TOPIC ONE - INCOME

Background

In this unit you will study income tax legislation. This unit is designed to give you an
introduction to the Income Tax Assessment Acts. It is beyond the scope of an
introductory unit to cover all tax areas such as Fringe Benefits Tax (FBT) and Goods
and Services Tax (GST) in detail and you will not be expected to study any other taxes
in this unit.

Income tax is levied by the Commonwealth government and is imposed at progressive

rates on all resident taxpayers. It is important to obtain a good basic knowledge of
income tax, as it will affect you regardless of the area of business in which you will
work.

You will be studying 2 main pieces of legislation the Income Tax Assessment Acts
(ITAA 36 and ITAA 97). The 1936 Act has been amended constantly over the last 70
years and has become unwieldy. In addition it is considered that its language is
difficult to understand. In 1994 a team of experts began working on rewriting the Act
in plain and simple English, under a project referred to as the Tax Law Improvement
Project (TLIP). This task has since been abandoned.

At present, only part of the 1936 Act has been amended. Consequently, you will need
to work with both the 1936 and the 1997 Acts. It is important to note that the rewrite
has not changed the law in any substantial way, nor are the court cases decided under
the old Act affected.

Navigating your way around the legislation

Rather than constantly refer to the year of the particular legislation sections which are
covered by the 1936 Act will be shown as s.6(1) for example, while sections covered
by the 1997 Act will be shown as s.995-1, with a dash being a distinguishing feature
of the numbering system adopted by the 1997 Act.
Objectives

When you have completed this topic, you should be able to:

understand the concepts underlying income and capital receipts;

explain the concept of income according to ordinary concepts and statutory

income, which is made specifically assessable under the ITAA 36 and ITAA 97;

identify income which is specifically exempted under the ITAA 36 and ITAA 97;
determine whether and when business income is assessable;

understand the concept of a Small Business Entity (SBE)

identify the year in which assessable receipts are taxed;

calculate Medicare Levy

include the franked component of a dividend in income and allow a tax offset
equal to the franking credit; and,

calculate the Low-income tax offset.

calculate the Small Business tax offset

Guide to the sections to be covered in this topic
Income Tax Income Tax Assessment
Assessment Act 1997 (ITAA 97)
Act 1936 (ITAA
36)
Introduction and Core Provisions 1-1, 1-2, 1-3, 1-7
A Guide to This Act 2-1, 2-5, 2-10, 2-15, 2-20, 2-
25, 2-30, 2-35, 2-40,
2-45
What this Act is about 3-5, 3-10, 3-15

6(1) Definitions 995-1

6(2A) Reference to income year 995-1

Tax base, tax payer 4-1, 4-10(1) and (3)

Accounting period 4-10 (2)(b)

Taxable income 4-15

Derivation of income 6-5(4), 6-10(3)

Assessable income 6-1, 6-5, 6-10, 6-15, 6.25,

Division 10, Division 15
Allowances in relation to 15-2
employment
Re-imbursement of travel 15-70
expenses cents/km
Royalties 15-20
Insurance or indemnity for loss of 15-30
assessable income
Refund of excess franking 67-10
credits
44 Dividend
Franking credits 207-5, 207-20(1)
Franking credits tax offset 207-20(2)
Exemptions 6-20, 6-23, Division 11,
sections 50 52
23L Certain benefits in the nature of
income not assessable
159N Low-income tax offset
Statutory income Division 15
Small business entity Division 328
251R 251Z Medicare Levy
Small business tax offset Division 328
Definitions

Section 995-1 of the 1997 Act and s.6(1) of the 1936 Act contain general definitions
that apply to the whole of the Income Tax Assessment Act. You should be aware of
the rules of statutory interpretation as they apply to definitions.

Income tax is levied upon taxable income at rates imposed by Parliament. The rates
are dependent upon the type of taxpayer e.g. adult individual or child, status e.g.
resident or non-resident of Australia; class e.g. company or some other entity.

The tax rates for the current year are set out in the final section of this book called Tax
Rates and Tables.

These are the individual tax rates for 2016/17 which we will use in this course.

Individual rates
Taxable Income Tax payable
$ $
0 18,200 Nil
18,201 37,000 Nil + 19% of excess over 18,200
37,001 87,000 3,572.00 + 32.5% of excess over 37,000
87,001 180,000 19,822.00 + 37% of excess over 87,000
180,001 + 54,232.00 + 47%* of excess over 180,000

These rates do not include Medicare Levy see later discussions.

(* This takes into account the 2% Temporary Budget Repair Levy)

Readings
AUSTRALIAN TAX LAW SELECT Paragraphs 2-110

Section 4-1 discusses who pays Income tax which includes individuals and
companies, and by some other entities. Within your course of study you will need to
calculate the tax payable for individuals, companies and trustees.

Section 4-10(1) discusses the concept of a financial year

A financial year begins on the 1st July and ends on the 30th June, the financial year
you will be studying is the year ended 30 June 2017.

Section 4-15 - provides the formula for calculating Taxable Income which is as
follows:
Taxable Income = Assessable Income Allowable Deductions.
Section 4-10(3) provides the formula for calculating tax payable which is as follows:
Income Tax = (Taxable Income x Rate) Tax Offsets

As can be seen from Section 4-15 and 4-10(3) you will need to understand a number
of concepts in order to calculate the taxable income and the net tax position of a
taxpayer. We will be looking in detail at the following areas mentioned in the formulae
above

Assessable income is made up of:

1) ordinary income the meaning of ordinary income is based on common law.

There is no statutory definition.

2) statutory income amounts that are specifically made income by statutes

but it excludes

1) exempt income - income that is specifically excluded as taxable income via the
provisions of 97 ITAA and 36 ITAA

2) income which is neither assessable income nor exempt income

Section 6-1 provides the following diagram to show the relationship between the above
concepts of income
Deductions are either

1) general deductions being any loss or outgoing to the extent that it is incurred
in gaining or producing assessable income or is necessarily incurred in carrying
on a business for the purposes of gaining or producing assessable income

2) specific deductions being amounts that are made specifically deductible by

statutes

(These will be discussed in detail in Topic 2)

Tax Offsets (credits and rebates) are designed to reduce the amount of pay taxable
by a taxpayer and include:

- Low income tax offset (LITO)

- Franking Credits (related to dividends)
- Pay-as-You-Go (PAYG) instalments/withholding

Instalments are payments made by taxpayers towards their future income tax liability.

Withholdings are amounts withheld by a taxpayers employers from the wages/salary,

etc., earned by the taxpayer.

