Calculating Tax Liability For John And Frank
Calculation of tax liability of John:
|
Calculation of tax liability of John |
||
|
Particulars |
Amount ($) |
Amount ($) |
|
Taxable receipts: |
||
|
Professional accounting fees received |
100,000.00 |
|
|
Sales |
25,000.00 |
|
|
Exempt income |
– |
|
|
Dividend (7000 x 50%) |
3,500.00 |
|
|
Interest received from Singapore company (9000 +1000) |
10,000.00 |
|
|
Gross salary from part time lecturing at CPA (26000 + 4000) |
30,000.00 |
|
|
Refund of medical expenses is exempt |
– |
|
|
Rental income |
10,000.00 |
|
|
178,500.00 |
||
|
Less: deductible expenses and other deductions |
||
|
Office rent deductible under s8-1 of ITAA 1997 |
14,000.00 |
|
|
Relevant cost for Do it superannuation guide (20000+10000-13000) |
17,000.00 |
|
|
Legal expenses for recovering accounting fee is allowed as per s8-1 of ITAA 1997 |
5,000.00 |
|
|
Salary to employee allowed as per s8-1 of ITAA 1997 |
30,000.00 |
|
|
Depreciation on Laptop (800 x 40%) |
320.00 |
|
|
Tax fees of tax agent allowed as per s8-1 of ITAA 1997 |
1,000.00 |
|
|
Borrowing expenses allowed as per s8-1 of ITAA 1997 |
3,000.00 |
|
|
Interest paid on loan for acquiring investment property is allowed as deduction |
20,000.00 |
|
|
Painting cost of investment property allowed as per s8-1 of ITAA 1997 |
5,000.00 |
|
|
Roof tiles replacement costs |
1,000.00 |
|
|
Legal expenses for lease on investment property |
5,000.00 |
|
|
Maintenance of John’s invalid father |
5,000.00 |
|
|
Rates on Family home (1000 x 10%) |
100.00 |
|
|
Electricity on family home (1000 x 10%) |
100.00 |
|
|
106,520.00 |
||
|
71,980.00 |
||
|
Short term capital gain |
||
|
Short term capital gain (40000 -20000) |
20,000.00 |
|
|
Short term loss (15000 -10000) |
(5,000.00) |
|
|
15,000.00 |
||
|
Less: Discount @33.33% |
5,000.00 |
|
|
Net short term capital gain taxable |
10,000.00 |
|
|
Gross taxable income |
81,980.00 |
|
|
Less: Carry forward tax loss |
18,000.00 |
|
|
Net taxable income |
63,980.00 |
|
|
Tax liability of John |
||
|
Net taxable income |
63,980.00 |
|
|
Short term capital gain out of the above (20000 -5000) |
10,000.00 |
|
|
Net taxable income without capital gain (63980 -10000) |
53,980.00 |
|
|
Tax rate on short-term capital gain |
15% |
|
|
Tax on short term capital gain |
1,500.00 |
|
|
Tax up to $18200 |
Nil |
|
|
Tax from $18201 to $37000 |
3571.81 |
|
|
Tax from $3701 to $53980 |
5518.175 |
|
|
Income tax payable |
10,589.99 |
|
|
Medicare levy @ 2% |
1,279.60 |
|
|
Total tax payable |
11,869.59 |
The net taxable income John is $63,980 and income tax payable is $10,589.99 and $1,279.60 is Medicare levy payable calculated @ 2% on taxable income (Australia, 2016).
Notes:
- Professional fees is ordinary income taxable as per s6-5 of Income Tax Assessment Act 1997 (ITAA).
- Revenue from sales is taxable as per 6-5 of ITAA.
- Military income as per s11-5 of ITAA.
- Capital gain is taxable at the rate of 15%.
- Dividend which is not franked is assessed as ordinary income as per s6-5 of ITAA.
- Interest received from foreign company entities is taxable and to be included in computation of taxable income.
- Gross salary is assessable as ordinary income under s6-5 of ITAA.
- Refund for medical expenses from Government Medicare is exempt as per s11-15 of ITAA.
- Rental income is taxable as per s65 of ITAA.
- Office rent, cost of goods sold, legal expenses to earn revenue and all other expenses incurred wholly for the purpose of earning income from business are allowed as deduction as per s8-1 of ITAA as these are revenue expenditures. All expenses incurred to produce taxable income is allowed as deduction as per the decision in Finn v FCT.
Out of the gross taxable income of $71,980 before considering short term capital gain $30,000 is income from salary assessable as ordinary income under s6-5 of Income Tax Assessment Act 1997 (ITAA 1997) and the balance is income from business and investment property. In calculating the taxable profit from business the revenue expenditures as per section 8-1 of Income Tax Assessment Act 1997 have been deducted (Saad, 2014).
