Taxation Law

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Chapter 2 of the Book
Income tax only works in developed countries – Australia has a heavily reliance on income tax.

Tax = [(assessable income – deductions) x rate] – offsets ( note there is a order for these) –payg(w) (at the very end +- any levies) Taxable Income
e.g. the medicare levy is based on your taxable income.

Note: The tax free threshold for a resident for part of the year is calculated through a special formula. (pg71 of text book)

Deductions reduce your assessable income to calculate the amount of tax you need to pay. They fall into two categories: general and specific deductions (see section 12-5; pg125)

Offsets reduces your tax payable – also known as credits or rebates: 1st : low income earners rebate – (non-refundable) no applicable to taxpayer under the age of 18 (from 1st july 2011) 2nd : non-other refundable offsets

3rd : Private health insurance (refundable)
4th : Franked dividends (refundable – only to individuals not companies) 5th : PAYG(W) the above gives you your income tax and then we deduct the rest of the payg(w)

see page 356 ITAA 97 for tax offset rules (division 63)

Divisions
Assessable and Exempt Income: Division 6
Deductions: Division 8:
Section 10-5 (division 10) – Lists the types of assessable income. Section 63-1: What tax offsets ordering and whether refundable. Section 6-20: talks about exempt income and division 11 further lists these is more detail Section 50 -5: lists which entities have exempt income

Section 51: Lists exempt incomes

What is a income: Division 4
Ordinary income: what the courts states
5 classes:
Personal exertion – wages, professional services (accounting) Income from property (rent, royalties)
Income generated from your business
Compensation payments (if you win a law suit)
Periodic payments( if it keeps coming in regularly)
Statutory income:
Capital Gains tax – selling of property; although when you live in a house you don’t get taxed) 22September 1985 – if you bought something before this then it is tax free.

Deductions: division 8-1; any losses in the course of your work. Division 26 denies certain deduction
Division 25 gives you specific deductions

Tax Rate: what determines the rate:
The financial year changes every year so you need to make sure your rate is for the correct year. So you can try and play with timing. What is your status – are you are resident(taxed on worldwide income) or a non-resident (only taxed on Australian sourced income) Non-Residence and source – is the income sourced from australia or someone else. Status: are you a corporation, am I a family trust company, is it a self-managed super fund (only taxed at 15c in the dollar) – once you turn 60 it is tax free, are you a child beneficiaries. Franked dividends (franking credits) – is the tax that has already been taxed by the company issuing the dividends.

Fringe benefits tax (non-assessable, non-exempt income): A separate tax ruling for non-cash benefits – you are getting taxed at the top rate + the medicare levy. (Sep 1987) GST (Introduced 2000) – you get taxed on your outputs (services) and credits on your inputs (e.g supplies). Therefore the end user gets lumped with the lot. To work out the tax you divide by 11.

Basis of tax
1.Income
2.Consumption – if you consume a lot you get taxed
3.Wealth

Residents have to pay the medicare levy, although non-residents pay tax from the 1st dollar incurred only on Australian income + they don’t have to pay the medicare levy.

Week 2 notes
Ordinary Income
The general principles in defining ordinary income is that it must Comes in to the recipient: this is income of what comes in, and not what is saved from going out FCT v Cooke and Shereden
Federal Coke co V FC of T
Must recognise it as income
Characteristics as such a time of derivation – Income will be treated as have been derived if it has been taken that to...
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