FNSACC522 Prepare tax documentation for individuals

RTO No. 31736 | CRICOS 03010G

FNSACC522 Prepare tax documentation for

individuals
Learner Guide
Date Version Summary of changes Responsible
April 2023 V1.0 New development based on Compliance R Beeston

Copyright © 2023 Malekhu Investments trading as Queensford College. All rights reserved.

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Ta ble of c onte nts

Key symbols used in this learning resource .......................................................................... 3

Introduction ............................................................................................................................ 3
1. The Australian Taxation System .................................................................................... 4
2. Income ............................................................................................................................ 9
3. Principles of assessable income .................................................................................. 20
4. Capital gains events ..................................................................................................... 35
5. Termination payments .................................................................................................. 45
6. Exempt Income ............................................................................................................. 58
7. Deductions .................................................................................................................... 62
8. Tax offsets .................................................................................................................... 77
9. Returns and assessment .............................................................................................. 89
10. Tax planning............................................................................................................ 110
11. Responsibilities and duties of tax agents ............................................................... 116
12. Acronyms ................................................................................................................ 122
References ......................................................................................................................... 123

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Key symbols used in this learning resource

Online Video A term or Fun

resource direct quote fact
or article

Introduction
This unit describes the skills and knowledge required to prepare non-complex income tax
returns for individuals following statutory requirements. It includes gathering and verifying
data, calculating taxable income, and reviewing compliance requirements.
It applies to individuals who use systematic approaches and follow specific guidelines to
ensure compliance requirements are met.
As a worker, a trainee, or a future worker, you want to enjoy your work and become
known as a valuable team member. This unit of competency will help you acquire the
knowledge and skills to work effectively as an individual and in groups. It will give you the
basis to contribute to the goals of the organisation which employs you.
It is essential that you begin your training by becoming familiar with the industry standards
to which organisations must conform.
These units of competency introduce you to some of the key issues and responsibilities of
workers and organisations in this area. The units also provide you with opportunities to
develop the competencies necessary for employees to operate as team members.
This Learner Guide Covers
• The Australian Taxation System
• Income
• Principles of Assessable Income
• Capital Gains Events
• Termination Payments
• Exempt Income
• Deductions
• Tax Offsets
• Returns and Assessment
• Tax Planning
• Responsibilities and Duties of Tax Agents

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1. The Australian Taxation System

What is Tax?
“Tax” is described as a compulsory contribution to State revenue. Taxation involves
directing resources from consumers to the government for use in spending programs. In
Australia, taxes are levied by State and Federal Governments and may be classified as
“direct” or “indirect” as follows:

Indirect Taxes Direct Taxes

Goods and Services Tax (GST) Income Tax

Excise Duty Medicare Levy

Customs Duty Capital Gains Tax

Fuel Tax Superannuation Tax

Luxury Car Tax Fringe Benefits Tax

Indirect taxes are those that are paid indirectly by consumers, as they are included in the
price of goods or services. Examples of indirect taxes in Australia include the Goods and
Services Tax (GST), Excise Duty, Customs Duty, Fuel Tax, and Luxury Car Tax.
Direct taxes, on the other hand, are taxes that are paid directly by individuals or
businesses to the government. Examples of direct taxes in Australia include Income Tax,
Medicare Levy, Capital Gains Tax, Superannuation Tax, and Fringe Benefits Tax.
Income tax is imposed upon individuals, companies and other entities and is based on a
taxpayer’s taxable income for the current year. The Australian taxation system is a
progressive tax system. Taxes are increased in line with increases in an individual’s
taxable income, e.g., those with a greater income pay more tax.
(Source: Baker, Cliff & Deaner, 2015 p.2)

Here are three examples of income tax in Australia:

• Personal Income Tax: This is the tax that individuals pay on their income, such as
salary, wages, and bonuses. The amount of tax paid is calculated based on the
individual's taxable income, which considers any deductions and offsets.
• Company Income Tax: This is the tax that companies pay on their profits. The tax
rate for company income tax is currently 30% for most companies, but there are
some exceptions for small businesses and other entities.
• Capital Gains Tax: This is a tax on the capital gain made from the sale of an asset,
such as property or shares. The amount of capital gains tax paid depends on
several factors, including the length of time the asset was held and the individual's
marginal tax rate.

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For an individual non-business taxpayer, the amount of income tax is withheld by the
employer from gross wages and salaries e.g. pay as you go (PAYG). The total amount is
recorded and shown on a payment summary at the end of the financial year.
Legislation Governing the Australian Tax ation System
The Australian taxation system is governed by a range of legislation and regulations that
are designed to ensure that individuals and businesses pay their fair share of tax. Some of
the key legislation that governs the Australian taxation system include:
• Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997:
These Acts provide the framework for the calculation and collection of income tax
in Australia. They set out the rules for determining taxable income, allowable
deductions, and tax rates.
• Taxation Administration Act 1953: This Act outlines the procedures and powers
that the Australian Taxation Office (ATO) has for administering and enforcing tax
laws. It covers issues such as tax returns, audits, and penalties for non-
compliance.
• Goods and Services Tax (GST) Act 1999: This Act sets out the rules for the
collection and payment of the GST, which is a tax on the consumption of goods
and services in Australia.
• Fringe Benefits Tax Assessment Act 1986: This Act provides the rules for the
calculation and collection of fringe benefits tax, which is a tax on non-cash benefits
provided to employees.
• Superannuation Industry (Supervision) Act 1993: This Act regulates the
superannuation industry in Australia, including the taxation of superannuation
contributions and benefits.
In addition to these Acts, there are a range of other regulations and guidelines that govern
specific areas of taxation, such as the taxation of trusts and the treatment of capital gains.
The ATO also provides guidance and support to taxpayers to help them understand and
comply with their taxation obligations.
Section 51(ii) of the Australian Constitution provides for the Commonwealth Parliament to
have power to make laws for the peace, order and good government for the
Commonwealth of Australia with respect to taxation. The principal legislation governing
taxation in Australia is as follows:
Income tax assessment act 1936 (ITAA36)
Income tax assessment act 1997 (ITAA97)
Any accompanying regulations
Case law (common law) is also applied in decisions handed down by the courts. The
ITAA97 has replaced some, but not all of the provisions of the ITAA36, some of which are
still in force. The general rules dealing with liability for tax are contained in ITAA97. The
Australia Taxation Office (ATO) administers the income tax system.
(Source: Baker, Cliff & Deaner, 2015 pp.2-3)

History of the Australian Taxation System

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Until 1916, income tax was levied by each of the Australia States. South Australia was the
first Australian State to impose a general tax on income in 1884, and by 1907 all States
were collecting income tax. The first federal income tax was levied in 1916 to raise
additional revenue. Between the years 1916 and 1942, income tax was levied by both the
State and Federal Governments. In 1936, with the introduction of the ITAA36, a uniform
tax system was introduced. With the outbreak of the Second World War, fundamental
changes were made to Australia’s taxation system. In 1942, income taxation was
consolidated and collected by the Commonwealth Government in order to increase
revenue. The Commonwealth Government is still responsible for the collection of all
income tax in Australia today, however, some funds are handed back to the States and
Territories for State funding programs.
(Source: Baker, Cliff & Deaner, 2015 pp. 2-3)

The constitutional considerations of Australian tax law are following the, and adhering to:
• Employment laws
• GST
• CGT
• Income tax
• Superannuation
• Financial reporting
• Privacy and confidentiality
The separation of powers in Australia divides the institutions of government into three (3)
branches; legislative, executive, and judicial. The legislature makes the laws; the
executive put the laws into operation, and the judiciary interprets the laws.
(Source: Separation of Powers: Parliament, Executive and Judiciary)

Sources of Taxation Law

There are basically three (3) sources of taxation law. These are:
• Statue Law: Statue law is law in the form of taxation legislation such as the
ITAA36 and ITAA97. Therefore, statutory power is legislation relevant to income
tax that is enforced by Federal Government. The Income Tax Assessment Act was
written to enact the collection of income tax. The ITAA 97 has replaced some but
not all parts of the ITAA36.
• Case Law: Case law is law created by the courts and also by the Administrative
Appeal Tribunal in interpreting statutes.
• Practices of the Australia Taxation Office (ATO): The ATO has the power to
make legally binding rulings and determinations.
s.51(ii) of the Constitution

Empowers the Commonwealth Government to impose income tax.

Statues

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Legislation on income tax matters enacted by the Federal Parliament.

Australian Taxation Office

Administers the income tax system.

(Source: Baker, Cliff & Deaner, 2015 pp. 4)

The Role of the ATO

The Australian Taxation Office (ATO) is the Australian government agency responsible for
administering the taxation system, including the collection of taxes and the enforcement of
tax laws. The ATO's role is to ensure that taxpayers comply with their tax obligations and
to provide guidance and support to taxpayers and tax practitioners.
For tax practitioners, the ATO provides guidance on tax laws and regulations, including
updates on changes to tax laws, rulings, and interpretations. Tax practitioners are
required to adhere to strict ethical and professional standards, which are enforced by the
ATO. They are also required to register with the Tax Practitioners Board and comply with
the Board's code of conduct.
For individuals, the ATO provides information on how to meet their tax obligations,
including how to lodge tax returns, pay taxes, and claim deductions and credits. The ATO
also administers various social security and welfare programs, such as the Goods and
Services Tax (GST) and the Medicare Levy, and provides information on these programs
to individuals.
To ensure compliance with tax laws and regulations, the ATO has developed policies,
procedures, and processes for tax practitioners and individuals. These include:
• Lodging tax returns on time: Individuals and businesses are required to lodge
tax returns by the specified due date, which is usually 31 October for individuals
and 28 February for businesses.
• Keeping accurate records: Individuals and businesses are required to keep
accurate records of their income and expenses to ensure that they are able to
complete their tax returns correctly.
• Paying taxes on time: Individuals and businesses are required to pay any taxes
owed by the specified due date to avoid penalties and interest charges.
• Reporting income correctly: Individuals and businesses are required to report all
of their income correctly, including any income earned overseas.
• Claiming deductions and credits correctly: Individuals and businesses are
allowed to claim deductions and credits for certain expenses incurred in earning
income, but they must do so correctly and in accordance with the law.
The ATO is responsible for enforcing compliance with these policies, procedures, and
processes, and for administering penalties and interest charges for non-compliance.
Taxpayers who are unsure of their obligations or who need assistance in meeting their tax
obligations can contact the ATO for guidance and support.

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Income Tax Rates

The purpose of income tax rates in Australia is to raise revenue for the government and
fund essential services and programs. Income tax is one of the main sources of revenue
for the Australian government, and the income tax rates are set by the government to
ensure that individuals and businesses pay their fair share of tax based on their income.
In Australia, income tax is a progressive tax system, which means that the more income a
person earns, the higher the percentage of their income they will pay in tax. The income
tax rates are structured in a series of income tax brackets, with each bracket taxed at a
different rate. The current income tax brackets and rates for the 2022-23 financial year are
as follows:
• $0 – $18,200: Nil
• $18,201 – $45,000: 19 cents for each $1 over $18,200
• $45,001 – $120,000: $5,092 plus 32.5 cents for each $1 over $45,000
• $120,001 – $180,000: $29,467 plus 37 cents for each $1 over $120,000
• $180,001 and over: $51,667 plus 45 cents for each $1 over $180,000
For example, if a person earns $60,000 per year, they would pay 19 cents for each dollar
over $18,200 up to $45,000 ($45,000 - $18,200 = $26,800 x 19% = $5,092), and then
32.5 cents for each dollar over $45,000 up to $60,000 ($60,000 - $45,000 = $15,000 x
32.5% = $4,875), for a total income tax of $9,967.
Employers are responsible for withholding income tax from their employees' wages or
salary and remitting it to the Australian Taxation Office (ATO) on their behalf. At the end of
the financial year, individuals must lodge an income tax return with the ATO, which
reconciles their actual income and deductions with the amount of tax that has been
withheld during the year.

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2. Income
What is Assessable Income?
Assessable income in Australia refers to the total income of an individual that is subject to
taxation by the Australian government. It includes income from all sources, both inside
and outside Australia, and can include:
• salary and wages
• rental income
• business income
• investment income (e.g., interest, dividends, capital gains)
• superannuation income
• government payments (e.g., Centrelink payments, pensions).
When preparing an individual's tax documentation, a tax agent must consider a number of
factors to ensure that all assessable income is correctly reported and included in the tax
return. These factors include:
• The nature of the income: The tax agent must consider the type of income
earned by the individual, whether it is ordinary or statutory income, and whether
any specific tax rules apply to that type of income.
• The source of the income: The tax agent must determine whether the income
was earned from sources within or outside of Australia, and whether any tax
treaties or agreements exist between Australia and other countries that may
impact the taxation of that income.
• Deductible expenses: The tax agent must identify any deductible expenses that
can be claimed against the assessable income, such as work-related expenses,
investment expenses, and charitable donations.
• Tax offsets and credits: The tax agent must consider any tax offsets and credits
that the individual may be eligible for, such as the Low- and Middle-Income Tax
Offset (LMITO), Senior Australian Tax Offset (SATO), and Franking Credits.
• Compliance with tax laws: The tax agent must ensure that the individual's tax
return is compliant with all relevant tax laws and regulations, and that all income is
accurately reported and disclosed.
Overall, a tax agent must take a comprehensive and thorough approach when preparing
an individual's tax documentation, considering all sources of assessable income and
ensuring that all applicable tax rules, deductions, and credits are correctly applied.
Under ss6.5 and 6.10 of the ITAA97 “assessable income” consists of ordinary income and
other amounts which are assessable, e.g. statutory income. It is not only necessary to
consider whether an item is income but also whether it has been derived (s6.5(4)
ITAA97). Section 6.5(4) describes derived income as follows:

s6.5(4) In working out whether you have derived an amount of

ordinary income, and (if so) when you derived it, you are taken to

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have received the amount as soon as it is applied or dealt with in

any way on your behalf or as you direct (Income tax Assessment Act
1997).

Examples of ordinary income include:

▪ Gross wages and salaries
▪ Interest
▪ Rental income
▪ Sales and services
Statutory income includes income such as dividends, royalties, capital gains and franking
credits, any allowances and redundancy payments. The provisions with respect to
ordinary income are set out in s6.5 of the ITAA97 as follows:

6.5 Income according to ordinary concepts (ordinary income)

(1) Your assessable income includes income according to ordinary concepts,
which is called ordinary income.
(2) If you are an Australian resident, your assessable income includes the *
ordinary income you * derived directly or indirectly from all sources, whether
in or out of Australia, during the income year.
(3) If you are a foreign resident, your assessable income includes:
(a) the * ordinary income you * derived directly or indirectly from all *
Australian sources during the income year; and
(b) other * ordinary income that a provision includes in your assessable
income for the income year on some basis other than having an *
Australian source.
(4) In working out whether you have derived an amount of * ordinary income,
and (if so) when you derived it, you are taken to have received the amount as
soon as it is applied or dealt with in any way on your behalf or as you direct.
(Source: Income Tax Assessment Act 1997: Sections 6.1 and 6.5)

The provisions for statutory income are set out in s6.10 of the ITAA97:

6.10 Other assessable income (statutory income)

(1) Your assessable income also includes some amounts that are not *
ordinary income.
(2) Amounts that are not * ordinary income but are included in your
assessable income by provisions about assessable income are called
statutory income.
(3) If an amount would be * statutory income apart from the fact that you have
not received it, it becomes statutory income as soon as it is applied or dealt
with in any way on your behalf or as you direct.
(4) If you are an Australian resident, your assessable income includes your *
statutory income from all sources, whether in or out of Australia.

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(5) If you are a foreign resident, your assessable income includes:

(a) your * statutory income from all * Australian sources; and
(b) other * statutory income that a provision includes in your assessable
income on some basis other than having an * Australian source.
(Source: Income Tax Assessment Act 1997: Sections 6.1 and 6.10)

Here is a table with five examples of ordinary income and five examples of statutory
income in Australia:

Ordinary Income Statutory Income

Salary and wages Superannuation contributions made by an

employer

Rental income from property Government grants or subsidies for research

and development

Income from a business Capital gains on assets held for less than 12
months

Income from investments (e.g., interest, Dividend franking credits

dividends)

Income from freelance or contract work Foreign income derived by Australian residents

Note this is not an exhaustive list and there may be other examples of ordinary and
statutory income in Australia. Additionally, the classification of income as either ordinary or
statutory may vary depending on the specific circumstances and applicable laws and
regulations.
Section 4.10 of the ITAA97 sets out the provisions to work out how much income tax you
must pay. The year of income for tax purposes is normally the same as the financial year,
e.g., 1 July to 30 June of the following year as follows:

4.10 How to work out how much income tax you must pay
(1) You must pay income tax for each * financial year.
(2) Your income tax is worked out by reference to your taxable income for the
income year. The income year is the same as the * financial year, except in
these cases:
(a) for a company, the income year is the previous financial year;
(b) if you have an accounting period that is not the same as the financial
year, each such accounting period or, for a company, each previous
accounting period is an income year.
(Source: Income Tax Assessment Act 1997: Sections 4.10 and 4.15 )

In Australia, the process for working out how much income tax a person must pay involves
several steps:
• Calculate taxable income: This is done by subtracting allowable deductions from

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assessable income. The resulting figure is the individual's taxable income.

• Determine tax liability: The tax liability is calculated based on the individual's
taxable income and the tax rates and thresholds set out in the Income Tax
Assessment Act 1997 (Cth) (ITAA 1997).
• Apply offsets and credits: Certain offsets and credits can be applied to reduce
the individual's tax liability. For example, the Low and Middle Income Tax Offset
(LMITO) can reduce tax payable for individuals with taxable incomes between
$48,000 and $90,000.
• Withholdings: Tax may be withheld from an individual's income by their employer
or other payer, and this can be used to offset their final tax liability.
• Lodgement and payment: The individual must lodge their tax return with the
Australian Taxation Office (ATO) by the due date (usually 31 October following the
end of the financial year) and pay any tax owed.
The legislation that governs this process is primarily the Income Tax Assessment Act
1936 (Cth) (ITAA 1936) and the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
These Acts provide the framework for calculating and assessing income tax in Australia,
and set out the tax rates, thresholds, and rules for calculating taxable income and
allowable deductions. In this learner guide, we will learn more about each of the above
steps in more detail.
Methods for calculating assessable income
For taxation purposes, there are two (2) different methods of calculating income. These
are as follows:
• Cash or receipts basis
• Accruals or earnings basis
Cash accounting
The cash basis means assessable income is derived when cash is received by the
taxpayer. The cash method applies to all wage and salary earners and for investment
income. For a business using the cash basis, assessable income consists of the sum of
cash received from cash sales, services, and debtors.

For example, if a business sells goods on credit in January but receives payment in February,
the income from that sale would be recorded in February when the payment is received.
Similarly, if the business pays for supplies in December but doesn't receive the supplies until
January, the expense would be recorded in January when the payment is made.

Accrual accounting
Under the accruals system, assessable income is derived when the right to receive
income comes into existence. Under the accruals basis, assessable income will reflect
any change in the accounts receivable balances over the income year in addition to
income received from cash sales and services performed. Assessable income using the
accruals basis can be calculated as follows:
• Cash received during the year from cash sales and debtors plus debtors’ balance
at the end of the income year (30 June) less debtors balance at beginning of the

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income year (1 July).

(Source: Baker, Cliff & Deaner, 2015 p.6)

For example, if a business provides services in January but doesn't receive payment until
February, the income from those services would be recorded in January when they were
provided. Similarly, if the business receives a bill for supplies in December but doesn't pay for
them until January, the expense would be recorded in December when it was incurred.

The key difference between cash and accrual accounting is the timing of when income
and expenses are recorded. Cash accounting only records income and expenses when
they are actually received or paid, while accrual accounting records income and expenses
when they are earned or incurred.
In Australia, businesses with an annual turnover of less than $10 million are generally
allowed to use cash accounting for tax purposes. Businesses with a turnover of more than
$10 million must use accrual accounting, unless they have received permission from the
Australian Taxation Office to use cash accounting.
The following example sets out the differences in using the two methods of calculating
income:

Example:
A business taxpayer had an opening debtors’ balance of $21,000 at 1 July. At the end of
the financial year there was a closing balance of $16,000. Cash received from cash sales
and debtors for the year was $189,000. All amounts are net of GST.
Calculate the assessable income for the year ended 30 June 2015 using the:
• Cash basis
• Accrual basis.
Using the cash basis the assessable income is $189,000.
Using the accrual method the assessable income is:
$
Cash received from cash sales and from debtors 189,000
Plus debtors’ balance at 30 June (end of financial year) 16,000
205,000
Less debtors’ balance at 1 July (beginning of financial year)21,000
Assessable income 184,000
(Source: Baker, Cliff & Deaner (2015 p.7))

The following are possible key sources of information a tax practitioner may consult when
calculating taxable income:
• Income statements: This includes payment summaries, group certificates, and
statements of earnings from employers or other payers.
• Bank statements: This provides information about interest and dividends earned
from bank accounts, investments, and other financial instruments.
• Rental statements: This includes statements from real estate agents or property

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managers, which provide information about rental income and deductible

expenses associated with rental properties.
• Business records: This includes financial statements, invoices, receipts, and
other documents related to the operation of a business.
• Investment records: This includes share registries, dividend statements, and
other records related to the ownership of shares, property, and other investments.
• Government statements: This includes statements from Centrelink or other
government agencies, which provide information about government benefits and
other payments received by the taxpayer.
• Deduction records: This includes receipts, invoices, and other documents related
to work-related expenses, investment expenses, and other deductible expenses.
• Taxation legislation: This includes the Income Tax Assessment Act 1936 (Cth)
and the Income Tax Assessment Act 1997 (Cth), which provide the legal
framework for calculating and assessing income tax in Australia.
• Taxation rulings: This includes rulings issued by the Australian Taxation Office
(ATO) that provide guidance on specific tax issues and how they should be treated
for tax purposes.
• Taxation guides: This includes guides and publications issued by the ATO and
other professional bodies, which provide information about taxation rules,
procedures, and compliance requirements.
By consulting these key sources of information, a tax practitioner can ensure that they
have a comprehensive understanding of the taxpayer's income and expenses and can
accurately calculate the taxable income and tax liability.
Common data provided by clients that must be reviewed to calculate taxable income
include, but are not limited to:
• Payment summaries - documents given to employees by employers which show
the gross amount of income they have earned from the employer. It also shows the
amount of PAYG that has been withheld and lists any allowances or deductions
that have given to the employee or paid by the business on behalf of the
employee. Normally issued in July.
• Statement of interest earned - Are documentation from the bank that lists any of
the interest that has been accumulated on the bank account held with the bank.
Also shows if any amounts have been withheld by the bank and remitted to the
ATO because TFN or ABNs haven’t been notified to the bank.
• Receipts - Receipts for the payment of expenses the individual could possibly
claim as a deduction.
• Logbook - Includes the details of travel or the number of hours a home office is
used to earn an income.
• Diaries -Are used to record amount under $10 in value that could be used as a
deduction on the income tax return, number of loads of uniform washing done that
the taxpayer is claiming a deduction for.

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Note: tax documentation must be kept for at least five (5) years from the date the tax
return is lodged.
Taxable Income
Taxable income in Australia is the amount of income that is subject to income tax after
deductions and offsets are considered. It is calculated by subtracting allowable deductions
and offsets from the assessable income.
Assessable income, on the other hand, is the total amount of income that a taxpayer
receives in a financial year that is subject to income tax. This includes income from all
sources, including employment, investments, and other sources.
The difference between taxable income and assessable income is that assessable income
is the gross income earned by the taxpayer, while taxable income is the net income that is
subject to tax after allowable deductions and offsets have been considered. Taxable
income consists of total assessable income less deductions. For example:
• Gross income – exempt income = Assessable income
• Assessable income – deductions = Taxable income
In other words, assessable income is the starting point for calculating taxable income, and
from there, deductions and offsets are subtracted to arrive at the taxable income. The
amount of tax payable is then calculated based on the taxpayer's taxable income.
It is important for taxpayers to accurately report their assessable income and allowable
deductions to ensure that their taxable income is calculated correctly and that they are
paying the correct amount of tax.
Under s4.15(1) of the ITAA97, taxable income is calculated as follows:

s4.15(1) Method statement:

Step 1: Add up all your assessable income for the income year.
Step 2: Add up your deductions for the income year.
Step 3: Subtract your deductions from your assessable income (unless they
exceed it). The result is your taxable income. (If the deductions equal or
exceed the assessable income, you don’t have a taxable income)”.
(Source: Income Tax Assessment Act 1997)

Tax payable or refund due is calculated as follows:

Tax payable on taxable income – non-refundable tax offsets
= Net tax payable
[Net tax payable + Medicare levy +Medicare surcharge (as applicable)] – [tax credits +
refundable tax offsets + PAYG payments]
= Refund due or balance payable
Medicare levy

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The Medicare levy is a levy imposed by the Australian government to help fund the
country's public health system, known as Medicare. It is a form of tax that is imposed on
the taxable income of individuals and families in Australia.
The Medicare levy is currently set at 2% of taxable income, although certain exemptions
and reductions may apply for individuals on low incomes or with certain medical
conditions.
The Medicare levy helps to fund a range of healthcare services in Australia, including
doctor's appointments, hospital treatment, and prescription medicines. It ensures that all
Australians have access to these services regardless of their ability to pay.
In addition to the Medicare Levy, individuals may also be required to pay a Medicare Levy
Surcharge if they do not have private hospital cover and earn above a certain threshold.
The surcharge is designed to encourage individuals to take out private health insurance
and reduce the burden on the public health system. The surcharge varies depending on
income and ranges from 1% to 1.5% of taxable income.
Under s251S of the ITAA36 most individual resident taxpayers are liable to pay a
Medicare levy of 2% of their taxable income.
(Source: Australian Taxation Office (2018))

s251S Medicare levy

(1) Subject to this part, a levy by the name of Medicare levy is levied
and shall be paid, at the rate applicable under the relevant Act
imposing the levy, for the financial year that commenced on 1 July
1983, and for each succeeding financial year, upon:
(a) the taxable income of the year of income of a person, not
being a company or a person in the capacity of a trustee, who,
at any time during the year of income, was a resident of
Australia otherwise than by virtue of subsection 7A(2);
(2) Levy payable by a person in accordance with this part is payable
in addition to any tax payable by the person in accordance with any
other provision of this Act.
(Source: Income Tax Assessment Act 1936))

Where a taxpayer either ceases to be a resident of Australia or becomes a resident for tax
purposes during an income year, the Medicare levy is only charged on taxable income
derived while the individual is an Australian resident.
(Source: Baker, Cliff & Deaner, 2015 p.9)

Overall, the Medicare levy is an important source of funding for Australia's public health
system and helps to ensure that all Australians have access to necessary healthcare
services.
Medicare is the scheme that gives Australian residents access to health care. The
Medicare levy of 2% helps fund the scheme. The Medicare levy is reduced if an
individual’s income is below a certain threshold and in some cases, an individual may not
have to pay the levy. The threshold is higher for seniors although a reduction may be
obtained based on a family’s taxable income.

