RMIT School of Accounting andLaw

Page 16 of 23

SCHOOL OF ACCOUNTING AND LAW

LAW2471 Taxation Law

Tutorial Problems

UNIT 1INTRODUCTION, THE TAX FORMULA, OVERVIEW OF THE FEDERAL TAX SYSTEM, BASIC SCHEME OF THE ACT

1. What legislation gives the Federal Parliament the power to make taxation laws?

2. Are there any constraints imposed on the Federal Parliaments power to make taxation laws?

3. What is the difference between a taxpayers marginal rate of tax and a taxpayers average rate of tax?

4. Which taxpayers pay a flat rate of tax and which taxpayers pay marginal rates of tax?

5. Compare progressive taxes and regressive taxes. Are you aware of any regressive taxes.

6. Why is it important to determine whether a person is a resident or a non-resident?

7. What is the major difference between the rates of tax applicable to resident and non-resident individuals?

8. What is the difference between ordinary income and statutory income?

UNIT 2RESIDENCE, SOURCE, INTERNATIONAL ASPECTS OF TAXATION, DERIVATION OF INCOME AND EXEMPT INCOME

1.Laurence Wong is an investment consultant working in Australia. In 2009, an overseas subsidiary of Laurences employer, a large financial institution which is based in Singapore, offered Laurence the opportunity to head up a financial consulting division in Singapore.

Laurence was interested in this opportunity as he originally came from Singapore in 2004 to settle permanently in Australia. He still has many relatives in Singapore, but his youngest sister is living Melbourne. His wife was born in Australia as was their only child. In 2006 Laurence and his wife bought a family home together.

The terms of offer to Laurence were that he would work in Singapore for three months and if both Laurence and the Singapore employer were satisfied with the arrangement, he would be offered a three year contract, with the an option to extend the contract for a further four years.

The letter of offer stated that the company would pay one third of Laurences rent and that the company in Singapore would pay for all expenses directly related to his work. In addition the company agreed to pay for his entire familys air fares to Singapore. The letter of offer further stated that Laurence would not work for any other investment consultant business in Singapore within three years of the termination of the contract and that Laurence would receive $250,000 for agreeing to this term.

Laurence accepted the offer and on 1 July 2009, he and his family flew to Singapore where he worked for three months up to 30 September 2009. On 30 September 2009 he advised the Singapore employer that he intended to accept the three year contract and would consider the four year option during that three year period. He requested two weeks leave to return to Australia immediately to visit his sick sister. The company agreed to grant Laurence two weeks leave and also to send the employment contract to the Melbourne office for Laurence to sign.

On 1 October 2009 Laurence signed a two year lease of an apartment in Singapore with an option of one further year. On the same day he placed his children in an international school. He took out a one year membership at a local gymnasium.

On 2 October 2009, Laurence returned to Melbourne to see his sister. He signed the contract of employment on 5 October 2009 in Melbourne. He leased him family home for three years. In July 2010, as his wife was concerned about the humidity in Singapore, Laurence decided that he would not stay in Singapore forever and that he might even return to Australia some time after the end of the three year contract and certainly at the end of the four year option.

During his two week stay in Melbourne he transferred money to Singapore where he invested in a Singapore investment company and in a Singapore bank savings account in respect of which he receives interest, which Laurence arranged would be transferred from his Singapore bank account into his Melbourne bank savings account. The Singapore investment company is incorporated in Singapore where its Board of Directors meets and receives its dividends from its investments. It invests in mining companies throughout world, with a strong emphasis on Australian mining companies. While in Singapore he continued to receive both franked and unfranked dividends from his Australian listed public company shares. Some of the listed public company shares are heavily invested in Australian real estate.

In December 2010, Laurence decided that when his contract finished in October 2012, he would exercise the four year option and stay in Singapore until 2016. Unfortunately, in April 2012 his child developed a medical condition that required treatment in Australia. Laurence and his family immediately returned to Australia on 1 May 2012.

On returning to Australia he decided, because of his childs medical condition, not to return to Singapore. He therefore resigned from the Singapore company. He received a lump sum of $250,000 from his Singapore ex-employer in respect of his agreement not work for any other investment consultant business in Singapore within three years of the termination of the contract.

In May 2012 Laurence began running his own investment advisory practice as a sole practitioner. Fortunately, he was able to provide a service to a client shortly after beginning business. He billed this client for fees of $5,000 in June 2012, but did not receive the cash payment for this account until August 2012. This was the only client he billed for the year ended 30 June 2012.

Since the tax year will be ending on 30 June 2012, he is concerned about his Australian tax liability for the period 1 July 2009 to 30 June 2012.

Required

Advise Laurence on the tax consequences of the above facts referring to appropriate case law and legislation. 2.Laura Desmond is a successful actor who was born in Australia and lived in Australia all her life until 2006 when she decided to live in Barcelona, Spain where she owns an apartment and works as an actor in Spanish films. She is a member of the local golf club. Since 2006 she has returned to Australia for three months every year during the Australian summer. In 2006 she entered into a 10 year lease agreement to rent the same apartment each year in Byron Bay on the northern NSW coast for the months of January, February and March. Her adult children live in Byron Bay. She is a member of the Byron Bay Golf Club. She owns a dog in Byron Bay which stays with her children while she is in Spain. In January 2012 she entered into a contract with an Indian company to play a supporting role in a film to be shot over three months on location in India. The contract was signed in Sydney and she was paid into her Spanish bank account. Laura worked in India from April until June 2012.

Advise Laura of her tax liability.

3. Junket Ltd was incorporated in Taiwan. All directors meeting are held in Taiwan. The companys managing director who owns a majority of the companys shares resides in Australia. The company's only business involves entering into shipping contracts for the chartering and sub-chartering ships on voyages between Taiwan and Hong Kong. All the shipping contracts are signed by the managing director in Melbourne.

Is Junket Ltd an Australian resident for tax purposes?Where is the source of Junket Ltds profits from its shipping contracts?4.Giardano Ltd is a Hong Kong company that operates a number of retail clothing stores in Australia. It was incorporated in Hong Kong. The Board of Directors meet monthly in Hong Kong where its superior directing authority takes place. The Australian resident managers of each of Giardano Ltds stores in Australia is responsible for determining for the stores he or she manages, trading hours, the layout of each store, the number of employees that work in each store and their salaries, and the fashion items to be sold in each store.

