Question 1
Present reports provide the explanation regarding the manner of calculation of tax liability relating to an individual as well as corporate entity. For provide explanation in more appropriate manner two case studies i.e. first relating to Mr. Jane and second relating to Green Pty Ltd has been solved comprising all the calculations and provisions. Income Tax is calculated in accordance with the provision specified in Tax Assessment Act 1997 as it the one main authoritative statue for calculation of Income Tax. Further relevant sections have been specified in solution so that same can refer for other relevant provisions.
Calculation of Gross Income of Mr. Jane from various sources for the year ended on 30th June 2017:
(Amount in $)
Salary from employment at Pty Ltd: 79000
Fully franked dividends: 20000
Cash received from Brown family discretionary Trust: 20000
Interest Income: 475
Rental Income: 35000
Profit from sale of shares: 1350
Gross Income 152825
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Year 2016-17 ( Amount in $) |
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Calculation of income tax payable by Mr. Jane |
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Particular |
Income |
Dividend |
Capital Gain |
Tax already paid |
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Gross salary |
79000 |
18828 |
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Dividend |
20000 |
5500 |
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Rental Income (note 4) |
30000 |
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Cash from discretionary trust |
20000 |
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Total non saving income |
129000 |
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Individual saving account |
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Bank saving account (note 1) |
475.00 |
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Total saving income |
475.00 |
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(Note: Interest from individual saving account is exempt) |
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Capital gain on sale of share (note 2) |
1200 |
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Total Income |
129475 |
20000 |
1200 |
24328 |
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Deductions (note 5) |
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Investment Expenses |
250 |
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Donation |
1125 |
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Insurance Premium |
1000 |
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Adjusted Income |
127100 |
20000 |
1200 |
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Personal allowance |
0 |
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Taxable Income |
127100 |
20000 |
1200 |
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Tax (working note 6 ) |
40159 |
24328 |
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Medicare Levy (note 7) |
2969 |
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Capital Gain Tax (note 8) |
180 |
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Remaining tax liability (43330-24328) |
18980 |
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Working Notes |
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Note -1 |
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Calculation of interest income |
Amount in $ |
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Interest income |
475 |
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(Income from individual saving account is exempt) |
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Total |
475 |
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(Assumption: It has been assumed that interest is relating to saving account) |
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Note -2 |
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Calculation of gain on sale of shares as per discounted method |
Amount in $ |
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(In accordance with views of Karras & Furceri (2015)Discounted method can be used here as shares have been held For more than 12 months) |
|
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Cost of shares |
800 |
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Brokerage Cost |
150 |
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Total Cost |
950 |
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Selling Price of shares |
3500 |
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Brokerage Cost |
(150) |
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Net proceeding received |
3350 |
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Nominal gain to be included in assessable income |
2400*50% |
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Gain |
1200 |
Note: As per the data available in question it has been provided that the total of brokerage cost relating to selling and buying of shares was $ 300 in total; thus an assumption is made that $150 brokerage relates to purchase of shares and $ 150 of brokerage relates to sale of shares. Hence the cost has been equally divided and solution has been done in accordance with same.
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Note 3 Mortgage repayments are not deductable expenses thus the same are not reduced.
Net taxable income 30000 |
Note-5
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Calculation of Deductions |
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Help Debt |
Amount in $ |
|
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Amount paid |
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Amount available for deduction |
20000 |
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Charitable Donations ( Gift aid) |
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Amount paid |
900 |
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Amount available for deduction |
900*10/8 |
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|
1125 |
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The deduction available of paying donation is 1.25 times of the amount which has been paid as donation (Tanzi, (2014).). Thus, the amount of deduction has been calculated according to formula. |
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Investment Expenses |
250 |
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Income protection insurance premium |
1000 |
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Note: As per the views of Kalotay, (2016), investment expenses have been assumed as expense relating for incurring assessable income; thus the same are deductable under section 8-1 of ITAA 1997. |
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Note-6 |
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Calculation of Tax |
Amount in $ |
|
|
0-87000 |
19822 |
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|
40100 |
14837 |
|
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Total tax on income other than dividend |
34659 |
|
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Tax on Dividend Income |
Amount |
|
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(Franked dividend will be taxed at 27.5% and the same is assumed to be fully credited by company) (Yinger, Bloom, & Boersch-Supan, (2016) |
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|
5500 |
5500 |
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Total Tax |
40159 |
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Note -7 |
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Medicare Levy |
Amount |
|
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Calculation of national insurance contribution (Taxable Income + Dividend Income+ Capital Gain) (127100+20000+1350) |
148450*2% |
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|
2969 |
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Total |
2969 |
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|
Note -8 |
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Calculation of Capital gain tax |
Amount |
|
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Capital gain |
1200 |
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In present case as the tax bracket of 33% applies to the individual thus 15% LTCG tax will be paid. (Kaldor, 2014) |
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|
1200*15% |
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Capital gain tax as per this method |
180 |
|
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Total |
180 |
Note: No Medicare Levy has been charged on capital gain tax (Brownlee, 2016). As per the provision of ITAA 1997 in case an asset is held for less than twelve months before selling it off than tax payer is entitled to a discount of fifty percent of CGT ; which decreases the rate of tax to 23.25%. Thus, as in present case the asset has been held for less than twelve months thus, the same provisions have been applied (Faccio & Jin, 2015).
