and water rates are not subjected to CGT according to provisions relating to assets that were bought pre 21st august 1991. In addition, the selling costs are inclusive of the valuation fees and the selling commission. Step two is to use the selling price to calculate the capital gains or loss. We have been provided with various alternatives for the selling price, thus let us calculate the capital gains or loss: a) If the selling price is$300,000 selling price 300,000 indexed cost 287,541 Net gain 12,459 b) If the selling price is $230,000 Since the indexed cost is more than the sale proceeds, no capital gain or loss. This is because the indexed cost base is said to be reduced to an equal amount of the sale proceeds resulting to zero. c) If selling price is 180,000 selling price 180,000 cost base 224,500 Net gain (44,500) The reason why we used the cost base is because the proceeds are below the historical cost of $224,500. Therefore, there is no way that we could have used the indexed cost base. d) Assessable amount sing the discounting method The discounting method gives individuals a 50% discount on the capital gains for assets that have been held for more than a year. selling price 300,000 cost base (224,500) Net gain 75,500 50%75,500 37,750 Assignment 20422/04 Exempt income, exempt clubs and societies a) The interest of $4,000 and the withholding tax are assessable incomes for tax purposes, section 25(i):6AC. However, a credit for the withholding tax can be allowed to the lesser to the extent of $1000. b) The amount received of $2,000 as a commonwealth government rebate for an apprentice is exempt from taxation, section 51-10. c) The pension amount paid to the disabled person, an Australian resident aged 45years is fully exempt, section 52-10(3). d) The rental income was paid to assist a jobless individual thus it is fully exempt for tax purposes, section 23. e) The membership income received by the club is exempt under the principle of mutuality, section 50-45. This is because the club is a non-profit making organization and it is considered as one person. According to the principle of mutuality a person cannot trade with himself thus, the income is at this point considered to be fully exempt for tax purposes. f) The income received by the Geelong aviation is exempt for tax purposes since the main object of the company is not to make profit but to promote aviation, section 50-40. If we were told that the aviation’s company motive was to make profit then the income would have qualified for tax. g) The allowance received by the fire brigade is an assessable income, section 26(e). This allowance has been received in the event of service in the fire station and relates to employment. That is the reason why it qualifies tor taxation. h) The scholarship provided to john by a company on condition that on completion he will work there is an assessable income, section 23(i) and 25(1). When the student finishes school, he will be part of the company as an employee thus the the scholarship relates to employment. i) The foreign salary by an Australian who works overseas for more than 91 days continuously is fully exempt under section 23. Q2 i. The taxable income of clubs includes the receipts and expenditure. Below is the taxable income of ranger shooting club: Rangers Shooting Club Taxable Income $ $ Assessable income: Bar trading- non-members 15,000 Gambling- non members room 30,000 interest 12,000 57,000 Allowable deductions: rates and taxes 5,000 superannuation for employees 12,000 Donations 500 bar purchases 25000*15000/60000 6,250 Bank charges 400 Depreciation on equipment in non-members gambling room. 15,000 (39,150) 17,850 ii. The tax on clubs is usually at 30%. The tax payable will therefore be: 30% 17,850= $5,355 Q3 a) The principle of mutuality states that one man cannot trade with himself. It is utilized for mutual members such as clubs and societies. The main assumption of this principle is that the members of these organizations are considered to be one; therefore any income derived is exempt. There are cases relating to this principle, for example in the case of madras gymkhana club vs. the deputy commissioners of the income tax. The main issue in this case was to determine whether the interest income received from the members on the investments of surplus fund as fixed deposits was exempt from tax using the principle of mutuality. The court held that the fixed deposits surpluses received from the banks and other financial institutions would not satisfy the principle. Therefore, the income was to be taxed. b) In most cases, clubs are allowed to vary the commissioner’s formula for determining the percentage of income and expenditures that is attributable to the non-members. They are to make sure that the variables used in the formula suits their circumstance. The also have to ensure that the formula is accurate and reasonable. c) The alternative method that the clubs can use in calculating the taxable income from the non-members is by way of keeping accurate and complete records of sales to both the members and non-members. The only way to achieve this is by maintaining cash registers, vouchers and other facilities separately for the members and non-members. Q4 The first step towards calculating the taxable income of united community centre is by determining the percentage that belong to the non- members. = (75% of members guests) + (total visitors- members guests (20%of membership*number of days) + total visitors = (0.75*500) + (12,000-500) = 10.45% (0.2*1,400*363) + 12,000 United community centre Taxable Income $ $ Assessable income: Bar trading 300,000*10.45% 31,350 Bank interest 12,000 Illegal gambling 450,000*10.45% 47,025 90,375 Allowable deductions: bar purchases 100,000* 10.45% 10,450 staff wages 80,000*10.45% 8,360 rates and taxes 6,000 bank charges 1,200 superannuation 9,000 depreciation 4000*10.45% 418 (35,428) taxable income 54,947 The tax payable at 30% 54,947 = 16,484.10 Work cited Cassidy, Julie. Concise Income Tax, 2007. The federation press. McCourt, Philip. Australian master guide, 2009. CCH Australian limited. Pg 1 Woellner Rob, Barkoczy Stephen, Murphy Shirley, Evans Chris. Australian taxation law, 2009.CCH Australia limited. Pg 314 Read More