Australia Taxation Law: Andrew and Mary Finlay Case - Essay Example

Case Study: Andrew and Mary Finlay Case Study: Andrew and Mary Finlay Goes Here al Affiliation Goes Here Case Study: Andrew and Mary Finlay Introduction. This case study consists of preparation of tax lodgings for Andrew and Mary Finlay (with 2 student deductions for children Jason and Angela). The study is an in depth look at how to prepare this family's tax lodging requirements. The resource used to complete these requirements is the Australian Taxation Office, Australian Government, website (www.ato.gov.au). This website contains all forms required, legal ramifications and case law, and calculators used to complete calculations required in different portions of the tax forms (such as depreciation calculations.) The success of this case study can be measured by what tools were used to identify and calculate requirements and the computation of the final tax levied. Determination of Residency. The first task identified was the determination of whether, for tax purposes, the Finlays are considered residents of Australia. The determination was made that the Finlays were considered residents based upon the residency test. According to Australian Tax Law the Finlays are considered residents because they were in Australia for 6 months or more during the 2006/2007 tax year. They also meet residency requirements because they met one or more of the three statutory residency tests. They are considered residents because they maintain a residence in Australia, have resided in Australia for 6 months during the tax year, and they contribute to the superannuation retirement fund. The biggest question to answer about residency and foreign income is what is taxable and what is not taxable. It has already been determined that the Finlays meet residency requirements for tax purposes. Although the tax forms ask for foreign income and foreign taxes paid on those earnings, the tax forms do not explain why. The first determination was that the income was earned in a country that has already taxed the income. If the foreign income was earned but not taxed it would be subject to taxation by the Australian Government. The United States (where Andrew Finlay worked). Has a tax treaty with Australia. In this treaty the United States and Australia was created for "the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income" (Australian Taxation Office website). This protocol covers all aspects of income earned in the United States. Most specifically, relating to this case study, income earned within the United States is taxed by the United States. Any income not taxed is considered taxable income in Australia and residents of Australia are subject to taxation on that income earned. It is very important for the individual to report foreign income and whether or not it was taxed. All records relating to the income and taxes paid should be kept as proof of income earned and taxes paid. Taxation also applies to dividends earned, interest earned, royalties, and capital gains earned in the United States. In this case study Andrew's earnings were taxed but dividends, capital gains, and interest earned in the United States were not taxed so they are subject to taxation in Australia. Other instance where income may not have been taxed by the United States include the following: 1) the income is less than the amount where taxation begins 2) the income falls into an exempt category in the foreign country 3) a memorandum of understanding exists 4) The income consists of supplements paid by the Australian Staffing Assistance Scheme 5) The foreign country levies a tax but does not have a system in place to collect those taxes TaxPack and Forms. This case study was completed using the Australian Taxation Office's "TaxPack" retrievable from their website at www.ato.gov.au. The TaxPack for individuals, supplement section, and Business and professional items schedule for individuals 2007. In addition, the rental property worksheet was used to calculate net rental income or loss. In this case it was for a loss of $12,158. Forms and Information Provided. The 2007 tax return for individuals was used to calculate the Finlay's tax situation. Page 1 of this form requires basic identifying information, such as name and tax file number (TFN), that was provided by the client. As stated earlier, the client has been determined a resident of Australia and their Brisbane residence has been recorded. One item required was whether or not a future return will be filed. Based upon the international employment of the past the "don't know" box was checked. The client will receive electronic funds transfer to their designated account if it is found that the client will receive a tax refund. On page two of the tax return for individuals Andrew's income earned in Australia is recorded ($38,000) as well as the tax withheld ($13,300). Andrew's contribution to his superannuation pension is recorded ($40,000). The total tax withheld is $58,300. Amounts withheld from dividends are recorded as $820. The franked amount is $240. The total gain on page 2 is $416,367. This amount plus the $38,000 brings the total income up to $454,367. Page three of the tax return for individuals asks for deductions from work related expenses. The car expenses were calculated using cents per kilometer method. Andrew Finlay declared the Subaru he purchased as an eligible vehicle. 