FIN320 Tax and Estate Planning: Analyzing Herbert & Dorothy's Finances

This report analyzes the financial situation of Herbert and Dorothy Evans, focusing on tax and estate planning strategies. The initial section details the current individual tax scenario for Australian residents, including tax rates, Medicare Levy Surcharge, and available tax offsets like LITO and LMITO. The report then proposes a shift from sole trader businesses to a partnership, highlighting the advantages and disadvantages, and presenting a comparative analysis of tax liabilities. Finally, it suggests future investment plans, particularly the establishment of a Self-Managed Superannuation Fund (SMSF) to manage estate planning, rental property investments, stocks, insurance, and debt reduction, outlining the benefits and flexibility of SMSFs, including tax advantages and wealth transfer.

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TAX AND ESTATE PLANNING
SECTION – 1: Current Scenario
Individual Taxpayers, who are Resident Australians, are required to pay their income
tax for the income 2018-19 at the rates specified by the Australian Taxation Office
(ATO), asserts Barkoczy, (2015). These rates are detailed in the table below.
Australian Resident Tax Rates for the Year 2018-19
Taxable Income Tax on the Taxable Income
From $0 to $18,200 NIL
From $18,201 to $37,000 19c for every Dollar above $18,200
From $37,001 to $90,000 $3,572 plus 32.5c for every Dollar above $37,000
From $90,001 to $180,000 $20,797 plus 37c for every Dollar above $90,000
From $180,001 and Above $54,097 plus 45c for every Dollar above $180,000
Medicare Levy Surcharge
The rates mentioned in the above table are EXCLUSIVE of the Medicare levy
Surcharge which is levied @ of 2% on the NET TAX payable by the taxpayer, asserts
Barkoczy, (2013). However, these rates are INCLUSIVE of the changes announced
through the Federal Budget for the year 2018-19.
As per the Australian Taxation Office (ATO), the Medicare Levy Surcharge (MLS) is
levied on those Australian taxpayers who have not taken out an appropriate Private
Hospital Insurance Policy to cover their personal medical expenses. The ATO has
prescribed an income threshold for those who DO NOT have an appropriate Private
Hospital Insurance Policy, say Deutsch et al, (2011). The income threshold, below
which the non-policy holders are not held liable for paying the MLS, is $90,000 for
those taxpayers who are holding the status as singles and $180,000 for those taxpayers
who have families.
Offsets Explained
If a resident taxpayer’s assessable income is calculated as less than $66,667 for income
year 2018-18, the taxpayer becomes eligible for the Low Income Tax Offset (LITO).

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However, the maximum tax offset which the resident taxpayer can avail is restricted to
$445, and is applicable to taxpayer’s whose taxable income is below $37,000. Another
provision of the ATO restricts the limitation by reducing the threshold by 1.5 cents for
each dollar over taxable income of $37,000, as per CCH, (2015).
Prior to the income year 2018-19, the Low Income Tax Offset (LITO) was the
only tax rebate available for the Australian resident individual taxpayers who were
having low income. In the Federal budget presented by the government for the year
2018-19, a proposal has been forwarded that in addition to the basic tax-free threshold
of $18,200, the applicable amount of LMITO (Low and Middle Income Tax Offset),
which was fixed at $445, will be made applicable to all Australian resident individuals
whose taxable income reaches $125,333.
Low and Middle Income Tax Offset
The Low and Middle Income Tax Offset (LMITO) is a tax offset introduced as part of
the Budget 2018 measures to revise the personal income tax rates. It applies in the years
from 1 July 2018 to 30 June 2022. The LMITO applies in addition to the Low Income
Tax Offset (LITO). The LMITO will be available subject to taxable income tests as
follows:
Income Offset on the Income
From $0 to $37,000 $200
From $37,001 to $48,000 $200 plus 3c for every Dollar above $37,000
From $48,001 to $90,000 $530
From $90,001 to $125,333 $530 LESS 1.5c for every Dollar above $90,000
Case Study Application
In case of Herbert and Dorothy Evans, their Individual Income Statements are annexed
under ANNEXURE TO SECTION – 1, LITO or even LMITO is not applicable in
Herbert’s case. However, Dorothy can avail a tax offset amount of $530, which is
applicable to taxpayers whose assessable income is between $48,001 and $90,000, as
per details taken from https://atotaxrates.info/tax-offset/low-and-middle-income-tax-
offset/ .

