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Taxation Law questions; “Calculate the net partnership income for the partnership Bash and Biff for the year ended 30 June 2010.
The partners advise you that they wish to claim the maximum deductions and reduce the profit as much as possible of the partnership
The book needed is Principles of Taxation Law 2012 by K.Sadiq
QUESTION ONE:
Lesley is an English backpacker who comes to Australia on a working holiday with her husband Maxwell. Their intention is to stay six months and then return to the UK. However, she has found an office job here and would like to stay for at least twelve months. Maxwell is an artist and he has also found a job in an art gallery and is planning to have an exhibition of his works.
They both arrived on 17 January 2009 and do not intend to return until 30 April 2011 at the earliest. They do not own a house in the UK and were renting. Their personal effects are stored in the UK with Lesley’s mother who also looks after Lesley’s cat, Oliver.
While in Australia, Lesley and Maxwell rent an apartment in the city. They have also bought a second hand car as they like to explore the Victorian countryside in the weekends. They also plan to travel to New Zealand before they return to the UK.
They have told you that they are fond of the beach side suburbs of Melbourne and would like to buy a beach property there to live whilst in Melbourne and retain it as an investment property even if they do decide to return to the UK.
REQUIRED:
Advise Lesley and Maxwell whether they are regarded as Australian residents for the year ended 30 June 2010.
You are required to refer to relevant case law, legislation and tax rulings.
(10 marks)
QUESTION TWO:
Sanjay started work as a geologist for a mining company. He was to be based in Brisbane but would be required to travel within Australia and overseas when required.
Sanjay started with the company on 1st of February 2010.
His remuneration consisted of the following:
• Cash salary of $55,000
• Contributions to superannuation of $4,500 paid by the employer,
• Payment of his subscriptions to the Australian Geology Association of $250,
• A travel allowance of $1,200 to cover travelling for work purposes,
• A uniform allowance of $990 to cover the cost of having to dry-clean his work clothes and pay for his safety shoes,
When he commenced work, one of his work colleagues, Jonathan suggested that he would be better off having a car provided by his employer rather than taking a car allowance. He was advised to obtain a novated lease rather than an operating lease and this could be structured so that no fringe benefits tax was paid.
REQUIRED:
Sanjay comes to you as the company accountant and wants you to explain the taxation consequences of the above salary package:
How is the travel allowance of $1,200 taxed and should he have a car as part of his remuneration package.
He advises you that if he did have a car, he would only travel 18,000kms in a year, that he would only want to spend $25,000 on a car.
Please advise Sanjay what the taxation consequences for him and his employer are if he takes up a car in his package or if he takes the car allowance.
(10 MARKS)
QUESTION THREE:
FNZ Australia Pty Ltd is a company that carries on business in Brisbane. It operates a business of providing detailed research reports to financial advisers to assist them in providing financial advice to their clients.
The business is registered for GST.
During the year ended 30 June 2010 the following monies were received and expenses paid from the company’s bank account:
Receipts:
Fees from clients $6,500,250
Bank interest on term deposit $15,269
Dividends received from investment in New Zealand $8,726
Payments:
Salaries to staff $895,326
Advertising $95,750
Bank fees $19,257
Consultants fees $168,824
Accounting fees $35,647
Stationery $95,250
Legal fees $28,964
Purchase of luxury motor car $85,700
Purchase of computer $3,250
Payment of school fees for one of the senior
Executive’s children $16,500
Notes:
The computer was only used 30% for private purposes and the balance of the time was for work purposes.
The outstanding debtors as at 30 June 2010 were $450,589. This amount is GST exclusive.
All providers of goods or services to FNZ Australia Pty Ltd provided tax invoices.
Required:
Please calculate the net GST payable or refundable by FNZ Australia Pty Ltd for the year ended 30 June 2010.
(10 MARKS)
QUESTION FOUR
Charcoal Foods Pty Ltd is a private company owned by Con and his wife Eva. They migrated from Greece 40 years ago. In Melbourne they established a successful chicken take away shop. They sold the shop in July 2006 for a significant sum. In 2009 an opportunity came up to set up a new retail shop in a newly built shopping centre in the south western suburbs of Melbourne. This business was established on 1 August 2009.
