Lesson 6 - Temporary Budget Repair Levy, Medicare Levy and Tax Calculation

Transcription

1 Tax Training School Lesson 6 - Temporary Budget Repair Levy, Medicare Levy and Tax Calculation Table of Contents Taxable income and rates of tax 2 Budget repair levy 2 The Medicare levy 2 Exemptions from the levy 5 The Medicare levy surcharge 7 Adjustments 12 - Item A1 - Under 18 excepted net income 12 - Item A2 - Part-year tax-free threshold 13 - Item A3 - Super co-contribution 13 HECS, HESC-HELP or SFSS 14 Income Tests IT1 - IT7 15 Calculation of refund or tax payable 18 Page 1 of 19

2 Taxable Income and Rates of Tax After all allowable deductions have been subtracted from assessable income, the remaining figure is the taxable income. This is the figure on which the income tax payable and Medicare Levy payable will be calculated. When calculating income tax, 'cents' are included. The general rates of tax for individuals and non-residents are determined by the ATO and are subject to change each year. Budget Repair Levy Individual taxpayers with a taxable income of more than $180,000 per year will have additional tax withheld by their employer, starting from 1 July The levy is payable at a rate of 2% of each dollar of a taxpayer s taxable income over $180,000. It will apply to both resident and non-resident individuals from 1 July 2014 and applies to the , and income years. The levy will cease to apply from 1 July The Medicare Levy The Medicare Levy is a compulsory levy that is payable on the taxable incomes of all Australian residents, subject to a few exceptions. Its purpose is to fund the Medicare scheme. The rate of the basic levy is 2.0% of taxable income from the 2013/14 financial year. All figures used in this lesson are figures. No levy is payable if taxable income is below the lower thresholds. The reduction formula is applied if taxable income is between the lower and upper thresholds (see tables below). The full levy of 2% is payable if taxable income is over the upper threshold amount. Page 2 of 19

3 Medicare Levy for Couples and Families 2015/16 Medicare Levy Thresholds Taxpayer NOT Eligible for Seniors and Pensioners Tax Offset (SAPTO) Lower Upper Limit Single taxpayer $21,336 $26,669 Families with no children $36,002 $45,001 *Families with: One child $39,308 $49,133 Two children $42,614 $53,266 Three children $45,920 $57,398 Four children $49,226 $61,531 Five children $52,532 $65,663 Six children $55,838 $69,796 * For each additional child over six children, add $ 3,306 to the lower limit and add $4,132 to the upper limit Taxpayer Eligible for Senior and Pensioners Tax Offset (SAPTO) Lower Upper Limit Taxable income Equal to or exceeding Single taxpayer) $33,738 $42,173 Families with no children $46,967 $58,707 *Families with: One child $50,273 $62,839 Two children $53,579 $66,972 Three children $56,885 $71,105 Four children $60,191 $75,237 Five children $63,497 $79,370 Six children $66,803 $83,502 * For each additional child over six children, add $3,306 to the lower limit and add $4,132 to the upper limit Family Income is the combined income of both partners within a de-facto or married relationship. If one member of a couple dies during the year then the remaining taxpayer is still considered to be married. If a taxpayer separates during the year then the family income is that remaining taxpayer's own taxable income after the date of separation. Up until the date of separation, both partners' incomes are included for family. Dependants for Medicare levy purposes are any of the following: A spouse (married or de-facto) Your child under 21 years old Full-time student less than 25 years age or a dependent child with an adjusted taxable income (ATI) of less than $1,786 Page 3 of 19

