Australian Tax Law - Case Study Example

Australian Tax Law By + Advise to MM on any taxation matters arising from their dealings with Joe. According to Australian Law, income tax is supposed to be paid by each individual and company and this include the MM company. The ITAA97 Section 4.10 states that income tax must be paid for each financial year, a period of 12 months starting from 1 July of the year under consideration. The general method of calculating the tax liability for the company involves finding out what the assessable income for the year is and subtracting the deductions applicable in order to find out the taxable amount.MM company will have to find out if the amount paid to Joe totalling to $70,000 is deductible for its income. This is in order to avoid double taxation as Joe is still going to pay income tax on this amount as part of his income. The bonus payment of $5,000 shall not be considered for this particular period. This is because it was paid to Joe on 10 July 2014 .This particular date falls outside of the financial year 2013/14 that runs from 1July 2013 to 1 July 2014. In Section 8.1 of the ITAA97, the company is allowed to deduct any amounts from its assessable income if this amount was incurred in the gaining or the production of the assessable income. In this situation, the amount paid to Joe was for his skills as a labourer. This skill enabled the company to conduct its business and hence be able to make income from its activities. It is therefore right to assume that the amount the company paid to Joe should not be taxed and is therefore a deductible from the assessable income of the company. MM have to pay employee super. The Superrannuation Guarantee (Administration) Act 1992 governs the relationship between employees and their employers. It includes details about the employer’s liability in the making of the payments. It also states how the calculation of the super guarantee charge is done. Contributions should be paid by the 28th of the month that follows the end of the quarter1. Failure to do this will result in the payment of a superannuation charge by the employers. Joe is qualified to have this payment made for him on his behalf by the company. The requirements are that the employee should be over 18 years old and they should earn more than $450 before taxation in a calendar month. Super payments are normally calculated and made after every three months. The payment of a former employee of backdated payments means that the super payments that had accrued to that employee must also be paid. The employees that are excluded from this arrangement include those who earn less than $ 450 in a month. Employees who are under the age of majority are also not included in this particular arrangement. Individuals who are employed under the Community Development Employment Programme are not eligible for these benefits. The importance of adhering to these arrangements was highlighted by the decisions of the court in specific cases. These cases are Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 and On Call Interpretation & Translations Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 366.In the latter case the employee had wrongfully categorised their workers as contractors and the court ruled that they should be characterised as employees. This was in order for them to benefit from the super annuation arrangement that they were entitled to. Therefore, the company should take their responsibility in the whole process seriously in order to avoid unnecessary criminal liability from the authorities 2) Advise to Joe on any taxation issues that arise in relation to his circumstances Salary and Wages Under Australian taxation laws, assessable income includes the value of all allowances, compensation, benefits, gratitude provided directly or indirectly for services that have been rendered. It involves payment of both cash money and payment in kind. Joe has annual earnings of $70,000 and an additional payment of $5,000.From this he will have to figure how much of it is taxable income. The law states that employment income must be declared for taxation purposes and this include an individual’s salary and wages, any allowances, any lump sum payments or any fringe benefits and super contributions. The bonus payment shall once again not be considered for taxation as it lass outside of the financial year under consideration. Under the 2013/14 tax laws, as an Australian resident Joe enjoys the tax –free threshold which means that the first $18,200 earned will not be subject to taxation. The remaining amount of $51,800 will be subject to taxation at the following rates: he will be tax 19c for every $1 that is over $18,200, and this rete will apply up to the amount of $ 37000.For the remaining amount he will be taxed a lump sum amount of $ 3,572 plus 32.5c for every $1 over $37,000. His contributions to the labour union are not taxable according to Self-Managed Superannuation Funds Product Ruling SMSFPR 2009/12.These contributions go to a type of superannuation fund that includes industry funds, defined benefit funds, defined contribution funds and retirement saving accounts. Gifts The plaque that was given to him shall not be subject to any taxation because of its value is not significant enough. In most cases, one is not required to declare rewards and gifts that are of such small amounts. The gifts are only taxable when they are of significant value or when they are part of a business activity. Investments and Rental property Joe is also a small business owner that