Taxation

Taxation In Australia• Australia is a Federation of States• Pre WW1 income tax was levied by the individual

states• During WW1 the federal government first levied

Income Tax• Between WW1 & WW2 uniform income tax was

developed but still gathered by the states• 1942 due to national emergency states handed

income tax powers to federal government• After WW2 the Federal Govt refused to hand

powers back to the states

Taxation In Australia

• All Levels of government raise taxation.– Local Councils – State Governments– Federal Governments

Local Government

• Most of the tax raised is by the way of rates• Other taxes may be in the way of levies & fees

State Taxes

• Payroll Tax• Tax levied on wages paid• Payable where yearly payroll is greater than

$600 000 • Payroll Tax Rate = 6%

Payroll Tax - Wages

• Employee or contractor?• Provisions were introduced to tax contracts

where the contractor works and operates exactly like an employee.

• ATO has guidelines to determine their own status as a contractor, these guidelines only apply to 'Pay As You Go (PAYG)’

Land Tax

• Every State in Australia has Land Tax• Land Tax is levied in NSW as follows

–Property owned at midnight 31st December

–Principle place of residence is exempt–Land used as farms are exempt

NSW Land Tax

• Tax is payable on aggregated land value owned above the threshold x $0.016

• Threshold in 2009 = $368 000• Land Value = $500 000 less threshold

$368 000$132 000 x $0.016

• Land Tax Pay $2112

Other State Taxes

• Stamp Duties on Transfer of Property• Mortgage Duties• Vehicle Registration & Transfer

Federal Taxes

• Income Tax• Company Tax• Capital Gains Tax• Fringe Benefits Tax• GST

Fringe Benefit Tax• Tax on non cash benefits given to employees• Paid by employer• Is a separate tax to income tax• FBT Tax year 31st March• FBT Rate = 46.5% and levied on grossed up

rate

Fringe Benefits Tax• May include such items such as

– allows an employee to use a work car for private purposes

– gives an employee a cheap loan – pays an employee’s gym membership – provides entertainment by the way of free tickets

to concerts – reimburses an expense incurred by an employee,

such as school fees, and – gives benefits under a salary sacrifice

arrangement with an employee.

Amount of FBT Tax

• If GST is claimed grossing up multiplier is 2.067

• Employer pays for Private Health Insurance of employee valued at $3000

• Taxable FBT Amount $3000 x 2.067 = $6201• FBT Tax Payable $6201 x 46.5% = 2883.47• Benefit Payable is now FULLY tax deductible

from Income Tax

Vehicles FBT• Payable where car is available for Private use.• The following types of vehicles (including four-

wheel drive vehicles) are cars: – motor cars, station wagons, panel vans and

utilities (excluding panel vans and utilities designed to carry a load of one tonne or more)

– all other goods-carrying vehicles designed to carry less than one tonne, and

– all other passenger-carrying vehicles designed to carry fewer than nine occupants

Vehicle FBT• Taxable FBT amount =

Value of Vehicle x Statutory % X Days Available365

Statutory % is determined by distance travelled<15000km = 26%15001 to 24999km = 20%25000 to 40000km = 11%> 40000km = 7%

Vehicle FBT• A Toyota Camry is provided valued at $35 0001. Travels 13000km for the year

$40 000 x 26% x 1 = $10 400 x 2.067 (Grossing)= $21 496 x 46.5%= $9996.01

2. Travels 43000km for the year$40 000 x 7% x 1 = $2800x 2.067 (Grossing)

= $5787.60 x 46.5%= $2691.23

3. Travels 27000km for the year$40 000 x 11% x 1 = $4400x 2.067 (Grossing)

= $9094.80 x 46.5%= $4229.08

Note All cost related to the vehicle private or business are now tax deductible incl. depreciation.

Capital Gains Tax

• Capital gains tax (CGT) is the tax you pay on any capital gain you make on the sale of an assett

• Capital Gain/Loss is basically the difference in purchase and sale price

• It is not a separate tax, merely a component of your income tax.

• You are taxed on your net capital gain at your marginal tax rate

CGT ASSETTS

• real estate – for example, a holiday home • shares in a company • units in a unit trust or managed investment

fund • collectables – for example, jewellery, and • personal use assets – for example, furniture.

