Case study 1: Special Professionals
| (a) John’s taxable professional income for the year ended 30 June 2015 | |
| Particulars | Amount $ |
| Gross wages from St George as a rugby league player | 200,000 |
| (PAYG included in the wages) | |
| Player of the match awards | 4,500 |
| Total income from the profession of rugby | 204,500 |
| Less: Deductible expenses | 26,000 |
| Taxable professional income | 178,500 |
| (b) John’s other taxable income for the year ended 30 June 2015 | |
| Particulars | Amount $ |
| Gross wages for coaching his son’s rugby league team | 3,500 |
| Gross wages for casual referring | 2,000 |
| Other taxable income | 5,500 |
Note:
As per the regulations of ITAA 97 under Australian Taxation Office, John Strong is a special professional since the taxation year 2011/ 2012. As per the regulations for measuring the assessable income from profession, rewards and prizes should be included whereas income from coaching and casual referring would be considered as other taxable income (Ato.gov.au 2017). In addition, income from wages from St. George excludes the amount withheld as PAYG, hence the same would be added back while calculating taxable professional income.
Further, John is entitled to opt for income averaging since; the taxable income from special profession in the year 1 2011/12 exceeds $2,500 that is income amounted to $40,000.
Case study 2: Superannuation Funds
| (a) Taxable income of the Falcon Superannuation fund for the year ended 30 June 2015 | ||
| Assessable income | ||
| Concessional contributions: | ||
| Employee Contributions | 800,000 | |
| Employer contributions | 600,000 | |
| Investment income: | ||
| Unfranked dividends | 27,450 | |
| Partly franked dividends | 82,300 | |
| Add: franking credits | 15,600 | 97,900 |
| Term deposit interest (90,000-78,600) | 11,400 | |
| Capital gain income: | ||
| Acquisition of asset in 2011 | 341,000 | |
| Less: Sale of investment property in 2015 | 440,000 | |
| Profit on sale of property | 99,000 | |
| Application of discount on capital gain (1/3) | 33,000 | |
| Net assessable amount of capital gain | 66,330 | |
| Total assessable income | 1,681,680 | |
| Less: Allowable deductions: | ||
| Accountancy fees | (4,200) | |
| Wages | (20,000) | |
| Benefits paid to the members | (330,000) | |
| Member’s death cover insurance | (4,150) | |
| Other operating expenses | (3,800) | |
| Total taxable income of the fund | 1,244,750 | |
| (b) Calculation of net tax payable for the year ended 30 June 2015 | ||
| Tax on concessional contributions at the rate 30%: Assuming the taxable income of members exceeds the threshold $300,000 | 1,400,000 | 420,000 |
| Penalty tax @47% on the unfranked dividends from private company | 27,450 | 12,902 |
| Tax on other taxable income at the rate 15% | ||
| Total taxable income | 1,244,750 | |
| Less: unfranked dividends from private company | (27,450) | |
| Less: concessional contribution | (1,400,000) | |
| Other taxable income | (127,800) | |
| Since, the net amount appears in negative balance, tax payable at the rate of 15% is not applicable | ||
| Total tax payable | 420,000 | |
| Add: Penalty tax on unfranked dividends | 12,902 | |
| Less: Franking credits on dividends | (15,600) | |
| Net amount of tax payable by the fund for the year ended 30 June 2015 | 417,302 | |
Note:
As per the regulations of ITAA 97 under Australian Taxation System, superannuation fund is entitled to claim capital gain deduction @33% if the asset or investment property is held for more than 12 months (Austlii.edu.au 2017). Therefore, Falcon is entitled to claim deduction since the property acquired in 2011 and sold in 2015. Further, payments in terms of investment in term deposits and PAYG installments are not allowable deductions under the regulations of ITAA 97, for determining taxable income.
For the purpose of computing net tax payable, superannuation fund is required to pay flat 15% tax on total taxable income while the income from concessional contribution is taxable at the rate of 30%. Therefore, concessional contribution including employer’s and employee’s contribution will be taxed @30% whereas the balance income will not be taxed since, the income reflected negative balance. In addition, the Falcon Superannuation Fund is entitled to claim tax credit on franked credits for dividend from the total tax payable.