he is operating assisted by his Brother in law. The business is therefore co-owned and Joe will be required to pay his share of the tax liability. Under normal circumstances business partnerships do not pay any tax on the income earned. However, the business is operating at a loss and he will therefore pay no tax but will instead be required to declare the amount of loss incurred. Joe owns a rental property that was purchased in 1984.The property is old and run down but is still a source of income and therefore Joe is allowed to make claims on the property expenses. Expenses that can be claimed on rental property include depreciation, council rates, insurance, land tax, maintenance and repairs, travel expenses to the property to inspect it and to collect the rent, bank charges and advertising costs3. All of the work that was done on the property took place within the financial period, there it is up for consideration, and this includes the 4.5% management commission. The paintwork that is scheduled for July 2014 amounting to 10,000 however shall not be considered for claims as it is past the financial period. He will need to work out an appropriate basis for the apportionment of the claims such as the one given; rental expense can be multiplied by the portion of the year that was under consideration in order to come up with the total deductible amount. The law requires the declaration of all rental income in whatever form that they may be earned such as a letting fee, a reimbursement to cover an expenditure and insurance compensation to indemnify for lost rent. The $15,000 income must be declared and will be taxed at the normal rates. Health Insurance refunds. The amounts that were incurred in the health care costs of the son are deductible expenses. Anyone who is covered by a policy, as a dependent child on a private insurance policy, should not be considered to have a share of the policy cost and therefore are not subjected to the income test. Dependents are defined as individuals under the age of 18. It also includes an individual who is considered by the insurer as a dependent, who is not over 25 years, and is not married. Under the law, eligibility to an insurance rebate depends on the size of the family, the income and the purpose of the refunding4. The rebate can be given in different forms. It can either be paid upfront as a reduction of the costs especially as to the premium payments or in the form of a refundable tax offset during the payment of taxes. 3) Advise to Donna on any taxation issues that arise in relation to her circumstances. Capital Gain Tax Capital gain is defined as the advantages that arise due to a change in the prices of an asset5.The following items: shares, land and buildings, unit trust, collectables such as artwork that cost more than $500, foreign currency and goodwill usually attract capital gains tax6. The following steps are followed in the assessment of a capital gain tax. One has to ascertain if the capital gain tax took place within the specific income year under consideration. If it did not take place within this period then there is no capital gain or loss. However if it did take place within the given income year then the second issue of concern is whether there are exemptions that are applicable to the transaction. If there is no exemption, then one has to check if the proceeds exceeded the cost base. If the capital proceeds exceeded the capital base then it is a gain. If the proceeds do not exceed the reduced cost base then it is a capital loss. The sale of the painting results into a capital gain tax7. The painting was sold at a price that was lower than its market value and therefore this resulted into a capital loss. The net capital loss will have to be deferred to the next income period. This is because the net capital gains that will have taken place within that period will offset the net loss. She should also keep a record of the transaction by keeping the receipt of the transaction in order for it to serve as proof that a capital loss did really occur in the next financial period. Carer Payment Her carer adjustment payments are not subjected to the payment of any taxes. This is because these payments fall under the exempt Australian government pensions, allowances and payments. The other payments that fall under this category include carer payment where the carer is of pensionable age and the care receiver is under age as in this particular situation. It is also exempted in cases where the carer is under age or of pensionable age and the care receiver has died. Other forms of support payment in this category include double orphan pension scheme, war widow and widowers pension schemes8. Payments that are made by the Australian government are also exempted from income tax including education payments for children who are under the age of 16 years old, baby bonus, and childcare benefit. Overseas payment for the federal police forces and the Australian defence forces are also not subject to imposition of any taxes. Bibliography Australian superannuation legislation 2012 (16th ed.). (2012). Sydney, NSW: CCH Australia. Barkoczy, S. (2012). Core tax legislation & study guide 2012 (15th ed.). Sydney, N.S.W.: CCH Australia. Barkoczy, S. (2014). Core tax legislation & study guide 2014 (17th ed.). Sydney: NSW. Deutsch, R. L. (2006). Australian tax handbook (Tax return ed.). Pyrmont, NSW: Thomson. Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths. Tax Laws Amendment (2005 Measures No. 1) Bill 2005. (2005). Canberra: The Committee. Read More