LAWS3101

Week 1: Touching base before we start on Topic 1

Dr Thea Voogt
Course coordinator
Law School

LAWS3101 Who we are:

Dr Thea Voogt, course coordinator
Is about you: Covers three taxes:
• Realising your dreams Income Tax Sue Chen
• Super organised course
• Knowledge check moments
• Consistency in how we Goods and Services Tax Rhonda Robinson
approach answers
• Setting you up for success
• Saving you time through topic Fringe Benefits Tax
study guides
• Supporting you when it gets
tough [Consults] Matthew Chen
Interaction of these

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The LAWS3101 course site… making it easy for you

• Weekly announcements… check your emails!
• Weekly folders with a to-do-list
• O-Week to-do-list
• 10 Tips for success in LAWS3101; What you need to know about tax before starting LAWS3101;
LAWS3101 Glossary
• Quiz on assumed knowledge
• Weekly Discussion boards
• Tutorials: How this works
• ECP  What to write down in assessments  Section and Division numbers, case names, ATO Rulings
numbers
• Assessments  Implications of timed exams; Assessments are not set from lecture slides
• Your starting point… always the topic study guide  Save time, know what to write down, plan for exams
• Principles of Taxation Law 2021 (PoTL)
LAWS3101: Introduction and Topic 1 3
LAWS3101 is very different to your other courses
• 10 Tips for success in LAWS3101  O-Week folder
House-keeping: Questions during lectures
LAWS3101
Topic 1: The taxation system in Australia
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2021 Budget expenditure

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2021 Budgeted tax income

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LAWS3101

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Topic 1 to 9: Focus on Income Tax

Taxable Assessable
Deductions
income income
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Self-assessment system
• Every citizen has taxpayer rights
• Obligation to report your taxable income
• Self-assessment system: complexity, system of Rulings
• Tax return of individuals are largely pre-populated
• Third party verification: interest, dividends, salary, PAYG

Paying your fair share of taxes

Doing the right thing

LAWS3101: Introduction and Topic 1 11

LAWS3101
Topic 1: The taxation system in Australia
Law School

The big picture about Topic 1

Apply the income tax formula to calculate taxes payable or refundable

Taxable Assessable
Deductions
income income

Taxabl
Income Tax
e
Tax rate
income
30 June 2021
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Topic 1 Learning outcomes

After completing your studies of Topic 1, you must:
1. Demonstrate that you can construct a detailed calculation of taxes payable by, or refundable to
individual taxpayers: based on their taxable income and circumstances; distinguishing between the
component parts of the calculation; determining, calculating, explaining and presenting the bases for
each of the component parts of the calculation; clearly stating whether taxes are payable or refundable.
Your answers for taxes payable or refundable must include dollars and cents, even if the cents are 0.
2. Apply the basic rules for the order in which tax offsets are to be taken and the rules that dictate whether
tax offsets are refundable.
3. Evaluate whether a taxpayer has access to the tax offsets.
4. Demonstrate that you can construct the calculation of taxes payable by companies. Your answers for
taxes payable must include dollars and cents, even if the cents are 0.

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Topic 1 Study guide

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Taxes payable is based on Taxable income

Taxable Assessable
Deductions
income income

Ordinary income
General deductions
[You need to explain!]

+ +
Statutory income Specific deductions
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Taxable income – ‘The three baskets’ concept

Income from Income from Income from

employment property business
‘Passive income’
Salary, wage Sales revenue
Rent
Bank interest
Dividends, s 44
Bonus, tips Services income
Royalties

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The taxpayers we focus on: Companies v Individuals

• Major differences between companies and individuals
• The three baskets
• Flow of funds

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Taxable income – ‘The three two baskets’ concept for companies

Inflow
Income from property
Income from business as
Income from employment while carrying on a
a corporation
business
‘Passive income’
Salary, wage Sales revenue
Rent
Bank interest
Dividends, s 44
Bonus, tips Services income
Royalties

Outflow:
Separate taxpayer
Salary, dividends, loans
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Taxable income – ‘The three baskets’ concept for individuals

Income from business

Income from employment
Income from property that is not a separate
from a separate employer legal entity

