Week 7 – Tax Offsets and
Offsets and rebates
Trading Stock – Division 70
Chapters 13 and 15
Income Tax Formula – s 4-10,
Less: Exempt income (s 6-20 and Div 11)
= Assessable Income (s 6-5 and s 6-10)
Less: Allowable Deductions (s 8-1 & Div 25)
= Taxable Income x Tax rate + Medicare
levy (1.5%) + (surcharge 1% if applicable)
= Tax payable - Less: tax offsets + rebates =
Tax refund or payment to ATO
Tax payable - Less: tax offsets + rebates
• Tax offsets and Rebates – available to individuals (except
imputation credits for Companies and Entrepreneur tax
• Tax offsets/rebates are deducted from tax payable.
Allowable deductions – s 8-1 and Division 25 deducted
from assessable income.
• Example: Your client earns $14,250 from a part time job and deducts
the cost of the laundry of a uniform, $250. Taxable income is $14,000
and tax payable is $1,200. Your client is eligible for the full amount of
the low income rebate (less than $30,000) of $1,200. Therefore, tax to
be paid to the ATO is $0.
List of relevant Tax Offsets
Dependant rebate – s 159J and s 159H, ITAA 36
– Spouse, child-housekeeper, invalid relative,
parent or parent-in-law, or parents
Low Income - $1,200
Senior Australians Tax Offset
Private Health Insurance
Child Care Rebate
• Who is a dependent? Includes a “defacto” spouse. The
number of children are not relevant for the rebate.
• Who is a “child” – only relevant as a “notional” dependent
for medical expense rebate. A person under 21 years a
“child” or a full-time student under 25 years.
• What is SNI – separate net income – dependents that earn
their own taxable income may preclude the taxpayer from
claiming a rebate. Spouse – cuts out if SNI $8,917 or
more. Full time student under 25 years – no rebate if SNI
more than $1,785.
Separate Net Income
• How is SNI calculated – not the same as taxable
income. SNI includes gross income: salary, wages,
pensions, capital gains and exempt income.
Deductions consist of: net child care expenses
after rebate for child care, travel from home to
work, food consumed during work hours.
• From the SNI is deducted the amount of $282 and
the rebate is reduced by $1 for every $4 excess.
• Rebate reduced or denied if eligible for a Part B – Family
Tax Benefit – which is aimed at assisting single income
families and those on low incomes, i.e. only one spouse
• Family Assistance Office, administers A New Tax System
(Family Assistance) Act 1999, but benefit paid by
• Assistance in the form of a Family Tax Benefit A, Family
Tax Benefit B, and Child Care Benefit.
• Example: still entitled to a Part A, Family tax benefit if 1
child and income below $89,803 per annum
• Spouse – $2,159 – no rebate if income >$8,917
• Child-housekeeper - $1,759 – no rebate if income >$7,317
• Invalid relative - $792 – no rebate if income >$3,449
• Parent or parent-in-law - $1,583 – no rebate income $6,613
• Children only notionally taken into account for medical
expense rebate or zone rebate.
• Example: Your client earns $120,000 and has a spouse and child of 4
years, and is working part-time earning $2,500 per annum. No Part B
Family Tax Benefit is paid. The spouse has travel expenses from home
to work of $450 and child care expenses of $500. The rebate is $2,159
less SNI – 282, divided by 4. SNI = 2,500 – (450 + 500) = 1,550 – 282
= 1,268/4 = 317. The amount of rebate claimed is 2,159 – 317 = 1,842
Maintenance of Parents
• Example: Your client looks after their parents in their
home. The mother and father receive a pension of $4,000
each per year. Their SNI is therefore $4,000. The
maximum rebate your client can claim is $1,583 per
• The amount of rebate that can be claimed is: $1,583 less
($4,000 minus 282) divided by 4 = 3,718/4 = 929.
• $1,583 less 929 = 654
• Your client looks after both parents, therefore the rebate is
654 x 2 = $1,308. This amount is deducted from tax
Medical Expense Rebate
• A rebate, 20%, of net medical expenses in excess of $1,500 per year.
Medical expenses include payments to doctors, dentists, nurses,
chemists and nursing homes etc.
• The medical expense does not include amounts refunded by Medicare
or private medical insurance.
• Example: Your client has incurred total medical expenses of $8,200
during the year for the family. A son, 23 years of age and a full time
university student, has incurred expenses of $3,400 and has a SNI of
$1,600, and a daughter, 20 years of age, has incurred $2,000 and has a
SNI of $5,000. Your client was reimbursed $3,000 by Medicare. How
much is the rebate? 8,200 – 3,000 = 5,200 less 1,500 = 3,700 x 20% =
740. The expenses of the son are included because the son is a
“notional” dependent because his income is less than 1,785.
Private Health Insurance Offset
• An incentive of up to 30% of the premium for private
• It can be taken as a deduction from the cost of the
premium with the insurer or as a tax offset with the tax
• The policy must cover hospital expenses. It can also cover
ancillary and hospital or a combination of both.
• Dependents includes a “child” under 25 years who is a
full-time student or a child under 18 years. If over 18 years
and not a full-time student then not a dependent.
