Lesson 7 - Tax Offsets

Transcription

1 Tax Training School Contents Tax Offsets 2 Refundable Tax Offsets 2 Tax Offsets on the return 2 T1 - Senior and Pensioners (including self-funded retirees) 4 T2 - Australian Superannuation Income Stream 7 Private Health Insurance Rebate 7 Tax Offsets not calculated on the return 8 - Low Income Tax Offset (LITO) 8 - Lump Sum Tax Offset 9 - Franking Tax Offset (Dividend Imputation) 10 Page 1 of 10

2 Tax Offsets A tax offset is an amount that may be subtracted from the tax payable by a taxpayer. An offset acts to directly reduce the amount of tax a taxpayer must pay. Tax offsets were previously known as rebates. A distinction needs to be made between deductions, that are subtracted from assessable income before tax is worked out, and offsets, which are subtracted from the actual tax payable on that assessable income. Generally, tax offsets can only reduce the amount of tax payable by a taxpayer to zero, I.E if your tax offsets are greater than the tax due, a refund is not given for the excess amount. Tax offsets in general do not reduce the Medicare levy. Refundable Tax Offsets There are exceptions to this known as refundable tax offsets: Private health insurance rebate Franking tax offset (dividend imputation) Where a normal tax offset directly reduces the amount of tax payable on your taxable income, a refundable tax offset is one that directly decreases the amount of tax owed to the ATO (or increases the refund to be received from the ATO). Refundable tax offsets can be used to offset the Medicare levy payable and allow the taxpayer to receive a refund if there is any unused portion remaining. Tax offsets which are actually calculated on the return form are allowed as whole dollars only. Other tax offsets are allowed in dollars and cents. Tax offsets on the tax return Adjusted Taxable Income (ATI) ATI is used to work out: if a person is eligible to claim a tax offset for zone or overseas forces (item T4) net medical expenses for disability aids, attendant care or aged care (item T5) invalid and invalid carer (item T6) whether a child is considered a dependant for Medicare levy purposes (item M1) entitlement to government super contributions (item A3). To claim a tax offset at items T4, T5 or T6, you will need to work out the taxpayer and their dependant s ATI for the relevant period to determine whether they are eligible for a tax offset, and the amount of any tax offset they are entitled to. Page 2 of 10

3 A person's ATI is the sum of the following amounts: taxable income reportable employer superannuation contributions deductible personal superannuation contributions certain tax-free government pensions or benefits received by the person target foreign income (income and certain other amounts from sources outside Australia not included in your taxable income or received as a fringe benefit) net financial investment loss (the amount by which the person's deductions attributable to financial investments exceeded their total financial investment income) net rental property loss (the amount by which the person's deductions attributable to rental property exceeded their rental property income) adjusted fringe benefits (total reportable fringe benefits amounts multiplied by 0.51) less any child support payments the person provided to another person. Note: Both the taxpayer's ATI and the dependant's ATI are used to determine the amount of any offset. The Effect of Adjusted Taxable Income Except for the housekeeper, the amount of income allowed to be earned by other dependants will affect the amount of tax offset available to the taxpayer at T1. The maximum offset claim of $2,588 for 2015/16 allowable needs to be reduced by $1 for each complete $4, by which the dependant's adjusted taxable income exceeds $282 (offset reduced to nil once dependants income exceeds $10,634). The calculation is as below: 1. Calculate the maximum tax offset allowable for the dependant as if there has been no separate ATI, having regard to any part-year limitations (see discussion later in this chapter); 2. Subtract $282 from the dependant's adjusted taxable income, and divide the result by 4; 3. Subtract (2) from (1). Children and students There are no actual tax offsets as such for these categories of dependants, but they are included notionally for the purpose of deciding which, if any (along with the amount), certain tax offsets the taxpayer may claim, e.g. zone offset. The amounts for each category of child or student are provided in a separate table. The threshold of $282 ATI also applies to this category. There are no tax offsets allowable for dependants who are not residents of Australia. If any of the offsets at T1 to T3 are being claimed, the Income Tests IT1 to IT7 must be completed also. Page 3 of 10

