Examples Of Assessable Income And Deductions For Taxation Purposes

Trading Stock Under Section 70-10

The following persons are resident taxpayers who are not liable for the Medicare Levy Surcharge. The information given relates to the 2015/16 tax year:

  1. Glenn derived taxable income of $22,000 and his wife Rowena derived taxable income of $6,000. They do not have any children.

Glenn and Rowena does not have to pay the Medicare levy since their combined family taxable income stands $28,000 which does not exceed the family Medicare levy threshold of $36,001.

  1. Kath derived taxable income of $41,000 and her husband Fred derived taxable income of $18,000. They have three dependent children.

Computation of Medicare Levy

In the Books of Kath and Fred

For the year ended 2015/16

Particulars

Amount ($)

Amount ($)

Assessable Income

Kath

41000

Fred

18000

Total Assessable Income

59000

Medicare Levy Payable (41,000*2%)

820

  1. Beck derived taxable income of $29,000 and her de facto partner Roy derived taxable income $23,000. They have four dependent children.

Computation of Medicare Levy

In the Books of Beck and Roy

For the year ended 2015/16

Particulars

Amount ($)

Amount ($)

Assessable Income

Beck

29000

Roy

23000

Total Assessable Income

52000

Medicare Levy Payable

Nil

  1. Will derived taxable income of $36,000 and his wife Tina derived taxable income of $22,000. They have three dependent children.

Computation of Medicare Levy

In the Books of Will and Tina

For the year ended 2015/16

Particulars

Amount ($)

Amount ($)

Assessable Income

Will

36000

Tina

22000

Total Assessable Income

58000

Medicare Levy Payable (36000*2%)

720

Fred, a resident taxpayer aged 47, has taxable income of $145,345 and reportable fringe benefits of $17,170. During the year Fred has paid PAYG tax instalments totalling $13,480. His wife, Jani, has taxable income of $27,000.

They have seven children and no private health insurance.

Required: Calculate Fred’s net tax payable for the 2016/17 tax year.

Tip: Check if Medicare Levy Surcharge will apply to Fred and, if applicable, include in your calculations.

Computation of Taxable Income

In the books of Fred for the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Salary

145345

Add: PayG

13480

Add: Fringe benefit

17170

Total Assessable Income

175995

Allowable Deductions

0

Total taxable Income

175995

Tax on taxable income

52750.15

Add: Medicare levy

3519.9

Less: PayG

13480

Total Tax Payable

42790.05

The following questions are based on the material in Chapter 2:

Ned Markson is a resident taxpayer employed by Acme Holdings Ltd. The following transactions were all as a consequence of Ned’s employment:

  • Net weekly wages totalled $78,000 for the year.
  • Total PAYG tax withheld from Ned’s weekly wages from Acme and forwarded to the ATO amounted to $19,000.
  • Additional wages paid to Ned as a Christmas bonus of $6,000 net (net of $4,200 PAYG tax withheld).
  • Reimbursement of out-of-pocket travel costs of $1,200 that Ned incurred during his employment.
  • A taxable travel allowance totalling $2,800. No PAYG was withheld from this amount.
  • Acme paid health insurance premiums for Ned and his wife to the value of $2,750.
  • Superannuation contributed $10,000 to Acme Holdings Superannuation Fund on behalf of Ned.

Required:

For each of these transactions indicate which amounts are to be included in Ned’s assessable income and provide Ned’s total assessable income.

Answer: Transactions that will be included in the taxable income of Ned are as follows;

  1. The total amount of net weekly wages will be included in the assessable income of Ned
  2. The receipt of Christmas bonus will be included in the Ned’s assessable income
  3. Ned will be subjected to claiming an allowable deductions on the travelling cost since it is not covered under the fringe benefit tax.
  4. Ned will be able to claim an allowable deductions relating to the cost incurred on travelling allowance since under section 8-1 of the ITAA 1997 the expenditure incurred by Ned is in the course of employment and the same can be claimed as allowable deductions.
  5. The superannuation contribution that is made by Ned will be subjected to allowable deductions under section 8-1 of the ITAA 1997.
  6. The premium paid by Ned will be subjected to allowable deductions.

The total amount assessable income of Ned is stated below;

Answer: Transactions that will be included in the taxable income of Ned are as follows;

g. The total amount of net weekly wages will be included in the assessable income of Ned

h. The receipt of Christmas bonus will be included in the Ned’s assessable income

i. Ned will be subjected to claiming an allowable deductions on the travelling cost since it is not covered under the fringe benefit tax.

j. Ned will be able to claim an allowable deductions relating to the cost incurred on travelling allowance since under section 8-1 of the ITAA 1997 the expenditure incurred by Ned is in the course of employment and the same can be claimed as allowable deductions.

k. The superannuation contribution that is made by Ned will be subjected to allowable deductions under section 8-1 of the ITAA 1997.

l. The premium paid by Ned will be subjected to allowable deductions.

