A trust is referred as the responsibility that are considered to be enforceable in respect of equity that a dependent on the person. The trustee is regarded as the owner of the definite property. As stated under the “Division 6 of the Part III of the ITAA 1936” there are principles that lay down the rules regarding the application of the tax on trusts income. based on wider sense, the rules are formed to evaluate the net earnings of the trust estate relating to its beneficiaries. Nevertheless, there are some amounts which becomes the part of the net income and the same is not for the beneficiaries but may not be assessable for the trustees.
The current case study of XYZ is related in giving advice for reducing their family trust tax consequences related to the income generated throughout the financial of 2017. The issue surround with the offering advice to XYZ family in order to lower their tax liability relating to earnings generated from the trust. A noteworthy factor that is involved in the family trust is the distribution of income from trusts. At the primary stage all the distributions relating to trust must be made to the individuals that meet the requirement of trust distribution under the trust deed for the beneficiaries of trust. Another advice can be delivered to the trustees is that distributions must only happen among the beneficiaries of the trusts that are inside the family group.
On the circumstances that beneficiaries receiving the distributions from the trusts, the obligations of paying tax falls on the beneficiaries. Conversely, to lower the liability of tax for any trust, added distributions of trust income should be made among the trustees that fall within the low income bracket rather than the trustee itself. The act of splitting the trust income or streaming is regarded as the advantageous method of reducing the tax liabilities for the XYZ.
Another recommendation can be made to reduce the trust tax liability of the for the XYZ trustee is the applying the 65-day rule. The trustee of the XYZ is required to implement the rule of 65 days as this would help the trustee in offering added time at the end of the taxation year to assess the income and ultimately helps in reducing the tax liability. The trustee of the XYZ is also recommended to implement the discretionary distribution facilities as this would help the trustee in locating the income among the lower income bracket.
A trust that has the calendar year of March 2018 are required to end their calendar in the month of march and must have their income distributed during the month of 30th September. This would assist the trustee of the XYZ to shift the income out of the trust and among the beneficiaries.
The XYZ trustee would be able to obtain deductions associated to distributions made and the beneficiaries would be able to recognize the proceeds along with the individual tax return. As a result of this, a lower tax would be implemented in the trust. However, it is worth mentioning that any sort of trust distributions that is meant to lower their tax liability of the trust by distributing the trust income within the trust agreements that are established and applicable rules of the ATO. The trustee can target to lower the trust income by assigning the trust income among the lower income bracket that are not liable for assessment. The trustees of the XYZ are recommended that they can shift their trust investment to lower their assessable income.
As stated by the Australian taxation office a person while deriving the taxable income from their business are under obligation of including all the gross sum of receipts or proceeds that originates from the ordinary course of business and not just the profit. As understood from the present situation of Kevin that is conducting the business activities in partnership relating to retail electronic products receives a gross amount from the its trading activities that amounted to $500,000.
Furthermore, Kevin further received a bad debt sum that was previously unrecoverable for a sum of $10,000. As stated under the “section 6-5 (1) of the ITAA 1997” the receipts of gross trading sum form the part of the taxable earnings of Kevin since the same is derived from the ordinary business course. As stated under the “subdivision 20-A”, the taxable earnings comprise of the sum that is obtained for the recoupment of loss. This represents that the amount received is to converse the effect of deductions. Furthermore, this bad debt that is recovered forms the part of taxable earnings because it constitutes income to reverse the earlier deductions.
There are certain payments that are reported by Kevin associated to trading stocks. As stated under the “section 8-1 (1)” the purchase of trading stock is an allowable deduction. The expenses relating to the purchase of trading stocks will be allowed for deductions for Kevin. Furthermore, a payment of partner’s salary was reported for $50,000 each. The salary paid to the partners are not allowed as deductions because the partner’s salary represents business distributions and it is not held for deductions.
As stated under “section 8-1 of the ITAA 1997” a person can claim allowable deductions relating to expenses which is incurred in generating assessable income and the expenses is occurred in deriving the taxable earnings. Conversely, the payment on interest is regarded as the business expenditure that is occurred in generating the taxable income. Furthermore, the interest expenses occurred is allowed for deductions.
An expense that is allowed as deductions must be relevant and incidental. The court in “Ronpibon Tin NL v Federal Commissioner of Taxation (1949)”, held that expenses that are outgoings must be occurred in the course of assessable income. The outgoings or loss must be relevant and incidental to that degree. The expenses of salary paid to staff is regarded as the business expenditure and would be held as allowable deductions under “section 8-1 of the ITAA 1997”.
A legal expense was incurred by Kevin for recovery of bad debt. As per the verdict in “Herald & Weekly Times v Federal Commissioner of Taxation” the taxpayer in such situation is permitted to claim allowable deductions associated to cost that are occurred in settling or defending the defamation act. Hence, the bad debt recovery expenses can be claimed as allowable deductions for Kevin.
Beside the business activities Kevin has reported certain income that are related to personal sources. As per the “section 6 of the ITAA 1936” income derived from the personal exertion constitute earnings from salaries, wages, gratuities, superannuation, bonus or profits from the business that is performed by the taxpayer alone or under partnership. Therefore, the share of profits obtained from the partnership business together with the salary receipts from part time job of instructor represents earnings derived from personal exertion and it would include in the assessable income.
As stated under “section 6-5 of the ITAA 1997” majority of the income that comes in is regarded as ordinary income for the taxpayer. The court of law in “Scott v Commissioner of Taxation” explained that income according to ordinary concepts is in accordance with the ordinary usage of mankind. Likewise, the receipt of dividend income by Kevin is regarded as earnings from ordinary sources. In compliance with “section 6-5 of the ITAA 1997” the dividend income forms the part of assessable income.
A mere gain of windfall in nature possess the nature of income. The gambling winnings are not regarded as income since the taxpayer is not performing the business of gambling. As held in “Moore v Griffiths” a mere winning from prize is not regarded as the income. The gambling winning is not included in the taxable income since it is not an income.
As per the Australian Taxation Office a person is allowed to deductions relating to expenses associated to subscriptions if such subscription is not used predominantly in deriving the taxable income that are not in the course of performing the business. Evidently, in the present situation of Kevin, expenses on subscription to profession journals was incurred by Kevin and it would be considered as allowable deductions.
As understood from the calculations performed, the total sum of assessable income for Kevin is $95,000 whereas the taxable income stands $22,782. The total amount of tax payable by Kevin for 2017 is $16,382.
Reference List:
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.
Chardon, Toni, Mark Brimble, and Brett Freudenberg. “Tax and superannuation literacy: Australian and New Zealand perspectives [Part 1].” Taxation Today 102 (2017): 17-25.
Davison, M., Monotti, A., & Wiseman, L. Australian intellectual property law. Cambridge University Press (2015).
McDaniel, Paul. Federal Income Taxation. Foundation Press, 2017.
ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET AL.). AUSTRALIAN TAXATION LAW 2018. OXFORD University Press, 2018.
ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.
Roe, Andrew. “The doctrine of sham in Australian taxation law.” AUSTRALIAN TAX REVIEW 46.2 (2017): 99-119.
Saad, Natrah. “Tax knowledge, tax complexity and tax compliance: Taxpayers’ view.” Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2017.
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