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SECTION – 2: Proposal for Partnership
If Herbert and Dorothy were to convert their existing businesses from sole trader to a
partnership, they will first have to apply for a Business Name, Australian Business
Number (ABN) and then for tax registrations. A partnership is different from a sole
trader, in a partnership the couple will be business partners and will be personally
liable for debts of the partnership business, although they will share, in equal
proportions, the control and management of the partnership business, as per Nethercott,
Devos & Richardson, (2010). The couple will distribute the income or losses from the
partnership business among themselves in equal proportions. In comparison to other
type of entities, a partnership is inexpensive in setting up and operating. Although
partners unknown to each other may go for a written partnership agreement, in case of
Herbert and Dorothy this is not essential, as a verbal understanding is equally binding,
says Renton, (2012).
As partners, Herbert and Dorothy will have to manage their superannuation
arrangements as individuals. However, as partners, they can withdraw the contribution
for their super contribution, although the partnership firm will have to pay
superannuation, at the required terms, to its employees. As partners, assert Smith &
Koken, (2011), the Fixed Monthly Drawings which the couple will draw from the
partnership business cannot be claimed as deductible expenses for taxation purposes as
the amounts which the partners withdraw from the partnership are not considered as
wages for taxation purposes. For Taxation purposes, Herbert and Dorothy will not be
considered as employees, but they can employ workers, as per Ault, Arnold & Gest,
(2010).
Key features
Below are cited the important features of a partnership business to be followed by
Herbert and Dorothy in case they decide to merge their individual Sole Trader
businesses into a Partnership Firm –
 Partnership firm must apply for an ABN which is to be used for all business
deals.
 Partnership is required to register for GST in case the annual GST turnover of
the partnership business is above $75,000.

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 All income, losses including control of the business will be shared in the agreed
proportions among the couple.
 The partnership firm will have its own TFN and will be required to file its
separate partnership return annually, which will include all the income and
deductions of the partnership firm.
 The partnership firm is not to pay income tax on its profits. The partners are
required to report the share earned from the partnership firm as income in their
individual tax returns.
 Each partner is liable for paying tax on their earned share from the partnership
firm at tax rates applicable for individuals and if applicable, can also avail the
small business tax offset.
The only disadvantage of a partnership firm is that the partners have unlimited liability
for the debts of their partnership business and each partner is 'jointly and severally'
liable for these debts, as detailed by Nethercott, Devos & Richardson, (2010).
Case Study Application
On the basis of the above mentioned details, Herbert and Dorothy can take best
advantage of the taxation laws if they plan to merge their businesses into a single entity
based on the features of Partnership. This will give them a broader and flexible platform
for managing their tax liabilities. This can be seen from the comparative analysis given
below –
Comparative Analysis of Different Income Sources of Herbert & Dorothy
Tax Liability of
Herbert Evans Dorothy Evans
Filing their Tax Return in Individual Capacity $66,696.00 $18,864.00
Filing their Tax Return as Partners $5,228.00 $5,744.00
Hence, it is evident that the couple can save $74,588 on taxes simply by changing the
operation mode of their businesses from Sole Traders to a Partnership Firm.
Additionally, the couple can also remove the disparities in the expenses which they are
presently claiming individually. The partnership system of managing an entity will not
only give the couple safety from debt payments, it will also give them the advantage of
drawing fixed amounts from the business, without disturbing their capital base, says

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CCH, (2015). An analysis of comparing their tax liabilities as individuals to their tax
liability if they form a partnership entity is annexed under ANNEXURE TO SECTION
– 2.
SECTION – 3: Future Plans
To facilitate smooth and efficient operations of their profitable business ventures, the
following avenues of channelizing their investments are proposed for Herbert and
Dorothy Evans. Some of the sectors, as per Deutsch et al, (2011), in which the couple
needs advise are –
1) Estate Planning
2) Investments in Rental Properties and Stocks
3) Insurance Planning and Debt Reduction
In the opinion of this paper, all these sectors can be taken care by Herbert and Dorothy
through the establishment of a Self-Managed Superannuation Fund (SMSF). This is the
foremost avenue to be adopted by Herbert and Dorothy for their surplus cash as well as
surplus profit from business activities. This will also give the couple an added
advantage of secure holding of their assets, be it the rental properties or stocks, assert
Ault, Arnold & Gest, (2010). The process, working and benefits of a SMSF have been
detailed below for the preview of the couple.
(A) Establishing a SMSF
Establishing a SMSF is done with the sole purpose to provide financial benefits to
members, especially after they retire and after their death to their dependents, as per
Deutsch et al, (2011). A SMSF is required to have its own Tax File Number (TFN), an
Australian Business Number (ABN) and a bank account for carrying out business
transactions. Since a SMSF functions as a trust and since minimum two trustees are
required, Herbert and Dorothy can easily start a SMSF, according to Barkoczy, (2013).
(B) Investment Choice
A SMSF will offer the couple the perfect opportunity for planning their investments
through a wide range of fixed assets, including investments in Real Estate, Stocks,
Other Immovable Assets and even Collectibles. Moreover, as per Nethercott, Devos &
Richardson, (2010), a SMSF can be used by Herbert and Dorothy for making
investments in most other investment products, including other SMSFs and assets,
whether these are located inside Australia or are located overseas, whether they held by