The total amount assessable income of Ned is stated below;

Computation of Assessable Income

In the books of Ned Markson

 For the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Net Weekly Wages

78000

Christmas Bonus

6000

Total Assessable Income

84000

Travelling cost

1200

Travelling Allowances

2800

Superannuation Contribution

10000

Premium on health insurance

2750

Total Allowable Deductions

16750

Total Assessable Income

67250

(Calculation of tax payable from dividend income)

Jim Dough, a single resident taxpayer, received the following amounts from investments during the 2016/17 tax year:

Fully Franked Dividends – Dynamic Ltd (franking credit $9,000)         $ 21,000

Partly Franked Dividends – Static Ltd (franking credit $2,400)              15,000

Unfranked Dividends – Lost Ground Ltd       20,000

Jim had no other income or deductions during the year.

Required:

  1. Calculate Dough’s taxable income for the 2016/17 tax year.
  2. Calculate Dough’s net tax payable or refundable for the 2016/17 tax year.

Computation of Assessable Income

In the books of Jim Dough

 For the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Australian Sourced Dividend Income

78000

Fully Franked Dividends

21000

Gross up Franking Credits

9000

30000

Partly Franked Dividends

15000

Gross up Franking Credits

2400

17400

Un-franked Dividend

20000

Total Taxable Income

67400

Computation of Assessable Income

In the books of Jim Dough

 For the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Australian Sourced Dividend Income

78000

Fully Franked Dividends

21000

Gross up Franking Credits

9000

30000

Partly Franked Dividends

15000

Gross up Franking Credits

2400

17400

Un-franked Dividend

20000

Total Taxable Income

67400

Tax on taxable income

13452

Add: Medicare levy

1348

Less: Franking Credit

11400

Total tax payable

3400

(Taxable income from Australian and foreign sources)

Yvette Jankic, a resident single taxpayer aged 31, worked in New Zealand from 1 July 2016 until 15 November 2016 and has provided the following information for the 2016/17 tax year:

Receipts

$

Interest (net of TFN tax withheld $490)

510

Interest from United Kingdom (net of withholding tax $300)

2,700

Dividend from the U.S. state of Georgia (net of withholding tax $2,100)

3,900

Gross salary – Australian employment (PAYG tax $5,285 withheld)

21,000

Reportable fringe benefit as per PAYG Summary

6,252

Net salary – New Zealand employment (tax withheld $2,540)

12,650

Bonus from Australian Employer for exceptional performance

2,000

Payments

$

Interest and Dividend deductions relating to United Kingdom and Georgia investments

250

Work-related deductions relating to Australian employment

300

Note – Yvette does not have private health insurance.

Required:

  1. Calculate Yvette’s taxable income for the 2016/17 tax
  2. Calculate Yvette’s net tax payable or refundable for the2016/17 tax

Computation of Assessable Income

In the books of Yvette Jankic

 For the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Salary

21000

Add: PayG

5285

26285

Add: Fringe benefit

6252

Salary from New Zealand Employment

12650

Add: Withholding

2540

15190

Bonus from Australian employer

2000

Interest

510

Interest from UK

2700

Dividend from US State of Georgia

3900

Total Assessable Income

50585

Allowable Deductions

Interest and dividend deductions

250

Work related deductions

300

Total allowable deductions

550

Total Taxable Income

50035

Computation of Assessable Income

In the books of Yvette Jankic

 For the year 2016/17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Salary

21000

Add: PayG

5285

26285

Add: Fringe benefit

6252

Salary from New Zealand Employment

12650

Add: Withholding

2540

15190

Bonus from Australian employer

2000

Interest

510

Interest from UK

2700

Dividend from US State of Georgia

3900

Total Assessable Income

50585

Allowable Deductions

Interest and dividend deductions

250

Work related deductions

300

Total allowable deductions

550

Total Taxable Income

50035

Tax on taxable income

7808.38

Add: Medicare levy

1000.7

Less: Foreign Income tax offset

Interest

20

Interest from UK

300

Dividend from US State of Georgia

1800

PayG withheld

5285

New Zealand Employment tax withheld

2540

Net tax refundable

-1135.92

The following questions are based on the material in Chapter 4:

On 10 April 1988, Penny Pleb, an Australian resident, purchased a block of land for $74,000 as an investment. On 19 February 2017, she sold the land for $125,000.

Penny also sold shares in Prosperous Ltd for $32,000 on 1 August 2016. The shares had cost Penny $8,000 on 17 July 2008. Penny did not dispose of any other assets during the year, nor did she have any capital losses from previous years.

Calculate using the indexed cost base method and also using only the discount method (without indexing) to determine the most favourable outcome for Penny. Show your workings for each method.

