TAXATION THEORY PRACTICE, AND LAW 

Question 1

Facts

Based on the case study outlines, Munir received an interest-free loan by Goodmates Pty Ltd. Hence, such interest free loan is considered as an additional benefit provided by the business or the employer to Munir. This is known as fringe benefit. Due to some kind of personal life issues and financial hardships that Munir was suffering, he is not in a position to repay the loan. Therefore, the directors of the company have decided to waive off the loan amount. 

Rules and or cases

FBT is assessed under the FBTAA 1986 and the tax amount is imposed under the Fringe Benefit Act 1986. The Act states that tax liability is imposed on the employers and there are 13 types of fringe benefit. The current rate of FBT is 47% (Ato.gov, 2021). FBT and the cost of benefit is usually deductible to employers under section 8-1 of ITAA 1997.

Application 

As determined by the board of directors of the company, to waive off the loan amount given to Munir on compassionate reason, therefore, the tax on fringe benefit shall be required to pay 47% tax on the amount of loan which is $5000 which is interest free. Therefore, the total tax payable by the company is $2350 to the ATO. 

Conclusion

Tax on taxable benefits, or FBT, is the tax employers pay on benefits paid to employees in addition to their salaries and wages. FBT is calculated from the taxable value of the services the employer provides to employees. Income tax is treated differently. It can be concluded that the management exempted compensation from Munir. The taxable liability must be borne by GoodMates Pty Ltd at 47%.

Question 2

Capital gains tax is levied in Australia when a capital asset is sold as real estate or shares, resulting in a capital gain or capital loss. In a capital gains situation, the amount of gain is added to the expected income, significantly increasing the total tax base that the individual or company has to pay. No capital gains tax withheld. All assets acquired by individuals or companies on or after September 20, 1985 are included in the scope of capital gains and are subject to capital gains tax, unless listed for exemption (Ato.gov, 2021).

Computation of cost base

Cost base = Value of asset + Charges for transfer of ownership + Additional improvement 

= $5000+$50+$1500

= $6550

The cost base amount is $6550

Calculation of capital gains

Capital gains = Sale price- Cost price- Expense on transportation

= $12000-$6550-$200

= $5250

The capital gain is $5250

Capital gain tax = 50% on capital gain

= 50/100*$5250 = $2625

Question 3

Companies must respect the GST and be treated as a registered GST company like Alex Limited. You need to issue a tax invoice to its customers, collect GST and send it to the ATO with a business statement (BAS). The following steps are required to report GST

Use of accounting software available in the market to create and prepare tax invoices. It automatically generates GST bank statements, invoices showing GST liabilities and credits during BAS (Ato.gov, 2021).

Placing the collected VAT amount in a separate bank account.

Use a cash accounting system to better align GST liabilities with business cash flows.

All the above procedures are followed by Alex Limited every year to prepare its GST invoices and determine the GST liability whereas Beta Pty Ltd is not required to follow these steps as it is not registered for GST in Australia.  

Question 4

Calculation of tax liability

Employment income of Andre $63013

Dividend income (80% franked)$200

Total income$63213

Less: Allowable Deduction $500

Taxable income$62713

Tax liability $3572+0.325*25713$11928.73

Medicare Levy$62713*2%$1254.26

Medicare Levy Surcharge$62713*1%$627.13

Total tax liability of Andre = $(11928.73+1254.26+627.13) = $13810.12

Tax liability is the total amount of tax amount owed by an individual, business or an entity to the taxing authority like ATO (Ato.gov, 2021). taxable income is the difference between the assessable income and the deductions available. 

Question 5

The two factors influencing tax avoidance are-

Return on assets: ROA is the ratio that measures the quantitative relationship between total assets at the end of the year. ROA is the indicator that illustrates the financial performance of the company depicting the success rate of generating profits. It can be inferred that the practice of tax avoidance is influenced by the high ROA of the business (Wang et al., 2020). A higher ROA means the company performs better in managing its assets to take the benefit of depreciation and amortisation expenses. This shows that the company generates high returns assuming practice tax avoidance. 

Sales growth: The sales growth represents the investment which is successful in the last accounting period and it helps in the prediction of sales growth in the future. The increase of sales represents high profitability for the business which results in an increase of tax expense of the business. As contradicted by Roza et al. (2020),  the company does not wish to pay high tax in case of generating high profits which is caused due to high sales. Therefore, this is a practice of tax avoidance. 

Question 6

Partnerships are defined as Section 995-1 of ITAA 1997 as an association of people who do business as partners or collectively receive casual or legal income, but do not include companies. A written partnership agreement is not required for a partnership to exist (Ato.gov, 2021). Partnership agreements are prepared and signed by all partnerships to explain how profits and losses will be distributed among the partners and how the business will be controlled.

Share of partnership income for Maria $1200000/3$400000

Less: Deduction from professional subscription$300

Net income of Maia from partnership business$399700

Interest income $10000

Income earned from gambling $200

Adjusted Gross Income $409900

Less: Standard deduction $12400

Taxable income $397500

Tax on and above income according to AY 2019-20 $47367.50*0.35*(397500-207350)

Tax threshold rates$113920

Net investment from income tax $(10000+200)*3.8%$388

Net tax liability for Maria$114308

The net tax liability for Maria is $114308 for the fiscal year 2019/2020.

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