Management
FINS2643
Lecture Wealth 8 Week 9 Taxation
Lecture 8 Summary
Taxable Income & Tax Liability
JESSICA YANG
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[1]
Assessable Income
[2]
(Allowable deductions)
- must be connected to income
generation
[3]
[4]
Taxable income
x Tax rate (Marginal)
Tax due on income
+ Other taxes & levies
[5]
Gross tax liability
(Offsets or rebates)
Net tax liability
Includes
Wages & salaries, business
income, government payments,
bonuses/commissions/tips,
statutory income, investment
income (capital gains, interest,
dividends, rent), non-exempt
income
Work related expenses, home
office, donations & tax prep
fees, repairs, interest on loans
for income producing assets,
capital allowances
(depreciation), capital costs
Medicare levy 1.5% and
surcharge 1%
Low income, education tax
refund, family tax benefit,
medical expenses, super cocontribution, franking rebate
Remember to deduct PAYG!
Useful equations:
Franking credit = Franked dividend x (3/7)
Motor vehicle:
= [(base value)(statutory function)(days used)](Type1/2 Benefit)
__________________________365
Diminishing value method:
Depreciation (per year) = Base x (days/365) x (150%/years of life)
Capital gains tax:
Disposal price
(Cost base)
Assessable cap gains
(Offsets, cap losses)
(Discount 50% >12 mths)
Overall tax liability
Indexed cost base = cost base x CP
Excludes
Exempt income, return of
capital, gifts, hobby income
Capital expenses (Add value&
part of cost base e.g. initial
repairs, replacements),
outgoing or loss for personal
reasons, private clothing
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Taxation of other structures
Company tax
o 30%
Partnership
o Does not pay tax
o Partners pay personal income tax
o Must file tax return
Trust
o Includes managed funds
o Must lodge tax return
o Do not pay tax on income distributed
o Losses cannot be distributed, only deducted from future trust income
Super fund
o 15% upfront tax on contributions
o 15% tax on income
o 10% tax on long term cap gains
o 33.3% discount on CGT
Tax on Financial securities (shares, fixed interest)
o Depends on asset class
Dividend Imputation Example:
Shareholder receives a $70 fully franked dividend. Find:
1. Franked dividends grossed up and added to taxable income of the recipient?
2. Franking credit claimable by shareholder depending on tax bracket?
Answer
1. Franked dividend grossed up = Franked dividend
(1 0.3)
= $70
(0.7)
= $100 (Company earning before tax)
2. Franking credit
= Franked dividend grossed up x (0.3)
= Possible refund of $30 (Company tax paid)
depending on shareholders personal tax bracket
3. Shortcut:
Franking credit
= Franked dividend x (0.3)
(1 0.3)
= Franked dividend x (3/7)
In the reverse:
o Company tax
o Franked dividend
= $100 x 30%
= $30
= $100 - $30
= $70
Salary packaging
Can include fringe benefits e.g. cars, living away from home, work travel
Fringe benefits Tax (FBT) is levied on the employer at the highest marginal
tax rate (46.5%) who recovers the FBT cost from the employee
FBT paid on cars if used for personal purpose:
a. Taxable benefit
= [(base value)(statutory function)(days used)-(recipient
payments)]
_________________________
365 days
b. Grossed-up taxable benefit
= Taxable benefit x (Type1/2)
c. FBT = Grossed-up taxable benefit x 46.5%
Exemptions include: laptops, car/phone where personal use is only incidental
Tax strategies & minimization
Structure: use of super & trusts
Salary packaging
Gearing
Insurance bonds
Low turnover
CGT discounts & exemptions by derivatives & hedging
Tax avoidance & evasion is illegal
JESSICA YANG
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Homework Tutorial Week 9
Chapter 10
Question 1: The government often uses tax relief for the advance of policy, such as
getting people to save for their long-term financial needs. Do you think the main
residence exemption should be capped to encourage diversified savings?
There are calls to review the main residence exemption:
Change to a lifetime capped amount (which is indifferent to source of capital gains,
for example, gains from shares could form part of the lifetime capped amount) or
Have it as a rollover which is granted only to the extent that the disposal receipts are
used to acquire a new main residence (Scandinavian countries prefer this model)
Question 3: If Toby received an additional cash payment from an employer in relation to
outstanding performance is it assessable to him and why? What if it was in the form of
property that would ordinarily be sold in the course of the employers business?
Yes if cash - reward for service and has a clear nexus to his employment
If it was property then it would be a property fringe benefit and the taxable value
would be equal to 75% of its market value. The employer would pay FBT on it.
Unless the item was exempt.
Question 6: Is salary sacrificing into superannuation a sensible choice for a young family
with a large mortgage?
Mortgage repayments are made from the after-tax income where tax of between
31.5% and 46.5% has typically been applied.
Super in contrast has only a 15% tax rate. Generally withdrawal after 60 is tax free.
One approach of this strategy is to salary sacrifice into super with the long-term view
to paying off the mortgage once retirement age is made with tax-free super
withdrawal.
However, if there is 30 or more years before this time then other risks including
legislative risk (to super rules or CGT concessions), marital breakdown and potential
for the financial markets to collapse just at the point of retirement causing financial
hardship at a time the taxpayer is least able to recover from it.
Question 9: Shelly is going overseas for three years and does not want to leave her share
portfolio to be managed by someone else. She has decided to sell it and put the money into a
managed share fund until she returns. The outcome of the sale is that she has $35,000 in
short-term capital gains (held less than 12 months), $103,000 in long-term capital gains
and $43,000 in capital losses. How much money from these sales will count towards her
assessable income?
Question 10: If Shelly had a yacht that she had sold for $12,000 but acquired for $15,000
and an antique clock bought for $300 and sold for $2000 will that change your
calculation for the above question?
