TAXATION

Taxation

Taxation

Introduction

Taxation has existed since the late 19th century and plays an important role in society. That governments require revenue to finance their activities is an economic fact. Without taxes a government would not be able to function properly as a government needs to raise revenue, and the most effective way of doing so is by the imposition and collection of taxes. “At the most basic level, taxes operate to redirect economic resources from the citizen to the government for use in its spending programs.” In addition to its revenue raising function taxation is used as a powerful social and political engineering device. The Government can use the tax system to influence or modify aspects of society or societal behavior. Since Keynes, the importance of taxation on the economic level control (the level of employment and price stability) is known. However, Keynes saw a double taxation mechanism: through taxes and through public spending. The logic is that a tax cut increases disposable income of individuals. Ceteris paribus, they can save more and spend more. Insofar as they increase their consumption, the vendor's income is increased. As the chain created by tax cuts, increased government spending causes an increase in income to the seller and increases its ability to spend, and increases as the income of others. Clearly, a decrease in government spending has the opposite effect. Therefore, to stimulate the economy, the state must spend more money. The effect of this stimulation is somewhat mitigated if increased spending is financed by a tax increase. Conversely, to reduce the effects of too rapid expansion and inflation, the state must reduce its spending. The Case study of presented over here follows the following Income Statement along with other additional information, which will be incorporated while countering the problems in the requirements given in the case study

SE Machinery Pty Ltd [SEM] Income Statement as of 30th June 2012

Revenue

$

$

Gross trading income

3,035,000

Australian public company dividends received

($600 imputation credits attached)

2,000

Profit on sale of fixed assets - furniture

2,600

3,039,600

Expenses

Bad debt written off

8,000

Cost of borrowing funds to finance working capital

300

Depreciation (including buildings)

175,000

Education fees

22,000

Entertainment expenses

15,000

Fringe benefits tax

43,000

Legal expenses

4,600

Loss on sale of fixed assets - precision machinery

1,000

Overseas travelling expenses

24,000

Provision for long service leave

26,000

Repairs & maintenance

64,500

Research and Development (carried out by CSIRO)

20,000

Salaries and wages

948,650

Superannuation contributions

76,000

Other expenses (all tax deductible)

200,000 1,628,050

Net Profit before tax

1,411,550

Requirement 1 (i)

In the case presented over here, it can be observed that the amount of $ 500,000 will be included in the taxable total amount. This is primarily because of the fact the according to Income Tax Assessment Act 1997 - Sect 6.5, it can be seen the assessable income of a business is termed, and generally come under the definition of ordinary income. The provisions about the assessable income and its further treated can be found in much detail in section 10.5, however in the section we are asked to refer here is ...