Income Taxation in Australia - Assignment Example

Income Taxation in Australia Student’s Name Course Instructor Date Part A When people migrate to other countries, the status indicated on their visas may not be very necessary in determining the issue of residency for taxation purposes. The issue of residency is critical because it is used as a basis of determining the taxation rates for taxpayers. The law is applicable across many countries. The same is applicable for the case of taxpayers in Australia. Taxation rates, allowable expenses and tax reliefsare well determined by the status of residency by the taxpayer. Since Basil is not is not an Australian by birth, but came to Australia for work related issues, more consideration will be referred to. In this regard, the consideration will be the provisions in ITAA36 s6(1). According to provisions in this particular Act, the person whose domicile is not Australia can be categorized as resident if he spends more than half of the income year in Australia. The more than half implies at least 183 days of income year. Since the Australian fiscal year begins on 1st of July and ends of 30th June, Basil qualifies to be resident. The contract of Basil allows him to stay in Australia for three years starting 28th August. When we use the 183 days rule, Basil qualifies on the grounds that by the end of the income year on 30th June, he would have stayed in the country for over one half of the income year. Therefore on this basis, Basis should be taxed by use of taxation rates applicable to residents. Besides, the Act also acknowledges situations where the Commissioner of Tax satisfied that the permanent residence of the person is outside Australia. From the information provided, it is true that Basil’s permanent residence is in England. Though he will be in Australia for three years, according to the specifications on his visa, he already has a permanent residence in England. In case he chooses to acquire a home in Australia, that is a separate issue. The issue is made easier with the analysis of the FCT vs. Applegate case. In the case, the issue of domicile was well elaborated. The court ruled that the issue of the term ‘permanent’ does not mean forever. The use of term permanent implies a period satisfactory to the commissioner of tax that the taxpayer met the test of residency. Therefore, in relation to the Applegate case, it is possible to classify Basil as a permanent resident of Australia irrespective of the fact that it has been specified that he has a residence in England. This categorization is essential to the domestic tax department in calculating the tax payable by Basil. On the basis derived above, the tax treatment of Basil will be easily determined. For the period of three years that Basil will be staying in Australia, he will be paying taxes at a rate equivalent to that of the citizens of the country. This will also consider other facets of taxation like allowable expenses and tax reliefs that the country extends to its taxpayers. Part B Salary: Basil’s annual salary amounts to $144,000. The treatment of the salary for taxation reasons in Australia is straight forward. The total amount earned is considered for tax purposes. That is to mean, the whole amount of income received by Basil that is in the category of salary is taxable. The whole of it must be added to assessable income in order to determine the amount of tax to be levied. The treatment of various components of the income that is received by Basil is clearly spelled out in the Income Tax Act of Australia. Rent subsidy: Basil receives a rent subsidy of $600 per month. This translates to $7200 per year. Tax subsidy is treated as a benefit extended to Basil. In relation to taxation, benefits are supposed to be taxed. For this reason, Basil will have to pay tax on the subsidy that has been extended to him. The tax rate for the subsidy that has been extended to him is likely to be higher than that charged on other taxable incomes. Therefore, the implication of the subsidy will mean he pays less rent. At the same time, he will have to pay more taxes that have been brought about by the extension of the subsidy. Motor vehicle: the commissioner of income tax is charged with the responsibility of quantifying the value of benefit derived from using a motor vehicle by an employer given to them by the company. The car that has been given to Basil that is fully serviced by the company is not considered a fringe benefit, but an allowance. In arriving at the tax payable, the consideration is upon the motor vehicle’s engine capacity. At the same time, the cost of the car matters very much. In relation to the same, Basil will be required to pay an FBT tax of 46%. The amount is calculated on the cost of the car plus other maintenance services that the car has been serviced with. Phone account: the phone accounts provided above are for four months. Since the employer pays for him half of the amount, the amount that is taxable is that paid by the employer. Therefore, the half amount paid by the employer is assessable for taxation purposes. For this reason, the amount will be added to the rest of the assessable income in order to be taxed in overall. One important issue to be considered further is whether Basil was using the phone for private engagements or official work. If it is for official purposes, then no tax will be paid. On the other hand, if the amount is spent private engagement, Basil is expected to pay tax for it if part of the expenses is met by the company. Holiday: Basil has been offered a fully paid trip to Hong Kong. The trip costs $10000 and it is fully paid by the company. This is an allowance that the company extends to its employees. The offer also has some requirements that must be met. If Basil decides to take up the offer, then he will have to pay tax on the allowance. Since this is an allowance, it is taxable and therefore Basil will have to pay for the tax accruing from the allowance. In the case where the offer expires before Basil picks it up, he will not pay the tax due. English rent: Basil receives his monthly rent income of $800 which translates to $9600 per year. In determining whether the rent income is tax assessable or