Taxation Law - Juliette - George - Assessment Answer

Taxation Law Assignment

Assignment Task

Juliette is a famous English dancer who is contracted by a private theatre management company based in the United States of America to come out to Australia to choreograph the dancing routines for a new stage musical based on the Harry Potter books. The contract is for 2 years from 15 March 2015 through to 15 March 2017. The contract is signed in England with payment of AUD$70,000 going into a Swiss bank account on 15 July 2015. Further payments of AUD$70,000 will go into the bank account every 6 months until the contract is complete.

Juliette flies into Sydney on 1 February 2015 with the intention of spending some time looking around the country while she is waiting for her job to begin. At this time Juliette gives up the lease on her flat in London and sells some of her furniture. Other items of furniture consist of valuable antique pieces, which she keeps in storage to use on her return. On arrival in Australia Juliette embarks on a bus trip around the country, which is planned to last for 2 months. However, on 28 February 2015 Juliette finds out her mother is seriously ill and she is required to fly back to England to see her in hospital. Juliette stays at her mother’s house until her mother is well enough to look after herself and returns to Australia to fulfill her contract on 1 May 2015.

As the contract will be fulfilled in Sydney Juliette leases a flat in Sydney and purchases furniture to go with it. As the year passes Juliette finds that she is deeply in love with the lead male dancer, Romeo, and they talk about getting married. As Romeo grew up in Sydney and wants to stay there Juliette buys a house for them to live in together in August 2015 and they marry on 1 September 2015. Juliette can’t believe her luck as she has always thought she might like to live in Australia permanently.

Sadly, her good luck came to an end when she received a call that her mother had once again become ill and she had to return to England to look after her on 15 October 2015. With a heavy heart Juliette said goodbye to Romeo and returned to England hoping that her mother’s condition would pick up quickly so that she could return to her husband and the country she had grown to love. However, Juliette’s mother required 24 hour care and insisted that Juliette was the one who looked after her, so Juliette had to stay on in England to fulfill her mother’s wishes. To make the arrangement easier for Juliette her mother paid her AUD$1,000 per month to cover her mobile phone bills to Romeo, even though she lived in her mother’s house without paying rent. Throughout this time Juliette still received her AUD$70,000 every 6 months as she was able to transmit her choreography notes to Romeo who then passed them onto the assistant choreographer and the show went on without her.

Unfortunately, Juliette’s mother passed away on 10 April 2016 and Juliette returned to Australia on 15 April 2016 to seek comfort in the arms of husband Romeo and distract her mind with work.

George had a relative who had lived in Sydney but who died in October 1995. On the death of the relative George inherited his Sydney house.

On inheriting the house George decided to let the property, and appointed ‘Honest Chris’ Real Estate’ managed by local real estate baron Christopher Skate, as property manager. The property had been rented from the time it was inherited.

Repairs were carried out in December 2015, including:

REQUIRED (Q2):

a) Prepare a statement setting out the taxable income that will arise from the rental property.

b) Prepare a discussion explaining each component of the rental property statement prepared in Q2a). This discussion should clearly explain the inclusion/exclusion of each element of the rental property statement above.

Introduction

Question One: An Overview of Income Tax Regimes for Residents and Non-Residents in Australia

In Australia, the taxable income is the amount of income that one pays tax on. This is commonly referred to as the amount that remains from the assessable income after deduction of all the deductions allowed from the income. The Assessable income is the total taxable income from various sources such as salary and wages, commissions, rent pensions, bonuses, dividends, and bank interests (Taxpayers Australia Inc, 2015). According to IBP Inc. (2015), the income tax rates for the year 2015 to 2016 are;

Between 0 – $18200, no tax

Between $18201- 37000 19 cents for every $1 above 18,200

Between $37,001- $ 80000 taxable income is $3,572 plus 32.5 cents for each $1 over $37,000

Between $80,001 – $180,000 the taxable income is $17,547 plus & 37 cents for each $1 over $80,000

Above $180000, the taxable income is $ 54,547 plus 45 cents for every dollar above 18000. These rates are not inclusive of a Medicare levy of 2 percent and a Temporary Budget Repair Levy of two percent for incomes above $180,000. These rates are for Australian residents only. Australia has a different income tax regime for foreign residents. Foreign residents are not supposed to pay the Medicare levy from their incomes (Robin et al., 2016).

IBP Inc. (2015) identifies the taxable income for foreign residents in Australia for the year June 30^th, 2015 to July 2016 as follows,

1) For incomes between 0 and $ 80000 the tax on income is 35 cents per each dollar

2) For incomes between the range of $ 80000 and 180000 Australian dollars, the income tax is $26000 plus a rate of 37 cents for every dollar above $80000.