You will not be required to calculate Pay-As-You-Go (PAYG (Instalments or

Withholding) in this course. PAYG amounts will be provided to you and will need to
be taken into account in the calculation of net tax payable.

When working out your answers you should use the following format

Assessable Income
Minus -
Deductions
Equals
Taxable Income
Multiply by
Tax Rates
Equals
Gross Tax Payable
Add
Medicare Levy
Minus
Tax Offsets
Equals
Net Taxation Payable/Refund
Remember that Assessable Income and Deductions are only in whole dollars and
gross tax payable/offsets and net tax payable/refund are in dollars and cents, even in
situations when tax payable has no cents e.g. $16,450.00

Using the income tax rates which are reproduced in the Tax Rates and Tables chapter
at the back of the book to work through this example to ensure you understand how
the gross tax payable has been calculated.

Example 1.1 Calculation of gross tax payable for 3 different taxable incomes

Taxable income Tax calculation Gross tax payable

$25,000 ($25,000 - $18,200) x 19% $1,292.00

$40,000 ($40,000 - $37,000) x 32.5% + $4,547.00

$3,572

$95,000 ($95,000 - $87,000) x 37% + $22,782.00

$19,822

MEDICARE LEVY

Readings
AUSTRALIAN TAX LAW SELECT Paragraphs 2-300 2-350

Medicare is a scheme introduced in 1984 by the Government which provides

Australian residents with access to affordable health care. It allows for both free and
subsidized treatment by medical practitioners or specialists and free treatment as a
public patient in a public hospital.

Individual resident taxpayers are liable to pay a Medicare levy if their taxable income
exceeds the relevant threshold. The current Medicare levy is 2% and is applied to the
taxpayers taxable income (Assessable Income less Allowable Deductions).

Example 1.2 Calculation of Medicare

Ellie had a taxable income of $100,000. Her Medicare levy payable would be
$2,000.00
The Medicare levy may be reduced for certain low income earners. Medicare is not
payable if an individual taxpayers taxable income does not exceed $21,335. Special
rates apply in certain situations for example married couples, families, senior
Australians and pensioners.

The 2015/16 Medicare levy rates for individuals;

(Please note at the time of writing the unit guide the 2016/17 Medicare Levy rates were not
available)

Taxable Income Thresholds Medicare Levy Rate

0 21,335 Nil

21,335 26,668 10% of excess above 21,335

26,668 + 2% of entire amount

Example 1.3 Calculation of Medicare using shading

Louise is a single taxpayer with a taxable income of $21,900.
Her Medicare levy would be 10% x (21,900 - 21,335) 56.50

Medicare levy surcharge

The Government has imposed a 1% to 1.5% Medicare levy surcharge on those

taxpayers whose income exceeds the imposed thresholds and who do not have any
private health insurance which covers them for hospital cover.

From 1 July 2015 a single taxpayer whose total income for surcharge purposes exceed
$90,000 will be liable and a couple or family $180,000 plus $1,500 for each dependent
child after the first.

Students will not be examined on Medicare levy surcharge; it is for informational

purposes only and the following example explains how it works.

Example 1.4 Calculation of Medicare levy and Medicare Surcharge levy

Hannah has a taxable income of $85,000 and reportable fringe benefits of $15,000
for the CY income year. She is not married and does not have any dependants.
She had no private patient hospital insurance during the current year.

Calculate Hannahs tax liability because of her lack of health cover.

Medicare levy 2% of $85,000 1,700.00
Medicare levy surcharge 1% of $100,000 1,000.00
2,700.00
Example 1.5 Calculation of net tax payable
Neal has assessable income of $50,000 and has allowable deductions of $699.50
and is entitled to a personal tax offset of $1,200. His employer has deducted PAYG
(Withholding) of $8,850.

Calculate his net tax payable.

Assessable income 50,000
Less: Deductions (note use whole dollars for deductions) 700
Taxable income 49,300

Tax on taxable income (($49,300 - $37,000) x 32.5%) + $3,572 7,569.50

Plus: Medicare Levy ($49,300 x 2%) 986.00
8,555.50
Less: personal tax offset 1,200.00
7,355.50
Less: PAYG (Withholding) 8,850.00
Refund of tax 1,494.50

Students should take a number of lessons from this example. Firstly note that
income and deductions are ALWAYS in whole dollars. Tax and offsets are always
shown in dollars and cents even if there are no cents in the calculation as in the
example above.

Secondly note the terms used are assessable income, deductions and taxable
income. There are no such terms as net taxable income. Taxable income is the
amount on which tax is calculated.

Low-income Tax Offset has been ignored at this stage. This is covered later in this
topic.
Jurisdictional Limits

The Australian income tax legislation is subject to jurisdictional limits, determined by

reference to the concepts of residence and source. For the purpose of this course, all
taxpayers will be residents of Australia who derive Australian-sourced income.

An Australian resident (someone who resides in Australia) is required to declare all

the income received no matter where this income comes from (i.e. taxed on worldwide
income). If tax has been paid on the income in another country, the Australian resident
taxpayer is entitled to a credit for the tax paid in the foreign country.

Foreign residents (those who reside outside of Australia) are only required to declare
the income they earn in Australia. Special withholding rules apply to interest and
dividends received by non-residents from Australian sources.

For example Johnny is a resident of Australia and has some investments in both
Australian and the UK. When Johnny lodges his tax return in Australia he will be
required to declare income from both investments. If Johnny paid tax in the UK on his
investments, the tax paid can be allowed as a credit against his Australian tax liability.

Income

Income should be shown in WHOLE DOLLARS. Assessable income includes income

under s.6-5 and other income included under any other section of the Act (statutory
income) - Division 15.

The base for income tax is taxable income, as defined in s.4-15. Taxable income is
defined as assessable income less deductions. The first step, therefore, in calculating
income tax payable, is to determine what is included in assessable income.

The definitions that you should refer to for this topic are:
assessable income
exempt income
taxable income
 year of income

While the 36 ITAA and 97 ITAA contain definitions, not all key words are included.
One such word is "income". Apart from relying upon what the Courts have decided is
income according to ordinary concepts, the Act contains provisions which specifically
capture certain receipts, making them assessable. This is commonly referred to as
statutory income, which along with ordinary income comprises assessable
income.

Income according to ordinary concepts

Judicial decisions have defined ordinary income under s.6-5 as income according to
ordinary concepts, and have established the following principles to assist in
determining whether a receipt is income:

(1) Income is something which actually comes in. (e.g. not merely the increase in
value of existing assets for example if you buy a rental property at the beginning
of the financial year for $100,000 and its value has increased to $110,000 by the
end of the financial year, your income does not increase by $10,000).