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Some taxpayers are exempt from the Medicare levy due to a range of circumstances such
as their foreign status or the type of health care they are provided. There are three
categories which are exempt from paying the Medicare levy. These include:
• Category 1: Medical exemption from Medicare levy
• Category 2: Foreign residents exemption from Medicare levy
• Category 3: Not entitled to Medicare benefits.
(Source: Medicare levy Exemption)

For the 2022-2023 income year in Australia, individuals and families may be eligible for a
reduction in the Medicare Levy if their income falls below certain thresholds. The income
thresholds for the Medicare Levy reduction are as follows:
• For individuals: The threshold is $23,226 or less. This means that individuals who
earn $23,226 or less in taxable income are not required to pay the Medicare Levy.
• For families: The threshold is $39,167 or less. This applies to families with one
dependent child. Families with additional dependent children may be eligible for a
higher income threshold.
If an individual or family's income is above the relevant threshold, they may still be eligible
for a partial Medicare levy reduction if their income falls within certain ranges. The
reduction amount is calculated based on the individual or family's taxable income.
It is important to note that these income thresholds and reduction amounts are subject to
change each financial year, so Tax practitioners must visit the ATO website for the most
up-to-date information.
Medicare levy Surcharge
The Medicare Levy Surcharge (MLS) is an additional tax applied to Australian taxpayers
who earn above a certain income threshold and do not have private hospital cover. The
MLS is designed to encourage individuals to take out private health insurance and reduce
the burden on the public health system.
The MLS is applied at different rates depending on the taxpayer's income and family
status. The following table outlines the MLS tiers and rates for the 2022-2023 financial
year:

MLS Tier Singles Families

Tier 1 <$90,000 <$180,000

0% 0%

Tier 2 $90,000-$105,000 $180,000-$210,000

1% 1%

Tier 3 $105,000-$140,000 $210,000-$280,000

1.5% 1.5%

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MLS Tier Singles Families

Tier 4 >$140,000 >$280,000

2% 2%

As the table shows, the MLS is not applicable to taxpayers who earn below $90,000 for
singles or below $180,000 for families. For those who earn above these thresholds, the
MLS is applied at a rate of 1% to 2% of their taxable income, depending on their income
and family status.
For example, a single taxpayer earning $100,000 per year and who does not have private
hospital cover would be subject to a MLS rate of 1%. This means that they would need to
pay an additional $1,000 per year on top of their income tax.
It is important to note that these MLS rates and income thresholds are subject to change
each financial year.
Avoiding the surcharge
Taxpayers can avoid the Medicare Levy Surcharge (MLS) by taking out an appropriate
level of private hospital cover. To be exempt from the MLS, taxpayers must have hospital
cover with an excess of $750 or less for singles, or $1,500 or less for families or couples.
The cover must be with a registered health insurer and provide benefits for in-hospital
treatment.

For example, if a single taxpayer earns $100,000 per year and does not have private hospital
cover, they would be subject to a MLS rate of 1%, or $1,000 per year. However, if the taxpayer
takes out an appropriate level of private hospital cover with an excess of $750 or less, they
would be exempt from the MLS and would not need to pay the additional tax.

It is important to note that not all levels of private health insurance cover will exempt
taxpayers from the MLS. Only policies that provide cover for hospital treatment and have
an excess of $750 or less for singles, or $1,500 or less for families or couples, will be
eligible for exemption.
Taxpayers should also be aware that taking out private hospital cover may result in other
costs, such as premiums and excess payments. It is recommended that taxpayers consult
with a qualified health insurance provider or financial advisor to determine the most
appropriate level of cover for their individual circumstances.
Private health insurance rebate thresholds
The Private Health Insurance Rebate is a government initiative designed to encourage
Australians to take out private health insurance. The rebate is calculated as a percentage
of the cost of private health insurance premiums and can be claimed as a reduction in
premiums or as a refund on your tax return.
The percentage of the rebate that you are eligible for is based on your income, age, and
the size of your family. The income thresholds for the rebate are adjusted annually to
reflect changes in the cost of living. The thresholds for the 2022-2023 financial year are as
follows:

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• Singles with an income of up to $90,000 per year are eligible for a full rebate of
26.791%
• Singles with an income of between $90,001 and $120,000 per year are eligible for
a partial rebate on a sliding scale, decreasing from 26.791% to 0%
• Singles with an income above $120,000 per year are not eligible for the rebate
• Families with an income of up to $180,000 per year are eligible for a full rebate of
26.791%
• Families with an income of between $180,001 and $240,000 per year are eligible
for a partial rebate on a sliding scale, decreasing from 26.791% to 0%
• Families with an income above $240,000 per year are not eligible for the rebate
It is important to note that the rebate percentage is based on the age of the oldest
policyholder. For example, if a family policy includes both adults and children, the rebate
percentage will be based on the age of the oldest adult on the policy.

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3. Principles of assessable income

Determining Assessability
In determining whether a receipt is assessable income the following factors need to be
considered.
• Is the taxpayer a resident of Australia?
• What is the source of the taxpayer’s income?
• Has the income been derived?
• Is the receipt a capital receipt?
• Is the receipt exempt from tax?
(Source: Baker, Cliff & Deaner, 2015 p.35)

Generally, a benefit is not assessable unless it consists of money or is capable of being

converted into money. Non-cash benefits may include fringe benefits which are subject to
fringe benefits tax under the Fringe Benefits Tax Assessment Act 1986 (FBTA). Receipts
which are capital in nature are not assessable under s6.5 of the ITAA97 as they are not
ordinary income. They may, however, be assessable as statutory income.
In Australia, the general rule is all income received by an individual is assessable income
and must be included in their tax return. However, there are some exceptions and
exemptions to this rule, and if a receipt is assessable income depends on a range of
factors.
The factors considered when determining if a receipt is assessable income include:
• Source of the income: The source of the income is an important factor in
determining whether it is assessable. Income earned from personal exertion or
from carrying on a business or investment is generally assessable, while income
received as a gift or inheritance may not be assessable.
• Timing of the income: The timing of the receipt of income can also affect whether
it is assessable. Income received during the financial year is generally assessable,
while income received after the end of the financial year may not be assessable
until the following year.
• Nature of the income: The nature of the income is also important in determining
whether it is assessable. Income that is received as cash, goods, or services is
generally assessable, while income received in the form of a loan, or a gift may not
be assessable.
• Purpose of the income: The purpose for which the income was received can also
affect whether or not it is assessable. Income received as compensation for loss or
damage may be exempt from taxation, while income received as a reward for
services rendered is generally assessable.
• Legal or contractual obligations: Whether there is a legal or contractual
obligation to receive the income can also affect its assessability. Income received
because of a contractual obligation, such as salary or wages, is generally
assessable, while income received as a gift or inheritance is not.

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Once all these factors have been considered, the taxpayer can determine whether or not
the receipt is assessable income. If it is assessable, it must be included in their tax return,
and if it is not assessable, it does not need to be included. It is important to note that
failure to include assessable income in a tax return can result in penalties and interest
charges from the ATO.
Australian Residency
In Australia, the tax residency status of an individual determines how they are taxed on
their income. There are two main types of residency status for tax purposes: Australian
residents and foreign residents.
Australian residents for tax purposes:
An individual is considered an Australian resident for tax purposes if they reside in
Australia or have been in Australia for more than six months in the financial year, and they
do not have a permanent place of abode overseas. This residency status is determined by
the residency tests in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936).
Residents for tax purposes are taxed on their worldwide income, which includes all
income earned both in and outside of Australia. They are also entitled to claim various
deductions and tax offsets.

Example of an Australian resident for tax purposes:

John is a citizen of Australia and has been living and working in Australia for the
entire financial year. He is considered an Australian resident for tax purposes
and must include his worldwide income on his tax return, including his salary
from his job in Australia and any investment income earned overseas. He is also
entitled to claim all available deductions and tax offsets.

Foreign residents for tax purposes:

An individual is considered a foreign resident for tax purposes if they do not meet the
residency tests under section 6 of the ITAA 1936. They are taxed only on their Australian-
sourced income, which includes income derived from Australian employment, rental
properties, and businesses.
Foreign residents are generally not entitled to claim the same deductions and tax offsets
as Australian residents. However, they may be eligible for some limited deductions and
tax offsets if they are derived from Australian-sourced income.

Example of a foreign resident for tax purposes:

Sarah is a citizen of the United States and has been living in Australia on a
temporary visa for six months. She is not considered an Australian resident for
tax purposes and is only taxed on her Australian-sourced income, which
includes her salary from her job in Australia. She is not entitled to claim all
deductions and tax offsets but can claim some limited deductions and tax offsets
that relate to her Australian-sourced income, such as work-related expenses.

Here is a table that compares the residency types:

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Residency Type Taxable Income Tax Rates Deductions + Tax Offsets

Australian resident for Worldwide income Progressive tax rates All available deductions
tax purposes and tax offsets

Foreign resident for tax Australian-sourced Flat rate of 32.5% Limited deductions and
purposes income tax offsets

Under s7(2) of the Social Security Act 1991 an “Australian resident” is defined as follows:

s7(2) An Australian resident is a person who:

(1) resides in Australia; and
(2) is one of the following:
(a) an Australian citizen;
(b) the holder of a permanent visa;
(c) a special category visa holder who is a protected SCV holder.
(Source: Social Security Act (1991))

Under s6(1) of the ITAA36 (Interpretation), a resident taxpayer is described as:

‘resident’ or ‘resident of Australia’ means:

(1) a person, other than a company, who resides in Australia and includes a person:
(a) whose domicile is in Australia, unless the Commissioner is satisfied that the
person’s permanent place of abode is outside Australia;
(b) who has actually been in Australia, continuously or intermittently, during more
than one-half of the year of income, unless the Commissioner is satisfied that the
person’s usual place of abode is outside Australia and that the person does not intend
to take up residence in Australia; or
(c) who is:
(i) a member of the superannuation scheme established by deed under the
Superannuation Act 1990; or
(ii) an eligible employee for the purposes of the Superannuation Act 1976; or
(iii) the spouse, or a child under 16, of a person covered by sub-subparagraph (A)
or (B); and
(2) a company which is incorporated in Australia, or which, not being incorporated in
Australia, carries on business in Australia, and has either its central management and
control in Australia or its voting power controlled by shareholders who are residents of
Australia.
(Source: Income Tax Assessment Act (1936))

The ATO considers a person to be an Australian resident for tax purposes if they have:
Always lived in Australia or have come to Australia and live here permanently.

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Been in Australia continuously for 183 days or more and for much of that time have been
in the one job and lived in the same place.
Been in Australia for more than half of the financial year unless their usual home is
overseas, and they do not intend to live in Australia.
The ATO sets out the tests undertaken to determine residency status on their website
Residency - the resides test:
Taxation Ruling TR 98/17: Income tax: residency status of individuals entering Australia,
outlines the circumstances in which an individual is considered as residing in Australia. It
considers people entering Australia such as:
• Migrants
• Academics teaching or studying in Australia
• Students studying in Australia
• Tourists
• Those on pre-arranged employment contracts.

(Source: ATO: Residency the Resides Test (2018) )

Temporary visas are distinguished from permanent visas which allow a person to live in
Australia indefinitely. If an Australian resident goes overseas temporarily and does not set
up a permanent home overseas they will continue to be treated as a resident of Australia
for tax purposes.
The ATO describes a person as a temporary resident if the person:
• Holds a temporary visa granted under the Migration Act 1958
• Is not an Australian resident within the meaning of the Social Security Act 1991?
• Does not have a spouse who is an Australian resident within the meaning of the
Social Security Act 1991.
(Source: ATO: Residency the Resides Test (2018))

If a person is a resident of Australia for tax purposes and meets the requirements to be a
temporary resident, the temporary residency rules mean:
• Most of their foreign income is not taxed in Australia except income earned from
employment performed overseas for short periods while they are a temporary
resident.
• If a capital gains tax event occurs on or after 12 December 2006, a temporary
resident is not liable to capital gains tax (nor is treated as having made a capital
loss) unless the asset is taxable Australian property.
Overseas students coming to Australia to study who are enrolled in a course of study that
is more than six (6) months in duration are generally treated as Australian residents for tax
purposes. As a rule, an Australian resident taxpayer is assessed on their sources of
income worldwide.
(Source: Baker, Cliff & Deaner, 2015 p.38)
Income received for sales performed

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Income Received for Sales Performed in Australia refers to income that is earned through
sales activities conducted within the country, regardless of whether the sales were made
by an Australian resident or a non-resident. This income is considered assessable income
and is subject to Australian income tax.
The Australian taxation laws that apply to income received for sales performed in Australia
are found in Division 6 of the Income Tax Assessment Act 1936 (Cth). The legislation
defines income received for sales as income derived from the sale of goods, services or
property, including lease payments, royalties, and dividends. It also includes income
derived from the provision of services or the performance of duties.
Examples of income received for sales performed in Australia include sales of goods or
services by a business located in Australia, royalties received for the use of intellectual
property in Australia, and commissions earned by sales agents operating in Australia.
Remuneration and allowances provided to employees or contractors for services rendered
in Australia are also included in income received for sales performed in Australia. This
includes salary, wages, bonuses, and other allowances such as car and travel
allowances.
Remuneration in the form of an allowance paid to an employee by an employer is
assessable under s15.2 of the ITAA97. Section 15.2(1) states as follows:

s15.2 Allowances and other things provided in respect of employment

or services
(1) Your assessable income includes the value to you of all allowances, gratuities,
compensation, benefits, bonuses and premiums provided to you in respect of, or
for or in relation directly or indirectly to, any employment of or services rendered
by you (including any service as a member of the Defence Force).
(Source: Income Tax Assessment Act (1997))

This may include uniform, car, meal and travel allowances, tips, annual bonuses and
incentive payments.
(Source: Baker, Cliff & Deaner, 2015 p.49-50)

In summary, income received for sales performed in Australia refers to income earned
through sales activities conducted within the country, and includes various types of
business receipts and remuneration and allowances provided in respect of employment or
services. This income is subject to Australian income tax under the relevant provisions of
the Income Tax Assessment Act 1936 (Cth).
Compensation Payments
Compensation payments refer to payments made to an individual as a result of a personal
injury, illness, or disability. The treatment of compensation payments with regard to
taxable income in Australia depends on the type of compensation payment received.
For lump sum damages, such as a settlement or damages awarded by a court, there are
specific rules under the Income Tax Assessment Act 1997 that determine what part of the
payment is assessable income and what part is not. In general, the compensation
payment is split into two parts: the first part represents compensation for lost income and

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is considered assessable income, while the second part represents compensation for non-
economic loss, such as pain and suffering, and is not assessable income.
For periodical payments, such as regular payments made by an insurer or employer as
compensation for a personal injury, the entire payment is usually assessable income, with
the exception of any amounts specifically identified as being for medical expenses or
reimbursement of expenses.
The table below provides a general overview:

Type of Compensation Payment Assessable Income Not Assessable Income

Lump sum payment for personal injury or First $500,000 and Remaining 50% of the balance
illness (other than employment-related) 50% of the balance

Lump sum payment for employment- First $1,620,000 and Remaining 50% of the balance
related injury or illness 50% of the balance

Lump sum payment for superannuation or Dependent on age and Tax-free component and some
annuity components of components for specific
payment circumstances

Periodic payment for personal injury or Entire payment N/A

illness (other than employment-related)

Periodic payment for employment-related Entire payment N/A

injury or illness

Life insurance payment to an individual Generally, not N/A

assessable

Life insurance payment to a super fund Generally, not N/A

assessable

Note: This table provides a general overview of the tax treatment of compensation
payments in Australia and is subject to individual circumstances and specific details of
each case.
In the case of life insurance payments, whether they are treated as assessable income
depends on the type of policy and the circumstances under which the payment is made. In
general, if the policy was purchased for personal purposes and the payment is made on
the death of the policyholder, the payment is not assessable income. However, if the
policy was purchased for business or investment purposes, or the payment is made for
other reasons such as a terminal illness, the payment may be assessable income.
Income received from property
In Australia, there are various types of income that can be received from a property. The
most common forms of property income are rent, capital gains, and rental-related
payments. Here is an overview of each:
• Rent Income: This is the regular income received by the property owner for
leasing out their property. Rent income is considered as assessable income and is

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subject to income tax in Australia. The tax treatment of rent income is outlined in
the Income Tax Assessment Act 1997.
• Capital Gains: If a property is sold for more than its cost base, the profit gained
from the sale is considered a capital gain. Capital gains are subject to capital gains
tax (CGT) in Australia. The tax treatment of capital gains is outlined in the Income
Tax Assessment Act 1997.
• Rental-Related Payments: There are several types of rental-related payments,
including rental bond payments, reimbursement of expenses, and payments for the
use of equipment or services. These payments are also considered as assessable
income and are subject to income tax in Australia. The tax treatment of rental-
related payments is outlined in the Income Tax Assessment Act 1997.
Additionally, there are some less common forms of property income, including:
• Rental Guarantee Income: This is income received from a rental guarantee
agreement, where a third party guarantees the rental payments. The tax treatment
of rental guarantee income is outlined in the Income Tax Assessment Act 1997.
• Vacant Land Income: If a property is not being leased out, the property owner
may still receive income from it, such as income from mining or grazing. This
income is considered as assessable income and is subject to income tax in
Australia. The tax treatment of vacant land income is outlined in the Income Tax
Assessment Act 1997.
Overall, the Income Tax Assessment Act 1997 provides guidance on the tax treatment of
the different forms of property income in Australia.
Royalties
Royalties are a form of income received from the use or exploitation of a property, such as
intellectual property, patents, or copyrights. In Australia, royalties are considered to be
assessable income for tax purposes and are subject to personal income tax.
When preparing end of year tax documentation for individuals, royalties must be reported
as part of their total assessable income on their tax return. The tax payable on royalties
will depend on the individual's marginal tax rate, which is determined by their taxable
income.
For example, if an individual earns $10,000 in royalties from the use of their intellectual
property, this amount will be included in their total assessable income for the year. If their
total assessable income for the year is $80,000, they would be taxed at a marginal tax
rate of 32.5%. Therefore, they would owe $3,250 in income tax on their royalties.
The specific legislation that governs the treatment of royalties for income tax purposes in
Australia is outlined in Division 6 of the Income Tax Assessment Act 1936.
Employee share schemes (ESS)
Employee share schemes (ESS) are schemes that allow employees to acquire shares or
rights to shares in the company they work for. In Australia, ESS income is taxed as
employment income.

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When an employee receives a share or right to acquire a share under an ESS, they are
required to include the market value of the share or right at the time it was acquired as
assessable income. This is referred to as the "discount" or "upfront taxation" method.
Alternatively, an employee may elect to be taxed when the share or right is sold, or when
there is no longer any restriction on the disposal of the share or right. This is known as the
"deferred taxation" method.
Here's a table comparing upfront taxation and deferred taxation for employee share
schemes in Australia:

Upfront Taxation Deferred Taxation

Shares are subject to income tax in the Shares are subject to income tax in the
financial year in which they are acquired. financial year in which they are sold.

Shares are valued at the market value at the Shares are valued at the market value at the
time they are acquired. time they are sold.

Any gains or losses in the value of the shares Any gains or losses in the value of the shares
after they are acquired are treated as capital after they are acquired are treated as capital
gains or losses. gains or losses.

Employees may be eligible for a discount on Employees may be eligible for a discount on
the market value of the shares at the time of the market value of the shares at the time of
acquisition. acquisition.

The amount of tax payable is based on the The amount of tax payable is based on the
employee's marginal tax rate. employee's marginal tax rate.

Example: An employee acquires 1,000 shares Example: An employee acquires 1,000 shares
in their company at a market value of $10 per in their company at a market value of $10 per
share, and receives a 20% discount. The share, and receives a 20% discount. The
employee pays $8,000 for the shares and is employee sells the shares 2 years later at a
subject to income tax on the market value of market value of $15 per share, and is subject
$10,000. to income tax on the capital gain of $7,000.

Reference: Australian Taxation Office - Employee share schemes.

In addition to the above, the tax treatment of ESS income may also be affected by the
specific terms and conditions of the ESS.
When preparing end of year tax documentation for individuals, ESS income should be
included in the income tax return in the same way as other employment income. The
discount or upfront taxation amount should be included in the "Salary and wages" section,
while any deferred taxation amount should be included in the "Capital gains" section.
The applicable legislation for the tax treatment of ESS income in Australia is contained in
the Income Tax Assessment Act 1997 (Cth).
An ESS is a scheme under which shares, stapled securities or rights to acquire them
(ESS interests) in a company are provided to an employee or their associate in relation to
the employee’s employment.

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Dividends
In Australia, dividends are a form of income received by individuals who hold shares in a
company. The income received from dividends is taxable and must be reported on an
individual's tax return. The amount of tax payable on dividends will depend on the
individual's marginal tax rate.
Dividends are taxed differently depending on whether they are franked or unfranked. A
franked dividend is a dividend that has had the company tax paid on it, while an unfranked
dividend is a dividend that has not had the company tax paid on it. The amount of franking
credits attached to a franked dividend will determine the amount of tax payable on the
dividend.
When preparing end of year tax documentation for individuals, dividends received during
the financial year must be included in the individual's income tax return. The dividend
income should be recorded in the 'Interest, dividends and other income' section of the tax
return. The amount of tax payable on the dividend income will depend on the individual's
marginal tax rate.
The applicable legislation for the taxation of dividends in Australia is the Income Tax
Assessment Act 1936 and the Income Tax Assessment Act 1997.

Example 1:
Sarah holds shares in a company and receives a dividend of $1,000 during the financial year.
The dividend is franked and has franking credits attached to it worth $429. As Sarah's marginal
tax rate is 32.5%, she will be required to pay tax on the dividend at a rate of 32.5%.
To calculate the tax payable on the dividend, Sarah will need to first calculate her assessable
income for the financial year, which will include the $1,000 dividend. She will then need to
calculate the amount of franking credits she is entitled to, which in this case is $429. Sarah can
then use these figures to determine the amount of tax payable on the dividend.

Example 2:
John is a shareholder in XYZ Pty Ltd. During the 2022-2023 financial year, he received $10,000
in dividends from XYZ Pty Ltd. Of this amount, $8,000 was franked dividends, and $2,000 was
unfranked dividends. John will be entitled to a franking credit of $3,429. Therefore, when he
prepares his tax return, he will need to declare $10,000 as his dividend income, but he can offset
his tax liability by the franking credit of $3,429.

A dividend includes any amount made by a company to its shareholders whether in

money or other form, e.g., shares (s6(1) ITAA36). Under s44(1) of the ITAA36, resident
shareholders are assessed on all dividends paid to them by resident and non-resident
companies out of profits. Individual shareholders who receive dividends from Australian
resident companies are entitled to a franking credit on any tax paid by the company on
that dividend. These dividends are called “franked dividends”.
A franked dividend is an arrangement in Australia that eliminates the effect of double
taxation of dividends. Dividends are dispersed with tax imputations attached to them. The
shareholder can reduce the tax paid on the dividend by an amount equal to the tax
imputation credits. The taxation has been partially paid by the company issuing the
dividend.

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(Source: Investopedia: Franked Dividend (2018))

Under s207.20(1) of the ITAA97, a taxpayer’s assessable income is increased by the

amount of company tax attributable to the dividend. This is called a “franking credit”.

A franked dividend is an arrangement in Australia that eliminates

the double taxation of dividends. The shareholder is able to reduce
the tax paid on the dividend by an amount equal to the tax
imputation credits. An individual’s marginal tax rate and the tax
rate for the company issuing the dividend affect how much tax an
individual owes on a dividend.
(Source: Investopedia: Franked Dividend (2018))

207.20(1) General rule – gross-up and tax offset

If an entity makes a franked distribution to another entity, the
assessable income of the receiving entity, for the income year in
which the distribution is made, includes the amount of the franking
credit on the distribution. This is in addition to any other amount
included in the receiving entity’s assessable income in relation to
the distribution under any other provision of this Act.
(Source: Australian Taxation Office (2018))

Dividends can be franked anywhere between 1% and 100%. The franking credit is
calculated as follows:
Franked dividend amount x 30/70 = Franking credit
Dividends paid by companies that have not paid Australian company tax are referred to as
“unfranked dividends” and are assessable under s44(1) of the ITAA36.

Example:
A taxpayer has a gross salary of $72,000, a fully franked dividend of $1,000, an unfranked
dividend of $500 and a 50% franked dividend of $800. Tax withheld is $15,900. Calculate
the amount of taxable income:
Taxable income
$
Gross salary 72,000
Fully franked dividend 1,000
Franking credit ($1,000 x 30/70) 429
Unfranked dividend 500
50% franked dividend 800
Franking credit ($800 x 50% x 30/70) 171
Taxable income 74,900
Under s207.20(2) of the ITAA97 a franking tax offset is allowed which is equal to the amount
of the franking credits.

Example:

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207.20(2) General rule – gross-up and tax offset

The receiving entity is entitled to a tax offset for the income year in
which the distribution is made. The tax offset is equal to the franking
credit on the distribution.”
(Source: Australian Taxation Office (2018))

Example:
Calculate tax offset amount and tax payable or refunded using figures from previous example:
$
Tax on $74,900 15,890
Less franking offset ($429 + $171) 600
15,290
Plus Medicare levy (2% of $74,900) 1,498
16,788
Less PAYG tax withheld 15,900
Balance Payable 888

Fringe Benefits
The fringe benefit tax (FBT) was introduced in 1986 under the FBTA. FBT is a tax payable
by an employer on the value of certain employment-related benefits provided to an
employee or an associate of the employee apart from a salary, wage, or superannuation
benefit.
(Source: Butterworths Business and Law Dictionary, 2002 pp. 223-224)

The Fringe Benefits Tax (FBT) is a tax applied to the value of fringe benefits provided by
employers to their employees or their employees' associates. Fringe benefits can include
items such as company cars, private health insurance, and entertainment expenses. The
FBT is separate from income tax and is paid by the employer.
When it comes to personal income tax, employees may be required to report the value of
fringe benefits they have received on their income tax return. The value of the fringe
benefits is generally included in the employee's taxable income, although some
exemptions and concessions may apply.
An example of how the FBT is applied when preparing end of year tax documentation for
individuals is as follows:

Suppose an employee has received a company car as a fringe benefit during the
financial year, which has a taxable value of $15,000. The employer has paid FBT on the
value of the car at a rate of 47%, meaning they have paid $7,050 in FBT.
When the employee prepares their income tax return, they will need to include the
$15,000 in their taxable income. However, they may be entitled to a tax offset to reduce
the impact of the FBT on their personal income tax liability.

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The FBT is governed by the Fringe Benefits Tax Assessment Act 1986 (Cth) and
administered by the Australian Taxation Office (ATO).
The most common benefits subject to FBT include motor vehicles, free or low-interest
loans, car parking and payments of private expenses.
Under s66(1) of the FBTA, FBT becomes due and payable by an employer in four
instalments at specified times during the tax year which begins 1 April and ends on 31
March (s102(b) FBTA). As the employer is liable for payments of FBT the employee or
recipient is not taxed on the fringe benefits they receive.
For an individual taxpayer, individual amounts of less than $3,773 in fringe benefit
payments are not shown or reported on the payment summary. The FBT law requires a
taxpayer to keep certain records relating to the fringe benefits provided.
(Source: ATO: Total reportable fringe benefits amounts (2018))

For more information on how FBT is applied access the guide

for employers here
Fringe benefits tax – a guide for employers

Foreign Income
Foreign income is income that is earned from overseas sources by Australian residents or
foreign residents for Australian tax purposes. The Australian taxation system requires that
all income earned by individuals, whether earned in Australia or overseas, be declared
and taxed appropriately.
Foreign income and foreign tax are defined under s6AB (1) and (2) or the ITAA36.

6AB (1) and (2) Foreign income and foreign tax

(1) A reference in this Act to foreign income is a reference to income (including
superannuation lump sums and employment termination payments) derived from
sources in a foreign country or foreign countries and includes a reference to an
amount included in assessable income.
(2) A reference in this Act to foreign tax is a reference to tax imposed by a law of a
foreign country, being:
(a) tax upon income; or
(b) tax upon profits or gains, whether of an income or capital nature; or
(c) any other tax, being a tax that is subject to an agreement having the force
of law under the International Tax Agreements Act 1953.
(Source: Income Tax Assessment Act (1936))

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Example:
An Australian resident works for a continuous period of 80 days in Spain. The resident earns
AU$12,000 and pays AU$2,0o0 in foreign tax. The foreign income of $12,000 is “grossed up”
by the $2,000 foreign tax. Total assessable foreign income is $14,000.

