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1. Calculate the net tax payable for Herbert and Dorothy for the 2018/19 financial year. Show all workings. Include Medicare, Medicare Surcharge (if applicable) and any offsets or rebates that may apply.

2. Provide advice to Herbert and Dorothy 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 Herbert and Dorothy 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. (Areas to consider include superannuation, Estate Planning, Insurance, debt reduction) No calculations are necessary, however you will need to provide details of the potential strategy/ies you are recommending they consider. Justify your recommendations.

Valuation of Tax Liability for Herbert

This report is prepared for generating knowledge about different concepts related to tax and estate planning. It focuses on the calculation of total tax liability of Herbert and Dorothy for the business year of 2018/2018. The report will also facilitate the advice to Herbert and Dorothy with regards to the decision of merger. Final section of this report will provide recommendations to Herbert and Dorothy with regards to making the arrangements of financial affairs in efficient manner. It will also facilitate information about other possible alternative strategies that can be taken into account by the Herbert and Dorothy for purpose of enhancing the long term and short term business position in the market.

Valuation of Tax Liability for Herbert and Dorothy:

In Australia, the income received from rental property is also taxable income. The rate of tax on income in Australia can be depicted through below table:

Tax Liability for Herbert:

On the basis of above table, it can be analyzed that the tax rate in Australia is different according to income slabs. So, the valuation of total taxable income for Herbert is as below:

Table Showing Valuation of Total Taxable Income for 2018-19

Particulars

Details (in $)

Total (in $)

Total Income from Rental Property ($500 per week)

$500 x 52 x 0.5

$13,000

Income on Term Deposit

$41,000 x 2.75% x 0.5

$563.75

Interest Payment on Rental Property Loan

$320,000 x 5.2% x 0.5

($8320)

Interest Payment on Motor Vehicle Loan

$28,000 x 8%

($2240)

Value of Net Income of Herbert (Test and Tag Business)

$241,000 - $43,000

$198,000

Total Income of Herbert

$201,003.75

As per the analysis of different tax slabs, it is determined that total income of Herbert is determined as $201,003.75 that falls in the slab of $180,001 and over. So, the value of tax liability of Herbert can be calculated in following manner:

Following table summarizes calculations of tax liability for Herbert:

Table showing calculation of tax liability of Herbert

Particulars

Amount (in $)

Fix Tax Liability if Taxable Income in higher than $180,000

$54,097

Tax Calculation @ 45% = $21,003.7 x 45%

$9451.59

Calculation of 2% Medical Levy = $182,803.75 x 2%

$3,656.075

Total Tax Liability for Herbert

$67,204.765

Total Tax Liability = $54,097 + 45% of Income exceeding the level of $180,000 + 2% Medicare Levy of Total Taxable Income

Value of income exceeding level of $180,000 can be ascertained as below:

= $201,003.75 - $180,000

= $21,003.75

Taxable Income for Medical Levy:

= $201,003.75 – $18,200

= $182,803.75

So, the tax liability can be determined in the following way:

Total Tax Liability = $54,097 + 45% of Income exceeding the level of $180,000+ 2% Medicare Levy of Total Taxable Income

= $54,097 + $21,003.75 x 45% + $182,803.75 x 2%

= $54,097 + $9451.69 + $3,656.075

= $67,204.765

Working Note:

  1. The incomes and expenses like interest on rental property loan, income on term deposit and income on rental property is given as combined income and combined expenses. For dividing these expenses and incomes, it is assumed that they divided these amounts in same ratio that is 50% for each.
  2. Total number of weeks in a year is taken as 52 weeks for the calculation of total annual income from rental property.
  3. The nationality of Herbert and Dorothy is not given in the scenario. So, it is assumed that both of them are the resident of Australia, as this was required for selection of the tax rate.

Valuation of Tax Liability for Dorothy:

The valuation of total taxable income for Dorothy is as below:

Table Showing Valuation of Total Taxable Income for 2018-19

Particulars

Details (in $)

Total (in $)

Total Income from Rental Property ($500 per week)

$500 x 52 x 0.5

$13,000

Income on Share Portfolio

$45,000 x 4.5%

$20,250

Income on Term Deposit

$41,000 x 2.75% x 0.5

$563.75

Interest Payment on Rental Property Loan

$320,000 x 5.2% x 0.5

($8320)

Net Income on Life Supplements Commissions

$85,000 - $12,000

$73,000

Total Income of Dorothy

$98,493.75

From the analysis of different tax slabs, it can be analyzed that the total income earned by Dorothy falls in the slab of $90,000 - $180,000, as the value of total taxable income of Dorothy is calculated as $98,493.75. So, the valuation of tax liability for Dorothy is as below:

Table showing calculation of tax liability of Dorothy

Particulars

Amount (in $)

