Essay On Taxation In Australia: Equity, Progressive System, Income Tax Act 1997, Residency Test, Assessable Income.

a)What are the primary functions of taxation in Australia?

b)What does equity mean when discussing the design of a good tax system?

c)In what way does s4-15 Income Tax Assessment Act 1997 require you to work out your taxable income?

d)Briefly explain what a progressive tax system aims at achieving?

e)Which section of the Income Tax Assessment Act 1997 includes the value of allowances in assessable income?

f)What topic does Taxation Ruling TR 2004/15

g)Which two Divisions of the Income Tax Assessment Act 1997 provide deductions for capital expenditure?

h)What is the applicable tax rate for a taxpayer who has $80,000 of taxable income in 2017/18?

i)What sub-divisions ofIncome Tax Assessment Act 1997 list the provisions that treat amounts as Non Assessable Non Exempt income?

j)Tax Determination TD 2017/4 sets out the cents per kilometer rates for private use of motor vehicles for the FBT year starting 1 April 2017. What is the applicable rate for motor vehicles with an engine capacity over 2500cc.

Functions of taxation in Australia

Question 1

All citizens are required to mandatorily pay tax if their income is more than the minimum threshold. The tax is collected by the government so that it is able to carry out its basic functions. The money collected through various forms of taxes provides the resources required by the government to be able to carry out their functions. It also ensures that the government is able to target income inequality (Riccardi, 2018).

Question 2

When it comes to a good system of taxation equity does not signify the equal treatment of all people. In a good system of taxation, referring to equity the government seeks to identify those who are having a higher income and impose a higher rate of taxation on them to ensure that the people, who are having a low income, are provided with less burden of paying taxes. This would target income inequality which is the purpose of a good system of taxation. Thus, equity means imposing more tax on those who earn more and having a progressive taxation system (Stiglitz, 2014).

Question 3

As stated in the provisions of section 4.15 of Income Tax Assessment Act 1997 there are three steps to work out the taxable income. In the initial step all assessable income for the year has to be summed up together. In the second step the tax payer has to add up all from of general and specific deductions which are available to them under division 8 of the legislation. In the third step the tax payer needs to subtract the deductions from assessable income. If the assessable income is more, then the remaining amount would be the taxable income of the tax payer.

Question 4

The primary purpose of a taxation system which is progressive in nature is to achieve equality. This quality is in relation to the practical burden of paying tax on an income group. For instance if the government wishes to impose tax of 45% on all income groups, the person having an income of 18200 will have to pay 45% on his income and a person having an income of 200000 will also have to pay the same. The person who is having an income of 18200 will only be left with $10010 as his earnings and thus the impact on him would be much more. Thus the progressive taxation system is introduced (Piketty, 2014).

Equity in the tax system

Question 5

Income Tax Assessment Act 1997 through Section   15.2 provides for the value of allowances in assessable income.

Question 6

The question that whether a company not incorporated in Australia would be considered as a resident for the purpose of taxation is addressed by Taxation Ruling TR 2004/15

Question 7

Subdivision 40H and Subdivision 40I of the ITAA 97 are the two divisions which deal with rules relating to deduction of capital expenditure

Question 8

The tax rate which is applicable if a person has earned 80000 is not a single tax rate. A person earning till 18200 is exempted from paying any tax. Till 37000 it is 19% and beyond 37000 to 87000 its 32.5% and thus in the present situation the tax would be as follows: $3572+ (80000-37001)*32.5 = $17546.68

Question 9

Subdivision 50A and 50B are the Sub-divisions of Income Tax Assessment Act 1997 which provide for the rules regarding treating an amount as a Non Assessable Non Exempt income

Question 10

When a motor vehicles has an engine capacity over 2500cc a rate of 63 cents is applied according to the ruling.

Martelle has come to Australia from UK and is not an Australian resident. The question which arises is that as she is staying in Australia would she be considered as an Australian resident for tax purpose.

Rule

In order to determine the residential status of a person for the purpose of taxation it has to be there are various tests which have been formed by common law. In addition taxation rulings and the ITAA 97 itself provides the definition of a person who would be considered as an Australian resident for taxation purpose.