4 T1 - Senior and Pensioners Tax Offset - includes self-funded retirees (SAPTO) The seniors and pensioners tax offset is available only if the taxpayer meets all the following conditions relating to: eligibility for Australian Government pensions and similar payments, and income. If the taxpayer has a spouse you also need to work out whether they were eligible. The SAPTO is subject to a number of conditions. A special tax offset is available to aged persons, whether they be self-funded retirees or pensioners. If both of the following conditions are met, a taxpayer is eligible for SAPTO: Condition 1 A. They showed at Item 6 on their return an Australian Government pension or allowance from Centrelink, or a pension, allowance or benefit from the Department of Veterans' Affairs (DVA). B. They satisfied the Centrelink age pension age requirement and were eligible for an Australian government age pension during 2015/16 but did not receive it because they did not make a claim or because of the application of the income test or the assets test, and they satisfy one of the following: They have been an Australian resident for age pension purposes for either 10 continuous years or for more than 10 years of which 5 years were continuous. They have a qualifying residence exemption (because they arrived in Australia as a refugee or under a special humanitarian program) They are a woman who was widowed in Australia (at a time when both they and their late partner were Australian residents). They have made a claim for the age pension and they had 2 years residence immediately before their claim. They received a widow b pension, widow allowance, mature age allowance or partner allowance immediately before turning age pension age. They would qualify under an international social security agreement. C. They satisfied the veteran pension age test and were eligible for a pension allowance or benefit from Veterans' Affairs during 2014/15 but did not receive it because they did not make a claim or because of the application of the income test or the assets test and they satisfy either of the following: They are a veteran with eligible war service, or; They are a Commonwealth veteran, allied veteran or allied mariner with qualifying service Does the taxpayer meet the requirements for Condition 1? If the taxpayer meets the requirements for Condition 1, proceed to Condition 2. Page 4 of 10

5 Condition 2 They meet this condition if any of the following applied in They did not have a spouse, and their rebate income was less than $50,119 They had a spouse, and the combined rebate income of them and their spouse was less than $83,580 At any time during the year they and their spouse had to live apart due to illness or because one of them was in a nursing home, and the combined rebate income was less than $95,198. The combined rebate income is the total of: Their rebate income Their spouse's rebate income, and The amount on which a trustee of a trust was liable to pay tax in respect of their spouse because their spouse was under a legal disability, such as being an undischarged bankrupt or a person who was declared legally incapable because of a mental condition. Rebate Income Rebate income is used to determine eligibility for the seniors and pensioners tax offset at T1. Rebate income is the total amount of the individual s taxable income plus the following amounts if they apply: adjusted fringe benefits (that is, the total reportable fringe benefits amounts multiplied by 0.51) reportable employer superannuation contributions deductible personal superannuation contributions net financial investment loss (that is, the amount by which deductions attributable to financial investments exceeded total financial investment income) net rental property loss (that is, the amount by which deductions attributable to rental property exceeded rental property income). Note: There is a difference between Adjusted Taxable Income and Rebate Income. Senior and Pensioners Tax Offset (SAPTO) 2016 rates Max. Rebate Level $* Shade-Out Threshold $ Cut-Out Threshold $ Single Couple (Each) Couple (separated due to illness each) Rebate Reduces by 12.5c for each $1 of taxable income above the shade-out threshold Page 5 of 10