4 Dependant Child for medicare levy reduction is any child who was an Australian resident you maintained in and whose adjusted taxable income was less than: Category of dependant child Any child under 21 years old you maintained who was not a full time student Any full-time student aged under 25 years old at a school, college or university ATI if not maintained for the whole year For the first child: $282 plus $28.92 for each week you maintained them. For each additional child: $282 plus $21.70 for each week you maintained them. $282 plus $28.92 for each week you maintained them. ATI if maintained for the whole year For the first child: $1,786 For each additional child: $1,410 $1,786 If a child or student has been a dependant for only part of the year for the purposes of Medicare, they are counted as a dependant for the whole year. If a couple are separated, then any child or student is counted as a dependant of the taxpayer receiving Family Tax Benefit for that child or student. For Medicare Levy purposes, the amount of the taxed element of a superannuation lump sum that does not exceed the cap of $195,000 for 2015/16, is not included in taxable income if you are over your preservation age. Calculating Individual and Family Medicare Levies Example 1 : A single taxpayer with a taxable income of $25,621. Reduction formula: (Taxable income - lower threshold) x 10% = Reduced Medicare Levy Payable ($25,621 - $21,335) x 10% = $ Example 2: Sally has a taxable income of $22,000. Her husband John has a taxable income of $27,000 and they have 3 dependant children. Reduction formula: Taxable income x 10% x (family income - lower threshold amount) Family Income Page 4 of 19

5 $22,000 + $27,000 = $49,000 family income Sally -$22,000/$49,000 x 10% x ($49,000 - $45,920) = $ John -$27,000/$49,000 x 10% x ($49,000 - $45,920) = $ Example 3: Jane has a taxable income of $19,000 and Scott has a taxable income of $25,000 with no dependants. Calculation: Jane - No Medicare Levy payable as she is under the threshold amount of $36,002 Scott - the Medicare levy payable is reduced taking the reduction amount from the levy that would be payable. The reduction amount is 2% of the lower family threshold less 8% of the excess of the family income above the threshold amount. (2% x $36,002 family no children threshold) - (8% x ($44,000 family income - $36002 lower threshold)) $ (8% x $7998)) $ $ = $80.20 Levy that would be payable $25,000 x 2% = $500 less reduction amount of $80.20 = $ Medicare Levy Exemption Medicare Levy Exemption is based on specific categories 1. Medical 2. Foreign residents and residents of Norfolk Island 3. Not entitled to Medicare benefits Category 1: Medical You are in this exemption category and can claim a full or half exemption if: one of the following applied during all or part of : You were a blind pensioner You received sickness allowance from Centrelink You were entitled to full free medical treatment for all conditions under defence force arrangements or Veterans Affair s Repatriation Health Card (Gold Card) during the period you met that condition, you also meet one of the following conditions. Page 5 of 19

6 Condition Exemption that applies You had no dependants Each of your dependants (including your spouse if you had one) either was in one of the exemption categories, or had to pay the Medicare levy You had dependant children who were not in an exemption category but who were also dependants of your spouse, and your spouse either: had to pay the Medicare levy, or met at least one of the category 1: Medical conditions and you have completed a family agreement stating that your spouse will pay the half levy for your joint dependants. You had at least one dependant (for example, a spouse) who: was not in an exemption category, and did not have to pay the Medicare levy (for example, because their taxable income was below the lower Medicare levy threshold) Full Full Full Half You were single or separated and you: had a dependant child who was not in a Medicare levy exemption category, and were entitled to FTB Part A or the rental assistance component of FTB Part a for that child, and were in a shared-care arrangement Then exemption from the Medicare levy is on the following basis: For the days that you had care of your dependant child Half For the days that you did not have care of your dependant child Full You had a spouse who met at least one of the Category 1: Medical conditions and you had a dependant child who: Was not in an exemption category, and Was dependant on both of you Full Or Half In this case, either you or your spouse can claim a full exemption and the other can claim a half exemption by completing a family agreement. Category 2: Foreign residents and residents of Norfolk Island If you were a foreign resident for tax purposes or a resident of Norfolk Island for the full year, you can claim a full exemption for the year (366 days). If you were a foreign resident or a resident of Norfolk Island for only part of the year, you can claim a full exemption for that period if: you did not have any dependants for that period, or Page 6 of 19

