Calculation Of Income Tax And GST Input Credit

Income tax assessment Act 1997 is one of the main statues for calculating income tax and an act of Australian parliament.

Under the provision of section 8-1 of the income tax assessment act, 1997, some of the general deductions are provided that are listed below:

Any loss or outgoing can be deducted from assessable income to the extent that

• Loss is incurred in conducting business for the purpose of producing and gaining assessable income.
• Loss is incurred in producing and gaining assessable income

However, under this section loss or outgoing cannot be deducted to the extent that:

• Loss or expenses incurred is of domestic or private nature
• Outgoing or loss is of capital nature
• Tax payers are prevented from deducting as per the provision act
• Expenses are incurred in relation to producing or gaining exempted income tax on net assessable non-exempt income (Miller and Oats 2016).

Under section 8-1, for loss or outgoing, a taxpayer is accordingly entitled to general deductions. This is applicable if the amount of expenses or losses satisfies none of the four negative limbs in subsection 8-1(2) and one of the two positive limbs in subsection 8-1(1).

The working of taxable income is provided under section 5.15 of income tax assessment act, 1997. Taxable income can be worked out by given formula as below:

Taxable income= Assessable income- Deductions

This involved adding up of all assessable income of year and then adding up deductions for income year. In last step, deductions are subtracted from assessable income. Therefore, it is stated under section 4-15 of income tax assessment act, 1997 that calculation of taxable income from assessable income is done by deducting allowable expenses. Under section 8-1(1) of the ITAA 1997, taxpayer can claim deductions for the items that are listed above or criteria given above. Deductions under section 8-1(1) of the ITAA 1997for the given situations are discussed below.

• In the first situation, an individual for moving machineries to a new site incurs cost. Deductions relating to expenses incurred for machinery will be considered under section 8-1 when usage of machinery helps in generating income that can be taxed (Bankman et al. 2017). This can be explained with the help of a given case where relocation of plant involved expense that are not allowed for deductions as capital expenditure expenses. Granite Supply Association Ltd v Kitton(1905) and Smith v Westinghouse Brake Company (1888) is a case that lead to relocating of plants that involve expenditures wold not be used for deduction as the capital nature expenses.
• Second case is incurring of cost that is involved in revaluing assets for effecting insurance cover. Under section, 8-1A of ITSS 1997, cost that is involved in asset revaluation is not regarded as considered for deductions and thereby it is not treated as deductible expenses (Lang et al. 2015).
• Third situation is about legal expenses that is incurred by an organization for opposing petition in winding up. It is provided in section 8-1 of the act, 1997 that expenditure incurred by organization in lawful proceedings regarding filing of petitions for opposing the winding up.
• Last situation deals with number on matters on which legal expenses are incurred by organization. These involve discharging of mortgage, conveyance and general legal advice relating to the business of clients. An organization has to incur expenses for hiring solicitor for servicing of such accounts. Under section 8-1, if an organization is incurring expenditure on hiring solicitor for servicing of all such accounts, then such expenditure is involved in permissible deductions.

An organisation has the right to take into credit for the payment of GST is the business activities helps in generating income according to GST Act, 1999. Business are required to have the proper documentation of any transactions or any purchase of materials, then only that business is credible for GST input credit (Hayashi 2014).

The given case is about Big bank that carries out its operating at national level with 50 branches and has been registered for GST. Bank has lanced new product for which GST needs to be charged. An amount of $ 1650000 has been incurred by bank that also involves GST on expenses for advertising. Expenses incurred by bank on advertisement are not regarded as expenses or is not eligible for input credit and this is ensured by bank.

Expenses that are incurred by organization by organization is eligible for input tax credit on GST if such expenses are inclusive of GDT and they are incurred during the normal course of operations of business.

Applications

Big bank has been operating nationally having fifty branches by providing deposit facilities and loans to customers. Insurance policies and Big bank are the new policies that are launched by bank. Advertising campaign of organization for promoting their newly launched products involved budget of $ 1650000 that was inclusive of GST. Specific promotion of contents insurance policies and Big bank home was specifically promoted by a television advertising campaign for which $ 550000 was allocated as budget. Budget of $ 1100000 was allocated for purpose of general advertising and this involved radio, media and print advertisement. The selling of products such as bank home and insurance policies accounts for 2% of total revenue that is generated by company. The budgeted amount that is set for advertising of the newly launched product is inclusive of GST value.

Therefore, it can be said that the source from which Big bank derives its major revenues involves a budgeted value of $ 1100000 which is incurred on promotion of goods and services. Organization is yet to receive income that will be generated from launching of newly launch products, the amount incurred on promotion of insurance policies, and bank home will be treated as capital expenditure.

