In this case, the issue is to determine the Income tax Liability of both Jordan and Cameron. The case provides that Jordan works from home for an IT company and Cameron works as marketing executives. They have two children one is financially independent and another is still dependent financially on them (Gitman et al. 2015). The main aim of the discussion is to provide a detailed computation of the income tax liability. In addition to this, provide an explanation for including or excluding items from the computation.
Laws and regulations
The following legislations and laws govern the income tax liability of an individual:
Analysis of Assessable Income
The section 4-1 of the Income tax Assessment Act 1997 provides that every individual, company and other entities are required to pay tax on their taxable income. The taxable income is calculated by deducting allowable deduction from the assessable income as per section 4-15 of the Income tax Assessment Act 1997. The assessable income of a taxpayer is classified into the ordinary income under section 6-5 of the ITAA 97 and the statutory Income as per section 6-10 of the ITAA 97. The section 6-5 states that any income according to the ordinary concept is termed as ordinary income (Saad 2014). The assessable income that are not ordinary income are the statutory income under section 6-10 of the ITAA 97. In this case, the income that should be included or excluded from the computation of the assessable income is discussed.
The income received from salary by Jordan and Cameron is $180000 and $120000. These amounts should be included in the assessable income as per section 6-5 of the ITAA 97. The employment income includes the amount that is received from employer by the employee (Forsyth et al. 2014). This includes many incomes in addition with the salary and wages. The section 15-2(1) of the Income Tax Assessment Act 1997 states that the assessable income of the taxpayer should include the value of benefits or allowances received that is directly or indirectly connected to the employment. The allowances are the separately identified payment made by the employer to employee.
It should be noted that the allowances or benefits should be included in the assessable income whereas the fringe benefit provided by the employer to employee should not be included in the assessable income as per section 23L (1). In the current case, the employer of Jordan has paid $4000 for insurance and provided a car for private use (Cheshire et al. 2014). The benefits that are provided falls within the meaning of fringe benefits and hence this should not be included in the assessable income of Jordan.
The income that the taxpayer earns from the investment should be included in the assessable income. The taxpayer is required to declare the full amount of rent received or entitled to be received. In the current case, they have received rental income from the holiday home $4000 (Kucukvar et al. 2014). They have also received income from rental property of $22000 during the current financial year. The rental income that is received should be included in the assessable income as per section 6-5 of the Income tax Assessment Act 1997.
The interest earned by the taxpayer during the financial should be included in the assessable income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997. In the current case, the bank interest of $2000 should be included in the assessable income as per section 6-5 of the Income tax Assessment Act 1997.
The dividend imputation system has been designed to prevent double taxation of Australian companies that are distributed to the shareholders. The section 200-5 of the ITAA 97 states that dividend imputation system allows the entity to pass to the member the credit on income tax that is paid by the organization. This section allows the shareholders of the Australian companies to claim tax offset on the dividend received (Kucukvar et al. 2014). The section 200-35(2) allows the taxpayer to claim tax offset to the extent of franking credit on the dividend distribution. That means an individual taxpayer receiving franked dividend will be allowed to claim deduction for tax offset. In the current case, the receipt of fully franked dividend will be taxable and the individual will be allowed to claim tax credit.
The rules provides that benefits received from superfund that includes both lump sum and income stream are tax free if the individual receiving the benefit is more than 60 years. Therefore, it can be said that the income received from superannuation is taxable. However, if the return from the superannuation is reinvested then it is not required to be included in the assessable income. Therefore, in the current case the after tax return that they have earned from the superannuation is not taxable and is not included in the assessable income (Obeng-Odoom 2014).
In this case, it is provided that all the assets except share portfolios are jointly owned by Jordan and Cameron. Therefore, all the other income from the assets will be equally included in the assessable of both except dividend.
Deductions
The Division 8 of the Income tax Assessment Act 1997 provides the details of allowable deduction. The section 8-1 of the Income Tax Assessment Act 1997 states that a taxpayer is allowed to claim deduction for expenses that are incurred for producing the assessable income or is necessary for carrying out business activity (Gurran and Phibbs 2013). That means for an expenses to be allowed as deduction it is necessary that it is connected with the generation of the assessable income. Therefore, in the current case the expenses that are incurred by Jordan and Cameron for producing the assessable income are allowed as deduction (Faccio and Xu 2015).
Computation of Net tax liability
|
Cameron |
|
|
Statement showing Calculation of Tax payable |
|
|
Particulars |
Amount |
|
Total Rental income |
$ 13,000.00 |
|
Gross Franked dividend |
$ 20,000.00 |
|
Interest earned |
$ 1,000.00 |
|
Assessable Income |
$ 154,000.00 |
|
Interest on Investment property |
$ 28,000.00 |
|
Interest on holiday home |
$ 12,000.00 |
|
Interest on share portfolio |
$ 3,500.00 |
|
Work related expenses |
$ 1,000.00 |
|
Donation |
$ 500.00 |
|
Tax agent fees |
$ 700.00 |
|
Expenses related to holiday home |
$ 7,500.00 |
|
Expenses related to Investment property |
$ 4,500.00 |
|
Total Allowable Deduction |
$ 57,700.00 |
|
Total Taxable Income |
$ 96,300.00 |
|
Total Tax on taxable income |
$ 23,323.00 |
|
Medicare Levy |
$ 1,926.00 |
|
Franking Credit |
$ (6,000.00) |
|
PAYG deducted by employer |
$ (35,000.00) |
|
Total tax refundable |
$ (15,751.00) |
The Taxation Ruling 93/30 deals with the income tax deduction of the home office expenses. The main aim of the ruling is to determine the expenses that are allowable as deductions. The Para 15 of the Ruling provides that the expenses that can be claimed as deduction is classified into occupancy expenses and the running expenses (Douglas et al. 2014). The running expenses of the business can be of different character. The expenses that are made for producing the assessable income is allowed as deduction.
The section 8-1 of the ITAA 97 provides that the expenses that are made for generating the assessable income or business activity is allowed as deduction. In the current case, the Jordan works from home and has employed her daughter for performing minor administrative work. The amount that is paid as salary is $200 per hour or $400 week and this income should be included in the assessable income of Cate (Lang 2014). The amount paid to Cate should be allowed as deduction from the assessable income as it is incurred in connection with generation of the assessable income for Jordan. Therefore based on the above discussion it can be advised that Jordan can claim the expenses as deduction.
Reference
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Forsyth, P., Dwyer, L., Spurr, R. and Pham, T., 2014. The impacts of Australia’s departure tax: Tourism versus the economy?. Tourism Management, 40, pp.126-136.
Cheshire, L., Everingham, J.A. and Lawrence, G., 2014. Governing the impacts of mining and the impacts of mining governance: Challenges for rural and regional local governments in Australia. Journal of Rural Studies, 36, pp.330-339.
Kucukvar, M., Egilmez, G. and Tatari, O., 2014. Sustainability assessment of US final consumption and investments: triple-bottom-line input–output analysis. Journal of cleaner production, 81, pp.234-243.
Obeng-Odoom, F., 2014. Urban property taxation, revenue generation and redistribution in a frontier oil city. Cities, 36, pp.58-64.
Gurran, N. and Phibbs, P., 2013. Housing supply and urban planning reform: The recent Australian experience, 2003–2012. International Journal of Housing Policy, 13(4), pp.381-407.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.
Douglas, H., Bartlett, F., Luker, T. and Hunter, R. eds., 2014. Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing.
Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.
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