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Archive for the ‘Taxation’ Category

When conservatives held various Tea Party rallies on April 15th, many people turned up their nose and pointed to the slogan of “no taxation without representation.” The idea was that conservatives had participated in the elections which resulted in Washington’s big spenders, and therefore couldn’t gripe about the results. Now that states such as California are asking for government bailouts, however, it is increasingly clear that Tea Party critics will be unable to repeat this mantra for the July 4th rallies (not to mention the smaller ones in between).

Various states – not just California – have found that they are not the federal government. They lack the ability to print money. Like many Americans, leaders in these states have found that they haven’t been able to pay their bills. And like far too many Americans, they are expecting the federal government to bail them out so they can continue spending more money than they have.

When I became an adult, I moved out of my mom’s house and into my own place. I was responsible for my own bills; I didn’t look to my mom to pay them. And for good cause – she would have told me that I was an adult with an income. Too many parents today keep their grown kids on the dole; the kids become accustomed to it, and are forty years old and dependant on their parents. Come on. Sometimes, you just have to say “no,” whether you are a parent or a federal government. You have to let your kids – and your states – suffer the consequences of their mistakes, or they will never learn.

California voters and officials have many, many programs that I did not vote for. I never participated in an election for any of these programs. I didn’t vote for any of the social or environmental programs that are enacted in the state. In fact, I don’t even know what it is I didn’t vote on because, hey, it wasn’t my election.

If I never had a chance to make my voice – or the voice of my elected officials – heard, then why is it that I have to pay for them? Make no mistake; money used to bail out California will come from my taxes, from my income, from my pocket, despite the fact that I never had the opportunity to make my voice heard.

And that, my friend, is taxation without representation.

Most Social Security payments are assessable income, with a portion of the payment exempt. However, special rebates are allowable recipients of some types of social security payments. One of the criteria of exemption is whether the recipient is a pension age. For a man, pension age 65 years. For women born before 1 July 1935, pension age is 60. For women born on or after 1 January 1949, it is 65. For women born between these two dates, there is a sliding scale. There is a long list of exempt amounts apart from pensions, where social security benefits and allowances payable under the Social Security legislation and are exempt.

Payments made in relation to studying, bereavement allowance, carer allowance, the carer payment is exempt were both the taxpayer and the care receiver are in the pension age or where the taxpayer is under pension age and the carer receiver has died. The disability support pension is exempt the taxpayer is under pension age. The disability wage supplement is also not part of assessable income. Disaster relief payments and double wharf and pensions, employment entry payments, there’s allowance, mature age allowance, mature age partner allowance, mobility allowance and new start allowance all also escape the definition of being assessable income. However, there also some exceptions to these rules which need to be examined in detail. Some of the other payments that are not part of assessable income a pension and bonus, pension education supplement, pharmaceutical allowance, seniors concession allowance, sickness allowance, special benefit, special needs age pension and special needs disability support pension. The special-needs widow pension and the special-needs white pension, telephone allowance, utility allowance and widow allowance as well as youth allowance are all exempt to some degree from being assessable income.

You grow your savings so to use them later. Outside of contributing they grow according to how you invest them. Government’s taxation plays an important part in how you choose what to invest in and how to hold that investment.

This article overviews how your savings or investments are taxed and how that influences what you choose to invest in.

Taxation affects growing your savings three ways. It:

1. Affects how much you’re able to contribute to your savings from your working income
2. Determines how much of your investment earnings will be taxed annually, and
3. Takes a share of the your investment gains when you sell them

Because of this omnipresence of taxes at every savings or investment interaction, you must understand how taxes work so you can minimize their drain on your savings. So, here’s how to ‘view’ your savings and investment in relation to how they’re affected by taxation.

First, let’s categorize investment types according to how they ‘hopefully’ increase.

There are two fundamental types of investments. They are:

* Debt-based investments, and
* Equity-based investments

Debt-based investments ‘borrow’ money from you and pay you ‘interest’ at least annually for the use of your money. At the end of the borrowing term – if there is a term at all- all your money is returned to you.

Examples are your bank savings accounts, CDs, bonds, and the like. These investments kick out an ‘annual’ income for you to use or reinvest as you wish. They’re also ‘income-based’ investment for those seeking some relatively assured annual income from their investments.

