ACC3TAX – Taxation

ACC3TAX – Taxation

Question 1 – Residency, Dividend distribution, Taxable income, Taxable liability

Shawrya Singh moved from India to Australia on 1 December 201W on a permanent residency visa to work for an Australian auditing firm. He is also a shareholder in a number of Australian companies, none of which is a base rate entity.

During the 201W/1X year he received the following distributions:

01/10/201W70% franked distribution from CSL$2,000
01/03/201X60% franked distribution from BHP$4,000
13/04/201XFully franked distribution from NAB$3,200
15/06/201XUnfranked distribution from ANZ$4,500

Shawrya also received a salary of $57,000 paid by his Australian employer in the 201X/1W year.

Required

Assuming Shawrya does not have any allowable deductions in the current year, calculate his taxable income and tax liability for the year ending 30 June 201X, stating relevant legislation to support your answer. (15 marks)

Question 2 – Assessable Income, deductions, CGT, Tax Liability

Annie Song is employed as a physicist by Modern Physical Ltd in Canberra. In July 201W she transferred to Melbourne to take up a position with Practical Ltd an Australian Manufacturing firm. During the year ended 30th June 201X the following events took place:

  • Received a salary from Practical Ltd $80,000.
  • Made a capital gain of $3,000 from the sale of 200 shares in Telstra Ltd, a public listed company on the Australian Stock Exchange. The shares were acquired in January 2007.
  • Made a capital loss of $1,000 on an antique coin collection. The collection was acquired in March 2006 at a cost of $700.
  • Annie indicated that her taxation return for the year ended 30 June of the previous year shows a net capital loss of $2,000 from the sale of shares.
  • Received a uniform allowance of $1,800.
  • Received a $2,000 bonus from her employer on 3rd July 201X for her excellent performance.
  • Spent $300 towards protective shields (she kept all necessary records).

Required

Calculate Annie’s taxable income and tax liablity for the year ending 30.06.201X. In your response ensure you state the appropriate legislation, tax rulings or common law cases to support your answer. [15 Marks]

Question 3 – Income vs Capital, Profit making intention, s 15-15, CGT

Wishing to diversify their business The Party Shop Pty Ltd, a party decoration shop which had stores around Australia, decided to sell their Adelaide store on 1 September 201W. The Adelaide store was estimated to have a current market value of $1,500,000 but was acquired in 1984 at a cost of $500,000.

Willing to obtain the best advantage possible, they decided to subdivide the store into 5 smaller shops and sell them individually. In March 201X the subdivision was completed at a total cost of $500,000 and all the stores were sold for a price of $1,000,000 each. However, on the 30.06.1X they had only received the payments regarding 3 of them.

Required

Advise the Party Shop Pty Ltd of the tax consequences arising from the sale of their Adelaide store. In your response ensure you state the appropriate legislation, tax rulings or common law cases to support your answer. [15 Marks]

Question 4FBT

Brian is a bank executive. As part of his remuneration package, his employer provided him with a three-year loan of $1m at a special interest rate of 1% pa (payable in monthly instalments). The loan was provided on 1 April 201W. Brian used 40% of the borrowed funds for income-producing purposes and met all his obligations in relation to the interest payments.

  • Calculate the taxable value of this fringe benefit for the 201W/1X FBT year.
  • Would you answer be different if the interest was only payable at the end of the loan rather than in monthly instalments?
  • What would happen if the bank released Brian from repaying the interest on the loan?

(8+5+2 = 15 marks)

Question 5 – Repairs, capital works, depreciation, common business deductions, FBT

Jardin Pty Ltd (Jardin) is a landscaping materials distributor which operates from its own premises, comprising a 1-hectare block of land, which includes a small office. Jardin uses the land as a storage facility and does not manufacture any products on its premises. In September 201W Jardin decided to expand its products line, which required the following investments in its current infrastructure:

  1. A large storage shed was built on the land in December 201W. The site required levelling, which was completed at a cost of $30,000 on 15 January 201X. Construction of the storage shed started on 16 January 201X and was completed by 1 March 201X at a cost of $280,000. Because of supplier delays, the first trading stock shipment was only received and stocked at the new storage shed on 1 April 201X. (3 marks)
  2. A new forklift truck was purchased at a cost of $15,000 (effective life 11 years). The new forklift was first used in stocking the new storage shed for the first time. (3 marks)
  3. Due to a heavy hail storm, two out of ten window glass panels in the storage shed were broken and had to be replaced. The repair works were done on 5 July 201X. (3 marks)
  4. Due to the increase in its operations, Jardin hired a new business manager on a part-time basis. At the 30 June 201X Jardin had paid the new manager $60,000 in salaries. (2 marks)
  5. Jardin also provided the new business manager with a car (a Kia Carnival costing $55,000) on 1 April 201X. He drives the car to and from work on a continuous basis during the year, and he is only required to cover the fuel costs of $600 per year. (4 marks)

Required

For each of the expenses listed in (a) to (e) above, advise Jardin Pty Ltd on whether such expenses would be deductible in the year ending 30 June 201X, stating your calculations (if any) and applying legislation and case law to support your answer.

