Tax Questions & Answers 2018. [2018 ed.] 9780455240732, 0455240736

Citation preview

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

TAX QUESTIONS AND ANSWERS 2018

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

INTERNATIONAL AGENTS & DISTRIBUTORS NORTH AMERICA Thomson Reuters Eagan United States of America

ASIA PACIFIC Thomson Reuters Sydney Australia

LATIN AMERICA Thomson Reuters São Paulo Brazil

EUROPE Thomson Reuters London United Kingdom

Tax Questions and Answers 2018

H M Hodgson

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

BBus MTax GradDipBus (Business Law) PhD FCPA CTA

C Mortimer BCommerce (UWA) MTax (UWA) CPA CTAw

Thomson Reuters 2018

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW ISBN 9780455240732 (pbk)

A catalogue record for this book is available from the National Library of Australia

© 2018 Thomson Reuters (Professional) Australia Limited

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. All Commonwealth legislative material is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968 (Cth), permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility This edition is up to date as of 30 January 2018. Product Developer: Lucas Frederick Edited and Typeset by Newgen KnowledgeWorks Pvt. Ltd., Chennai, India Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests.

Authors H M Hodgson BBus MTax GradDipBus (Business Law) PhD FCPA CTA Helen Hodgson is an Associate Professor in Taxation in the Curtin Law School at Curtin University. Helen is a registered tax agent and was formerly a Member of the Legislative Council of Western Australia.

C Mortimer BCommerce (UWA) MTax (UWA) CPA CTA

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Colleen Mortimer is a Lecturer in Taxation in the Curtin Law School at Curtin University. Colleen is a registered tax agent and is Senior Manager in Corporate and International Tax at BDO.

© 2018 THOMSON REUTERS

v

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Other contributors I G Wallschutzky PhD (Bath) MCom DipBusStud Ian Wallschutzky was formerly Associate Professor in Taxation at the University of Newcastle.

G L Payne B Com (with merit) LLB CA Garry Payne was formerly a Senior Lecturer in the Australian Taxation Studies Program (ATAX), within the Faculty of Law at the University of New South Wales.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

He was formerly a senior tax writer with Australian Tax Practice, Sydney. He has also been a tax manager with Peat Marwick, Chartered Accountants, Sydney and a lecturer in taxation law at what is now the University of Southern Queensland.

K E Emmerton BBus MTax Grad Dip H Ed CPA Kaye Emmerton is a tax accountant with Jamieson Webb Business Accountant Pty Ltd in Toowoomba. She was formerly a Lecturer in the Australian Taxation Studies Program (ATAX), within the Faculty of Law at the University of New South Wales.

R K Fisher BBus BEc LLB (Hons) MTax MFinMgt CPA CTA Rodney Fisher is an Associate Professor in the Law Faculty at the University of Technology, Sydney. Rodney has previously worked in practice and as an academic.

J Butler BCom LLB LLM CTA Jennifer Butler is a Lecturer in the School of Business and Law at CQ University. Jennifer has previously worked in practice and in corporate environments.

© 2018 THOMSON REUTERS

vii

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Preface  The 2018 edition is the 22nd edition of Tax Questions and Answers. This edition has been fully updated and reflects changes that apply to 30 June 2018. All questions and answers are based on the 1936 and 1997 Income Tax Assessment Acts, where applicable. Tax Questions and Answers is designed to teach tertiary students how to apply tax law in a practical context. A self-learning approach is adopted, with questions and detailed answers being provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

There is an emphasis on narrative questions, so as to develop the ability to identify issues in factual situations. There are also numerous calculation questions. The answers demonstrate the application of technical principles in addressing the factual situations, and often discuss common errors students may have made. This is particularly valuable for external students. Additional questions without answers are provided for tutorial, discussion or assignment purposes. The combination of authors provides an unmatched diversity of questions which does not limit exposure to a single style. Answers are segregated from questions. All questions and answers are based on the law and tax rates applicable to 30 June 2018, unless otherwise stated. It is hoped that students will find Tax Questions and Answers invaluable in coming to grips with tax law and preparing for exams. As this is our 22nd edition, we’d like to thank all the teachers who use our book, who have contributed directly to its content and who offer us invaluable feedback each year. H HODGSON C MORTIMER January 2018

© 2018 THOMSON REUTERS

ix

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Contents Preliminary Authors................................................................................................................v Other contributors............................................................................................ vii Preface............................................................................................................... ix Abbreviations....................................................................................................xv How to use..................................................................................................... xvii Tax rates.......................................................................................................... xix

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Questions Q1 Residence and source.......................................................................... 3 Residence............................................................................................................3 Source...............................................................................................................10 Q2 Income................................................................................................. 15 General..............................................................................................................15 Exempt income.................................................................................................25 Trading stock.....................................................................................................29 Q3 Capital gains tax................................................................................. 37 Q4 Fringe benefits tax.............................................................................. 53 Q5 Deductions.......................................................................................... 67 General..............................................................................................................67 Capital allowances and repairs..........................................................................85

© 2018 THOMSON REUTERS

xi

Tax Questions and Answers 2018 Q6 Tax accounting.................................................................................... 99 Small Business Entities...................................................................................106 Q7 Rebates and rates of tax.................................................................. 111 Q8 Companies........................................................................................ 125 Q9 Partnerships...................................................................................... 141 Q10 Trusts............................................................................................... 151

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Q11 Superannuation funds and retirement payments........................ 167 Superannuation funds......................................................................................167 Retirement and termination payments............................................................171 Q12 Special classes of taxpayers......................................................... 177 Primary producers...........................................................................................177 Authors, inventors and sportspersons.............................................................185 Clubs and associations....................................................................................187 Other taxpayers...............................................................................................189 Q13 International taxation..................................................................... 191 Withholding tax...............................................................................................191 International agreements.................................................................................194 Foreign income tax offsets and accruals systems...........................................198 Q14 Tax administration.......................................................................... 205 Q15 Tax planning and anti-avoidance................................................... 217 Q16 State taxes and goods and services tax....................................... 233 State taxes.......................................................................................................233 Goods and services tax (GST)........................................................................239 Q17 Case studies.................................................................................... 247 xii

© 2018 THOMSON REUTERS

Contents

Answers A1 Residence and source...................................................................... 273 Residence........................................................................................................273 Source.............................................................................................................281 A2 Income............................................................................................... 285 General............................................................................................................285 Exempt income...............................................................................................303 Trading stock...................................................................................................307 A3 Capital gains tax............................................................................... 319 A4 Fringe benefits tax............................................................................ 349

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

A5 Deductions........................................................................................ 361 General............................................................................................................361 Capital allowances and repairs........................................................................400 A6 Tax accounting.................................................................................. 411 Small Business Entities...................................................................................416 A7 Rebates and rates of tax.................................................................. 419 A8 Companies......................................................................................... 433 A9 Partnerships...................................................................................... 447 A10 Trusts................................................................................................ 461 A11 Superannuation funds and retirement payments........................ 479 Superannuation funds......................................................................................479 Retirement and termination payments............................................................487

© 2018 THOMSON REUTERS

xiii

Tax Questions and Answers 2018 A12 Special classes of taxpayers......................................................... 493 Primary producers...........................................................................................493 Authors, inventors and sportspersons.............................................................503 Clubs and associations....................................................................................505 Other taxpayers...............................................................................................507 A13 International taxation...................................................................... 509 Withholding tax...............................................................................................509 International agreements.................................................................................513 Foreign income tax offsets and accruals systems...........................................517 A14 Tax administration........................................................................... 523 A15 Tax planning and anti-avoidance................................................... 537

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

A16 State taxes and goods and services tax....................................... 551 State taxes.......................................................................................................551 Goods and services tax (GST)........................................................................556 A17 Case studies.................................................................................... 561

Tables Legislation Table.............................................................................................564 Cases Table......................................................................................................572 Rulings and Determinations Table..................................................................576 Index................................................................................................................577

xiv

© 2018 THOMSON REUTERS

Abbreviations The following is a list of common abbreviations used throughout Tax Questions and Answers.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

AAT AITR

Administrative Appeals Tribunal Australian and New Zealand Income Tax Reports ATH Australian Tax Handbook ATO Australian Taxation Office ATR Australian Tax Reports CFC Controlled foreign company CGT Capital gains tax CTBR Commonwealth Taxation Board of Review DCT Deputy Commissioner of Taxation ETP Employment termination payment FBT Fringe benefits tax FBTAA Fringe Benefits Tax Assessment Act 1986 Cth FCT Federal Commissioner of Taxation GST Goods and services tax HECS Higher Education Contribution Scheme IT Income Tax Ruling ITAA 1936 Income Tax Assessment Act 1936 Cth ITAA 1997 Income Tax Assessment Act 1997 Cth SGAA Superannuation Guarantee (Administration) Act 1992 Cth SISA Superannuation Industry (Supervision) Act 1993 Cth SISR Superannuation Industry (Supervision) Regulations 1994 Cth TAA Taxation Administration Act 1953 Cth TD Taxation Determination TPA Income Tax (Transitional Provisions) Act 1997 Cth TR Taxation Ruling

© 2018 THOMSON REUTERS

xv

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

How to use This publication contains 17 chapters of questions in the first half of the book, and corresponding answer chapters at the back of the book. Each chapter contains a selection of questions, divided into those for which answers are provided in the answers chapter and those for which no answers are provided (indicated in the question by the symbol [T]). Issues you should answer are identified in the questions by indicators (❑) in the margin. As a general rule, questions within a chapter or sub-topic progress from the less difficult to the more difficult, or from general to specialised.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Questions without answers are provided for tutorial, discussion group or assignment use. They consist of extra questions on issues similar to those covered in questions for which answers are provided or additional questions on more difficult or specialised areas that may not be covered in all courses. Although Tax Questions and Answers may be used in conjunction with any prescribed tax text, useful references are provided throughout the questions sections, cross-referring readers to various Thomson Reuters texts. In solving each question you should: 1. Examine the information provided to: (a) determine the key issues; (b) ascertain whether more information is required; 2. Identify what source materials are available. A minimum would be relevant legislation and the Useful References listed in each question chapter. 3. Never assume you know the answer. You might have previously known the answer, but the law may have since changed. Check before committing yourself. 4. Use time lines, flow charts or diagrams to simplify and organise data. Sometimes these can be done mentally and other times they might require putting pen to paper. The following is an example of a flow chart you can use to determine whether an amount is assessable. Develop and use similar schemas for other topics. © 2018 THOMSON REUTERS

xvii

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.



xviii

Tax Questions and Answers 2018

© 2018 THOMSON REUTERS

Tax rates All questions and answers are based on the law and tax rates applicable for the year ended 30 June 2018 (as known at the time of publication), unless otherwise stated. A complete listing of all tax rates, rebate levels and other essential tax data for the year ended 30 June 2018, which can be used in answering questions, is contained in the Australian Tax Handbook 2018. For ease of reference, the most commonly used figures are reproduced below.* *  Note that at the time of publication not all of the figures for the year ended 30 June 2018 had been released. Some of the figures below are for the 2017 year.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

General tax rates – residents (2017–18) Taxable income

Tax payable1

$0 – $18,200

Nil

$18,201 – $37,000

Nil + 19% of excess over $18,200

$37,001 – $87,000

$3,572 + 32.5% of excess over $37,000

$87,001 – $180,000

$19,822 + 37% of excess over $87,000

$180,001 +

$54,232 + 45% of excess over $180,000

1

An unincorporated small business entity (eg a sole trader) can claim a tax offset of 8% (capped at $1,000).

Medicare levy (2016–17) Taxpayer

Lower threshold

Upper threshold

Eligible for SAPTO

$34,244

$42,805

All other individuals

$21,655

$27,068

— Individual

— Families Individual with spouse or dependants eligible for SAPTO

$47,670

$59,587

Dependants not eligible for SAPTO

$36,541

$45,676

— Extra income per child — $3,356

© 2018 THOMSON REUTERS

$4,195

xix

Tax Questions and Answers 2018 Medicare levy is phased in at 10% of the excess over the lower threshold amount. Full levy (2%) payable once the taxable income exceeds the upper threshold amount.

Medicare levy surcharge and private health insurance offsets (2017–18) No surcharge and maximum rebate Singles Families

1

Tier 1

Tier 2

Tier 3

$90,000 or less

$90,001–$105,000

$105,001–$140,000

$140,001 or more

$180,000 or less

$180,001–$210,000

$210,001–$280,000

$280,001 or more

— Private Health Insurance Offset — Aged under 652

25.934%

17.289%

8.644%

0%

Aged 65 – 69

30.256%

21.612%

12.966%

0%

34.579%

25.934%

17.286%

0%

1.25%

1.5%

2

Aged 70 or more2

— Medicare levy surcharge — Rate

0.0%

1.0%

Add $1,500 to the threshold for each additional child after the first. 2 Private health insurance rebate percentages are adjusted annually on 1 April by a rebate adjustment 1

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Common personal offsets (2017–18) 2017–18 Offset description

Maximum offset

Maximum ATI reaches1

DICTO2

$2,666

$10,946

Sole parent3

$1,607

N/A

$376

$1,786

– first child

$376

$1,786

– each additional child

$282

$1,410

Student under 253 Child under 213

 educed by $1 for every $4 by which adjusted taxable income (ATI) of dependant exceeds $282 (this does R not apply to the notional sole parent offset). Maximum ATI is the amount of the dependant’s ATI above which the offset cuts out altogether. 2 Taxpayers eligible for the zone offset, overseas forces offset or overseas civilian offset may also be eligible for DICTO. DICTO may not be available, or may be reduced, if the taxpayer is a member of a FTB Part B family or if the taxpayer and another person are both eligible for FTB Part B in respect of the same child. 3 Sole parent, child and student offsets are notionally retained only for the purposes of calculating the zone offset, overseas forces offset and (but not in the case of the sole parent offset) overseas civilian offset. 1

xx

© 2018 THOMSON REUTERS

Tax rates Medical expenses

20% of excess over $2,333 if income is equal to or below ML surcharge threshold

Medical expenses

10% of excess over $5,504 if income is above ML surcharge

Zone Zone A

$338 + 50% of relevant rebate amount

Zone B

$57 + 20% of relevant rebate amount

Special area

$1,173 + 50% of relevant rebate amount

Low income taxpayer Nil – $37,000

$445

$37,001 – $66,667

$445 – (Excess over $37,000 × 1.5%)

Pensioner and Senior Australian Tax Offset (SAPTO) (2016–17) Offset reduces by 12.5% for each $ over the threshold. SAPTO

Offset

Threshold

Single

$2,230

$32,279 – $50,119

Couple (each)

$1,602

$28,974 – $41,790

Couple but living apart

$2,040

$31,279 – $47,599

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Company tax rate (2017-18) Company type

Tax payable on entire amount

Base rate entities1

27.5%

All other companies

2

30%

 ompanies with annual aggregated turnover of less than $25m and which have passive base rate income C which is not more than 80% of the assessable income. 2 Note special rates apply to certain non-profit companies, life insurance companies, credit unions and pooled development funds. 1

Capital gains tax index numbers See note at front of Chapter Q3.

© 2018 THOMSON REUTERS

xxi

Tax Questions and Answers 2018

HELP repayment thresholds and rates HELP repayment income 2017–181, 2, 4

Repayment rate2, 3

Below $55,874

Nil

$55,874 - $62,238

4.0%

$62,239 - $68,602

4.5%

$68,603 - $72,207

5.0%

$72,208 - $77,618

5.5%

$77,619 - $84,062

6.0%

$84,063 - $88,486

6.5%

$88,487 - $97,377

7.0%

$97,378 - $103,765

7.5%

$103,766 and above

8.0%

 ELP repayment income is taxable income (plus reportable fringe benefits total, reportable superannuation H contributions, net exempt foreign employment income and total net investment loss). 2 The repayment thresholds and rates also apply to Trade Support Loan (TSL) debts. 3 Applied to the total HELP repayment income. Note that there is an exemption from making repayments in a particular income year for taxpayers who do not have to pay the Medicare levy or are entitled to a Medicare levy reduction. 4 The Budget Savings (Omnibus) Act 2016 establishes a new minimum repayment threshold for HELP debts of 2% when a person’s HELP repayment income reaches $51,957 (applicable from 2018-19).

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

1

xxii

© 2018 THOMSON REUTERS

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Questions

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Q1  Residence and source Residence

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 4. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Chs 16, 17 and 18. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 2. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Ch 2.

[Q1.1]

B Jones, “BJ” to his friends, was a bank manager who was transferred by his employer to Fiji for two years. During that time he and his family leased a house in Fiji. The family’s house in Melbourne was let, unfurnished. The family furniture was stored in a neighbour’s double garage. At the end of the two-year period BJ had expected to move to his employer’s London branch. Instead, to take advantage of promotion, he returned to Australia. BJ was unaware of the possibility of the Australian promotion until two weeks before his return to Australia.

❑

Discuss whether, for the two-year period, BJ would be regarded as a “resident” of Australia. For simplicity, assume that he left for Fiji two years ago and returned on 30 June during the current income year. Answers: [A1.1].

© 2018 THOMSON REUTERS

3

[Q1.2]

Tax Questions and Answers 2018

[Q1.2]

Bob, a 23-year-old motor mechanic from Mayfield, NSW, left Australia on 1 June during the current income year for the purpose of going to Saudi Arabia to work for a period of nine months as a motor mechanic. Bob was single and had lived with his parents. He left almost all his belongings here and hoped to start a full-time university course at Newcastle University in the following March. As was usual with his employer (a company incorporated in Cyprus), he first went to Cyprus to sign a contract of employment. Among other things, the contract provided that all work be done in Saudi Arabia and that payment be made in Saudi Arabia. No Saudi tax was payable on the salary paid, but because Bob signed an employment contract in Cyprus, income tax of 5% was payable in that country.

❑

Discuss whether, for the current income year, Bob is a resident of Australia. Answers: [A1.2].

[Q1.3] ❑

If a person has a permanent home both in the United Kingdom and in Australia and spends approximately half the income year in each country, is that person a dual resident? Does this mean that the person will be subject to double taxation? Explain, with reference to parts of the relevant double tax agreement.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A1.3]. [Q1.4]

Alex Thermos arrived in Australia in 1965. He started a small retail business which flourished. However, 10 years ago he returned to Greece to care for his parents who through ill health were unable to care for themselves. Thermos intended to remain with them until they died. After his return to Greece his parents’ health improved sufficiently for him to get a parttime job in Greece producing A$20,000 pa. Thermos’ only other income was from rental of his Australian home. Net rental is $5,400 pa.

❑

Discuss the income tax implications of the above. Answers: [A1.4].

[Q1.5]

H K Junk Pty Ltd is a company incorporated in Hong Kong. All directors’ meetings are held in Hong Kong and the annual general meeting is held in Hawaii. The company’s main business is entering into shipping contracts for voyages between Sydney and Hong Kong. Most contracts are signed in Sydney, on behalf of the company, by the managing director.

❑

Is the company an Australian resident? Answers: [A1.5].

4

© 2018 THOMSON REUTERS

Residence and source

[Q1.8]

[Q1.6]

On 1 December an 18-year-old Chinese student arrives at Newcastle University to undertake a BCom degree course. She works part time in a local restaurant to help pay her way. Her earnings to 30 June are $10,000. Unfortunately, she does not spend enough time studying and fails all her subjects. This leads to her return home on 1 July.

❑

Did the student become an Australian resident? Answers: [A1.6].

[Q1.7]

A Drifter has lived in peace on the streets of San Francisco for the last 12 months. One of the beautiful people he met gave him a return ticket to Sydney. Drifter arrives in Sydney intending to stay until his return flight in eight months time. While in Australia, Drifter looks for new ways to experience life. His first adventure is to get a job. He finds his job fulfilling and asks you to outline for him the income tax implications.

❑

Is Drifter an Australian resident? Answers: [A1.7].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q1.8] ❑

Discuss whether the following come within the meaning of “resident” as defined in s 6 of ITAA 1936: 1. John Brown, aged 16 years, who was born in Australia, and who has been living for the past eight years with his uncle in Mexico. His mother died when he was four years old and his Australian resident father has been in a mental health facility since John was eight years old. 2. Alan Peach, who has lived in Brisbane for the past four months and who works as a rigger on a large building project. On completion of the project Peach will return to Holland, his native country. 3. Bill Smith, an Australian citizen, who has been living for the past two years in Hong Kong where he owns his home. He has no family ties in Australia and does not intend to return to Australia in the foreseeable future. 4. Jeff Wayne, an American film star, who lived at a hotel in Sydney during a visit to Australia (from 28 January to 28 November), the purpose of which was to film a television series set in Australia. The series was not a success and Wayne returned to the USA on 28 November. 5. I M D Greatest, an American recording artist, arrives in Australia on 1 June during the current income year for her first Australian

© 2018 THOMSON REUTERS

5

[Q1.9]

Tax Questions and Answers 2018 tour. Shortly after arrival she declares that she loves Australians and Australia and intends to buy a ranch and settle here permanently.

Would it affect your answer if you were told that Greatest intends to marry an Australian resident she has just met?

6. A company, incorporated in the USA, which sends a management team to Australia to operate a local branch. 7. A company, incorporated in New Zealand, which opens a branch in Perth to conduct geological surveys in Western Australia for overseas clients. 8. A company, incorporated in South Australia as the wholly owned subsidiary of a company incorporated in Canada. No business will be carried on by the South Australian company in Australia in the income year. 9. A company, incorporated in the New Hebrides to carry out merchandising activities in the New Hebrides, which has its central management and control in Sydney. Its voting power is controlled by Australian residents. Answers: [A1.8].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q1.9] ❑

In what circumstances, if any, will overseas students studying in Australia be regarded as Australian residents? What income tax benefits, if any, are there for the students? Answers: [A1.9].

