1. Aus Tax Fundamentals

Question 1

Income tax year ends

Answer 1

30 June 2019

Question 2

GST legislation tax period ends

Answer 2

30 June 2019

Question 3

FBT legislation year ends

Answer 3

31 March 2019

Question 4

What is covered in s. 4-15 ITAA 1997

Answer 4

The simple way of calculating Taxable income.

Assessable Income - Deductions = Taxable Income

Question 5

How is Income tax payable calculated in s.4-10 ITAA 1997

Answer 5

Taxable Income x Tax Rate - Tax Offsets = Income tax payable/refundable

Question 6

What are some types of tax offsets?

Answer 6

• To provide a tax benefit to a specific group within the community (e.g. those on low incomes or carers).
• To recognise the tax that has already been paid on assessable items (e.g. the foreign income tax offset recognises income tax levied by a foreign jurisdiction).
• To encourage activities that the Government considers desirable (e.g. R&D tax incentive provides a tax offset to eligible companies).
• To reflect a resident company’s tax that is imputed, or attributed, to Australian shareholders, under what is commonly called the ‘dividend imputation’ system
(i.e. franking tax offsets).

Question 7

What is a main difference between Exempt Income and NANE?

Answer 7

Exempt income is not assessable, but can reduce the tax loss that would otherwise be available.
NANE income does not reduce tax losses.

Question 8

What is the system most company’s use to calculate Taxable Income?

Answer 8

They do a Reconciliation of accounting profit to taxable income
Accounting profit/(loss) (P/L)

Add: Expenses in P/L but not tax deductible
Less: Expense not in P/L but tax deductible
Less: Income/gains in P/L but not assessable
Add: Income/gains not in P/L but assessable

Equals: Taxable income

Question 9

Why is resident status important when calculating assessable income?

Answer 9

Australian resident - assessable income includes ordinary and statutory income from all sources
Foreign resident taxpayer - assessable income includes ordinary and statutory income from Australian sources

Question 10

What are the four tests an individual must satisfy to be considered a resident under s. 6(1) ITAA 1936

Answer 10

Resides
Domicile (origin at birth, choice or by law (parents choice))
More than 183 days
Membership of a Commonwealth Government superannuation scheme

Question 11

What are the tests a Company must satisfy to be considered a resident under s. 6(1) ITAA 1936

Answer 11

1st. A Company incorporated in Australia
2nd. Not incorporated but
a. Central management and focus are in Australia
b. Voting power is controlled by Shareholders who are Australian Residents

Question 12

What are common types of Statutory Income under s. 6-10 ITAA 1997?

Answer 12

Net capital gain
Sale of WIP amounts
Disposal of a leased car for a profit

Question 13

What are some examples of Exempt Income?

Answer 13

All income from Charities & Public education institutions
Benefits under FBT
Some government allowances, pensions and benefits
Maintenance payments made to a former child or spouse

Question 14

Some examples of NANE income?

Answer 14

Dividend paid to parent company
GST on taxable supply
FBT

Question 15

What are the two positive limbs of s. 8-1(1) in General Deductions?

Answer 15

A taxpayer can deduct from their/its assessable income any loss or outgoing to the extent that it is:
•• incurred in gaining or producing the taxpayer’s assessable income (s. 8‑1(1)(a)), or
•• necessarily incurred in carrying on a business for the purpose of gaining or producing the taxpayer’s assessable income (s. 8‑1(1)(b))

Question 16

What are the four negative limbs of s. 8-1(2) in General Deductions?

Answer 16

A taxpayer cannot deduct a loss or outgoing under s. 8‑1 to the extent that it is:
•• capital, or of a capital nature (s. 8‑1(2)(a))
•• of a private or domestic nature (s. 8‑1(2)(b))
•• incurred in relation to exempt income or NANE income (s. 8‑1(2)(c)), or
•• prevented from being claimed as a deduction by a provision in the tax legislation (s. 8‑1(2)(d))

Question 17

How is a tax loss calculated in s. 36-10?

Answer 17

Deductions - Assessable Income - Net exempt Income = Tax loss

Question 18

Whats are two key tax loss rules?

Answer 18

A capital loss can only reduce a capital gain

A revenue loss can only reduce a net capital gain (as well as assessable income generally)

Question 19

When is a repair to an asset deductible in s. 25-10?

Answer 19

• restores a function of an asset, does not improve it
• simply renews or replaces part of an asset (not entire asset)
• Does not add to or change the character of an asset

Question 20

When is a repair not deductible under s. 25-10?

Answer 20

• the work improves the function of the asset significantly
• the maintenance is to prevent future damage, rather restore functionality (however these costs may be deductible under s. 8-1)
• It is an initial repair to restore functionality because an asset was bought at a low cost, it is capital in nature

Question 21

What are the most important state taxes?

Answer 21

Land tax
Stamp Duty
Payroll tax

Question 22

What is the difference between ordinary deductions and specific deductions?

Answer 22

A “general” deduction under ITAA97 s 8-1 is a loss or outgoing that has a relevant connection with income producing activities (eg personal exertion, business or investment activities), and that is not of a capital, private or domestic nature.
A “specific” deduction, on the other hand, is an amount that a provision other than the general deduction provision allows as a deduction (ITAA97 s 8-5).
Specific wins if there’s a conflict here

Question 23

What are some specific deductions?

Answer 23

Repairs - (excludes improvements and Initials repairs)
Borrowing expenses (>$100 = Spread over 5 years or the loan term, whichever is less)
Bad Debts (if previously included in assessable income and actually written off)
Tax-related expenses (income tax-related and paid to registered tax agent)
Acquired WIP
Tax Losses (reduced by net exempt income, used as a future tax deduction, oldest loss must be used first)
Entertainment (Not deductible unless subject to FBT)
Prepayments (Must be deductible under s 8.1, >=$1000= Spread over period and capped at 10 years)

Question 24

How is trading stock valued?

Answer 24

Cost
Marketing selling value
Replacement value
or Lower value if becoming obsolete