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Analysis Of Scenario And Report Of Tax And Estate Planning

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Questions:

1. Calculate the net tax payable for Darren and Samantha for the 2017/18 financial year. Show all workings. Include Medicare, Medicare Surcharge (if applicable) and any offsets or rebates that may apply. 

2. Provide advice to Darren and Samantha about merging both of their businesses into a partnership. Show how you have compared the option of merging versus not merging. Show all workings/calculations. Justify your advice.

3. Advise Darren and Samantha as to whether they could possibly arrange their financial affairs more efficiently; and whether there are other strategies they could be considering to enhance their short term and/or long term position. No calculations are necessary, however you will need to provide details of the potential strategy/ies you are recommending they consider. Justify your recommendations.

 

Answers:

Answer 1.

Taxable income=Gross income less allowable deductions (expenses relating to the income)

Medical levy=2% of gross income

Darren and Samantha Net Tax Payable Statement

For FY 2017/2018.

Gross Income;                       

                                                       Darren                  Samantha                          Dar & Sam            

 Income Frm Asset=                                                                                     $450*52=$23,400

Jim & Gardening Income =          $235,000

Tupperware Commission=                                        $72,000    

Term Deposit=                                                                                          5%*$40,000=$2000

Share of Rental Income Interest

(And term deposit)                          $12,700           $12,700                                       ($25400)

=$23,400+$2,000=$25,400/2=$12,700

Total Gross Income =            $247,700                  $84,700                                                 0         

Less allowable deductions   

 Interest on Rental property                                                             4.2%*$280,000= ($11,760)      

Share loan interest on rental pro   ($5,880)                 ($ 5,880)                                   $ 11,760

Jims gardening expense                ($39,000)

Expense on Tupperware                                             ($9,000)                                                                          

Expense on credit card 12%*$2,700= ($324)

Total Taxable Income =$247,700-$39,324-$5,880    =$84,700-$9,000-$5,880                      0   

Net Total Taxable Income        = $202,496                = $69,820                                       = $0            

 

NB;

  1. 1. There is a contra of $11,760 and $25,400 on the equally distribution of revenue and expenses from the rental property.
  2. Since the dividend earned are franked in nature we’re not going to subject it to taxation.

  

                                            Darren                        Samantha                             Darren Samantha

Medical Levy=2%*$247,700=$4,954         2%*$84,700=$1,694                          0

Medicare Surcharge rate=        1%                         0%                                           0%

Medicare surcharge for Darren=1%*$202,496=$2,024.96 this is because the taxable income of Darren is within the tier  one of $180,001-$210,000 that subjects to 1%,for Samantha and the joint invest for Darren Samantha is not subjectable to any because it’s below the base tier of $18,0000.

Medical Levy Surcharge=Medical Levy plus medical surcharge

Total Medical Levy Surcharge for Darren==$4,954+$2,024.96= $6,978.96 

Total Medical Levy Surcharge for Samantha= =$1,694+$0==$1,694

Total Medical Levy Surcharge for Darren Samantha =0                                                                                                  

Calculation of income tax for individuals uses the below tax brackets; Fletcher

0-$18,200        -     Nil

$18,201-$37,000    - 19c for each $1 over $ 18,200

$37,001-$87,000 - $3,572 plus 32.5c for each $1 over $37,000

$87,001-$180,000 - $19,822 plus 37c for each $1 over $87,000

$180,001 and over - $54,232 plus 45c for each $1 over $180,000

For Darren;

The taxable income for Darren is $202,496

This income therefore lies between the brackets;

$180,001 and over - $54,232 plus 45c for each $1 over $180,000

Tax payable on this is $54,232 plus 45/100*(202,496-180,000)

=$202,496-$180,000=$15,676

Plus 45c for each $1 over $180,000=$22,496*0.45=$10,123.2

Total Income tax payable for Darren=$10,123.2+$54,232=$64,355.2

For Samantha;

The taxable income for Samantha is $69,820;

Samantha’s income lies between brackets;

$37,001-$87,000 - $3,572 plus 32.5c for each $1 over $37,000

Tax payable on this, $3,572 plus the cover of $37,000;

The over=$69,820-$37,000=$32,820

=32.5/100=0.325

The over is=$32820*.325=10666.5

Total income tax payable for Samantha=$10,666.5+$3,572=$14,238

Total Net Tax Payable Income Tax plus Medical Surge Levy;

Samantha and Darren since they have private health insurance with HCF fund that is accredited they are eligible to a rebate on family basis, Dennis (2005, Pg.23) therefore they entitled to rebate offset.

The collective income from the two of $ 272,316 from the combination of $202,496 and $69,820 classifies the tier 3 family threshold in which rebate ought to be calculated from Burkhauser

It’s therefore clear that the threshold lies between $210,000-$280,000 hence subject to 8.644% rebate premium.

