Principles of Taxation Laws - Essay Example

Principles of Taxation Laws Item Amount for June 30, 2008 Amount for June 30, 2009 Salary as a temporary life guard (12 months salary) $12,000 Prize-money from betting on horses 12,000 $60,000 Agist of 2 acres (1 month in June 2008, and 12 months in June 2009) 600 7,200 Salary as a Doctor (10 months) 50,000 Cost to purchase 2 more horses -23,000 Stable fees and training -8,000 Veterinarian’s fees -6,000 Food and other expenses -15,000 Jockey’s fees -9,000 Large drug company donation 10,000 Bank interest on the business loan (for 4 months) -833 Assessable Income $24,000 $65,367 Health insurance premiums (for 12 months) gross of 30 per cent $3,240 x 30 per cent -972 Total Taxable Income $24,000 $64,395 Total Income Taxes Payable $3,060 $14,284.43 Item Amount for June 30, 2008 Amount for June 30, 2009 Interest from Alex (for 4 months) 917 Interest on time deposit (net of 20 per cent withholding) €4,800 €4,800 9% superannuation contribution 4,500 Cost to purchase Betzy -12,000 Cost of re-qualifying exam -500 Before I go on the specific explanations on the amounts included and excluded in the calculation of Catherine’s total taxable income and income tax payable, may I state first that Catherine is not an Australian citizen but rather a French citizen. However, for taxation purposes, Australia’s taxation laws ignore citizenship unlike that of the United States. Hence, Catherine’s incomes derived or sourced in Australia are taxed according to Australia’s taxation laws. Moreover, Catherine’s status whether as a resident must be established to determine whether her income sourced outside Australia should be included in her assessable income. According to the statutory test of the 183 day rule, Catherine for taxation purposes is a foreign resident of Australia for the years ended June 30 2008 and 2009. This means that her income from outside Australia is not taxable under Australian taxation law. It must be emphasized that only Australian residents are taxed of their income from foreign sources. Simply, the following facts were used to decide on whether Catherine was a resident: For the duration of her stay, she was residing in Australia. Her intent was obvious – she sold her apartment in France prior to coming to Australia. Immediately upon her arrival, she got a job (Australian Taxation Office). Several months after arrival she married Alex, an Australian citizen and resident. As regards the tax rate to be used in computing for Catherine’s income tax payable for the year ended June 30, 2008, the following rates apply: Taxable income Tax on this income $1 – $6,000 Nil $6,001 – $30,000 15c for each $1 over $6,000 $30,001 – $75,000 $3,600 plus 30c for each $1 over $30,000 $75,001 – $150,000 $17,100 plus 40c for each $1 over $75,000 $150,001 and over $47,100 plus 45c for each $1 over $150,000 As regards the tax rate to be used in computing for Catherine’s income tax payable for the year ended June 30, 2009, the following rates apply: Taxable income Tax on this income $0 – $6,000 Nil $6,001 – $34,000 15c for each $1 over $6,000 $34,001 – $80,000 $4,200 plus 30c for each $1 over $34,000 $80,001 – $180,000 $18,000 plus 40c for each $1 over $80,000 $180,001 and over $58,000 plus 45c for each $1 over $180,000 Explanations Included Items for 2008 It must be noted that the 1.5 per cent Medicare levy for Australians was included in computing for Catherine’s tax liabilities for June 30, 2008. This is so because as so far as the exemption categories for Medicare levy, Catherine is not exempted. The following are the exemption categories: 1. “You were a blind pensioner or you received the sickness allowance from Centrelink. 2. “You were entitled to full free medical treatment for all conditions under defence force arrangements or Veterans’ Affairs Repatriation Health Card (Gold Card) or repatriation arrangements. 3. “You were not an Australian resident for tax purposes. 4. “You were a resident of Norfolk Island. 5. “You were a member of a diplomatic mission or consular post in Australia – or a member of such a person’s family and you were living with them – and you were not an Australian citizen and you do not ordinarily live in Australia. 6. “You have a certificate from the Medicare Levy Exemption Certification Unit of Medicare Australia showing that you are not entitled to Medicare benefits because you were a temporary resident for Medicare purposes.. A letter from Medicare is not sufficient” (Australian Taxation Office). Income from Personal Activities or Services Salary as a temporary lifeguard. Catherine’s income as a lifeguard from July 2007 to June 2008 (12 months) totaling $12,000 is an example of an ordinary income, hence it is included as part of her June 30, 2008 year end’s taxable income. Ordinary income is, one of the two types of a taxpayer’s assessable income, “included in assessable income when it is “derived” by a taxpayer” (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 730). This means that ordinary income becomes assessable income the moment it was earned rather than at the moment the payment for that income was received. Prize money from betting horses of $12,000. For the taxable year ended June 30, 2008, this amount is considered income from personal services of Catherine as part of her other income instead of income from business activities. Remember that at this time Catherine was not carrying on ‘horse betting’ in a systematic and organized way. Income from Property The other type of assessable income is statutory income. Its inclusion in the total taxable income of the taxpayer depends on the type of that income. A statutory income can become