(2) Income receipts may be differentiated from receipts of a capital nature as they
are received regularly or periodically. (Examples are salary, dividends and
interest and pensions which are received regularly.)

(3) General categories of receipts such as salary, wages, rent, interest, dividends,
and business profits are, in the main, considered to be income.

(4) Income under s.6-5 is something paid in money or that can be converted to
money i.e. money or moneys worth.

(5) The return received on capital invested is considered to be income e.g.

dividends paid on shares, interest on funds invested and rent from properties.
The shares, money lent and property are capital assets.

(6) Some receipts which are not generally considered to be income are proceeds
from the sale of capital assets, compensation for the loss of a capital right to
income, gifts, and windfall gains from lottery or betting wins.

Capital receipts

Capital receipts are usually the amounts received for the disposal of assets. For
example, a rental property is disposed of for $100,000. This is a capital receipt. Note:
the gain on the disposal may be taxable under another provision but will not be
assessable as ordinary income under s.6-5. We will look at the Capital Gains Tax
provisions in Topic 4.

Distinguishing Income from Capital

It is often difficult to distinguish income from capital. A useful analogy is that of the
tree and its fruit. When you sell the tree that is a receipt of a capital nature but the fruit
of the tree is income. The fruit is regular it comes each year but you can only sell
the tree once. This analogy emerged from the American case, Eisner v Macomber
(1920) 252 US 189.

For example, dividends are income (received annually), the price obtained from selling
the shares which paid the dividends, is a capital receipt it can only be received once.

Similarly expenditure can be on capital account (e.g. buying the tree) while other
expenses are on revenue account (e.g. fertilising and watering the tree.)

Statutory Income

In addition to income which is categorised as such because it meets the criteria of

income according to ordinary concepts, there are items of income which are made
assessable by legislation. These items are known as statutory income, that is, a
specific section of the legislation operates to deem these items to constitute
assessable income. Some examples are franking credits under s.207-20(1) and
allowances under s.15-2.

Readings
AUSTRALIAN TAX LAW SELECT 3-000; 3-080 3-100; 3-150 3-290;
4-000 4-050; 5-000 5-210; 6-800 6-805; 6-860 6-880.
Source and derivation of income

Section 6-5(2) includes in the assessable income of a resident for a financial year,
income from Australian and overseas sources. It is necessary to understand the
concepts of source and derivation of income to ensure that all income is included in
the correct year of income.

Salary and wages are derived when received, regardless of when the work was
performed. So, for example, if work is done in the last week of the current year but is
not paid until the following year, it will be derived in the following year. For example
Mary was paid on the Friday of each week and her pay period ran from Friday to
Thursday, in the last week of June her pay period started on 24th June and finished on
30 June and Mary received her pay for that week in her bank account on 1 July. As
her wages were not received in the current income year, they will be assessable as
part of the following years assessable income

Dividends are derived when they are paid and rent is derived when received. An
example would be that if the annual rent was $48,000 but the tenant didnt pay the last
months rent until July of the following year, the rent derived in the current year would
be 11 months x $4,000 = $44,000.

Interest is derived when it is available i.e. credited to the account. This is called
constructive (deemed) receipt of income.

Constructive receipt is when income is credited without restriction and made available
to the taxpayer. Common examples include interest credited on fixed term deposits
and added to capital and dividends that have been reinvested to purchase additional
shares.

For example, a taxpayer invests $100 in the bank on 1 July CY for 1 year and receives
$30 interest. The taxpayer advises the bank to reinvest the capital plus interest into
another fixed account for another year. Even though the taxpayer did not receive the
$30 interest the interest was actually derived the amount when the interest was due
and payable. Rather than receiving cash the taxpayer directed the bank to reinvest it,
therefore needs to declare $30 in the assessable income.

Readings
AUSTRALIAN TAX LAW SELECT 13-000 13-025; 13-200 13-230;
13-400 13-430
Example 1:6 Derivation of salary

Poh Sheng works as a Manager is a large business. He has decided to take 3 months
of long service leave commencing on 4 July FY. The 3 months of leave were paid to
him in a lump sum on 28 June CY. This payment totalled $25,000.

How much did he derive in the current year?

Answer
Salary and wages are derived using the cash basis and the income is derived when it
is received. As the $25,000 was received in the current financial year it will be derived
in the CY not in the FY when the leave is actually taken.

Example 1:7 Derivation of interest income

Kelly lent her friend Sami $5,000 on 1 July CY Sami paid her interest of $550 by
cheque on 30 June CY and Kelly banked the cheque on 5 July FY.

When did Kelly derive the interest?

Answer:

Interest is derived when paid. In this case the interest will be derived in the current
financial year when the cheque was paid to Kelly.

Exempt Income

Exempt income is not included in assessable income under the provisions of s.6-5.
You must be able to distinguish between exempt income and receipts that are not
income, e.g. capital receipts.

It is important for students to understand the importance of exempt income. Exempt

income is offset against losses, prior to the losses being allowed as a deduction.
Losses will be discussed in Topic 2.

Income tax exemptions fall within two main types

 a) organisations, funds and persons which are specifically exempt from paying
tax, for example charities, trade unions, public hospitals, educational
institutions, religious bodies, non-profit organizations,
b) items of income that are exempt from tax, whereby it is the income that is
exempt and not the taxpayer receiving it, for example the payments made
to part-time Defence Force Reserves

Common examples of exempt income encountered in this course are:

Maintenance or alimony paid by a spouse or former spouse;

Reserve Force income; and,
Exempt pensions.

AUSTRALIAN TAX LAW SELECT 9-000; 9-020; 9-025; 9-030; 9-075 9-200

Allowances and Re-imbursements

Allowances paid by an employer to an employee in cash are assessable under s.15-

2. They are amounts paid to compensate employees for either incurring a particular
expense or for some aspect of the working environment. For example, taxpayers who
are required to purchase their own tools may be provided with a Tool Allowance. The
employee may receive a set amount each pay for the purchase of tools and then will
buy tools as required during the year.

The Tool Allowance will be included in assessable income and the purchase of tools
will be either deductible in full or depreciated under the provisions of Division 40. (This
will be covered later in Topic 3).

For example, an employer may pay an annual Car Allowance of $1,000 but the
employee may have only used the car to the total of $800. The assessable income
will include the $1,000 and a deduction will be claimed for $800.

An employer may, however, pay an allowance as compensation for a particular aspect

of the job, for example, a job may be in a very isolated area of the state and a Remote
Area Allowance is paid. This allowance will be included in assessable income under
s.15-2, however, there is no expense which can be deducted against the allowance.

