Understanding of the Cases and Section of the Legislation and Application of Taxation Law

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QUESTION 1

Australian as per OECD who analyse tax burdens of around 35 countries, Australians pay more tax as compared with other nations. At the same time benefits are also highest in he country. Income tax is most significant revenue generating stream of Australian taxation system and it is required to be paid over all the forms of income. Tax is paid mainly over three sources of income that are business earnings, personal earnings and capital gains. Income includes salary from employment, profits from running business & returns over investments (Australian Income Tax, 2019). It also includes the benefits on sale of capital assets.

In this question Emmi is an accounts students who works part time in Crown Melbourne Restaurant. During her working tenure she has earned various incomes and gifts. Emmi wants to know her assessable income for the year after claiming all the deductions and exemptions that are available.

A) Tips from customers

Para 26(e) of ITAA 1936 provides that all the tips receive by employees working in hotels and restaurants will form part of their assessable income. ATO has stated in its guidelines that when an employee receives any tips directly form the customers or is transferred by employer without deducting tax it will be reported in the income tax return of individual. As per the above guidelines given by taxation office it is clear that the tips received by Emmi directly from customers will form part of her assessable income.

b) Income from employment

Every individual is required to pay tax over the income received from employment. Though government grants exemption to the individual from payment of taxes if income earned is below the threshold limit of $18200. Section 15 of ITAA 1997 states that income from employment of an individual is taxable. Individual may be receiving various income from her employment that are assessable but the tax law provides deductions for income employment allowance and fringe benefits. In the present case Emmi is only receiving salary from working at restaurant therefore the salary income of whole $ 25000 is taxable under the income tax (Sadiq, 2019). She will be available with deduction of zero tax upto the income of $ 18200. If she had been working at more than one office she was required to pay tax over all the income received during the year from all the employment.

c) Perfume from customer on Christmas

Tax law ITAA 1997 states that gifts received by employee are not taxable. The gifts above the threshold limit of $ 10000 are taxable to the individual, however gifts given on special occasion are exempt and are not required to be disclosed in the tax returns. Also the gift of perfume is not related to any business activity of or in relation to income earning activity. Emmi received perfume worth $250 from an customer on an special occasion of Christmas as present or gift. This is below the threshold limit and also not related to business or employment related activities. Emmi gifted the same perfume to her mother. No deductions is available for the gift to her mother. It is not required to be reported in the tax return of Emmi as it is exempt in her hands. Deductions are available for charity and not for gift to family member.

d) Payment of meals by the employer

Tax law provides that the entertainment charges paid by the employer for employee amounts to fringe benefits. Tax law provides for separate tax department for taxing of fringe benefits received from employer. Section 32 of ITAA' 97 provides that fringe benefits means benefits which are received from the employer after their salary (Hobson, 2019). It is the benefit that employer provides to its employees in addition to their salary. Australian taxation office states that individual is not required to state the benefits in tax return if they are below $ 2000. This means if the fringe benefits exceeds $ 2000 it is required to be reported in tax returns of the year. Fringe benefits are taxed separately under Fringe Benefits Tax Assessment Act, 1986. Payment of meals by employer amounted to $ 385, and it is not taxable as per guideline of tax law.

e) Gift of money from parents

Australian Taxation law provides that giving money as gift top parents is not an taxable event. Tax is to be deducted over the income received form sale of monetary gifts. Money received by individual from parents on special occasion is not taxable. Provided that money is paid out of love and affection and is not having connection with the income generating activities of the individual. The law provides that gifts above the limit of $10000 are taxable. Since the money is given on special occasion of Christmas out of love and affection it is not chargeable for tax. Monetary gift of $1500 by her father is exempt in the hands of Emmi and also not required to be declared in her tax returns.

Assessable Income of Emmi for the year.

Assessable income is defined as the income on which tax is to be paid by the individual. Assessable income is calculated by adding all the income earned by an individual during the year. It includes income from employment, tips from customers, allowances, bank interests and many more which brings benefit in monetary terms (Assessable Income, 2019). Individuals can claim the allowable deductions over their assessable income for reducing the taxable income on which tax is actually calculated. Tax liability can be reduced through the deductions (Maley and Maley, 2018). Deductions are not used for reducing the tax liability but for reducing the taxable income.

