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  • Subject Name : Taxation Law

Australian Taxation Law - Section 1

Baldrick bought an investment property on 1 July 2018 for $2,000,000. He rented out his property from 1 July 2018. He borrowed $1,800,000 on the same day from the bank to buy the property and incurred certain expenses to acquire the property.

Following is the table by which he can minimize his tax liability as he don’t want a SBE election, calculation of taxable income is:-

Sec 110-35(2) and 35(10) of income tax assessment act 1997is used to calculate these

Section 6-10 assessable income

A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year This property id a negatively geared property

Australian Taxation Law - Section 2

Franking Account of Melchett Pty Ltd. for the year ended 2019

Date

Transaction

DR

Cr

Bal

01.07.02018

Opening Balance

 

 $ 60,000.00

 $ 60,000.00

07.04.2018

Franking credit on franked dividend paid

 $ 1,13,142.86

 

 $ (53,142.86)

28.08.2018

Payment of income tax

 

 $ 27,000.00

 $ (26,142.86)

31.01.2019

Income tax refund.

 $ 4,60,000.00

 

 $ (4,86,142.86)

22.02.2019

Franking Credit on franked dividend recd

 

 $ 1,08,000.00

 $ (3,78,142.86)

03.02.2019

Franking credit on franked dividend paid

 $ 54,000.00

 

 $ (4,32,142.86)

31.03.2019

Payment of income tax.

 

 $ 44,000.00

 $ (3,88,142.86)

30.06.2019

Franking credit on franked dividend paid.

 $ 1,05,857.14

 

 $ (4,94,000.00)

Sections applicable for above franking account

  • Section 205-25
  • Section 202-60(2)

Notes:

Item no 2: Dividend upto 55 percent is franked so franking credit is calculated on 55 percent dividend, out of 480000

Item 4: It will reduce the Franking credit, as it is an amount paid to ATO, any refund will reduce the bal

Item 6: dividend paid is $ 420,000*0.30 = $126,000, and balance is unfranked dividend which does not affect our franking account

Item 8: Franked dividend of $ 380,000*0.65 = $ 247,000 is paid, so franking credit allocated is calculated on $ 247,000

Following is used for calculating:-

  • Corporate tax rate is taken as 30%
  • Payroll tax payment has no impact on Franking A/c
  • Refund of tax also will not affect the franking a/c
  • Payment or refund of FBT does not affect franking A/c.
  • Transactions which represent tax paid by the co is credited and tax allocated as dividend is debited

Melchett Pty ltd has distributed more franking credit then its balance so there is a deficit and is liable to pay tax which is as per account is $494000 to reconcile the account.

Australian Taxation Law - Section 3

Facts

Mrs. Bretty Blues who runs a business as sole traders wants to know that if she changes her business structure, currently she has a profit of $200000 plus a family income of her minor son whose income also be clubbed.

Answer:

Sole Trader business entity have many advantages and disadvantages. Sole Traders are liable for taxation on business income which is included in their annual Personal Income Tax Return and taxed at marginal rates.

As a sole trader has to report all their income in the individual tax return as per different section of Tax return for individuals (supplementary section) 2020 at Order ATO publications, report all your income in your individual tax return, using the section for business items to show your business income and expenses (there is no separate business tax return for sole traders)

Need to pay tax at the same income tax rates as individual taxpayers and you may be eligible for the small business tax offset

Sole trader can claim a deduction for any personal super contribution they make after notifying the fund.

As a sole trader you can't claim deductions for money 'drawn' from the business. Amounts taken from the business are not wages for tax purposes, even if you think of them as wages

Partnership

Partnership is the business entity where it is typically conducted by 2 or more people, who have the authority as the Owners or Principles of the business. The partners share the costs, profits and losses of the business, however, the partnership does require its own Tax File Number.

  • the partnership doesn't pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
  • each partner pays tax on their share of the partnership profit at the individual tax rate and may be eligible for the small business tax offset

As a partner you can't claim deductions for money drawn from the business. Amounts you take from a partnership are not wages for tax purposes.

