Prepare Tax Documentation for Individuals

Prepare Tax Documentation for Individuals
© National Core Accounting Publications

© National Core Accounting Publications
Chapter 12 Tax Offsets © National Core Accounting Publications

Dependant Tax Offsets A taxpayer who directly contributes to the maintenance of a resident "dependant" may be entitled to a tax offset not greater than the maximum prescribed tax offset for each class of dependant. © National Core Accounting Publications

Spouse - means a married or de facto partner
Dependants A dependant is classified as any one of the following: * This definition excludes in-laws. Spouse - means a married or de facto partner Invalid Relative *- means a taxpayer's child, brother or sister aged 16 years or older and who gets an invalid pension or equivalent rehabilitation allowance, or certified permanently incapacitated © National Core Accounting Publications

Parent - means a parent or parent-in-law of the taxpayer
Dependants Child-housekeeper - means a taxpayer's child (including adopted or step-child) who is wholly engaged in keeping house for the taxpayer Parent - means a parent or parent-in-law of the taxpayer Child - means a taxpayer's child, spouse's child or adopted child under 21 years of age Student - means a taxpayer's child who is aged under 25 and who is a full-time student at school, college or university © National Core Accounting Publications

Dependants Where a child or student personally derives more than $1,785 for a full year then that child or student is not counted as a dependent for tax offset purposes. Note that the invalid relative, child-housekeeper, parent, child and student dependant tax offsets are not directly available. They are notionally retained for the purposes of calculating other tax offset entitlements such as the Zone tax offset. © National Core Accounting Publications

Maintaining a Dependant
Maintaining a dependant means that a taxpayer has: resided with the dependant given the dependant food, clothing, lodging, or helped the dependant to pay for their living, medical or educational costs © National Core Accounting Publications

Overseas Dependants A tax offset is not allowed for a dependant who is a non-resident of Australia. However, the dependent spouse and children of a taxpayer are deemed to have the same domicile as the taxpayer. Thus, if a migrant’s spouse and children are overseas waiting to join that taxpayer in Australia, the migrant may be entitled to claim a dependant tax offset. © National Core Accounting Publications

Eligibility for Dependency Tax Offsets
Eligibility for a dependant tax offset is income tested according to the “income limit for family assistance purposes”. This income testing is based on the adjusted taxable income (ATI) of the taxpayer where the offset is claimed in respect of a spouse, or the combined ATI of the taxpayer and the taxpayer’s spouse where it is claimed in respect of any other class of dependant. The relevant ATI threshold for income testing of the offset is $100,000 in 2015/16. © National Core Accounting Publications

Adjusted Taxable Income (ATI)
ATI consists of: taxable income adjusted fringe benefits tax-free pensions or benefits target foreign income reportable super contributions total net investment losses from rental property, shares or managed investment schemes (excluding capital gains or losses) less deductible child maintenance expenditure © National Core Accounting Publications

Adjusting for ATI Where a dependant derives ATI, the maximum tax offset is reduced by $1 for every $4 by which the ATI exceeds $282. i.e. ATI less $282 4 The ATO prescribes that cents are ignored in the calculation of the ATI adjustment (reduction). © National Core Accounting Publications

Types of Dependant Tax Offsets
Invalid and Invalid Carer tax offset A taxpayer may only receive an amount of the Invalid and Invalid Carer tax offset if they contribute to the maintenance of their spouse, relative or spouse’s relative, who is genuinely unable to work due to invalidity or because of their care obligations and who is an Australian resident. © National Core Accounting Publications

Invalid and Invalid Carer tax offset Eligibility A taxpayer may be entitled to this offset for an income year if, during that year, they contributed to the maintenance of an eligible dependant. Eligible Dependants An eligible dependant may include: a taxpayer’s spouse, parent, child (aged 16 years or over), brother or sister (aged 16 years or over) who is genuinely unable to work due to invalidity; the taxpayer’s spouse’s parent, brother or sister (aged 16 years or over), who is genuinely unable to work due to invalidity; or, a taxpayer’s spouse or parent/parent-in-law, who is genuinely unable to work due to carer obligations. © National Core Accounting Publications

Invalid and Invalid Carer tax offset The maximum Invalid and Invalid Carer tax offset is equal to the highest value existing dependency offset, which is $2,535 in 2015/16. It is indexed annually in line with the consumer price index. Note that where the dependant’s adjusted taxable income is $10,422 or more in 2015/16 no offset is available. © National Core Accounting Publications

Illustrations: Invalid and Invalid Carer tax offset
Cersei maintained her brother Jaime who was genuinely unable to work due to invalidity and who received $8,000 from a Disability Support Pension. (b) Debbie and Davros are married and Davros had an ATI of $140,000 in 2015/16. Debbie, aged 35, does not work as she cares for her mother who receives an invalidity service pension. © National Core Accounting Publications