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listed or unlisted property trusts, including their derivative products such as Dividend
Warrants and Options, as detailed by Marsden, (2010).
(C) Tax Benefits
Herbert and Dorothy will be able to take advantage of the following benefits which are
provided exclusively to the SMSFs by the Australian Taxation Office (ATO). In the
Accumulation Phase of the SMSF, Herbert and Dorothy will be able to–
 gain tax benefits for their Concessional Contributions which are taxed at a flat
rate of 15% in a SMSF;
 get benefit of Government Co-contribution for all their qualifying contributions;
 get investment earning which are taxed at maximum rate of 15% in SMSF;
 pay Capital Gains Tax @10% on assets held for above 12 months; and
 implement their strategies of managing individual members’ tax positions;
 have all their earned income and capital gains exempt from withdrawal tax when
they transit to the Pension Phase, as detailed by Renton, (2012).
(D) Flexibility
The governing rules of SMSF, as per Smith & Koken, (2011), provide their members
with flexibility which is not available to other superannuation funds. This flexibility
offers tax benefits and a SMSF can acquire business real assets either from another
member or from other related parties of the fund, assert Ault, Arnold & Gest, (2010).
(E) Other Benefits
(a) Life Insurance
As members of a SMSF, Herbert and Dorothy will be able to get both life and income
protection insurance covers. The advantage for the couple from this approach will be
that the premium of such insurance policies will be paid by the SMSF and the premium
amount is considered as a tax-deductible expense for the SMSF, say Deutsch et al,
(2011). Since the ATO has now abolished the Reasonable Benefit Limits, the barrier for
members requiring higher life insurance through their SMSF has been removed. A
Reasonable Benefit Limit is the maximum amount of the retirement benefit an
individual can receive over the individual’s lifetime at a concessional tax rate, says
Barkoczy, (2015).
(b) Effective Transfer of Wealth
SMSF’s inherent flexibility will allow Herbert and Dorothy to make arrangements for
facilitating an effective wealth transfer after their death, asserts Renton, (2012). Since

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the superannuation savings are the largest asset or, in some cases, the second largest
asset, after the individual’s family home, it becomes prudent for the authorities to
ensure that the superannuation savings of the couple are transferred between generations
in an effective manner, asserts Barkoczy, (2013).
(c) Retirement Income
A SMSF is the right source for paying its members their benefits as a retirement income
stream. This also includes the transition from the Accumulation Phase to the Retirement
Income Phase. Moreover, as Herbert and Dorothy will be the fund trustees, they can
tailor-make their payments for meeting their financial needs, says Marsden, (2010).
Case Study Conclusion
This paper firmly believes that the dispositions made here are for the betterment of
Herbert and Dorothy. The SMSF is the single, most effective, source of fund
management, which can prove to be a boon for the couple in planning their long-term
(as well as short-term) wealth management strategies.
LIST OF REFERENCES
Ault, H. J., Arnold, B. J. and Gest, G. 2010. Comparative income taxation: a structural
analysis. 3rd ed. Kluwer Law International, Amsterdam.
Barkoczy, S. 2013. Foundations of Taxation Law 2012, 5th ed. CCH Australia Limited,
North Ryde, NSW.
Barkoczy, S. 2015. Australian Tax Case book, 12th ed. CCH Australia Limited, North
Ryde, NSW.

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CCH. 2015. Australian Master Tax Guide 2015. CCH Australia Limited, Sydney, NSW.
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011)
Australian tax handbook. Thomson Reuters, Pyrmont, NSW.
Low and Middle Income Tax Offset. Retrieved on 5th October, 2018 from
https://atotaxrates.info/tax-offset/low-and-middle-income-tax-offset/
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia
Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual:
questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney, NSW.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of
Average Means, 4th ed. John Wiley & Sons, Milton, QLD.
Smith, B. and Koken, E. 2011.The Superannuation Handbook. John Wiley & Sons,
Milton, QLD.