Con and Eva and their 2 daughters in law Liza and Danielle took the opportunity to set up a new business selling roast chicken, salads, chips and wedges.
The company is registered for GST.
For the year ended 30 June 2009 their accountant Nic prepared the following financial accounts. The figures in the financial accounts are net of GST.
Sales of chickens $1,234,052
Opening stock 0
Purchases 155,000
Closing stock 18,000
Cost of sales $137,000
Gross profit $1,097,052
Operating expenses
Administration expenses 485,375
Selling expenses 324,678
Total expenses 810,053
Net profit for accounting purposes 286,999
In preparing the accounts, Nic provided the following information:
Administration expenses:
This includes the following items:
Accounting depreciation $55,351
Provision for annual leave $19,752
Provision for wastage of food $13,578
Fine for breaching Health and Safety regulations $4,250
Prepaid rental for the shop (Note 1) $18,000
Wage to Brad (Note 2) $25,750
Loan application fee charged by Bank (Note 3) $4,500
Interest on loan $10,417
Repairs (Note 4) $25,780
Normal operating expenses $307,997
Total administration expenses $485,375
Selling expenses are made up of the following:
Bad debts (Note 5) $2,985
Purchase of consumables (Note 6) $7,953
Advertising in the local paper $12,758
Cleaning costs $22,589
Normal operating costs $278,393
Total selling costs $324,678
Notes:
Note 1:
The company prepaid the 18 months rent for the shop for the period 1 August 2000 to 1 January 2011.
Note 2:
Brad is Liza’s young son aged 15. He is still at high school. The task he undertook was helping his grandmother Eva to prepare the salads after school. He only works for 2 hours a day for three days a week. The normal pay for a person to do this job would have been $6,670.
Note 3:
The company borrowed $250,000 from the bank. The bank charged a loan application fee of $4,500. The loan is for 10 years. The funds were borrowed on 5 August 2009.
Note 4:
The repairs consisted of the following:
1. $800 to replace the shop window damaged by an act of vandalism,
2. $1,600 to install a new awning at the front of his shop. This was done on 17 April 2010,
3. $15,000 spent on initial repairs to the freezer soon as moving into the shop.
4. $4,300 spent to put in a sprinkler system to meet Fire Safety Regulations
5. $4,080 on maintenance costs on the fryer, roaster and register caused by normal wear and tear.
Note 5:
The bad debts represent a customer that they sold chickens to for a wedding on credit that refused to pay on the grounds that the chicken was too salty.
Note 6:
This represents the purchase of cleaning aids, serviettes and plastic forks.
Other information:
In preparing the accounts Nic advises you that the following items were not taken into consideration in preparing the above financial accounts:
Fit out of shop:
Chicken Roaster purchased on 1 August 2009 at a cost of $55,600. The cost of installation was $6,696. The effective life of the machine is 5 years.
Counters and benches were installed on 1 August 2009 at a cost of $25,780. The effective life is 8 years.
Cash register purchased on 9 September 2009 at a cost of $3,750. The effective life is 6 years.
A minivan for deliveries – this was purchased on 13 November 2009. The cost was $18,750. The effective life is 8.5 years.
The above figures are inclusive of GST.
Trading stock:
The value of the closing stock as at 30 June 2009 is:
Cost $18,000
Market value $11,890
In addition Con and Eva, Liza and Danielle consumed some chicken for their own consumption. The estimated personal consumption amount is $1,800.
In addition $1,250 of chicken wings were in transit from Ingham in Queensland and as at 30 June 2010 were in Sydney on a truck which would arrive in their shop on 1 July 2010. They had paid for the chicken wings and the cost has been taken up in the purchases figure in the financial accounts prepared by Nic.
REQUIRED:
Please calculate the taxable income for the company. You are required to provide a brief explanation each item and why it is included or excluded.
The company wishes to minimise its tax liability and claim the maximum tax deductions allowed under the tax law.