3) Between $180000 and over, the income tax is $ 63000 plus 45 cents for every dollar above 180000. These rates are not inclusive of the temporary budget repair levy of 2 percent for taxable incomes over the $ 180000 mark. These rates are for the financial year July 2016 to 30^thJune 2017.

According to Frank et al. (2015), the income tax levies for the year June 30^th, 2014 to July 2015 for foreign residents were as follows;

For A taxable income of between 0-$80000, the income tax is 32.5 cents for every dollar.

Between 80,001 dollars and 180,000 dollars the income tax was $ 26,000 plus 37 cents for each dollar over $ 80000.

For taxable incomes above $180000, the income tax was $63000 plus 45 cents for every dollar over 180000.

In Australia, there are some allowable deductions that are claimable when filling income tax returns. These work-related deductions are entitled to when they are reimbursements, related to the job, and one must record the expenses to prove the deductions (CCH Australia, 2012). Under Australian tax laws, the assessable income of residents includes all income from every source including income from other countries. However, for non-residents, the assessable income is only for income sources within Australia (Morgan, Mortimer, & Pinto, 2014). There is also a superannuation rate that applies to both residents and non-residents. Non-residents must pay the superannuation fund regardless of nationality. The superannuation rate for both residents and non-residents is 9.5 percent of income from the year 2014. Superannuation is the money the employer contributes to the retirement fund (Australian National Audit Office, 2013). Nethercutt (2014) also highlights that Australian residents are taxed on all their worldwide income from all sources while temporary residents are only taxed on the income generated in Australia.

Calculation of Income Tax Payable by Juliet since 15^thMarch 2014 to 15^thMarch 2015

Juliet Signed to work for the Australian company in England. The initial deposit that was paid was $ 70000 deposited into a Swiss bank account. The money was sourced from an Australian company hence the payment is liable to income tax charges in Australia. Non-residents are charged income tax for Income generated in Australia (Nethercutt, 2012). Between March 2015 to 30^thJune 2015, Juliet was still a non-resident in Australia hence the income tax charged on the income is for non-residents.

The total gross income was $ 70000.

For the year 2014 to 2015, the non-resident income tax rates were as follows;

For a taxable income of between 0 and $80000 Australian dollars, the taxable income was 32.5 cents for every dollar (IBO Inc., 2015).

Therefore, the income tax for the year ended June 30^th, 2015 was total gross income $70000 less income tax of 32.5 cents per Australian Dollar, less 9.5 superannuation fee for non-residents for the gross sum.

32.5/100 Multiplied by $70000= total income tax for year one up to June 30^th, 2015 = 22750

Less The attention fee which is 9.5 percent of gross income which amounts to 9.5% of $70000= $6650.

The net income for the year ended June 3oth 20 2015 was 70000 less income tax $22750 less superannuation fee of

($6650) which is equal to $40,600.

The income tax for the financial year 1^stJuly 2015 to 30^thJune 2016

In this case, Juliet married her fiancée on 1^stSeptember 2015 and obtained permanent residence. This means that her taxation status changed from that of a non-resident to a resident. Even when she moved to England to take care of her mother, her taxation status remained that of a resident. Therefore, for the five months she lived in England and earned 1000 dollars per month, it means that this income was also taxable.

The total income for the financial year 1^stJuly 2015 to 30 June 2016;

As per the contract terms, the other payments due for the year are two instalments of $ 70000 on September 15^th2015, and 15^thMarch 2016.

The total income is $140000 plus the income earned overseas which is $ 5000 for the five months she worked in England.

The total income is 145,000. The income tax levies for residents in Australia is as follows;

An income range of 0 – 18200$... No tax

An income range of between $18201- $37000, the income tax rate is 19 cents for every $1 above $18,200

An income range of between $37,001- $ 80000, the taxable income is 3,572 plus 32.5 cents for each $1 over $37,000

An income range of $80,001 – $180,000, the taxable income is $17,547 plus 37c for each $1 over $80,000

Above 180000 dollars the taxable income is $ 54,547 plus 45 cents for every dollar above $180000

Therefore, the income tax payable is;

Income over $ 80000 is 145,000-80,000= 65000

32.5/100 of $65000 = $21125 plus$ 17547= 38672

The total income tax is 38672 for financial year July 2015 to July 2016.