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ANNEXURE TO SECTION - 1
Income Statement of Test and Tag,
the Sole Trader business being run by Herbert Evans.
Gross Revenue collected during the year 2018-19 $241,000
Net of expenses incurred for running the business $43,000
(These include Herbert’s Superannuation contributions and
his expenses on running and maintenance of his car for business
purposes)
NET REVENUE $198,000
Apart from this business, Herbert also has other income, as detailed below.
50% share from the Rental Property Income $13,000
(Both Herbert and Dorothy share the income in equal proportions
as they own the rental property in equal proportions)
50% share from the interest received on the Term Deposit $564
(Both Herbert and Dorothy share the interest earned in equal
Proportions as the Term Deposit is held jointly)
TOTAL OTHER INCOME $13,564
Herbert is also liable to share the expenses, in equal proportions with Dorothy, which
the couple incurs on earning from the joint assets. Expenses which Herbert has to bear
are detailed below.
50% share of the annual interest paid on the loan for
the jointly owned rental property $832
Interest on car loan $2,068
TOTAL OTHER EXPENSES $2,900

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On the basis of the above details, the Assessable Income of Herbert Evans for the Year
2018-19 will be as per details provided below.
Net Revenue from the business ‘Test & Tag’ $198,000
Total Other Income $13,546
Total Income during the Year 2018-19 $211,564
LESS: Expenses incurred on earning Other Income $2,900
ASSESSABLE INCOME FOR THE YEAR 2018-19 $208,664
TAX LIABILITY OF HERBERT EVANS
Herbert’s income is taxable at the highest rate of 45%.
His tax liability is $54,097 + ($208,664 - $180,000)*45%
This calculates to $54,097 + 12,899 = $66,996
Herbert is not liable for Medical Levy Surcharge as he has a Private Health Insurance
policy.
Hence, Income Tax liability of Herbert Evans for the Year 2018-19 stands at
$66,996.
Income Statement of Endless Life,
the Sole Trader business being run by Dorothy Evans.
Gross Revenue collected during the year 2018-19 $85,000
Net of expenses incurred for running the business $12,000
(These include Dorothy’s Superannuation contributions and
her expenses on running and maintenance of her car for business
purposes)
NET REVENUE $73,000
Apart from this business, Dorothy also has other income, as detailed below.
50% share from the Rental Property Income $13,000

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(Both Dorothy and Herbert share the income in equal proportions
as they own the rental property in equal proportions)
50% share from the interest received on the Term Deposit $564
(Both Dorothy and Herbert share the interest earned in equal
Proportions as the Term Deposit is held jointly)
Fully Franked Dividend on Share Portfolio $2,893
TOTAL OTHER INCOME $16,457
Dorothy is also liable to share the expenses, in equal proportions
with Herbert, which the couple incurs on earning from the joint assets.
Expenses which Dorothy has to bear are detailed below.
50% share of the annual interest paid on the loan for
the jointly owned rental property $832
Interest on Credit Card outstanding amount $271
TOTAL OTHER EXPENSES $1,103
On the basis of the above details, the Assessable Income of Dorothy Evans for the Year
2018-19 will be as per details provided below.
Net Revenue from the business ‘Endless Life’ $73,000
Total Other Income $16,457
Total Income during the Year 2018-19 $89,457
LESS: Expenses incurred on earning Other Income $1,103
ASSESSABLE INCOME FOR THE YEAR 2018-19 $88,354
TAX LIABILITY OF DOROTHY EVANS
Dorothy’s income is taxable at the mid-level rate of 32.5%.
Her tax liability is $3,572 + ($88,354 - $37,001)*32.5%
This calculates to $3,572 + 16,690 = $20,262
Dorothy has already paid $868 as Franking Tax. Dorothy can avail Offset of $530 under
the LMITO Scheme, thereby reducing her tax liability to $18,864 ($20,262 - $868 -
$530).

