Terms Beginning With 'a'

Ability-to-Pay Taxation

  • January 03, 2020
  • Team Kalkine

Ability-to-Pay Taxation The neoteric trending concept in which the tax is levied as per the taxpayer’s economic ability to pay.
It is based on the concept that a person who earns more should pay more taxes and the one earning less should pay less.

 

What is a luxury tax? A luxury tax is a tax imposed on those goods and services that are possessed by only the affluent sections of the society. These goods are luxury goods. The idea is to tax the richer sections of society. Some of the items that come under luxury taxes include perfumes, luxury cars, jewellery, etc. This makes luxury taxes a progressive tax as the richer people in the society are taxed more than the lower income groups. This is the opposite of a regressive tax. However, there are instances of the luxury tax being levied on the luxuries of the lower income groups. The ethical reason for the introduction of luxury taxes was to prevent economic spending on unnecessary and non-essential goods. Conversely, in the modern world the revenue earned from luxury taxes overweighs the ethical intent behind the tax. It can be implemented through a sales tax system, value added system or as a customs duty. When were luxury taxes introduced? Luxury taxes were first introduced in France in 1918. The purpose of the tax was to attack manifestations of wealth and rather than instruments of labour. A luxury tax would strike enjoyment but not the industry producing luxury goods. The luxury goods were classified into 2 categories as follows: Obvious luxuries: This group included perfumes, yachts, liqueurs, watches, antiques, etc. General articles: These articles were normal items that became luxuries past a certain point such as clothing items. There was an upper limit placed on the prices of these everyday items, beyond which these goods became luxury items. These taxes were not well received by the public as there were many protests in France. People perceived the tax as a tool for the government to earn more revenue. Thus, the luxury tax was eventually removed and was later introduced with major changes. England was the second country to introduce the luxury tax in 1918. Most countries were criticised for implementing the luxury with the intent of increasing revenue rather than checking spending. What are the categories of luxury taxes? In current times, luxury taxes have evolved, and they have the following two categories: Sin Taxes: These are the taxes imposed on products which are detrimental to the well-being of individuals. These goods include cigarettes, liquor, and other harmful substances. The government can discourage spending on these goods with a tax while earning revenue at the same time. Items which are only purchased by wealthier sections of the society. Both these categories were relatively well received by the population as they hit only selected individuals in the economy. Why are luxury taxes important? Luxury taxes are indirect taxes, the burden of which falls on the consumers. The goods on which luxury taxes are levied include private jets, expensive cars, yachts, etc. In essence, a luxury tax is supposed to bring more equality in the economy by taxing the ultra-wealthy population. The revenue collected from these wealthy sections of the society would be ultimately used as government spending which will benefit the entire population. Therefore, a luxury tax is not a regressive tax but is a progressive tax. A regressive tax is one which affects the lower income groups more than it affects the higher income group. What are the challenges of implementing a luxury tax? Government must adopt a luxury tax cautiously as there have been many previous instances where a luxury tax has failed to serve its purpose. For example, in the US, the luxury tax had to be abolished as it ended up hurting the sellers of these luxury items and it did not even generate as much revenue as was expected out of it. There was also a black market that had formed for these luxury goods, which is another challenge that comes with luxury taxes. The major challenge in adopting a luxury tax anywhere in the world is to identify which goods can be termed as luxury goods. The variations that exist in the definition of the term “luxury item” make it a somewhat vague subject. With the goods that hold a large price tag, it becomes obvious that they must constitute as luxuries. However, the part that difficult to answer is where to draw the line. The erroneous classification of everyday items as luxury goods can be motivated by many reasons which are mostly political. It has been observed that luxury taxes are often imposed during times of war, to increase the government revenue. This can also be done to obtain revenues in times of distress when other types of taxes can not be increased. These motives by the government may go unfulfilled as sometimes a luxury tax might fail. If goods lying only on the more expensive side are taxed, then it is possible that their demand falls sharply. Thus, the government would not be able to earn the expected revenue and the tax would fail. Any real-life example of a luxury tax being implemented? The Australian Taxation Office has implemented a luxury car tax on imported vehicles. These vehicles are valued above a certain threshold, which makes them fit to be deemed as “luxury cars”. The LCT value is calculated given by the car’s sale price minus any LCT included in the sale price and minus any other taxes or fees.

