Tax Assignment Sample
Q1:
Answer :In Australian taxation law, the concept of assessable income is central to the determination of an individual's or entity's taxable income. According to the Income Tax Assessment Act 1997 (ITAA 1997), assessable income is defined as the income that is subject to taxation. It is a broader term than taxable income, which is the amount left after deductions have been applied to assessable income. To better understand the calculation of taxable income, it is crucial to differentiate between various types of income and the role of deductions. This answer will explore the various categories of income that fall within the framework of assessable income, such as ordinary income, statutory income, and capital gains, and examine how deductions function in determining taxable income.
The Concept of Assessable Income
Under Australian tax law, assessable income includes all the income an individual or entity earns unless specifically exempted by law. The central concept of assessable income is the amount upon which a taxpayer’s liability to tax is calculated. The determination of assessable income is a critical component of the taxation process because it forms the basis of a taxpayer’s liability to pay tax.
Assessable income is further categorized into ordinary income and statutory income, both of which contribute to the final calculation. In addition, certain items of income, such as capital gains, may also be included in assessable income, albeit with specific rules surrounding their taxation.
Ordinary Income
Ordinary income is the income that arises from a taxpayer’s regular or usual activities. It includes wages, salary, business profits, interest, dividends, rent, and other forms of income derived from carrying on a business or personal services. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines ordinary income as income “according to ordinary concepts.” The key feature of ordinary income is its regularity and frequency—it represents the day-to-day earnings that a person receives in exchange for their labor, capital, or property.
Examples of ordinary income include:
- Employment Income: Salaries, wages, and bonuses.
- Business Income: Profits derived from running a business.
- Investment Income: Interest earned on savings, dividends from shares, and rental income from property.
The source of ordinary income is a crucial aspect in determining its taxability. Income must be earned in Australia or through Australian activities to be considered assessable. Foreign income may also be included, but the taxpayer can often claim a foreign income tax offset or a tax credit to avoid double taxation.
Statutory Income
Statutory income refers to income that is specifically included in assessable income by statute—that is, by laws passed by Parliament. While statutory income may not be considered "ordinary income" in the usual sense, it is still subject to taxation as part of the broader concept of assessable income.
Statutory income includes:
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Government grants and allowances: Payments from the government, such as unemployment benefits, social security payments, or subsidies for business activities.
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Income from certain investments: For example, certain forms of retirement savings or tax-deferred income.
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Superannuation: In certain cases, superannuation payouts may be treated as statutory income.
An important characteristic of statutory income is that it is not necessarily earned through the usual activities that generate ordinary income but is nonetheless taxable because of the specific rules set out in tax legislation.
Capital Gains
Capital gains represent the profit made from the sale or disposal of capital assets, such as property or shares. Under the Capital Gains Tax (CGT) provisions of the Income Tax Assessment Act 1997, capital gains are treated as part of assessable income. Capital gains are generally calculated as the difference between the sale price and the cost base (i.e., the original purchase price plus associated costs, such as stamp duty, legal fees, etc.).
While capital gains are included in assessable income, the taxation of capital gains differs from other types of income. The Capital Gains Tax provisions allow for certain exemptions and discounts. For example, individuals may be eligible for a 50% CGT discount on assets held for over a year. Moreover, the first $10,000 of a capital gain on the sale of a primary residence is often exempt, provided certain conditions are met.
Capital gains are included in assessable income because they represent an increase in a taxpayer's wealth and can be considered part of the taxpayer’s overall economic gain. However, since capital gains are taxed separately under the CGT regime, there are specific provisions and exemptions that determine how much of the capital gain is ultimately subject to taxation.
Deductions and Taxable Income
Once the total assessable income has been determined, taxpayers can claim deductions to reduce their taxable income. The role of deductions is to reduce the total amount of income that is subject to tax, ensuring that individuals are not taxed on their entire earnings. Deductions are often claimed for expenses that are incurred in the process of earning assessable income.
Some common deductions include:
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Work-related expenses: For example, uniforms, travel costs, and tools of trade.
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Investment expenses: Costs related to earning income from investments, such as interest on loans for investment properties.
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Self-education expenses: Expenses incurred by individuals who are furthering their education in connection with their current profession.
The role of deductions is to ensure that taxpayers are only taxed on income that truly represents their net earnings, rather than their gross income. This aligns the tax system with the principle of fairness, as individuals can be taxed only on the income they have effectively received after necessary expenses.
Fairness in the Tax System
The inclusion of various types of income as assessable income impacts the overall fairness of the tax system. While assessable income includes a broad range of income types, including wages, business income, statutory income, and capital gains, there are concerns about whether the system taxes individuals and businesses fairly.
For instance, the capital gains tax regime has been critiqued for allowing wealthy individuals to benefit from the CGT discount, which reduces their taxable capital gains. This creates an imbalance, as lower-income earners do not generally benefit from such tax concessions.
On the other hand, the deductions system can be seen as favoring high-income earners who have the means to incur significant deductible expenses, such as investment-related expenses or self-education costs. This may lead to a situation where higher-income individuals have their taxable income reduced substantially, leading to lower effective tax rates.
Conclusion
The concept of assessable income under Australian tax law is crucial in determining the amount of tax payable by individuals and businesses. The different categories of income—ordinary income, statutory income, and capital gains—are integrated into the assessable income framework, and each type of income is treated according to specific rules laid out in the tax legislation. Deductions further influence the calculation of taxable income, allowing taxpayers to reduce the amount of their income that is subject to taxation.
While the tax system is designed to ensure fairness, there are concerns that certain provisions, such as the capital gains tax discount and the scope of deductions, may disproportionately benefit higher-income individuals. As such, the Australian tax system continues to evolve, striving to balance the need for revenue generation with the goal of equitable taxation.