Income Tax Tutorial Review

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Alice’s taxable income is worked out by using s4-10(3).

s4-10(3). [pic 1]

Tax Rates are from Schedule 7 of the Income Tax Rates Act, p. 1583.

- Which section of the Income Tax Assessment Act 1997 (the Act) determines whether Alice is a taxpayer entity, and why she is such an entity?

- Alice in an individual

- S9-1 (individual) a natural person; s4-1. Alice is an individual and is liable to pay tax.

- S4-1 – an individual must pay income tax and individuals are in s9-1, item 1.

- Which section of the Act determines how Alice’s taxable income is worked out?

- Taxable Income = AI – D; s 4-15.

- Is Alice’s salary assessable income under the Act? If so, under which section and how much is assessable income?

- Yes - her income is assessable.

- S 6-5(1) – ordinary income. No definition of ordinary income. Ordinary income is income according to ordinary concepts; AG British Columbia v Ostrum.

- 6-10 – statutory income. Specifically provided for in the legislation – it tells you which types of income are assessable.

- Exempt income

- Alice’s income is ordinary and assessable under s6-5

- Wages and salary

- $85 000 is ordinary income.

- Which section of the Act determines whether the expenses incurred by Alice can be deducted by her? Are the expenses deductible?

- A deduction is an amount which reduces your assessable income

- Have the effect of reducing the amount of tax you pay

- S 8-1: expenses incurred in relation to producing assessable income can be deductible.

- Is Alice carrying on a business?

- Employees do not carry on a business according to this section

- s 8-1(1)(a) – she can deduct it and the second limb of the exclusions do not apply

- What is the amount of Alice’s taxable income?

- AI = 85 000 (s 6-5)

- D = 20000 (s 8-1(1)(a))

- Method: TI = AI – D (s 4-15)

- Assessable Income $85 000 – Deductions $2000 = $83 000

- Under which Act and section is income tax imposed, and in which Act and section can the rate of income tax to be paid by Alice be found?

- Page 1582 – schedule 7 – general rates of tax

- Tax free threshold is $6000

- What is the amount of Alice’s “basic” income tax liability?

- Basic income tax liability = taxable income x tax rate

- She is paying tax on her taxable income ($83 000)

- (37 000 – 6000) (tax free threshold) x 15% = 4650

- (80 000 – 37 000) x 30% = 12 900

- (83 000 – 80 000) x 37% = 1110

- 4650 + 12 900 + 1110 = 18 660

- How will Alice’s entitlement to a dependant spouse rebate be taken into account?

- Rebate of $2286

- Under s159J – rebates for dependents (including dependant spouse rebate)

- Difference b/w tax offset and deduction-

- Deduction changes where you fit in the % of tax rate bracket

- Tax offset decreases tax paid $1 for $1

- Tax offset = 2286

- What is the amount of Alice’s “actual” income tax liability?

- Actual income tax liability = basic income tax liability – tax offsets + credits

- 18 660 – 2286 dependent spouse offset = 16 374

- How will the PAYG income tax instalments withheld from Alice’s salary be taken into account?

- Refund or bill – depends on how much you paid vs your actual income tax liability

- AITL payable 16 374

- Credit for PAYG (20 0000)

- Refund of $3626

- Alice has paid $20 0000 but only owes $16 374

- Under tax law – can only use the tax free threshold for 1 job

“Actual” income tax liability is less than income tax instalments paid

If the tax liability is more than the amount of tax paid then money is owed to the Commonwealth: Div 3A Pt IIB TAA.

“Actual” income tax liability is more than income tax instalments paid

The excess of the actual income tax liability is a debt due to the Commonwealth and is payable to the Commissioner: Pt 4-15 Sch 1 TAA.

Should Alice expect to receive a refund or a bill after she lodges her tax return? Work out the amount of the refund or bill (ignoring the Medicare Levy).

- Refund

Question 2

“Carrying on business”

2 Definition of “business”: s 995-1(1) – includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee

Spriggs & Riddell v FCT [2009] HCA 22 at [67]:

“The definition of ‘business’ … does not state that a contract of employment cannot form part of a business. What the definition provides is that a person