Taxation Law Practice - Essay Example

TAXATION LAW PRACTICE Introduction In order to properly determine the taxable income of Mr. George Bore, it is necessary to establish the allowable deductions and taxation laws applicable for Mr. Bore. Discussion Taxation law means a law of the commonwealth or of a territory imposing a tax or otherwise dealing with Australian tax. Tax includes income, excise and other taxation devices. Income tax may either be corporate or personal. Commercial law, trade, intellectual property, and others deal with the transactions giving rise to tax. Business organizations focus upon the entities themselves (ATO, 2007). PERSONAL INCOME TAX Only the federal government imposes income taxes on individuals, and this is the most important source of revenue for this level of government. The state governments do not impose any income taxes, and have not done so since World War II. In Australia, income taxes are increasingly imposed with higher income earners paying a higher percentage than lower income earners (ATO, 2007) Where income is earned in the form of capital gains on prescribed assets, only half of the gain is measurable for Capital Gains Tax (CGT) purposes if it was held for at least 12 months. If the assets were held for less than 12 months, then it is fully measurable for CGT purposes. A person's principal place of residence however is exempt from CGT. Where income is earned in the form of capital gains on prescribed assets, only half of the gain is assessable for Capital Gains Tax (CGT) purposes if it was held for at least 12 months. If the assets were held for less than 12 months, then it is fully assessable for CGT purposes. A person's principal place of residence however is exempt from CGT. The sliding scale rates for the 2007-08 Tax year are: 0% From 0 to 6,000 15% From 6,001 to 30,000 30% From 30,001 to 75,000 40% From 75,001 to 150,000 45% Above 150,000 Medicare (National Health Insurance) is charged at a flat 1.5% rate. If you earn more than 50,000 and do not have private health insurance you are liable for an extra 1% of your taxable income. This extra charge is known as the Medicare Levy Surcharge. Individuals are also taxable in their own name, for their share of any partnership or trust profits for the financial year (ATO, 2007). CORPORATE TAXES Companies and corporations pay tax on profits. Not just like personal income taxes which use a progressive range, corporate taxes in Australia are calculated at a flat 30% rate. Tax is paid on corporate income at the corporate range before it is distributed to individual shareholders as dividends. A tax credit called a franking credit is provided to individuals who receive dividends to reflect the tax already paid at the corporate level a process known as dividend imputation (ATO, 2007). GOODS AND SERVICES TAXES The Federal Government levies a multi-stage tax of 10% on the supply of most and services by entities registered for Goods and Services Tax (GST). There are lots of supplies which are GST-free just like many basic foodstuffs, medical and educational services, exports; input-taxed like residential accommodation, financial services; exempt similar to Government charges; or outside the scope of GST. The profit from this tax is disseminated to the States. State governments do not charge any sales taxes though they do impose stamp duties on a series of transactions (ATO, 2007). PROPERTY TAXES Local governments are typically funded largely by property taxes on residential, industrial and commercial properties. Aside from that, some state governments charge tax on land values for investors and primary residences of high value. The state governments also charge taxes on the transfer of property title and the registration of commercial leases. Fire Service Charges are also frequently applied to domestic house insurance and business insurance contracts. These charges are required under State Government law to assist in funding the fire services in each State (ATO, 2007). EXCISE TAXES Both the federal and state governments require excise taxes on inelastic goods such as cigarettes, petrol, and alcohol. PAYROLL TAXES State governments require payroll taxes at diverse rates. INHERITANCE TAX In Australia, there is completely no inheritance tax although inherited assets may have Capital Gains Tax implications for beneficiaries. SUPERANNUATION TAXES Private pensions known as superannuation in Australia may be taxed at up to three points, depending on the circumstances. At the point of contribution to a fund, on speculation income and at the time benefits are received. In some conditions, no tax is applicable at all. The compulsory nature of Australian Superannuation means that it is sometimes regarded as being similar to social security taxes charged in other nations. This is more frequently the case when comparisons are being made between the tax burdens of respective nations. ADMINISTRATION TAXES Taxation in Australia is administered at the federal level by the Australian Taxation Office (ATO). Federal GST revenue is theoretically given to the states under a distribution formula known by the Commonwealth Grants Commission (ATO, 2007). Tax law involves the taxation of income and property acquired through personal and professional efforts. Aside from income tax, there is also sales tax, gift tax, inheritance tax, capital gains tax, property tax, and a myriad of other areas of tax. Double taxation is a situation in which two or more taxes may need to be paid for the same asset, financial transaction and/or income and arises due to overlap between different countries' tax laws and jurisdictions. The accountability is often mitigated by "tax