Illustrations: Dependant (Invalid and Carer) tax offset
(c) Eddard has a dependent spouse, aged 25, with no ATI who is a full-time student. (d) Fritz and Felicity have a daughter Anne, aged 18, who received a disability support pension of $5,282. Felicity does not work as she cares for Anne and she has no ATI. © National Core Accounting Publications

Illustrations: Dependant (Invalid and Carer) tax offset
(e) Mahala supports his 75 year old mother who permanently resides in Sri Lanka. She receives a Sri Lankan pension of $7,000 per year. © National Core Accounting Publications

Notional Housekeeper and Child-housekeeper tax offsets Since the 2012/13 income year, the Housekeeper and Child-housekeeper tax offsets have been notionally retained only for the purposes of calculating the zone and overseas forces tax offsets. All other taxpayers may no longer receive a tax offset in respect of a housekeeper or child-housekeeper, as they may not meet the requirement of maintaining a dependant who is genuinely unable to work. © National Core Accounting Publications

Beneficiary tax offset Recipients of certain Commonwealth Government payments may be eligible for a Beneficiary tax offset. The maximum level of tax offset is determined according to the taxpayer’s age, marital status, place of residence, and if there are dependant children. © National Core Accounting Publications

Beneficiary tax offset For 2015/16 the beneficiary tax offset is rounded up to the nearest whole dollar and is calculated by using the following formula: Rebateable benefits Beneficiary offset calculation $0 to $37,000 15% x [Rebatable benefits – $6,000] Over $37,000 15% x [Rebatable benefits – $6,000] + 15% x [Rebatable benefits – $37,000] © National Core Accounting Publications

Net Medical Expenses Tax Offset (NMETO)
The NMETO may be available to a taxpayer whose “net eligible medical expenses” exceed a threshold (CPI adjusted limit). Persons with adjusted taxable incomes above the MLS threshold ($90,000 for single taxpayers and $180,000 for couples or families in 2015/16) face an increased threshold before being able to claim the medical expenses tax offset. © National Core Accounting Publications

Adjusted taxable income below the MLS threshold For 2015/16 the medical expenses tax offset is calculated as follows: (Net Eligible Medical Expenses less CPI adjusted limit*) x 20% Adjusted taxable income above the MLS threshold (Net Eligible Medical Expenses less $5,233*) x 10% Note: * the 2014/15 thresholds of $2,218 and $5,233 are used for illustrative purposes as the 2015/16 thresholds had not been released at the time of preparation of these slides. © National Core Accounting Publications

Eligibility From 2015/16 until 2018/19 the NMETO is only available to taxpayers for out of pocket medical expenses relating to: disability aids, attendant care, or aged care expenses © National Core Accounting Publications

Eligible medical expenses Medical expenses which qualify for the tax offset include payments: to a carer who looks after a person who is blind or permanently confined to a bed or wheelchair. for residential aged care expenses. to nursing homes or hostels (not retirement homes) for an approved care recipient’s permanent or respite care, provided the payments were made to an approved care provider and were for personal or nursing care - not just for accommodation. © National Core Accounting Publications

Disability Aids Disability aids are items of property manufactured as, or generally recognised to be, an aid to the functional capacity of a person with a disability but, generally, will not include ordinary household or commercial appliances. Attendant Care Attendant care expenses relate to services and care provided to a person with a disability to assist with everyday living, such as the provision of personal assistance, home nursing, home maintenance, and domestic services. Age Care expenses Aged care expenses relate to services and accommodation provided by an approved aged care provider to a person who is a care recipient or continuing care recipient within the meaning of the Aged Care Act Nursing homes or hostels Note that retirement home payments are not included in the NMETO. Only payments made to nursing hostels, or homes for an approved person's respite or permanent care can be claimed. © National Core Accounting Publications

Eligible dependants For medical expenses tax offset purposes the definition of "dependant" means: the spouse of the taxpayer, regardless of their income. a child of the taxpayer under 21 years of age who the taxpayer maintained. a student under 25 years old whom the taxpayer maintained and whose ATI was less than $1,786 if the taxpayer maintained them for the whole year. a dependant (invalid or carer), but only if the taxpayer can claim the Invalid and Invalid Carer tax offset for them. © National Core Accounting Publications

Net eligible medical expenses: © National Core Accounting Publications

Illustration: Calculation of NMETO
S. Icke is single and had incurred residential aged care expenses of $3,950 during the year ended 30 June She received refunds of $1,000 from Medibank Private, a private health insurance fund. Health cover insurance payments to Medibank Private were $1,300. Her adjusted taxable income was $50,000. Required: Calculate the Net Medical Expenses tax offset. Solution: Net eligible medical expenses = $2,950 (i.e. 3,950 – 1,000) Therefore, the Medical expenses tax offset is: (2,950 – 2,218) x 20% = $146 (rounded) © National Core Accounting Publications