6 Example : A single age pensioner has a rebate income level of $35,000. The SAPTO would be calculated as follows: a. Maximum offset = $2,230 b. Reduction in offset = ($35,000 - $32,279) x = $2,721 x (The comes from the 12.5 cents in every dollar over the threshold) = $ c. Tax offset allowed = $2,230 - $ = $1, = $1,890 (rounded to the nearest whole dollar) Codes are required to identify the taxpayer's status - these are provided separately with the income threshold levels. The codes are as follows: A B C D E You were single, separated or widowed You and your spouse: Were both eligible for the SAPTO, and; Had to live apart due to illness* or lived apart because one of you was in a nursing home Your spouse was not eligible for the SAPTO and you and your spouse lived apart due to illness or because one of you was in a nursing home. You and your spouse lived together and you were both eligible for the SAPTO You and your spouse lived together but your spouse was not eligible for the SAPTO *Had to live apart due to illness refers to situations where you and your spouse did not live together because one or both of you have an indefinitely continuing illness or infirmity and, as a result, your combined living expenses were increased. Veteran code letters: V W X You were a veteran, war widow or war widower Your spouse was a veteran, war widow or war widower Both V and W apply to you. If the taxpayer was in more than one category during the year, then whichever of those categories gives the highest offset amount should be used. Note: Exceptions to this are: If A and B apply and the spouse's income was less than $18,334, select B. If A and C apply and the spouse received an Australian Government pension or allowance and their taxable income was less than $18,640, select C. If A and D apply and the spouse's taxable income was less than $12,494, select D. If A and E apply and the spouse received an Australian Government pension or allowance and their income was less than $13,140, select E. Page 6 of 10

7 T2 - Australian Superannuation Income Stream Many taxpayers elect to receive a pension from their superannuation fund instead of a lump sum. This income would have been shown at Item 7 - Income on the Tax Return. The taxpayer may be entitled to a tax offset equal to 15% of the taxed element or 10% of the untaxed element of the superannuation income stream benefit. It is only available where the pension fund is subject to tax on superannuation contributions and has age restrictions. (See table provided in Lesson 2 Item 7 ). The tax offset amount will be shown on taxpayer s PAYG payment summary - superannuation income stream. Private health insurance rebate The private health insurance rebate is an amount that the government contributes towards the cost of a taxpayer's private health insurance premiums. The majority of people with private health insurance claim the rebate as a reduction in the amount of premiums they pay to their private health insurers (known as premium reduction). The private health insurance rebate is income tested and is based on income for surcharge purposes. This means that if a taxpayer has a higher income, their rebate entitlement may be reduced or they may not be entitled to receive any rebate at all. Taxpayers will be income tested on their share of the private health insurance policy. Status Income thresholds Base tier Tier 1 Tier 2 Tier 3 Single $90,000 or less $90,001 - $105,000 $105,001 - $140,000 $140,001 or more Family $180,000 or less $180,001 - $210,000 $210,001 - $280,000 $280,001 or more Age Rebate for premiums paid, 1 July March 2016 Under 65 years % % 9.273% 0% years % % % 0% 70 years or over % % % 0% Age Rebate for premiums paid, 1 April June 2016 Under 65 years % % 8.930% 0% years % % % 0% 70 years or over % % % 0% Page 7 of 10

8 Tax offsets not calculated on the return Beneficiary tax offset The beneficiary tax offset is available to taxpayers who receive certain Centrelink benefits and Commonwealth education allowances. The tax offset directly reduces the amount of tax payable. No tax will be payable for the year if the taxpayer: only received any of the qualifying payments and allowances has no other taxable income. If the taxpayer has no tax payable, the beneficiary tax offset is not available to be used. If a taxpayer is entitled to both the beneficiary tax offset and the pensioner tax offset, then the offset that gives the greatest amount will be used. Low Income Tax Offset (LITO) A tax offset is available to any resident taxpayer whose taxable income falls below a certain threshold. This threshold may change each year, and the amount of offset is also subject to change (provided separately). The offset (or rebate) is reduced by 1.5 cents for each $1 in excess of the threshold ($37,000). The general effect of the offset is to increase the threshold at which tax becomes payable, however the offset is not refundable. Low Income Tax Offset thresholds Financial years LITO amount $445 $445 Taxable income the LITO begins to be reduced at $37,000 $37,000 You are no longer eligible for LITO if your taxable income is $66,667 and over $66,667 and over Withdrawal rate 1.5% (0.015) 1.5% (0.015) To calculate an individual's LITO amount, use the following formula: Taxable income LITO reduction threshold ($37,000) = Threshold excess (A) Page 8 of 10