In other words, the mere receipt of a cash allowance does not automatically mean that
an employee can claim a deduction against the allowance received. Deductions will
be covered in details in Topic 2.
Re-imbursements differ from allowances because they are paid by the employer after
the employee has incurred an expense. If we follow the example above, regarding the
purchase of tools and the employer did not provide a Tool Allowance but rather
reimbursed the cost of any tool purchases. The employee would have spent $700 and
received a re-imbursement of $700. It is generally not considered to be assessable
income.

For the purposes of this course the only re-imbursement that constitutes assessable
income is a cents-per-kilometre re-imbursement for car travel which is assessable
income under s.15-70.

For example an employee was re-imbursed on the actual number of work-related

kilometres on the actual number of work-related kilometres travelled. At the end of
June CY this was $4,500. She was re-imbursed at the rate of 50 cents per kilometre.

The amount would be assessable under s.15-70. The employee would then be able
to claim a deduction for the appropriate work-related travel.

Allowances Re-imbursement
paid before the fact paid after the fact

Cash Allowance Non-cash benefit Generally not income the only

Include in e.g. use of a car. exception is s.15-70
assessable income Subject to FBT
under s.15-2

.
Readings
AUSTRALIAN TAX LAW SELECT 4-100 4-150; 4-190

Fringe benefits
Although Fringe Benefits Tax (FBT) is not examinable in detail in this course it is
necessary for students to have a basic understanding of this tax and how it interacts
with the Income Tax Assessment Act.

Fringe Benefits Tax has operated since 1986 and taxes employers on benefits
provided to employees e.g. the use of a company car. Employers generally obtain tax
deductions for benefits provided to employees (subject to the provisions of the Income
Tax Assessment Act) and then pay Fringe Benefits Tax at 49% (47% plus 2.0%
Medicare Levy). The FBT year runs from 1 April to 31st March.
The main types of fringe benefits are:
Car Fringe Benefits
Debt waiver Fringe Benefits
Loan Fringe Benefits
Expense payment Fringe Benefits
Housing Fringe Benefits
Living away from home allowance
Airline transport Fringe Benefits
Board Fringe Benefits
Meal/entertainment Fringe Benefits
Tax exempt body entertainment Fringe Benefits
Car parking Fringe Benefit
Property Fringe Benefits
Residual Fringe Benefits

Example 1:8 Fringe Benefits

An employer pays an employees telephone bill of $1,000. 60% of this represents

work-related use.

The employer obtains a tax deduction for the $1,000 but will pay FBT at 49% on the
private element of the phone bill - $400.

Contrast this with the employee paying the telephone bill instead. The employee
would only be able to deduct $600 under s.8-1.

The following are fringe benefits of which you should be aware:

Use of employers property, including cars.

Payment of HELP assistance on behalf of employees
Payment of spouse travel
Entertainment
Club membership

Fringe benefits are neither assessable nor exempt income s.23L(1). A cash benefit
provided by an employer (e.g. an entertainment allowance) is not subject to FBT but
is assessable income in the employees hands under s.15-2. Therefore, as a general
rule, cash allowances and benefits are assessable income to employees under s.15-
2, while non-cash benefits are subject to tax at the employer level under the FBT rules.
There are special rules that govern the assessability of non-cash business benefits
(e.g. those received by self-employed taxpayers) but these rules are not covered in
this course.

Readings
AUSTRALIAN TAX LAW SELECT 26-000 26-160

Dividends

Dividends represent income from property and are regarded as income according to
ordinary concepts. The Australian legislation includes special provisions, however,
which govern the assessability of dividends in the hands of shareholders.

Companies can pay dividends to shareholders from profits which have been taxed or
from profits which, for one reason or another, have not been taxed in the hands of the
company. Where dividends are paid out of the companys taxed profits, the
shareholder is entitled to an offset which reflects the tax already paid by the company.
Dividends paid from taxed profits are referred to as franked dividends and those from
untaxed profits are referred to as unfranked dividends. It is also possible for a
dividend to be partly franked. The company is required to inform the shareholder of
the extent to which a dividend is franked.

All dividends are assessable income under s.44. Additionally, where a shareholder
receives a franked dividend, franking credits are included in assessable income. They
reflect the tax paid by the company (s.207-5). A franking credit equal to the company
tax paid is then available (s.207-20).

Franking Credits are calculated using the following formula Dividend amount x 30%
(Company Tax Rate)/ 100-30% (Company Tax Rate) - for example if a taxpayer
received a dividend of $1000 franked to 100% - to work out the franking credit - $1,000
x 30/70 = $428.57 (this needs to be rounded to $429). Students will not be required
to calculate the amount of franking credit at this stage.
Example of a Dividend Statement

ABC LIMITED Payment date

ABN 000 000 000 15 February CY

Shareholder dividend statement

Notification of PY final dividend - paid 15 February CY

Security No. of Unfranked Franked Franking

description shares amount amount credit

Ordinary shares 6,400 $200 $700 $300

TFN amount $0.00 Net dividend $900.00

Please note that your tax file number has been received and recorded.
Please retain this advice for taxation purposes as a charge may be levied for a replacement.
Please advise promptly in writing of any change of address.

Example 1.9: Individual receiving franked dividends

Clavell Pty Ltd, an Australian resident company who is not classified as a Small
Business Entity (SBE), had a taxable income of $10,000 for the year ended 30
June. It paid its total after tax income to its shareholders, as a dividend which was
franked to 100%. All shares have equal dividend rights.

Jackie owned 50% of the shares in the company. She earned a salary of $25,000
during the year in addition to the dividend.

James owned the remaining 50% of the shares in the company. In addition to the
dividend income James received a salary of $55,000 during the year.

Calculate the net tax payable by James and Jackie.

Answer:
Clavell Pty Ltd
$
Taxable income 10,000
Net tax payable @ 30% 3,000
Dividends paid 7,000
Dividends are paid from after-tax income. As the shareholders have equal
dividend rights, each will receive a cash dividend of $3,500 with a franking credit
of $1,500.

Jackie
Step 1: Taxable income
$ $
Salary 25,000
Dividend s.44 3,500
s.207-20(1) franking credit (3,500 x 30/70) 1,500 5,000
Taxable income 30,000

Step 2: Net tax payable

Gross tax 2,242.00
Plus: Medicare (30,000 x 2%) 600.00
2,842.00
Less: franking credit s.207-20(2) 1,500.00
Net tax payable (ignoring other tax offsets) 1,342.00

If Jackie had not received any dividend, the tax on $25,000 salary would have been
$1,292.00. As Jackies marginal rate of tax is less than the company tax rate of
30%, the franking credit offsets the tax otherwise payable on her salary.