assessable “when it is “received”” (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 730), “when it “arises”” (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 730), or “when it is “payable to you”” (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 730). An example of this is the rent for the 2 acres of land. Agist for the 2 acres of land at $600 each month. There is not much question on whether this income should be included or not in Catherine’s total taxable income. The reason is that it is paid in cash, cash which is unlike cheque receipts with their conditions is less troublesome when it comes to taxation. Excluded Items for 2008 1. Interest on Catherine’s three year term deposit in France from the proceeds of the sale of her apartment. As a foreign resident, Catherine’s income derived outside Australia are not taxed in Australia (s6.5(3) and s6.10(5) ITAA97). 2. As for the cost to purchase the horse Betzy, it was excluded in the computation of Catherine’s taxable income and income tax payable for 2008. The purchase of Betzy was not undertaken by Catherine to primarily carry on a horse related business. Rather the horse was purchased because Catherine is very passionate about horses. According to ATO Case Decision # CDS10293, an expense is allowed to be deducted from income if the expenses resulting from: “the activities undertaken by the taxpayer have a significant commercial purpose; and “the taxpayer has a purpose of profit as well as a prospect of profit from the activities.” 3. The cost of Catherine’s requalifying exam as a doctor is excluded. For the computation of total assessable and taxable income, and income tax payable, the fee of $500 is not relevant. Moreover, this fee is not yet a work related expense, since Catherine was not working as a doctor yet when she incurred the expense (Australian Taxation Office). Included Items for 2009 It must be noted that the 1.5 per cent Medicare levy for Australians was included in computing for Catherine’s tax liabilities for June 30, 2009. This is so because as so far as the exemption categories for Medicare levy, Catherine is not exempted. Specifically Catherine is a resident of Australia, hence invalidating exemption category no. 3. The following are the exemption categories: 1. “You were a blind pensioner or you received the sickness allowance from Centrelink. 2. “You were entitled to full free medical treatment for all conditions under defence force arrangements or Veterans’ Affairs Repatriation Health Card (Gold Card) or repatriation arrangements. 3. “You were not an Australian resident for tax purposes. 4. “You were a resident of Norfolk Island. 5. “You were a member of a diplomatic mission or consular post in Australia – or a member of such a person’s family and you were living with them – and you were not an Australian citizen and you do not ordinarily live in Australia. 6. “You have a certificate from the Medicare Levy Exemption Certification Unit of Medicare Australia showing that you are not entitled to Medicare benefits because you were a temporary resident for Medicare purposes.. A letter from Medicare is not sufficient” (Australian Taxation Office). Income from Personal Activities or Services Catherine’s salary in the practice of her profession as a doctor for ten months for the year ended June 30, 2009 is included regardless when she received the cash payment for such wages as such income is considered income from trading which then means the taxation law uses the accrual basis of accounting (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 737). Large drug company donation of $10,000. This income is part of Catherine’s ordinary income; hence it is part of assessable income for the year ended June 30, 2009. Although this income is a gift from the large drug company (gifts, as a general rule, are not taxable), that gift is closely connected to Catherine’s profession as a doctor. Remember it was given to “fund her trip to the USA to attend an internationally recognised medical conference and present the results of her recent research into the horse flu virus.” Income from property Agist for the 2 acres of land at $600 each month. There is not much question on whether this income should be included or not in Catherine’s total taxable income. The reason is that it is paid in cash, cash which is unlike cheque receipts with their conditions is less troublesome when it comes to taxation. Bank interest on the business loan (for 4 months) is an example of a statutory expense which is assessable when incurred. Hence, the $833 interest for four months is included and deducted from Catherine’s taxable income. This item is unlike the interest income from the loan to Alex because that interest is to be received at the end of 2009. Although it was not clear on the case when whether Catherine had already paid for the bank charge, the law is clear that this expense is already incurred (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 767), hence assessable. Income from a business Prize money of $60,000 from betting on horses. During this taxable year, Catherine implemented a system – winnings of and expenses for the horses were periodically recorded. From the facts given in the case, it can be concluded that Catherine’s intent in buying two more additional horses is to earn income from regularly racing these horses. Related expenses incurred for the horses are incurred during the 2009 taxable year hence included as deduction from Catherine’s 2009 taxable income. These expenses include the stable fees and training, veterinarian’s fees, food and other expenses, and jockey’s fees. When these fees are paid is immaterial in the