Zone Tax Offset A tax offset is available to taxpayers who are residents of specified remote areas of Australia - Zone A and Zone B. Zone A comprises areas where factors of isolation, uncongenial climate and high living costs are more pronounced, while Zone B comprises areas less badly affected. The tax offset for Zone A residents is higher than for Zone B residents. © National Core Accounting Publications

Zone Tax Offset © National Core Accounting Publications

Zone Tax Offset Amount of Zone tax offset The Zone tax offset comprises two parts: a fixed amount, and a percentage of a base amount © National Core Accounting Publications

Percentage of base amount
Zone Tax Offset Amount of Zone tax offset Fixed amount Percentage of base amount Zone A $338 50% Zone B $57 20% Special area - Zone A or B $1,173 © National Core Accounting Publications

Zone Tax Offset Base amount From 1 July 2014 a taxpayer who is eligible for the zone tax offset will only be entitled to claim for a dependent (including a spouse) if that taxpayer is eligible for the Invalid and Invalid Carer tax offset. The base amount is made up of certain tax offsets to which the taxpayer is entitled, plus notional tax offsets. A notional tax offset is an offset to which the taxpayer would be entitled to if it was still allowable. © National Core Accounting Publications

Zone Tax Offset Base amount The Zone tax offset base amount includes tax offsets to which the taxpayer is entitled for the income year for: Dependant (Invalid and Invalid Carer) Notional tax offsets for any of the following: Notional Sole Parent base amount of $1,607 in 2015/16. Notional dependent children/student as follows: each student aged under 25 years $376 first non-student aged under 21 years (includes pre-school age) $376 other non-students aged under 21 years $282 © National Core Accounting Publications

Illustration: Calculation of Zone Tax Offset
Bakka Bourke resided in a special area of Zone A for nine months during the year of income. He is a sole parent and he wholly maintained his two dependent student children aged 10 and 16. The 16 year-old had $618 income from investments. Required: Calculate the Zone tax offset entitlement for Bakka Bourke. Solution: Notional sole parent $ 1,607 Notional Dependent children/students tax offset 10 year-old child $ 376 16 year-old child less ATI reduction – (618 – 282) Therefore, the Zone tax offset is: $1,173 plus 50% x (1, ) = $2,310 © National Core Accounting Publications

Private Health Insurance Tax Offset
The Private Health Insurance tax offset is a fully refundable tax offset allowed to eligible taxpayers who have taken out appropriate private health insurance. It can be taken either as a tax offset or as a direct reduction to the amount of the premium paid to the health insurer. It is income tested against three income tier thresholds. © National Core Accounting Publications

The 2015/16 income tier thresholds are as follows: No Tier Tier 1 Tier 2 Tier 3 Singles $90,000 or less $90, ,000 $105, ,000 $140,001 or more Families $180,000 or less $180, ,000 $210, ,000 $280,001 or more © National Core Accounting Publications

Rebate Adjustment Factor (RAF) Since 1 April 2014 all private health insurance rebate percentages have been adjusted annually by a Rebate Adjustment Factor representing the ratio of the proportional increase in the consumer price index to the proportional average premium increase. © National Core Accounting Publications

Rebate Adjustment Factor (RAF) Rebate Adjustment Factor (1 July 2015 to 31 March 2016) No Tier Tier 1 Tier 2 Tier 3 Aged under 65 27.820% 18.547% 9.273% 0% Aged 65-69 32.457% 23.184% 13.910% Aged 70 or over 37.094% The RAF’s for the period 1 April to 30 June 2016 were not available at the time of preparation of these slides. The Department of Health will publish these percentages in April 2016. © National Core Accounting Publications

Illustration: Calculation of Private Health Insurance Tax Offset
Candy Floss, aged 25 and single, paid $1,500 in gross premiums for private health insurance with Medibank Private for the year ended 30 June Premiums of $1,125 were paid from 1 July 2015 to 31 March 2016, and $375 from 1 April to 30 June She elected not to take the reduced premium option. Her taxable income was $95,000 for 2015/16. Required: Determine the income tier and calculate the Private Health Insurance tax offset. © National Core Accounting Publications

Illustration: Calculation of Private Health Insurance Tax Offset
Solution: The income tier is Tier 1 as income for surcharge purposes is $95,000. The Private Health Insurance tax offset is: 1,125 x % = $ for 1 July 2015 to 31 March 2016 plus 375 x Rebate Adjustment Factor for 1 April to 30 June 2016. © National Core Accounting Publications

