ACC5TAX Tax Assignment: Income Tax, PSI, and Tax Calculation

This tax assignment, prepared for ACC5TAX at La Trobe University, provides a comprehensive analysis of income tax assessment and personal service income (PSI) rules under the Income Tax Assessment Act 1997. The report examines various issues, including the applicability of PSI rules to a tax accountant, the difference between accrual and cash accounting, and the deductibility of business expenses. It also explores the tax implications of compensation received due to injury and differentiates between a business and a hobby for tax purposes. Furthermore, the assignment includes a tax calculation based on the provided information, demonstrating the application of relevant tax provisions, depreciation methods, and PAYG tax installments. The report concludes with a summary of the key findings and references to relevant tax laws and rulings, providing a detailed understanding of the Australian taxation system.

Tax Assignment
Submitted by:

Contents
Introduction.................................................................................................................................................3
Solution A....................................................................................................................................................3
Issue 1......................................................................................................................................................3
Issue 2......................................................................................................................................................4
Issue 3......................................................................................................................................................4
Issue 4......................................................................................................................................................5
Issue 5......................................................................................................................................................5
Solution B....................................................................................................................................................6
Tax Calculation........................................................................................................................................6
Conclusion...................................................................................................................................................7
References...................................................................................................................................................7
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Introduction
The Income Tax Assessment Act which was formed in the year 1997, states that there is a
number of distinct tax rulings that are carried out for the calculation of liability of income tax for
an individual assessee in the given case. For carrying out this report, various case studies, case
laws and provisions related to the assessment are been carried out so as to verify this case. The
solutions of each case have been conducted as per the provisions and the case laws of the income
tax act of the Australian taxation office and each answer is given considering all the rules and the
provisions related with that particular case. The case laws are also taken into consideration while
answering the cases. [Anon., 2019]
Solution A
Issue 1
Personal Service Income or PSI is an income which an individual earns from his personal skills
or from any of business that he is running or any other skills which he has. This is the definition
of the Personal service Income given by the Australian Taxation office. The rules of the PSI are
applicable only if the PSI is received by the person (Anon., 2019).
There are certain steps which are needed to be followed so that it could be decided that whether
the 50% of the income that has earned belongs to the PSI or the total income it has earned is off
the PSI. The income earned from the contrast is based upon the expertise and the skills of the
person performing the contract than it is termed as the Personal Service Income.
The steps that are needed to be followed so that this could be understood that the income earned
is PSI or not are-
1. The contract that was made was based upon the skills of the person or not.
2. This step involves three portions that are- payment made for a particular task, tool or
equipment requirement and the last one is mistake fixing of the own expenses. If these
three criteria are fulfilled by the 75% of the income than one should move to the third
step otherwise the income would not be considered as the PSI.
3. The 80% portion of the income earned must flow from one single client. If these criteria
are fulfilled than move to the next step and if not the income is not treated as PSI.
4. After the fulfillment of all the above three conditions the income comes out to be as the
PSI and if anyone out of these tests fails then the income does not constitute as a PSI.
The above-mentioned steps should be taken into consideration so that to know that the PSI is
applicable in the given case or not. The applicability in the given case is checked below-
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In this given case, Mr. Thomas Hawks, tax accountant charges fees from all his clients and it is
the source of income for him in that financial year. To check that the above steps are applicable
to the case or not the following steps are implemented in the case. (Anon., 2019)
1. The 50% of the income that is earned by Mr. Hawks is earned by him due to his skills
and expertise in the field of the profession. This income is earned by him from his own
skills and constitutes more 50% of his income and hence satisfying the first step.
2. The second step is also fulfilled by him as the search carried by him in the financial year
as stated in the question.
3. Jenny Pvt. Ltd. is the client of Mr. Hawks and he is receiving a major portion of his
income from this client only. Hence satisfying the third step of 70% income must flow
from one client.
4. All the three tests are been not passed by him and hence attracting the PSI rules.
Issue 2
The accrual method of accounting is a method in which incomes and expenses are recorded on
the date when they occur and not on the date when the actual payment is received or made by the
entity. Most of the accounting works on this concept only and hence this is the method which is
followed commonly. While the cash basis of accounting is the method in which the transaction is
recorded as and when the cash is paid or received by the entity. This accounting majorly focuses
upon the cash inflow and outflow in the business.
