Taxation Of Employment Income: Eligibility Of Deductions

Your firm has a client who has been a management accountant for many years and is now also teaching part-time at TAFE and has recently acquired a rental property. We prepared his Tax Return, sent it out for signature.

He has sent the Tax Return back to us unsigned, saying that we had made an error in claiming a tax deduction for the interest and expenses for the first four months that he owned the rental property, as it was not earning income at the time, as it runs counter to the matching principle.

Your manager has asked you to prepare an essay exploring this issue. Explaining to the client diplomatically that he is in error.

Rules and regulations for computing taxable income

Income tax is charged on the assessable income of the assessee. The government of Australia prescribed various rules and regulations for assessing the income of the person. In Australia, the Income Tax Assessment Act 1997, defined all the principles and standard for computing the income of the assessee (Doerrenberg, Peichl, and Siegloch, 2017). In this Act, various deductions and exemption are prescribed; the assessable income is computed after considering all the deductions and exemption (Chardon, Freudenberg and Brimble, 2016). The present study revolves around the taxation of the employment income. The tax is levy on the income of the employee which is received in terms of the salary and wages by the employer. In this study, relation between the income and the expenses which are incurred for earning the income along with the eligibility of the deduction from the assessable income of the person during the year is also analysed.

The present study is related to the eligibility of the deduction of the expenses from the assessable income of the person. In the given study, it is stated that the employee does not agree with the tax return prepared by the company. The employee contended that the expenses were related to the period in which he was not earning the income. Therefore the deduction is not allowed from the assessable income. In this case, the employee was working as a management accountant and recently started the part-time teaching job in an institute also. For this, the person acquired the rental property and incurred the interest and expenses related to the rental property. The objection of the employee is that in the first four months he was not earning the income. Therefore, the expenses related for the first fourth is not allowed for the deduction from the assessable income.

The income tax is chargeable on the taxable income of the person. The Income Tax Assessment Act described various rule and regulation for computing the taxable income of the person. With this regards the government provide certain exemptions and also certain deductions of the expenses from the assessable income of the person (Employment income, 2018). However, for claiming the deduction, all the rules related to the eligibility of the deduction must be fulfilled by the person.  Income tax is a levy on the employment income also. The receipt of the employee in the form of salary or wages is taxable under the income tax assessment act1997. Further the definition of the salary and wages defined under the act, which included the bonus, commission etc. which is given by the employer to the employee (Azémar and Hubbard, 2015).

In case of the employment, the employee also incurs some expenses, with respect to the expenses incurred by the certain employee guideline are defined under the act. The Income Tax Assessment Act 1997, general deduction and the specific deduction are stated (White and Townsend, 2018).

The section 8-1 of the Income Tax Assessment Act is about the eligibility of the general deduction with respect to the expenses. According to this section, a person can claim the deduction of the expenses under this section only if the expenses are work related. In another word, the expenses must be directly related with the generation of the income (Zidar, 2015). All the expenses which are not related to the earning the income cannot be claimed for the deduction. Another condition for eligibility of the deduction of expenses incurred by the employee is that the expenses must not be reimbursed by the employer if any expense which is incurred by the employee but compensated by the employer is not allowed for the deduction from the assessable income. Moreover, if the certain expenses which were incurred by the person for the personal reason as well as for the professional reason, then the person can claim the deduction of the expenses only to the extent which is related with the generating the income of the person. Further, the revenue nature expenses are only allowed for the deduction from assessable income of the person; the capital nature expenses are not eligible for the deduction.

Prescribed deductions and exemption for employment income

Apart from the general deduction of the expenses which are prescribed above, The Income Tax Assessment Act 1997 also define some specific deduction of the expenses to the person. The section 8-5 of the income tax assessment act prescribes about the certain deduction of the certain expenses, which are eligible for the deduction under this section (Australian Taxation office, 2018). However, a person is not allowed to make a claim the deduction of expenses twice.