Case study 3: Partnerships
| (a) Net income or loss from the partnership for the year ended 30 June 2015 | ||||||||||||||
| Particulars | Amount $ | Amount $ | ||||||||||||
| Sales | 1,780,000 | |||||||||||||
| Interest on advance | 5,000 | |||||||||||||
| Proceeds from sale of delivery van | 20,000 | |||||||||||||
| Less: Adjustable value | (12,000) | |||||||||||||
| Total income of partnership business | 1,793,000 | |||||||||||||
| Less: Allowable deductions | ||||||||||||||
| Interest on bank overdraft | (15,000) | |||||||||||||
| Operating expenses | (1,420,000) | |||||||||||||
| Interest on loan taken from TED | (35,000) | |||||||||||||
| Net income from the business | 323,000 | |||||||||||||
(b) Allocation of income between the partners |
||||||||||||||
| TED | ||||||||||||||
| Salary income | 90,000 | |||||||||||||
| Interest on Ted’s capital | 55,000 | |||||||||||||
| Distribution of income: | 89,000 | |||||||||||||
| Total distribution of income | 234,000 | |||||||||||||
| Mary | ||||||||||||||
| Distribution of income | 89,000 | |||||||||||||
| Total distribution of income | 89,000 | |||||||||||||
| (c) Calculation of Mary’s taxable income for the year ended 30 June 2015 | ||||||||||||||
| Income from partnership business | 89,000 | |||||||||||||
| Distribution of capital gain | 8,000 | |||||||||||||
| Less: Allowable deduction for interest on advance | (5,000) | |||||||||||||
| Taxable income of Mary | 92,000 | |||||||||||||
Note:
According to the regulations of Taxation Ruling 2005/7, ITAA 97 partner’s salary as well as interest on capital is not assessable in the income of partnership business; however, it is included in the allocation income of the individual partners (Austlii.edu.au 2017). Sale of delivery van includes adjustable value $12,000, which is to be added back to the sales proceeds in accordance with the regulations of Australian Taxation System. In addition, capital gain on long- term shares is not entitled to capital gain deduction for the partnership business firm as per ITAA 97.
Case study 4: Income of Minors
| Computation of excepted taxable income under Div 6AA | ||
| Particulars | Amount $ | Amount $ |
| Gross interest received on term deposit | 10,000 | |
| Total interest income | 10,000 | |
| Distribution of income from family trust | 4,000 | |
| Add: Tax paid by the trustees | 1,880 | 5,880 |
| Income distributed from the estate of late uncle | 9,000 | |
| Fully franked dividend income | 1,400 | |
| Interest received on savings account | 200 | |
| Total excepted taxable income | 26,480 | |
| Computation of eligible taxable income under Div 6AA | ||
| Gross wages from part- time job at Kmart | 5,000 | |
| Income received from mowing lawns for neighbors during the year | 6,000 | |
| Total eligible income | 11,000 | |
| Computation of tax payable by Susan for the year ended 30 June 2015 | ||
| Tax on excepted income: | ||
| At normal rates | ||
| $0- $18,200 | Nil | |
| $18,201 – $31,180 @19% | 8,279 | 1,573 |
| Tax on eligible income: | ||
| At higher rates | ||
| $0- $416 | Nil | |
| $417- $1,307 @68% | 890 | 605 |
| $1,308 – $12,000 @47% | 10,692 | 5,025 |
| Total tax payable | 7,203 | |
| Add: Medicare levy @2% on taxable income (26,480 + 11,000) | 750 | |
| Less: Low income tax rebate as the income is less than $37,000 | -445 | |
| Total tax payable | 7,508 |
Note:
As per the regulations of Div 6AA under Australian excepted income earned by the minors are taxed at normal rates while the eligible income is taxed at higher rates if the minor is not involved as full- time worker.
Case study 5: Foreign source income of entities
| (a) Computation of taxable income of John Pty Ltd for the year ended 30 June 2015 | ||
| Particulars | Amount $ | Amount $ |
| Gross interest from Italy | 30,000 | |
| Fully franked dividend | 14,000 | |
| Add: franked credits | 6,000 | 20,000 |
| 20% partly franked dividend | 2,100 | |
| Partly franked credit | 900 | 3,000 |
| Partly unfranked credit | 12,000 | |
| Unfranked dividends | 15,000 | |
| Interest | 5,300 | |
| Add: TFN tax | 4,700 | 10,000 |
| Total taxable income | 90,000 | |
|
(b) Calculation of net tax payable for the year ended 30 June 2015 |
||
| Total taxable income | 90,000 | |
| Tax payable at the rate of 30% | 27,000 | |
| Less: foreign tax paid | (4,700) | |
| Less: TFN tax | 6,630 | |
| Net tax payable | 15,670 | |
Note:
Foreign income for business entities includes income from investment, foreign business, capital gains or interest from investments hence, the amount will be included in the total taxable income. However, as per the regulations of ITAA 97, business entities are entitled to claim tax offset if an amount of tax has been paid in the foreign country.
