Calculation Of Income Tax Liability For Mr. Jane And Green Pty Ltd

Question 1

Present reports provide the explanation regarding the manner of calculation of tax liability relating to an individual as well as corporate entity. For provide explanation in more appropriate manner two case studies i.e. first relating to Mr. Jane and second relating to Green Pty Ltd has been solved comprising all the calculations and provisions. Income Tax is calculated in accordance with the provision specified in Tax Assessment Act 1997 as it the one main authoritative statue for calculation of Income Tax. Further relevant sections have been specified in solution so that same can refer for other relevant provisions.

Calculation of Gross Income of Mr. Jane from various sources for the year ended on 30^th June 2017:

(Amount in $)

Salary from employment at Pty Ltd: 79000

Fully franked dividends: 20000

Cash received from Brown family discretionary Trust: 20000

Interest Income: 475

Rental Income: 35000

Profit from sale of shares: 1350

Gross Income 152825

Year 2016-17                                       ( Amount in $)
Calculation of income tax payable by Mr. Jane
Particular	Income	Dividend	Capital Gain	Tax already paid
Gross salary	79000			18828
Dividend		20000		5500
Rental Income (note 4)	30000
Cash from discretionary trust	20000
Total non saving income	129000
Individual saving account
Bank saving account (note 1)	475.00
Total saving income	475.00
(Note: Interest from individual saving account is exempt)
Capital gain on sale of share (note 2)			1200
Total Income	129475	20000	1200	24328
Deductions (note 5)
Investment Expenses	250
Donation	1125
Insurance Premium	1000
Adjusted Income	127100	20000	1200
Personal allowance	0
Taxable Income	127100	20000	1200
Tax (working note 6 )	40159			24328
Medicare Levy (note 7)	2969
Capital Gain Tax (note 8)	180
Remaining tax liability (43330-24328)	18980

Working Notes
Note -1
Calculation of interest income	Amount in $
Interest income	475
(Income from individual saving account is exempt)
Total	475
(Assumption: It has been assumed that interest is relating to saving account)
Note -2
Calculation of gain on sale of shares as per discounted method	Amount in $
(In accordance with views of Karras & Furceri (2015)Discounted method can be used here as shares have been held For more than 12 months)
Cost of shares	800
Brokerage Cost	150
Total Cost	950
Selling Price of shares	3500
Brokerage Cost	(150)
Net proceeding received	3350
Nominal gain to be included in assessable income	2400*50%
Gain	1200

Note: As per the data available in question it has been provided that the total of brokerage cost relating to selling and buying of shares was $ 300 in total; thus an assumption is made that $150 brokerage relates to purchase of shares and $ 150 of brokerage relates to sale of shares. Hence the cost has been equally divided and solution has been done in accordance with same.

Note 3  Mortgage repayments are not deductable expenses thus the same are not reduced. Note -4 Rental Income Gross Rental Income: 35000 Deductable Expenses (Repairs, Rent and Insurance) (2000+2500+500) (5000) Net taxable income 30000

Note-5

Calculation of Deductions
Help Debt	Amount in $
Amount paid
Amount available for deduction	20000
Charitable Donations ( Gift aid)
Amount paid	900
Amount available for deduction	900*10/8
	1125
The deduction available of paying donation is 1.25 times of the amount which has been paid as donation (Tanzi, (2014).). Thus, the amount of deduction has been calculated according to formula.
Investment Expenses	250
Income protection insurance premium	1000
Note:  As per the views of Kalotay,  (2016), investment expenses have been assumed as expense relating for incurring assessable income; thus the same are deductable under section 8-1 of ITAA 1997.
Note-6
Calculation of Tax	Amount   in $
0-87000	19822
40100	14837
Total tax on income other than dividend	34659
Tax on Dividend Income	Amount
(Franked dividend will be taxed at 27.5% and the same is assumed to be fully credited by company) (Yinger, Bloom, & Boersch-Supan, (2016)
5500	5500
Total Tax	40159
Note -7
Medicare Levy	Amount
Calculation of national insurance contribution (Taxable Income + Dividend Income+ Capital Gain) (127100+20000+1350)	148450*2%
	2969
Total	2969
Note -8
Calculation of Capital gain tax	Amount
Capital gain	1200
In present case as the tax bracket of 33% applies to the individual thus 15% LTCG tax will be paid. (Kaldor, 2014)
1200*15%
Capital gain tax as per this method	180
Total	180

Note: No Medicare Levy has been charged on capital gain tax (Brownlee, 2016).  As per the provision of ITAA 1997 in case an asset is held for less than twelve months before selling it off than tax payer is entitled to a discount of fifty percent of CGT ; which decreases the rate of tax to 23.25%. Thus, as in present case the asset has been held for less than twelve months thus, the same provisions have been applied (Faccio & Jin, 2015).

