Income Tax Law and Practice Sample Assignment
Assignment- Income Tax Law and Practice (Australian Law)
The main objective of the essay is to have an idea about the current taxation system and reforms made in Australia during 2018. It contains the details of how a wrong of deduction claim or over claim of expenses effect the growth and development of the country and most importantly on the financial position of an individual or business residing/operating in Australia.
The work related expenses vary from persons to persons. The following are some of the expenses which are considered as work related expenses according to the Australian Taxation Office;
- Conveyance and Travel expenses which includes travel between work and home
- Clothing, laundry and dry cleaning expenses for buying, hiring, mending or cleaning certain uniforms
- Gifts and Donations for Official Functions
- Home office Expenses includes include rent or mortgage interest, council rates and house insurance premiums
- Interest, Dividend and Other Investment Income Deductions
- Self-education Expenses which includes current employment or profession
- Tools, equipment and other equipment
- Deductions for specific industries and occupations
- Union and professional association fees for example welfare fund contributions
- Entertainment expenses which includes business lunches, attendance at sporting events, gala or social nights, concerts or other similar types of functions or events.
- Capital Allowances
- Internet and mobile phone expenses
According to a press release published by the ATO on 20 February 2018, the “ATO is warning taxpayers they will be paying close attention to claims for ‘other’ work-related expenses this Year, and is reminding people to keep appropriate records.”
In the abovementioned statement the Australian Government is warning the tax payers to keep timely records of their work related tax deductions. The said warning has been issued as the assistant commissioner of taxation feels that the citizens of Australia are making risky and false claims regarding their work related deductions.
According to the statement of Assistant Commissioner Kath Anderson, the tax office has issued a warning notice for the tax payer to records of claims they want to make and also clarified that every expenses that occurred due to work cannot be fall into the category of Other Work Related deductions. He also added that the claims related to tax deductions include home office expenses, mobile phone bills, internet bills, work equipment etc.
According to the recent report more than 6 million Australians claims this type of deduction which are over-claiming even if they were not aware of whether they are eligible for such deductions or not. In the year 2017, Australian tax payers claimed over $7.9 billion for Other Work Related deductions.
The Taxation Department also made it clear that all the Australian tax payers have to prove that the money spent by them was related to work an only a bank statement cannot be considered as a proof all the time. Every businesses and individual tax payer must claim work related tax on case-by-case basis. A work related expenses must fulfill the following three criteria to get deduction under the Income Tax Act;
- The claims expenses must have paid not it is noted that it must not be reimbursed.
- Another factor which must be considered is the expenses must be related to the income of an individual and must not be a private expense.
- One must keep records to the expenses incurred during a particular financial year by keeping the aforesaid two conditions in knowledge.
It is very important to consider the aforesaid conditions to claim deduction. During the past few years it has been noted that most of the tax payer make legitimate claims but a few of them are also making false claims. Every year the Income tax department doesn't allow many claims because there were no evidences to prove that the expenses incurred were related to work.
According the provisions of the Australian Income Tax Law if an expense is incurred in relation to both work and private, one can claim for deduction for work related portion only. For example if someone is using the telephone for both work and personal use, he/she cannot claim for the entire telephone bill amount. Only the calls of the bill related to work will be taken into consideration for deduction.
According to the latest reports, Australia has reached more than 1 million tax payer in the current financial year who are supporting the idea of genuine reporting and compliance strategizes applicable for the work-related expenses. Due to this compliance strategizes and genuine reporting the Australian Taxation Office is able to adjust the amount more than $100 million which will be used for the welfare of the people of Australia.
The Productivity Commission has published an article on how Australia's Tax and transfer functions distribute income of the people of Australia. The need for the publication of the aforesaid article was considered as in the year 2014 budget, the main focus was given by Government was how to budget the gap between revenue and spending of the Government.
The budgets of both the years 2014 and 2015 were controversial as the budget impacted mostly on the low income groups. It was very difficult to judge to either increase the taxes or cut the spending. It is necessary to understand the distribution of spending. While considering the current tax reforms made by the Taxation Department, Australia people are taking undue advantage of the deduction facility. Analysis of the past year deduction claims it was necessary to take a step like this. The advantages of such reforms are growth and economic development of the country. However, due to the reforms the people from lower income group have to face financial crisis.
The Federal, Local and Government Taxes and Rates are applied depending on the size of the business. The taxes are paid on income but a business can claim for deduction for business expenses. The expenses may include insurance premiums, bank charges, telephone bills, printing and stationery, staff training expenses etc. To pay the income tax a business must submit a Business Activity Statement (BAS) to the Australian Tax Office. It is a kind of tax reporting issued by the Australian Tax Office. This tax report is used to pay GST.
Due to the recent reform in the income tax law by Australian Government, It led to increase in the household goods which occurred as a result of increases in pensions and benefits. It also led to cuts in personal income tax. The pension and benefits are raised to 4 Percent. The effects of theses change are enduring. There is also one more factor which was effected is that reduction in personal income tax. The reform directly and indirectly affected the individuals and businesses.
