Taxation System of Australia and Assessable Income Calculation

This document provides an overview of the taxation system in Australia, including the different types of taxes and the role of various organizations. It also explains how to calculate assessable income and discusses the tax consequences of selling assets. The document covers topics such as tips from customers, income from employment, gifts, and payment of meals by the employer. Additionally, it explores the capital gains tax and its implications on the sale of residential houses, cars, small businesses, furniture, and paintings. The document includes relevant tax laws and guidelines.

ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
A) Tips from customers...............................................................................................................1
b) Income from employment.......................................................................................................2
c) Perfume from customer on Christmas.....................................................................................2
d) Payment of meals by the employer..........................................................................................2
e) Gift of money from parents.....................................................................................................3
Assessable Income of Emmi for the year. ..................................................................................3
QUESTION 2 ..................................................................................................................................4
a) Sale of residential house..........................................................................................................5
b) Sale of Car ..............................................................................................................................6
c) Sale of small business .............................................................................................................6
d) Sale of furniture ......................................................................................................................7
e) Sale of paintings .....................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Taxation system of Australia can be said as among the complex systems of tax in the
countries. Australian taxation system consists of more variety of taxes including taxes like tax on
capital gain, fringe benefits, income tax and goods and service tax. The integrity of tax system is
maintained by number of organisation who are playing different roles in the system, ensuring
that all the Australian are treated with equality. Every individual resident of Australian is
required to pay income tax on the income earned during the year. Present report is based on the
income earned by an student by working with studies. It swill also analyse the tax consequences
on the capital gains from sale of assets. Taxation system also provides for the deductions and
exemptions for various incomes on fulfilling certain conditions. Study will provide
understanding about the taxation system of Australia.
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
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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
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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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Assessable income of Emmi
Income from working at restaurant $25000
Tips from Customers $335
Total Assessable Income $25335
Deductions 0
Total Taxable Income $25335
Tax Calculations
0 – 18200 Nil
18201 – 37000 19.00%
Income $11665
Tax Rate 19.00%
Tax $2216.35
Medicare Levy (1.5%) $380.025
Total tax payable $2596.375
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
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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
Sale of House
CPI 2019 115.4
CPI September 1999 40.5
Indexation factor 2.849
Cost base 55000
Indexation factor 2.849
Indexation cost base 156716.049
Sales proceeds 630000
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Indexed cost base 156716.049
Capital gain 473283.951
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
Sale of Business
Sale consideration 125000
Photography equipments 53000
Cost base 63000
Capital loss -10000
Goodwill 50000
Capital gain 50000
50% Discount 25000
less capital loss -10000
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Taxable Capital gain 15000
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
Paintings
Collectables
Sale proceeds $8000
Cost base $1000
Capital gain $7000
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
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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.
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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.
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences,
The Australian National University.
Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.
Sharkey, N. and Murray, I., 2016. Reinventing administrative leadership in Australian taxation:
beware the fine balance of social psychological and rule of law principles. Austl. Tax
F..31. p.63.
Online
Exemptions and deductions. 2019. [Online]. Available through :
<https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/>.
Capital Gain. 2019. [Online]. Available through : <https://www.ato.gov.au/Individuals/Tax-
return/2019/Supplementary-tax-return/Income-questions-13-24/18-Capital-gains-2019/>.
Assessable Income. 2019. [Online]. Available through :
<https://www.ato.gov.au/non-profit/your-organisation/in-detail/income-tax/mutuality-
and-taxable-income/?page=13>.
Australian Income Tax. 2019. [Online]. Available through : <https://www.hrblock.com.au/tax-
tips/understanding-the-australian-income-tax-system>.
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