The tax is a levy on the income which is earned by the person during the financial year. With this regards the person can claim the deduction of the expenses which was incurred during the year (Adam Cobb, 2016). The income tax act does not prescribe any matching concept with regarding the eligibility of the deduction of the expenses form the assessable income. For instance, if a person will receive a salary in the upcoming months, then also the person can claim the deduction of the expenses of the earlier month which is incurred during the financial year. The essential condition for claiming the deduction of the expenses is only that the expenses must be directly related with the earning the income of the person. The person should also maintain the records of the all the expenses which can be claimed from the assessable income.

In this study, it has been given that the individual is working as a management accountant and also as a teacher in an institution. For this, the individual acquired a rental property and incurred the interest and other expenses. As per the provisions prescribed under the income tax assessment act 1997, in the income of the individual, all the salary received as a management accountant and as a teacher included, although working in an institution is part-time.

In this act, the general deduction and the specific deduction which are allowed to the person is prescribed above. For the eligibility of claiming the deduction from the assessable income certain conditions must be fulfilled by the individual.

Since the employee is recently joined the institution, and after that individual acquired rental property. It has been seen that the individual has acquired the property on the rent, which enables for the working in an institution. Therefore the expenses related to the rent were directly related to the generation of the income of the individual. Moreover, the interest and the other expenses are not reimbursed by the employer, and it has been assumed that all the record with respect to the expenses was maintained by the employee. By applying the above-prescribed provisions of the income tax assessment act, the employee is eligible for claiming the deduction of the expenses forms the assessable income.

Apart from the above, the employee contended that the deduction of the expenses from the assessable income is not correct for the first four periods of the month, because at that time the income is not generated by him.  The opinion of the employee was not correct, because, at the time of assessing the income, the employee applies the matching concept rule. However, the income tax assessment act does not define any definition for the deduction of the expenses according to the matching concept. The income tax is a levy on the income of the individual which was earned during the financial year. Along with this, the person can claim the deduction of the expenses which was incurred during the financial year for generating the income. It is not necessary to match the revenue and the expenses on a monthly basis.

On the basis of the above analysis, it has been observed that the opinion of the employee is not correct according to the income tax assessment act 1997. The employee can claim the deduction of the interest and other expenses related to the work even if in the first four months he was not generating the income.

Conclusion 

On the basis of the above examination, it has been seen that the assessable income is computed by the person after claiming the deductions which are prescribed under the income tax assessment act 1997. However, for claiming the deduction, the person must satisfy the above prescribed all the condition. In the income tax assessment act, certain general and specific deductions are described, which can be claimed by the person for ascertaining the taxable income. Further, in the income of the employee, all the salary and wages received from the entire job is included, it does not make any impact whether the working of the employee is full time or the part-time. Apart from this, the income tax is charged on the income which is earned during the year, therefore the all the expenses which are incurred during the year, the employee can claim the deduction with respect to all the expenses. However, the expenses must be incurred for earning the income which is chargeable to tax.  In other words, it can be concluded that the in the income tax the matching concept with regards to the income and expenses is not applicable.

References 

Adam Cobb, J. (2016). How firms shape income inequality: Stakeholder power, executive decision making, and the structuring of employment relationships. Academy of Management Review, 41(2), 324-348.

Australian Taxation office. (2018). Deductions you can claim. Retrieved from <https://www.ato.gov.au/individuals/income-and-deductions/income-you-must-declare/employment-income/>.

Australian Taxation office. (2018). Employment income. Retrieved from <https://www.ato.gov.au/individuals/income-and-deductions/income-you-must-declare/employment-income/>.

Azémar, C., & Hubbard, R. G. (2015). Country characteristics and the incidence of capital income taxation on wages: An empirical assessment. Canadian Journal of Economics/Revue canadienne d'économique, 48(5), 1762-1802.

Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.

Doerrenberg, P., Peichl, A., & Siegloch, S. (2017). The elasticity of taxable income in the presence of deduction possibilities. Journal of Public Economics, 151, 41-55.

White, J., & Townsend, A. (2018). Deductibility of employee travel expenses: The ATO's guidance. Taxation in Australia, 52(11), 608.

Zidar, O. M. (2015). Tax cuts for whom? Heterogeneous effects of income tax changes on growth and employment(No. w21035). National Bureau of Economic Research.