Introduction to the concept of income for tax purposes
This discussion is about income tax case study which describes that the disparity between the hobby of person and his business cannot weaken the concepts of income. In given report, we will discuss about various items such as tax computation, car fringe benefit and the assessment of the income. The overall evaluation of such report defined the core aspects of the taxation for the purpose of the tax computation in different circumstances.
The case studies under income tax show that difference between the person’s business and hobby does not affect the ordinary conception of income. The activity when a person gets benefits from his/her skills, talent or hobbies and in consideration of that he earns money or income. It is not always mandatory that the person exploits his/her skills or talent commercially to make profits from his/her business. There is a case of exception for the same when the person receives voluntary consideration for his skills. For Example when an author writes for his personal pleasure and receives voluntary consideration for that from external sources or Government, without having an intention to sell his skills, is not considered as an income. But where the person wants to sell his work with an intention to earn benefits then it falls under the head of income. The concept works irrespective of the fact that the activities are being carried on in a specific manner or by a proper system or not.
Thus, on the basis of above discussed concept, the income earned by Hilary in the consideration of sale of copyright for $10000, pictures for $2000 and manuscript for $5000, the entire received amount considered as an income from personal exertion and falls under the taxable income. The fact doesn’t matter that earlier, she wrote the book for her own pleasure and she decided to sell it later. In both cases the entire amount is liable to tax imposition as per the Australia Tax Practices.
This is a benefit provided by the employer to his employee in which the employer holds a car and allow the employee to use the car for his personal use. In this arrangement the employer either has purchased his own car or taken it on lease. At the same point, the employee uses the car for his personal use instead of using it at employer’s place. A car parked in the premises of the employee irrespective of the fact that he uses it or not, is also said to been used by the employee (Arens, Elder, and Mark, 2012).
Tax computation for income from personal exertion
These are two methods to calculate the taxable value of fringe benefit:
- Statutory Formula Method
- Operating Cost Method
The current requirement asks to calculate the taxable value of fringe benefit using the statutory formula (Tran-Nam, , et al. 2010).
The following information is given in the questions already.
The base value of the car : $50,000
The number of days in the FBT year when the car was used or available for private use of employees : 183
The number of days in the FBT year : 365
The employee contribution : $1000
Car travelled (in kms) : 16,000 km
Formula does not require the travelled kilometres in consideration.
The statutory % rate is 20%. The formula is as follows:
= {(base value of car x the applicable statutory percentage x the number of days the car was used for personal purpose) / the number of days in FBT year} – employees contribution (Somers, and Eynaud, 2015).
= {(50000 x .20 x 183) / 365} – 1000
= {(1,830,000)/365} – 1000
= 5013.6986 – 1000
= 4013.6986
= $ 4014
In the above mentioned case the mother lent a sum of $40,000 to his son as a loan which is required to be paid after 5 years as a whole sum of $50,000. There was no formal agreement and no requirement to pay any interest. Although, her son has repay the money back in a period of 2 years only. He paid $44,000 as the capital repayment of $40,000 along with the interest of $4000 for two years. The interest was calculated at the rate of 5% per annum for two years (Peiros, and Smyth, 2017).
Out of the total cheque given for $44,000, the sum repaid as capital repayment which is $40,000 will not be taxed and the interest amount of $4,000 shall be taxed on the hand of mother.
On the other hand the capital repayment of $40,000 shall not be taxed on the side of son but the amount of interest for $4,000 allowed to be deducted in computation of taxable income for him.
If in the given case the child was a minor the provision of clubbing would have applied. If child made any investment out of the borrowed money and earned any income from such investment, the income generated from that investment would have added to the mother’s income and got taxable in the hands of mother (Richardson, and Lanis, 2007).
Taxable value of car fringe benefits with taxable income calculation
Since 20 September 1985, the Capital Gain Tax (CGT) came into force. After that, any major capital improvement made in a residence property purchased before that shall be taken into account for capital gain tax. The arrangement has been taken place when the residence is not the person’s main residence.