[Q1.10] Mr Bondage is a senior executive of an Australian brewing company and an Australian resident. The company decides to attempt to expand into the South East Asian market. Bondage is to be posted to Singapore to take responsibility. Bondage expects to live in Singapore for a period of between one and three years and believes it would be to his advantage to be regarded as a non-resident for Australian tax purposes. His assets in Australia are his home in Gordon, a unit in Noosa which is used for family holidays during September each year and is available for rental for the rest of the year, a further investment home unit in Randwick, a superannuation policy with AMP, listed company shares, debentures, bank accounts and membership of the Australian Golf Club. His wife and young daughter will accompany him to Singapore, but his 19-year-old son will remain in Australia and continue to reside in the Gordon home at a below-market rent. The Noosa home unit will continue to be used by his son during September.

6

© 2018 THOMSON REUTERS

Residence and source

[Q1.12]

Bondage expects to return to head office in Australia from time to time for business reasons, possibly five or six times a year, for periods of between one and two weeks. ❑

Advise Bondage as to his residence status for Australian tax purposes and any steps to increase his chances of being treated as a non-resident. Answers: [A1.10].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q1.11] Johnny Cheque is an internationally renowned country and western singer. He was born in the United States and lives there with his family. Cheque is employed by a United States company which provides his services to promoters. He regularly comes to Australia to perform at Tamworth and the five mainland State capitals. He expects that such performances will involve about four weeks in Australia each year for quite a few years as Cheque is immensely popular. He is impressed with Australia both as a place to visit and for the potential increases in the value of real estate, and is proposing to purchase a home unit on the Gold Coast. He expects to use this home unit for a holiday for the whole of January and possibly some of February each year. The rest of the year it will be available for rental. Cheque is concerned that this arrangement may result in his being treated as a resident of Australia for Australian tax purposes and thus exposing his worldwide income to Australian taxation. ❑

Required: (a) discuss whether Cheque is an Australian resident; (b) state the source of income for: (i) the United States company’s income which is derived from contracts with Australian companies; (ii) Cheque’s service fees from the United States company; and (iii) the rental income; (c) indicate through what entity, if any, you would advise Cheque to acquire the rental property. Answers: [A1.11].

[Q1.12] Discuss whether the following come within the meaning of “resident” as defined in s 6 of ITAA 1936. ❑ 1. A student from Malaysia who arrives in Adelaide on 1 February during the current income year. The student proposes to undertake a degree in medicine which will take five years to complete. Upon completion the student must return to Malaysia and work for a hospital for a period of at least five years. © 2018 THOMSON REUTERS

7

[Q1.13]



Tax Questions and Answers 2018

2. A company incorporated in the Cook Islands to carry out manufacturing operations in the Cook Islands. The company has its central management and control in Australia and its voting power controlled by Australian residents. 3. A 31-year-old engineer born in Melbourne who leaves Australia for the first time on 24 December during the current income year to take up a three-year contract with a construction company in Kuwait. If circumstances permit, she may negotiate a further three-year contract on completion of the present contract. She is indifferent about returning to Australia since she has no dependants in Australia. Answers: [A1.12].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q1.13] Nick Stannos arrives in Australia from a European country on 26 January. He rents a small apartment and accepts two jobs. By 30 June he has saved [T] $10,000 and decides to return to Europe permanently. ❑

For the relevant income year, will Stannos be regarded as a resident or non-resident? In any event, what difference does it make?

❑

If Stannos had remained in Australia indefinitely and was regarded as a resident of Australia from 26 January, how would his European salary income of A$20,000 (derived in the period 1 July to 24 January) be taxed? Assume ex-Australian tax of A$3,000 has been paid in respect of this income. Answers: For tutorial use. No answers provided.

[Q1.14] Dick Lang, an Australian citizen, has been employed for the last two years as an Airline Pilot by Pacific Airways. When not flying around [T] Polynesia, he makes his home in Vanuatu. His salary is A$50,000 pa. He owns shares in Australia which yield unfranked dividends of A$4,000 each year. Dick has his money paid directly to his mother who lives in Brisbane. ❑

Is Lang an Australian resident? What other income tax implications are there? (Assume that when Lang first left Australia he did so on Christmas Day two years ago.) Answers: For tutorial use. No answers provided.

[Q1.15] Basil Baron is an English-born airline pilot employed by Air India. His wife and children live in Brisbane but Basil is only home with them [T] for two or three days per fortnight and rarely flies into Brisbane in the course of his work. He maintains a flat in New Delhi, the capital of India and operations base for Air India. Mrs Baron and the children join him 8

© 2018 THOMSON REUTERS

Residence and source

[Q1.17]

in India during the school holidays. The majority of Basil’s flights are between New Delhi and London. ❑

Consider whether Basil is a resident of Australia for Australian income tax purposes. Answers: For tutorial use. No answers provided.

[Q1.16] On 1 February Zac Chichesque fled from his home and native country in Eastern Europe in fear for his life. Chichesque was a political activist [T] and his quest for radical political reform had failed. It appeared his ideas were about 20 years too soon. On 1 April he arrived in Australia and immediately sought political asylum. The only possession he now has, apart from meagre clothing, is a gold bar worth $500,000. This was purchased only weeks before the turmoil that led to his departure. While awaiting the outcome of his request for political asylum and permanent residence status (which could take 12 months for a decision) Chichesque lives with relatives. While ever-hopeful of returning to his native country, he does not expect this will be possible within the next 10 years. ❑

Required:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(a) discuss whether, at 30 June, Chichesque is a resident of Australia; (b) apart from the tax-free threshold and Medicare levy, briefly mention one other Australian income tax implication for Chichesque if it is assumed he became a resident on 1 April. Answers: For tutorial use. No answers provided.  [Q1.17] Fancy Free is a mining specialist working for a company incorporated in Australia. The company is a subsidiary of a company incorporated [T] in Delaware, USA. During the year Fancy spent two months working in Indonesia and a further three months working in East Timor. Wages related to these projects were paid directly by the American parent company. Fancy usually lives in single person’s accommodation provided by the company, whether in Australia or offshore. Without any family ties in Australia, Fancy enjoys the local social life available when posted abroad. While in Indonesia Fancy formed a romantic relationship with an Indonesian resident, who accompanied Fancy to East Timor. ❑

Advise Fancy in relation to any income tax obligations in Australia. Answers: For tutorial use. No answers provided.

© 2018 THOMSON REUTERS

9

[Q1.18]



Tax Questions and Answers 2018

Source Useful References

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 4. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Ch 16. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 2. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Ch 2.

[Q1.18] Kurt Volkler is a South African resident who specialises in assaying the value of diamonds. He signs a contract in Johannesburg with the Pretoria Diamond Company to work for that company’s head office in Johannesburg and to visit its various branch offices throughout the world. During the current income year, he spends two months in the company’s Sydney office and one month in the company’s Melbourne office assaying the value of diamonds. During this period his salary, equivalent to A$8,000 for the three months, is paid directly into his Johannesburg bank account by the parent South African company. As he is a South African resident, the South African government, which taxes its citizens on their worldwide income, deducts the equivalent of A$2,500 from his salary. ❑

Would any part of this $8,000 form part of assessable income in Australia for Kurt? Why or why not? Answers: [A1.18].

[Q1.19] A Branch is a non-resident who occasionally visits Australia. On one such visit Branch stays at Norfolk Island and is impressed by a particular species of tree that grows wild on the island. None of the residents can remember the name of the tree, so Branch calls it a “Christmas” tree. She decides to take cuttings of the trees, raise them in Melbourne where they will be assured of plenty of water, and then export them to Chile where she intends to sell them for a profit.

10

© 2018 THOMSON REUTERS

Residence and source ❑

[Q1.22]

Branch has been advised that whether any amounts will be subject to Australian tax will depend on the “source of income”. Do you agree? What do you consider to be the “source of income”? Why? Answers: [A1.19].

[Q1.20] Ocean Oil Spillage Equipment is a Panamanian company specialising in hiring vessels to fight oil spillages at sea. A spillage occurs in Bass Strait and the Australian oil drilling company responsible, Unbroken Mountains Pty Ltd, enters into a charter agreement with Ocean Oil Spillage Equipment under which Ocean Oil Spillage Equipment supplies the ship and Unbroken Mountains Pty Ltd supplies the crew and oil spillage experts. The vessel is specially equipped for its task. The ship will operate in Bass Strait for four months, calling occasionally at Melbourne to collect food and workers etc. The contract is entered into in Panama and the charter fees are paid into a Panamanian bank account. ❑

What is the source of income for the charter fees? Give reasons for your answer, supporting it with reference to case law.

❑

Will the charter fees be subject to Australian tax?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A1.20]. [Q1.21] Company XYZ owned land on the Gold Coast which had considerable subdivisional potential. Some years after acquisition it granted options to Company ABC to acquire the land. (Note: the shareholders and directors of both companies were the same.) The directors of ABC then went to Switzerland where, on behalf of ABC, they entered into written agreements nominating Company MNO to exercise the option. (Note: the directors and shareholders in MNO were the same as those in XYZ.) ABC received $1m from MNO for the nomination and claims that the amount is not assessable because it has a Swiss source and because Swiss tax will be paid. ❑

Do you agree? Why or why not? Explain fully. (Assume that the $1m has a revenue character.) Answers: [A1.21].

[Q1.22] What is the source of income in the following? ❑

1. Rhodesia Metals Ltd is a company whose central management and control has always been in Sydney. Its main business has been buying and selling land in New Zealand. It decides to sell the

© 2018 THOMSON REUTERS

11

[Q1.23]



Tax Questions and Answers 2018 entire business to a Hong Kong company. Relevant contracts for the sale are exchanged in Hong Kong.

2. Coote Pty Ltd is a New Zealand company which commenced action in a Brisbane court against a Brisbane newspaper over a story appearing in an afternoon edition. Prior to the court hearing, the newspaper offers Coote Pty Ltd an out-of-court settlement of $1m. Coote Pty Ltd accepts the offer. Coote Pty Ltd then decides not to set up branch operations in Australia. Answers: [A1.22]. [Q1.23] Investco Pty Ltd purchased a parcel of shares on 1 June 1986 for $100,000. It sells them on 1 December during the current income year [T] for $200,000. The shares are in an Australian company but both the purchase and sale took place in the London register. ❑

What is the source of income for the profit made? Answers: For tutorial use. No answers provided.

[Q1.24] Generally, what is the source of income for: [T] ❑ (a) wages; and (b) dividends. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

List two specifically deemed sources of income in the ITAA 1997 or ITAA 1936. Answers: For tutorial use. No answers provided.

[Q1.25] Mr Johns successfully applied for a position in Fiji offered by his multinational employer, and was transferred to the position two years [T] ago. The transfer was for an unlimited time. Johns was accompanied by his wife and child to his new home. They made a decision not to sell their house and chose to rent for the period of their absence. Johns maintained a small investment of $10,000 in Australia as a contingency fund. He was paid in Fiji by his Fijian employer. Johns worked successfully in Fiji for 18 months when he became very ill and returned to Australia to convalesce. His wife and child returned with him. Net rent from the Australian house (after deduction for interest, rates etc) was $1,500. The house is jointly owned. ❑

Required: 1. Discuss whether, during the period Johns lived in Fiji, he was an Australian resident. 2. Assuming Johns was a resident, what was the source of income of his Fijian salary?

12

© 2018 THOMSON REUTERS

Residence and source

[Q1.27]

3. Assuming Johns was a non-resident, what was the source of income of the interest and rental income? 4. What Australian tax is payable in points 1 and 2? Answers: For tutorial use. No answers provided. [Q1.26] Euro Tech Pty Ltd is a software development company located in Perth. About half of its sales are made to companies residing in various parts [T] of Asia. These sales arise partly (15%) from unsolicited inquiries from those companies, partly (75%) as a result of representations made to those companies by sales people travelling from Perth to visit those companies in the countries in which they reside, and partly (10%) from the company’s website. All product development and manufacture is conducted in Perth. ❑

Required: 1. What is the source of income of the overseas sales? 2. What difference would it make in point 1 above if all invoices were sent by an office established by the company in Hong Kong? 3. What difference would it make in point 1 above if the company’s website was managed by a server located in Singapore?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q1.27] Em Therapist has recently completed a course in massage therapy. Reading in an advertisement that you can travel the world and earn [T] good money at the same time, Em applies for a position on a cruise ship. Under the arrangements between Spa PLC (a British company) and the Cruise Line operators (registered in Patagonia), the health and beauty facilities on each ship in the Cruise Line are operated by Spa PLC. All staff are employed by Spa PLC and could be allocated to any of the ships operated by Cruise Line. The remuneration arrangements are a combination of salary and commission, and any customer tips are passed on to the employee. Following a three-week training course in London, Em is offered a position on a ship cruising in the North Atlantic during the northern summer cruise season. The ship visits ports in Canada, North America, Central America and the West Indies, but spends most of its time in international waters. ❑

Em seeks your advice on whether the income is taxable in Australia. Answers: For tutorial use. No answers provided.

© 2018 THOMSON REUTERS

13

[Q1.28]



Tax Questions and Answers 2018

[Q1.28] In April of the current tax year, Valda arrives from India on a 12-month contract to play basketball professionally. He is injured and is sent home [T] in June of the same year, but before leaving he earned $30,000 from playing basketball and $60,000 from modelling sportswear. ❑

Advise Valda of any Australian tax obligations.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided.

14

© 2018 THOMSON REUTERS

Q2 Income General

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Chs 5, 6, 8, 9 and 10. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Chs 3, 4, 5, and 6. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 3. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 3, 4 and 6.

[Q2.1]

On the last garbage collection day before Christmas, Norm Smith leaves a full carton of beer next to his garbage bin for collection by his garbage collectors. This is in accordance with Norm’s usual practice at this time of year, as it is with a number of other residents of his garbage collection area.

❑

Would any amount be included in the assessable income of the garbage collectors as a result of the receipt of these cartons of beer? Give reasons for your answer. Answers: [A2.1].

[Q2.2]

A D Hesive has collected stamps for over 20 years. Although she has not acquired any since 19 September 1985, she has over 100,000 stamps. Recently she had them valued. To her surprise, they were valued at $1 million. She has decided to sell the collection, and to facilitate this has taken a 12-month lease of a small store in a large shopping complex.

© 2018 THOMSON REUTERS

15

[Q2.3] ❑

Tax Questions and Answers 2018 Hesive seeks your advice on whether or not she might be regarded for tax purposes as “carrying on a business”. Advise her. Answers: [A2.2].

[Q2.3]

B Lucky opens a savings account with a local credit union. The account was opened during a promotion for new customers. The credit union offered a $1,000 prize to one of its new customers. To be eligible, customers had to deposit a minimum of $1,000 and leave it in the account for a minimum of six months. Lucky was the prize winner.

❑

Is her prize assessable? Answers: [A2.3].

[Q2.4] ❑

State whether or not the following items form part of the assessable income of an Australian resident taxpayer under any provisions other than the capital gains tax provisions. Give brief reasons for your answers. 1. A table purchased at a garage sale for $50 and sold for $200. 2. A lump sum awarded as damages to a person for personal injuries received in a motor car accident.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

3. An honorarium received by the treasurer of a charitable organisation. 4. Five hundred shares in a company allotted at a price of $1 each to an employee of the company. At the time of issue, shares of the company were being traded on the stock exchange at $1.50 but at the end of the year of income their price had dropped to $0.90. 5. The profit on sale of investments by a life assurance company. 6. A prize in a literary competition won by a journalist. 7. A legacy bequeathed to a taxpayer in consideration of his acting as an executor under a will. Answers: [A2.4]. [Q2.5] ❑

State to what extent, if any, the following are assessable income, giving brief reasons for your answers. 1. On 1 January A Dabble, a share trader, purchased 1,000 shares in Arab Oil, a company listed on the Adelaide Stock Exchange. To cover his initial purchase cost of $2,000, Dabble sold 200 shares on 1 March for $10 per share. On 1 June Dabble sold another 600 shares for $1 each. The 200 unsold shares were valued at $3 each on 30 June. (All transactions take place in the current income year.) 2. J Blo, a resident of Darwin, was paid $2,500 for expert advice given to the Australian Government while she served as a member of a Royal Commission enquiring into a Darwin cyclone.

16

© 2018 THOMSON REUTERS

[Q2.8]

Income

3. In August I Dribble, a non-resident, arrived in Australia to play basketball for the Newcastle Falcons team. His earnings for the year ended 30 June were $30,000 for playing basketball, $20,000 for coaching and $60,000 for advertising sportswear. Ignore the impact of any double tax agreements. Answers: [A2.5].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q2.6]

The following article appears in your afternoon newspaper:

❑

Comment on the assessability of Clever’s quiz show winnings. Answers: [A2.6].

[Q2.7]

B Aussie is a lifesaver and saves a small boy from drowning. The boy’s mother is grateful and offers Aussie $250 cash. Aussie refuses the money but later accepts a digital wrist watch valued at $300.

❑

Is there any amount which could be regarded as income?

❑

Would it make any difference to your answer if Aussie had received a medallion rather than a watch? Answers: [A2.7].

[Q2.8] ❑

Are any of the following items assessable income? Give brief reasons for your answers. 1. A prize valued at $750 given to the owner/manager of a small retail store for having the greatest increase in sales of “Nature’s Dew”

© 2018 THOMSON REUTERS

17

[Q2.9]

Tax Questions and Answers 2018 during a particular period. The prize was made available by the manufacturer of Nature’s Dew and the competition was not open to wholesalers. 2. Receipt of $60 per month from a State Government for the care of a ward of the state. The payments will continue until the lengthy legal process for adoption is completed. Answers: [A2.8].

[Q2.9]

I M Lucky is a punter who considers that a bet of $10,000 is just a “flutter”. His TAB turnover reaches millions of dollars a year. Generally, Lucky finishes in front and attributes his success to the system he uses, coupled with the latest inside information, which he purchases. Whether or not Lucky pays tax on the profits made may depend on whether he is “carrying on a business”.

❑

Is Lucky carrying on a business? Give reasons. Answers: [A2.9].

[Q2.10] You have just received notice in the mail that you have been awarded the prize for outstanding achievement in taxation law at your university and you are offered a choice of prizes.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

Discuss the tax implications of the following available prizes: • a cash prize of $1,000; • a leather briefcase (retail value $1,200) embossed with your name and the name of the award for which the prize was granted; • payments of $100 per month for the next year of your study. Answers: [A2.10].

[Q2.11] Milly, the mistress of a notorious criminal and underworld gang leader, has signed a contract with a newspaper for the sole rights to her story, “My Life as a Crime Boss’ Moll”. Under the contract, the newspaper was to pay the full sum of $210,000 after the completion of the writing of the articles and the publication of the first part of the series, which occurred during the current income year. However, on the instruction of the taxpayer, only $50,000 was paid into her account; the remainder of the sum remained unpaid at the end of the income year. ❑

Discuss what part, if any, of the total contract value of $210,000 is assessable in the current income year. Answers: [A2.11].

18

© 2018 THOMSON REUTERS

[Q2.14]

Income

[Q2.12] Ted Witt, a top Western Australian State Australian Rules footballer, is approached by a Victorian club to play for them in the coming season. Ted did not accept the offer, but agreed not to play for any other national club for two years. For this he received the sum of $50,000. Later that year, Ted had several disagreements with his Western Australian club and as a result he decided to leave and play in Victoria for the club that had approached him earlier. The Victorian club paid $20,000 to release Ted from his present contract and paid him an additional $10,000 to cover the cost of moving. ❑

Discuss the income tax implications for Witt. Answers: [A2.12].

[Q2.13] A budding ventriloquist, Rosie Voice, entered a talent contest on the television show Red Faces. With talent such as hers she won both the heat and the final. As prizes she received a cruise (market value $10,000) for winning the heat and a trip to the USA (market value $20,000) plus $5,000 cash for winning the final. Rosie had performed at children’s parties and variety shows in the past but had never made more than $1,000 in any one year. She now finds that after winning the Red Faces contest she has sufficient work for a full-time career. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

What amounts, if any, are assessable? Answers: [A2.13].

[Q2.14] Victor holds patents for a new type of motor mower and enters into an exclusive licensing agreement with a Japanese company for the manufacture and sale of such mowers in Japan. The licensing agreement provides for a payment of $5 for each mower sold and for the payment by the licensee to Victor of a lump sum of $50,000, described as a “nonrefundable advance of royalties”. The Japanese company is entitled to credit royalty entitlements payable against this sum, but in fact no mowers are sold by the licensee, and the $50,000 is the only amount ever received by Victor. ❑

Advise Victor on the implications of the above facts. You may ignore capital gains tax implications. Would it make any difference if, in the current year, the licensee had in fact sold 400 mowers under the licensing agreement? Answers: [A2.14].