Rebate =8.644%*$272,316 =   $23,538.99             

They are therefore entitled for an offset of $23,538.99

Darren’s;

           Total Tax Payable=

                             Income Tax Payable +Medical Levy Surcharge

                            = $64355.2+$6978.96 =$71,334.16

Tax Payable=$71,334.16

Samantha’s;

Tax Payable=

                           =   Income Tax Payable +Medical Levy Surcharge

                            = $14,238+$1,732 =$15,970

           Tax Payable=$15,970

 

Therefore the Total Tax Payable=$71,334.16+$15,970=$87,304

                       Less/offset rebate=                                = ($23,703.23)

Darren & Samantha Net Tax Payable                    =$63,600.77

 
 

The above calculations are done based on the following assumption;

  1. Damarren and Samantha are both residents for tax purposes.
  2. Based on the revenue generation unit rental property an assumption of 52weeks making a year is made.
  3. Since there is no revenue generated via the motor vehicle an expense relating to it is not allowable in nature.
  4. it’s therefore clear that any expense incurred that don’t relate to revenue is therefore not allowable.
  5. An assumption that Darren and Samantha are carrying the rental property as business is made and therefore since there is no declaration on how to share gain on this have shared revenue and expenses equally.
 


Answer 2.

Partnership businesses basically involves profits and losses hence tasking the venture to declare tax return. Unlike individual income tax where prescribed tax bracket is outline hence creating guaranteed tax obligation, in partnership the latter depend on the performance and operation of the business according to Regan.

If Darren and Samantha decide to merge and form partnership form of business of course a different approach on taxation has to be trailed. It’s therefore expected to see Darren and Samantha declaring to have agreed to do business as partner via partnership agreement that dictates on the sharing of profit and losses respectively as well as in other occasions of dissolution, recruiting as well as conversion. Sharing ration has to be outlined depending on the capital contributed or other investment stands made.

Assume that Darren and Samantha are in a partnership business we therefore expect to see income generated less deductible expenses so as to inform on loss or profit made. In reality the higher the higher the profit the greater the portion of profit Samantha and Darren share while the lower the profit the lower the share. On the other hand in case of loss suffering the loss has to be shared depending on the agreement.

For taxation basis we expect partnership profit and losses to be the one subjected to tax, it’s there clear that tax burden depends on the declaration hence flexible in nature thus if the profit is less we expect low capture on tax while when its high the vice versa takes stand. The worst of all is when losses is suffered there is no tax that is being charged. It’s therefore the discretion of Darren and Samantha to declare the profit or loss depending on the performance for tax purposes.

From question one when individual i.e. Darren and Samantha are taxed depending on the incomes each of them gets they are not subjected to offsets or rather don’t enjoy fringe benefits tax reliefs as well as tax credits as it is in businesses that have many parties in control Vegh,2015.

It’s clearly showing that Darren’s net taxable pay is =$71,334.16 while that of Samantha is =$15,970 if we sum these two incomes==$71,334.16+$15,970=$87304.16 whereas that of Darren and Samantha after joined they get offsets and totals to =$63,600.77 depicting that there are factors that minimizes tax burden in partnership unlike in sole traders.

It’s further clear that since in partnership we only expect to pay tax after a profit has been made, on occasions that the latter doesn’t occur there is no tax charge to be claimed, hence creating an avenue for the reporters of the accounts to always overstate the deduction and expenses so as to minimize profit and create loss for purposes of tax avoid Cnossen.

Darren and Samantha ought to know that if they operate a partnership business there is no separation of legal entity sense instead each partner will be enjoying the paying tax on their share of net partnership income. Therefore through this they will be able to use partnership losses to reduce respective income for taxation purpose.

Gains and losses from the the partnership business is mostly retrieved back to individual partners tax status. There are other tax incentives and gains that are enjoyed by partners in a partnership business the likes of capital gains which is mostly   not taxed. Darren and Samantha likewise ought to know that while operating a business as partnership they’ve access to 50% on any capital gain especially on the gain on the rental property whereby instead of it being summed up as taxable income for further taxation its yet to be subjected only up to 50% thus reducing the taxable income by half;

i.e.                                                       Darren                  Samantha                          Dar & Sam           

 Income Form Asset=                                                                                     $450*52=$23,400

             =$23,400*50%

             =$11500, thus we are only to subject $11,500 of the rental revenue for tax purpose.

Likewise if the business was that of partnership form we expect each partner to just declare rent share and respective expenses in the tax return. Partnerships passes income tax to respective individual and not business hence no taxation at all in this level.                   

Partnerships that are family based in nature a good example being this one of Darren and Samantha greatly the benefit of tax avoidance on gifts and estate Monroe(2012,Pg.4)

Darren and Samantha in case they are willing to do contributions as well as distribution and withdraws them can do so without any oncome tax burden. In business there exists booms/recess or rather high/low seasons times hence leading to loss and profits. With this in mind partnership business is always lucky since the loss incurred can be claimed for deduction purposes in the partner share of loss.

Darren and Samantha can control the loss by increasing allowable deductions (expenses) hence making the income being less than the expenses causing loss hence claim deduction guaranteed.

If Darren and Samantha operates the business as partnership we would further subject all the expenses to be allowable with no sidelines on whether it has any direct relation to the income hence the expenses the likes of motor vehicle loan interest would be considered hence reducing the taxable income unlike the way we’ve failed to allow the expense with the presumption that it’s not relating to direct income generation.

