Taxation System In Australia

Role of Taxation System in Australia

The major role which is played by the tax system in Australia is to maintain the revenue administration system of the Government which is then used for running the nation as a whole. There are a variety of taxes which are in place in Australia which relates to income tax system, superannuation and excise which are all maintained by the taxation system incorporated by the Government[1]. Therefore, in general the taxation system in Australia maintains the revenue system and flow of cash from public to government and then back to the public in Australia.

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Requirement b

The concept of equity in a tax system refers to the principle that the burden which is related to tax liability should be imposed fairly on the society. The principle of equity is made up of two elements which are horizontal equity and vertical equity[2]. The concept of horizontal equity states that individuals should pay the same amount of taxes while the concept of vertical equity states that individuals who are in different positions should pay different sum as taxes.

Requirement c

As per the provisions of Section 4-15 of Income Tax Assessment Act 1997 (ITTA 1997), establishes the method in which an individual can work out taxable income for the year. The general formula which is followed for computing the taxable income of the business is

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The above formula makes it clear that the taxpayer needs to sum up his assessable income and the deductions which are applicable and finally subtract the total deductions from the assessable income of the individual to arrive at taxable income of the individual[3].

Requirement d

The main principle of progressive tax system is to increase the rate of taxation as the income of the taxpayer increases. In this tax system, tax are charged as per tax brackets which are set which progressively increases to a higher rate of tax as the income of the taxpayer increases[4]. This sort of taxation system focuses to reduce the inequity of distribution of income among individuals and charges more taxes from lower earning group of peoples and more from higher earning group peoples[5]. Progressive taxation system aims to bring about growth and development in areas where it is difficult to bring about intervention of government.

Requirement e

The section which includes the value of allowances into the assessable income is Section 15-2 of ITAA 1997.

Requirement f

The “taxation ruling of TR 2004/15” includes provisions which is related to the case where a company which is not incorporated in Australia will be treated as an Australian resident as per the second statutory test of the definition of “Resident of Australia” which is stated in “subsection 6(1) of the ITAA 1936”.

Equity in Tax System

Requirement g

The two divisions which provide for deduction for capital deductions under ITAA 1997 are listed below:

  • Division 40 Uniform Capital allowance
  • Division 43 Capital Works Allowances

Requirement h

The applicable tax rate in the case where the taxable income of the business is $ 80,000 in 2017/18 for a taxpayer is shown below:

Taxable Income = $ 80,000 (Marginal tax rate 32.5% with $ 3,572 plus 32.5 cents for every dollar over $ 37,000).

Requirement i

The provisions of sub-division 11-B of ITAA 1997 covers the provisions of treating the amounts of Non-Assessable Non-Exempt Income.

Requirement j

As per the provisions of Tax Determination TD 2017/4, 53 cents per kilometer is applicable for motor vehicles which has an engine capacity of 2500 cc.

Question 2

The “taxation ruling of TR 98/17” is associated with the provisions of residency status of a person who enters Australia. The term of residence which in ordinary meaning can be interpreted by taxation commissioner and the same is covered in “subsection 6(1) of the ITAA 1936”. The ruling which are covered in the section generally relates to individuals who enter Australia.

As per the case study which is shown in the question deals with Martelle who has arrived in Australia for some work purpose even though she intends to return to her country after the work is done. As per the provision, when a person comes into the country with no intention on staying in the country for a permanent basis than all factors of the person’s presence should be considered when determining the residential status of the person[6]. The quality and behavior of the individual also helps in determination of the residential status of the business. The factors which are considered by Australian Tax Office (ATO) for establishing a residency status of an individual are listed below:

  • The intention and the objective for the presence of the individual
  • The individual relation of family, employment and business relations in the country.
  • Maintenance as well as location of the assets.
  • Individual’s social and living arrangements in Australia.

As per the provisions which are stated in Residency laws, when an individual’s behavior is similar with those who are living in Australia, then such a person will be treated as a resident of Australia[7]. The tax commissioner of Australia is of the view that a period of six months is sufficient for determining whether the behavior of a person is consistent with the usual residents of the country.

As per the cases laws of “Reid v The commissioner of Inland Revenue (1926)” the quality of existence and also the time which the person spends in the country or the duration of the stay of the person decides the residence of that particular person. In addition to this, it was the verdict given by the court in case of “Miesegaes v Commissioner of Inland Revenue (1957)” that a person who enters the country with a view to avail employment opportunities in the country can be held to be resident of the country if the same is consistent with the residency laws which are in force in Australia.