7 all your dependants were in an exemption category for that period. # Only until 30/06/2016 then Norfolk Island residents are subject to the Medicare Levy. Category 3: Not entitled to Medicare Benefits You can claim a full exemption for any period for which you have a Medicare entitlement statement from the department of Human services showing you were not entitled to Medicare benefits because you were a temporary resident for Medicare purposes, and either: you did not have any dependants for that period, or all your dependants were in an exemption category for that period. You also qualify for a full exemption under this category if: you were a member of a diplomatic mission or consular post in Australia (or a member of such a person s family and you were living with them) you were not an Australian Citizen you do not ordinarily live in Australia, and either you did not have any dependants for that period, or all your dependants were in an exemption category for that period. Note: If a person is exempt, they NEED to provide a certificate confirming their exemption. The taxpayers may choose which one should pay the levy - preferably the lower taxable income taxpayer. The family agreement does not get sent to the ATO but is retained by the taxpayer for a period of 5 years from the date of lodgement of the return. The Medicare Levy Surcharge Individuals and families who do not have appropriate private patient hospital cover through private health insurance may have to pay an additional surcharge called the Medicare levy surcharge. The thresholds for the income year are listed in the table below: Unchanged Tier 1 Tier 2 Tier 3 Singles $90,000 or less $90,001 - $105,000 $105,001 - $140,000 $140,001 or more Families $180,000 or less $180,001 - $210,000 $210,001 - $280,000 $280,001 or more Medicare levy surcharge rate 0% 1% 1.25% 1.5% The family income threshold is increased by $1,500 for each Medicare Levy surcharge dependant child after the first child. Your dependants (regardless of their income) are your: spouse, even if they worked during or had their own income Page 7 of 19

8 children under 21 years old children years old who are studying full time at school, college or university. Dependants must have been Australian residents and you must have contributed to their maintenance. Your spouse includes another person (of any sex) who: you were in a relationship with that was registered under a prescribed state or territory law although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple. The definition of child includes children of people who are in the same-sex relationships. Appropriate level of private patient hospital cover An appropriate level of private patient hospital cover is cover provided by a registered health insurer for hospital treatment in Australia which has an excess of: $500 or less (for policy covering only one person), or $1,000 or less (for all other policies). Excess is the amount you pay before your health insurer pays for any claims you make. Income for Medicare Levy Surcharge (MLS) purposes Your income for MLS purposes is your taxable income plus the following if they apply to you: reportable fringe benefits (shown on your payment summary) reportable superannuation contributions (which is the sum of both your reportable employer superannuation contributions and your deductible personal superannuation contributions) your net investment loss (which is the amount by which your financial investment deductions exceeded your financial investment income, plus the amount by which your rental property deductions exceeded your rental property income) the amount on which family trust distribution tax has been paid. If you were aged between your preservation age and 59 years old, this amount is then reduced by the taxed element amount of superannuation lump sums, other than a death benefit, received during that do not exceed your low rate cap (see Superannuation lump sums and income for MLS purposes ). Medicare Levy Surcharge exemption categories Your income for MLS purposes was $90,000 or less, and for the whole of , you were single without a dependent child. Your income for MLS purposes was $90,000 or less, and for part of you were single your spouse did not die during the year, and for the whole of the year you did not have a dependent child. Page 8 of 19

9 You were single with a dependent child for the whole of the year and your income for MLS purposes was $180,000 or less (plus $1,500 for each dependent child after the first). You had a spouse (with or without dependent children) for the whole of the year, and your combined income for MLS purposes was $180,000 or less (plus $1,500 for each dependent child after the first). In working out whether your income exceeds an MLS income threshold, if your spouse died in and you did not have another spouse before the end of the year, you are treated as having had a spouse for the remainder of You and all your dependants (including your spouse, if any) were in a Medicare levy exemption category for the whole of The combined income of you and your spouse for MLS purposes was above the limit, but your own income for MLS purposes was $21,335 or less. Page 9 of 19

10 Page 10 of 19

11 How Private Health Statement is recorded with the ATO Adjusted Taxable Income (ATI) for surcharge purposes is only used to determine whether you are liable to pay. Note: Ancillary cover or extras cover, does not avoid the surcharge. It must be hospital cover. Example 6 : A taxpayer has a taxable income of $76,000, fringe benefits of $10,000 and reportable employer super contributions of $30,000. The taxpayer's spouse has a taxable income of $65,000 and reportable super contributions of $10,000. As income for surcharge purposes includes reportable super contributions, the total family income for surcharge purposes is $191,000. Neither taxpayer has private patient hospital insurance cover. The couple's family threshold is $180,000. Therefore, as their family income exceeds the threshold amount, they are liable to pay the Medicare levy surcharge. Taxpayer 1 has to pay a surcharge of $860 ($86,000 x 1%) Taxpayer 2 has to pay a surcharge of $650 ($65,000 x 1%) Where the required private patient hospital cover is held for only part of the financial year, then the amount of the surcharge payable by the taxpayer is prorated, for which the cover was not held. Page 11 of 19