Foreign income is subject to the same tax rules as income earned in Australia. Under the
Australian taxation system, foreign income is treated as assessable income for Australian
tax purposes. However, Australian residents may be entitled to foreign income tax offsets
to avoid double taxation.
The Foreign Income Tax Offset (FITO) is a tax offset that can be claimed by Australian
residents who have paid foreign income tax on their overseas income. The offset is
designed to reduce the amount of Australian tax paid on foreign income, ensuring that
Australian residents are not taxed twice on the same income.
Resident taxpayers are entitled to a non-refundable tax offset for foreign income tax paid
on an amount included in their assessable income. The tax offset is limited to the less of
foreign income tax paid and the foreign tax offset cap.
The formula to calculate the FITO is set out in s770.75 of the ITAA97 as follows:

s770.75 Foreign income tax offset limit

(1) There is a limit (the offset limit) on the amount of your tax offset for a year. If
your tax offset exceeds the offset limit, reduce the offset by the amount of the excess.
(2) Your offset limit is the greater of:
(a) $1,000; and
(b) this amount:
(i) the amount of income tax payable by you for the income year, less
(ii) the amount of income tax that would be payable by you for the income
year if the assumptions in subsection (4) below were made.
Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000
for the year, you do not need to work out the amount under paragraph (b).
Note 2: The amount of the offset limit might be increased under section s770-80.
(3) For the purposes of paragraph (2)(b), work out the amount of income tax
payable by you, or that would be payable by you, disregarding any tax offsets.
(4) Assume that:
(a) your assessable income did not include:
(i) so much of any amount included in your assessable income as represents
an amount in respect of which you paid foreign income tax that counts
towards the tax offset for the year; and
(ii) any other amounts of ordinary income or statutory income from a
source other than an Australian source; and

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(b) you were not entitled to any deductions that:

(i) are debt deductions that are attributable to an overseas permanent
establishment of yours; or
(ii) are deductions (other than debt deductions) that are reasonably related
to amounts covered by paragraph (a) for that year”.
(Source: Income Tax Assessment Act (1997) )

Where the foreign tax paid is no more than $1,000 no calculation of the FITO is required.

Example:
FITO is less than $1,000.
George, an Australia resident taxpayer derived $6,000 investment income from Iraq and paid
$900 foreign tax. As the foreign tax paid is less than $1,000, the FITO to be claimed is $900.
In accordance with the assumptions set out in s770.75(4) where the foreign tax paid is more than
$1,000 FITO is calculated as follows:
Example:
Mitchell is an Australian resident taxpayer who derived AU$6,000 net dividend income from Italy
and paid AU$3,000 foreign tax. His Australian income is $80,000. He has AU$500 deductions
relating to the income derived in Italy and $6,000 deductions relating to the income derived in
Australia. Mitchell has private health insurance. Calculate the tax payable.
$
Assessable income –Australia 80,000
Foreign income – Italy – grossed up 9,000
89,000
Less deductions
Australian deductions 6,000
Foreign deductions 500 6,500
Taxable income $82,500
Tax payable on $82,500 is $18,472
Calculation of FITO:
Under ss770-75(2) and (4) of the ITAA97 disregarded assessable foreign income is:
$9,000 - $1,000 = $8,000
$82,500 - $8,000 = $74,500.
Tax payable on $74,500 is $15,760
FITO = $18,472 - $15,760 = $2,712

As the amount of foreign tax paid of $3,000 is greater than the FITO limit of $2,712, the
available FITO is the calculated limit of $2,712. If the amount of foreign tax paid had been
less than $2,712, the offset amount would have been the amount of foreign tax paid.

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Example, continued:
Tax payable is as follows:
$
Tax paid on $82,500 $18,472
Less FITO $2,712
$15,760
Plus Medicare levy (2% of $82,500) $1,650
Tax payable $17,410

An example of foreign income and its treatment in end-of-year tax documentation for
individuals is as follows:

Samantha is an Australian resident for tax purposes who works for a multinational company with
a branch in London. She earns a salary of £80,000 per year. She must declare her foreign
income earned in pounds as part of her Australian tax return.
To avoid double taxation, Samantha can claim a foreign income tax offset for the tax she paid in
the UK on her foreign income. This will reduce the amount of Australian tax she is required to
pay on her foreign income.
The relevant legislation for foreign income taxation in Australia is the Income Tax Assessment
Act 1997.

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4. Capital gains events

Capital Gains Tax (CGT)
In Australia, the capital gains tax (CGT) is a tax on the profit made from the sale of an
asset that has increased in value since it was purchased. The CGT is calculated on the
difference between the purchase price and the selling price of the asset, also known as
the capital gain. The tax is levied at the individual's marginal tax rate, which is determined
by their taxable income.
The CGT applies to various assets, including property, shares, and other investments.
However, certain assets are exempt from the CGT, such as personal use assets like a car
or household items, and assets acquired before September 20, 1985.
When preparing an individual tax return, the capital gains made during the financial year
must be declared on the tax return. The capital gain is added to the individual's taxable
income and taxed at their marginal tax rate. However, individuals may be eligible for CGT
concessions, which can reduce the amount of CGT they need to pay.
The main principles of the CGT are:
• Timing of the CGT event: The CGT event occurs when the asset is sold, given
away, or otherwise disposed of.
• Cost base: The cost base is the amount that was initially paid for the asset, as
well as any other costs incurred during its ownership, such as legal fees or stamp
duty.
• Capital proceeds: The capital proceeds are the amount received from the sale of
the asset, less any costs associated with the sale, such as brokerage fees or legal
fees.
• Capital gain or loss: The capital gain or loss is calculated by subtracting the cost
base from the capital proceeds. If the result is positive, it is a capital gain, and if
negative, it is a capital loss.
• CGT concessions: Various concessions are available, such as the 50% discount
for assets held for more than 12 months, small business concessions, and
exemptions for certain assets.
A taxpayer’s assessable income includes any net capital gain for the income year. A net
capital gain is the total of a taxpayer’s capital gains for an income year reduced by capital
losses made by the taxpayer.
Under s102.20 of the ITAA97, a capital gain or loss only arises if a CGT event occurs.

A list of CGT events is set out in s104.5 of the ITAA97.

(Source: Income Tax Assessment Act (1997) )

Some of the principles of CGT can include, but are not limited to the following:
• Pre – CGT Assets Section 160ZZS
• CGT and Trusts

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• CGT and Shares, rights, and options

• CGT and leases (short-term only)
• CGT and the loss or destruction of assets
• Discount Capital Gains – Subdivision 115-A
• Important CGT Exemptions
CGT assets
CGT only applies to assets have been acquired or disposed of after 19 September 1985.
Section 108 of the ITAA97 sets out the types of CGT assets namely:
• Goodwill
• Foreign currency
• Shares
• Collectables
Sections 108.10(2) and (3) of the ITAA97 define a “collectable” as follows:

s108.10(2) and (3)

(1) A collectable is:
(a) artwork, jewellery, an antique, or a coin or medallion; or
(b) a rare folio, manuscript or book; or
(c) a postage stamp or first-day cover; that is used or kept mainly for
your (or your associate’s) personal use or enjoyment.
(Source: Income Tax Assessment Act (1997))

(3) These are also collectables:

(a) an interest in any of the things covered by subsection (2); or
(b) a debt that arises from any of those things; or
(c) an option or right to acquire any of those things.
(Source: Income Tax Assessment Act (1997))

CGT assets as set out above are subject to CGT, however, collectables acquired for $500
or less are CGT exempt. Personal use assets which are kept by the taxpayer for their
personal use and enjoyment, e.g., clothing, furniture, electrical appliances and white
goods are usually not subject to CGT.
(Source: Baker, Cliff & Deaner, 2015 p.108)

Division 118, s118 of the ITAA97 sets out the assets specifically exempt from CGT.
(Source: Income Tax Assessment Act (1997))

Here are examples of when capital gains tax is applicable to assets and when it is not in
Australia:

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Asset type Capital Gains Tax Applicable Capital Gains Tax Not Applicable

Property Investment properties, holiday homes, Family home (primary residence)

and rental properties

Shares Shares held as an investment Shares held in a superannuation fund

Units in a unit Units held as an investment Units held in a managed fund

trust

Collectibles Collectibles such as artwork, antiques, Personal use assets, such as a stamp
and coins collection or family heirloom

Business Business assets that are sold, Business assets that are passed
assets including goodwill down to a family member

It is important to note this table is not an exhaustive list and that there may be additional
factors which impact if capital gains tax is applicable in specific situations.
Implications of CGT
Under s102.5 of the ITAA97, any net capital gain must be included in a taxpayer’s
assessable income in the year in which it occurs. A capital loss may be written off against
other capital gains in the same year of income however if no capital gain occurs in that
same year, the loss is carried forward and is offset against a future capital gain. A capital
loss that arises on the disposal of a collectable asset can only be offset against a capital
gain arising from the disposal of another collectable asset (s108.10 ITAA97).

Example:
In the current year collectables were disposed of which yielded a capital gain of $300 and a
capital loss of $500. A capital gain of $600 was also made on shares in the current year.
The net capital gain on shares is $600. The capital loss on collectables of $200 cannot be
offset against the net capital gain on shares but must be carried forward and offset against a
future capital gain on collectables.
(Source: Baker, Cliff & Deaner, 2015 p.109)

Calculation of CGT
For assets acquired before 21 September 1999 and held for at least twelve (12) months
and then disposed of, the CGT can be calculated using:
• The frozen indexation method
• The discount method
Frozen indexation method
Where CGT is calculated using the frozen indexation method and CGT assets are
acquired before 21 September 1999 and disposed of after 21 September 1999, the

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consumer price index (CPI) figure is for the quarter when CGT event occurs, e.g., quarter
ending 30 September 1999.
For assets acquired and disposed of after 21 September 1999 and held for at least twelve
(12) months and then disposed of, the capital gain is calculated using the discount
method only.
Under the frozen indexation method, the indexed cost base of the CGT asset is
calculated. The indexed cost base is the cost base of the CGT asset adjusted for the
effects of inflation using CPI figures.
The cost base of the asset includes the capital costs of acquisition and disposal. This
includes:
• purchase price or market value of the asset if given
• cost of enhancements and improvements
• incidental costs of acquisition, e.g., transfer duty, fees for services of a valuer,
surveyor, auctioneer, broker, accountant, borrowing expenses, advertising, and
legal costs.
Non-capital costs such as rates, land tax, repairs and insurance can only be included in
the cost base if the taxpayer cannot claim a tax deduction and the asset was acquired on
or after 21 August 1991. Non-capital costs cannot be included in the cost base of
collectables or personal use assets.
(Source: Baker, Cliff & Deaner, 2015 pp.111)

The current consumer price index rates are as follows:

• Consumer price index (CPI) rates are published by the Australian Bureau of
Statistics (ABS). We reproduce the rates here as these are relevant to the
provision on tax and superannuation law.
The figures provided are the “All groups CPI weighted average of eight capital cities”
which have been obtained from ABS. The ABS makes each figure available three to four
weeks after the end of the quarter.
Consumer price index (CPI) rates:
Year 31 March 30 June 30 September 31 December

2022 123.9 126.1 128.4 130.8

2021 117.9 118.8 119.7 121.3

2020 116.6 114.4 116.2 117.2

2019 114.1 114.8 115.4 116.2

2018 112.6 113.0 113.5 114.1

2017 110.5 110.7 111.4 112.1

2016 108.2 108.6 109.4 110.0

2015 106.8 107.5 108.0 108.4

2014 105.4 105.9 106.4 106.6

2013 102.4 102.8 104.0 104.8

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Year 31 March 30 June 30 September 31 December

2012 99.9 100.4 101.8 102.0

2011 98.3 99.2 99.8 99.8

2010 95.2 95.8 96.5 96.9

2009 92.5 92.9 93.8 94.3

2008 90.3 91.6 92.7 92.4

2007 86.6 87.7 88.3 89.1

2006 84.5 85.9 86.7 86.6

2005 82.1 82.6 83.4 83.8

2004 80.2 80.6 80.9 81.5

2003 78.6 78.6 79.1 79.5

2002 76.1 76.6 77.1 77.6

2001 73.9 74.5 74.7 75.4

2000 69.7 70.2 72.9 73.1

1999 67.8 68.1 68.7 69.1

1998 67.0 67.4 67.5 67.8

1997 67.1 66.9 66.6 66.8

1996 66.2 66.7 66.9 67.0

1995 63.8 64.7 65.5 66.0

1994 61.5 61.9 62.3 62.8

1993 60.6 60.8 61.1 61.2

1992 59.9 59.7 59.8 60.1

1991 58.9 59.0 59.3 59.9

1990 56.2 57.1 57.5 59.0

1989 51.7 53.0 54.2 55.2

1988 48.4 49.3 50.2 51.2

1987 45.3 46.0 46.8 47.6

1986 41.4 42.1 43.2 44.4

1985 37.9 38.8 39.7 40.5

(Source: Australian Taxation Office 2023)

The following formula is used to calculate the indexation factor as set out in s114.1 of the
ITAA97:
Indexation factor = CPI for quarter when CGT event occurred
CPI for quarter in which expenditure occurred
The indexation factor must be calculated to three (3) decimal places (round up as
applicable) before being applied against the cost base of an asset.

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Example:
Frozen indexation method
A block of land was purchased for $150,000 on 30 June 1997 and sold on 30 July 1999 for
$220,000. Calculate the assessable amount of the capital gain.
Capital proceeds from disposal $220,000
Less indexed cost base
$150,000 x 68.7 (CPI quarter ending 30/09/1999)
66.9 (CPI quarter ending 30/06/1997)
$150,000 x 1.027 $154,050
Capital gain $65,950
(Baker, Cliff & Deaner, 2015 p.109)

Discount method
The discount method for calculating a capital gain may be used where:
• A taxpayer is an individual, a trust or complying superannuation entity.
• The CGT event happened either before or after 21 September 1999.
• The asset was acquired at least twelve (12) months before the CGT event
occurred.
• The taxpayer did not choose to use the indexation method.
The method applies a discount percentage. The discount percentage for individuals and
trusts is 50% and 33⅓ % respectively for complying superannuation entities and eligible
life insurance companies.
The capital gain is reduced by the discount percentage after capital losses have been
applied.

Example:
Discount method
A block of land was purchased for $150,000 on 16 June 1997 and sold on 3 July 2006 for $220,000.
Calculate the assessable amount of the capital gain.
($220,000 - $150,000) x 50%
Capital gain = $35,000

A further example showing where improvements have been made and selling costs incurred
in the sale of the asset is set out below:

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Example:
An investment property was acquired for $60,000 on 1 July 1988. Improvements costing
$25,000 were carried out during August 1993. On 31 March 2012 the property was sold
for $180,000. Selling costs incurred were $6,000. Calculate the capital gain using the
frozen index method and the discount method.
Frozen indexation method:
Capital proceeds from disposal $180,000
Less indexed cost base
$60,000 x 99.9 $119,402
50.2
Improvements
$25,000 x 99.9 $40,876
61.1
Selling costs $6,000 $166,278
Capital gain $13,722
Discount method:
($180,000 – ($60,000 + $25,000 + $6000) x 50% $44,500

Where an asset is acquired and disposed of within twelve (12) months, the cost base of
the asset is subtracted from the capital proceeds of disposal.
(Source: Baker, Cliff & Deaner 2015 pp. 117)

Calculation of a Capital Loss

A capital loss cannot be used to reduce other types of assessable income but must be
written off against other capital gains:
Capital loss = Reduced cost base – capital proceeds from disposal
Under s110.55 of the ITAA97, the reduced cost base is the historical cost-plus expenses
less deductions. The reduced cost base contains the same elements as the cost base, but
the elements are not indexed.

Example:
Chandra purchased 800 shares @$3 per share on July 2000. Brokerage and transfer duty costs
were $100. In January 2015 Chandra sold all 800 shares for $2.50 per share and incurred
brokerage costs of $75.
Purchase price $2,400
Brokerage and transfer duty (January 1998) $100
Brokerage costs (August 2011) $75
Reduced cost base $2,575
Capital loss = Reduced cost base – disposal cost
Capital loss: $2,575 – (800 x $2.50) = $575
(Source: Blake, Cliff & Deaner, 2015 p.121)

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Section 121.20(1) of the ITAA97 requires any person who has acquired a CGT asset to
keep records as follows:

121.20(1) What records you must keep

(1) You must keep records of every act, transaction, event or circumstance that can
reasonably be expected to be relevant to working out whether you have made a capital
gain or capital loss from a CGT event. (It does not matter whether the CGT event has
already happened or may happen in the future.).
Note 1: There are exceptions: see s121.30.
Example 1: Where you dispose of a CGT asset the records that are relevant to working
out your capital gain or loss are records of:
• the date you acquired the asset
• the date you disposed of it
• each element of its cost base and reduced cost base and the effect of
indexation on those elements
• what you sold it for (the capital proceeds).
(Source: Income Tax Assessment Act (1997))

Main residence exemption

A taxpayer’s dwelling owned by an individual and normally occupied as the taxpayer’s
main residence is usually exempt from CGT under s118.110 of ITAA97:

s118.110 Basic case

(1) A capital gain or capital loss you make from a CGT event that happens in relation to
a CGT asset that is a dwelling or your ownership interest in it is disregarded if:
(a) you are an individual; and
(b) the dwelling was your main residence throughout your ownership period.
Note 1: You may make a capital gain or capital loss even though you comply with this
section if the dwelling was used for the purpose of producing assessable income: see
s118-190.
(Source: Income Tax Assessment Act (1997))

Under s118 of the ITAA97 a taxpayer who occupies a dwelling as a main residence and
then ceases to occupy it can choose to have the dwelling treated as the main residence.
The main residence exemption will continue to apply for a maximum of six (6) years if the
dwelling is used to produce assessable income e.g. rental income. A taxpayer is entitled
to another maximum period of six (6) years each time the dwelling becomes and ceases
to become the main dwelling.
Note: The dwelling can only be treated as the taxpayer’s main residence provided the
taxpayer does not have another main residence. Consider the following two (2) examples.

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Example 1:
Patricia occupied a dwelling as her main residence for five (5) years. She was then
transferred overseas for four (4) years. She rented out the dwelling in her absence. When she
returned from overseas she occupied the dwelling as her main residence.
Provided Patricia had no other main residence while overseas, the dwelling can be treated as
her main residence and the main residence exemption applies. Any gain on the disposal of
the property is CGT exempt.

Example 2:
Phillip occupied a home as his main residence for two (2) years and was then transferred
interstate. He rented out the property for eight (8) consecutive years in his absence.
The full exemption is not applicable as Phillip was absent from the property for more than six
(6) years. However, a partial exemption may apply.

Under s118.192 of the ITAA97, there is a special rule that applies where a main residence
is first used for income producing purposes after 20 August 1996, the cost base for
determining the capital gain will be the market value of the dwelling on the date that it was
first used for income producing purposes.
(Source: Baker, Cliff & Deaner ,2015 p.124)

(Source: Australian Taxation Office (2018))

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Example:
Veronica purchased a dwelling on 4 September 2002. She occupied the dwelling for two (2) years
and then rented the dwelling out for seven (7) years. She sold the dwelling on 5 September 2011
for $650,000. The market value of the dwelling when first used for income producing purposes was
$510,000.
The full main residence exemption is not available as Veronica was absent from the dwelling for
more than six (6) years. She is entitled to a partial exemption for this period. Calculate the
assessable amount of the capital gain.
Capital gain = $650,000 - $510,000
=$140,000 x (7 years x 365 days) – (6 years x 365 days)
7 years x 365 days
= $140,000 x 365 = $20,000
2,555
Note: Leap years are ignored.

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5. Termination payments
Employment Termination Payments
Lump sum payments may be received by employees when they terminate their
employment. An employment termination payment (ETP) is a lump sum paid to an
employee when they terminate their employment.
ETPs are subject to special tax treatment, and the tax payable on an ETP can differ
depending on the circumstances of the termination. There are two (2) broad types of
ETPs: a life benefit ETP and a death benefit ETP.
• A life benefit ETP is received because of the termination of a taxpayer’s
employment (s82.130(1)(a)(i)) ITAA97).
• A death benefit ETP is received by a person after another person’s death in
consequence of the termination of that other person’s employment
(s82.130(1)(a)(ii)) ITAA97).
Both the life benefit ETP and the death benefit ETP consist of two components: a tax-free
component and a taxable component. Under s82.130 an employment termination
payment is classified as follows:

82.130 What is an employment termination payment?

(1) A payment is an employment termination payment if:
(a) it is received by you:
(i) in consequence of the termination of your employment; or
(ii) after another person’s death, in consequence of the termination of
the other person’s employment; and
(b) it is received no later than 12 months after that termination (but see
subsection (4)); and
(c) it is not a payment mentioned in section 82.135.
(Source: Income Tax Assessment Act (1997))

Here are examples of employment termination payments in Australia, along with brief
explanations:
• Redundancy payments: A payment made to an employee when their job is no
longer required, and they are therefore made redundant. The payment may be
genuine or non-genuine, depending on the circumstances of the termination.
• Payment in lieu of notice: A payment made to an employee when they are
terminated without being provided with the required notice period.
• Golden handshake payments: A one-time payment made to an employee as an
incentive for them to leave their job voluntarily.
• Severance payments: A payment made to an employee when their employment
is terminated, as compensation for the loss of their job.
• Unused annual leave and long service leave payments: A payment made to an
employee for any unused annual leave or long service leave they have accrued.

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• Retrenchment payments: A payment made to an employee when they are

retrenched, which is similar to redundancy but often refers to a more significant
workforce reduction.
• Compensation payments: A payment made to an employee as compensation for
loss of employment due to an unfair dismissal, discrimination or other breaches of
employment law.
• Termination payments: A payment made to an employee when their employment
is terminated, which may include payments for unused sick leave or bonuses.
• Post-employment restraint payments: A payment made to an employee when
they are restrained from working for a competitor or starting a competing business
for a specific period after leaving their job.
• Death benefits: A payment made to the dependents or estate of a deceased
employee, which may include unpaid salary or other employment-related
entitlements.
Each of these types of employment termination payments may be subject to different tax
treatment, depending on the circumstances of the payment and the employee's age and
length of service.
TPs made on or after 1 July 2007 cannot be contributed or rolled over into a
superannuation fund.
(Source: Baker, Cliff & Deaner, 2012 p.91)

Payments not classified as employment termination payments are set out in s82.135 of
the ITAA97.
Source: Income Tax Assessment Act (1997))

Under s82.140 of ITAA97, the tax-free component of life benefit may consist of a
pre-1 July 1983 segment and/or an invalidity payment:

82.140 Tax-free component of an employment termination payment

The tax-free component of an employment termination payment is so much of the
payment as consists of the following:
(a) the invalidity segment of the payment;
(b) the pre-July 83 segment of the payment”.

(Source: Income Tax Assessment Act (1997) )

Under s82(10) (1) of the ITAA97, the tax-free component is not assessable or exempt
income. Under s82(10) (2) of the ITAA97, the taxable component is assessable income of
the taxpayer. A tax offset reduces the maximum tax rate on the taxable component as
follows:
▪ 15% (plus Medicare levy) where the taxpayer has reached their preservation age
▪ 30% (plus Medicare levy) where the taxpayer is under the preservation age

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The preservation age is the age at which a taxpayer can retire and access their
superannuation. Where a taxpayer was born before 1 July 1960, the preservation age is
fifty-five (55). For those born after 30 June 1960, the preservation age will be between
fifty-five (55) and sixty (60) years.
Here is a table outlining the 2022 to 2023 Employment Termination Payment (ETP) tax
rates for life benefit and death benefit in Australia:

ETP type Tax-free component Concessional tax rate Excess tax rate

Life Benefit ETP $215,000 17% 47% + Medicare levy

Death Benefit ETP $215,000 0% 47% + Medicare levy

Note that the tax-free component for both types of ETPs is $215,000 for the 2022 to 2023
financial year. Also, the concessional tax rate of 17% only applies to the taxable
component of the life benefit ETP. In contrast, the taxable component of the death benefit
ETP is not subject to concessional tax rates and is instead taxed at the top marginal tax
rate plus the Medicare Levy.
It is important to remember that these rates may change over time, so it is always a good
idea to seek professional advice or check with the Australian Taxation Office for the most
up-to-date information.

Let's say John has worked for XYZ Company for 10 years and is made redundant. His employer
offers him a redundancy payment of $50,000.
According to the Australian Taxation Office rules for genuine redundancy payments, John is entitled
to a tax-free amount of $10,989 plus $5,496 for each completed year of service. In John's case, this
means his tax-free amount would be:
$10,989 + ($5,496 x 10) = $66,969
This tax-free amount is subtracted from the total redundancy payment of $50,000, leaving a taxable
amount of $16,031.
The taxable amount of $16,031 is subject to concessional tax rates of 15% plus the Medicare Levy,
which is currently 2%.
So John's tax liability for the redundancy payment would be:
$16,031 x 0.17 (15% concessional tax rate + 2% Medicare Levy) = $2,726.27
Therefore, John would receive a net payment of:
$50,000 - $2,726.27 = $47,273.73
In summary, for a genuinely made redundant employee like John, a tax-free component is available
that is calculated based on the number of years of service. Any amount of the redundancy payment
that exceeds this tax-free component is taxed at a concessional rate of 15% plus the Medicare
Levy. In John's case, he would receive a net payment of $47,273.73 after tax.

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Let's say Jane has worked for ABC Company for 30 years and has decided to retire. Her
employer offers her a retirement bonus of $220,000, $30,000 of which is a pre-July 1983
segment of the payment.
According to the Australian Taxation Office rules for ETPs, Jane's payment will be divided into
two components: the tax-free component and the taxable component. The tax-free component is
calculated based on Jane's age and the amount of the payment, while the taxable component is
the remainder.
To calculate the tax-free component for the taxable component of the payment that is not a pre-
July 1983 segment, the following formula applies:
For those under preservation age: Lump Sum Cap Amount + (Service Days / 365 x $205,000)
For those over preservation age: Lump Sum Cap Amount + (Service Days / 365 x $205,000) x 2
where Lump Sum Cap Amount is $225,000 for the 2022-23 financial year.
Let's assume Jane is 60 years old and has reached her preservation age. Her tax-free
component would be calculated as follows:
Lump Sum Cap Amount + (Service Days / 365 x $205,000) x 2 $225,000 + (30 x $205,000 / 365)
x 2 $225,000 + $11,507.69 $236,507.69
So, Jane's tax-free component for the taxable component of the payment that is not a pre-July
1983 segment is $236,507.69.
Now let's calculate the taxable component. To do this, we subtract the tax-free component from
the total payment:
$220,000 - $236,507.69 = -$16,507.69
Since the tax-free component is greater than the total payment, there is no taxable component
for the taxable portion of the payment.
For the pre-July 1983 segment of the payment, the entire $30,000 is tax-free.
Therefore, there is no tax withheld for Jane's ETP payment, and she would receive the full
payment of $220,000.
In summary, for Jane's ETP payment, there is a tax-free component for the taxable component
of the payment that is calculated based on her age and the amount of the payment. Since Jane
has reached her preservation age, her tax-free component is $236,507.69 for the taxable
component of the payment that is not a pre-July 1983 segment. The pre-July 1983 segment of
the payment is entirely tax-free. Since the tax-free component is greater than the total payment,
there is no taxable component for the taxable portion of the payment, and no tax is withheld.
Jane would receive the full payment of $220,000.

Superannuation
Superannuation benefits refer to the amount of money an individual has saved in a
superannuation fund during their working life. These benefits are intended to provide a
source of income for individuals in retirement and are regulated under the Superannuation
Industry (Supervision) Act 1993 (Cth) (SIS Act).
When preparing an individual's tax return in Australia, superannuation benefits must be
considered and may be subject to tax. The tax treatment of superannuation benefits
depends on various factors, including the age of the individual, the type of benefit, and the
amount of the benefit.

