Income Tax: Revenue Law - Assignment Example

INCOME TAX: REVENUE LAW STUDENT NAME TUTOR INSTITUTION DATE Question 1 In order to determine the taxable income, there needs to be a determination of what is the taxable income found by subtracting assessable income from deductions as per sections 4-15 of ITAA97. Income is therefore considered as salary, wages and payments based on them being periodical, recurrent and regular. It must be something that can be converted into cash as considered in FCT V Cooke & Sheridan, as well as personal exertion, property and carrying on business. ETP is gives an entitlement to rebate at section 195SU, superannuation contributions and pension are offsets, as well as termination payments at Division 13 of ITAA97. Therefore Jenni is entitled to a rebate on the superannuation contribution. Their salary are considered as income as per section 6-5 of the ITAA97 therefore the $62,000 and $36,000 are all entitled to taxation with no rebate or offset because they are derived from an undertaking. A Capital gains Tax (CGT) is the tax one pays on a capital gain, and this is incurred when the shares are sold. The $38,000 CGT made from the transfer of shares is a taxable component based on the fact that it is incurred after transfer of shares and its appreciation in value. Ordinary income that is in terms of an inheritance is not considered as income under sections 21A and section 15-2 of ITAA97. In this case therefore, they are not entitled to pay any tax on $70,000 on the inheritance and can be considered as a tax offset. On the other hand they can get a dependent rebate under section 159J and 159H of ITAA 1936, this is based on the spouse being dependent on Jenni. The Senior Australian Tax Offset can also be claimed by both Jenni and Bob as well as low income rebate for $1,500. The capital gain will be assessed on the basis of the gain made on the disposal of shares Question 2 Superannuation is a retirement savings scheme that shifts the responsibility for a person’s retirement to the individual. In this case therefore, Bob can be considered to have reached a preservation age, and is therefore entitled to its benefits. In this case for Bob to effectively qualify to contribute to the superannuation funds, then he must be able to satisfy the work test. The test provided under the SIS Legislation 2007 provides that if one has to contribute and is in between the ages of 65-69, then the person must have been gainfully employed on at least a part time basis during the financial year in which the contributions were made. The qualification is that Bob must show that he has worked a minimum of 40 hours a week. This is based on the fact that a superannuation benefit under ITAA97 s 307-5 (1) provides that it is dependent on the age of the taxpayer, whether it is a lump sum or an income stream or whether it comprises a tax free or a taxable component effective 1 July 2012. At section 15-3, states that return to work payments is assessable as well as section 15-15 provides that a profit-making undertaking or plan also falls part of an assessable income. In this case as long as he can prove that he can work under the provided hours under ITAA97 and is in gainful employment in the financial year then one can contribute to the superfunds. Question 3 Bob’s withdrawal of $1Milllion out of the fund to invest in a motel complex in Fiji can be considered as receipt of income from a superannuation income stream and therefore subject to tax. The 15% is for the taxed element and 10% for the untaxed element of the superannuation fund. However this income cannot be considered as assessable as it is used as capital. According to ITAA 97, a superannuation fund is given on the premise that it must meet the sole purposes of providing super benefits to its members, it must not be any personal benefit to members, cannot carry on business and it cannot mortgage assets or borrow money. Mary is not supposed to use any of a superannuation entitlement on a business as well as use it in the lease agreement. If its sole purpose was to set up a business aimed at profit making then any income obtained from it would be considered as assessable. It is provided for under ITAA97 section 106-5 that any Capital Gain or loss from a CGT event that happens that relates to a partnership or any one of the CGT asset is made on both on reference to the partnership agreement or by the law. The withdrawal of the money from the Superfund is considered as capital in nature based on the fact that it would be used to gain income as well as determine a person’s assessable income. This undertaking is to carry on a business with the intention of a profit, however there needs to be a link between the business and the superannuation fund that is whether it is intended to improve the superfund. This can be made directly to the superfund and is subject to no tax based on the fact that Bob has reached the preservation age according to ITAA97. Question 4 At the age of 59 this is considered as a preservation age for any person who in contributing to their Super funds. Generally, persons who have already reached the preservation age are entitled to a reduction of over $ 165,000 and her tax would be at a marginal rate and with no offset available to them. In this instance, Jenni is considered to be paying and making contributions to a complying super fund and also the fact that she has a low income earner spouse. The ITAA97 provides that a person is liable for a tax offset of $540 per year if the contributions is less than $13,8000, were not deductible , the contributions are being paid to a complying superfund for the income year. Moreover persons need to be citizens in order to qualify for the tax offset as well as persons are living on a permanent basis. Question 5 How will the money paid for unused long service leave and annual leave be treated for income tax purposes? Bob receives $56,000 for an accumulated payment for his long service leave and annual leave. The annual leave, received in lieu of retirement or termination is provided for at section 26AC of ITAA97 and long service leave, received in lieu of retirement at section 26AD of ITAA97. Section 26-10 of ITAA97 dealing with leave payments provides that one cannot deduct under this Act a loss or outgoing for long service leave, annual leave, sick leave or other leave except: (a) An amount paid in the income year to the individual to whom the leave relates (or, if that individual has died, to that individual’s dependant or *legal personal representative); or (b) An accrued leave transfer payment that is made in the income year. In this case the leave payouts have been paid as lump sum payment. Further Section 15-2 provides that assessable income includes the value to anyone all allowances, gratuities, compensation, benefits, bonuses as long as it is provided in money or in other form. However section 15-(2) (3) provides that an unused annual leave payment or an unused long service leave payment is not subject to taxation. A deduction for leave at section 26-10 can only be claimed in the year which is paid ITAA97 at Subdivision 83-B that considers taxation for unused long service leave payments and provides that the amount of unused long service leave that accrued from 1993 is included as assessable income and taxed at marginal rates, therefore the unused long service leave payment is to be taxed as an assessable income at a marginal income. The annual leave payout is assessable income, is to be made at no more than 30% at section 83-15 of the ITAA 97, and the unused payment is not subject to tax. Question 6 One way in which their tax can be made more effective is if they would provide for themselves a private health insurance and medical expenses to be liable for tax offsets and rebates. Deductions provided for under section 8-1(2) that provides for a person to deduct any loss or outgoing to the extent that it is incurred in gaining or in producing assessable income or when it is incurred in carrying on a business for the purpose of gaining or producing income. In this case Bob can claim that the $1M withdrawn from the superannuation fund is a loss or outgoing for him to get the assessable income. This qualifies both under it being incidental and relevant as well as essential and character of the expenditure. This is also based on the fact that the expense is relevant to the reduction of future expense. The setting up of a trust fund by Jinni can also be considered as provided for in FCT v Bargwanna & Another (2012) ATC 20, where the purpose would be mainly to provide a benefit to the family or beneficiaries. As long as it means the purpose of section 62 of SISA, it only attracts the rate of 15% . List of References Deutsch, R., Friezer, M., Fullerton, I., Hanley, P., & Snape, T. (2012). The Australian Tax Handbook 2012 Book. Sydney: Thomson Reuters. Gilders, A., Taylor, B., Walpole , S., Burton, S., & Ciro, M. (2012). Understanding Taxation Law 2012. Sydney: LexisNexis. Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 (ITAA97) Woellner, R. B., Barkoczy, S. & Krever, R., 1999. Australian Taxation Law. 9th ed. Sydney: CCH Ltd. Read More