treaties" between countries. It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make two-sided double taxation agreements with each other. In some circumstances, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself to be non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may examine any anomalies that might indicate tax avoidance. Training in taxation is especially important if one anticipates a career as a tax lawyer or a career in business or estate planning. But, students should be aware of the significance of taxation to a career as a general practitioner or family law specialist. Students interested in specializing in tax should consider the awareness in Taxation. Those who are looking in the direction of a career in business/commercial law should consider the concentration in Business Transactions. Those interested in estate planning need all of the core tax courses. General and family practitioners may receive adequate training with the basic 3 hour Taxation course, but need to remain sensitive to the tax issues involved in divorce, marriage, damage awards and settlements, and business adjustments. (Saint Louis University, 2007). European Union savings taxation From the European Union, member states have accomplished a many-sided agreement on information exchange.[1] This means that each will report to their counterparts in each other jurisdiction a list of those savers who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These savers should have declared that foreign income in their own country of residence, so any difference suggests tax evasion. For a transition period, some states have a separate arrangement.[2] The European Union stated "they may offer each non-resident account holder the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source as is the case for residents." ASSESSABLE INCOME Under the income test, assessable income is income which is used to work out what rate of payment you receive. It has been proposed to amend the Inland Revenue Act to give necessary effect for the removing of computing assessable income. This would mean that the present Section 29 of the Act, which provides for the deduction of annuity, ground rent, royalty, interest and losses from statutory income in arriving at the taxable income, would be amended so that such deductions would therefore be deductible from legal income in arriving at the taxable income. Qualifying payment will be allowed also as a deduction from statutory income. Although, not announced it is assumed that the proposed amendment would be made effective from April 1, 2007. Taxable income is the portion of income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. In general, taxable income refers to an individual or corporation's gross income, adjusted for various deductions allowable by statute. The main questions put by most individuals in any jurisdiction are "what makes up my taxable income" and what tax rates should be applied such that I can work out my tax liability to the state. For example, suppose within a year, one person earned $100,000 from work, made $50,000 profit from selling stock, and won the lottery for $1,000,000. This person has, prima facie, an income of $1,150,000. On the other hand, some of this income may be taxed at a lower rate or maybe not taxable at all. In most western countries, 100% of regular salary above a certain threshold is taxable and a portion of Capital Gain just like for example profit from selling stock or real estate is taxable. INCOME AND TAX OF MR. GEORGE BORE IN THE YEAR 2006/2007 Employment Salary (Conference fee) $10,000 Voluntary gift (lump sum) $15,000 Rent Received $13,000 Income in U.S. $37,000 Withholding Tax $1,800 Net Income in U.S. $35,200 ASSESSABLE INCOME $38,000 ALLOWABLE DEDUCTION $1,880 Medical Expenses Mother $760 George $600 Chelsea $520 TAXABLE INCOME $36,120 Total tax to be paid by George -30% $10,836 The table above shows the income of Mr. George Bore and the tax withheld. This income includes employment, business, and personal which are recognized as assessable income with or without withholding tax. To compute the total amount of taxable income, it is necessary to determined first the assessable income with withholding tax and compute the allowable deduction. As gleaned from the table above, it shows that the income of Mr. George Bore for his employment which is divided by conference fee and lump sum fee is $10,000 and $15,000 respectively. Aside from that, he earned also $13,000 for the rent. He received a salary of $37,000 with withholding tax of $1,800 in Australia before living the country. Mr. Bore received a salary of $10,000 for being a speaker during the conference in Gold Coast but he signed the contract in Switzerland. Another salary of him is $15,000 as payment for lump sum. Aside from that, he purchased a business for the agreed price of $310,000. From that $310,000, he purchased goods like equipment, vehicle, furniture, floor coverings, etc. From the salaries of Mr. Bore, the assessable income is $38,000. However, it has allowable deduction of $1,880 for him to have a taxable income of $36,120. Therefore the total tax amount to be paid by Mr. Bore to Australia is $10,836. The salary of Mr. Bore from the U. S. is non-taxable through the Commission on Taxation in Australia. The Australian Taxation Office States that " all incomes outside the country should regard as non-taxable income". CONSTITUTIONAL PROVISIONS WITH REGARDS TO AUSTRALIAN TAXATION OFFICE Section 51(ii) of the Australian Constitution Australia is a federation and legislative power is distributed between the Commonwealth and the States. This section states areas of Commonwealth power. These powers are