Interest earnings are taxed annually; they’re added to your income to be taxed as your highest income tax rate. Only earnings are taxed – not what you loaned to get the earnings.

Equity-based investments require you to ‘buy so as to own’ an investment – perhaps a share in a company (like stock). Your share or ownership value – called capital – hopefully will increase in time so when you sell your share you’ll receive back more than you paid; but there’s no guarantee.

The gain of what you receive over what you paid (called your basis in capital) is called your capital gain. Most equity-based investors seek capital growth.

Capital gains are taxed only when you sell your equity-based investments. These are taxed at very low capital gains tax rates if you hold your investment for more than 1 year. Your capital basis is never taxed. Some equity-based investments promise a yearly dividend (earnings) too. These relatively assured earnings make ‘dividend- paying’ equities an ‘income-based’ investment like debt-based investments.

Dividends are taxed annually. Generally they’re taxes like interest. But some are taxed at low tax rates depending on what income tax bracket you’re in.

I’ll call investments you make in equity-based and income-based subject to the taxation I’ve outlined above ‘normal taxable investments’.

The government has set up and regulates retirement-savings plans as an incentive for workers to save for retirement. Examples are 401(k) and IRA savings plans. The incentive is tax-based and prescribes a completely different taxation method for whatever investment type you use within these plans.

The taxation procedures for these government-regulated plans are:

* All contributions to these plans are deductible from working income. This eliminates the income tax that would be due on what you contributed to the plan that year.
* All earnings or gains from what you invested in within the plan are tax-deferred until you withdraw your plan savings at retirement.
* All withdrawals will be subject to your income tax rates. Withdrawal before you turn 591/2 will include penalties in addition to the income tax.

So, you should view all your savings as partitioned under the two taxing systems for savings:

* Normal taxable investments
* Regulated-savings plans

These tax attributes determine your investment options as follows:

Normal taxable investments:

Income-based investments are generally highly taxed – interest earnings at your highest income tax bracket as for nonqualified dividends. Qualified dividend earnings may have lower 0% to 15% tax rates though. So, choose generally assured earnings only if you need the yearly earnings to live on and for an emergency fund.

Equity-based investments have their capital gains taxed at low rates (5% or 15%) if held for more than 1 year – otherwise at income tax rates. These are clearly tax-advantaged investments to use to grow your savings over the long term.

Regulated-savings plans:

These help you put more into your savings every year – but contributions are limited. Always contribute when your company matches your contributions. Their tax-deferred character helps yearly compounding too. Choose high earning income-based investments for their assurance.

The best long term growth approach is in equity-based capital growth items – stocks and residential property – held as normal taxable investments.

Everybody loves a piece of land. That is the real limited resource we have on earth. And the government allows us some deductions on them too.

Real estate tax deduction is a policy whereby owning a piece of property like your house gives you many tax advantages. Some of these include:

1. Interest paid on mortgage: permissible unto a maximum if you have bought your first and second homes within $1.1 million.

2. Fee points: completely deductible points, these are arrived at when you have taken mortgages. One point converts to 1% of the original amount and this is literally thousands of dollars and completely deductible.

3. Equity loan interest: certain rules imposed by Internal Revenue department, but partially deductible as it are loan on your home credit.

4. Home improvement loan interest: interest on making improvement but remember, there is a slight difference between a repair and an improvement. You can flout the rules by knowing the difference.

5. Home office deduction: if your home doubles up as your office too, then this is the deduction to make.

6. Selling Costs: these are costs that you normally include like legal costs, transfer costs advertising and admin costs and so on.

7. Capital gains exclusion: is a house which you resided for two years in the past five years, you need not pay any capital gains tax. Married taxpayers can get a maximum limit of $500000 and 4250000 if filed individually.

8. Home moving costs: this is an option available to ones who are relocating. If you are moving to any other part of the stator country, claim it.

9. Property Tax: Finally, the real estate tax (property tax) that you pay to your local government is completely deductible from your federal income tax.

So you see, taxes are not really that harsh, if you plan and make the most of it. Just keep those years and eyes open and make a small payment to those smart tax consultants, they will ensure they will the rest.

The Australian Taxation Office (ATO) benchmarking process means that, for small businesses, the quality of taxpayers’ record-keeping is about to take the spotlight.