Case Study 6: Trusts
(a) Schedule nominating the following:
| Distribution statement | Bill | Jane | Mary | Local Club | George | Trust |
| Beneficiary | Family member | Family member | Family member | |||
| Present entitlement | Presently entitled | Not presently entitled | Presently entitled | |||
| Legal disability | – | Legal disability | – | |||
| Applicable sections for assessable income | section 102 AG | section 98 | section 102 AG | section 102 AG | section 102 AG | Section 99 A |
| Assessment of amount | – | – | – | 8,000 | 15,000 | 166,000 |
| Distribution of income | 22,000 | 5,000 | 40,000 | 8,000 | 15,000 |
- Beneficiary
As per the regulations of Australian Trust Law on “family trust”, beneficiaries can only be the members within the “family group”. Accordingly following members can be nominated as beneficiary.
| Bill | 19 year old son |
| Jane | 17 year old daughter |
| Mary | Harry’s wife |
- Present entitlement of beneficiary
According to the regulations of Australian Taxation System, present entitlement of beneficiaries requires absolute assigned interest in the trust income that cannot be defeated by other member of the trust. Present entitlement also requires the right to make demand for immediate income payment which is restricted in case of minor members. Therefore, Mary, the wife of Harry and Bill as a nominated beneficiaries are presently entitled since Jane is minor member and cannot claim the income until she attain maturity.
- Legal disability of the beneficiaries
Regulations of TD 92/159, ITAA 97/36, a beneficiary is referred under legal disability if the beneficiary is minor that is age below 18 years or if the member is mentally incapacitated. In the present case, Jane is minor since her age is 17 therefore, she would be referred under legal disability.
- Applicable sections of the assessable income
In order to make the income assessable, regulations of section 102 AG under ITAA 1936 is applicable that incorporates income from employment, order of court for will, income from investment of the trust or other direct income for beneficiary’s benefit.
- Assessable taxpayer on each amount
| Net income of the trust $99,000 | Trustee of the trust that is Harry |
| Distribution of income to Bill $22,000 | Harry, trustee of the family trust |
| Distribution of income to Jane $5,000 | Harry, trustee of the family trust |
| Distribution of income to Mary $40,000 | Harry, trustee of the family trust |
| Local Under 10 Soccer Club $8,000 | Soccer club |
| Income undistributed to George $15,000 | Harry, trustee of the family trust |
| Income from part- time job by Jane | Jane is assessed under the regulation of income of minors |
| Income from grandmother’s estate | Trustee of the estate is assessed as Jane is minor |
| Unfranked dividend | Jane is assessed |
- Amount distributed or retained
| Amount distributed: | ||
| Distributed to Bill | 22,000 | |
| Distributed to Jane | 5,000 | |
| Distributed to Mary | 40,000 | |
| Distributed to Local Soccer Club | 8,000 | |
| Amount retained: | ||
| Distribution for George | 15,000 |
(b) Computation of tax payable by the trustee for the year ended 30 June 2015
| Particulars | Amount $ | Amount $ |
| Total distributed income | 75,000 | |
| Income distributed as presently entitled | ||
| Bill | 22,000 | |
| Jane | 40,000 | |
| 62,000 | ||
| Tax on above income at normal rates | ||
| $0- $18,200 | Nil | |
| $18,201 – $37,000 @19% | 18,799 | 3,572 |
| $37001 – $40,000 @32.5% | 2,999 | 975 |
| Income distributed to beneficiary under legal disability | ||
| Tax at higher rates @45% | 5,000 | 2,250 |
| Tax on undistributed income at higher rate @45% | 15,000 | 6,750 |
| Total tax payable | 13,546 | |
Case study 7: Primary Producers
| Calculation of taxable income of Fred for the year ended 30 June 2015 | ||
| Particulars | Amount $ | |
| Receipts | ||
| Income from sale of bananas | 160,000 | |
| Insurance received for loss of bananas in flood | 60,000 | |
| Agistment income | 10,000 | |
| Profit from sale of sheep 2013/2014 | 80,000 | |
| Profit from sale of second wool clip 2013/2014 | 11,000 | |
| Insurance recovery installment received during the year 2010/2011 ($40,000*1/5) |
8,000 | |
| Total income | 329,000 | |
| Less: Allowable deductions | ||
| Wages | (84,000) | |
| New telephone lines (assumed the internet connection used for business of primary produce) | (8,000) | |
| New fence (purchase cost) | (12,000) | |
| Accelerated depreciation for new fence ($12,000/30) | (400) | |
| New pipes: 1/3 of the cost incurred | (5,000) | |
| ($15,000*1/3) | ||
| Deduction on general small business pool balance: 30% of the opening balance | (45,000) | |
| ($150,000*30%) | ||
| Total taxable income | 182,600 | |
As per the regulations under ITAA 97/36, primary producers incorporate abnormal income that arises from trading in sheep from forced disposal or livestock death (Ato.gov.au 2017). In the given situation, Fred elected to spread the profit earned during 2013/2014 amounted to $80,000 from forced disposal. However, Fred can elect to defer the amount of profit against the cost of livestock replacement for the period of five years.