Capital Gains Tax• Capital Gain/Loss = Sale Price – Cost Base

• Cost Base includes– The Original Purchase Price– Items that are not immediately tax deductable

• Agent Fees• Solicitor Fees• Council Rates for Holiday House – note if it is an

investment property earning income, rates would be

Capital Gains Tax

• It is not a tax in itself but forms part of your assessable income tax

• Assessable amount is subject to discounts if kept for 12 months– Individuals 50 % discount– Trusts 331/3 % discount– Companies 0% Discount

Capital Gains Tax - Individual• House Purchased in 2001 for $300 000• House Sold in 2008 for $700 000

– Cost Base =$300 000 Purchase Price

– $ 15 000 Agent Fee on Sale– $ 5 000 Legal Fees– $ 15 000 Stamp DutyCost Base = $335 000

• Capital Gain = $700 000 - $335 000 = $365 000• Assessable Income = $365 000 x 50%

= $182 500

Capital Gains Tax - Company• House Purchased in 2001 for $300 000• House Sold in 2008 for $700 000

– Cost Base =$300 000 Purchase Price

– $ 15 000 Agent Fee on Sale– $ 5 000 Legal Fees– $ 15 000 Stamp DutyCost Base = $335 000

• Capital Gain = $700 000 - $335 000 = $365 000• Assessable Income = $365 000 (No

discount)

Capital Gains Tax - Exemption

• Principal Place of residence• an asset you acquired before 20 September

1985 • cars, motorcycles and similar vehicles • compensation you received for personal injury • a personal use asset – for example, items such

as boats, furniture, electrical goods

Income Tax

• Progressive Tax levied on assessable income• Income is “World Wide Assessable Income”• Assessable Income = Gross Income –

Allowable Deductions

Income

• Income will include worldwide source of– Salary & Wages– Payments made under contract– Bank Interest– Dividends– Rent Received– (There are many other sources of Income)

Deductions

• Any cost incurred in running your business• Items that are not allowable

– Fines– Capital Costs (These must be depreciated)– Personal Items (E.g. Non Protective Clothing)

Taxable Income 08-09 Tax Payable

$0 -$6 000 Nil

$6 001 - $34 000 15c for each $1 over $6,000

$34 000 - $80 000 $4,200 plus 30c for each $1 over $34,000

$80,001 – $180,000 $18,000 plus 40c for each $1 over $80,000

$180,001 and over $58,000 plus 45c for each $1 over $180,000

Determine Assessable Income and Tax Payable for Individual

Money Received Costs for the YearContract Income $95 000 Fuel for work Vehicle $ 3 000Bank Interest $1 500 Income Insurance $ 2 500Income Protection $3 700 Materials $15 000Rent Received $9 500 Workcover Licensing $ 120

Work Cover Fine $ 1 500Mortgage Payments $12 000 ($2500 Int)Ute Purchase 1/7/xxxx $35 000

Contract Income 95,000.00$ Fuel 3,000.00$ Bank Interest 1,500.00$ Income Insurance 2,500.00$ Income Protection 3,700.00$ Materials 15,000.00$ Rent Received 9,500.00$ Licenses 120.00$

Fines Not AllowableGross Income 109,700.00$ Mortgage Payments Interest Only

$4,500Ute Depreciation

Income Cost for the YearDetermine Assessable Income

Answer to Weekly Review Opening

Vaue Depreciation

Amount Depreciated

Value Year 1 45,000.00$ x (1.5/ 7 ) = 9,642.86$ 35,357.14$ Year 2 35,357.14$ x (1.5/ 7 ) = 7,576.53$ 27,780.61$ Year 3 27,780.61$ x (1.5/ 7 ) = 5,952.99$ 21,827.62$ Year 4 21,827.62$ x (1.5/ 7 ) = 4,677.35$ 17,150.28$ Year 5 17,150.28$ x (1.5/ 7 ) = 3,675.06$ 13,475.22$ Year 6 13,475.22$ x (1.5/ 7 ) = 2,887.55$ 10,587.67$ Year 7 10,587.67$ x (1.5/ 7 ) = 2,268.79$ 8,318.88$

Diminishing Value

Effective Life

Opening Vaue

Depreciation Amount

Depreciated Value

Year 1 45,000.00$ x (1/ 7 ) = 6,428.57$ 38,571.43$ Year 2 38,571.43$ x (1/ 7 ) = 6,428.57$ 32,142.86$ Year 3 32,142.86$ x (1/ 7 ) = 6,428.57$ 25,714.29$ Year 4 25,714.29$ x (1/ 7 ) = 6,428.57$ 19,285.71$ Year 5 19,285.71$ x (1/ 7 ) = 6,428.57$ 12,857.14$ Year 6 12,857.14$ x (1/ 7 ) = 6,428.57$ 6,428.57$ Year 7 6,428.57$ x (1/ 7 ) = 6,428.57$ -$

