Overview Of Income Tax Law For Ordinary Notion Assessment

Calculating Assessable Income under the Income Tax Assessment Act 1997

Describe about the Income Tax Law for Ordinary Notion Assessment.

The Australian taxation law provides that every individual, company and other entities are required to pay tax on their taxable income. The section 4-15 of the Income Tax assessment Act 1997 provides that the income on which tax is payable is calculated by subtracting deductions that are allowable from Assessable income. The section 6-5(1) of the Income Tax Assessment Act 1997 states that assessable income should include incomes earned according to the ordinary notion and this is called ordinary income. The section 6-10 of the Income Tax Assessment Act 1997 provides that Assessable income also consist of incomes that are not considered as ordinary income. These incomes are included by virtue of in the assessable income and therefore are called statutory income. Therefore, from the above discussion it can be said that two methods of determining assessable income are ordinary income and statutory income (Gambiza and Pinto 2016).

The Goods and Services Tax is applicable to the entities that make taxable importations and taxable supplies as described in the GST Act. It is charged on the value of the taxable importations and taxable supplies at the rate of 10%. As per subdivision, 9 of the GST Act the taxpayer will have GT liability on all the taxable supplies made by the taxpayer. There is no GST liability if the supplies are free from GS and are input taxed. The section 17-5 of the Income tax assessment act 1997 provides that GST amount will not be included in the assessable income of the taxpayer (May 2016). The section 27-95(1) and section 116-20(5) of the Income Tax assessment act 1997 states that proceeds from sale of CGT asset will not include the GST amount paid on that asset. That means the GST amount will be deducted from the sale proceed of the CGT asset. The GST act provides that if the taxpayer makes a creditable acquisition then the taxpayer under section 11-20 of the act can obtain input tax credit on that acquisition. The section 27-5 of the ITAA 1997 states that the input tax credit obtained on creditable acquisition will not be allowed as deduction. Further section 27-80 and section 103-30 of the ITAA 1997 provides that while calculating the cost base of the CGT asset input tax credit on acquisition should not be included. Therefore based on the above discussion it can be concluded that GST paid on “taxable supplies” and “taxable importations” and input tax credit for “creditable acquisitions” and “creditable importations” is excluded from the calculation of the taxable income of the taxpayer (Tang 2016)

Goods and Services Tax applicable to taxable importations and taxable supplies

The Goods and Services Tax is applicable to the entities that make taxable importations and taxable supplies as described in the GST Act. It is charged on the value of the taxable importations and taxable supplies at the rate of 10%. As per subdivision, 9 of the GST Act the taxpayer will have GT liability on all the taxable supplies made by the taxpayer. There is no GST liability if the supplies are free from GS and are input taxed. The section 17-5 of the Income tax assessment act 1997 provides that GST amount will not be included in the assessable income of the taxpayer. The section 27-95(1) and section 116-20(5) of the Income Tax assessment act 1997 states that proceeds from sale of CGT asset will not include the GST amount paid on that asset (Verikios et al. 2016). That means the GST amount will be deducted from the sale proceed of the CGT asset. The GST act provides that if the taxpayer makes a creditable acquisition then the taxpayer under section 11-20 of the act can obtain input tax credit on that acquisition. The section 27-5 of the ITAA 1997 states that the input tax credit obtained on creditable acquisition will not be allowed as deduction. Further section 27-80 and section 103-30 of the ITAA 1997 provides that while calculating the cost base of the CGT asset input tax credit on acquisition should not be included. Therefore based on the above discussion it can be concluded that GST paid on “taxable supplies” and “taxable importations” and input tax credit for “creditable acquisitions” and “creditable importations” is excluded from the calculation of the taxable income of the taxpayer (Long 2016).

An individual for becoming a tax agent is required to fulfill the requirements provided in section 20-5(1) of the TASA 2009. It states that the individual should be above the age of 18, should be a fit and proper person and should comply with all the education and experience requirements of the TASA to be eligible for becoming a tax agent (Rashid et al. 2016). The requirements that an individual should have to qualify the fit and proper person test are:

The individual should posses good character, integrity and fame;

There should be no event that could affect the individuals continued registration has happened in the past five years;

The individual should not be declared as undercharged bankrupt at any time during the previous five year;

Requirements for becoming a tax agent under TASA 2009

In the past five years the individual should not have served imprisonment;

If all the requirements stated above are satisfied then the individual is qualified as a tax agent.

The meaning of the self assessment and how it applies to individual tax payers are discussed below:

The tax system in Australia is based on self-assessment and it was introduced through the legislation of Taxation Law (self-Assessment) Act 1992.

The tax that is paid to the government after computation by the taxpayer is called the self-assessment of tax.

In this system, the taxpayer is required to prepare the income tax return.

