• Internal Code :
  • Subject Code :
  • University :
  • Subject Name : Law

Taxation Law

Issue

To calculate Wilma’s taxable income or loss

Legislation

Income Tax Assessment Act

Application

To calculate her taxable income for 30 June 2019-

Details

Sections

Authority

Assessable income (in $)

Deductions (in $)

 Wilma’s Salary

Sec 6-5

Ordinary income

110000

 

Backpay Salary

Sec6-5

Arrear amount is deductible

 

40000

20% floorspace rent

Sec6-5

Not a work-related expense

 

10000

A computer used for work

Sec 6-5

Work-related expense

 

3000

Electricity

Sec 6-5

Work-related expense

 

500

Course fees in the university

Sec 6-5

Excluding HECS made it non-deductible

12000

 

Travel expenses from work to university

Sec 6-5

Work-related self-education

 

1000

Yoga expenses

Sec 6-5

Work-related expense

 

800

Interest on term deposits

Sec 6-5

Income for employee

15000

 

Franked dividends of XYZ Ltd.

Sec 6-5

Franked dividends are deductible

 

9000

Unfranked dividend of ABC Ltd.

Sec 6-5

Unfranked are not deductible

10000

 

Paid to the tax agent

Sec 6-5

Deductible is paid in relation to work.

 

190

Total

   

157000

64490

Taxable Income

     

92510

Explanations

A. Salary and wages are ordinary income as they are considered remuneration. Therefore Wilma’s annual salary of $110,000 per annum is assessable income as per section 6-5(1) ITAA 1997.

B. Schedule 1 of the Taxation Administration act 1953, gives a detailed version of the collection and recovery of income tax and other liabilities. This schedule deals with the taxability of the lumpsum payments. There are many types of payments like A, B, C, D, E. the employer of Wilma who paid her a lumpsum amount of 40000 on 1 July 2019 as an underpayment of her salary for the past 4 years, so that shall fall under lumpsum E payments in arrears (Australian Taxation Office, 2018). This is in relation to payment which was supposed to be paid in earlier years and should be shown on PAYG payment summary. This includes back-payments which have been accrued for more than 12 months; or salary that was accrued at the time of suspension and was paid when the service was resumed; or on superannuation annuities in earlier years of employment; or on repatriation and social welfare pensions, allowances etc. including those paid by a foreign government as well etc (Australian Taxation Office, 2018).

C. For the expenses, she incurred in 20% of the total floor space in relation to her work-

1. $10,000 of the annual rent which she paid for the space she used for her work is deductible. As per the ITAA 1997 act, employees who work at home can claim deduction on expenses like electricity, a decline in value of any fixed assets, phone and internet expenses. Things which employee cannot claim a deduction for is general household items like milk, tea, coffee, education of the children by setting up online programs for them, occupancy expenses like rent, mortgage interest, water etc. (Australian Taxation Office, 2020). However, what she used only for her office work is entitled to be deducted.

2. $3000 she spent on acquiring computer which is to be used for work with a depreciation life of 3 years. So for this, she can claim a deduction from her employee. This all depends on the cost of the depreciating asset, the effective life of the depreciating assets and the usage of the asset for work-related stuff (Australian Taxation Office, 2020). One thing which an individual should be careful of is that the asset used has to be used for work-related stuff only. Had it been used for personal

use by the employee then he has to demarcate the usage between the personal use and the official use (Australian Taxation Office, 2020).

3. $500 was spent on electricity by Wilma for the work-related thing. So that is meant to be deducted as per reasoning given in point 1.

D. Wilma, to brush up her teaching skills and have more command over it, she enrolled herself in a university to study Master of Education. For this, she incurred expenses like-

1. $12000 as the course fees for 4 subjects excluding the HECS. The Higher Education contribution scheme or HECS is a government automated course for the Australian higher education system. Since she did not enrol for this subject even persuing her Masters, therefore she is not entitled to a deduction of $12000. According to the taxation legislation of Australia, where an employee decides to pursue a course along with his work, so to claim compensation, he has to show that the work and his course is inter-related. Then only can he claim for deduction (Australian Taxation Office, 2020).

2. For the travelling expenses, he is entitled to a deduction of $1000 since is a work-related self-education (Australian Taxation Office, 2020).

E. Wilma's expense on her yoga of $800 is deductible as per the Australian legislation. Reason being, if an employee spends money on keeping himself fit and adequate for the job so that he cannot claim for deduction. In scenarios where the expense is related to work, then he can claim a deduction (Australian Taxation Office, 2020). Here Wilma went for yoga classes to levy off the stress she has of work, hence deductible.

F. Investments returns-

1. $15000 is not deductible as per Australian taxation policy as it is deemed to be the income of the individual as per ITAA (Finder, 2020).

2. $9000 franked dividend of XYZ LTD is deductible. Franked dividends are those where the company before distributing dividends has already paid tax on that. So to curb the dual taxation, the investors can deduct that (Australian taxation Office, 2020).

3. Unfranked dividend is the opposite of the franked tax and hence not deductible. So $10000 shall be taxed (Australian Taxation Office, 2019).

G. $190 paid to tax agent is deductible as it is paid to an agent to get the work done of the employee (Australian Taxation Office, 2020)

References for Taxation Law

Australian Taxation Office, 2018. Lump-sum Payments. Retrieved from https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Salary-and-wages/?page=4

Australian Taxation Office, 2020. Home Office Expenses. Retrieved from https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/home-office-expenses/

Australian Taxation Office, 2020. Decline in value of depreciating assets – individuals. Retrieved from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Decline-in-value-of-depreciating-assets/

Australian Taxation Office, 2020. Education and study. Retrieved from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Education-and-study/

Australian Taxation Office, 2020. Fitness and sporting industry employees – income and work-related deductions. Retrieved from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Occupation-and-industry-specific-guides/Fitness-and-sporting-industry-employees---income-and-work-related-deductions/

Finder, 2020. Paying tax on term deposit interest. Retrieved from https://www.finder.com.au/paying-tax-on-term-deposit-interest

Australian Taxation Office 2020. Refund of franking credits instructions and application for individuals 2020. Retrieved from https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Refund-of-franking-credits-instructions-and-application-for-individuals-2020.pdf

Australian Taxation Office 2019. Income and Income Tax. Retrieved from https://www.taxsuperandyou.gov.au/sites/default/files/downloads/Your.Tax_Activity1_01032019.pdf

 Australian Taxation Office, 2020. Cost of managing tax affairs. Retrieved from https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Cost-of-managing-tax-affairs/

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