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INCOME IN ARREARS

REBATE TAX OFFSET

30 June 2017

The following income is eligible for the rebate:

1. Salary and wages paid were accrued during a period ending more than 12 months before the date on

     which they were paid.

2. Salary and wages paid to a person after reinstatement to duty following a period of suspension to the

    extent to which the salary or wage accrued during the period of suspension.

3. Some superannuation income streams or annuities paid to an individual.

4. Some Income by way of compensation or sickness or accident pay in respect of incapacity for work.

5. Some other Commonwealth benefits, pensions, allowances or training payments.

 

Rebate Tax Offset Calculation:

The amount of the eligible lump sum which accrued before the year of receipt must not be less than 10% of the taxable income of the year of receipt after deducting the amount of the eligible lump sum that accrued in earlier years, abnormal income, net capital gains, ETP's and lump sum payments on termination of employment in lieu of annual leave or long service leave.

THE FORMULA:

Tax on arrears less notional tax on arrears.

Tax on arrears is the amount of tax (excluding Medicare Levy) payable in the year of receipt attributable to the amount of the eligible lump sum that accrued in earlier years.

Notional Tax on arrears is the amount representing the tax that would have been payable on the amount of the lump sum that accrued before the year of receipt if that amount had been taxed in the year in which it accrued.

The notional tax on arrears equals the sum of:

1. Recent Accrual Years: The notional tax on the amount of the eligible lump sum that accrued in the year most recent accrual years before the year in which the lump sum was received.

This is the extra tax that would have been payable if the amount accrued in those years had been taxed as income in those years.

2. Distant Accrual Years: The notional tax on the amount of the eligible lump sum that accrued in accrual years before the recent accrual years.

This is the amount of the lump sum that accrued in those years multiplied by the average rate of tax on the amount that accrued in the recent accural years.

However if the taxable income of the recent accrual years included an ETP, a payment received for unused leave received on termination of employment, abnormal income or a net capital gain, the average rate is calculated without regard to those amounts.

Example:

In the year ended 30 June 2017 Caroline assessable income is $60,000 plus a lump sum payment of $15,000 representing a back payment of income arrears.

The lump sum accrued $5,000 in the 30 June 2016 year, $5,000 in the 30 June 2015 year and $5,000 in the 30 June 2014 year.

Caroline's assessable income was $30,000, $20,000 and $10,000 in those years respectively.

As Caroline's income for the year ended 30 June 2017 is $60,000 she meets the 10% eligibility test as $15,000/$60,000 = 25%

Calculation of rebate:

1. Tax on arrears is tax on $75,000 ($60,000 + 15,000) = $17,422 less tax on income excluding arrears $60,000

     = $11,047 the difference = $6,375 ($17,422 - $11,047).

2. Notional tax for recent accrual years

a) 30 June 2015 gross tax is ($20,000 + $5,000) = $1,292 less gross tax on $20,000 = $342 the difference is $950

b) 30 June 2016 gross tax is ($30,000 + $5,000) = $3,192 less gross tax on $30,000 = $2,242 the difference is    

    $950.

3. Notional tax on distant accrual years. $5,000 x average rate of tax on the arrears that accrued in the years

     = ($950/$5,000 + $950/$5,000)/2 = .19 x $5,000 = $950 .

4. Tax on arrears $6,375 ($17,422 - $11,047) less notional tax on arrears $2,850 ($950 x 3)

      = $3,525 income arrears rebate for 30 June 2017 year.

 

Google ATO Income arrears rebate tax offset


Disclaimer
The information provided in the above documents is not intended to be, nor should it be construed as tax advice. Any specific recommendation for a client can only be done after their individual circumstances have been determined by David Douglas Accountants.

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