(30 MARKS)
QUESTION FIVE
The following shareholders come to you for advice:
? A resident individual
? A non resident individual living in Singapore
? A resident private company
During the year ended 30 June 2009 they all received the following income:
? Dividends from Australian Bank Ltd franked to 75%. The cash amount of the dividend was $8,500,
? An unfranked cash dividend from Industrial Company Ltd of $7,200
? A cash dividend from Airbus Pte (a French based company) of $1,800. Foreign withholding tax of $200 has been deducted by the French Tax authorities.
? Rental profit from an Australian based property of $3,500
Assume that the resident individual is on the top tax rate of 45% plus the Medicare levy of 1.5%. The company tax rate is 30%. Australia has a double taxation agreement with Singapore.
Required:
Calculate the Australian income tax liability for all three taxpayers.
QUESTION SIX
The Gardenias Family Trust is a discretionary family trust with 2 adult beneficiaries, Emma and Peter.
During the year ended 30 June 2010 the activities of the trust gave rise to the following:
Loss from rental property ($6,000)
Interest income from Term Deposits $4,000
Cash received from fully franked dividends $14,500
The trustee of the trust resolved to distribute 50% of the trust income to Emma.
Emma also has the following income:
Salary of $20,000 from which tax instalments of $2,800 has been deducted under PAYGW
Her work related expenses were $275. She has private health cover.
She is also looking after her invalid father, who lives in a granny flat at the back of her house. He derived income of $7,500 for the year.
Required:
A) Calculate the taxable income and tax payable or refundable for Emma for the year ended 30 June 2010
B) Would your answer differ if the Gardenias Family Trust made a rental loss of $36,000?
MARKS 15
QUESTION SEVEN
As at 30 June 2010, Joe Buck had disposed of the following assets:
(a) A holiday house. The house was purchased on 1 March 2001 for $200,000 and was sold for $600,000. At the time of acquisition Joe spent $2,000 on surveyor’s cost, $15,000 on stamp duty and $3,000 for a valuation. On 1 February 2003, Joe spent $100,000 adding a second floor to the house. On 15 June 2004 he spent $20,000 in a successful court action to establish that his neighbour’s new fence had encroached on Joe’s property by 15 centimetres. In the previous income year he had rented the property out to Mr Ratso Risso for a total of six months during school holiday periods. At all other times he used it personally. During the period that he owned the house he had paid a total of $80,000 in interest, rates and insurance. He had claimed $20,000 of the $80,000 in respect of interest, rates and insurance as a tax deduction in his personal tax return in respect of the six months that he had rented the property in the 2007-8 financial year.
(b) A pair of David Beckham socks that he bought at Sotheby’s Auctions on 1 January 2005 for $12,000. He sold the socks for $22,000.
(c) A painting that he had bought on 2 February 2005 for $20,000. He had recently had the painting valued at $40,000. He gave it to his daughter as a wedding present on 30 June 2010.
(d) A house and land. He had bought the property as vacant land on 1 June 1984 for $100,000. He completed the building of a house on the land on 30 May 2005 at a cost of $200,000. He sold the house and land for $800,000. Independent valuations indicate that the value of the land at the date of sale was $500,000.
Joe has unabsorbed net capital losses from previous years. The unabsorbed losses are:
(i) $15,000 capital loss from the sale of a rare coin
(ii) $220,000 capital loss from the sale of shares.
Joe had no other assessable income for the income year ending 30 June 2010. He made a trading loss of $25,000 in respect of the operation of his supermarket business for the year ending 30 June 2010.
REQUIRED
Calculate Joe’s net capital gain and his taxable income for the year ending 30 June 2010.
(20 marks)
QUESTION EIGHT
Your client, Bill Jones runs a small financial planning business in the suburb of Gowrie, Canberra. The business is structured as a discretionary trust with his company, GWC Pty Ltd as the trustee of the “Jones Family Trust”. Bill Jones and his wife Mary are the two Directors of the trustee company. The trust not only has an ABN and TFN but is also registered for GST.
Receipts
$
198,000 Consulting income
17,000 Rental income from an income producing investment apartment
1,000 Interest on Bank deposits.
