Income Tax Returns - Assignment Example

Name: Course: Institution: Tutor: Date: Assignment 20422/09 Q 9.1 a) Implications of admission of a new partner in partnership on: Depreciable plant and equipment When the composition in partnership occurs due to a partner leaving or joining the partnership, the partner’s interests in the partnership assets also change. According to section 40-295 (2), a balancing charge has to occur as a result of the change in partnership composition. The provisions set out under division 40 ITAA 1997 state that a balancing charge is deemed to have occurred on an asset that is a depreciating asset. The termination value and the cost of the depreciating asset will be the markets value of the asset at the time the composition changes. This applies at anytime there except at times when there is a roll over. Therefore, when there is a roll over there is no balancing charge or balancing deduction at the time when the partnership composition occurs. A roll over is said to occur when the partnership owners choose to elect jointly. When a new partner is admitted in the partnership, any balancing charge is accounted for in the new entrant partner’s return. Other events on balancing charge are accounted for at the partnership level. Trading stock In partnership, trading stock is accounted for as part of the partnership as pointed out in section 90 of the ITAA 1936. A and B admitted C into their partnership thus causing a change in the composition of partnership. According to section 70-100, the change in partnership composition leads a change in the ownership interests also. In the provisions provided under the trading stock, a change in the composition of partnership leads to disposal of the trading stock by the transferor partners. Also, there will be a deemed acquisition of the trading stock by the transferee partners at the market value. Again where there is continuity between the transferor and transferee, they can choose for the transfer of trading stock to be made at the closing stock value as at the prior trading period. This choice obviously causes a timing difference between the cost and the market value. This effect leads to a deferring tax and it is always felt until the trading stock is sold off to a third party. On the other hand, if the choice is not made, the trading stock is deemed to have been disposed at the market value by the transferor partners. Such transactions are to be accounted for at the partnership level thus affecting the partnership return. b) Capital gains tax (CGT) implications arising from the sale of partnership assets For capital gains tax (CGT) purposes, a change in partnership compostion leads to disposal of assets. Where a new partner is admitted into the partnership: the existing partners taken to have disposed off part of their interests in the partnership assets to the new partner. Therefore, in cases where the transaction is not at an arm’s length, the market value has to be substituted by the actual capital proceeds. If a partner leaves the partnership, he or she is treated to have disposed off the partnership assets while the remaining partners are taken to have acquired the interests in the partnership assets. . The transactions are accounted for at the partner’s level thus affecting only the individual partners and not the partnership. c) Factors that determine whether or not a partnership exists There should be a motive of carrying out business between or among the parties. The parties can either be individuals, trustees or companies. The partners should receive the income jointly. Note that income from jointly owned asset does not mean that a partnership exists. Such incomes are rent, interest or dividends from a co-owned property. However, the co-owners must disclose such incomes when submitting their tax returns. There should be a valid agreement among the partners. A valid agreement exists in a written form in the partnership deed. Common interests, rights and obligations should exist. d) Limited partnership According to the provisions of s.49 (1) of the partnership Act 1963, a limited partnership is one which limits the partner’s liabilities. The amount of partners to be contributed in the event of a liability is limited to the amount shown in the register of limited partnerships. For example, let’s say that the register states that the limited amount for each partner will be $30,000. Then it happens that the partners have a liability of $ 250,000 which they are owed. In such a case each partner is only supposed to contribute $30,000 not any other amount. For taxation purposes, the limited partnerships are usually treated as companies. Therefore, they have to pay taxes. This is contrary to the income of partnerships which is not taxed. However the partnership should submit a partnership tax return at the end of each period disclosing all the income earned and the deductible expenses. Q9.2 a) X and Y net partnership income $ $ PROFIT 32,000 Add: 30,000 salaries -X 62,000 The statement of partnership includes the incomes eligible to the