What is a partnership? In business, a partnership is an arrangement where two or more persons share the profits according to agreements. Partners are collectively co-owners of the enterprise and also contribute to the capital of the business.  Partners also share the management responsibilities of the firm. A partnership is essentially an agreement to advance the mutual interest of the partners. Partners in the agreement could involve businesses, Governments, individuals, schools, or a combination of any of these.  Partnership laws in each jurisdiction govern the rules, regulations, and obligations of the partnership firms. Partners not only share profits but losses and liabilities as well.  What are the advantages of a partnership? Easier and fewer obligations Partnership structure was designed to spur growth in small businesses. Unlike limited companies, a partnership structure tends to have lesser obligations like simpler accounting standards.  In most jurisdictions, partnerships attract different tax structures, and the entity is not taxed, instead the income of partners is taxed. Companies are incorporated under company laws and have a plethora of obligations, but partnerships come with relatively lesser obligations.  Sharing the booms and boons In a sole proprietorship, capital is employed by a single person, who has all the obligations for the liabilities and is the owner of all assets. Conversely, a partnership enables sharing capital deployment, asset, liabilities, losses, and profits. Partnership structure allows sharing roles and responsibilities in the business enterprise.  Knowledge, experience, reach and skills With many partners in a firm, it allows broadening the capability of the management decision and outcomes. Partnership firms also onboard new partners based on their needs. For instance, a law partnership could invite a new partner, who specialises in a practice lacking at the firm.  Collective financial commitment  Partners in a firm are invested in the business through the capital. Losses and profits are also shared on a share in the firm, which is usually based on the proportion of capital invested in the business.  It also motivates the partners to remain committed to the firm since losses and profits would be shared as well. What are the disadvantages of a partnership firm? No separate legal entity A partnership firm has no independent legal existence unless the agreement has a specific provision in place. When the partners of the firms leave or cease to be partners anymore, the firm is dissolved. In this way, the firms could be unstable and uncertain. Taxation  Since partnership firms are not taxed separately and the profits are shared by the partners that are taxed at individual income tax level, partners cannot retain the earnings. Partnership firms do not provide tax planning opportunities compared to limited companies. Thus, making it tax inefficient for the partners. Profit-sharing Even if one partner has made significantly more efforts compared to other partners, the profits would be shared as per the partnership agreement. Profit and loss sharing could be good, but it may well turn out to be disastrous as well.  Disagreement with partners More number of partners in a firm increases the chances of higher level of disagreements among them. Since decisions are also bound to be consulted with each partner, the decision-making ability of the firm could be hampered in the event of disagreements among partners.  What are the types of partnerships? General Partnerships General Partnerships are the most common partnership firms that exist in many jurisdictions. Small businesses often incorporate a General Partnership since it is the simplest partnership, which requires minimal formalities.  Share of profits could be enlisted in the partnership agreement and is usually based on a similar proportion of the capital invested by the partners. At least one partner in GP has unlimited liabilities since a partnership is not a separate legal entity.  In this way, partners will be held accountable if the firm enters bankruptcy and dues are supposed to be cleared by the partners.  Limited Partnerships Limited Partnerships allow one to have limited partners in the firm. LPs can have a mix of general partners and limited partners. It is incorporated to designate limited partners with specific responsibilities without bearing any significant liability.  It can be the case that limited partners are not involved in the daily operations of the business and contribute on a consulting basis. Limited partners usually invest capital in the business and take a share of profit. They largely remain out of the decision-making roles. Limited Liability Partnerships Limited Liability Partnerships are a more complex type of partnerships. The structure allows partners to have limited liabilities along with limited scope on managerial decisions. These limits are often defined by the extent of a partner’s investment in the firm. 