decision to include them. As quoted by WOELLNER, BARKOCZY, MURPHY & EVANS, “The principle to be applied in deciding whether a loss or outgoing was ‘incurred’ is clear enough. It is not necessary that there should have been any actual disbursement” (2008, p. 770). In the same vein as the logic behind including the year’s prize winning as income from business, expenses related to the horses are considered deductible from business income. Catherine’s monthly payment for her health insurance premium is included in the computation of the 2009 taxable income and income tax payable as a rebate. According to the Australian Taxation Office’s Web site “The private health insurance rebate is worked out as a percentage of the premium paid to a registered health insurer for a complying private health insurance policy.” For this case, I assumed that Catherine’s health insurance policy, for lack of further information, has complied. In the computation of the rebate, I assumed that the age of the oldest person covered by the policy is 65 years old, hence the allowable amount of rebate is 30 per cent of the amount of premium paid (Australian Taxation Office). Excluded Items for 2009 1. Interest from Alex for the business loan passed on to him so he can buy a race horse. As specified in the case, Catherine’s agreement with Alex, her husband, is that the interest of 11 per cent shall be paid in arrears or at the end of the year. As mentioned by WOELLNER, BARKOCZY, MURPHY & EVANS’s Australian Taxation Law 2008, radical changes in the taxation rules of the country after the 1980s resulted at the inclusion of income as taxable income based on when in can be taxable rather than on when that income was received (WOELLNER, BARKOCZY, MURPHY & EVANS, 2008, p. 729). However, when this arrears will be received, Catherine might become eligible “to pay a reduced rate of tax on that income” (Australian Taxation Office). 2. Interest on Catherine’s three year term deposit in France from the proceeds of the sale of her apartment. As a foreign resident, Catherine’s income derived outside Australia are not taxed in Australia (s6.5(3) and s6.10(5) ITAA97). 3. For allowable deductions for Catherine’s superannuation contribution, I excluded them in the computation of taxable income and income tax payable with the assumption that Catherine is not eligible to claim a deduction based on the fulfillment of all of the conditions below: “[she satisfies] the ‘maximum earnings as an employee’ condition, “[she meets] the age-related conditions, “[she] made personal contributions to a complying super fund or a retirement savings account (RSA), “[she] made the contributions in order to obtain super benefits [herself], or for [her] dependants in the event of [her] death, “[she has] written to [her] super fund or RSA provider, in the approved form Deduction for personal super contributions (NAT 71121), and advised them of the amount [she] intend[s] to claim as a deduction, and “[her] super fund or RSA provider has acknowledged [her] notice of intent and agreed to the amount [she] intend[s] to claim as a deduction (Australian Taxation Office). Moreover, according to ATO Case Decision # CDS10293, an expense is allowed to be deducted from income if the expenses resulting from: “the activities undertaken by the taxpayer have a significant commercial purpose; and “the taxpayer has a purpose of profit as well as a prospect of profit from the activities.” Hence, in this case, as opposed to what happened in the year ended June 30, 2008, the cost to purchase the two additional horses for $23,000 is deductible. Conclusion In determining the assessable income, taxable income, and income tax payable of an individual, the following factors need to be considered: 1. Is the person being taxed a resident or non-resident of Australia? 2. Does the person being taxed derived income from different sources? Personal services? Business? Property? Within Australia? Outside Australia? 3. What are the allowable deductions for the person? 4. What additional items need to be considered? Levy? Rebates? Lastly, Catherine, based on the foregoing, has an income tax liability of $3,060 for the year ended June 30, 2008 while $14,284.43 for the year ended June 30, 2009. Works Cited Australian Taxation Office. (2008). Arrears payments. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/keywordlist.asp?k=arrears%20payments. Australian Taxation Office. (2008). Claiming work related expenses. Retrieved October 30, 2008, fromhttp://www.ato.gov.au/individuals/content.asp?doc=/content/16077.htm&pc=001/002/013/008/001&mnu=979&mfp=001/002&st=&cy=1. Australian Taxation Office. (2008). Examples of residents and non-residents. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/Content/36280.htm. Australian Taxation Office. (2008). How the rebate works. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/Content/14882.htm&page=4#P19_2342. Australian Taxation Office. (2008). Individual income tax. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/Content/12333.htm. Australian Taxation Office. (2008). Medicare levy exemption. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/content/40501.htm. Australian Taxation Office. (2008). Private health insurance rebate. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/Content/14882.htm. Australian Taxation Office. (2008). Superannuation. Retrieved October 30, 2008, from http://www.ato.gov.au/individuals/content.asp?doc=/content/00120268.htm&pc=001/002/064/002/006&mnu=6749&mfp=001&st=&cy=1. s6.5(3) and s6.10(5) ITAA97. Woellner, R., Barkoczy, S., Murphy, S. & Evans, C. (2007). Australian Taxation Law 2008 (18th ed.). Australia: CCH. Read More