© 2018 THOMSON REUTERS

19

[Q2.15]



Tax Questions and Answers 2018

[Q2.15] Clothco Ltd sells imported clothing by wholesale and holds 12 valuable ❑ import quotas which permit it to import stock. Clothco wishes to restructure its business and for that purpose, sells two of its quotas at a profit. To obtain additional funding for its restructuring, Clothco enters into an arrangement under which shares in Clothco’s subsidiaries are sold to an associate for $50 million, that amount is lent to another subsidiary (Stooge Pty Ltd), and later the right to receive the unpaid interest instalments from Stooge is assigned by Clothco to a finance company (Moneybags Ltd) in return for a lump sum payment of $30 million. Clothco and Moneybags are not related, the transactions outlined above were not interlocked or interrelated and, in particular, Moneybags’ agreement to take the assignment of the unpaid interest instalments is on purely commercial grounds. The Commissioner has assessed Clothco under s 6-5 of ITAA 1997 on the basis that the lump sum payment of $30 million is income according to ordinary concepts. ❑

Advise the parties, ignoring any capital gains tax consequences.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A2.15]. [Q2.16] Which, if any, of the following give rise to “income”? ❑ 1. A dentist swapping dental work valued at $600 with a retailer for a video which has a market value of $550 (but only cost the retailer $300). 2. A pensioner swapping surplus eggs valued at $150 (for the year) with a neighbour for surplus vegetables grown in a home garden. 3. A builder helping you at weekends to erect your home, doing so on the basis that he can have your caravan (which cost you $10,500 on 1 January 1997) when you move into the home. Assume the value of the builder’s work was $11,000 and the caravan had a market price of $12,000 when you handed it over on 1 January in the current income year. 4. Volunteering your accounting expertise to a local charity which in turn arranges for someone to clear rubbish from your yard. Would your answer be different if you were unaware of the charity’s intention to clear the rubbish? Answers: [A2.16]. [Q2.17] Discuss whether the following amounts are assessable. Include references ❑ to any relevant provisions in the ITAA 1997 or ITAA 1936.

20

© 2018 THOMSON REUTERS

[Q2.21]

Income

1. A car valued at $15,000, given as a prize to a depositor of a building society. The competition was open to all those who were able to maintain a minimum balance of $10,000 for the year. 2. An exchange gain (not of an income character) of $1 million made by a large industrial company on repayment of long-term loans. 3. A travel allowance of $4,500 (paid at 45 cents per kilometre for 10,000 km travel) paid to an employee by an employer because the employee was carrying out tasks required by the employer. Answers: [A2.17]. [Q2.18] Lego Engineering Pty Ltd enters into manufacturing contracts with various companies. It receives $100,000 compensation in connection [T] with the cancellation of a contract made in the course of the company’s business with Unreliable Pty Ltd. The contract would have taken up 15% of Lego Engineering’s manufacturing capacity for the next two years, and provided it with revenue of $150,000 over that period. ❑

Would Lego Engineering be assessed on the compensation received?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q2.19] A waitress in a restaurant receives flowers every week from a regular Friday night customer. Would any amount be included in her assessable [T] ❑ income as a result of these gifts? Answers: For tutorial use. No answers provided. [Q2.20] Two lecturers at an Australian regional university decide to go on strike because of lack of air conditioning and telephones in their offices. After [T] six weeks without pay, they appeal to the public for assistance, and receive a number of donations of food parcels every week for the next eight weeks. ❑

Would any amount be included in the assessable income of the lecturers in respect of these food parcels? Would your answer be any different if the parcels were received from students they were currently teaching? In both instances give reasons for your answers and canvass all relevant arguments. Answers: For tutorial use. No answers provided.

[Q2.21] Dev Pty Ltd owns a country property bought as a potential factory site on which there is a considerable amount of gravel. At the start of the current [T] income year Dev granted to Gravelex Pty Ltd the exclusive right for five

© 2018 THOMSON REUTERS

21

[Q2.22]

Tax Questions and Answers 2018 years to excavate and remove gravel from the land in return for payments calculated as follows: (a) a minimum payment by Gravelex of $2,000 per month regardless of whether or not any gravel is removed during that particular month; (b) subject to para (a), payment each month by Gravelex of 50 cents per cubic metre of gravel removed in that month; (c) provided that if it is found at the end of any year that the total volume of gravel removed in that year did not exceed 48,000m3, then Dev will refund to Gravelex any amount in excess of $24,000 paid by Gravelex in that year under the terms of the agreement mentioned in para (a).

❑

Advise the parties on the tax implications of these arrangements.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q2.22] On his own, Shifty runs a taxi-cab operation. Because of arthritis and his advancing age (he is 55 years old), he has for some time been unable to [T] run it efficiently. Shifty earns about $6,000 pa from the taxi-cab, but a younger man could easily earn substantially more. Led Foot, an ambitious 25-year-old, is anxious to get into the taxi-cab game, but cannot afford the up-front capital sum Shifty is asking for the cab and plates. The parties have, therefore, tentatively agreed that Shifty will sell the cab to Led on the basis that Led pays Shifty $3,500 pa for the rest of Shifty’s life. Shifty tells you that his actuarial life expectancy is 11 years (more or less), and the present value of the cab and plates etc is $33,000. ❑

Advise Shifty on the taxation implications. Would it make any difference if the parties inserted in their agreement a clause stating that payment was to be made annually “provided that the total sum payable is not to exceed $38,500”? Answers: For tutorial use. No answers provided.

[Q2.23] Briefly discuss the income tax implications of the following, stating which sections of the ITAA 1997 or ITAA 1936, if any, are most relevant. [T] ❑ 1. A $10,000 bonus paid by the Australian Cricket Control Board to the captain of the Australian cricket team for outstanding leadership during a successful tour of England. 2. A boat valued at $35,000 given to an amateur footballer to turn professional. 3. Profit of $25,000 made by a trucking company on the disposal of one of the 30 trucks it has leased to carry on its business. 22

© 2018 THOMSON REUTERS

[Q2.26]

Income

4. An exchange gain of $500,000 made by a manufacturer in respect of money borrowed in 1997 and used to finance construction of a new factory building. 5. Gifts and payments made by a football club and its supporters to a star professional player, largely in their delighted response to his being selected to play for Australia. The club gave him a car valued at $25,000; supporters, through a collection at one game, gave him $2,452. Answers: For tutorial use. No answers provided. [Q2.24] Bart Mart Pty Ltd was incorporated in 1960. Its main activity has been the design, construction and management of shopping centres. Bart [T] Mart’s usual practice is to target in advance an area with potential for a shopping centre and to acquire land in the area. In respect of one possible development it purchased land in 1984. However, when it came time to develop that site the area was in deep recession. Bart Mart consequently sold the land on 1 June in the current income year, for a profit of $450,000. ❑

Briefly discuss whether the profit is assessable.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q2.25] Which of the following is likely to be assessable income when received (other than under the capital gains tax provisions in Pt 3-1 of ITAA [T] ❑ 1997): 1. A lottery win? 2. Betting wins by a jockey on bets placed at a racetrack? 3. A case of wine received from a friend who owns the vineyard? 4. Money received from the sale of gold nuggets found with a metal detector while on holiday? 5. A lump sum received for the sale of the right to use your trademark? Answers: For tutorial use. No answers provided. [Q2.26] Are the following compensation payments assessable income? Give brief reasons to support your answer, referring to relevant cases. [T] ❑ 1. Compensation of $130,000 was received following a workplace accident. The lump sum was divided into $40,000 loss of earnings, $60,000 loss of future earning capacity and $30,000 for pain and suffering.

Advise whether it would be better to accept a lesser sum of $75,000 without any agreed allocation of the funds between current and future earnings and pain and suffering.

© 2018 THOMSON REUTERS

23

[Q2.27]



Tax Questions and Answers 2018

2. A lump sum was awarded to a company for loss of anticipated profits after a franchise agreement was cancelled. 3. A manufacturer of clothing received a lump sum payment to cease marketing clothing in Australia for a period of 10 years. Would your answer be different if the amount was received as a series of monthly payments? 4. New plant was being transported to a factory ready for installation. While stored in the warehouse of the transportation company, the plant was destroyed by fire. An insurance payment for the destruction of the plant was received from the insurer of the transportation company. 5. A car park was constructed for use in a car parking business. Due to professional negligence by the architect, the roof of the car park was too low to allow access by four-wheel-drive vehicles. The client was awarded damages equal to the cost of correcting the fault in the car park and damages equivalent to the lost revenue from parking for the six weeks that it took to rectify the problem. Answers: For tutorial use. No answers provided. [Q2.27] Should the following amounts be disclosed as income on the relevant taxpayer’s tax return? [T] ❑ Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(a) gold medals won by members of the Australian netball team; (b) a cash payment of $100,000 won by Wendy on a TV quiz show – she also wins a car worth $40,000 and when she is invited back the next week wins another $80,000; (c) a $50 weekly allowance paid to Jake by his wife for doing the housework; (d) $40,000 collected by Mike when he illegally sells drugs; (e) a hamper worth $100 paid by an employer to each employee on 31 December to thank them for a profitable year. Answers: For tutorial use. No answers provided.

24

© 2018 THOMSON REUTERS

[Q2.30]

Income

Exempt income Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Chs 3, 4 and 5. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Ch 2. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Ch 7.

[Q2.28] I M Bryte is a first class honours graduate in engineering and is offered a stipend of $15,000 pa for three years if he will conduct research into pollution of the Yarra River. The grant is made to Bryte through Monash University by the Yarra River Prawn Cooperative. Bryte enrols in a PhD course on a full-time basis and undertakes as his research project the proposal put to him by the Cooperative.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

Will Bryte be assessable on the stipend? Answers: [A2.28].

[Q2.29] Are the following receipts assessable income? Give reasons. ❑ • A scholarship of $3,000 pa received by a full-time student from an industrial company, conditional upon the recipient agreeing to accept employment with the company for at least three years after graduation. • Remuneration of $600 earned for part-time services as a member of the Australian Army Reserve. Answers: [A2.29]. [Q2.30] A university tennis club contacts you to determine whether the club’s surplus of $756 is assessable as income. ❑

With specific reference to the ITAA 1997 or ITAA 1936, provide the club with an answer. Answers: [A2.30].

© 2018 THOMSON REUTERS

25

[Q2.31]



Tax Questions and Answers 2018

[Q2.31] Aldo Gomez is the ambassador for Lizarb in Australia on a three-year appointment. For the year ended 30 June his income is as follows:

Salary, paid in Lizarb Expense allowance, paid in Canberra Interest income from Canberra Building Society Profit on sale of BHP shares, sold three months after purchase

$ 80,000 40,000 5,000 4,000

While in Australia, Gomez is provided with a substantial residence, rent free. ❑

Is Gomez taxable on any amount in Australia? Answers: [A2.31].

[Q2.32] Discuss whether any amounts are assessable in respect of the following situations:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

1. Interest income is received by the Rejuvenated Church of Australia. 2. A Lock played football for an Australian schoolboys’ team. He was such an outstanding prospect that a leading football club offered him a three-year university scholarship if he would play for them. Lock, if he accepted the scholarship, would be free to choose any course of study and, when he finished the course, would not be required to work for the club or render services to it in any way. Lock would also receive normal match payments and bonuses for playing football with the club. Answers: [A2.32]. [Q2.33] With reference to the ITAA 1997 or ITAA 1936, indicate whether the following are liable for tax on Australian source interest income which ❑ they derive: 1. A superannuation fund which provides benefits to employees of a large retail company. In the history of the fund no one has ever received a benefit which is excessive. 2. The Lake Macquarie Municipal Council. 3. The Tweed Heads Bowling Club. 4. The Cronulla Leagues Club Ltd. 5. The Royal College of Surgeons.

26

© 2018 THOMSON REUTERS

[Q2.36]

Income 6. The University of Southern Queensland. 7. The Institute of Chartered Accountants. Answers: [A2.33].

[Q2.34] Discuss whether the following amounts are assessable or exempt, supporting your answers with reference to the ITAA 1997 or ITAA 1936. ❑ Assume the amounts are received by an Australian resident. 1. $12,000 received by an unidentified informer giving evidence to a Royal Commission into organised crime in Australia. 2. $20,000 received as an honorarium by the President of the Renmark Public Authority Commission (the Commission was formed with public money to carry out public works in the Renmark area). 3. $8,000 received by way of age pension by a 73-year-old man. 4. $9,000 received by way of disability support pension by a 37-yearold woman. Answers: [A2.34].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q2.35] Discuss whether the following items are exempt from tax. If so, support your answer with reference to the ITAA 1997 or ITAA 1936. ❑ 1. A car, valued at $45,000, provided to an employee by an employer. The employee uses the car for work purposes during the week but uses it for private purposes on weekends. During the week it is left at the employer’s premises. The weekend use saves the employee $2,500 pa in personal expenditure. 2. A capital gain of $100,000 made by a trade union from sale of vacant land acquired in 1987 for the purpose of erecting new union premises. 3. Maintenance payments of $15,000 pa received by a woman from her former husband. How would your answer differ if the husband was the recipient of the maintenance payments? If the husband received the maintenance payments and also had interest income of $5,400 pa, how much tax would he be liable to pay? Answers: [A2.35]. [Q2.36] An Australian resident, from time to time, is offered employment in Spain. If this employment income is subject to tax in Spain, how would ❑ it be treated in Australia? Assume that the Spanish income amounts to

© 2018 THOMSON REUTERS

27

[Q2.37]

Tax Questions and Answers 2018 A$50,000 and that during the current income year the Australian resident worked in Spain for: • 10 weeks; • 40 weeks. If the resident rented out his or her Australian home while away, discuss how the net rental income would be subject to tax, assuming it amounted to $5,400. How would your answer differ if the income was exempt from tax in Spain? Answers: [A2.36].

[Q2.37] To what extent are the following income payments exempt from tax? ❑ 1. A redundancy payment of $25,000 for an employee who has been employed for five years and loses the job due to a corporate restructure. 2. A $50 cash tip paid to a waiter by a restaurant client. 3. A microwave oven retailing for $499 and a toaster valued at $59 received from a supplier of goods to the business. 4. Sickness Allowance, with additional rental assistance payment. 5. Australian Government Disaster Relief Payment paid by the Commonwealth Government.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A2.37]. [Q2.38] As a member of the Claypit Tennis Club you attend the annual meeting at which financial statements for the year are presented. These disclose: [T] Receipts and payments Balance at bank – 1 July Add Member subscriptions Donation – Racket Racquets Ltd Fees – court hire to public Interest – Claypit Credit Union Less Electricity Telephone Net replacements Resurfacing of courts Stationery Trophies Term deposit – Claypit Credit Union Balance at bank – 30 June

$

10,800 1,000 2,160 1,215

1,620 360 1,150 2,120 260 4,380 7,000

$ 4,193

15,175 19,368

16,890 2,478

In his report the treasurer states that, as usual, all members paid their subscriptions promptly when due in August. 28

© 2018 THOMSON REUTERS

[Q2.39]

Income

Con Surned, a member who has just experienced a desk audit in respect of his personal tax return, asks whether the club has adequately provided for income tax. The treasurer replies that tennis clubs are not subject to tax. This opinion is then corrected by the president, who points out that clubs can be subject to tax but “this couldn’t apply to our club as the club has obviously lost, as there is less in the bank than at the beginning of the year”. ❑

Express to the meeting your views on the issue raised. Answers: For tutorial use. No answers provided.

[Q2.39] ABC is a club whose income is exempt from tax. Its directors ask you to advise them whether they will need to concern themselves with: [T] • fringe benefits tax; • capital gains legislation; and • the PAYG withholding system. ❑

Advise the club. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Trading stock

Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 17. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Ch 12. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 14. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 3, 5 and 13.

© 2018 THOMSON REUTERS

29

[Q2.40]



Tax Questions and Answers 2018

[Q2.40] The following figures relate to the trading stock of a retailer for the year ended 30 June: $ 108,000 127,000

Opening stock (cost) Closing stock (cost) ❑

Calculate the amount assessable or deductible, giving reasons.

❑

What method(s) of valuing opening and closing stock does a retailer have? Can methods be altered from year to year? Is there any difference if the taxpayer is a primary producer? Answers: [A2.40].

[Q2.41] Discuss whether the following can be considered trading stock for purposes of the ITAA 1997. ❑ (a) Shares. (b) Accounts receivable: (i) for a retail store; (ii) for a building society. (c) Land: Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(i) for a dealer in land; (ii) for a land development company; (iii) for a real estate agency. (d) Spares: (i) for a manufacturer; (ii) for a spare parts dealer. (e) Unpicked fruit. (f) Unmined coal. (g) Work in progress (half complete): (i) for a manufacturer; (ii) for a partnership of accountants. (h) Motor vehicles. (i) Horses. (j) Bulk wine (not fully matured). (k) Gold futures contracts. 30

© 2018 THOMSON REUTERS

[Q2.45]

Income (l) Goods in transit. (m) Recently planted tulip bulbs. (n) Nursery plants growing in pots. (o) Building materials acquired by a builder. Answers: [A2.41].

[Q2.42] State what amounts, if any, are assessable in respect of the following, giving brief reasons. ❑ 1. A gift of 500 sheep, which cost $1,200, from Dad to his son Dave to assist Dave in establishing himself as a grazier. At the date of the gift the sheep had a market value of $6,000. 2. Stock costing $450 but which has a market value of $1,100, taken by a retailer for her own use. Answers: [A2.42]. [Q2.43] Cyril Co Ltd, a retailer of footwear, purchased part of its stock requirements from an associated company instead of purchasing directly from wholesalers at a lower price. ❑

Discuss the income tax implications of the above.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A2.43]. [Q2.44] What are the income tax implications in respect of trading stock where a business is purchased or disposed of during an income year? ❑ Answers: [A2.44]. [Q2.45] D Lerious carries on a business involving the sale of new gazebos and the repair and sale of second-hand gazebo chairs. All units are identical and indistinguishable. Lerious provides you with the following information in relation to the business: (a) In relation to the new gazebos, manufacture only began on 1 July in the current income year. Costs associated with the production of each unit are:

Labour Materials Factory overheads

$ 70 80 100

During the income year, 10 gazebos were manufactured, of which six had been sold at a sale price of $500 each.

© 2018 THOMSON REUTERS

31

[Q2.46]



Tax Questions and Answers 2018

(b) In relation to the repaired gazebo chairs: (i) Lerious bought five chairs at the beginning of the previous income year at a price of $5 each. There were no sales and no other purchases in that year, and the closing stock for that year was shown for tax purposes to be $25; (ii) Lerious bought three chairs in the current income year at a price of $10 each; (iii) the market selling price of such chairs at the end of the current income year was $20 each; (iv) the cost of replacing such chairs at the end of the current income year would be $15 each. During the current income year, four gazebo chairs were sold, resulting in sale proceeds of $82. ❑

Advise Lerious on how to bring the gazebos and gazebo chairs to account for income tax purposes at the end of the current income year.

❑

Would it make any difference if Lerious was of the view that certain units were obsolete and had a nominal value of only $1?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A2.45]. [Q2.46] A company buys old furniture and rebuilds and sells it. For the current income year closing stock was $35,000. Closing stock of the previous period was $30,000. Sales for the current year were $100,000, with $25,000 paid for the old furniture. Labour costs for the restoration were $30,000; parts and materials cost $6,000. ❑

Prepare the trading account for tax purposes, indicating the relevant sections of the ITAA 1997. Answers: [A2.46].

[Q2.47] A taxpayer sells personal computers as part of his trading operations. Technological advances have left the taxpayer with stock of outmoded computers which have to be discounted below cost price or usual market prices to sell. ❑

Is any relief available to the taxpayer in determining the value of closing stock for this range of computers? Answers: [A2.47].

[Q2.48] Edison Co Pty Ltd manufactures and sells electric light bulbs. It values its stock on hand at year end, for tax purposes, at cost. An independent survey conducted on 30 June of the previous year yields the following information in relation to the company’s electric light bulb trading stock on hand: 32

© 2018 THOMSON REUTERS

[Q2.50]

Income

$ 50,000 80,000 60,000

Cost Market selling value Replacement price

However, because the company is in severe financial difficulties and urgently needs cash, it sells its entire trading stock on 1 July of the current year to Osmar Light Bulb Co, an unrelated company, for $75,000. (Assume an independent survey of values on 1 July would not have varied from the 30 June values.) ❑

What will be the income tax consequences on the taxable income of Edison for the current tax year as a result of this sale? Discuss relevant sections of the ITAA 1997 in your answer. Answers: [A2.48].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q2.49] Specialist Pty Ltd manufactures and sells two products, product X and product Y. An independent survey yielded the following information in relation to the company’s trading stock on hand:

Cost – Product X Cost – Product Y Market selling value – Product X Market selling value – Product Y Replacement price – Product X Replacement price – Product Y

30 June last year $ 60,000 30,000 80,000 60,000 70,000 40,000

30 June this year $ 70,000 20,000 60,000 40,000 80,000 30,000

Last year, the company valued its entire closing trading stock, for tax purposes, at replacement price. ❑

Assuming that purchases during this year amounted to $120,000 and sales proceeds amounted to $280,000, and that the company had no other transactions, calculate the company’s taxable income for this year if you are told that the Directors wish to value trading stock for tax purposes so as to give the smallest possible taxable income. Answers: [A2.49].

[Q2.50] In valuing trading stock at year-end, Rubber Sole Shoe Trading Co Pty Ltd values all of its stock of a revolutionary new shoe it manufactures at nil value. The claimed reason for such a valuation is that since there has never been a shoe like this on the market before, it is not known whether it will sell or not and it, therefore, has a zero market value. © 2018 THOMSON REUTERS

33

[Q2.51] ❑



Tax Questions and Answers 2018

Discuss. Answers: [A2.50].

[Q2.51] A taxpayer sells and services computers. Spare parts are purchased in the course of work; those parts are not sold directly to the public, but are used either to replace defective parts in computers that are sold, or to fix computers sold under maintenance agreements. ❑

Discuss whether the spare parts constitute trading stock. How would your answer differ if the taxpayer only leased computers to others and used the spare parts to remedy defects in the leased computers? Answers: [A2.51].