Computation of Capital Gains Tax of Sale of Land

Particulars

Amount ($)

Sale Price

125000

Less: Cost of Selling

0

Adjusted Sale Price

125000

Purchase Price

74000

Add: Cost of Purchase

0

Adjusted purchase Price of asset

74000

Capital Gains/(loss)

51000

CGT Old Regime

Indexed capital gain/loss

29,080

Tax payable under old regime (marginal tax rate x indexation factor x capital gain)

5,540

CGT New Regime

Tax payable under Discount regime (marginal tax rate x half capital gain)

4,413

Computation of Capital Gains Tax of Sale of Shares

Particulars

Amount ($)

Sale price

$32,000

less Cost of selling

$0

Adjusted sale price

$32,000

Purchase price

$8,000

add Cost of purchase and ownership

$0

Adjusted purchase price of asset

$8,000

Capital gain/loss

$24,000

CGT Old Regime

Indexed capital gain/loss

24,000

Tax payable under old regime (marginal tax rate x indexation factor x capital gain)

3,940

CGT New Regime

Tax payable under Discount regime (marginal tax rate x half capital gain)

1,020

Brad Emerson, a resident taxpayer, sold the following CGT assets during the 2016/17 tax year:

ASSET

COST

BASE

ACQUISITION

DATE

DISPOSAL

DATE

SALE

PRICE

Shares – AAA

$48,000

19 Jan 87

20 Feb 17

$71,000

Shares – BBB

$62,000

30 May 05

17 Apr 17

$77,000

Shares – CCC

$49,000

8 Jun 09

24 Mar 17

$35,000

Determine the minimum amount of capital gains that Brad is able to include as assessable income in his 2016/17 income tax return.

Income from Personal Exertion

Calculate using the indexed cost base method and also using only the discount method (without indexing) to determine the most favourable outcome for Brad. Show your workings for each method.

Computation of Capital Gains Tax

In the books of Brad Emersion

For the Year ended 2016/17

Asset 1

Asset 2

Asset 3

Asset name

Shares AAA

Shares BBB

Shares CCC

Indexation option

Capital gain

$

0

N/A

N/A

CGT payable

$

0

N/A

N/A

Discount method

Capital gain

$

23,000

$

15,000

$

-14,000

CGT payable

$

173

$

113

$

0

Least capital gain

$

0

$

15,000

$

-14,000

Least CGT payable method

Indexation

Discount

Discount

option

method

method

(Partial main residence exemption)

Benita Ford, a resident taxpayer purchased a house on 30 June 2007 which she used as her main residence for 2 years until 30 June 2009. She then leased the property to tenants for 8 years until the property was sold on 30 June 2017. Benita will apply the main residence exemption for 6 years of this period.

  • The house was originally purchased for$420,000.
  • The market value of the property on 30 June 2009 was $475,000.
  • The house was sold for$705,000.

Benita did not dispose of any other assets during the 2016/17 tax year.

Calculate Benita’s Net Capital Gain in respect of the 2016/17 tax year (after allowing for the partial main residence exemption).

Computation of Capital Gains Tax

In the Books of Benita Ford

For the Year ended 2016-17

Sale price

$705,000

less Cost of selling

$0

Adjusted sale price

$705,000

Purchase price

$420,000

add Cost of purchase and ownership

$0

Adjusted purchase price of asset

$420,000

Capital gain/loss

 $      2,85,000

Number of days where the ownership was not the main residence

2,190

Total number of days in ownership

730

Net Capital Gains

 $        8,55,000

Total Capital Gain from CGT Event x

Number of days in your ownership period when the dwelling was not your main residence

Total number of days in ownership period

The following questions are based on the material in Chapter 5

(Foreign Pension)

Leonard Expat, a 58 year-old resident taxpayer with private health insurance, received a government pension from the United Kingdom that is taxable in Australia, but not in the United Kingdom. Leonard is exempt from tax in the United Kingdom, but subject to tax as an Australian resident taxpayer.

During the 2016/17 tax year, Leonard received $15,000 of pension, and also derived interest and unfranked dividends of $48,000.

  1. Calculate Leonard’s tax payable or refundable for the 2016/17 tax

Computation of Taxable Income

In the Books of Leonard Expat

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Income From Pension

15000

Interest and Un-franked Dividend

48000

Total Assessable Income

63000

Allowable Deduction

0

Total Taxable Income

63000

Computation of Taxable Income

In the Books of Leonard Expat

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Income From Pension

15000

Interest and Un-franked Dividend

48000

Total Assessable Income

63000

Allowable Deduction

0

Total Taxable Income

63000

Tax on Taxable Income

12022

Add: Medicare Levy

1260

Total Tax Payable

13282

The following questions are based on the material in Chapter 5

(Superannuation lump sum, low cap  amount)

Stan Eckhardt, aged 57, received a superannuation lump sum of $310,000 from his superannuation fund upon retirement on 15 April 2017. PAYG tax of $28,170 was withheld from the lump sum. The lump sum comprised entirely of an element taxed in the fund.

Stan also received gross wages of $85,000 up to the date of his retirement.  PAYG tax of $22,110 was withheld from Stan’s wages. Stan has adequate private health insurance.

  1. Calculate Stan’s net tax payable or refundable for the 2016/17 taxa.

Computation of Taxable Income

In the Books of Stan Eckhardt

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Wages

85000

Superannuation Lump sum

310000

Total Assessable Income

395000

Allowable Deduction

0

Total Taxable Income

395000

Computation of Taxable Income

In the Books of Stan Eckhardt

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Wages

85000

Superannuation Lump sum

310000

Total Assessable Income

395000

Allowable Deduction

0

Total Taxable Income

395000

Tax on Taxable Income

150982

Add: Medicare Levy

7900

Less: 15% Tax Offset

46500

Less: PayG Withholding on Superannuation

28170

Less: PayG Withholding on Wages

22110

Total Tax Payable

62102

On 14 August 2016, Tammy Gochi, aged 53, retired from her job as chief executive officer of Megacorp Limited to commence service as a volunteer for Whalepeace International. She received a superannuation lump sum of $160,000 which entirely comprised an element taxed in the fund. PAYG tax of $34,500 was withheld from the lump sum.