8,000 Fully franked dividend
Payments
$
15,000 Body Corporate fees on income producing property
25,000 Part-time employee salary
5,000 Interest on money borrowed to purchase the income producing investment apartment
5,000 Borrowing expenses relating to a new loan to acquire the investment apartment. The loan is for 10 years and began on 1 July 2009
1,100 Fees paid to a registered Tax Agent
14,000 New item of plant with an estimated life of 20 years
1,200 New item of plant with an estimated life of 3 years
1,000 Travel to and from work
Additional Information
(a) The Trust has a carry forward tax loss from an earlier income year of $25,000.
(b) The Trust is using the Small Business Entity (SBE) concessions
(c) Stock at beginning of the year was valued at $20,000
Stock at end was: Cost $16,000
Market selling value $19,000
Replacement $18,000
Jones does not make an election under S.328-285 (2) of ITAA97.
(d) On 1 July 2009 the opening depreciation pool balance for the general SBE pool (i.e. assets with an effective life of less than 25 years) was $40,000. During the year the Jones family trust purchased 2 new depreciating assets used 100% for business purposes. These are recorded in the payments information listed above. The investment apartment was purchased new, and is part of a hotel complex. The real estate agent advised Bill Jones that the construction cost of the apartment was $87,000 and this was confirmed by the builder.
(e) Bill Jones and his wife Mary have resolved to distribute 50% of the net income of the trust and the imputation credits to Bill and the balance to Mary.
Bill Jones – Personal Tax details
Receipts
$
2,000 Exempt income from part-time military service
2,000 Private Health fund refunds
6,000 Fully franked dividend received from an Australian company
Payments
$
2,000 Rates on his principal residence
5,000 Doctors fees for Bill Jones
3,000 Doctors fees for Bill Jones’s wife, Mary
6,000 Maintaining Bill Jones’s father who is a permanent resident of Australia and has a separate net income of $1,000.
Additional Information
(a) Bill Jones has a spouse, Mary, and during the tax year ended 30 June 2010 his spouse derived $2,000 in salary, a net capital gain (assessable under s 102-5 of ITAA97) of $1,000. She also incurred $1,000 in travel expenses driving to and from home to work. Mr and Mrs Jones do not receive the Family Tax Benefit Part B.
(b) Bill Jones has a carry forward tax loss from an earlier income year of $1,000.
(c) Bill Jones and his family are members of a private health fund and do have private hospital insurance.
REQUIRED
You must first calculate the net income of the trust for the year ended 30 June 2010 and then calculate Bill Jones’s personal tax liability for the year ended 30 June 2010. Do not calculate the tax payable for Mary Jones. You should explain your treatment of each item in this question. Figures can be rounded to the nearest dollar.
(20 marks)
QUESTION NINE
Wendy works as an assistant accountant for Lee Shirts Pty Ltd. Wendy is divorced from her husband and lives with her daughter, Sue. Wendy’s personal records reveal the following:
Receipts
$45,000 Gross salary from employment with Lee Shirts Pty Ltd ($8,000 deducted as PAYG withholding)
$1,000 Dividend from BHP shares franked to 75 per cent.
Payments
7,500 Medical expenses for Wendy and her daughter, Sue, aged 6 years.
5,200 Maintaining Wendy’s mother Elizabeth. During the period 1 July 2009 to 30 June 2010 Elizabeth derived $2,500 from a tax-exempt pension and a net capital gain of $500.
700 Fees for membership of Accounting Association
REQUIRED
Calculate the tax payable by Wendy.
(10marks)
QUESTION TEN
Barry Hall and Brett Stoker are adult Australian residents. On 1 July 2003 they formed a partnership called “Bash and Biff” to run a sports supply business. The partnership supplies football wear and equipment to football clubs in Australia. The business is registered for GST.
The partnership accounts for the business for the year ending 30 June 2010 disclose the following financial details:
The following receipts and expenses are exclusive of GST unless otherwise stated.
RECEIPTS
Gross trading receipts $3,900,000
Capital gain from sale of shares held in an Australian internet company 20,000
– see note (ii) below
Cash dividend from BHP 10,500
See note (iii) below
Interest income from Bank of China 11,250
See note (iv) below
Insurance proceeds received for writing off the car 80,000
EXPENSES
Salary to Barry 40,000
Interest on loan of funds by Brett 10,000
Salaries paid to employees 950,000
Rent and power 30,000
Purchase of trading stock (see note (v) below) 620,000
Superannuation to staff 85,500
Superannuation paid on behalf of Barry 50,000
Purchase of BMW motor vehicle for Brett (see note (vi) below) 120,000
Purchase of treadmill and exercise bikes (see note (vii) below) 180,000
Interest on bank overdraft 18,623
Provision for long service leave (see note (viii) below) 25,984
Provision for bad debts (see note (ix) below) 22,000
Notes – additional information in respect of the partnership.