Many provisions are being made in the income tax law and various reforms are being made to make people warn about the consequences of their false information provided. The taxation authorities are dealing with the complex solutions to take charge of the false information.
The Advantages of Tax Reforms in Australia;
The following are some of the advantages of tax reforms in Australian related to work related deductions;
- An organization now days have replaced work related deductions with personal allowance and they are also providing a lower Income Tax rate.
- Due to the tax reform the over claiming of the amount will be reduced.
- The legislative charges to enable annual income tax returns for employees have been abolished.
- The Australian individuals will be not incur compliances cost in getting tax returns due to reforms in work related deductions.
- It will help the growth and economic development of the country as the reduction in over claiming amount will give rise to lower deduction rate.
The Disadvantages of Tax Reforms in Australia;
The following are some the disadvantages of tax reforms in Australian related to work related deductions;
- Due to the reforms the touch payroll of an employee may get affected. The employer in that case will have to inform the ATO that the employee is not required to purchase tools for their job, drive their own car, wear a uniform etc.
- There will be fair outcomes between workers whose employer reimburses work- related expenses and workers in a weak bargaining position who must incur the expenditure themselves.
- Employees will suspect that PAYG tax is over-withheld at source. Until this issue is addressed, employees will feel hard done by if their deductions are taken away.
- If the substantiation legislative rules in the income tax law are being rorted necessary amendments must be made.
- If there are certain types of claims which are being over-claimed it effects all the occupations who are claiming for deductions. As the amendments have to be made according to the designated occupation.
- The ATO will maintain data on whether tax agent prepared returns reflect higher than average work related tax deductions. As the agents are working with the Tax Practitioners Board, they will be investigated and in case they find any discrepancy they may lost their jobs.
- The power of the ATO auditor will increase as he will be only person investigating about outlandish tax deduction claims.
From the above discussion and explanation it can be concluded that the decision of the Taxation Office, Government of Australia has its own pros and cons. In one way the tax payer were taking undue advantage of work related deduction by over-claiming the amount than the expenses actually incurred. As mentioned above more than 6 million people are making false claim to get deductions which is not a good practice. Thus, it was necessary for every tax payer to keep track of the expenses which occurred related to work in a particular financial year to avoid such type of over claiming.
The ATO has taken necessary steps to overcome this type of mal practice by issuing a warning notice for the tax payers that they should keep the records of their spending so that they present these records as evidence at the time of claiming deductions for work related expenses. While there are many benefits for doing so other hand there are certain limitations and disadvantages as well.
The idea of maintain the standards in deduction of a work related expense invokes tension among the tax practitioners as it has its own pros and cons. However, this step has been considered as putting the risk in revenue generation. A large number of clients who are depended on their agents to find out as many work related deductions as to avail more deductions in their incomes. On the other hand, the tax payers must keep record of their expenses to avail deduction for work related expenses.
Back, T. (n.d.). Retrieved from https://www.taxback.com/: https://www.taxback.com/blog/6-tips-for-claiming-tax-back-in-australia
Business, F. (2016, March 6). Retrieved from https://www.foxbusiness.com/: https://www.foxbusiness.com/features/6-factors-that-affect-how-much-income-tax-you-pay
conversation, T. (2015, October 9). Retrieved from http://theconversation.com/: http://theconversation.com/who-really-benefits-from-australias-tax-and-social-security-system-48808
Government, T. (2018, February 27). Taxation affecting your business. Retrieved from https://www.business.tas.gov.au/: https://www.business.tas.gov.au/finances-tax-and-insurance/taxation-affecting-your-business
Johnson, D. (1999, September). Impact of new tax legislation on households.
KOEHN, E. (2018, February 21). ATO signals crackdown on “other” work-related deductions, as Australians continue making “outright false” claims. Retrieved from https://www.smartcompany.com.au/: https://www.smartcompany.com.au/finance/tax/ato-crackdown-other-work-related-deductions/
Review, F. (2018, February 20). ATO targets 'other' work expenses this year. Retrieved from http://www.afr.com/: http://www.afr.com/news/policy/tax/ato-warns-other-wont-cut-it-as-a-work-expense-this-year-20180220-h0wd8y
Sam Reinhardt and Lee Steel. (n.d.). A brief history of Australia’s tax system . Retrieved from https://www.taxsuperandyou.gov.au/: https://www.taxsuperandyou.gov.au/sites/default/files/01_Brief_History.pdf
Smith, G. (2009, February). Australian Tax Reforms: Past and Future. Retrieved from https://www.victoria.ac.nz/: https://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/pdf/smith.pdf
Stef Mason, E. &. (2004, June). International Accounting Standards and Australian Income Tax.
Wilcox, H. &. (2017, July 12). A Guide to Taxation in Australia. Retrieved from https://hallandwilcox.com.au: https://hallandwilcox.com.au/a-guide-to-taxation-in-australia/