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Dorothy is not liable for Medical Levy Surcharge as she has a Private Health Insurance
policy.
Hence, Income Tax liability of Dorothy Evans for the Year 2018-19 stands at
$18,864.
ANNEXURE TO SECTION - 2
Profit of Herbert and Dorothy (a Partnership business) for the Year 2018-19
Gross Revenue collected during the year 2018-19 $326,000.00
LESS:
Net of expenses incurred for running the business $55,000.00
Fixed Monthly Drawings – Herbert Evans ($7,500/pm) $90,000.00
Fixed Monthly Drawings – Dorothy Evans ($7,500/pm) $90,000.00
Superannuation Contribution – Herbert Evans (9.5%) $12,872.50
Superannuation Contribution – Dorothy Evans (9.5%) $12,872.50 $260,745.00
NET PROFIT OF THE PARTNERSHIP $65,255.00
(This will be shared equally by the couple and the 50% share
will be reported individually by Herbert & Dorothy in their
Individual Income Statements)
INCOME STATEMENT OF HERBERT EVANS
50% share from the Profit earned by the Partnership Firm $32,627.50
Apart from this business, Herbert also has other income,
as detailed below.
50% share from the Rental Property Income $13,000.00
(Both Herbert and Dorothy share the income in equal proportions
as they own the rental property in equal proportions)
50% share from the interest received on the Term Deposit $564.00
(Both Herbert and Dorothy share the interest earned in equal
Proportions as the Term Deposit is held jointly)
TOTAL INCOME $46,191.50

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Herbert is also liable to share the expenses, in equal proportions
with Dorothy, which the couple incurs on earning from the
joint assets. Expenses which Herbert has to bear are detailed below.
50% share of the annual interest paid on the loan for
the jointly owned rental property $832.00
Interest on car loan $2,068.00
TOTAL EXPENSES $2,900.00
On the basis of the above details, the Assessable Income of
Herbert Evans for the Year 2018-19 will be as per details
provided below.
Total Income during the Year 2018-19 $46,191.50
LESS: Expenses incurred on earning Other Income $2,900.00
ASSESSABLE INCOME FOR THE YEAR 2018-19 $43,291.50
TAX LIABILITY OF HERBERT EVANS
Herbert’s income is taxable at the rate of 32.5%.
His tax liability is $3,572.00 + ($43,291.50 - $37,000.00)*32.5%
This calculates to $3,572.00 + 2,045.00 = $5,617.00
Herbert Evans can avail Offset of $389.00 ($200 + 3c for every dollar above $37,000 =
$200 + (43,291-$37,000=$6,291*3%=$189) under the LMITO Scheme, thereby
reducing his tax liability to $5,228.00 ($5,617 - $389).
Herbert is not liable for Medical Levy Surcharge as he has a Private Health Insurance
policy.
Hence, Income Tax liability of Herbert Evans for the Year 2018-19 stands at
$5,228.00.

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INCOME STATEMENT OF DOROTHY EVANS
50% share from the Profit earned by the Partnership Firm $32,627.50
Apart from this business, Dorothy also has other income,
as detailed below.
50% share from the Rental Property Income $13,000.00
(Both Herbert and Dorothy share the income in equal proportions
as they own the rental property in equal proportions)
50% share from the interest received on the Term Deposit $564.00
(Both Herbert and Dorothy share the interest earned in equal
Proportions as the Term Deposit is held jointly)
Fully Franked Dividend on Share Portfolio $2,893.00
TOTAL INCOME $49,084.50
Dorothy is also liable to share the expenses, in equal proportions
with Herbert, which the couple incurs on earning from the
joint assets. Expenses which Herbert has to bear are detailed below.
50% share of the annual interest paid on the loan for
the jointly owned rental property $832.00
Interest on Credit Card $271.00
TOTAL EXPENSES $1,103.00
On the basis of the above details, the Assessable Income of
Dorothy Evans for the Year 2018-19 will be as per details
provided below.
Total Income during the Year 2018-19 $49,084.50
LESS: Expenses incurred on earning Other Income $1,103.00

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ASSESSABLE INCOME FOR THE YEAR 2018-19 $47,981.50
TAX LIABILITY OF DOROTHY EVANS
Dorothy’s income is taxable at the rate of 32.5%.
Her tax liability is $3,572.00 + ($47,981.50 - $37,000.00)*32.5%
This calculates to $3,572.00 + 3,569.00 = $7,141.00
Dorothy has already paid $868 as Franking Tax. Dorothy Evans can avail Offset of
$529.00 ($200 + 3c for every dollar above $37,000 = $200 + (47,981-
$37,000=$10,981*3%=$329) under the LMITO Scheme, thereby reducing her tax
liability to $5,744.00 ($7,141 - $868 - $529).
Dorothy is not liable for Medical Levy Surcharge as he has a Private Health Insurance
policy.
Hence, Income Tax liability of Dorothy Evans for the Year 2018-19 stands at
$5,744.00.

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