Role Of Tax And Accounting Mechanism In Determining Taxable Income

Residency Test

Discuss about the Role of Tax and Accounting Mechanism.

Peter by birth is an Australian resident and his profession is musician as he plays guitar for a well known band in Australia. The band was popular in Australia and in early 2016 the band members had to move to Britain for attaining more success. However, in the month of October the band had to return in Australia permanently. From the period of 2015 to 2017, Peter being an individual had derived incomes from his profession and other sources as well (Kendall and Baum 2016). The current report is prepared in order to assess the taxable income of Peter for the period ranging from 2015 to 2017. This will assist Peter in determining the taxable amount for the each period. Furthermore, it also includes several recommendations that is useful for Peter in lowering his amount of taxable amount.

According the Australian taxation act, an Australian resident is required to pay tax for income generated by them within or outside the Australia. A non-resident and resident in Australia have to pay income tax for the amount generated by the Australian source (Arber and Rahimi 2015). Peter has spent more than a year in Britain and his residential status for the period of 2015 to 2017 must be determined appropriately under the “residency test”. The below stated table helps in determining the residential status, under the Income Tax Assessment Act 1998:

Taxable Period	Domicile Test Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	183 Day Test	Superannuation Test	Residential Status
2015-16	Having a permanent place of residency in Australia	Residing in Australia for 198 days	Not a member or eligible employee under the superannuation Act, 1990 & 1976	Resident
2016-17	Having a permanent place of residency in Australia	Not residing in Australia	Not considered as eligible member or eligible employee under superannuation Act 1990 & 1976	Resident
	Having a permanent place of residency in Australia	Residing in Australia for 182 days	Not considered as eligible member or eligible employee under superannuation Act 1990 & 1976	Resident

According to ITAA 1997, if an individual meets the criteria of any one of the above test then he or she would be considered as Australian resident for taxation. Peter does not falls under the superannuation test since he is not covered under the superannuation Act, 1976 and not cannot be treated as a resident for superannuation test (Coffee et al. 2013). However, Peter did not stayed in Australia for 198 days on 2015-16 and in 2016-17 he does not stayed in Australia as well. Therefore, according to the 183 days test he will be considered as Australian resident for the year 2015-16.

The study gives evidence that Peter also has a house at Brighton in Australia, which is used for permanent residency. He had also leased the house during his visit in Britain. He lived in the leased house of Britain and currently he is staying in rented house temporarily. It is reflected that the house in Australia is only considered as permanent place of residence for Peter during the period of 2015 to 2017 (Barkoczy 2016). Therefore, Peter meets the criterion of domicile test and Peter is considered as Australian resident for taxation period starting from 2015-16 to 2017-18. Peter is liable to pay the income tax for any type of assessable income derived within or outside the place of Australia for the above stated period.

Income from Professional Services

Incomes earned by Peter within the stated period are assessed for the purpose of tax under the different taxation rules and other assumptions. For determining the assessable income, the gross earnings of Peter need to be computed. Such earnings include both the foreign earnings and domestic earnings of Peter. However, the assessable income would not include goods and services tax, borrowed amount and earnings from hobbies of Peter.

Peter is by profession a guitarist and entertains people through live concerts and music albums. A large part of his annual income is derived from the payment of live concerts (Woellner et al. 2014). Hence, these kinds of income are referred as his personal service income and must be considered in his total assessable income under division 84 of the ITAA 1997.

Royalty income is derived from intellectual properties and it is regarded as form of investment. Music and songs are regarded as intellectual property for singers and musicians therefore, royalty received from the sale of music albums is regarded as their investment income under section 15(20) of the ITAA 1997 (Taylor and Richardson 2013).

Receipt of cash from prize or award is not considered while computing the assessable income (Faccio and Xu 2015). Any person participating in such contest on regular basis and winning a significant amount of awards then such cash prize is regarded as assessable income. Music albums of Peter were nominated for numerous concerts and have won several awards from that contest from the period 2015 to 2017 (Santhanam 2016). The cash prize received by Peter is included in the assessable income.

