Tax liability refers to the tax debt that a company, corporation, or an individual owes the government. Sources of tax liabilities include income tax and taxes associated with capital gain and sales. Taxation theory, practice and law, below, applies to businesses and individuals in Australia.
Q 1
Part A
Ways (methods) Andrew might be able to claim deductions for his car expenses
According to Australian Taxation Office (2021), the car expenses that can be claimed include oil and fuel expenditure, car servicing and repairs, registration costs, motor vehicle loan interest, premiums on insurance cover, depreciation, and lease payments. If Andrew uses his car for both private and business, he should accurately identify the percentage associated with business use. Proof or evidence may be required. This is because Australian Taxation Office (ATO) declares that private expenses cannot be claimed. Using a logbook or diary is important when recording the private and business travels. Again, Andrew must deduct the travelling expenses from home to the business premises. This may only be included if he runs a home-based business and took the trip for business reasons.
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The car expenses that Andrew can claim include:
- Work-related expenses when travelling from the regular work premise to meet a client
- Car use to attend work-based meetings and conferences far from workplace, especially when items delivery or collection of supplies is involved
- When travelling between two different work stations, Andrew’s home should not be one of these
- If Andrew uses the car to go to alternative workplace and returns to the regular work premise or home
- Travelling from the usual workplace to a client’s premises or alternative work place
The load amount of Andrew’s car must not exceed one tonne, and the vehicle should be capable of carrying 9 or fewer passengers. The calculation of car expenses is completed using either the logbook method or cents per kilometer approach (ATO, 2021).
Cents per kilometer method
- This method applies a common rate which works as follows:
- For the income year 2020 to 2021, 72 cents per kilometer is claimable from 1st July 2020
- 68 cents per kilometer apply for income years 2018-2019 as well as 2019-2020
- 66 cents per kilometer should be used for income years 2015-2016, 2016-2017, and 2017-2018
- Only 5,000 kilometers per car are claimable
- Calculation of deductions require multiplying the count of business kilometers travelled during the given year with the appropriate per kilometer rate
- Written evident is necessary to show the way Andrew completed the business trips. Diary records or entries in ATO’s app are important.
- The deductions can be claimed by two different users of a common car, if the car is jointly owned. The amount of business claimed per person should not exceed 5,000.
- The rates indicated above account for depreciation, insurance, fuel, repairs, maintenance, and registration expenses.
Logbook Method
Here, Andrew should ensure that:
- Claims only cover the work-related part of your car’s actual expenses
- Expenses should only focus on operational costs and value decline. No capital costs are allowed. The capital costs to keep out of the claim are:
o Your car’s purchase price
o Principal on money you borrowed to buy the car
o Additional improvement expenses
- Working on the work-related usage requires that Andrew owns actual logbook and odometer readings should show all the records from the start to end of logbook duration. The minimum period is 12 weeks.
- If Andrew wants to claim oil and fuel costs under this method, the following are required:
o Valid receipts
o Odometer-based records, showing all the readings from the beginning to the end of logbook period
- Also, provide written evidence for other car expenses
- Use myDeductions tool in ATO app to store the electronic logbook
Again, the car should belong to Andrew. Deductions are still acceptable if he has leased the car or the vehicle is under a hire-purchase agreement. In fact, ATO (2021) explains that key considerations when calculating deductions for a car used for work-related tasks include types of car ownership. ATO provides a deduction tool in its app to help individuals to store records of annual expenses and receipts. ATO’s MyDeductions app records the point to point travel, GPS, and odometer trips.
Cents per kilometer and logbook methods are not applicable when if Andrew uses another person’s car. However, he will still claim a deduction for the valid work-related costs he incurred when using someone else’s car. If Andrew has a way of proving that a family or private agreement for ownership or lease of the car exists, he can be allowed to apply either the logbook or cents per kilometer approach to calculate the expenses.