partners less the deductible expenses of the partners only. Other incomes such as rental incomes for the partners’ follow in case they occur. statement of partnership distribution X Y Sharing ratio 7 6 salary 16,154 13,846 profit 32,000 - 48,154 13,846 b) Bill and Jack net partnership income $ $ loss (65,000) Add: salaries -Bill 25,000 -Jack 20,000 45,000 (20,000) Bill and Jack partners statement of partnership distribution Bill Jack Sharing ratio 50% 50% salary 25,000 20,000 loss (32,500) (32,500) (7,500) (12,500) c) Oliver and Julie net partnership income $ $ loss (45,000) Add: salaries -Oliver 22,500 -Julie 21,500 44,000 interest on capital -Oliver 2,000 -Julie 1,000 3,000 2,000 Oliver and Julie partners statement of partnership distribution Oliver Julie Sharing ratio 2 1 salary 22,500 21,000 loss (30,000) (15,000) interest on capital 2,000 1,000 (5,500) 7,000 Note that the interest on loan is a deductible expense under s8-1 (2) of the ITAA 1997. This is because the loan was intended for business purposes not for individual motive. That is the reason why we did not include it in the partners’ distribution schedule. If we were told that the interest of 500 was on loan taken by Oliver, then it would have been deducted from his incomes. Q9.3 a) There is partnership because; the individual’s motive was to establish a joint venture and to share profits or losses equally. b) There is no partnership existing between Jill and her husband. Their professions are different and thus are the motive. She just an employee and not a partner. c) George and Kate are co-owners of a property bequeathed to the. Co-owned property does not amount to partnership but the two have a choice to form a partnership by sharing the income. d) There is existence of partnership between Shane and his wife though their professions are different. The existence of a joint account leads to the partnership. e) A partnership exists between Alison and her sister since she the profit sharing ratio will be 3:1 respectively. If we were told that the sister was not to receive any profit or loss share, then there would be no partnership. Q9.4 a) A and B Partnership distribution statement A B Totals interest on capital 4,800 5,600 10,400 salaries 22,000 33,000 55,000 profit share 38,160 25,440 63,600 Total 64,960 64,040 129,000 b) Tax payable by A A Taxable Income Assessable Income $ Interest on advance loan 15,000 share of partnership income S.90 64,960 79,960 Tax payable 30% 79,960 21,883 Medicare levy 1.5%79960 1,199 Total tax payable 23,082 Q9.5 i) Adam and Jody s.90 net partnership income $ $ Net accounting profit 29,700 Add: Partners wages- Adam 15,000 -Jody 10,000 25,000 interest on capital Adam 800 Jody 600 1,400 superannuation contributions Adam 3,000 Jody 1,500 4,500 60,600 ii) Adam and Jody Partnership distribution statement Adam Jody Total wages 15,000 10,000 25,000 superannuation fund 3,000 1,500 4,500 interest on capital 800 600 1,400 profit share 14,850 14,850 29,700 33,650 26,950 60,600 iii) Adam Taxable Income $ net partnership income s.90 33,650 interest on advance 500 superannuation contribution (3,000) 31,150 Assignment 20422/10 Q10.1 a) Circumstances under which a minor is excluded from under the provisions of s.10 div 6AA of ITAA97. To begin with, if they were permanently blind. They were disabled and the disability is permanent or for an extended period. They have been working full time The minors were entitled to a disability pension or rehabilitation allowance as a form of support. b) Eligible income is that income that is not realized as a result of the minor’s efforts such as interest earned from a birthday gift or proceeds from a family trust distribution. This income attracts penalties. On the other hand, excepted income is that income that is excluded under div 6AA and it is usually taxed at the normal rates. The income is as a result of the minor’s personal efforts and it should be disclosed in item A1 on the tax returns. Such incomes include compensation, employment income, incomes from deceased person’s estate or centrelink benefits. Q10.2 tax payable $ marginal tax 983 eligible income 45% 17,000 7,650 8,633 Medicare levy 1.5%29,550 443 tax credits PAYG (750) Tax paid by trustees (7,990) 336 The working for the marginal rate tax using the current rates is as follows: 1st 6,000- nil Excess (12,550-6000) = 6,000 * 0.15 =982.50 approximately $983 Note that where a minor has both eligible and excepted income, they are reported and taxed separately. Assignment 20422/11 Q11.1 Eligible assessable income for certain professionals and writers, section 11- Div. 405 Zoran Taxable income eligible income income from playing soccer 25,500 expenses incurred when playing soccer (500) 25,000 ineligible income investment income 9,000 related investment expenses (1,000) 8,000 33,000 abnormal income 25,000-18,000 7,000 normal income 18,000 + 8,000 26,000 notional income 26,000 + (1/5*7,000) 27,400 Tax payable Marginal rate on notional income 3,210 Marginal rate on normal income (3,000) 210 Tax on abnormal income 210 *5 2,100 Tax on