Calculation Of Net Tax Payable For Jane Brown | Taxation Period 2016-17

Every Australian resident is liable to pay income tax on the income earned from both within Australia and outside Australia under section 4-1, ITAA. In this case, the residential status of Jane Brown is not clearly stated. Hence, it is assumed that Jane has fulfilled all the criterions of an Australian resident for taxation purpose and therefore, has to pay income tax on her incomes (Woellner et al. 2016).

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The tax charged on the taxable income of the taxpayer, which is, in turn, ascertained from the total assessable income and allowable deductions of the taxpayer. It is not necessary that every income as assessable income and for every expense, the taxpayer would enjoy deductions. Hence, the stated incomes and expenses of Jane are properly assessed below to check whether the items can be considered  for taxation purposes or not:

In accordance to Australian taxation legislation, incomes can be classified under two heads. Any income, generated from any ordinary or general form of activity, is grouped under ordinary income as per Section 6-5, ITAA. Incomes, which do not fall under ordinary income class, are considered as statutory income under Section 6-10, ITAA (Barkoczy 2016).

On the basis of the above discussions, the incomes of Jane are assessed and classified below:

Income from Trust: Division 6 of ITAA (1936) describes that income of the trusts is taxable income. However, the incomes are taxed in two different manners. For the undistributed income of trust, the income tax should be paid by the trust. The distributed income should be included in the total assessable income of beneficiary and taxed as a part of the taxpayer’s taxable income. In this case, income, received by Jane as a beneficiary, from the trust, is a distributed income of trust and therefore, must be incorporated in the total ordinary taxable income of Jane (Russell 2016).

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Dividend Income: Section 6-5, ITAA (1936) prescribes that the dividend, received by any Australian resident from any company, is an ordinary taxable income from investment. Hence, the dividend income of Jane should be considered as taxable income. Furthermore, as the dividends are fully franked, Jane can enjoy tax offset for the franking credit, i.e., 30% of the total dividend, deducted from the total dividend under section 44, ITAA (1936). However, as it is not cleared from the case study whether, the franking credit is deducted already from the mentioned dividend amount or not, it is assumed that it is gross dividend, paid to Jane.

Assessable Incomes

Income from Salary: Salary, earned by Jane from her employee, is an ordinary assessable income under section 6-5, ITAA (1936). However, the total taxable income should include the gross salary of Jane and PAYG withhold, deducted from her salary, can be deducted from het gross tax as tax offset.

Interest Income: Income from interest is also an ordinary assessable income from investment property as per section 6-5, ITAA (1936) and must be considered for taxation purpose.

Rental Income: Rental income is another ordinary assessable income, generated from rental property under section 6-5, ITAA (1936).

Capital Gain on Sale of Share: As per section 102-5 ITAA,1936, for sale of any capital assets, Jane has to pay tax on the net capital gain, generated from the sale of assets. However, as she had hold the shares for more than 12 months and is an individual taxpayer by taxation status, she can reduce her net capital gain by 50% by applying discount method under section 115-10, ITAA (1936) (Evans et al. 2015).

In general, taxpayers can enjoy deduction only for such expenses, which are incurred for generate incomes. However, all such expenses cannot be considered as allowable deduction. Moreover, for enjoying the deductions, it is necessary to keep records and proper receipts of the expenses. It is assumed that Jane has maintained all the records and receipts of the stated expenses.

Investment Expenses: Jane has earned dividend and interest from her investments. Hence, under section 8-5, ITAA, the expenses, incurred for her investments cam treated as allowable deduction.

Expenses for Rental Property: Jane receives rent from her rental property. Therefore, the expenses, incurred for the rental property, are also allowable deduction as per section 8-5, ITAA. However, it should be noted for mortgage repayments, Jane can get deduction only for the interest on the mortgage, not for the repayment of principal amount. As in the case study, the interest amount is not mentioned separately, it is assumed that the interest amount is the 50% of the total mortgage repayments.

Donations: As per Division 30, ITAA, donations can be considered as allowable deduction, if it is given to certain listed organizations or for certain causes. It is assumed that Jane has given donation to one of the listed organization and therefore she is eligible to enjoy deduction for the donation

Income protection Insurance Policy: Income protection insurance policy helps to ensure the continuity of income stream. Therefore, premium, paid for such insurance, is also allowable under section 8-5, ITAA.

Allowable Deductions

On the basis of the above discussions and assumptions, the net tax payable of Jane Brown for the taxation period 2016-17, is calculated below:

Computation of Net Tax Payable

Taxpayer: Jane Brown

Taxation Period: 1/07/2016 to 30/06/2017

Particulars

Amount

Amount

Assessable Income:

Income from Trust

$20,000

Dividend Income:

Net Dividend

$14,000

Franking Credit

$6,000

$20,000

Income from Salary

$79,000

Interest Income

$475

Rental Income

$35,000

Net Capital Gain:

Sale of Shares

$3,500

Less: Cost of Shares

($800)

Less: Brokerage Expenses

($300)

Gross Capital Gain

$2,400

Less: 50% Discount on Gain

($1,200)

