Review notes for taxation

1. Superannuation (LUMP2. Superannuation (INCOME STREAM

3. Employment Termination PaymentsUnused sick leave, excess over tax-free redundancy, “golden hand shakes”, severance pay Cn’t be rolled over to a super fund

4. Unused Leave Payments

5. RedundancyTax free amount=$8806+[$4404x year of completed service] [s83-175] Excess amount taxed as ETPSmall Business Concessions & Depreciating Assets

N.B.1.Identical materials or substantially identical materials need to be grouped tgt [s40-8012] 2. Assets costing < $1,000 each [ID 2003/946]Small Buz: cn’t be groupedNon Business: Cn be grouped Depn using effective life3. For buildings & structural improvements (e.g. roads, bridges, pipelines, fences etc.)

Partnership/Company &DividendPartnerships1. Income divided equally if there is no partnership agreement; 2. Salaries to partners are not deductible as they are distribution of income (5-090 MTG); 3. Interest expense- for general law partnership is deductible (Robert&Smith Case; TR95/25) -Not available to partners in rental property as not carrying on business (considered as investment) – loan used for private purposes-no deductions;

– borrowing used to replace internally generated goodwill- no deduction 4. Exit/Entry of parteners:-retiring partner receive their share of future assessable inc. andassessable under s.15-50 -s25-95 deduction to amounts paid for WIP after 23/9/985. CGTRelates to partners not partnership (ITAA 97, 106-5)Partners individual interests in partnership assets disposed of by partnership Or disposing of their own interest in the partnership itself Companies1.

CompanyPartnershipTaxPay as separate entity s4No pay as partnership s90CGTHave CG No discountHave both CG & discountLossCn’t distributec/f to offset against future economic incomeCn’t offset2. Dividend-Distribution of profits to shareholder owners (s.6(1), ITAA36); payable form profits -No automatic distribution of taxable income, pay dividends according to company law, assessable -fully franked dividend: original income was fully taxed FD= Tax paid x 70 /3 Unfranked dividend: original profit is untaxed

-excess imputation credit are refundable (s67-25) credit=FD x CR / (1-CR) – Tax on dividendsa) IndividualFranked dividend70,000Imputation Credit 70,000x 30/7030,000Taxable Income100,000Tax payable (100,000-80,000)x37% +17,54724,974Less imputation credit(30,000)Net tax payable(5,053)+ Medicare Levy1,500Tax refund(3,553)- corporate tax entity “excess franking tax offsets” are treated as a tax loss (s36-55, ITAA97) as franking tax offsets are generally not refundable to corporate tax entities. b) Company-As per individuals. Gross-up by 207

c) Non residents-unfranked dividends: withholding tax (@15% or 30%). No further assessment (128 D) -fully franked dividend: no withholding tax and not assessable (128B(3))

d) Partnerships & Trusts-Dividend is grossed up with gross distributed to partner/beneficiary -Partners and beneficiaries receive a notional allocation of attached franking credits 50:50 split cash dividend $10,000 fully franked

Fully franked dividend for partner @50%50,000Imputation credit (10,000×30/70) @ 50%2,142Total taxable income52,142

3. a) Franking AccountFranking Dr.Franking Cr.No impact-tax refund-pay franked dividend (30/70)-pay com. Tax-receive franked dividend (30/70)-receive non-resident dividend (with tax withholding)-receive unfranked dividend

b) Franking deficit tax (FDT)Dr. Bal-liable for franking deficit tax (FDT) [amout=Dr. bal.]

Cr. Bal.-paid out as fully franked dividendor-carry forward* FDT applies cos the com has given shareholder credit for tax it has not paid and the com is required to pay the tax as an advance payment. c)d) Distribution by liquidatorsAssessable if they represent income[s.47]. The inc. includes any capital gain calculated without regard to indexation or CGT discount[s47 (1A)]. e) Loans to shareholders- loans to associated person, the excess is deemed to be unfranked dividend. -no tax deduction for the company-[Div. 7A] apply where e shareholders have no capacity or intention of repaying loans at less than the bench mark i/r (7.40%). f) bad debts and tax loss deductionsonly claim deductions for tax losses or bad debts written off if satisfy either one: Continuity of ownership test [165-12]:>50% shares owned by sole shareholders from the loss year to the income year the loss is claimed/ both the year debt incurred and year debt written off Same business test [165-123]:Carrying on the same business immediately before the majority change inownership occurred in the year of claim (125-126) Calculation of Taxation- Individual Taxpayers1. Reportable Fringe Benefit(RFB)not assessable to employees but take into account in calculation of a) Medicare levy surcharge; b) Family Tax Benefit; c) HELP; d) some tax offsets 2. (Reportable Employer Superannuation Contributions)RESCis the super contri. made by employer where the taxpayer has the capacity to influence the size of the contribution. 3. Calculating Gross Tax Payable

ResidentTaxable income (X)

0-18,200*Nil18,201-37,000(X-18,200)@19%37,001-80,0003,572+(X-37,000)@32.5%80,001-180,00017,547+(X-80,000)@37%>=180,000154,547+(X-180,000)@45%*Pro-rated Tax free threshold13,464+ (4,736x number of months resident/12)Non ResidentTaxable income (X)

0-80,[email protected]%80,001-180,00026,000+(X-80,000)@37%>=180,00163,000+(X-180,000)@45%

4. Deduct Tax Offsets (Rebates and Credits)ATI= Taxable Inc. + [[email protected]%+RESC+Net investment &Rental loss+ Tax free pensions+ exempt overseas Inc.] – [any child maintenance paid by taxpayer or their partner] Dependent Rebates (ATI gains, the excess is c/f indefinitely – Capital gain & cost base

MethodsDecriptionCalculationCGT discount:

Assets(A) held >= 12 months before the relevant CGT event.Allows you to reduce your capitalgain by:50% for individuals (including partners in partnerships) and trusts^ 33 1/3% for complying superfunds.Not available to companies.

Capital gain =(Capital proceeds- cost base x A)Less capital lossesReduce by the relevant discount percentageIndexation*:

Acquired before 21/9/1999 at11.45am (ACT)& held >= 12 months

Indexation factor=CPI for quarter diposed/ frozen at 123.4CPI for quarter in which expenditure was incurred

(round to 3 d.c.)Capita gain =(Capital proceeds- indexed cost base x A)

Cost incurred in different quarters indexed separatelyOther:

Assets held 100 yrboat/ caravan/horse for showing, personal use for enjoymentBuilding constructed after 19/9/85 on pre CGT land (20/9/1985) Exemptimprovement threshold =$134,200

4. Main residence exemption (118-110)-disposal of dwelling is exempt if used by individual as main residence -partial exemption:proportion CGT if also used for income producing purposes (rental property for part of ownership or place of business at home) -adjacent land exempt to extent used for private & domestic purposes to a max 2 hectares -changing main residences: both cn be MR for up to 6 months

-Absence Exemption:[118-145]if ceases to reside in MR and owns no other MR, exemption still applies for max. 6 yr even if inc. producing -land is exempt if house built within 4 yrs that becomes MR >=3 months

5. SBE- turnover 55 & reitiredActive asset (AA) of SBE entitled to additional 50% discount (i.e. assessable on 25% of gain).Exempt if capital proceeds used for retirement.i.e. >55 or over rolled to super fund (SF) if 10/5/2006 25% 1/7/02-10/5/06 18.75% apply to cost of car.