What is wealth management? Wealth management is an approach to wealth creation and sustaining wealth. Wealth management professionals evaluate customers financially and recommend avenues for wealth creation and sustainability.  The emphasis is on financial sustainability alongside capital appreciation. It also includes adequate risk management and managing retirement. Wealth management professionals provide advice to clients for tailored wealth management solutions.  They engage in discussions with clients and recommend a variety of financial products to manage wealth and effectively achieve financial goals and freedom. The scope of wealth management spans across financial products, including retail banking, legal and tax advice, estate planning, investment management.  Wealth management seeks to deliver growth and long term wealth appreciation. Most of the banks run separate wealth management services under businesses like private banking, private wealth or wealth management.  Traditionally wealth managers had been engulfed with managing affluent class of people or High Net worth Individuals (HNIs) with large and complex asset base. Wealth management industry is also undergoing a change in investor expectations, digitisation, technological advancements, intensive competition etc. Retail investor expectations are also evolving as they are inclined to access asset classes, which are traditionally privy to HNIs or institutional clients. Also, the wealth management process continues to evolve with the changes in the industry and customer preference.  Simply put, it is a standard practice for investors, especially household investors, to maximise money and investment along with adequate risk management and sustainability. Increasingly wealth management solutions are embracing a tailored approach because of broadening and rising clients expectations.  Advisors attempt to understand the financial situation of the clients and optimise future outcomes of financial decisions, thus improving the future financial situation of clients. It becomes vital for advisors to deliver advice that is in the best interest of customers.  Moreover, wealth management is essentially a consultative process of interacting with clients to understand financial situation, evaluate goals, develop strategic plans to achieve goals, recommend necessary products to implement strategic plans, and monitor risk and sustainability of solutions.  Not all people seeking to manage wealth afford wealth management services. Given that services are traditionally used by affluent people, the wealth management industry has been accessible to a small section of people who can afford.  What is the wealth management process? Wealth management process is an end to end management of the financial situation of a client and continues to evolve along with changing financial situation of the client. Below is a basic wealth management process. Interaction and data collection: Wealth management professional interacts with prospective clients and enumerate the basic financial situation and financial goals. They also examine the assets, liabilities, retirement planning, insurance costs, income tax situation, cash expenses.  All the data is required to assess the financial situation of the client. With data and specified financial goals, wealth management professionals devise a plan for the clients.  Determining objectives: In this stage, the emphasis is on the financial objectives of the clients. It becomes important to assess the objectives of wealth management because financial goals vary from person to person. Wealth managers review clients expectations and engage in discussions.  They along with clients devise objectives for investments, retirement planning, insurance, income tax, business and also analyse the cash flow of the clients. After considering the expectations of the clients, objectives are defined for the clients.  Analysing information and recommending plan: Now wealth managers have expectations of the clients and objectives for the financial goals. The information is analysed and to develop an appropriate strategy. The strategy is developed considering objectives that are of most importance to the clients.  All inputs by the clients are considered duly for an effective strategy. After completing the analysis, the strategy is communicated with the clients to achieve stated financial goals and deliver on expectations.  Clients also come up with suggestions, improvement in the strategy, and evaluate the strategy. Wealth managers ensure that clients understand the aspects of strategy, and nothing is missed with respect to financial planning and goals.  Implementing the plan  Implementation is a crucial part of the wealth management process, and devised strategy is executed by wealth managers. This process usually includes implementing recommended changes by wealth managers like buying a specific insurance policy, retirement plan or investments.  Monitoring: It becomes imperative for wealth managers to monitor the process and recommend necessary changes to the process. Wealth managers attempt to ensure the strategy is aligned to achieve its goals considering the changes in the economic environment as well as the financial situation of the clients.  What are wealth management products? Some basic wealth management products include: Insurance: As a risk management product, insurance helps to minimise financial risk arising out of expected events. Under this, a wealth manager evaluates the insurance policies with the clients such as health insurance, life insurance, property insurance, motor insurance.  They also evaluate insurance policies and recommend a suitable policy when required or when the existing policies are not aligned with the strategy.  Retirement Planning: Retirement planning is one of the objectives of wealth management. Investment in retirement products helps people to achieve retirement goals. Wealth managers evaluate existing retirement products and recommend appropriate products. Under this, the investments are directed towards pension plans, annuities and fixed income investment with relatively minimal risk.  Investment: Wealth creation is also an important part of wealth management. It is achieved through managing investments of the clients. With changing economic environment, investment management strategy also evolves continuously along with investment recommendations.  Clients are recommended to invest in asset classes such as equity, fixed income but not limited to ETFs, mutual funds, commodities and currency. Wealth managers usually have internal capabilities to recommend appropriate investment avenues for clients.  Taxation and loans: Wealth managers seek to avail all possible taxation benefits for the clients to manage wealth efficiently. They may recommend clients to invest in a product that delivers taxation benefits while recommending an effective tax plan by managing assets.  Debt is one of the liabilities for the clients, and repayment of debt also impacts the financial situation of the client. Wealth managers recommend efficient loan options available for the clients. They also evaluate existing loans of clients and advice to refinance wherever possible and beneficial. 

Imputation credits is also known as franking credits, which the companies pay as a type of tax credit to its shareholders along with the dividend. Imputation credits is a method to lessen or remove double taxation. In Australia, there is a provision of franking credit which is being paid to the investor in the tax bracket of 0% to 30%.

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