No. The yacht is a personal asset disposal and of a personal asset for a loss (here of $3000) is
ignored for CGT purposes. (Asset must be income producing)
The $1700 gain from disposal of clock is also ignored as the cost base of the clock (a
collectable) was below the $500 threshold .
Problem 2.
It is August 2009 and Samantha is discussing her financial affairs with you.
You ask her about the amount of tax she pays and she indicates that she has no idea how much
she pays. Samantha earns $65,000 per year. She has a savings account with $15,000 in it
earning 2.5%. Her employer pays the superannuation guarantee on top of her salary.
She has private health insurance cover. What percentage of tax is she paying on her total
income? Can you improve that for her?
Strategies:
Negative gearing in the form of a loan purchasing shares that produce dividend
income with franking credits and deductible interest. This would reduce her overall
liability depending on the amounts involved.
Salary sacrifice into superannuation particularly if Samantha has paid off her
mortgage (see above discussion to question 6 on mortgage versus super).
Alternatively, perhaps Samantha would like to drive new cars and does a high number
of kilometres in which case she could consider a car fringe benefit.
JESSICA YANG
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Case Study 10.1
Reginald and Mia earn $98,000 and $69,000 respectively. They have $10,000 in a savings
account earning 2.5%. Their outgoings are $2500 a month mortgage payments on their
main residence (on a loan of $395,000 over 30 years) which they acquired four years ago
for $499,000 (current value is $525,000) and additional $26,000 in additional
expenditure of which $500 are deductible in total. They have no private health
insurance. Reginalds grandmother dies leaving him her house, which she acquired after the
death of her husband in 1986 for $55,000 (current valuation is $630,000). Reginald and Mia
are uncertain as to whether they should dispose of the house or move into the house and sell
their own house, or lease it out (current rent is likely to be $500 per week) or lease out their
house (rental return expected is $425 per week). Mia would like to stop work and have
children over the next five years. Advise Reginald and Mia which approach would be best for
them in relation to the house bearing in mind taxation consequences.
Reginald
Salary/Wages (excl
Super)
Interest
Assessable
Personal Deductions
T axable Income
(1-6000) @0%
(6001-37000) @15%
(37001-80000) @30%
(80001-180000) @37%
(180000+) @45%
Income tax
Medicare Levy
Medicare Surcharge
Tax liability
Net income
Combined Income
Expenditure
Mortgage
Total Outgoings
Net Savings Capacity
Chapter 11
98,000
125
98,125
-250
97,875
0
4,650
12900
6614
0
24164
1468
979
26611
71,514
124,705
26000
30000
56000
68,705
Mia
69,000
125
69,125
-250
68,875
0
4,650
9563
0
0
14213
1033
689
15934
53,191
Question 4: Mandy has purchased an investment property and incurred expenses in the
tax year. Allocate her expenses incurred correctly between deductible, depreciable or the
first element of the cost base for capital gains purposes.
a.
townhouse $195,000
b.
conveyancing fees: $1200
c.
stamp duty: $55,000
d.
interest in first year on loan $6000
e.
repaint after rain damage (after date of acquisition) $3000
f.
cost of adding a carport $4000
Mandys expenditure is treated for tax purposes as follows:
a)
First element of the cost base and is therefore not deductible to Mandy.
b) Second element of the cost base and are not deductible.
c)
Stamp duty is also the second element of the cost base.
d) Interest on the loan is a general deduction there is sufficient connection
between the interest incurred and the income (rent) received.
e)
Repaint is likely to be a deductible repair as it is remedying damage done during
the time the asset was generating assessable income. The repaint does not appear to fall
into one of the capital categories. Deductible.
f)
Adding a carport will be a depreciable over the life of the asset. It is likely to be a
building depreciation depending on the specifics of the structure.
Question 5: Nick earns $127,500 and has $2000 worth of deductions. He has a dependent
wife with $13,500 income from part-time work and three dependent children. Nicks
family has had a bad year for health for all three children. Nick has out of pocket
incurred $5500 in medical bills including $2000 for Harry (aged 21). Advise Nick of the
medical expenses offset and include advice as to who should take the offset.
Medical expenses offset: available where net medical costs > 1500.
o Offset = about above 1500 x 20%
The issue is whether expenditure incurred on behalf of a financially dependent adult
child is able to be included in calculating Nicks offset.
As Harry is a dependent student under 25 the $2000 can be included.
Therefore: $5,500 $1,500 (threshold) = $4,000. $4,000 x 20% (rebate amount) =
$800.
Generally the individual who is likely to pay the most tax will receive the maximum
benefit of the offset. This is likely to be Nick but would depend on the interaction
between taxes withheld and any deductions he may have or other offsets such as
franking credits.
Question 6: Soran and Maura earn $165,300 and $4000 respectively with no deductions.
They do not have private health insurance. They have two children, Seth and Su-ann,
who are 15 and 13. Calculate their Medicare levies.
Medicare levy = 1.5%
Medicare levy surcharge = 1% (single >70k, couple >154k + 1.5k/child after first,
exempt if one partner <18.8k)
Medicare levy:
Sorans is $2480 being 1.5% of his taxable income (which is the same as his
assessable income as he has no deductions).
Maura is below the threshold and will pay no Medicare levy.
Medicare levy surcharge:
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Their combined income for MLS purposes is $169,300 which is above the 147,500
threshold ($146,000 plus $1500 for the additional dependent child after the first).
Soran will be liable for 1% of his taxable income, $1653, but as Maura is below the
MLS repayment threshold of $18,488 she is also exempt from Medicare levy
surcharge.
Note that if Mauras income was the difference between being over the $147,500
threshold Soran would still be required to pay the surcharge the exemption only
applies to whether Maura pays the surcharge not Soran.