James
Step 1: Taxable income
$ $
Salary 55,000
Dividend s.44 3,500
s.207-20(1) franking credit (3,500 x 30/70) 1,500 5,000
Taxable income 60,000

Step 2: Net tax payable

Gross tax 11,047.00
Plus: Medicare (60,000 x 2%) 1,200.00
12,247.00
Less: franking credit s.207-20(2) 1,500.00
Net tax payable 10,747.00

If James had not received any dividend, the tax on $55,000 salary would have
been $9,422.00. As James marginal rate of tax is slightly more than the company
tax rate of 30%, the franking credit almost completely offsets the additional tax due
to the dividend.
Refund of excess franking credits

The excess franking credits which exceed gross tax payable less tax offsets such
as Low-income Tax Offset can be refunded to the taxpayer. This does not apply
to all taxpayers see table below.

Taxpayer Refund of credit

Individual Yes

Trustee assessed under s.98 or 99A for No

dividend not paid directly to trust Topic 6

Trustee assessed under s.99 Yes

Topic 6

Company No
Topic 7

Readings
AUSTRALIAN TAX LAW SELECT 18-130; 18-200 18-210; 18-389 18-390

Illegal Income

The fact that income may come from illegal means (e.g. drug-dealing, prostitution,
bookmaking, insider trading or theft) is irrelevant, it is still classified as income and
must be declared for taxation purposes.

In Topic 2 you will review legislation which relates to the deductibility of expenses
necessarily incurred in earning illegal income.

"The income tax law is a lot of bunk. The government can't collect legal taxes from
illegal money." Al Capone

Al Capone, the worlds best known gangster and public enemy number one, was
allegedly head of a crime organization that netted huge profits from the illegal liquor
trade during the Prohibition era. In 1931 Capone was found guilty of tax evasion and
was sentenced to jail.
Compensation payments

Payments received by a taxpayer in consideration of restrictions of future income-

earning capacity are assessable, but if the amount is received in the form of a lump
sum then it is classified as capital and not income.

For example
- If the payment is to replace a capital asset (e.g. leg, hand) then it is
capital;
- If the payment is to replace lost revenue (e.g. wages) then it is income;
- But if the payment is to replace both capital and revenue and paid in one
lump sum and cannot be dissected into the various components it will be
capital. If it can be dissected into components then the amount which
replaces lost revenue will be taxable.

Not Income and Not Capital?

There are certain types of income that are not classified as either income or capital for
income tax purposes, they include

a) windfall gains lottery winnings, game show prizes or money are not
assessable.

b) gifts a voluntary payment or gift that is not related in any way to personal
exertion will not be assessable (e.g. gifts to children on birthdays). But if the
payment or gift is properly characterised in the hands of the taxpayer as a
product or incident of employment or a reward for services (present or past)
then it is assessable income even if paid or given by a third party. (E.g. An
employer offers a $20,000 bonus to the salesperson who makes the highest
number of sales during the year. As the salesperson is earning income from
personal services then the value of the bonus would be included as
assessable income)

c) private or domestic transactions some examples are pocket money and

housekeeping money.
Low-income Tax Offset (LITO)

Individual taxpayers who have a taxable income less than $37,000 are entitled to an
offset of $445. This phases out by 1.5 cents for every dollar by which the taxable
income exceeds $37,000. The offset cuts out at a taxable income of $66,667. Note,
this offset is calculated in dollars and cents see the example below.

Low-income tax offset

Taxable Income (TI) Offset Calculation
$ $
0 37,000 445.00
37,001 66,666 $445.00 [(TI 37,000) 0.015]
66,667 + Nil

Example 1.10: Low-income tax offset

Geoff has a taxable income of $30,000. Calculate his net tax payable.

Answer: $
Tax on $30,000 2,242.00
Plus: Medicare 600.00
2,842.00
Less: Low-income tax offset 445.00
Net tax payable 2,397.00

As Geoffs taxable income is below $37,000 the full offset of $445 is allowable.

Rework your answer if Geoffs taxable income is

(i) $40,940 and (ii) $78,000.

Answer: $
(i) Tax on taxable income of $40,940 4,852.50
Plus: Medicare 818.80
5,671.30
Less: 445.00 - [(40,940 - 37,000) x .015]
445.00 59.10 385.90
Net tax payable 5,285.40

(ii) Tax on taxable income of $78,000 16,897.00

Plus: Medicare 1,560.00
Net tax payable 18,457.00

As the income is above $66,667 there is NO Low-income offset.

The LITO is not refundable i.e. it cannot result in a refund of tax, it will only reduce
the tax payable to nil in situations in which the taxpayer has not already paid tax, such
as where no PAYG (Withholding) has been deducted or franking credits are available.

Example 1.11(a): Limit of Low-income tax offset

Emily has a part-time job and derives a salary of $15,500. She also receives interest
of $3,000.

Calculate her net tax payable.

Answer:
$
Taxable income 18,500

Tax on $18,500 57.00

Less: LITO 445.00
Net tax payable Nil

As the LITO exceeds the gross tax payable, it can only reduce the tax payable to nil,
it does not result in a refund. In other words, it is limited to gross tax payable in this
example.

Example 1.11(b)

Morgan has a part-time job and earns a salary of $18,500. He has had PAYG
(Withholding) of $100 deducted from his salary. He has no other income.

Calculate Morgans net tax payable.

Answer:
$
Taxable income 18,500

Tax on $18,500 57.00

Less: LITO 445.00
Nil
PAYG (Withholding) 100.00
Refund 100.00

This example shows that while the LITO is not refundable, other offsets (including
PAYG (Withholding) and franking credits for individuals, are refundable.
Readings
AUSTRALIAN TAX LAW SELECT 2-500 2-520; 2-640

Carrying on a business

Whether or not a taxpayer is carrying on a business is a question of fact. Each

situation is judged on its merits but the Commissioner will look to the following criteria
in deciding whether or not the taxpayer is carrying on a business or merely engaging
in a hobby.

Profitability. There is no requirement for a profit to be present in a particular

year but there must be an expectation of a profit.

Size. Generally, the larger the size of the operations the more likely it is that the
Commissioner would consider a business was being carried on. It should be
noted, however that very small operations have been considered to be a
business.

Repetition and regularity of activities. This would usually suggest that there
is a business being carried on, but in some instances a single activity has been
held to constitute the carrying on of a business.