(15 marks)

Question 6 – Specific Deductions, self-education expenses, depreciation

Edward Summers is a senior meteorologist employed by the Weather Research Centre (WRC) in Australia. In July 201W he enrolled on a Marine Biology course at the University of Queensland with the intention of developing research on the effects of global warming on the Great Barrier Reef. In order to attend the course, Edward reduced his workload at WRC to 2 days per week.

During the year ending 30 June 201X, Edward incurred the following expenses:

  1. $12,000 in course fees and $550 in textbooks. (3 marks)
  2. $100 on broad-spectrum sunscreen, which he is required to wear as a matter of work safety during data collection trips to WRC meteorology stations. (3 marks)
  3. $200 on a backpack which he uses to carry his laptop and textbooks to work and to the University. (3 marks)
  4. $80 in road toll fees incurred while driving between home and work. (2 marks)
  5. $3,000 on a laptop computer (effective life 4 years), purchased on 1 July 201W and used 80% for work and 20% for study. (4 marks)

Required

For each of the expenses listed in (a) to (e) above, advise Edward Summers on whether such expenses would be deductible in the year ending 30 June 201X, stating your calculations (if any) and applying legislation and case law to support your answer.

(15 marks)

Question 7 – Franking, dividend distribution, benchmark rule

Blackstore Ltd made three frankable distributions during the 201W/201X franking period as follows:

  1. $200,000 which is franked to 60%
  2. $240,000 which is franked to 50%, and
  3. $280,000 which is franked to 80%.

Required

Advise Blackstore Ltd of the tax consequences (if any) for breaching the benchmark franking rule during the 201W/201X franking period. Ensure you state the specific legislation, cases and tax rulings where appropriate to support your calculations and your answer.

[15 Marks]

Question 8 – Trust distributions

Jack Richkid is a 46-year-old accountant who is the Trustee of the Richkid Discretionary Trust whose beneficiaries include himself, his partner Jill (a 44-year-old voluntary social worker who did not derive any other assessable income); their son Bill (a 14 -year-old high-school student who did not derive any other assessable income) and Richkid Pty Ltd (which is a private company wholly owned by Jack).

Richkid Pty Ltd only derives investment income and therefore does not qualify as a base rate entity for income tax purposes for the year ended 30 June 201X.

In the 201W/1X year the trust generated income of $150,000, and incurred running expenses of $85,000. All the income derived by the trust is assessable for income tax purposes and all of its expenses are deductible for the 201W/1X year.

Due to his other income, Jack is taxed at the top marginal rate and wishes to minimise his tax liability by making the other beneficiaries of the Richkid Discretionary Trust presently entitled to a share of trust income (and therefore to a share of the net income of the trust).

For the year ended 30 June 201X Jack as trustee distributes the trust income on the following basis:

  • 25% to Jill
  • 45% to Bill
  • 15% to Richkid Pty Ltd

However, Jack inadvertently fails to distribute the remaining 15% of the income of the trust to any beneficiary.

Required

Advise Jack Richkid as Trustee of the Richkid Discretionary Trust on the tax consequences of the above trust distributions for the year ending 30 June 201X, applying legislation and case law to support your answer. (15 Marks)

Question 9 – Partnerships and specific deductions

Stephen and Caroline Harris are married and live in Melbourne. They jointly own a townhouse in Hawthorn which is rented to tenants and generated $35,000 rental income at the end of the 201W/1X income year. By 30 June 201X, they had paid $5,500 in interest associated with apartment’s mortgage and had also spent $2,500 fixing the bathroom’s plumbing system. Real estate management fees amounted to $4,700 and were paid in the current income year.

As Caroline is not currently working, they decided to split the profits at a rate of 75% for Caroline and 25% for Stephen. If there are losses, they agreed that Stephen is to take 75% and Caroline would take only 25%.

Required (15 Marks)

  1. Advise Stephen and Caroline of the income tax implications arising from the above arrangements for the year ending 30 June 201X, applying legislation and case law to support your answer (calculations not required). (8 marks)
  2. Assuming the same facts as above, except that now Stephen and Caroline are carrying on a financial planning practice in the Hawthorn townhouse with a written partnership agreement according to which Stephen’s interest is 25% and Caroline’s interest is 75%. What would be the tax consequences in this case and how would the partnership net income be distributed? Support your answer and calculations with legislation and case law. (7 marks)

Question 10 Tax administration

  1. In October 201W Robert Tinte, an artist, travelled to Brussels for an art exhibition. After the exhibition he remained in Brussels for 5 days to visit friends. The total travel expenses were $8,000, which he claimed in full in his 201W-1X income tax return as a work-related deduction. In September 201X, Anna Blanche, who is also an artist and is friends with Robert, advised him that she had been audited by the ATO in relation to her work-related travel expenses. Robert is now worried that he might be audited and asks for your advice on what to do.

Required

  1. Advise Robert on the best course of action in dealing with the ATO in the circumstances described above and explain the tax consequences if he takes no action. (12 marks)

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