During the remainder of the 2016/17 tax year, Tammy also received a superannuation income stream benefit of $40,000 from the fund. PAYG tax of $9,780 was withheld from this amount. The entire amount was taxed in the fund.

Tammy’s only other income during the 2016/17 tax year was gross salary of $36,290 for the period up to the date of her retirement. PAYG tax of $9,035 was withheld by her employer. Tammy has private hospital insurance.

  1. Calculate Tammy’s net tax payable or refundable for the 2016/17 tax

Computation of Taxable Income

In the Books of Tamay Gochi

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Salary

36290

Superannuation Lump sum

160000

Income Stream Benefit

40000

Total Assessable Income

236290

Allowable Deduction

0

Total Taxable Income

236290

Computation of Taxable Income

In the Books of Tamay Gochi

For the year ended 2016-17

Particulars

Amount ($)

Amount ($)

Assessable Income

Gross Salary

36290

Superannuation Lump sum

160000

Income Stream Benefit

40000

Total Assessable Income

236290

Allowable Deduction

0

Total Taxable Income

236290

Tax on Taxable Income

79562.5

Add: Medicare Levy

4725.8

Less: 15% Tax Offset

24000

Less: PayG Withholding on Superannuation

34500

Less: PayG Withholding on Salary

9035

Less: Withholding from Income Stream

9780

Total Tax Payable

6973.3

Calculating Tax Payable

The following questions are based on the material in Chapter 6:

(Small business asset pool, additions)

Gwyneth is a resident, individual small business taxpayer. As at 30 June 2016, she had a General small business pool balance of $ 41,800.

During the year Gwyneth purchased an asset for $34,800 with an effective life of 5 years and another asset for $40,400 with an effective life of 30 years.

There were no disposals during the year.

Calculation Item

Pool Balance

Depreciation Claim

Closing pool balance from previous year 

 $    41,800.00

Opening pool balance for current year 

 $    41,800.00

Add : New asset purchase

 $    75,200.00

Subtotal

 $ 1,17,000.00

Less: Proceeds of asset sale or disposal

 $                –   

Subtotal

 $ 1,17,000.00

Pool deduction claim (30% of $41,800)

 $    12,540.00

 $          12,540.00

Subtotal

 $ 1,04,460.00

New asset deduction claim (15% of $75,200)

 $    11,280.00

 $          11,280.00

Calculation of Small Business Pool Balance

Calculation Item

Pool Balance

Depreciation Claim

Closing pool balance from previous year 

 $    41,800.00

Opening pool balance for current year 

 $    41,800.00

Add : New asset purchase

 $    75,200.00

Subtotal

 $ 1,17,000.00

Less: Proceeds of asset sale or disposal

 $                –   

Subtotal

 $ 1,17,000.00

Pool deduction claim (30% of $41,800)

 $    12,540.00

 $          12,540.00

Subtotal

 $ 1,04,460.00

New asset deduction claim (15% of $75,200)

 $    11,280.00

 $          11,280.00

Total depreciation for current year

 $          23,820.00

Closing pool balance

 $    93,180.00

The following questions are based on the material in Chapter 7:

(Identification of trading stock)

Required: Identify which of the following would be classed as trading stock under Section 70-10:

  • Pairs of shoes held by a retailer for resale.
  • Shares held by an
  • Blocks of land held by a property
  • Clothing held by a retail clothes shop, currently under lay by.
  • Petrol held in underground tanks by a service
  • Raw materials held in store by a
  • Stationery supplies held for office use by an insurance company.
  • Videos held for hire by a video

(a) Trading Stock under Section 70-10

(b) Cannot be classified as trading stock

(c) Land held by property investor would be classified as the trading stock under division 70 of the ITAA 1997

(d) Clothing held by the retail clothes shop will be classified as trading stock since the clothes are acquired or held for the purpose of selling in the ordinary course of business

(e) Petrol held by an underground tank by a service station will be classified as trading stock petrol is acquired for selling them in ordinary course of business.

(f) Raw materials held by the store manufacturer will be regarded as trading stock under section 70-10 of the ITAA 1997 since it is held for the purpose of manufacturing and will be treated as trading stock. 

(g) Will not be classified as trading stock since the stationary supplies it is not for the purpose of resale or exchange. The stationary supplies are for office use only and therefore cannot be treated as trading stock under section 70-10 of the ITAA 1997.

(h) Videos held by hire video store is for the purpose of sale or exchange in the ordinary course of business. Therefore it will be treated as trading stock under section 70-10 of the ITAA 1997. 

