PACC6006 Taxation Law

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03-07-2021

Question:

Jane is an eligible beneficiary of the Brown Family Discretionary Trust. The trustees decided to distribute a cash amount of $20,000 to Jane for the current tax year.

Jane also receives $20,000 fully franked dividends. Jane has a $20,000 HELP debt.

Jane received $79,000 (gross income) from employment at Company Pty Ltd for the period 1 July 2016 to 30 June 2017. The correct amount of PAYG has been withheld.

Jane reports interest income of $475.

Jane advises of investment expenses of $250.

Jane receives rental income of $35,000 from an investment property. The associated expenses are:

Mortgage repayments: $25,000
Repairs: $2,000
Rates: $2,500
Insurance: $500

Jane sold a parcel of 200 Coles Myer Group shares on 1 July 2016 for $3,500. She had purchased these shares on 1 July 2009 for $800. Her brokerage costs of buying and selling were $300 in total.

Jane made donations (for which she presents tax invoices and receipts) to the value of $900.

Jane does not wear a uniform to work.

Jane pays premiums on an income protection insurance policy equivalent to $1,000 per year.

Jane does not have Private Health Insurance.

Green Pty Ltd is a resident gardening company registered with the following information:

TFN: 859 376 213

ABN: 79 512 647 864

ACN: 86 572 314 719

The following is the financial information for the year ended 30 June 2017.

GST (where it is applicable) has not been removed from the following amounts.

Depreciation (for tax purposes) was reported to be $5,500 for the current year.

Income:

Sales	345,000
Exempt income	10,000
Dividends (fully franked)	10,260
Interest received	900
Compensation from a client who failed in a legal suit to obtain damages from Green Pty td for alleged property damage.	4,000
Net capital gain	4,000

Expenses:

Advertising (print, net, signage, flyers)	1,000
Bad debts	900
Bank Charges	150
Capital expenditure (qualifies for immediate deduction)	3,000
Cost of sales	6,000
Sub-contractor expenses	23,000
Depreciation expenses	2,000
Electricity	800
Entertainment	2,000
Environmental protection (disposal of chemicals)	600
Fines (speeding and parking tickets)	500
Insurance	600
Interest expenses within Australia	1,200
Lease expenses within Australia	4,000
Motor Vehicle 3^rd Party insurance	550
Motor Vehicle expenses (petrol & maintenance)	4,000
Motor Vehicle Registration	1,200
Rent expenses	11,800
Stationery & Office supplies	200
Tea, coffee, sugar & milk for staff use	100
Telstra (Phones & Internet)	2,000
Wages	45,000

Answer:

In the given case study, Janes is liable to make tax payment as all the criteria for being an Australian resident is fulfilled by her. It is stated that under section 4-1, ITAA that every Australian resident is required to make tax payment whether it is earned inside or outside Australia.. There are two components, involved in computation of tax on the taxable income and this comprised of allowable deductions and total assessable income.

Allowable deductions-

Expenses incurred for income generation are used for deducting by the tax payers.

Donations- As per case study, Janes is eligible for enjoying deductions for donations according to division 30, ITAA.

Expenses generated from investment-according to section 8-5, ITAA interest generated from investment and dividends are treated as allowable deduction.

Insurance policy for income protection- Under section 8-5, ITAA the amount of premium that is paid on insurance is allowable for deduction.

Expenses for rental property-As per section 8-5, ITAA rental property expenses are allowed for deductions only if the interest is charged on mortgage as given in the vase study.

Assessable income-

The income generated from ordinary activities can be referred as ordinary income under section 6-5, ITAA. Statutory income is the income that does not fall under ordinary groups as per section 6-10, ITAA.

Jane’s incomes are assessed and classified below:

Income generated from salary-

Income from trust-As per Division 6 of ITAA (1936), the income generated from trust is taxable income. Income received by Jane from trust forms a part of ordinary taxable income.

Dividend income- Dividend received by Jane forms a part of taxable income as per section 6-5, ITAA.

Rental income- Rental income of Jane generated from rental property is treated as ordinary assessable taxable income as per section 6-5, ITAA.

Capital gain from selling of shares- Net capital gain of Jane that is received from selling of the assets is included under taxation purpose according to section 102-5 ITAA, 1936

Calculation of net tax payable:

Computation of Net Tax Payable
Taxpayer: Jane Brown
Taxation Period: 1/07/2016 to 30/06/2017

Particulars	Amount
Income from Trust	$20,000
Franking Credit	$20,000
Income from Salary	$79,000
Interest Income	$475
Rental Income	$35,000
Interest on Mortgage	$12,500
Repairs	$2,000
Rates	$2,500
Insurance	$500
Expenses for Investment Advice	$250
Premium for Income Protection Policy	$1,000
Donation	$900
Total Allowable Deduction	$19,650
Taxable Income	$136,025
Tax on Taxable Income	$37,961
Add: Medicare Levy @2%	$2,721
Add: Medicare Lecy Surcharge @1.25%	$1,700
Gross Tax Payable	$42,382
Less: Tax Credit for Franking Credit	$6,000
Net Tax Payable	$36,382

Assumptions & Related Regulations:

The rate of tax charged in Australia varies from individual to business firms. Generally, the rate of tax charged on business firm is 30%. Tax rate is lower for companies having a turnover below $ 2 million. It is depicted from the case study that Green Pty limited is eligible for enjoying lower tax rate because of its lower turnover.

Assessable income-

As per section 6-10, ITAA, the statutory income of Green Pty limited is as follows:

Compensation provided by clients
Capital gain (Net)

Under section 6-5, ITAA, ordinary income can be listed below:

Dividends received
Sales
Interest received

Allowable deductions-

Fines- Fines are regarded as non-deductible expenses as per section 26-5, ITAA.

Entertainment- Under division 32, ITAA, expenses on entertainment are not allowable for purpose of deductions.

Calculation of net tax payable:

Calculation of bet tax payable is done in accordance with the assumptions provided.

Computation of Net Tax Payable
Taxpayer: Green Pty. Ltd.
ABN: 79 512 647 864
Taxation Period: 1/7/2016 to 30/06/2017
	GST Exclusive
Particulars	Amount
Sales	$313,636.36
Interest Received	$900.00
Total Assessable Income	$332,796.36
Advertising	$909.09
Bad Debts	$900.00
Bank Charges	$150.00
Capital Expenditure	$2,727.27
Cost of Sales	$54,545.45
Sub-Contractor Expenses	$20,909.09
Depreciation Expenses	$5,500.00
Electricity	$727.27
Environmental Protection	$600.00
Insurance	$545.45
Interest Expenses within Australia	$1,200.00
Lease Expenses Within Australia	$4,000.00
Motor Vehicle 3rd Party Insurance	$500.00
Motor Vehicle Expenses	$3,636.36
Motor Vehicle Registration	$1,090.91
Rent Expenses	$10,727.27
Stationery & Office Supplies	$181.82
Staff Amenities	$90.91
Phone & Internet	$1,818.18
Wages	$45,000.00
Total Allowable Deduction	$155,759.09
Taxable Income	$177,037.27
Tax Rate	$0.29
Gross Tax Payable	$50,455.62
Less: Tax Offset for Franking Credit	($3,078.00)
Net Tax Payable	$47,377.62