$1,200

Total Assessable Income

$155,675

Allowable Deductions:

Interest on Mortgage

$12,500

Repairs

$2,000

Rates

$2,500

Insurance

$500

Expenses for Investment Advice

$250

Premium for Income Protection Policy

$1,000

Donation

$900

Total Allowable Deduction

$19,650

Taxable Income

$136,025

Tax on Taxable Income

$37,961

Add: Medicare Levy @2%

$2,721

Add: Medicare Lecy Surcharge @1.25%

$1,700

Gross Tax Payable

$42,382

Less: Tax Credit for Franking Credit

$6,000

Net Tax Payable

$36,382

Tax rate applicable to business firms are different from the individuals in Australia. In general, the business firms are charged 30% tax on the net taxable income. However, small business entities, who have a yearly turnover of less than $2 million, can pay tax at the rate 28.5%. From the case study, it can be stated that Green Pty Ltd. is a small business entity due to turnover lower than $2 million and therefore, eligible to enjoy lower tax rate (Geljic et al. 2016).

The following incomes are assessable as ordinary income under section 6-5, ITAA:

  • Sales
  • Dividends ( it is assumed that the amount, mentioned in the case study, is gross dividend income)
  • Interest Received (Richardson et al. 2014)

The under mentioned incomes are the statutory incomes of Green Pty Ltd. as per section 6-10, ITAA:

  • Net Capital Gain
  • Compensation from Client (Barkoczy 2017)

It is further assumed that the exempt income of the company fulfills the criterions as mentioned in section 6-20, ITAA and hence, it is not included in the taxable income.

All the expenses of Green Pty Ltd. are allowable deduction under section 8-5, ITAA, except the followings:

Entertainments: Though certain entertainment expenses can be considered as allowable, in general, entertainment expenses are not allowable under Division 32, ITAA. As the nature of the entertainment expenses of the company is not mentioned clearly, it is assumed that it is a non-deductible expense.

Fines: As per section 26-5, ITAA, any kind of fine are non-deductible expenses (Barkoczy 2017).

Net tax payable of Green Pty. Ltd. is computed below in accordance to the above assumptions and discussions in the following table:

Computation of Net Tax Payable

Taxpayer: Green Pty. Ltd.

ABN: 79 512 647 864

Taxation Period: 1/7/2016 to 30/06/2017

GST Inclusive

GST

GST Exclusive

Particulars

Amount

Amount

Amount

Amount

Assessable Income:

Sales

$345,000.00

$31,363.64

$313,636.36

Dividend Income:

Net Dividend Income

$7,182.00

Franking Credit

$3,078.00

$10,260.00

Interest Received

$900.00

Compensation from Client

$4,000.00

Net Capital Gain

$4,000.00

Total Assessable Income

$31,363.64

$332,796.36

Allowable Deduction:

Advertising

$1,000.00

$90.91

$909.09

Bad Debts

$900.00

Bank Charges

$150.00

Capital Expenditure

$3,000.00

$272.73

$2,727.27

Cost of Sales

$60,000.00

$5,454.55

$54,545.45

Sub-Contractor Expenses

$23,000.00

$2,090.91

$20,909.09

Depreciation Expenses

$5,500.00

Electricity

$800.00

$72.73

$727.27

Environemntal Protection

$600.00

Insurance

$600.00

$54.55

$545.45

Interest Expenses within Australia

$1,200.00

Lease Expenses Within Australia

$4,000.00

Motor Vehicle 3rd Party Insurance

$550.00

$50.00

$500.00

Motor Vehicle Expenses

$4,000.00

$363.64

$3,636.36

Motor Vehicle Registration

$1,200.00

$109.09

$1,090.91

Rent Expenses

$11,800.00

$1,072.73

$10,727.27

Stationery & Office Supplies

$200.00

$18.18

$181.82

Staff Amenities

$100.00

$9.09

$90.91

Phone & Internet

$2,000.00

$181.82

$1,818.18

Wages

$45,000.00

Total Allowable Deduction

$9,840.91

$155,759.09

Taxable Income

$177,037.27

Tax Rate

$0.29

Gross Tax Payable

$50,455.62

Less: Tax Offset for Franking Credit

($3,078.00)

Net Tax Payable

$47,377.62

Apart from the calculated tax offsets, Green Pty. Ltd. can reduce its tax expenses further through input tax credits for the GST paid on expenses as per section 27-15, ITAA. 

References & Bibliography:

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue

Barkoczy, S., 2017. Core tax legislation and study guide. OUP Catalogue

Barkoczy, S., 2017. Foundations of Taxation Law 2017. OUP Catalogue

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward

Geljic, S., Koustas, H. and Burke, D., 2016. Small business restructure roll-over. Taxation in Australia, 50(7), p.404

Richardson, G., Taylor, G. and Wright, C., 2014. Corporate Profiling of Tax-Malfeasance: A Theoretical and Empirical. Citation: Richardson, G. and Taylor, G. and Wright, C, pp.359-382.

Russell, T., 2016. Trust beneficiaries and exemptions from CGT: reflections on the Oswal litigation. Taxation in Australia, 51(6), p.296.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.