‘Passive income’
Salary, wage Sales revenue
Rent
Bank interest
Dividends, s 44
Bonus, tips Services income
Royalties

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* The taxpayers we focus on: Companies v Individuals

• Major differences between companies and individuals
• The three baskets
• Flow of funds
• What it means to ‘carry on a business’
• The relevance of legal business structures
• Where do SBEs (Small Business Entity) fit in? What you need to know about tax before starting
LAWS3101 page 5

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Knowledge check moment: Poll 1
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Income tax formula for companies You need this to

calculate franking
credits!
Income
Taxable 30% or
tax
income 26%
payable

Type of corporate taxpayer Corporate tax

rate
Company with turnover ≥ $50 million 30% from $1

Company with a turnover < $50 million and ≤ 80% of assessable income from passive income 26% from $1

Company with a turnover < $50 million and > 80% of assessable income from passive income 30% from $1

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Knowledge check moment:
What is ‘passive income’?
How will you approach the 80% threshold rule?
1. Add together $ value of all passive income [rent, interest, dividends etc]
2. Which % of taxable income is your answer?

Think about a company that owns property and rents it out….

Question in zoom chat…..
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Income tax formula for individuals

Tax offsets:
Specific
Basic tax liability order

Tax Other taxes

Income and Taxes
Taxable Marginal offsets
tax levies payable or
income tax rate and based on refundable
payable
PAYG taxable income

Consistency

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Consistency: Topic 1 Study guide, page 2
Element
Basic income tax payable
Less: Low income tax offset
Less: Low and middle income tax offset
Plus: ML (Medicare Levy)
Plus: MLS (Medicare Levy Surcharge)
Plus: HELP Repayment
Less: PAYG (no specific place in order)
Less remaining offsets:
 Franking credits
 Foreign income tax offset
 Unincorporated small business offset
Taxes payable or refundable ($.00)
LAWS3101: Introduction and Topic 1
Basis of calculation?
PoTL Table 3.5, 3.6, 3.7
PoTL [15.30], [15.170]
PoTL [15.170]
PoTL [3.50], New Table 3.2
PoTL Table 3.3
PoTL Table 3.4
Amount provided in assessments
Covered in Topic 1, 2 and 4
AU$ provided in assessments
PoTL [15.130]
Differences: AU resident taxpayers, foreign
residents, working holiday-makers?
Yes. Use different tax tables
Yes. Only AU resident individuals
Yes. Only AU resident individuals
Yes. Must have access to Medicare benefits
Yes. Must have access to Medicare benefits
Must have HELP Debt
No
Yes. See Topic 2
Yes. Only AU resident individuals
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Marginal tax rates  Basic income tax payable

Taxable income (TI) Australian resident individuals Working holiday-makers (Visa Foreign residents
class 417, 462)
0 – $18,200 Nil  Tax threshold TI x 15% TI x 32.5%

$18,201 – $45,000 19% for each $1 of TI over $18,200

$45,001 – $120,000 $5,092 + 32.5% x (TI - $45,000) $6,750 + 32.5% x (TI - $45,000)

$120,001 – $180,000 $29,467 + 37% x (TI - $120,000) $31,125 + 37% x (TI - $120,000) $39,000 + 37% x (TI - $120,000)
$180,001 and over $51,667 + 45% x (TI - $180,000) $53,325 + 45% x (TI - $180,000) $61,200 + 45% x (TI - $180,000)

  

What goes into TI? World-wide income Australian source income Australian source income

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Consistency: Topic 1 Study guide, page 2
Element
Basic income tax payable
Less: Low income tax offset
Less: Low and middle income tax offset
Plus: ML (Medicare Levy)
Plus: MLS (Medicare Levy Surcharge)
Plus: HELP Repayment
Less: PAYG (no specific place in order)
Less remaining offsets:
 Franking credits
 Foreign income tax offset
 Unincorporated small business offset
Taxes payable or refundable
LAWS3101: Introduction and Topic 1
Basis of calculation?
PoTL Table 3.5, 3.6, 3.7
PoTL [15.30], [15.170]
PoTL [15.170]
PoTL [3.50], Table 3.2
PoTL Table 3.3
PoTL Table 3.4
Amount provided in assessments
Covered in Topic 1, 2 and 4
AU$ provided in assessments
PoTL [15.130]
Differences: AU resident taxpayers, foreign
residents, working holiday-makers?
Yes. Use different tax tables
Yes. Only AU resident individuals
Yes. Only AU resident individuals
Yes. Must have access to Medicare benefits
Yes. Must have access to Medicare benefits
Must have HELP Debt
No
Yes. See Topic 2
Yes. Only AU resident individuals
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Medicare Levy (ML)

