PFM Assessment Task 2 Flashcards
What is tax?
Mandatory payments collected from individuals and corporations by a government entity to fund government activity.
Why pay tax?
Taxes are the primary source of revenue for most governments. Among other things, this money is spent to improve and maintain public infrastructure, including the roads we travel on, and fund public services, such as schools, emergency services, and welfare programs.
Who collects tax? (including the three levels of govt.)
Different levels of government levy different types of taxes.
- Federal (Canberra)
- State (eg Victoria)
- Local (eg Brimbank)
Who should pay tax?
Most resident individuals whose total income exceeds the $18,200 tax-free threshold for the income year. Every individual carrying on a business or profession regardless of income or loss.
What is income tax?
As an individual, you will pay tax based on the marginal tax rate. It is a progressive tax system.
Define and give examples of assessable vs not assessable income.
Assessable:
Assessable income is income on which tax must be paid. Some
examples of assessable income are:
- wages and salaries, bonuses and commission received as
employment income
- income support payments from the government such as
age pensions, and family and youth allowances
- money received from property or investments, for example,
rent earned from leasing property or other items
- interest from assets such as bank deposits or bonds
- dividends earned from ownership of shares in a company
- a capital gain on the sale of a capital gains tax (CGT) asset
for more than you paid for it.
Not Assessable:
Not all money received by an individual is considered to be
assessable income. Money received from a hobby is not considered as assessable income unless the individual intends to create a business from the hobby. For example, if you have a regular job and enjoy painting pictures as an unrelated hobby in your spare time, any income from the paintings you sell is not regarded as assessable income. Examples of non-assessable income are:
- pocket money
- inheritances
- irregular and unexpected income such as lottery or prize
winnings
- some scholarships.
Explain the difference between tax minimisation and tax evasion.
Tax minimisation is when you legally arange 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 a significant loss in tax revenue available to the government to spend on services like health, education and transport. Examples of tax evasion
include not declaring assessable income, such as wages or tips, deliberately overclaiming expenses, avoiding GST, and not lodging a tax return to avoid paying tax. It is not tax avoidance if you get paid in cash. It becomes tax avoidance when you do not declare that cash income on your tax return.
Explain what tax deductions are using an example.
Allowable deductions are expenses incurred in gaining or producing assessable income or necessarily incurred in running a business for the purpose of producing your assessable income. Allowable deductions reduce the amount of income on which you have to pay tax. For example a teacher can’t claim a tax deduction for the cost of presents she bought for her students but she can claim the cost of attending a work related conference.
Using deductions to calculate taxable income.
Taxable income is all of your Assessable Income, LESS any Allowable Deductions.
Definition: Allowable Deductions are those expenses incurred in earning Assessable Income eg for a teacher, professional learning, some stationery
Paying tax using PAYG
The PAYG withholding amount will depend on:
- your weekly, fortnightly or monthly wage or salary
- whether your TFN was provided
- the amount earned in relation to the tax-free threshold.
When you lodge your tax return at the end of the financial year, you will be entitled to a credit for the amount of tax which has been withheld from your pay.
● What is superannuation?
Superannuation, often called super, is money you set aside during your working life to provide an income to live on when you retire from work.
Super is often called ‘forced savings’ as your employer must (by law) pay 10% of your wage directly into a super fund of your choice every pay period.
In Australia you can start accessing your super at 60 years of age.
● Why is it important?
Super is important for you because the more super you accumulate during your working life, the higher your standard of living will be in retirement.
Most Australians would like to have a higher income in retirement than that offered by the government age pension.
The age pension will provide a basic safety net for older Australians, which is usually supplemented or even replaced by the income generated from superannuation.
Demographic changes and greater life expectancy have increased the proportion of the Australian population in the retirement age group. Currently there are five people of working age for every person aged 65 and over but by 2047 that will reduce to just 2.4.
The demand for government pensions and services will increase, and the number of people in the working age groups will fall. There will be significantly less people in the workforce contributing through taxes to government revenue and there will be a higher demand for government services.
● Who is entitled to it?
Your employer must make super guarantee payments on your
behalf unless:
- you are under 18 years old and do 30 hours or less of work per week for the employer
- you are paid less than $450 (before tax) in a calendar month from the employer
- the work is of a domestic or private nature, for example as a part-time babysitter or nanny, and is 30 hours or less per week
● What is the super guarantee?
The superannuation guarantee (SG) is the percentage of your ordinary time earnings (in addition to your wages) paid into your super fund by your employer.
Superannuation can grow through funds that come from:
- an employer
- government super contributions
- voluntary contribution
- salary sacrifice