Calculation of Taxable Income

In the case which is provided in the question, Martelle opened an account in bank that had the facility of receiving her salary directly into that account and moreover she purchased a boat for a vacation trip with her friends to an island. The behavior which is demonstrated by Martella is consistent with that of a normal resident living in Australia[8]. Therefore, adhering to the case laws and judgements which was made in “Reid v The commissioner of Inland Revenue (1926)” Martellla will be considered to be a resident of the country which is covered in “subsection 6(1) of the ITAA 1936”. The salary amount which Martella receives in the bank account which she has opened will be liable for taxation as per the tax laws applicable in Australia.

Question 3

The earnings of an employee which can be through salaries, wages, bonus, fees allowances which is received by the employee for the services which is provided by the employee are subjected to income tax which the employee needs to pay which is stated in “Section 6-1 of the ITAA 1936”. Section 6-5 states that most of the income which is earned by residents forms part of the ordinary income of the resident and therefore subjected to tax. Therefore, the amount which Ellen earns as salary during the year is to be considered for tax assessment. Similarly, Ellen also received $ 425 from Westpac bank and the same is also covered in the provisions of “section 6-5 of the ITAA 1997” and therefore covered as ordinary income which is taxable in nature.

            As per the verdict which is given by the court in “Moore v Griffiths (1972)” wiining of lotteries or prizes is not to be considered as an income source and therefore cannot be charged to tax. However, such winnings can be held taxable in case there is a “nexus” with the normal revenue generating activities of the individual. It was held in the case of “Kelly v FC of T (1985)” where a professional footballer was awarded as the best player in football profession. The amount which was received by the player was held taxable as the same was closely related to the profession which required application of his skills and therefore was included in the taxable income of the player[9]. Thus, relying on the judgement in the case cited above the amount which is received by Ellen which is of $ 6,500 will be held taxable as the same is incidental to the profession which is followed by Ellen.

Progressive Tax System

            As per the tax rules which are stated, payments which are received for restriction of practice or relinquishing rights of practice is not considered to be a part of income of the individual. Any payments which is received by an individual which restrain him from doing a business cannot be considered to be a part of the income of the individual. It can result in CGT event D1 where a taxpayer agrees not to carry out similar business with his competitor in exchange for a lumpsum payment which is also not considered to be included in the taxable income of the business. Therefore, as stated in the case of Ellen where she received $ 10,000 for signing a restriction of operation contract cannot be held as taxable income of the taxable.

            The Australian Tax Office (ATO) allows an individual to claim private health insurance rebate which is refundable tax offset which can be acquired by filing tax returns. The sum of $ 500 incurred by Ellen for private health insurance can be claimed as tax offset.

            The net amount of tax liability which needs to be incurred by Ellen for the year ended 30th June 2018 is stated below:

Particulars

Amount ($)

Amount ($)

Assessable Income

Income from Salaries

108000

Australian Sourced Interest Income

425

Income from Winnings

6500

Total Assessable Income

 

114925

Allowable Deductions

Nil

Total Taxable Income

 

114925

Tax on Taxable Income

 

30154.25

Add: Medicare Levy

2298.5

Less: Private Health Insurance Offset

500

Total Tax Payable

 

31952.75

Question 4

As per the provisions which is stated in section 40-25 (1), an individual who is applicable to pay taxes for the year can avail for deductions for decline in value of depreciating assets which are used by the business for the year. The section clearly states that an individual can claim for deductions for such depreciating assets which are used for assessable purpose[10]. The assets which are used by the business or installed in the business can be held for claiming deduction. A taxpayer can claim deductions for decline in the value of the assets by following the methods listed below:

  • Diminishing Value method (section 40-72)
  • Prime cost method (section 40-75)

Prime Cost Method

Prime Cost Method

Asset Name

Asset Cost

Days Held

Effective Life

Deductions for Decline in Value

Hairdryer

8000

365

7

1142.86

Computer Software

295

365

3

98.33

Audi Q5

85,000

365

6

14166.67

Total deductions for Decline in Value

 

 

 

15407.86

Diminishing Value Method

Diminishing Value Method

Asset Name

Asset Cost

Days Held

Effective Life

Deductions for Decline in Value

Hairdryer

8000

365

7

2285.71

Computer Software

295

365

3

196.67

Audi Q5

85,000

365

6

28333.33

Total deductions for Decline in Value

 

 

 

30815.71

The calculations which is shown in the above table shows deduction of $ 30815.71 under diminishing value method and Jenifer should select this method for claiming reduction from her assessable income.