From the information provided in the question, it can be concluded that Mr. Hawks, in this case,
has followed the cash basis of accounting method. (Anon., n.d.)
Issue 3
The provisions made by the Australian Tax Office says that all the expenses which are incurred
for earning any of the income, which arrives after all the deduction made in it related to the
expenses are taxable. This includes every income earned either from business or from the
profession. Most of the income that is earned from the profession is taxable under the laws of
Income Tax. Most of the expenses which are incurred in the context to the income are deductible
from the income earned. The proper and clear records should be maintained by the entity of all
incomes and expenses incurred in the financial year so that the actual incomes and expenses
could be ascertained; this is helpful in obtaining the actual incomes and deduction which are
owed to be paid at that particular time. (Anon., n.d.)
For the purpose of calculating all the business expenses depreciation has to be taken as business
expense. The depreciation on the assets of the entity has to be claimed as for the simplified
depreciation rules induce applicable for small business entities having fixed assets of value less
than $20,000. The depreciation of the fixed assets has to be distributed over the life of the Asset.
As per the case is given in the question based on the information the following conclusion is
made upon the income and expenses of Mr. Hawks.
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All the expenses that he incurred in the present financial period were in relation o the salaries,
office supplies, wages, interest charges, council rates, and other cleaning and mortgage charges.
All these expenses form a part that was essential to earn the income of the business. All these
expenses are deducted from the income of the present financial year and the balance income that
comes from deducting the expenses of the current period from the income of the current period is
taxable. (Anon., 2019)
Issue 4
The case law FCT v Slaven the case 39 as per the tax rulings IT 2193 gives the following brief.
In this case, there was a person who was injured as he met with an accident and this resulted in
the loss of the income as this employee was not able to work for a particular period of time.
Therefore, they could claim the loss of the income that they have incurred in the period. This
theory was followed up to the year 1979 and then afterwards there was an amendment that was
made in the act of motor accidents stating that the losses that the person has incurred and which
are paid by the motor vehicle act would not be considered as the income of the assessee on which
tax has to be paid by them and rather would constitute as a part of compensation received by him
because of the loss and would not form a part of the assessable income of the assessee.
In the above case, Mr. Hawk got an injury in the February month of the year 2020 and for that,
he received a compensation of $5000. Thus this amount of $5000 would constitute as a part of
compensation received and not the part of assessable income.
This income would not form the part of the earned income of the financial year and hence is not
liable for the tax. (Anon., n.d.)
Issue 5
Tax Ruling 97/11 gives the understanding that whenever an activity is carried out by any person
whose sole motive is to earn profits is known as Business. Business is a commercial activity that
is carried out to earn profits. Australian business number is needed to be obtained by the business
entities so that they could file a claim of tax deductions over the expenses they have incurred for
earning the business income which is taxable. The claim of expenses by the business could be
filed only if they have obtained the business number and the expenses incurred are for the
earning of the taxable income. On the other side, hobby is considered as the passing time that
one does in their free time. There are a number of benefits that one can receive by performing the
hobbies and they are – personal enjoyment and satisfaction. The hobbies are performed by the
person out of their will and passion to do that work.
In the present case, Mr. Hawks got into an informal contract of photography. He just entered into
a contract where he would do photography for free for him and the equipment of photography
was received by him for $2500. He entered into this contract as photography is the hobby of Mr.
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Hawks. In this case, he gave his services out of his hobby and got equipment to work for his
hobby. (Anon., n.d.)
Solution B
The Australian Tax law and the provisions of the ITA act 1997, states that the Personal service
income which is earned by any person would be taxable in his hands in the same way the Normal
Income earned by any of the assessee is taxable. The only major difference which can be seen is
that there are certain expenses whose deduction cannot be claimed by the assessee if he earns the
Personal Service Income. The examples of the expenses that cannot be claimed under the PSI are
mortgage interest, rent and other expenses that are been paid for non principal works to the
associates. (Anon., n.d.)
In the case provided in this question, the assessee paid the interest of mortgage for his premises
that were not for business use but were been used for his residence. Therefore, he cannot claim
any of the deductions for this expense and would not be deducted from the earned income of the
current financial year. (Anon., n.d.)
There is a number of methods using which the depreciation can be calculated. Here, in this case,
the depreciation would be charged according to the Written Down value method.