The keeping of records and the running of the operations in a business-like

manner. Where proper records are kept and the operation is run in a similar
manner to other such operations there is a greater likelihood that this would be
a business.

It must be noted that expenses incurred prior to the commencement of a business

are not deductible under s.8-1, but may be deducted under s.40-880. Losses from
non-commercial activities are now quarantined until the activities result in a profit
under the non-commercial business loss rules. These rules are outside the scope
of this course.
Readings
AUSTRALIAN TAX LAW SELECT 6-000 6-280

Derivation of income

As we considered the time of derivation of income such as salary and dividends

earlier in this topic, so we must consider the time of derivation of business income.
None of this is legislated but has been interpreted by the Courts.

The methods for accounting purposes are either

Cash means the taxpayer has derived an amount if it has been received in cash or its
equivalent or it has been dealt with on the taxpayers behalf (s.6-5 (4)), also known as
the receipts basis.

Accruals means the taxpayer has derived an amount if the taxpayer has completed
all relevant tasks so as to claim payment, even though payment has not been received,
also known as the earnings basis.

Trading business
A trading business derives income when the sale is made. Thus income is derived
even though not all the sale price has been received.

This issue of derivation is important as it affects many business particularly those

who offer credit to their customers - e.g. terms 30 days.

Example 1:12 Trading businesses

A furniture retailer offers a deal in which clients can buy now and pay later.
This offer is made in May of the current year and sales of $150,000 were
made. The purchasers have removed all the furniture from the premises but
none of them has paid any of the purchase price which is due in October - the
next financial year.

In which year should the retailer return the income?

 Answer

The furniture retailer should return as assessable income the $150,000 in the
current financial year as the income has been derived, although not yet
received.

Example 1:12 continued

In the following year the retailer receives cash of $900,000. This represents
the $150,000 which was derived in the previous year and current year cash
sales.

In addition, $400,000 of sales had been made at 30 June but was not payable
until after the 30 June of that year.

How much income was derived in the following year?

Answer

Cash received
900,000
Less: income derived in the prior year (opening debtors)
150,000

750,000
Plus: sales made during year but not yet paid (closing debtors)
(Trading business income derived when sale is made)
400,000
Income derived during this year
1,150,000

Personal services

Doctors, dentists and barristers are considered to provide personal services and
should return on the cash basis. That is, income is only derived when it is received.
 Example 1:13 - Personal services

Sally is a doctor who has sent out invoices totalling $120,000 but has only
received payments of $110,000 in the current year.

How much should she return as assessable income in the current year?

Answer
As a doctor Sally is providing personal services and will return on a cash
basis so she will only be assessable on $110,000.

Professional services

The Courts initially considered that solicitors and accountants provided professional
services and should return their income on the accruals basis. Further decisions
considered that this did not apply to small practices. Such practices can return their
income on the cash basis while large accounting or legal practices must return their
income on the accruals basis.

Example 1:14 Professional practices

June runs her own legal firm with the assistance of a receptionist and an
articled clerk. At the end of the year she has sent out invoices totalling
$200,000 and received payments of $180,000.

How much income should June return in the current year?

Answer
As the owner of a small business June could return her income on the cash
basis - $180,000.
 You could compare this with Potters a large legal firm with 10 partners, and
100 other staff both legal and support. This business would return its income
on the accruals basis.

Prepaid income

Some businesses receive income in advance for services to be provided in the

future. This applies to such things as dancing or aerobic lessons, swimming lessons
or anything which is paid in advance and will be provided over a specified period. At
the end of the financial year payments have been received for services which will be
provided in the following year. Providing the income is held in a separate unearned
income account and refunds are given for cancelled courses then this income has
not come home to the taxpayer and is not derived until the services have been
provided. Arthur Murray (NSW) Pty Ltd v FC of T (1965) 114 CLR 314

The facts of this case was that the taxpayer sold prepaid dancing lessons with
prepaid fees attributable in part to lessons to be provided in future income years. The
Commissioner assessed the tax payer on the basis that prepaid fees constituted
income derived by the taxpayer when received. The High Court concluded that
amount received in respect of service to be provided in future years are not earned
until the future obligations for which they are paid are discharged.

Example 1:15 Prepaid income

Bill starts a business during the current year providing courses in self-
defence. All courses must be prepaid however refunds are given. At 30 June
CY he had received payments for courses which had not yet commenced and
for partially completed courses. Bill received a total of $95,000 in the current
year of which $15,000 represented income for future or incomplete courses.

How much income has Bill derived in the current year?

Answer
Bill has only derived income for services which he has provided - $80,000.
 Note: If Bill never provided refunds then he would have derived the amount
received of $95,000 during the current year.

Readings
AUSTRALIAN TAX LAW SELECT 6-400; 13-100 13-330

Small Business Entities (SBE)

A number of specific provisions apply to small business entities. Section 328-110

defines a small business entity to be one which is carrying on a business and which
has an annual average turnover less than $2 million. The following flowchart can
assist to determine an entities status.
Once an entity qualifies as a Small-Business Entity it is then entitled to choose
various concessions such as simplified depreciation and pre-payments of expenses.

The intention of this system is to lessen the burden of complying with the tax laws.
There are seven main features of being a Small Business Entity:

a. a simplified depreciation regime under which depreciating assets costing less

than $20,000 each are written off immediately and other assets are pooled
together and depreciated at an accelerated rate - subdivision 328-D.
b. a simplified trading stock regime in which SBE taxpayers do not have to account
for changes in the value of trading stock or do stock takes at the end of the
income year if the movement between opening and closing stock is less than
$5,000 - subdivision 328-E.
c. An outright deduction for the prepayment of expenses under certain conditions.
d. Immediate deductions for professional expenses associated with starting up a
new business.
e. The ability to obtain a special reduction on the sale of assets used in the
taxpayers business (Active Asset Reduction) under the Capital Gains Tax
regime.
f. Reduction in company tax to 28.5%
g. Small Business Tax Discount (Offset)

You will be told in the question if a small business entity wishes to use a specific
concession.

Readings
AUSTRALIAN TAX LAW SELECT 15-000 15-900

Small Business Tax Discount (Offset)

One of the Small Business incentives delivered as part of the 2015 Budget, the Small
Business tax discount for unincorporated businesses came into effect on 1 July 2015.

The discount is available as an offset to individual small business taxpayers up to a

maximum of $1,000 per financial year.

The offset is applied against tax payable on business income.