Is Giardano Ltd an Australian resident for tax purposes.

Is Giardano Ltd taxable in Australia?5.Frank earns $60,000 per year and due to a capital gain was expecting a high tax bill for the income year ending 30 June 2011. He believed his income would be lower in the following income year. He requested his employer to pay him only $50,000 by 30 June 2011 and to credit the remainder to his account in the employers books. He was paid the $10,000 on 20 July 2011. Advise Frank.

6. Howard, Abbott and Costello have for many years conducted a prosperous accounting practice as a partnership with between 50 to 100 employees. A large part of the income-producing activities are carried out by employees without the direct involvement of the partners. The composition of the partners changed from time to time. Over the years they have always accounted for their income on an accruals basis. The amount of the partner's drawings exceeded the fees received. This year, however, they wish to change to a cash basis of accounting. Advise the firm as to whether they may change their system of accounting.

7.In the 2011-2012 income year, Billy Barrister received $50,000 in fees from clients who had paid their bills. Of this amount, $10,000 represented fees for appearances made and advice given during the 2010-2011 income year and $40,000 represented fees for services provided during the 2011-2012 income year. Billy was also owed $30,000 from clients he had advised and acted for in the 2011-2012 income year and who had not paid their bills by 30 June 2012. How much income has Billy derived during the 2011-2012 income year?

8.A gymnasium offers a gymnasium membership payable in advance. There is no contractual right to a refund, although occasionally refunds were once granted to clients whose health circumstances prohibited them from continuing to attend the gymnasium. All other requests for refunds have been consistently refused. By 30 June 2011 the gymnasium had received $5,000 of membership subscriptions in respect of memberships commencing 1 July 2011. When is the $5,000 taxable?

UNIT 3INCOME ACCORDING TO ORDINARY CONCEPTS

1. Chalk is a teacher employed by a State Department of Education at school A. On the basis of school sizes the Department directed Chalk to leave school A and the commence duties the following year at school B. Chalk refused to comply with this direction and was suspended by the Department. During his suspension he was paid a sum equivalent to his former take home salary by an Action Committee formed by his teaching colleagues at the school who supported his cause and who make fortnightly contributions. Over an eight week suspension Chalk received a total of $4,000.

Discuss whether this amount is income according to ordinary concepts.2.Discuss whether the following items are income according to ordinary concepts and/or assessable income:

(i)Tattslotto winnings.

(ii)Prizes derived by a contestant on "Sale of the Century".

(iii)A car awarded by a TV Station to the best AFL footballer of the year.

(iv)The earnings from illegal bookmaking.

(v)Tips to a waiter.

(vi)A travel allowance given to an employee.

(viii)A $500 trophy received by a retired accountant on winning an amateur fishing contest.

(ix)An Austudy allowance received by students.

(x)A colour TV received by an employee from his employer on his retirement. The set was valued at $400.

(xi)Maintenance from his ex-wife for Robert and the three children - $150 per week.

(xii)Rent-free accommodation provided to an employee by an employer.

(xiii)A pharmacist leases his shop from the supplier of an important pharmaceutical product. As a result of the pharmacist selling more than 1000 units in one month of the suppliers product, the pharmacist receives rent free accommodation for six months by the owner.

3.As a result of a car accident an employee driver received a third party court settlement of $100,000, $20,000 for loss of a limb, a social security disability pension and sick pay from the employer.

Are these sums ordinary income and/or assessable income?

4.The taxpayer rented many properties for its business from W with whom he had very good relationship. W decided to develop its properties in other ways and over 2 years took back a number of these properties as each lease expired. W paid the taxpayer a number of ex-gratia payments in connection with the loss of the tenancies.

Advise the taxpayer whether the ex-gratia payments are of an income nature or a non-taxable gift.

5.An actor, Oyl Wells had been engaged by a film company under an agreement to produce, direct and act in a film Citizen Abel. The completed film had been shown in London and New York since December 1944 but had not been very popular. It was agreed that the best way to promoting interest in the film would be for the taxpayer to refrain from appearing in, directing or producing any other film for a period of 18 months other than for the film company for which he received $15,000. There was no obligation for the film company to employ him and it did not do so during the period.

Advise Wells whether the $15,000 is of an income nature.

6.A Sydney firm of solicitors, Markbys, needed a mining law expert and approached Kembla with the object of attracting him from his current employment in Perth. Ultimately, he agreed to leave the Perth firm and join the Sydney firm as a consultant for an initial term of five years. As part of the agreement he received:

(i)$100,000 for giving up his employment with the Perth firm; and

(ii) $200,000 for agreeing not to work for any other firm during the period of his employment with Markbys;

(iii) $500,000 for agreeing not to work for any other firm of mining law solicitors in Sydney for 5 years after ceasing his employment with Markbys.

(iv)a transfer allowance of $20,000 to meet removal expenses. The taxpayer used this money to relocate his family, furniture and personal effects.

Kembla will also receive an attractive salary of $80,000 per year during the initial five years.

Advise Kembla whether the above receipts are of an ordinary income nature.7.Mitre Tools Pty Ltd carries on business as a hardware retailer throughout Australia. On 1 January 2006, Mitre loaned $10 million to a wholly owned subsidiary for a period of seven years and one month at an interest rate of 10% per annum. One day after making the loan, Mitre assigned the right to receive the interest under the loan to Citicorp for a lump sum payment of $4 million which was equal to the present value of the future interest. Mitre and Citicorp had discussed the possibility of the assignment some time before the loan was made. Advise Mitre of what amount, if any, it is required to include in its assessable income under sec 6-5, ITAA97.8.After completing a carpentry course in 1999, Jariydd began restoring weatherboard inner city houses, with the assistance of his wife. This usually involved painting and renovating the kitchen and bathroom before selling the property, usually at a substantial profit. During the Week Jariydd worked as a Public Accountant, with the renovating activity taking up his time on most weekends. Between the years 1999 and 2004 he renovated and sold on average two houses each year.

