LAW 601 – Taxation Law
Deductions,
Exemptions
and
Allowances
Lecturer: Ashneel Singh
10/12/2011 1
Overview
PAYE
Deductions, exemptions and allowances for:
Individuals
Business
Chargeable income or taxable income
10/12/2011 2
PAYE
Pay As You Earn (PAYE) is a system for the
collection of tax monies from taxpayers deriving
income from employment
Two essential features:
Payments made to CIR throughout tax year as
income from employment is derived
Payments remitted by employer rather than
employee
PAYE (cont’d)
Advantages of the system:
State receives tax revenue attributable to
employment income as a steady stream
throughout the year
State is preserved from potential large bad debt
where workers fail to budget for a single year end
tax payment
CIR deals only with employers, ie. much smaller
group of persons rather than employees
PAYE (cont’d)
Employers to register with CIR for PAYE purpose prior to
carrying on trade, etc. under regulation 3
An employee on commencement of employment must file
with his employer a declaration (Form IRS458) of his
personal allowance under ss.25 and 26 (reg. 4)
Information will be used by employer in determining
quantum of employee’s PAYE deduction
Employees with more than one job, files a declaration
with one employer only (ie. one who pays greater
income) reg.4(1)(d)
PAYE (cont’d)
On a change in relevant personal circumstances
of an employee (eg. marrying, birth of a
dependant child, paying premiums of life
insurance) a fresh declaration to be filed with
employer within seven days reg.4(4)
PAYE (cont’d)
PAYE deduction
Actual sum to be deducted by an employer is
determined by reference to tax tables
Figure relied on in using tax tables is employee’s
taxable emoluments for relevant pay period
Tax tables prepared by CIR and amended every
time there is a change in tax rates or tax brackets
applicable to individuals
Table states the sum (expressed in dollars and
cents) to be deducted from a given value of
taxable emoluments
PAYE (cont’d)
Different tables apply dependent on whether
salary or wage are paid weekly, fortnightly or
monthly
Table serve two objectives:
They provide a simple means for employer to
determine the sum to be deducted
Tables aim to ensure the aggregate deduction for
the year will approximately as closely as possible
the assessed tax liability for the year
8
10/12/2011
PAYE (cont’d)
Sums deducted by an employer pursuant to the
regulations must be remitted to the CIR by the
15th of the following month (reg.12)
Employer provides employee annual certificate of
deduction detailing aggregate emoluments and
PAYE deductions for the year
Employee utilises certificate of deduction in
making his annual return (s.44)
Deduction – Resident
Individual
A resident’s chargeable income is
total income for the year less any
available allowance under s.25 and
deductions under s.26
Both ‘allowance’ and ‘deduction’
operate as deduction
Deduction – Resident
Individual
A ‘deduction’ represents and is measured by an
actual expenditure of the taxpayer
An ‘allowance’ is a deduction of an arbitrary
value set by the legislation and involves no
reference to any actual expense or expenditure
of the taxpayer
Allowance – Resident
Individual
s.25, allowances
s.25(1) Wife allowance
An allowance to a married man where the wife is
living with or wholly maintained by the husband
$1,200
s.43 (1) – Income of a married woman
Couple may elect for separate assessment
Husband and wife are assessed ‘as if they were
unmarried”
A male assessed as if unmarried cannot claim a
s.25 wife allowance
Allowance – Resident
Individual
s.25(1)(b), widowed allowance
Allowance of $1000 to an individual, man or
woman who is widowed
What if a widowed taxpayer has re-married?
Could a male who has been widowed and has
remarried claim both wife allowance and widowed
allowance?
Once widowed, always widowed
Can only claim wife allowance
Allowance – Resident
Individual
s.25(1)(A), legally separated spouse allowance
Subject to two proviso:
If both spouses have legal control and custody of
a dependant child or children, allowance of
$1,200 is equally shared
Note: proviso is silent when they have legal
control and custody of different children
Allowance is reduced by $1 for every $1of the
spouse’s total income not chargeable with tax
other than exempt interest and dividend income
Allowance – Resident
Individual
s.25(2), child allowance
5 children only
Allowance of $500 for each of the first two
dependent children
Allowance of $300 for another three dependent
children
S.2 – defined the term dependant child
Child must be natural child, step child or adopted
child of taxpayer
Allowance – Resident
Individual
s.25(2), child allowance (cont’d)
Dependency exist in three circumstances:
Child under 18, dependent on parents for support
Child over 18 and under 27, engaged in fulltime
study, apprentice in trade, dependent on parents
for support
Child over 18, dependent on parents for support
due to physical and mental capacity
Child ceases to be dependent if earns own world
total income
Allowance – Resident
Individual
s.25(2), child allowance (cont’d)
Child allowance is subject to two provisos:
Allowance to any one taxpayer cannot exceed
$1900 (5 children)
One allowance granted for same child
Allowance – Resident
Individual
s.25(2), child allowance (cont’d)
Can be exploited:
Eg. 4 children, both parents working, share
children equally and maximizes deduction of
$500 for two children
However, usual case parents are married,
attracts s.43(2)(a)
S.43(2)(a) – combine allowance of couple under
s.25 cannot exceed what would be available to
husband individually
Allowance – Resident
Individual
If parents not married then deduction could be
maximised
Where parents are separated, children with
mother and father paying maintenance then
children would normally be dependent children of
father.