[Q2.52] B A Sod is a wheat farmer in western New South Wales. During the current income year, Sod produced 2,400 tonnes of wheat. On 30 June the wheat was located as follows:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• 2,000 tonnes delivered to the NSW Wheat Board’s silo awaiting shipment to the Ukraine. (Sod’s quota with the Wheat Board is 2,100 tonnes); • 400 tonnes remaining on Sod’s property. Of this, 100 tonnes is to be shipped to the Wheat Board to fulfil Sod’s contractual arrangements with the board. (To date, no amounts have been received in respect of the actual or planned deliveries to the Wheat Board.) Sod will use another 50 tonnes as seed and the balance will be sold by Sod if and when buyers can be found. ❑

Required: (a) At 30 June, what amount of wheat, if any, is Sod required to bring to account as stock on hand? (b) Which of the following expenses incurred by Sod during the income year are to be used in determining the cost of closing wheat stock?

Planting and tending costs Water and fertiliser costs Harvesting costs Transport costs – to Wheat Board on farm Opportunity cost of Sod’s labour

$ 240,000 180,000 100,000 30,000 8,000 25,000

Answers: [A2.52]. 34

© 2018 THOMSON REUTERS

[Q2.57]

Income

[Q2.53] Discuss whether trading stock can ever lose its character as trading stock. [T] ❑ Answers: For tutorial use. No answers provided. [Q2.54] Bill Whitford owns a small island which he intends to develop for residential accommodation. Before this can be done he must obtain [T] development approval and carry out extensive work on the island to prepare it for sale in individual lots. The purchase price of the island was $10 million and at present about half the development cost of $8 million has been incurred. At the present time, the market value of the island, if it were to be sold to another developer, would be $25 million. ❑

Discuss whether the island is trading stock and, if so, how it is to be valued for the present tax year. Answers: For tutorial use. No answers provided.

[Q2.55] X carries on business as a retailer and decides to enter into partnership with Y on 1 July. X contributes trading stock from his former business, [T] valued at $10,000 (cost $6,000) and Y contributes $8,000 cash. ❑

Discuss the value, or values, which can be placed on the stock for the partnership between X and Y.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q2.56] All Star Frozen Food Pty Ltd imports frozen food from New Zealand. Owing to industrial trouble the last two shipments have been delayed. At [T] 30 June stock worth $1.5 million is on board two ships outside Newcastle harbour. The company has received bills of lading in respect of the stock and it has taken out insurance cover. Is the shipment “trading stock on hand”? Answers: For tutorial use. No answers provided. [Q2.57] Discuss which of the following methods, if any, may be used to determine the cost of trading stock for the purpose of s 70-45 of ITAA 1997. [T] ❑ (a) LIFO; (b) FIFO; (c) Weighted average; (d) Standard cost; (e) Retail inventory; (f) Base stock. Answers: For tutorial use. No answers provided. © 2018 THOMSON REUTERS

35

[Q2.58]



Tax Questions and Answers 2018

[Q2.58] Barry Ena was a real estate agent who purchased six blocks of land in 1993. Permission to subdivide and build houses on the land was given [T] by the local council, subject to certain conditions. At 30 June this year, these conditions had not been fulfilled. The land was roughly subdivided, roads were cleared and in position, and areas for the school and open space were identifiable. Ena valued some trading stock on hand at 30 June at the market value of the individual blocks, and other residential land at cost. ❑ Is the land “trading stock”? Do you agree with his methods of valuation? Would your answer be different if Ena was a land developer? Answers: For tutorial use. No answers provided. [Q2.59] We Fly U Ltd commences business as a commuter airline in July when it purchases two aircraft (at a cost of $800,000 each) and a range of [T] maintenance spares (costing $90,000). During the current income year ended 30 June it purchases a further $16,800 of spares. Purchases each month were $1,400. Its stock of spares at 30 June is valued on a cost basis at $80,000. The normal rate of depreciation on aircraft is 30% pa diminishing value. ❑

What amounts are allowable to the company in respect of the above transactions?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q2.60] When calculating the value of trading stock on a cost basis, which of the following amounts are included? [T] ❑   1. Freight and insurance of raw materials   2. Freight of finished goods   3. Warehouse security costs   4. Factory payroll   5. Salary of general manager   6. Repair costs of goods under warranty   7. Quality control testing   8. Commissions to sales representatives   9. Power to factory building 10. GST on sales 11. Advertising. Answers: For tutorial use. No answers provided.

36

© 2018 THOMSON REUTERS

Q3  Capital gains tax

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Index numbers (as reissued 2012) Year 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985

31 March 110.5 108.2 106.8 105.4 102.4 99.9 98.3 95.2 92.5 90.3 86.6 84.5 82.1 80.2 78.6 76.1 73.9 69.7 67.8 67.0 67.1 66.2 63.8 61.5 60.6 59.9 58.9 56.2 51.7 48.4 45.3 41.4 37.9

© 2018 THOMSON REUTERS

Quarter ending 30 June 30 September 110.7 111.4 108.6 109.4 107.5 108.0 105.9 106.4 102.8 104.0 100.4 101.8 99.2 99.8 95.8 96.5 92.9 93.8 91.6 92.7 87.7 88.3 85.9 86.7 82.6 83.4 80.6 80.9 78.6 79.1 76.6 77.1 74.5 74.7 70.2 72.9 68.1 68.7 67.4 67.5 66.9 66.6 66.7 66.9 64.7 65.5 61.9 62.3 60.8 61.1 59.8 59.7 59.0 59.3 57.1 57.5 53.0 54.2 49.3 50.2 46.0 46.8 42.1 43.2 38.8 39.7

31 December 112.1 110.0 108.4 106.6 104.8 102 99.8 96.9 94.3 92.4 89.1 86.6 83.8 81.5 79.5 77.6 75.4 73.1 69.1 67.8 66.8 67.0 66.0 62.8 61.2 60.1 59.9 59.0 55.2 51.2 47.6 44.4 40.5

37

[Q3.1]

Tax Questions and Answers 2018

Questions Useful References

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 11. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Chs 3 and 12. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 8. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 12, 13, 14, 15, 16, 17 and 18.

[Q3.1]

On 1 January 1991, Russell Shrewd purchased 200 shares in ABC Ltd for $1,400 and 300 shares in XYZ Ltd for $2,600, intending to hold them as an investment. On 15 August 2015, he sold the shares in ABC Ltd for $700. As at 30 June 2017, the shares in XYZ Ltd had risen in value to $3,000. Russell’s only other income in the year ended 30 June 2017 was a salary of $22,000. On 20 December 2017, Russell sold the shares in XYZ Ltd for $3,600. His only other income in the year ended 30 June 2018 was a salary of $23,000.

❑

What is Russell’s taxable income for each of the years ended 30 June 2017 and 30 June 2018? Answers: [A3.1]. 

[Q3.2]

Con Metropoulis received a promotion and transferred to Sydney. Before moving, Con sold the following assets: Item Home Vacant land Caravan Old etching Antique sideboard

38

Purchase price $ 95,000 28,000 7,000 500 2,000

Sale price $ 135,000 30,000 5,500 8,000 1,800

© 2018 THOMSON REUTERS

Capital gains tax

[Q3.5]

All assets were purchased on 29 January 1991 and sold on 30 June in the current income year. ❑

What amounts would be included in Con’s assessable income for the year of sale? Answers: [A3.2].

[Q3.3]

Janice Quick purchased land in 1973 for $500,000. On 20 September 1995, at a cost of $1 million, she commenced building a factory on which a deduction under ss 43-215 and 43-25(2) of Div 43 of ITAA 1997 (at 4% pa as an industrial building) is available and was available under the corresponding Div 10D of ITAA 1936 provisions.

❑

Advise Quick of the income tax implications if the property was sold on 1 April during the current income year, and the amount of the sale price attributable to the factory building was variously: (a) nil; (b) $400,000; or (c) $2 million. Answers: [A3.3].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q3.4] ❑

John Webb, aged 35, has always been an Australian resident. During the current income year he married Kate, an English resident, and they decided to make their home in the UK indefinitely. He left Australia on 30 September in the current year. John owns the following assets: 1. A house in Melbourne. He bought the house seven years ago as a rental property. He is keeping the property. 2. 4,000 shares in Telstra – a public company listed on the Australian Stock Exchange. He will keep the shares. 3. A Hyundai Excel car that he had bought five years ago for $16,000. Before he leaves for the UK he sells the car to his brother for $4,000. 4. A vacant block of land in New Zealand. He bought the land three years ago, with the idea he would eventually build a holiday cottage there. He is keeping the land.

❑

Advise John whether there are any capital gains tax implications in respect of the above assets upon leaving Australia. Answers: [A3.4].

[Q3.5]

Malcolm Rich purchased a block of land on 22 June 1991 for $100,000. He plants trees on the land on 20 October 1995 at a cost of $20,000, for

© 2018 THOMSON REUTERS

39

Q3.6]

Tax Questions and Answers 2018 landscaping and to provide shade. He sells the land to Ian Solvent on 15 January in the current year for $200,000, payable in eight monthly instalments of $25,000 each, commencing on 15 January, with the final instalment due on 15 August next year.

❑

Calculate Malcolm’s assessable capital gain for the current year. What would be the effect if Solvent fled the country on 7 July and the final two instalments were never received by Rich? Assume Solvent had sold the land prior to departure and there is no possibility of recovering the final two instalments. Answers: [A3.5].

[Q3.6]

Jim Grocer purchased a retail outlet in 1982 at a cost of $700,000. On 20 September 1985 he added a liquor outlet at a cost of $100,000. On 1 September during the current income year he sold the integrated business for $2 million.

❑

What, if any, are the income tax implications? Answers: [A3.6].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q3.7]

Because of his wife’s ill-health, Brian sold his gift shop and family home in Victoria and moved to WA on 20 June this year. Brian had acquired the vacant premises 10 years ago for $750,000 and established the business on that date. He sold the business on 20 May this year for a net consideration of $1,880,000. This was made up as follows:

(a) (b) (c) (d) (e)

Goodwill Trading Stock Fittings Shop and land Less debt taken over secured over stock and fittings

$ 440,000 60,000 120,000 1,360,000 (100,000)

In addition, Brian received a further $20,000 for signing a contract not to open another business within a 10 km radius for the next five years. The turnover of the shop for the previous financial year was $540,000. Brian’s home is valued at $1.8m. He also has a 45% interest in a property development company which has assets of $5.4m. His wife also has a 5% interest in that company. The turnover of the property development company last year was $1.2m. ❑

Advise Brian of the tax consequences arising from the sale. Answers: [A3.7].

40

© 2018 THOMSON REUTERS

Capital gains tax

[Q3.9]

[Q3.8] [T]

Julio and Lee-Roy own a company, Igloo Pty Ltd, which carries on business importing and wholesaling compact discs and tapes. The company owns a warehouse from which it conducts its business. The turnover of the business for the year is $2.5m. Julio and Lee-Roy decide to move to larger premises nearby and Igloo Pty Ltd sells the warehouse. The warehouse has been used by the company as its business premises for six of the nine years the warehouse was owned and the warehouse was used as business premises immediately before its disposal. A capital gain of $600,000 is made on the disposal of the warehouse, which is sold on 1 January of the current year. Igloo Pty Ltd has no prior year net capital losses. Julio and Lee-Roy have owned the issued shares of the company equally since incorporation on 1 July 2007. Julio is age 58 and Lee-Roy is age 59. The net value of the assets of the company, including goodwill, are $3 million. The net value of assets owned by Julio, who was previously a singer, is $2.1 million and the net value of Lee-Roy’s investment assets is $300,000. Lee-Roy’s home is also valued at $750,000. Julio has previously claimed a CGT retirement exemption amount of $200,000 when he sold the right to royalties from his smash album “Julio! Julio! Julio?”

❑

Required:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(a) Discuss the application of the CGT small business exemptions. (b) Would it make any difference if Julio and Lee-Roy chose to sell their shares in the business? Answers: For tutorial use. No answers provided. [Q3.9]

P Thrifty has long maintained an active interest in the stock market and prides himself as a sound judge of a good investment in shares. Over the years he has developed a strategy of grouping his shares into two categories: an investment portfolio and a speculative portfolio. Shares for the investment portfolio are purchased as a longer term investment for their return of franked dividends. Shares for the speculative portfolio are purchased with the intention of selling them at a profit. Investment portfolio transactions for the current income year: • 1,000 BHP shares (purchased on 1 May 1984 for $1 each), sold on 3 August for $5 each. Brokerage was $50 on purchase and $250 on sale; • 2,000 Elders shares (purchased 5 August 1990 for $2 each), sold on 30 November for $1.50 each, to prevent further loss. Brokerage was $280 on purchase and $220 on sale and fully franked dividends received during the year were $300;

© 2018 THOMSON REUTERS

41

[Q3.10]



Tax Questions and Answers 2018

• 500 Franklins shares (received from his father’s estate), sold on 6 July for $10 each. (His father purchased these shares on 2 June 1978 for $0.10 each and they had a market value of $4 each at the time of his father’s death on 2 August 1987.) Brokerage was $100 on the sale of the shares. Speculative portfolio transaction for the year: • 3,000 MIM shares (purchased 2 August 1993 for $3 each), sold on 4 August for $5 each. Brokerage was $100 on purchase and $200 on sale. ❑

Outline the effect of each of the transactions on the assessable income of the taxpayer. Answers: [A3.9].

[Q3.10] On 1 December 1984 Kim and Lee purchased a house as joint tenants, at a cost of $100,000. On 31 December 2006, when the house was valued at $140,000, Lee purchased Kim’s interest for $70,000. Lee sold the house on 30 June in the current income year for $250,000. ❑

Advise Lee of the income tax implications, assuming: (a) the house was Lee’s main residence; or

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(b) the house was let to tenants. Answers: [A3.10]. [Q3.11] Jack and Jill are married but work in different cities. Jack lives in Sydney in a house in which he has a 70% interest. Jill lives in a house in Melbourne in which she has a 50% interest. Together, Jack and Jill own both houses. Each was purchased on 1 January 1997 for $200,000. ❑

What, if any, are the income tax implications if both houses are sold on 31 January in the current income year, for $350,000 each. Answers: [A3.11].

[Q3.12] On 31 May 2011 Joan purchased a house for use as a main residence, at a cost of $190,000. On 31 August during the current income year, she purchases another house and moves into it. Although she immediately advertised her former house for sale, it is not sold until 31 May. ❑

If the house was sold for $300,000, what, if any, are the income tax implications? Answers: [A3.12].

42

© 2018 THOMSON REUTERS

Capital gains tax

[Q3.16]

[Q3.13] On 1 February in the current income year, A Pensioner purchases a home unit for $160,000 and uses it as her main residence. The unit purchase includes a garage space in the same building. Since she does not drive, she sells the space on 28 February for $7,000. ❑

What, if any, are the income tax implications? Answers: [A3.13].

[Q3.14] On 31 July 1987, A Travla purchased a home for $150,000. He used this place as his main residence until 30 June in the current income year. ❑

Travla intends to travel overseas for three years. Advise him of the income tax implications if he lets the house for the period that he is away and, on his return: (a) sells it; (b) resumes residence for three months and then sells it; or (c) intends to resume residence, but dies of a heart attack on seeing its condition.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A3.14]. [Q3.15] Angela buys a vacant block of land for $50,000 on 20 October 1997. On 26 May 1999 she builds a house (assume that this is the date of either contracting for or commencing construction) on the land at a cost of $100,000 and occupies it as her main residence. ❑

What, if any, are the capital gains tax implications if she sold the property on 1 June in the current year, for $300,000?

❑

What difference would it make if the land was purchased on 20 October 1984?

❑

What difference would it make if, in the original situation, the house was built on: (a) 26 May 2003? (b) 26 May of the current year? Answers: [A3.15].

[Q3.16] Which of the following can form part of the cost base of a house used for ❑ income-producing purposes?

© 2018 THOMSON REUTERS

43

[Q3.17]



Tax Questions and Answers 2018

Repairs to broken windows Rates and land tax Interest expense Legal fees on purchase Legal fees on mortgage Stamp duty on purchase Stamp duty on mortgage Purchase price Extensions (garage) Concrete driveway Removal of old chimney Clearing of land

$ 270 700 11,000 800 760 3,000 250 150,000 20,000 8,000 2,000 1,500

Answers: [A3.16]. [Q3.17] Mr Wheaten purchased a grazing property in 1950 for the equivalent of $10,000. On 1 January 1992, at a cost of $75,000, he constructed a dam for use in the business. On 1 June in the current income year the property was sold for $1 million.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

What capital gain, if any, accrues for each of the following estimations of the dam’s worth: (a) nil; (b) $50,000; and (c) $100,000? Answers: [A3.17].

[Q3.18] Juan Bond receives $55,000 by way of insurance recovery for the loss of his Lotus sports car. The money was received on 30 December in the current income year and the loss occurred on 29 December in the previous income year. The vehicle, which cost $35,000 on 1 May 2012, was not used for income-producing purposes. ❑

What are the capital gains tax implications? Answers: [A3.18].

[Q3.19] On 1 December 1984, Joe commenced business as a sole trader, purchasing plant and equipment costing $100,000. On 1 July in the current income year, he transferred the business to JoeKing Pty Ltd, a newly incorporated company. Joe received 200,000 $1 shares in return for his business.

44

© 2018 THOMSON REUTERS

[Q3.20]

Capital gains tax ❑

Required: (a) discuss the capital gains implications of the above; (b) indicate what would happen if on 1 December in the current income year JoeKing Pty Ltd sold the business for $250,000; (c) discuss what would happen if Joe sold his shares on 1 December in the current income year for $250,000; (d) explain the effect in para (a) if on 2 July the company issues a further 450,000 $1 shares to Patricia King in return for her plant and equipment worth $50,000; (e) explain the effect in paras (a)–(c) if Joe acquired the plant and equipment on 1 December 1986 instead of 1 December 1984; (f) indicate what difference it would make in para (a) if JoeKing Pty Ltd already had assets when Joe transferred his business to the company. Answers: [A3.19].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q3.20] On 15 June in the current income year, Di Stressed was forced to sell several items of property which were given to her by her now-deceased mother on the previous 15 October. Her mother died earlier in the current year, on 24 February. Particulars are as follows:

Item

Date purchased by mother

Sale price

Market value on acquisition by Di

Market value on mother’s death

$

$

$

$

15.9.47

4

2,200

2,000

2,100

Diamond ring

5.1.98

550

450

600

650

Shares in X Co

10.6.70

500

12,500

12,000

11,000

Pearl necklace

❑

Cost to mother

Required: (a) calculate Di Stressed’s taxable income for the current income year, assuming she has a salary income of $18,000 for the year; (b) explain whether there are any income tax implications for the mother as a result of the gift of the ring; and (c) indicate what Stressed’s taxable income would be if she had received the three items of property on 14 June this year pursuant to her mother’s will. Answers: [A3.20].

© 2018 THOMSON REUTERS

45

[Q3.21]



Tax Questions and Answers 2018

[Q3.21] Provide advice as to whether there are any CGT consequences for the ❑ following taxpayers. (a) Under a Family Court order made as part of a property settlement, a taxpayer transfers ownership of a post-CGT rental property to her spouse. (b) The Australian Government compulsorily acquires from a taxpayer vacant land for use by the defence forces. The taxpayer acquired the land in July 2003, and is paid the current market value on sale. (c) A taxpayer holds 2,000 Class A shares in a company, the shares being acquired in September 2005. In January of the current year the company redeems and cancels all Class A shares and, in substitution for the cancelled shares, the company issues new shares with an equivalent market value. Answers: [A3.21].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q3.22] On 1 July in the current income year an electrician borrowed $100,000 to buy a block of land, in his own name, intending to build a house for himself and his family. However, before starting to build, he accepted an offer for the land of $250,000. Sale took place in May of the same income year. Interest expense was $15,000. ❑

What amount, if any, is assessable? Answers: [A3.22].

[Q3.23] What are the income tax implications for an individual who purchased ❑ an aeroplane before 21 September 1999 for $250,000, depreciated it under the diminishing value method and sold it on 1 January in the current income year for $400,000? Assume the written down value and undeducted cost at the date of sale was $27,618. The aeroplane is used 100% for business purposes. Answers: [A3.23]. [Q3.24] Mr and Mrs Martin each hold two shares in a family company. The company was established in 1980 for the purpose of conducting a retail business in premises in Yass. The Martins have twins (a boy and a girl) who will turn 18 on 1 July. Present plans are for each of the twins to receive one of the shares in the family company, Mr Martin transferring one of his shares to his son and Mrs Martin transferring one of her shares to her daughter. ❑ 46

What capital gains issues, if any, arise? How would your answer differ if, instead of the above share transfer arrangement, the share transfer © 2018 THOMSON REUTERS

Capital gains tax

[Q3.27]

occurred on Mr Martin’s death, one share being transferred to each of his children? (Mrs Martin would retain both of her shares.) ❑

What are the implications for the family company if the Martins are considering: (a) buying vacant land in Yass; or (b) buying a retail business (operating through leased premises) in Queensland. Assume that in each case it is the family company that will acquire the assets and that within five years both assets would be sold. Also assume that the shareholders would want to participate in any gains which accrued. Answers: [A3.24].

[Q3.25] Cleangreen Pty Ltd has assets of $2.2m, with an issued capital of 10,000 shares. The shares were issued to family members as follows, for $1 each, in January 1987. • Enviro: 5,500 • Menta: 3,000

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• List: 1,500. List is marrying Brownout, so as a wedding present to the new member of the family Enviro proposes to the shareholders that a further 1,000 shares be issued to Brownout, at $1 per share. ❑

Discuss the taxation consequences of the new share issue. Answers: [A3.25].