In 2004 he retired from the Public Accounting firm. With more time he was able to renovate and sell one house each month and within a short time was employing two carpenters on a full-time basis.

He was also able to indulge in his other main interest, namely horse racing, attending race meetings almost every weekend. Although his gambling losses were almost $20,000 in 1988, he had substantial success in 1999, 2000 and 2001, with his net winnings averaging $100,000. He regarded his success as mainly due to luck as his betting was very unsystematic and he based his selection of horses on intuition after a brief study of the racing guide.

In 2001 Jariydd purchased 10 acres for $100,000 in what was then farming country on the outskirts of the city. Although he had kept approximately a dozen sheep on the property, the main purpose for the purchase was to provide a weekend rural retreat for the family, particularly while the children were young. He had never farmed the property in the traditional sense, but had nonetheless regularly kept a dozen sheep on the property and would occasionally sell some of the lambs at the local market. His daughters had also kept a few horses for riding excursions at the pony club.

Following his divorce in 2009 he decided to sell the property. With the spread of suburbia this land became very valuable as a new shopping centre had been built in 2004. Consequently in 2010 he subdivided the land. Jariydd controlled the marketing of the blocks of the subdivision. He did not engage the services of a sole agent to sell the blocks, but gave general instructions to a number of estate agents in the areas to act on his behalf in selling them. A site office was erected on the land. Jariydd did not advertise for the sale of the lots. The sale of the land as suburban housing blocks realised a profit of $1,000,000.

One of the blocks was gifted to his girlfriend Tammzynn, together with a Mercedes Car and some jewellery valued at $100,000. The jewellery had been given to him by his mother prior to her death in 1990.

The economic recession in Australia caused liquidity problems and Jariydd was having trouble servicing bank loans he had incurred for the purpose of purchasing houses for renovation. This was compounded by the downturn in the housing market that made it difficult to sell many of the renovated homes. In fact some had to be sold at a loss.

After his divorce in 2009 he bought a residential house which he lived in with his girlfriend. In 2010, as a consequence of his concerns about bankruptcy, he decided to subdivide the property into two blocks. He sold one of the blocks while retaining the other block as his principal residence.

To raise further cash, his girlfriend kindly agreed to also sell the Mercedes car, jewellery and the land he had gifted her. Jariydd had never included the proceeds from any of the above activities in his tax returns. Worried that the Taxation Commissioner may conduct an audit of his affairs, he decided, along with his girlfriend, to seek the advice of a Tax Consultant.

Advise Jariydd and his girlfriend Tammzynn of the tax implications of the above facts, including reference to any applicable legislation and case law.

Note: You are not required to calculate Jariydds tax liability)

9.The growth of Grouchos dental practice necessitated a move to new leased premises. This worried Groucho as the monthly rental bill was double that of the older office accommodation. Fortunately the landlord had paid him a lease incentive of $10,000 to enter the new lease.

Is the lease incentive ordinary income under s. 6-5, ITAA97? Consider the CGT implications after completing CGT in your lectures. 10.The firm of XYZ Pty. Ltd. is a distribution agent for electronic components used in the video industry. The firm received a sum of $80,000 compensation for the cancellation of an agency contract by the manufacturers. The loss of the agency affected the firm's performance as the agency accounted for 50% of the firm's income. The remaining 50% of the firm's income was derived from six other agencies.

Advise whether the compensation payment is ordinary income. 11.In 2003 Gift Distributors Pty Ltd entered into a six year forward selling agreement to supply its various exclusive expensive gift products at fixed prices to Gempo Gifts, a chain of giftware retailers. Gift Distributors Pty Ltd agreed not to supply its products to any other person in Australia for the period of the agreement and Gempo Gifts agreed not to sell any other products in Australia. Gempo Gifts continued to sell a small number of other products to New Zealand retailers.

In 2005 Gift Distributors Pty Ltd decided to cease business. It advised Gempo Gifts that it intended to cease supplying giftware. It paid $800,000 compensation to Gempo Gifts based loosely on the profit that Gempo Gifts would have made from the sales over the remaining four years of the agreement. In the next month Gempo Gifts tried to develop its business of supplying other products to New Zealand shops but this did not prove successful and it soon went out of business.

Advise whether the compensation received by Gempo Gifts is ordinary income. Consider the CGT implications after completing CGT in your lectures.

UNIT 4 CAPITAL GAINS TAX

1. What is the difference between a capital gain and a capital loss and between a net capital gain and a net capital loss? What is the meaning of reduced cost base?2.Your grandmother has a holiday home in Lorne and decides to transfer the home to you as a gift. Your grandmother purchased the holiday house in October 1986 for $60,000. Today the house is valued at $200,000. Are there any CGT consequences for the gift?

3.Melinda is a school teacher with an annual salary of $55,000. She disposed of the following assets during the 2011-2012 income year.

AssetPurchase

pricePurchase

dateSale priceSale date

Fridge (Personal) X$9001/12/06$2001/9/11

Sculpture$1,0001/6/07$3,5001/11/11

Antique Furniture$1,2001/8/98$7001/9/11

Motor Car$7,0001/7/98$25,0002/12/11

Block of Land *$80,0001/10/09$260,00030/6/12

Shares A$50,0001/3/06$90,00030/6/12

Shares B$50,0001/10/11$70,00010/6/2012

Shares C$40,0001/10/11$10,00010/6/2012

Block of Land **$100,0001/10/84$500,00010/6/2012

* Note: On 1 February 2010 a holiday apartment was built on the block of land at a total cost of $70,000. On 20 February 2010 trees were planted on the land at a cost of $10,000 to provide shade. On 1 July 2011 Melinda granted a 3 month option to purchase the block of land for $260,000 exercisable by 1 August 2011 to a neighbour. She charged the neighbour $5,000 for the grant of the option. The neighbour decided not to exercise the option that lapsed on 30 September 2011. Melinda retained the $5,000. Melindas lawyers charged her $1,000 in respect of the legal fees concerned with creating the option contract. On 1 October 2011 Melinda granted another option to another neighbour to purchase the land and apartment for $260,000 exercisable by 30 June 2012. She charged the neighbour $5000 for the grant of the option. Melindas lawyers charged her $1,000 in respect of the legal fees concerned with creating the option contract. The neighbour exercised the option on 30 June 2012.