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A .Calculation of Business Profit |
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|
(Amount in $) |
|
|
Income |
|
|
Sales |
345000 |
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Other Income |
4900 |
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Total |
349900 |
|
Expenses |
|
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The specified expenses are allowable for taxation purpose under SS Act section 1075 (1) |
|
|
Advertisement Expenses |
1000 |
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Bad Debts (working note 1) |
900 |
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Bank Charges |
150 |
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Capital Expenditure (working note 2) |
3000 |
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Cost of sales |
6000 |
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Sub- Contractor Expenses |
23000 |
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Electricity Expenses |
800 |
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Entertainment Expenses |
2000 |
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Environment protection (disposal of chemicals) |
600 |
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Interest expenses |
4000 |
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Motor Vehicle expenses |
4000 |
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Motor Vehicle registration expenses |
1200 |
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Rent Expenses |
11800 |
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Stationary Expenses |
200 |
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Tea, coffee for staff use |
100 |
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Phones and Internet |
2000 |
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Wages |
45000 |
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Division 40 of Income tax assessment act 1997 allows depreciation as deductible expenditure |
|
|
Depreciation (working note 3) |
5500 |
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Total allowable expenditure |
111250 |
|
Net profit |
238650 |
|
(Amount in $) |
|
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B. Calculation of tax liability on dividends (fully franked) |
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|
Dividend received |
10260 |
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Tax @ 30% |
3078 |
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Note: the whole amount will be available for credit |
|
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C. Calculation of tax liability on net capital gain |
(Amount in $) |
|
Net Capital gain |
4000 |
|
Tax @ 30% |
1200 |
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D. Calculation of Total Tax Liability |
|
|
(Amount in $) |
|
|
Business Income |
238650 |
|
Net Capital Gain (working note 4) |
4000 |
|
Dividend Income |
10260 |
|
Exempt Income |
10000 |
|
Gross assessable Income |
262910 |
|
Less |
|
|
Exempt Income |
10000 |
|
Taxable Income of Green Pty Ltd. |
252910 |
|
Tax Liability @ 30% |
75873 |
|
Credit available (working note 5) |
3078 |
|
Net tax liability |
72795 |
In accordance with views of Brown, Handley & O’Day (2015) bad debts can be claimed as a deduction by taxpayer in case the same has been included in taxpayer’s assessable income as per the provision of section 8-1 of ITAA 97 and section 40-880 of ITAA 1997. The same was resolved in case of Re Sobel Investments Pty Ltd and FCT (2012) AATA 180. Thus, in present scenario it has been assumed that bad debts were previously treated as assessable income and the same have been now claimed as deductible expenditure.
It has been assumed that specified capital expenditure as immediate deduction is allowed to be deducted for income tax purpose as well under section 40-880 deductions.
Depreciation calculated for taxation purpose has been reduced for ascertaining the business profit of Green Pty Ltd as the same is only deductible as per the provisions of division 40 of Income Tax Assessment Act 1997.
Capital gain or loss on asset is ascertained after reducing the cost of asset from the amount received for asset while disposing the same. Capital gain is part of income tax and is not considered as separate tax; even though the same is referred as capital gain tax. In present case as no details relating to same have been provided; net capital gain is included in taxable income and taxed @ 30% .
As it has been specified in the question that dividends are fully franked thus, the tax relating to same is fully available for credit.
Calculation of credit
= 10260*30%
= $ 3078
Working Note 6
Other Details
- Environment expenses have been assumed to be related to necessary for continuing business and accomplishing environmental liability of the company. Thus, the same can be deductible (Auerbach & et.al.2013)
- In accordance with views of Abraham, Mike & Alastair (2015), fines are not part of business expense not the same are deductible; thus the same have not included in business expenses.
- Exempt Income is part of assessable income but no taxation is provided on same thus the same have been reduced while calculating taxable income (Ainsworth & et.al., 2015).
- As per the view of Becker, Reimer & Rust (2015) interest Income and Dividend Income have been treated as part of other income of Green Pty Ltd; thus the same have been included in business income of company .
References
Abraham, Mathew, Mike Dempsey& Alastair Marsden. (2015).”Dividend reinvestment plans: a tax-based incentive under the Australian imputation tax system.”
Ainsworth & et.al. (2015). “Do franking credits matter? Exploring the financial implications of dividend imputation.”.
Auerbach, A. J. (Ed.). (2013). Corporate takeovers: Causes and consequences. University of Chicago Press.
Becker, J., Reimer, E., & Rust, A. (2015). Klaus Vogel on Double Taxation Conventions. Kluwer Law International.
Brown, C., Handley, J., & O’Day, J. (2015). The dividend substitution hypothesis: Australian evidence. Abacus, 51(1), Pp37-62.
Brownlee, W.E., 2016. Federal Taxation in America. Cambridge University Press.
Faccio, Mara & Jin Xu. (2015) . “Taxes and capital structure.” Journal of Financial and Quantitative Analysis 50.03 .Pp 277-300.
Kaldor, N. (2014). Expenditure tax. Routledge.
Kalotay, A., 2016. Optimal Municipal Bond Portfolios for Dynamic Tax Management. The Journal of Investment Management, 14(1), Pp.87-99.
Karras, G., & Furceri, D. (2015). Taxes and growth in Europe. South-Eastern Europe Journal of Economics, 7(2).
Tanzi, V. (2014). Inflation, indexation and interest income taxation. PSL Quarterly Review, 29(116).
Yinger, J., Bloom, H. S., & Boersch-Supan, A. (2016). Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier.
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