The Australian Issue of Taxation - Case Study Example

First, I would like to appreciate your concern for the issue of taxation. It is an issue that most people tend to ignore when they have the time and resources, only for it to catch up with them when lawsuits and even legal actions are highly unavoidable. It is therefore advisable to take the information in this letter seriously. Your main concerns and the advice related to each of them, based on the taxation acts Income Tax Assessment Act 1936, and Income Tax Assessment Act 1997 are as set out below. Questions and answers Q1. What amount of your income is recognized by the law as taxable? A . Income tax Act categorizes income as either assessable or non-assessable. Assessable income should be taxed while the non-assessable is not taxed. Further, there are forms of incomes that are exempted from tax. Your taxable income based on the law are $10,000 participation benefits from the Quiz show, $3000 gained from a subsequent appearance, and a $50,000 given as an incentive for a job. Q2. Is there any form of income that you receive which should be exempted from tax? A . Income that is exempted from tax is the $100,000 prizes from the quiz show, the $30000 obtained in regard to dancing, the relocation cost and the $4200 worth of gift (briefcase) obtained from the department of taxation as recognition for good performance. Q3. When is this tax payable? A . Tax is collected annually by the government. Therefore, the taxable income should be calculated for each financial year and multiplied by the current taxation rates for a specific category and the tax paid before the end of the fiscal year. Income from different years should not be combined. Q4. How can you evade taxation and what are the implications of evasion? A . Tax evasion is a serious offence in any country. This is because of the importance that any government regards the revenue collected from the citizen and the intended use. The government has the authority to follow-up tax defaulters and prosecute them. If you evade tax, you will be eventually caught up with and prosecuted. Reasons for Answers Background Legal systems in Australia The Australian governance is strongly based on the rule of law. The legal system significantly recognize and upholds justice, independence and rule of law as fundamental elements of the judiciary. Procedural state of fairness, precedent of the judiciary and the separation of powers are principles that are fundamental in the Australian legal system.1 Among the duties that the legal system recognize for citizens and non-citizens in Australia is the revenue generation for the country in the form of taxes. The law does not only indicates the required percentages of taxes that the people should give, but also what forms of incomes are taxable and which are not. The basis of each of the categorization of incomes is also outlined as per the supreme law of the land and the penalties attached to it clearly described. Sally is a successful and brilliant tax student in the Curtin Law School. In addition to this, she is a promising dancer and an enthusiastic quiz show follower. Her various endeavours and education success have earned her several forms of recognitions. Some of these recognitions are in the form of monetary and commodity prizes which she has received. Her need for advice is based on the need to understand the taxation requirement in her case and how she can be on the safe side of the law in terms of fulfilling her tax obligations from her income. Taxation in Australia Taxation in Australia has existed since the late decades of the 19th century. In the constitution, the taxation policy appears under the Income Tax Assessment Act of 1936, hereafter referred to as the Act. The act was amended under the Taxation Laws Amendment Act of 1997. It is based on the principles of taxation, exemptions and deductions described in the Act that this paper is based. The concept of taxation has always played a crucial role in the society as the government requires the collected revenue to finance activities. To always be on the right side of the law, it is necessary to recognize several things. First, the importance of paying taxes. Following the importance aforementioned of paying taxes, the government is obliged to make follow-ups of all taxpayers and those who seem to avoid paying taxes especially from the indirect incomes. The third consideration, which stems from this is that there are serious repercussions of failure to pay taxes whether intentional or not. In fact, in legal systems, ignorance is no defence. The relevant issues in this case are; Taxable income in Australia. What amount of Sally’s earnings is liable to be taxed and how much tax should she be ready to give for each. Is there any form of income that she receives which should be exempted from tax? If yes, how much should be exempted and under which circumstances. Is there a way in which she can evade the taxation legally? Does this have any monetary legal or procedural implications There are various divisions of the law that these issues will be addressed. First, from the statutory law. There are two acts and their attached regulations; (a) Income Tax Assessment Act 1936; (b) Income Tax Assessment Act 1997; Secondly, the advice will also be based on the Common law and its