Australian Taxation System has a guideline determining the degree to which taxation is implemented on different categories of income. Assessable income refers to income, which can legitimately be subjected to taxation. Non-assessable income is in the category of income, which government policies have legitimately exempted from state taxation (Woellner, 2011). The total amount of US$ 1,200,000 comprises two significant components, US$ 500,000 being a capital contribution to the business, which is assessable, and US$ 700,000 is a prepaid business income, which is not assessable. Capital contribution automatically qualifies to be part of assessable income. On the other hand, prepaid business income is a liability to the business, until the commodities it was intended for are delivered. Business capital is advantageous to enterprises over revenues earned in advance. A good example is in the case of Westfield LTD in 1994, when it had received various capital contributions (Coleman, 2011).
For SEM, the initial income of US$1,200,000 is partially assessable. The other factor determining the qualification of an income as assessable for a person is whether a taxpayer resides in Australia or in another region during a certain period. Assessable income for an Australian resident includes revenues ordinarily generated either directly or indirectly during the financial year (Coleman, 2012). This could be either generated from inside Australia or outside, from all possible sources within the financial year. For the foreign residents, it includes revenue generated directly or indirectly from all sources during the income year and other regular revenue that a government provision considers as his or her assessable income. This strictly includes revenues generated from within Australia. In the case of SE Machinery Pty Ltd, the Capital contribution to modifications of US$ 500,000 is assessable since SE Machinery Pty Ltd is a company based in Australia and the income, which Australia has earned through the financial year.
Arthur Murray’s principle states that whenever a company earns any prepaid income for services rendered, it only derives income when or after it renders the services. In the Australian tax system and the general Taxation Ruling T.R., this principle applies even to the prepayment of goods (Cooper, 2012). In the case of SE Machinery Pty Ltd, Arthur Murray’s principle partially applies because the customer had accepted to pay US$500,000 to SEM for the modification cost. Since the contract describes this amount as a capital contribution, the US$ 500,000 is non-refundable, and SEM can derive income from it. The second aspect of the application of Murray’s principles is the prepayment for the supply of Teftoffelex, an amount of US$ 700,000. Here, the principle fails to apply and SE Machinery will only consider this as an income upon delivery of the 100 cartons of Teftoffelex. Australian Taxation System exempts old people above 60 years from paying taxes. Anyone from the age of sixty onwards is free from taxes so their incomes are non-assessable. However, for income for a person below the age of sixty, any component of their income is assessable except for 15%, which are set aside as tax offset provision.
In taxation, the general rule for determining the taxable income for a particular period is expressed as Taxable Income = Assessable Income – Allowable Deductions. Following the application of Arthur Murray’s Principle, any prepaid income is subtracted from the gross income to obtain the net assessable income. Allowable deductions are the items, which the prevailing government policy has exempted from taxation. These include statutory expenditures such as medical insurance for employees, retirement benefit contributions, family reliefs, and others. In Australia, the government exempts essential commodities from taxation. These include food, medicine, and humanitarian services. The taxation system has undergone reforms, which have seen the establishment of Family Tax Benefit (FTB). In the sale of depreciated fixed assets, taxpayers are required to do calculations for the balancing adjustment amount caused by the disposal (Lipton, 2011). To calculate the balancing adjustment amount, the taxpayer compares the termination value of the asset against its corresponding adjustable price. When the termination value exceeds the adjustable value, the taxpayer includes the difference, as a part of assessable income; otherwise, the difference is considered as an eligible deduction.
Australian Taxation policy recognizes conditions under which business expenditures can be declared exempted or taxable. Where the expenditure is deductible, it is deducted from the assessable expenditure before the computation of Profit before Tax (PBT). Such expenditure includes capital expenditure and other prepaid expenses. Tax relief is not allowable for capital expenditures and other expenses of the same nature. Intriguingly, the exact provisions for Family Tax Benefits are not acknowledged as tax expenditures; hence, they are not listed in the Tax Expenditures Statement, even though they help offset taxes. In this case, the government only considers as tax expenditure, the expenses it incurs in treating the Family Tax benefits as exempt income.
In Taxation regulations, the revenue collection authorities enforce various criteria in determining whether expenditure has been incurred or not. The system of taxation has a task to determine whether a taxpayer has an existing liability or not. If the authorities discover liabilities in existence, the next aspect they ascertain is whether the liability is feasible or not, and approximation of the amount of liability, which they however cannot accurately ascertain (Deutsch et al, 2012). In this respect, they further evaluate the legal matters surrounding the liability about acquisition and ownership. If they do find the existence of existing liability, an expense is only considered incurred at the time when its cost is settled. Expenditures are quantified using probabilities and approximation, taking care of possible errors and omissions (Cooper, 2010). Statutory regulations provide that if a taxpayer has a right to claim deductions for a particular financial year but fails to do so, then he or she have to amend the assessment so that he or she can receive payments for the deductions the following financial year. The law also requires that if there is any bad debt for a write-off, it must be written off within the financial year when the taxpayers are claiming for the refunds of taxation. It is within the discretion of Revenue Offices to determine circumstances, which qualify debts as bad hence classified for writing off. Such circumstances include the death of a debtor or a debtor running into bankruptcy and operating under receivership.
