Rebates and Provisional Tax - Assignment Example

Name: Course: Institution: Tutor: Date Assignment 20422/07 Rebates and provisional tax Q1 a) Difference between a personal deduction and a rebate. A personal deduction is an expense that is subtracted from the assessable income so as to come up with the taxable income. The taxpayers’ savings on a personal deduction is equal to the marginal rate of tax for every $1. On the other hand, a rebate is a deduction that is made on the tax payable thus its effect is to reduce the tax liability. For instance, a taxpayer can qualify for a rebate if he or she has dependents that he pays medical expenses over a certain period of time (this excludes the Medicare levy and health funds rebates). When a taxpayer gets a rebate, he saves $1 for every $1 rebate. b) Difference between housekeepers rebate and child-housekeeper rebate A housekeeper rebate is claimed only a taxpayer has a non-family member who is in care of the house. This kind of rebate is not affected by the net income receivable by the housekeeper. On the other hand, a child- housekeeper rebate is claimed on behalf of a child who cares for the house after the age of 16 years. Unlike the housekeepers rebate, the child-housekeeper rebate is affected by the separate net income (SNI) receivable by the child. Normally, the rebate is reduced by $1 for every $4 of separate net income (SNI) in excess of $282. c) Johns tax liability $ Marginal rate on the taxable income 2,910 less: rebate for spouse 1610-(1040-282)/4 1,410 low income rebate 235- (23,700-21,6000) 151 (1,561) 1,349 Add: Medicare levy - Tax liability 1,349 Note that the Medicare levy has been excluded because there are exceptions for the low income earners in Australia. John will also enjoy the rebate fro the spouse and the low income rebate since he is a under the category of low income earners. In Australia, Medicare levy is a separate kind of levy that is imposed on taxpayers so as to enable them pay for their public health. It is imposed at a flat rate of 1.5% on the taxable income, unlike other taxes. Q2 a) The parenting allowance is not considered as part of the separate net income (SNI) though it is deducted from the spouses rebate. b) Wages are considered as part of the separate net income (SNI). This is because the separate net income includes most assessable income items and wages is part of the assessable income. c) The previous year’s losses are not considered to be part of the separate net income. The losses which are considered as part of SNI are the one which relate to the current year only. d) The tax agent’s fees are not part of the separate net income (SNI) since they do not affect it. Such fees are considered to be centre link expenses which do not affect the SNI. e) The amount incurred on travelling to and from work does not amount to the reduction of the separate net income (SNI). This is because the travel expenses to and from work are not deductible expenses. If it was travelling expenses, then they would have reduced the separate net income since they are deductible expenses. Q3 a) Howard qualifies for the spouses rebate as shown below: = (1610* 150/365) -(882-282)/4 = 661.64-150 = $511.64 b) To begin with, Keith receives the parenting allowance; therefore he is not entitled to the spouses rebate. The rebate that he is entitled to is the parent rebate allowance since the separate net income (SNI) amounting to $4,940 is below the required threshold. The parent rebate is calculated below: = $1,448 – (4,940-282)/4 = 1,448 – 1,164.50 =$275.5 Keith is also entitled to the invalid relative rebate since his incapacitated sister receives the invalid pension as shown below: = $725 – (2080-282)/4 =725-449.5 =$275.5 Q4 The medical expenses are defined as the net amount of payments after subtracting all the reimbursements or refunds received or receivable from Medicare or the private health fund. The expenses should relate to: A legally qualified medical practitioner, nurse, chemist, public or private hospital in respect of illness. A legally qualified dentist for dental services or treatment of artificial teeth. Payments made to nursing homes for individuals who need special care. The purchase or repair of artificial limb, eye or hearing aid. Therapeutic treatment administered by referral from qualified medical practitioners. The rebate on the medical expenses paid can be claimed by the taxpayer himself, wife, husband or any child of the taxpayer below 21 years. According to Philip (804), the taxpayer must also be an Australian resident as pointed out in the ITAA 1997 s159. The section however provides that the rebate may be payable during an overseas trip. It’s not necessarily made by an Australian resident or in Australia. The following is the medical expenditure rebate of ken tuck, a self employed builder: Ken Tuck Eligible medical expenses $ prescribed medicine 105 prescribed milk substitute 190 Dental fillings and extractions 390 New dentures 460 General medical practitioners 450 specialist medical practitioners 280 private hospital charges 890 2,765 less: Health benefit association refund (700) Net medical expenses 2,065 medical expense rebate 20% (2065-1500) 113 Note that when it comes to the medical expenses we excluded the ones that were not prescribed such as the one made to the herbalist, non-prescribed sunglasses, and hair spray. This is because these deductions do not fall into the category of the itemized items of the medical expenses. The medical rebate is usually allowed at 20% on the net medical expenses on the surplus of $1,500 (Philip 804). It is usually deducted after deducting the reimbursements payable to a government, society, public authority or an association. In our case we had only the health benefit association refund. Q5 a) Taxable income David Taxable Income $ Tax rate gross salary 35,000 marginal rate (MR) Annual leave for 12 months 1,000 marginal rate (MR) Long Service Leave (LSL) - Post 17/8/93 2,400 marginal rate (MR) -pre 16/8/78 600*5% 30 marginal rate (MR) -b/w 16/8/78 to 7/8/93 22,000 30% ETP Pre 1/7/83 5% 80,000 4,000 marginal rate (MR) post 30/6/83 already taxed(100000) - zero Redundancy of 45000 - zero interest on savings account 500 marginal rate (MR) Gross franked dividends (imp. Credit 1200) 4,000 marginal rate (MR) Gross foreign interest (200 tax paid) 1,000 marginal rate (MR) Taxable Income 69,930 Note: The franked dividends have been stated at their gross amounts when determining the taxable income for David above. The redundancy payment relating to the 24 years of service is usually excluded from tax because it relates to retirement. We are told that David retired from his full-time employment at the age of 60 years. The amount of foreign interest is already stated at gross so there was no need to add back the $200 relating to the tax paid. The undeducted contributions to the fund do not form part of the taxable income for David. The taxable income is below the tax free threshold therefore it is subject to the marginal tax rate. The current tax free threshold is $6,000. b) Tax payable / refund $ $ Taxable income 69,930@ MR 17,671 LESS: Tax on notional income 47,930 @MR (10,239) Tax on the lump sum @ MR 7,432 LESS: Tax on lump sum @ concessional rate LSL 22000 *30% (6,600) Rebate 832 therefore: tax on taxable income @ MR 17,671 Add: Medicare levy (1.5% of 69,930) 1,048 LESS: Rebates or Credits rebate 832 imputation tax credit 1,200 withholding tax on foreign interest 200 PAYG Tax & lump sum tax 34,000 (36,232) tax Refund (17,513) Note: David was not a low income earner therefore he is entitled to pay the Medicare levy at 1.5% on the taxable income. When calculating the tax payable or refund, the rebate was deducted plus any other taxes that had been paid in advance such as the imputation tax credit, tax paid on the foreign interest and the pay as you go (PAYG). The deductions have been done to avoid the double taxation effect. Before calculating the tax refund, the first step was to determine the rebate (s159A) that David was to be entitled to. Assignment 20422/08 Trade stock and completion of form 1 Q1 a) Raines wants to minimize his tax liability. This is referred to as tax planning where a taxpayer determines in advance on how he can reduce the tax effect on the taxable income. To achieve the minimum taxable income for G.Raines, a machinery manufacturer, we will use the lowest stock values. This is shown below: $ Raw materials @ replacement value 34,000 work in progress @ market value 15,000 finished goods @cost 16,000 value of the closing stock 65,000 Note that the value of closing stock does not include the factory lubricants and the production spare parts. b) D. Cloke is wondering whether his trading stock can be valued at the saleable value of $10,000 instead of $20,000 the market value or replacement cost. According to section 70-75 of the ITAA 1997, he can successfully apply to the commissioner of domestic taxes to value the stock at the saleable value of $10,000. Though the commissioner has to do some procedures to find out whether the value of the stock at its saleable value is $10,000. If it is evident that the salable value is $10,000 then, Cloke will value the stock at $10,000. c) R.Shaw purchased new equipment in the current year for $48,000 and at the same time he bought spare parts worth $12,000. Only $1,000 of the spare parts was used in the current trading period. Shaw wants to know how he will treat the stock of the parts for taxation purposes. In such a case, he can only claim a deduction for spare parts that were used during the current trading period. The balance remaining of $11,000 will be treated as spare parts on hand for future use. Q2 a) The statement of taxable income Ann Tiquity Taxable income Assessable Income $ $ $ cash sales 89,450 credit sales 68,080 157,530 bad debts recovered 290 insurance recovery 2,600 total assessable income 160,420 Allowable deductions cash purchases 4,000 credit purchases 55,550 59,550 excess opening stock over 1,000 wages 16,900 shop rental 10,800 subscriptions to the trade association 450 interest on loans 3,200 motor vehicle expenses 2,100 advertising expenses 600 repairs on trade tools 240 laundry 80 business insurance 460 depreciation on equipment 3,600 depreciation on motor vehicle 1,300 100,280 60,140 less: concessional deductions superannuation contributions 1,600 donations 100 1,700 NET TAXABLE INCOME 58,440 The insurance recovery amount is an income as it replaces the lost income that could have been realized. The credit sales and the cash sales are part of the income since they contribute to the total revenue receivable. The credit purchases and the cash purchases are treated as deductible expenses since they are incurred for the purpose of generating income. Other expenses such as wages and advertising expenses are treated as normal expenses incurred in the normal course of business under section 8-1 of the income tax of Australia (ITAA) 1997. The concessional contributions relate to those contributions for which a tax deduction is claimed and include personal or the employer sponsored contributions. That is the reason why the superannuation contributions and the donations have been deducted. They qualify for the concessional tax rate and there is always a limit to the amount which one can claim. For years 2009/2010, the limit amount is $25,000. Note that the concessional contributions are taxed at 15% inside the taxpayer’s super fund. The workings below show how the credit sales and credit purchases were determined for the purposes of calculating the taxable income. From the look of the calculations, they are the balancing figures as shown below: Debtors opening balance 8,600 Add: credit sales 68,080 less: Bank (66,380) closing balance 10,300 Creditors $ Opening balance 2,100 Add: credit purchases 55,550 less: Bank (53,250) closing balance 4,400 Work cited McCourt, Philip. Australian master guide, 2009. CCH Australian limited. Pg 804 Read More