contemporaneous, and states can legislate. Section 51(ii) allows the Commonwealth to enact laws implementing. Taxation, but so as not to discriminate between States or parts of states. However, section 99 holds Commonwealth laws succeed in circumstances of irregularity (Australian Constitution, 2007). The broad power in section 51(ii) to impose 'taxation' must be read subject to the start of section 51 which grants the powers 'subject to this constitution'. This section must be considered in combination with section 90. Section 90 of the Australian Constitution This section gives the Commonwealth the exclusive power to impose 'duties of customs and of excise'. Any state taxing law on this power will be undemocratic. The definition of 'customs and excise' has therefore been an important, and litigated, constitutional issue. In general, a customs duty is a tax required on goods entering a jurisdiction. An excise is a type of sales tax on goods. The major purpose of section 90 is that significant objectives of federation was achieved, niform trade relations with other countries, and free trade between the states. In contrast, in application and interpretation of section 90 has led to a revenue imbalance. This section limits the states ability to raise money even though they have considerable funding obligations like education and schools (Australian Constitution, 2007). Section 114 of the Australian Constitution This section provides that the Commonwealth cannot tax state property, nor States tax Commonwealth property (AC, 2007). Section 53 of the Australian Constitution This section prevents the Senate from introducing or amending taxation bills. This also applies to revenue and appropriation bills. This limits the power of the Senate and reflects a constitutional distinction between the House of Representatives as popular house, and the Senate as the states house. Further more, this does not apply to bills imposing or appropriating fines or other financial penalty (Constitution of Australia, 2007). Section 55 of the Australian Constitution This section requires that legislation imposing tax deals only with imposing tax, and that other provisions are of no effect. Laws imposing taxation shall deal with 'one subject only', laws imposing customs only customs, and laws of excise only excise. The purpose of this section is to enhance the powers of the Australian senate. As section 53 limits the power of the senate to reject taxation bills, this section prevents the House of Representatives attempting to line on other issues. This section explains why Australian tax law is made up of several pieces of legislation (2007). Sections 53 and Sections 55 prescribe procedural limitations on tax legislation. Section 96 of the Australian Constitution This provides the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit Therefore, the States Grant Act placed the 'term and condition' that states did not tax at all as a pre-requisite to funding. The Income Tax Act 1942, by setting high tax rates that would reflect the combined current commonwealth and state taxes made imposing current tax rates unattractive or impossible for state governments. This is because the Income Tax Assessment Act 1942 said that individuals had to pay Commonwealth tax prior to State taxes. The effect of this is that scheme meant either the states had to accept grants and stop taxing, or decline grants and try to collect tax at rates which were unsustainable". STATE SALES TAXES, SECTION 90, AND INTERPRETATION OF 'EXCISE' As a result of the loss of income taxing powers, states turned to other taxation powers such as sales taxes. As 'excise' taxes are an exclusive Commonwealth power in section 90 of the constitution, the interpretation of excise became a critical issue. The High Court has interpreted 'excise' to mean any tax imposed up to and including the point of sale. The result of this interpretation is to prevent state sales taxes. It state excise and franchise tax regimes were strike down as an excise.(Hav New South Wales, 1997) INCOME TAX ASSESSMENT ACT 1997 ACT NO. 38 OF 1997 This compilation was prepared on July 7, 2005 taking into account amendments up to Act No. 81 of 2005. The text of any of those amendments not in force on that date is appended in the Notes section. The operation of amendments that have been incorporated may be affected by application provisions that are set out in the Notes section prepared by the Office of Legislative Drafting and Publishing (Canberra, 2005). INTERNATIONAL TAX AGREEMENT ACT 1953 ACT NO. 82 OF 1953 This operation was prepared on April 1, 2005 taking into account amendments up to Act No. 21 of 2005. The text of any of those amendments not in force on that date is appended in the Notes Section. The operation of amendments that have been incorporated may be affected by application provisions that are set in the Notes Section prepared by the Office of the Legislative Drafting and Publishing (Canberra, 2005). REFERENCES: Australian Taxation Office: ATO legal database: Extrinsic materials Australian Taxation Office (ATO). (2007). "International tax essentials for businesses." From ato.gov.au/ Australia Tax Practice, Australia tax handbook (current annual edition). Butler, M Autralia fedral company taxation, Sydney, Butterworths, 1994. Magney, T & Scholtz, W Tax planning for business , Sydney, Butterworths, 1995. Taxation laws of Australia: legislation and official explanations 1936-90, Index 1936-90 shelved on Level 10 under Australia Taxation Laws. Shanker Iyer & Co, "Australian Income Tax," From iyerpractice.com Australian Allowable Deduction (2007). "Australian Taxation for Foreign Nationals". From yahoo.com/ Read More