(Business deductions for employing others)

Zac Harris operates a retail outlet selling kitchen utensils. During the 2016/17 tax year, Zac had the following transactions relating to his employees:

  • Zac paid net wages to his employees totalling$215,000.
  • As at 30 June 2017, there was one week’s worth of wages that remained unpaid amounting to $4,500. Zac made a journal entry accruing this amount as an expense.
  • Zac deducted $74,000 of PAYG tax from his employee’s wages. Of this amount, $9,000 was paid on 5 July
  • Zac paid a retiring employee $7,000 of annual leave entitlements on termination.
  • Zac paid an employee a redundancy payment of $15,000. The employee had given 7 years’ service to
  • Zac provided for an increase in annual and long service leave of$8,500.
  • Zac paid travel allowances amounting to$3,400.

Required: Identify which amounts are allowed as deductions for Zac’s business for the 2016/17 tax year.

The net wages of $215000 paid to the employee is allowable deduction because it is necessary for generating assessable income as per section 8-1 of the ITAA 1997

The accounting for the purpose of tax can be done using the accrual and cash basis. The Taxation Ruling TR 98/1 provides that the accrual method of accounting is the appropriate method for business. Therefore, the accrued wages of $4500 should be allowed as deduction because accrual method of accounting is followed.

The PAYG is the tax amount deducted by the employer from the employees in order to deposit it with the ATO. It is a liability of the business and it cannot be deducted as an expenses.

The termination payment are paid to the employee for the service provided during employment. The employment termination payments are made in lump sum and are taxed in a different manner. The annual leave entitlement is not part of the ETP but a concessional tax treatment can be received.

The redundancy payment are made to thee employee that are dismissed from employment as the job is abolished. The redundancy payments are made in replacement of salary or wages for the outgoing employee. Therefore, the redundancy payment will be allowed as deduction by the business.

The section 26-10 of the ITAA 97 provides that loss or outgoing for annual or long service leave is not allowed as deduction except the mount paid in the income year or an accrued leave transfer payment made during the year.

In the current case Zack has provided for the increase but no amount related to annual leave is paid to the employee. Therefore, the amount is not allowed as deduction.

The travel allowance of $3400 paid is included as a part of the salary or wages of the employee. It is an allowable expenditure for the business.

The following questions are based on the material in Chapter 9:

(Tax related expenditure)

Required: For each of the following resident individual taxpayers, calculate the amount that they would be entitled to claim as a deduction for the 2016/17 tax year:

  • On 10 August 2016, Dennis paid $100 to Australia Post to lodge his income tax return via Tax Pack
  • Daniel paid three PAYG tax instalments of $6,000 each in October 2016, January 2017 and April
  • On 24 August 2017, Wilson paid his tax agent a fee of $300 for preparing his 2016/17 income tax return during July 2017.
  • On 5 October 2016, Hope paid her cousin who is studying to be anaccountant $200 to prepare her 2015/16 income tax
  • During the year, Jacqueline paid a total of $42,000 in payroll tax.
  • On 15 April 2017, Josh paid $13,600 in fringe benefits
  • During the year, Krystal travelled a total of 400 kilometres in her 2,800cc Ford Falcon driving to her tax agent for meetings involving tax planning and attending to her income tax and fringe benefits tax returns. She did not use her car for any other work or business related trips during the
  • On 15 February 2017, Raelene paid $11,800 land tax on her business premises.
  • On 27 January 2017, Dirk paid $18,900 in NSW land tax on his family’s holiday house. He did not use this property for business or producing rental
  • On 1 August 2016, Troy paid his solicitor $700 to prepare a submission to the Administrative Appeals Tribunal relating to his 2013 income tax assessment which Troy was
  • On 15 March 2017, Leonie paid $7,000 on her 2015 income tax assessment. This amount included $6,000 of income tax, $800 of penalties and $200 from the shortfall interest

(a)

The section 69 of the ITAA 97 allows deduction in respect of tax related expenditure. The electronic transmission of information related to expenditure is allowed as deduction. Therefore the amount of $100 incurred for lodging the income tax return via post office is not allowed as deduction.

(b)

The PAYG instalment is the tax amount that is withhold by the employer and is deposited with the ATO. Therefore, the amount of $6000 is not tax related expenditure so it is not allowed as deduction.

(c)

The section 25-5 ITAA97 allows deduction for the expenses incurred in the management of the tax related affair. Therefore the amount of $300 paid as tax agent fees is allowed as deduction but as the amount is paid in August so it is not allowed as deduction under section 8-1 in the year 2016-17.

(d)

The amount paid for preparing the tax related expenditure is allowed as deduction under section 8-1 ITAA 97. The amount of $200 paid for preparing the income tax return of 2015-16 is allowed as deduction.

(e)

The payroll tax of $42000 is a liability and it is not a tax related expenditure so it is not allowed as deduction.

(f)

The FBT of $ 13600 is a tax liability that is required to be deposited with the ATO. The FBT amount is not used for calculating the tax liability of the individual.  This amount is not a tax related expenditure hence it is not allowed as deduction.

(g)

The Division 28 allows the taxpayer to claim deduction for the car travel used for the purpose of visiting the tax agent. It is because visiting the tax agent is regarded as the business kilometre for the purpose of tax.  Therefore the car expenses used for meeting the tax planner will be allowed as deduction.

