Forms of Taxation in Australia

Question:

Advise income tax implications with relevant sections of Acts, case law and ATO rulings.

There are many forms of taxation in Australia. Individuals and companies in Australia are required to pay taxes or charges to local, state, and federal government level. The taxes are basically collected in order to provide funds for the payment of public services and transfer payments, distribution for economic wealth.

The most significant form of taxation in Australia is Income tax which is collected by the federal government through the Australian Taxation Office (ATO). Federal government also collects Australian GST revenue and after the collection process it so paid the states under a formula that is determined by the Commonwealth Grants Commission for distribution.

The most significant source of revenue in Australia is the taxes on individuals which are imposed by the federal government. The state governments do not impose income taxes in Australia.

Personal income taxes in Australia are imposed on the basis of personal income of the individual and thus the progressive basis.

Australia does not provide for heavy taxation system and thus maintains a low tax burden in comparison to other wealthy, developed nations. There are various types of taxes in Australia under which it divides the burden of tax equally between the poor and rich.

1. Australia’s taxation system is having personal income tax as the most important source of income that is why it is important to understand what is meant by income. Income can be earned by way of personal exertion (by working) and it can also be earned from investment. Income is always in the form of money or goods and services.

2. Here, Allan is a doctor by profession. He is receiving gifts along with his prescribed fees. As per the terms of the law amounts which are received as gifts may or may not treated as income. However, gifts may be taxable if they are part of the business activity. In this case Allan treated wine maker’s dog where he got dozens of wine bottles as gift thus as per the provisions of WET, Wine is threshold and thus wine producer has to pay WET so there will be no liability of WET on Allan.

3. Here, Allan and Batty had started selling excess produce of their garden in a local supermarket and retailers on regular basis thus they are having access to the income on regular basis. The gardening is not their hobby and they are selling the excess produce to the market on regular basis. Thus they have to assess the income and pay tax on the assessed income. They also need to maintain adequate records in regard to selling the produce in the market. They should also make a reasonable estimate of their tax payable. They also require taking assistance from ATO to reconstruct their records in order to make reasonable estimates. However they will have to bear penalty that is imposed by the law for non maintenance of appropriate records.

4. Bartering means the exchange of goods or services for other goods or services without exchange of money and thus money is not involved in the barter system and thus they are managed by the trade exchanges. Under the case study Allan and Batty provides trade exchange services to other people and thus keeps records of the transaction of the members thus the adequate amounts of debit and credit of the members. An online fee of $50 is being charged for battering which is taxable as they are charging fee for their services and as per the above definition of income it should be taxable under GST 2004/04 rulings. Further, Income tax implications of the Barter transactions are same as that related to the cash or credit transactions. Thus barter transactions are also assessable and deductable while calculating taxable income.

Income Tax and GST Collection by Federal Government

5. Income tax provisions of barter, cash and credit transactions are same. A liability for taxation including GST arises wherever a member of barter system makes a sale to another member who is subject to tax.

Payment is made in the form of kind under barter system payment and thus money is not involved in the transaction. Maintenance if debiting and crediting of account is done in order to keep a check on the transactions between the members of the barter system. The member conducting a sale of the product is credited with his account and the member who purchases is debited with his account with the equal value of goods or services.

According to the rules of laws, Fair market value of the product or service is being used as the value of those product or service in monetary terms. Fair market value clearly reflects the arm’s length price or it money value. Fair market value is the value which is charged by the seller in case the product is sold to a stranger or the services are provided to a stranger.

Most of the business-oriented countertrade organisations use a specified rate for converting credit units into an Australian dollar equivalent but here Allan and Batty are converting it into Barts. Each credit unit is having a value equal to one Australian dollar.

As per the laws of taxation, GST, income tax payment must be remitted and converted in the Australian currency. Payment in dollars is accepted by the other members.

Tax invoice is also required for a barter transaction as it is required for other transactions. But the tax invoice must contain or comply with all the usual requirements of a taxable invoice.

The solution provides for the tax implications of the various events that occurred during the year for Australian actress, Nicole who has performed a number of roles in films and has appeared as guest in various serials.

Event: For a telemovie set of 1950, Nicole was asked to gain weight of 10 kilograms to play the role and would be given the role only if she does so. For the same Nicole agreed and increased her diet and spent $ 1000 for the same. She was paid $ 50,000 for the same.

Issue: Will the $ 1000 spent be allowed as deduction?

As per the provisions of the Australian Income Tax provisions, Nicole is a professional as per the provisions of Australian Income tax laws if a person performs or appears in a film, on a tape or disc, or in a television or radio broadcast is covered in the definition of special professional. ^[1]

Being in the above case, Nicole Grownman is an Australian actress working in films and guest appearances in serials is covered in the definition of special professionals.

As per the provisions following will be considered in assessable income for the special professional-

• royalties from copyright of a literary, dramatic, musical or artistic work, and
• income from endorsements, advertisements, interviews, commentating and any similar service
• Rewards and prizes
• Income from a patent for an invention. ^[2]

Conclusion

In light to the above provisions the actress has earned $50,000 from the role that she has played in the film. So this $50,000 will consider while calculating the assessable income of Nicole Grownman. However, $1,000 will not be allowed as deduction being the actress does not have any specific prove that this expenditure is being made to the above mentioned revenue.

Personal Income Tax in Australia

Event: As a result of her weight gain Nicole had to buy new clothes at a cost of $2000. At the end of filming she wanted to lose weight and get back into shape so hired a dietician at a cost of $1,000 and a personal trainer ($2,500) and spent a week at a health clinic ($1,500).

Issue: Will deduction be allowed?

Discussion on Tax Implications: As per the provisions of income tax laws any personal expenditure made by the professional will not be considered as allowable expenditure while calculating the assessable income of the assessee.