interpretation of the statutory law as well as on the detailed regulations by the Australian tax Office. Taxable Income in Australia Division 6 of the ITAA97 deals specifically with the types of income that are recognizable by the law. The statutory and non-assessable income are well described.2 The section 8-1 ITAA97 outlines the possible sources of personal income and their eligibility for tax. In the same sections, the law puts clearly what types of incomes are exempted from tax. According to these sections of the law, and as explained by the Australian tax office, there are only a few sources of income that are exempted from tax. These include income from the department of defence, United Nations salaries and education payments. Pensions, social security allowances, bursaries and income from non-profit organisations are also exempted from tax. All other forms of income including normal salaries, dividends, bonuses, wages interest pensions, royalties, income from rental services, foreign income, partnerships and trusts are all liable to taxation.3 Determining the taxable income The provisions for taxable income calculations are found in Div 4 of the ITAA97. These provisions explain the process of calculating the income tax payable for both residents and non-resident taxpayers. From these provisions of the Act; Income tax= (taxable income*rate) – offsets Further, taxable income = assessable income – deductions; where assessable income combines the ordinary income and statutory income less exempt income. Ordinary income (s 6-5 ITAA97) is that income that comes following ordinary concepts such as employment and wages. For an Australian resident, the ordinary income is the income from all sources in and out of the country. For non-residents, it refers only to the income derived directly or indirectly from Australian sources. Statutory income (s 6-10 ITAA97) is all other amount of income that is not from ordinary sources, but still within the assessable and taxable bracket. This includes the money received by other people on behalf of a person. From this section, we can regard the money received due to participation and subsequent appearance in the quiz show as well as that given as an incentive for a job as assessable income. This type of money is however not from ordinary sources but falls on the statutory income bracket. It is, therefore, taxable. Non-assessable income Some forms of income are recognised by the law as non-assessable and therefore do not attract tax. In this bracket based on the provisions of the Act (s 6-15 ITAA97), we find the following types of incomes; 6-15(1) income that is neither ordinary nor statutory (not ordinary or statutory income) does not have to be taxed. 6-15(2) exempt income. This is the income that according to the Act and other laws such as those described by the Australian taxation office are exempted from tax. 6-15(3) any amount that is not within the two categories above (non-assessable non-exempt income) is not taxable.4 The implication of this section is that a taxpayer is not supposed to pay taxes on income that is acquired as a form of gifts, or any proceedings from a hobby of other forms of income that the law exempts from taxation. In the case here, the $100,000 initially received as a prize in the quiz show is a form of gift and therefore is not assessable. Similarly, the $4200 worth briefcase is also a gift hence not taxable. In addition, dancing is a hobby which is not initially intended to raise any income. In fact, an offer to have it raise income is rejected and therefore the money given is not assessable under this provision. In a previous case involving a taxpayer, Brajkovich – a Gambler who was charged of failure to pay tax on profits obtained from gambling, the defendant said that he took all the necessary steps to form gambling as his hobby and not a business.4 The court held that Profit motive for gambling not enough to classify it a business. Gambling although primary source of income not business and therefore any profit from it is non-assessable. The relocation money given is not considered as a form of income according to the Act (s 6-15 ITAA97) but as money to cover the cost. This means that the amount received whether used in relocation or otherwise cannot be treated as income and hence it is neither ordinary nor statutory income hence non-assessable. According to the Australian Taxation Office, gifts as classified under the provision of s6-15(2), are considered to be present when there is a transfer of money or property made voluntary and occurring by way of benefaction. In this case, the gifts are deductible regardless of the value.5 However, if the income is in the form of purchase of raffle tickets, attending a fundraiser or membership fee for a club or a group, they are not gifts and therefore not deductible. In a case involving a gift, a professional footballer Kelly receives $20,000 as a gift from Channel 7 for outstanding performance. The question is, therefore, whether Kelly is supposed to pay tax for the gift. In consideration to this case, the jury established three important facts. First, the gift was in recognition for his performance and skills and not a wage or salary. Secondly, there was no obligation for the payment and hence the gift was independent. Thirdly, the gift was open to all