Taxation Law: Australian Foreign Income Laws - Essay Example

? Taxation Law: Australian Foreign Income Laws Introduction There are a number of issues to consider with regard to the tax obligations of a firm. For small businesses and individuals in business, there may be some exemptions which may be applicable to their case. According to the Australian Tax Office, businesses or individuals who offer personal services such as contracting and consultancy can benefit from some tax cuts. The Australian Tax Office defines personal services as those services, which are derived from personal efforts or skills. In this regard, the Berta Company can be seen as offering personal services as it offers direct consultation services to businesses as well as professional newsletter to subscribers. Businesses like Berta can benefit from certain tax exceptions from some of their income if they have qualified according to the Australian Tax Office rules. For instance, if a firm like Berta is a run as a company, it will benefit from some exemptions such as from such costs as salaries. According to Australian Tax Office rules, if the business is run as a company and not as a sole trader or a partnership, the owner can claim tax exemptions for salaries paid to both self and any other employees. In this regard, Roberta can deduct her own salary, and that of the husband from the taxable income since her business is not a partnership and it not a sole trader. The Berta business is a limited company and therefore its entity is separate from that of the owner, Roberta. In this case, in her tax reporting, she will be justified to deduct her own salaries and that of the other employees from the taxable income. Businesses are also allowed to deduct any costs which they incur during the running of a business. However, these costs must be directly related to the running of the business and not personal costs. For instance, if there are any costs such as rental costs, travel costs telephone costs among others, the business can deduct this from its taxable income. In this regard, there are a number of issues which must be considered in Roberta’s case. In this regard, there are a number of costs which must be looked at in order to determine whether some of the costs can be said to be directly related to the business. In this regard the assessable income foe Berta as a company would be as follows: $ 60,000 as payment for advice given to Old Owl, paid on 31/12/10 $ 60,000 as Contract payment from 1/1/11 from Old Owl $5,000 as payment by newsletter subscribers equal (instalments quarterly) $ 3,000 as payment for advice given to Cave Services Pty Ltd on 31/12/10 $ 2,000 as payment for advice given to various individuals (1/7/10 – 31/12/10) Total assessable income would them be $ 130,000 for taxation. However, since barter qualifies as a limited firm which can deduct employee’s salaries from its taxable income, it will also be able to deduct the following from the taxable income; Roberta’s Salary: $70,000 Alana’s Salary: $50,000 Total Deductable expenses: $130,000 This would then mean that the total assessable income for Berta Ltd. for the operational year 1/7/11 to 30/6/12 would be $130,000 minus $120,000 which would be $10,000. However, that is not the end of this matter because the two individuals have to also pay income tax from their own salaries. In this regard, Roberta has to pay tax for the $70,000 income tax which she paid herself. This applies because of the same rules that make her salary exemptible from the taxable income of the Berta Ltd. Since Berta is a limited enterprise which means that from a business point of view it is a different and separate entity from the person of Roberta, she has to pay her income tax on the income earned from Berta Ltd. The same applies to Alan’s salary which must be subjected to an income tax because this amount was exempted from taxation in the Berta’s income. Alan will therefore have a taxable amount of $50,000 for the year 1/7/11 to 30/6/12 unless there are any eligible tax deduction or tax exemptions which may apply to him. For the year 1/7/12 to 30/6/13 The same rules applies for the year 1/7/12 to 30/6/13 with regard to the assessable income for the Berta. The following will be the assessable income for Berta and Roberta as well as her husband. For Berta Ltd, it will be as follows; $ 120,000 received as payment for advice given to Old Owl on 31/12/10 $ 60,000 received as payment for contract fees from 1/1/11 from Old Owl $5,000 as payment by newsletter subscribers equal (instalments quarterly) $ 22,000 as payment for advice given to Australia/China foundation However there are costs which can be deducted from this as follows: Roberta’s Salary: $70,000 Alana’s Salary: $50,000 $2,000 for Chinese salaries paid for May and June 2013 (since the $4,000 had a prepayment for July’s salary and therefore not inclusive in the current year. $2,000 accommodation costs (derived from the 5 year accommodation costs in China) There are however a number of issues which must be looked at here. To begin with, there is the issue of foreign income due to the fact that Roberta was operating in China where she also had to pay tax. According to the Australia Tax Office, individuals and businesses can apply for tax exemptions if they have paid tax in the foreign country where they were doing business. This may be applicable for Roberta and her firm (Berta Ltd.) as well as her husband. The tax office is considerate of individuals who have to pay tax in foreign countries and tries to make sure that these individuals do not have to pay double tax. However, in such a case, the concerned firm will have to apply for the tax exempt as well as prove that they had paid tax elsewhere. Proving is usually done using relevant documentation such as receipts given when the tax payment was made etc. However, the total amount which can be exempted depends on a number of issues such as the amount of tax which was paid. For instance, is the amount of the tax paid aboard is much lower than the amount of tax which could have been paid at home on the same amount of income, the firm or the individual would then have to pay the difference. China is one of the main Australian trade partner for which Australian tax