• Payable when individuals access Medicare benefits
• Additional ‘tax’, remitted via PAYG
• = Taxable income x 2%

• Exceptions
• Rules for low-income earners
• Thresholds  $23,226 taxable income
• Phase-ins  $29,032 taxable income
• If TI > threshold, but TI < phase-in = ML = (TI – threshold) x 10%

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Medicare Levy Surcharge (MLS)

• Potentially, who pays the MLS? Access to Medicare benefits

• Private health cover? Yes  No MLS payable, you have private health cover for income
year
No  May be liable
Future risk of not having private health cover…

• Considers family circumstances in Step 1 to determine the rate

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MLS

• Calculate ‘Income for surcharge purposes’

1
• Determine the applicable rate (%) at which MLS
is charged
2
• Determine the amount of MLS payable
3

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MLS: Step 1 [Family-based]

‘Income for surcharge purposes’
= Taxable Income
+ Reportable Fringe Benefits
+ Net Financial Investment Loss
+ Net Rental Property Loss
+ Exempt foreign employment income
+ Reportable Superannuation contributions
= Total
 If the taxpayer has a spouse, determine the ‘Income for surcharge purposes’ for the taxpayer
and their spouse
Topic 1 Case study 1

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Taxable income – ‘The three baskets’ concept

Income from Income from Income from

employment property business
‘Passive income’
Salary, wage Sales revenue
Rent
Bank interest
Dividends, s 44
Bonus, tips Services income
Royalties

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MLS: Step 2

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MLS: Step 3 [Each taxpayer separately]

MLS payable = (Taxable income + Reportable Fringe benefits) x % in Step 2

• Performed for each taxpayer individually, even if they are in a family

• Include the MLS for each taxpayer in their own taxes payable calculation
• Formulas is step 1 and step 3 are different!

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HELP Repayment
• Higher Education Loan program for undergraduate students who have their studies funded by
the Federal Government
• Must repay the HELP debt when HELP Repayment Income > Threshold  ‘Income contingent
loan’
• HELP Repayment income (HRI)
St • = Taxable Income + Net Financial Investment Loss + Net Rental Property Loss + Reportable Fringe
ep Benefits + Reportable Superannuation contributions + Exempt foreign employment income

1
• Determine rate of repayment
St • Based on HRI
ep
2
• HELP Debt Repayment
St • = HRI x rate in Step 2
ep
3
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HELP Repayment

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HELP Repayment
• Higher Education Loan program for undergraduate students who have their studies funded by
the Federal Government
• Must repay the HELP debt when HELP Repayment Income > Threshold  ‘Income contingent
loan’
• HELP Repayment income (HRI)  Not family-based
St • = Taxable Income + Net Financial Investment Loss + Net Rental Property Loss + Reportable Fringe
ep Benefits + Reportable Superannuation contributions + Exempt foreign employment income

1
• Determine rate of repayment
St • Based on HRI
ep
2
• HELP Debt Repayment
St • = HRI x rate in Step 2
ep
3
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Breather… question in zoom chat
Knowledge check moment:
Topic 1 Case study 1
Law School

