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1.Jane Brown (aged 30).

Jane is an eligible beneficiary of the Brown Family Discretionary Trust.  The trustees decided to distribute a cash amount of $20,000 to Jane for the current tax year.

Jane also receives $20,000 fully franked dividends.  Jane has a $20,000 HELP debt.

Jane received $79,000 (gross income) from employment at Company Pty Ltd for the period 1 July 2016 to 30 June 2017.  The correct amount of PAYG has been withheld.  

Jane reports interest income of $475.

Jane advises of investment expenses of $250.

Jane receives rental income of $35,000 from an investment property.  The associated expenses are:

  • Mortgage repayments: $25,000
  • Repairs: $2,000
  • Rates: $2,500
  • Insurance: $500

Jane sold a parcel of 200 Coles Myer Group shares on 1 July 2016 for $3,500.  She had purchased these shares on 1 July 2009 for $800. Her brokerage costs of buying and selling were $300 in total.

Jane made donations (for which she presents tax invoices and receipts) to the value of $900.

Jane does not wear a uniform to work.

Jane pays premiums on an income protection insurance policy equivalent to $1,000 per year.

Jane does not have Private Health Insurance.

Calculate the net tax payable/ refundable situation for Jane for the current tax year (include references, calculations & assumptions)

2.Green Pty Ltd is a resident gardening company registered with the following information:

TFN: 859 376 213

ABN: 79 512 647 864

ACN: 86 572 314 719

The following is the financial information for the year ended 30 June 2017.

GST (where it is applicable) has not been removed from the following amounts.

Depreciation (for tax purposes) was reported to be $5,500 for the current year.

Sales

345,000

Exempt income

10,000

Dividends (fully franked)

10,260

Interest received

900

Compensation from a client who failed in a legal suit to obtain damages from Green Pty td for alleged property damage.

4,000

Net capital gain

4,000

Advertising (print, net, signage, flyers)

1,000

Bad debts

900

Bank Charges

150

Capital expenditure (qualifies for immediate deduction)

3,000

Cost of sales

    60,000

Sub-contractor expenses

23,000

Depreciation expenses

2,000

Electricity

800

Entertainment

2,000

Environmental protection (disposal of chemicals)

600

Fines (speeding and parking tickets)

500

Insurance

600

Interest expenses within Australia

1,200

Lease expenses within Australia

4,000

Motor Vehicle 3rd Party insurance

550

Motor Vehicle expenses (petrol & maintenance)

4,000

Motor Vehicle Registration

1,200

Rent expenses

11,800

Stationery & Office supplies

200

Tea, coffee, sugar & milk for staff use

100

Telstra (Phones & Internet)

2,000

Wages

45,000


Calculate the net tax payable/ refundable situation for Green Pty Ltd (include references, calculations & assumptions)

Jane Brown's Tax Calculation

1.This case study contains different information about Jane Brown. The main issue is to compute the net tax refundable or payable in the existing tax year. The tax is computed through application of different provisions of pertinent laws.

“Section 4(1) of the Income Tax Assessment Act” denotes that each individual, firm and other organisation are needed to incur income tax. “Section 4(10) of the Income Tax Assessment Act” states that tax payable is computed through application of tax rate with taxable income (Aust 2013). “Section 4(15) of the Income Tax Assessment Act” stated that taxable income is computed by deducting allowable deduction from the overall assessable income. Such assessable income is categorised as statutory income and ordinary income. “Section 6(5) of the Income Tax Assessment Act” denotes that income in accordance with the ordinary concept is adjudged as ordinary income. Any income, which could not be considered as ordinary, is termed as statutory income in accordance with “Section 6(10) of the Income Tax Assessment Act”.

Hence, both “Section 6(5) and Section 6(10) of the Income Tax Assessment Act” denote that income obtained from all sources are taxable for resident taxpayers and the income obtained from the nation is taxable for the non-residents. It could be said that the ascertainment of the taxpayer’s residential status is necessary before taxable income is computed. “Section 6(1) of the Income Tax Assessment Act” lays stress on for rules, which ought to be applied to ascertain the taxpayer’s residential status. However, due to the lack of adequate information, it is assumed that Jane Brown holds the citizenship of Australia for tax purpose (Barkoczy 2016).

