Topic 8 - Tax Planning Strategies

Question 1

Taxation has a number of different functions including:

Answer 1

• 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 2

Income tax (direct tax)

Answer 2

Direct tax is a tax paid directly by the person or organisation on whom it is levied and is payable on most forms of income and profits. Examples include wages and salaries

Question 3

Goods and services tax (indirect tax)

Answer 3

It is a broad-based value-added tax on goods and services and is charged at a flat rate of 10% on suppliers and importers

Question 4

The three basic sources of taxation law in Australia are:

Answer 4

• the Income Tax Assessment Act 1997 (ITAA97)
• case law, where interpretation of legislation by the courts sets precedent
• the Australian Taxation Office (ATO), which gives advice on the application of the law with rulings and determinations.

Question 5

Some of the exempt government payments for assessable income include:

Answer 5

youth allowance
family tax benefits
disability support pension
ABSTUDY
carer allowance

Question 6

Allowable deductions include two types of expenses or outgoings

Answer 6

general deductions and specific deductions.

Question 7

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

Answer 7

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 8

allowable deductions

Answer 8

Expenses incurred by the taxpayer which are deducted from assessable income to derive taxable income.

Question 9

assessable income

Answer 9

Income that is assessable or recognised and measured under taxation law.

Question 10

best interest duty

Answer 10

The obligation placed upon the financial planner to act in the best interests of the client.

Question 11

fringe benefits tax (FBT)

Answer 11

A tax applied to the taxable amount of non-cash benefits provided to an employee.

Question 12

goods and services tax (GST)

Answer 12

An indirect tax imposed on the purchase of goods and services at a flat rate of 10%.

Question 13

income splitting

Answer 13

Shifting income from a person on a high marginal tax rate to a person or entity in a lower tax bracket.

Question 14

negative gearing

Answer 14

A situation where the total deductions associated with an investment, including the interest charge, exceed assessable income generated from the investment; in this case, the loss can be claimed as a tax deduction.

Question 15

reportable employer superannuation contributions (RESCs)

Answer 15

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.

Question 16

tax offsets or rebates

Answer 16

Reductions in tax payable provided by the government to support or assist individuals or activities.