Taxation Report: Analysis of Australian Taxation and Deductions

This report provides a comprehensive analysis of taxation principles, focusing on assessable income, deductions, and relevant tax laws in Australia. It begins with an introduction to taxation as a primary revenue source for governments and outlines the structure of the report. The report examines assessable income, as defined by the Income Tax Assessment Act 1997, including compensation payments and other income sources. It also covers allowable deductions, such as repairs and interest on business loans, referencing specific sections of the ITAA 1997. The report includes calculations for deductible interest and GST payable on disposed vehicles, as well as the deductibility of wages, salaries, and donations. It also addresses the recognition of inventories and the carry-forward of losses. The report concludes with a summary of the key concepts and their implications for businesses, referencing relevant books, journals, and online resources.

TAXATION

Table of Contents
INTRODUCTION...........................................................................................................................1
OUESTION 1...................................................................................................................................1
A...................................................................................................................................................1
B...................................................................................................................................................2
QUESTION 2...................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Taxation is the main source of revenue for any country's government. Tax is the amount
of total income which is earn by the individuals or the business organisation in one financial year
(Oats, 2012). A part from the total income or profit generated by an individual or company is
paid to the country's government which is utilized by the government to support the economy of
the country. Taxation laws have different slab rates for different amount of income earned by an
individual and business organisation. The following report contains the detailed information
about the assessable income received by company in the form of compensation. This report
consists of two problems which provides the complete knowledge about the taxation reforms in
Australia and different types of deductions allowed. It also explains the treatment in various
cases to maximize companies total tax deduction.
OUESTION 1
A
Assessable Income: As per sections 6-5, 6-10, 6-15, 17-10 and 17-30 of the Income Tax
Assessment Act 1997, every income which is earned from the proceeds in the ordinary course of
business, which includes gross earnings, net capital gains and income received from foreign.
While calculating assessable income the amounts which are owed by the business, and changes
in the value of stock trading and the amounts which are not the part of regular business are also
considered (McCluskey and Franzsen, 2017). The amount received by business in the form of
GST are not included in the assessable income. Other incomes which are excluded from the
company assessable income is the revenue generated from activities which are not related to the
ordinary course of business. Assessable income is a income which is liable and attracts the tax
liability, it is a income on which the tax is applicable.
As per the income tax assessment act 1997 under section 6-15 any amount received by
the company in the form of Crowdfunding, Personal services income, Cash income, Payments
outside of ordinary business activities, Income sourced through the sharing economy,
Commissions, gratuities, investment earnings and compensation payments and Government
payments are considered as an assessable income.
As given in the above case Bob Jane Racing Pty Ltd was given the compensation of
$65000 by the council is included in the company assessable income. It will be added in the
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company's total assessable income given in the section 6-15 of Income Tax Assessment Act
1997, it says that if a company receive any commissions, investment earning compensation
payments and gratuities will be added in the assessable income of the company on which
company has to pay tax as these are the part of business activities (Income Tax Assessment Act.
1997).
B
Deductions: Deduction which are allowed from the assessable income are mentioned in
the Section 8 of Income Tax Assessment Act 1997, which states the general deductions is the
loss incurred by the company and should be directly relatable to the assessable income of the
company. On the other hand Section 8-5 of ITAA 1997 gives the specific deduction in which the
loss is deductible under two or more provisions the deduction will be given as per the most
appropriate provision applicable. Deduction for repairs are given under the section 25-10 of the
Income Tax Assessment Act 1997, as per this section the cost incurred by any company in
repairs of its premises or depreciating assets which are held or used by the company is deductible
from the total assessable income. ITAA does not define repairs, it has ordinary meaning which
states that deterioration of property which is being repaired, making or remedying good of
defects, and repairing the mechanical or physical sense of any assets which contemplates in the
continued experience of a property.
As in the given case Bob Jane Racing Pty Ltd is not eligible for the deduction as they
incurred cost and received compensation to repair its racing track but instead company decided