Effective Life

Prime Cost Method

Depreciation Scedule

Opening Vaue

Effective Life

Depreciation Amount

Depreciated Value

Year 1 45,000.00$ 15 2,666.67$ 42,333.33$ Year 2 42,333.33$ 15 2,666.67$ 39,666.67$ Year 3 39,666.67$ 15 2,666.67$ 37,000.00$ Year 4 37,000.00$ 15 2,666.67$ 34,333.33$ Year 5 34,333.33$ 15 2,666.67$ 31,666.67$ Year 6 31,666.67$ 15 2,666.67$ 29,000.00$ Year 7 29,000.00$ 15 2,666.67$ 26,333.33$ Year 8 26,333.33$ 15 2,666.67$ 23,666.67$ Year 9 23,666.67$ 15 2,666.67$ 21,000.00$ Year 10 21,000.00$ 15 2,666.67$ 18,333.33$ Year 11 18,333.33$ 15 2,666.67$ 15,666.67$ Year 12 15,666.67$ 15 2,666.67$ 13,000.00$ Year 13 13,000.00$ 15 2,666.67$ 10,333.33$ Year 14 10,333.33$ 15 2,666.67$ 7,666.67$ Year 15 7,666.67$ 15 2,666.67$ 5,000.00$

Straight Line Method

Contract Income 95,000.00$ Fuel 3,000.00$ Bank Interest 1,500.00$ Income Insurance 2,500.00$ Income Protection 3,700.00$ Materials 15,000.00$ Rent Received 9,500.00$ Licenses 120.00$

Fines Not AllowableGross Income 109,700.00$ Mortgage Payments 2,500.00$

$4,500Ute 9,642.86$

Gross Deductions 37,262.86$

Income Cost for the YearDetermine Assessable Income

Taxable Income 08-09 Tax Payable

$0 -$6 000 Nil

$6 001 - $34 000 15c for each $1 over $6,000

$34 000 - $80 000 $4,200 plus 30c for each $1 over $34,000

$80,001 – $180,000 $18,000 plus 40c for each $1 over $80,000

$180,001 and over $58,000 plus 45c for each $1 over $180,000

Assessable Income = $109 700 - $37 262.86 = $72 437.14

Tax Payable = $4200 + ($72 437.14 - $34 000) x $0.30= $4200 + $11 531.14= $15 731.14

Note – Partners pay taxes as individuals

Determine Assessable Income and Tax Payable for Individual

Money Received Costs for the YearContract Income $95 000 Fuel for work Vehicle $ 3 000Bank Interest $1 500 Income Insurance $ 2 500Income Protection $3 700 Materials $15 000Rent Received $9 500 Workcover Licensing $ 120

Work Cover Fine $ 1 500Mortgage Payments $12 000 ($2500 Int)Ute Purchase 1/7/xxxx $35 000

• COMPANY TAXCompanies are taxed at a flat rate of 30% with no tax free threshold

Contract Income 95,000.00$ Fuel 3,000.00$ Bank Interest 1,500.00$ Income Insurance 2,500.00$ Income Protection 3,700.00$ Materials 15,000.00$ Rent Received 9,500.00$ Licenses 120.00$

Fines Not AllowableGross Income 109,700.00$ Mortgage Payments Interest Only

$4,500Ute Depreciation

Income Cost for the YearDetermine Assessable Income

Answer to Weekly Review Opening

Vaue Depreciation

Amount Depreciated

Value Year 1 45,000.00$ x (1.5/ 7 ) = 9,642.86$ 35,357.14$ Year 2 35,357.14$ x (1.5/ 7 ) = 7,576.53$ 27,780.61$ Year 3 27,780.61$ x (1.5/ 7 ) = 5,952.99$ 21,827.62$ Year 4 21,827.62$ x (1.5/ 7 ) = 4,677.35$ 17,150.28$ Year 5 17,150.28$ x (1.5/ 7 ) = 3,675.06$ 13,475.22$ Year 6 13,475.22$ x (1.5/ 7 ) = 2,887.55$ 10,587.67$ Year 7 10,587.67$ x (1.5/ 7 ) = 2,268.79$ 8,318.88$