(i) The partnership agreement stipulates that Barry and Brett share profits and losses in respect of both income and capital gains and losses on the basis of 3/5 to Barry and 2/5 to Brett.
(ii) The partners purchased the Australian internet company shares in January 2004 and sold them on 31 May 2010.
(iii) The dividend was declared by the company to be 65% franked.
(iv) The Bank of China withheld AUD $1,250 from the gross interest
(v) Trading stock at the beginning of the financial year was $370,000. The trading stock at the end of the year was valued as:
Market value $860,000
Cost $790,000
Replacement value $846,000
(vi) The car was purchased for use by Brett as he was responsible for sales. The car was purchased on1 January 2010. It was only used 95% for work purposes. On 31 May 2010 the car was involved in an accident and written off. The partnership received $80,000 from the insurance company on 15 June 2010. The purchase price only is exclusive of GST.
(vii) Various items of equipment were purchased on 1 July 2009 for $65,000 and 1 January 2010 for $115,000. The effective life for the equipment is 8 years. The figures are exclusive of GST. The items are used 100% for business purposes.
(viii) During the year the partnership paid out long service leave to staff of $13,507.
(ix) During the year the partnership wrote off as bad debts $6,849.
Required:
Calculate the net partnership income for the partnership Bash and Biff for the year ended 30 June 2010.
The partners advise you that they wish to claim the maximum deductions and reduce the profit as much as possible of the partnership.
Calculate the share of the net partnership income for both Barry and Brett for the year ended 30 June 2010.
Note – For each item you must give a brief reason that explains your inclusion or exclusion of any of the above items. Marks will not be awarded if you fail to explain your inclusion or exclusion of any item.
You must justify your answers by referring to case names and legislation.
(20 marks)
QUESTION ELEVEN
During the 2009-10 financial year, Carol disposed of the following assets:
(a) A holiday house. The house was purchased on 1 October 2004 for $350,000 and sold for $450,000. The contract of sale was entered into on 5 May 2010 and settlement is to take place on 5 July 2010. The stamp duty and legal fees at the time of acquisition were $20,000. The advertising and estate agent’s fees at the time of disposal were $8,000. On 1 April 2005, Carol spent $15,000 adding a second bathroom to the house. Carol rented the house out for 6 months, from 1 October 2006 to 1 April 2007. During this period she derived rent of $10,000. At all other times she kept it for private use by her family. During the period that she owned the house she had paid a total of $75,000 in interest, rates and insurance. She had claimed $15,000 of the $75,000 as a tax deduction for the year ended 30 June 2007.
(b) Vacant Land. Carol sold vacant residential land originally purchased on 16 June 1984 for $100,000. She initially intended to build a house on the land, but lacked the finance to do so. The land was sold for $500,000. The contract of sale was entered into on 28 May 2009 and settlement is to take place on 30 August 2009.
(c) A Harley Davidson motor cycle. The motor cycle was purchased by Carol for use by her husband for $130,000 on 1 July 2006. It was a special and rare motor cycle with only 4 made in 1956 and based on the ‘Easy Rider’ film. It was sold for $220,000 on 12 December 2009.
(d) A painting purchased for $20,000 on 1 May 2001, sold $30,000 on 30 April 2010.
(e) A horse. Carol used the horse for recreational purposes. Carol had bought the horse on 1 May 2004 for $6,000. She sold the horse to a horse trainer for $16,000 on 26 March 2010.
(f) On 1 July 1994, Carol purchased a house for $300,000, which she used as her main place of residence. On 1 July 1998 she left Australia to take up a job in London. During her stay in London she did not buy a house, but instead lived in rented accommodation. She returned to Australia and began living in the house again on 30 June 2004. During her absence from Australia, a friend lived in the house and paid Carol rent of $12,000 per year. Her friend also paid all the outgoings on the house such as the rates, insurance and electricity. The house was sold for $600,000 on 26 May 2010.
