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MLC301-Principles of Income Tax Law

Question :

Every person has to pay a part of income to the government as a tax on his/her income. This tax is known as Income Tax. It is a type of Direct tax. This report consists of the tax rate laws imposed by the federal government of Australia, principles of income tax law – MLC301 and types of taxable incomes. It was created to study the income tax laws in Australia.

  • What is meant by Income Tax?
  • Explain the principles of Income Tax.
  • Describe the types of taxable incomes.
Answer :

Income Tax is a kind of tax imposed by the government on the income generated by individuals, businesses and investments within the jurisdiction of the country. According to the law, payers of tax should file an income tax return annually to determine their tax restrictions. Tax on the income is a source of revenue for the government which is used to fund public services, pay government obligations and for the welfare of the citizens of the country. Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. On individuals, income tax is levied at progressive rates and at one of two rates for corporations.

Principles of Income Tax:

  1. The ability-to-pay principle: Income is considered to be an indicator of an individual or company’s economic performance. Thus, one of the main principles of income taxation is that of measuring an individual’s ability to pay, and so the Income Tax Act (ITA) regulates which types of accretion of wealth are deemed to be income and therefore taxable. Tax on income reflects each individual's ability to pay. No married couples or households can pay the tax on the income jointly.
  2. The principle of universality: In ascertaining income as an individual’s ability to pay, the geographic origin of the income, whether domestic or foreign, is irrelevant.
  3. The principle of periodic taxation: The taxable income is always charged for a particular period of one calender year for an individual. While computing the overall tax paying ability of a person, income of the whole life would be considered.

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Types of Incomes:

There are total 5 types of income that comes under the category of taxable income in Australia:

Income from salary: This category of income includes:

  • Compensation in cash or in kind to employed persons, both monetary and non-monetary.
  • Pension income received by a retiree from social security, from a private pension fund or from the employer itself.
  • Compensation of any kind granted by a company to a minority shareholder
  • Compensation granted to particular political officials In simple terms, income from employment is subjected to income tax which is held by the employer.

Let's talk about the tax slabs for the income of the residents:

Taxable Income

Tax on the income

$0 - $18,200

NIL

$18,201 - $45,000

19 cents for each $1 over 18,200

$45,001 - $120,000

$5,902 plus 32.5 cents for each $1 over $45,000

$120,001 - $180,000

$29,467 plus 37 cents for each $1 over $120,000

$180,001 and over

$51,667 plus 45 cents for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.

Income from Capital gains: This category of income particularly comprises of:

  • Income in return for capital
  • Income from investments including capital gains on assets generating capital gains.
  • Income from derivative trade.

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Income from commercial activities: This category of income comprises of:

  • Income from trade or business but not agricultural or forestry
  • Income from professions
  • Freelance services

Income from Government Payments: This category of income includes income from pension, the disability support pension, jobseeker payment, New start, Youth Allowance, community development, etc.  

Income from other sources: This category of other income includes recurrent earnings, income from the sale of private real estate, speculative gains, income from occasional services, income from fulfilling certain official duties, etc.

In simple terms, Income tax is a type of direct tax deducted on the income of individual and corporation that acts as a source of revenue for the country. This tax helps in betterment and development of the country. Government of Australia considers five kinds of taxable income – income from salary, income from capital gains, income from business, income from government payments and from other sources.

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