Australian Tax Law

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Australian Tax Law

Introduction

The Australian Tax laws have several requirements for assessing the taxable income of individuals. The ordinary income of an individual qualifies for assessment purposes. For an Australian resident, taxable income includes ordinary income acquired directly or indirectly inside or outside Australia. Jess is not an Australian resident and thus her income is treated differently from that of an Australian resident. Section 6-5(3) of the Australian Tax Law states that only the ordinary income earned from within Australia can be assessed for taxation[1]. Several important aspects of Australian taxation standards should be considered while carrying out the assessment. First, statutory income must be included in an individual’s assessable income. Second, exempt income cannot be assessed for taxation purposes.

Residence

Several Australian laws have been enacted to determine whether a person is an Australian resident. According to the Australian government taxation office Website, one qualifies to be taxed as an Australian resident if he/she fulfills one or several requirements[2]. First, the person was born in the country. Second, he/she moved into the country to stay permanently. The person should have lived in the country for a period not less than six months during which they held the same job and lived in the same area. The person should have lived in Australia for a period greater than half a fiscal year. This last provision however excludes individuals whose usual home is outside Australia and those who have no intention of living in Australia. A person holding a temporary visa and not the spouse of an Australian resident is not an eligible resident. A company is resident if it was incorporated, carries out business and controls voting power in Australia.

Taxation Eligibility Assessment

An assessment of Jess Jones’ tax eligibility should begin with her eligibility as a residence. Jess Jones resided in Sydney from July 2012 to June 2013. This period amounts to one financial year exceeding the statutory half a year period that makes one eligible for taxation. Jones intends to live in the country for these days because she already has a job and assets. She is thus eligible for taxation by virtue of having stayed in the country for more than 183 days of the financial year. Her retail store in Cairns also qualifies as a resident business in the country since it operates within the country.

Retail Store Deductions

Jones’ retail store is eligible for a corporate tax of 30%. The deductions to be made before tax computation include decline in value. The decline in value calculations for the depreciating assets is as follows:

Item

Financial year ending 30th JuneOpening adjustable Value ($)Decline in Value ($)Non-taxable use (%)Deduction for decline in value ($)Adjustable value year end ($)Advertising Billboards 20135550450455505Air conditioning unit20133000410412959Alarms20132200180182182Cash registers2013524012901295111Floor coverings2013780025602567544Furniture and fittings201313000160016012840Totals: 649 649

From the above table, the opening adjustable value represents the cost of the assets during the year they were acquired. The opening adjustable value for consequent years will equal the adjustable value at the end of each year. Since Jones’ store is being assessed for only one year, there is no reason to calculate the adjustable value for subsequent years. The fourth column comprises the decline in value calculations. The decline in value calculations for the assets was made using the diminishing value method as adopted by Jess Jones. The formula used to calculate the value is as follows: the opening adjustable value is divided by the effective life then the outcome multiplied by 2.0. The 2.0 value is used instead of 1.5 because the assets were held after 10 May 2006. The decline in value deduction is the value to be deducted for taxable use of assets. It is calculated by reducing the decline in value by the percentage of non-taxable use. The end year adjustable value is calculated by deducting the decline in vale from the adjustable value at the beginning of the year. The total deduction claim for a decline in value of the company’s assets will amount to $ 649.

Total taxable income of the Company

The total taxable income of Jess’s store can be calculated from the trading figures given as follows:

Sales: 280,000

Clos SOH-Open SOH: 15000

295,000

Deductions:

Purchases 150,000

Operating Expenses: 131250

13750

Less decline in value 649

Total taxable income 13051

The above amount as calculated refers to the total taxable income of the company. The sales value as used above refers to the total amount of sales made by the company during the year. Clos SOH refers to the closing stock as at the end of the financial covered by the given financial statements. The Open SOH refers to the stock carried forward from the previous year. This represents the stock at the beginning of the fiscal year. The opening stock is deducted from the closing stock and the outcome added to the sales value. This value ($295,000) gives the cost of goods sold during the year. From the cost of goods sold, other necessary deductions such as the purchases and the costs of operations are deducted. After these deductions, the decline in value as previously calculated for the assets is deducted from the final value. The result is the total taxable income of the company. This figure is the one subject to tax deductions.

