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HI6028 Taxation Theory, Practice & Law

  1. Demonstrate an understanding of the Australian income tax system, the
    concept of FBT, Ordinary Income, deductions, general anti-avoidance
    provisions and income tax administration. (ULO 1).
  2. Identify and critically analyse taxation issues. (ULO 2).
  3. Interpret the relevant taxation legislations and case law. (ULO 3)
  4. Apply taxation principles to real life problems. (ULO 4).

Solution:

Introduction

The government requires funds for the development of the nation and Taxation is one of the major resources for any government. Every country has their own set of laws, rules, and regulations which describes the taxability of any income, deductions, and exemptions.

In the given assignment we would discuss some basic concepts of taxability of income, calculation of tax and concept of Fringe benefits tax, and assessment of the value of Fringe benefits.

Question 1

Income Tax is the direct tax that is levied by the government on the income of their citizen and in some cases on the income earned from the resources as defined by the taxation law of that country. There may be numerous laws and rules which define who would be charged for income tax, what incomes come under the ambit of taxation law, and what would be the rate for taxation. (Iknow, 2021)

In the given case Susanne is a single person and resident of Australia for Taxation purpose so she would be taxed as per the below rate chart:

Taxable IncomeTax on the Income
0=18200Nil
18201-4500019% for each $1 over 18200
45001-120000$5092 plus 32.5% for each $1 over 45000
120001 – 180000$29467 plus 37% for each $1 over 120000
180001 and over$51667 plus 45% for each $1 over 180000
The above do not include Medicare levy of 2%

Before calculation of tax liability of Susanne, we need to calculate the taxable income of Miss Susanne. (Taxguru, 2020) The same is calculated using the simple equation

Taxable Income               =            Assessable Income – Deductions

The below table will help to derive assessable income of Susanne

Calculation of Total assessable Income and Taxable Income of Susanne for Tax Year 2020-21
ParticularsAmount($)
Total Taxable Income90,000
Income from Investment10,000
Total Assessable Income100,000
Less:  Deduction
Total Taxable Income100,000

From the above table it can be seen that the taxable income of Susanne is $100,000 so Susanne will fall under the bracket of $45,001 – $120,000 and will be taxed as under:

ParticularsAmount($)Amount($)
Tax Liability  
For Income up to $45,000             5,092 
On Remaining Income @ 32.5cents for each $1 over $45000  
(100,000-45,000)17,875      22,967
   
Student loan (HECS)  
@7% of Taxable Income  
(100,000 * 7%)        7,000
   
Less : Lower and Middle Income Tax Offset (LMITO)  
              1,080 
Less : 3% of Taxable Income over  $90,000        (300)(780)
   
Medicare Levy  
@2% of Taxable Income  
(100,000 * 2%)         2,000
   
Medicare Levy Surcharge  
@1% of Taxable Income  
(100,000 * 1%)         1,000
   
Total Tax and Other Levies       32,187

Thus the total levy from Susanne is $32,187 on account of income tax including HECS, Medicare Levy, and Medicare Levy surcharge and deduction of Lower and Middle Income Tax Offset (LMITO).

Calculations:

  1. If a person doesn’t have any private health insurance then he/she would become liable to pay Medicare Levy Surcharge and the rate of Medicare Levy Surcharge would depend on the income bracket under which the total taxable income of the person falls. Since Susanne is not having any private health insurance so she need to pay Medicare Levy Surcharge too. She is a single person and comes under the taxable income bracket of $90,001 – $105,000, so her liability of Medicare Levy Surcharge would be 1% of taxable income. (pwc, 2020)
  1. Once the Help Repayment Income reaches a certain threshold limit, the repayment liability of HECS- HELP loan starts and the repayment of HECS-HELP would again depend on the taxable income bracket of the person. The Help repayment income of Susanne comes under the limits of $94,869 – $100,560 and for this bracket, the repayment obligation is 7% of Taxable Income.
  1. The Superannuation Guarantee Charge is the liability that comes over the employer if the employer is not able to provide minimum superannuation support to their employees. So is not part of the assessable income of Susanne.
  1. Income of Investment from shares is part of the assessable income of Susanne.
  1. Since the taxable income is more than $66,667, so Susanne is not eligible for Lower Income Tax Offset (LITO). But For the income year 2018/19 to 2021/22, a tax offset called Lower and Middle Income Tax Offset is available to the resident individual which is non-refundable and provided based on taxable income slabs. Since the taxable income of Susanne comes under the income limits as prescribed for LMITO so she is eligible for Lower and Middle Income Tax Offset (LMITO). For LMITO, Susanne comes under the bracket of $90,000 -126,000 and for this bracket, LMITO is decided as $1,080 less 3% of the excess over $90,000.

Question 2

Part A

To motivate the employees, employers generally offer some additional benefits to their employees over and above their monetary compensation, these additional benefits are known as fringe benefits. The same benefits can be offered to some specific employees like employees at senior designations and some of them can be provided to all the employees. Some of the examples of fringe benefits are the reimbursement of various personal expenditure of employees like education fees of their children’s, telephone expenses, the computer uses, Health Insurance, Car Facility, etc. (Eroad, 2019)Below are some of the salient features of fringe benefit and taxation thereof:

  1. Definition of Fringe Benefits: Employer-Employee relationship is the major requirement for the fringe benefit comes into the purview of tax only. When there is an employer and employee relationship between the two people then only any facility would be treated as a fringe benefit. That is the reason that the facility provided by the principal to their agents is not considered into French benefits. To become taxable under fringe benefit tax a transaction must have the following characteristics:
  1. The benefit should be provided during the year of tax only.
  2.  It should be given by the employer or an association of employer or by a third party who is under agreement with the employer to their employees or Association of employees.
  3. There must be an employer-employee relationship
  • Laws and Regulations: Fringe benefits are consumed by employees but the taxation liability thereon comes on the employers. Fringe benefits are imposed on the value of almost 13 types of fringe benefits and the tax is calculated on the taxable value assessed for fringe benefits. The taxable value for each benefit is calculated with different methods and the value is assessed as per the rules defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the fringe benefits tax is imposed as per the Fringe Benefits Tax Act,1986. (Eroad, 2019)

The basic formula of Fringe Benefits Tax is:

Fringe Benefits Tax = Taxable Amount of Fringe Benefits for the FBT year * Fringe Benefits Tax Rate

The Fringe Benefits Tax rate for the year 2017/18 to 2021/22 is as under:

3. Assessment of Taxable Value: As described above the fringe benefit tax rates are implied on Taxable value to derive the fringe benefits tax liability of every employer. To derive the taxable value of the fringe benefit, every fringe benefit is treated as a separate unit as the valuation rules are different for every kind of fringe benefit. Below are some of the basic rules of valuation of fringe benefits:

  1. Where goods or services, in which the employer deals, are provided to the employees at concessional rates then the rule of “in-house” is applied to evaluate the value of goods or services.
  2. If Contribution made by the recipient of goods or services (i.e. Employees) remains unreimbursed, then the amount of contribution would reduce the taxable value of fringe benefits.
  3. “Otherwise deductible rule” will reduce the taxable value of a fringe benefit.

4. Tax Payment and Procedures: As stated above The Fringe Benefits Tax liability is payable by the employer and for this assessment of fringe benefits needs to be done. The employer needs to make a self-assessment of Fringe Benefits Tax and the employer needs to pay Fringe benefit liability every quarter and have to report an activity statement for same. The Employer can claim credit of the quarterly installment paid earlier while making the final payment of fringe benefits tax at the end of the year. The employer need to file an annual FBT return by the 21st may of the following year after the end of the FBT year or any date as may be decided by commissioners. This is to be noted that under s 8-1 ITAA97, the Fringe Benefits Tax and Cost of these benefits are deductible Expenses for the employers.

5.

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