Taxation Information For Individuals And Trusts

Scenario

1.According to Income Tax Assessment Act 1997, assessable income mainly includes ordinary income and statutory income. The assessable ordinary income of an Australian citizen includes the ordinary income generated directly or indirectly from all the sources, whether in or outside Australia, during the financial year. If the person is a foreign citizen, then his assessable income will be the ordinary income derived from all the sources in Australia as well as the income generated from the sources other than Australian source (Legislation.gov.au, 2017).

There are some amount of income which are not ordinary income and are included in assessable income through provisions. They are known as statutory income. A person being a resident of Australia, his assessable income will include statutory income produced from all sources, in and outside Australia. In case of a foreign resident, assessable income will comprises of statutory income from all Australian sources along with the bases other than Australian source (Legislation.gov.au, 2017).

Apart from being assessable, these ordinary and statutory income can also be exempt income and non-assessable income (Legislation.gov.au, 2017).

2.Examples of ordinary income:
• A person receiving an amount as an award for performing its services like wages received by an employee.
• Amount received by a person in form of return on its investments such as dividends, rental income, royalties for allowing someone to use a patent, interest on deposits and so on.
Both the receipts mentioned above are considered as an ordinary income of a person.
Examples of statutory income:
• A net capital gain is a statutory income which is deemed to assessable as per ITAA 1997.
• Profit earned on sale of traditional securities is also treated as statutory income.
Capital gain is not considered as an ordinary income and is included in statutory income.

3.Australian taxation office has a right and power to conduct various audits in order to check the discrepancies in the tax return of individuals. The three such audits conducted by ATO are:
Tax audit
ATO always wants to be sure that all the Australian taxpayers are paying the right amount of tax and the taxation system is fair enough for them. However, if it find any inconsistency in the tax return, he conducts a tax audit. An audit which critically examine and review a fraud or an inaccurate amount in a tax return. It can be conducted randomly or intentionally. If any return is audited on random basis, it will require a simple closer look to make sure that all the information is correct, but if the ATO intentionally audit the tax returns, it means there are some possible errors, issues or frauds. In order to conduct this audit:
• ATO can ask for additional information to verify the details of the return.
•The audit manager can interview the related individual.
•The taxation office has a right to visit the faulty person’s home or office to get more information related to tax.
Financial Audit
This type of audit is conducted by the Australian National Audit Office (ANAO). It includes the formal examination of the financial statements of a company or a corporation. It is the evaluation of financial statements and transactions of the business. The purpose of this audit is to present accurate amount of the transactions to the users of financial reports. When ATO find any errors in a tax return of a company, it becomes necessary for the taxation office to critically review its financial accounts, in order to verify the details contained in the return (Anao.gov.au, 2018).
Compliance Audit
An approved SMSF auditor is hired for conducting a compliance audit. This type of audit is been conducted according to the Standards on Assurance Engagements. The auditor must check that the individual has complied with the sections of SISA and regulations in SISR. The objective of organising such audit is to comprehensively review that whether organization has complied with the standards or regulatory guidance or not. The violation of any guideline or rule will be found out by conducting this audit (Ato.gov.au, 2015)

Income type

4.

Residents	Non-residents
The person who has lived in Australia permanently or for At least 183 days during an income year. Along with this his domicile is in Australia and he makes contribution to The commonwealth superannuation fund (Barkoczy, 2010).	The person who does not satisfy any of these conditions is considered as non-resident for tax purposes (Barkoczy, 2010).
They are entitled to claim tax free threshold.	They are not provided with tax free threshold and are taxed only on their Australian income.
Need to file tax return to disclose their worldwide income.	Need to file tax return only to disclose their Australian income (Barkoczy, 2010).
Liable for Medicare levy.	Not liable for Medicare levy.

