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    Accounting

    Income Calculation

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    Income Calculation


    Question 1 Calculation of Alex’s income

    The case provides a description about being the Alex as a resident of UK for tax purposes, he has derived an assessable income of $90,000 from Australian sources which indulges no deduction on the income earned. The case requires calculation of taxable income of Alex and tax payable by him. As per the UK tax laws, it is necessary to identify the class of residentship that individual holds for the tax purposes i.e. if individual holds a domicile in the UK he has to pay tax on foreign income however, if the domicile is abroad than individual is not required to pay tax on foreign income (Freebairn, J., 2015). Also, if there is tax treaty between the two countries the individual can claim relief on the amount of tax paid in other country. Assuming Alex has a domicile in UK. He is required to pay tax on the foreign income $90,000. The amount shall first be converted into euros. 1 A$ = 0.53 pounds, hence A$ 90,000 = £47700. 
    Hence, Alex’s taxable income shall be €54,000.
     


    Hence, tax payable by Alex shall be £47,700*20%= £9,540.
    Also, he shall be liable to tax in Australia @ 32.5 for each 1$ hence, tax payable by him in Australia shall be  A$ 2769.
     
     
    Question 2 Calculation of Anna’s income
    The case study involves calculation of Anna’s income who is a fitness consultant. He has contract with two clients Sam and Lily. In the fist case Anna has charged $1000 for the training purpose from the client which includes the training material cost amounting to A$ 100. As per the Australia tax law any expenditure incurred for carrying on the operations of the business shall be allowed as deduction for the tax purpose. Hence, the amount of A$ 100 shall be deducted from Anna’s income. In second contract anna provided a video tutorial to client and charged $1000 which included $200 for the cost of recording materials. Hence, the same shall also be liable to deduction. The table below presents the calculation of the taxable income of Anna.
     
     
    Hence, the income of A$ 1700 shall be Anna’s income for tax purpose.
     
    Question 3 Calculation of capital gain for Alex
    The case study is about Alex who has an interest of collecting old gramophones. Out of his collection heh sold one of the gramophones for $3000 which he brough for $500 on 1st June, 2000 (Evans,  Minas,  and Lim,  2015). As per the Australia tax act, 1997 the capital gain tax is applicable to the following:
    Real estate
    Shares and investments
    Cryptocurrency
    Lease, goodwill and licenses
    Collectable and personal use assets exceeding a certain amount
    The collectables include following items:
    Paintings
    Jewelry
    Antiques
    Coins
    Books
    Postage stamps
    The collectable an interest in any of the item mentioned above.
    The capital gain arising from any of the above-mentioned collectable shall not be considered if:
    Collectable has been acquired at $500 or less
    Interest in the collectable for $500 or less has been acquired before 16th December 1995
    The interest in the collectable was acquired when the market value was less than $500
    If such asset is disposed than there shall be no capital gain or loss.
    As per the above-mentioned case, the gramophone can be considered as a collectable as it is a type of an Antique (Carling, 2015) . Hence, the shall be chargeable to CGT however, the asset has been acquired for less than $500 hence, as per ITAA, 1997 the disposal shall not acquire any for of CGT. Alex shall not be liable to any capital gain tax on the sale of gramophones.
     
    Question 4 Issue in relation to deductibility of management fees
    The case study is based on the property investor Sam, who purchased in Sydney a commercial building for $ 2,000,000. He acquired loan for bank for purchasing the building and for renting the property he paid an up front payment of $8100 as management fees to William (Antoniades, 2015). The taxability issue of interest on loan and management fees has to determined. As per ITAA, 1997, if a loan is taken for purchasing the rental property the deduction can be claimed on the interest. It is evident that property is required to be rented or shall be available for rent purpose, if the property is use for the private purpose the interest cannot be allowed as deduction (Yates, and Yanotti, 2016). Also, for the rental property if loan is taken for repairs, renovations and for purchasing deprecating asset than interest shall be allowed as a deduction. Hence, as per the ITAA, 1997, the interest on loan shall be allowed as deduction as the property has been purchased for the renting out purposes (Blaufus, Kreinacke, and Mantei, 2015). In the context of the management expenses, as per ITAA, 1997, management fees are deductible if the following items are qualified:
    The fees have been reimbursed for the advice in connection with the buying selling of investment.
    The expenses cover the cost of managing or administrating the investment which is owned by investor who makes the claim
    If it is not a commission
    It is in relation to the advice on investment in the non registered account.
    Hence, the lump sum payment of $8100 is sort of a commission to the broker for renting out the property and hence is a non deductible expense (Ritchie, 2016).
     
    Question 5 Calculation of tax consequence on sale of machinery
    The case involves tax consequences in relation to the sale of machinery. John has purchased a machinery on 1st June 2018 for $8000, the effective life of machine is 5 years. The machine was sold for $4000 on 31st august 2019. The machine was used 90% for business purpose. As per the ITAA, 1997, the asset is reduced for the non taxable use i.e. the value of asset will reduce for the time it was used for private purpose. Hence, here the value of machinery is $8000*90%= $7200. The financial year in Australia is from 1st July to 30th June.
    Formulae for calculation of deprecation under the prime cost method is:
    =Asset cost*(days held/365 days) *(100%/ effective life of asset)
    Asset held for (1st June 2018 to 31st august 2019)
    =$7200*(457/365) *(100%/5)
    =$1803
    Hence, the value of machinery is $7200-$1803=$5397
    The machinery is sold at $4000, hence the machine is sold at a loss of $1397. Hence, there is a short-term capital loss incurred by the sale of machinery.