players. Based on this, the gift does not qualify as an assessable income as it is neither an ordinary nor a statutory income.6 It is in a matter of fact received from the pursuit of a hobby and hence no tax should be claimed. The income from the dancing in our case here should, therefore, be treated as a gift obtained in pursuit of a hobby. No tax is payable. Tax payable Based on the above arguments, the total taxable income is $10,000 + $3000 + $50000= $63000. This should then be multiplied by the current taxation rates for non-regular resident taxpayer to get the amount of tax payable from the income. The income that should not be taxed is $100000 + $30,000 + $4200 = $134200. The relocation cost is not part of income. As outlined in section 8-1 of the ITAA97, an expenditure to qualify as a deduction, it must be at least in part be incurred in gaining a position or status that will produce assessable income. The relocation for the sake of securing a job satisfy this connection and therefore the relocation cost qualifies as a deduction. Even if the money was to be regarded a paid to sally for work before she does the exact duties, it would still not be assessable. This is comparable to the case involving ATO v Arthur Murray, a taxpayer who allegedly received income for work that have not been done. The court held that usually income received before work done is not regarded as derived. Therefore, it was not assessable. In Australia, the financial year covers the period from 1st July to 30th June the following calendar year. Before the beginning of every financial year, every taxpayer is supposed to have submitted their tax returns for the year ended. Failure to do this, the taxpayer will be considered to have defaulted tax, and the law will catch up with them in a variety of ways. However, some cases require deeper deliberations to obtain the exact motive of the income and how it can be described under the taxation law, a case of this nature involved Jarrold v Boustead. The taxpayer, Boustead was paid an inducement payment for him to turn pro football player. The payment was on top of the salary that he would get. The court held the inducement payment not ordinary income. The distinction have to be drawn between whether the payment was an advancement of payment for contracts or a bonus on top. This is the case that has to be considered in this situation. If however, the money given by the company was to restrict the client from being employed by a competitor, as is the case of Sally’s income from the dancers club, then the case becomes different. It will be handled in a similar way to a previous case involving. Australian tax Office v Beak, a taxpayer who was given money for not obtaining a job in a competing business after retiring. To determine if the income is assessable, the court held that Restrictive covenants generally characterised as capital and are hence assessable. Tax avoidance Avoiding to pay tax is an offence. It is a problem that most governments around the world confront in a day to day basis. Australia has regarded tax avoidance as part of the great predilection. However, any form of tax avoidance used currently, even with the greatest caution has an equivalent strict approach under the law. In this case, you may decide to evade tax through sham transactions, this would mean that some of the income aforementioned as assessable are purported to be gifts and benefits that are exempted from tax. However, with the strictness of the law, the true nature of these incomes will be accessed. If any transaction has been effective under the supreme law, such a transaction is assessed and tested under the anti-avoidance rule. The process is aimed at negating tax benefits and seeking to establish the taxability of every form of income for an individual. This will definitely lead to revealing of attempted evasion and prosecution may then follow. In some cases, people attempt to use tax agents to amend their tax and income particulars with the aim of avoiding taxation. A case of this nature was decided in 2012. The defendant, Loukia Bariamis was a tax agent who tried to amend the client’s address, bank accounts and BAS. False information was, therefore, provided in regard to the client, and the ATO database generated $1,820,939 I tax refunds for the client. Pursuant to section 134.2(1) of the criminal code, the defendant was found and pleaded guilty and was sentenced to four years imprisonment.7 Further considerations Paying of taxes is an obligation of every citizen. The importance of paying taxes is that the government obtains revenue that is used to finance the various activities that are for the benefit and the service of the citizens. As a constitutional obligation, taxpayers should not be reminded of their duty. It is expected that everyone with a form of income will take it upon himself or herself to pay taxes to the government. As such, ignorance is no defence, and a failure to comply with the taxation regulations is punishable by the law. Further, any attempt to avoid paying taxes, whether planned or otherwise is an offense and the perpetrators should be persecuted. The Australian law has mechanisms of identifying loopholes in the taxation regulations that can be applied by people to evade tax. In this case, it is advisable not to attempt any form of tax