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
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
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:-
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.
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.
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
Disadvantages are
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.
Advantages
Disadvantages
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
Disadvantages
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
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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