In the given case, Nicole brought new clothes at a cost of $2000, spends $1000 on dietician, $2500 on a personal trainer and spent a week at a health clinic worth $1500. All these expenditure made by the actress is being done in order to keep her fit. All these expenditures are personal in nature and should and not allowed as allowable expenditure.

Conclusion:

Being the expenses personal in nature, deduction will not be allowed.

3. Nicole was paid $2,000 by Woman’s World for an interview in which she spoke about the new telemovie as well as her personal life. She donated the money to the Royal Children’s Hospital.

Tax Implications

As per the provision of Australian tax laws any gift or donation made to organisations that have the status of deductible gift recipients (DGRs) s allowed as allowable deduction under income tax laws.

However, four conditions must be met:

• The gift must be made to a deductible gift recipient.
• The gift must truly be a gift. A gift is voluntary transfer of money or property from which no material benefit is received.
• The gift must be covered by one of the gift types. The most common gift is money but deductions may be claimed for other types of gifts such as property or shares.
• The gift must comply with any relevant gift conditions. ^[3]

In the given case, the actress has donated the amount to Royal Children’s Hospital. The hospital is covered under the definition of deductible gift recipients under Australian income tax laws. ^[4]

Hence, the donation made by actress will be allowed as allowable expense for her being the same is covered in terms of above stated provision.

4. Event: The Telemovie received critical acclaim and Nicole was offered a small role in a Hollywood movie. Under the contract she was to receive $AU20, 000. She flew first class to the United States at a cost of $5,000; economy class would have been $2,000. After filming she spent a week visiting agents in Hollywood in the hope of securing more roles. Nicole regarded the week as a ‘working holiday’ and she treated herself to ‘five star’ accommodation at a cost of $6,000.

Issue: Will she be eligible for deduction of the extra week spending?

As per the provisions of income tax laws any personal expenditure made by the professional will not be considered as allowable expenditure while calculating the assessable income of the assessee.

In the given case, she spent $5,000 travelling to United States and $6,000 staying in a five star hotel, both of these is personal expenditure and will not be considered as allowable expenses.

In this case, Nicole earned $20,000 in Hollywood.

As per the provisions of law, if you continue to remain an Australian resident while working overseas, you must declare your worldwide income in your Australian tax return, even if tax was being paid out in the country where you earned the income.

Low Tax Burden in Australia

Being, in this case, she earned $20,000 other side Australia, she needs to disclose the same to the authorities. ^[5]

Conclusion:

Deduction will not be allowed for the expenses incurred being personal in nature and Nicole will have to disclose in her return the income of $ 20,000 earned.

5. Event: A story is published by the well-known magazine Eye Spy for Nicole which contained a number of untruths. Since, her career is blossoming she is concerned about her repute and loss of future roles. She has spent $10,000 in legal fees, sued the magazine for libel and was successful in securing damages of $50,000.

Issue: Taxability of $ 50,000 damages received and the $ 10,000 legal fees paid?

Tax Implications

In lieu of the provisions of the Australian Income tax law, any benefits derived as a consequence of any legal suit will be taxable in the hands of the recipient.

However, the tax benefit is only available if:

• The full details of the reasons and circumstances leading to you incurring the legal expenses are provided
• Copies of any documentation in relation to the circumstances – such as, court documents, etc. are provided.
• Proof that how are these expenses relevant to your gaining or producing of assessable income is provided
• Proof of making the payment is available.

In the given case, the magazine publisher Eye-Spy has written some untrue facts about the actress and hence, she filed the legal suit against the magazine and the decision of the court was in her favour. As a consequence, the former paid Nicole $50,000 to compensate the damages. Nicole had incurred $ 10,000 as a legal fees in the complete court procedures.

Conclusion

In light to the above provisions, $50,000 will be taxable and if she meets out the above conditions related to the legal expenses, she will be allowed to avail deduction for the $ 10,000 incurred.

6. Event: For a short break in acting, Nicole Paid $ 1,000 to a voice coach for improvement of voice projection.

Issue: Will $ 1,000 be allowed as deduction? Whether the same is a private or career related expense?

As per the provisions of the Australian Tax, any expense incurred by a professional in the capacity of improvement of him/herself professionally is allowed as deduction.

In the given case, Nicole had incurred $ 1,000 for improvement in voice projection, which can be considered as an expense for professional growth.

Conclusion

Hence, the above expense incurred is allowed as an allowable expense in light of the above provisions.

7. Event: Nicole shifted to a rented house in town and has specifically selected a two bedroom unit so that one room could be utilized exclusively as study/office where she could read script and deal with correspondence and meditate.

Issue: Will she be entitled for a tax deduction for an apportionment of the rent used for business purpose?

Considering the provisions of the Australian Tax laws, for the rental expenses incurred by the assessee for a rented premise which will be used for the business purposes will be treated as allowable expenses.

In the given case, Nicole has specifically selected a two bedroom unit so that one room could be set aside for exclusive use as a study/office where she could read scripts, deal with correspondence and meditate. Hence, in this case one room is used by Nicole for personal purpose and the other for business purpose.

Conclusion:

Hence, in the light of the provisions of the Australian Income Tax, deduction will be allowed for the proportionate the rent paid for the room used for business / office purpose.

Reference:

1. Australian Taxation Office, 2014, “Income Averaging for Special Professionals 2013-2014”;
2. Australian Taxation Office, 2014, “Taxable Professional Income”; 
3. Australian Taxation Office, 2014, “Gifts and Donations”; 
4. The Royal Children’s Hospital Foundation, 2014, “Legal Status and Privacy Policy”; 
5. Australian Taxation office, 2014, “International Taxa on Individuals”; Available at:.