HI6028 — Taxation Theory, Practice and LawInteractive Tutorial Questions and Solutions –Tutorial – 6 Week 7Trimester 1.2021Tutorial Question 1A. Anish purchased a machine on 1st October 2020 at a cost of $220,000 (including GST).This machinery is estimated to have a useful life of five years.B. Jean purchased a BMW X5 car and will be use 100% for business purpose on 1 October2020 at a cost of $132,000 (inc GST) estimated to have a useful life of five years.Required: With reference to relevant legislation, discuss and calculate what amount is allowedas a deduction for the decline in value of the machinery and the car discussed above, usingboth prime cost and diminishing value methodsSuggested solutionA. Machinery for $220,000 (incl GST)First, we need to establish the value of the machinery (Ex GST) which we cando by ($220,000*10/11 = $200,000)Diminishing Value Method (s40-70 of ITAA 1997), post 9 May 2006 event, the decline invalue is:$200,000 x (273/365) x (200%/5) = $ 59,835.62Under the prime cost method (s40-75 of ITAA 1997)$200,000 x (273/365) x (100%/5) = $29,917.81The amount of $20,000 paid as GST, on the basis of the entity is registered for GST wouldbe an input Tax Credit (S11-20 GSTA)B. BMW X5- $132,000 (Inc GST)Pursuant to s40-230, for the year 2020-21, $59,136 the cost limit applies to motor vehicle.First, we need to establish the value of the car (Ex GST):Calculate the GST: $59,136 x 1/11 = $5,376Cost of the car: $132,000 – $5,376 = $126,624$126,624 > $59,136, therefore the cost of the car is further reduced to the car limit of $59,136(TD2006/40)Diminishing Value Method (s40-70 of ITAA 1997), post 9 May 2006 event, the decline invalue is:$59,136 x (273/365) x (200%/5) = $17,692Prime cost method (s40-75 of ITAA 1997)$59,136 x (273/365) x (100%/5) = $8,846The amount of $5,376 can be claimed ($59,136/11), based on the entity is registered for GSTwould be an input Tax Credit (S11-20 GSTA).Questions -2What is the difference between a deduction and a tax offset? Which tax offsets are refundabletax offsets be used to reduce a taxpayer’s ML liability?Suggested solution‘Deductions’ differ from ‘tax offsets’ in an important way. Deductions reduce assessable incomeprior to application of the appropriate marginal tax rate to determine income tax payable. Taxoffsets are applied after the calculation of basic tax liability and, therefore, reduce the actualamount of income tax payable.Tax offsets are also known as ‘rebates’ or ‘credits’. Tax offsets may generally only be used inthe income year in which entitlement to them arose. Generally, tax offsets can only reduce anyincome tax payable on taxable income to nil and any excess is lost. However, certain tax offsetsare ‘refundable’ to the extent that the tax offsets exceed the taxpayer’s income tax payable forthe year. Examples of refundable tax offsets include (Div 67 ITAA97):• Excess franking credits, but only if received by certain entities• Private health insurance offset• Film production offset, and• Research and development. Non-refundable tax offsets cannot generally be used to reducethe liability for Medicare Levi.Questions 3Julie is a single, resident taxpayer. She has taxable income $50,000 in the year 2020/21income year. Calculate how much LITO and LMITO that she was eligible to claimed duringthis year?Suggested solutionThe low-income tax offset (LITO) is outlined in s 159N ITAA36. As the taxpayer’s taxable incomeof $50,000 is greater than the lower threshold of $37,000 and less than the upper threshold of$66,667, the taxpayer will be entitled to a reduced amount of the low-income earners tax offset.This is calculated as follows:Maximum offset $445Reduction ($195) [($50,000 – $37,000) × 1.5%]LITO available $250In addition, Julie may be entitled to the low- and middle-income tax offset (LMITO). As thetaxpayer’s taxable income of $50,000 exceeds $48,000, but does not exceed $90,000, she willbe entitled to an LMITO of $1, 080.