The ITAA 36 section 6-1 provides for the definition of a resident. A person will be considered as a resident in case if with the ordinary meaning of the word reside the person is found to be residing in Australia.

The principle test in relation to the situation is the residency test which analyzes the place of adobe of the person whose tax residency needs to the analyzed. The other test is the 183 days test which states that the person has to be staying in Australia for 183 days or more to become a resident for tax purpose. The taxation ruling which specifically deals with the provisions regarding the place of adobe test are TR IT 2650 and TR 98/17. In relation to the reside test the court takes into consideration the persons physical presence in Australia, the frequency and duration of visit,  the existence of economic or family ties, the purpose of visit, employment ties and permanent place of adobe and purchase and maintenance  of assets in the company. In addition the residency cannot be identified through the application of any single factor (Stiglitz, 2014).

Progressive tax system

On the other hand it has been stated by the one-eighty-three days test that a person would be deemed to be a resident of Australia for the purpose of taxation in case the person resides in Australia for the purpose of 183 days. There are certain exceptions to this rule which include factors such as the person having a permanent place of residence abroad and having no purpose of staying in Australia and taking up residency. In addition the residency cannot be identified through the application of any single factor.

In the case of In FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR 322 the court stated that where a person is found to be staying in Australia for a period which is more than their actual purpose of visit they would be considered to have the intention of residing in the country.

Through the facts of the case study it has been stated that Martelle has come to Australia for the purpose of creating colourful designs based on vibrant colours of the Great reef. The project is estimated to last for six and a half months. In the given situation if the provisions of the 183 days test are applied it can be stated that as the person is staying in Australia for a period of more than 183 days she would be considered as an Australian resident for taxation purpose. It is also provided that she has purchased a boat. However this boat is also in relation to her work where she at times takes her friends on sail. In addition it is also provided that she has the intention of returning to her country or origin. Her father has also agreed to take care of her assets and investments. She has not made any investments. In this situation the application of the 183 days test would not be successful as she has the intention of going back to France where she has a permanent place of adobe. In addition she has not purchased any immovable property in Australia which could provide her intention to stay here. Thus she is not to be considered as a resident for taxation purpose. In case a person is classified as a resident for taxation purpose under s 6-5 and 6-10 he or she has to pay taxes on every income earned by them not taking into consideration the source from which such income is gained. The person also does not require under 251U(1)(d) of the ITAA 36 to pat Medicare levy, but they are required to pay CGT.

Provisions under the Income Tax Assessment Act 1997

Conclusion

Thus, the above application implies that Martelle would not be considered as a resident for taxation and purpose.

In the first situation under the rules provided by s6-5 of the ITAA 97 the $9000 received into the bank account directly would be taken as an ordinary income as it is in from of money received for providing services.

It has been provided by s6-5 of the ITAA 97 that rent or interest received is a form of assessable income. Thus the interest of $425 is also to be considered as assessable income.

Any prize or gift is not considered as an assessable income if they are a windfall transaction. However as highlighted through the case of Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 prize or gift provided with respect to the employment services are assessable income. The case of Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570 signified that the overall situation is to be considered for determining the accessibility of the prize. The verdict has been supported by ATO ID 2002/644 by stating that when a prize is received by the tax payer because of activities including income deriving activity only then such prize is to be considered as the assessable income.  As the $6,500 winnings for being Queensland Designer of the Year is an isolated transaction it would not be an assessable income.

Ellen has also been asked to sign a restrictive covenant which states that she is not going to carry out the same business in her own name. For this she is provided with sum of $10000. The court stated in the case of Paykel v FC of T 94 ATC 4176 that an amount which is provided for signing a restrictive covenant is a capital gain and not a regular income. Thus in the same way the $10000 received by Ellen would be a capital gain rather than an assessable income as it is a onetime transaction having no repeated nature.