12 Adjustments Item A1 - Under 18 Special rules apply to the income of minors (persons who are under the age of 18). Under these rules, certain types of income received by minors may be taxed at higher rates. However, minors who are residents of Australia do not have to lodge a tax return if they earn less than $416. The rules were introduced to discourage adults from splitting their income and diverting it to their children. Excepted Person Minors will be exempt from the special rules if they were: Working full-time, or had worked full-time for 3 months or more (ignoring any full-time work that was followed by full-time study) intending to work full-time for most or all of the following income tax year not intending to study full-time in the following financial year. Entitled to a disability support pension or rehabilitation allowance, or someone was entitled to a carer allowance for them Permanently blind, disabled and were likely to suffer from the disability permanently Entitled to a double orphan pension, or Unable to work full-time because of a permanent mental or physical disability. Ordinary rates of tax apply to all of the income of an excepted person (minor who is exempt). The return should be marked $0 at J, and the code A added for an exempt minor. Excepted Income Not all types of income received by minors is covered by the special rules. Ordinary rates of tax apply to income (called excepted income or 'good' income), which includes: Employment income Taxable pensions or payments for Centrelink or the Dept. of Veteran Affairs Compensation, superannuation or pension fund benefits Income from a deceased person's estate Income from a partnership in which they were an active partnership Net capital gains from the disposal of any property or investments listed above, and Income from the investments of any of the amounts listed above. The income less all deductions relating to this income should be added and put at J with the code M. All other income is taxed at higher rates. If the minor: Only has excepted income (part-time employment) - taxed at ordinary rates Has some excepted income, and some other income (such as a family trust distribution) - excepted income taxed at ordinary rates, other income taxed at higher rates Only has other income (such as family trust distribution) - taxed at higher rates. Page 12 of 19

13 Deductions are allowable as per normal deductibility rules for each type of income. Codes required at A1 A M The taxpayer should be treated as an adult because they are exempt from the normal system of taxing minors (excepted person) Other 'good' income (expected income). Item A2 - Part-year Tax-free threshold The full tax-free threshold is not available in a financial year in which a taxpayer is not a resident for the full year. This item needs to be completed to allow for a prorated tax-free threshold. This is applied to the amount of income earned in relation to the period of time actually spent in Australia (regardless of whether all of that time was spent earning income). The following formula is used to determine the level of tax-free threshold a part-year resident has access to: $13,464 + (( $4,736 x number of months as a resident of Australia) Divided by the number of months in the year (12)) Always count the first month that an individual became, or stopped being, an Australian resident. If someone arrived in November and remained in Australia for the rest of the financial year, the number of months they were a resident of Australia for would be 8 months. eg. $13,464 + ($4,736 x 8) / 12 = $13,464 + $3,157 = $16,621 prorated tax free threshold Item A3 - Super co-contribution There is no absolute requirement for the average taxpayer to complete this item - the ATO will be able to match data using information on the return. As this item can be very complex and has been designed to assist self-employed taxpayers that make personal superannuation contributions or those who earn a considerable amount through investments, we will not cover this item in detail and the following is for general information only. For those who wish to learn more, please see the ATO website. The superannuation co-contribution scheme by the Government assists eligible individuals to boost their future superannuation savings by giving them an additional payment according to the level of the individual's personal contributions. The maximum amount payable is $500. The super co-contribution is not taxed when paid, is not assessable income for tax purposes and is preserved in the fund to which it is paid. Individuals will be eligible for the super co-contribution if ALL of the following apply: they make personal super contributions by June 30 and don't claim a tax deduction for them their total income less deductions is less than the maximum threshold 10% or more of their income is from eligible employment or carrying on a business they are less than 71 years old they are not a temporary visa holder (unless a NZ citizen or prescribed visa holder), and; Page 13 of 19