Assessable income of Emmi for the year is $25335 from salary and tips from customers since she is not having any deductions, assessable income will be the taxable and tax will be calculated over the same. Tax liability is $2216 and the medicare levy of 380.25, aggregating total income tax payable of $2596.37. The tax liability and assessable income has been calculated as per the guidelines provided by Australian taxation office in accordance with ITAA, 1936 and ITAA 1997.

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QUESTION 2

When and asset is sold for more than what it was purchases for than the difference is referred as capita gain. Capital gain tax event occurs when the assets is sold. When the asset is kept for less than 12 months than it will attract short term capital gain or loss. If the asset is hold for more than 12 months the gain will be termed as long term. Tax law provides that capita gain become levy when the assets is disposed. Different transactions on which capital gain tax arises are transfer of contractual rights, licences shares, personal use assets disposal, sale of collectables, especially the real estate transactions (Capital Gain, 2019). Gains or losses over sale of assets are required to be reported in the tax return of an individual. Though it sounds as separate tax as capital gain tax but is part of the assessable income and is not separate tax. It is charged in the personal income tax return of individual (Fry, 2017). Taxation office provides that set off for capital losses is available only against capital gains and on no other income. Capital gain tax is applicable to all the assets that are acquired after September 20, 1985 except otherwise stated.

Capital gains tax are covered under the provisions of ITAA 1997 under chapter 3 and division 100. capital gains can be worked out using two methods that are discounting method and indexation method. Indexation is applicable when assets is held for more than 12 months and the assets are acquired before September 21, 1999. On the other hand discounting method that is also applicable when the assets is held for not less than 12 months. In this method tax is calculated over 50% of the total capital gain and rest of the portion is exempted.

Age of liu is 65 and is now selling all the assets and business in Australian and returning back to his home country. He want to know the capita gains tax consequences of various transactions.

a) Sale of residential house

Main residence CGT exemption is available foreign and temporary tax residents if they acquired the property before 2017. Residence exemption is available when the individual has lived in it and property was not used for generating assessable income. Exemption is available to liu as he used the house for main residence as it was not over more than 2 hectares of land. He did not owned any other property and also property was acquired before 1985 (Sharkey and Murray, 2016). Liu can claim full exemption on the capital gain arising on sale of his house.

b) Sale of Car

Australian taxation office in the exemption lists had specifically provide for the exemption on sale of car having capacity of less than nin passengers. It is not included under personal use asset. Sale of car is exempt capital gain. Deductions or set off are not available for capital loss over exempt assets. Liu has car worth $8000 which was purchased for $37000 will have capital loss on its disposal (Exemptions and deductions, 2019). The capital loss on sale of car is anot allowed for set off against any other capital gains.

c) Sale of small business

Tax law classifies small business whose turnover are less than $ 2 million. CGT exemption & concessions have been provided by taxation department to the small business. Small business concessions are available only after certain conditions are satisfied. They can avail the exemption under the specified 4 exemption streams. Liu had the business of photography below the threshold turnover but did not had any of the exemptions (Murphy, 2019). Therefore goodwill and equipments will be considered separately. Gain on sale of goodwill is taxable as per ruling given in TR 1996/16. However he can claim set off for capital loss of $ 10000 on sale of photograph equipments. Total taxable gain would be $15000 using discounting method.

d) Sale of furniture

Section 108 of ITAA 1997 provides that gain over personal use assets is exemption. Furniture are considered as personal assets if they are used for personal purpose. Exemption list provides that personal use asset below threshold limit of $ 10000 are exempt from tax. Therefore gain over sale of furniture is exempt.

e) Sale of paintings

Painting is defined as collectable by the Australian tax individual can claim exemption on its sales if no single painting was acquired for above $500. Liu acquired one painting for $ 1000 and is sold at $ 8000 (Murphy, 2019). Capital gain arising on this painting is taxable while all other paintings which are acquired for less than $500 are not taxable as they are exempt.\

REFERENCES

Books and Journals

Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal.57(1). pp.49-63.

Hobson, K., 2019. 'Say no to the ATO': The cultural politics of protest against the Australian Tax Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.

Lymer, A., 2019. Contemporary issues in taxation research. Routledge.

Maley, M.N. and Maley, D.M., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.

Murphy, K., 2019. Moving towards a more effective model of regulatory enforcement in the Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.

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