Discuss about the Understanding Tax Avoidance And The Evasion.
The current study is based on the understanding of tax liabilities for Mark and Millie. The case study provides that Mark is working as the marketing and product development director for Millmark Pty Ltd. Miller on the other hand is working as the CEO of family company Millmark Pty Ltd. The case study provides that both Mark and Millie has two children with one being financially independent and the other being financial dependent on the parents. The primary objective of the discussion is to determine the tax liability for the couple and additionally providing them with the necessary explanation regarding the inclusion and exclusion of relevant items.
The below stated legislations and laws governing the income tax liability for an individual taxpayer is applicable in the current study;
As per “section 4-1 of the Income tax assessment act 1997” each individual and company are under obligation of paying tax on his or her assessable income. The assessable income is computed by deducting the deductions that are allowable from the taxable income “section 8-5 of the Income Tax Assessment Act 1997” (Woellner et al. 2016). A persom’s chargeable income is categorised under the ordinary income under “section 6-5” and the statutory income under “section 6-10 of the ITAA 1997”. Section 6-5 defines that any income that is derived from the ordinary income is classified as the ordinary income. Statutory income represents those incomes that does not form the part of the ordinary income under “section 6-10” (Anderson, Dickfos and Brown 2016). In the current case study, both the ordinary income and statutory income are considered in determining the assessable income of Mark and Millie.
The income derived by mark and Millie stands 150,000 and130,000 respectively. The amount derived by Mark and Millie must be included in the assessable income in terms of “section 6-5” since this income form the part of the employment income.
As stated under the “taxation ruling of TR 95/9” it discusses whether an individual taxpayer are allowed to claim or specifically exclude items under “subsection 51 (1)” (Barkoczy 2016). According to this ruling an individual taxpayer is not allowed to claim deductions on the cost of travelling between home and place of work as these expenses are classified as private expenditure. As noticed from the current situation both Mark and Millie incurred travelling expenditure from home and place of work. Therefore, the expenditure would not be considered allowable for deductions since it is a private expenditure.
As stated under “section 6-5” an individual generating rental income would be included in the taxable income of the person (Tan, Braithwaite and Reinhart 2016). Similarly, in the case of John and Millie the rental income generated by the investment property, holiday house with factory showroom and building will be held assessable under “section 6-5”.
As stated under “section 15-2 (1) of the ITAA 1997” the taxable income of the individual taxpayer also includes the value of benefits derived or the allowances that are received is either directly or indirectly associated to the employment. As stated under section 23L (1) the allowances are generally separately recognized while the fringe benefit reported by the employee forms the part of fringe benefit and does not forms the part of assessable income (Cao et al. 2015). In the present case study, it is noticed that both Mark and Millie are provided with car for their private use. Additionally, Millie also receives from the company a private medical insurance of benefit of $5,000 per annum. Hence, the benefit provided to both Mark and Millie are within the concept of “Fringe benefit act 1986” and the same is excluded from their respective assessable income.
“Section 6-5 of the Income tax assessment act 1997” defines that interest derived by the taxpayer during the financial year must be declared and included in the taxable income for determining the tax liability of the taxpayers (Braithwaite 2017). The bank interest received by both Mark and Millie will be considered as the part of taxable income under “section 6-5”.
According to the Australian taxation office, receipt from superannuation fund comprises of both lump sum and income stream, which are considered tax-free on the circumstances where the individual is receiving the benefit, is greater than 60 years. Income generated from the superannuation fund are considered in the taxable income of the taxpayer (Saad 2014). In the current case of Mark and Millie, the receipt of after tax return from their superannuation will considered non-taxable and cannot be included in the taxable income of the respective taxpayers.
The “division 8 of the ITAA 1997” lay down the necessary detail regarding the allowable deduction (Miller and Oats 2016). As defined under “section 8-1 of the ITAA 1997” an individual taxpayer is permitted to claim deduction for expenditure that is occurred in generating the taxable income or obligatory in carrying out the business activities.
Mark and Millie reported expenditure relating to work that amounted to $1,000 and $2,200 correspondingly. As stated under “subsection 51 (1) of the Income tax Assessment Act 1997” the losses and outgoings are regarded as the permissible deductions up to the extent they are occurred in generating the revenue or producing an assessable income (Coleman and Sadiq 2013). The court of law in the case of “Federal Commissioner of Taxation v. Hayley (1958)” stated that expenses should have the necessary character of outgoing when generating the taxable income. Hence, the work related expenditure reported by Mark and Millie will be considered as allowable deductions since it holds the necessary characteristics of outgoings in deriving the taxable income.
