Tax Law, the Adjusted Gross Income - Assignment Example

Name Student Id Lecturer’s Name Date Question 1 Taxation refers to an assessment by the government of property value, estates and transactions of a deceased person, licenses granting income or a right, as well as import duties from all foreign countries1. Taxation covers and includes all what a government imposes upon an individual, and this is aimed at serving or for service of the state. Taxes are divided into two classes: indirect taxes and direct taxes. Laws and policies that direct the process of tax, together with rules, are covered by the tax law2. The Adjusted Gross Income (AGI) of a person income is therefore calculated by deducting the adjustments from the person’s total income3. A person’s AGI is mainly the starting point in obtaining taxable income. Taxable income is obtained by deducting certain deductions from the persons AGI4. The taxable income is therefore the amount that is used to determine how much a person owes the federal or state in taxes. Usually the biggest deductions taken are the standard deduction, personal exemptions, or itemized deductions5. After figuring out the person tax, one may therefore be entitled to certain credits that bring down tax liability such as education credits6. It is therefore possible to go through the calculations more than one occasion in order to conclude on what would be the lowest domestic tax liability. Income tax is the tax that is levied by the government on all income received by individual taxpayers of Australia. Income tax is levied on three sources of income for individual taxpayers this include personal earnings which comprises of salary and wages, business income and capital gains. Income tax contributes the largest share of government income7. Individual Income tax is exercised in a progressive manner by ensuring those who have a lot of income pay a bigger portion of their income while those of companies is levied on a flat rate. Therefore, it is important for individuals to be aware of the tax implications when they carry out a transaction. Suzette should be aware of the income tax implications she will have to meet as a result of the transactions she has carried out. The sale of land attracts income tax; therefore, Suzette will have to pay even if the land was vacant. She purchased the land with an aim of selling at a profit and therefore, this is considered as trading stock and the gains are termed as ordinary income and Suzette will have to pay Goods and Sale tax (GST)8. Suzette will be earning income inform of rent and therefore, she will be liable to paying tax on this income. The tax involved from this taxation is Goods and Sale tax. She has developed the houses with an aim of earning income. She will be liable for paying tax when she sell the houses this kind of tax will be GST she will need to make claims for any costs involved. Suzette renovated the houses with the aim of selling them and she later sold four of the eight houses which will make her liable to pay GST on the amount earned from the sale of the houses. Question 2 Income can be received in form of property, services or money. It is not all income that is taxed; therefore, there is taxable and non – taxable income. In most cases, any amount included in a person’s income is taxed, unless the law states otherwise and specifically exempts it. Taxed income is reported on a person’s returns, and is subjected to taxation. Non- taxable income is not shown on a person’s returns, or may be shown, but it is not taxed9. Taxation is normally done on an income that is available to a person irrespective of whether it is in a person’s possession. For example, a valid check made available to a person, or received before a tax year ends, is seen as income received constructively in that year, irrespective of whether the person will cash or deposit it during the following tax year10. Income received by an agent on behalf of a client is considered constructively as income received on the year the agent received it11. Prepaid income like compensating for future services is normally include in a person’s income in the yea a person received it. However, in case an accrual method of accounting is used by a person, there is a possibility of deferring the prepaid income that a person receives for services yet to be performed, before the following tax year ends. In such a case, a person includes the income in his or her income as it is earned by performing services12. Other types of income include; employee compensation. Child care providers, baby-sitting, fridge benefits, business and investment income, rents from property that is personal property, partnership income, partner’s distributive shares, personal returns, corporation income, corporation returns, royalties, as well as bartering. The amount of income a person earns determines how much one owes the federal and state revenue taxes. Tax return preparation helps one to comprehend how tax law evaluates a person’s income. First and foremost one is supposed to determine their filing status. If a person is married the best alternative is always to file jointly. If a person files their taxes jointly with their spouse, one is obliged to sum up all of their taxes jointly13. Even if one is married, though, one can decide to file their taxes separately. When a person files their taxes separately, it therefore means that each one sums up their income and one pay their taxes separately. One has to divide up their deductions, and understand that in order for both of them to calculate amount of their separate deductions they can’t use same amount of expenses. In some states they have property laws that necessitate married couples who separately files returns to pool all their income and expenses and later split both the revenues and expenditures equally when it comes to returns. The states that practice such property laws are referred to as the community property states14. Capital gain is the difference