Senior and Pensioner Tax Offset (SAPTO)
A taxpayer may be eligible for a SAPTO if they meet all of the following conditions: condition one – eligibility for Commonwealth age pension or similar payments condition two – rebate income threshold © National Core Accounting Publications

Senior and Pensioner Tax Offset(SAPTO)
Condition one – eligibility for Commonwealth age pension or similar payments A taxpayer will satisfy this condition if at any time during the year they were eligible to receive a Commonwealth of Australia government age pension or allowance, or a pension, allowance or benefit from the Department of Veterans’ Affairs. © National Core Accounting Publications

Condition two – rebate threshold income The term rebate income is applied to describe the components of income that determine a taxpayer’s eligibility for the SAPTO. © National Core Accounting Publications

Condition two – rebate threshold income For 2015/16 the income thresholds are: SAPTO 2015/16 Rebate income Eligibility condition Threshold - max tax offset applies Above threshold - no longer eligible Single and rebate income was less than: $32,279 $50,119 Couple and the combined rebate income of taxpayer and spouse was less than: $57,948 $83,580 Couple and at any time during the year they had to live apart due to illness or because one of was in a nursing home and the combined rebate income of the couple was less than: $62,558 $95,198 No change to the maximum tax offset values or the reduction rate applied for every $1 over the maximum rate threshold up to the cut-off threshold. © National Core Accounting Publications

The amount of the SAPTO available depends on the personal circumstances and the amount of rebate income of a taxpayer. If the taxpayer has a spouse, the calculation of the actual entitlement is based on individual income, even though eligibility for the SAPTO is dependent on both the taxpayer’s and the spouse’s combined rebate income. Category 2015/16 income threshold 2015/16 cut-off income threshold Maximum SAPTO Single $32,279 $50,119 $2,230 Each partner of a couple $28,974 $41,790 $1,602 Each partner of a couple living apart due to illness or in a nursing home $31,279 $62,558 $2,040 © National Core Accounting Publications

Medicare Levy and SAPTO
The Medicare Levy threshold amount for senior Australians who are eligible for the SAPTO in the 2014/15 income year was $33,044. The Medicare Levy phase-in limit for senior Australians who are eligible for the SAPTO was $41,306. Taxable Income Rate of Medicare Levy $0 to $33,044 0% $33,045 to $41,305 10% of the difference between taxable income and $33,044 (i.e. “shading-in”) $41,306 and above 2% of taxable income The Medicare Levy income thresholds for senior Australians who are eligible for the SAPTO in the 2015/16 income year were not available at the time of preparation of these slides. © National Core Accounting Publications

Illustration: Senior Medicare Levy Threshold
Annie, a single resident taxpayer, aged 77, receives the Age pension and has investment income. Her taxable income in 2015/16 was $34,000. She qualifies to receive the Senior and Pensioner tax offset. Required: Calculate the Medicare Levy for Annie. Solution: The Medicare Levy is $95.60. i.e. (34,000 less 33,044) x 10% = $95.60 © National Core Accounting Publications

Part-Year Tax Offsets Pro-rata calculations are made where a person is a dependant for part of an income year. e.g. due to death, divorce, resident for tax purposes for only part of the income year. Any income derived by the dependant before becoming classified as a dependant does not form part of the ATI when adjusting the maximum tax offset. © National Core Accounting Publications

Illustration: Calculation of Part-Year Tax Offset
Jack and Jill married on 1 January Jill was genuinely unable to work due to invalidity throughout the income year. She received a Disability Support Pension of $750 per month for the entire year. Required: Calculate Jack’s Invalid and Invalid Carer tax offset for 2015/16. Solution: Therefore, the Invalid and Invalid Carer tax offset is: Maximum $2,535 x 6/12 $ 1,268.00 less ATI reduction (750 x 6) – 282 = $1, ,054.00 4 (ignore cents in result) © National Core Accounting Publications

Limit on Tax Offsets The sum of tax offsets allowed to a taxpayer cannot exceed the amount of tax (excluding Medicare Levy) otherwise payable by the taxpayer. © National Core Accounting Publications

Illustration: Limit on Tax Offsets
Herbie has $30,000 taxable income (PAYG tax withheld $1,000). He is eligible to claim full tax offsets for maintaining his father and his brother, aged 30, who are both genuinely unable to work due to invalidity. Required: Calculate tax payable (including all tax offset entitlements) for the current income year. © National Core Accounting Publications

Illustration: Limit on Tax Offsets
Solution: Note: The above tax offsets are non-refundable, meaning that the tax offsets in excess of the amount of tax on taxable income are lost. © National Core Accounting Publications

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