Self-education expenditure are usually considered as the deductible expenditure that are generally incurred in maintaining or increasing the skills of taxpayer in an occupation in which an individual is presently employed. The self-education expenditure are generally incurred to improve the taxpayer’s prospects of gaining promotion or deriving greater pay (Kenny 2013). As stated in “Studdert v Federal Commissioner of Taxation” where the court of law allowed the flight engineer to claim an allowable deduction for the cost incurred in undertaking flight lesson as this would improve the performance in his current job and uplift the prospect for promotion.
Mark incurred a self-education expenditure of $6000. Referring to the case of “Studdert v Federal Commissioner of Taxation”, it can be stated that mark will be allowed to claim an allowable deductions on the self-education expenditure management .
As held in the case of “Lunney v Federal commissioner of taxation” travel from home and place of work is generally not considered as allowable deductions (Krever 2013). In the current case both Millie and Mark will not be able to claim allowable deductions for travelling expenses since they are regarded as private expenditure.
Millie and Mark reported a living expenditure of $18,000. The court of law in “Fullerton v Federal Commissioner of Taxation” denied the taxpayer to claim domestic or family arrangement expenditure. Similarly, the cost of living represents a family expenditure and the same cannot be considered allowable.
As held in “Ronpibon Tin NL v Federal Commissioner of Taxation (1949)” an expenditure is considered allowable for deductions if the expenditure is occurred in generating the taxable income (Morgan, Mortimer and Pinto 2013). According to Australian taxation office, an individual incurring expenditure on donations will be considered as allowable deduction. The donation of $500 by Millie will be considered as allowable deduction under “section 8-1”. The case study evidently provides that both Mark and Millie has incurred expenses in the form of interest on investment property, holiday home, bank loan on share portfolio. Further evidence also suggest that an additional expenditure on rented holiday home, investment property and tax agents.
Referring to the judgement passed in the event of “Ronpibon Tin NL v Federal Commissioner of Taxation (1949)” the expenditure incurred by Mark and Millie will be considered for deductions since they are occurred in gaining taxable income.
The Australian taxation office denies an individual to claim deduction on main residence expenditure since they are not occurred in deriving the taxable income (Woellner 2013). The interest expenses on main residence, rates and taxes with electricity expenses formed the part of main residence and Mark and Millie cannot claim the same in this circumstances.
Instances from the case study suggest that Mark incurred a capital loss from the share portfolio and according to the ATO, an individual is allowed to claim tax offset for capital loss only in the event of capital gain. The capital loss of $7,000 bought forward by Mark cannot be offset because he did not reported any capital gains from the share portfolio. Furthermore, “section 8-1”prohibits an individual to claim permissible deduction on credit card expenses. Therefore, the credit card expenses will not be allowed for deduction management .
On the other hand, to reduce the corporate tax rate for Millmark Pty Ltd both Millie and Mark can undertake the method of progressively reducing the tax rate to 25% since their aggregate turnover limit is below $25 million (Woellner et al. 2014). The method of enterprise tax plan would help MillMark Pty Ltd to reduce the tax liability by enrolling under the Small business entities. This method would help in reducing the tax liability and would not create an impact on the total amount derived from the company.
As stated under the taxation ruling of IT 2489 an individual that are below the age of 18 years and derives remuneration through full time work will be held liable for tax. Similarly, as stated under “Division 6AA of the part III of the ITAA 1997” person below the age of 18 engaged in a part time employment and deriving income would be considered as taxable income (Woellner 2013). As evident, Martin is below 18 years and is employed in a part time administrative work. Therefore, Martin would be held liable for taxation purpose.
The taxation ruling of TR 93/30 is associated with claiming deductions under the home office expenditure. The primary objective of the taxation ruling is to ascertain the expenses, which are considered allowable as deductions (Morgan, Mortimer and Pinto 2013). As evident in the current case study it is noticed that with the expansion of business both Millie and Mark are wondering to employ their younger children in some administrative work to work as personal assistant.
The amount that would be paid as remuneration stands $300 per hour or $600 per week. Similarly, the income that would be derived by Martin would form the part of taxable income. The amount that would be paid to Martin will be considered as allowable deductions from the taxable income since it is occurred in generating the taxable income. Hence, based on the above stated discussion Mark and Millie would be able to claim deduction for the expenditure incurred for home office purpose.
Reference List:
Anderson, C., Dickfos, J. and Brown, C., 2016. The Australian Taxation Office-what role does it play in anti-phoenix activity?. Insolvency Law Journal, 24(2), pp.127-140.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue management .
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.
Coleman, C. and Sadiq, K. 2013. Principles of taxation law.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business management taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.
Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
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