The income tax returned prepared should contain all the assessable income and all the allowable deductions and offsets.

The returns submitted by the taxpayer are accepted at face value and may be subsequently assessed by the ATO.

After the self-assessed tax return is lodged and a notice of assessment is served by the ATO then the taxpayer is formally obliged to pay tax (Boud 2013).

A business entity that has an annual turnover less than $2 million is termed as small business entity. The taxation law provides a wide range of concession to a small business entity and among them, one such concession is deduction for prepaid expenses (Frecknall-Hughes, J. and McKerchar 2013). The law requires that a prepaid expense more than $1000 should be appropriately apportioned among the financial years. The small business entity is however allowed a concession under 12 months rule. The concession is if the entity chooses then it can claim deduction for the prepaid amount immediately in the year the expenses are incurred. The necessary condition is that the prepayment should not exceed for more than 12 months and the period should end either in the year expense is incurred or in the following next year.

In the given case, the deduction that can be claimed by Jack for deduction during the year 2015/16 is given below.

a)

Jacks elects small business concession
Statement showing calculation of deduction for 2015/16
Particulars	Amount
Rent paid(including advance of 3 months)	$                              300,000.00
Insurance premium paid (including 6 months in advance)	$                                72,000.00
Lease payment	$                              120,000.00
Total allowable deduction	$                              492,000.00

 The advance lease payment is for 27 months therefore as the advance is for more than 12 moths the advance cannot be claimed as expense in the year 2015/16.

 b)

Jacks do not elects small business concession
Statement showing calculation of deduction for 2015/16
Particulars	Amount
Rent paid	$                              240,000.00
Insurance premium paid	$                                48,000.00
Lease payment	$                              120,000.00
Total allowable deduction	$                              408,000.00

Statement showing calculation of Capital Gain Using Nominal Method
Particulars	Amount
Sales Proceed	$        550,000.00
Less:
Cost of purchase	$      (265,000.00)
Cost of Renovation	$      (180,000.00)
Selling Commission	$        (18,000.00)
Capital Gain	$          87,000.00
Less:
Discount (50%)	$          43,500.00
Net Capital Gain/(loss)	$          43,500.00

b)

Statement showing calculation of Capital Gain Using Indexation Method
Particulars	Amount
Sales Proceed	$        550,000.00
Less:
Indexed Cost of purchase	$      (382,467.84)
Cost of Renovation	$      (201,195.65)
Selling Commission	$        (18,000.00)
Capital Gain/ (loss)	$        (51,663.49)

Calculation of Indexation factor cost of purchase
CPI for September 1999	123.4
CPI for December 1987	85.5
Indexation factor	1.443274854
Calculation of Indexation factor cost of renovation
CPI for September 1999	123.4
CPI for March 1994	110.4
Indexation factor	1.117753623

C)

The section 100-35 of the ITAA 1997 states that if the amount received from the CGT event exceeds the cost then that is called capital gain and if the cost of the CGT event exceeds the amount received then it is a capital loss. There are two methods of calculating capital gain or loss for assets held for more than 12 months. In discount method, 50% of the capital gain is reduced for individuals and it is not available to the companies. In the indexation method the cost base of the asset is increased by applying indexation factor up to September 1999. The indexed method is applicable for assets acquired after 20 September 1985 but before 21 September 1999 and the asset should be held for at least 12 months. Therefore, for assets acquired between this period both the discount method and indexed method can be used to find the best option for paying less tax.

In the given case under indexation method it is capital loss so this method should be chosen by the taxpayer because by using this method the taxpayer will pay the minimum tax.

Reference

Boud, D., 2013. Enhancing learning through self-assessment. Routledge.

Frecknall-Hughes, J. and McKerchar, M., 2013. Historical perspectives on the emergence of the tax profession: Australia and the UK. Austl. Tax F., 28, p.275.

Gambiza, T.M. and Pinto, D., 2016. Sharing the rides but are we sharing the profits?. Tax Specialist, 19(5), p.187.

Long, B., 2016. A taxing issue: Reflections of Christian economists on tax reform in Australia. St Mark's Review, (235), p.v.

May, S., 2016. Applying the GST to imported digital products and services: Problems and solutions. Tax Specialist, 19(3), p.110.

Rashid, A.A., Hanif, A. and Kamaruddin, R., 2016. Acceptance towards Goods and Services Tax (GST) and Quality of Life: Antecedent and outcome using partial least square method. Environment-Behaviour Proceedings Journal, 1(2), pp.25-32.

Tang, C., 2016. Australian GST update—2015. World Journal of VAT/GST Law, 5(1), pp.32-41.

Verikios, G., Patron, J., Gharibnavaz, R., Economics, K.P.M.G. and Winston, A., 2016. OPTIONS FOR REFORMING AUSTRALIA'S GOODS AND SERVICES TAX.