INCOME TAX ASSESSMENT REPORT

PART A.

Inspector- General of taxation, is independent statutory body entrusted with the function of reviewing tax administration and periodically issues the recommendation for tax improvement strategies to the government of Australia. The current inspector-General of Taxation is Mr.Ali Noorozi.The law requires the institution to give business notice promptly and ensure taxable income is collected with the principle of prudence and economic sense.
The office of the Inspector-General was created in 2003 by the inspector-General of Taxation Act of 2003.All the powers that govern the Inspector General activities are derived from the legislation of 2003.Under the Act, the function of Inspector General is not limited to the investigation of tax-related issues in various entities within Australia, investigating tax systems and evaluate their effectiveness in tax collections.However, the Inspector General has no power to investigate rules creating or imposing an obligation to the taxpayer to pay any amount under taxation law or to deal with the qualification of such amount. Under the Taxation Act of 2003, the Inspector General may transfer of actions other than tax administration to Ombudsman. The Inspector-General governance starts with the formal appointment by the Governor- General using written instruments. The holder of the office work on full-time basis and remuneration is determined by the remuneration tribunal of Australia. The public governance and accountability Act of 2013 explains that the Inspector General is the accountable authority of the entity. Moreover, the Inspector General enjoying legal protection to empower him to investigate and execute the systems established by law for tax administration and collection. At the end of every financial year, the Inspector General presents a written report to the Minister concerned for improvement in the tax administration system.
The topic that Taxation Ruling TR 2016/3 discusses is the income taxation arising from website commercial use by businesses. The website is treated as an intangible asset which comprises of software integration for online use (Australia, 1936). The ruling indicated that taxation deductibility would be to the extent that the software is used to generate income otherwise web site shall not be subjected to expenditure tax deduction but will be treated as in-house use which is subject to capital deductibility. The ruling further classified the types of expenditure that are subject to taxation. For instance, labor cost which is directly referable to the enhancement of the income or profit-yielding of the business structure are capital in nature and are not subject to taxation. In a situation where labor costs are partly capital in nature and partly I the revenue account the expenditure must be apportioned on a reasonable basis (Australia, 1997). The ruling also explained that the social media content of a business constitute a capital asset of the business and is, therefore, subject to expenditure tax deductibility.For the income tax purposes, the following assets are non-tax deductible. Computer hardware, the domain name and the content on it which is independent of the business operations. The expenditure incurred by the business to keep the website running is regarded as the maintenance cost which does not attract any taxation. The ruling also allocated the software development pool which takes five years of which the first year, the tax deduction is nil but from year two to year four, any expenditure on software development attracts that 30% tax and the fifth year, the tax is 10%.Small businesses under the law are required to the instant asset write-off threshold and general small business pooling to capital expenditure incurred in acquiring in-house software.

4 Liability to taxation division one defines the criteria of tax assessment and liability. Under chapter 18, the act defines the business accounting period which 12 months ending on 30th June every year. This means that all business are required by law under the tax assessment Act of 1936 to file a tax return.Section21 of the Act explain that consideration can be in the form of cash or kind, but all are legal tax payment. Section 21A of the Act spelled that non-cash benefit that is not convertible to cash shall be treated as if they are convertible for taxation purposes (Australia., & Australia, 1936). The Act explains that any foreigner doing business in Australia and as a result has gained income shall be legible to pay tax but shall not be deemed as a citizen of Australia. In cases where they are foreigners in Australia, the income tax that they will pay will depend on the number of years they have taken in that area. However, the trustees of an estate of deceased in Australia is liable to pay the income tax in respect of the year of income which comprises of salary, wages and allowances derived by the deceased in respect of the service or business of the deceased. The Act also defines conditions that income may be assessable. For instance, income derived by taxpayers by the provision of fringe benefit is not assessable.

Division 30- gift and contribution discuss the gift deductibility criteria. The Act emphasizes on the old declaration and instruments that address the taxation of gifts. The Act provides that contribution is deductible if such contribution is meant for charitable organizations. A gift is deductible only if contribution will not benefit the individual. There must be a written contract agreement outlining the relationship between the donor and the donee. On the valuation of the gift as an estate deductible, the Act spelt out the valuation procedures and determination of whether the gift is deductible or non-deductible. For instance, in the case where bequeathed painting to a certain museum including their continuous displays and requirement that the proceed from the sale of artworks be used to purchase of works. It was held that the gift was deductible since the only limitation on the Museum sale of art was the requirement on the valuation of gift, the Act outlines that the amount of income or charitable deduction is equal to the property fair value on the date of the gift. Once a gift is completed, the article of 1997 explain that donors no longer have the right to enforce the term of charitable gift.

Under section 25-45 of Income Tax Assessment Act of 1997, the taxpayer is allowed to deduct a loss caused by an employee through theft.For example, a former employee who was working part-time basis as administrator for 18months.The employee was responsible for entering the financial transactions into the company system. During that period, some cheques were applied for the employees benefit without the taxpayer’s knowledge. It was held that the loss was due to theft by the employee and therefore it was deductible (Australia. & Australia, 1997). The Act provides law deduction for loss caused embezzlement, stealing, theft, larceny, defalcation among others. However, the Act provides that the deduction of tax due losses caused by the employee will take effect the year the loss is discovered and the actual year when the loss occurred and these deductions will be listed in the other expenses category on the tax return. A loss is not deductible if the taxpayer has applied for reimbursement with the aim of recovery of the loss fund. The evidence is required to prove for the deductibility of theft.
The deduction is not allowable under section 8-1 of the income tax assessment Act of 1997 for subscription paid to an association. When an individual retires from the association. For example in the case of Kevin a retired plastic surgeon he had retained his membership of the Australian Medical Association. Kevin was not deriving any income from the plastic surgery; it was held that under the income Act section 8-1 Kevin cannot claim deductions of his subscription. However, under section 25-55 of the Tax Act of 1997, a deduction is allowable to individuals or persons up to a maximum of $42 in an income year for payment.Therefore Kevin was legible to claim deduction under section 25-55 up to $42.Section 25-55 of the Tax Act of 1997 differs materially in that this spelt out payment of an individual for membership for a trade that allows tax deductible of up to $42 but under section 73(1) of Tax Assessment Act of 1936, refers to periodic subscription paid for membership or a professional body. It was therefore held that deductibility is limited to section 25-55 of the Tax Assessment Act of 1997 and does not extend to section 8-1 of the same Act. The members should know which professional body they are and the legal application of tax deduction. These terms should be included in the contract. Also, under section 8-1 of the Income Tax Assessment Act, payment of contribution or special levies person to a professional body is deductible only if the purpose of that levies is directly linked to the assessable income of those persons. Under section 8-1 of the Income Tax Act of 1997, the following are not deductible. First, payment to provide overseas relief. Second, payment to assist a political party. Third, payment to assist employees suffering from financial crisis or difficulties.Fourth, being on strike or being laid off by the employer and finally payment by the salaried official of the union of a professional body for the purpose of election.
Under section 70.115 of the Income Tax Assessment Act of 1997, provides the criteria of how compensation arising from loss of trading stock should be treated. The Act treats this type o compensation as capital gains and not ordinary income. The Act further stipulates that if the compensation is done as a result of the loss of trading activities, then such compensation is a result of a loss of the capital asset and therefore it is treated as capital gains. However, if the compensation is a result of the loss of wages, salaries and revenue then such compensation can be treated as ordinary income under section 6-5 of the Income Tax Assessment Act of 1997.
.Section 25-50 of Income Tax Assessment Act of 1997 allows the taxpayer to deduct some specific payments. As outlined under section 8-1 of the general compensation the Act emphasizes on the apportionment of damages arising from trading stock since it affects both capital and income. A loss of revenue is treated as ordinary income as it has the effect of reducing income at the same time a loss of trading activates have the effect of capital assets. Therefore under the above provisions, compensation due to loss of trading stock is treated as ordinary income if the business loss income. It can also be treated as capital gains that require indemnity by the insurer if the trading stock is also a business asset.
Following the Treasury amendment bill in Australia, those taxpayers whose income is between $30,000 and $ 37000 meets the income tax threshold and has a tax liability of 19%.According to the income tax amendment bill that took effect as from July 2016, those current residents in Australia with $18200 and below do not meet the threshold to pay tax.
Income year is the period in which the taxpayers are required by law to submit their tax returns. Under section 6 of the tax amendments bill of 2016, taxpayers are supposed to file their returns after the lapse of 11 months of business operation (Australia. & CCH Australia Limited, 2016). The income year, therefore, is the fiscal year of individuals and businesses that they use to generate income for taxation purposes.

PART B.

Julia assessable income and allowable deductions

First, the Julia is not on employment in Australia and therefore she is not legible to pay income tax from employment.However, Julia made a gross sale of $450,00 of which, sales worth $18000 was not paid hence it has effect sales by reducing sales. Hence net sales are $450,000-18000=$432000.

The cost of sale is arrived at by adding the purchases to opening stock and the carried inwards less closing stock. However, Julia has just started the business in Australia, and this business has no opening trading stock. As at 30 June 2017, the closing stock was valued at $28000.Trading stock purchased was $90000. The closing stock has a portion which will go to the expenses account. For instance, stock valued $8000 have expired and cannot be sold hence constitute an expense to the business.Interest on the loan used to purchase the stock is also added to the stock value since it has an effect of increasing the purchase value of stock. Under the Income Tax Assessment Act of 2016, foreigners are only legible to pay tax on the income earned while in Australia. As per this article, Julia is not required by law to declare her income from her home country. Income Tax Act of 2005 states that there will be no tax deductions or returns of illegal business, however, the income from the illegal business should constitute the gross income. The $100000 illegal business should be added to form part of gross income as required by law. This conforms with the case of James vs. United States where the United States went to Supreme Court to seek clarification of the tax from illegal business. The court held that James was required to include income from the illegal business to form gross income. Under section 25-50 of Income Tax Assessment Act of 1997, tax deduction as a result of the loss of trading stock is allowed. The stock that expired constitutes a reduction of capital asset of the business, and therefore Julia should be compensated.

