Taxable Income in Australia - Essay Example

Student’s Name: Instructor’s Name: Course Title: Submission Date: Taxable income Introduction Tax is a great means of income for the government in any country. Governments have expenditures, which need to be catered for and these expenses cannot be financed by debts. In fact, soliciting for funds through debts to cover for the government’s expenses is the last option any situation. Through taxation, governments earn a considerable amount of income that helps in funding and implementing the planned projects. In fact, Australian government depends highly on income tax to realize its income. Even though there are different types of taxes, one of them is income tax. This is the amount of tax that is realized from income earned by citizens in a country. Tax payment is not easily avoidable in Australia. Anyone found guilty of evading tax is answerable to commissioner of taxation, the head of taxation office in Australia. This is provided in ITAA 36 and 97. “The section, if construed literally, would extend to every transaction whether voluntary or for value which had the effect of reducing the income of any taxpayer”. This implies that one should not evade tax (Potas 27). Taxable income is the amount of income after expenses as well as other deductions that the tax system in a country bases its taxation methods. Taxable income is computed differently in different states depending on the taxation systems in place. In some countries, some incomes are exempted of tax while some expenses are not deducted from the income of a person in computing the taxable income. While tax may be computed from taxable income of a person or corporation of the current period in some systems, in others, taxation is based on income of the previous periods (Barcoczy 275). Different taxations rates are applied for different types and levels of income. In Australia, there are three income sources for individual taxpayers namely capital gains, business income and personal earnings. Individual taxation is done on progressive method while that of companies is done flatly at 30%. The financial year in Australia starts on 1st July and ends on 30th June. Taxable income Taxable income as stated earlier is the amount of income from which the tax system of a country is based. It is calculated by adding all the earnings of an individual less the expenses incurred in the financial year of reference. For James, his total earnings would include the capital gain realized after selling the house and his personal income. Since James has been operating a rental house business, he has business income that should be taxed (Fisher et al 198). On the other hand, James incurs expenses and these would be seen as deductions in computing his taxable income. For instance, James incurs expenses in purchasing the rental properties as well as costs repairing and maintaining the rentals. All these expenses would be deducted from the total earnings to get the total taxable income The capital gain is as follows; The revenues from the property include all revenues realized from the ownership of the property as well as the sale of the property. These are computed as follows; Sale of the rental house proceedings in 2012 305,000 Sale of scrap metal proceedings in 2011 150 Total earnings from the sale of property $305,150 All the expenses incurred in selling or buying the house would be included irrespective of the period in time they are incurred because they relate to the rental property sold. As noted by ,Barcoczy “For depreciating assets that you started to hold on or after 10 May 2006 the formula for the decline in value is: base value x days held/365 x 200%/asset’s effective life” (24). The total depreciation figure from the assets given would be calculated with the base value of the opening adjustable value as follows: Curtains and drapes = 970x366/366x200/6= 323 Air conditioners = 1450x366/366x200/10= 290 Floor coverings = 4588x366/366x200/10= 918 Gas hot water system = 700x366/366x200/12= 117 Stove = 900x366/366x200/12 = 150 Total depreciation expense = $1,798 Expenses in dollars = purchase price of the house in 1995 = 85,000 Purchase costs in 1995 5,000 Cost of constructing a pergola in 1998 15,000 Roof replacement cost in 2001 8,000 Agents commissions on house sale in 2012 6,000 Legal cost on house sale in 2012 600 Management commission 2012 640 Interest on loan in 2012 4,000 Repairs to the fence in 2011 1,500 Repainting stairs in 2011 1,200 Replacement of gas hot water system in 2011 4,500 Installation of a new sir conditioner in 2011 900 Stove, hot water system, floor coverings, air conditioners, curtains and drapes 16,800 Depreciation expense 1,798 Total expenses from the rental house = $150,938 Taxable capital gain is the difference between the total earnings and total expenses incurred from as a result of ownership of the property. This is computed as follows: Total earnings from the sale of property 305,150 Less Total expenses from the rental house 150,938 Taxable Capital gain $154,212 Since rental revenues are regarded as business income, they are taxed on yearly basis. This is to mean that a business income of 6,400 is taxed in every financial year in the country. This implies that in 2011/2012 financial year, the taxable business income is $6,400. The third category of an individual’s taxable income is one’s earnings from salaries and wages. In this case, although without kept records, James has an expense to be deducted from his salary. He incurs a cost of buying Truckie’s Dream Magazines weekly related to his job. He has to have these magazines in order to look “at road testing results of new truck models and trucking routes around the country”, which is very beneficial in his job. Although this cost has no records, it can be proved and therefore becomes an expense that needs to be deducted from his personal salary. The taxable salary of James would be computed as the difference between his annual earnings and his annual expenses of purchasing the magazine. This is as follows: 2011/2012 personal income 95,000 Less 2011/2012 magazine expense =(4.95 per wkx52wks) = 257 Total taxable personal income = $94,743 James total taxable income is computed from the summation of his total taxable personal income, total taxable capital gain and total taxable business income. This is as shown below; Total taxable personal income $94,743 Taxable Capital gain $154,212 Taxable business income $6,400 Total taxable income $255,355 James’s tax payable for the 2011/12 income year Tax payable is the amount of tax that an individual should pay the tax collecting agency of a country in any given financial year. It is computed using the different income levels and different taxes in a country. For the case of Australia, there are a number of tax incomes that are payable by an individual. These include personal tax, Medicare Levy, Flood Levy, among others (CCH editors 32). The tax payable for James is computed as follows: Medicare levy; James taxable income lies in the 5th category in the taxation chart and therefore the tax payable is calculated as 54,550+45% of excess of over 180,000 = 54,550+{45%x(255,355-180,000)}= $88,459.75 Flood Levy; James taxable income lies in the 3rd category in which the tax payable is 250+ 1 cent for each $1 over $100,000 = 250+{0.1x(255,355-100,000)}= $15,785.5 Medicare Levy Threshold; James is in the 3rd category in which being a single man, he will pay a threshold of 1.5% of his taxable income. This equals= 1.5%x255,355= $3,830.28 This brings the total taxable figure to ($88,459.75+$15,785.5+$3,830.28) = $108,075.53, however, James is entitled to tax offsets that reduce the amount of tax he actually pays. These are legalized by the government of Australia and include the following: Super contributions in 2011/2011 according to concessional contribution and James age of 35 years, he is entitled to contribute $25,000. James’ tax payable would be reduced by the figure of the super concessional fund he should pay. Therefore, James’ tax payable is as follows; Total tax payable for James is as follows; Medicare Levy $88,459.75 Flood Levy $15,785.5 Medicare Levy Threshold $3,830.28 Total tax payable to pay $108,075.53 Less tax offset $25,000 Total tax payable $83,075.53 Works Cited Barcoczy, Stephen. Foundations of taxation law, Ed. 4. Sydney: CCH Australia Limited, 2012. Print. CCH editors. Australian Master Tax Guide. Sydney: CCH Australia Limited, 2012. Print. Fisher, R, Hodgson, H and Mortimer, C. Tax questions and answers 2012. Sydney: Thomson Potas, Ivan. “Thinking about Tax Avoidance, by Ivan Potas, Australian Institute of Criminology.” Trends and Issues in Crime and Criminal Justice, 43, 1993. Print. Read More