Calculation of tax liability of Frank:
|
Calculation of tax liability of Frank |
||
|
Particulars |
Amount ($) |
Amount ($) |
|
Taxable receipts |
||
|
Fees received |
60,000.00 |
|
|
Rental income from investment property |
15,000.00 |
|
|
Retting win is taxable income |
200.00 |
|
|
Part time income from military services is exempt income |
||
|
Dividend not franked |
5,000.00 |
|
|
Gross interest income from Singapore |
10,000.00 |
|
|
90,200.00 |
||
|
Less: Expenditures |
||
|
Rates on investment property |
3,000.00 |
|
|
Interest paid on loan for acquiring investment property is allowed as deduction |
5,000.00 |
|
|
Repairs to income producing property as per s8-1 of ITAA 1997 |
10,000.00 |
|
|
Borrowing expenses allowed as per s8-1 of ITAA 1997 |
3,000.00 |
|
|
Electricity on home 1000 x 10% |
100.00 |
|
|
Costs of superannuation guide (10000+5000-7000) |
8,000.00 |
|
|
Roof tiles replacement costs |
||
|
Legal expenses for lease on investment property |
||
|
29,100.00 |
||
|
Taxable income from business |
61,100.00 |
|
|
Gross salary income assessable as ordinary income as per s6-5 of ITAA 1997 |
30,000.00 |
|
|
Net capital gain for the year |
40,000.00 |
|
|
131,100.00 |
||
|
Less: Division 36 loss from previous year |
9,000.00 |
|
|
Net taxable income |
122,100.00 |
|
|
Tax liability of John |
||
|
Net taxable income |
122,100.00 |
|
|
Net capital gain for the year |
40,000.00 |
|
|
Net taxable income without capital gain (125100 -40000) |
82,100.00 |
|
|
Tax rate on long-term capital gain |
0.15 |
|
|
Tax on long term capital gain |
6,000.00 |
|
|
Tax up to $18200 |
Nil |
|
|
Tax from $18201 to $37000 |
3,571.81 |
|
|
Tax from $3701 to $82100 |
14,657.18 |
|
|
Income Tax payable |
24,228.99 |
|
|
Medicare levy @ 2% |
2,442.00 |
|
|
Total tax payable |
26,670.99 |
Net taxable income of Frank is $122,800 out of which $40,000 is from net capital gain earned from sale of holiday house and $30,000 is income from salary taxable as per s6-5 of ITAA 1997. The resultant income tax liability of Frank for the period is $24,228.99 and $2,442 is Medicare levy.
Working notes:
|
Particulars |
Amount ($) |
Amount ($) |
|
Sale price of holiday home |
510,000.00 |
|
|
Less: |
||
|
Holiday home purchased costs |
200,000.00 |
Gross salary received (24000 +6000) |
|
Rates spend |
100,000.00 |
|
|
Legal fees |
30,000.00 |
|
|
Garage addition costs |
20,000.00 |
|
|
Rates , taxes |
40,000.00 |
|
|
390,000.00 |
||
|
Capital gain before discount |
120,000.00 |
|
|
Less: CGT discount (Huizinga, Voget and Wagner, 2018) |
60,000.00 |
|
|
Net capital gain |
60,000.00 |
|
|
Less: Capital loss from prior period |
20,000.00 |
|
|
Net capital gain for the year |
40,000.00 |
Notes:
The revenue expenditures incurred specifically to earn income from business as per section 8-1 of ITAA 1997 have been deducted from revenue earned from business to calculate the taxable profit from business and profession of Frank. Gross salary received by Frank is taxable as per s6-5 of ITAA 1997 (Richardson, Taylor and Lanis, 2015).
- Fees is ordinary income taxable as per s6-5 of Income Tax Assessment Act 1997 (ITAA).
- Rental income is taxable as it is ordinary income as per s6-5 of ITAA.
- Non-assessable non-exempt income is not considered for calculation of taxable income.
- Revenue from sales is taxable as per 6-5 of ITAA.
- Part time military income as per s11-5 of ITAA.
- Long term Capital gain is taxable at the rate of 15%.
- Dividend which is not franked is assessed as ordinary income as per s6-5 of ITAA.
- Gross interest received from foreign company entities is taxable and to be included in computation of taxable income.
- Gross salary is assessable as ordinary income under s6-5 of ITAA.
- Rental income is taxable as per s65 of ITAA.
- All expenses incurred to produce taxable income is allowed as deduction as per the decision in Finn v FCT.
- Carry forward division 36 tax loss from past years are allowed to be set off against the taxable income of current year.
References:
Australia, C.C.H., 2016. Australian Master Tax Guide: 2016. CCH Australia.
Huizinga, H., Voget, J. and Wagner, W., 2018. Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics. Available at: https://www.sciencedirect.com/science/article/pii/S0304405X18301132 [Accessed on 6 November 2018]
Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.