[Q3.26] In your hurry to get to a tax lecture, you park your car poorly and, in the process, badly damage the Vice Chancellor’s car. As the accident is clearly your fault and you do not have any insurance, you agree to meet the costs of any necessary repairs. After obtaining three quotes, the Vice Chancellor informs you that the cost will be $2,000, which you pay to her when the work is complete. ❑

Is it possible that this transaction could have any CGT implications for the Vice Chancellor? Answers: [A3.26].

[Q3.27] On 20 October 2010 Arnie Scott, at a cost of $5,000, purchased 1,000 shares in a resident public company. On 1 July 2013 the company had a [T] one-for-one bonus issue, increasing Scott’s holding to 2,000 shares. On © 2018 THOMSON REUTERS

47

[Q3.28]

Tax Questions and Answers 2018 1 November 2013 Scott elected to reinvest a dividend of $1,500 that was due to him. This resulted in the acquisition of a further 750 shares. On 1 May in the current income year half the shares were sold for $8,000.

❑

What is the capital gain on disposal? Answers: For tutorial use. No answers provided.

[Q3.28] On 1 December 2010 a local business person bought a newsagency for $100,000. The business flourished and, to expand, on 1 January in the [T] current income year the business person accepted an offer of $75,000 for a one-half share in the business from another local business person. ❑

What, if any, are the capital gains implications of the above? Give references to relevant provisions. Answers: For tutorial use. No answers provided.

[Q3.29] What, if any, are the capital gains implications of a transfer of a family business from a partnership to a company? Assume there are both pre[T] ❑ and post-19 September 1985 assets.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q3.30] Since 1946, Mr and Mrs Jones have carried on business through a company in premises which cost $20,000. On 1 November 2010, when [T] the premises were valued at $500,000, they increased the number of shares issued in their company from two to four. Each of their twin sons was allocated one of the newly issued shares. On 1 May in the current income year the company moved into new premises, and sold the original premises for $850,000. ❑

What, if any, are the capital gains implications of the above? In your answer, refer to relevant provisions. Answers: For tutorial use. No answers provided.

[Q3.31] Bib, Bob, Bub and Stuart carry on business in partnership. They have only one asset, purchased in 1984 for $200,000. Stuart died on [T] 1 December 2000, when the asset was worth $1 million. Bib, Bob and Bub consequently acquired Stuart’s interest, in equal proportions. They held the asset until they terminated the partnership on 1 February in the current income year. The asset was sold to Stan for $1.5 million. ❑

What, if any, are the income tax implications? Answers: For tutorial use. No answers provided.

[Q3.32] On 1 January of the current income year a resident individual sold the following assets which were purchased on 31 July 2008. [T] 48

© 2018 THOMSON REUTERS

[Q3.35]

Capital gains tax Asset Jewellery Car Vacant Land A Vacant Land B Stereo Television

Purchase price $ 550 20,000 70,000 40,000 3,000 1,000

Sale price $ 4,950 22,000 40,000* 70,000 8,000 750

* Sold to the taxpayer’s spouse. Market value of the land at that time was $55,000. 

❑

Calculate the net capital gain. Show all calculations. Answers: For tutorial use. No answers provided.

[Q3.33] Centre Point Pty Ltd owns a twelve-storey rental building in the middle of a large Australian city. The property was purchased in 1959 [T] and, following a recent inspection by the fire department, incurred the following expenses: • installation of external fire stairs – $1m. • replacement of all internal wooden doors and architraves with fireproof metal doors and architraves. Total cost $2m. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

Required: 1. What, if any, are the capital gains implications? 2. To what deductions, if any, is the taxpayer entitled in respect of the expenditure? Answers: For tutorial use. No answers provided.

[Q3.34] On 21 July 1995 Tower Pty Ltd, a retail firm, purchased an old building in Brisbane for $2m. It was estimated that the land was worth at least [T] half of this purchase price. In the current income year, the taxpayer spent $200,000 demolishing the building in preparation for construction of a new building. ❑

Discuss the capital gains implications of the above. How would your answer differ if the taxpayer was a property developer? Answers: For tutorial use. No answers provided.

[Q3.35] A and B are professional practitioners, each of whom operates through a company. A holds 100% of the shares in Company A and B holds 100% [T] of the shares in Company B. Since 1 July 2005 they have rented space for use as their business premises from Company C, which owns land and buildings. From the date of incorporation until 1 July 2009 Company C © 2018 THOMSON REUTERS

49

[Q3.36]

Tax Questions and Answers 2018 was owned equally by A, B and C. Since 1 July 2009 Company C has been owned equally by A and B. A, who is now aged 60, wishes to retire. No capital gain arises on the sale of assets held by Company A. However, a capital gain of $100,000 arises in Company C on disposal of the land and buildings. Company C has a net capital loss carried forward of $10,000.

❑

Required: 1. Discuss whether the land and building owned by Company C are “active assets”. 2. Advise the parties how any amounts otherwise assessable can be minimised. Give full details. Answers: For tutorial use. No answers provided.

[Q3.36] Trees R Us Pty Ltd was established in 2010 as a company limited by shares. The company currently has net assets of $600,000. There are two [T] classes of shares:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

1. 500 A class shares, owned by Maple. The cost base for this parcel of shares is $5,000. These shares have voting rights but no dividend rights. 2. 1,000 B class shares – 500 are owned by Cedar and 500 are owned by Maple. Dividends are paid according to ownership of these shares. They have equal voting rights. The cost base for this parcel of shares is $2,500 to each shareholder. As Maple is becoming more active in the company, the company proposes to cancel the A class shares. This will leave a single class of shares, with equal voting rights. ❑

Discuss the capital gains tax consequences of this course of action. Is there an alternative way to equalise the power of the two shareholders? Answers: For tutorial use. No answers provided.

[Q3.37] P Ilates owns a number of investments. Income was earned on some of the investments and some were sold during the current tax year as shown [T] in the following table. Asset

50

Purchase date

Cost

Income received

$

$

Sale date

Sale price $

Shares in Stretch Inc

12.01.2007

16,000

1,000 dividend

23.02

23,000

Fitness studio – rented out

26.08.1999

170,000

8,000 rent less 1,700 expenses

13.05

250,000 less $1,800 commission

Antique dining setting

1.1.2010

4,500

n/a

12.9

5,600 © 2018 THOMSON REUTERS

Capital gains tax

[Q3.39]

Other expenses were: • Bank interest: $5,600. P Ilates had a mortgage over the rental property. During the year an extension of the loan was granted. This money was used to purchase a new car. The interest related to the additional money borrowed was $1,200 (included in the above amount). • Preparation to sell the rental property (all in April of the current year): – Repainting due to tenant damage – Garden clean-up and restoration – Remove and rebuild pergola

$ 1,200 2,500 5,600

P Ilates had a capital loss (collectible) carried forward from last year of $1,500. ❑

Calculate the net capital gain for the year. Answers: For tutorial use. No answers provided.  

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q3.38] Ashley owns shares in several companies. During the year Ashley sold the following parcels of shares: [T] • Shares in ZYX Pty Ltd had been purchased on 1.1.2009 for $12,000 (including broker fees). These shares were sold on 1 January this year for $23,000. Since 2009 bank interest of $3,900 has been paid on a loan to purchase these shares. • Shares in WV Pty Ltd had been purchased on 1.1.2011 for $15,000 (including broker fees). These shares were sold on 1 January this year for $18,000. • Shares in UTS Pty Ltd had been purchased on 1.1.1998 for $20,000 (including brokers fees). These shares were sold on 1 January this year for $14,000. Last year Ashley realised a capital loss of $3,000 from the sale of an antique. The loss could not be claimed last year. ❑

Calculate Ashley’s net capital gain for the year. Answers: For tutorial use. No answers provided. 

[Q3.39] Molly purchased a home in 2000 for $150,000. Molly lived in the home, except for a period of one year when she was required to work in Russia. [T] Molly allowed a friend to live in the home rent-free while she was away. © 2018 THOMSON REUTERS

51

[Q3.40]



Tax Questions and Answers 2018

In 2006, Molly purchased a butterfly collection for $800 and a coin collection for $600. In October of the current tax year, Molly became ill and needed money for medical expenses so she sold her butterfly collection for $300. She was advised to hold onto her coin collection as it was rapidly increasing in value. In January of the current tax year, Molly sold her home in the city for $400,000 and moved to a cottage she had purchased in the country. Molly drowned herself in a pond two months later, leaving all her estate to her brother Ryan. ❑

Advise the executor of Molly’s estate of the capital gains tax consequences in relation to the sale of Molly’s assets and the bequest of the remaining assets to Ryan. Answers: For tutorial use. No answers provided. 

[Q3.40] Tardis Pty Ltd, a manufacturer of high technology toys, currently has four shareholders, all related, each owning 1000 shares. An employee [T] has developed a new process that will revolutionise the manufacturing process. In recognition of the employee’s efforts, the directors vote to issue 500 new shares to the employee. The market value of the company is currently $15m. Are there any taxation consequences arising from the new issue of shares? Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

52

© 2018 THOMSON REUTERS

Q4  Fringe benefits tax Useful References

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 7. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Ch 4. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 57, 58 and 59.

[Q4.1] ❑

Required: 1. What is fringe benefits tax? 2. Who is liable to pay it? 3. When is it payable? 4. Is it deductible under s 8-1 of ITAA 1997? 5. What types of benefits are liable to the tax? 6. What is the rate of the tax? 7. What legislation exists to cover the tax? 8. How is the tax assessed? 9. What additional records must be kept for FBT purposes? Answers: see [A4.1]

[Q4.2]

On 1 April 2017, Newcastle Tyres Pty Ltd purchased a new car costing $20,000 including GST. The company had insufficient space to garage the car and requested the manager to garage it at his home. The car was, in fact, garaged at the manager’s home each night of the year, though the car was only used for private travel on 210 days.  

© 2018 THOMSON REUTERS

53

[Q4.3]

Tax Questions and Answers 2018 Other particulars regarding the car are: Stamp duty on registration Registration and insurance Petrol and oil for the year Repairs and maintenance Total kilometres travelled in year (as per log book) Business kilometres travelled Contribution by employee for petrol and oil (declaration provided to employer)

$320 $900 $1,900 $500 38,000 km 16,000 km $700

A car telephone costing $3,500 was installed on the day of purchase and has been used predominantly (95%) for business purposes. All costs are inclusive of goods and services tax. ❑

Calculate the taxable value of the car fringe benefit and the FBT payable for the current FBT year, using the two different methods. In your calculations, treat the car as if a full input tax credit was available. Answers: see [A4.2]

[Q4.3]

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

1. What is the taxable value for FBT purposes of the following payments made by an employer on behalf of an employee?

Item Calculator Air fares (holiday) University fees HELP charges Taxi fares Interest expense

Payment by employer $ 300 1,200 450 850 300 500

Tax deduction had employee paid $ 300 Nil 200 Nil 100 500

2. What is the Reportable Fringe Benefit for the year ended 30 June? Answers: see [A4.3]

54

© 2018 THOMSON REUTERS

Fringe benefits tax

[Q4.8]

[Q4.4]

A major public company lends its top executives $10,000 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.

❑

What fringe benefit tax implication is there in respect of this arrangement?

❑

What difference would it make if the loan were for a swimming pool? Answers: see [A4.4]

[Q4.5]

The taxable value of fringe benefits provided by XYZ Ltd to its employees for the current FBT year is: • cars – $32,000: input tax credits are available for GST purposes; • loans – $6,000: no GST has been paid; and • external expense payments – $4,000 inclusive of GST. An input tax credit is available.

❑

Calculate the fringe benefits tax payable for the year.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A4.5] [Q4.6]

A Nagger works for a company which has an ISD telephone and a fax with an international line. Nagger uses both for private purposes. The total value of the charges by the telephone company in respect of Nagger’s private use is $750.

❑

What fringe benefit, if any, results? Answers: see [A4.6]

[Q4.7]

B Tighte is an employer who, instead of providing her sales people with motor vehicles, reimburses them on a “per kilometre” basis for business travel. A friend has told her that this is an expense payment fringe benefit.

❑

Is this true? Explain fully to Tighte why she is, or is not, liable for FBT. What income tax implications are there for Tighte in paying car expenses on a per kilometre basis? Answers: see [A4.7]

[Q4.8]

On 1 January of the current calendar year an employer purchased a new car at a cost of $54,000. The car is given to an employee who uses it mainly for private purposes – of the 6,000 km travelled to 31 March, 900 km were for business purposes.

© 2018 THOMSON REUTERS

55

[Q4.9]

Tax Questions and Answers 2018 Expenses incurred were: $ Registration and insurance for 12 months from 1 January Petrol and oil (per month) Repairs (blown tyre 14 February) Contribution by employee for petrol and oil (declaration provided to employer) Air conditioner installed 6 January

❑

1,200 125 150 100 4,000

Calculate the taxable value of the car fringe benefit, using the two different methods. (Assume the car is garaged at the employee’s home each night.) Answers: see [A4.8]

[Q4.9] ❑

Calculate the taxable value of any fringe benefit for which an employer might be liable in respect of the following:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

1. A retailer who purchases a microwave oven for $350 and sells it under a staff discount scheme to an employee for $400, when the usual selling price to the public is $600. 2. A furniture manufacturer who sells furniture to an employee for $1,200 when the usual selling price to the public is $1,800. 3. An employee who uses an employer’s welding equipment extensively over a two-month period, when the cost of hiring equipment would have been $1,000 and the employer’s out-ofpocket expenses were $150. Answers: see [A4.9] [Q4.10] Are the following statements true or false? Explain your answers. ❑ 1. If an employer provides a benefit to anyone other than an employee, the benefit cannot be a “fringe benefit”. 2. If anyone other than an employer provides a benefit to an employee, a fringe benefit does not arise. 3. If an employer is taxable as a result of the provision to an employee of a particular fringe benefit, it is nevertheless possible for the employee to be assessable in respect of the benefit. Answers: see [A4.10]

56

© 2018 THOMSON REUTERS

Fringe benefits tax

[Q4.14]

[Q4.11] Are the following items fringe benefits? Give reasons. ❑ 1. The free use by an employee’s family of a holiday home owned by the employer. 2. Payment by an employer of an employee’s telephone account. 3. A lump sum payment to a retiring employee paid out of the employer-sponsored superannuation fund. 4. Payment by an employer of an employee’s medical fund contributions. Would your answer be different if the employer did not claim the contributions as a deduction? Answers: see [A4.11] [Q4.12] A private company claims $40,000 as salary paid to one of its directors, who works 10 hours per week in the business. Following a field audit the amount allowed is reduced to $8,000, in terms of s 109 of ITAA 1936. ❑

Does the amount disallowed constitute a fringe benefit?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A4.12] [Q4.13] A full-time organiser of the Disenchanted Employees Union (the income of which is exempt) is provided with a car, and is paid $500 per day whenever he is required to attend executive meetings held in the union’s central office, located 100 km away. Tax is not deducted from the payment, since the amount is merely designed to cover travel and incidental costs associated with attendance at the meeting. The union does not pay FBT, since it believes that it is an exempt body in terms of s 50-15 of ITAA 1997. ❑

Is this view correct? Answers: see [A4.13]

[Q4.14] Jack Sanders is a fitter employed as a toolmaker at Cooper Pedy Engineering Pty Ltd. He is provided with a four-wheel-drive station sedan which he uses occasionally to pick up parts and supplies for his employer from a wholesaler in a nearby town. All other use of the vehicle is private. During working hours the vehicle is parked at the Cooper Pedy parking station, the employer paying the fee of $30 per week. Sanders is a keen yachtsman, and in his spare time is building a steel yacht which he proposes to sail on Lake Cooper Pedy. The yacht is being built on the employer’s premises since Sanders finds it convenient to use the electric welder, presses and other equipment located there. From time to time, Sanders also uses sheet steel from the employer’s stock, for which he is invoiced at cost. © 2018 THOMSON REUTERS

57

[Q4.15] ❑



Tax Questions and Answers 2018

Discuss the liability, if any, of Cooper Pedy Engineering Pty Ltd for fringe benefits tax. Answers: see [A4.14]

[Q4.15] I R Broke is an employee of Risky Finance Pty Ltd, a subsidiary of Offshore Bank Ltd. On 30 June Broke is provided with a 10-year housing loan by Offshore Bank Ltd at an interest rate of 5% pa. He could have taken out a similar loan with his employer at 13% pa, the Commonwealth Bank at 10% pa or the Asia Bank at 9.5% pa. ❑

On what basis will any FBT be calculated? When will any FBT liability first arise? How will it be calculated? Is other information needed? Answers: see [A4.15]

[Q4.16] A gang of five shearers is engaged for two weeks shearing sheep on a rural property. During that time, they occupy motel-style units on the property and are provided with full board. The units occupied are used in certain periods of the year to provide accommodation for paying guests and are, therefore, of high standard.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

Is there a taxable fringe benefit? Discuss. Answers: see [A4.16]

[Q4.17] Des Count is a shop assistant in a large supermarket which sells goods at 5% mark-up on cost. Staff is entitled to a 10% discount on goods purchased from the store. During the current FBT year ended 31 March, Count spent $9,450 (after discount) at the supermarket. ❑

In respect of Count’s purchases, calculate the taxable value of any fringe benefit for which Count’s employer may be liable. Answers: see [A4.17]

[Q4.18] Wee Care Pty Ltd operates a chemical plant in Perth. It has had difficulty attracting female employees and has decided to build and run a child care facility on its premises. Construction costs will be $500,000 and the facility will be able to care for 50 children. Employees will not be charged for daily care but will have to provide lunch for their children. ❑

58

If the cost of equivalent care at other centres is $80 per child per day, what fringe benefit liability, if any, will arise for Wee Care Pty Ltd?

© 2018 THOMSON REUTERS

Fringe benefits tax

[Q4.22]

Assume the centre is open six days per week, 48 weeks per year, and that cost of running the centre is $180,000 pa. Answers: see [A4.18]

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q4.19] Justin Evans is the managing director of a mining company which has its head office in Perth and its main mine in the Kimberley. On 1 July of the current FBT year the company provided him with a leased car which would have cost $50,000 if purchased (inclusive of a delivery charge of $400 and an initial transfer tax of $600). The lease is for four years. Between 1 July and the following 31 March Justin expects to travel 23,000 km, of which 18,000 km will be for business purposes. He is entitled to use the car for private purposes at any time. Justin does not contribute to the running costs of the car. ❑

Calculate the taxable value of the car using the statutory formula method. Would it make any difference if the company purchased the car rather than leased the car?

❑

What difference would it make if Justin traded in his car when the company leased the current car? Assume the trade-in reduced the cost of the car by $12,000. Justin did this because his employer agreed with him to payout the lease at the end of the four years and give the leased car to him. It is anticipated that the payout figure at the end of the lease would be $15,000. The market value of the car is expected to be $20,000. Answers: see [A4.19]

[Q4.20] Calculate the loan fringe benefit of a $10,000 loan by a company to one of its employees at: [T] ❑ (a) 1% pa; (b) 5% pa; and (c) 15% pa. Answers: For tutorial use. No answers provided. [Q4.21] An employer pays university fees amounting to $750, and a HELP charge of $3,000, for the daughter of an employee. [T] ❑

Do the payments constitute fringe benefits? Discuss. Answers: For tutorial use. No answers provided.

[Q4.22] A small private company has been leasing a motor vehicle for one of its directors. The lease has come to an end and the director would like the [T] car for his spouse.

© 2018 THOMSON REUTERS

59

[Q4.23] ❑



Tax Questions and Answers 2018

Advise the company of the income tax and FBT implications if the residual value of $8,000 is paid out by: (a) the company; (b) the director. Answers: For tutorial use. No answers provided.

[Q4.23] Bib and Bub transfer their partnership assets to a newly formed company. The company also takes over payment of the leases of their cars, both of [T] which are used extensively for business purposes. ❑

Is there any fringe benefit in these circumstances? Explain your answer. Answers: For tutorial use. No answers provided.

[Q4.24] Dennis Ture conducts a professional practice as dentist and orthodontist. His receptionist, Kim Smiley, is an efficient and popular employee. Ture [T] notes, however, that her smile is compromised by protruding teeth. He suggests to her that, if she desired it, he could create a film-star smile by straightening her teeth. He is happy to do this without imposing the normal $4,000 fee. As he points out, his practice will grow when others see the transformation. It is, in his view, simply a form of advertising.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

If Ture carries out the work, are there any tax issues involved? Would your answer be different if Ture charges Kim for the cost of materials only, no charge being made for his labour or profit? Answers: For tutorial use. No answers provided.

[Q4.25] Wizard is an estimator employed by Lizard. Much of her estimating work involves the use of a Rabbit microcomputer and specialised applications [T] software. Wizard is often required to produce estimates at short notice. She suggests to her employer that she be provided with a second Rabbit computer, for use exclusively at home, to enable the preparation of urgently required estimates outside normal office hours. Lizard is impressed with the suggestion, but wonders whether there are any tax implications. ❑

Advise Lizard. Answers: For tutorial use. No answers provided.

[Q4.26] Stan is an employee of a small family company. The week before his wedding he was involved in a motor vehicle accident and wrote off his [T]

60

© 2018 THOMSON REUTERS

[Q4.29]

Fringe benefits tax

car. His employer decided to hire a car for two weeks (at a cost of $800) and allow Stan to use it to go on his honeymoon trip. The employer had previously given Stan and his bride a microwave as a wedding present. ❑

Is there any fringe benefit in these circumstances? Answers: For tutorial use. No answers provided.