not, we have to look at the residency provisions. In this case, Basil is being treated as a resident of Australia for all the three years he will be there. According to the provisions of the Income Tax of Australia, a resident is required by law to pay tax on all his or her income. This includes the worldwide income earned while still staying in the country. For this case Basil will be require to pay tax on the rent income from the English rented house. This is so regardless of the fact that the income is banked in the UK bank account. It is required that he files returns, the rent income is included. Gain on English shares: when Basil sold his English shares; he made a profit from the sale. The treatment of the income derived from sale of shares is quite unique. In essence, income derived from sale of shares is not assessable for taxation reasons simply because the shares are not traded on Australian Stock Market. Instead, the amount is supposed to be treated as an exempt income according to Income Tax Act. The income derived from sale of shares is charged withholding tax of 10%. The withholding tax is the final tax charged to the income. Therefore, if the amount provided represents the net amount of income that Basil received, then no tax will be charged. Australian shares: according to Income Tax Assessment Act of 1936 -SECT 26C, income derived from the sale of shares is subjected to tax. Therefore from the information provided regarding Basil, the net amount realized is assessable for taxation purposes (Evans 1998, p290). Therefore, if Basil could have sold the shares at a price higher than the acquisition cost, the difference would have been considered assessable for tax purposes. In contrary, the sale of Basil’s Australian shares was at a price less than the cost price. This means that Basil incurred a tax savings for the year (Abhayaratna & Johnson 2009, p60). Chairs: Basil purchased chairs not for sale purposes. He meant to use the facilities for his own comfort in his house. The decision to sell them later on was made based on the prevailing circumstances. For taxation reasons, the net profit realized from the sale of the asset at a profit is not considered assessable. The benefits derived from this particular transaction can be treated more of windfall gains. These onetime gains that an individual receives in their lifetime does not constitute assessable amount for taxation reasons. Therefore, Basil is not required to pay any tax in relation to the transaction. Part C Facts and Issues in FCT vs. Rowe The case relates to payments made by the government to an individual in relation to specific obligations on the side of the government. The case was about an incident that took place between 1885 and 1886. Rowe incurred legal costs in relation to government inquiry. The inquiry was about his dismissal and it was found out that he was dismissed illegally. The problem arose when he demanded to be refunded the costs he had incurred for litigation and his request was turned down. When he later on appealed and the amount was given to him, it was added to assessable income. The taxpayer immediately applied for the decision to be rescinded. This decision had been taken by the Australian Tax Office (ATO). When the decision was reversed, ATO had to appeal to the Federal Court. Facts and Issues in FCT vs. Stone The issue surrounding this case is about Stone, a lady who worked as a policewoman at the same time as a javelin thrower. The issue specifically concerns her earnings and the subsequent assessable income. The issue arose in 1999 where she received her assessable income of $39832 being her salary as a police officer. Apart from her salary, there were other receipts that were included in her tax returns. The large portion of the amount received was in form of prizes. The total amount consisting of the receipts was $136448. The commissioner of tax treated all those receipts as assessable and that was the cause of discomfort. According to the information provided, large portion of her income was basically from her javelin rewards. The implication to this is that she would pay a lot of taxes. Why the grants in the two cases are not all income The income received by Stone for javelin was considered income for tax purposes. This is part of her earnings that complemented her salary. The taxpayer is supposed to pay this as part of her earnings. On the other hand, the case in Rowe was not a payment, but a mere reimbursement. The reimbursement in this case is form of litigation expenses. Litigation cost was reimbursed since the ruling was made in the favour of Rowe. Therefore, in the case of Rowe it was not a payment but rather a reimbursement which is tax exempt. References Abhayaratna, T & Johnson, S 2009, 'Revisiting tax losses', Australian Tax Forum, vol. 24, pp. 59–76. Brown, EC 1948, 'Business-income taxation and investment incentives', Income, employment and public policy: Essay in honour of Alvin H. Hansen, Norton, New York, pp. 300– 316. Clark, J, Pridmore, B & Stoney, N 2007, 'Trends in aggregate measures of Australia's corporate tax level', Economic Roundup, Winter, pp. 1–28. Desai, M, Foley, C & Hines, J 2009, 'Domestic effects of the foreign activities of U.S. multinationals', American Economic Journal: Economic Policy, vol. 1, no. 1, pp. 181– 203. Devereux, M, Griffith, R & Klemm, A 2002, 'Corporate income tax reforms and international tax competition', Economy Policy, vol. 17, no. 35, pp. 450–495. Evans, C 1998, 'The Australian capital gains tax: Rationale, review and reform', Australian Tax Forum, vol. 14, no. 3, pp. 287–323. Fane, G & Smith, B 1986, 'Resource rent tax', in Trengove, CD (ed), Australian energy policy in the eighties, Centre of Policy Studies, Allen and Unwin, Sydney, pp. 209–240. McDermott, B 2005, ‘Commission of Taxation v Stone (2005) 215 ALR 61: Its Implications for the Role of Intention in Assessing Business Receipts, and the Treatment of Gains Made by Athletes’, Sydney Law Review Vol. 28: 373, p 373-386. Schabe D & Walpole, M 1996, ‘A Symmetry Cemetery’, Revenue Law Journal, Vol.6: 1, p132-146. Yates, J 2003, ‘Tax Concessions and Subsidies for Australian homebuyers and home owners’, AHURI, Vol. 3: 27, p1-4. Read More