Taxation Law

ACC304 Taxation Law Workshop 4 Statutory Income

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Learning Objective 1

Explain the connection between statutory income, assessable income and taxable income

Statutory income Assessable income = ordinary income + statutory income

Statutory income is assessable income by virtue of a specific section of law.

Includes amounts that are not ordinary income, but are included in your assessable income under a specific section of law (Section 6-10(2))

Statutory Income

Where income may be included in assessable income by more than one section of law, Section 6-25 states the amount is included once only. • The statutory provision overrides the general provision.

The two types of income form assessable income and are connected to the basic tax equation contained in s 4-15 ITAA 1997: Assessable income – allowable deductions = taxable income

Class activity 1

Is statutory income defined in either ITAA? Why, or why not?

Class activity 2

Discuss the following comment: The amount of money you receive will

also always be the amount of statutory income you need to put in your tax return.

Class activity 3 Discuss the following comment : The concept of statutory income is irrelevant as every receipt is a form of ordinary income and will be included in assessable income.

Learning Objective 2

Calculate the franking credit associated with a franked dividend and correctly apply the relevant law

Franked dividends A dividend is defined in Section 6(1) ITAA 36 to include any profit distribution made by a company to its shareholders. There are two related provisions: Example In April 2018, John receives a franked dividend of $70 from BHP Ltd. According to the Distribution Statement, this dividend is franked to 100%.

Assessable income = Dividend $70 Section 44(1)(a) AND Imputation Credit $30 Section 207-20(1)

Franked dividend How does it work?

The dividend itself is assessable income $70. The imputation credit is added to the assessable income even though it is an imaginary amount. The credit is a tax offset applied against the tax payable on John’s taxable income.

Formula (Assume tax rate of 30%)

Amount of franked dividend x 30 x % franked 70

Therefore: $70 * 30/70 * 100% or $30

Assessable income = $70 + $30 = $100

Cash = $70 Is this a good deal?

Partial franking Dividends can be fully or partially franked.

In April 2018, John receives a franked dividend of $70 from BHP Ltd. According to the Distribution Statement, this dividend is franked to an extent of 50%.

Formula $70 * 30/70 * 50% = $15

Assessable income = $70 + $15 = $85

Pre-workshop question 1 Roberto is a resident for the full year and receives a cash dividend of $880 from The Hill Pty Limited, which was 95% franked. He also received a cash dividend of $1,000 from Broken Crown Pty Limited which was 75% franked. Roberto reinvested the dividend from Broken Crown Pty Limited through their dividend reinvestment plan.

• In relation to these transactions, how much will Roberto include in his assessable income?

Pre-workshop question 2 • A company paid a 45% percent franked

dividend of $7,000 to a resident shareholder. • Required • Calculate the imputation(franking) credit

associated with the dividend and identify which sections the dividend and imputation(franking) credit are assessed under.

• Explain the tax benefits of the imputation (franking) credit to a resident investor.

Learning Objective 3

Calculate the assessable amount associated with trading stock and apply the relevant law

Trading stock s70-10 ITAA97 Meaning of trading stock (1) Trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a * business; and (b) * live stock.

What are some examples of trading stock?

Business income from sale of trading stock is assessable under s6- 5(1) – ordinary income from business activities. Purchase of trading stock is deductible under s.8-1(1). It is not capital (s.70-25).

Trading stock Compare the values of trading stock on hand at the start of the income year and at the end of the income year (s.70-35(1)).

• If closing stock is greater than opening stock, the excess is assessable income (s.70-35(2)).

• If opening stock is greater than closing stock, the excess is an allowable deduction (s.70-35(3)).

Class activity 4 Yankers Enterprises Pty Ltd sells training course materials to organisations. The materials are imported from a United States-based course developer and on-sold for a profit. Yankers provides you with the following information for the purposes of preparing its income tax return for the CIY:

Sales $690,000 Less; Cost of goods sold • Opening stock $120,000 • Plus: purchases $530,000 • Less: closing stock $250,000 $400 000

Gross profit $290,000

What is Yankers Enterprises’ assessable income for the current income tax year?

Pre-workshop question 3

Kezza runs a small business. Her opening balance of stock was $4,000. During the year there was sales income of $30,000 and purchases of $5,000. Trading stock valued at $500 was destroyed due to water damage. The closing balance of stock was $6,000 and reflects the reduction due to stock damage.

• What is the taxable income from trading for the CIY?

Class activity 5 Explain which of the following items could be considered as trading stock:

• Shares traded on the ASX • Accounts receivable • Land • Unpicked fruit • Unmined coal • Work in progress for a manufacturer • Goods in transit

Learning Objective 4

Calculate the assessable amount associated with assessable balancing adjustments and apply the relevant law

s40-285 Assessable balancing adjustment

When a depreciating asset is disposed of the proceeds of the sale, or termination value (TV), is compared to the written down value, called the adjustable value (AV), on the day of disposal.

• If the TV is greater than the AV the excess is assessable statutory income under s40-285(1)

• If the TV is less than the AV the difference is an allowable deduction under s40-285(2)

Example A depreciating asset with an AV or $5,500 was sold for $6,250. There

is an assessable balancing adjustment of $750.

Class activity 6 Basil Pty Ltd sells a computer which has been used for income-producing purposes. The termination value of the computer is $1,500 and its cost was $2,500. At the time of sale, the computer’s adjustable value is $1000.

What is the balancing adjustment amount in respect of the sale?

Pre-workshop question 4 A non-current asset is a depreciating asset. It initially had a depreciation cost base of $45,000, it cost $2,500 to transport and install the item, and it has an effective life of 5 years for tax purposes and was purchased on 1/7/15. It was sold on 1/4/17 for $27500. Required State the relevant legislative provisions and calculate: • the depreciation expenses for each relevant year

income year under both the Prime Cost method and the Diminishing Value method

• any assessable or deductible balancing adjustment associated with this disposal.

Net capital gains In 1985 the inequitable distinction between capital and income receipts was partially addressed by the introduction of a capital gains tax.

Essentially if a taxpayer makes a net capital gain related to a CGT asset it will be included in assessable income and

taxed at the taxpayer’s marginal rates.

Capital gains tax will be the focus of our next workshop