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Income tax in australia
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Income tax in australia

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The presentation is about Income tax in Australia. The presentation talks about the tax structure, who is taxable, what income is taxable, what income is exempted, etc.

The presentation is about Income tax in Australia. The presentation talks about the tax structure, who is taxable, what income is taxable, what income is exempted, etc.

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Income tax in australia Presentation Transcript

  • 1. Who pays income tax in Australia, what are the sources of income and when do we derive income? HelpWithAssignment.com
  • 2.
    • Federal System of Government
    • Commonwealth Government - Canberra
    • State Governments - Victoria, NSW, QLD, SA, Tas. Two Territories - ACT and NT.
    • Local Government - Municipalities
    • Australian Constitution - division of powers between Commonwealth and State governments
    HelpWithAssignment.com
  • 3.
    • Statutory Law - enacted by Parliament – Income Tax Assessment Act 1997 (ITAA 97), Income Tax Assessment Act 1936 (ITAA 36), Fringe Benefits Tax Assessment Act 1986 (FBTAA 86), A New Tax System (GST) Act 1999 (GST ACT).
    • Common Law or Case Law - made by the Judges - Commonwealth Courts and State Courts
    • Administrative statements - Rulings by the Australian Taxation Office (ATO) – Not Law
    HelpWithAssignment.com
  • 4.
    • Income Tax - Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997
    • Capital Gains Tax – Capital gains taxed as income - from 20 September 1985
    • Fringe Benefits Tax – FBTAA 1986
    • Goods and Services Tax - GST from 1 July 2000 - 10%
    HelpWithAssignment.com
  • 5.
    • Pay-roll tax - differs between States
    • Victoria - 5.15% if pay-roll over $550,000
    • Land Tax - value of land only, differs between States
    • Victoria – 3.5% if value over $2,700,000
    • Stamp Duty - tax on documents, Transfer of Land, Mortgage, Hire of equipment.
    HelpWithAssignment.com
  • 6.
    • Medicare levy – not a tax but a levy on income
    • Medicare levy – all individual taxpayers pay 1.5% of taxable income for medical care – companies and trusts do not pay levy - beneficiaries do pay and trustees
    • If individual taxpayer earns more than $70,000 as single or $140,000 family and one child then must pay extra surcharge if no private medical insurance (1%)
    • Private medical insurance – provides relief for government hospitals
    HelpWithAssignment.com
  • 7.
    • Tertiary Education paid by individuals as a Higher Education Loan Program– HELP
    • Collected by ATO along with Medicare levy on individual tax return
    • HESA - Percentage depending on taxable income – 4% if income over $41,595
    • Primary and secondary education – small charge
    HelpWithAssignment.com
  • 8.
    • Death duty - but capital gains tax applies
    • Gifts – no gift duty – not income – but CGT
    • Inheritance tax
    • Sales tax - replaced by GST
    • Poll tax – UK, for a short time a tax on voting in an election
    HelpWithAssignment.com
  • 9.
    • Income tax main source of revenue for Commonwealth government
    • Income tax paid by Individuals - progressive rate of tax – marginal rates
    • Company tax - flat rate of 30%
    • Partnerships and Trusts - individual rate
    • Superannuation funds - flat rate 15%
    • Capital gains – discount over 12 months
    HelpWithAssignment.com
  • 10.
    • Section 4-1    Who must pay income tax
    • Income tax is payable by each individual and company, and by some other entities
    • 4-10(1)   You must pay income tax for each year ending on 30 June, called the financial year .
    • 4-10(2)   Your income tax is worked out by reference to your taxable income for the income year . The income year is the same as the financial year, except in these cases:
        • ( a)  for a company, the income year is the previous financial year;
        • (b)  if you have an accounting period that is not the same as the financial year, each such accounting period or, for a company, each previous accounting period is an income year.
    • The Commissioner can allow you to adopt an accounting period ending on a day other than 30 June. See section 18 of the Income Tax Assessment Act 1936 .
    HelpWithAssignment.com
  • 11.
    • Gross Income
    • Less: Exempt income (s 6-20 and Div 11)
    • = Assessable Income (s 6-5 and s 6-10
    • Less: Allowable Deductions (s 8-1 & Div 25)
    • = Taxable Income x Tax rate + Medicare levy (1.5%) + (surcharge 1% if applicable)
    • = Tax payable - Less: tax offsets + rebates =
    • Tax refund or payment to ATO
    HelpWithAssignment.com
  • 12. HelpWithAssignment.com
  • 13.