to build up a bypass and reduce the length of its track by 30 meters. As per the section 25-10 of
Income Tax Assessment Act 1997 any amount incurred for the repairing of existing property is
deductible from the total assessable income but if any cost incurred in the construction of new
premisses and improve its business operation will not be deducted from the total assessable
income. It also say that the total amount which is incurred by a company in the repairs and
maintenance will be deducted from total assessable income (Rowland, 2012). In this case the
total amount incurred by company was $ 85000 in the construction of new bypass this amount
will not be deducted from assessable income as the cost incurred was not for repairs.
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QUESTION 2
1.) As per the ITAA 1997 interest paid by a company on a loan borrowed for business use as
well as for personal use the proportion of interest paid on business loan is deductible. As
in the above mention case $502000 was borrowed from the bank and 35% i.e., 175700 is
being used for personal use and remaining amount of $326300 is used for business use.
Interest paid was $27500 the amount which is deductible is as under:
Total interest expense X Loan for business use
Total borrowing
= Deductible interest
$27500 X $326300
$502000
= $17875
The above calculation shows that the interest amount is divided in to two parts the interest on
business use and interest on personal use from which the interest on loan taken for business use
is deductible from the total assessable income.
2.) As per the Australian Taxation Office laws if a business purchases a second hand car
from a dealer who is not registered for GST and plans to exchange or resale it, then the
may claim the GST credit (Hurst, 2018). It also states that the cost incurred to purchase
that car is more than $300 then only it can claim its credit. If company does not plan to
resale it or exchange it then it will not be eligible for tax credit and company has to pay
tax on it. In the above given case HRM Pty Ltd has purchased a second hand car in
exchange of its Toyota corolla and plans to use it, the company here in this case is not
eligible for deduction.
3.) As per the ATO any business disposing off its old motor vehicle is liable to pay GST on
the price of car. The amount which is to be calculated on the car is taken as the one –
eleventh value of the total sale price of the car (Rowland, 2014). In the above case the
company has disposed off its old vehicle with the written down value of the car on the
date of sale is $1964 but the company sold the car at a price of $3000 the calculation of
tax is as follows:
GST payable = Sales price X 1 / 11
= $3000 X 1 / 11 = $272.7272
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4.) As per the Income Tax Assessment Act 1997 any business working as a company or
charity can claim the deduction of the wages or salaries paid to is employees and
workers up to the reasonable wages allowed or actual payment maid which ever is lower
(Yuan, 2016). In the above case of HRM Pty Ltd wages paid to Deb Neil's wife is $
35000 where as the reasonable wage for the similar job is $ 40000 the company can claim
deduction up to the amount which was actually paid to Deb i.e., $35000 this amount will
be deducted from the total assessable income.
5.) As per ITAA 1997 the maximum deduction allowed in case of donation to the political
party is $1500. this is the maximum for which a company can claim deduction in case
whether it donated to political party or individual candidate. In the above given case
HRM Pty Ltd is eligible to claim the deduction of $1000 as it has donated it to the liberal
party.
6.) According to Australian taxation rules recognition of inventories must be consider as per
the accounting rules it is required to consider the stock amount with in accounts. The
events are consider when they occurs and the amount should be considered accordingly.
As per above case $25735 will be consider in the books of accounts as in closing stock as
at 30th June 2019.
7.) As per the ITAA 1997 it has a provision in which a company can carry forward its losses
indefinitely subject to the any of two conditions, the owner ship and the control of the
company is same since its incorporation and the company has carried on the same
business since it has occurred a loss. In the above given case it has earned an exempted
income of $55000 and the loss carry forwarded is $75000 total exemption which a
company can claim is $130000.
CONCLUSION
Taxation is the main source through which a country's government can generate its
revenue and utilize it in development of the nation. From the above report it can be concluded
that amount which is received in the form of compensation is added to the total assessable
income and the cost of repairs are deducted from the total income. This report also explains the
various provision of ITAA 1997.
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REFERENCES
Books and Journals
Oats, L. ed., 2012.Taxation: a fieldwork research handbook. Routledge.
McCluskey, W .J. and Franzsen, R. C., 2017.Land value taxation: An applied analysis.
Routledge.
Rowland, N., 2012. Season's greetings and best wishes for the festive season.Taxation in
Australia. 47(6). p.317.
Hurst, G., 2018. Committed to a seamless member experience. Taxation in Australia. 53(4)
p.163.
Rowland, N., 2014. Wishing you a safe and happy festive season. Taxation in Australia. 49(6).
p.295.
Yuan, H., 2016. Mid market focus: The sharing economy and taxation. Taxation in Australia.
51(6). p.293.
Online
Income Tax Assessment Act. 1997. [online] Available through:
<https://lawlex.com.au/tempstore/consolidated/5495.>
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