** Note: On 1 February 2012 a house was built on the vacant block of land at a cost of $200,000. Independent valuations indicate that 70% of the profit from the sale of the property reflects the increase in the value of the land.

Melinda has an unabsorbed net collectable loss in respect of $400 from the 2009-2010 income year and a further unabsorbed net collectable loss from the 2010-2011income year of $800. She also has a net carry forward capital loss from the sale of options from the 2010-2011 income year of $12,000. She has a prior year trading loss of $12,000 from the 2009-2010 income year. In the 2011-2012 income year Melinda earned $10,000 exempt income and $4,000 non exempt non assessable income. Calculate Melindas net capital gain (or net capital loss) and tax payable for the 2011-2012 income year.4.Wayne, who sells motorbikes out of his shop in Elizabeth Street, disposed of the following assets during the 2011-2012 income year.

AssetPurchase pricePurchase dateSale priceSale date

Antique vase$40010/6/06$15001/9/11

Manuscript$1,00010/6/07$5,0001/7/11

Painting$7,00010/6/05$50030/10/11

Stereo *$12,00010/8/06$60001/7/11

TV-Audio System *$11,00023/4/05$20,00015/10/11

Diego Maradonas World Cup T-shirt$11.0001/12/10$16,0001/11/11

Shares$1,00020/1/06$7,00020/6/12

Land$50,00020/7/11$25,0003/3/ 12

Harley Davidson *$20,00011/10/07$35,00011/11/11

Main residence **$80,00030/6/92$380,00030/6/12

Apartment at a ski resort ***$40,00019/3/84$200,0001/11/11

* Note: The stereo, TV-audio system and Harley Davidson motor bike were never used as business assets.

** Note: Although Wayne owned his residential home for 20 years, he only lived in it for 10 years from 30 June 1992 until 30 June 2002 when the house was valued at $180,000. He rented it out to a tenant for the remaining 10 years he owned the house. He did not own another main residence in that period.

*** Note: In July 2011 Wayne agreed to lease his ski apartment for 6 months at a rental of $2,000 a month. He charged the tenant $2000 in respect of the creation of the lease. Waynes lawyer charged him $500 in respect of the legal fees for the creation of the lease.

Waynes taxable income for the 2011-2012 income year from the motorbike shop is $60,000. He has a carry forward trading loss from the motorbike shop of $90,000 from the 2010-2011 income year. He earned $10,000 exempt income and $5,000 non assessable non exempt income in the 2011-2012 income year. He also has a net collectable loss in respect of the 2007-2008 income year of $500 and a net carry forward capital loss in respect of the purchase and sale of shares for the 2008-2009 income year of $4,000.

Calculate Waynes net capital gain (or net capital loss) and tax payable for the 2011-2012 income year.

What difference would it make if Wayne had lived in his main residence until 30 June 1996 and rented it out for the next ten years and then lived in it for the remaining 6 years that he owned the house and had never owned another main residence in that period?

What difference will it make if Wayne sells ski apartment for $200,000, payable in four quarterly instalments of $50,000, commencing 1 November 2007 and the final payment is never received on 1 August 2008 as the purchaser becomes bankrupt?

5.In January 2005 Hugh Ego, a resident taxpayer, contracted to purchase a house for $90,000 for the purpose of earning rental income. In the same month Hugh paid $2,000 in stamp duty, valuer and accountants fees and legal expenses. After taking possession of the property in March 2005, Hugh discovered the roof needed replacing. He spent $8,000 on a new roof in March 2005 and then immediately let the house out to tenants. The house remained rented out until its sale in June 2012. In April 2007 he spent $20,000 adding another room to the house. In May 2011 he installed a spa at a cost of $7,000. Unfortunately, in October 2011 he was forced to spend $3,000 removing the spa as it failed to comply with council regulations. In April 2008, Hugh signed a contract for sale of the house for a price of $510,000. The sale was settled in June 2012. At settlement Hugh paid legal expenses of $1,000 and a real estate agents commission of $9,000 in respect of the sale.

During the period of his ownership of the house, Hugh spent $60,000 on interest in respect of the loan to acquire the house, $10,000 on insurance, $12,000 on rates and taxes and $18,000 on repairs. This included $6,000 on interest, $2,000 on insurance, $2,000 on rates and $3,000 on repairs spent in the 2011-2012 income year.

Advise Hugh of the amount of the capital gain that he has accrued for the 2011-2012 income year in respect of the disposal of the house.

Calculate Hughs tax payable for the 2011-2012 income year on the basis he has taxable income of $15,000 from his paper round and $10,000 rent from the rental property, a prior year income loss of $12,000, net exempt income of $10,000, a prior year capital loss from the sale of shares and options of $2,000 and a prior year capital loss of $5,000 from the sale of a rare coin..What difference would it have made to your answer if Hugh had used the house as a personal holiday house throughout the period of his ownership and had never rented it out and consequently had not earned the rental income of $10,000 mentioned in the above paragraph.

What difference would it have made to your answer if Hugh had used the house as a personal holiday house for half the period of his ownership and he had rented it out for the half of the time that he owned the property and that $60,000 of the $100,000 expenses mentioned related to the period in which he rented the house out and the $6,000 on interest, $2,000 on insurance, $2,000 on rates and $3,000 on repairs mentioned above related to the rental of the property to a tenant during the 2011-2012 income year.UNIT 5 FRINGE BENEFITS TAX1.Boss Co. is a trading company that purchased a car on 1 July 2012 for $60,000. On 1 July 212 Boss Co. provided the car to Alf for the remainder of the FBT year (273 days. Alf travelled overseas from 1 August 2012 until 23 August 2012. While overseas he left the car in the airport car park and kept the keys to the car. During the period that Alf had the use of the car, it travelled a total of 34,000 kilometers of which 30,000 kilometers represented income-earning use. Boss Co. incurred a total of $5,000 for insurance, registration, maintenance and fuel in respect of the vehicle. Alf incurred $800 in fuel costs in using the car, of which $100 related to travel in the course of his employment with Boss Co. During office hours Boss Co. allows Alf to park the car on its downtown business premises free of charge.