In statements released, the Australian Taxation Office has said that: “if taxpayers’ keep good records then the taxpayer has nothing to fear. Fail to keep good records and the onus will be on the taxpayer to prove the ATO wrong, if and when they apply the benchmark and issue a default assessment”

What this means for businesses is that if the taxpayer can not substantiate their lodgments they must prove the ATO wrong or else the industry set benchmark will be applied by the ATO.

For example: John runs a small sandwich shop with a turnover of $150,000. The key ratio’s the ATO would be looking at for a sandwich shop would be Labour/Sales, Rent/Sales and Cost of Goods Sold/Sales. All of Johns ratio’s are substantially different to that of the ATO. John receives a letter from the ATO stating that his lodgments are different to the benchmarks. Does John need to worry?

Well this depends on the accuracy of his lodgment. If they are correct and John is able to substantiate his claims then whether they fall outside the benchmarks or not he is correct and can back up his claims. However, if he failed to keep records of his claims then the ATO will enforce the benchmarks set.

The ATO says that in dealing with the cash economy it isn’t their intention to issue arbitrary default assessments, and that there is a robust process they follow in relation to benchmarking audits.

Many businesses have already received letters from the Australian Taxation Office advising that the previous years assessments have fallen outside the benchmark for that industry. This has caused unwanted alarm in many cash businesses across Australia. However, as long as the tax payer has good record keeping they have no reason to be alarmed.

Additional information can be found about the business benchmarking process directly on the ATO Website.

Enterprises in Albania must follow financial accounting and reporting rules aimed at providing investors with a true and fair view of the financial situation of the enterprise. These rules increase transparency and international comparability of the results of an enterprise or a group, and are a strong step into the foreigner market. International Accounting Standards (IAS) and National Accounting Standards (NAS) are widely used by Multinational Enterprises (MNEs).

Financial accounting and reporting rules are quickly shifting away from traditional legal concepts applied in commercial and fiscal laws. They are increasingly based on a fair presentation approach. The results shown for financial purposes may differ considerably from the profits shown in the books of single enterprises or in the tax returns. MNEs therefore risk being confronted with unwarranted requests for tax profits adjustments or with the requirement that profits shown for financial purposes in a given country be taxable in that country.
The national and international business community is of the view that it is important for tax authorities and policy makers to understand the reasons why the results shown in financial statements of an enterprise or a group differs from the taxable results of such enterprise or group.

Different approaches followed to determine taxable profits
Some countries in Europe follow the concept of dependence in determining the taxable results. This means that the profits resulting from the commercial accounts are taken as the primary basis for tax assessment. Subject to the relevant taxation rules, certain fiscal adjustments have to be made in order to calculate the taxable profits.

Other countries, in particular those with a common law tradition, follow the concept of independence. Two separate sets of rules are applied, one for the commercial results and another for tax purposes. Such countries do not rely heavily on commercial accounting rules for taxation, which may have as a consequence that the two systems differ considerably.
Both systems have advantages and shortcomings. With separate taxation rules, two sets of rules must be applied, which may increase the compliance burden for enterprises. It may also be easier to deviate for tax purposes from certain principles followed in commercial accounting. However, even when taxation is based on the commercial accounts, certain tax adjustments are unavoidable.

For the time being, it would be unrealistic to ask for a common approach in this respect. Each country is free to decide whether the determination of the taxable results should be based primarily on commercial accounts or derived from the application of a separate set of taxation rules.
Countries have the right to follow different approaches with respect to the relationship between commercial and tax accounting (dependence/independence). Both approaches have advantages and shortcomings. However, in both cases, well-established principles of taxation must not be disregarded.

Differences between commercial accounting and capital market rules
Commercial law prescribes how the financial results of a single enterprise are determined. These rules are often set out in specific accounting laws. Accounting and reporting rules are based on the principle of fair presentation and are mainly designed to increase transparency for investors. The standards must be applied consistently to the whole group. Sometimes, enterprises are given a choice with regard to the application of a given method or rule. The uniform application is examined by external auditors and is enforceable by supervisory bodies. Specific accounting and reporting standards for companies increase transparency and comparability, mainly for investors. A convergence of the principles governing existing accounting and reporting standards is desirable in order to increase comparability and to facilitate multiple listings. However, possible tax implications for companies, especially in countries relying on commercial accounts as primary basis for tax assessment, have to be kept in mind, and the convergence should not deteriorate the tax position of enterprises.