A .Calculation of Business Profit
	(Amount in $)
Income
Sales	345000
Other Income	4900
Total	349900
Expenses
The specified expenses are allowable for taxation purpose under SS Act section 1075 (1)
Advertisement Expenses	1000
Bad Debts (working note 1)	900
Bank Charges	150
Capital Expenditure (working note 2)	3000
Cost of sales	6000
Sub- Contractor Expenses	23000
Electricity Expenses	800
Entertainment Expenses	2000
Environment protection  (disposal of chemicals)	600
Interest expenses	4000
Motor Vehicle expenses	4000
Motor Vehicle registration expenses	1200
Rent Expenses	11800
Stationary Expenses	200
Tea, coffee for staff use	100
Phones and Internet	2000
Wages	45000
Division 40 of Income tax assessment act 1997 allows depreciation as deductible expenditure
Depreciation (working note 3)	5500
Total allowable expenditure	111250
Net profit	238650

	(Amount in $)
B. Calculation of tax liability on dividends (fully franked)
Dividend received	10260
Tax @ 30%	3078
Note:  the whole amount will be available for credit
C. Calculation of tax liability on net capital gain	(Amount in $)
Net Capital gain	4000
Tax @ 30%	1200
D. Calculation of Total Tax Liability
	(Amount in $)
Business Income	238650
Net Capital Gain (working note 4)	4000
Dividend Income	10260
Exempt Income	10000
Gross assessable Income	262910
Less
Exempt Income	10000
Taxable Income of Green Pty Ltd.	252910
Tax Liability @ 30%	75873
Credit available (working note 5)	3078
Net tax liability	72795

In accordance with views of Brown, Handley & O’Day (2015) bad debts can be claimed as a deduction by taxpayer in case the same has been included in taxpayer’s assessable income as per the provision of section 8-1 of ITAA 97 and section 40-880 of ITAA 1997. The same was resolved in case of Re Sobel Investments Pty Ltd and FCT (2012) AATA 180. Thus, in present scenario it has been assumed that bad debts were previously treated as assessable income and the same have been now claimed as deductible expenditure.

It has been assumed that specified capital expenditure as immediate deduction is allowed to be deducted for income tax purpose as well under section 40-880 deductions.

Depreciation calculated for taxation purpose has been reduced for ascertaining the business profit of Green Pty Ltd as the same is only deductible as per the provisions of division 40 of Income Tax Assessment Act 1997.

Capital gain or loss on asset is ascertained after reducing the cost of asset from the amount received for asset while disposing the same. Capital gain is part of income tax and is not considered as separate tax; even though the same is referred as capital gain tax. In present case as no details relating to same have been provided; net capital gain is included in taxable income and taxed @ 30% .

As it has been specified in the question that dividends are fully franked thus, the tax relating to same is fully available for credit.

Calculation of credit

= 10260*30%

= $ 3078

Working Note 6

Other Details

• Environment expenses have been assumed to be related to necessary for continuing business and accomplishing environmental liability of the company. Thus, the same can be deductible (Auerbach  & et.al.2013)
• In accordance with views of Abraham, Mike & Alastair (2015), fines are not part of business expense not the same are deductible; thus the same have not included in business expenses.
• Exempt Income is part of assessable income but no taxation is provided on same thus the same have been reduced while calculating taxable income (Ainsworth & et.al., 2015).
• As per the view of Becker, Reimer  & Rust (2015) interest Income and Dividend Income have been treated as part of other income of Green Pty Ltd; thus the same have been included in business income of company .

References

Abraham, Mathew, Mike Dempsey& Alastair Marsden. (2015).”Dividend reinvestment plans: a tax-based incentive under the Australian imputation tax system.” 

Ainsworth & et.al. (2015). “Do franking credits matter? Exploring the financial implications of dividend imputation.”.

Auerbach, A. J. (Ed.). (2013). Corporate takeovers: Causes and consequences. University of Chicago Press.

Becker, J., Reimer, E., & Rust, A. (2015). Klaus Vogel on Double Taxation Conventions. Kluwer Law International.

Brown, C., Handley, J., & O’Day, J. (2015). The dividend substitution hypothesis: Australian evidence. Abacus, 51(1),  Pp37-62.

Brownlee, W.E., 2016. Federal Taxation in America. Cambridge University Press.

Faccio, Mara & Jin Xu. (2015) . “Taxes and capital structure.” Journal of Financial and Quantitative Analysis 50.03 .Pp 277-300.

Kaldor, N. (2014). Expenditure tax. Routledge.

Kalotay, A., 2016. Optimal Municipal Bond Portfolios for Dynamic Tax Management. The Journal of Investment Management, 14(1), Pp.87-99.

Karras, G., & Furceri, D. (2015). Taxes and growth in Europe. South-Eastern Europe Journal of Economics, 7(2).

Tanzi, V. (2014). Inflation, indexation and interest income taxation. PSL Quarterly Review, 29(116).

Yinger, J., Bloom, H. S., & Boersch-Supan, A. (2016). Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier.