ILAC formatTaxation Law
Taxation Law 30 June 2021 Isabelle Lies was born in Australia and has lived there her whole life. Isabelle has been working for Queensland Health as a midwife since she graduated from university. Isabelle is married to Jake and they jointly own a home at 62 Ormonde Road, Yeronga Q. 4104. Isabelle and Jake also have a two-year-old daughter named Kahlia. Isabelle was offered a job in England as part of a project between the Australian and British Governments to implement support programs for young pregnant women in abusive relationships. Isabelle would help design the program in London and learn the strategies for dealing with this group before returning to Australia to initiate it in Brisbane, Sydney and Melbourne. The job requires Isabelle to work in London for a period of three years, commencing on 1 July 2020. Isabelle and Jake decide that it is a great opportunity, so Isabelle signs a contract with the British Government, and they leave Australia on 1 June 2020 and move to London. Before leaving, Isabelle and Jake rent their home in Yeronga to tenants and sell their furniture. They cancel their gym memberships, private health insurance and advise Centrelink of their intention to leave Australia. Upon arriving in London, Isabelle and Jake rent a small apartment 15 minutes from Isabelle’s work. Jake, who is a physiotherapist is successful in obtaining a job at one of the A League Football Clubs. Isabelle employs a carer to look after Kahlia when her and Jake are working. Both Jake and Isabelle open an account with Bank of England and transfer all their savings from their bank in Australia to the new account. Isabelle enrols Kahlia in swimming lessons at the local indoor swimming complex. Isabelle and Jake advise all relevant businesses and authorities of their new address and redirect their mail from their Yeronga property to the apartment they rent in England. Isabelle receives the following receipts that she believes are related to the 2021 tax year. (i) A payment of $800 for unpaid allowances from Queensland Health for May 2020. The payment was received directly into Isabelle’s Bank of England account on 21 July 2020. (ii) $1200 unfranked dividend from BHP Group Ltd, a global resources company, which was deposited into her Bank of England account on 10 September 2020. The dividend is paid out of accumulated company profits that BHP Group Ltd realised in the 2018/2019 income year. (iii) $40 interest paid by the Bank of England into her savings account with them on 10 July 2021. (iv) Salary from UK Health, her employer. $150,000 was received between 1/7/2020 to 30/6/2021 and $3,000 was received on 7/7/2021 (all amount converted from Pound sterling to $AUD). All amounts relate to the work Isabelle carried out during 1 July 2020 to 30 June 2021. Case Study Assessment – Question 1 Taxation Law 30 June 2021 (v) A royalty payment received for $600 for a children’s book that Isabelle wrote in 2018. The payment was received on 9 September 2020 and was for sales from 1 July 2020 to 30 June 2021. The books had been sold throughout Australasia. The book is published by Allen & Unwin in Melbourne. (vi) Rent received from the tenants of the Yeronga property. The weekly rental on the property is $800 and is received each Friday into Isabelle’s account. In total they receive $44,800 relating to rent received from 28 May 2020 to 30 June 2021. Required: Determine the tax consequences for Isabelle in respect of these receipts for the 2021 tax year. Hint: you should consider Isabelle’s residency status followed by where the receipts are sourced and in what tax year they are derived to reach your final outcome. Chapter 1 30 June 2021 Tax Law Chapter 1: Assessable Income Objectives The aim of this chapter is to introduce students to the concept of ordinary income and then to examine particular categories of income that can be received by taxpayers and highlight whether they are assessable or not. Chapter Overview 1.0Introduction1 2.0Basic Tax Formula and Terms1 3.0Ordinary Income: Characteristics5 4.0Personal Exertion Income9 5.0Property Income14 6.0Business Income16 7.0Statutory Income23 8.0Exempt Income23 9.0Effect of GST on Assessable Income23 10.0Conclusion23 Introduction As basic premise, a taxpayer’s assessable income will include receipts that are regarded as ordinary income and statutory income. The taxpayers may also have other receipts that are exempt from income tax, and then some receipts sourced from overseas. This chapter will explore how different receipts can be categorised as such, and what this means for the taxpayer’s assessable income. Basic Tax Formula and Terms Basic tax formula Reading · Sections 4-10 and 4-15 ITAA97 The basic formula to calculate a taxpayer’s income tax payable for an