*Topic 1 Case study 1

Jake Bentley is an Australian resident individual. He is 34 years old and single. He has no private health cover. Jake completed a commerce degree at UQ
in 2013 and went on to qualify as a chartered accountant in 2016. His HELP debt balance at the end of this income year is $6,300.
Jake has always been passionate about blues music and in 2018, he opened his own blues music and gin bar in Fortitude Valley, called Blue-gum Dry.
Blue-gum Dry was an instant success and Jake used some of the money from this business as a deposit, to purchase a rental property in an exclusive unit
complex in Bulimba. This property was tenanted for the entire current income year. Jake also derives bank interest on a 20-year fixed deposit savings
account that was opened when he was 16 years old when he received a large inheritance from a family member.
Jake’s taxable income for this income year totals $370,000. The turnover of Blue-gum Dry for this income year totals $3,259,000. Interest on the fixed
deposit savings account totals $30,000 for this income year. During the income year, Jake made voluntary tax deductible personal super contributions to a
super fund totalling $15,000.
These are the relevant facts about the rental property for this income year:
$
Rent, ordinary income, s 6-5 ITAA97, income from property 56,000
Tax deductible expenses incurred, s 8-1 ITAA97 17,500
Tax deductible capital allowances (tax depreciation) based on the construction cost of the unit of $1 million, Div 43 ITAA97 25,000
Tax deductible interest on the mortgage loan that he used to fund the remainder of the purchase price of the unit, s 8-1 ITAA97 18,500

Finally, during this income year, Jake remitted PAYG installment payments totalling $80,000 to the ATO as part payment of his tax obligations for this
income year.
You are required to:
Calculate Jake’s taxes payable or refundable for the current income year. Show all your calculations, present all formulas and bases for your calculations in
words, and provide reasons for your answers.

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Knowledge check moment:
Topic 1 Case study 1
Poll 2
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Consistency: Topic 1 Study guide, page 2
Element
 Basic income tax payable
Less: Low income tax offset
Less: Low and middle income tax offset
 Plus: ML (Medicare Levy)
 Plus: MLS (Medicare Levy Surcharge)
 Plus: HELP Repayment
 Less: PAYG (no specific place in order)
Less remaining offsets:
 Franking credits
 Foreign income tax offset
 Unincorporated small business offset
Taxes payable or refundable
LAWS3101: Introduction and Topic 1
Basis of calculation?
PoTL Table 3.5, 3.6, 3.7
PoTL [15.30], [15.170]
PoTL [15.170]
PoTL [3.50], Table 3.2
PoTL Table 3.3
PoTL Table 3.4
Amount provided in assessments
Covered in Topic 1, 2 and 4
AU$ provided in assessments
PoTL [15.130]
Differences: AU resident taxpayers, foreign
residents, working holiday-makers?
Yes. Use different tax tables
Yes. Only AU resident individuals
Yes. Only AU resident individuals
Yes. Must have access to Medicare benefits
Yes. Must have access to Medicare benefits
Must have HELP Debt
No
Yes. See Topic 2
Yes. Only AU resident individuals
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Income tax formula for individuals: Tax offsets

Other taxes and

Income Taxes
tax
Taxable Marginal Tax levies
payable or
payable
income tax rate offsets based on
refundable
taxable income

Low and
Unincorporated Foreign
Low income middle Franking
small business income tax
tax offset income tax credits
offset offset
offset

Topic 1 Study Guide Consistency

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Tax Offsets
• Purpose: Reducing taxes payable
• Position/order

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Consistency: Topic 1 Study guide, page 2
Element
 Basic income tax payable
Less: Low income tax offset
Less: Low and middle income tax offset
 Plus: ML (Medicare Levy)
 Plus: MLS (Medicare Levy Surcharge)
 Plus: HELP Repayment
 Less: PAYG (no specific place in order)
Less remaining offsets:
 Franking credits
 Foreign income tax offset
 Unincorporated small business offset
Taxes payable or refundable
LAWS3101: Introduction and Topic 1
Basis of calculation?
PoTL Table 3.5, 3.6, 3.7
PoTL [15.30], [15.170]
PoTL [15.170]
PoTL [3.50], Table 3.2
PoTL Table 3.3
PoTL Table 3.4
Amount provided in assessments
Covered in Topic 1, 2 and 4
AU$ provided in assessments
PoTL [15.130]
Differences: AU resident taxpayers, foreign
residents, working holiday-makers?
Yes. Use different tax tables
Yes. Only AU resident individuals
Yes. Only AU resident individuals
Yes. Must have access to Medicare benefits
Yes. Must have access to Medicare benefits
Must have HELP Debt
No
Yes. See Topic 2
Yes. Only AU resident individuals
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Tax Offsets
• Purpose: Reducing taxes payable
• Position/order
• Refundable v non-refundable
What Apply against What if > tax payable Basis?
Low income rebate Basic tax Non-refundable, use to reduce tax to $0 TI < $66,667
Low and middle income tax offset Basic tax Non-refundable, use to reduce tax to $0 TI < $126,000
Foreign income tax offsets Basic tax, ML, MLS Non-refundable, use to reduce tax to $0
Franking credits All taxes Refundable
Unincorporated small business Self-limiting
offset