As Ellen has withdrawn her health insurance, she would be liable to pay Medicare Levy surcharge

Thus the total Income Tax payable by Ellen for the year ending June 2018 is as follows

Part 4

It has been provided through Division 40 of ITAA 97 that an amount equal to the decline in value or depreciation of an asset used to produce the assessable income as per s 40-25(7) has the right to be deducted from the assessable income. The calculation of depreciation can be done through the use of two methods provided by the ITAA 97.  These methods cannot be changed once adopted. These Methods are as follows

Residency test for taxation purposes

As per Section 40-75(1) depreciation is equal to Asset Value x (Days held/365) x (200%/effective life of the asset)

As per Section 40-75(1) depreciation is equal to Asset Value x (Days held/365) x (100%/effective life of the asset)

Part 5

It has been stated through the provisions of TR 97/11 that in order to distinguish between a hobby and a business a few factors have to be considered. An income derived from the business is  assessable but an income derived from hobby is not assessable. In a business the person carrying out the activity must intend to use it for making profit. The person must also have the intention of indulging into the activity. The activity must have a regular and repetitive nature. The activity has to be carried out in a way, which is considered to be standard and systematic. The operations have to include activities which are generally carried out as business activities. It has to be ongoing and permanent.  As stated through s 995-1 the definition of business includes trade, vocation and profession which do not include the work performed in the role of an employee. In FC of T v Ferguson 1979 the court stated that the identification of a business is a matter of fact. In addition it had been stated through Case P67 82 ATC 317 provided via TR 2005/1 that a person who is operating an activity of photography providing only 12% of his time to the activity was carrying out a photography business. Thus Julia has to consider the above discussed rules to ensure that the ATO will take her activity as a business.

Part 6

1. Under section 8.1 of the ITAA 97 any expenses which have been incurred by a taxpayer for deriving the assessable income are to be deducted. The Money paid to employees is also to be deducted as they work to get the assessable income. Thus $300000 is eligible to be deducted.
2. The ATO deals with those expenses which have been incurred at arm’s length. They have the discretion of considering such expenses as reasonably incurred or not. Here a sum of $4000 is provided for working nine hours to the son. It is stated 26-35(1)of ITAA 1936 that such deduction would only be made to the extent considered as reasonable by the commissioner. The payment here is not prima faice reasonable.
3. Under div 32 and section 32-5 it is provided that outgoing or loss for entertainment are not to be deducted. These expenses are deducted if incurred in relation to income production activities like advertisement. Thus, the $900 is not deductible as it is not related to an income producing activity.  
4. An expense is only deductible in case it has nexus with deriving the assessable income under s8.1  However, here such nexus can been seen in the expenditure of $2,000 for smart clothing for employees to have good image before the client as this ensures positive image and more income. Thus the expense is deductible.
5. Meal expenses for the clients would not be deductible as they do not have any nexus in the production of the business assessable income. Thus they are not deductions under section 8-1 of the ITAA 97.
6. An expense is only deductible in case it has nexus with deriving the assessable income under s8.1, the interest is also paid to gain the assessable income. In addition it does not fall within the positive limb and thus it is to be taken as a deductible expense. Thus the Interest cost of $3,400 on a loan is deductible.
7. Under section 8-2 of the ITAA 97 travelling expenses incurred to travel from and to work is not deductible as it is triggering the negative limb. The rules of FC of T v. Lunnet 1958 also confirm the same. Thus the expenses of travel is not to be deducted.
8. The expense would be deductible only to the extent they have been used to gain the business income. Here the phone has been used to gain the business income in 80% of the times. Thus 80% of the expense is to be deducted under section 8.1 as they are gained for getting business income.
9. The marketing conference has been carried out in relation to the business product marketing and thus it has direct nexus with deriving the assessable income of the business. Thus such expenses are to be deducted under section 8.1 of the ITAA 97.
10. $500 has been incurred, for management of tax affairs. As per section 25-5(1) of the ITAA 97, any expense which has been incurred for managing tax affairs are to be deducted. Thus the expenses are deductible.

References

FC of T v Ferguson 1979.

FC of T v. Pechey 75 ATC 4083; (1975) 5 ATR 322

FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494.

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Paykel v FC of T 94 ATC 4176

Piketty, T., (2014). A global progressive tax on individual net worth would offer the best solution to the world’s spiralling levels of inequality. LSE American Politics and Policy.

Riccardi, L., (2018). Introduction to Taxation. In Introduction to Chinese Fiscal System (pp. 1-5). Springer, Singapore.

Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514

Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570

Stiglitz, J.E., (2014). Reforming taxation to promote growth and equity. Roosevelt Institute, White Paper.