between what one incurred in acquiring property and the return one gets after disposing it15. This difference is the one which is taxed and not the whole amount. Therefore, capital gains are the profits that an individual realises when he or she sells a property. Capital gain tax is the amount levied on this profit16. Thang capital gain tax will only involve the property and shares he has sold but not the ones he will continue holding. Capital gains tax requires to be filed when a sale of capital has been transacted and profit realised. Therefore, in this case Thang will have to pay capital gain tax on the profit realised after selling the house. Thang realised a gain of $490,000 after selling the house this is the amount which will be subjected to taxation. This derived from deducting the cost of buying the house and the cost of the stamp duty. These are the only costs which were involved while Thang held the property. The law requires that capital gain tax be paid on profits realised after the sale of property. This value is derived by looking at the current market value of the property. To determine the amount of CGT that Thang should pay there is need to establish whether the shares sold can be treated as trading stock. In the case, IMFC v. FCT (1971) 2 ATR 361; 71 ATC 4140, the issue was to determine whether a taxpayer who carries business of trading in exchange traded options and acquires shares with an intention of disposing them as part of activity of trading stock. This case will help in establish whether Thang is liable for paying CGT on the shares he sold. The could held that a person who carries business activities in trading stock and acquires shares that are later sold at a profit is liable to paying capital gain tax. The shares should be for listed company but can ne of a company where possessing shares means ownership of the company17. The reason behind the court’s decision was that according to section 70-10 of ITAA 1997 defines trading stock as anything that is produced or acquired as a way of ensuring that is ordinary course of business. The shares acquired in a company that produces goods which will sold at a profit can be considered to be contributing to trading stock. The activities can be carried out by the owner himself or through authorized agents. In this case Thang will have to prove that buying of shares in a company was not entirely for the sake of making profits but as part of his retirement plans because he is 53 years old and nearing the retirement age. In using this case Thang will have to pay CGT if it established that his purchasing of the company shares was for profit purposes. The shares will be treated like any other form of capital. Question 3 The 2014-2015 budget have made proposals to have Family Tax Benefit (FTB) Program amended through some changes. The budget has proposed a better targeting of Family Tax Benefit 2 (FTB-2) through lowering the income cut-off point for sole-parents and primary earners in a couple to $ 100,000. Prior to the changes this cut-off was $ 150,000. This means that parents earning $100,000 will not be eligible for FTB-B and this will take effect from July 1 2015. The budget has also proposed introduction of a new FTB allowance directed towards single parents who have children a child between the age of six to the age of twelve years on a maximum of FTB-A of around $750 per child as a way of partially making up for the loss of the parents access to FTB-B. Prior to this proposal single parents had access to FTB-B and there was no FTB allowance directed towards them. The FTB-B was catering for children of up to twelve years; the budget proposes to change this so as to limit FTB-B to families with children below the age of six years it until 30 June 2017. , the families which are currently receiving this benefit will continue to receive. The budget has also proposed changes to limit FTB-A Large Family Supplement to families with four or more children. This currently caters for families with three or more children. These will the country to save on its revenue. There are also proposals to maintain FTB payments rates for two years. Currently the rates are indexed. The proposals also include removal of FTB-A per child add-on so as to ensure that the second step in the FTB-A income taper will start at $94,316 for all families regardless of the number of children in the family. The budget further proposes reduction of the FTB end of year supplements to the original levels that were in place in 2004. The values were $600 for an FTB-A child and $300 for an FTB-B family, the proposal wants to change them from $726.35 for FTB-A child and $354.05 for FTB-B family. The government will continue to provide the benefits to support families to have better lives all the above proposals will take place form 1st July 2015. There is also a proposal to introduce a genuine Paid Parental Leave (PPL) which will include superannuation as a way of recognising the role women play in the workforce. This will be up to 26 weeks of paid leave. This will commence from July 1 2015. This proposal is aimed at encouraging more people to take part in workforce. The changes in Family Payment system and Education Entry Payment are aimed at ensuring the government has saved its revenue on providing these services. The revenue saved on these services will be directed towards the people who need more instead of all the people in the society. Question 3, II Implementation of the changes will be highly effective in the Australian people and the government because it will help in achieving the principles of taxation. The implementation of the changes will increase fairness to the Australian tax system. Fairness is realised when the government supports people with less income get more benefits that those who earn high income. The changes will see families with low income benefit from the government support and getting increased allowances18. The changes are aiming at have more needy