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Under s301.1 to 301.225 of the ITAA97, a superannuation benefit received by a taxpayer

is generally taxable where that benefit is a:
• Superannuation member benefit paid from a complying superannuation fund
• Superannuation co-contribution payment
• Superannuation annuity payment
• Superannuation guarantee payment
Superannuation benefits are generally taxed when they are paid out to the individual, and
the tax treatment will vary depending on whether the benefit is paid as a lump sum or an
income stream. Under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997),
superannuation benefits paid as a lump sum can be taxed in two ways:
• The taxable component of the lump sum is taxed at the individual's marginal tax
rate, with a tax offset of 15% applied to the taxed element
• The entire lump sum can be taxed at a concessional rate, depending on the
individual's age and the amount of the benefit.
If the individual is under preservation age (currently age 60), then the taxable component
of the lump sum will be taxed at their marginal tax rate, with a tax offset of 15% applied to
the taxed element. If the individual is over preservation age, then the taxable component
of the lump sum will be taxed at a concessional rate of 15% for the first $1.565 million of
the taxable component, and at the individual's marginal tax rate for any amount above this
threshold.
Superannuation benefits paid as an income stream, such as a pension, are also subject to
tax. The taxable portion of the income stream is generally taxed at the individual's
marginal tax rate, with a tax offset of 15% applied to the taxed element. The tax treatment
of income streams will depend on various factors, such as the age of the individual, the
source of the income stream, and whether the income stream is a capped defined benefit
income stream.
It is also important to note that there are certain circumstances in which superannuation
benefits may be tax-free. For example, if an individual is over preservation age and
receives a lump sum death benefit from a superannuation fund, the benefit may be tax-
free if it is paid to a tax dependant. Similarly, if an individual is permanently incapacitated
and receives a superannuation benefit, the benefit may be tax-free up to a certain limit.

John is 60 years old and has recently retired. He receives a superannuation lump sum benefit of
$400,000, which is made up of a tax-free component of $100,000 and a taxable component of
$300,000.
Because John is over preservation age, the taxable component of his lump sum benefit will be
taxed at a concessional rate of 15%, up to a cap of $1.565 million.
The first $300,000 of the taxable component is below the cap, so it will be taxed at 15%. The tax
payable on this amount is calculated as follows:
$300,000 x 15% = $45,000

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The remaining $65,000 of the cap can be used to reduce the tax payable on any amounts above
the cap. However, in this example, the entire taxable component is below the cap, so this step is
not required.
In summary, John's superannuation lump sum benefit of $400,000 will be taxed as follows:
Tax-free component: $0
Taxable component: $45,000
Total tax payable: $45,000

It is important to note that this is just one example, and the tax treatment of
superannuation benefits can be quite complex.
Preserved superannuation entitlements are preserved until the taxpayer.:
▪ Has permanently retired from the workforce upon reaching preservation age
▪ Leaves an employment arrangement after sixty (60) years of age
▪ Reaches sixty-five (65) years of age
▪ Becomes totally and permanently disabled
▪ Dies

(Source: Baker, Cliff & Deaner, 2015 p.167)

A superannuation benefit can be paid as either a lump sum benefit or an income stream
benefit. A superannuation benefit whether a lump sum or an income stream comprises
two (2) components. These components are:

• The tax-free component

• The taxable component
A summary of the tax treatment of the element taxed in the fund is set out below:

Age of recipient Lump sum payment Income stream

Under preservation age Taxed at marginal tax rate* Taxed as ordinary

income

Preservation age to First $215,000 tax-free, balance taxed at Taxed as ordinary

under 60 concessional rates income

60 and over Entire benefit tax-free** Taxed as ordinary

income

*Note: A tax offset of 15% applies to the taxed element of the taxable component for
individuals under preservation age.
**Note: If the superannuation benefit includes an untaxed element, tax may be payable on
this element.
SAPTO

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In Australia, the tax offset for superannuation benefits is also known as the "seniors and
pensioners tax offset" (SAPTO). It is a tax offset that is designed to help lower-income
seniors and pensioners reduce their tax liabilities.
The SAPTO can apply to superannuation benefits in certain circumstances. Specifically, it
can apply to the taxable component of superannuation benefits received as an income
stream or lump sum by an individual who is eligible for the offset. The amount of the offset
will depend on the individual's taxable income and other factors such as their marital
status and whether they are eligible for other tax offsets or deductions.
For the 2022-2023 financial year, the SAPTO is available to individuals who are:
• Aged 65 years or older; or
• Aged 55 years or older and retired on permanent disability grounds.
The amount of the SAPTO ranges from $2,375 to $2,535 for single individuals and from
$1,365 to $1,453 per person for couples who are eligible. The offset is calculated based
on a range of factors, including the individual's taxable income, the type and amount of
income they receive, and their marital status.
Overall, the SAPTO is an important consideration for seniors and pensioners who receive
superannuation benefits. It can help to reduce their tax liabilities and ensure that they can
maximise their retirement income.

Assume John is 70 years old and he received a taxable superannuation income stream of $35,000 in
the 2022-2023 financial year. He also received an Age Pension of $15,000 and his total taxable
income for the year is $50,000.
To calculate the SAPTO for John, we need to first determine his adjusted taxable income (ATI), which
is his taxable income minus any applicable deductions. Let's assume that John has no deductions.

• ATI = Taxable income

• ATI = $50,000
Based on John's ATI, his SAPTO entitlement for the 2022-2023 financial year is $2,535.
However, the SAPTO is subject to income thresholds. For single individuals, the SAPTO reduces by
12.5 cents for every dollar of ATI above the lower income threshold of $32,279. For couples, the
SAPTO reduces by 12.5 cents for every dollar of ATI above the lower income threshold of $28,974
per person.
In John's case, he is a single individual with an ATI of $50,000. His ATI exceeds the lower income
threshold by $17,721 ($50,000 - $32,279). Therefore, his SAPTO entitlement will be reduced by
$2,215.13 ($17,721 x 0.125).
So, John's final SAPTO entitlement for the 2022-2023 financial year will be:
• SAPTO entitlement = Maximum SAPTO - (ATI - Lower income threshold) x Rate of reduction
• SAPTO entitlement = $2,535 - $2,215.13
• SAPTO entitlement = $319.87
This means John's taxable income will be reduced by $319.87 when calculating his final tax liability.

Untaxed plan cap

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In Australia, the untaxed plan cap is a limit on the amount of untaxed superannuation
contributions and earnings that can be paid to an individual in retirement before additional
tax is payable. The cap applies to individuals who receive superannuation benefits from
an untaxed source, such as a government-funded superannuation scheme or an
employer-funded scheme where contributions were not taxed at the time they were made.
The untaxed plan cap applies to both lump sum payments and income streams. For the
2022-2023 financial year, the untaxed plan cap is $1.755 million. This means that any
superannuation benefits paid to an individual from an untaxed source that exceed this cap
will be subject to additional tax.
For lump sum payments, the untaxed element of the benefit that exceeds the cap will be
taxed at the top marginal tax rate of 47%. For income streams, the amount of the benefit
that exceeds the cap will be subject to an additional tax of 15% on top of the normal tax
rate.
It's important to note that the untaxed plan cap is separate from the concessional and non-
concessional contribution caps, which apply to superannuation contributions made by
individuals. Overall, the untaxed plan cap is an important consideration for individuals who
receive superannuation benefits from an untaxed source.

Assume Jane is 65 years old and she received a lump sum superannuation benefit of $400,000
in the 2022-2023 financial year. The lump sum is from an untaxed superannuation scheme,
meaning that it hasn't been taxed before.
To determine the tax liability on the untaxed component of Jane's lump sum, we first need to
calculate the applicable untaxed plan cap for the financial year. For the 2022-2023 financial year,
the untaxed plan cap is $1,615,000.
Jane's $400,000 lump sum falls below the untaxed plan cap, so it is entirely within the cap.
However, if Jane had received a larger untaxed lump sum that exceeded the untaxed plan cap,
the excess would be taxed at the top marginal tax rate of 47%.
In Jane's case, the taxable portion of her lump sum will be calculated as follows:
• Taxable component = Lump sum - Untaxed plan cap
• Taxable component = $400,000 - $1,615,000
• Taxable component = $0 (because the entire lump sum is within the untaxed plan cap)
Therefore, Jane will not have any tax liability on her untaxed lump sum, as it falls within the
untaxed plan cap for the 2022-2023 financial year.
However, it's important to note that the untaxed plan cap can change from year to year, so it's
important to check the current cap at the time of receiving a superannuation benefit to determine
the applicable tax treatment.

Other Termination Payments

Unused Annual leave

When an employee is terminated, they may receive an Employment Termination Payment
(ETP) that includes a payment for unused annual leave. The tax treatment of this payment
depends on a few factors, such as whether the employee is eligible for the tax-free
component and whether the payment is classified as a genuine redundancy payment.

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If the payment for unused annual leave is included in a genuine redundancy payment, it
may be eligible for the tax-free component, which is based on the employee's years of
service. The tax-free component is calculated as follows:
• Years of service x base amount ($11,342 for the 2022-2023 financial year) +
service amount ($5,672 for the 2022-2023 financial year)
• The resulting amount is the tax-free component that can be applied to the payment
for unused annual leave, up to a maximum of $11,342 for each full year of service.
However, if the payment for unused annual leave is not included in a genuine redundancy
payment, it is taxed as a lump sum payment. The tax rate for the taxable component of
the payment depends on the employee's age and the amount of the payment.
For individuals under preservation age (currently 60 years), the taxable component of the
payment is taxed at the individual's marginal tax rate, plus Medicare levy.
For individuals between preservation age and age 59, the taxable component of the
payment is taxed at a rate of 17% for amounts up to the low-rate cap (currently $225,000
for the 2022-2023 financial year), and the individual's marginal tax rate plus Medicare levy
for any amount over the low-rate cap.
For individuals aged 60 or over, the taxable component of the payment is taxed at a rate
of 0%, regardless of the amount.
Lump sum payments made to a taxpayer upon termination of employment for unused annual leave
accrued between 16 August 1978 to pre-17 August 1993 payments are fully assessable however
the maximum tax rate is 30% plus Medicare levy (s83.10 ITAA97).
(Source: Baker, Cliff & Deaner 2015, p.181)

Now, let's take a worked example to illustrate the tax treatment of the payment for unused
annual leave:

Assume John has been made redundant after working for 10 years at a company, and he is
eligible for the tax-free component for a genuine redundancy payment. He is entitled to receive a
lump sum payment of $50,000, which includes $10,000 for unused annual leave.
The tax-free component for John's payment can be calculated as:

• 10 years of service x $11,342 base amount = $113,420

• $5,672 service amount = $119,092
Since the maximum tax-free component for each full year of service is $11,342, John's payment
for unused annual leave is eligible for the full tax-free component of $11,342.
The remaining $38,658 of John's payment for unused annual leave is considered the taxable
component. Since John is under preservation age, the taxable component is taxed at his
marginal tax rate of 32.5% plus Medicare levy of 2%, resulting in a tax liability of:
Taxable component = $38,658
Tax liability = $38,658 x 34.5% = $13,336.61
Therefore, John's payment for unused annual leave will be split into two components for tax
purposes: a tax-free component of $11,342 and a taxable component of $38,658, which will be
taxed at his marginal tax rate plus Medicare levy.

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Unused Long Service Leave

In Australia, unused long service leave may be included in an Employment Termination
Payment (ETP) if an employee's employment has been terminated. The tax treatment of
unused long service leave in an ETP depends on when the long service leave was
accrued and the employee's age.
For long service leave accrued before 16 August 1978, the entire amount will be taxed at
a concessional rate of 5%. This is because the long service leave is considered to have
been accrued before the introduction of the current tax system in Australia.
For long service leave accrued between 16 August 1978 and 17 August 1993, the taxable
amount will depend on the employee's age at the time of termination. If the employee is
under preservation age (currently age 60), the taxable amount will be taxed at the
individual's marginal tax rate. If the employee is over preservation age, the taxable
amount will be taxed at a concessional rate of 15%.
For long service leave accrued after 17 August 1993, the taxable amount will be taxed at
the individual's marginal tax rate, regardless of the employee's age at the time of
termination.

As an example, let's say an employee's long service leave was accrued as follows:
Before 16 August 1978: $10,000
Between 16 August 1978 and 17 August 1993: $20,000
After 17 August 1993: $30,000
If the employee's employment is terminated and they receive an ETP including their unused long
service leave, the tax treatment would be as follows:
$10,000: taxed at a concessional rate of 5%, resulting in $500 of tax payable
$20,000: if the employee is under preservation age, taxed at their marginal tax rate (let's assume
32.5%), resulting in $6,500 of tax payable. If the employee is over preservation age, taxed at a
concessional rate of 15%, resulting in $3,000 of tax payable.
$30,000: taxed at the employee's marginal tax rate (let's assume 32.5%), resulting in $9,750 of
tax payable.
Therefore, the total tax payable on the long service leave component of the ETP would be
$16,750 if the employee is under preservation age or $13,250 if the employee is over
preservation age.

A genuine redundancy payment

When an employee is made redundant from their job, they may receive an employment
termination payment (ETP) that includes a genuine redundancy payment. A genuine
redundancy payment is generally tax-free up to a certain limit, while any amount above
this limit is subject to tax. The tax treatment of genuine redundancy payments in Australia
is outlined in Division 83 of the Income Tax Assessment Act 1997.
Tax-free component
The tax-free component of a genuine redundancy payment is made up of two parts:
• The base amount, which is a fixed amount that increases each year in line with the

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Consumer Price Index (CPI). For the 2022-23 financial year, the base amount is
$11,342.
• The service amount, which is calculated based on the employee's years of service
with their employer. For each year of completed service, the service amount is
equal to:
o One week's pay, if the employee is under 30 years old
o 1.5 week's pay, if the employee is aged 30 or over but under 50
o Two week's pay, if the employee is aged 50 or over
The total tax-free component of a genuine redundancy payment cannot exceed the base
amount plus the service amount. Any excess over this limit is taxable.
Assessable income
The assessable income component of a genuine redundancy payment is any amount over
the tax-free limit. This amount is added to the employee's other taxable income for the
year and is subject to tax at their marginal tax rate.
Tax rates
The tax rates for genuine redundancy payments depend on the amount of the payment
and the employee's marginal tax rate. For the 2022-23 financial year, the tax rates for
genuine redundancy payments are as follows:
• For the tax-free component: 0%
• For the first $225,000 of the assessable income component: 17%
• For the amount of the assessable income component above $225,000: 47%

Let's consider two different examples of genuine redundancy payments, and calculate the tax
payable for each.
Example 1: John has worked for his employer for 10 years and is aged 45. He receives a
genuine redundancy payment of $20,000.
Tax-free component:
Base amount: $11,342
Service amount: 10 x 1.5 weeks' pay = $15,000
Total tax-free component: $26,342
Assessable income:
Amount over the tax-free limit: $20,000 - $26,342 = $0 (therefore, no assessable income)
Tax payable:
John does not need to pay any tax on his genuine redundancy payment, as the entire amount
is within the tax-free limit.

Example 2: Jane has worked for her employer for 20 years and is aged 55. She receives a
genuine redundancy payment of $100,000.
Tax-free component:

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Base amount: $11,342
Service amount: 20 x 2 weeks' pay = $80,000
Total tax-free component: $91,342
Assessable income:
Amount over the tax-free limit: $100,000 - $91,342 = $8,658
Tax payable:
Jane's assessable income of $8,658 is added to her other taxable income for the year.
Assuming she has no other income, her total taxable income is $8,658.
The tax payable on this amount is calculated as follows:
On the first $18,200: 0%
On the amount between $18,201 and $45,000: 19% x $8,658 = $1,645.02

Early retirement scheme payments

Early retirement scheme payments are a type of employment termination payment (ETP)
that can be received by an employee who retires early under an approved scheme. These
payments are subject to specific tax treatment in Australia.
Tax treatment:
• The first $10,638 (2022-23 financial year) of the ETP is tax-free for all taxpayers.
This is known as the ETP tax-free amount.
• The rest of the ETP is taxed at the individual's marginal tax rate plus Medicare
Levy.
• However, for those who are aged 55 or over, and have reached their preservation
age, the taxable component of the ETP is eligible for a tax offset. This offset is
known as the "seniors and pensioners tax offset" (SAPTO).

Example 1:
John is 52 years old and has reached his preservation age. He receives an early retirement
scheme payment of $120,000. The payment is made up of a taxed element of $80,000 and an
untaxed element of $40,000. John's marginal tax rate is 37%, and he is eligible for the SAPTO.
Calculation:
ETP tax-free amount = $10,638
Taxable component = $80,000 (since the untaxed element is not eligible for SAPTO)
Taxable income = $69,362 ($80,000 - $10,638)
Tax payable = $25,682.94 (37% x $69,362) - SAPTO tax offset

Example 2:
Sarah is 45 years old and receives an early retirement scheme payment of $50,000. The
payment is made up of a taxed element of $30,000 and an untaxed element of $20,000. Sarah's
marginal tax rate is 32.5% and she is not eligible for SAPTO.

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Calculation:
ETP tax-free amount = $10,638
Taxable component = $30,000 (since the untaxed element is not eligible for SAPTO)
Taxable income = $19,362 ($30,000 - $10,638)
Tax payable = $6,292.05 (32.5% x $19,362)

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6. Exempt Income
What is Exempt Income?
In Australia, "exempt income" refers to the types of income that are not subject to taxation
under the Income Tax Assessment Act 1997 (Cth). Exempt income may include certain
government payments, certain types of investment income, and other types of income that
the Australian Taxation Office (ATO) has deemed exempt.
Section 6.20(1) of the ITAA97 describes exempt income as the amount of ordinary income
or statutory income which is made exempt from income tax. Ordinary income is exempt
under the provisions of s6.20(1) of the ITAA97. Statutory income is exempt income under
the provisions of s6.20(3) of the ITAA97.
Examples of exempt income in Australia include:
• Government payments: Certain government payments such as Family Tax
Benefit, Child Care Benefit, and Age Pension are considered exempt income.
• Scholarships and grants: Scholarships and grants provided for educational
purposes, as well as some other types of grants, are considered exempt income.
• Foreign income: If you are an Australian resident for tax purposes, but you
receive income from overseas, that income may be considered exempt income if it
is not taxable in the foreign country, and you have paid foreign tax on it.
• Capital gains on personal assets: Capital gains on the sale of personal assets
such as a family home, car or personal use asset are generally exempt from
taxation.
• Certain types of insurance payments: Certain types of insurance payments,
such as those for personal injury or illness, are considered exempt income.
• Superannuation: Certain types of superannuation payments, such as those made
to individuals who are over the age of 60, may be considered exempt income.
The above examples are not an exhaustive list of exempt income in Australia, and some
exemptions may be subject to certain conditions or limits.
Exempt Amounts of Ordinary and Statutory Income
Division 51 of the ITAA97 sets out the amounts of ordinary and statutory income that are
exempt from income tax. These are listed below:

Division 51 Exempt amounts

51.1. Amounts of ordinary income and statutory income that are exempt
51.5. Defence
51.10. Education and training
51.30. Welfare
51.32. Compensation payments for loss of tax-exempt payments
51.33. Compensation payments for loss of pay and/or allowances as a Defence
reservist
51.35. Payments to a full-time student at a school, college or university

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51.40. Payments to a secondary student

51.42. Bonuses for early completion of an apprenticeship
51.43. Income collected or derived by copyright collecting society
51.45. Income collected or derived by resale royalty collecting society
51.50. Maintenance payments to a spouse or child
51.52. Income derived from eligible venture capital investments
51.54. Gain or profit from disposal of eligible venture capital investments
51.55. Gain or profit from disposal of venture capital equity
51.57. Interest on judgment debt relating to personal injury
51.60. Prime Minister’s Prizes
51.100. Shipping
51.105. Shipping activities
51.110. Core shipping activities
51.115. Incidental shipping activities
(Source: Income Tax Assessment Act (1997))

Under s23AC of the ITAA36 the pay and allowances of members of the Australian
Defence Force, serving a period of operational service in a defined operational area, e.g.,
Afghanistan, is exempt income as follows:

23AC Exemption of pay and allowances of members of Defence Force

serving in operational areas
(1) Pay and allowances earned by a person as a member of the Defence Force are
exempt from income tax where:
(a) the pay and allowances are earned during a period of operational service of
the person; and
(b) the person served in an operational area for the whole or a part of that
period.
(Source: Income Tax Assessment Act (1936))

Pensions and Allowances

Payments received from Centrelink are generally assessable under s6.5(1). These
include:

▪ Age pensions
▪ Newstart allowance
▪ Youth allowance
▪ Austudy
▪ Parenting payments

(Source: Income Tax Assessment Act (1997))

Under Division 52 of the ITAA97, some social security payments are exempt and these
include:
• family tax benefit

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• career allowance
• disability support pension
• disaster relief payment
• double orphan pension
• rent assistance
• veteran affairs disability pension and allowances
• pensions and allowances for war widows.
Source: Baker, Cliff & Deaner 2015, p.91)

Exempt Foreign Income

Since 1 July 2009, the general exemption for Australian residents working overseas for
more than ninety (90) continuous days has been only available for income derived as:
▪ An aid or charitable worker employed by a recognised non-government
organisation
▪ A government aid worker
▪ A specified government employee

Where a person derives foreign income from a period of continuous employment for less
than 91 continuous days, that income is assessable in Australia. Where a person derives
otherwise exempt foreign employment income for a period of continuous employment for
91 days or more, but no foreign tax is withheld, that income is no longer exempt and is
classified as assessable income in Australia.
(Source: Baker, Cliff & Deaner, 2012 p.51)

The salaries and the foreign source of income for foreign consular and diplomatic
representatives and staff are usually exempt from taxation in Australia. The Australian
earnings of non-residents or visitors to Australia who are representing the government
of a foreign country are specifically exempt from taxation under s842-105 (ITAA97)).

(Source: Income Tax Assessment Act (1997))

Here is an example:

Let's consider the example of John, an Australian resident for tax purposes, who has the following
income and deductions for the financial year ending 30 June 2022:
Assessable income:
• Salary income: $80,000
• Interest income from a savings account: $1,000

• Total assessable income: $81,000

Exempt income:
• Government age pension: $20,000

• Capital gain from the sale of his family home: $50,000

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• Total exempt income: $70,000

Deductions:
• Work-related expenses: $2,000

• Donations to a registered charity: $500

• Total deductions: $2,500
To calculate John's taxable income, we deduct his deductions and exempt income from his
assessable income:
$81,000 - $70,000 - $2,500 = $8,500
John's taxable income is $8,500, which is below the tax-free threshold of $18,200. Therefore, John
does not have to pay any tax.
In this example, John's assessable income includes his salary and interest income, while his
exempt income includes his government age pension and capital gain from the sale of his family
home. Even though John has a substantial amount of exempt income, he is not required to pay any
tax because his taxable income is below the tax-free threshold.

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7. Deductions
General Deductions
In Australia, "general deductions" are expenses that are directly related to the production
of assessable income, but are not specifically covered by other deduction provisions
under the Income Tax Assessment Act 1997 (Cth).
Examples of general deductions in Australia include:
1. Home office expenses: Expenses incurred when working from home, such as the
cost of a home office, phone and internet expenses, and electricity bills.
2. Car expenses: Expenses incurred for work-related travel, such as fuel, servicing,
and maintenance costs.
3. Clothing and laundry expenses: Expenses for clothing and laundry that are
required for work purposes, such as protective clothing or a uniform.
4. Tools and equipment: Expenses incurred for purchasing or repairing tools and
equipment that are required for work purposes.
5. Travel expenses: Expenses incurred for work-related travel, such as flights,
accommodation, and meals.
6. Education and training expenses: Expenses incurred for courses or training that
are not directly related to an individual's current or future employment but may be
relevant to their income-earning activities.
To be eligible as a general deduction, the expense must have a direct connection with the
income-earning activity and must not be private or domestic in nature. In addition, the
expense must be incurred in the income year in which the deduction is claimed and must
be supported by adequate records.
Division 8, ss8.1 to 8.5 of the ITAA97 divide deductions into general deductions and
specific deductions. Section 8.1 of the ITAA97 provides a general formula to determine
whether deductions are allowable as follows:

a. it is incurred in gaining or producing your assessable income, or

b. it is necessarily incurred in carrying on a business for the purpose of gaining
or producing your assessable income.
(Source: Income Tax Assessment Act (1997))

For an amount to be deductible under s8.1(1) the loss or outgoing must have been
incurred in gaining or the production of assessable income. An employee is entitled to a
deduction under s8.1(1) for expenses incurred in earning assessable income provided the
expense is not private, capital or of a domestic nature.
Examples of losses and outgoings that are not deductible are set out in s26.5 to s26.60 of
the ITAA97 and include:

• Traffic fines, s26.5

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• Provisions for LSL, annual leave and sick leave s26.10

• Higher education loan program (“HELP”) s26.20
• Membership fees to social or recreational clubs s26.45
• Expenditure relating to illegal activities s26.54
• Non-compulsory uniforms s26.55

(Source: Income Tax Assessment Act (1997))

Ordinary operating expenses of a business are deductible. Certain types of capital

expenditure relating to commencing or ceasing a business are deductible under s40.880
of the ITAA97. This is referred to as “black hole” expenditure. Under s40.880, 20% of the
expenditure is deductible in the year it is incurred, and the balance is allocated equally to
each of the next four (4) income years. The initial franchise fee and any renewal or
transfer fee that form part of the capital cost base of a business cannot be claimed as a
deduction.
(Source: Baker, Cliff & Deaner 2015 p.246)

An employee is entitled to the following general deductions if they were incurred in

producing assessable income:
• Tools of trade
• Equipment
• Technical or trade books or journals
• Types of occupational or protective clothing
• Travel expenses
• Meal allowances
• Union subscriptions
• Professional association subscriptions
• Sickness and accident insurance
• Home office expenses
• Internet connection
• Telephone
• Self-education expenses
• Depreciation on equipment/vehicles
• Sunscreen and products for outdoor workers
(Source: Baker, Cliff & Deaner, 2015 P.246)

The table below outlines transactions that are general deductions an those that are non-
deductible:

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General Deduction Not Deductible

Work-related car expenses Private car expenses

Home office expenses Private rent and mortgage payments

Tools and equipment Non-work-related clothing

Work-related phone and internet expenses Private phone and internet expenses

Self-education expenses Education expenses not related to current or

future employment

Protective clothing and uniforms Non-work-related meals and entertainment

Union fees and professional memberships Social club fees and memberships

Travel expenses for work Family holiday expenses

Professional development courses and Health and fitness expenses

seminars

Tax agent fees for tax return preparation Fines and penalties

Note this is not an exhaustive list, and whether an expense is deductible or not will
depend on the specific circumstances and requirements set out in Australian taxation law.
Rental Deductions
In Australia, rental deductions refer to expenses incurred in earning rental income that can
be claimed as deductions to reduce the taxable income from rental properties. Taxpayers
who own rental properties can claim the following as deductible expenses:
• Advertising for tenants
• Agent’s commission and fees
• Bank fees and charges
• Body corporate fees
• Borrowing expenses
• Cleaning and rubbish removal
• Council rates and charges
• Depreciation
• Electricity and gas
• Garden maintenance and lawn mowing
• Building, contents and public liability insurance
• Land tax
• Lease document expenses
• Leasing and letting fees

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• Loan interest
• Pest control
• Postage, telephone, and stationery expenses
• Repairs and maintenance
▪ Travel expenses to collect rent, inspect property and make repairs.
(Source: Baker, Cliff & Deaner, 2015 P.247)

To be eligible for rental deductions, the expense must be incurred in the income year the
deduction is claimed and must be directly related to the rental property. Additionally, the
rental property must be available for rent or rented out during the income year.
Travelling expenses
An employee’s travel expenses are deductible under s8.1(1) provided they are incidental
and relevant to an employee earning wages or salaries. The same principle applies to
self-employed persons where the business or professional activity is conducted at the
taxpayer’s residence. Reasonable overtime meal and travel allowances form part of
assessable income. The allowance is then claimed as a deductible work expense.
(Source: Baker, Cliff & Deaner, 2015 pp.248)

Here is a worked example:

Sarah is a self-employed graphic designer who has recently completed a project for a client in a
different city. She incurred the following travel expenses:

• Flights: $500
• Accommodation: $800

• Meals: $300
• Taxi fares: $100
• Public transport: $50
Sarah uses her car for work purposes but did not use it on this occasion as she travelled by
plane. Therefore, there are no car-related expenses to claim.
To claim these expenses as deductions on her tax return, Sarah must ensure that the expenses
are directly related to her income-earning activities and that they are not private or domestic in
nature.
Assuming that Sarah has earned $80,000 in assessable income for the year and has no other
deductions or exemptions, her taxable income before the deduction of travelling expenses would
be $80,000.
Sarah's travelling expenses are a total of $1,750, which can be claimed as a deduction against
her assessable income. Therefore, her taxable income after the deduction of travelling expenses
would be $78,250.
Based on the current tax rates for the 2022-23 financial year, Sarah's tax liability would be
calculated as follows:
$18,200 x 0% = $0

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($45,000 - $18,200) x 19% = $5,330
($87,000 - $45,000) x 32.5% = $14,950
($78,250 - $87,000) x 37% = -$3,238 (tax refund)
Sarah's total tax liability would be $16,042, but with the tax refund of $3,238, her net tax payable
would be $12,804.
Note that this is a simplified example and does not take into account other factors that may affect
Sarah's tax liability, such as other deductions or exemptions, and any tax offsets or rebates she
may be eligible for.