Fix Tax Liability if Taxable Income in higher than $90,000

$20,797

Tax Calculation @ 37% = $8,493.75 x 37%

$3,142.69

Calculation of 2% Medical Levy = $80,283.75 x 2%

$1,605.875

Total Tax Liability for Dorothy

$25,545.57

Valuation of Tax Liability for Dorothy

Tax Liability = $20,797 + 37% of Total Income Exceeding the level of $90,000 + 2% Medical Levy on Taxable Income

Valuation of Total Income Exceeding level of $90,000:

= $98,493.75 - $90,000

= $8,493.75

Taxable Income for Medical Levy:

= $98,493.75 – $18,200

= $80,283.75

So, the value of total tax liability for Dorothy can be determined in following manner:

Total Liability = $20,797 + 37% of Total Income Exceeding the level of $90,000 + 2% Medical Levy on Taxable Income

= $20,797 + $8,493.75 x 37% + $80,283.75 x 2%

= $20,797 + $3,142.69 + $1,605.875

= $25,545.57

Working Note:

  1. In the calculation of total taxable income, the interest expense is not taken into consideration. It is so because the interest expense on credit card is a personal expense, so the tax benefit on this interest expense in not available for anyone.

In general, merger can be defined as the activity of combining two or more business entities. The impact of merger can be seen on the net profitability position of resulting partnership. The impact of merger incident can also be seen on the total assets and liability position as well as the tax liability of companies. There are different advantages that may be evidenced by Herbert and Dorothy as a result of merger. Example of these benefits includes the economies of scale, greater level of profitability to the companies provided increased ability to invest in research and development activities, and the firms in difficult business situation can get benefits from merger due to enhanced market share and financial health.

Impact of Merger on the Calculation of Tax Liability for Merged Herbert and Dorothy:

Following table summarizes the valuation of total taxable income for Herbert and Dorothy merged Herbert and Dorothy:

Table Showing Valuation of Total Taxable Income for 2018-19

Particulars

Details (in $)

Total (in $)

Total Income from Rental Property ($500 per week)

$500 x 52

$26,000

Income on Share Portfolio

$45,000 x 4.5%

$20,250

Income on Term Deposit

$41,000 x 2.75%

$1127.5

Interest Payment on Rental Property Loan

$320,000 x 5.2%

($16,640)

Interest on Motor Vehicle Loan

$28,000 x 8%

($2,240)

Net Income on Life Supplements Commissions

$85,000 - $12,000

$73,000

Value of Net Income of Herbert (Test and Tag Business)

$241,000 - $43,000

$198,000

Total Income of Herbert and Dorothy Merged

$299,497.5

On the basis of analysis of different tax slabs of government of Australia, it can be observed that total income of Herbert and Dorothy merged is $299,497.5 that falls in the tax slab of $180,001 and over. In this context, the valuation of tax liability for Herbert and Dorothy merged can be determined in the following manner:

Table showing calculation of tax liability of Herbert and Dorothy Merged

Particulars

Amount (in $)

Fix Tax Liability if Taxable Income in higher than $180,000

$54,097

Tax Calculation @ 45% = $119,497.5 x 45%

$53,773.875

Calculation of 2% Medical Levy = $281,297.5 x 2%

$5,625.95

Total Tax Liability for Herbert & Dorothy Merged

$113,496.825

Tax Liability = $54,097 + 45% of Total Income exceeding the level of $180,000 + 2% Medicare Levy of Total Taxable Income

Valuation of Total Income Exceeding level of $180,000 can be carried out as below:

= $299,497.5 - $180,000

= $119,497.5

Valuation for Taxable Income for Medical Levy:

= $299,497.5 - $18,200

= $281,297.5

So, the valuation of total tax liability of the Herbert and Dorothy merged can be calculation as below:

Tax Liability = $54,097 + 45% of Total Income exceeding the level of $180,000 + 2% Medical Levy on Total Taxable Income

Impact of Merger on the Calculation of Tax Liability for Merged Herbert and Dorothy

= $54,097 + $119,497.5 x 45% + $281,297.5 x 2%

= $54,097 + $53,773.875 + $5,625.95

= $113,496.825

Summary Table for Before Merger and After Merger Tax Liabilities:

Following table is helpful to understand the differences in before merger and after merger tax liabilities of the individual companies and merged:

Table Summarizing Before and After Merger Tax Liabilities

Particulars

Herbert

Dorothy

Merged

Tax Liability before merger

$67,204.765

$25,545.57

Total Liability of Herbert and Dorothy before Merger = $92,750.335

So, equalization of tax liability before merger = $92,750.335/ 2

$46,375.17

$46,375.17

Tax Liability of Merged after the merger

$113,496.825

So, equalization of total tax liability in Herbert and Dorothy after merger = $113,496.825/ 2

$56,748.41

$56,748.41

 

On the basis of above table, it can be analyzed that there is no any tax benefits available with the strategy of merger for both Herbert and Dorothy. For example, the total tax liability for Herbert and Dorothy before the merger was $92,750.335 that increased to $113,496.825 that is very high. In this context, it can be stated that this merger will not be beneficial for the companies from the point of view of tax expenses in business.