Diminishing Value

Effective Life

Opening Vaue

Depreciation Amount

Depreciated Value

Year 1 45,000.00$ x (1/ 7 ) = 6,428.57$ 38,571.43$ Year 2 38,571.43$ x (1/ 7 ) = 6,428.57$ 32,142.86$ Year 3 32,142.86$ x (1/ 7 ) = 6,428.57$ 25,714.29$ Year 4 25,714.29$ x (1/ 7 ) = 6,428.57$ 19,285.71$ Year 5 19,285.71$ x (1/ 7 ) = 6,428.57$ 12,857.14$ Year 6 12,857.14$ x (1/ 7 ) = 6,428.57$ 6,428.57$ Year 7 6,428.57$ x (1/ 7 ) = 6,428.57$ -$

Effective Life

Prime Cost Method

Depreciation Scedule

Opening Vaue

Effective Life

Depreciation Amount

Depreciated Value

Year 1 45,000.00$ 15 2,666.67$ 42,333.33$ Year 2 42,333.33$ 15 2,666.67$ 39,666.67$ Year 3 39,666.67$ 15 2,666.67$ 37,000.00$ Year 4 37,000.00$ 15 2,666.67$ 34,333.33$ Year 5 34,333.33$ 15 2,666.67$ 31,666.67$ Year 6 31,666.67$ 15 2,666.67$ 29,000.00$ Year 7 29,000.00$ 15 2,666.67$ 26,333.33$ Year 8 26,333.33$ 15 2,666.67$ 23,666.67$ Year 9 23,666.67$ 15 2,666.67$ 21,000.00$ Year 10 21,000.00$ 15 2,666.67$ 18,333.33$ Year 11 18,333.33$ 15 2,666.67$ 15,666.67$ Year 12 15,666.67$ 15 2,666.67$ 13,000.00$ Year 13 13,000.00$ 15 2,666.67$ 10,333.33$ Year 14 10,333.33$ 15 2,666.67$ 7,666.67$ Year 15 7,666.67$ 15 2,666.67$ 5,000.00$

Straight Line Method

Contract Income 95,000.00$ Fuel 3,000.00$ Bank Interest 1,500.00$ Income Insurance 2,500.00$ Income Protection 3,700.00$ Materials 15,000.00$ Rent Received 9,500.00$ Licenses 120.00$

Fines Not AllowableGross Income 109,700.00$ Mortgage Payments 2,500.00$

$4,500Ute 9,642.86$

Gross Deductions 37,262.86$

Income Cost for the YearDetermine Assessable Income

Assessable Income = $109 700 - $37 262.86 = $72 437.14

Tax Payable = $72 437.14 x 30%= $21731.14

Compare Against Individual

Tax Payable = $4200 + ($72 437.14 - $34 000) x $0.30= $4200 + $11 531.14= $15 731.14

Simplified Depreciation Rules

•immediately write off most depreciating assets costing less than $1,000 each (low-cost assets)

•pool in a general small business pool and deduct at the rate of 30% most other depreciating assets with an effective life of less than 25 years, such as motor vehicles and computers

•pool in a long-life small business pool and deduct at the rate of 5% most depreciating assets with an effective life of 25 years or more, such as wharves and cement silos,

•deduct most newly acquired assets at either 15% or 2.5% in the first year, regardless of when they were acquired during that year.

The Simple Tax System?

• The tax system that was introduced 1st July 2000

• GST Introduced• Australia Business Numbers introduced• PPS Tax repealed• Group Tax replaced with PAYG witholding

Australian Business Number (ABN)

• Required for every business registered for the GST. Sole Trader, Partnerships & Companies

• Payments to business without ABN require 48.5% to be withheld.

• Must be quoted on “TAX INVOICES”• If you have greater than $50 000 turnover you

must register for the GST

Tax Invoices less than $1000

• Tax Invoices must be issued for sales > $82.50 GST Inclusive (2009)

• the words ‘tax invoice’ stated prominently • the name of the supplier • the ABN of the supplier • the date of issue of the tax invoice • a brief description of the goods or services

sold, and • the total price of the sales (including GST).

Tax Invoices greater than $1000• the words ‘tax invoice’ stated prominently • the name of the supplier • the ABN of the supplier • the name of the recipient • the address or ABN of the recipient • the date of issue of the tax invoice • the quantity of the goods or the extent of the

services sold • a brief description of the things sold, and • the total price of the sale (including GST

Recipient Created Tax Invoice (RCPI)

• What is a recipient created tax invoice?• If a business makes a sale, it is required to issue a tax invoice

to the purchaser, for the sale, within 28 days of it being requested.