An improvement made to a residence is considered as major capital improvement where the original cost (Indexed in case the contract under which the improvement is made is entered before 11.45am on 21 September 1999) of the habitancy acquired before the date 20 September, 1985:-
- Exceeding the amount received on the disposal by 5% at a minimum.
- Exceeds the improvement threshold of the income year of asset disposal.
IT is analysed the lower of the following will be considered as capital gain.
- Indexation method : proceeds on sale of improvement – cost base of improvement (indexed)
- Discount method:{ proceeds of improvement – cost base of improvement ( without indexation) } – 50% discount
The improvement for the year shows that the income in 1986-87 is $53,950 and for income year 2016-17 is $145,401.
First it is required to check if it’s a major capital improvement, as the dwelling is purchased before 20 September 1985:
- The cost of the improvement amounted to $60000 that is more than 5% of $800,000 i.e. $40000.
- The cost base of improvement after indexation is $161,706 (60000* 145401/53950) is more than income threshold for 2016-17 being $145,401 (Ryan, 2016).
Hence, it amounts to a major capital improvement.
CALCULATION OF CAPITAL GAIN OR LOSS
- INDEXATION METHOD : proceeds on sale of improvement – cost base of improvement (indexed) = 800,000 – 161,706 = $638,294
- DISCOUNT METHOD : {proceeds of improvement – cost base of improvement ( without indexation) } – 50% discount = (800,000-60000)*.50 = $370,000 (Somers, and Eynaud, 2015).
HENCE, THE CAPITAL GAIN IS $370,000
In following cases, certain incomes will be kept exempted for the tax payer (Nelson, Simshauser, and Kelley, 2011).
- When the property is purchased before 20 September 1985
- When it is the main residence (only single main residence is permitted)
- When the property is bought out of self-managed super fund (SMSF)
- Partial exemption is made where, the main residence is used as business or an investment property is made main residence.
The tax implication in the given part would be $370,000
The tax requirements for imposition are different for an individual and company. If the owner of the capital asset is an entity instead of an individual then the requirement of tax changes accordingly. Both companies and individuals pay different amount of tax on the same taxable income because the tax rate applies on the basis of the nature of the tax payer. If the tax payer is a company then it is liable to pay flat 30% tax on its income without availing any discount or deduction on the income.
Although, the above discussed discount method is not allowed for the companies to include in the calculations of its net capital gain or loss. Through the indexation method, the companies can compute its long term capital gains i.e. the gain or loss from the assets which has been held by the company for more than 12 months. Hence the above calculation applies to companies and the available capital gain amount to as follows (Alles, Kogan, and Vasarhelyi, 2018).
DISCOUNT METHOD: {proceeds of improvement – cost base of improvement (without indexation)} – 50% discount = (800,000-60000)*.50 = $370,000
Conclusion
At the end, the overall analysis of the report reflects that the tax computation on the capital gain or income earned is varies as per the nature of the tax payer. Different rules and regulation of taxation applies on the different tax payers. To calculate the taxable income of a person several rules and transactions needs to be complied. In above discussion all the given questions have been answered by the methods of calculating taxes in various manners.
References
Alles, M. G., Kogan, A., and Vasarhelyi, M. A. 2018. Feasibility and Economics of Continuous Assurance 1. In Continuous Auditing: Theory and Application (pp. 149-167). Emerald Publishing Limited.
Arens, A. A., Elder, R. J., and Mark, B. 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Nelson, T., Simshauser, P. and Kelley, S., 2011. Australian residential solar Feed-in Tariffs: industry stimulus or regressive form of taxation?. Economic Analysis and Policy, 41(2), pp.113-129.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor’s commission. Taxation in Australia, 51(7), p.394.
Richardson, G. and Lanis, R., 2007. Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of Accounting and Public Policy, 26(6), pp.689-704.
Ryan, C., 2016. Are you experimenting with the R&D tax incentive?. Taxation in Australia, 50(9), p.529.
Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO’s proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.
Tran-Nam, B., Evans, C., Walpole, M. and Ritchie, K., 2010. Tax compliance costs: Research methodology and empirical evidence from Australia. National Tax Journal, pp.229-252.
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