Less allowable deductions  

Motor Vehicle Loan Interest Payable=7%*$18000=$1260(this is if the business was partnership), hence we expect the total taxable income of $202496 to be subjected to a deduction of 1260 before being taxed bracket wise Willis.

I therefore wish to strongly advise Darren and Samantha to merge so as to enjoy the flexible legal way of tax avoidance especially when the economic factors is not favoring the market.

 

Answer 3.

Financial planning forms the basis of every success on matters concerning business operation it starts from good recording keeping, tax planning, set up of internal controls, budgeting  as well as cost control.

Darren and Samantha are expected to be cautious on their day to day management of the business. Poor management mostly leads to business closure, losses, low profits among others the likes of provision of services and sale of goods that do not meet customer satisfaction.

They are therefore required to ensure there is proper book keeping and recording that captures each and every transaction however small it is for purposes of accountability and trail. This will greatly facilitate back up and record keeping. Proper book keeping will help Darren and Samantha track each and every move that may be of any help to the business or that which retards operation hence creating an avenue of decision making.

For instance if there is records indicating all the expenses and gains relating to the two motor vehicles from acquisition in my own view would analyze the gain on that motor vehicle and if there is nothing that the two generates or contribute directly or indirectly at all, would rather advise for disposal or alternative measures of probably making it for commercial purpose rather than private.. However this is only possible and applicable if there is proper book keeping.

By budgeting and provision of prudent management skills is an action Darren and Samantha will not run from especially on expenditure and operations if they are to be successful financially, basically if they budget and allocate resources wisely the usage of credit cards to sort manageable expenses would not happen. Budgeting will also facilitate investing on generating units that yields returns in time so as to curb the monster of spending  money on funds that do not pay back in time thus doing away with the project i.e. the two funds  that do not yield anything at all would have been considered whether option wise or via alternative swaps.

 


Tax planning is also a task that Darren and Samantha has to put into consideration for successful financial planning. This is an obligation that the states requires from every individual or partners in business or employed hence if you are not able to meet the aforesaid state obligation expect closure, prosecution ,freezing of accounts and assets Richter.

All this consequences retards operation and of course shake the financial stand and position of the firms. Darren and Samantha should be advised to never buoy cot any obligation that relates to day to day operation of the firm.

Darren and Samantha should introduce internal controls measures that oversees and guides each and every firm processes from primary point to the optimal point of cash generation. This internal controls should be seen to serve, protect and manage the operation of the business hence minimizing inefficiency and malpractices that would befall operations.

Finally I advise Darren and Samantha to be cost effective thus introducing cost based analysis via the value of money concept this will control  investing on projects that are expensive  in nature and don’t pay back in time. Likewise it serves the purpose of ensuring that there is no misappropriation and misallocation of resources to respective cost centers. I therefore advise them to be engaged in audit exercise for determination of true and fair state of the business in operation.

I further advise Darren and Samantha to invest in financial advisors now and then for the market is dynamic and keeps on camouflaging with the prevail economic factors.

 

References

Byrnes, J.M., Cobiac, L.J., Doran, C.M., Vos, T. and Shakeshaft, A.P., 2010. Cost-effectiveness of volumetric alcohol taxation in Australia. The Medical Journal of Australia, 192(8), pp.439-

Denniss, R., 2005. Who benefits from private health insurance in Australia?. New Doctor, (83), p.23.

Regan, M., Smith, J. and Love, P.E., 2010. Impact of the capital market collapse on public-private partnership infrastructure projects. Journal of construction engineering and management, 137(1), pp.6-16.

Richardson, G. and Lanis, R., 2007. Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of Accounting and Public Policy, 26(6), pp.689-704.

Siahpush, M., Wakefield, M.A., Spittal, M.J., Durkin, S.J. and Scollo, M.M., 2009. Taxation reduces social disparities in adult smoking prevalence. American journal of preventive medicine, 36(4), pp.285-291.

Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G., 2009. Australia’s future tax system. Canberra, Commonwealth Treasury.

Monroe, A., 2012. Integrity in taxation: Rethinking partnership tax.

Willis, A.B., Pennell, J.S. and Postlewaite, P.F., 2006. Partnership taxation.

Cnossen, S., 2010. Excise taxation in Australia. In Melbourne Institute–Australia’s future tax and transfer policy conference.

Richter, W.F., 2006. Efficiency effects of tax deductions for work-related expenses. International Tax and Public Finance, 13(6), pp.685-699.

Taylor, S.M., Juchau, R.H. and Houterman, B., 2010. Financial planning in Australia. LexisNexis Butterworths.

McKerchar, M., 2007, June. Tax complexity and its impact on tax compliance and tax administration in Australia. In IRS Research Conference.

Borden, B.T., 2008. Aggregate-Plus Theory of Partnership Taxation. Ga. L. Rev., 43, p.717.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Vegh, C.A. and Vuletin, G., 2015. How is tax policy conducted over the business cycle?. American Economic Journal: Economic Policy, 7(3), pp.327-370.

Fletcher, M. and Guttmann, B., 2013. Income inequality in Australia. Economic Round-up, (2), p.35.

 

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