From the above discussion, it can be inferred that budgeted amount of $ 1100000 involved in promotion of insurance policies and bank home will be eligible for or permitted to taken input tax credit. Nonetheless, the amount of input credit will not be prohibited or restricted from input tax credit and the reason is attributable to the fact that income generation of origination accounts for 2% of expenditure. The following table depicts the calculation of input tax credit:

Calculation of Input Tax credit
Particulars	Amount ($)	Amount ($)
Total spending on advertisement and promotional activities	1,650,000.00
GST input credit 100% eligible for:	1,100,000.00
Portion of advertisement expenditures ineligible for input credit in respect of GST	550,000.00
100%  GST input credit		100,000.00
Add: For 2% contribution in revenue		3,000.00
Amount of input credit allowed to the bank		103,000.00

Table 1: Input tax credit

(Source: Created by Author)

A tax payer can claim foreign tax offset if he or she have paid income on profit, income or gains of capital nature that are involved in Australian assessable income. Offset is exposed to limit in some circumstances. An individual is entitled to offsetting of foreign income tax under the following situations and they are as follows:

• An individual has deemed to pad or has actually pad foreign income tax amount.
• Value of assessable income must include gain or income that is paid on foreign income tax.

If the payment of income tax has been done after the year when related gains have been included in Australian tax return, then an individual is required to request amendment for claiming the offset.

Rules concerning the offset of income tax are depicted in sub division of 717A of the ITAA act, 1997.

Angelos
Statement showing calculation of Taxable Income
Particulars	Amount	Amount
Gross Income
Employment income from Australia	$         44,000.00
Employment income from United States	$         12,000.00
Employment income from United Kingdom	$           8,000.00
Rental income from property in United Kingdom	$           2,000.00
Dividend income from United Kingdom	$           1,200.00
Interest income from United Kingdom	$              800.00
Total Asseessable  Income		$           68,000.00
Less:
Allowable Deduction
Expenses incurred in deriving employment income from Australia	4,000
Expenses incurred in deriving employment income from United States	900
Expenses incurred in deriving rental income from United Kingdom	500
Gift to a deductible gift recipient	400
Interest (debt deductions) incurred in deriving dividend income	140
Expenses (debt deductions) incurred in deriving interest income	60
Total Allowable expenses		$             6,000.00
Total taxable Income		$           62,000.00

Table 2: Income Tax Payable

(Source: created by Author)

Angelo’s
Statement showing Tax payable and Medicare Levy
Particulars	Amount
Tax Payable on Income	$11,697.00
Medicare Levy payable on taxable income	$1,240.00
Total Tax and Medicare Levy/ Tax Payable	$12,937.00

Table 3: Income Tax Payable

(Source: Created by Author)

Calculation Showing Average Australian tax
Particulars	Amount
Tax payable	$12,937.00
Taxable Income	$62,000.00
Average rate of tax	21%

Table 4: Income Tax Payable

(Source: Created by Author)

Calculation of passive foreign Income
Particulars	Amount	Amount
Gross Foreign Rental income	$           2,000.00
Expenses incurred	$             (500.00)
Net Foreign rental income		$             1,500.00
Gross Foreign Dividend Income	$           1,200.00
Expenses debt deduction not allowed	$                      -
Net Foreign Dividend income		$             1,200.00
Gross foreign interest income	$              800.00
Expenses debt deduction is not allowed	$                      -
Net Foreign interest income		$                800.00
Net Passive Foreign Income		$             3,500.00

Calculation of other foreign Income
Particulars	Amount	Amount
Gross income from Employment USA	$         12,000.00
Expenses incurred for generating income	$             (900.00)
Net employment income from USA		$           11,100.00
Employment income from United Kingdom		$                800.00
Net other Foreign income		$           11,900.00

Calculation of Adjusted ANFI for each class of foreign income
Particulars	Passive Income	Other income
Net Foreign income	$           3,500.00	$           11,900.00
Taxable Income	$         62,000.00	$           62,000.00
Taxable Income (including donation)	$         62,400.00	$           62,400.00
ANFI	$           3,477.56	$           11,823.72

Calculation of Australian tax payable on each class of foreign income
Particulars	Passive Income	Other income
Net Foreign Income	$           3,477.56	$           11,823.72
Average Tax Rate	21%	21%
Australian Tax on each class of income	$              725.63	$             2,467.15

Statement showing Deduction that can be claimed
Particulars	Passive Income	Other income
Australian Tax on each class of income	$              725.63	$             2,467.15
Foreign tax paid	$              800.00	$             3,600.00
Allowable Foreign Tax Offset	$              725.63	$             2,467.15

Calculation of foreign tax offset is done by providing two options. In first option, tax payable amount is reduced and in second option, income tax payable is deduced. Therefore, the amount of tax limit is calculated at $ $4972.50 (11794.18-6821.68). It is very clear from figure that amount of foreign tax paid is less than the amount of foreign tax offset. Value of foreign tax offset stands at $4400.

The following table depicts the calculation of net income for partnership for the give come year. 

Calculation of net income for partnership for the income year:

Table 5: Net Income from partnership

(Source: created by Author)

References:

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Hayashi, A.T., 2014. The Legal Salience of Taxation. The University of Chicago Law Review, pp.1443-1507.

Lang, M., Pistone, P., Schuch, J. and Staringer, C. eds., 2015. Introduction to European tax law on direct taxation. Linde Verlag GmbH.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.