    • 6-1(1) -  Assessable income consists of ordinary income and statutory income.
    • 6-1(2) - Some ordinary income, and some statutory income, is exempt income.
    • 6-1(3) -  Exempt income is not assessable income.
    • 6-1(4) - Some ordinary income, and some statutory income, is neither assessable income nor exempt income - NANE
    HelpWithAssignment.com
  • 14.
    • 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .
    • 6-5(2) - If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
    • 6-5(3) - If you are not an Australian resident, your assessable income includes:    the ordinary income you derived directly or indirectly from all Australian sources during the income year; and
    HelpWithAssignment.com
  • 15.
    • 6-10(1) - Your assessable income also includes some amounts that are not ordinary income.
    • 6-10(2) - Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income .
    • 6-10(4) - If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.
    • 6-10(5) If you are not an Australian resident, your assessable income includes:   your statutory income from all Australian sources
    HelpWithAssignment.com
  • 16.
    • Australian residents subject to income tax on all income – ordinary and statutory – on a worldwide basis.
    • Non-residents subject to income tax on Australian sourced income – ordinary and statutory.
    • Temporary residents – Division 768 – income tax only on income sourced in Australia – foreign income exempt – territorial basis.
    HelpWithAssignment.com
  • 17.
    • Only Australian residents obtain tax-free threshold - $6,000 or $11,000 with low income rebate.
    • Non-residents are subject to tax payable on first dollar – 29%
    • Non-residents do not obtain rebates and offsets – dividend imputation.
    • No Medicare levy for non-residents.
    HelpWithAssignment.com
  • 18.
    • Statutory Definition – “resident” Section 6(1), ITAA 36
    • "resident” or "resident of Australia" means -
      • (a) a person , other than a company, who resides in Australia and includes a person -
        • (i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;
        • (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income , unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or
        • (iii) who is:
          • (A) a member of the superannuation scheme established by deed under the Superannuation Act 1990 ; or
          • (B) an eligible employee for the purposes of the Superannuation Act 1976 ; or
    HelpWithAssignment.com
  • 19.
    • 1. person who lives or resides in Australia – based on ordinary concepts contained in the common law – Levene and Lysaght cases
    • 2. Domicile test – Australian domicile unless Commissioner satisfied that the ‘permanent place of abode’ is outside of Australia – Applegate and Jenkins cases
    HelpWithAssignment.com
  • 20.
    • 3. The 183 day rule – people coming to Australia and no usual place of abode outside Australia
    • 4. Superannuation test – applies the members of the Commonwealth superannuation fund and their family – Commonwealth government public servants.
    HelpWithAssignment.com
  • 21.
    • Taxpayer moved to Vila to establish an office of the Sydney law firm in 1971. Stayed there for 2 years but returned on one occasion when his wife had a baby. The taxpayer became ill in 1973 and returned to Australia.
    • ATO argued that his domicile was Australian and that he had not satisfied the requirement that his ‘permanent place of abode’ was outside Australia.
    • High Court held that permanent does not mean ‘forever’ and assessed objectively each year.
    HelpWithAssignment.com
  • 22.
    • The new law takes effect from 1 July 2006 and is now contained in Division 768, ITAA 97.
    • Generally foreign income derived by temporary residents is non-assessable non-exempt income and capital gains and losses they make are also disregarded for CGT purposes.
    • exceptions for employment-related income and capital gains on shares and rights acquired under employee share schemes
    • Similar to a ‘territorial basis’ of taxation
    HelpWithAssignment.com
  • 23.
    • Tax residence status is determined subjectively based on
    • taxpayer ’ s presumed intent as a matter of fact and degree by examining objective factors that include:
      • presence in the country, the history of the person's residence;
      • mode of life, nationality, frequency, duration and regularity of visits to the country;
      • family length and purposes of absences from the country and whether the individual has set up a permanent home outside the country;
      • and business ties that the person has with the country and other countries;
    • - the maintenance of a home in the country available for use by the taxpayer
    HelpWithAssignment.com
  • 24.