income year in s 4-10(3) ITAA97 is: Income Tax Payable = [Taxable income x Tax Rate] – Offsets The taxable income is then itself is determined by the following formula in s 4-15(1) of ITAA97: Taxable income = assessable income - deductions For Australian residents, see subsection 6-5(2): Your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year For foreign residents, see subsection 6-5(3): Your assessable income includes the ordinary income you derived directly or indirectly from all Australian sources during the income year Terminology Reading · Text at paragraphs 2-000 to 2-030; 3-000, 3-080 to 3-100 It is important to understand exactly what each of these terms mean. Income tax year Reading · Section 4-10(1) and (2) · Section 995-1 ITAA97 definition of ‘financial year’ In Australia, the income tax year runs generally from the 1st of July to the 30th of June (known as the income tax year or the financial year). During the income tax year, you need to determine which receipts are assessable income for the taxpayer, and what expenditure can be claimed as a tax deduction. Sometimes, a receipt might be assessable to the taxpayer but be attributable to a different tax year. This concept of derivation is explored in a later chapter. 1 July 30 June 1 July 1 July Income tax year Assessable income Reading · Section 995-1 ITAA97 definition of ‘assessable income’ · Subsection 6-1(1) of the ITAA97 Per subsection 6-1(1) of the ITAA97: The basic taxation formula in subsection 4-10(3) can be rewritten as: Income Tax = [(Assessable income - deductions) x Rate] – Tax Offsets Ordinary Income +Statutory Income Ordinary income Therefore, to understand ‘assessable income’ we need to know what receipts are regarded as ‘ordinary income’ (s 6-5 ITAA97) – which is a receipt that is income according to ordinary concepts (discussed in more detail below). There are three types of ordinary income: · income from person exertion · income from property · income from business Statutory income Statutory income is essentially an amount that the statute (ie legislation/Act) specifically includes in a taxpayer’s assessable according to s 6-10 ITAA97. An example, of statutory income are capital gains as they are included in assessable income under s 102-5(1) ITAA97. Review Activity 1-1: What happens if the one receipt could be regarded as both ‘ordinary’ income as well as ‘statutory’ income (such as the receipt of a dividend from a company)? Review Activity 1-2: What happens if a receipt if an amount is not ordinary income nor statutory income? Exempt income Ordinary income may also be exempt income by virtue of a specific section: see s 6-20 ITAA97, which means that there is a provision to say that such a receipt is exempt from being included in a taxpayer’s assessable income. Non-assessable non-exempt income In some instances, an amount may be ordinary income, but a specific section modifies how it is to be treated and renders the amount to be non-assessable and non-exempt: see s 6-23 ITAA97. Deductions A taxpayer is able to deduct certain expenditure from their assessable income to lessen the taxpayer’s income tax liability. Deductions are covered later in the Study Guide Chapters on ‘Deductions’. Tax rates Rates of income tax vary according to the nature of the taxpayer (i.e. individuals, company, and superannuation fund) and are contained in the Income Tax Rates Act 1986. Offsets The term ‘offsets’ includes rebates and credits which may be available to taxpayers. Tax offsets are deducted from the tax payable on taxable income making them more valuable than a deduction. Some tax offsets (such as the dependent rebate and the housekeeper rebate) are indexed annually in line with the CPI, but a decrease in the CPI cannot cause an offset to fall. Note there is no substitute for reading the legislation, and students should develop the habit of referring to the actual text of the legislation. In written answers, students are expected to supply legislative references to support their conclusions. All sections refer to the ITAA97 TAX PAYABLE Tax is payable by each individual, company and by some other entities s4-1 HOW MUCH MUST YOU PAY? For each income year income tax is worked out by reference to your taxable income s4-10 [TAXABLE INCOME x INCOME RATES] Less TAX OFFSETS s4-10(3) HOW DO YOU DETERMINE TAXABLE INCOME? s4-15 ALLOWABLE DEDUCTIONS Refer to Div 8 ITAA97 TOTAL ASSESSABLE INCOME Refer to Div 6 ITAA97 less General deductions s 8-1 Specific deductions s 8-5 See Div 12 ITAA97 Ordinary income Common law income s 6-5 Statutory income s 6-10 See Div 10 ITAA97 EXCLUDED FROM ASSESSABLE INCOME Exempt income and non-assessable non-exempt income See Div 11 ITAA97 Ordinary Income: Characteristics Reading · Text at paragraphs 3-150 to 3-290. Meaning of