Jess Jones’ Taxable Income

For the period between July and November 2012 Jess earns $ 28000 from the shows she records with Australian television Network BTV. The shows were presented in Sydney during which time she resides in Sydney. This amount is taxable because it was earned in Sydney. During the time, that she resides in Sydney Jess is also offered a contribution column in a newspaper owned by BTV’s owner. Jess writes two columns every week for the newspaper and earns $1500 for each column. This amounts to $ 3000 every week. The article-writing job continues for 46 weeks. Since Jess earns $3000 a week, then the total amount she earns from the column writing job amounts to $138,000. Jess’ total earnings for the year amounted to $166,000. This reflects the total amount of her earnings from the television shows and the newspaper columns during the entire period. According to the Australian Government taxation office, this amount is taxable under Australian law[3]. Residents have different income tax rates under this law from non-residents. For the earnings from the television show, Jess is eligible for an income tax of 19c for every $1 earned during the year. This is because her income falls in the 0-$80,000 threshold. Her column writing earnings attract an income tax of $ 3572 plus 32.5c for each $1 since they occur in the $80,001-$180,000 income threshold.

Other Taxable Incomes

Some of her other taxable incomes include $ 4000 in investments from the term deposit with the Australian bank. Her franked dividends from BHP are part of her taxable income. The Australian Taxation Office website states that all franked dividends are subject to taxation. Her 1,500 shares at ten cents per share are eligible for taxation. This is because the earnings are from a foreign country and Australian tax residents are taxed for their global incomes[4]. Earnings from a foreign company are only eligible for income tax if they are the earnings of locals. Her earnings from Telstra dividends at five percent per share are eligible for taxation given the fact that she earns them from an Australian company. Jess holds 2000 Telstra shares. The total earnings from these shares between the beginning of October 2012 and the beginning of April 2013 amounted to $100. Like the dividends from BHP, a foreign company, her interests from US banks amounting to $1800 are not exempt from Australian taxable income. Tax residents’ foreign earnings are taxable under the Australian taxation law (The Australian Taxation office 2013). Jess also bought a piece of land for $ 55,000 and built a shed on it costing $ 25000. She later sold the land in March 2013 for $ 85,000. In this transaction, Jess earns a profit of $5000. This profit from the sale of assets is taxable and adds to her taxable income. Her foreign income is exempt from tax[5].

Other Deductions from Income

Jess is servicing a loan she used in paying for her investments. During the 2012/2013 financial year, Jess paid $865 in interest for this loan. The medical expenses incurred by Jess on Behalf of her ailing mother and daughter are deductible from the total taxable amount. The Australian taxation website states that residents are eligible for the Medicare levy[6]. Since Jess has sought outside payment for her medical bills, she should deduct her medical expenses from the total taxable income. She therefore is eligible for a deduction claim of $2450 for the medical expenses incurred that should have been catered for by the Medicare fund. Jess can only claim deductions for expenses that are work related. These expenses include the 20% of telephone expenses and the newspaper expenses. There is a provision for deduction of these expenses because they are work related. Work to home transport expenses are not deductible so Jess cannot expect a refund of the amount she uses while going to the television station. Travel expenses incurred for work related conferences could be deducted to reduce the taxable income[7]. Jess cannot claim deductions for her home office expenses given the fact that her employer BTV owns an office.

Tax payable Calculations

The following list represents the total taxable income plus the deductions that Jess can claim from the Taxman:

Income from BTV shows: 28000

Add Income from Columns 138000

166000

Investments from Au Bank 4000

BHP dividends 150

Telstra dividends 100

Profit from land sale 5000

Total taxable income 175250

Deductions:

Loan interest 865

20% telephone calls 80

Conference expenses 2500

Newspapers 350

400

800

Total Taxable income 170255

The above amount of $170,255 represents Jess’ total taxable income for the period during which she worked in Australia. The total amount of tax to be charged on resident income falling within this threshold is $3572 plus 32.5c for each $1 earned. The tax for this income can be calculated as:

3572 + (32.5c * 170255) = 58904.875

The total income tax for Jess’ Personal income is $ 58904.8975.

Jess store’s total income for the year 2012/13 is $13051. This amount is subject to a 30% income tax. The income tax therefore for the store is $3915.3. Jess is therefore required to pay a total amount of $62820.1975 income tax.

References

Australian Taxation Office 2011, Company Tax Rates, Fact sheet, viewed 17 April 2013, .

Australian Taxation Office 2012, Residency– what you need to know, Fact sheet, viewed 17 April 2013,

.

Australian Taxation Office July 2011, working in Australia – what you need to know, Fact sheet, Viewed 17 April 2013, .

Australia 2012, Tax Laws Amendment (Income Tax Rates) Act 2012, Viewed 17 April 2013, .

Australian Trade Commission July 2011, Taxation in Australia, Viewed 17 April 2013,

Australian Taxation Office 2012, Tax deductions, Fact sheet, Viewed 17 April 2013,

[1] Australian Taxation Office 2012, Residency– what you need to know, Fact sheet.

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