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  • Subject Name : Accounting and Finance

Taxation

Part A: Short Answer Type Questions

1: The Tax-free threshold for Australian resident individual

As per ATO, the tax-free threshold can be referred to the amount that a tax payer is allowed to earn in a financial year to become liable to pay tax. For the residents of Australia, the tax-free threshold for the current financial year is $18,200 only. That means, the first portion of the income of all the residents of Australia up to $18,200 is tax-free. However, a tax payer will be progressively taxed on any income which is above the amount of threshold. The prescribed tax-free threshold will be expected to continue at $18,200 till FY 2024 to FY2025.

2: Difference between allowance and reimbursement of work related expenses

The difference between reimbursement and allowance of work related expenses are discussed below:

1. Allowances:

It can be separately recognized payments that are provided to an employee against:

  • Extreme conditions of work: for example, height, dirt or danger
  • Special duties or Qualifications: for example, safety officer or first aid certificate
  • The expenses that are not allowed to be claimed as deduction under tax by an employee: for example, general travelling expense from home to work and vice versa.
  • The work related expenses that are allowed as deduction under tax by an employee: for example, travelling expense between various work destinations or sites.

2. Reimbursements:

As per ATO, the reimbursements can be referred to the payments that have been made to a worker or an employee for the actual expenses that have been already incurred by such employee, and the employer might get subjected to the FBT (fringe benefits tax). That means, if the reimbursement to the employee by the employer is covered under fringe benefits tax, then the amount will not be considered to be assessable income in the hands of the employee, which also implies that such employee will not be able to claim any deduction for the expense.

3: Gambling is just a hobby or it can be a business at per Australian taxation rulings:

As per ruling IT 2655 of the Income Tax Act, both gambling and betting, irrespective of whether the taxpayer is conducting on a gambling and betting business or conducting such activities as a hobby, states that ‘all the proceeds or income from gambling or betting or both does not form part or can be considered as the assessable income of a tax payer for tax purposes. However there is an exception that the person has been considered as a professional gambler and/or its gambling or betting activities is its business or a portion of its business’.

As per ATO, the definition of ‘professional gambler’ is a person that has business connection with the industry. A classic example is the horse racing industry, where punters will be required to have a business connection in the industry of horse racing such it can be a breeder of horses or a trainer), before it is required to be liable to pay any tax.

As per ATO, the winnings of gamblers are not taxed in Australia. The main three reasons for such non-taxation are as follows:

  • The gambling in Australia is not considered to be a profession. Rather it is considered to be a recreational activity or a hobby.
  • As per the views of the government of Australia, any income from gambling activity will not be considered as income, but mere good luck results.
  • It is considered that if someone wins a large amount, then there are also high possibilities to lose large in various other sessions of gambling.
  • However the government of Australia and ATO taxes the gambling operators

Taxation of gambling operators in Australia differs from state to state and different gambling services are taxed in a different way. There are taxes on the turnover, on player loss and net profit. As gambling operators need to obtain a license to offer their services, certain fees must also be paid at this stage of gambling business development.

4: Liability of Medicare levy surcharge

The Medicare levy surcharge (MLS) is levied on Australian taxpayers who do not have an appropriate level of private patient hospital cover and earn above a certain income. MLS is designed to encourage individuals to take out private patient hospital cover and to use the private hospital system to reduce demand on the public Medicare system. We use a special definition of income (called income for MLS purposes) to determine if you have to pay the MLS, and the rate of MLS you will have to pay. This income is different to your taxable income. The MLS rate of 1%, 1.25% or 1.5% is levied on your taxable income, total reportable fringe benefits, and any amount on which family trust distribution tax has been paid. If you have to pay the MLS, it is in addition to the Medicare Levy.

The base income threshold (under which you are not liable to pay the MLS) is $90,000 for singles and $180,000 for families. However, you do not have to pay the MLS if your family income exceeds the threshold but your own income for MLS purposes was $22,801 or less.

5: Home office expenses: home office vs. work from home

If you work from home (either part time or full time) then some portion of the home office expenses may be claimed as a tax deduction. However, if you set up your home office in a room that is shared or has a dual purpose (such as a living or dining room), you can only claim the expenses for the hours you had exclusive use of the area.