Self-education expenses
Self-education expenses incurred by a taxpayer including course fees, travel expenses,
photocopying, stationery, textbooks, depreciation on computer equipment may be
allowable as deductions. Guidelines are as follows:
• Expenses incurred in short-term refresher course are fully deductible.
• Where a new or additional qualification is undertaken providing there is a
connection between the taxpayer’s current profession, occupation, trade, or
business which results in an increase in skills and knowledge and income then the
expenses will be deductible.
• Motor vehicle expenses incurred in travelling between home to an educational
institution are deductible expenses. If a taxpayer travels from home to college and
then to work, a deduction is only available for the trip from home to college.
• Self-education expenses do not include help charges. Under s82a of the ITAA36,
the first $250 of self-education expenses does not qualify as a deduction.
(Source: Baker, Cliff & Deaner, 2015 pp. 249-250)

Here is an example:

John is a full-time employee who works as an accountant in a private firm. He has decided to
complete a short course on tax accounting to enhance his skills and knowledge. The course fees
cost $2,000 and he also purchased textbooks and other materials for $500.
To claim these expenses as deductions on his tax return, John must ensure that the expenses
are directly related to his current employment and that they are not private or domestic in nature.
Assuming John has earned $70,000 in assessable income for the year and has no other
deductions or exemptions, his taxable income before the deduction of self-education expenses
would be $70,000.
John's self-education expenses are a total of $2,500, which can be claimed as a deduction
against his assessable income. However, there are some limitations to the amount of self-
education expenses that can be claimed as deductions. For individuals who are employees,
such as John, the first $250 of self-education expenses are not deductible, and the remaining
expenses can only be claimed if they meet certain criteria, such as being sufficiently connected
to the individual's current employment.

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Assuming that John meets these criteria, he can claim a deduction of $2,250 ($2,500 - $250) on
his tax return. Therefore, his taxable income after the deduction of self-education expenses
would be $67,750.
Based on the current tax rates for the 2022-23 financial year, John's tax liability would be
calculated as follows:
$18,200 x 0% = $0
($45,000 - $18,200) x 19% = $5,330
($87,000 - $45,000) x 32.5% = $14,950
($67,750 - $87,000) x 37% = -$7,168 (tax refund)
John's total tax liability would be $12,112, but with the tax refund of $7,168, his net tax payable
would be $4,944.
Note that this is a simplified example and does not take into account other factors that may affect
John's tax liability, such as other deductions or exemptions, and any tax offsets or rebates he
may be eligible for.

Home Office Expenses

Where a taxpayer carries on a business from their home, home office expenses are
deductible under s8.1(1) of the ITAA97. Expenses can be apportioned according to floor
space as follows:
Relevant expenditure = Floor area of room/workshop
Total floor area
The same formula can be used to determine other types of occupancy expenses e.g.,
rent, home loan interest, insurance, repairs, rates, water charges and land tax. Expenses
such as heating power and lighting expenses, telephone expenses, internet expenses are
deductible to the extent that their cost relates exclusively to the business home office.
Other expenses including depreciation of equipment, fixtures and fittings and furniture are
deductible.
(Source: Baker, Cliff & Deaner, 2015 p.252)

Here is an example:

Harpreet is a freelance graphic designer who works from home. She has a dedicated home
office where she works for 8 hours a day, 5 days a week. Harpreet uses her personal computer,
printer, and phone for her work. She has also incurred expenses on electricity, internet, and
office supplies.
To claim these expenses as deductions on her tax return, Harpreet must ensure that the
expenses are directly related to her work as a graphic designer and that they are not private or
domestic in nature.
Assuming that Harpreet has earned $80,000 in assessable income for the year and has no other
deductions or exemptions, her taxable income before the deduction of home office expenses
would be $80,000.
Harpreet's home office expenses include:
• Electricity bills: $1,200 for the year

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• Internet bills: $720 for the year

• Office supplies: $400 for the year

• Depreciation of computer and printer: $700 for the year

• Phone bills: $480 for the year

Harpreet can claim a portion of these expenses as deductions based on the proportion of her
home office space to the total area of her home. Assuming that her home office space is 10% of
the total area of her home, Harpreet can claim 10% of each of these expenses as deductions.
Therefore, her total home office expenses that can be claimed as deductions would be:
• Electricity bills: $120 (10% of $1,200)

• Internet bills: $72 (10% of $720)

• Office supplies: $40 (10% of $400)

• Depreciation of computer and printer: $70 (10% of $700)

• Phone bills: $48 (10% of $480)
Harpreet's total deductible home office expenses would be $350.
Assuming that Harpreet meets all the criteria for claiming these expenses as deductions, she
can claim a deduction of $350 against her assessable income. Therefore, her taxable income
after the deduction of home office expenses would be $79,650.
Based on the current tax rates for the 2022-23 financial year, Harpreet's tax liability would be
calculated as follows:
$18,200 x 0% = $0
($45,000 - $18,200) x 19% = $5,330
($120,000 - $45,000) x 32.5% = $31,625
($79,650 - $120,000) x 37% = -$14,743 (tax refund)
Harpreet's total tax liability would be $22,212, but with the tax refund of $14,743, her net tax
payable would be $7,469.
Note that this is a simplified example and does not take into account other factors that may affect
Harpreet's tax liability, such as other deductions or exemptions, and any tax offsets or rebates
she may be eligible for

Motor Vehicle Expenses

Motor vehicle expenses incurred while deriving assessable income are deductible (s8.1(1)
ITAA97). Under s28.13(1) a car expense is considered a loss or outgoing.
These include:

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• Petrol

• Oil
• Repairs

• New tyres
• Lease charges
• Interest on a car loan

• Depreciation
• Car washes
• Registration
• Insurance
• Road assistance membership
The cost of a driver’s licence is not deductible however car parking, road tolls and car hire
expenses are deductible as travel expenses.
(Source: Income Tax Assessment Act (1997))

Section 28.15 of the ITAA97 sets out the different methods of claiming car expenses.
These methods are as follows:

• Logbook method (s28-90 to s28-100 of the ITAA97). Where a motor vehicle is used for business
purposes a log book must be kept for a continuous period or for at least twelve (12) weeks in
the first year and then every five (5) years to determine the use percentage. Written evidence
must be kept for all expenses and odometer readings.

• ⅓ actual car expenses method. Written evidence must be provided for all expenses and total
kilometres travelled.

• 12% of original value method (s28.70 to s28.80 ITAA97). A record of cost of the vehicle must
be kept and an estimate of kilometres travelled.
• Cents per kilometre method (s28.25 to s28.35 of the ITAA97). The cents per kilometre method
applies a set rate per kilometre up a maximum of 5,000 kilometres travelled. The cost per
kilometre is based on the car’s engine capacity and is set out in Schedule 1 of the Income Tax
Assessment Regulations 1997 (Cth).
Where kilometres travelled are less than 5,000 the two (2) methods to be used are the log book
method and the cents per kilometre method.
(Source: Income Tax Assessment Regulations (1997))

Here is a worked example:

Billy is a self-employed plumber who uses his motor vehicle for work-related purposes in Australia. In
the 2022-2023 financial year, he incurs the following motor vehicle expenses:

• Fuel expenses: $4,000

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• Registration and insurance expenses: $1,200

• Maintenance and repairs: $2,000

• Depreciation of the vehicle: $5,000

• Interest on the car loan: $1,500

Billy has kept accurate records of his motor vehicle expenses and can substantiate his claims.
Calculation of Deductions:

• Fuel expenses: Billy can claim a deduction for the portion of his fuel expenses that are
incurred for work-related purposes. He estimates that 70% of his fuel expenses relate to his
work-related travel. Therefore, his deduction for fuel expenses is $2,800 (70% x $4,000).

• Registration and insurance expenses: Billy can claim a deduction for the full amount of his
registration and insurance expenses as they are used exclusively for his business.
• Maintenance and repairs: Billy can claim a deduction for the portion of his maintenance and
repairs expenses that are incurred for work-related purposes. He estimates that 50% of his
maintenance and repairs expenses relate to his work-related travel. Therefore, his deduction
for maintenance and repairs expenses is $1,000 (50% x $2,000).
• Depreciation of the vehicle: Billy can claim a deduction for the depreciation of his vehicle
based on the business-use percentage of the vehicle. He uses his vehicle 60% of the time for
work-related travel. Therefore, his deduction for depreciation is $3,000 (60% x $5,000).
• Interest on the car loan: Billy can claim a deduction for the portion of the interest on his car
loan that is incurred for work-related purposes. He estimates that 40% of the interest relates to
his work-related travel. Therefore, his deduction for interest on the car loan is $600 (40% x
$1,500).
Total Deductions: $8,600 ($2,800 + $1,200 + $1,000 + $3,000 + $600)
Calculation of Tax Payable:
Assuming that Billy has no other business expenses or income, and that he is in the 32.5% tax bracket,
his tax payable for the 2022-2023 financial year is calculated as follows:

• Taxable Income: $100,000 (assumed)

• Less Deductions: $8,600
• Taxable Income after Deductions: $91,400

• Tax Payable: $22,938 (32.5% x $70,790)

Therefore, Billy's tax payable for the 2022-2023 financial year would be $22,938.

Prepaid Expenses
A prepaid expense is expenditure incurred for things to be done under an agreement in
whole or in part in a later income year. If expenditure is incurred for something to be done
in full in the same year it is not a prepaid expense to which the prepayment rules apply.
As a rule, prepaid expenditure must be apportioned over the period in which the relevant
service was provided.
The following expenses are excluded from the prepaid expenditure rules and are fully
deductible in the year incurred as follows:

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• Amounts less than $1,000

• Payments under a contract of service e.g., Wages or salary
• Amounts required to be paid by court order or government legislation
• Amounts that are private, capital, or domestic in nature
A twelve (12) month rule allows an immediate deduction for prepayments where:
• Payment is incurred for a period of service not exceeding twelve (12) months
• The period of service ends in the next income year
Where the twelve (12) month rule is not satisfied deductible prepaid non-business,
expenditure must be claimed proportionately over each income year containing all or part
of the eligible service period or over ten (10) years whichever is less. The formula for
calculating the prepaid expenditure deduction is as follows:
Expenditure x Days in the eligible service period in the income year
Total days in the eligible service period

Scenario
Josie owns a rental property. On 31 October 2021 she made an interest only payment of $15,000 in
relation to her loan used to finance purchase of that property. Her payment covers the period 1
November 2021 to 1 February 2022. Calculate her pre-paid expenses deductions for the relevant
financial years.
Calculations
Based on the information provided, the relevant financial years for this pre-payment are the 2021-2022
and 2022-2023 financial years in Australia.
To calculate the deductible portion of the interest payment for each year, Josie needs to apportion the
payment based on the number of days it covers in each financial year.
Step 1: Determine the number of days the payment covers in each financial year.
2021-2022 financial year: The payment covers the period from 1 November 2021 to 30 June 2022,
which is 242 days.
2022-2023 financial year: The payment covers the period from 1 July 2022 to 1 February 2023, which
is 216 days.
Step 2: Calculate the deductible portion of the payment for each financial year.
2021-2022 financial year: Josie can claim a deduction for the portion of the payment that relates to the
242 days in this financial year. This is calculated as:
$15,000 x (242/365) = $9,967.12
2022-2023 financial year: Josie can claim a deduction for the portion of the payment that relates to the
216 days in this financial year. This is calculated as:
$15,000 x (216/365) = $8,876.71
Therefore, Josie's pre-paid expenses deductions for the relevant financial years are $9,967.12 for the
2021-2022 financial year and $8,876.71 for the 2022-2023 financial year.

Specific deductions

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In Australian taxation law, specific deductions refer to expenses that are incurred by an
individual or business that are directly related to the earning of income. These expenses
can be deducted from the income earned to reduce the taxable income and ultimately
reduce the amount of tax payable.
Specific deductions are different from general deductions, which are expenses that are
indirectly related to the earning of income, such as home office expenses, motor vehicle
expenses, or travel expenses. Specific deductions are expenses that are unique to the
individual's income-earning activities.
Some examples of specific deductions in Australia include:
• Work-related clothing and uniforms
• Tools and equipment used for work
• Professional memberships and subscriptions
• Self-education expenses directly related to the individual's current work activities
• Income protection insurance premiums
• Legal expenses incurred to protect employment income
To be eligible for specific deductions, the expense must be incurred while earning
assessable income, and there must be a clear connection between the expense and the
individual's income-earning activities. The expense must also be supported by appropriate
documentation such as receipts or invoices.
It is important to note that not all expenses incurred while earning income are deductible.
Expenses that are considered private or domestic in nature, such as personal grooming
expenses or private travel expenses, are not deductible.
Overall, understanding the concept of specific deductions is important for individuals and
businesses in Australia to ensure they are correctly claiming all allowable deductions and
reducing their tax liability as much as possible.
Specific expenses set out in s25.5 to s26.35 and Division 30 of the ITAA97 are allowed as
a deduction and include:

• Tax-related expenses
• Repairs
• Lease document expenses
• Borrowing expenses
• Discharge of mortgage expenses
• Bad debts
• Loss through theft or embezzlement of employees
• Subscriptions to associations
• Election expenses
(Source: Income Tax Assessment Act(1997))

Section 25.5 of the ITAA97 allows a deduction for expenditure incurred in the
administration and management of a taxpayer’s income tax affairs, e.g. tax agent’s fees,

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fees for advice on tax matters, cost of preparing and lodging objections and payment of
interest on late or underpayments of tax.
Section 25.10 of the ITAA97 allows a deduction for expenses incurred in carrying out
repairs to any premises, plant, tool, or equipment used or held to produce assessable
income. Capital repairs such as replacement of an asset are not deductible. Section 25.25
of the ITAA97 allows a deduction for expenses incurred in borrowing money to be used to
produce income. Expenses that are less than $100 are deducted in the year of income
while expenses of more than $100 must be apportioned over the life of the loan up to a
maximum of five (5) years.
Under s25.35 of the ITAA97, only actual bad debts are allowed as a deduction. Under
s25.45 of the ITAA97, losses incurred through theft or embezzlement by an employee are
deductible. Other losses by non-employees are deductible under s8.1(1) of the ITAA97.
Legal expenses incurred by a business in borrowing money, discharging mortgages and
preparation of leases are deductible under ss25.20, 25.25 and 25.30 of the ITAA97.
(Source: Income Tax Assessment Act (1997))
Gifts and donations are allowable deductions under Division 30 of the ITAA97. A gift must
meet four conditions:
• The gift must be made to a deductible gift recipient
• The gift must truly be a gift, e.g., a voluntary transfer of money or property that you
receive no material benefit or advantage for
• The gift must be covered by one of the gift types. To be deductible, a gift must be
money or property covered by one of the following gift types:
o Money of $2 or more
o Property (including listed shares) the Australian valuation office has valued
at more than $5,000
o Property (including listed shares) purchased during the 12 months before
the gift was made, irrespective of their value
o Listed shares with a market value of $5,000 or less on the day you made
the gift that you acquired at least 12 months before the gift was made
o Trading stock disposed of outside the ordinary course of business
o Property gifted under the cultural gifts program
o Property gifted under the cultural bequests program
o Places included in the national heritage list, commonwealth heritage list,
register of the national estate
o The gift must comply with any relevant gift conditions, e.g. the gift may only
be deductible between certain dates or for a specific use
(Source: Australian Taxation Office ( 2018))

Under s280.10 of the ITAA97 superannuation contributions are deductible. Since 1 July
2007, self-employed taxpayers under seventy-five (75) years of age are entitled to claim a
full deduction for contributions made to a complying superannuation fund. Under s290.10

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to be eligible less than 10% of total assessable income including fringe benefits must be
derived from employment as an employee.
Employers can claim a full deduction for all superannuation contributions made to
complying superannuation funds on behalf of eligible employees under s290.60 of the
ITAA97. Employees can only claim for contributions made in respect of themselves if less
than 10% of their total assessable income including fringe benefits for the income year is
attributable to employment or similar activities.
(Source: Income Tax Assessment Act (1997))
Here is an example:

Robyn's tax return for the 2021-2022 financial year shows the following details:

• Total income earned: $80,000

• Gifts donated to registered charities: $1,000
• Personal superannuation contributions made: $5,000

• Accounting fees paid: $1,500

To calculate Robyn's taxable income and tax payable, we need to subtract her deductions from her
total income:
• Total Income: $80,000
• Less deductions:
o Gifts donated to registered charities: $1,000
o Personal superannuation contributions made: $5,000
o Accounting fees paid: $1,500
• Taxable Income: $72,500
Using the Australian Taxation Office's tax rates and thresholds for the 2021-2022 financial year,
Robyn's tax payable is calculated as follows:
$0 – $18,200: 0% tax = $0
$18,201 – $45,000: 19% tax on income over $18,200 = $5,092
$45,001 – $120,000: 32.5% tax on income over $45,000 = $9,163.75
Total Tax Payable: $14,255.75
Therefore, Robyn's tax payable for the 2021-2022 financial year is $14,255.75.
It's worth noting superannuation contributions are subject to annual limits, and any amount
contributed above the limit may attract additional tax. In addition, gifts donated to registered charities
are subject to specific rules and conditions in order to be tax-deductible. Robyn should ensure that
she meets all relevant requirements and keeps accurate records of her deductions in case of an audit
by the Australian Taxation Office

Substantiation requirements
Under s900.15 of the ITAA97 to claim a work expense as a deduction, it must be
substantiated by written evidence. Under s900.30(1) of the ITAA97, a work expense is an
expense incurred by a taxpayer in producing wages or salaries, e.g. expenditure on

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protective clothing, uniforms, tools, depreciation of property used to produce assessable

income, subscriptions to business/trade unions or journals. An employee is entitled to a
deduction for any expenses actually incurred even if the amount claimed exceeds the
allowance, e.g., $600 travel allowance and $800 travel expenses were incurred.
Under s900.115 written evidence includes a receipt, invoice or similar source document
that contains:

• Name (or business name) of the supplier

• Amount of the expense or cost of the asset
• Nature of the goods, services, or asset
• Date the expense was incurred, or asset was acquired
• Date of the document
(Source: Australian Taxation Office (2018))

A document may be in written or in electronic format and includes:

• bank and other financial institution statements
• credit card statements
• BPay reference numbers, often also called receipt or transaction numbers
• email receipts
• your PAYG payment summary - individual non-business; this may show, for
example, your total union fees
• paper or electronic copies of documents - these must be a true and clear
reproduction of the original
• evidence you have recorded yourself, usually in a diary, for expenses of $10 each
or less, including tolls or car parks where you cannot get a receipt, providing the
total of these expenses is not more than $200
(Source: Australian Taxation Office (2018))

Here are examples in accordance with the Income Tax Assessment Act 1997:

Expense Substantiated written evidence

Work-related car expenses Logbook detailing all business-related journeys, fuel receipts, and
car maintenance records

Travel expenses Receipts or invoices for airfares, accommodation, meals, and

other travel-related expenses

Home office expenses Receipts for home office equipment, utility bills, and internet and
phone bills

Self-education expenses Receipts or invoices for course fees, textbooks, and other
learning materials

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Expense Substantiated written evidence

Work-related uniform Receipts or invoices for uniform purchase or cleaning

expenses

Donations to registered Receipts or written acknowledgements from the charity

charities

Investment property Invoices or receipts for maintenance and repairs, interest on

expenses loans, and property management fees

Professional membership Receipts or invoices for membership fees paid to professional

fees associations or unions

Income protection insurance Receipts or invoices for insurance premiums paid

premiums

Legal expenses incurred to Invoices or receipts for legal fees incurred in employment
protect employment income disputes or other work-related legal matters

It's important to note that the substantiated written evidence requirements may vary
depending on the specific expense and the amount claimed. Taxpayers should refer to the
Australian Taxation Office website or consult with a registered tax agent for more
information on substantiation requirements.
Under the Income Tax Assessment Act 1997 (ITAA97), taxpayers are generally required
to keep documentary evidence to support their claims for work-related expenses.
However, there are some exceptions to this requirement.
One such exception is found in section 900-15 of the ITAA97, which states that the
requirement to obtain documentary evidence in a year of income for work expenses does
not apply where the total amount of those expenses is $300 or less. In other words, if a
taxpayer's total work-related expenses for the year are $300 or less, they do not need to
keep written evidence to support their claims.
It's important to note that even if a taxpayer is not required to keep written evidence for
their work-related expenses, they still need to have incurred the expenses in the course of
their employment, and the expenses must be directly related to earning their income.
Additionally, the taxpayer must be able to explain and justify the basis for their claims if
requested to do so by the Australian Taxation Office (ATO).
In addition to the $300 threshold, there are also other circumstances where the
requirement to keep written evidence may not apply, such as where the expenses were
incurred while the taxpayer was travelling away from home overnight for work, or where
the expenses were for certain items like protective clothing or uniforms. However, in these
cases, the taxpayer is still required to be able to demonstrate that the expenses were
incurred and directly related to their employment.
Retaining records
All other documentary evidence must be retained by the taxpayer and kept for five (5)
years from the date of lodgement of the tax return in which the claim was made. Where a

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taxpayer is engaged in business all documentary evidence must be retained for five (5)
years (s900.25(1) ITAA97).

Type of expense Documentary evidence required Applicable timeframe

Car expenses Receipts, logbook 5 years from the due date of the tax return

Travel expenses Receipts, itinerary, diary 5 years from the due date of the tax return

Uniform and Receipts, photos, diary 5 years from the due date of the tax return
protective clothing

Self-education Receipts, course materials, 5 years from the due date of the tax return
Expenses invoices, diary

Donations Receipts, bank statements, 5 years from the due date of the tax return
written evidence from the
recipient

Rental property Receipts, bank statements, 5 years from the due date of the tax return
expenses invoices, rental statements

Other work-related Receipts, invoices, diary 5 years from the due date of the tax return
expenses

Capital Gains Tax Contracts, valuations, receipts, 5 years from the due date of the tax return
(CGT) Events diary in which the CGT event occurred

Foreign income Foreign tax returns, receipts, 5 years from the due date of the tax return
invoices, bank statements

Substantiation records are not required to be lodged with the tax return. The ATO can
require the taxpayer to produce records within twenty-eight (28) days although additional
time may be allowed.
If deductions cannot be substantiated by the production of documentary evidence, upon
the Commissioner’s request the ATO may:
▪ Disallow the deduction for the expense claimed
▪ Impose penalties for incorrect claims

8. Tax offsets
Personal Tax Offsets
In Australia, a personal tax offset, also known as a tax credit, is a reduction in the amount
of income tax payable by an individual. Personal tax offsets are designed to provide
targeted tax relief to low-income earners, families, and individuals with specific
circumstances such as disability or illness.

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The purpose of personal tax offsets is to provide targeted tax relief to individuals who may
be struggling financially due to their circumstances. The government provides these
offsets to help ease the financial burden of specific expenses or situations. Personal tax
offsets can also provide an incentive for individuals to make certain types of investments,
such as superannuation contributions.
There are several types of personal tax offsets available in Australia, including:
• Low-income tax offset: This offset is available to individuals with an income of
less than $66,667. The offset is calculated as 20% of the amount of tax payable,
up to a maximum offset of $700.
• Senior Australians and pensioners tax offset: This offset is available to seniors
and pensioners with an income of less than $32,279 for singles and $28,179 for
each member of a couple. The offset amount varies depending on the individual's
income and circumstances.
• Offset for medical expenses: This offset is available to individuals who have
incurred out-of-pocket medical expenses above a certain threshold. The offset is
calculated as 20% of the amount of expenses over the threshold.
The calculation of personal tax offsets varies depending on the type of offset claimed.
Some offsets are calculated as a percentage of the tax payable, while others are
calculated based on specific expenses incurred by the taxpayer. The amount of the offset
is subtracted from the taxpayer's total tax payable, reducing the final amount of tax owed.
Dependants
In Australia, tax offsets are available to taxpayers who have dependents. A dependent is
defined as someone who relies on the taxpayer for financial support, and this relationship
can provide tax benefits to the taxpayer. There are different classifications of dependents,
each with specific eligibility requirements and tax benefits.
The main classifications of dependents in Australia are:
• Child Dependent: A child under the age of 18 or a full-time student aged between
18-24 who is financially dependent on the taxpayer.
• Spouse Dependent: A spouse or de facto partner who is financially dependent on
the taxpayer.
• Invalid and Carer Dependent: A person who is unable to work due to a physical
or mental impairment, and who is financially dependent on the taxpayer.
• Parent or Parent-in-Law Dependent: A parent or parent-in-law who is financially
dependent on the taxpayer.
The eligibility criteria for each classification of dependent vary, but generally, the
dependent must be a resident of Australia and meet certain requirements related to age,
income, and relationship to the taxpayer.
When a taxpayer has a dependent, they may be eligible for a range of tax offsets and
benefits, including:
• Dependant Tax Offset: This offset is available to taxpayers who have a spouse or
child dependent, and the amount varies depending on the dependent's

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circumstances and the taxpayer's income.