The tax discount is a non-refundable tax offset, meaning it can only reduce the income
tax liability to nil and any excess of offset is not refunded

Essential features of the Small Business Offset

It applies to small business entities (SBE)

The offset is only available to an individual (not in a trustee capacity) who is a
- small business entity (sole trader)
- partner in a small business entity partnership
- beneficiary of a small business entity trust
The tax offset is 5% of the tax apportionable to total net business income

Total net small business income is assessable business income less attributable
deductions. Net capital gains are disregarded in working out the net small business
income and deductions for gifts or contributions under Division 30 as well as
deductions for personal superannuation contributions and tax-related expenses under
25-5 are not included within attributable deductions.
The small business tax offset for an income year is calculated by first determining the
percentage of an individuals taxable income for the income year that is total net small
business income. The percentage is then applied to the individuals basic income tax
liability for the income year, with the amount of the tax offset being equal to 5% of the
result of that calculation, up to a maximum amount of $1,000.

How to calculate the tax offset

Step 1 Work out the proportion

Total net small business income

Taxable income

Step 2 Calculate the tax payable on total net small business income

Basic income tax liability x step 1 proportion

Step 3 Calculate the offset

5% (rate of offset percentage) x Step 2

Note basic income tax liability is the tax on the taxable income before any
Medicare Levy or offsets are taken into account. For example taxable income is
$100,000 basic tax liability would be $24,632.

Division 328-355 to 328-375(3) are the operating provisions for the offset.

AUSTRALIAN TAX LAW SELECT 15-210

 Example 1:16 Small Business Offset

Oscar is a small business entity. For the current income year, Oscars
taxable income is $100,000, his basic income tax liability is $25,000 and his
total net small business income is $50,000.

Step 1 - $50,000 (total net small business income)

$100,000 (taxable income)
0.5 is the proportion

Step 2 - $25,000 (basic tax liability) x 0.5 (step 1 proportion) = $12,500

Step 3 - 5% (tax offset rate) x $12,500 (step 2 amount)

$625 tax offset

As the offset is less than $1,000 Oscar can claim the full amount of $625 as
an offset.

Example 1:17 Detailed income question

Baxter owns a business selling travel goods. Baxter also teaches part-time at the
local technical college. His receipts during the current year are as follows:

$
Sales. This includes $2,500 from sales made last
year but doesnt include sales of $3,200 made in June
of the current year but not yet paid 360,000

Salary from technical college. This includes Long

Service Leave of $4,200 which Baxter was going to
take in July of the following year 62,000

Withdrawal from bank. This was made up of the

original capital deposited of $20,000 plus interest of
$1,000 which was paid last year and re-invested.
Interest of 5% was paid on the invested money
22,050

Dividends franked to 100%. Franking credits of

$5,143 were attached 12,000

Unfranked dividend 4,000

Required:

Assuming Baxter had no expenses calculate Baxters taxable income and net tax
payable. Baxter is not an SBE taxpayer.

Answer:

1. Baxter is operating a trading business therefore business income is derived when

the sales are made.

The $2,500 received during the current year for sales made last year must be
excluded from the current years income as it would have been part of last years
sales.

Sales of $3,200 made during the current year but not paid must be included in
current year income as it is derived when the sale is made, not when the cash is
received.

2. Salary is derived when received, therefore even though the Long Service Leave
relates to the following year, as it was received in the current year it is derived in the
current year.

3. Interest is derived when credited. The $1,000 was credited in the previous year
and was derived last year. Only the $1,050 credited in respect of the current year is
derived in this year. The repayment of the original capital which was invested is not
income.

4. Dividends must include the cash dividends received and also the franking
credits.

Business income ($360,000 2,500 + 3,200) 360,700

Salary (include LSL) 62,000
Interest 1,050
Dividend 12,000
Franking credits 5,143
Unfranked dividend 4,000
Taxable income 444,893

Tax on taxable income 178,731.71

Plus: Medicare levy 8,897.86
187,629.57
Less: franking credits 5,143.00
Net tax payable 182,486.57
Note: there is no LITO as the taxable income is more than $66,667.

SUMMARY OF THIS TOPIC

Tax Formula
Gross income Income from all sources.

Less: Exempt income Income which is exempted under s.50 - s.52

Equals: Assessable income Also includes statutory income under 6-5 and
Division 15

Minus: Deductions Deductions allowable under the Act

Equals: TAXABLE INCOME Tax is paid on this amount

Multiply by: tax rate Rate specified by the Income Tax Rates Act

Equals: Gross tax payable

Plus: Medicare Levy

Minus: Credits/Offsets Amounts which reduce tax payable

Equals: Net tax payable

Income according to ordinary concepts

Periodicity, regularity or recurrence

Reward for personal services

Workers compensation payments

Business income

Return on capital

Must be something that actually comes in.

Capital Receipts

Income from the sale of an asset.

Derivation of Income

Individuals Derived
Salary and Wages when received

Interest when credited

Rent when received

Dividends when paid or credited

Business Derived
Trading business When sale made (accruals method)

Prepaid income When service provided (depending on refund policy)

Professional Cash basis for sole practitioners

services Accrual basis for large practitioners

Personal services Cash basis

Now that you have completed this topic you should be able to
calculate:

the assessable income of an individual and a business taxpayer;

the year in which income has been derived by a taxpayer; and,

the net tax payable by an individual taxpayer.

 TOPIC ONE QUESTIONS - INCOME

1. Explain the meaning of the following terms and, if possible, identify them
in the ITAA 1997:

(a) gross income;

(b) exempt income;

(c) assessable income;

(d) allowable deductions;

(e) taxable income;

(f) gross tax payable;

(g) tax offsets and rebates;

(h) credits;

(i) net tax payable.

2. Give examples of receipts which:

(a) constitute income according to ordinary concepts;

(b) do not have the character of income;

(c) have the character of an assessable capital gain;

(d) have the character of income but are exempt.

3. Are the following subject to taxation in the hands of the recipient? Give
reasons, quote sections of the ITAA and indicate any special points you
consider are relevant.

(a) Tips received by a hotel waiter who also receives a salary.

(b) Prizes won by a contestant in a quiz competition.

 (c) A $100 bonus paid to the top salesman of the week by his employer.

(d) $5,000 received by a lion-tamer from his employer for the loss of a finger.

(e) Reward for information supplied by a housewife to the police, leading to the
arrest of a murderer.

(f) $10,000 won at a legal casino by a member of the public.

(g) $10,000 won at an illegal casino by a professional gambler.

(h) Jamie's pocket money.

(i) Bank interest from a savings account.

(j) Winnings from a once-a-year bet in the Melbourne Cup.

(k) Rent from a boarder who shares a house with you.

(l) Wages to a member of the Regular Army.

(m) Danger Allowance of $4,000 paid to a mine worker.