Home Office Running Expenses:

These are general home office running expenses and include:

  • the cost of using a room (power costs for heating, cooling and lighting)
  • business related phone costs
  • The decline in value of plant and equipment (computer, printer, scanner etc.)
  • The decline in value of furniture and furnishings (Tables, chairs, curtains/blinds, floor coverings, light fittings etc.)
  • the cost of repairs to furniture and furnishing used for your work
  • cleaning costs

You can’t claim a deduction for running expenses if there is no additional cost incurred. For example, if you conduct your work in the living room of your home where other people watch the television. That’s why it’s important to have a dedicated office or room of the house if you wish to claim home office expenses.

Part B: Case Studies

1: The Benjamin Case Study

Benjamin left Australia and moved to Ireland when he was 25 along with his wife Annaliese. The couple purchased property started family in Ireland. In 2000, both Benjamin and his wife Annaliese moved back to Australia to be closer to Benjamin’s family. They purchased a house in Noosa during the same period. On February 1, 2019, they moved back to Ireland, they sold their house in Noosa and all other personal possessions. They also closed their Australian bank accounts.

The taxation period in Australia starts on 1 July and ends on June 30. The couple left Australia on February 1, 2019. That means in the financial year 2018-2019. Also for the FY 2018-19, the couple stayed from July 1, 2018 to January 31, 2019 in the territories of jurisdiction of Australia.

Resides test

The primary test of tax residency is called the 'resides test'. If you reside in Australia, you are considered an Australian resident for tax purposes and you don't need to apply any of the other residency tests. Some of the factors that can be used to determine residency status include:

  • Physical presence: Benjamin was present in Australia from year 2000 to January 31, 2019
  • Intention and purpose: He was born and brought up in Australia and have emotional belonging.
  • family: Benjamin’s parents lived in Australia and he moved along with his wife in 2000
  • Business or employment ties: none
  • Maintenance and location of assets: Benjamin has a house in Noosa and other personal belongings. He and his wife also have Australian bank accounts
  • Social and living arrangements: Benjamin’s parents lived in Australia and has a house in Noosa.

AS per resides test, Benjamin can be considered to be an Australian resident as per taxation laws.

Domicile test

Benjamin is an Australian resident because his domicile is in Australia, he has a place that is his permanent home in Noosa.

183-day test

Since, Benjamin left the country before the financial year ended, hence a 183-day test will also be conducted. Since, Benjamin is a resident because he is actually present in Australia for more than half the income year. He stayed from July 1, 2018 to January 31, 2019 which is 215 days.

Conclusion: It can be concluded that Benjamin will be considered to be an Australian resident for the income tax year 2019 on the basis of all the tests.

2: Rebekah Case

Rebekah is a 21 years old American nationalist and arrived Australia on a working holiday during September 1, 2018. She has no relatives in Australia but has made some friends in Australia.

The taxation period in Australia starts on 1 July and ends on June 30. Rebekah left Australia on June 23, 2019 and moved back to USA. That means in the financial year 2018-2019 she stayed from September 1, 2018 to June 23, 2019 in the territories of jurisdiction of Australia.

Resides test

The primary test of tax residency is called the 'resides test'. If you reside in Australia, you are considered an Australian resident for tax purposes and you don't need to apply any of the other residency tests. Some of the factors that can be used to determine residency status include:

  • Physical presence: Rebekah was present in Australia in the financial year 2019
  • Intention and purpose: she was on a working holiday.
  • family: she has no family in Australia
  • Business or employment ties: Worked at a day care centre and a kindergarten in different cities.
  • Maintenance and location of assets: she has not accumulated any asset in Australia
  • Social and living arrangements: She does not have any permanent residential in Australia; she stayed in various accommodations at different locations of Brisbane and Melbourne. However she has an Australian bank account.

As per resides test, Rebekah cannot be considered to be an Australian resident as per taxation laws.

Domicile test

Rebekah is not an Australian resident because his domicile is in USA, she does not has a place that can be considered her permanent home.

183-day test

Since, Rebekah left the country before the financial year ended, hence a 183-day test will also be conducted. Rebekah is a resident because she is actually present in Australia for more than half the income year. She stayed from September 1, 2018 to June 23, 2019 which is 296 days.