• Parent Tax Offset: This offset is available to taxpayers who provide financial
support to their elderly parents, and the amount varies depending on the
dependent's circumstances and the taxpayer's income.
• Carer Tax Offset: This offset is available to taxpayers who provide care and
support to a dependent who has a physical or mental disability, and the amount
varies depending on the dependent's circumstances and the taxpayer's income.
Here is an example:

Mary is a single mother with three children under the age of 18. She earned a taxable income of
$55,000 for the financial year 2021-2022. Mary is eligible for the Child Tax Offset, which is a tax offset
available to taxpayers who have a child dependent.
The Child Tax Offset is calculated as a percentage of the taxpayer's income, and the percentage varies
depending on the number of eligible children the taxpayer has. For Mary, with three eligible children,
the percentage of her income used to calculate the offset is 10%.
Mary's income for the year was $55,000. Her Child Tax Offset would be calculated as follows:
10% x $55,000 = $5,500
Mary's Child Tax Offset for the year is $5,500. This offset is used to reduce the amount of tax Mary
owes to the Australian Taxation Office (ATO).
Mary's taxable income of $55,000 is subject to marginal tax rates, which are rates that increase with
increasing levels of income. For the 2021-2022 financial year, the marginal tax rates in Australia for
residents are as follows:
Up to $18,200 - no tax payable
$18,201 to $45,000 - 19 cents for each $1 over $18,200
$45,001 to $120,000 - $5,092 plus 32.5 cents for each $1 over $45,000
$120,001 to $180,000 - $29,467 plus 37 cents for each $1 over $120,000
$180,001 and over - $51,667 plus 45 cents for each $1 over $180,000
Mary's taxable income of $55,000 falls into the second marginal tax rate bracket, which means she
owes 19 cents for each dollar of taxable income over $18,200 up to $45,000. This translates to:
($45,000 - $18,200) x 19% = $5,131
Mary's tax liability for the year is $5,131, but her Child Tax Offset of $5,500 can be used to reduce this
amount. Therefore, Mary's final tax payable for the year is $0, and she will be eligible for a tax refund of
$369.
It's important to note that this is a hypothetical scenario, and the calculations used are for illustrative
purposes only. The actual tax liability and offset amounts may vary depending on individual
circumstances and other factors that may apply.

Determining eligibility for tax offsets

Eligibility for a dependant tax offset is income tested according to the “income limit for
family assistance purposes”.

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This income testing is based on the adjusted taxable income (ATI) of the taxpayer where
the offset is claimed in respect of a spouse, or the combined ATI of the taxpayer and the
taxpayer’s spouse where it is claimed in respect of any other class of dependant.
(Source: Baker, Cliff & Deaner, 2015 p.361)

As of the 2021-2022 financial year, the ATI threshold for income testing for tax offsets in
Australia is $55,270 for individuals, and $98,000 for families (where the family's adjusted
taxable income includes the income of the individual, their spouse or de facto partner, and
any dependent children).
It's worth noting that different tax offsets may have different income test thresholds, and
these thresholds can change from year to year.
ATI includes:
• Taxable income, adjusted fringe benefits (reportable fringe benefits amount x
.535), tax-free pensions or benefits, target foreign income, reportable
superannuation contributions, total net investment losses less deductible child
maintenance expenditure.
Maximum dependent tax offsets for 2021 - 2022 are as follows:

Type of dependant Maximum tax offset Ati cut-out threshold

Spouse or De facto Partner $540 $40,000

Child under 18 $2,745 $55,270

Child 18-24 and in full-time education $2,745 $59,538

Child 18 or older with a permanent disability $3,747 $59,538

Other Dependant $2,265 $38,474

Note: The ATI cut-out threshold refers to the Adjusted Taxable Income at which the
maximum tax offset is reduced to $0. The cut-out thresholds may vary depending on the
specific tax offset and financial year. It's important to consult the Australian Taxation
Office (ATO) for the latest information and eligibility criteria.
Here is an example:

Max has a child with a permanent disability who is over 18 years old and financially dependent on him.
In the 2021-2022 financial year, the maximum tax offset for a child with a permanent disability is
$3,747.
Max's Adjusted Taxable Income (ATI) for the financial year is $55,000.
To calculate Max's tax offset for his child with a disability, we can use the following formula:
Tax Offset = Minimum of (Maximum Tax Offset, ATI - Cut-Out Threshold) × 15%
In Max's case, the maximum tax offset is $3,747, and the ATI cut-out threshold for this tax offset is
$59,538. Since Max's ATI is below this threshold, we can use his full ATI to calculate the tax offset:
Tax Offset = Minimum of ($3,747, $55,000 - $59,538) × 15%

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= Minimum of ($3,747, -$4,538) × 15%
= $0
Since Max's ATI is below the cut-out threshold, he is eligible for the full tax offset of $3,747. This tax
offset will directly reduce the amount of tax he owes.
Assuming Max has no other tax offsets or deductions and using the tax rates for the 2021-2022
financial year, his taxable income is $51,253. This means he will owe $8,422 in tax.
However, with the tax offset of $3,747 for his child with a disability, Max's tax liability is reduced to
$4,675.
It's worth noting this is a hypothetical scenario, and the actual tax liability for an individual may vary
depending on their specific circumstances and other tax offsets and deductions they may be eligible for

Here are 5 URLs with more information on different types of income tests and how they
are used to assess tax offsets for individuals in Australia:
Australian Taxation Office - Income tests for government benefits:
https://www.ato.gov.au/Individuals/Centrelink-Child-Support-and-Medicare/Income-
and-assets-tests/Income-tests-for-government-benefits/
Australian Government Department of Human Services - Income tests:
https://www.humanservices.gov.au/individuals/enablers/income-tests
Australian Taxation Office - Eligibility for tax offsets:
https://www.ato.gov.au/Individuals/Income-and-deductions/Offsets-and-rebates/Tax-
offsets/
Australian Government Department of Social Services - Family Tax Benefit:
https://www.servicesaustralia.gov.au/individuals/services/centrelink/family-tax-benefit
Australian Taxation Office - Senior Australians and pensioners tax offset:
https://www.ato.gov.au/Individuals/Seniors-and-retirees/Senior-Australians-and-
pensioners---tax-offset/

Other Offsets

Pensioner tax offset

Where a taxpayer is in receipt of a veteran’s affairs or age pension, they may be eligible
for a pensioner tax offset (s160AAA (1) ITAA36). The tax offset is not available where a
taxpayer receives the Senior Australians tax offset (SATO).
The maximum pension tax offsets for 2022-2023 are set out below:

Type of pensioner Maximum tax Phase-out Cut-out rebate

offset threshold threshold

Single senior Australians and pensioners $2,375 $35,980 $54,929

Married/Defacto/Couple Separated due to $4,510 $60,081 $89,471

Illness Senior Australians and Pensioners
(combined)

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Type of pensioner Maximum tax Phase-out Cut-out rebate

offset threshold threshold

Single Self-funded Retirees $1,515 $35,980 $42,279

Married/Defacto/Couple Separated due to $2,540 $60,081 $84,472

Illness Self-funded Retirees (combined)

Single Invalid and Invalid Carer $750 $35,980 $37,229

Married/Defacto/Couple Separated due to $1,500 $60,081 $74,601

Illness Invalid and Invalid Carer (combined)

The term “rebate income” is now used instead of “taxable income” when determining
eligibility for a pensioner tax offset. Rebate income consists of the following amounts:
• Taxable income
• Adjusted fringe benefits
• Total net investment losses
• Reportable superannuation contributions
Here is an example:

Scenario
Joan receives the old age pension. She is single and her rebate income is $35,000. Calculate the
pensioner tax offset.
Workings
Based on the current tax laws in Australia for the 2022-2023 financial year, Joan may be eligible for
the maximum pensioner tax offset of $2,375 since she is a single senior Australian or pensioner with
a rebate income of $35,000 which is below the phase-out threshold of $35,980.
However, it's important to note that there may be other factors that could affect Joan's eligibility for
the pensioner tax offset, such as her residency status, her assets, and her other sources of income.

Beneficiary tax offset

The beneficiary tax offset is available to taxpayers who receive certain Centrelink benefits
and Commonwealth education allowances. Generally, you pay no tax if your only income
is a qualifying benefit or allowance. If you are not in receipt of the full amount of any
qualifying benefits and allowances or have other taxable income you may be eligible for a
partial offset.
(Source: Australian Taxation Office (2018))
Recipients of allowances such as Newstart, youth, Austudy, sickness, partner and special
benefits may be eligible for a beneficiary tax offset (s160AA ITAA36). The current formula
for calculating the beneficiary tax offset in Australia is:
Beneficiary tax offset = (rebate income - base amount) x 15% where:
• "rebate income" is the total amount of income received as a beneficiary for the
financial year

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• "base amount" is the maximum amount of income a person can earn before the
tax offset starts to reduce. As of the 2021-2022 financial year, the base amount is
$32,279 for single individuals and $28,974 for each member of a couple
• "15%" is the current tax offset rate for beneficiaries
If the result of this calculation is less than zero, the beneficiary tax offset is zero. If the
result is greater than the maximum tax offset amount (which varies depending on the type
of benefit and the person's circumstances), the beneficiary tax offset is capped at the
maximum amount.
Here is an example:

Scenario
Justin receives $39,000 Rebatable income in 2022 as a sickness benefit. Calculate his
beneficiary tax offset for 2022-2023.
Workings
Based on the current tax laws in Australia for the 2022-2023 financial year, Justin may be
eligible for the maximum beneficiary tax offset of $540 since his Rebate Income of $39,000 is
below the phase-out threshold of $43,999.
The calculation for Justin's beneficiary tax offset would be:
Beneficiary tax offset = ($0.20 x Rebate Income) - $2,574
Beneficiary tax offset = ($0.20 x $39,000) - $2,574
Beneficiary tax offset = $7,800 - $2,574
Beneficiary tax offset = $5,226
However, since the maximum beneficiary tax offset is $540, Justin would receive $540 as his
beneficiary tax offset.
It's important to note that there may be other factors that could affect Justin's eligibility for the
beneficiary tax offset, such as his residency status and his other sources of income.

Mature age offset

The Mature Age Worker Tax Offset (MAWTO) was introduced in Australia in 2004 as an
initiative to encourage mature age workers to stay in the workforce. The offset was
designed to provide a tax concession to eligible taxpayers who were over the age of 55
and had income from working.
The offset was initially introduced with a maximum amount of $500 per year, but this
increased to $1,000 per year in 2006. It was abolished by the Australian government in
2014 as part of a range of measures aimed at cutting government spending.
Superannuation tax offset
The superannuation tax offset in Australia is a tax benefit available to low- and middle-
income earners who make voluntary after-tax contributions to their superannuation fund.
This offset is also known as the Government co-contribution.
To be eligible for the superannuation tax offset, a person must have made voluntary after-
tax contributions to their superannuation fund and have an adjusted taxable income of

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$41,112 or less in the 2021-2022 financial year. The amount of the offset is calculated
based on the amount of after-tax contributions made and the person's income.
For those with an adjusted taxable income of less than $41,112, the maximum offset is
$500 for the 2021-2022 financial year. The offset gradually reduces as income increases,
phasing out completely for those with an adjusted taxable income of $56,112 or more.
It is important to note that the superannuation tax offset is not available for people who
have exceeded their non-concessional contributions cap, have not lodged their tax return,
or have not provided their superannuation fund with their tax file number.
The superannuation tax offset was introduced in 2003 as part of the Simplified
Superannuation reforms and has been subject to various changes since then. The offset
was temporarily reduced in 2012-2013 and 2013-2014 before being reinstated in its
current form in 2014. It is still in effect in Australia as of 2023.
Private health insurance tax offset
The private health insurance tax offset is a financial incentive provided by the Australian
government to encourage individuals to take out and maintain private health insurance. It
is available to Australian residents who have a complying health insurance policy with a
registered health insurer.
The amount of the offset is determined by the individual's income level and their age, as
well as the level of cover they have under their health insurance policy. The higher the
income level, the lower the offset.
Here is a table outlining the tier thresholds for the private health insurance tax offset in
2022-2023:

Tier Single income threshold Family income threshold

1 $90,000 $180,000

2 $90,001 - $105,000 $180,001 - $210,000

3 $105,001 - $140,000 $210,001 - $280,000

4 $140,001 or more $280,001 or more

If you have a single income below the threshold for Tier 1, you are eligible for a 25.059%
rebate on your private health insurance premiums. If you have a single income between
the thresholds for Tier 1 and Tier 2, the rebate gradually reduces from 25.059% to
16.706%. For those with a single income between the thresholds for Tier 2 and Tier 3, the
rebate gradually reduces from 16.706% to 8.352%. Finally, if your single income is above
the threshold for Tier 4, you are not eligible for the private health insurance rebate.
If you have a family income below the threshold for Tier 1, you are eligible for a 33.413%
rebate on your private health insurance premiums. If you have a family income between
the thresholds for Tier 1 and Tier 2, the rebate gradually reduces from 33.413% to
22.275%. For those with a family income between the thresholds for Tier 2 and Tier 3, the
rebate gradually reduces from 22.275% to 11.137%. Finally, if your family income is
above the threshold for Tier 4, you are not eligible for the private health insurance rebate.

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Medical expenses
The medical expenses tax offset (METO) is a tax offset that is available to Australian
taxpayers who have incurred a significant amount of out-of-pocket medical expenses. It is
designed to provide some financial relief for taxpayers who have experienced large
medical bills throughout the year.
To be eligible for the METO, taxpayers must meet the following criteria:
• They must have out-of-pocket medical expenses that exceed the relevant
threshold amount.
• They must have paid for medical expenses that relate to the treatment of a specific
medical condition, injury, or illness. These expenses can include medical and
dental fees, optometrist fees, prescription medications, and some travel expenses
related to medical treatment.
• The expenses must not have been reimbursed by a private health insurer or any
other third party.
Not all taxpayers are eligible for the METO. The offset is only available to those who are:
• Australian residents for tax purposes
• Registered for Medicare
• Have incurred out-of-pocket medical expenses
The METO is calculated as a percentage of eligible out-of-pocket medical expenses
above the relevant threshold. The offset percentage is based on the taxpayer's income
level and age. In general, taxpayers with a lower income and those aged 65 years and
over are eligible for a higher offset percentage.
The threshold amount varies depending on the taxpayer's income and family status. For
the 2021-2022 financial year, the threshold for singles is $2,397, while for families it is
$4,736. These thresholds are indexed annually.
It is important to note the METO is being phased out and is no longer available for most
taxpayers. However, it is still available for taxpayers who received the offset in the 2018-
2019 financial year or earlier, provided they continue to meet the eligibility criteria.
Zone tax offset
The zone tax offset is a tax concession available to Australian residents who live and work
in certain areas designated as remote or isolated from metropolitan centres. The two
zones covered by the offset are the Zone A and Zone B areas. Zone A includes areas
such as Lord Howe Island and the Tiwi Islands, while Zone B covers other remote or
isolated areas such as Broome, Kalgoorlie, and Mount Isa.
The amount of the offset depends on the zone in which the taxpayer lives and the number
of days they have lived in that zone during the tax year. The offset is made up of two
components: a fixed amount and a percentage-based amount.
The current fixed amount for the 2022-23 tax year is $1,318 for Zone A and $672 for Zone
B. The percentage-based amount is 50% of the taxable income earned in the relevant
zone more than the fixed amount.

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To claim the zone tax offset, a taxpayer must have lived or worked in a designated remote
area for more than 183 days in a tax year. The offset can be claimed by completing the
relevant section of the individual tax return form.
The following table shows the applicable zones with the corresponding fixed amounts and
percentage-based amounts for the current tax year:

Zone Fixed amount Percentage-based amount

A $1,318 50% of taxable income

B $672 50% of taxable income

Here is an example:

John is a teacher who lives and works in Alice Springs, which is in Zone B.
He earned $70,000 in taxable income for the 2022-23 tax year.
John is entitled to a fixed zone tax offset of $672 plus 50% of the taxable income earned in Zone
B above the fixed amount, which is $34,664 ($70,000 - $672).
Therefore, John's zone tax offset is $17,332 ($672 + $17,332 = $18,004).

Low-income earners
The Low-Income Tax Offset (LITO) is a tax credit available to low-income earners in
Australia. It was introduced to help reduce the tax burden on those who earn a low income
and is designed to be a progressive tax measure. The LITO is applied after all other tax
offsets and deductions have been considered.
To be eligible for the LITO, an individual must have a taxable income of $66,667 or less in
the 2022-23 financial year. The maximum offset available is $700 for those who have a
taxable income of $37,500 or less, with the offset gradually reducing to zero for those who
have a taxable income between $37,501 and $66,667. Those with a taxable income of
$66,667 or more are not eligible for the LITO.
It is important to note that the LITO is non-refundable, which means that it can only be
used to reduce a person's income tax liability to zero. Any excess amount of the LITO
cannot be claimed as a refund.
The following table outlines LITO thresholds and amounts for the 2022-23 financial year:

Taxable income LITO amount

$0 - $37,500 $700

$37,501 - $45,000 $700 - ((Taxable income - $37,500) x 5%)

$45,001 - $66,667 $325 - ((Taxable income - $45,000) x 1.5%)

For example, if an individual has a taxable income of $30,000 for the 2022-23 financial
year, they would be eligible for the maximum LITO of $700. If their taxable income was
$40,000, they would be eligible for a LITO of $450, calculated as follows:

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LITO = $700 - (($40,000 - $37,500) x 5%) = $450.

Penalties and audits
The Australian Taxation Office (ATO) imposes penalties on individual taxpayers who fail
to comply with their tax obligations. These penalties are meant to encourage taxpayers to
meet their tax obligations and to ensure the integrity of the tax system.
There are several reasons why the ATO may impose penalties on individual taxpayers,
including:

Reason for penalty Applicable consequence

Late lodgement of tax A penalty may be imposed based on the number of days the return or
returns or activity statement is overdue, up to a maximum of $1,110 per return or statement
statements

Failure to lodge on time A penalty of $222 may be imposed for each 28-day period or part thereof
(FTL) penalty that a return or statement is overdue, up to a maximum of 5 penalties or
$1,110

Failure to take reasonable A penalty of up to 25% of the shortfall amount may be imposed
care

Recklessness or A penalty of up to 75% of the shortfall amount may be imposed

intentional disregard of tax
law

False or misleading A penalty of up to 75% of the shortfall amount may be imposed

statement

Failure to pay on time Interest may be charged on any outstanding amount and a penalty of up
to 5% of the unpaid amount may be imposed

It is important to note penalties may be higher for repeat offenders and those who
deliberately avoid their tax obligations. The ATO also has the power to take legal action
against individuals who fail to comply with their tax obligations.
Audits
The ATO may audit individual taxpayers for a variety of reasons, including suspected non-
compliance, errors, and discrepancies in tax returns. Audits may be conducted randomly,
or they may be initiated by the ATO in response to specific concerns or red flags.
The consequences of an ATO audit can be serious, and may include fines, penalties, and
even criminal charges in extreme cases. It is important for taxpayers to be aware of the
potential triggers for an audit, and to take steps to avoid them whenever possible.
Here is a table outlining some of the potential reasons for ATO audits and the applicable
consequences:

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Reason for audit Applicable consequences

Significant changes in income or Possible adjustment of tax liability and payment of additional
deductions taxes or penalties

Large charitable donations or deductions Scrutiny of donation records and possible adjustment of tax
liability

Discrepancies in reporting of business Possible adjustment of tax liability, imposition of penalties or

income and expenses fines, and increased scrutiny of future tax returns

Unreported offshore income or assets Possible adjustment of tax liability, fines, and criminal charges
in extreme cases

Suspicious behaviour or patterns, such as Possible investigation and imposition of penalties or fines
consistently large refunds

Failure to keep proper records or provide Possible imposition of penalties, fines, and increased scrutiny
documentation of future tax returns

It is important to note this table is not exhaustive, and there may be other reasons for an
ATO audit not listed here.

For more information on the when and how penalties can be imposed by the ATO
access the information here
Penalties
For more information on how audits are conducted and access the following links
ATO website: https://www.ato.gov.au/General/Compliance/What-attracts-our-
attention/
ASIC's MoneySmart: https://moneysmart.gov.au/income-tax/audits
CPA Australia: https://www.cpaaustralia.com.au/-
/media/corporate/allfiles/document/professional-resources/taxation/audits-
understanding-your-rights-and-obligations.ashx

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9. Returns and assessment

Who must lodge a return?
The ATO website sets out a comprehensive list of resident individuals who must lodge an
income tax return. In the 2022-2023 tax year, individuals who earned income in Australia
are required to lodge an income tax return if they meet any of the following criteria:
• Their taxable income is equal to or exceeds the tax-free threshold of $18,200.
• They had tax withheld from any payments during the financial year (e.g., salary,
wages, pensions).
• They are entitled to a refund of franking credits and had excess imputation credits
in the financial year.
• They received income from a rental property or had a capital gain in the financial
year.
• They had a reportable fringe benefits amount of more than $2,000 in the financial
year.
• They made personal superannuation contributions and intended to claim a
deduction for those contributions in the financial year.
• They received income from a trust or partnership in which they are a beneficiary or
partner.
In the current 2022-2023 tax year, the tax-free threshold in Australia is $18,200. This
means that if an individual's taxable income is below this amount, they are not required to
pay any income tax.
Historically, the tax-free threshold has increased over time. Prior to the 2012-2013 tax
year, the threshold was $6,000. It then increased to $18,200 in the 2013-2014 tax year
and has remained at this level since then.
In accordance with s161 of the ITAA36 every person, if required by the Commissioner
must lodge an income tax return as follows:

s161 Annual returns

Requirement to lodge a return
(1) Every person must, if required by the Commissioner by notice published in the
Gazette, give to the Commissioner a return for a year of income within the period
specified in the notice.
Note: The Commissioner may defer the time for giving the return: see section 388-
55 in Schedule 1 to the Taxation Administration Act 1953.
(1A) The Commissioner may, in the notice, exempt from liability to furnish returns
such classes of persons not liable to pay income tax as the Commissioner thinks
fit, and a person so exempted need not furnish a return unless the person is
required by the Commissioner to do so.

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(2) If the taxpayer is absent from Australia or is unable from physical or mental
infirmity to make such return, the return may be signed and delivered by some
person duly authorized.
(3) Nothing in this section prevents an approval by the Commissioner of a form of
return under section 35D of the Superannuation Industry (Supervision) Act 1993
from requiring or permitting a return under that section to be attached to or to
form part of, a return under this section.
Note: However, the rules applicable to a return under section 35D of the
Superannuation Industry (Supervision) Act 1993 are those specified in that Act.
(Source: Income Tax Assessment Act (1936))

How to lodge a return

In Australia, individual tax payers can use either the online myTax service or paper tax
return forms to complete and lodge their income tax returns. The myTax service is an
online platform provided by the Australian Taxation Office (ATO) that allows individuals to
complete and lodge their tax returns electronically. Paper tax return forms can be obtained
from the ATO or from a post office.
The current income tax return forms for the 2022-2023 tax year can be accessed on the
ATO website at the following URLs:
• myTax:https://www.ato.gov.au/Individuals/Lodging-your-tax-return/MyTax/
• Paper tax return form: https://www.ato.gov.au/Forms/Individual-tax-return-
instructions-2023/
It is important to note that not all taxpayers are eligible to use myTax, and some may be
required to complete a paper tax return form. Eligibility for myTax depends on factors such
as the complexity of an individual's tax affairs and whether they have received any
government payments during the financial year.
Forms
In Australia, individual taxpayers can use a variety of forms to lodge their income tax
returns. The most used forms are the T1 forms, which are provided by the Australian
Taxation Office (ATO). The T1 forms can be used to lodge tax returns for individuals who
are Australian residents, foreign residents, and temporary residents.
If an individual chooses to prepare their own tax return, they can use the electronic
lodgement service (ELS) provided by the ATO. The ELS can be accessed through the
ATO website or through tax preparation software approved by the ATO. Individuals who
use the ELS can use the T1 form for their tax return, which can be accessed through the
ATO website. The T1 form is used to report income, deductions, and other relevant
information required for calculating an individual's taxable income.
On the other hand, if an individual chooses to use a tax agent to prepare their tax return,
the tax agent can access the T1 form through the ATO's online portal for registered
agents. The registered tax agent will need to complete and lodge the tax return on behalf
of their client. The tax agent will need to have the necessary source information, such as
payment summaries, bank statements, and receipts, in order to prepare an accurate tax
return for their client.

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The T1 form is available on the ATO website, along with instructions for completing the
form. The instructions provide details on the various sections of the form, including
income, deductions, tax offsets, and other relevant information that taxpayers need to
provide.
Here is the link to the T1 Individual tax return form on the ATO website:
https://www.ato.gov.au/Forms/Individual-tax-return-instructions-2022/
Tax agents completing the tax return
When an individual's tax return is prepared by a tax agent, the tax agent must be
registered with the Tax Practitioners Board and must have the necessary qualifications
and experience to prepare tax returns. The tax agent will need to obtain information from
the taxpayer to prepare the tax return, including details of their income, deductions, and
any offsets they may be eligible for.
The cut-off dates for lodgement of tax returns vary depending on the circumstances of the
taxpayer. For individuals who prepare their own tax return, the deadline for lodgement is
31 October following the end of the financial year. However, if a taxpayer uses a
registered tax agent, the deadline for lodgement may be later than 31 October, depending
on the individual circumstances of the taxpayer.
The source information required to lodge an income tax return includes:
• PAYG payment summaries from employers
• statements from banks and financial institutions detailing interest earned
• dividend statements
• records of any other income received.
The taxpayer will also need to provide details of any deductions they wish to claim, such
as work-related expenses or charitable donations.
Here is a link to the ATO website with more information on lodging a tax return through a
tax agent: https://www.ato.gov.au/Individuals/Lodging-your-tax-return/Lodge-through-a-
registered-tax-agent/
Checklist of information to be obtained from taxpa yer
When obtaining instructions to prepare an individual tax return the following information
needs to be obtained from the client:
Personal details of the client
• Full name, date of birth, whether the same name was used in the last return
lodged and details of previous name as applicable;
• Tax file number
• Occupation
• Residential address
• Postal address as applicable
• If postal address has changed since lodgement of the last return
• Telephone numbers for work and mobile as applicable

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• If taxpayer is a war veteran, widow, widower and under the aged pension age
• If the client has an ABN
• Family details:
o Spouse’s full name, date of birth, whether the same name was used in the
last return lodged and details of the previous name as applicable
• Spouse’s tax file number
• Spouse’s occupation
• If married or de facto in current year – date of event
• If there are dependent children and date of birth of each child
• As of January, whether each child is in primary of high school
• If the client has shared care of the children in which case the % of care allocated
by the family assistance office
Tax agent details
• A copy of the previous return needs to be attached if the client is using the
services of the organisation for the first time.
• If an accountant prepared the previous tax return.
• Details of previous accountant if applicable.
• If the agent’s fee is to be paid from the refund.
• Bank account details for direct deposit of refund, e.g., BSB, account number.
Income
• If the income was received from salary or wages. If applicable obtain payment
summaries from client.
• If allowances were received, e.g., bonuses. Where details are not provided in
payment summaries details of allowance need to be provided.
• If the client received an ETP. ETP summary needs to be provided.
• If the client received an Australian government allowance or payment, e.g.,
Newstart, youth allowance or sickness benefits. Payment summaries must be
provided.
• If income received from Australian annuities or superannuation income streams.
Payment summary needs to be attached from super fund.
• If income was received from Australian super lump sum payments.
• If interest was received from bank accounts or investments. Account details and
interest must be provided.
• If a divided income was received. Statements must be provided.
• If income was received from partnerships or trust. Information needs to be
obtained.
• If any business income was received. Business schedule may need to be
completed.

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• If capital gains or losses were made during the financial year. A CGT schedule
needs to be completed.
• If income was received from overseas sources. Description of income to be
provided.
• If income was received from ownership of a rental property. Information to be
provided.
• If bonuses were received from a life assurance policy. Statements to be provided.
• If income was received from forestry managed investments. Information to be
provided.
• If any other income was received, e.g., royalties, share rights, jury duty. Details to
be provided.