“Division 6 of the Income Tax Assessment Act 1936” is concerned with the income of the trust. It is assumed that the trustee is a citizen for working out the trust’s net income. In addition, the net income of the trust could be divided to the beneficiary in most effective ways. The act denotes that a trust is not needed to incur income tax on the distributed amount (Boll 2014). However, in case of undistributed income, the trust needs to make tax payments. In addition, tax payment is needed on the sum of money distributed on the part of the family trust. It is noteworthy that since this is not a special income, it needs to be incorporated in assessable income and it is to be taxed at marginal rate. According to the case study, Jane has obtained $2,000 from the family. Hence, depending on discussion, it could be stated that the trust receipt need to be in assessable income (Braithwaite 2017).

“Section 44 of the Income Tax Assessment Act 1936” denotes that assessable income of the resident shareholder of the organisation needs to incorporate dividend. Dividend could be defined as the gain distributed on the part of an organisation obtained from any source. The dividend obtained is an ordinary income in accordance with “Section 6(5) of the Income Tax Assessment Act 1997”. Thus, Jane has received a franked dividend, which needs to be incorporated in assessable income. Due to inadequate information, it has been assumed that the gross dividend is $20,000 (Lamb, Erskine and Fletcher 2015).

Calculation of Green Pty Ltd's Net Tax Payable

According to “Section 6(5) of the Income Tax Assessment Act 1997”, salary could be adjudged as assessable income. Hence, the salary amount of Jane could be included in assessable income. The salary needs to be incorporated in gross salary; thus, PAYG needs to be added up with the overall salary. The commissioner depending on “Sections 15-25 and 15-30 of the Tax Administration Act 1953” forms the schedule of withholding (Lang 2014).

According to “Section 6-5 of the ITAA 1997”, interest could be considered as ordinary income. Hence, the interest income amounting to $475 needs to be incorporated in assessable income. In addition, the investment income needs to be included in assessable income as well in compliance with “Section 6(5) of the ITAA 1997”. According to the provided case, the rental property income needs to be incorporated in assessable income. As per “Section 8(1) of the Income Tax Assessment Act”, the taxpayer could subtract from assessable income any outgoing necessary for earning compared to assessable income. Therefore, in this case, amount spent for gain from investment property needs to be subtracted. The overall amount needs to be taken into account as the assessable income (Richardson, Taylor and Lanis 2013).

“Section 102-5 of the Income Tax Assessment Act 1997” denotes that the net capital gain in the tax year needs to be included in assessable income. According to the provided case, the acquisition of shares has been made in 2009, which signifies that the method of discount could be used. The payment of insurance premium is made to protect income, which is deductible in the form of sum received as taxable.

According to the above discussion, the computation of taxable income is made, which denotes that the tax payable is $34,715. In addition, it is presumed that the interest amount is incorporated in mortgage repayment and the amount is $15,000. The computation is discussed as follows:

Calculation of Taxable income of Jane for the year 2015-16

Particulars

References

Amount

Amount

Figure

Authority

Income received from Trust

ITAA 36 Division 36

$20,000.00

Dividend Income

Fully Franked (Net)

$14,000.00

franking Credit

$6,000.00

Gross Dividend

ITAA 36 s44 & ITAA 97 s6.5

$20,000.00

Salary Income

ITAA 97 s6.5

$79,000.00

Interest income

ITAA 97 s6.5

$475.00

Rent Income

ITAA 97 s6.5

$35,000.00

Capital gain from sale of shares

Sales proceed

$3,500.00

Less:

Cost of Acquisition

$800.00

Gross capital Gain

$2,700.00

Less:

Discount @ 50%

$1,350.00

Net Capital Gain

ITAA 97 s102.5 & s115.10

$1,350.00

Assessable Income

$155,825.00

Allowable Deductions

Repair

ITAA 97 s8.1

$2,000.00

Interest on Mortgage

ITAA 97 s8.1

$15,000.00

rates

ITAA 97 s8.1

$2,500.00

Insurance

ITAA 97 s8.1

$500.00

investment advise

ITAA 97 s8.1

$250.00

Insurance for Income Protection

ITAA 97 s8-1

$1,000.00

Total deduction

$21,250.00

Taxable income

$134,575.00

Tax on taxable income ($17547+.37(134575-80000))

$37,739.75

Medicare Levy

$2,691.50

Medicare levy surcharge

1682.19

Gross Tax Payable

42113.44

Tax offsets/Rebates/ Credits

Special Zone Rebate

ITAA 36 s79A

1173.00

franking credit

ITAA 97 s205.15

-$8,571.43

Tax Payable

$34,715.01

 Less:

