Topic 3 : Taxation Planning

Question 1

Taxation planning

Answer 1

is the legitimate organisation of an investor’s affairs in accordance with taxation laws to minimise tax

Question 2

Tax evasion

Answer 2

nvolves criminal falsification or non-disclosure as a means of reducing tax.

Question 3

Tax avoidance

Answer 3

fits between the two and although it looks to minimise tax through legal means, the strategies employed are artificial and contrived and have no reason other than obtaining a tax benefit.

Question 4

Taxation has a number of different functions including

Answer 4

• to finance the activities of government that modern society expects and that may not be adequately provided by the free market — for example, defence, health, education and roads
• to achieve the government’s economic objectives — for example, an increase in taxes can be used to reduce private-sector spending and therefore restrict inflation
• to achieve desirable social objectives — taxation can be used to encourage or discourage spending on particular types of products and services such as imports, tobacco, alcohol and heavily polluting goods
• to redistribute income and wealth — for example, to provide social welfare to families.

Question 5

Allowable deductions

Answer 5

Allowable deductions include two types of expenses or outgoings: general deductions and specific deductions.

Question 6

Examples of the type of expenses that would be considered an allowable general deduction include:

Answer 6

• travelling and car expenses incurred in the course of an employee’s work
• subscriptions for professional journals related to the employee’s employment
• business deductions and interest paid in connection with an activity that generates assessable income.

Question 7

pay as you go (PAYG)

Answer 7

where tax is pre-paid in instalments to the ATO throughout the year towards payment of their expected final tax liability.

Question 8

Most companies are levied income tax at a flat rate of

Answer 8

30% on their taxable income for the financial year. There is no tax-free threshold.From the 2015–16 financial year, companies classified as a small business entity are subject to a reduced tax rate of 28.5%

Question 9

Complying superannuation funds pay income tax at a flat rate of

Answer 9

15%

Question 10

Tax offsets

Answer 10

Tax offsets are used by the government to provide social and welfare assistance and support to individuals and families in need, encourage certain kinds of activities and investment, and provide a credit for payments of tax.a tax offset represents a reduction in the amount of tax that is required to be paid by a taxpayer

Question 11

The low income tax offset

Answer 11

To assist low-income earners, the government provides a tax offset which has the effect of reducing net tax payable. The low income tax offset is currently set at $445, payable for taxable incomes up to $37 000. Where the taxable income of a taxpayer exceeds $37 000, the offset is reduced by 1.5 cents for each dollar in excess of $37 000, and cuts out completely at a taxable income of $66 667.

Question 12

Medicare levy

Answer 12

2% of taxable income to help fund the National Disability Support Scheme

Question 13

Medicare levy surcharge

Answer 13

The Medicare levy surcharge is an additional levy imposed on individual taxpayers that are high-income earners without adequate private health insurance

Question 14

HECS and HELP charge

Answer 14

The system, called HELP (higher education loan program), assists students by allowing them to defer payment of their higher education fees and to repay them at a later time through the taxation system when their taxable income reaches a certain minimum income threshold

Question 15

Taxation of minors

Answer 15

Where a minor is in receipt of unearned income, the first $416 of taxable income is exempt from tax. A rate of 68% applies to income between $417 and $1307, and the top adult marginal tax rate of 47% applies to that part of the income above $1307. The aim of the shading between $416 and $1307 is to achieve a maximum overall rate of 47%

Question 16

franked dividend.

Answer 16

Where a company has paid full tax on the profits from which a dividend is derived, the dividend is known as a franked dividend.

Question 17

unfranked dividend.

Answer 17

In situations where the company has not paid tax on its profits for the year, perhaps due to carried forward tax losses, any dividend paid is known as an unfranked dividend.

Question 18

partially franked dividends.

Answer 18

Companies can have a situation where they have paid some tax on their profits, but not the full rate. Any dividends paid from profits in this situation are known as partially franked dividends.

Question 19

Dividend reinvestment

Answer 19

Regardless of whether the shareholder receives dividends in the form of cash or in the form of additional shares in the company, the dividend is still taxable and is required to be included in the taxable income of the taxpayer.

Question 20

Interest deductibility

Answer 20

Interest incurred on a loan used to finance any investment may be an allowable deduction as long as it is incurred in earning assessable income.

Question 21

However, the transfer of investments or other assets may give rise to a number of issues and tax consequences.

Answer 21

• Care needs to be taken with the transfer of income to children because of the special penalty rates of tax that apply to the unearned income of minors
• The person to whom the income has been diverted is entitled to demand actual payment of the income and the asset (as it is in their name), which may not be intended or desirable.
• The transfer of an asset to another entity or person, including a family member, is considered a disposal, and accordingly the impact of the CGT provisions must be considered. That is, the amount of any CGT payable on the transfer of the asset would need to be considered in determining the feasibility of the strategy.

Question 22

income splitting

Answer 22

transferring income from an individual paying tax at a high marginal tax rate to an individual or other entity that is on a lower rate of tax

Question 23

Negative gearing

Answer 23

arises where the total deductions associated with an investment, including the interest charge, exceed assessable income generated from the investment.

Question 24

Salary sacrificing

Answer 24

lso known as salary packaging, is a common benefit made available by employers and is aimed at providing an employee with their salary in a more tax-effective manner. Salary sacrificing involves substituting part of an employee’s future cash salary or wages for non-cash benefits provided by the employer, such as a car, additional super contributions or a laptop.

Question 25

Fringe benefits tax

Answer 25

Although the provision of non-cash benefits does not form part of the assessable income of an employee and is not subject to income tax, non-cash benefits may be subject to another form of tax called the fringe benefits tax (FBT).

Question 26

The rate of the FBT

Answer 26

The rate of the FBT is 49% (for the periods ending 31 March 2016 and 31 March 2017), based on the highest individual marginal tax rate plus the increased Medicare levy of 2%. For the FBT year ending 31 March 2018, the FBT tax rate is expected to fall back to 47%.

Question 27

Benefits are divided into four main categories for FBT purposes:

Answer 27

fully taxed fringe benefits
concessionally taxed fringe benefits
exempt fringe benefits
excluded benefits.

Question 28

Fully taxed fringe benefits

Answer 28

These are benefits provided by an employer where the actual cost or value of the benefit is fully assessable for FBT purposes.

Question 29

Concessionally taxed fringe benefits

Answer 29

These are benefits provided by an employer where the taxable value of the benefit is assessed at a lower amount than the actual monetary value. Concessionally taxed fringe benefits provide the most tax advantage to employees on the highest marginal tax rate.

Question 30

Exempt fringe benefits

Answer 30

A number of fringe benefits provided to employees are exempt from FBT and, accordingly, are particularly attractive to salary sacrifice into. Some eligible work-related benefits include notebooks, laptops and other portable computers; protective clothing (required for employment); briefcases, mobiles and calculators.

Question 31

Excluded benefits

Answer 31

These are benefits that are specifically excluded under FBT legislation. One of the most common excluded benefits is superannuation which makes it particularly attractive as part of a salary sacrifice arrangement.

Question 32

dividend imputation

Answer 32

A system in which shareholders are entitled to tax credits for the relevant amount of tax paid by a company on its profits.

Question 33

reportable employer superannuation contributions (RESCs)

Answer 33

Additional superannuation contributions salary sacrificed by an employee or made on behalf of an employee that are included in the definition of income for the purposes of determining entitlement to government benefits and obligations for government taxes and levies.