(n) Re-imbursement for cost of purchase of compulsory uniform.

(o) An overseas trip provided to the Employee of the Year by the employer.
The trip was worth $10,000.

(p) A motor vehicle provided to an employee by her employer for both work-
related (80%) and private use (20%). The value of the car for FBT purposes
is $10,200.

4. Are the following subject to taxation in the hands of the recipient? Give
reasons, quote sections of the ITAA and indicate any special points you
consider are relevant.

(a) Part-time dishwashing payments received under a false name by a student.

(b) Bonus of $500 paid to an employee on completion of three years without

absence on sick leave.

(c) The old age pension.

 (d) An entertainment allowance paid to a sales manager.

(e) Austudy allowance received by a student.

(f) A lump sum legacy of $10,000 received from a relative's estate.

(g) Maintenance received by an ex-husband.

(h) A retainer received by a solicitor during a year in which no services are

performed for the client.

(i) A prize of $1,000 received by a sportsman for fairest player of the season,
where the person concerned receives a fee for playing the sport.

(j) $600 remuneration earned for part-time services as a member of the

Defence Force Reserve.

(k) $500 earned by a twelve year-old child from delivering newspapers.

(l) Uniform Allowance to cover cost of purchase and laundry of compulsory

uniforms.

5. Indicate if assessable income has been derived and when it was derived in
the following situations.

(a) An employee received the sum of $1,500 on 29 June CY being in respect

of long service leave commencing 30 June CY and terminating five weeks
hence. The employee intended to return to work at the end of the period of
leave. Would your answer be different if the leave commenced on 1 July
the following year?

(b) A landlord receives rent in advance from his tenants. Actual receipts for
this financial year were $2,800 of which $250 was in respect of the month
of July of the following year. An amount of $200 was received during the
previous year in respect of the month of July CY.

(c) $1,000 - which represents an increase of $50 per week in salary for the
previous twenty weeks received on 21 July CY, by a government clerical
officer.

(d) A taxpayer received a lump sum of $81,120 on redemption of a fixed

deposit. This represented the original principal of $70,000 and interest for
the previous year of $3,000. This interest was rolled over with the principal
 and invested for another 12 months. The remaining $8,120 was the
interest accrued on this total of $73,000.

(e) A taxpayer lent a friend $10,000. Interest was payable at 10% p.a. The
friend paid the taxpayer $1,000 by cheque on 30 June CY which was not
deposited in the taxpayer's bank account until 15 July of the following
financial year.

(f) Jeannie's employer had a cash flow problem in the previous financial year
and could not pay her all her salary. $10,000 of last year's salary was paid
in the current year in addition to this year's salary of $55,000.

6. Abyan had a taxable income of $38,300. Calculate her net tax payable
including Medicare levy.

7. Clive Clumsy was injured during his employment, and for the first 10 weeks after
the injury he received $400 per week compensation. A Supreme Court judgment
awarded him $71,000 for the injury. This was made up as follows:
$26,000 being loss of pay of $1,000 per week for 26 weeks to date less the
$400 per week for the first 10 weeks already paid.
$5,000 being payment for hospital and medical expenses incurred.
$30,000 for reduced working capacity in future.
$10,000 for pain and suffering.

Clive has other income of $12,562. Calculate his taxable income and net tax
payable including Medicare levy.

8. Maggi had the following income and deductions:

$
Salary 25,000
Re-imbursement of work-related kilometres travelled 1,900
Interest 1,000
Army Reserve Income 2,500
Expenses which are fully deductible for tax purposes
(which includes motor vehicle expenses re-imbursed) 2,800

Calculate her taxable income and net tax payable for the current year
including Medicare levy.
9. Julie earns income from a variety of sources during the year as follows:
$
Rent from city office block 120,000
Dividend from BHP Ltd franked to 100% 5,000
Franking credits on this dividend is $2,143
Unfranked dividend from Benny Pty Ltd 2,000
Dividend franked to 50% from Ascot Mining NL 3,000
Franking credit on this dividend is $643

She incurs expenses of $35,000 which are allowable deductions.

Calculate her taxable income and net tax payable including Medicare levy.

10. Steven received the following amounts during the financial year:

$
Allowance from Centrelink while unemployed 2,600
Honorarium as treasurer of a charitable organisation 500
Lump sum damages for personal injuries sustained in
a car accident 6,200
A lump sum legacy under the will of a deceased relative 1,950
Unfranked dividends from Family P/L 8,000
Dividends from Australia Bank Ltd franked to 100% 6,000
Franking credits attached to this dividend $2,571

Calculate Steven's assessable income and net tax payable including

Medicare levy.

11. When is the following income derived?

a) A karate instructor opened a karate school on 1 July CY and received fees in

advance. However, where the full courses of lessons were not taken pupils
received a refund. Fees received during the year amounted to $26,500. Fees
received during the year in respect of lessons still to be taught amounted to
$1,500.

(b) The taxpayer carries on a small accounting practice employing one secretary.
For the year ended 30 June he has sent out accounts for $2,000 which are
unpaid. In which year is the $2,000 assessable? Would your answer be
different for unpaid fees of an accounting practice with 20 partners employing
250 people?
12. How much income is derived in the current year?

(a) A taxpayer runs a film processing shop. Most customers pay at the time they
pick up their film but the business is used by a number of local real estate
agents who pay monthly for films developed showing properties they are
advertising for sale. At 30 June of the current year $4,000 was outstanding
for films which had been developed and collected by the real estate agents.
The taxpayer had received $150,000 in cash during the current income year,
of which $2,800 was the amount outstanding at the previous 30 June.

(b) Alan is a dentist who operates with the assistance of a full-time receptionist
and 2 part-time dental therapists. Alan has issued bills of $500,000 of which
he has received $450,000. Of the remaining $50,000, $22,000 represents
work done for which the clients have arranged to pay off the bill in monthly
instalments. The remaining $28,000 represents amounts on invoices sent out
but not yet due. In addition to the $450,000 Alan also received $52,000 on
amounts outstanding from last year and $15,000 time payments.

(c) Sharp and Shonkey was a legal partnership of 4 partners and 20 legal and
administrative staff. Invoices totalling $8 million had been issued during the
year. The partnership received payments of $8,055,000. This represented
$7,930,000 for the current year invoices and the remainder was monies owing
from the previous income year.

13. Sean owns a SBE business. He has the following income and expenses:
$
Net business income 83,460
Dividends franked to 100% 7,000
Franking credits attached - $3,000
Interest 42,100

Required: Calculate the taxable income and the net tax payable.
How would your answer change if the business income was $53,460?