Income Tax Calculation Australia

Question: Part One: Income tax rates Martha is a resident who is 40 years old and has $170,000 of taxable income for the current income year. Calculate her basic income tax liability. Requirements DEFINE + Relevant Sections + FORMULA + Show Calculation + Income Brackets - Tax Rates Part Two: Ordinary income In 1979, a doctor who lived and worked in Sydney purchased a 20 acre parcel of rural land on the outskirts of the city for $100,000. Over the years, he used the property as a hobby farm for growing fruit trees and as a weekend retreat for relaxation. Recently, the surrounding area has become more developed and the property has increased in value substantially. The doctor has also recently run into financial difficulties as a result of a malpractice suit and he is considering selling the property. Advise him as to whether he would be required to include any amount in his assessable income as a result of the sale. Part Three: General deductions Compare the decision in FC of T v Anstis (2009) with the decisions in Lunney and Hayley v FC of T (1958) and FC of T v Maddalena. Is it possible to reconcile the outcomes in these cases? Part Four: Provisions that deny or limit deductions Discuss some of the circumstances in which entertainment expenditure is deductible? Answer: Part 1: In Australia, taxes on individual income are on the basis of PAYG system which refers to Pay as you go. Under the PAYG system, assesses are required to pay taxes on the income generated in that particular year. A progressive tax rate is followed (ATO 2013). The threshold limit for non-payment of taxes for any financial year is said to be $18, 200 whereas the highest tax rate is said to be 45%. According to Section 24K, income derived from office or employment shall be taken to be accrued in a particular territory, only if the entire activities are performed in the same given territory and after the approval of the Commissioner for the remuneration generated to be approvable (Commonwealth Consolidated Acts 2015). Considering that Martha is an Australian resident for taxation purposes, and has generated the income from employ-employee relationship, she is liable for the tax paid within the territory she has been operating in. The formula for calculating her basic tax income liability would be: $17,547 plus 37c for each $1 over $80,000. Therefore here in, it would lead to a basic tax liability of $17,547 plus (37c x $90,000) = $17,547 plus $33,300 = $50,847. Below mentioned are the various income and tax brackets for 2014-15: Part 2: Ordinary income According to Section 6-5 of the Income Tax Assessment Act 1996 (Cth), ordinary income refers to any income generated from the following sources (ATO 2013): Money earned in return for the transfer of services (wage) Normal profits from the regular course of business Any form of return on investment (dividend, interest, royalty, etc). Any form of receipt of capital nature comes under the purview of capital gains, and not ordinary income. For example, if the monthly payment of a certain individual X is $2,000 against his services as a bartender, the same will be taken into consideration as income generated from ordinary concepts, i.e., ordinary income. Therefore, they shall be considered as income by regular means and the basic tax calculation shall remain as was explained in the above part. The income and tax bracket for the same remains to be: However, any form of revenue generated from the sale of capital assets come under the purview of section 102-5 of the Income Tax Assessment Act 1936 (Cth). Any income generated from the sales of a capital asset like land is subjected to the rules of capital gain taxation, and hence the calculations differ from the regular tax computation of ordinary incomes (Commonwealth Consolidated Acts 2015). In the given case, the doctor does not have to include any revenue generated from the sale of the land he purchased in 1979 at $100,000 as assessable income; however the proceeds from the same deducted by the indexed cost of the same as on the present date would be subjected to capital gains taxation. Part Three: General Deductions According to Section 8.1 of the Income Tax Assessment Act 1997 (Cth), any form of payment which is incurred in the ordinary course of transactions for the purpose of generating the assessable income in order to arrive at the taxable income is known as deductions. These deductions are subject to deduction from the gross income of the individual or business house (ATO 2014). In the case study of FC of T v. Anstis (2009), a taxpayer had reduced the expenses of conveyance apart from travelling to university, supplies for children during teacher rounds, administration fees and depreciation on computer as deductions against the Youth Allowances she was entitled to, for the generation of her tax return in 2006. However, this was challenged by the ATO Commissioner, but later on passed as allowable deductions (Morgan 2014). In the case study of Lunney and Hayley v. FC of T (1958), the two tax payers were ships joiner and dentist who were under the practice of deducting their personal conveyance fares from home to work, and vice-versa. However, the FC of T challenged that these were personal expenses and cannot be taken in as allowable deductions (Commonwealth of Australia n.d). In the case study of FC of T v. Maddalena, the verdict was given that any form of fees given to investment planners are not to be considered as allowable deductions from assessable incomes, as these are much earlier incurred, and are directly not related with the earning of assessable income (ATO n.d.) The similarity between the first two cases is that the conveyance fees was involved as a source of deduction, and the difference between case 1 and case 23 is that the prior one was approved as allowable deduction, whereas the latter ones were not passed as deductibles. Part Four: Provisions that deny or limit deductions Except for certain cases, entertainment expenses by means of providing employees with food/drinks/recreation or travel/accommodation expenses, are not deductible under Section 35-5 of the Income Tax Assessment Act 1997 (Cth). However, if food/meal/recreation or travel/accommodation is being provided for the purpose of generating more assessable income, they become deductible in nature and can be done so. For instance, in the case study of Amway of Australia vs. Commissioner of Taxation (No. 2) 2003, a significant cost was incurred for organizing the Australian Leadership Seminar, which was backboned with the purpose of generating better tie-ups with distributors and more business volume subsequently. These costs were passed as entertainment expenses and were still subject to deduction (Purdon 2004). Reference: ATO (n.d.). Taxation determination. [Online], available from ATO Website: https://law.ato.gov.au/atolaw/view.htm?DocID=TXD/TD9560/NAT/ATO/00001PiT=99991231235958 (Accessed January 9, 2015). ATO (2014, August 13). Individual income tax rates. [Online], available from ATO Website: https://www.ato.gov.au/Rates/Individual-income-tax-rates/ (Accessed January 9, 2015). ATO (2014, June 1). Definitions. [Online], available from ATO Website: https://www.ato.gov.au/definitions/ (Accessed January 9, 2015) ATO (2014, May 27). Definitions. [Online], available from ATO Website: https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Other-income,-deductions-or-offsets/Entrepreneurs-tax-offset/?page=21 (Accessed January 9, 2015) Commonwealth Consolidated Acts (2014). Income Tax Assessment Act 1997 Section 995.1. [Online], available from Austlii Edu Website: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#cgt_event (Accessed January 9, 2015) Commonwealth of Australia (n.d.). Deductibility of travelling expenses between residence and place of employment or business. [Online], available from Law ATO Gov Website: https://law.ato.gov.au/atolaw/view.htm?locid=%27ITR/IT112/NAT/ATO%27PiT=99991231235958 (Accessed January 9, 2015) Morgan, FJ (2014). Anstisv FCT - Self-education expenses allowed as a deduction as being incurred in deriving assessable Youth Allowance income (what out theres an appeal) [C3]. [Online], available from FJM Tax Website: https://www.fjmtax.com/tax-newsletter/2094-anstis-v-fct-self-education-expenses-allowed-as-a-deduction-as-being-incurred-in-deriving-assessable-youth-allowance-income-what-out-theres-an-appeal-c3.html (Accessed January 9, 2015) Purdon, A (2004, May). Non-deductible entertainment expenses no such thing as a free meal! [Online], available from Television Education Network Website: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfmPaperDisplay=https://www.tved.net.au/PublicPapers/May_2004,_Accountants_Education_Channel___Tax,_Non_Deductible_Entertainment_Expenses___No_Such_Thing_as_a_Free_Meal_.html (Accessed January 9, 2014).