From the accounts of Leigh Edmond, the Australian government amended its income tax or transitional provisions act of 1997, section 70. These amendments were passed in parliament and implied changes in government laws. One of the reasons for amendments was to create laws, which could perfect the revenue collection system and make it faster. One of the rulings made during that dispensation of taxation law amendments was Section 55 which out known as the income tax Assessment Act of 1997 (Barkoczy, 2011). This act requires a taxpayer to store transactional records with a comprehensive description of activities carried out in his or her business, The business incomes, and expenses. These details were found to be vital for tax assessment of taxpayers’ incomes and expenditures for ascertaining the taxable income. The section also required taxpayers to keep records of liabilities in order to determine the number of deductions and items to be exempt from taxation. An example is in the case of SE Machinery LTD. To calculate individual expenses and income, we calculate deductible expenses and assessable incomes:
- Loan= 25,000 + 300= 25300
- Bad Debt W/O=8000
- Leave Paid =2400
- Loss from Disposal of Machinery = 2277-3277= -1000
- Income from Disposed Furniture = (5526-2926) = 2600
- Total Expenses = 57295
- Total Income = 1914150
Another case law, which was established, was the Taxation of foreign investment fund (FIF) covered in Chapter 4 (Barkoczy, 2011). This chapter contains a description of how tax is treated when an Australian resident receives income from a foreign origin including Diaspora investments and interest disposal in foreign investments. Thirdly, and closely relating to this chapter, is section 23AK which describes treatments of non-assessable income and non-exempt incomes from foreign investment funds (Deutsch et al, 2012).
The computation does not depend on cost except where the payment period exceeds one year. For other taxpayers, fairly distribute these prepayments to cover the whole period covered. Any prepayment, which is less than One thousand Dollars, is considered deductible no matter which financial year it falls in. In cases where the service period runs only for one financial year, the expenses are classified as deductible during that specific year. If the service duration runs for more than one financial year, then the expenses are distributed according to the number of days covered during the years but of course up to ten years’ maximum. The formula for distribution is:
X= N / T,
Where X is the expenditure, N is the number of days covered in the service period of the financial year and T is the sum of days covered in the service period (Deutsch et al, 2012). The calculation of taxable income uses the general formula stated as:
Taxable income = Assessable income – Deductions
One of the best methods to conduct the calculation is to prepare a tabulated list of all components of assessable income and others for eligible deductions. The bottom of the table thus displays the totals for assessable income on the left and eligible deductions on the right and the difference between the two being the resultant taxable income. In the entire process of computation, this formula obeys Arthur Murray’s principle, hence the advance payment of US$ 700,000 for the delivery of new products is not included as part of the assessable income. This is because its delivery is scheduled for August 2012, which falls outside the income year. Other items, which will be excluded, are the oversea travel costs, Depreciation, Entertainment costs, Repairs, maintenance, and the cost of converting the old store into a lunch and change room. This means that they are variable decisions, which a company has control over by management strategies. Secondly, and of course due to the first reason, Australian Taxation policies does not recognize them as components of eligible deductions (Nethercott et al, 2010).
The table is hence compiled below.
Table 1. Taxable income of SEM Pty Ltd for the year ended June 30, 2012.
The use of Arthur Murray’s principle is fair to the companies since it articulates the burden, which companies have to bear paying taxes for income whose transactions are a risk of decline. Supposing the advance payment of US$ 700,000 was to be included as assessable income, the taxable income would have been 1856855 + 700000 = US$ 2556855. Whether a general income of a company is to be included, as part of assessable income will depend on whether the mode of business returns of income that is whether it uses accrual basis or income on a cash basis or on an accruals basis. In cases where a company uses the cash basis, the general income is derived within the year when the company receives the income. When a company uses accrual method, then the general income is only derived upon the creation of provision for a recoverable debt or liability. This implies that a taxpayer is not obliged to proceed with the reporting process until the company is enlisted as viable for tax payment. In Australia, the objective of taxation system has been restated in taxation review, known as the Henry Review. Henry Review essentially emphasized on the need to secure sustainability of the taxation system in Australia. Nevertheless, the measure of success of a taxation strategy is not entirely judged by the amount of tax collected. The criteria for evaluation are summarized by Henry Review as sustainability, compliance to policy, equity, efficiency and simplicity.
References
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