5.According to section 6(1) of ITAA 1936 provides following test of individual residency in Australia:
Common law test
If the individual ‘resides’ in Australia according to the general meaning of that word, then he is considered as a resident of Australia. This concept include person’s overall circumstances that can happen in relevant financial year (Nexusnotes, n.d.) These are:
•Purpose of residing in Australia
•Extent of business, family and employment ties within the country.
•Assets maintenance and location
•Social and living arrangements of an individual.
Domicile test
If the domicile of an individual is in Australia, unless the commissioner is satisfied with the fact that he or she has a permanent place outside Australia, the person is consider to be a resident. The individual who moves abroad can still be a resident if his or her domicile is in Australia (Nexusnotes, n.d.).
183 days test
A person is treated as a resident when he or she resides in the country for 183 days or more continuously. Also when the commissioner is satisfied that the individual has a place outside Australia and he/she does not want to take up a residence in the country (Nexusnotes, n.d.).
Superannuation test
This test is basically applies to the families and members of commonwealth superannuation fund who contributes to this fund annually. An individual is treated as a resident if he or she is a contributing member of the superannuation fund (Nexusnotes, n.d.).

6.The Code of Professional Conduct provided by Tax Agent Services Act 2009 consists of 14 core principles, among which principle 5 states that the person must have appropriate arrangements for managing the conflicts of interest which may arise in the activities undertaken by him/her as a registered tax agent or BAS agent. The principle laid down various situations in which conflict of interest can arise and also the arrangements made by the agent for managing them (Tpb.gov.au, 2017). Some of the examples of conflicts are:
•When the tax practitioner act for both the clients. This can be an actual conflict in a manner that each client can feel that the registered tax practitioner is not serving in his or her interest.
•The situation in which personal interest of tax practitioner is involved. He may provide a tax advice regarding some transaction to his client, which will eventually provide benefit to him.
•The conflict of interest also arises when the practitioner acts against the client’s requirements (Tpb.gov.au, 2017).

7.Examples of ‘adequate and effective conflict management arrangements’ are:
• By combining the internal control measures and disclosures of the conflicts can help in managing the conflicts of interest. Continuous disclosures may need to an effective management of conflicts arising (Tpb.gov.au, 2017).
• Maintaining appropriate record and documents which includes the details of conflicting management policies and procedures followed by a tax practitioner and updating about the step taken for managing such conflicts of interest (Tpb.gov.au, 2017).
Furthermore, various other measures can also be taken for managing the conflicts of interest, such as:
• Timely monitoring of the compliance with the procedures.
• Physically separating the departments in order to make them work individually (Tpb.gov.au, 2017).
• Imposing disciplinary penalties in case of breach of any internal procedures.
• Formulating strict and defined procedures for dealing with the situation in which conflicts arises (Tpb.gov.au, 2017).

8.John must tell about the Code of Professional Conduct, which he is obliged to follow as a tax practitioner to his client, Daniel. He should communicate him the 4th principle of the conduct which says that ‘act lawfully in the best interest of your clients’. According to this principle, he must act in the best interest of Daniel but without violating the law. The practitioner must satisfy all the requirements of his client, by working within the framework of law (Tpb.gov.au, 2017). As he knows that the deduction claimed by his client is not appropriate as per the law and if he does so, he will breach the first principle of profession conduct which is Honesty and Integrity. So, he should advice Daniel that he is not authorized to do such faulty deduction in his tax liability and also about its obligation to follow the principle. When the tax practitioner acts on behalf of his or her client, they must act only where they are authorised to and their actions must be in accordance with the law.
Though the principle state that practitioner must act in the best interest of the clients, but it also state that the actions taken by the practitioner must be within the law. John is obliged to follow this code of professional conduct and he must explain his professional obligation to his client in order to avoid the situation of conflict (Tpb.gov.au, 2017).