From the tax perceptive advantages

  • Can receive some tax advantages
  • The taxable income or loss of the Partnership is distributed,as per the Partnership Agreement. If no agreement exists, it will be divided equally between the parties.

Disadvantages are

  • In regards to taxation, a Partnership is required to lodge an Income Tax Return.
  • Each partner is responsible for the other partner’s share of the business liability.

Company

There are 2 types of companies: Public company and a Private Company. Like a Partnership, a Company must also have its own Tax File Number. It is entitled to an Australian business number (ABN) if it is registered under the Corporations Act 2001.

  • usually pays its income tax by instalments through the pay as you go (PAYG) instalments system
  • pays tax at the company tax rate or lower company tax rate (if a base rate entity)
  • may be eligible for small business concessions
  • must pay super guarantee contributions (SGC) for any eligible workers. This includes you, if you are a director of the company, and any other company directors.

Advantages

  • Liabilities are limited to the Company’s assets only. It will not extend to the owner’s assets (with some exceptions)
  • All profits are taxed at one tax rate.

Disadvantages

  • A more complicated and expensivestructure to set up due to compliance costs
  • There are additional legal and financial reportingobligations

Trusts

Under the trust business is transferred to a third party who has legal control to run the business, and who distributes income and/or capital between the relevant Beneficiaries. Like a Company and Partnership,a Trust needs to have its own Tax File Number. It is also recommended to have a Trust Deed, which sets out the powers of the Trust, and formalises its administration.

Advantages

  • There is flexibility of income distributions (Discretionary Trust).
  • Discretionary Trusts offer the greatest level of asset protection.

Disadvantages

  • Can be difficult to dismantle
  • Need to lodge a separate Tax Return for the Trust
  • Beneficiaries pay Personal Income Tax on their income distributions from the Trust.

Conclusion

As a sole trader Mrs. Bretty will have to file her tax return as a personal capacity and tax will be levied as per current tax slab, his son’s income will also be clubbed and she will have to pay tax on $230000.

She should either go for Company structure or Partnership form of business because for Trust it requires lot of complexities and very difficult to dismantle it and it is not fit for all types of businesses.

With kind of family composition Mrs. Bretty currently have it will be good for her in case she enters into a partnership with her husband which will divide her profit earned and thereby will reduce her tax liability with change of lower tax rate.

If she forms a company , then also the tax rate will be 30% but again have to enter into lot of formalities and again difficult to change the form of business structure formation.

Section 328-110 of the Income Tax Assessment Act 1997(ITAA 1997).

Therefore, At this stage it is suggested that Mrs. Bretty should look for Partnership form of business entity to get the maximum tax benefit.

Applicable Slab used for the purpose

1. Tax rate is taken as For FY 2019-20:

Below 18200 AUD- NIL

From 18201- 37000 AUD-19%

From 37001 – 90000 AUD- 32.5%

From 90001 – 180,000 AUD- 37%

Above 180001 AUD- 45%

2. Medicare Levy of 2 % is levied and assumed that there is no exemption available to Tom

References for Australian Taxation Law

Business.gov.au. 2020. Reviewing Your Business Structure | Business.Gov.Au. [online] Available at: <https://www.business.gov.au/new-to-business-essentials/reviewing-your-business-structure> [Accessed 13 June 2020].

Knox Taxation and Business Advisory. (2020). Types of Business Structures in Australia | Small Business Start-ups. [online] Available at: https://www.knoxtax.com.au/business-structures-australia/.

‌LegalVision. (2017). Advantages and Disadvantages of Being a Sole Trader. [online] Available at: https://legalvision.com.au/advantages-disadvantages-operating-sole-trader/.

Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. (2020). Australian taxation law 2020. Docklands, Victoria: Oxford University Press.

‌Anon, (n.d.). What’s the Best Type of Business Entity for Tax Purposes – KDP LLP. [online] Available at: https://www.kdpllp.com/whats-the-best-type-of-business-entity-for-tax-purposes/ [Accessed 13 Jun. 2020].

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

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