[Q4.27] Bert Price works as a travelling salesperson for a national wholesaler. Bert’s employer has given him a “Shell Credit Card”. This allows Bert [T] to buy petrol and other goods at Shell service stations without having to use cash. During the year Bert’s employer receives and pays accounts for $2,500. Of this, $1,000 is estimated to constitute Bert’s private expenditure. Pursuant to an agreement between Bert and his employer, Bert reimburses his employer for only $500 of the private expenditure. ❑

What is the taxable value of the fringe benefit in these circumstances? Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q4.28] Calculate the taxable value of the housing fringe benefit in each of the following. [T] ❑ Employer Manufacturer

Place Sydney

Type of accommodation Motel

Market value $160 per day

Retailer

Remote area

On-site van

$120 per day

Motelier

Brisbane

Motel

$120 per day

Special conditions None 150 km to nearest town Employee must live on the job; local accommodation $180 per week

Assume that the employee is required to use the accommodation for 21 days. Where applicable, state what other information you need. Answers: For tutorial use. No answers provided. [Q4.29] ABC Ltd is a finance company which offers loans to employees at 5% pa, calculated on the daily balance of the loan. [T] On 1 July, H Elp, an employee of the company, borrowed $2,500 to repair his uninsured car which had been involved in an accident. The loan plus interest was to be repaid on 31 December. However, owing to Christmas expenses, Elp arranged an extension of time to 28 February to repay.

© 2018 THOMSON REUTERS

61

[Q4.30] ❑



Tax Questions and Answers 2018

Calculate the taxable value of any fringe benefit for which the finance company may be liable. Answers: For tutorial use. No answers provided.

[Q4.30] [T]

1. Octopus Pty Ltd allowed its managing director use of a company car. Details relating to the car for the whole of the current FBT year are as follows: Cost (including GST) Opening written down value Distance travelled during FBT year:  Business  Private Contribution to fuel and oil by managing director Days car used or available for use Repairs and maintenance Fuel and oil (including $500 by managing director) Registration and insurance for holding period

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

$40,000 $34,000 14,000 km 24,000 km $500 365 $1,200 $1,500 $1,800

Calculate the taxable value of the car using the two different methods. 2. Telecom Pty Ltd pays private expenses of $1,000 for one of its employees.

❑

Calculate the amount of FBT payable if this was for the current FBT year. Answers: For tutorial use. No answers provided.

[Q4.31] Answer the following questions: [T] ❑ (a) What is the taxable value of a loan of $100,000 made for a period of 12 months to an employee by an employer if the interest rate was: (i) 3%? (ii) 9%? (iii) 12%? (b) What difference would it make in (a) above if the loan was used: (i) by an employee, wholly for income-producing purposes? and (ii) by the spouse of an employee, wholly for income-producing purposes? (c) At present Which Bank Pty Ltd lends money to employees for housing at 5.5%. No loan establishment fees are charged. What 62

© 2018 THOMSON REUTERS

Fringe benefits tax

[Q4.33]

exposure to fringe benefits tax is there if Which Bank Pty Ltd lends in the market at a rate of interest of 8.5% and normal loan establishment fees were $1,500? Answers: For tutorial use. No answers provided. [Q4.32] Discuss the fringe benefits tax implications of the following: [T] ❑ (a) An employer providing a Christmas lunch at a local restaurant, costing $1,000, for 10 of its key employees. (b) A sporting club, which pays its honorary treasurer an honorarium of $5,000 pa, providing a car to him. The car is used 90% for club business. The treasurer has a full-time job at the local hospital. (c) An employer giving each of its 15 staff a leg of ham valued at $60 for Christmas. (d) An employer letting staff take home laptop computers. It is estimated that only half the work done at home is business-related. (e) A company director, not in receipt of any remuneration from the company, having use of the company two-tonne truck while undertaking renovations to his own home.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q4.33] In each of the following state whether or not there is a fringe benefit, specify the type of benefit and the taxable value (if any): [T] ❑ (a) Megafab Pty Ltd pays $8,500 for an evening harbour cruise which includes a band and a cocktail party. In attendance are 10 key employees plus their respective spouses and 10 key customers and the customers’ respective spouses. (b) Multifab Pty Ltd pays $9,300 for an overseas holiday for one of its employees. The employee was brought out from France to Australia 12 months ago, on a three-year contract. Part of the terms of engagement was that the employee would receive each year either a return holiday to his home country or a holiday to the country of his choosing. This time the taxpayer returned to France. (c) What difference would it make in (b) above if the employee had a holiday in South Africa? Assume the normal return economy airfare to South Africa was $3,000. (d) Megachip Pty Ltd provides each of its top ten executives with laptop computers and mobile phones. Ostensibly these are for work purposes, but the employer has no objection to the employee taking these items home or using them for private purposes. During the year it is estimated that the laptops are used 95% for business © 2018 THOMSON REUTERS

63

[Q4.34]



Tax Questions and Answers 2018

purposes and that the phones are used 75% for business purposes. The computers cost $4,000 each, while the phones cost $450 each and calls amount to a further $1,000 each. Answers: For tutorial use. No answers provided. [Q4.34] Kim is employed as a trainee accountant for a large retail firm, Boss [T] Ltd. During the current fringe benefits tax year Boss Ltd provided the following items as part of a salary package: 1. Study expenses: all study expenses are reimbursed as long as they are related to Kim’s duties and all units are passed. This year Kim was reimbursed $2,400 for HELP and $500 for text books and stationery in respect of business studies at university. 2. Superannuation: in addition to the compulsory superannuation levy, Boss Ltd contributed an additional $5,000 to Kim’s superannuation fund. 3. Laptop computer: provided to allow Kim to work at home and for study purposes.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

4. Employee discounts: all employees are entitled to a discount of 20% on any purchases within the store. This year Kim purchased goods with a retail value of $6,500, receiving a discount of $1,300 during the year. The goods cost Boss Ltd $4,900. 5. Car: Kim is provided with a car that is used for private purposes. (a) During the year, the car travelled 17,000 km, of which 2,000 km was work-related and the remainder was private. (b) The car was purchased for $25,000, including GST, on 1/4/2017 Licence, insurance and services cost $1,200. Kim was required to provide the petrol, which cost $1,270. ❑

Calculate the fringe benefits tax payable in respect of the benefits provided to Kim for the year. Answers: For tutorial use. No answers provided.

[Q4.35] An employer who is registered for GST provides the following benefits [T] as part of an employment package for an employee aged 30. Tax invoices are held for all taxable supplies.  

64

© 2018 THOMSON REUTERS

Fringe benefits tax 1. 2. 3. 4.

❑

[Q4.36]

HELP fees Child care (on premises) Entertainment allowance (amount spent was $1,100) Car (a) Lease payments (3rd year) (b) Licence and insurance paid 1 April for one year (c) Petrol and oil (d) Services and repairs (e) Original cost of vehicle if purchased Travelled 17,000 km total, 8,000 km business

$ 3,960 7,500 1,300 9,240 1,300 2,040 950 62,000

Required: 1. Calculate the fringe benefits tax payable by the employer. 2. Identify the income tax treatment of each amount in the hands of the employer and the employee. Answers: For tutorial use. No answers provided.

[Q4.36] Addemup is employed as an accountant. The employment contract provides as follows: [T] Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• Salary: $45,000. • Laptop computer provided: $3,600. • Professional development allowance: $750. (Addemup paid $1,060 to attend computing skills courses run through Lowfees University.) • Car: the employer pays the costs of leasing, licence, insurance and scheduled services, which amounted to $520 per month. The running costs of $100 per month are paid by Addemup. The car was used to travel 15,000 km for the FBT year, of which 2,500 were business related. The value of the car when leased last year was $25,000. • All expenses include GST where applicable. ❑

Required: 1. Calculate the fringe benefits tax payable by Addemup’s employer for the year. Assume that monthly car payments are constant and that all other FBT transactions occurred during the FBT year ended 30 April. 2. Calculate Addemup’s taxable income and Reportable Fringe Benefit for the year ended 30 June. Answers: For tutorial use. No answers provided.

© 2018 THOMSON REUTERS

65

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Q5 Deductions General

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Chs 12 and 13. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Chs 7, 8, 9 and 10. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Chs 9 and 10. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 8 and 9.

[Q5.1]

Dockyards Pty Ltd operates a large shipbuilding concern in Newcastle but ceased operations shortly before Christmas due to a sudden downturn in orders. By the new year, all of the company’s assets had been disposed of and Dockyard (Investments) Pty Ltd was incorporated as a subsidiary company to invest the proceeds of sale. Because of the close connection between the two companies the latter company paid workers’ compensation claims which arose for settlement after the former company had been wound up.

❑

Is Dockyard (Investments) entitled to a deduction for these amounts? Answers: see [A5.1].

[Q5.2]

Plantations Pty Ltd was incorporated to undertake afforestation operations. Two items of expenditure were incurred during the relevant income year: clearing the land ready for cultivation and weeding around newly sown trees.

© 2018 THOMSON REUTERS

67

[Q5.3] ❑

Tax Questions and Answers 2018 Are either of these expenses allowable as deductions? Answers: see [A5.2].

[Q5.3] ❑

Discuss whether a deduction would be allowable for the following: 1. Provision for the estimated amount of trade debtors’ accounts which might not be collected. 2. Fines paid by a bookmaker for conducting illegal off-course betting activities. 3. An amount of $450 paid to a solicitor for preparing a partnership deed. 4. The expense incurred by the production manager of a large manufacturing firm who travelled overseas to purchase a new computer. 5. The salary of a housekeeper employed by a taxpayer who conducts a business which demands attendance in the city during the day. 6. The cost incurred by a company operating a drive-in theatre to reconstruct a public access road, converting it from a gravel road into a more wear-resistant bitumen road.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

7. Newspapers purchased by an accountant who advises clients on financial and investment matters. 8. The cost of dog food and veterinary expenses in respect of two dogs used by a scrap metal dealer as watchdogs. 9. The cost incurred by an insurance consultant for a home phone answering service used to record calls while out. (It is estimated that half of the calls recorded are private. However, prior to accepting his position as an insurance consultant the taxpayer did not have an answering service.) 10. Travelling expenses incurred by a school teacher in using her own car to attend sports afternoons. The sporting activities were at a nearby field and the only alternative means of transport was to walk. Answers: see [A5.3]. [Q5.4] ❑

68

What deduction, if any, will be allowed in respect of the following? Give reasons. B Brown takes up a position as a taxation officer with the Australian Taxation Office. She quickly perceives that promotion to higher positions, which carry higher salary levels, depends upon her work experience and knowledge of accounting, taxation and law. She undertakes a university degree and during the relevant year of income incurs the following © 2018 THOMSON REUTERS

Deductions

[Q5.7]

expenses: HELP fees of $2,500; university fees of $750; books costing a total of $630; photocopying and purchases of writing aids totalling $250; and travelling expenses from work to university amounting to $267. Would your answer be different if Brown failed to pass any subjects in the first year?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A5.4]. [Q5.5]

The Matsushima Motor Co Ltd is the Australian subsidiary of a Japanese car manufacturing company. It imports cars from its Japanese parent and sells them in Australia. The company has been enjoying considerable sales success in Australia and was rapidly overhauling local car manufacturers in sales volume. Because of the threat to local employment if this situation continued, the Australian Government announced its intention to impose a quota on the annual number of cars which could be imported from Japan and sold in Australia (assume such a system did not previously exist). In the current income year Matsushima spent $950,000 on placing advertisements in the Australian media attacking the quota system and demanding its repeal, and asking the Australian public to petition parliament in this regard in order to preserve their freedom of choice in obtaining the quality, low-cost car which the company had been importing and selling. The amount spent was five times the company’s normal annual advertising expenditure.

❑

Discuss the deductibility of this expenditure. Answers: see [A5.5].

[Q5.6] ❑

Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997: 1. The cost of moving machinery to a new site. 2. The cost of revaluing assets to effect insurance cover. 3. Legal expenses incurred by a company opposing a petition for winding up. 4. Legal expenses incurred for the services of a solicitor in respect of a number of matters, including conveyancing, discharge of a mortgage, and general legal advice relating to a client’s business operations. (The solicitor’s account does not separate the costs of the various matters.) Answers: see [A5.6].

[Q5.7] ❑

Discuss the deductibility of the expenditure in the following situations, referring to any relevant provisions of the ITAA 1997.

© 2018 THOMSON REUTERS

69

[Q5.8]

Tax Questions and Answers 2018 1. The costs incurred by a butcher in defending a prosecution for selling wombat meat. If the prosecution is successful, the butcher will lose the licence to operate. 2. Norman Greig is a luxury car retailer who pays $800 per year in membership fees to the exclusive Palm Beach Golf Club. He claims that he does this in order to meet people who would be on sufficiently high incomes to purchase his luxury cars. Answers: see [A5.7].

[Q5.8]

Discuss whether the following are allowable as deductions. 1. Expenses amounting to $1,000 incurred by a Melbourne accountant attending an International Congress of Accountants in Perth, including: registration fee $150, hotel expenses $450 and fares $300. 2. $150,000 paid to construct a building, completed on 1 April of the current year, for use solely in relation to scientific research relating to the company’s products. Would your answer be different if the building was to be used half for scientific research and half for quality control testing?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

3. Registration charges and fees of $750 in connection with the grant of a patent and the registration of a copyright. 4. A donation of $80 paid by a taxpayer to a local ambulance centre (which provided free ambulance service), on the stipulation that the taxpayer would be given, under a reciprocal arrangement among ambulance centres, free ambulance service in any locality in which the taxpayer subsequently resided. Answers: see [A5.8]. [Q5.9] ❑

Discuss whether the following are allowable as deductions: 1. Legal costs and travel and accommodation expenses incurred by a jockey in the course of appealing – successfully – against a nine-month disqualification for poor handling of a horse at a race meeting. Would the position be different if the appeal had been unsuccessful? 2. Interest paid on money borrowed to purchase shares for investment purposes. 3. Fees paid by a taxpayer carrying on a business to an accountant for preparing her income tax return, negotiating with the Commissioner’s representatives and successfully disputing an assessment before the AAT.

70

© 2018 THOMSON REUTERS

[Q5.12]

Deductions

4. A yearly subscription of $142 paid to an association primarily engaged in disseminating information designed to keep members abreast of current developments in their line of business. Answers: see [A5.9]. [Q5.10] Referring to relevant provisions of the ITAA 1997 or ITAA 1936, ❑ discuss whether, for the current income year, the following amounts are deductible: 1. $7,000 paid by a self-employed person for superannuation. How would your answer differ if the amount paid was $40,000? 2. $350 interest paid by the person mentioned in item 1 on a loan of $7,000 to pay the superannuation. 3. Speeding fines of $700 paid by the owner-driver of a taxi. 4. $25,000 paid by a newly incorporated company for an environmental impact study. The amount was incurred on 1 January of the current year in relation to a project expected to last 25 years.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

5. A gift of shares to a registered charity which operates in Australia. The shares were acquired two years ago at a cost of $2,000 and on the date of the gift were valued at $12,000. 6. A new roof costing $16,000 for a house used solely for rental purposes. The house was purchased on 1 July in the current income year and the roof was replaced two months later. Answers: see [A5.10]. [Q5.11] What deductions, if any, are allowable in respect of the following? ❑ 1. A gift of a painting and $200 cash to the Royal Newcastle Hospital by a local business person. The painting was purchased two years ago at a cost of $1,000 and was valued at $2,500 at the time of the gift. 2. A $1,000 debt written off in the following circumstances:

A taxpayer purchased a small retail clothing store on 1 August in the current income year. Included in the purchase price was an amount of $10,000 for book debts. By 30 June the taxpayer had collected $9,000 of the debts and decided to write off the remaining $1,000 as a bad debt.

Answers: see [A5.11]. [Q5.12] Australian Tax Practice, commonly known as ATP and widely recognised as the leading tax publisher in Australia, donates a prize to the value of $250 to a university for the Best Student in Taxation Law. © 2018 THOMSON REUTERS

71

[Q5.13] ❑



Tax Questions and Answers 2018

Would Australian Tax Practice be entitled to a deduction for the cost of the prize? Refer to any relevant sections of the ITAA 1997. Answers: see [A5.12].

[Q5.13] E Eye was a journalist who decided to go freelance. He resigned from his job with a broadcasting network, intending to go into television. Before doing so he travelled to Europe and America to observe the latest trends in the industry. He travelled alone and is of the view that the full cost of $6,000 for his six-week trip will be deductible. ❑

Advise Eye. Answers: see [A5.13].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.14] For the following, identify any deductions. ❑ 1. Lambert has a full-time job as a butcher and a part-time job playing the piano in a band. Lambert’s travelling expenses from home to his full-time employment are $410 and his travelling expenses in connection with his part-time job amount to $370. Lambert’s parttime job requires attendance at many different venues during the year and he also transports some of the band’s equipment. 2. Noss, a retailer, finds it virtually impossible to maintain adequate stocks and a high level of service to customers because of overcrowding in her small suburban store. Although rents are substantially higher, she decides to move into the city, expecting that increased profits will compensate for the move. The move includes expenses of $29,307 for the removal of trading stock. 3. On 1 March, Risk borrows $12,000 for three years at 10% pa, reducible monthly. Borrowing expenses include: procuration fees ($90), stamp duty ($210), a survey fee ($180) and broker’s commission ($50). The money borrowed is to be used in Risk’s business. (Ignore the calculation of interest.) Would your answer be different if the business ran at a loss in the first year? Answers: see [A5.14]. [Q5.15] The directors of XYZ Ltd, which has a 30 June balance date for tax purposes, resolve to write off as a bad debt an amount of $2,500, owed by a company which has gone into liquidation. The directors’ meeting at which the resolution to write off the debt is passed is held on 17 June; minutes of the meeting are prepared and signed on 24 June and the accountant makes the relevant entry through the books on 5 July.

72

© 2018 THOMSON REUTERS

[Q5.17]

Deductions ❑

Is the write-off allowable as a deduction? If so, indicate in which tax year the deduction will be available. Answers: see [A5.15].

[Q5.16] Kerry is an air traffic controller employed by the Department of Aviation. Kerry holds a pilot’s licence and during the current income year incurs $2,000 expenses in keeping up the flying hours necessary for the retention of that licence and $1,500 expenses in obtaining a higher grade of licence. There is no statutory or contractual requirement on controllers to obtain a flying licence and the holding of a pilot’s licence and ongoing flight training are not essential prerequisites for promotion. However, the Department of Aviation acknowledges that flying qualifications and experience help controllers to keep up to date with developments in their field and increase their knowledge and ability in their job. ❑

Will Kerry be able to obtain a deduction for all or any of these expenses? Answers: see [A5.16].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.17] Among its expenses for the current income year, Rotic Pty Ltd has paid the following amounts: (a) $20,000 to a potential competitor in return for the competitor’s agreement not to open within the next six months an outlet in NSW competing with Rotic’s business; (b) $6,000 in speeding and parking fines incurred by the drivers of Rotic’s delivery trucks while delivering Rotic’s products; (c) $29,000 in entertainment expenses incurred by Rotic, comprising: (i) $8,000 in providing food and drinks to VIPs visiting Rotic’s premises to discuss business deals; (ii) $10,000 in respect of seminars organised and conducted on Rotic’s premises at which Rotic’s staff were taught to operate its new office computer; and (iii) $11,000 on providing food and drinks for members of the public attending an open exhibition of Rotic’s products held in Sydney. ❑

Advise Rotic on whether any of the above amounts are deductible. Answers: see [A5.17].

© 2018 THOMSON REUTERS

73

[Q5.18]



Tax Questions and Answers 2018

[Q5.18] Beta Pty Ltd acquires all of the assets in Alpha Pty Ltd. Included in the purchase price is an amount of $8,500 in respect of accounts receivable. They have a book value of $10,000. Of the $10,000 in book debts, $6,800 is collected. Beta Pty Ltd abandons any hope of ever recovering the balance. ❑

What deduction, if any, is available to Beta? Answers: see [A5.18].

[Q5.19] What amounts, if any, are deductible in the following circumstances: ❑ 1. Legal fees incurred by a taxpayer in securing registration as a tax agent. 2. Payments by a tobacco company to fund a public campaign against proposed legislation restricting tobacco advertising. 3. Expenditure incurred by a mining company on the demolition of dangerous structures. The structures have been used in the ordinary course of income-producing activities. 4. Legal fees incurred by a doctor to defend his right to practice.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

5. A lump sum paid by a company to a retiring director to stop that director from subsequently competing with the company. 6. An amount paid by a partnership, which carries on the business of delivering and compacting sand on building sites, for the right to remove sand from certain land. 7. Legal costs incurred by a professional rugby league player to obtain a release from the New Zealand Rugby League. Answers: see [A5.19]. [Q5.20] Would bridge tolls and parking fees, paid by an employee using their ❑ employer’s car to drive from the employee’s home office to premises of clients of the employer, be deductible? Answers: see [A5.20]. [Q5.21] A taxpayer used a car to travel 4,500 km during the year for business purposes. The total distance travelled in the car was 18,500 km. The car cost $35,000 five years ago, had an adjustable value of $10,000 on 1 July and had an engine capacity of 1800cc. The log book requirements were met and the total cash expenses of operating the vehicle for the year were $2,500. ❑

Calculate the maximum amount that the taxpayer can claim as a tax deduction. Answers: see [A5.21].

74

© 2018 THOMSON REUTERS

[Q5.23]

Deductions [Q5.22] ❑

1. RR Pty Ltd borrows money to buy land and build a motel. Is the company entitled to a deduction for interest if it: (a) continues to own and operate the motel; (b) sells the land and buildings on a sale/lease back arrangement and then operates the motel; (c) sells the land and buildings and severs its relationship with the venture? 2. JN Pty Ltd is the trustee of a medical practitioner’s family trust. After obtaining mortgage finance the trustee purchased the doctor’s home and leased it back to her for a commercial rent.