9.According to section 262A of ITAA 1936, a person is required to keep its business records for the purpose of income tax. The subsection 4 of 262A states that the person who has maintained or kept the records for the purpose of this act, must retain those record until:
The end of 5 five years starting from the date when the tax return has been lodged. The person need to keep them so long if:
• He has claimed a deduction
• Acquisition or disposal of an asset and
• Involved in a dispute with ATO (Iknow.cch.com.au, n.d.).
According to ATO, a determination SDR 2006/01 has been made in which records for 2004-05 and after income years kept by the individuals, having simple tax affairs, are need to maintain for only two years (Ato.gov.au, 2016).

10.

Scenario	Lodgment date
Income tax return for all individuals and trusts where one or more prior year income tax returns were outstanding as at 30 June.	31st October 2017
Taxpayers who lodge their own return using e-tax or Tax Pack	31st October
Income  tax  return  for  individuals   and   trusts   which   were tax level 6 (tax payable of $20,000 or more on last tax assessment) as per latest year  lodged	31st March 2018
Business Activity Statement for first quarter	28 October
Business Activity Statement for second quarter	28 February
Business Activity Statement for third quarter	28 April
Business Activity Statement for fourth quarter	28 July

Description

11.As per the Australian Taxation Office, taxpayers need to keep following records or documents as an evidence:
•Summary of the payments made to the payer, which includes the department of Human Services and employer.
•Receipts or invoices related to the purchase and sale of assets.
•Statements containing dividend information from the companies.
•Receipts and invoices for expenses related to claims and repairs.
•Statements showing the interest earned from the bank or other financial institution.
•Summary of managed investment funds (Ato.gov.au, 2017).

12.Tax invoices showing the taxable supplies of more than $1000 should include following information:
•The document is treated as a tax invoice.
•Identity of seller
•The Australian Business Number (ABN) of the seller
•Date of issuing the invoice
•Brief description of the items or the products sold, along with the quantity and price being mentioned.
•The GST payable amount- can be shown separately or if the amount is one-eleventh of the total price, then to be mentioned as ‘total price includes GST’.
•The extent to which each sale on the invoice is recognized as a taxable sale.
•The identity of buyer
•ABN of buyer (Ato.gov.au, 2017).

13.According to Australian Taxation office, following are the tax payers which are required to lodge their tax return with them:
•All the individuals and the trust must lodge their tax return on the due dates specified by ATO. There are different dates prescribed by the authority according the description of the trust and individual (Ato.gov.au, 2017).
•Another type of tax payers are the companies and super funds, the lodgment dates of which are displayed on the client listing of ATO. SMSF are require to lodge an SMSF annual return and to pay a supervisory levy. Different due dates are prescribed by the taxation office as per the description of entities and for the companies and super funds who have an approved substituted accounting period (SAP).
•Partnerships that function on approved SAP must lodge their return by the last day of fourth month after the end of closing accounting period followed by the firm.
•Consolidated groups are also a type of tax payers who file their returns with Australian Taxation Office. The head company of the group has to lodge the return on various due dates under certain specified circumstances (Ato.gov.au, 2017).
•All the tax payers who does not operate on SAP, having more than one prior year tax returns overdue as at 30 June 2017, are required to file their return by 31 October 2017. If the overdue tax return are filed within the specified date, then 2017 tax return will be calculated according to the tax agent’s normal lodgment program (Ato.gov.au, 2017).

14.

Scenario	Assessable income
Kelly’s net wages were $1 350. Her employer had deducted $380 tax.	The assessable income will be $1350
Alan received net wages of $50 300 and bank interest of $400 over the year. His employer deducted $19 700 tax.	Assessable income will be $50,300 + $400 = $50,700.
Karl received a net salary of $41 800 over the year plus $120 bank interest. He also was paid a gross salary of $2 000 for a part-time job he had during the year. The tax deducted from his full-time job was $13 600 and $600 was deducted from his part­ time wages.	Full time and part time assessable income of Karl is, $41,800+ $120+ $2,000= $43,920.
Fiona runs a small business that had $36 000 in sales during the year. Her net profit was calculated by deducting $22 000 of expenses.	Sales- Expense = Net profit $36,000-$22000 = $14,000 This will be Fiona’s assessable income.

