Taxation Sections

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Computing Taxable Income

1. Tax Payable
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Tax is payable on a person’s taxable income|Australia’s Tax Law decrees that every year ending 30 June, most people in Australia (and this includes companies) have to pay tax on an amount which the Tax Law calls the person’s “taxable income.” This amount – the person’s “taxable income” for that year – is the end result of a much longer series of steps which the Tax Law prescribes in detail.|s. 4-1| |||

Tax payable = taxable income x. tax rate|Once the amount of taxable income has been calculated, the Tax Law then applies a scale of Tax Rates to this amount in order to work out exactly how much tax the person has to pay for this year.|s. 4-10(3)| |||

Taxable income is assessable income minus allowable deductions|Our concern is not with the tax rates nor the amount of tax payable, but rather with the steps that lead up to finding the amount of taxable income earned during the year.Taxable income is defined in the Tax Law to be the difference between a person’s assessable income and deductions (reduced by losses made in prior years). So it is a two-step process – looking first at what amounts fall into assessable income, and then looking at what amounts are deductions.These are the two critical concepts that we want to examine:1.Which receipts and other amounts form part of a person’s assessable income?2.Which payments and other amounts are allowed as deductions?If we know the answers to these questions, we then know how much is the person’s taxable income.|s. 4-15|

2. The first part of taxable income: assessable income
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Assessable income is ordinary income|Section 6-5 of the Tax Law says that a person’s assessable income includes all their “ordinary income” derived during the year. |s. 6-5| |||
Plus statutory income|Section 6-10 then says that a person’s assessable income also includes other amounts (that are not ordinary income) but which are “included in your assessable income by provisions [in Tax Law] about assessable income.” In the Tax Law, this is called “statutory income.”|s. 6-10| |||

|So the basic idea of “assessable income” is that it is made up of two amounts:·amounts which are “income” within the ordinary meaning of that word; and·amounts which aren’t ordinarily thought of as income, but which Tax Law says will be taxed as if the amount is income (statutory income).I will pause here to let you look at sections 6-5 and 6-10 in the Tax Law. They are on pages 1 and 2.||

3. Ordinary income
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Ordinary income is not defined|It may seem odd, but the Tax Law does not give us any written definition of what is “ordinary income.” So, in the absence of a written definition, it is the opinions of judges deciding cases and interpreting the word “income” that tells us what is the “ordinary income” made assessable by s. 6-5 of the Tax Law. The cases give the meaning that taxpayers and their advisers later rely on.|| |||

But it has a generally accepted meaning|In general terms, the concept of ordinary income means three broad types of receipts:1. amounts that a person receives as a reward for performing services (eg, the wages received by an employee)2. amounts that a person receives which are profits from carrying on a business, and3. amounts that a person receives which are a return on the person’s investments (eg, dividends on shares, interest on term deposits, rent on investment properties, royalties paid for allowing someone to use a patent, and so on).EXAMPLEBob earns $1,280 per week working in the warehouse at Coles’ major warehouse in Carlton. The $1,280 he receives is ordinary income because it is payment for performing services.+ Ordinary income$1,280- Deductions nil Taxable income$1,280|| |||

The meaning is found in decided cases|These three classes are not written in the Tax Law nor can they be found in this compiled form in...
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