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Part B: Prime Cost and Diminishing Value Methods
Prime Cost
The prime cost involves claiming of fixed amount on yearly basis. The formula provided by ATO (2020) is:
Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)
For the Mercedes purchased by John, the prime cost is as follows:
= 118000 × (365 ÷ 365) × (100% ÷ 10) = (118000× 10%)
= $11800
Diminishing value method
It is based on the assumption that an asset’s value depreciates more in the early years of effective life (ATO 2020). The formula for calculating diminishing value is:
Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)
For the Mercedes bought by John, diminishing value is as follows for 10 years:
· For the first year
= $23,600
· For the second year
= $18,880
· For third Year
= $15104
· Fourth Year
= $12083.2
· Fifth Year
= $9666.56
· Sixth Year
= $7733.248
· Seventh Year
= $6,186.5984
· Eighth Year
= $4949.27872
· Ninth Year
= $3959.422976
· Tenth Year
= $3167.5384
Q2
a) Types of entities that are exempt from income tax
In Australia, the federal government imposes tax on individual and corporate income categories that are considered taxable. Both the Income Assessment Act of 1936 and the 1997 Income Tax Assessment Act are applied when calculating income tax. Based on these statutes, a progressive rate ranging between 0% and 45% is applied of taxable income. The applicable rate is determined by amount of income. There is as well a 2% levy on Medicare (ATO 2021a).
The individual income tax rates are different for Australian residents and foreigners for tax purpose. A special tax rate also applies to children, under 18 years, receiving unearned income. On the other hand, company income tax depends on annual turnover and is subject to dividend imputation (Australian Government 2021). 27.5% or 30% rate is often applied on the taxable income of a company.
The Income Tax Assessment Act 1997 (Cth) indicates that a not-for-profit organization has to pay tax, and that such should be included in the taxable income section. This may only reconsidered if the organization qualifies for a tax exemption (Australian Government 2021). To access tax exemptions and endorsements, according to ATO (2017), knowledge of charity tax concessions is essential. The charity tax concessions endorsement is only accessible to organisations with Australian Charities and Not-for-profits Commission (ACNC) registration. A charity that fails to apply for this endorsement cannot get income tax exemption.
b) Calculations based on Mery’s annual income and deduction details:
Anyone that runs a business will have most of the income received accessible for tax income reasons. The assessable income is also known as total income. The accounting method in use has a major influence on the amounts include in an income year.
For the tax payer, Mery, the following details are captured:
- She is a resident single mom with one dependent child (7 years old) taxpayer of Australia for the tax year 2020-2021
- Her Taxable Salary earned is $102,000 (Including tax withheld) having no private health insurance.
- She had a $7,000 deduction.
- Mery has a student loan outstanding for his previous studies at Queensland University technology of $42,000.
- Mery’s employer pays superannuation guarantee charge of 10% on top of her salary to her nominated fund.
The applicable assessments and deductions are as follows:
Total Assessable Income
Items | Amount in $ |
Employment income | 102,000 |
Passive income from investment (capital gain) | 6,000 |
Assessable income for tax year 2020-21 | 108,000 |
Total Taxable Income
Items | Amount in $ |
Employment income | 102000 |
Passive income from investment (capital gain) | 6000 |
Assessable income | 108000 |
Deductions | 7,000 |
Taxable income | 101000 |
HELP Repayment Amount
Item | Amount in $ |
Student loan | $42,000 |
Medicare Levy
Items | Amount in $ |
Medicare levy | 1843.01 |
Total | 1843.01 |
Medicare Levy Surcharge
Items | Amount in $ |
Medicare Surcharge | 0 |
Total | 0 |
Total Tax Liability
Items | Amount in $ |
Taxable income | 108000 |
Applicable tax | $5,092 plus 32.5 cents for every $1 above $45,000 |
Tax amount | 25,567 |
Tax on FEE-HELP loan | 0 |
Tax on the 10% superannuation | 0 |
Total tax liability | 25,567 |
Net Tax Liability
Items | Amount in $ |
Taxable income | 108,000 |
Total tax liability | 25,567 |
Net tax liability | 82,433 |
