LSB102018InsuranceandTaxes

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Lecture 10
Managing a business:
insurance and taxes
Learning objectives
How can insurance minimise the risk of something
going wrong? What are the rights and obligations of the
insurer and of the insured?
What are the tax implications of operating a business?
What are the different forms of tax payable by a
business?
Taking out insurance
Types of insurance
• Life insurance is a type of insurance where the
insurer agrees to pay an agreed sum upon the
insured’s death or the attainment of a particular age
• General insurance includes:
– property insurance, where the insured is
indemnified upon the occurrence of loss of or
damage to particular real or personal property,
Types of insurance
– liability insurance, where the insured is
indemnified in the event of a claim against them
by a third-party, and
– motor vehicle insurance
The process of arranging insurance
Duty of disclosure
• At common law a contract of insurance is a contract uberrimae
fidei (of utmost good faith)
• Both parties to the insurance contract have a duty to disclose all
material facts to the other party
• The insurer must notify the insured in writing, before the
contract is entered into, of the consequences of breaching the
duty of disclosure
• If the insured becomes aware of a change in circumstances that
increases the risk then they have an obligation to notify the
insurer of those changes
Duty of disclosure
• The consequences of failing to comply with the duty of
disclosure depend upon whether the failure was innocent or
fraudulent
• Fraudulent: The insurer is entitled to avoid the contract
• Innocent: The liability of the insurer to pay a claim is reduced
to an amount that would place the insurer in the same
position it would have been in had the failure to disclose not
occurred
• The court can disallow an avoidance of contract by an insurer
if it would be harsh and unfair not to do so
Making a claim
• Upon making a claim the insured may be entitled to:
– the market value of the subject matter of the
insurance at the time of the loss or destruction
– the amount required to repair or replace the subject
matter of the insurance following the loss or
destruction, or
– the amount previously agreed upon by the parties
Making a claim
• If the insurance policy contains an excess clause, the
insured will be obliged to pay the first part of a claim
themselves
• In the event of over-insurance, the insured is only
entitled to recover the amount of their actual loss
• In the event of under-insurance, if the policy contains
an average clause the amount of the insured’s
entitlement will be reduced proportionately
Making a claim
• In most indemnity insurance contracts, the insurer is
granted a right of subrogation:
• upon payment of the claim, the insurer assumes all
of your rights in relation to the subject matter of the
insurance, including the right to sue a third-party if
they are the cause of the loss
Paying tax
Forms of tax
Forms of tax
• Income tax is a tax levied on the taxable income of a
person or a business in a given year
• Corporations pay income tax at a flat rate, presently
30% in Australia
• Income tax payable by individuals (including sole
traders and partners) is in 2017-2018 calculated as
follows:
Income tax
• If a business has employees it is obliged to withhold
income tax from the payments that it makes to them
under the Pay As You Go (PAYG) withholding scheme
• At the end of the financial year each employee
completes a tax return setting out their actual
income, and any difference between the total
amount withheld and the employee’s actual tax
liability is paid by the employee or refunded by the
ATO
Goods and services tax
• Goods and services tax (GST) is a federal tax of 10% on
the sale of most goods and services
• GST is collected by each supplier in the supply chain who
is registered for GST
• Each supplier will usually charge the GST to the person to
whom they supply the product, and then pass on the GST
collected to the ATO monthly, quarterly or annually less
the amount of GST they paid to any other person who
supplied products to them (known as ‘GST credits’ or
‘input tax credits’)
Other taxes
• Fringe benefits tax is federal tax calculated on the
basis of the taxable value of the fringe benefit paid to
an employee
• Capital gains tax is federal tax payable on any gain a
taxpayer makes when they sell an asset such as real
property or shares
• Excise duty is a federal tax payable on the sale of
certain products such as alcohol, petrol, tobacco and
coal produced or manufactured in Australia
Other taxes
• Pay-roll tax is a State tax payable on the wages paid
to employees
• Land tax is a State tax payable annually and
calculated on the basis of the unimproved value of
the real property of which the taxpayer is the owner
• Stamp duty is a State tax paid upon certain
transactions such as the sale of a motor vehicle, and
calculated on the basis of the value of the item
Other taxes
• Rates are a tax payable to a local authority calculated
on the basis of the unimproved value of land owned
by the tax payer, and are applied to fund the
provision of basic services to that land
Tax administration
• A Tax File Number (TFN) is a number issued by the ATO to
all individuals and organisations
• Individuals and organisations are obliged to cite their TFN
whenever they have any dealings with the ATO
• An Australian Business Number (ABN) is a unique 11-digit
number issued by the ATO to those individuals and
organisations that conduct business in Australia
• If a business is carrying on an enterprise or intends to
register for GST it must apply for an ABN
Tax implications for different
business structures
• A partnership is not a separate legal entity and as such
does not pay income tax
• The individual partners pay income tax on their share
of the partnership income
Company
• A company is a separate legal entity and as such has
its own TFN
• Any company registered under the Corporations Act
2001 (AUS) is entitled to an ABN
Tax implications for different
business structures
Trust
• A trust has its own TFN separate from the TFN of the
trustee. A trustee carrying on business in Australia may
apply for an ABN for the trust
• Whether or not a trust has an income tax liability
depends on the type of trust, the wording of the trust
deed and whether the income earned by the trust is
distributed (in whole or in part) to its beneficiaries
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