Low Income Rebate
• Only a resident individual is eligible for the $1,200 rebate
provided their taxable income is below $30,000.
• The rebate phases out if the taxable income is more than
$60,000. The rebate reduces by 4 cents for every dollar
• The effect of the low income rebate is that no tax is
payable on taxable incomes less than $14,000 (not $6,000)
• Example: client has a taxable income of $36,000. As the
taxable income exceeds $30,000, the rebate is less than
$1,200. $36,000 less 30,000 x .04 = 240. The rebate is
1,200 less 240 = 960
• 70-10 Trading stock includes:
– (a) anything produced, manufactured or
acquired that is held for purposes of
manufacture, sale or exchange in the ordinary
course of a business; and
– (b) live stock.
• Note 1: Shares in a PDF are not trading
stock. See section 124ZO of ITAA 1936 .
Definition – Trading Stock
• Includes items integrated into trading stock
• Includes consumable goods (which become part of
manufactured goods, eg raw materials, labels,
• Spare parts? - not trading stock unless for resale
• Land? Shares? – Business dealing -trading vs.
• Standing or growing crops, unshorn wool? -
become trading stock when severed, shorn: Tax
Ruling, TR 95/6
ACCOUNTING FOR TRADING STOCK
FOR TAX PURPOSES
• The difference between trading stock on
hand at the beginning and the end of the
year is brought to account - s 70-35(1)
• If the value of trading stock on hand at end
of year greater than at the beginning of the
year: the difference is Assessable income (s
6-5) - s 70-35(2)
ACCOUNTING FOR TRADING STOCK
FOR TAX PURPOSES
• If the value of trading stock on hand at the end of
the income year is less than at the beginning of
the income year: the difference is deductible (s 8-
1) - s 70-35(3)
• Deduct purchases of trading stock – s 8-1 and s
70-15. Cost is normally the basis of the purchase
price, but if seller and buyer not dealing at arm’s
length - cost of trading stock is it’s Market Value-
not actual purchase price – s 70-20
• Assessable income
Sales – s 6-5 $2,500
Excess of closing stock over opening stock s70-35(2)
• Allowable deductions
Purchases – s 8-1 $1,500
Operating expenses – s 8-1 300
• Taxable income $1200
Accounting Profit & Loss Treatment
Income: Sales – s 6-5 2,500
Stock - Beginning 1,000
Purchases – s 8-1 1,500
Stock - End 1,500
Gross Profit 1,500
Less Operating expenses – s 8-1 300
Net Profit $1,200
Meaning of "on hand" - s 70-35 - at end
• “On hand” for the purposes of valuing the
• Stock is “acquired”, and therefore, “on
hand”, even though taxpayer has no legal
title or possession - but when taxpayer has
power to deal with trading stock as if it is its
own. eg, “floor plan” arrangement: FCT v
Suttons Motors (page 819)
• legally owned by the taxpayer - even if has no
physical possession: - All States Frozen Food
Pty Ltd v FCT - goods in transit still on ship.
• the taxpayer has dispositive power over the
trading stock: Farnsworth v FCT Taxpayer had
sent fruit to a central packing house -ceased to be
on hand -lost dispositive power-only had a
contractual right to enforce packing house to deal
with fruit according to rules of the association.
FCT v Raymor (NSW)
• Concerned the valuation of trading stock ‘on
hand’. Pre-paid for stock prior to 30 June, and
claimed a deduction pursuant to s 8-1.
• Stock take value did not include pre-paid stock
because it was not on hand. (page 814). Therefore
gave rise to ‘tax avoidance’.
• Section 70-15 introduced to overcome this
Value of Trading Stock
• Value of Trading stock at Start of Year - s 70-40(1) - the
value of trading stock on hand at the beginning of the year
must be the same as the value adopted at the end of the
• Value of Trading stock at end of the Year - s 70-45(1) -
taxpayer has the option to value each item of trading stock
on hand at the end of the year at either:
– market selling value; or
– replacement price.
Value of Trading stock
• Under s 70-50, the taxpayer may elect a lower value than
any of above, e.g. in the case of obsolescence. Reasons for
Tax rates increasing or decreasing in next year, losses to
• Normally market cost greater than replacement cost and
greater than Cost. Therefore electing market cost instead
of cost will increase taxable income by increasing the
value of ending stock over opening stock.
• Generally, to minimise Taxable Income, choose the
lowest possible value of closing stock, unless you want to
absorb carry forward losses or other deductions.
Obsolescence and Non-arm’s length
• Section 70-50 – stock can be valued at less than
the three methods provided by section 70-45 –
namely cost, market value or replacement value.
• Stock must be obsolete and value reasonable.
• If stock sold outside normal business practice
then market value must be used. Section 70-90(2)
– amount received NANE. Section 70-95 –
purchaser is deemed to have acquired the trading
stock at market value. Sales income – s 6-5.
Small Business Entity – trading stock
• Concession for small business entities
• If the difference between the opening and
closing stock value is less than $5,000, an
option not to include the difference.
• See section 328-285 – taxpayer has a choice
if under the SBE system.