There are different financial arrangements or financial strategies that could be taken into account by Herbert and Dorothy for achievement of better financial position. Example of these strategies includes the estate planning, investment in superannuation funds, insurance and the debt reduction strategies. In general, estate planning can be defined as the process of preparing legal documents for transfer of owner of particular assets or property in the situation of death. It is a requirement of estate planning that it must be in written, notarized by the person, and signed. This would give right to the nominee to get the assets and money legally, at the time of unfortunate accidental death or illness death of life partner. This should be done by both Herbert and Dorothy.

It can also be recommended to Herbert and Dorothy to invest in the superannuation funds. In general, superannuation funds are the investment opportunities provided by Government of Australia to all Australians through which they can ensure the availability of an income stream for them after age of retirement. This type of investment is also known as the pension fund. In other words, the investment in superannuation funds can help to both Herbert and Dorothy to secure their lives in the older age. The investment in this fund is suggested to both Herbert and Dorothy, because the tax benefits are available on the investment in superannuation funds for all Australians. There are different debt reduction strategies that can be adopted by Herbert and Dorothy like timely transfer for payment of transactions done through credit card, increase in debt repayment percentage, use of savings for paying off larger debts, making negotiation with financial institutions for obtaining loan at lower interest rate etc.

Summary Table for Before Merger and After Merger Tax Liabilities

The third financial strategy that can be recommended to Herbert and Dorothy is the investment in insurance plans. Insurance policy can be purchased by both Herbert and Dorothy for securing the life of partner as well as life of nominee in case accidental or illness death of the insurance holder. At the same time, rate of return is also very high for making investment in the insurance policies as compared other normal investment plans of banks and financial institutions. This policy is also recommended to the both Herbert and Dorothy, because the tax benefits are available on the amount paid as insurance premium. In other words, the individuals can claim for tax deduction from the government and tax regulation bodies in Australia for the insurance premium paid for income protection under individual policy. Tax benefits are available on different types of policies like income protection insurance, life cover insurance, total and permanent disability insurance, etc. There are different benefits of investing in insurance policies like keeping pace with the inflation, cover suspension benefits, waiver of premium benefits, financial planning benefit, terminal illness as well as death benefits etc.

Specific Suggestions: It can be suggested to Herbert and Dorothy to invest in life insurance plan, because this investment will help both of them to enjoy the tax benefits. It is so because the tax benefits are offered by the government of Australia over insurance premiums paid. At the same time, return on life insurance plan is also very high at the time of maturity. Another benefit of life insurance plan is that it provides cover from accidental death or illness death of one of the life partner to the nominee. It means the economic stability can be ensured in case of unfortunate or sudden death of one of the partners. In addition to this, the superannuation fund is also an attractive financial plan for both Herbert and Dorothy for ensuring economic security of their lives at the old age stage. At the same time, they will also be able to avail tax rebate benefits available by Australian Government on this plan.

Conclusion

On the basis of above calculations and analysis, it can be concluded that Australian government has set different income slabs for charging the tax charges from its residents. It does not charge tax from individuals the income level of whom is below the level of $18,200. At the same time, maximum tax lab is 45% for income above the level of $180,000. From the analysis of given scenario, it is observed that there will be not benefit of merger of their businesses in terms of tax liability resulting from merger activity. The after merger tax liability of the companies is very higher as compared to original tax liability before merger. There are different financial planning strategies that can be recommended to Herbert and Dorothy for better financial position such as estate planning, investment in superannuation funds, investment in the insurance policies like income protection plan, life cover plan etc and the focus on debt reduction strategies. This will improve the overall business position and financial position of Herbert and Dorothy.

References

Aus Gov (2018) Medicare levy. [Online]. Available at: https://www.ato.gov.au/Individuals/Medicare-levy/ (Accessed: 24 September 2018).

Australian Gov (2018) Individual income tax rates: 2018-19. [Online]. Available at: https://www.ato.gov.au/rates/individual-income-tax-rates/ (Accessed: 24 September 2018).

Baker, T. and Logue, K.D. (2017) Insurance law and policy: cases and materials. UK: Wolters Kluwer Law & Business.

Cummings, J.R. (2016) Effect of fund size on the performance of Australian superannuation funds. Accounting & Finance, 56(3), pp. 695-725.

Greve, H.R. and Man Zhang, C. (2017) Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), pp. 671-694.

Yang, L., He, B.J. and Ye, M. (2014) Application research of ECOTECT in residential estate planning. Energy and buildings, 72, pp. 195-202.

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[Accessed 12 July 2024].

My Assignment Help. 'Essay: Tax Liability For Herbert And Dorothy Calculation.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/fin320-tax-and-estate-planning/analysis-of-scenario-and-report.html> accessed 12 July 2024.

My Assignment Help. Essay: Tax Liability For Herbert And Dorothy Calculation. [Internet]. My Assignment Help. 2021 [cited 12 July 2024]. Available from: https://myassignmenthelp.com/free-samples/fin320-tax-and-estate-planning/analysis-of-scenario-and-report.html.

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