(a)Does provision of the car amount to assessable income for Alf?

(b)Can Alf claim any allowable deductions for his petrol costs?

(c)How much fringe benefits tax must Boss Co. pay in respect of the provision of the car in the 2008-2009 FBT year?

(d) Can Boss Co. claim a tax deduction in respect of the provision of the car in the 2012-2013 FBT year? 2.On 1 April 2013 Errol Employer lent $100,000 to Andrea Employee on the basis that this amount was to be repaid in 3 years time in full and that monthly interest of 4% per annum was payable on the principal sum. During the 2013-2014 fringe benefits tax year, Andrea paid Errol all the monthly interest payments on the due date. Andrea used 20% of the borrowed funds for income producing purposes and the balance of the funds to purchase her home. (a) What is Errols fringe benefits tax liability in respect of the loan to Andrea?

(b) Advise Errol in respect of the deductibility of the expense in regard to the provision of the above benefit to Andrea.

(c) What is Andreas tax liability in respect of the receipt of the above benefit?(d) What are the consequences of Errol forgiving $20,000 of the loan of $100,000 on 31 March 2009 as a consequence of Andreas excellent services?UNIT 6 GENERAL DEDUCTION PROVISION

Income Tax Formula:

Gross Income

Less: Exempt income (s 6-20 and Div 11)

= Assessable Income (s 6-5 and s 6-10)

Less: Allowable Deductions (s 8-1 & Div 25)

= Taxable Income x Tax rate + Medicare levy (1.5%) + (surcharge 1% if applicable)

= Tax payable - Less: tax offsets + rebates =

Tax refund or payment to ATO

These questions are concerned with determining whether or not certain expenses are an allowable deduction, s 8-1, and if so reducing the amount of a taxpayers assessable income. This in turn determines the amount of taxable income that a taxpayer is required to pay income tax on, as shown above.

1. Are deductions allowable under sec 8-1 in the following circumstances and if so under what limb of sec 8-1, to what extent and in which year?

(a) Percy Plugher has a full-time job as a furniture removalist and is also employed as a professional footballer. On weekdays he incurred expenses in travelling between his full-time work places and training at his Melbourne club as well as expenses on travelling between his home and the grounds upon which matches were played on the weekend. During the football season Percy also incurs $50 per week on additional high carbohydrate foods that his coach has prescribed he should eat to ensure that he maintains a heavy weight for optimum playing performance.

(b) Basil Foresight works full time as a barrister with an office at Owen Dixon Chambers in Melbourne. Basil uses one of the bedrooms in his home as a home office in which he regularly works at night and on weekends on legal advice and preparation for court appearances. Throughout the year Basil has paid interest on his home mortgage. The room used as a study comprises 20% of the total floor area of the house.

(c)The Mop-It-Up Insurance company carries on insurance business including the payment of compensation to policy holders for property damage due to storms. In June 2010 several hundred houses were damaged by a major storm. The Mop-It-Up company estimated that it would have to pay around $1 million in claims arising from this storm and accordingly it made a provision for additional claims of $1 million in its accounts for the year ending 30 June 2010.

(d)The owner of the Skippy Rooburger chain of fast food outlets paid one of its rivals 15 monthly payments of $100,000 each in consideration of its rival agreeing not to sell rooburgers in Australia for a period of 5 years.

(e)Entertainment Hotels Pty. Ltd. owned and operated a chain of three hotels in Sydney. On 19 October 2010 the liquor licenses of two of the hotels were cancelled, largely as a result of a report presented on a popular television current affairs program, alleging breaches of the licensing laws and the use of the hotel premises for immoral purpose.

The company considers that these allegations were unfounded and would have a disastrous effect on the company's operations. Consequently, it instituted legal proceedings for the restoration of the licences and was successful in having one of the licences restored as from 30 July 2011. The company is currently seeking restoration of the other licence. The court proceedings have resulted in legal expenses of $13,000 to this date.

In an effort to offset the effect of the allegations, the company sought the advice of a leading firm of marketing consultants who, after a thorough analysis of the company's predicament, advised that the most prudent course of action would be for the company to undertake a $10,000 advertising campaign to promote the hotel on commercial television. The theme of the advertisement was to promote the hotels as suitable places for young people to spend their time and to meet decent yet sophisticated young people. The advertisements emphasised atmosphere rather than the sale of alcohol.

Advise the company whether any part of the $23,000 expended is an allowable deduction, supporting your answer with relevant case law.

2. You are the tax accountant for Computer Consultants Pty Ltd. Your have been asked to review the 30 June 2010 accounts for the company. After you conducted your review you notice the following items that had been claimed as a tax deduction in the financial reports:

Provision for long service leave $60,000 (an amount of $21,000 was actually paid). Provision for doubtful debts $40,000 (this was an estimate only by the marketing staff and no legal action has been taken).

The payment of $125,000 for the purchase of the goodwill of a competitor business, Nationwide Computer Contractors Pty Ltd. The sum of $33,500 which had been stolen from the company as a result of computer fraud when using internet banking. No employee is responsible for the theft and at this stage no one has been charged by the police for the fraud.

You are required to write a report to the directors explaining the correct taxation treatment of the above items. In your report you should refer to the sections of the act and any relevant case law.

3. Icon Pty Ltd is an Australian perfume manufacturer that in recent years has suffered substantial losses in its business. In January 2010 the company engaged the services of On The Ball Pty Ltd to conduct an efficiency study aimed at reorganising Icon Pty Ltds business, increasing its productivity and reducing its business costs. The study recommended retrenchment of various employees. Icon Pty Ltd paid On The Ball Pty Ltd $50,000 for the efficiency study.