Further profit earned from second wool clip during the year 2013/ 2014 can be used to defer the profit income over the period of five years, therefore, profit of $11,000 can be used as deferred profit to reduce the tax liability. In addition, amount received as insurance recovery for loss of livestock during the fire amounted to $40,000 would be included in total receipts calculated as one- fifth over the period of five years.
Note:
According to the taxation system of Australia for primary producers, deduction of cost with respect to the purchase of fence before 12 May 2015 is entitled to get deduction on decline of value up to the useful life of 30 years. In addition, installation of new pipes on July 2014 with the effective life of 50 years would be allowed as deduction by considering one- third amount since it purchased before 12 May 2015.
Case study 8: Company Reconciliation
| In the books of Click Pty Limited | |
| (a) Statement showing reconciliation of accounting net profit to taxable income for the year ended 30 June 2015 | |
| Amount $ | |
| A. Net Profit as per the accounting income statement | 360,351 |
| B. Income reconciliation adjustments: | – |
| C. Expenses reconciliation adjustments: | |
| Long service leave provision- unpaid ($5,960 – $5,320) | 640 |
| Traffic fines | 800 |
| Franking credit (4,980 * 30/100) | 1,494 |
| Doubtful debts provision ($3,350 – $2,800) | 550 |
| Directors’ fees in excess of ATO’s consideration ($135,000- $104,000) | 31,000 |
| Total taxable income | 394,835 |
| (b) Tax payable by the company for the year ended 30 June 2015 | |
| Total taxable income | 394,835 |
| 30% tax on taxable income | 118,451 |
Less: Tax offset for franking credit (1,494)
| Net tax payable | 116,957 |
Note:
According to the regulations of Australian Taxation System amount recognized as expenses under provision is not an allowable deduction under section 4-15 ITAA 97. Therefore, unpaid amount of long service leave provision has been added back together with the balance amount of doubtful debts provision.
Case study 9: Company franking accounts
| (a) Franking Account for the year ended 30 June 2015 | |||||||||
| Russel Pty Ltd | |||||||||
| Date | Particulars | (Debit) | Credit | Franking account balance | |||||
| 6/30/2014 | Opening balance | -549 | -549 | debit | |||||
| 7/30/2014 | PAYG installment paid | 12,500 | 11,951 | credit | |||||
| 7/31/2014 | Paid franking deficit tax | 549 | 12,500 | credit | |||||
| 03/09/2014 | Dividend received from Dutchy Ltd. (60% of $7,000) | -4200 | 8,300 | credit | |||||
| 10/1/2014 | Received unfranked dividend | – | 8,300 | credit | |||||
| 10/29/2014 | PAYG installment paid | 13,000 | 21,300 | credit | |||||
| 10/30/2014 | Paid 60% franked dividend | 6,000 | 27,300 | credit | |||||
| (14000*30/70) | |||||||||
| 2/4/2015 | Received partly franked dividend | 1,281 | 28,581 | credit | |||||
| 2/28/2015 | PAYG installment paid | 12,500 | 41,081 | credit | |||||
| 4/28/2015 | PAYG installment paid | 12,900 | 53,981 | credit | |||||
| 6/16/2015 | Paid 60% franked dividend | 107,143 | 161,124 | credit | |||||
| (250,000*30/70) | |||||||||
| Total balance | 161,124 | credit | |||||||
Note:
Receipt of unfranked dividend from the company, Bronko Ltd does not apply franking credits hence, not to be included in the statement of franking accounts. Similarly, paid balance of company tax for the year 2013/2014 $6,951 will not be included in the franking account since it is a part of regular tax payments.
| (b) Calculation of additional taxes payable | ||||
| 30-06-2015 | No additional tax since the account does not have deficit balance | 161,124 | credit | |
According to the taxation regulation on franking account, a company or entity is liable to pay franking deficit tax if the balance of franking account appears deficit at the end of the financial year. In the above case, Russel Pty Ltd does not have any deficit balance on 30 June 2015 hence the company is not entitled to pay franking deficit tax.
(c) Effect of additional taxes payable by the company that is franking deficit tax involves tax offset for the future taxation assessment if the company is Australian resident as per ITAA 97 regulations. In addition, the additional tax will be used to offset the excess amount against the tax liability amount determined in the previous year if the balance $161,124 would have reflected credit or deficit balance.
Reference List and Bibliography
Alstadsæter, A. and Jacob, M., 2016. Dividend taxes and income shifting. The Scandinavian Journal of Economics, 118(4), pp.693-717.
Ato.gov.au. 2017. Home page. [online] Available at: http://www.ato.gov.au [Accessed 1 Feb. 2017].
Austlii.edu.au. 2017. Australasian Legal Information Institute (AustLII). [online] Available at: http://www.austlii.edu.au/ [Accessed 1 Feb. 2017].
Seabrooke, L. and Wigan, D., 2016. Powering ideas through expertise: professionals in global tax battles. Journal of European Public Policy, 23(3), pp.357-374