PAYG

$(18828.00)

Net tax Payable

15887.01

Disregarded Items

Type

Help debt

$20000

Table 1: Computation of taxable income

(Source: As created by author)

2.According to the provided case, Green Private Limited is a resident organisation and the major issue is to determine the taxable income along with computing it. According to the “Income Tax Assessment Act”, expenditures are made to earn assessable income, which are allowed in the form of deduction. “Section 27-15 of the Income Tax Assessment Act 1997” states that the credit related to input tax could be subtracted in the form of outgoing or loss, as per the act. Thus, it could be stated that the organisation would need to adjust expenditures with GST (Taylor and Richardson 2013).

Moreover, assumption has been made that gross dividend amount has been provided. The rate of tax for the organisation is 30%. However, in case of small-sized organisations, the tax rate is 28.5%. An organisation is categorised as small-sized, in case; the aggregate business turnover is below $2 million. According to the provided case, the annual turnover of the organisation is below $2 million. Hence, the tax rate of 28.5% would be applied in this case. The computation is presented as follows:

Computation of the Taxable Income and Tax Payable for Green Pty Ltd

Particular

Reference

Amount

Amount

Figure

Authority

Sales

ITAA 97 s6.5

$313,636.36

Dividend fully franked

$10,260.00

Add: franking Credit

$4,397.14

Gross Dividend

ITAA 36 s44 & ITAA 97 s6.5

$14,657.14

Interest

ITAA 97 s6.5

$900.00

Compensation from client

ITAA 97 s6.5

$4,000.00

Net Capital gain

ITAA 97 s102.5 & s115.10

$4,000.00

Assessable Income

$337,193.51

Allowable Deduction

Advertising

ITAA 97 s8.1

$909.09

Bad debts

ITAA 97 s8.1

$900.00

Bank Charges

ITAA 97 s8.1

$150.00

Capital expenditure (qualifies for immediate deduction)

ITAA 97 s8.1

$2,727.27

Cost of sales

ITAA 97 s8.1

$54,545.45

Sub-contractor expenses

ITAA 97 s8.1

$20,909.09

Depreciation expenses

ITAA 97 s8.1

$5,500.00

Electricity

ITAA 97 s8.1

$800.00

Entertainment

ITAA 97 s8.1

$1,818.18

Environmental protection (disposal of chemicals)

ITAA 97 s8.1

$600.00

Fines (speeding and parking tickets)

ITAA 97 s8.1

$500.00

Insurance

ITAA 97 s8.1

$600.00

Interest expenses within Australia

ITAA 97 s8.1

$1,200.00

Lease expenses within Australia

ITAA 97 s8.1

$4,000.00

Motor Vehicle 3rd Party insurance

ITAA 97 s8.1

$550.00

Motor Vehicle expenses (petrol & maintenance)

ITAA 97 s8.1

$3,636.36

Motor Vehicle Registration

ITAA 97 s8.1

$1,200.00

Rent expenses

ITAA 97 s8.1

$10,727.27

Stationery & Office supplies

ITAA 97 s8.1

$181.82

Tea, coffee, sugar & milk for staff use

ITAA 97 s8.1

$100.00

Telstra (Phones & Internet)

ITAA 97 s8.1

$1,818.18

Wages

ITAA 97 s8.1

$45,000.00

Total deduction

$158,372.73

Taxable Income

$178,820.78

Tax on Taxable Income @28.5%

$50,963.92

Tax offsets/Rebates/ Credits

Franking credit

ITAA 97 s205.15

-$4,397.14

Tax Payable

$46,566.78

Table 2: Taxable income

(Source: As created by author)

References:

Aust, A., 2013. Modern treaty law and practice. Cambridge University Press.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Boll, K., 2014. Shady car dealings and taxing work practices: An ethnography of a tax audit process. Accounting, Organizations and Society, 39(1), pp.1-19.

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Lamb, D., Erskine, P.D. and Fletcher, A., 2015. Widening gap between expectations and practice in Australian minesite rehabilitation. Ecological Management & Restoration, 16(3), pp.186-195.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Richardson, G., Taylor, G. and Lanis, R., 2013. Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms. Journal of Contemporary Accounting & Economics, 9(2), pp.136-150.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

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