PFM Flashcards
What is tax?
Tax is the money paid by individuals and businesses to the government: federal, state or territory and local. These governments use their tax revenue to provide public goods and services needed by the community.
Why pay tax?
Governments need to fund the services they provide to the community, such as education, health, defence and infrastructure such as roads. To do this they must collect money through the tax system. Without taxes, the government would have no money to provide services.
Who pays tax?
Tax is collected from individuals and businesses. The amount of tax levied is generally based on the amount spent on certain items or the level of income or profit.
When individuals earn income: wages, commission, etc - they pay income tax.
A goods and services tax (GST) is included in the price of most goods and services.
Companies pay company tax, an income tax on profits.
Sole trader businesses pay income tax on their profits.
The combined effect of taxes and government spending has an important impact on income distribution in Australia.
Who collects tax? (including the three levels of govt).
The three levels of government are federal, territory/state and local that have the right to collect taxes.
The Australian Government collects the most tax revenue. On average, each year more than 80% of tax revenue comes from taxes such as income tax, the Medicare levy, GST, company tax and excise tax.
State or territory governments annually collect approximately 16% of total tax revenue from taxes such as payroll tax, stamp duty and land tax.
Local governments in the same period collect about 3% of total tax revenue, largely from rates charged on the owners of property.
Examples of tax in each of the three governments.
The federal government uses tax money to fund medicare, defence and immigration. The territory/state government uses tax money to fund public transport and housing. The local government uses tax money to fund roads and the collection of rubbish.
Who should pay tax?
The government believes the level of wealth and income should be taken into account in determining who pays tax and the amount they should pay.
Individuals who earn more than $18,200 per year have to pay tax, as they have exceeded the tax-free threshold.
Who should not pay tax?
People who receive certain pensions, such as the disability pension, do not need to pay any tax on these pensions because this income is classed as tax exempt.
A number of religious, charitable, scientific and education organisations are exempt from paying tax.
What is income tax?
Income tax is taxes levied on the earnings of companies and individuals.
Define and give examples of assessable vs not assessable income.
Assessable income is income on which tax must be paid regularly. Examples of assessable income are wages, salaries, income support payments and money received from properties and investments.
Not assessable income is money usually earned by hand, which is done irregularly. Examples of not assessable income are pocket money, unexpected income, inheritances and scholarships.
What is proportional tax?
Proportional tax is the same percentage that is levied, regardless of the level of income. Company tax is a proportional tax as the same rate applies for all companies, regardless of the profit earned.
What is progressive tax ?
Progressive tax is the higher the income, the higher the percentage of tax is paid. Income tax for individuals is a progressive tax.
What is regressive tax?
Regressive tax is the same dollar amount of tax that is paid, regardless of the level of income. The departure levy on passengers at airports is a regressive tax.
What is tax minimisation and tax evasion.
Tax minimisation is when you legally arrange your tax affairs to reduce the amount of tax you pay.
Tax evasion is when you deliberately lie to the ATO to reduce your amount of tax payable.
It causes loss in tax revenue available to the government to spend on services like health, education and sports.
What is a tax return?
A document that shows the ATO how much you have earned and what deductions you have, for the period 1st of July to 30th of June each year.
You have until October 31 each year to lodge for a tax return.
What are tax deductions? Include examples.
A deduction is an expense that can be subtracted from taxable income to reduce the amount owed.
An example is if you earn $50,000 in a year and make a $1,000 donation to charity during that year, you are eligible to claim a deduction for that donation, reducing your taxable income to $49,000.
