Week 5 Flashcards
Tax planning
Legitimate organisation of an investor’s affairs to minimise tax while complying with tax laws.
Tax avoidance
Planning which is ultimately designed to avoid taxes payable under the law.
Tax evasion
Unlawfully escaping liability for, or payment of, tax by deliberately and dishonestly evading tax.
The Australian Taxation System
Income tax has been levied by the Australian Government since 1942.
Sources of taxation law:
Income Tax Assessment Act 1936 and 1997 (ITAA97)
Case law
Australian Taxation Office rulings and determinations
Forms of taxation Income Tax Capital Gains Tax (CGT) Fringe Benefits Tax (FBT) Goods and Services Tax (GST)
Income Tax
Pay as you go (PAYG)
All existing payment and reporting systems for individuals and companies, was replaced with the “pay as you go” (PAYG) system from 1 July 2000.
All forms of income tax paid by businesses are generally paid in quarterly instalments at the time of remitting GST payments.
PAYE tax instalments deducted from employees salary & wages are aligned with these quarterly instalments.
Reporting of tax obligations provided to Taxation office through Business Activity Statement (BAS)
Income Tax calculations
Taxpayers pay income tax for each financial year, normally ending 30 June.
Income tax = (Taxable income x Rate) + Levy – Tax offsets
Taxable income involves consideration of both income and deductions.
Taxable income = Assessable income – Allowable Deductions
Net tax payable calculation
Assessable income
less Allowable Deductions
= Taxable income
x tax rate applicable
= Gross tax payable
less non-refundable tax offsets (i.e. LITO, LMITO)
Less refundable tax offsets (i.e. private health insurance rebate, franking credit)
Plus Medicare Levy/ Medicare Levy Surcharge (calculated on taxable income)
Less PAYG credits (i.e. total tax already paid during the year)
= Net Tax payable
Assessable income for taxation purposes
Assessable income consists of ordinary income and statutory income derived during the income year.
Need to ascertain not only whether income has been derived but also where it comes from.
Income is not defined in the Income Tax Assessment Act (S.6-5(1) of ITAA).
Courts have interpreted income to mean “income according to ordinary concepts”.
Sources of ordinary income
Income from personal exertion
earnings from providing personal services
e.g. under employment (wages, LSL, directors fees) or other contract.
there must be a nexus between the provision of the services and the receipt of the benefit
excludes hobbies, gambling and gifts not related to the personal service.
Income from business activities
Includes normal proceeds from carrying on a business activity
What is deemed to be a business needs to be determined in the light of the case - otherwise deemed a hobby.
Characteristics of a business: eg.
frequency;
size of activity;
profit potential;
whether the activity is systematic
Allowable deductions
General
The ITAA classifies deductions as either of a general or specific nature:
General - (S. 8-1 of ITAA)
is any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for income producing activities.
must be a nexus between the outgoing and assessable income.
does not include outgoings that are of a capital, private or domestic nature or incurred in producing exempt income.
Specific deductions
Some deductions that would not be allowable under the general provisions are nonetheless deductible under specific provisions of the Act.
Most common provisions relate to expenditure incurred on capital items:
repairs and maintenance (s. 25-10)
depreciation (ss. 40-43)
certain donations (s. 30)
Substantiation
Where work expenses exceed $300 in total, an employee must be able to satisfy substantiation rules:
written evidence of expenditure required to be kept for 5 years
Audit
Tax Return facilitation
Property Investment Deductions
Entities Subject To Income Tax
Basic entities relevant for taxation planning are
Individuals Partnerships Trusts Superannuation funds Companies
Individuals
Tax Planning Issues
Advantages
Salary packaging
Split of property income
Main residence exempt from CGT
Possible halving of CG(note Labour party proposal to reduce it to 25%)
Tax-free threshold and graduated tax scale
Domestic losses carried forward