Different approaches and different purposes

Commercial, financial and taxation rules serve their own purposes and, as a consequence, differences in the results should be expected and accepted.

o Commercial accounting rules are used to determine the commercial results of a single entity. They establish, in particular, whether a profit or a loss has resulted for a given period. The rules may form part of a country’s commercial or company law. They are intended to protect the rights of shareholders and creditors and, as a consequence, the prudence principle occupies an important place.

o Financial accounting and reporting rules are part of a country’s capital market regulations. Their objective is to give investors (and other stakeholders) a reliable and, as accurate as possible, picture of the financial situation of the economic entity (group) at a given moment (financial position, performance, cash flows). The guiding principle is “fair presentation” or “true and fair view”. Other important rules in this respect are “substance over form”, “market value measurement”, and – as a consequence of true and fair – the factual prohibition of hidden reserves.

o Taxation rules are used to determine taxable profits. Their objective is to define the tax liability of enterprises to the tax administration for a given year. The rules must be susceptible to compliance by taxpayers and control and enforcement by tax authorities. Taxation rules for companies are usually designed to preserve economic neutrality, so that business decisions are not unduly influenced by fiscal measures. The rules may also provide for non-fiscal objectives. Tax laws reflect general principles of taxation, such as non-discrimination or taxation according to economic capacity, but also practicalities, such as availability of funds for payment of the liability (realization), fairness between different categories of taxpayers (neutrality), the annual character of the liability (loss carryovers, standardized depreciations), long-term profitability (prudence, imparity, valuation below market value) and other such factors. For example, tax systems may prescribe special timing rules for the recognition (or deferral) of income, loss carryovers from other years and other rules peculiar to the field of taxation.

The approaches followed for the calculation of commercial, financial and taxation statements serve different purposes. Although the respective rules are focused on the same general object (the results of a business entity in a given period), it is important to understand that, under existing concepts, the rules applied in financial accounting and those applied for tax purposes should not be expected to be strictly comparable.

The good of interactions between accounting and taxation rules

As a result of demands by international capital markets (globalization), widely used accounting and reporting standards are expected to lead to a certain harmonization in the area of accounting and reporting. On the other hand, so long as each country imposes its own taxes, implementing its own tax policies, a similar degree of harmonization of taxation rules is not to be expected. At the same time, the more the rules used for financial accounting differ from those used in the field of taxation, and the more the results of a group become transparent, the more obvious the differences that result from the application of the two sets of rules become. Tax authorities should not use the financial results of an entity (in the same country or in third countries) as a pretext for an adjustment of the taxable profits of an enterprise or to justify transfer pricing corrections.
The rules applied for financial accounting and those used for tax purposes may differ considerably and may lead to results that cannot reasonably be compared. Tax authorities and policy makers should accept that the underlying principles of financial accounting are not always compatible with basic principles and practices used in the field of taxation. From a tax policy perspective, it is important that taxation rules are not undermined by an inappropriate extension of financial reporting requirements.

Internationally recognized accounting standards can be seen as a coherent set of rules for accounting and reporting that should give investors a “true and fair view” of the financial situation (balance sheet), performance (income statement) and changes in the financial position (cash flow) of an economic entity at a given moment.

In the field of taxation, some widely accepted principles clearly deviate from concepts used for financial accounting and reporting purposes. In addition, tax laws often provide for non-fiscal objectives, e.g. the granting of specific incentives (for R&D, for special reserves, to promote self-financing, to attract certain business activities, etc.). They may be designed to influence the behavior of enterprises by granting incentives or using disincentives (e.g. environmental taxes or relieves). Furthermore, a country’s taxation system is the result of a political decision-making process and therefore, in many cases, neither neutral for businesses nor fully internally consistent.
Taxation and financial accounting rules serve different purposes, have different objectives and are based on different principles. Although both sets of rules are used to measure the annual results of an enterprise, differences in the results or in the methods applied have to be accepted. Financial accounting looks at the enterprise as an economic entity, whereas taxation is normally based on a separate entity approach.

Policy makers in the fields of taxation and accounting must be aware of these differences. Tax authorities must respect them and refrain from using companies’ financial results for tax adjustments.

By Eduart GJOKUTAJ