    • Section 6(1)(b)- a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia;
    • See case: Esquire Nominees v FCT, the company was involved in investments from Norfolk Island. The company was incorporated in Norfolk Island, a tax haven. Investments in Australia. Held: Company was a resident of Norfolk Island as it was incorporated there and had its central management and control there. The source of the dividend income was Norfolk Island.
    HelpWithAssignment.com
  • 25.
    • 1. place of incorporation
    • 2. carries on business in Australia and its place of central management and control is in Australia – both limbs must be satisfied – TR 2004/15 – distinction between passive and active business
    • 3. controlling shareholder test and carries on business in Australia – more than 50%
    HelpWithAssignment.com
  • 26.
    • What is the source of income depends on the type of income involved:
      • Sale of goods
      • Sale of property – real and personal
      • Services
      • Interest
      • Dividends
      • Royalties
    HelpWithAssignment.com
  • 27.
    • Sale of goods – where business activity takes place (e-commerce)
    • Sale of property – real property – place where located
    • Services - place where performed or contract – French and Efstathakis
    • Interest – place contract made or money advanced – withholding 10%
    • Dividends – Esquire Nominees – source place where company derived profit – withholding tax applies
    • Royalties – Australian source if paid to foreign owner of the IP – withholding tax applies
    HelpWithAssignment.com
  • 28.
    • Tax accounting based on a financial year – 1 July to 30 June unless SAP.
    • Income tax based on income derived during the financial year except for companies, based on previous financial year – instalment rate, PAYG instalments
    • Different from financial accounting – tax reconciliation
    • When do we ‘derive’ income?
    HelpWithAssignment.com
  • 29.
    • No definition in the statutory law for the meaning of ‘derive’.
    • Ordinary meaning – to get or obtain income from a source.
    • Common law meaning based on ordinary business or commercial principles.
    • How we account for income is based on the nature of our business – Carden’s case
    HelpWithAssignment.com
  • 30.
    • You are taken to have received an amount of income as soon as it is applied or dealt with on your behalf or as you direct: s 6-5(4)
    • Therefore, is it derived when received in cash or on an accruals basis?
    • Example: $10,000 invested with a bank on term deposit for one year at 4.5% interest. It matures on 1 July, and $450 paid in interest. When should it be included in assessable income? Prior year or current year? Cash or Accruals
    HelpWithAssignment.com
  • 31.
    • A different result will be obtained depending on whether using an accruals or cash basis for accounting
    • Accruals – when invoices sent to clients or goods sold on credit – bad debts
    • Cash – only when the goods or services have been provided and cash paid by the customer - prepayments
    HelpWithAssignment.com
  • 32.
    • Cash Invoice/Accruals
    •  
    • Year 1. 200,000 500,000
    •   Year 2. 800,000 600,000
    • In year 1, accounted on a cash basis, in year 2 accounted on an accruals basis. What was the effect of the $200,000 of cash that is not included in year 2?
    HelpWithAssignment.com
  • 33.
    • Large accounting practice with 295 employees and partners.
    • Accounted for income on a cash basis and then changed to accruals basis. The ATO argued that cash was the correct basis. The High Court said no, cash for small professional practices, and accruals for large practices, such as that of Henderson. $179,000 tax free to the partnership.
    • Note: if you engaged in switching between cash and accruals accounting then could be argued - tax avoidance, Part IVA
    HelpWithAssignment.com
  • 34.
    • Provided dancing lessons over an extended period and had a no-refund policy, although refunds were given. Suspense account held money for future lessons and after lesson money paid for a portion into a revenue account. Taxpayer claimed money for future lessons was not derived until lessons provided, ATO argued derived when received.
    • High Court: amounts received in advance not income until service or goods provided.
    HelpWithAssignment.com
  • 35.
    • Are dividends derived when the Directors announce the company profit and declare the rate of dividend and the date for the payment of the dividend?
    • According to the case of Brookton Co-operative – dividend derived when the dividend is actually received, cash or dividend reinvestment plan, not when declared
    HelpWithAssignment.com
  • 36.
    • If taxpayer owed money, but not paid because of a dispute, when is it said to have been derived?
    • BHP Billiton Petroleum - income that was subject to a dispute not included in assessable income – accruals basis of accounting.
    • Federal Court – unfair to include income because tax accounts cannot be reopened and to pay tax on income that has not been received.
    • Amended assessments – 2 years or 4 years
    HelpWithAssignment.com
  • 37.
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