Office considers for tax offsets for Australians who have paid tax income in foreign countries. The individual or the business however has to include the assessable income which has been taxed in the foreign country. Once the business is able to determine that it had paid or was deemed to pay the taxes in the foreign country, it will be except from the tax obligations from the Australian authorities. As is seen however, the foreign tax offset does not then affect the assessable income amount because this has to remain the same. In this regard, even in cases where Berta Ltd., Roberta and Alan have paid their taxes in China, they will still have to list all the assessable income in and apply for a tax offset. The tax offset is a good way for protecting the individual from over-taxation and it can be very useful for businesses. Businesses such as Berta Ltd. have to be protected from too much taxation or they would not be able to stand the pressure of paying off the taxes and remain in business. In regard, many countries such as Australia try to protect small businesses as well as the individuals. The case for Berta The case for Berta Ltd. is however a little different than most cases. For instance, it is much difficult to determine whether Berta Ltd. can be considered as a foreign firm because of a number of issues. To begin with, Berta is an Australian company and the only reason it had gone to China was in order to serve one of the firms in Australia which had decided to go to china. This can complicate the issues in terms of the way the taxes should be considered. It may not be easy to determine whether it is possible for the Chinese authority to tax the company since it is not listed as a Chinese company. However, if there are any arrangements as to how the business should be able to pay its Chinese taxes. Once this is settled, Berta would then be able to file for tax offsets in order to avoid paying the taxes twice. The same case will apply for the personal income for Roberta and her husband Allan. They must consider how much of their income (salary) is eligible to tax offsets and whether or not they should pay any taxes in the Australian side or in the Chinese side. Whichever the case, as discussed, the amounts in the assessable income amount will remain unchanged. In this regard, Roberta must be able to look at the ways in which the taxation rules affects her tax obligation in terms of how much tax she must pay. In a modern global economy, countries are continually competing with each other with regard to their tax laws and requirements in order to encourage foreign direct investments in their economies (Janeba, 1997). According to Kobetsky (2011), taxation authorities use certain policies and guidelines when making taxation rules in order to comply with international standards and in order to make sure that they are developing sensible and practical tax rules. The continued integration of international trade has led to a dire need for countries to align their tax rules to each other (Arnold and McIntyre, 2001). Lymer and Hasseldine (2002) also concur with this view and look at how international taxation rules have evolved in the trial to aid international business. Businesses should be able to take advantage of the good international tax polices (Read and Gregoriou, 2007). International tax policies are also made in line with international laws and this is important for businesses to be able to look at (Shlomo, 2004). Trade partnerships between two countries have tried to solve the issue of double taxation by allowing collaboration between the governments to cushion businesses and individuals from double taxation (Holmes, 2007). According to Australia CCH (2011) this is becoming more important and the tax laws continue to be eased off in order to aid in the integration of international business. International tax laws and requirements are designed to me the following issues; Compliance As already discussed, it is necessary for countries to be in compliance with international tax laws in order to make sure that the businesses which operate across international borders are able to operate smoothly. Many countries especially those which depend a lot on international trade are becoming more aware of this fact and are trying to ease of their taxation rules and requirements for businesses and individuals whose incomes are international. In this regard, countries like Australia have continually revised their taxation rules in order to create an environment which is conducive for a global economy. Protecting the local economy No matter how the government would like to ease off the tax burden on individuals and firms, the government must also be considerate of the fact that it does not want to lose its revenues as it needs these revenues to finance the local infrastructure. In making tax laws therefore, the government wants to ensure that there are no loopholes which may be used by tax evaders to deny the government its revenue. In this case, the government will always make sure that the tax laws available are well designed and that the businesses are complying with the rules and regulation. This is why it is necessary for businesses like Berta Ltd. to be able to look for ways in which they file for their taxes in order t make sure that they are not that they are not flouting any rules. Bibliography Arnold, B.J. & McIntyre, M.J. (2001). International Tax Primer. Sydney: Kluwer Law International. Australia CHC. (2011). Australian Income Tax Legislation 2011: Taxation Administration Act. Sydney: CCH Australia Limited. Holmes, K. (2007). International Tax Policy and Double Tax Treaties: An Introduction to Principles and Application. London: IBFD. Janeba, E. (1997). International Tax Competition. New York City, NY: Mohr Siebeck,. Kobetsky, M. (2011). International Taxation of Permanent Establishments: Principles and Policy. Cambridge: Cambridge University Press. Lymer, A. & Haseeldine, J. (2002). The International Taxation System. London: Springer. Read, C. & Gregoriou, N.G. (2007). International Taxation Handbook: Policy, Practice, Standards and Regulations. London: Elsevier. Shlomo, R. (2004). International Tax as International Law. Cambridge : Cambridge University Press. Read More