The life of the asset is taken to be as five years and hence depreciation to be calculated as per
WDV in the upcoming 5 years.
For the purpose of avoiding the tax consequences in the upcoming time, the assessee is already
paying the installments of PAYG tax. These are paid by the assessee on a regular basis. These
are the per month installments that are required to be paid by the assessee so that the burden of
the tax does not lie of the assessee at the end. He estimates his taxable income and on the basis of
that PAYG installments are paid by him on regular basis so as to avoid the tax liability burden on
him at the time of paying tax. At the end only the balance amount is to be paid by the assessee if
the amount is short and if the amount is more than the actual liability than the excess amount
would be adjusted in the upcoming years or would be returned. This actually reduces the burden
over the assessee of paying tax and therefore he can divide his liability according to the income
he is expecting at the end of the financial year. (Anon., n.d.)
Tax Calculation
The below given is the table that gives a brief about how the calculations are made to compute
the taxable liability of Mr. Thomas Hawks for the year ending as on June 30, 2020.
Calculation Mr. Thomas Hawk's Tax Liability for the year ending 30 June 2020
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Particulars Particulars $ $
Income Professional Receipts(Cash Receipt) 576,000
Compensatory Income 0
Expenses Salaries and wages 93,600
office supplies 5,019
cleaning and heating 7,413
Mortgage inters and council rates on office
premises 0
Depreciation 7754 113,786
Net income 462,214
Tax on Income 190,337
PAYG Installments 113,680
Net Tax to be Paid 76,657
This table gives the calculation of the liability of Mr. Thomas for the year and the amount of tax
that he has to pay at the end of the financial year. The above table shows the expenses as the
deductions and the net income that arrives is liable for tax and then the tax liability is calculated
deducting the already paid taxes in the form of PAYG and hence at the end the actual liability of
$99,813.30 is been left with the assessee that he has to borne and pay at the end of the financial
year. (Anon., n.d.)
Conclusion
Form the above-prepared report, it could be concluded that the rules and the provisions of the
PSI are been implemented successfully and their tax rulings are also applied for giving all the
solutions to the cases. In the other one to check out the tax liability of the assessee, all the
provision have been studied well and applied while solving the case. The tax rulings of the
Australian Tax Office are also been considered. The proper distinguish is also been made
between the hobby and the business. Then further a talk about the motor vehicle act that what is
considered as a part of assessable income and what form as a part of the compensation received.
All the cases are been solved with keeping in mind all the rules and provisions of the Australian
Tax Office. (Anon., n.d.)
References
Anon., 2017. Deductions that can't be claimed against PSI. [Online]
Available at: https://www.ato.gov.au/business/personal-services-income/in-detail/claiming-deductions-
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when-receiving-psi/?
anchor=DeductionsthatcantbeclaimedagainstthePSI#DeductionsthatcantbeclaimedagainstthePSI
Anon., 2018. A business or a hobby?. [Online]
Available at: https://www.business.gov.au/planning/new-businesses/a-business-or-a-hobby/
Anon., 2019. IT 2193. [Online]
Available at: https://www.ato.gov.au/law/view/document?locid=%27FOI/1194205P
Anon., 2019. Personal services income (PSI). [Online]
Available at: https://www.business.gov.au/finance/taxation/personal-services-income
Anon., n.d. Are you in business?. [Online]
Available at: https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Are-
you-in-business-/
[Accessed 1 may 2019].
Anon., n.d. Business premises test for PSI. [Online]
Available at: https://www.ato.gov.au/Business/Personal-services-income/Working-out-if-the-PSI-rules-
apply/Step-4--The-remaining-tests/Business-premises-test/
[Accessed 7 august 2019].
Anon., n.d. Claiming deductions when receiving PSI. [Online]
Available at: https://www.ato.gov.au/business/personal-services-income/in-detail/claiming-deductions-
when-receiving-psi/
[Accessed 30 March 2017].
Anon., n.d. Personal services income. [Online]
Available at: https://www.ato.gov.au/Business/Personal-services-income/
[Accessed 7 august 2019].
Anon., n.d. Working out if the PSI rules apply. [Online]
Available at: https://www.ato.gov.au/business/personal-services-income/working-out-if-the-psi-rules-
apply/
[Accessed 2019].
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