80 percent usage meant that of the 7000 kms 5600 kms were traveled for business expenses. The vehicle was used for 136 days and contained a conventional engine (all information needed to calculate this deduction). This method provided the greatest deduction amount. Total deductions from page 3 were $225,175. These deductions include a business loss on the rental property of $12,518. This loss was calculated using the Rental Properties 2007 Worksheet found at the Australian Tax website (www.ato.gov.au). Total income less deductions came to $229,192. Income or losses from previous years was not available so section L1 was not considered. Income, business gains, and business losses were calculated using the tax return for individuals supplementary section and the business and professional items schedule for individuals. Private health insurance information was provided on page 4. Total tax offsets came to $5716 and were recorded on page 4. Tax offsets also included a $5000 contribution to Mary's superannuation pension. Page 5 medicare levy reduction or exemption was not applicable. This family has private health insurance coverage. The medical expenses tax offset was calculated as: Total allowable medical expenses: $5080. Less refunds received: $00.00 Net medical expenses: $5080. Less: $1500 Equals: $3580 Divided by 5 to calculate offset $716. These offsets include health insurance coverage ($2080), glasses for Andrew ($600), dental care for Jason ($500), hospital expenses for Angela ($800), and medical consultations and prescriptions for Mary ($1,100) On page seven of the tax return information about Mary Finlay was collected. Mary's taxable income amounts $3600 from craft sales. This brings their total taxable income up to $226,160. Depreciation of Business Assets. The tables below show the business assets that depreciated, their diminishing values, declining value deduction, and their adjustable value at the end of the tax year. The deduction for declining value is $20,240. Table 1 Assets that decline in value Asset Description Date Started to decline in value Acquisition date Cost Non-taxable use % Decline in value method Effective life (years) Billboard 17 Jan 2006 17 Jan 2006 $4525 0 Diminishing Value 20. Cash register 17 Jan 2006 17 Jan 2006 $5240 0 Diminishing Value 6.667 Furniture 17 Jan 2006 17 Jan 2006 $80000 0 Diminishing Value 13.333 Computer equipment 17 Jan 2006 17 Jan 2006 $22500 0 Diminishing Value 4. Computer 11 Jan 2006 11 Jan 2006 25000 0 Diminishing Value 4. Table 2 Decline in value calculations for income tax year 2006-2007 Asset description Opening adjustable value Decline in value Non-taxable use % Deduction for decline Adjustable value at end of year billboard $4,372 $327 0 $327 $4,045 cash register $4,708 $1,059 0 $1,059 $3,649 furniture $75,932 $8,542 0 $8,542 $67,390 Computer equipment $18,686 $7,007 0 $7,007 $11,679 computer $2,061 $772 0 $772 $1,289 $17,707 total deduction Some rental assets were depreciated using the straight line method calculator. This calculator is designed for assets worth $300 or more. Any assets purchased during the tax year worth less than $300 are written of as a deduction at cost. The rental income/loss was entered on page 11 part 20. Table 3 Rental Items to be Depreciated Asset description Date started to decline in value Acquisition date Cost Non-taxable use % Decline in value method Effective life Curtains 1 Jul 2006 1 Jul 2006 $500 0 Diminishing value 6.000 Air conditioner 1 Oct 2006 1 Oct 2006 $750 0 Diminishing value 10.000 Table 4 Decline in Value of Rental Items Asset descriptions Opening adjustable value Decline in value Non-taxable use Deduction for decline in value Adjustable value at end of year Curtains $500 $166 0 $166 $334 Air conditioner $750 $112 0 $112 $638 Total $278 Rental Property Calculations. The Finlays provided many improvement on the rental property they own. They put more into the property than they received in income from the property (a loss of 12,518). It is assumed that the improvements on the property will add value to the property and that the value added will maintain the property over a longer period of time. It is also assumed that they will recoup their losses over time. Home Office Expenditures. Because there are no figures for maintaining the home, the "home office" deductions could not be calculated. Had this been a real client the tax preparer would have called the client requesting a list of home expenditures. With that information the tax professional would be able to calculate the expenditures relating to the home office. Financial Investments. Interest income includes interest on a term deposit in an Australian Bank ($2500). Dividend income is $820 and the fully franked amount is $240. Andrew sold 500 shares of his Westpac shares for $19.20 each. He gained $9600 from that sale. The capital gain for that sale is the $9600 minus the value of the shares at purchase date ($2768) which is $6632. The share purchase date was determined using the first in first out (FIFO) method where the first Westpac shares bought were the first shares sold. Conclusion. The TaxPack used does not allow for individual tax calculation as far as deducting taxes already paid or calculation of tax owed to the Australian Taxation Office. References NAT 0976-6.2007. (TAXPAK) Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au Residency Overview. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au/taxprofessionals/content.aspdoc=/content/64131.htm Tax Return For Individuals 2007. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au Tax Return For Individuals Supplementary Section 2007. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au Business and Professional items schedule for Inividuals 2007. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au Exempt Foreign Employment Income. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au/taxprofessionals/content.aspdoc.=/content/28908.htmpage=2&H2 Australia and United States Treaty. Australian Government, Australian Taxation Office, Retrieved January 20, 2008 From www.ato.gov.au/taxprofessionals/content.aspdoc.=/content/55549.htm Read More