In March 2010, as a consequence of On the Ball Pty Ltds recommendation, a number of employees of Icon Pty Ltds employees were retrenched including the companys general manager Charles Chen who was paid a lump sum of $80,000 for agreeing to the termination of his four year employment contract six months before its completion. Furthermore, as Charles Chen had significant influence over a number of the companys major clients, the company agreed to pay Charles Chen three annual lump sum payments of $100,000 on condition that he refrain from any employment or from carrying on any business in direct competition with the company within Australia for three years.

In 2009 Icon Pty Ltd wanted to manufacture a mens eau de cologne which was subject to a patent owned by Frankincense Ltd and which was about to expire. Frankincense Ltd applied for a 10 year extension of their patent. Icon Pty Ltd incurred $50,000 in legal costs in successfully opposing Frankincense Ltds application which meant that the perfume became generally available for manufacture by all eau de cologne manufacturers. Icon Pty Ltd began to manufacture and sell the perfume to retailers.

In 2010 directors and agents of Icon Pty Ltd were charged under the Secret Commissions Act with having paid illegal secret commissions to employees of its retail buyers as a means of boosting sales of Icon Pty Ltds products. The directors and agents were found guilty, given a good behaviour bond and fined. The company paid the fines and legal fees of its directors and agents as it believed its reputation was at stake. It made the decision out of consideration for its own business interests, rather than the personal interests of the directors and agents.

(1)Advise Icon Pty Ltd as to the deductibility of:

(a)the $50,000 in respect of the efficiency study provided by On The Ball Pty Ltd; (b)the $80,000 paid to Charles Chen for agreeing to the termination of his employment contract; (c)the three $100,000 annual payments paid to Charles Chen for agreeing not to compete with Icon Pty Ltd for 3 years. (d) the payment of $50,000 in opposing Frankincense Ltds patent extension application. (e)the payment of the fines and legal fees in defending its directors and agents. (2)Advise Charles Chen as to whether he is assessable in respect of the receipt of the $80,000 for agreeing to the termination of his employment contract and the $100,000 annual payments paid to him for agreeing not to compete with Icon Pty Ltd for 3 years. UNIT 7SPECIFIC DEDUCTIONS, TRADING STOCK, REPAIRS, NON-COMMERCIAL BUSINESS ACTIVITIES

1. Your client, Boost Trading Company Pty Ltd, has incurred the following expenses during the current financial year and has come to you for advice as to whether or not a tax deduction can be claimed under a specific section of the ITAA or under s.8-1, ITAA?

(a) Land tax and Payroll tax in relation to the manufacturing plant

(b) Accounting expenses incurred when disputing an amended income tax assessment for the year-end 30 June 2014.

(c) The speeding fines incurred by two of the sales team on their visit to clients

(d) Legal expenses and stamp duty incurred for up front expenses of $3,000 when the company entered into a 3 year loan agreement on 1 January 2013 to borrow money to purchase a new factory site.

(e) The theft of $150,000, by the company accountant, as a result of transferring money from the Company bank account on the Internet

(f) The loss of $300,000 when the accounts clerk was robbed while taking the sales takings to the bank to be deposited

(g) The company wrote off a bad debt of $50,000 in respect of a loan made to a valued employee to enable the employee to pay for a medical operation.

2.Crowbar Ltd has the following items of stock on hand at 30 June 2013. Its opening value for stock for items A, B, C on 1 July 2012 was:

Units of stock ABC

Valued at cost18,00019,00011,000

Its closing values for stock for items A, B, C on 30 June 2013 were:

Units of stock ABC

Cost$10,000$10,000$15,000

Replacement cost$11,000$3,000$7,000

Market selling value$14,000$2,000$18,000

Crowbar Ltds average annual turnover over the previous 4 years was $800,000?

Advise Crowbar Ltd whether deductions available to it in respect of its purchases of trading stock. This question does not require any calculations.

Advise Crowbar Ltd as to which value of closing stock it should choose at 30 June 2013 on the basis that the company wishes to minimise its taxable income. Would your answer be different if Crowbar Ltd had carry-forward losses from a prior income year?

What difference would it make to your answer if Crowbar Ltd had an average annual turnover over the previous 4 years of $5,000,000?3.On 10 June 2013 the taxpayer ordered 1000 units of batik shirts from Indonesia. It agreed to pay for the shirts upon arrival in Australia. The bill of lading for the shirts was in the taxpayers name and had been received by the taxpayer. The shirts had not arrived in Australia on 30 June 2013.

Are the shirts trading stock on hand of the taxpayer?

What difference would it have made if the bill of lading had not been received by the taxpayer and the shirts were not at the taxpayers risk while in transit?4. On 1 January 2013 a clothing wholesaler ordered 10,000 items of clothing from an overseas supplier. The agreement stated that the supplier was to deliver 1,000 items every 6 months commencing 1 July 2013. Is the clothing wholesaler able to claim a deduction for all the 10,000 items of clothing ordered on 1 January 2013?5. Fashion City Ltd ordered contracted to buy 1000 T-shirts on 1 June 2013 from a local importer at a cost of $5 per T-shirt. By 30 June 2013, 800 T-shirts had been delivered of which 100 remained unsold.(a)Assuming that Fashion City Ltd uses cost as the basis to value its closing stock, what is the value of stock on hand on 30 June 2013?

(b)Advise Fashion City Ltd in regard to any deductions it can claim in respect of its trading stock for the year ended 30 June 2013. 6.In the tax year ending 30 June 2013, Dr. Soos, a child psychologist decided that his

consulting rooms were in a state of disrepair. He incurred the following expenses:

$

Replacement of broken tiles in roof1,000

Replacement of carpet in consulting room3,000

Replacement of outdoor bathroom with indoor bathroom12,000

Replacement of glass windows with double glazed windows22,000

Painting of consulting room1,000

Reconcreting patient car park5,000

Gardening: pruning trees and mowing lawns500

Dr. Soos bought a second-hand video game machine for $2,000 to entertain children in the waiting room. When he first tried to use it he discovered that it would not operate as the screen was broken and needed replacing. He spent $1,000 on a new screen.

Advise Dr. Soos of the deductibility of these expenses.