Peter does not trade car or shares for deriving ordinary income and both the assets are regarded as Capital gain taxation assets. Any kind of profit or loss that is derived from the sale of assets is included in the assessable income of Peter under section 102, ITAA 1997. Peter bought shares and car during 2010 and 2011 and sold the same on 2016 (Lucia 2015). It is evident that the Peter owned the assets for more than two years and he is eligible for 50% exemption on profits. On incurring any kind of loss he may adjust, the same with the profit derived from any other asset or may carry it forward in the next period of tax.

Lease rent is considered as a type of investment income even though the lease rent from the house property is not specified it must be considered in computing the assessable income of Peter under section 25AB, ITAA 1936 (Olsen 2016).

Particulars	Details	2015-16	2016-17	2017-18	Total
Income generated from live concerts & sale of Album
In Australia		$          1,40,000			$          1,40,000
Outside Australia		$          1,50,000			$          1,50,000
Royalties:
Inside Australia			$             30,000		$             30,000
Outside Australia			$          2,50,000	$           15,000	$          2,65,000
Cash Awards
In Australia		$             20,000	$             10,000		$             30,000
Outside Australia				$           16,000	$             16,000
Lease Rental Income:
Sum of Ordinary Income		$          3,10,000	$          2,90,000	$           31,000	$          6,31,000
Capital Gains Tax:
Sale of Cars	$           60,000
Less: Purchase Consideration	$           95,000
	$          -35,000
Sale of Shares	$           11,000
Less: Purchase Consideration	$              5,000
	$              6,000
Net capital gains tax		$            -29,000
Capital Loss		$            -29,000	$            -29,000	$          -29,000	$            -29,000
Total Assessable Income		$          3,10,000	$          2,90,000	$           31,000	$          6,31,000

Capital Gains from the Sale of Car and Shares

Conclusion:

The above stated table implies that the total amount of ordinary income, apart from the lease income of Peter is as follows

The capital loss incurred on CGT assets can be set off against the capital gains on CGT assets and this kind of loss is not generated with the ordinary income of Peter and must be carried be carried forward by him in the following years. The total amount of ordinary income of Peter would be carried forward in the next years. Hence, the ordinary incomes of Peter are regarded as his total assessable income for the stated period. Peter should have to pay tax on the foreign incomes to the British government. Therefore, according to the treaty formed between Australia and United Kingdom Peter can enjoy the tax benefits for the amount of tax paid to British tax departments. In addition to this, he can also cut down the net amount of taxable income for the period of 2017-18 by subtracting the rental expenditure from his lease rent.

Reference list:

Arber, R. and Rahimi, M., 2015. International graduates’ endeavours for work in Australia: Experiences of international graduates of accounting transitioning into the Australian labour market. International Education and Cultural-Linguistic Experiences of International Students in Australia, p.59.

Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. The American Economic Review, 105(5), pp.38-42.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Coffee, N.T., Lockwood, T., Hugo, G., Paquet, C., Howard, N.J. and Daniel, M., 2013. Relative residential property value as a socio-economic status indicator for health research. International journal of health geographics, 12(1), p.22.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.

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

Kendall, E. and Baum, S., 2016. The residential context of health in Australia: no longer the lucky country?.

Lucia, R., 2015. Role Of Tax And Accounting Mechanism In Taxation System. Annals-Economy Series, 3, pp.205-210.

Olsen, L.T., 2016. A New Accounting and Taxation Paradigm. Journal of Futures Studies, 20(3), pp.133-142.

Santhanam, R., 2016. 51_Salaries and Income-Tax.

Stantcheva, S., 2015. Optimal taxation and human capital policies over the life cycle (No. w21207). National Bureau of Economic Research.

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

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Taxation of consolidated groups. In Australian Taxation Law 2014 (pp. 951-996). CCH.