• However, in some situations, the price of goods or services is calculated by the purchaser and not the seller (for example, a motor vehicle dealer who accepts a trade-in vehicle and calculates the selling price once they have assessed the value of the vehicle).

• In certain situations, the purchaser is able to issue a tax invoice to the seller once a price has been worked out. This kind of tax invoice is referred to as a recipient created tax invoice (RCTI).

Pay as You Go (PAYG) Witholding

• Method by which wages & salary earners pay tax

• Employer deducts from gross pay from employees at prescribed rates

Pay As You Go (PAYG) Instalments

• System for reporting and paying tax• This is where the business can report & pay

– Tax withheld from employees– An estimate of the companies accrued income tax– GST Collected– Any other taxes collected or witheld

Goods & Service Tax (GST)

• The Goods and Services Tax (GST) in Australia is a Value Added Tax (VAT) on the supply of goods and services in Australia.

It was introduced by the Federal Government with the A New Tax System (Goods and Services Tax) Act 1999, taking effect from July 1 2000. The basic premise of the new tax was to broaden the tax base, which was heavily biased toward the provision of services

Business Activity Statement

• Form submitted to the ATO to report tax obligations

• Including– GST – PAYGW– PAYGI– Wine Equalization Tax (WET) & – Luxury Car Tax (LCT)

Business Activity Statement (BAS)

• Everyone registered for the GST must complete

• If your turnover is less than $20 million you can lodge BAS quarterly

• If your turnover is less than $1 million you can use the Cash Accounting Method

BAS Exercise

Parking Permit 32.00$ postage 1.30$ Pay Bunnings 1,250.00$ stationary 62.35$ Postage 47.97$ tolls 160.00$ tolls 80.00$ computer 1,500.00$ USB Drive 16.00$ USB Drive 16.00$ tolls 80.00$ Parking 8.00$ Drop Saw 1,250.00$ Tools 78.38$ tolls 80.00$ Materials 250.00$ Subcontract Carpenter 2,500.00$

Total Expenses 7,412.00$

Costs Incurred1/01/2009 6,000.00$

15/01/2009 3,562.00$ 29/01/2009 8,000.00$ 12/02/2009 4,500.00$ 26/02/2009 6,000.00$ 12/03/2009 3,200.00$ 26/03/2009 8,000.00$

Income 39,262.00$

Income (GST Inclusive)Amount Paid 15,000.00$ Tax Withheld 5,000.00$

Employee Wages

Gross Sales

Does it include GST?

1/01/2009 6,000.00$ 15/01/2009 3,562.00$ 29/01/2009 8,000.00$ 12/02/2009 4,500.00$ 26/02/2009 6,000.00$ 12/03/2009 3,200.00$ 26/03/2009 8,000.00$

Income 39,262.00$

Income (GST Inclusive)

Parking Permit 32.00$ postage 1.30$ Pay Bunnings 1,250.00$ stationary 62.35$ Postage 47.97$ tolls 160.00$ tolls 80.00$ computer 1,500.00$ USB Drive 16.00$ USB Drive 16.00$ tolls 80.00$ Parking 8.00$ Drop Saw 1,250.00$ Tools 78.38$ tolls 80.00$ Materials 250.00$ Subcontract Carpenter 2,500.00$

Total Expenses 7,412.00$

Costs Incurred

Capital Purchases – Purchases that you are required to depreciate. Generally assets greater than $1000

Parking Permit 32.00$ postage 1.30$ Pay Bunnings 1,250.00$ stationary 62.35$ Postage 47.97$ tolls 160.00$ tolls 80.00$ computer 1,500.00$ USB Drive 16.00$ USB Drive 16.00$ tolls 80.00$ Parking 8.00$ Drop Saw 1,250.00$ Tools 78.38$ tolls 80.00$ Materials 250.00$ Subcontract Carpenter 2,500.00$

Total Expenses 7,412.00$

Costs Incurred

Non Capital Purchases – All other items including assets less than $1000

Amount Paid 15,000.00$ Tax Withheld 5,000.00$

Employee Wages

Back of the BAS Statement

Note – Subcontractors are treated as non capital suppliers on previous slides

Gross Sales less GST

Installment Rate given by ATO

You can increase the rate

PAYG Tax Payable

$39 262 /11

$7412 / 11

Tax Payable

GST Credit

Amount Owing/Refund