UNIT 8 CAPITAL ALLOWANCES 1.Johnny Dangerous, who conducts a hot air balloon business providing scenic flights over the Snowy Mountains sells his old balloon on 30 June 2011 when its adjustable value is $7,000. Johnny had bought the old balloon for $10,000 several years beforehand. Johnnys average annual turnover for the last 4 years was $3 million. The balloon is used 100% for business use.

What amount, if any, is assessable or deductible to Johnny under the ITAA if the old balloon is sold for: (i) $5,000; (ii) $9,000; and (iii) $15,000?

What difference would it have made to your answers had the taxpayer used the balloon only 50% for business use?

2.Rodney Roadrager purchased a vehicle (car A) on 30 September 2008 for $40,000 that was used 80% for business purposes. The taxpayer estimated the effective life of the vehicle to be 5 years and uses the diminishing value method of depreciation. Rodneys average annual turnover for the previous 4 years was $2 million and the total value of his depreciating assets was $2.5 million.

On 30 April 2010 the taxpayers sold the vehicle for $20,000 and on the same date purchased a replacement vehicle (car B) that was to be used 100% for business purposes. The taxpayer estimated the effective life of the vehicle to be 4 years and uses the diminishing value method of depreciation.

Details of the new vehicle's costs are:

Cost of vehicle $80,000

Cost of new engine and testing of new engine2,000

Stamp duty450

Third party insurance500

Air-conditioning1,000

Wheel trims200

Rodney sold car B on 30 June 2011 for $65,000

Required

(a)Calculate the taxation implications of the disposal of car A.

(b)Calculate the cost of car B for depreciation purposes on the assumption that the taxpayers wish to minimise their tax liability in the income year ending 30 June 2011.

(b) Calculate the taxation implications of the disposal of car B.

3.Harold Holt runs a swimming pool business. The average annual turnover for his business over the last 4 income years has been $3 million dollars. He pools 50 low-cost depreciating assets with a total cost of $25,000 during 2008/09. Second element costs incurred during the year for these low-cost assets total $5,000. At the beginning of the year Harold also allocates 29 low-value items to the pool with diminishing value opening adjustable value of $19,600 and incurs $10,000 of second element costs for these assets. No private or exempt use is expected. The closing pool balance for the previous income year was $10,000.

Required

(a)Calculate the 2008/09 decline in value.

(b)Calculate the closing pool balance on 30 June 2009.

4.The following values apply to the taxpayers 2008/09 general SBE pool :

opening balance of pool - $60,000

depreciating assets purchased during 2008/09 (effective life of less

than 25 years and used 100% for business purposes - $10,000

cost addition amounts during 2008/09 for assets in pool - $1,000

proceeds from sale of pooled assets (100% business use) - $5,500

Required

(a)Calculate the 2008/09 decline in value.

(b)Calculate the closing pool balance on 30 June 2009.

UNIT 9 REBATES/OFFSETS1.A taxpayer with a taxable income of $25,400 for the 2012-2013 income year also incurs $5,000 on medical expenses (of which $1,000 has been reimbursed through the Medicare system and $800 has been reimbursed through the taxpayers private health cover). These expenses are incurred in respect of the taxpayers dependant son who is a resident under 21 years of age and his daughter aged 24 who is a full time student whose adjusted taxable income was $1,500 for the 2012-2013 income year. Calculate the medical expenses rebate available to the taxpayer. Is the taxpayer entitled to any other rebate?

2.During the 2012-2013 income year, X, a single mother, had the sole care of her father, C, a 69 year old university student who derived taxable income of $1,282, net exempt employment income of $500 and made a capital gain of $500 during the income year. Is X entitled to a rebate and if so, what is the amount of the rebate?

3.Mr and Mrs Brown have come to you for advice prior to asking you to prepare their tax returns for the year ended 30 June 2013. The main concern they have relates to their ability to minimise tax by claiming the maximum rebates and tax offsets that are available to them. Mr Brown has just retired at the age of 62 years and has income of only $25,400 for the financial year. The financial details relevant to them claiming tax offsets and rebates are as follows:

Mr and Mrs Brown have incurred the following private expenses:

1,800 - Contributions to a Health Fund for private hospital cover for himself and his wife.4,000 - Fees paid to legally qualified medical practitioners for treatment for himself, his wife and his son 24 years of age and a full time university student. His sons adjusted taxable income is $980 only.

6,000 - Maintaining Mrs Browns father who is a permanent resident of Australia and who during the 2012-2013 income year earned $2,282 of ordinary income from a part-time job and made a capital gain of $1,000.

Mrs Brown has adjusted income of $1,882 which consists of a net dividend fully franked paid to her by the ANB Bank Ltd.

REQUIRED

Calculate the total of the rebates and tax offsets that are available to both Mr and Mrs Brown

UNIT 10 TAXATION OF PARTNERSHIPS

1.A & B are in partnership as retailers of electrical goods. The partnership records for the financial year ending 30 June 2013 disclose the following:

Receipts$330,000Gross sales from trading

3,500 Net Australian dividends received from an Australian resident company (fully-franked)

4,000Interest

5,000Bad debts recovered

4,000Net exempt income

5,000Non-assessable non exempt income

20,000Capital gain from the purchase and sale of shares purchased in December 2011Payments$ 30,000Purchases of trading stock

35,000Partners salaries, partner A receives $30,000, partner B receives $5,000

4,000Interest on a cash advance made to the partnership by Partner A

12,000Interest on capital of Partner A

3,000Expenses of partner A travelling between home and work and for lunches

40,000Staff salaries

15,000Rent on shop

2,000Legal expenses in recovering outstanding trading debts

3,000Legal expenses incurred in altering the partnership agreement

Other information in respect of the Partnership(a) A and B share partnership income and capital profits and losses on a 3/5 and 2/5 basis.

(b) Trading stock on hand 1 July 2012 is $100,000.

(c) Trading stock on hand 30 June 2013 is $97,000 (if valued at cost price), or $99,000 (if valued at the price at which it can be replaced), or $103,000 (if valued at market selling value).

(d) A and Bs average turnover was for the previous 3 income years was $1,500,000 (e) Accounting depreciation was $12,000. Capital allowances calculated pursuant to the requirements of the ITAA97 were $8,000.(f) The partners wish to minimise their tax liability for the income year ending 30 June 2013.

