Taxation Strategies and Structures - Math Problem Example

Topic: Taxation Name: Lecturer: Course name: Course code: Date: Question one Robert and Juliet assessable income ROBERT JULIET Salary - 24,000 Gross income 160,000 Add other incomes Assessable income 250 250 Rent income 8400 - Franked credit 900 900 Franked dividend 385.5 385.5 Total income 170385.5 25,985.5 Less allowable expenses Tax fee 600 600 Traveling to work exp 400 Interest 600 Subscription to Professional association 800 Taxable income 169,185.5 24,185.5 Assumptions 1. Juliet entitled to the maximum low income tax offset of $1,500 as her taxable income does not exceed $30,000. 2. Home mortgage to Mr. Robert and Credit card interest is not allowable expenses. 3. Traveling and entertainment expenses are not waived from the tax burden since this were not use for the purpose of the business. 4. They are both subject to Medicare levy as their income is above $ 8000 separately 5. Donations are not taken as allowable since there was no any benefit derived from the it They are taxed as follows; Robert tax Juliet 24,185.5* 0.15 $3,627.825 $169,185.5*0.037+17550 $ 80,148.64 Medicare levy 170,385.5*1.5% 25985.5*1.5% 2555 390 Medicare sub charge 170,385.5*1% 1704 $ 4017.83 Tax payable by Mr. Robert is $80148.64 +2555 +1704 = 84,407.64 Less- Franking credit 771/2 = (385.5) $ 84,022.14 Tax payable by Juliet is $ 4017.83 Less Franking credit (385.5) (1,500) $2132.12 Question two Taxation strategies This is the strategy that involves maximizing the total tax deductions in the current financial year with an aid of reducing the assessable income. Mr. Robert should adopt this strategy to reduce his tax liability (Joseph J. Cordes, 2008). To adopt this strategy Robert should reduce his assessable income using superannuation. Complete tax deduction is available in favor of all superannuation contributions made on his wife as employee and himself (Zane Swanson, 2006). This strategy saves Robert from paying lots tax liability. Secondly Mr. Robert should embark on claiming more tax deductions on payment of interest the finances alternatives like the mortgage or the investment. Strategies for minimizing the tax liability Mr. Robert total tax is relatively high. He needs to adopt the following strategies to reduce the tax burden; 1. Bringing forward his tax deductions Also on donation to a charitable organization, Mr. Robert should make sure he is registered with the Australian Business Register website which allows exception on the non allowable tax deductions such as donations (Deborah Schanz, 2011). This is allowable only if a benefit is derived out of the donations. 2. Capital Gains Tax Discounts When an asset is sold, the increase in value in selling it which is capital gain is subject tax, Mr. Robert should claim for the discount on the capital gains since capital gain is treated as income and is taxable but he needs to apply discount which is waived from this tax. This capital gain discount percentage is available to individuals, trusts and superannuation funds. In order for Robert to claim capital gain discount he should have posses the asset for the one year. After which he will get 50% discount for capital gains made by an individual or a trust or 33.33% discount on complying with the superannuation (Zane Swanson, 2006). By doing this, Robert will save a lot of tax liability especially when the value of asset is high. Divert of 3. Income and Assets to trust This is the strategy that involves transfer of ownership of income to the beneficiaries to lower the income subject to taxation. Robert having two kids, should put is income and assets under the trust foe the beneficiaries. 4. Tax Offsets and Rebates This involves an ideal way of limiting the tax liability (Hugh J. Ault, 2010). Mr. Robert s claim for the following has his strategy to limit tax payable; a. Medical expense offset- Mr. Robert can claim up to 20% of the medical expenses, by this he would have reduce the taxable income hence paying less tax b. Spouse Superannuation Contribution Rebate- He should consider paying his superannuation on behalf of his spouse. Also he can get a rebate of $ 540 of which tax liability would be lessened. Question three Effective tax structures Mr. Robert would be in a strategic condition in adopting the new tax structures (Mark Gertler, 2009). To achieve these effective tax solutions he should consider the following structures; Capital gain tax minimization- This involves assets transfer to the beneficiaries so as he limits the tax on gains in case sale of the asset. Income tax minimization- it involves protection of his assets and income from being subjected to total taxation by claiming of discounts and transferring possession of the gainful items in the business (Zane Swanson, 2006). Ease in administering of cost structure and initial registration structures- This structure limits the cost of accounting for tax returns and cost of introducing new entity service trust or the superannuation fund. Effective tax rate is calculated as follows; Earned Income Income Taxes Payroll Taxes Total Paid Taxes Effective Tax Rate $10,000.00 $0.00 $1,412.96 $1,412.96 14.13% $20,000.00 $840.00 $2,825.91 $3,665.91 18.33% $30,000.00 $2,335.00 $4,238.87 $6,573.87 21.91% $40,000.00 $3,835.00 $5,651.82 $9,486.82 23.72% $50,000.00 $5,725.00 $7,064.78 $12,789.78 25.58% $100,000.00 $18,369.00 $14,129.55 $32,498.55 32.50% Question four Capital Gain = Sell Price – Indexed Purchase Price Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year of purchase) = 190* 114.7/582 = 37.45 Capital gains Selling price $ 290,000 Indexed purchase price $ 37.45 Less selling exp ($ 2,000) Capital gain $287,962.55 Since Mr. Robert has acquired the property since 1995 to date the he is to claim 50% discount on the total capital gain thus he will not suffer for any additional marginal tax rate. This means that. Robert should pay tax for the 50% 0f $287,962.55 = $ 143,981.18 Mr. Robert should set a trust and divert the share owning to his two kids, this means that he would not be taxed on the share returns. Thus the amount for the tax he would have pay would be secured. Question five a. Necessary repayment for each loan Monthly compounding -n = 20yrs * 360 = 240, 30 I = 0.08/12 I = 0.00667 C= PV/ (1- [1+i]-n)/i C = 200000/ (0.006667)240 /12 = $1672.93 Total interest payable = $1672.93 x 240 = $401503.20 Weekly compounding –n = 20yrs * 364 =1040 7 I= 0.08/52 I= 0.01538 C = 200000/ (0.01538)1040 C= $ 385.58 Total interest payable = $385.58 x 1040 = $401003.20 b. Difference in interest paid over the 20 years considering both options . Monthly compounding = $401503.20 Weekly compounding = ($401003.20) $ 500 The difference in the interest payable is $ 500 Reference list Deborah Schanz, S.S., 2011. Business Taxation and Financial Decisions. Graham, J.R., 2007. Taxes and Corporate Finance. Hubbard, R.G., 2007. Asymmetric Information, Corporate Finance, and Investment. Hugh J. Ault, B.J.A.G.G., 2010. Comparative Income Taxation: A Structural Analysis. Joseph J. Cordes, R.D.E.J.G.G., 2008. Taxation and Tax Policy. Marcia Millon Cornett, A.S., 2009. Fundamentals of financial institutions management. Mark Gertler, R.G.H., 2009. Federal Income Tax Aspects of Corporate Financial Structures. Zane Swanson, B.N.S.A.S., 2006. The Capital Structure Paradigm of Taxes. Read More