families benefit from the government revenue. The changes are aimed at taking the benefits from the people who do not need it and transferring it to the people who need it most. The government has reduced the threshold for getting the benefits from $150,000 to $100,000. The budget considers people earning above $100,000 to be financially stable and will be able to meet their family needs. This change is aimed at raising more revenue to cater for more people who earn below $100,000. A fair and just tax system aims at giving the best to its citizens as a result of the revenue it has collected from them. The changes also ensure that the less privileged people in the society are not neglected or discriminated while accessing government services and benefits. Therefore, by introducing a single parents allowance the government will be helping single parents to cater for their services with ease. Fairness is also realised when the government aims at ensuring that there is proper distribution of the resources. The changes will also help in protecting government revenue in that it will help in reducing government spending through reduced support. The changes will help in sealing all the loopholes that the government revenue goes to waste. The changes are looking forward to reducing the number of people who benefit from Family Payment system and Education Entry Payment and this will save the government revenue. It will also widen the government tax base because people who used to benefit from the FTB system will cease to benefit. This will make them liable to paying taxes. Government revenue should be used to providing services to its citizens and therefore, improving the lives of its people is one of the primary goals of a tax system. There will be increased revenue for the government to cater for more of its needy citizens. Changes are geared towards ensuring that government revenue is not misused by directing to things which will not benefit majority of the citizens. The changes will ensure that people who can provide for their families do not compete with the needy services for the government to provide them with benefits. It is also possible that the more people benefit from government services will trust the government and pay more taxes. This will increase government revenue and the increase will mean improved government services. Current FTB has widened government spending which means it cannot provide other services to the people. Therefore, the changes highly protect the government revenue. The implemention of the changes supports principle of equality in that it ensures that people benefit from the government services. The people should get government benefits in relation to their incomes19. People with low income should benefit more from the government in terms of support to educate their children. The changes works to ensure that people who do not need government support do not get it. People should contribute to government revenue so that the government can provide them with services. Therefore, people should pay tax with according to their earning. This means that those who earn high incomes benefit less from government services but they have to pay high taxes according to their incomes. The changes will ensure that people get best services from the government because it is their right20. The citizens should also understand the tax systems and respect the tax law and pay the required taxes to the government to enable the government provide the necessary services with the revenue earned from taxes. The government should also strengthen its tax system to ensure there are no individuals avoiding paying tax and yet they do not qualify to be exempted from paying taxes21. The principles of exemption and deduction should also be applied where necessary so as to ensure that no one is taxed unfairly. There should be also strong values that should guard against misuse of these principles to an extent that people avoid paying taxes22. The implementation of the changes will ensure that there is efficiency in the Australian tax system. Efficiency will mean that there is a better way of collecting taxes and a better way of putting them into use. The changes will work to streamline how the support is given to the citizens. There have been a lot of people who earn high incomes but they have been benefiting from the government support yet they do not need it. The changes will contribute positively towards tax payers’ responsibility because they will be aware of the needy people who require the government support in educating their children and providing for their families23. An efficient tax system ensures that citizens get the best services from the government. In a way these changes are related to responsible approach because they advocate for rationality acceptable to all, respect for all people as well as the universal notion. They also try to reach the distributive justice principle acceptable to all rational people. This emphasizes equal distribution of resources except in cases where unequal distribution is beneficial to everyone. There should be justice in everything that the government engages in so as to achieve its revenue goals. The changes in the FTB mean that the government will be responsible for catering for more people by way of reducing the beneficially. The government will provide more support to the needy by taking support from the rich and transferring it to the poor. Changes in FTB will see efficiency restored in the Australian tax system24. Bibliography Books Coleman et al. Principles of taxation law 2014, Thomson Reuters, Pyrmont NSW. Deutsch, RL, Fundamental tax legislation 2014, Thomson Reuters, Pyrmont, NSW. Lehman, Coleman, Taxation Law In Australia. (Thomson Reuters, 2001). Parsons, Richard, Income Taxation in Australia: Principles of Income, Deductility and Tax Counting. (Thomson Reuters, 2011). Statutes Income Tax Assessment Act (ITAA) Cases IMFC v. FCT (1971) 2 ATR 361; 71 ATC 4140 Read More