9 Threshold excess (A) x = Amount to reduce LITO amount by (B) Therefore, $445 (B) = Taxpayer's LITO amount. Example : An individual has a taxable income of $40,000. His LITO is calculated as follows: $40,000 - $37,000 = $3,000 (A) $3,000 (A) x = $45 (B) $445 - $45 (B) = $400 Lump Sum Tax Offset A special tax offset may be available to taxpayers who have had amounts included in full in their incomes because of provisions relating to lump sums on termination of employment or retirement (discussed in Chapter 2- shown at 'A' on the PAYG Payment Summary). The purpose of the offset is to ensure that a taxpayer who has such a lump sum will not pay more than the correct amount of tax. Lump sum payments received could be: Back payment of salary or wages that accrued in a period more than 12 months before the date of payment Salary or wages that accrued during a period of suspension and were paid on resuming duty Back payments of non-superannuation annuities that accrued in earlier years of income Repatriation and social welfare pensions, allowances and payments Periodical workers and accidents compensation payments but not payments made to the owner of the policy, and/or Commonwealth education or training payments. Lump Sum A on the PAYG Payment Summary are paid for unused holiday pay and unused long service leave as per the following: unused holiday pay and other leave related payments that accrued before 18 August 1993; unused long service leave that accrued after 15 August 1978, but before 18 August 1993; unused long service leave accrued after 17 August 1993 or unused holiday pay and other leave related payments, where the amount was paid in connection with a payment that includes (or consists of) either: - a genuine redundancy payment - an early retirement scheme payment - the invalidity segment of an ETP or super benefit. If an amount has been included at Lump sum A, the Type box must show the type of payment made as per the following codes: R if the payment was made for a genuine redundancy, invalidity or under an early retirement scheme T if the payment was made for any other reason. Taxpayers who have received a lump sum payment in arrears after 30 June 2005 and are liable for the Medicare levy surcharge may be eligible for an additional offset to reduce the levy surcharge liability. (See further lessons for details). The lump sum tax offset is automatically calculated by the ATO this will also show up in the Handitax software. Due to the complexity of calculating the lump sum offset you will not be required to do any of these calculations. Page 9 of 10

10 Franking Tax Offset (Dividend Imputation) A resident taxpayer is entitled to a refundable tax offset if a franked dividend has been received during the year. When a company pays a dividend to a shareholder, it is legally required to advise the shareholder as to whether the dividend is franked or not, and if it is, of the amount of the franking credit. Taxpayers whose franking credit exceeds their tax liability are entitled to a refund of the excess amount of franking credit. This is because this tax offset is a refundable tax offset. The amount of tax offset is equal to the amount included in the income section of the return. The refund applies to franking credits attached to franked dividends paid to a resident individual on or after 1 July Resident individuals are not eligible for the offset if either of two following conditions are not met; Holding Period rule This rule applies to shares purchased on or after 1 July It requires the taxpayer to hold the shares "at risk" for at least 45 days. The taxpayer is not required to hold the shares for more than 45 days before the dividend is paid in order to be eligible for the franking tax offset. Days after the dividend is paid can be counted and the days do not have to be in the same financial year. It does not apply if a taxpayer's total franking credits entitlement for the year of income are less than $5,000. Related Payments rule This rule applies to arrangements entered into after 31 May 1997 and applies to an individual if they make, are under an obligation to make, or are likely to make, a 'related payment'. A related payment is a payment that passes on the benefit of the franked dividend to someone else. The taxpayer is also required to comply with the holding period rule. If the taxpayer is not entitled to the franking tax offset in respect of a dividend because of these two rules, then the amount of that franking tax offset does not have to be included in the taxpayer's assessable income. Page 10 of 10