14 they lodge a tax return for the relevant year Super co-contribution amounts The table below shows examples of what your co-contribution amount would be in , depending on your income level and your personal super contribution for the year. Contributions made in the income year If your personal super contribution is: $1,000 $800 $500 $200 And your income is: Your super co-contribution will be: $36,021 or less $500 $400 $250 $100 $39,021 $400 $400 $250 $100 $42,021 $300 $300 $250 $100 $45,021 $200 $200 $200 $100 $48,021 $100 $100 $100 $100 $51,021 or more $0 $0 $0 $0 HECS, HECS-HELP or SFSS These are student financial assistance programs which are loans from the government to pay for government assisted places in tertiary education. HECS balances can be found on the ATO portal and the ATO pre-filling report. HELP, SSL,ABSTUDY SSL and TSL repayment thresholds and rates Below $54,126 Nil Below $54,869 Nil $54,126 - $60, % $54,869 - $61, % $60,293 - $66, % $61,120 - $67, % $66,457 - $69, % $67,369 - $70, % $69,950- $75, % $70,910 - $76, % $75,191 - $81, % $76,223 - $82, % $81,433 - $85, % $82,551 - $86, % $85,719 - $94, % $86,895 - $95, % $94,332 - $100, % $95,627 - $101, % $100,520 and above 8.0% $101,900 and above 8.0% Page 14 of 19

15 SFSS repayment thresholds and rates Below $54,126 Nil Below $54,869 Nil $54,126 - $66,456 2% $54,869 - $67,368 2% $66,457 - $94,331 3% $67,369 - $95,626 3% $94,332 and above 4% $95,627 and above 4% Repayment income (*RI) = Taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income. Income Tests IT1 - IT7 Income tests are used to work out your eligibility for a number of tax offsets and benefits, which can reduce the amount of tax you have to pay. A number of offsets, benefits and obligations are assessed using a family income threshold. If you have a spouse, you should include your spouse s income in the relevant section of your tax return. You must complete all questions in this section of your tax return. Where the amount is zero, write 0. Income tests are used to work out whether you: Can claim certain tax offsets and the amount you are entitled to receive Can receive some government benefits or concessions Are entitled to a rebate for your private health insurance Must pay Medicare levy surcharge or have a HELP, SFSS or Trade Support Loan repayment liability Must pay tax. This information may also be passed onto another government agencies, such as the Department of Human Services, to ensure you are receiving your correct entitlement to government benefits. It will also be used to correctly determine any child support payments. IT1- Total Reportable Fringe Benefits Amounts Benefits provided in respect of employment will be included as fringe benefits provided to the employee. This amount is known as your reportable fringe benefits amount on your PAYG Summary. If the value of certain fringe benefits provided to the taxpayer or associate exceeds $2,000 in a FBT year (1 April to 31 March), the employer must record the grossed-up taxable value of those benefits on the payment summary for the corresponding income year (1 July to 30 June). Page 15 of 19

16 As the taxpayer does not pay income tax on fringe benefits, the grossed-up taxable value of a benefit reflects the gross salary that would have to be earned to purchase the benefit from after-tax dollars. The grossed-up taxable value is reported to ensure the value of the benefits is consistent with other forms of income on the payment summary. Even though a reportable fringe benefits amount is included on the payment summary, it is not included in the total income or loss amount and income tax and Medicare levy are not paid on it. It is, however, included in a number of income tests relating to certain government benefits and obligations. Categories included in the Reportable Fringe Benefits amount include Car fringe benefit Loan fringe benefits Debt waiver fringe benefits Expense payment fringe benefits Housing fringe benefits Board fringe benefits Airline transport fringe benefits Property fringe benefits Entertainment benefits Car parking fringe benefits Residual fringe benefits An employer only needs to show a fringe benefits amount on the employee s payment summary if the taxable value of certain benefits exceeds $2,000. All reportable benefits are then grossed-up using a FBT gross-up factor equal to the highest marginal rate of tax plus the Medicare levy, ( ending 31 March 2015)). IT2- Reportable Employer Superannuation Contributions Reportable employer super contributions appearing on the PAYG Summary are salary sacrificed super contributions or other contributions your employer makes to a super fund on behalf of an employee. These are additional to the minimum contributions they must make under an industrial agreement or the super guarantee. Note: Employers can complete this item incorrectly. It should be confirmed with the client that these are additional payments. It is possible to do a quick calculation (9.5% of income) to confirm that it is not the super guarantee. IT3 - Tax-free Government pensions Although tax-free pensions are not included in the calculation of taxable income, they are included here for the purpose of calculating a taxpayer's Adjusted Taxable Income. See Lesson 2 notes for an example of tax-free pensions. Page 16 of 19