normal income 3,660 Medicare levy 1.5%33,000 495 Tax Payable 6,255 Note: For the MR on notional profit (27,400-6,000) *15%= 3210 and on the normal profit (26,000-6,000)*15%=3,000 The Medicare levy is usually on the taxable income. When it comes to the incomes of professionals, the income that is from specified sources is usually offset with the related expenses. Q11.2 Foreign source income for residents a) Determination of whether the countries below are listed in accordance with the regulations: Croatia – not in the list Singapore – listed Bahamas – not in the list India – listed Canada –listed China- in the list Turkey –listed Cuba – not listed The listed countries are ones which have signed the double treaty agreement. The agreement helps in avoiding double taxation. Double taxation occurs where a person is taxed in a foreign country and in his country. The effect results to high tax payable by the individuals thus getting a very low net income. In simple terms, the agreement enhances fairness. The treaty also helps government’s combat tax evasion. In cases where an individual works in a country that is not listed, there are no exceptions except to suffer the burden. The amount to be held by the foreign country varies from one jurisdiction to another. Also the procedures are different across the many different jurisdictions. b) I) Toh Pty is a CFC in any listed country ii) According to section 340 of the ITAA97 Goldhurst limited is considered as CFC by Gold Haven Pty limited. Q11.3 a) The dividends are stated at their net value. For taxation purposes, they should be at gross therefore, adding back the withholding tax as shown: taxable income Dividend (net) 17,000 withholding tax 8,800 25,800 tax payable marginal rate 15% (25,800-6000) 2,970 withholding tax 2,970 - Medicare levy 1.5%25,800 387 387 Note that if the tax deducted from the foreign country exceeds that of the own country, then no tax is payable. That’s the reason why the tax payable before the Medicare levy is added back is nil. b) The assessable income for Ronald will be 50%80,000=40,000 Therefore the marginal rate tax 4,350 +30% (40,000-35,000) =5,850 Medicare levy 1.5%*40,000=600 Total tax payable 5,850+600=6,450 c) Jimmy should not account for the dividend in the current year because they had already been accounted for on an accrual basis during the previous trading period. The accrual basis of accounting recognizes income when realized and not when earned. Q11.4 Any non- resident person who has worked in Australia for a period of less than 91 days is not exempted from paying taxes in Australia. Chris who worked in Australia for 80 days qualifies to pay taxes in Australia. In his country, he will be given a foreign tax credit of $2,000 which was deducted in Australia. Therefore, his assessable income will be stated at gross by adding back the $2,000. Assessable income= 13,000 + 2,000 Section 12 Review of tax compliance for individual taxpayers Q11.5 a) Tax collection procedures for salary or wage earners In Australia, salary or wage earners pay taxes referred to as pay as you go (PAYG). The system only applies at the federal level as the individuals are not the ones to collect the income taxes. Therefore, the employer deducts the PAYG and then submits it to the ATO. Submission can be made on a monthly basis or on a quarterly basis. It all depends on the size of the employee’s payroll. b) Tax collection procedures for self-employed For individuals who are self-employed, they should collect information from the tax commission regarding the rates to apply when calculating the tax payable. These individuals also use the pay as you go (PAYG) system. The only difference between them and the salary earners is that they are the one to file their own returns. Q11.6 i) Betty has been given a notice by the commissioner of taxes to pay the tax owing before 21 days lapse. Therefore, she should make sure that she submits the amount owing at the right time because failure to do so attracts penalties. ii) The income relating to the bequeathed trust estate to Betty from her mother is an assessable income. Therefore, she should apply to the commissioner of taxes for amendments to be done by including the $4,000. Q11.7 The income of Maria’s son who is 14 years old is above the tax free threshold for minors therefore taxable. Tax evasion is considered to be illegal. It true that Maria evaded taxes by failing to disclose the son’s income thus breach occurred. The aspect of intention is very crucial at this point. It is vital to consider whether she intended to evade tax or whether it was out of her knowledge. If it not intentional she writes to the commissioner of domestic to give her a waiver. If the evasion was intentional, then she should pay the amount of tax owed plus the penalty. The commissioner is given the power to give waivers in the Australian law under section 227 of the ITAA97. Work cited Cassidy, Julie (2007). Concise income tax. Federation press. Pg 371 CCH editors (2009). Australian tax master guide 2009. CCH ltd publishers. Pg 177 Read More