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Low income tax offset, Low and Middle income tax offset

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Foreign income tax offset

• Do you earn income outside of AU?
• Are you ‘tax resident’ in AU?
• YES + YES  May get access to foreign income tax offset
• No double taxation agreement between AU and the country where you earned the money  Pay taxes
in AU and the other country
• How much tax did you pay on that specific income in AUD?
• That is your offset

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Franking credits: The taxation of dividends

Dividend imputation system = Dividends paid by AU company
 Tax corporate profits once
 Dividends are paid from after tax profits
 Shareholder get a ‘credit’ for corporate taxes

1. Dividends: s 44 ITAA36 = Assessable income, amount of the dividend

2. Franked distribution: s 207-20 ITAA97 = Assessable income, gross up amount  Franking credits
= Dividend x () x % of franking
= Dividend x () x 100% if fully franked and not a base rate entity
= Dividend x () x 100% if fully franked and a base rate entity
3. Franking credits = Franking credits tax offsets [cents!]

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Dividend advice statement

Pd in cash/reinvest? Dividends, s 44 = $42, assessable income

Tax offset = franking credits = $18.00 Gross up, s 207-20, assessable

income = $42 x 3/7 x 100% = $18

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How the dividend imputation system operates

• Company has accounting profit, and cash, and reserves to distribute
• Calculate taxable income, pay taxes  @ 30% or 26%
• Remainder of cash: Reinvest or pay dividends? No tax implications
Shareholder receives income, but gets a ‘credit’ for Marginal tax Marginal tax
corporate tax already paid rate of 45% rate of 19%
Receive cash dividend from large listed company, s 44 ITAA36 $70 $70
Gross up, s 207-20 ITAA97
= $70 x 30%/100-30%
= $70 x 3/7 $30 $30
Taxable income $100 $100
Basic tax payable $45.00 $19.00
Less franking credits ($30.00) ($30.00)
Tax payable/ (Refund) $15.00 ($11.00)

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Breather… questions in zoom chat
Law School
Consistency: Topic 1 Study guide, page 2
Element
 Basic income tax payable
Less: Low income tax offset
Less: Low and middle income tax offset
 Plus: ML (Medicare Levy)
 Plus: MLS (Medicare Levy Surcharge)
 Plus: HELP Repayment
 Less: PAYG (no specific place in order)
Less remaining offsets:
 Franking credits
 Foreign income tax offset
 Unincorporated small business offset
Taxes payable or refundable
LAWS3101: Introduction and Topic 1
Basis of calculation?
PoTL Table 3.5, 3.6, 3.7
PoTL [15.30], [15.170]
PoTL [15.170]
PoTL [3.50], Table 3.2
PoTL Table 3.3
PoTL Table 3.4
Amount provided in assessments
Covered in Topic 1, 2 and 4
AU$ provided in assessments
PoTL [15.130]
Differences: AU resident taxpayers, foreign
residents, working holiday-makers?
Yes. Use different tax tables
Yes. Only AU resident individuals
Yes. Only AU resident individuals
Yes. Must have access to Medicare benefits
Yes. Must have access to Medicare benefits
Must have HELP Debt
No
Yes. See Topic 2
Yes. Only AU resident individuals
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Unincorporated small business offset

• Unincorporated business, turnover < $5 million
• Taxable income is the individual taxpayer’s
• Marginal tax rate applies… could be > corporate tax rate of 30% and 26%
• Must calculate this  s 328-360 (2)
= 13% x (Basic income tax X )

• Net small business income for year

­ = Assessable income - deductions for the small business
­  net capital gain for SBE

Maximum offset = $1,000 = cap

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Knowledge check moment:
Complete Topic 1 Case Study 1
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Questions about Topic 1?

Zoom chat
Discussion Board
After each lecture…
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