Other deductions;

Medicare levy of 2 percent of gross income ($145,000) = $2900

Superannuation fee charged at 9.5 percent of gross income ($145,000) =$13775

Net income for Juliet in the year 2015 -2016 is $145000-($38672+$2900+$13775) = $89653

Question Two: Overview of Laws Governing Rental Income and Income Tax

In Australia, income tax is inclusive of any rental income. Rent is the full amount of any rent-related income received for the year or entitled to for the rented property paid to the agent or an individual. Any rental income must be included in the calculation of income tax. Rental income is inclusive of any letting and booking fees received, any rental bond money paid to an individual like bond money received for tenant defaults or damages that require maintenance and repairs. All insurance payments received for damage to property or lost rent, any reimbursements for any deductible expenditure also count as rental income. The services and Goods Tax is not applicable for rent accruing from residential homes (Taxpayers Australia Inc., 2015).

The law on capital gains tax does apply in some instances on inherited property. Capital gains taxes are normally disregarded in Australia when a property is passed to the deceased person’s legal representative, personal beneficiaries like next of kin or the deceased person’s legal representative to the beneficiary (Morgan, Mortimer, & Pinto, 2014). This exception is not applicable when the property is inherited by a non-resident. A foreigner is supposed to pay capital gains tax on inherited tax in cases when they are disposing or selling off the property (Frank et al., 2015).

Foreign nationals only pay for income tax for their earnings in Australia and are not charged for income earned in other countries (CCH Australia, 2012).

According to Taxpayers Australia Inc. (2014) Australian Tax laws also entitle people to claim expenses related to the rental property for the period the property was rented or available for rent. These expenses include advertising costs for tenants, any bank charges, council payments, council rates, and insurances. Other claimable expenses are land taxes; the decline in the price of depreciating assets, agent fees and commissions, costs incurred during repair and maintenance of the property, and travel undertaken for property inspection (Robin et al., 2016; Australian National Audit Office, 2013).

According to CCH Australia (2002), the claims for a decline in the price of declining assets are another claim that taxpayers can claim on Rental income. This claim is made for depreciating assets obtained when owning the property or that were subsequently bought after the purchase of property. These depreciating assets are the assets expected to decline in their worth over time, for instance, electronics and furniture.

Determining the Total Income Tax George Is Supposed to Pay for the Financial Year

George is a non-resident in Australia. The rental income he earns from the inherited property is subject to payment of income tax since non-residents are supposed to pay for income tax for income made in Australia.

The total income for the year 2015 to 2016 is $ 13000

George is entitled to claim some deductions from the rental income as follows

1. Repairs and maintenance in December costs = (15000+6000 +1200+2500+1000) = 25700
2. The claim of the diminishing value of assets.

The prime cost method of diminishing value assumes that the value of an asset reduces at the same rate as its effective life. This method is used in claiming a fixed amount of money every year under Australian Tax laws. The items that qualify for this deduction are items acquired during the ownership processes of the property or other fixed items acquired later (Devos,2012).

According to (Nethercutt, 2014), the diminishing value is calculated as follows;

Diminishing Value =Asset cost x DAYS the assert is held/ (365) x100 %/ the effective life of the asset,

The Costs of diminishing value of assets for each item that George can claim are,

Asset cost x Days the asset is held/ (365) x100%/ the effective life of the asset.

Stove $900 X 365/365 x100/12 =$7500

Hot water service $ 2000 x365/365 x100/12=$16666.67

Carpets $ 3500 x365/365 x 100/10 =35000

Furniture and fittings 5000 x 365/365 x100/13.33 = $37509.

The income tax charges for the year July 2015 to 2016 for foreign residents were as follows;

A taxable income of between 0-$80000, the income tax is 32.5 cents applies for every dollar

The taxable income for George is $ 13000

The total income tax George is entitled to pay is 32.5/100 x 13000 = $ 4225.

However, George is entitled to claim some deductions allowed in the Australian taxation laws from the taxable income as follows;

The total costs of repair and maintenance for the rental property = the costs of repairs and maintenance in December 2015 = ($15000+$6000 +$1200+$2500+$1000) = $25700

The commissions paid to the property agents which is 5 percent of the rental income (13000) 5/100x $13000 = $650.

George is also entitled to claim costs of the diminishing assets in the rental property as explained below;

Stove $900 x 365/365 x100/12 = $7500

Hot water service $ 2000 x365/365 x100/12 = $16666.67

Carpets $ 3500 x365/365 x 100/10 =$35000

Furniture and fittings 5000 x 365/365 x100/13.33 = $37509

The total cost of diminishing assets = $ 96675.67

The total claims for deductions George is entitled to (repairs cost $25700+Agent commission$ 650+ the cost of diminishing asset $96675.67). The total cost of claimable deductions is $123025.67.

This figure indicates that the total deductions George can claim are more than the total rental income.