The Income Tax Assessment Act 1936 ( the ITAA 1936 ) and the Income Tax Assessment 1997 ( the ITAA 1997 ) are the chief income revenue enhancement Torahs in Australia. The ITAA 1936 was regarded to be complex and unmanageable and be rewritten and reconstructed into the ITAA 1997 by the Tax Law Improvement Project ( TLIP ) . However this rewritten procedure does non stop.
This essay analyses several regulations of the ITAA 1936 and the ITAA 1997 which covers income revenue enhancement for the employee, the company and its managers and stockholders.
First, this essay identifies four sorts of taxpayers. Second, after clear uping the several cardinal constructs, such as the assessable income, the ordinary income and so on, and saying their relationships with each other, this essay analyses the instance and calculates the assessable income for each taxpayer harmonizing to the relevant regulations of the Income Tax Assessment Act. Finally, this essay makes some suggestions about how to better be after the household ‘s income revenue enhancements.
Who the taxpayers are
Harmonizing to Section 4.1 of the ITAA 1997, every person, company and some other entities, which are stipulated in the Division 9, should pay income revenue enhancement.
Snow White Cleaning Pty Ltd. ( the Snow White ) is a taxpayer because it is a company and received income by offering the cleansing service harmonizing to Section 6.5 of the ITAA 1997.
Mary is a taxpayer because she received income by being the employee of the company and acquiring wages for her cleansing service harmonizing to Section 6.5 of the ITAA 1997. Besides, under Section 12.35 of the Pay As You Go keep backing system ( The PAYG withholding system ) in SchA 1 to TAA, salary and rewards are assessable.
Mary and her hubby Rory are taxpayers because of two grounds. First, they received income by being the managers of the Snow White. Second, they are the stockholders of the Snow White, should pay revenue enhancement for their dividends harmonizing to Section 44 ( 1 ) of the ITAA 1977.
Assessable Income of each identified taxpayer
Harmonizing to Section 4.10 ( 2 ) of the ITAA 1997, multiplying the nonexempt income and the relevant rate and minus the revenue enhancement offsets equals the income revenue enhancement. Harmonizing to Section 4.15 ( 1 ) , the assessable income minus the tax write-offs equals the nonexempt income. So ciphering the assessable income is an of import measure when ciphering the concluding income revenue enhancement. So before determining and ciphering the assessable income of each identified taxpayer, we should foremost happen out what the construct “ income ” agencies.
In Scott V FCT, the justice held the construct of income should be defined within the uses of the ordinary people, although the legislative act could qualify some exclusions or particular regulations[ 2 ]. So the Section 6.1 ( 5 ) of the ITAA 1997 distinguishes two types of the income: the ordinary income and the statutory income.
The Section 6.1 ( 5 ) of the ITAA 1997 besides applies another categorization which divides the income into three types: the assessable income, the exempt income and the non-assessable non-exempt income. Both the ordinary income and the statutory income could be one of the three types discussed above, but could non be two or three of these three types at the same clip.
Harmonizing to Section 6.5 ( 2 ) of the ITAA 1997, when the taxpayer is an Australian occupant, the taxpayer ‘s assessable income includes the ordinary income no affair where the income comes from and how the income comes from. Besides there are several statutory income should be assessable harmonizing to Section 6.10 of the ITAA 1997 with a list of these statutory income in Section 10.5 of the ITAA 1997.
Mary as the employee
Mary received a wage of $ 75,000 from the Snow White. The Section 6.5 of the ITTA 1997 provides that ordinary income is included when ciphering the assessable income. Mary is an Australian occupant, and should pay revenue enhancements for her ordinary income no affair where the income has been derived from. Obviously, the wage the employee received should be regarded as ordinary income and assessable.
Besides, the Snow White was non any peculiar entity such as charity, public educational establishment and so on in Section 11 ( 5 ) . It was the salary which was non involvement on substructure adoptions and so on in Section 11 ( 10 ) . The wage was non any scholarship or educational allowance in Section 11 ( 15 ) . So the wage was non any type of exempt income stipulated in Section 11 ( 5 ) , 11 ( 10 ) , and 11 ( 15 ) . The assessable income was $ 75,000.
Mary and Rory as the managers
Mary and Rory each received the managers ‘ fees of $ 10,000. The managers ‘ fee was merely another illustration of ordinary income and was assessable. The assessable income was $ 10,000 each.
Mary and Rory as the stockholders
Mary and Rory each received a to the full franked dividend of $ 10,000. The ITAA 1997 stipulates the construct of dividend in Section 44 ( 1 ) and the frankable distributions and some exclusions in Section 202.40 ( 2 ) .
In MacFarlane V FCT[ 3 ], and in FCT V Condell[ 4 ], the Judgess both regarded when judging the dividend was whether assessable or non, it was critical to happen where the company ‘s fund came from. In this instance, the company ‘s gross came from Manningham Secondary College, which means the dividend comes from Australia, so the dividend was assessable.
Harmonizing to Section 207.20 ( 1 ) , when ciphering the stockholder ‘s assessable income, the hard currency distribution and the franking credits should both be considered. In this instance, the imputation recognition is $ 4,286 ( to the full franked dividend $ 10,000* company revenue enhancement rate 30 % /70 % ) . The imputation sum is $ 4,286.
For Mary, the nonexempt income is $ 89,286 ( $ 4,286+ salary $ 75,000+ manager ‘s fee $ 10,000 ) .