(g) Carol bought BHP shares 2 June 2009 $45,000 sold on 2 May 2010 for $90,000.
Carol has capital losses she is carrying forward from previous years of $15,000 from the sale of an antique and $30,000 from the sale of some shares.
REQUIRED:
Calculate Carol’s net capital gain for the year ending 30 June 2010.
(10 marks)
QUESTION TWELVE
Janet Lee and her husband, Rick run a car restoration business under their own names. They are registered for GST.
The following figures are GST inclusive.
During the quarter from 1 April to 30 June 2010 they derived the following income:
Proceeds received from sales $98,750
Expenses:
Staff salaries $13,000
Rent of commercial premises $12,600
Tea and coffee for staff $185
Stationery $950
Cleaner $450
Consumables for cars $850
Bank fees $375
School fees for their daughter $19,800
Dentist fees for their son $1,320
PAYGW paid on salaries to staff $5,850
All businesses supplying the above goods and services are registered for GST except Tim the cleaner.
REQUIRED:
Calculate the amount of GST payable or refundable for Janet and Rick for the quarter 1 April 2010 to 30 June 2010.
You are not required to calculate the taxable income for Janet and Rick.
(10 marks)
QUESTION THIRTEEN
(a) WP Ltd a public company lends it top executives $100,000 each to enable them to purchase shares in the company. The loan is interest free and the shares are ordinary shares on which fully franked dividends will be paid.
REQUIRED:
What are the fringe benefits tax implications in respect of this arrangement?
What difference would it make if the loan was for the payment of school fees for their children?
(b) Dennis Church is a dentist. His receptionist Kylie is an efficient and popular employee. However her smile is compromised by her protruding teeth.
Denis offers to fix her teeth. The normal fee for fixing the teeth is $4,000. However he is prepared to waive this fee as fixing her teeth will be good advertising for the firm.
REQUIRED:
What are the fringe benefits tax implications for Dennis?
If Dennis had charged Kylie for the cost of the materials only would it make any difference?
(5 x 2 = 10 marks)
QUESTION FOURTEEN
Jack Walsh is an Australian tax resident. He was employed as a tax accountant with a large financial institution. In 2000 he left the organisation after 15 years to start his own financial consulting business through a company called Jack Walsh and Associates Pty Ltd. The shareholder of his company was a family trust called JAW Family Trust. Jack had no clients and built his business up from scratch and by 2010 his practice was valued at $650,000. He started off with one staff member in 2000 and by 2010 he had six staff. All staff were employed by Jack’s company. One of the staff was his wife Ann. Ann only worked 3 days a week and was paid a salary of $58,000 per annum. She acted as the administration manager of the company. Her background was as a secretary only and she had no administration skills.
Fiona one of the other staff salary packaged a lap top computer as part of her salary package. The lap top computer was used by Fiona’s son to record music as he was a DJ.
As there was a lot of filing to be done in the practice Jack asked his son Horatio who was a third year architecture student at Melbourne University to assist. Horatio could work 2 days a week for five hours a day. He was paid $16 per hour. The normal pay for a filing clerk was $20 per hour.
The company outgrew its office space. Jack looked at other office space but the landlord was keen to retain Jack’s company as a tenant and offered to relocate Jack’s company to another floor in the same building. As consideration for Jack doing this the landlord offered to Jack three months rent free.
He also gave to Jack an airline ticket to Cairns plus three nights’ accommodation for him and Ann. The cost of the ticket and accommodation was $2,500. Fortunately for Jack the Financial Planning Association was running a conference on financial planning at the same time in Cairns.
Jack whilst on holiday was approached by a large financial planning firm to acquire his company for $1,200,000. Jack said he would need to consider the tax implications of this.
Required:
Identify the taxation issues arising from the transactions in the above scenario and advise Jack of the income tax, capital gains tax, FBT and GST consequences (if any) for himself, Ann, Fiona, Horatio and the company.
Suggestion:
List each taxpayer and the activities you believe affect them and comment on the tax consequences.
(10 marks)
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