Ch.11 - 2010 Reed International Books Australia Pty Limited...

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© 2011 LexisNexis Australia 1 Financial Planning in Australia 4ed – by Taylor, Juchau, Houterman Solutions by Elen Seymour Chapter 11 1 Taxes: Deductions, Offsets and Other Taxes Solutions to Questions 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 or moving into the private health care system. Are tax offsets better than other incentives or penalties for encouraging such behaviour? As we examined earlier in this chapter there is a direct dollar for dollar benefit in the government giving an offset rather than a deduction. Another aspect to consider is that unless an offset is refundable the way a franking offset is then it is only of benefit to those taxpayers that have tax to pay. In a sense an offset only targets those who pay more tax rather than necessarily all those that incurred the expenditure that the offset is seeking to provide relief from. A deduction whilst it does not give the same dollar for dollar advantage at least provides relief for all who incurred the expenditure — and consequently is often easier to cap and to understand. Moving into the area of broader social policy we might also consider a more direct system such as the Baby bonus, or the recent so-called Rudd Christmas bonus paid to certain classes of individuals. If we consider these direct cash payments, we need to ask do they achieve the desired goal (substituting paid maternity leave or stimulating the economy to stave off recession) in an effective way. We should also ask does it create undesirable effects such as increased gambling, continued blow out of the Current Account Deficit, and even suggestions of scheduled births to take advantage of different baby bonus rates. Question 2: Another tax relief incentive is the dividend imputation system. How does this system work and why do you think the Australian Government brought in the franking credit system? The dividend imputation system, also known as the franking credit system, was brought in to ameliorate the double taxation of dividends being sourced out of taxed profits of companies and being assessable income in the hands of the shareholder. The franking system works through a series of mechanisms. First, a company keeps a franking account which tracks those events which cause the company to debit or credit the franking account — essentially tax paid or franked dividends received is a credit and tax refunded or dividends franked is a debit. A company may then with its after-tax profits decide to distribute a franked dividend to its shareholders. Within certain statutory restraints a company may choose the amount to frank its dividends — whether full or partial franking. The franked dividend in the hands of the shareholder is assessable income and the shareholder must include the franking 1 Note all calculations are based on the 2009/10 tax rates. © 2011 Reed International Books Australia Pty Limited trading as LexisNexis.
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Ch.11 - 2010 Reed International Books Australia Pty Limited...

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