15.

Scenario	Income type
A lotto win	Exempt income
Wages	Assessable income
A capital gain	Statutory income
A gift received from a friend	Exempt income
A car allowance from an employer	Assessable income
A tax refund cheque	Exempt income
Bank interest received	Assessable income
A family tax benefit	Exempt income

16. 

Description	Expense or Capital
Wages	Expense
Stationery	Expense
Forklift truck	Capital
Telephone bill	Expense
Fuel	Expense
Land	Capital
Photocopier	Capital

17. 

In the Books of Matthew
Computations of Allowable deductions
For the year ended………….
Particulars	Legislation	Amount ($)
Interest on home Loan	Section 8-1 ITAA 1997	16200
Interest on Investment Property	Section 8-1 ITAA 1997	14360
Insurance on Investment Property	Section 8-1 ITAA 1997	570
Total Allowable Deductions		31130

18. 

Computation of Medicare Levy and Medicare Levy Surcharge
Name	Taxable income of taxpayer	Taxable income of spouse	Hospital Insurance	Medicare Levy	Medicare Levy Surcharge
Bill	44 500	No spouse	No	840	Nil
Sally	35 000	60 000	No	700	Nil
John	76 600	72 400	Yes	1532	Nil
Fred	69 300	110 000	No	1386	Nil
Allie	78 844	No spouse	Yes	1576	Nil

19. 

Name	Taxable income	LITO
Bill	14 500	Income is less than $37000, so maximum offset as per ATO is $445
Sally	35 000	Income is less than $37000, so maximum offset as per is $445
John	56 600	Income is more than $37000, so LITO will be: $445-[($56600-$37000)*1.5%] = 151
Fred	69 300	Income is greater than the threshold limit of $66,667, so the LITO will be nil
Allie	78 844	Income is greater than the threshold limit of $66,667, so the LITO will be nil

20.

Name	Taxable income	Residence status	Tax
Steven	34 000	Resident	($34,000-$18,200)*19% = $3002
Martin	65 400	Non-resident	($64,500*32.5%) = $21255
Gary	65 400	Resident	$3,572 + [($65,400-$37,000)*32.5%] = $12802
Russell	17 500	Resident	nil
June	17 200	Non-resident	( $17200*32.5%) = $5590
Harry	19 750	Resident	($19,750 – $18200)*19% = $294.5
Sharon	110 930	Resident	$19,822 + ($110,930 – $87,000)*37% = $28676.1
Hanna	90 320	Non-resident	$28,275 + ($90,320 – $87,000)*37% = $29503.4
Courtney	224 864	Resident	$54,232 + ($224,864 – $180,000)*45% = $74420.8

21.

Computation of Tax under Operating Cost Method
Operating cost method:
Taxable value of benefits
Particular	Amount ($)	Amount ($)
Petrol	1600
Depreciation	2812
Registration	350
Insurance	600
Tyres and Battery	1075
Servicing	525
Total operating cost		6962
Proportion of Private Use:
Total kilometre run	22000
Work related Use	18000
Private related Use	4000
Private use (%)	18%
Taxable value of benefits		1265.81818

22.

Depreciation Schedule
Particulars	Original Cost	Depreciation Rate	Depreciation Claimed	Adjusted Tax Value
Electric Guitar	3600	20%	257.80	1289
Drum Set	3000	10%	300.00	550
Electric Keyboard	2000	30%	288.30	961
Total			846.10	2800

23. An individual can claim GST credits for any amount of the GST that is included in the lease charges. The business that is accounting for GST based on the non-cash accruals basis, will be entitled to claim the GST credits of one-eleventh of the lease instalments for the each period of tax either in two forms;

1. Either making any portion of the lease payments that is due during the period
2. Receive any invoice from the supplier.

In context of the above stated example, the business is accounting for GST based on the cash basis. Therefore, the business will be able to claim GST credit of one-eleventh portion of the lease installment amount that is paid by the business during the tax period.