evasion because chances are that the government will catch up with you sooner or later. In 2007. Robert DiPierdomenico was fined $2,000 for failing to lodge end-of-year tax returns for six full years. Although no mention of tax evasion was evident, mere failure to lodge the returns carried such a fine which was backdated for six years. According to the Tax office, the penalties and fines are only designed to ensure that taxpayers are ‘encouraged’ to comply reasonably with their tax obligations. Tax evasion penalties are of three types depending on the situation. Administrative penalties are applied directly on a taxpayer who fails to lodge returns on time, fail to withhold or willingly or otherwise choose not to update their income details. These penalties are under the tax law and are enforced and issued directly to the tax offices. In other cases, when tax evasion goes beyond mere failure or negligence, such as changing the income details the civil and criminal penalties come into force and the defendant can be prosecuted, charged and even imprisoned based on the merits of the case. Penalties are short of being regarded as criminal offenses in tax evasion. The penalties are imposed in cases of failure to take reasonable care in which case 25% of the shortfall amount is penalised; recklessness penalties are 50%, while intentional disregard of the tax obligations attract a 75% penalty from the tax office. Besides penalties, unpaid taxes attract interest that is payable before a taxpayer can be cleared. Interest charges generally apply to the amount that is not paid which include shortfalls, late payments and tax debts. The interest is present independent of penalties and does not necessarily imply dishonesty. The interest rates are determined quarterly in each financial year to the unpaid amount. According to the Tax Office, the essence of interests is to motivate payment of taxes by due date, avoiding some taxpayers taking advantage of those who pay their taxes on time and compensating the government for the economic effects of late revenue collection. Basing my argument on these findings, it is clear that there are serious consequences of a conviction to tax fraud in Australia. Involvement in any scheme that is aimed at evading tax is an offence that can be convicted. Real life examples indicate that a jail sentence of even up to four years is possible with tax evasion or assisting in the same. A tax evasion matter that is serious enough to be taken to court, when the administrative laws cannot solve can be decided in a variety of ways. One, when the matter is not serious enough to warrant a conviction, it may be dissolved with directives to pay the taxes inclusive of the penalties and interests and a strict follow-up and observation to ensure that the suspect maintains their tax paying obligations. The second solution can be imposed fines for matters that are more serious. The fines are higher than in the first case above and stricter. In this case, the taxpayer is also observed and monitored for a specific period of time as the court may decide. Thirdly, a good behaviour bond may be imposed. This means that the taxpayer is allowed to go after paying the taxes, interests and penalties on a bond that he or she will maintain good conduct for a specific period of time. Failure to this leads to summons and conviction. In other cases, the offenses are deemed serious and conviction is given immediately, this could be in the form of imprisonment or community service order. For instance, in 2002, tax office filed a suit against a business person Mr ‘Connor who was engaged in tax fraud through attempted evasion of tax. His companies were received money from contractors in cheques but paid the workers in cash to avoid tax deductions. Through tis, Mr ‘Connor retained a 7% commission, and made a cumulative profit of $140,000. Eventually, the Australian Tax Office caught up with him and he was ordered by the court to pay more than $160,000 and serve a two year’s imprisonment which was followed by a non-parole period of 18 months. Recommendations Based on the provisions of the law described above, it is advisable to take action. First, ensure you visit the Tax offices to verify all your income and obtain a guideline that is always available on the current tax rates for your specific category. Secondly, ensure that all the assessable income as described above are included in your tax returns, and these should be separated if they represent different fiscal years. The returns should be filed and submitted in time to ensure that the state regards you as compliant. Further, any interests and penalties should be paid for compliance. In addition, it would be a grave mistake to try any means of avoiding tax paying whether through ignorance of the obligation or consulting fraudulent tax agents for assistance. This is taken as a criminal offense by the law and can lead to prosecution and even imprisonment. Works Cited Barrios, Salvador et al. “International Taxation and Multinational Firm Location Decisions.” Journal of Public Economics 96 (2012): 946–958. 2 LAWS5144: introduction to taxation laws. 3, 5 Australian tax office (ATO): https://www.ato.gov.au/Individuals 4Australian Master Tax Guide 2011. Sydney, N.S.W: CCH Australia, 2011. 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