17 IT4 - Target Foreign Income Target Foreign Income is income received from sources outside of Australia (in Australian dollars), that has not already been included as assessable income or is received as a fringe benefit. Examples include: Gifts or allowances from a foreign source on a regular basis, including from relatives An overseas pension or allowance that is not assessable income Income received by Australian residents employed overseas that is classed as non-assessable income (exempt income shown at N - Item 20 ) Income from foreign business interests and investments that are exempt from Australian tax Foreign income received whilst a temporary resident that is exempt from Australian tax. IT5- Net Financial Investment Loss Any losses as a result of financial investments from shares, managed investment schemes, distributions from a partnership that had income or losses from any investments or similar need to be shown at this item. It does not include rental property losses, capital gains or losses, or interest from everyday bank accounts. All investment income (before deductions) is added together. Any relevant deductions are then applied. If the remaining amount is a negative, it is written at ' X ', otherwise the box is left blank. IT6 - Net Rental Property Loss Any losses attributed to rental property owned (Australian or overseas) need to be shown here. The net rental amounts from R at Item 20, or Item 21 and the taxpayer's share of any net rental income or loss from a partnership are added together. Any deductions relating to a low-value pool from Items D6 or P8 are subtracted and if the result is negative (ie. a loss), the amount is shown at ' Y '. IT7- Child Support Paid The total amounts of child support the taxpayer paid to another person for the maintenance of a child are added together and put at ' Z '. Page 17 of 19

18 IT8 - Number of Dependent Children Under 21 years old, or 21 to 24 years old and a full-time student at school, college or university regardless of their income. The child must be an Australian resident and you must have contributed to their maintenance. This information is used to determine whether the taxpayer is entitled to an increase in the income test threshold for the: Private health insurance rebate Net medical expenses tax offset, and Medicare levy surcharge. Calculation of refund due or balance payable Once the taxpayer's income tax payable is calculated based on the taxable income, the amount of any tax offsets to which the taxpayer is entitled should be subtracted. Tax offsets will be covered next lesson. The remaining tax liability after tax offsets is referred to as net tax. Medicare levy and any HECS or HECS-HELP or SFSS repayments is then added to this net tax. The total is then compared to the amount of : any tax which has been withheld under the PAYG withholding system, any tax which has been withheld due to not supplying a tax file number, and any other credits to which the taxpayer is entitled. If the net tax is less than the tax instalments, then the taxpayer will receive a refund of the difference. If the net tax and levy is more than the tax already paid, then the taxpayer will have to pay the difference as the balance owing to the ATO. Example 7 : Betty is a taxpayer who has $52,000 in salary income. She has $2,435 in allowable deductions and $50 in interest income. Her PAYG instalments come to $16,000. Ignoring any offsets or rebates, calculate Betty's tax refund or liability. She has private hospital cover. Note: This example is a simple calculation and does not include things such as the Low Income Tax Offset. Answer: Taxable income = assessable income - deductions = $52,050 - $2,435 = $ 49,615 Tax payable = [($49,615 - $37,000) x 32.5%] + $3,572 = ($12,615 x.325) + $3,572 = $4, $3,572 = $7, Page 18 of 19

19 Medicare levy = $49,615 x 2% = $ Total tax payable = $ $7, = $ Less PAYG inst = $ ,000 REFUND = $ Page 19 of 19