For more information on withholding mechanisms, access the ATO

guidelines.
Payments you need to withhold from

Deductions
• If a vehicle is used for work purposes. Car make, model, number and engine
capacity to be provided. Logbook should also be provided of kilometres travelled
and receipts for expenses.
• If there are any other work-related travel. Details to be provided.
• If there are any other travel-related receipts, e.g., accommodation. Receipts to be
provided.
• If there are work related uniform and other clothing expenses. Description to be
provided including laundry expenses, e.g., number of washing loads.
• If the client attended an educational institution or courses. A description and cost
need to be provided including student union fees, textbooks, course fees,
stationery, parking. Travel can be claimed from home to place of education or from
work to place of education. You cannot claim travel from place of education to your
home if you went to work first. Details of car make, model, number and engine
capacity must be provided.
• If expenses were incurred from working from home, e.g. electricity, internet
access, stationery, telephone calls, printer cartridges, computer depreciation.
• If tools or equipment were purchased for work. A description and amounts need to
be provided.
• If there are any subscriptions for union fees or professional bodies, journals,
periodicals. Receipts must be provided.
• If the client works outside in the sun, a deduction can be made for sunscreen.
• If there are any other work deductions. A description needs to be provided.
• If there have been any gifts or donations to charitable organisations. Description
needs to be provided.
• If the tax affairs were managed by a tax agent, the previous year the amount

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incurred.
• If personal superannuation contributions were made more than those made by the
employer. A description of the dates, names of fund and policy number needs to
be provided.
• If personal superannuation contributions were made on behalf of a spouse.
• If the client has income protection insurance. Name of fund and policy number
needs to be provided.
Tax offsets
• If the client has a dependent spouse (without child), child house-keeper or house-
keeper. Details to be provided.
• If the client has private health insurance. Who does the policy cover, give details of
fund and number and no of days covered.
• If there have been any expenses incurred by any school-aged children. This will
exclude any items such as school fees, tutoring costs, uniforms, and subject
levies. Description to be provided.
• If the taxpayer lived in a remote zone or served overseas with the defence force.
Details including no of days need to be provided.
• If medical expenses of more than $2,000 were incurred. Details regarding medical
expenses will exclude reimbursements received from medical practitioners. All
details need to be provided.
• If a parent, parent-in-law, or invalid relative was maintained by the taxpayer during
the year. All details to be provided.
Other
• If the taxpayer became a tax resident of Australia during the financial year. Dates
need to be provided.
• If the taxpayer stopped being a tax resident of Australia during the financial year.
Dates to be provided.
• If notification has been received from the ATO regarding an impending audit or
review. Details to be provided.
• If money is owed to a government department, e.g., child support, HELP, family
tax benefit debts. Details to be provided.
• If capital returns were received on listed company shares? Details to be provided.
When gathering and obtaining information from clients it is important not to stereotype
individuals. Cultural differences can sometimes affect the outcome of an interview. Listed
below are some useful tips to follow when interviewing clients from different cultural
backgrounds and/or where English is their second language:
• Give proper personal space: Different cultures have different norms regarding what
personal space is public and private.
• Be sensitive towards their religious views.
• Learn about other cultures, e.g. greetings, goodbye rituals.

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• Where there are lapses in communication apply humour and avoid being
defensive.
• Do not interrupt if the client is speaking.
• Keep the language simple and avoid jargon.
• Speak at the right pace and speak clearly.
• Pause between sentences to allow time for comprehension.
• Avoid completing the customer’s or client’s sentences.
• Names and addresses may need to be written or spelt out.
• Do not raise your voice, patronise, or condescend.
Substantiation of Claims
To claim a deduction, you may need:
▪ Statements from your bank, building society or credit union
▪ Written evidence from your supplier or association
▪ Your PAYG payment summary
▪ Other written evidence.

A receipt is normally required providing a description of the purchase, the amount, date
and name of supplier in order to claim a tax deduction for a work-related expense.
Work-related expenses
Any amounts claimed for motor vehicle expenses or travel costs (including tolls and
parking) are not included in the $300 limit. The ATO allows 34¢ per hour for electricity for
every hour the taxpayer spends working at home in an office separate from the rest of the
family. A log needs to be kept for a month of the hours worked.
Work-related STD and mobile calls can be itemised by reviewing the taxpayer’s phone
accounts. The same percentage of work-related calls made can be applied for all other
months. Line rental and mobile calls can also be apportioned.
(Source: Baker, Cliff & Deaner, 2015 p.252)

Allowances
Each year the ATO produces a list of considered reasonable travel and overtime meal
allowances. A taxpayer can claim up to this amount even if the employer pays the
employer less than the amount stipulated. Where an employer pays an allowance to an
employee and the amount is below the amount listed by the ATO, the amounts do not
have to be substantiated with a receipt. The expense must be incurred. A log describing
all food expenses, the employee’s activities during the day, and the nights spent away
from home (if more than five (5)) is required.
Reasonable allowance amounts are set out in Taxation Determination TD, which is issued
by the Australian Taxation Office (ATO). These amounts are used to determine the
maximum amount that can be claimed as a tax deduction for certain expenses incurred by
employees while performing their work duties.

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TDs provide guidance on the interpretation of tax laws, and they are legally binding on the
ATO. They are generally issued in response to changes in the law, changes in ATO
policy, or developments in court decisions or other authorities.
For example, TD 2021/12 sets out the reasonable travel allowance expense amounts for
the 2021-22 income year. The determination specifies the maximum amounts that can be
claimed as deductions for accommodation, meals, and incidental expenses incurred by
employees when they travel away from home overnight for work purposes.
In general, the reasonable allowance amounts set out in TDs are based on industry
benchmarks and other data sources. They are reviewed periodically to ensure that they
remain appropriate and up to date.
It is important to note that the reasonable allowance amounts are not a guarantee of the
amount that can be claimed as a deduction. The amount claimed must be reasonable in
all the circumstances and must be supported by appropriate records and documentation.
(Source: Australian Taxation Office (2018))

Identify discrepancies or any unusual features and conduct research to

resolve, or refer to appropriate authority
Tax agents may identify discrepancies or unusual features and may raise queries during
the analysis and verification of clients’ tax information.
Discrepancies may include mismatches between expenditure reports and invoices;
mismatches between payments and invoice amounts; underpayment of GST instalments,
etc. Unusual features which may alert a tax agent may include incorrect report formats,
absence of an auditable trail, etc. Queries raised by tax agents may include reasons for
significant variations from budget, reasons for inappropriate authorisations, etc.
The table below outlines a range of discrepancies and how these can be legally and
ethically dealt with:

Discrepancy Explanation Legal and Ethical Management

1. Underreported When an individual or Tax agents should inform their clients of the
income business reports less underreported income and provide them with the
income than they opportunity to correct the mistake. If the client
earned. refuses to correct it, the tax agent may be
required to report the discrepancy to the ATO.

2. Overstated When an individual or Tax agents should verify the accuracy and
deductions business claims more eligibility of claimed deductions before including
deductions than they them in a tax return. If an overstatement is
are legally entitled to identified, the tax agent should inform their
claim. clients and advise them to revise their tax return
accordingly.

3. Failure to When an individual fails Tax agents should advise their clients of their
declare foreign to declare income obligations to report foreign income and help in
income earned from overseas declaring and paying any associated tax
sources. liabilities. If the client refuses to declare the

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Discrepancy Explanation Legal and Ethical Management

foreign income, the tax agent may be required to
report the discrepancy to the ATO.

4. Inconsistent When information Tax agents should ask the client to provide
information provided by the client is additional information or clarification to resolve
inconsistent or the inconsistency. If the client is unable or
contradictory. unwilling to provide sufficient information, the tax
agent should document the discrepancy and
inform their client of their obligations to provide
accurate information.

5. Non- When an individual or Tax agents should advise their clients of their
compliance with business does not obligations to comply with tax laws and
tax laws comply with relevant tax regulations and assist them in correcting any
laws and regulations. non-compliance issues. If the non-compliance is
significant or intentional, the tax agent may be
required to report the discrepancy to the ATO.

Tax agents are required to discuss and resolve the discrepancies or unusual features with
their clients. Clients may be required to rectify the discrepancies with external parties, for
examples, banks, suppliers, ATO, etc. Tax agents may suggest improvements to the
clients’ systems, policies, and procedures.
If clients refuse to rectify the discrepancies or refuse to answer the queries raised, tax
agents need to explain to their clients that if reasonable care isn’t taken clients may be
liable to different rates of penalty, based on the reasons for the error.
If tax agents lodge a fraudulent income tax return following their client’s instructions, they
may breach the Code of Professional Conduct issued by Tax Practitioners Board.

Taxation Practitioners website

Code of Professional Conduct

If tax agents fail to convince their clients to correct the fraud, the tax agent should
consider resigning from working with the client or should report the incident to the ATO.

Tax Office
Technology Catches Tax Cheats

Tax practitioner support and guidance

There is a wide range of sources for tax agent to seek advice or guidance to evaluate and
moderate decision processes:
If a tax agent is member of a professional body, they can obtain advice from peer group
discussion, but he/she must be mindful of the confidentiality of client information.
Research the existing and updated tax legislation, case law or ATO tax rulings which may
be applicable to current situations.

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Tax agents are required to undertake continuing professional education according to the
TPB’s Code of Professional Conduct. Thus, the tax agent may obtain updated guidance to
resolve current issues.
Tax agents may apply for a private ruling to the Commissioner who will consider the way a
tax law applies to his/her client in relation to a specified matter. However, tax agent may
need to obtain prior approval from the client before applying for a private ruling.
The ATO’s Tax Agent Portal Help offers messaging facilities that allow tax agents to send
enquiries and receive answers from the ATO.
The Tax Agent Portal Help provides answers to frequently asked questions. The answers
may help Tax Agents to evaluate current situations.
Note: The Tax Agent Portal gives registered tax agents secure access to client
information and online communication with the ATO.

Taxation Portal
Registering for online services

Depreciating assets
A depreciating asset is an asset that has a limited effective life and can reasonably be
expected to decline in value over the time it is used. Depreciating assets include such
items as computers, electric tools, furniture, and motor vehicles. Land and items of trading
stock are excluded from the definition of a depreciating asset. Only the holder of a
depreciating asset can claim a deduction for its decline in value.
The decline in value of a depreciating asset is worked out based on its effective life.
Generally, the effective life of a depreciating asset is how long it can be used for:
• a taxable purpose
• the purpose of producing exempt income, or non-assessable non-exempt income.
The two (2) methods of working out a deduction for the decline in value of a depreciating
asset such as a computer, tools and equipment are the:
• Diminishing value method
• Prime cost method
The decline in value of a depreciating asset acquired on or after 1 July 2001 is calculated
based on the effective life of the asset. The effective life of a depreciating asset is the total
estimated period the asset can be used by an entity for the purpose of producing
assessable income.
(Source: Australian Taxation Office (2018))

Under s40.95 of the ITAA97 a taxpayer can either:

• work out their own estimate of the effective life of a depreciating asset; or
• rely on the ATO’S determination of effective life.
The ATO publishes rulings on recommended periods of effective life of depreciating
assets which taxpayers may adopt.

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The prime cost method is calculated as follows:

Cost Days held

x
Effective life 365

Under the diminishing value method, the decline in value of a depreciating asset is
calculated as follows for assets acquired after 10 May 2006:

days held 200

Base value x x
365 asset’s effective life

Days held can be 366 for a leap year

The base value is the cost of the asset. The number of months held can be used in lieu of
days held if applicable.
For a later income year, the base value is the asset’s adjusted value at that time plus any
improvements to the asset during the year.

Example 1 - Diminishing Value Method:

John runs a small business and purchases a computer for $2,000 on 1 July 2022. He intends to use it
for business purposes only and estimates that its effective life is 4 years. John decides to use the
diminishing value method to calculate depreciation.
Firstly, John needs to calculate the depreciation rate for the computer. Using the ATO's effective life
for computers, the rate is 37.5% per year (or 18.75% for half-year).
Therefore, for the first year (2022-23), the depreciation expense is $375 (which is 18.75% of $2,000).
The carrying amount of the computer at the end of the first year is $1,625 ($2,000 - $375). For the
second year (2023-24), the depreciation expense is calculated as 18.75% of the carrying amount of
the asset at the beginning of the year, which is $1,625, resulting in a depreciation expense of
$306.56. The carrying amount at the end of year two is $1,318.44. This process is repeated until the
end of the estimated useful life.
Example 2 - Prime Cost Method:
Sarah buys a delivery van for her business on 1 January 2023 for $30,000. She believes that the van
has a useful life of 6 years and decides to use the prime cost method to calculate depreciation.
The depreciation rate for the prime cost method is calculated as 1/6, which is 16.67% per year.
Therefore, the depreciation expense for the first year (2022-23) is $5,000 (which is 16.67% of
$30,000). The carrying amount of the van at the end of the first year is $25,000 ($30,000 - $5,000).
For the second year (2023-24), the depreciation expense is calculated as 16.67% of the original cost,
which is $5,000 again. The carrying amount at the end of year two is $20,000. This process is
repeated until the end of the estimated useful life.
Note the choice of depreciation method (diminishing value or prime cost) may affect the timing and
amount of deductions available for tax purposes and may also impact the financial statements of the
business.

Tax losses
A tax loss is made when the total deductions claimed for an income year exceed the total
of assessable and net exempt income for the year. There are some deductions that

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cannot be used to create or increase a tax loss, e.g. donations, gifts and personal super
contributions.
A tax loss is different from a capital loss. A capital loss can only be offset against any
capital gains in the same income year or carried forward to offset against future capital
gains. Australian residents can calculate an overall tax loss based on worldwide income
and deductions. Foreign residents can calculate a tax loss based on their Australian
income and deductions incurred in earning that income.
(Source: Australian Taxation Office (2018))
A tax loss incurred in one year may be carried forward and deducted in a succeeding
future year. Under Division 36 of the ITAA97, a tax loss can be carried forward indefinitely
for deduction against taxable income until it is absorbed. As a rule tax loss must be offset
in the order in which they are incurred:
• Exempt income (if any); and
• assessable income which exceeds deductions for the current income year.
(Source: Baker, Cliff & Deaner, 2015 p.403)

Scenario
Jordan has a tax loss of $8,000 from the previous year which is carried forward to the current year.
In 2022 and 2023 he has assessable income of $40,000, deductions of $8,000 and net exempt
income of $5,000. Calculate the taxable income for the year ended 30 June 2023
Workings
To calculate the taxable income for the year ended 30 June 2023, we need to first calculate the
current year's tax loss, then subtract that loss from the assessable income and add the deductions
to get the taxable income.
Jordan has assessable income of $40,000, deductions of $8,000, and net exempt income of $5,000,
so his total income for the year is:
$40,000 - $8,000 + $5,000 = $37,000
Since Jordan has a tax loss carried forward from the previous year of $8,000, we need to subtract
that from the total income to get his taxable income for the year:
$37,000 - $8,000 = $29,000
Therefore, Jordan's taxable income for the year ended 30 June 2023 is $29,000.

Lodgement of tax returns

You must lodge a tax return on time to avoid penalties. In most cases, a tax return needs
to be lodged by 31 October each year. A tax return can be lodged online, by mail or
through a registered tax agent. Taxpayers can use an online tool on the ATO website to
determine whether they will need to lodge a tax return.
Under s161 of the ITAA36 a tax return must:
• be lodged in the form provided
• be lodged electronically or in the prescribed manner
• be lodged within the specified time

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• contain information as required

• be signed by the taxpayer.
A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a
return before the due date for lodgement. The Commissioner has the power to grant an
extension under s161 of the ITAA36).
Special extension arrangements may be made for clients of tax agents under the Tax
Agent Lodgement Program. The lodgement program covers all lodgement dates for the
next twelve (12)-month period. The lodgement program is designed to accommodate
progressive lodgement of documents throughout the year and to enable tax agents to
spread their work over an income year and conform to ATO revenue obligations. These
dates are subject to change on an annual basis.
(Source: Australian Taxation Office (2018))
Over 70% of income tax returns are lodged electronically. The advantages of lodging
electronically are as follows:
• Immediate acknowledgement by the ATO of receipt of returns
• 24-hour access to the ATO
• Faster turnaround. 95% of original assessments will be processed in 14 days
• Access to a range of electronic reports
• Reduction in paper usage
• Accuracy through edit checks within the software
• Privacy
Discuss and confirm documentation with client
Tax agents should exercise reasonable care when preparing returns and should take
positions in those returns that are reasonably arguable. It is essential for tax agent to
discuss and agree on returns with their clients. If clients disagree with the relevant tax
treatments, tax agents need to confirm the statutory requirements with clients. Errors or
omission of items in the returns can thus be avoided if tax agents discuss the returns with
clients. If tax agents fail to discuss and agree on the returns with clients, the returns may
be lodged with errors.
Safe harbour is the term which applies if taxpayers (and taxpayers’ registered agent if
taxpayers use one) take reasonable care in making the tax returns or statements,
taxpayers will not incur a penalty. However, if reasonable care wasn’t taken, there are
different rates of penalty, based on the reasons for the error. For statements made on or
after 1 March 2010, the clients may not be liable to an administrative penalty for making a
false or misleading statement if the:
• statement is made by a registered agent
• clients provide all relevant tax information to the registered agent to enable the
statement to be made correctly
• shortfall amount or the false or misleading nature of the statement was due to the
registered agent’s lack of reasonable care.

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In addition, the clients may recover damages against their tax agent by suing for damages
due to negligence under common law. This negligence may also be considered a breach
of contract as the contract may (implicitly) require the agent to act reasonably and with
due competence.
The Code of Professional Conduct under the Tax Agents Services Act (TASA)
establishes several obligations upon Tax and BAS agents, including to:
• act with honesty and integrity
• act in the best interests of clients and avoid conflicts of interest
• maintain client confidentiality
• provide a competent service
• not obstruct administration of the tax laws
• advise clients of their rights and obligations under tax laws
• maintain professional indemnity insurance
• respond to requests from the Board.

The Code of Professional Conduct acts as a guide for tax practitioners to identify and
prevent conflicts of interest from occurring. Learn more about how the Code helps
practitioners manage conflicts of interest here
TPB Information Sheet: Code of Professional Conduct – managing conflicts of interest

Non-compliance with the Code of Practice can result in any of these actions by the Board:
• Written caution
• Order the agent to complete a course of action
• Suspension of registration
• Termination of registration
Tax practitioners must also inform individuals of their tax obligations.

For a list of an individual’s tax obligations access the ATO Taxpayer Charter
Your Obligations

Tax penalties and tax offences

Penalty taxes differ from tax offences. Penalties are imposed by way of additional tax,
while tax offences are prosecuted by the courts. On 1 July 2000, a uniform administrative
penalty regime came into force. The uniform penalty regime provides for the imposition of
penalties:
• Relating to statements and schemes
• Late lodgement of returns
• Failing to meet other tax obligations
A penalty may be payable where:

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• A taxpayer fails to lodge an income tax return or other document by the due date.
• A taxpayer refuses or fails to provide relevant information.
• A taxpayer fails to provide records.
• A taxpayer has understated an amount of assessable income, e.g., shortfall.
• Tax is paid after the due date.
The shortfall penalties apply where there is tax shortfall amount because of a taxpayer:
• Making a false or misleading statement.
• Taking a position for income tax purposes that is not reasonably arguable.
• Entering into a tax avoidance scheme.
• Failing to give documents to the commissioner.
The base penalty for a tax shortfall is calculated as a fixed percentage of the amount of
the shortfall.
On 1 July 1999, the penalty arrangements for late payment and other obligations were
streamlined with the introduction of a uniform tax deductible general interest charge (GIC).
Taxpayers who fail to lodge an income tax return are liable for a GIC. The GIC applies to
late or underpayments, the late lodgement of returns and the late payment of penalties.
The GIC is updated quarterly with rates for the next quarter generally announced two
weeks before the start of the quarter.
(Source: Australian Taxation Office (2018))
Income tax when due and payable becomes a debt to the Commonwealth of Australia. A
taxpayer’s liability to pay tax is a civil liability. If the Commissioner has reason to believe
the taxpayer will leave the country before the due date for payment, the tax becomes due
before the departure date, or a departure prohibition order may be issued. The
Commissioner may also obtain an injunction to freeze the assets of the taxpayer to
prevent disposal.
Unpaid tax may be recovered after written notice from the taxpayer or any persons
holding money on the taxpayer’s behalf e.g., financial institutions. A third-party notice
cannot be issued by the ATO to deprive a taxpayer of all their income.
Notice of assessment
With individual taxpayers, the ATO calculates the refund or tax payable based on the
information provided in the tax return which includes the taxable income and tax offsets.
The taxpayer executes the return on the basis that the information contained is true and
correct. The Commissioner for Taxation is required to make an assessment based on the
taxpayer’s taxable income and tax payable (s166 ITAA36).
The ATO issues a notice of assessment to the taxpayer that details the balance of tax
payable or refund due. There is no time limit on when the original assessment notice will
be issued. If the taxpayer has not received a notice of assessment within twelve (12)
months of lodging a return under s171 of the ITAA36 he or she may request that the
Commissioner makes an assessment.
Payment of tax

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For individuals and trustees’ income tax is due for payment:

• Twenty-one (21) days after the due date for lodgement of the taxpayer’s income
tax return
• Twenty-one (21) days after service of the notice of assessment, whichever is later
All income tax liability can be paid by cheque, money order, BPay or direct credit at any
post office or the ATO. The Commissioner may grant an extension of time for payment of
income tax and/or permit the tax to be paid by instalments
(Source: Australian Taxation Office (2018))

Rulings and determinations

There are six (6) types of rulings for income tax purposes and these are set out in the
ATO’s interpretation of the law. These are:
• Oral rulings
• Public rulings
• Private rulings
• Product ruling
• Class rulings
• Tax determinations
For simple tax affairs, a taxpayer can apply for an oral ruling which is legally binding on
the Commissioner. A public ruling contains a statement that it is a public ruling and sets
out the Commissioner’s opinion about how the tax laws apply to a person or class of
persons. Public rulings can be in the form of official rulings, ATO publications, information
booklets, return form guides, the Tax Pack or media releases.
(Source: Baker, Cliff & Deaner, 2012 p.394)

The public rulings program is updated monthly and can be accessed here wesite:
https://www.ato.gov.au/General/ATO-advice-and-guidance/ATO-advice-products-
(rulings)/Public-rulings/
A private ruling is a written expression which sets out the Commissioner’s opinion about
the way a tax applies or would apply to a particular taxpayer’s tax affairs or
circumstances, whereas a public ruling defines the way the tax law applies generally.
Private rulings include information regarding:
• Income tax
• Medicare levy
• Fringe benefits tax
• Franking tax
• Withholding tax (mining and non-resident)
• Excise duty
• Fuel tax credits (net fuel amount)
• Excise product grants and benefits including the following fuel schemes: energy

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grants, cleaner fuel grants and product stewardship (oil) benefits)

• Indirect taxes such as GST, luxury car tax (LCT) and wine equalisation tax (WET).
Class and product rulings are also public rulings. Class rulings are public rulings that
enable the ATO to provide legally binding advice in response to a request from an entity
seeking advice about the application of a relevant provision to a specific class of entities,
for a scheme. This may include:
• an employer seeking advice about the tax consequences of retention bonuses for
a class of employees.
• an employer seeking advice about the tax consequences of an early retirement
scheme for a class of employees.
• an employer seeking advice about the tax consequences of an employee share
acquisition plan for individual employees.
• the Australian government, state, or territory government, or one of their
authorities, seeking advice about a proposed transaction e.g., an industry
restructure that has tax consequences for participants in that industry.
The ATO is subject to freedom of information legislation which enables taxpayers to view
their tax files. Applications to view tax files must be made in writing and include enough
information for the file to be identified. Tax officers engaged in gathering and accessing
information must be aware of their privacy obligations. The Privacy Act 1988 (Cth) sets
out the privacy requirements that bind the ATO in the handling of personal information .
The Implication of GST
GST is a broad-based, multi-stage tax of 10% on most goods, services and other items
sold or consumed in Australia. Generally, businesses registered for GST will include GST
in the price of sales to their customers and claim credits for the GST included in the price
of business purchases.
A business must register for GST if the GST turnover is $75,000 or more (for non-profit
organisations the threshold is $150,000 or more). Taxi drivers must register for GST
regardless of turnover amount.
In Australia goods and services are generally taxable unless they are GST-free or input-
taxed. Where goods and services are taxable, GST is included in the price. GST free
sales include most basic foods, some education courses and some medical, healthcare
products and services.
GST is a self-assessed tax. A GST-registered business must issue tax invoices to
customers, collect GST, and send the amount with a business activity statement (BAS) to
the ATO. GST credits can be claimed on GST amounts forwarded to the ATO by lodging a
business activity statement (BAS) or an annual GST return. GST can be paid
electronically, by mail or in person but must be paid on time to avoid interest and
penalties.
(Source: Australian Taxation Office (2018))
Reviews and audits

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After the notice of assessment has been issued some assessments are either reviewed or
audited by the ATO to ensure compliance with tax law. A review or audit involves
checking a taxpayer’s tax affairs to ensure the information given is accurate and tax
obligations have been complied with. The ATO may also contact other entities such as
banks, employers, customers, and suppliers to obtain information.
The ATO may conduct a review to check for any errors and help the taxpayer to correct
these and reviews may also be performed to collect information about specific industries
and activities. A tax audit is a systematic examination of a taxpayer’s income tax affairs by
the ATO to determine whether the taxpayer has fully complied with the tax laws. The
objective is to detect shortfalls in tax payments. These audits include:
• Primary audits
• Business audits
• Special audits
Primary audits cover employees, pensioners and investors and include:
• Income matching – matching by computer income gathered from external sources
which are then matched against information included in the taxpayer’s income tax
return. The income matching system relies on the use of tax file numbers.
• Substantiation audits – a taxpayer is required to forward receipts and documentary
evidence to the ATO to verify deductions claimed.
• Desk audit – designed to check the accuracy of income tax returns of salary and
wage earners, property income earners and small business taxpayers. The desk
audit may determine whether deductions are allowable. Penalties and interest may
apply for any shortfalls. The taxpayer may be required to bring records to the ATO
to substantiate claims.
Business audits involve an examination of the taxpayer’s business operations, records,
accounting systems and other relevant material. Business audits may be conducted by
ATO auditors at the taxpayer’s business premises during normal business hours.
Special audits involve enforcement activity directed at following up serious fraud cases.
(Source: Baker, Cliff & Deaner, 2015 p.468)

The ATO’s compliance program

The ATO's Compliance Program is a plan that outlines their approach to ensuring tax
compliance across different areas of tax and business. The program sets out the ATO's
focus areas, compliance strategies, and the tools and approaches they will use to identify
and address non-compliance. The program is developed annually and is designed to
address emerging risks and trends in the tax and business environment. It aims to
encourage voluntary compliance by taxpayers, while also taking a firm stance against
deliberate tax evasion and non-compliance. The program covers various tax types and
areas, including income tax, GST, superannuation, and international tax, and sets out the
ATO's enforcement priorities and compliance activities for each.
As of September 2021, the ATO's compliance program is focused on several key areas,
including:

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• COVID-19 economic stimulus measures: The ATO is monitoring compliance with

COVID-19 economic stimulus measures, such as JobKeeper payments, cash flow
boost payments, and early release of superannuation.
• Tax governance: The ATO is focused on promoting good tax governance
practices, such as effective tax risk management, tax transparency, and tax
reporting.
• High-wealth individuals and private groups: The ATO is targeting high-wealth
individuals and private groups that may be engaging in aggressive tax planning or
other non-compliant behaviours.
• Black economy: The ATO is targeting the black economy, which refers to
businesses and individuals who operate outside of the tax system and may not
report their income or pay their fair share of tax.
• Tax crime: The ATO is working to prevent and detect tax crime, such as fraud,
money laundering, and tax evasion.
Where deliberate fraud has occurred, or the taxpayer has acted recklessly in making a
claim, they may be prosecuted, and penalties may be imposed. Advisory letters are sent
to people in occupations where it is considered there is a higher risk of incorrect claims.
Taxpayers must keep written records for all their work-related expenses if claims total
more than $300. The use of third-party information allows the ATO to detect income from
a range of sources that have not been declared on an individual’s tax return.
(Source: Australian Taxation Office (2018))

Any errors made with completing a tax return should be corrected as soon as possible. In
some circumstances, there are legal time limits to be complied with and penalties may
apply. The time limit for changing most tax information, apart from income tax returns, is
four (4) years from the due date for payment of the original statement or assessment. For
income tax returns it is two (2) years for most individual taxpayers and four (4) years for all
other taxpayers. Records and all other information relevant to the correction should be
kept for five (5) years.
(Source: Australian Taxation Office (2018))
Tax havens
A tax haven can be described as a country offering low or zero tax rates and other
incentives to foreign companies and investors. Tax havens can be used by companies to
shift income from high to low taxing countries with the assistance of a subsidiary or an
intermediary. The following are commonly known tax havens:
• Bahamas
• Bermuda
• British Virgin Islands
• Cayman Islands
• Channel Islands
• Hong Kong
• Luxembourg

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• Monaco
• Panama
• Seychelles
• Singapore
• Switzerland
• United Arab Emirates.
It is important to note just because a country is listed as a tax haven does not necessarily
mean it is unlawful for Australian residents to do business or invest there. However,
Australian residents should be aware of the tax implications and regulations related to
investing or doing business in tax havens.
Most transactions between Australia and tax havens are lawful international dealings and
not attempts to evade or avoid tax however these systems may be exploited by Australian
taxpayers to evade paying tax.
(Source: Butterworths Business and Law Dictionary, 2002 p.465)

Australian Transaction Reports and Analysis Centre (AUSTRAC) is a primary source of

information that identifies Australian taxpayers who may be engaged in unlawful tax
evasion using tax havens. AUSTRAC’s purpose is to protect the integrity of Australia’s
financial system and contribute to the administration of justice through their expertise in
countering money laundering and the financing of terrorism.
AUSTRAC oversees the compliance of Australian businesses, defined as “reporting
entities”, with their requirements under the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 and the Financial Transaction Reports Act 1988.
These requirements include:
▪ Implementing programs for identifying and monitoring customers
▪ Managing the risks of money laundering and terrorism financing
▪ Reporting suspicious matters
▪ Monitoring threshold transactions and international fund transfer instructions
▪ Submitting an annual compliance report
In its intelligence role, AUSTRAC provides financial information to state, territory and
Australian law enforcement, security, social justice and revenue agencies, and certain
international counterparts. The intelligence provided has been analysed by highly qualified
AUSTRAC personnel who use sophisticated tools to identify information that can assist
AUSTRAC’s partner agencies to investigate and prosecute criminal and terrorist
enterprises in Australia and overseas. AUSTRAC monitors domestic transactions over
$10,000 as well as international transactions.
(Source: Australian Transaction Reports and Analysis Centre (2018))
To learn more about the elements of international tax relevant to Australian Income Tax
Law access the following information on International Tax Agreements here
International Tax Agreements

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Principles of Australian Tax Law

There are seven principles of effective tax governance outlined by the ATO. The legal
environment in which all these principles are required is when a practitioner is preparing,
lodging, and reporting on all an individual’s tax requirements.
The table below outlines each principle and how it can be applied when preparing an
individual’s tax return:

Principle Description Example for Individual Tax Return

Principle Accountable Ensuring management establishes a tax control framework to

1 management and outline their tax governance principles and practices, and they
oversight have oversight of the tax function so it operates effectively.