(g) During the income year ending 30 June 2012 the partners made a loss of $10,000 on the sale of a rare manuscript and a loss of $25,000 on the sale of shares both purchased in December 2011.

As personal records disclose the following:

Receipts$ 20,000Rental income from a block of flats

5,000Gambling winnings from weekly attendance at horseraces.

6,000Pay for As part-time membership of the Defence Force Reserves which is exempt under the ITAA97

1,000Medicare refunds for Doctors fees

10,000Dividend income from shares in an Australian Resident Company. The shares were 50% franked

8,000Net salary as a part-time lecturer at RMIT (excluding PAYG Tax Instalments of $2,000)

Payments$ 400Membership fees to professional association

3,000Rates on income producing property

600Rates on family holiday home that has never been rented

1,000Contributions to a Health Fund for private hospital cover for himself and his wife

4,000Fees paid to legally qualified medical practitioners for treatment for himself and his wife

6,000Maintaining As father who is a permanent resident of Australia who earned $3,282 ordinary income and $2,000 net capital gain during the income year. The father is supported jointly and equally by A and his two brothers.

1,000Tax Agent fees

5,000Borrowing expenses relating to a new loan on the rental property that is used exclusively for income producing purposes. The loan commenced on 1 January 2013 and is for 10 years.

20,000

Interest on rental property loan

1,000

Donation to Red Cross Appeal

Note(a) A has a carry forward Division 36 loss of $10,000 from the previous income year.

(b) As wife has adjusted taxable income of $12,000.

(c) A sold some shares during the year. They were purchased in March 2013 and A has calculated the capital gain from their disposal to be $10,000. (d) A is a member of a private health insurance fund.

(e) Figures can be rounded to the nearest dollar.

Required:

Compute As total tax liability for the year ending 30 June 2013. You should explain your treatment of each item in this question.

For example

ItemExplanationAmount Assessable IncomeFees(Sec. 6-5, ordinary income $30,000

from personal exertion)

UNIT 11 TAXATION OF COMPANIES AND SHAREHOLDERS

1.High Five Ltd is a listed public company. It has an issued share capital of 1000 $1 shares. Its dominant shareholder owns 600 shares. Fifteen shareholders own 20 shares each and 10 shareholders own 10 shares each.

Is High Five Ltd a public company for tax purposes.

What difference would it make if the dominant shareholder holds 500 shares and the remaining 500 shares are owned by 25 shareholders who each hold 20 shares? What if the dominant shareholder holds last 300 shares and the remaining 700 shares were held by 35 shareholders who each hold 20 shares?2.During the 2012-2013 income year, X Ltd (a resident manufacturing company) received a dividend of $100,000 franked to the extent of 30% from Y Co. On 1 July 2010 the shares of the company were owned 80% by William and 20% by Richard. There was no change in the shareholding of the company until 1 September 2011 when the shareholding of the company changed to 10% William, 15% Richard and 75% Angela and remained so until 30 June 2013. On 30 May 2012 the companys acquired an insurance business. The company earned $20,000 from the insurance business in the income year ending 30 June 2013. Assuming that the companys only other receipt of income is $100,000 dividend referred to above and assuming X Ltd has carry forward losses of $60,000 from the 2010-2011 income year, how much tax will it be required to pay for the 2012-2013 income year?

What difference would it make if the company had acquired the insurance business on 30 May 2011?

What difference would it make if on 1 September 2011 Angela Pty Ltd had acquired 75% of the shares in X Ltd and the shareholding of Angela Pty Ltd on 1 September 2011 had been Angela 60%, William 20% and Richard 20%?3.The net profit of Eva Nup Ltd, a resident public company for corporate law purposes for the year ended 30 June 2013 comprised:-

Net income from trading in computer parts$ 81,500

Exempt income 24,000

Rental income18,000

Net dividends (see below)45,500

Interest31,000Net profit $200,000In determining the net trading profit, expenses included:-

Salaries - Directors$ 21,000

Provision for Doubtful Debts5,500

Provision for Long Service Leave6,500

Fines in connection with charges for contempt of court600Legal expenses in connection with charges for contempt of court400

Depreciation6,200

The following additional information is available:-

(a)Capital allowance allowable for tax purposes:$7,500

(b)Provision - Doubtful Debts account shows:Balance - 01/07/2012$21,200

Amount provided for year 5,500

$26,700

Bad Debts written off 4,000Balance - 30/06/2013$22,700(c)Provision - L.S.L account shows:Balance 01/07/2012$32,600

Amount provided for year 6,500

$39,100

L.S.L paid4,600Balance 30/06/2013$34,500(d)Shareholding:

Eva Nup Ltd has 15 different shareholders who own 100% of the companys shares. What difference would it have made if 20 shareholders owned 80% of the shares in the company?(e)Directors' Salaries:The Commissioner considers that $16,000 is a reasonable amount for salaries paid to directors.

(f)Prior year income loss:

The company has unabsorbed losses of $34,000 from the income year ending 30 June 2011. Its shareholding has not changed since that date. On 30 May 2012 the company acquired a number of new insurance and finance businesses.

(g)Net dividends received; details thereof:Dividends 100% franked from resident companies $13,000

Dividends 50% franked from resident companies $17,000

Unfranked dividends received from a resident company $7,000

Net dividend of $8,500 received from French company in respect of which $1,500 had been withheld in France.

(h)Purchases of Trading Stock:The taxpayer has claimed as an expense the purchase of goods for resale which were on board a container ship in the Pacific Ocean as at 30 June 2013. The taxpayer's tax manager confirms that the stocktake as at that date does not include that $8,000 shipment. The taxpayer has received the bill of lading for the goods.What difference would it have made if the taxpayer had not received the bill of lading?

(i)Unpaid debts:

On 1 August 2012 the company sold stock to a client for $10,000 to which it has forwarded an account and remains unpaid and has not been included in its net income from trading.

Required

Calculate the company's net tax payable, in respect of the year of income ended 30 June 2013.

22/2/2015LAW2471 Tutorial Problems 2015, Semester 1

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