❑

Is the trust entitled to a deduction for interest on the mortgage? 3. Betty and Jim are husband and wife. They sell their home for $120,000 and, together with loan funds of $180,000, purchase a two-storey property. They use the upstairs for their home and downstairs for their retail business.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

What deductions, if any, are Betty and Jim entitled to for interest on the loan? 4. Sue is a solicitor who borrows $100,000 and lends it, interest-free, to ABC Pty Ltd. ABC lends the money, interest-free, to DEF Pty Ltd. DEF invests the money in a business. Profits are distributed to shareholders, one of whom is Sue.

❑

Is Sue entitled to a deduction for interest on the loan? 5. UVW Pty Ltd borrows $1 million and lends it interest-free to its wholly owned subsidiary. No dividends have ever been received although similar loans have been made between the companies for the last 10 years.

❑

Is UVW entitled to a deduction for the interest on the loan? Answers: see [A5.22].

[Q5.23] 1. Robyn borrows $10,000 to purchase plant used in a business to produce assessable income. Is she entitled to a deduction for interest on the loan after the plant is sold? Would it make any difference if the plant was sold because the business ceased? 2. Crash Pty Ltd borrows $500,000 to purchase a block of flats for the purpose of renting them out. Prior to tenanting the flats, Crash goes into liquidation and the property is sold – with no gain or loss arising. © 2018 THOMSON REUTERS

75

[Q5.24] ❑



Tax Questions and Answers 2018

Is Crash entitled to a deduction for interest on the loan? Assume the interest amounted to $20,000 and that no rent was ever received. 3. Clarissa and Kenny are wife and husband and, in their joint names, borrow $100,000. The money is used as working capital in a business purchased in Clarissa’s name. The business is profitable.

❑

Are both Clarissa and Kenny entitled to deductions for interest expense? 4. Is a company entitled to a tax deduction for payment of its company tax? Is it entitled to a tax deduction for interest on money borrowed to pay its company tax?

❑

What if the money is used in preparing statements in response to takeover offers under relevant legislation? 5. B Quick carries on business on his own account as a haulage contractor. On one trip he skidded on loose gravel and crashed into a shop. Quick’s insurance paid for all but $10,000 of the damage; Quick borrowed money to pay the balance.

❑

Is Quick entitled to a deduction for the $10,000 paid out as compensation? Is he entitled to a deduction for interest on the borrowed money?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A5.23]. [Q5.24] Joe resigned his position as an electronics technician to undertake further studies to upgrade his qualification from an associate diploma to a degree in engineering. The duration of the studies was two years. Joe’s employer had indicated verbally that he could return to his job on completion of his intended studies. Increased salary or promotion was not discussed. During the first half of the current income year, being the second year of the two-year period, Joe participated in a student exchange program with a university in the USA. The costs (all substantiated) incurred were as follows:

Airline ticket Accommodation Meals Study books and materials Computer purchase Motor vehicle purchase (used for 4.5 months)

$ 2,500 1,500 1,200 600 2,000 2,300

Of the six months that Joe was absent from Australia, four-and-a-half months were spent engaged in study; the remainder of his time was spent on holiday activities. The dominant purpose of the travel was to study in the USA. 76

© 2018 THOMSON REUTERS

[Q5.25]

Deductions

While engaged in study, Joe derived income by providing part-time tutoring in electronics. For this he received $1,000. Joe also received salary from a private company (of which he is a shareholder and a director) for the design, development and manufacture of a communications device which was sold by the company for a profit. The type of duties carried out for the company relate directly to the studies being undertaken. He received the salary in two lump sums as follows:

Year 1 Year 2

$ 2,000 4,000

Joe hopes to graduate after his return to Australia and then gain employment, with a substantial increase in salary and position. ❑ 1. Advise Joe if the costs or part thereof are allowable as a deduction for tax purposes. ❑ 2. What if the following record appeared in the company minutes:

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.



Two lump sum payments should be made to Joe to assist in defraying the cost of travel by him to the USA. The payments are to be made in recognition of specialist knowledge to be obtained and provided by Joe in matters of the current market and the latest developments in relevant manufacture which is important to this company’s ongoing operations.

Answers: see [A5.24]. [Q5.25] State which of the following gifts are deductible under Div 30 of ITAA ❑ 1997. 1. The donation of a work of art to the University of Adelaide, valued at the date of the gift at $2,000. The work was purchased at a cost of $1,500 some years ago. Would your answer be different if the gift was made to the Adelaide Museum? Would your answer be different if the work of art was purchased six months ago at a cost of: • $1,500; • $2,500? 2. The following donations: • $20 to Austcare; • $50 to Community Aid Abroad;

© 2018 THOMSON REUTERS

77

[Q5.26]



Tax Questions and Answers 2018 • $100 to the Salvation Army; • a television set valued at $750 to the National Heart Foundation (the set having been purchased six months ago for $850); • $600 to the Wallsend Amateur Swimming Club.

Answers: see [A5.25].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.26] Ratty liked messing about in boats so much that he decided to start a charter boat service, ferrying tourists up the river to Toad Hall. To commence the business he acquired a launch at a cost of $30,000 and all necessary safety equipment cost a further $5,000 (each item cost less than $1,000). He also acquired a 10-year lease to use several jetties along the river for an up-front payment of $10,000, with annual payments of $1,000.   The business commenced on 1 Jan Yr 1 and the cashbook shows the following financial results:

Tour income Launch operating costs Advertising Administration costs Lease cost Interest expense

Year 1 4,059 5,368 642 1,200 1,000 884

Year 2 7,027 3,104 265 761 1,000 2,237

$ Year 3 15,300 5,600 1,380 1,548 1,000 1,525

Year 4 20,500 11,253 2,150 1,635 1,000 1,486

Year 5 17,620 9,523 2,205 1,438 1,000 1,235

Ratty also receives a taxable pension, which has allowed him to continue to invest time in the charter boat business. ❑

Advise Ratty on the taxation implications of these trading results. Answers: see [A5.26].

[Q5.27] T Tree runs a successful information technology business. With a view to future retirement, T purchases 100 hectares of land and plants the land with native wildflowers. It is expected that it will take several years before the first commercial harvest. In the meantime T is paying the costs of owning the property and caring for the plants. ❑

Advise T Tree on the taxation consequences of the venture. Answers: see [A5.27].

78

© 2018 THOMSON REUTERS

Deductions

[Q5.31]

[Q5.28] What deductions, if any, would be allowable in respect of expenditure incurred in connection with an unsuccessful application for variation in a [T] ❑ company’s air traffic rights in an attempt to increase the number of routes available to the company and thus its income? ❑

What deductions, if any, would be allowable in respect of expenditure incurred by another airline company in opposing the application of the first company? Answers: For tutorial use. No answers provided.

[Q5.29] Willy Last is a clerk employed by a local firm of solicitors. Willy has a heart condition and has a pacemaker for use at his home. However, his [T] home pacemaker is not suitable for use at work and Willy, therefore, rents a pacemaker from Rent-A-Pacemaker Ltd for use at work. He claims that without this pacemaker he would not be able to do his job properly, as he would be in constant fear of a heart attack. ❑

Would Willy be able to claim a deduction for the $600 rental fees he pays to Rent-A-Pacemaker during the year?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q5.30] Mod Clothing Pty Ltd operates two fashion stores in NSW through an agency arrangement with the manager of each store. The managing [T] director of Mod Clothing travels first class to Melbourne to arrange for the setting up of a similar agency/store in Victoria, which will be the company’s first store outside NSW. The fares incurred by the company for this trip amount to $2,000. ❑

Is this expenditure allowable as a deduction? Answers: For tutorial use. No answers provided.

[Q5.31] Would any deduction be allowable in respect of the following? [T] ❑ 1. I M Good, a university lecturer, sets aside one room of his house as a study. Good uses the room about 20 hours per week, in which time he prepares lecture material and does research on the second edition of a book he is writing. The first edition produced royalties of $9,000; he expects the second edition to be more successful than the first. Good estimates that 90% of the time he spends in the study is related to working on his book. 2. T & GG Ltd, a large insurance company specialising in third party insurance, at the end of the income year makes a provision for the payment of $500,000 in respect of third party insurance claims which had been settled but not paid. Answers: For tutorial use. No answers provided. © 2018 THOMSON REUTERS

79

[Q5.32]



Tax Questions and Answers 2018

[Q5.32] Are the following allowable as deductions? Why or why not? [T] ❑ 1. The cost of replacing loose tools in an engineering business. 2. A pension paid to the widow of a deceased employee in consideration of the employee’s past services to the business. 3. The cost of CDs and music downloads purchased by a full-time employee of a large finance company. The employee is also paid for articles he writes as a critic for a pop music magazine. 4. Interest expenses on a loan used to pay superannuation contributions. Assume interest was paid by: (i) the employer; and (ii) the employee. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.33] Discuss the deductibility of the items in each of the following cases, mentioning any relevant sections of the ITAA 1997 and clearly identifying [T] ❑ and explaining why the item would or would not be deductible under the relevant section. 1. National Clothing Co Ltd spends $2,000 purchasing a flagpole to erect outside its head office for the purpose of flying the Australian flag every day. The company claims a deduction for the $2,000 as part of its normal business expenses, claiming that it helps its corporate image and will help to promote the sale of its Australianmade products. 2. Porelly Rubber Co decides to produce a diary for distribution to all of its customers. It has never produced a diary before and spends $2,000 having the diaries compiled, printed and distributed. 3. A commercial TV station agrees to provide, free of charge and without any interruptions for commercials, half an hour of broadcasting time for an important political broadcast. It incurs costs (not of a capital nature) associated with the broadcast of $7,000 and claims a tax deduction for these costs. Answers: For tutorial use. No answers provided. [Q5.34] In January last year the office safe was stolen from the head office of G Locks Pty Ltd by a gang known as the “Three Bears”. The safe contained [T] cash receipts from trading ($16,500) and cash subscribed for debentures in the company ($13,500). At a later date the safe was found. It had been broken open and the money had been taken. The company had the safe repaired at a cost of $750. 80

© 2018 THOMSON REUTERS

Deductions

[Q5.37]

In February this year one of the members of the gang was apprehended and $6,000 in notes, being part of the proceeds of the theft, was recovered and returned to the company. ❑

Consider: (a) in relation to the year ended 30 June last year, what deductions the company may be entitled to; (b) in relation to the year ended 30 June this year, whether the company will be assessable on the amount of $6,000. Answers: For tutorial use. No answers provided.

[Q5.35] U Dole is presently unemployed and is in receipt of Newstart Allowance. One of the conditions of Centrelink (formerly the Department of [T] Social Security) in paying these benefits is that recipients actively seek employment. To this end, Dole buys newspapers and incurs expenses to travel to job interviews. He has not yet been successful in securing a job, but for the current income year incurred the following expenses: newspaper purchases ($104), travelling expenses related to attending interviews ($650) and clothing expenses to improve his presentation ($150).

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

What deductions, if any, is Dole entitled to for the above expenses? Would your answer be different if Dole was successful in getting a job during the year? Answers: For tutorial use. No answers provided.

[Q5.36] Davis and Co Pty Ltd manufactures and sells electric toasters. During the immediately preceding income year the company sells $200,000 [T] worth of toasters. However, the company incurred operating expenses of $275,000 and made an overall tax loss for that year of $75,000 (thus paying no tax). During that income year the company had sold 100 toasters (amounting to $2,000) to Riggs Ltd. When, in January of the current income year, Riggs went into liquidation, it had still not paid for these goods. It being apparent to Davis that Riggs had no assets, in February of the current income year Davis wrote off as a bad debt the $2,000 it was owed for the toasters. ❑

Is Davis entitled to claim a deduction for this bad debt? Answers: For tutorial use. No answers provided.

[Q5.37] State whether the following would be allowable as deductions, giving reasons and citing any relevant provisions of the ITAA 1997. [T] ❑ 1. A donation by an architect of $500 to the Italian Society for the Care of the Elderly in Rome. © 2018 THOMSON REUTERS

81

[Q5.38]



Tax Questions and Answers 2018

2. A nurse is required to wear only white-coloured stockings by her hospital employer. The hospital does not provide her with the stockings and, due to wear and tear, she finds she must buy a new pair every two to three weeks. 3. A company claims as a deduction the $10,000 cost involved in installing filters on the chimney of an existing production process. Answers: For tutorial use. No answers provided. [Q5.38] What deductions, if any, are available in respect of $30,000 spent on an environmental impact study undertaken to determine whether to set up a [T] ❑ new manufacturing plant in a country area. Assuming the venture went ahead, would an amount of $500,000 spent in decontaminating the site be deductible? Assume that 30 years earlier the site had been used to dump hazardous chemicals.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q5.39] Plume is a public accountant and registered tax agent whose practice is primarily concerned with taxation work. Plume found himself unable to [T] prepare and lodge all his clients’ returns for the year ended 30 June within the prescribed period. As a consequence of late lodgment, additional tax was imposed on each client whose return was lodged late. He forwarded to those clients, on whom additional tax had been imposed, cheques payable to the Commissioner of the amount for which each had been additionally charged. ❑

Is Plume entitled to a deduction in respect of these payments? Answers: For tutorial use. No answers provided.

[Q5.40] Discuss the extent to which the following circumstances give rise to deductions: [T] ❑ 1. Pulp Ltd publishes the Morning Bugle newspaper. In June, it printed libellous matter; damages of $10,000 had to be paid. The company paid the money in October. 2. I Moove was a teacher at the University of Melbourne and resigned his position to take up duties on 1 March at the University of Wollongong. He incurred expenses of $800 in respect of transport, cartage and other costs associated with moving from Carlton to Wollongong to take up his new position. He also purchased a new briefcase at a cost of $90 and a new suit for $440. Answers: For tutorial use. No answers provided.

82

© 2018 THOMSON REUTERS

Deductions

[Q5.44]

[Q5.41] Sneezy is an anaesthetist registrar at a large private hospital. Although she does not receive an entertainment allowance, she does nevertheless [T] do quite a lot of entertaining. Her regular guests include academics, surgeons, hospital administrators and nurses. She claims that it is necessary to entertain to keep abreast of current developments in her field. Her expenses for the year amount to $1,200. ❑

What amount, if any, will be allowed as a deduction? Answers: For tutorial use. No answers provided.

[Q5.42] Annie Mals is a self-employed country veterinary surgeon who uses a four-wheel drive vehicle in the course of carrying on her profession. The [T] vehicle is used privately only on the rare occasions she visits friends on outlying farms. She keeps a small station wagon for private travel purposes, but it is used for business when the other vehicle is being repaired. ❑

Advise Annie as to what she must do to ensure that deduction claims for travelling expenses in respect of the vehicles will be allowed.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q5.43] A Family Court judge, on the advice of the Attorney-General’s Department, installed a radio-controlled garage door, steel security [T] doors and deadlocks at his residence at a cost of $2,100. The government reimbursed the judge $1,000; the judge claimed an income tax deduction of the balance. ❑

Advise the judge on the deductibility of the costs incurred. Answers: For tutorial use. No answers provided.

[Q5.44] A Bean is a lecturer in law at the University of Queensland. During the current income year he takes six months sabbatical leave. This is leave [T] on full pay which all academic staff is entitled to take to allow them to pursue research in their areas of expertise. Research is one of the criterion which is considered for academic promotion in universities. Bean spent the whole six months in London where he conducted research for his work on the comparison of Australian and United Kingdom labour laws. He rented a fully furnished apartment while in London and he also used this as his office. From time to time he employed a research assistant who worked from his apartment as well as at university libraries. Bean has kept full records for his travel, accommodation, as well as all meal expenses while in London. His wife accompanied him on the trip.

© 2018 THOMSON REUTERS

83

[Q5.45] ❑



Tax Questions and Answers 2018

Required: (a) Discuss the deductibility of the expenses incurred by Bean while in London on sabbatical leave. (b) Would your answer be different if Bean was on leave for: (i) 12 months? (ii) two years? (c) Discuss the merits of paras 101-107 of Ruling TR 98/9 and, if the Commissioner’s arguments are correct, how they impact on Bean’s claims. Answers: For tutorial use. No answers provided.

[Q5.45] Are the following items income tax deductions in the year in which they are incurred? [T] ❑ 1. The cost of purchasing non-slip shoes to wear in a commercial kitchen? 2. The cost of purchasing a white shirt worn only to work? 3. The cost of laundering the overalls provided by your employer?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

4. The cost of a hair cut to a police officer who is required to have short hair? 5. The cost of a hair cut to a television presenter? Answers: For tutorial use. No answers provided. [Q5.46] Alan is an electrician by trade, who operated an electrical maintenance business full time until 30.6.Y1, making profits in excess of $20,000 pa. [T] On that date he commenced full-time employment as a sales representative for an electrical wholesaler. He has maintained his electrical contractor’s licence and carries out minor electrical repairs, working from his home. Since then his business shows the following results:

Income Cost of sales Other expenses (including depreciation) Stock on hand at 30.6 (Opening value = $2,700) Depreciable assets

❑

Year 1 22,000 12,000 5,000 3,600

Year 2 2,300 1,659 1,439 983

$ Year 3 4,936 4,403 2,076 1,856

Year 4 3,588 3,006 2,052 2,898

Year 5 18,000 9,000 4,200 3,700

1,558

974

609

380

2,587

Advise Alan on the tax consequences of the venture. Answers: For tutorial use. No answers provided.

84

© 2018 THOMSON REUTERS

[Q5.47]

Deductions

[Q5.47] Alix Tronix is trained as an electronics technician. For personal reasons, Alix moves to a regional area where the work opportunities are limited. Alix [T] purchases a residence with a workshop attached, valued at $220,000 (built before 1985), and spends a further $16,000 on plant to set up an electronics workshop, with each item costing between $300 and $1,000. Alix purchased a vehicle for $15,000, which is used 80% in the business. Alix negotiates a contract with a local government agency to install and maintain the radio systems in their fleet vehicles; however, the income from that source is erratic and tends to come in large sums. Other sources of income are primarily from local residents requiring repairs to electronic products. In lean times, Alix worked casually as bar staff at the local hotel to pay the bills. ❑

Given the following financial data, and assuming that Alix uses the pooling method to claim depreciation, calculate the taxable income in each year.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Year 1 2 3 4 5

Gross income $ 15,000 12,000 18,000 24,000 16,000

Expenses $ 25,000 8,000 12,000 22,000 13,000

Bar income $ 17,000 8,000 9,000 7,000 8,000

Answers: For tutorial use. No answers provided.

Capital allowances and repairs Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Ch 14. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Chs 9 and 10. • Coleman et al, Australian Tax Analysis: Cases, Commentary, Commercial Applications and Questions (8th ed, Thomson Reuters, 2013) Chs 10 and 11. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Chs 8, 9 and 10.

© 2018 THOMSON REUTERS

85

[Q5.48]



Tax Questions and Answers 2018

[Q5.48] The owner of a dance hall, on ascertaining that a portion of the ceiling of the hall was in need of repairs, decided to replace the whole of the ceiling with a different but better material. The new ceiling, in addition to enhancing the appearance of the hall, improved the acoustics. The total cost of the material and of erecting the new ceiling was $240,000. It was estimated that the cost of repairing the ceiling would have been $150,000. ❑

With reference to s 25-10 of ITAA 1997, discuss the amount, if any, allowable as a deduction for income tax purposes. Answers: see [A5.48].

[Q5.49] Tom Scavenger buys a large second-hand engine-driven item of plant for use in his manufacturing operations for a cost of $7,000. However, when he tries to use it he discovers that it won’t operate because two large cylinders in the engine are broken. He has the broken cylinders repaired at a cost of $500. ❑

Is this expenditure deductible? Answers: see [A5.49].

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.50] What amount is allowed as a deduction for the decline in value of the following items purchased during the current income year by a small business taxpayer and used solely for the purpose of producing assessable income? 1. A lathe purchased on 1 July at a cost of $24,000, estimated to have a life of seven years. 2. A car purchased on 1 June at a cost of $80,000, estimated to have a life of six years. 3. A computer software program with an effective life of three years purchased on 1 July costing: (a) $600; (b) $275. Answers: see [A5.50]. [Q5.51] During the current income year a taxpayer ceases to hold the following depreciating assets: Item Office equipment Computer Diamond head drill 86

Cost Adjustable value Termination value $ $ $ 10,000 7,000 6,000 3,000 0 500 1,000 900 1,100 © 2018 THOMSON REUTERS

Deductions ❑

[Q5.54]

What amounts, if any, are assessable or deductible in respect of these balancing adjustment events? Assume all depreciating assets were used for taxable purposes. Answers: see [A5.51].

[Q5.52] Bill Farmer, a primary producer, incurred the following expenditure during the current year: (a) A second-hand tractor purchased from an associate (his brother Sam) for $24,000. Sam had determined an effective life of six years of which four years remains, and had used the diminishing value method to calculate the decline in value. (b) Irrigation plant purchased from his neighbour Jack, also a primary producer, for $3,000. (c) Landcare expenses incurred in June 2002, $5,000. (d) Draining swamp areas for new pasture at a cost of $4,000. ❑

What amounts qualify for a deduction for decline in value?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A5.52]. [Q5.53] On 1 October in the current income year, Rockbottom Pty Ltd purchased for $1.2 million a large warehouse in which it operated a supermarket. On enquiry, it found that construction of the warehouse had cost the vendor $700,000. The vendor had originally commenced construction of the building on 19 September 2004 and it was first opened for business by the vendor on 1 March 2005. Upon acquisition by Rockbottom, two months were spent fitting out the building for retail operations; Rockbottom opened the supermarket on 1 December of the current year. ❑

For the year ended 30 June, calculate any deductions allowable to: (a) the vendor; (b) Rockbottom. Answers: see [A5.53].