(h)

The land tax is a liability that is required to be paid. The land tax of $11800 paid on business premises is an allowable expenditure.

(i)

The section 8-1 of the ITAA 97 provides that the expenses that are necessary for producing the assessable income is allowed as deduction. In this case the land tax of $18900 paid for family holiday house will be not be allowed as deduction because it is not used for producing the assessable income.

(j)

The ATO 2002/367 provides that the cost incurred for objecting and appealing against the tax decision is allowed as deduction under section 25-5(1)(a). Therefore the  amount of $700 paid to solicitor will be allowed as deduction.

(k)

The section 26-5 of the ITAA 97 provides that the amount paid as penalty cannot be claimed as deduction. The income tax paid is not an allowable deduction and the interest charged for the shortfall amount is also not allowed as deduction. The amount of $7000 is not allowed as deduction as deductible expenses.

(Calculation of deductions – business taxpayer)

Ricky Falzano conducts business operating a waste removal service and has provided the following data in respect of the 2016/17 tax year:

INCOME

Gross Income

$ 1,638,940

EXPENDITURE

Net Wages paid to employees

743,900

PAYG tax withheld from employees’ wages

296,720

PAYG tax instalments paid

87,845

Fringe Benefits Tax paid

5,155

Entertainment of employees (subject to FBT)

5,380

Entertainment of clients (not subject to FBT)

9,235

Annual leave paid

14,780

Annual leave provided

5,560

Rent paid to Ricky’s brother for the business premises

137,000

Payroll Tax paid

19,430

Employees superannuation contributions

98,020

Personal superannuation contributions for Ricky

50,000

Superannuation Guarantee Charge paid

11,315

Other overheads paid

69,330

Note 1 – The market value of rent for the business premises was $65,000.

Note 2 – The deduction available to Ricky for decline in value on his equipment and office fittings was $46,780.

Required: Calculate Ricky’s taxable income for the 2016/17 tax year.

Calculation of Ricky’s Taxable Income

Particulars

Amount

Amount

Gross Income

1638940

Assessable Income

1638940

Allowable Deductions

Gross Wages

1040620

Entertainment Expenses (subject to FBT)

5380

Annual leave paid (s26-10 ITAA97)

14870

Rent paid

65000

Personal Superannuation contribution

50000

Other overhead paid

69330

Depreciation

46780

Total Allowable Deductions

1291980

Taxable Income

346960

The following questions are based on the material in Chapter 10:

(Application of decline in value methods)

On 1 July 2016, Di Lifter commenced business operating a retail nursery. Di chooses to apply her own estimates of effective life to various assets purchased during her first year of trading.

Asset

Cost ($)

Date of Purchase

Effective Life (years)

Depreciation Method

Chemical Sprayer

40,000

1 July 16

10

Prime Cost

Temperature Gauge

12,000

1 July 16

6

Diminishing Value

Soil Elevator

37,500

1 Nov 16

15

Prime Cost

Deleafer

10,500

1 Feb 17

7

Diminishing Value

For each asset, calculate only the deduction for decline in value available to Di for the 2016/17 tax year.

Asset

Cost ($)

Date of Purchase

Days held

Effective Life (years)

Depreciation Method

Formula

Depreciation Amount ($)

Chemical Sprayer

40,000

01-07-16

365

10

Prime Cost

Asset’s cost × (days held/365) × (100%/asset’s effective life)

4000

Temperature Gauge

12,000

01-07-16

365

6

Diminishing Value

Base value × (days held/365) × (200%/asset’s effective life)

4000

Soil Elevator

37,500

01-11-16

241

15

Prime Cost

Asset’s cost × (days held/365) × (100%/asset’s effective life)

1651

Deleafer

10,500

01-02-17

149

7

Diminishing Value

Base value × (days held/365) × (200%/asset’s effective life)

1225

Required: The following are all resident taxpayers. In each case, calculate the deduction available for decline in value as well as any assessable income (if any) arising from the disposals during the 2016/17 tax year.

  • Trevor sold shop fittings from his retail store on 31 October 2016 for $3,700. The fittings had originally cost $5,600 and were depreciated using the diminishing value method using an effective life of 10 years. The opening adjustable value was $4,000 on 1 July 2016. The fittings were originally purchased in 2008/09. Decline in value on Trevor’s other assets was$15,000.

Calculation of deduction available

Particulars

Amount ($)

Opening Adjusted Value

4000

Days Held

123

Effective Life

10

Depreciation

270

Net Adjusted Value

3730

Termination Value

3700

Assessable Income

30

Hannah sold equipment from her factory on 31 May 2017 for $9,200. The equipment had originally cost $11,000 and was depreciated using the prime cost method using an effective life of 5 years. The opening adjustable value was $6,000 on 1 July 2016. Decline in value on Hannah’s other assets was$1,700.

Calculation of deduction available

Particulars

Amount ($)

Opening Adjusted Value

6000

Days Held

335

Effective Life

10

Depreciation

1101

Net Adjusted Value

4899

Termination Value

3700

Assessable Income

1199

Joe sold office equipment from his law practice on 1 November 2016 for $600.  The office equipment had an original cost of $1,800 but was added to the low value pool in 2014 when it became a low value asset. The low value pool had an opening balance of $3,500 and there were no additions to the pool during the year.