Conclusion: It can be concluded that Rebekah will be considered to be an Australian resident for the income tax year 2019 on the basis of 183-day tests.

Solution

Donations and charity of televisions (units)

5

 

Cost to William (per unit)

2800

 

Market value (per unit)

3400

 
 

Legal Fees

50000

 
 

Employee Wages

   

Total Employee Wages

410000

 

Wages to relative (mother-in-law)

90000

 

Wages to similar non relative employee

60000

 
 

Value of trophy

1200

 

Reimbursement to employee's iphone used at work

2000

 

Cash Register

2400

Useful Life (years)

6

Depreciation using SLM

400

Given:

Given

Amount

Cash Sales

2760000

Cash received against Previous years sales

340000

Total Cash received

3100000

Credit sales (cash not received)

430000

Other Income (receipt from competitor)

450000

Purcahases

1300000

Ending inventory

235000

Opening inventory

430000

Salary as part time teacher at local college

30000

Unpaid salary

1000

Part 1: William’s assessable income for the year ended 30 June 2019

Particulars

Cash Basis

Accrual Basis

Incomes

   

Cash Sales FY 2019

2760000

2760000

Cash received for Sales in FY 2018

340000

0

Credit Sales

0

430000

     

Lump-sum received from competitor (Assessable income)

450000

450000

     

Salary received during FY 2019

30000

30000

Lump sum received against unpaid salary (assessable when received)

0

0

     

Trophy winnings (Not assessable)

0

0

     

Total assessable Income

3580000

3670000

1. Assessable income: Under subsections 6-5(2) and (3) of the Income Tax Assessment Act 1997 (ITAA 1997) taxpayers must include in assessable income the gross income derived.

2. Basis of Accounting: William can either keep its records on cash basis (under subsection 6-5(4) of the ITAA 1997) or accrual accounting method. The method of accrual accounting is considered to be more practical and accurate for businesses including trading (as of Williams) or manufacturing, however as per the above analysis, it can be observed that if Williams follow cash basis, then his assessable income will be less for the financial year ended 30 June 2019.

3. Lump-sum received from competitor: William received a compensation of $450,000 from a competitor for agreeing not open a similar business in Melbourne during 12 December 2018. It is required to determine whether the received compensation amount is of capital in nature or income in nature, the reasons of receiving the compensation will be considered by courts. Since William received the amount for loss of revenue as he will not be able to commence his business in Melbourne, hence the compensation is of income nature. (Heavy Minerals Pty Ltd v FC of T (1966) 115 CLR 512)

4. Salary: is assessable income. However the lump sum of 1000 received during the subsequent year due to error in the payroll section will be taxed in the financial year it is received.

5. Trophy winnings: William is not a professional athlete and does not earn its livelihood from playing sports, he is a big fan of American Football and competes occasionally in the local Sydney competition and the winning of the trophy worth $ 1200 is one such occasional event.

Part 2: Income tax deductions which William can claim for the year ended 30 June 2019

Particulars

Amount

Expenses

 

Purchases

1300000

Opening stock > closing stock

195000

   

Total Employee Wages

410000

Wages to relative (non deductible) less wages to similar employee

30000

Deductible Wages

380000

   

Legal Fees

50000

   

Donation of trading stock (television) deductible at market value

17000

   

Depreciation

400

   

Total tax deductions

2382400

1. Trading Stock: Considering William elected to carry stocktake an include differences between opening and closing stocks as assessable income (or deductions) us-70-35(2) of ITAA 1997. The difference is larger than $5000 and opening stock is greater than closing, therefore, it is negative assessable income.

2. Employee Wages: As per s26-35 of ITAA97, excessive payments to a relative is not deductible, hence the deductions will only allowed up to the standard rate. William must comply ITAA 36 s109 (concerning excessive payments) since he employed a family member.

3. Donations: Donation of trading stock is deductible at market value on the day of donations has been made.

4. Depreciation: The cash register is depreciable equipment and William can claim depreciation deductions under either Div 40 or Div 328 ITAA 97 for its cost. Since

William does not wish to use the SBE election, hence depreciation is charged using straight line method (SLM).

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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