Question 5

As per the provisions which is covered in section 6-5 states that income which are earned during normal course of operations are covered as ordinary income. However, gains which are earned by an individual cannot be treated as income unless other legislations provide for the same. As per the case, Julie is a photographer by hobby and has decided to set up a business of photography. The regulations which are set by Australian Tax Office (ATO) clarifies the difference which exist between profession and hobby for taxation purpose. When a hobby is turned into profession, the tax obligations for the individual commences from the same. As stated in the case of “Stone v FC of T (2005)” the intention of generating profits from the business must be there and also ATO considers the nature of the operations which is undertaken by the business.

Residency Status for Tax Purposes

As evident in the case of Julie, as the individual converts his hobby to form a business, Julie needs to register the business along with the official name of the business and also obtain appropriate ABN number for conducting the business. The other factors which the individual needs to consider are keeping tracks of recording requirements, setting up of bank accounts. The income which is generated by Julie from the Photography business will be considered to be ordinary income in the normal course of business as per the provision of Australian Tax laws.

Question 6

As per section 8-1 of ITTA 1997 an individual is entitled to claim deductions for any expenses which is incurred by the business during the normal course of operations of the business. As per the case study which is shown in the question, Chang is a business owner which operates a marketing business for which different costs are incurred by the business. Chang incurs a salary costs which costs up to $ 300,000 and also reports a cost of $ 4,000 that Chang pays to his son for designing of graphics. The salaries costs which are incurred by Chang during the year will be considered to be a part of the deductions which is allowable to Chang during the year. The deduction is allowable under general provision of section 8-1.

Chang has incurred $ 900 in local bowls club for entertainment of his clients. The provisions of Australian Tax Office provide that deduction can be claimed for recreational activities and therefore such an expense which is undertaken by Chang is allowable as deduction during the year.

Chang incurred expenses which is regarding purchase of clothing materials such as suits for portraying correct image in front of clients. This expense which is incurred by the taxpayer will not be allowed as deductions under section 8-1. Therefore, the expenses on smart clothing will not be allowed as deduction for Chang during the year.

The expenses which is incurred by Chang on providing meals to the clients will be allowed as deductions during the year as the same are covered in general provisions of ATO relating to deductions which will be allowed to taxpayers for incurring on clients for food, drink and recreational activities.

“Section 8-1 of the ITAA 1997” allows a taxpayer to claim deduction in case of any interest which is paid by loans. Therefore, Chang will be allowed to claim deduction for the loan undertaken by Chang during the year.

As per the provisions of section 8-1, Chang will not be allowed to claim travelling expenses incurred during the year as deduction.

The provisions which are set by ATO states that any expenses which is incurred by the tax payer in course of business will be allowed as deduction. If the service is used for both personal and work purpose than deduction will only be provided for work related expenses. Therefore, Chang can claim 80%of the expenses on telephone expenses.

As per the provisions established by ATO, a taxpayer can claim deduction for accommodation and travel as long as work related conference is attended. Therefore in this case, deduction will be allowed.

As per Section 25-5 of ITAA 1997, Chang can claim deductions for charges incurred for tax returns of the business. The section specifies deduction relating to certain costs of the business.

Reference

Ato.Gov.Au. 2018. . “Residency – The Resides Test” Accessed September 2 2018.

Ato.Gov.Au.. 2018. “Deductions You Can Claim” Accessed September 2 2018.ms in tax compliance behavior.” Journal of Business Ethics 115, no. 3 (2013): 451-468.

Burkhauser, Richard V., Markus H. Hahn, and Roger Wilkins. “Measuring top incomes using tax record data: A cautionary tale from Australia.” The Journal of Economic Inequality 13, no. 2 (2015): 181-205.

Chen, Shu-Hua, and Jang-Ting Guo. “Progressive taxation and macroeconomic (In) stability with productive government spending.” Journal of Economic Dynamics and Control 37, no. 5 (2013): 951-963.

Lindsay, Ira K. “Tax Fairness by Convention: A Defense of Horizontal Equity.” Fla. Tax Rev. 19 (2016): 79.

Meade, James E. The Structure and Reform of Direct Taxation (Routledge Revivals). Routledge, 2013.

Mehrotra, Ajay K. Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929. Cambridge University Press, 2013.

Sharma, Rajeshwar, and Nisha Singh. “Use of depreciation as a tax policy device to control inflation.” (2015).

Winer, Stanley L., Paola Profeta, and Walter Hettich. The political economy of taxation. Oxford University Press, 2013.