Topic 3 : Taxation Planning Flashcards
(33 cards)
Taxation planning
is the legitimate organisation of an investor’s affairs in accordance with taxation laws to minimise tax
Tax evasion
nvolves criminal falsification or non-disclosure as a means of reducing tax.
Tax avoidance
fits between the two and although it looks to minimise tax through legal means, the strategies employed are artificial and contrived and have no reason other than obtaining a tax benefit.
Taxation has a number of different functions including
- to finance the activities of government that modern society expects and that may not be adequately provided by the free market — for example, defence, health, education and roads
- to achieve the government’s economic objectives — for example, an increase in taxes can be used to reduce private-sector spending and therefore restrict inflation
- to achieve desirable social objectives — taxation can be used to encourage or discourage spending on particular types of products and services such as imports, tobacco, alcohol and heavily polluting goods
- to redistribute income and wealth — for example, to provide social welfare to families.
Allowable deductions
Allowable deductions include two types of expenses or outgoings: general deductions and specific deductions.
Examples of the type of expenses that would be considered an allowable general deduction include:
- travelling and car expenses incurred in the course of an employee’s work
- subscriptions for professional journals related to the employee’s employment
- business deductions and interest paid in connection with an activity that generates assessable income.
pay as you go (PAYG)
where tax is pre-paid in instalments to the ATO throughout the year towards payment of their expected final tax liability.
Most companies are levied income tax at a flat rate of
30% on their taxable income for the financial year. There is no tax-free threshold.From the 2015–16 financial year, companies classified as a small business entity are subject to a reduced tax rate of 28.5%
Complying superannuation funds pay income tax at a flat rate of
15%
Tax offsets
Tax offsets are used by the government to provide social and welfare assistance and support to individuals and families in need, encourage certain kinds of activities and investment, and provide a credit for payments of tax.a tax offset represents a reduction in the amount of tax that is required to be paid by a taxpayer
The low income tax offset
To assist low-income earners, the government provides a tax offset which has the effect of reducing net tax payable. The low income tax offset is currently set at $445, payable for taxable incomes up to $37 000. Where the taxable income of a taxpayer exceeds $37 000, the offset is reduced by 1.5 cents for each dollar in excess of $37 000, and cuts out completely at a taxable income of $66 667.
Medicare levy
2% of taxable income to help fund the National Disability Support Scheme
Medicare levy surcharge
The Medicare levy surcharge is an additional levy imposed on individual taxpayers that are high-income earners without adequate private health insurance
HECS and HELP charge
The system, called HELP (higher education loan program), assists students by allowing them to defer payment of their higher education fees and to repay them at a later time through the taxation system when their taxable income reaches a certain minimum income threshold
Taxation of minors
Where a minor is in receipt of unearned income, the first $416 of taxable income is exempt from tax. A rate of 68% applies to income between $417 and $1307, and the top adult marginal tax rate of 47% applies to that part of the income above $1307. The aim of the shading between $416 and $1307 is to achieve a maximum overall rate of 47%
franked dividend.
Where a company has paid full tax on the profits from which a dividend is derived, the dividend is known as a franked dividend.
unfranked dividend.
In situations where the company has not paid tax on its profits for the year, perhaps due to carried forward tax losses, any dividend paid is known as an unfranked dividend.
partially franked dividends.
Companies can have a situation where they have paid some tax on their profits, but not the full rate. Any dividends paid from profits in this situation are known as partially franked dividends.
Dividend reinvestment
Regardless of whether the shareholder receives dividends in the form of cash or in the form of additional shares in the company, the dividend is still taxable and is required to be included in the taxable income of the taxpayer.
Interest deductibility
Interest incurred on a loan used to finance any investment may be an allowable deduction as long as it is incurred in earning assessable income.
However, the transfer of investments or other assets may give rise to a number of issues and tax consequences.
- Care needs to be taken with the transfer of income to children because of the special penalty rates of tax that apply to the unearned income of minors
- The person to whom the income has been diverted is entitled to demand actual payment of the income and the asset (as it is in their name), which may not be intended or desirable.
- The transfer of an asset to another entity or person, including a family member, is considered a disposal, and accordingly the impact of the CGT provisions must be considered. That is, the amount of any CGT payable on the transfer of the asset would need to be considered in determining the feasibility of the strategy.
income splitting
transferring income from an individual paying tax at a high marginal tax rate to an individual or other entity that is on a lower rate of tax
Negative gearing
arises where the total deductions associated with an investment, including the interest charge, exceed assessable income generated from the investment.
Salary sacrificing
lso known as salary packaging, is a common benefit made available by employers and is aimed at providing an employee with their salary in a more tax-effective manner. Salary sacrificing involves substituting part of an employee’s future cash salary or wages for non-cash benefits provided by the employer, such as a car, additional super contributions or a laptop.