For Rory, the nonexempt income is $ 14,286 ( $ 4,286+ manager ‘s fee $ 10,000 ) .
Snow White Cleaning Pty Ltd
There is another inquiry about the differences between the income and the capital additions when make up one’s minding the character of some grosss. In FCT V Dixon, the justice held grosss received on a regular basis or sporadically will be more likely to be ascertained to be assessable income[ 5 ]. However, the justice in Prendergast V Cameron held a different position keeping that the income might be paid at a clip and the capital additions might be paid by manner of installment[ 6 ]. In this instance, the Snow White received the grosss for supplying cleaning service instead than selling assets such as land, edifices and so on. More significantly, the Snow White received the grosss sporadically, which is $ 120,000 a twelvemonth over 3 old ages, intending the Snow White should go on supplying cleaning service for the back-to-back three old ages. Besides, there were besides other little contracts. Sing the above three points, the grosss are more appropriate to be decided as the income.
Harmonizing to Section 6.5 of the ITAA 1997, the gross the Snow White received from supplying services was ordinary income and should be assessable. So the Snow White ‘s assessable income was $ 152,000 ( $ 120,000+2* $ 16,000 ) .
More effectual revenue enhancement planning
There are several agencies to assist Mary rearrange her personal businesss and lower her, her hubby ‘s and her company ‘s revenue enhancements.
However, revenue enhancement planning will be hazardous because the boundary line between the revenue enhancement planning and the revenue enhancement equivocation is non perfectly clear. Sometimes the taxpayer ‘s purpose could be considered. In Fletcher V FCT, the justice gave weight to the taxpayers ‘ purpose when make up one’s minding whether an anti-avoidance proviso applies[ 7 ]. So when using following revenue enhancement be aftering techniques, it is suggested to obtain legal advice signifier advocate, merely like in Tip Top Dry Cleaners Pty Ltd V Mackintosh[ 8 ].
Choice of entity: Partnerships instead than company or limited partnerships
Mary could take partnerships instead than company to run her cleansing concern. The advantages of partnerships are as follows.
The two proprietors of the Snow White are all in one household. If the household runs the cleansing concern through partnerships, they pay single income revenue enhancements. This twelvemonth the gross of the Snow White was $ 152,000. Mary and Rory each received $ 76i??000 ( $ 152,000/2 ) and the assessable income was $ 76,000 which was less than $ 89,286. So, the partnerships could salvage more revenue enhancements from the partnerships position.
If the partnerships get losingss, the single spouses could countervail losingss against their other income. Company or limited partnerships could merely countervail losingss against the future income of the company ( sometimes including the parent company in a amalgamate group ) or the limited partnerships, and the stockholders of the company or the single spouses of the limited partnerships could non bask the beginning. As the Snow White was founded after 2008, which means it is vulnerable to losingss. So the partnerships will be more appropriate for Mary.
Besides, if the Snow White disposes of assets of partnerships, the spouses that are Mary and her hubby could bask 50 % CGT ( Capital additions revenue enhancement ) price reduction under some conditions harmonizing to Part 3.1 of the ITAA 1997.
However, if the twosome chooses the partnerships, Mary will non be the employee of the Snow White. Because in Ellis V Joseph Ellis & A ; Co, the justice regarded one could non be both the employer and the employee at the same clip[ 9 ].
Choice of revenue enhancement system: little concern entity instead than standard revenue enhancement system
Harmonizing to Subdivision 328 ( degree Celsius ) of the ITAA 1997 and Section 328.110 ( 1 ) , ( 4 ) , if the “ aggregated turnover ” of an entity was less than $ 2 million last twelvemonth, was likely to be less than $ 2 million at the beginning of this twelvemonth, and turned out to be less than $ 2 million at the terminal of this twelvemonth, the entity was a little concern entity. In this instance, the “ aggregated turnover ” of the Snow White was evidently less than $ 2 million in the recent two old ages.
If the Snow White chooses to use the little concern system, the Snow White will bask a broad scope of revenue enhancement grants, such as the CGT little concern grant which stipulated in the Division 152 of the ITAA 1997.
Other revenue enhancement planning
There are other agencies to assist Mary and her household to be after their revenue enhancements. For illustration, one of them is maximize and accelerate tax write-offs. However, when utilizing this technique, the taxpayers should maintain the relevant written grounds about deductible disbursals harmonizing to Division 900 and Division 28 of the ITAA 1997. Otherwise these disbursals will non be deducted.
The ITAA 1997 stipulates different revenue enhancement governments for different entities and different income. How to take the most appropriate revenue enhancement program is assorted from one entity to another.
As to this instance, this essay regarded it is more appropriate for the household cleaning concern to take partnerships alternatively of company or limited partnerships because of three chief grounds. First, the partnerships could run like an income splitting device and secondly, reassign the loss from the partnerships to the single spouses. Third, the household may perchance have 50 % CGT price reduction when disposing of assets of partnerships.
However, there are disadvantages about the partnerships. One of them is the spouse and the employee could non be the same individual at the same clip.
In add-on to partnerships, this essay suggests to use the little concern government, instead than standard revenue enhancement system, and maximise and speed up tax write-offs. When using these revenue enhancement planning techniques, the revenue enhancement remunerators should be careful because there are obscure countries between revenue enhancement planning and revenue enhancement equivocation. The best manner to defence the revenue enhancement planning hazard is to obtain legal advice signifier advocate.