Week 3 Taxation Planning Introduction Flashcards
Why Taxation Planning?
Taxation implications are an important factor in any investment decision. it is essential that financial planners understand the taxation system and how it affects various investment alternatives. Must understand difference between taxation planning, tax evasion and tax avoidance.
Tax Planning, Tax Avoidance, Tax Evasion
Tax Planning: Legitimate organisation of an investors affairs to minimise tax while complying with tax laws
Tax Avoidance: Planning which is ultimately designed to avoid taxes payable under the law which are artificial and contrived.
Tax Evasion: Unlawfully escaping liability for, or payment of, tax by deliberately and dishonestly evading tax
Income Tax
Taxable income involves consideration of both income and deductions:
Taxable income = Assessable income - allowable deductions
Assessable income includes salary and wages, rent, dividends, interest, annuities.
Allowable deductions: Expenses may be deducted from assessable income if they are incurred in gaining that assessable income. An expenditure necessarily incurred in earning income
How Much Tax Does She Pay?
Taxable income of $50,000 in 19/20
($50,000 - $37,000) X .325 = $4,225
$4,225 + $3572 = $7797 (tax payable)
Tax Rates Payable by Other Entities
Companies: Pay a flat rate of 30% on their taxable income
Small business entities rate is 27.5%
Superannuation funds: Pays a flat rate of 15% on their taxable income
(Non-complying superannuation funds pay a penalty rate of 45% Capital Gain Tax discount rate 33.3%
Partnerships: Profits are allocated to each partner and tax is paid by each partner at their marginal tax rate
Trust: Trust income is distributed between members and tax is paid by each member at their marginal tax rate.
Net Tax Payable
Net Tax Payable = ((taxable income above threshold x Marginal personal tax rate) + lump sum of tax for that threshold)
Less: Tax offsets
Add: Levies
Tax Offsets
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.
Tax offsets directly reduce the amount of tax you must pay, it is referred to as rebates, directly reduce the amount of tax payable on your taxable income
- They are not the same as deductions, which are taken away from income before tax is calculated
- Offsets can only reduce the amount of tax paid to zero
- If you have a disability or you care for a person with a disability, you may be eligible for certain tax offsets
Low income Tax Offset 2018/2019
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.
The LITA allows Australians to earn up to $20,542 and not have to pay income tax, providing a real benefit to low income and part time workers.
How much tax does she pay (LITO)
Taxable income of $50,000 in 2019/2020.
$4,225 + $3,572 = $7,797 (Tax Payable)
LITO
($50,000 - $37,000) x 1.5% = $195
$445 - $195 = $250 (LITO offset)
Net Tax Payable $7,797 - $250 = $7,547
Medicare Levy
Medicare is the scheme that gives Australian residents access to healthcare
To help fund the scheme, most taxpayers pay a medicare levy of 2.0% of their taxable income.
Medicare Levy Surcharge
1 - 1.5% applies if your income is above a certain threshold and you or any of your dependants dont have appropriate private patient hospital cover.
The Medicare Levy Surcharge is a 1% to 1.5% tax that you have to pay if your annual income is over $90,000 as a single or $180,000 as a couple or family, and you’re not currently covered by a registered private health insurance policy.
How much tax does she pay
Taxable income of 50,000 in 19/20
$4225 + $3572 = $7797 (tax payable)
Medicare
$50000 x 2% = $1000 (medicare levy)
Elsie is BELOW the medicare levy surcharge income threshold
Net tax payable = 8547 (7797 - 250 + 1000)
Taxation Of Minors
Special tax rules applies to minor’s unearned income
Intended to prevent taxpayers avoiding tax by directing income to children.
- A minor is defined as an unmarried person under 18 years of age and not in full employment.
- Tax rates as high as 68% are applied to unearned income over $416
- Income which is considered earned by minors, such as employment income are taxed at normal adult MTR (marginal tax rate)
- First $416 of unearned income is tax free and any income amounts above 1307 are taxed at top adult marginal tax rate (45%+2%)
Taxation of Investment Income
Income received from most forms of investments such as shares and property are assessable for tax
Taxation and Share Investment
Dividends are income from investment in shares
Under the dividend imputation system payment of company tax is imputed, or attributed to shareholders. The tax paid by the company is allocated to shareholders by way of franking credits attached to the dividends they receive.
The franking tax offset will cover, or partly cover the tax payable on the dividends depending on the shareholders marginal tax rate. Excess credits can be used to offset other income or refunded to the shareholder.