Proviso (ii) provides otherwise if father deducts
maintenance payment in calculating total income
s.19(k) prohibits deduction of maintenance
payments
Deduction – Resident
Individual
s.26, deduction
Provides for a deduction in calculating
chargeable income where the taxpayer has paid
premiums towards life or accident insurance
policies or contributed to a superannuation
scheme
Provision is policy driven
The deduction is intended to encourage
taxpayers to provide for their own or family’s
future
Deduction – Resident
Individual
The deduction is equal in value to the payments
made in the tax year
Life insurance and Fiji National Provident Fund
Subject to a cap (but not in all cases) of $1,500
Deduction – Resident
Individual
Deduction is only available for payments within
seven specified cases:
S.26(a) and s.26(b)
S.26( c)
S.26(d)
S.26(e)
S.26(f)
S.26(g)
Tax on income
Income Tax Act Cap 201 imposes a number of
taxes
First, there is a general tax on income
When people talk about income tax it is usually
normal tax which they have in mind
Second, there are a number of specific taxes,
each imposes a tax on a single specific form of
income eg. Interest, dividends or royalties
Normal tax
Normal tax is levied by s.7 of the ITA on the
‘chargeable income’ of individuals (s.7(1)(a)) and
companies (s.7(1)(b))
s.7(1)( c )(d) and (e), Mutual insurance
companies, non-resident insurance companies
and non-resident shipping companies constitute
special cases
s.7 does not provide details on tax rates
Rates of normal tax are set out in Schedule 4
s.7(3) provides the link to schedule 4
Normal tax is levied for the year of assessment
Chargeable income
Taxable income or chargeable income:
Normal tax is levied on a person’s ‘chargeable
income’
Or more strictly speaking, levied on a person with
regard to their chargeable income
The ITA provides five different accounts of
chargeable income as follows:
Chargeable income
(cont’d)
The ITA provides 5 different accounts of
chargeable income as follows:
s. 24,
category of taxpayer: resident individual,
definition of chargeable income: total income for
the year derived in Fiji or elsewhere less
deductions in s.25 and s.26
Chargeable income
(cont’d)
s.31
category of taxpayer: non- resident individual,
definition of chargeable income: total income for
the year derived in Fiji less deductions in s.31
s.32(a)
category of taxpayer: resident company,
definition of chargeable income: total income for
the year derived in Fiji or elsewhere
Chargeable income
(cont’d)
s.32(b)
category of taxpayer: non- resident company,
definition of chargeable income: total income for
the year derived in Fiji
s.33
category of taxpayer: deceased estate, trust or
settlement,
definition of chargeable income – total income for
the year
Chargeable income
(cont’d)
For each class of taxpayer, except deceased
estates, trusts and settlements chargeable
income is defined with reference to three
elements:
Total income
Income period
Geographic source
Total income
Major concept introduced in s.11
It concerns the forms of receipts (eg. salary,
interest, etc.) and expenses (eg. repairs and
maintenance) that enter into the calculation of a
person’s overall net income
Income period
This is a year
For a company or individual operating as a sole
trader or partner this may be other than a
calendar year (s.51(2), s.52, s.53)
Geographic source of
income
For a non-resident (company or individual), this
is Fiji sourced income
For a resident (company or individual), this is
worldwide income
There is no geographic reference in the
chargeable income definition for deceased
estates, trusts and settlements
Taxable Income
Taxable Income = assessable income – deductions
Assessable income is the aggregate gross
income
Allowable deductions is expenses in earnings
income
Australian ITAA
Summary
Chargeable income:
Income
+ fringe benefit
- deduction, exemptions and allowances
= Chargeable Income
LAW601 – Taxation Law
Thank-you