Wednesday, September 10, 2008

Snork Maiden's Taxable Income



I've computed Snork Maiden's 2007-8 income for her Australian tax return (the tax year runs from July 1st to June 30th). I can't complete the return or work out how big a refund she should receive until I've done my tax return, which is the next project. The first two sections of the table should be pretty self explanatory. Income distribution from trusts is Australian source income, not including capital gains from managed funds (mutual funds). For some reason this has its own special section in the tax return (well combined with partnership income) while capital gains and foreign income from managed funds is reported in other relevant sections of the return together with income in those categories from ordinary shares and other assets.

Net income at $48,629 is firmly in the 30% marginal tax rate bracket (31.5% including the Medicare levy). Income is reduced this year by only being in the country for nine months of the tax year. Rather than applying a lower rate to long-term capital gains, Australia only requires taxpayers to report half the gain. I've added back the "concession" in the line "net income without CGT discount". On the other hand you have to report dividends in terms of the gross dividend before the company paid Australian corporation tax on it. You then get to claim the tax they paid back to avoid double taxation of dividends. These credits are called "franking credits". I've deducted this notional income in the final line of the table. Neither of these changes make much difference to Snork Maiden's return, but will make a big difference to mine.

Snork Maiden had $11,272 in tax withheld (including franking credits). I estimate she should have paid from $7,962 (if my net income is zero) to $10,062 (if my net income is above the maximum threshold for a "spouse offset" to apply). Her refund should, therefore, be between $1,209 and $3,309. The effective tax rate is, therefore, between 16.3% and 20.6%. There are no state income taxes in Australia.

Unlike the US, Australia does not require you to compute your tax yourself. All you need to do is report income, deductions, credits etc. They do show you how to compute the tax at the end of the "Taxpack". There is also a calculator on the ATO website.

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