Taxable Income from Australian and Foreign Sources

The balancing adjustment is required to be made when an asset is disposed. However, this balancing adjustments is not applicable in case of low value assets. In case of low value assets the amount received from disposing the low value assets is used to reduce the value of pool. This in turn reduces the future depreciation charged in the low value assets.

The balancing adjustment is required to be made when an asset is disposed. However, this balancing adjustments is not applicable in case of low value assets. In case of low value assets the amount received from disposing the low value assets is used to reduce the value of pool. This in turn reduces the future depreciation charged in the low value assets.

Calculation of deduction available

Particulars

Amount ($)

Opening Adjusted Value

3500

Depreciation rate

37.50%

Depreciation

1313

Sales Value

600

Net Value of pool

713

Tommy, an employee of Kwikee Couriers, sold a phone on 15 May 2017 for $50. He had purchased the phone in 2015 for $250 and had claimed the full cost of the phone as a deduction in that

The amount of phone was claimed as deduction in the year it was purchased so there is no depreciation in the later period. The entire amount of $50 received from the sales of phone should be allowed as deduction.

The following questions are based on the material in Chapter 11:

(Calculation of zone tax offsets with notional offsets)

During the 2016/17 tax year, each of the following resident taxpayers resided in prescribed areas that are subject to zone tax offsets:

  • Emmett resided in the ordinary are of Zone A for the entire year. He lives with his daughter Beth, aged 9, who has no adjusted taxable income.
  • Guillame resided in the special are of Zone B for the entire year. He lives with Deni, his 24 year old daughter who is engaged in full-time studies. Deni has adjusted taxable income of $200.
  • Yanni lived alone in the special are of Zone A up until his death on 31 December 2016.
  • Karyn resided alone in the ordinary area of Zone A until 30 April 2017 when she returned to Perth to live.

For each of these taxpayers, calculate the zone tax offset (if any) that they are entitled to claim for the 2016/17 tax year.

The Zone Tax offset is dependent on  the usual place of  residence of the taxpayer. In this case Emmett is ordinary resident of Zone so he is allowed to claim zone tax offset. He has a daughter of age 9 so he is further allowed to claim base amount in addition to the fixed amount.

In this case Guillame is an ordinary resident of Zone B so he is allowed to claim tax offset. He has a student daughter who is dependent so allowed to claim base amount.

(a)

The Zone Tax offset is dependent on  the usual place of  residence of the taxpayer. In this case Emmett is ordinary resident of Zone so he is allowed to claim zone tax offset. He has a daughter of age 9 so he is further allowed to claim base amount in addition to the fixed amount.

Calculation of Zone Tax offset

Particulars

Amount

Fixed Amount

338

Base Amount

282

Total Zone Tax offset

620

In this case Guillame is an ordinary resident of Zone B so he is allowed to claim tax offset. He has a student daughter who is dependent so allowed to claim base amount.

Calculation of Zone Tax offset

Particulars

Amount

Fixed Amount

57

Base Amount

376

Total Zone Tax offset

433

Calculation of Zone Tax offset

Particulars

Amount

Fixed Amount

338

Base Amount

Total Zone Tax offset

338

Karyn is not an ordinary resident of Zone A so she is not allowed to claim Zone tax offset.

The following questions are based on the material in Chapter 12:

(Tax losses, partner in partnership)

The following data relates to Stephanie Garner, a resident taxpayer. Stephanie derives income from a public relations business and is also a partner in a marketing business.

2014/15

2015/16

2016/17

Assessable business income

$ 93,400

$ 126,000

$ 133,400

General business deductions

80,000

129,000

119,200

Share of Partnership Net Income (Loss)

(21,800)

14,900

(5,600)

Superannuation and Gifts

4,000

11,000

8,000

Net exempt income

1,500

3,000

2,000

General business deductions are separate from personal superannuation, gifts, partnership losses and losses of previous years.

Please assume that the necessary tests have been satisfied such that any partnership losses from Stephanie’s share in the marketing business may be deducted from other income as appropriate.

2014/15:

Calculation of Taxable Income and losses that can be carried forward for 2014/15

Particulars

Amount

Amount

Assessable business income

$93,400.00

Less:

Business deduction

$80,000.00

Assessable Income from business

$13,400.00

Personal superannuation and gifts

-$4,000.00

Share of partnership business

-$21,800.00

Net Taxable Income

-$12,400.00

Net Exempt income

$1,500.00

Carry forward of losses

-$10,900.00

2015/16:

Calculation of Taxable Income and losses that can be carried forward for 2015/16

Particulars

Amount

Amount

Assessable business income

$126,000.00

Less:

Business deduction

$129,000.00

Assessable Income from business

-$3,000.00

Personal superannuation and gifts

-$11,000.00

Share of partnership business

$14,900.00

Net Taxable Income

$900.00

Loss carried Forward

-$10,900.00

Net loss carried forward

-$10,000.00

2016/17:

Calculation of Taxable Income and losses that can be carried forward for 2016/17

Particulars

Amount

Amount

Assessable business income

$133,400.00

Less:

Business deduction

$119,200.00

Assessable Income from business

$14,200.00

Personal superannuation and gifts

-$8,000.00

Share of partnership business

-$5,600.00

Net Taxable Income

$600.00

Loss carried Forward

-$10,000.00

Net loss carried forward

-$9,400.00

The following questions are based on the material in Chapter 13:

(Investor, capital gains)

Karl Kruger is a 38 year-old single Australian resident taxpayer. During the 2016/17 tax year, Karl received and retained the following records:

Account Summary received from XYZ Bank

Interest from Term Deposits

$ 17,200

Interest from Savings Account         

350

Bank Charges relating to Term Deposits        

40

Interest charged on line of credit (used for personal expenses)         

715

4 February 2017 Dividend Statement from Eccy Ltd

Franked Dividend     

2,100

Franking Credits               

900

Rental Summary from Hawkeye Real Estate

Gross Rent Received             

15,200

Rental expenses:

Agent’s Commission                        

920

Council Rates     

1,490

Landlord Insurance

290

  • Karl’s rental property was built in 1999 when total construction costs of $200,000 were incurred. Karl has owned and leased the property since 2008.
  • Karl made mortgage repayments on his rental property of $20,000, of which $12,100 was principal.
  • Karl also sold the following assets during the year:

ASSET

PURCHASE

COST

ACQUISITION

DATE

DISPOSAL

DATE

SALE

PRICE

Quality shares

$12,000

12 Apr 11

10 May  17

$18,600

Oil Painting

6,000

03 Mar 98

26 Feb 17

5,200

Crummy shares

4,000

21 Aug 06

03 May 17

2,500

Calculation of Capital gain

Particulars

Amount ($)

Amount ($)

Amount ($)

Quality Shares

Discount method

Sales price

18600

Less:

Purchase price

12000

Gain

6600

Less:

50% Discount

3300

Net capital gain

3300

Oil Painting

Discount method (1)

Sales price

5200

Less:

Purchase price

6000

Gain

-800

Less:

50% Discount

Net capital loss

-800

Indexation Method (2)

Sales price

5200

Less:

Indexed Cost

6152

Net capital loss

-952

Lower of 1 or 2

-952

Crummy Shares

Discount Method

Sales price

2500

Less:

Purchase price

12000

Net capital loss

-9500

Total net Capital loss

-6200

Capital loss for collectables

-952

Statement showing Calculation of Taxable Income

Particulars

Amount

Amount

Assessable Income

Interest from Term Deposits

$17,200.00

Interest from Term Deposits

$350.00

Frank dividend

$2,100.00

Franking Credits

$900.00

Rent Received

$15,200.00

Total Assessable Income

$35,750.00

Allowable Deductions

Bank Charges relating to Term Deposits

40

Rent related expenses

2700

Interest expenses

7900

Capital Losses

6200

Total Allowable deduction

$16,840.00

Taxable Income

$18,910.00

  1. Prepare a statement calculating Karl’s taxpayable/refundable.

Calculation of Tax payable or Refundable

Particulars

Amount

Taxable Income

$18,910.00

Tax Payable (18910-18200)*19%

$134.90

Medicare Levy (2%*18910)

$378.20

Total Tax Payable

$513.10

The following questions are based on the material in Chapter 14:

Explain the function of the Tax Agent Services Act 2009 (TASA) and the Tax Agent Services Regulations 2009 (TASR)?

The main function of TASA is that it is tasked with ensuring that tax agent services which are being provided to the public is offered to them in compliance with professional and ethical conduct. There are certain functions which the act performs in order to ensure that the users of tax agent services receive an ethical and professional service. The functions performed are as follows:

a) In order to provide tax services the tax agents must be registered. Hence, it performs the function of establishing national board to register tax agents and BAS agents.

b) It also performs the function of establishing professional conduct for the tax agents and the BAS agents.

c) It also performs the function of levying of sanctions that ensures discipline among the tax agents and the BAS agents.

What are the three necessary criteria for the anti-avoidance provisions of part IVA ITAA36 to apply?

In order to ensure that the provisions specified in part IVA applies the following conditions should be affirmed.

1) That a tax benefit had been received from a scheme. This implies that the specific benefit would not have been available if the scheme had not been entered into.

2)  There have been eight matters specified in the part IVA that objectively specifies that either the person himself or other person entered into the scheme and the sole purpose of it was to enjoy the tax benefit.

3) The overall practical financial consequences of the scheme were such that in its absence it would have not been possible to make available the tax benefit.   

References

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Davis, A.K., Guenther, D.A., Krull, L.K. and Williams, B.M., 2015. Do socially responsible firms pay more taxes?. The accounting review, 91(1), pp.47-68.

Duong, L. and Evans, J., 2016. Gender differences in compensation and earnings management: Evidence from Australian CFOs. Pacific-Basin Finance Journal, 40, pp.17-35.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Okello, A., 2014. Managing Income Tax Compliance through Self-Assessment (No. 14-41). International Monetary Fund.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

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