INTRODUCTION TO TAXATION

TOPIC 1. – INTRODUCTION TO TAXATION

TUTORIAL QUESTIONS

Resident tax rates 2019-20
Taxable income Tax on this income




0 – $18,200 Nil


$18,201 – $37,000 19c for each $1 over $18,200


$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000


$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000


$180,001 and over $54,097 plus 45c for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.

Foreign resident tax rates 2019-20
Taxable income Tax on this income




0 – $90,000 32.5c for each $1


$90,001 – $180,000 $29,250 plus 37c for each $1 over $90,000


$180,001 and over $62,550 plus 45c for each $1 over $180,000
  1. What is the basic income tax payable for an Australian resident individual with taxable income for the 2019-20 income year of:
(a) $15,000? Nil – below $18,200
(b) $40,000? [($40,000 – $37,000) x 32.5%] + $3,572 = $4,547
(c) $100,000? [(100,000 – $90,000) x 37%] + 20,797 = $24,497
(d) $300,000? [($300,000 – $180,000) x 45%] + 54,097 = $108,097
  1. What is the basic income tax payable for a foreign resident individual with taxable Australian income for the 2019-20 income year of:
(a) $15,000? $15,000 x 32.5% = $4,875
(b) $40,000? $40,000 x 32.5% = $13,000
(c) $100,000? [($100,000 – $90,000) x 37%] + $29,250 = $32,950
(d) $300,000? [(300,000 – 180,000) x 45%] + $62,550 = $116,550

Question 3:

Mark is an Australian resident taxpayer. His gross salary for 2019/20 is $89,000 and an amount of $27,600 of PAYG withholding tax has been deducted from his salary by his employer. He has incurred expenses of $8,200 which are allowable deductions.

Required:

Calculate Mark’s tax liability for the 2019/20 income year.

Answer:

Step 1: Calculate Mark’s taxable income – $89,000 – $8,200 = $80,800

Step 2: Calculate Mark’s BITL – [($80,800 – $37,000) x 32.5%] + $3,572 = $17,807

Step 3: Deduct non-refundable tax offsets (LAMITO) $17,807 – $1,080 = $16,727

Step 4: Calculate Medicare Levy and Medicare Levy Surcharge (Note since taxable income

<$90.000, there is no MLS) – $80,800 x 2% = $1,616 + $16,727 = $18,343

Step 5: Deduct any refundable tax offsets and other tax credits (PAYGW) – $18,343 – $27,600 = ($9,257) (Refund)

Question 4:

Calculate the Medicare levy payable (if any) for the year ending 30 June 2020 on the following amounts of taxable income for a single Australian resident taxpayer who is not entitled to the seniors and pensioners tax offset:

(a) $15,000 Nil – below $22,801
(b) $23,000 ($23,000 – $22,801) x 10% = $19.90
(c) $40,000 $40,000 x 2% = $800
(d) $140,000 $140,000 x 2% = $2,800

*If your taxable income is between $22,801 and $28,501, your Medicare levy will be 10% of the difference between your taxable income and the lower threshold ($22,801).

Question 5:

Jacqueline is an Australian resident for income tax purposes. She has taxable income of $77,000. She has been provided with a receipt for an expense in the amount of $1,000. This expense will constitute a deduction. How much tax will Jacqueline save for the 2019-20 income year?

Answer

The value of a deduction will be at the taxpayer’s highest marginal tax rate. As Jacqueline’s taxable income is $77,000, her highest marginal tax rate is 32.5% and the deduction of $1,000 would have reduced her tax payable by $325.

Question 6:

Indicate whether the following statement is true or false and include a brief explanation with your answer:

“ATO Rulings are a source of law, as they are legally binding on the Commissioner when a taxpayer relies on them”.

Answer:

False. ATO Rulings are not a source of law – they the Commissioner’s interpretation of how the law applies. The only sources of tax law are legislation (statutory law) and case law (judicial law).

Question 7:

Indicate whether the following statement is true or false and include a brief explanation with your answer:

“The Goods and Services Tax (GST) is a proportional tax because when it applies, the rate is always 10%”.

Answer:

False: GST is a regressive tax in that the burden of the tax falls more heavily on low income taxpayers. Example: Assuming that it costs an average of $550 per week (including GST) to meet an individual’s basic needs. The GST on that expenditure is $50. That amounts to 5% of the total income of someone earning $1,000 per week, but only 1% of someone earning $5,000 per week.

Question 8:

Indicate whether the following statement is true or false and include a brief explanation with your answer:

“Horizontal equity and vertical equity are terms describing identical concepts – both are about fairness in the tax system”.

Answer:

False: Although both terms are about fairness in the tax system, the concepts are not identical.

Horizontal equity is about levying the same tax burden on all taxpayers in the same financial situation (i.e. with the same level of income). For a tax system to achieve horizontal equity the type of receipt should not determine the tax treatment; rather, the tax payable on assessable income should be the same.

Vertical equity is about levying tax at different levels depending on a taxpayer’s ability to pay it. The progressive tax rate scale that we have in Australia is an example of vertical equity in that higher tax rates apply (as a proportion of income) as income increases.

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