Julia is entitled to claim for deductions on the expenses incurred for the trip to Melbourne together with her manager. However, the wife to the manager is not entitled to the deduction. Division 30 of tax deduction of Income Assessment Act of 1997 states that a taxpayer can only claim a deduction if he can prove that the expenses are related to the business. Regarding this clause, the manager’s wife is not a partner of the business, and therefore she doesn’t qualify to claim the deduction. Julia also indicates that they went to holiday in Melbourne, Julia must prove that the holiday was part of business trip to qualify for deductions of car expenses otherwise the law does not allow deduction on private travels. A taxpayer is entitled to claim the deduction for depreciation of capital assets used to generate income. In reference this clause, Julia is legible to claim the deduction for depreciation of capital assets such as depreciation on office furniture, office equipment, shop fittings among other capital assets of the business. Julia taxable income is arrived at as follows;

Depreciation calculation with the diminishing value method.

Asset

Value of asset($)

Depreciation (%)

Amount

furniture and fittings

10,000

1500

Office Equipment

20,000

8000

Computer Systems

15000

7500

Shop fittings

45000

13.33

5999

floor covering

15000

6000

Programmable Cash register

25000

10000

Refrigeration Unit

20,000

3000

Sundry plant and equipment

38500

5775

Simulated indoor plant

2500

375

furniture and fittings

25000

3750

Stove

1500

150

refrigerator

1200

180

Hot water system

1300

130

Net sales $432000 Less

Cost of sale

Purchases $90000

Add/; Interest on purchases $2500

Goods available for sale $92500

Less closing stock. (20,000)

Cost of goods sold ($72500)

Gross income $359500

Expenses and deductions Gross income brought down $359500

Manager salary $45000

Staff wages $8000

Borrowing expenses 500

General operating expenses 2000.

Vehicle expenses. 2000

Airfare 2800

Accommodation 4200

Bad debts 8000

Depreciation of office Furniture 1500

,, Office Equipment 8000

,, Computer Systems 7500

,, Shop fittings 5999

,, floor covering 6000

,, Cash register (programmable) 10000

,, Refegiration Unit 3000

,, Sundry plant and equipment 5775

,, Simulated indoor plant 375

Manager residential

Depreciation on furniture and fittings 3750.

, stove 150

, refrigerator 180

, Hot water system 130

Net income before tax 234641

359500 359500

Taxable income 234,641

Taxable income for Julia for financial year 2016/2017 is $234,641 having deducted the allowable deductions as required by the law. Such deductions included conference fees and motor vehicle expenses.

B) The net income tax payable for the year 2016/2017 by Julia will be as follows. The tax rate of small businesses in Australia is 30%

Tax liability =taxable income× tax rate.

=234,641×30100

= 234,641×0.3

= $70,392.3

Taxpayers are entitled to tax relief on medical insurance. For example, Julia has medical insurance cover of $2300.The law allows a tax relief of 20%.Therefore, tax relief will be 2300×0.2=$460

Tax payable by Julia = $70,392.3-$460

= $69932.3

The table for depreciation used in this report is as attached.

Effective life (years)

Prime cost method (%)

Diminishing value method (%)

1 1/2

66.67

100

33.33

66.67

3 1/3

4 1/2

22.22

44.44

5 1/2

18.18

36.36

6 2/3

14.29

28.57

12.5

8 1/3

11.11

22.22

8.33

16.67

7.69

15.38

13 1/3

7.5

6.67

13.33

References

Australia. (1997). Income Tax Assessment Act. Canberra: Commonwealth Govt. Printer

Australia. (1936). Australian Income Tax Assessment Act, including regulations rating acts & international agreements. North Ryde, N.S.W: CCH Australia.

Australia. & Australia. (1922). Federal income tax: Amending income tax assessment act no. 31 of 1921, amending income tax assessment act no. 32 of 1921, which amend in some particulars the income tax assessment act 1915-1918 with explanatory notes of the amendments. Melbourne: Govt.

Australia. & CCH Australia Limited. (2016). Australian income tax assessment act 1936-1974: With Income tax regulations, Income tax act, Income tax (dividends and interest withholding tax) act, Income tax (drought bonds) act, Income tax (bearer debentures) act, Income tax (withholding tax recoupment) act, Income tax (international agreements) act, Relevant provisions of banking act and Taxation Administration Act: in force as at 1 January 2016 North Ryde, N.S.W: CCH Australia Ltd.

Australia. & Australia. (1936). Income tax: Explanatory handbook showing the differences between the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1922-1934. Canberra: L.F. Johnston, Commonwealth Government Printer.

INCOME TAX ASSESSMENT REPORT

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