Principle Recognise tax issues Identifying tax issues and risks and having a process in place to
2 and risks assess the significance of those issues and risks.

Principle Seek advice Seeking appropriate advice from internal or external experts to
3 ensure tax positions taken are reasonable and supportable.

Principle Integrity in reporting Ensuring that the tax return is accurate and complete, and that it
4 complies with tax laws and regulations.

Principle Professional and Building a productive relationship with the ATO and responding
5 productive working in a timely and professional manner to ATO requests for
relationship information.

Principle Timely lodgements Ensuring tax returns are lodged, and payments are made on
6 and payments time to avoid penalties and interest charges.

Principle Ethical and Acting with honesty, integrity, and in the best interests of clients
7 responsible behaviour and ensuring that tax obligations are met.

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10. Tax planning

What is tax planning?
Tax planning is the process of arranging your financial affairs in a way that legally
minimises your tax liability. Tax planning for individuals in Australia involves various
factors and considerations, including:
• Income and deductions: Your taxable income can be reduced by claiming all
eligible deductions and credits, such as charitable donations, work-related
expenses, and medical expenses. Maximizing these deductions can lower your
overall tax liability.
• Investments: Different investments are taxed differently in Australia, and tax
planning can involve investing in tax-efficient options such as superannuation,
which offers lower tax rates on investment earnings.
• Timing of income and expenses: Tax planning can also involve strategically
timing the receipt of income or payment of expenses to minimize tax liability in a
particular financial year.
• Capital gains: If you sell an asset, such as property or shares, for a profit, you
may be liable for capital gains tax. Tax planning can involve structuring the sale of
assets to minimize the amount of tax paid on the capital gain.
• Superannuation: Tax planning can also involve contributing to superannuation,
which offers tax benefits such as tax deductions for contributions made and lower
tax rates on investment earnings.
When undertaking tax planning, it is important to ensure that all strategies used are legal
and comply with Australian tax laws. Tax planning should be done in consultation with a
qualified tax professional who can provide advice and ensure compliance with all relevant
tax laws and regulations.
Tax avoidance and tax evasion
Tax avoidance is the organisation of a taxpayer’s affairs so that the minimum tax liability
arises while at the same time complying with the law. Tax avoidance is legal provided
activities carried out comply with the law. Tax evasion, on the other hand, is where a
taxpayer fails to make full and true disclosure of all assessable income and deductions
which results in the non-payment of tax. Tax evasion involves activities that are illegal and
do not comply with the law.
Tax avoidance is the organisation of a taxpayer’s affairs so that there is a minimum tax
liability e.g., putting into effect arrangements to avoid tax.
(Source: Baker, Cliff & Deaner, 2015 p.471)

There are anti-avoidance rules for the income tax published by the ATO, these are:
General anti-avoidance tax rules (GAAR)
These are a set of rules that apply in the following cases:
• If an individual obtained a tax benefit from a scheme – a benefit that would not

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have been available if the scheme had not been entered into
• If it is objectively concluded that you or any other person entered into or carried out
the scheme, or any part of it, for the sole or dominant purpose of obtaining the tax
benefit
(Source: The general anti-avoidance rule for income tax)
Specific anti-avoidance tax rules
There are a few specific anti-avoidance tax rules included in tax legislation. These can
include, but are not limited to the following:
• Personal services income rules
• False or misleading statements

Tax avoidance

John is a self-employed consultant earning $150,000 per annum. He has a significant tax liability
and is exploring ways to reduce his tax burden legally. He hires a tax agent who suggests
several tax avoidance mechanisms to minimize his tax liability.
Creating a Family Trust:
The tax agent advises John to create a family trust and transfer his business income to the trust.
This would enable John to reduce his taxable income as the trust can distribute the income to
the family members, including himself, at a lower tax rate.
Income Splitting:
John's tax agent also advises him to split his business income with his spouse or adult children,
who are on a lower tax bracket. This would reduce John's taxable income and decrease his tax
liability.
Capital Gains Tax Planning:
The tax agent advises John to sell his business assets and investments at the appropriate time
to minimize his capital gains tax liability. The agent also suggests holding onto his investments
for more than 12 months to qualify for the 50% capital gains tax discount.
While these strategies may be legal, the ATO may view them as tax avoidance mechanisms if
they are used solely to reduce tax liability and not for a genuine commercial purpose. If caught,
John may be penalized, and his tax liability could be increased.

Tax evasion

Samantha, a waitress, earns cash tips from customers that she does not report on her tax return.
She hides the cash in a safe at home and deposits it into her bank account in small amounts to
avoid suspicion. She intentionally fails to report this income to avoid paying taxes on it. This is
considered tax evasion.

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For more information on the specific anti-avoidance rules outlined above, access the
following
Sole trader
Tax Administration Act

Methods to reduce taxation liability

Tax planning may involve:
• Reducing assessable income, e.g., income exemptions, changing the basis of
accounting, salary packaging, diverting income
• Increasing deductions and tax offsets
• Reducing rate of tax or deferring payment of tax
• Income splitting
Salary sacrificing
Salary packaging or salary sacrificing is an arrangement whereby an employee agrees to
exchange or sacrifice part of their pre-tax salary or wages in return for the employer
providing another benefit using the amount sacrificed. The benefit received is not
assessable income of the employee. Salary sacrificing, with respect to superannuation, is
a tax effective form of salary packaging as a contribution made by an employer to a
complying superannuation fund and is not subject to FBT and the employer can obtain a
tax deduction for the increased superannuation. The employee can increase their
superannuation benefits and reduce their taxable income by an amount equal to the
sacrificed amount. Salary packaging contributions are taxed at 15% when received by the
superannuation fund.

Scenario
Lauren is in full time employment and receives a remuneration package of $50,000 gross salary.
The remuneration package consists of $45,000 gross salary and $5,000 superannuation. Lauren
negotiates with her employer so that her gross salary is sacrificed and a further $5,000 is paid
into her superannuation fund. How has this saved Laurens total tax payable?
Workings
By sacrificing $5,000 of her gross salary, Lauren has effectively reduced her taxable income
from $50,000 to $45,000. This means she will pay less tax overall.
Assuming Lauren is a resident for tax purposes and not entitled to any other deductions or
offsets, her taxable income of $45,000 will be taxed as follows:
$18,200 × 0% = $0
($45,000 – $18,200) × 19% = $5,607
Total tax payable = $5,607
If Lauren had not sacrificed any of her salary and received the full $50,000, her tax payable
would have been:
$18,200 × 0% = $0

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($37,000 – $18,200) × 19% = $3,357
($50,000 – $37,000) × 32.5% = $4,225
Total tax payable = $7,582
Therefore, by sacrificing $5,000 of her gross salary and redirecting it into her superannuation
fund, Lauren has saved $1,975 in tax payable ($7,582 - $5,607).

Superannuation co-contribution scheme

As of the 2021-22 financial year, the Australian Government's superannuation co-
contribution scheme provides eligible individuals with a tax-free payment of up to $500
when they make an after-tax contribution to their super fund and meet certain conditions.
The co-contribution is calculated at 50 cents for every dollar contributed, up to a maximum
of $500. To be eligible, the individual must:
• make a personal (after-tax) contribution to their superannuation fund
• earn less than $54,837 in the 2021-22 financial year
• pass the two income and work tests
• be under 71 years old at the end of the financial year
• lodge an income tax return for the relevant financial year.
The superannuation co-contribution scheme has fluctuated over the past 10 years. Here is
a brief overview of the changes:
• From 2011-2012 to 2013-2014 financial years, the maximum co-contribution was
$1,000, with the matching rate being 50%.
• From 2014-2015 to 2016-2017 financial years, the maximum co-contribution was
reduced to $500, with the matching rate remaining at 50%.
• From 2017-2018 financial year onwards, the maximum co-contribution was further
reduced to $500, with the matching rate being reduced to 40%.
It's important to note these changes have been made as part of the government's efforts
to balance the budget and reduce government spending. However, the co-contribution
scheme remains an important way for low and middle-income earners to boost their
retirement savings.
Negative gearing
Negative gearing is an investment strategy where the costs associated with owning an
income-producing asset, such as a property or shares, exceed the income generated from
that asset. In Australia, negative gearing is commonly associated with property
investment.
When an investor negatively gears, they can deduct the loss from their taxable income,
reducing their tax liability. This is because the loss is treated as an allowable deduction
against other income, such as salary or wages. The aim of negative gearing is to offset
the losses in the short-term against the tax savings, with the expectation that the asset will
eventually generate a profit in the long-term.
For example, let's say an investor purchases a rental property for $500,000 and the rental
income for the year is $20,000. However, the costs associated with owning the property,

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including interest on the mortgage, property management fees, repairs, and maintenance,
total $30,000 for the year, resulting in a loss of $10,000. This loss can be deducted from
the investor's taxable income, reducing their tax liability.
The tax implications of negative gearing can be significant, particularly for high-income
earners who are able to deduct their losses at their marginal tax rate. However, it's
important to note that negative gearing should not be the sole reason for investing in
property or any other asset, and investors should carefully consider the risks and potential
benefits before making any investment decisions.
As for a calculated example, let's say an investor has a taxable income of $100,000 and
negatively gears a rental property with a loss of $10,000. Their taxable income would then
be reduced to $90,000, resulting in a tax saving of $3,700 (based on the 37% marginal tax
rate for the 2021-22 financial year). This tax saving can help offset the loss in the short-
term and potentially provide long-term gains as the property increases in value over time.
Here is a list of advantages and disadvantages of negative gearing:

Advantages of negative gearing Disadvantages of negative gearing

Potential for capital gains on the investment Cash flow issues from holding a negatively
property geared property

Tax benefits from offsetting rental losses Increased debt and financial risk
against other income

Lower taxable income and reduced tax liability Dependence on the property market for returns

Opportunity to build wealth through property Reduced ability to diversify investments

investment

Potential for rental income to increase over Possibility of increased taxes and loss of tax
time benefits if laws change

Ability to claim a wide range of deductions Potential difficulty in finding suitable tenants
and managing property effectively

Possible ability to reduce personal income tax Difficulty in selling the property if the market is
liability slow or if it has decreased in value

Possible ability to leverage the investment to Potential for the property to decrease in value,
purchase further properties leading to a capital loss

It is important to note that a deduction cannot be claimed unless the expenditure has been
incurred and can be substantiated (e.g., receipts are available). Deductions can be
increased through:
• Contributions to superannuation funds
• Expenditure incurred in investments in rental properties
• Donations to charities who are deductible gift recipients
• Investing in the Australian film industry or environmental related expenditure

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• Maximising dependant tax offsets

• Ensuring medical expenditure is incurred in one year where possible
• Ensuring bad debts are written off before the end of the year of income
• Maintenance on rental properties is performed in the year of income where
possible
Tax liability can be deferred by deferring the receipt of assessable income:
• Adopting the cash method of accounting
• Rolling over superannuation lump sums into approved deposit funds (ADFS)
• Selecting the lowest value for the closing value of trading stock
In Australia income tax is levied on the individual and not the family unit. Income splitting
is the most common tax planning technique. Income may be diverted to family members
who will be taxed on that income at a lower rate of tax. When diverting income to family
members, whether by way of payment for services or via a family trust, penalty rates
under Division 6AA of the ITAA97 apply to the unearned income of minors.

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11. Responsibilities and duties of tax agents

Tax accounting refers to accounting for the tax-related matters. It is governed by the tax
rules prescribed by the tax laws of a jurisdiction. Often these rules are different for the
rules that govern the preparation of financial statements for public use (i.e., GAAP). Tax
accounting, therefore, adjusts the financial statements prepared under financial
accounting principles to account for the differences with rules prescribed by the tax laws.
Information is then used by tax professionals to estimate the tax liability and for tax
planning purposes.
(Source: Accounting-simplified.com (2018))

Accounting principles and practices

Apart from legislation, tax practitioners must also follow accounting principles and
practices when preparing the tax documentation of their individual clients. These can
include but are not limited to the following.
Accrual Principle
The accrual principle accounts for all income earned within the financial year, even if the
money itself has not yet been received. All assessable income for the year must be
recorded even if the entire payment has not been made yet.
Cash Principle
Following this principle, the tax practitioner must include all of the assessable cash
income for the financial year when recording the transaction. However, only cash that has
been received will be counted as assessable income for that same financial year.
(Source: Accounting methods)

Tax Agent Services Act 2009 (TAS Act)

The TAS Act came into effect on 1 March 2010. The Act introduced several changes
including:
• the creation of a national Tax Practitioners Board (TPB)
• a requirement tax agents and Business Activity Statement (BAS) providers be
registered and regulated
• introduction of a Code of Professional Conduct for registered tax agents and BAS
agents
• provision for sanctions to discipline registered tax agents and BAS agents.
The Act aims to ensure the services provided to the public by registered tax agents and
BAS agents are of appropriate ethical and professional standards.
(Source: Tax Practitioners Board (2018))
Tax Agent Services Regulations 2009 (TASR 2009)
The Tax Agent Services Regulations 2009 (TASR 2009) is a regulation under the Tax
Agent Services Act 2009 (TASA 2009) in Australia. The TASR 2009 sets out the
requirements and obligations for registered tax agents, BAS agents, and tax (financial)

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advisers to maintain their registration and comply with their professional and ethical
duties.
Under the TASR 2009, registered tax practitioners are required to meet a number of
obligations, including:
• Continuing Professional Education (CPE) - Registered tax practitioners must
undertake a certain number of CPE hours each year to maintain their registration.
The amount of CPE required varies depending on the type of registration held.
• Professional Indemnity Insurance (PII) - Registered tax practitioners are
required to hold adequate PII to protect themselves and their clients in the event of
professional negligence.
• Code of Professional Conduct - Registered tax practitioners must comply with
the Code of Professional Conduct, which sets out the professional and ethical
standards that must be adhered to in the provision of tax agent services.
• Fit and Proper Person Requirement - Registered tax practitioners must be of
good character and have the necessary qualifications, experience, and
competence to provide tax agent services.
• Client Records - Registered tax practitioners must keep accurate and up-to-date
records of all clients and their tax affairs.
The implications of the TASR 2009 in 2022 and beyond are that registered tax
practitioners must continue to meet these obligations to maintain their registration and
provide tax agent services. The ATO has indicated that it will continue to enforce
compliance with the TASR 2009 and act against registered tax practitioners who do not
comply with their obligations.
Furthermore, there have been ongoing discussions about potential reforms to the TASA
2009 and the TASR 2009 to strengthen the regulation of tax practitioners and enhance
consumer protections. These reforms may include changes to the fit and proper person
requirement, increased reporting requirements, and increased powers for the Tax
Practitioners Board to investigate and penalize non-compliance. As such, it is important
for registered tax practitioners to stay informed about any changes to the TASR 2009 and
the wider regulatory environment and ensure they meet their obligations to maintain their
registration and provide quality tax agent services to their clients.
Tax Practitioners Board (TPB)
The TPB is a national board responsible for the registration and regulation of tax
practitioners and for ensuring compliance with the TAS Act, including the Code of
Professional Conduct.
This is achieved by:
• Administering a system to register tax and BAS agents, ensuring they have the
necessary competence and personal attributes.
• Providing guidelines, information, and webinars on relevant matters.
• Investigating conduct that may breach the TAS Act, including non-compliance with
the Code of Professional Conduct and breaches of the civil penalty provisions.
• Imposing administrative sanctions for non-compliance with the Code.

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(Source: Tax Practitioners Board (2018))
Negligence of tax agent
Negligence of a tax agent in Australia refers to a breach of the duty of care owed by a tax
agent to their clients. A tax agent owes a duty of care to their clients to provide
professional services with reasonable care and skill. If a tax agent breaches this duty of
care, they may be liable for any loss or damage suffered by their clients because of the
breach.
The specific legal requirements for establishing negligence of a tax agent in Australia are
like those for any other professional negligence claim. These requirements include:
• Duty of Care - The tax agent owed a duty of care to their client, which is
established by the existence of a professional relationship between the tax agent
and the client.
• Breach of Duty - The tax agent breached their duty of care by failing to provide the
professional services with reasonable care and skill.
• Causation - The breach of duty caused the loss or damage suffered by the client.
• Damages - The client suffered actual loss or damage because of the tax agent's
breach of duty.
Penalties and consequences for being negligent as a tax agent can be severe. If a tax
agent is found to have been negligent in their provision of tax agent services, they may
face legal action from their clients, including claims for damages or compensation. In
addition, the Tax Practitioners Board (TPB) has the power to take disciplinary action
against tax agents who have breached their professional obligations, including the
obligation to provide services with reasonable care and skill. This may include fines,
suspension or cancellation of their registration, and other sanctions.
Furthermore, tax agents who engage in negligent conduct may also be subject to
investigation and enforcement action by the Australian Taxation Office (ATO). The ATO
may impose penalties and interest charges on clients who have claimed incorrect
deductions or underpaid their tax because of the tax agent's negligence.
In summary, negligence of a tax agent in Australia can have serious consequences, both
for the tax agent and their clients. Tax agents must ensure they provide professional
services with reasonable care and skill to avoid potential legal action and disciplinary
action from the TPB, as well as investigation and enforcement action from the ATO.
Civil penalties
In Australia, tax agents play a crucial role in assisting taxpayers with their obligations
under the tax law. As such, the Australian Taxation Office (ATO) imposes penalties on tax
agents who do not comply with their obligations.
Civil penalties for tax agents have been increased and expanded in recent years. The Tax
Agent Services Act 2009 (TASA) and Tax Laws Amendment (2013 Measures No. 2) Act
2013 introduced new and increased civil penalty provisions for tax agents. These changes
were made to ensure that tax agents are held accountable for their conduct, and to
promote compliance with tax laws.

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Under the TASA, the ATO can impose a range of civil penalties on tax agents for
breaches of their obligations. Some of the civil penalties that can be imposed on tax
agents include:
• Failure to comply with the Code of Professional Conduct: Tax agents must
adhere to a Code of Professional Conduct, which includes obligations such as
acting honestly and with integrity, providing competent services, and protecting
client confidentiality. A breach of the Code of Professional Conduct can result in a
civil penalty of up to $12,600 for an individual and up to $63,000 for a corporation.
• Failure to lodge documents: Tax agents are required to lodge various
documents on behalf of their clients, such as tax returns and activity statements.
Failure to lodge these documents on time can result in a civil penalty of up to
$2,550 per document for an individual and up to $12,750 per document for a
corporation.
• Making false or misleading statements: Tax agents must ensure that any
statements they make to the ATO, or their clients are true and accurate. Making
false or misleading statements can result in a civil penalty of up to $12,600 for an
individual and up to $63,000 for a corporation.
• Failure to provide information: Tax agents are required to provide information to
the ATO when requested. Failure to provide this information can result in a civil
penalty of up to $2,550 for an individual and up to $12,750 for a corporation.
• Failure to maintain records: Tax agents must maintain accurate and complete
records relating to their clients' tax affairs. Failure to maintain these records can
result in a civil penalty of up to $2,550 for an individual and up to $12,750 for a
corporation.
In addition to these civil penalties, the ATO can also take disciplinary action against tax
agents, such as suspending or cancelling their registration.
Overall, the ATO takes compliance with tax laws seriously and has increased its focus on
enforcing penalties for non-compliance by tax agents. Tax agents must ensure that they
meet their obligations and adhere to the Code of Professional Conduct to avoid penalties
and disciplinary action.
Ethics and professional responsibility
Tax practitioners in Australia are subject to ethical and professional responsibilities, which
are designed to promote the integrity and trustworthiness of the tax profession. These
responsibilities are outlined in the Code of Professional Conduct (the Code), which is
contained in the Tax Agent Services Act 2009 (TASA). The Code of Professional Conduct
sets out five core principles tax practitioners must adhere to:
• Honesty and integrity: Tax practitioners must act honestly and with integrity
when dealing with clients, the Australian Taxation Office (ATO), and other
stakeholders. This includes being truthful in all communications and disclosures
and avoiding conflicts of interest.
• Independence: Tax practitioners must be independent in their professional
judgment and avoid any conflicts of interest that could compromise their objectivity.
This means that they must not allow personal or business relationships to

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influence their advice or recommendations.

• Confidentiality: Tax practitioners must protect the confidentiality of their clients'
information, and only disclose information with the client's consent or as required
by law. This duty continues even after the engagement has ended.
• Competence: Tax practitioners must have the necessary skills, knowledge, and
experience to provide competent services to their clients. This includes keeping up
to date with changes to tax laws and regulations.
• Professional behaviour: Tax practitioners must act in a way that upholds the
reputation of the profession. This includes complying with all relevant laws and
regulations, providing accurate and complete advice, and treating clients and
colleagues with respect.
The Code of Professional Conduct also sets out specific duties and responsibilities that
relate to each of these core principles. For example:
• Duty of confidentiality: Tax practitioners must not disclose any confidential
information about their clients, unless required by law or with the client's consent.
• Duty of competence: Tax practitioners must ensure that they have the necessary
skills, knowledge, and experience to provide competent services to their clients.
This includes keeping up to date with changes to tax laws and regulations and
seeking assistance or advice when necessary.
• Duty to act lawfully: Tax practitioners must act in accordance with all relevant
laws and regulations and must not engage in any illegal activities or conduct that
would bring the profession into disrepute.
• Duty to maintain records: Tax practitioners must maintain accurate and complete
records of their clients' tax affairs, including financial statements and tax returns.
• Duty of independence: Tax practitioners must be independent in their
professional judgment and avoid any conflicts of interest that could compromise
their objectivity. This includes disclosing any potential conflicts of interest to clients
and taking steps to manage them appropriately.
In summary, tax practitioners in Australia are subject to a strict Code of Professional
Conduct, which outlines their ethical and professional responsibilities. Adherence to the
core principles and specific duties and responsibilities is crucial to maintaining the integrity
and trustworthiness of the tax profession.
Organisational policies and procedures
There are several common policies and procedures that accounting organisations may
have in place for the preparation of non-complex tax documentation for individual clients.
Some of these policies and procedures include:
• Client engagement letter: This is a letter that outlines the terms of the
engagement between the accounting organisation and the client. It should include
details such as the scope of services to be provided, the fees and payment terms,
and the responsibilities of both the accounting organisation and the client.
• Record-keeping procedures: Accounting organisations must maintain accurate
and complete records of their clients' tax affairs. Record-keeping procedures

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should outline how information is collected, processed, and stored, and how long
records should be retained.
• Quality control procedures: Quality control procedures should be in place to
ensure that tax documentation is prepared accurately and in compliance with
relevant laws and regulations. This may include review procedures, such as a
second reviewer checking the work of the preparer.
• Training and education: Accounting organisations should provide ongoing
training and education to their staff to ensure that they are up to date with changes
to tax laws and regulations. This may include attending seminars, webinars, or
other training events.
• Independence policies: Accounting organisations should have policies in place to
ensure that their staff maintain independence and objectivity when preparing tax
documentation. This may include policies around conflicts of interest, such as
prohibiting staff from preparing tax documentation for family members or close
associates.
• Client communication policies: Accounting organisations should have policies in
place for communicating with clients, such as how frequently updates will be
provided and how communication will occur. These policies may also include
guidelines for responding to client queries or concerns.
• Risk assessment procedures: Accounting organisations should have procedures
in place to assess the risk associated with preparing tax documentation for
individual clients. This may include reviewing client information to identify potential
red flags, such as unusual transactions or inconsistencies in the client's financial
information.
Overall, these policies and procedures are designed to ensure accounting organisations
prepare non-complex tax documentation for individual clients accurately and in
compliance with relevant laws and regulations. They help to mitigate risk, maintain quality
control, and promote transparency and accountability in the preparation of tax
documentation.

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 FNSACC522 Prepare tax documentation for individuals

12. Acronyms

ATO Australian Taxation Office

ATI Adjusted taxable income

AUSTRAC Australian Tracking Analysis Centre

BAS Business Activity Statement

Code Code of Professional Conduct

CPI Consumer Price Index

CGT Capital gains tax

ESS Employee Share Scheme

ETP Employment Termination Payment

FBTA Fringe Benefits Tax Assessment Act 1986 (Cth)

FBT Fringe benefits tax

FITO Foreign Income Tax Offset

GIC General interest charge

GST Goods and services tax

HELP Higher education loan program

ITAA36 Income Tax Assessment Act 1936 (Cth)

ITAA97 Income Tax Assessment Act 1997 (Cth)

LSL Long Service Leave

PAYG Pay as You Go

TAS Act Tax Agents Services Agent

TAS Regulations Tax Agent Services Regulations

TPB Tax Practitioners Board

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Sect 26ah bonuses and
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SECT 4.10 How to work - SECT 4.10How to work out how much income tax you must pay.
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