[Q5.54] Eyesag Ltd carries on a manufacturing business in a building in which the roof supports, which are of timber construction, are in need of replacement. If they are not replaced, the roof is likely to fall in. The taxpayer is unable to acquire enough timber beams at short notice to replace all of the former wooden beams. As a result, the taxpayer replaces about a quarter of the beams with steel supports. The total cost of replacement is $48,000, of which $18,000 is for the steel beams.

© 2018 THOMSON REUTERS

87

[Q5.55] ❑



Tax Questions and Answers 2018

What amount, if any, is deductible for repairs? Answers: see [A5.54].

[Q5.55] Are any of the following allowable as deductions? If so, how much and ❑ under which section of the ITAA 1997? 1. The replacement at a cost of $9,863 of the motor in a forklift truck owned by a manufacturing company. 2. Modifications costing $25,692 to an industrial shed owned by a heavy engineering repair business enabling the installation and operation of an overhead heavy-lift crane. Answers: see [A5.55]. [Q5.56] Tanya Brown sells a car which she has used for both business and private use. The taxable use percentage is 60%. In claiming car expenses she has used a combination of the “cents-per-kilometre” method (for two years) and the “log-book” method (for a further two years). The car, which cost $20,000, has an adjustable value of $7,214 and is sold for $12,000. Tanya has held the car and claimed the decline in value for exactly four years. ❑

What are the consequences on disposal of the car?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: see [A5.56]. [Q5.57] State the effect the following will have on taxable income: AC-DC Co, ❑ which is not a small business entity, incurs the following expenditure on 1 January in the current income year: Purchase of equipment to be used in manufacturing business (effective life – 20 years)

$60,000

The company ceases to hold the following assets on 30 June in the current income year: Item Machinery Building (ITAA 1997, Div 43 deductions claimed) Motor vehicle (log book method used for claiming deductions)

Cost $ 44,000 104,000

Adjustable value $ 32,000 100,000

Termination value $ 30,000 150,000

12,000

8,000

13,000

Answers: see [A5.57].

88

© 2018 THOMSON REUTERS

[Q5.61]

Deductions

[Q5.58] Alex Rival is about to go overseas on a one-year holiday. She instructs a local estate agent to rent out her home while she is away and to undertake any necessary repairs, including repainting of the whole house at a cost of about $1,800. In doing the work, minor repairs amounting to $99 were carried out and the repainting was done at a cost of $1,750. ❑

What deductions, if any, are allowed to Rival? Answers: see [A5.58].

[Q5.59] U R Rich operates a small foundry and, after encountering severe production problems over the last 12 months, seeks the advice of a consultant engineer who recommends that: • the furnace be relined immediately, either with bricks similar to those presently in use (cost $23,000) or with more modern bricks which will last twice as long (cost $35,000); • an electrically powered forklift vehicle be purchased. A new vehicle will cost $27,000 but the engineer knows where Rich can buy an identical vehicle, which has only been used for 40 hours, for $25,000; and

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• a new overhead crane be installed. With no modifications to the existing building, this will cost $60,000; if existing supports in the building are strengthened, it will cost $80,000. ❑

Discuss the income tax implications of each of the above. Answers: see [A5.59].

[Q5.60] Bert Garner sells, for $22,000, a fishing trawler he uses in his business. The vessel was purchased in October 2000 for $20,000 and, when it ceased to be held by Garner, its adjustable value was $16,000. ❑

Discuss the income tax implications of the following: (a) Garner purchasing a replacement vessel for $26,000 and using it exclusively for business purposes; (b) A partnership of Garner and his fiancée, purchasing the original trawler for $22,000. The partnership will use the trawler exclusively for business purposes. Answers: see [A5.60].

[Q5.61] A taxpayer’s machine which cost $20,000 was destroyed by fire on 1 October in the current income year, at which date the adjustable value for tax purposes was $4,000. An amount of $13,000 was recovered by way of insurance on 31 December. On 2 January a replacement machine was purchased for $24,000. © 2018 THOMSON REUTERS

89

[Q5.62] ❑



Tax Questions and Answers 2018

What will be the cost used to calculate the decline in value of the new machine for the year ended 30 June? Answers: see [A5.61].

[Q5.62] Bib and Bub, partners in a business for several years, take in a third partner, Bob. Bib and Bub have never bothered about a partnership agreement and admit Bob on the same basis. They are later told they should have formally agreed on a value for the depreciating assets transferred from the old to the new partnership. ❑

Advise Bib, Bub and Bob of the tax implications in relation to depreciating assets on varying a partnership. Answers: see [A5.62].

[Q5.63] A non-business taxpayer maintained a low-value pool with a value of $5,000 at the start of the year. During the year the taxpayer: • purchased a printer valued at $250 (used 100% for work-related purposes); • purchased a scanner valued at $600 (used 75% for work-related purposes);

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

• on 1 February purchased a new computer for $2,320 (used 75% for work-related purposes); • traded in the old scanner for $200 (used 75% for work-related purposes). ❑

Calculate the depreciation claim for the year and the value of the lowvalue pool at the end of the year. Answers: see [A5.63].

[Q5.64] Andy Mann operates a home repairs and maintenance business which would qualify as a small business entity. He has a large number of tools, which generally cost less than $6,500 to purchase. Currently his records show the following:

Business vehicle (80% business use) Three ladders Electric tools Lawnmowing tools

90

Adjustable value $ 18,000 560 3,700 1,800

Original cost $ 32,000 1,350 5,700 3,600

© 2018 THOMSON REUTERS

Deductions

[Q5.68]

On 1 September 2015 he replaced his work vehicle at a cost of $46,000. The trade-in value of the old vehicle was $14,000. During the current tax year he also purchased new electric tools valued at $1,800 and sold a lawn mower with a value of $700 for $250. ❑

Advise whether he should enter the small business system to access the small business depreciation system in respect of the plant and equipment. Answers: see [A5.64].

[Q5.65] Vali Deli Ltd operates a corner store at the bottom of a steep hill. During the current income year a runaway truck demolished the front of the [T] shop. The owners of the store are undecided whether to restore the front of the shop to its original condition at a cost of $27,500, or to rebuild it so that it has a much more attractive appearance. The cost of this latter course will be $39,800. ❑

Advise the taxpayer. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.66] Rentco Ltd owns a building which is partly used as office space and partly let for residential purposes. The building has an old slate roof which is [T] quite leaky. Both the tenants and the taxpayer’s office staff complain about the roof. The taxpayer cannot afford a new slate roof so replaces it with a corrugated iron roof. ❑

What amount, if any, is allowable as a deduction for repairs? Answers: For tutorial use. No answers provided.

[Q5.67] Park Co carries on business as a motor racing promoter and finds that flooding has caused damage to sections of its track. Repair of the track [T] would involve reconstruction of the “long straight”, at a cost of $58,000. Park decides on an alternative – costing only $32,000 – involving the construction of a bypass and reduction of the length of the track by 300 metres. The bypass was constructed with exactly the same materials as the original track. ❑

What amount, if any, will be allowed as a deduction under s 25-10 of ITAA 1997? Answers: For tutorial use. No answers provided.

[Q5.68] Furnaces Pty Ltd was advised by a local building inspector that one of the chimneys on its premises was unsafe and, unless it was repaired, the [T] factory would have to be closed. Furnaces decided that it was not feasible

© 2018 THOMSON REUTERS

91

[Q5.69]

Tax Questions and Answers 2018 to stop operations to repair the chimney, so they gained permission to build an alternative chimney adjacent to the old chimney, thereby allowing production to continue. They found that although the new chimney was substantially the same size and make as the old one, it was cheaper to build than it would have been to repair the old one. After the new chimney was erected, the old chimney was demolished.

❑

Is any amount allowable as a deduction for the cost of the new chimney or the cost of demolishing the old chimney? Answers: For tutorial use. No answers provided.

[Q5.69] O Noe leases a building for five years. He is in the business of making television commercials and needs a large soundproof room. With [T] permission of the owner, he builds a room adjacent to the original building. At the expiration of the lease, he moves to larger premises. The owner of the building signs up a new tenant two days later. ❑

Examine the income tax implications for all the parties to the leases. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.70] Explain the options available to a taxpayer to determine the “effective life” of depreciating assets. Can the effective life ever be changed during [T] ❑ the life of an asset? Answers: For tutorial use. No answers provided. [Q5.71] Pyro Pty Ltd loses all of its assets in a fire and as a result goes into voluntary liquidation. Net trading profits prior to the fire were $16,000, [T] but some of the equipment was irreplaceable and future production would have been hampered as a result of the loss of the old equipment. The equipment, which originally cost $26,000 and had an adjustable value of $19,000, was insured for $22,000. ❑

Calculate the taxable income of Pyro and indicate the amount of tax payable for the income year. Would your answer be different if the taxpayer were an individual? Explain why. Answers: For tutorial use. No answers provided.

[Q5.72] Proud, managing director of Fall Ltd, is contemplating the purchase by the company of a luxury car for his use within the business. Under [T] consideration is a vehicle costing $100,000. This may be acquired under hire purchase or alternatively may be leased for four years at $35,000 pa, residual value at the end of the period being $30,000. Proud estimates

92

© 2018 THOMSON REUTERS

Deductions

[Q5.75]

that the company could sell or trade in the vehicle at the end of four years for $45,000 or could alternatively sell it to one of the company executives for $20,000. ❑

Advise Proud of the taxation effects of the alternative methods of acquiring the vehicle and of its ultimate disposal. Answers: For tutorial use. No answers provided.

[Q5.73] On 1 January four years ago, Swanky leased a new car. It has a value of $60,000 and a leasing cost of $18,000 pa. [T] On 1 January in the current income year, on expiry of the lease, Swanky acquired the vehicle for $22,000 and immediately gave it to his son, a university student, who had no separate income. ❑

Calculate the effect of the above on Swanky’s taxable income for each of the years involved, ended 30 June. Would your answer be different if Swanky sold the vehicle to his son for $100 after using the vehicle in the business until 31 March in the current income year?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q5.74] Bristol Rovers Pty Ltd is a private company which was incorporated to promote the Bristol Rovers Australian Rules team in the national [T] competition. The company has its own licensed club and its own ground and facilities. The ground has a grandstand which at the end of the season was found to be unsafe; part of it collapsed at a critical moment during the team’s last home game. It is uneconomic to repair so the company decides to replace it with an entirely new stand (an exact replica of the old one). The cost of the new stand is $4.5 million. ❑

Is Bristol Rovers entitled to any deductions as a result of building the grandstand? Answers: For tutorial use. No answers provided.

[Q5.75] Damp Mines NL carries out bauxite mining activities at Gove, NT. The ore is mined some 10 km inland and is transported by rail to the sea [T] where it is mechanically loaded on to waiting ships. At times some of the ore is spilled into the harbour. It is later dredged from the bottom of the harbour when the harbour is deepened and all dredged material is used to fill swamp land. This land will later be used as a storage area for ore. The accountant at Damp Mines asks whether any of the following expenses for the year ended 30 June are deductible for tax purposes.

© 2018 THOMSON REUTERS

93

[Q5.76]



Tax Questions and Answers 2018 Item Rail link Locomotives (two) Ore wagons (100) Harbour fees Harbour deepening Harbour dredging Item Bulk ships (four) Clearing of swamp Loading equipment Wharf and jetty

❑

$ 9.7m 2.4m 5.0m 25.6m 4.8m 1.2m $ 100.0m 0.5m 16.0m 22.0m

Advise the accountant. Assume all expenses were incurred during the current income year.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q5.76] On 1 July four years ago, A Cutlass purchased a car for $17,000, solely for use in his business. For the next two income years he was entitled to, [T] and claimed, 100% of actual expenses and 100% of the deductions for the decline in value of the car. He used the diminishing value method to calculate the decline in value of the car. For the third and fourth years he claimed deductions in respect of his car on a per km basis under s 28-25 of ITAA 1997. The car was then sold for: • $9,689; • $3,133. ❑

Indicate the balancing adjustment, if any, under s 40-285, or any special provisions. Answers: For tutorial use. No answers provided.

[Q5.77] On 31 January in the current income year, Watta Blow purchased a row of old shops for $250,000 and completely restored them for a further cost [T] of $500,000. Six months after opening for business, fire swept through all the shops; they were subsequently demolished. ❑

Discuss the tax implications (other than capital gains tax) for Blow if: (a) Blow was uninsured; (b) insurance received was $400,000; (c) insurance received was $520,000. Answers: For tutorial use. No answers provided.

94

© 2018 THOMSON REUTERS

[Q5.80]

Deductions

[Q5.78] What amounts are deductible in the following circumstances? On 1 July of the current income year Cecil Hook purchased for $50,000 a second[T] ❑ hand fishing trawler. Similar trawlers when new have a life expectancy of eight years. However, due to its poor state it is expected to last for only five years. Hook spends $3,000 reconditioning the motor and $20,000 fixing the hull to make the boat seaworthy. These costs and $2,000 for repainting ensure that the boat is new and ready for Hook’s newly established fishing business. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q5.79] Ray and Jayne purchased a residential rental property two years ago at a cost of $185,000. During the current income year the property was rented to [T] a Mr I M Sneaky for $200 per week. Unfortunately, Ray and Jayne received a telephone call from their real estate agent advising them that Mr Sneaky had left the country owing six weeks’ rent. Furthermore, he appears to have had a party before he left, causing some damage to the property. Ray and Jayne incurred the following expenditure to rectify the damage:

Professional cleaning Replace lounge room carpet Repainting of kitchen Repairing holes in walls New stove Replace plants in the garden

$ 600 700 400 900 800 300

After the work was completed, Ray and Jayne decided not to rent the property out again, but to live in it themselves. ❑

Advise Ray and Jayne as to the treatment for taxation purposes of the above amounts incurred. Are they entitled to a tax deduction for the rental income owed to them? Answers: For tutorial use. No answers provided.

[Q5.80] Big Buyer has purchased the following assets during the year for use in a business. [T] 1. A microwave for the staff room, costing $295 on 1 March. 2. A computer, costing $2,900 on 1 February. 3. A printer, costing $760 on 1 March. 4. A fridge for the staff room, costing $750 on 1 October. The old fridge, which was in the low-value pool, was sold for $200. © 2018 THOMSON REUTERS

95

[Q5.81] ❑



Tax Questions and Answers 2018

Big Buyer has a general small business asset pool with an opening balance of $3,600 at the start of the year. Advise the depreciation that can be claimed for the year. Answers: For tutorial use. No answers provided.

[Q5.81] Jo is an architect and uses the following equipment in her business:  [T] Office equipment: the written down value of the assets at 1 July was $6,400. The effective life was seven years, on a diminishing value basis.  Additional plant purchased during the current tax year included: • Printer – 1 April $600. Effective life four years. • This replaced a printer on hand. The retailer gave a cash rebate of $100 for the old printer, which had a written down value at 1.7 of $470 (not included above). It has been depreciated at 33.33% DV. • DVD Writer – 1 February $290. Effective life five years. • Computer – 30 November $2,600. Effective life four years.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

❑

Required: Calculate the depreciation deduction available to Jo, assuming that Jo is a small business entity. Answers: For tutorial use. No answers provided.  

[Q5.82] Casey maintains a general small business asset pool for depreciable assets. The opening balance of the pool is $3,200. The remaining shop [T] fittings all have a depreciation rate of 15% (DV). The adjustable value at the start of the year was $25,000.

Asset purchases during the year: Fixtures (on 15 October) Cash register (on 1 July)

Cost Effective life $ (years) 800 15 3,500 6 2/3

Casey threw out the old cash register, which had an adjustable value of $276 on 1 July. ❑

Calculate the depreciation claim for the year and the closing balance of the asset pool. Answers: For tutorial use. No answers provided.

96

© 2018 THOMSON REUTERS

[Q5.84]

Deductions

[Q5.83] Lily White operates a beauty salon and seeks your assistance in preparing her depreciation schedule and balancing charges for the current year. She [T] advises you that she has the following equipment which was all acquired before 12 May 2015:

Standalone sink units (6) Pedicure chairs (10) Nail dryer (1) Display cabinet (1) Sun beds (3) ❑

Purchase date 1.3.Y1 1.9.Y1 1.4.Y2 1.9.Y2 1.4.Y3

Cost $ 2,000 each 3,000 each 7,000 8,000 3,500 each

Effective life (years) 10 5 5 15 4

Calculate the available deduction given that: (a) Three of the pedicure chairs acquired on 1.9.Y1 were sold on 1.4.Y3 for $2,800 each. (b) The sink units were depreciated on the diminishing value method. (c) Plant acquired between 1.7.Y1 and 30.6.Y2 was depreciated on the prime cost method.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(d) She wishes to keep her tax payable for the year as low as is legally possible. (e) The business is a small business entity. Answers: For tutorial use. No answers provided. [Q5.84] Kookitup Pty Ltd is a catering company that operates a large commercial kitchen to cater for functions. Each year the company needs to purchase [T] ❑ a large number of new items of cooking equipment and replaces items that are no longer viable for commercial use. Some of these items, such as tables and chairs, are sold secondhand in a clearance sale. The company has set up a low-value asset pool, and its records for the year show the following asset purchases:

Cost band $ 0–299 300–6,499 6,500+

© 2018 THOMSON REUTERS

Opening value $ 54,600 359,000 634,820

Purchases/ cost $ 9,600 36,672

Disposals (at cost) $ 2,700 24,974

97

[Q5.84]

Purchases Oven Delivery van Bain marie Fridge unit Disposals Delivery van Marquee

❑

Tax Questions and Answers 2018 Date 21 Jan 1 Mar 31 Oct 21 Dec OWDV at 1 Jul $15,700 $2,500

Purchase price $4,372 $36,590 $1,560 $12,378 Sale price $12,700 $3,600

1. Calculate the depreciation claimable for the year. 2. What difference does it make if the business is a small business entity?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided.

98

© 2018 THOMSON REUTERS

Q6  Tax accounting [Q6.1]

A soft drink manufacturing company charges a deposit on bottles of soft drink sold to customers. This deposit is refundable upon return of the empty bottle. However, the company does not keep the money received as deposits in any separate bank account, but mixes them with all other moneys received and uses them in its business in the ordinary fashion. In its accounting records the company credits a “Deposits on bottles” account upon receipt of deposits and debits the same account when refunds are made.

❑

Do these deposits represent income of the company if it normally returns its income on: (a) An earnings basis?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

(b) A cash received basis? Give reasons for your answer. Answers: [A6.1]. [Q6.2] ❑

Income tax is payable on income derived by a taxpayer during the income year. In each of the following, indicate what amount of income, if any, has been derived during the year ended 30 June: 1. An employee who receives $5,000 on 29 June, being in respect of long service leave to commence on 30 June and terminate five weeks later. The employee intends to return to work at the end of the period of leave. (Would your answer be different if the leave commenced 1 July?) 2. A landlord who receives rent in advance from tenants. Actual receipts for the year ended 30 June were $12,800, of which $1,000 was in respect of the month of July. (An amount of $900 was received during the previous year in respect of July of that year.) 3. A finance company which lent $20,000 12 months ago on the condition that the principal and interest of $2,222 are repayable in full on 1 July. Payment of $22,222 was, in fact, received on 3 July. 4. A dance instructor who opens a dancing school and receives fees in advance (but where the full course of lessons is not taken, pupils

© 2018 THOMSON REUTERS

99

[Q6.3]

Tax Questions and Answers 2018 receive a refund). Fees received during the year amount to $26,500. Of this, fees received during the year in respect of lessons still to be taught amount to $1,500. 5. A retailer who commences business on 29 June and makes his first and only sale on 30 June, selling a colour television set for $1,150. The purchaser bought by way of credit card, which meant that the retailer did not receive payment for six weeks. When he did receive it, he received the sale price less 5%. Answers: [A6.2].

[Q6.3]

T Tube engages in advanced medical research through a tertiary institution’s research company. For the year ended 30 June he completed work valued at $30,000. All of this had been paid to the company which, according to its arrangement with Tube, credited it to account no 251/77X. Only Tube was entitled to raise invoices on this account; for the current year these totalled $8,000.

❑

Briefly discuss what amount of income, if any, for the year ended 30 June has been derived by Tube.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A6.3]. [Q6.4]

Webster, Nicholls and Co is a public accounting partnership with eight partners, 15 employed salaried accountants and 20 support and secretarial staff. The partnership has offices in Brisbane, Townsville and Toowoomba. Although it is involved in some long-term projects, approximately 75% of turnover is represented by work taking less than three months to complete. Up to and including the year ended 30 June last financial year, the partnership submitted its income tax returns on a cash received basis and the Commissioner assessed them on this basis. However, due to the increasingly complex nature of their activities, the partnership has decided to submit its return for the current income year on an earnings basis.

❑

Answer the following questions: (a) Must the Commissioner accept the altered basis for returning income? What are the relevant considerations? (b) For tax purposes, in which income year are fees which were earned but not received prior to 30 June last year regarded as having been derived? (c) What treatment should be adopted in respect of the value of workin-progress (ie uncompleted work) as at 30 June this year? Answers: [A6.4].

100

© 2018 THOMSON REUTERS

Tax accounting

[Q6.7]

[Q6.5] 1. Smith has a mortgage with the ABC Bank. The interest rate is 10% pa, though this can be reduced to 4% pa if Smith forgoes interest on funds invested with the bank. ❑

If the mortgage is $100,000 and Smith invests $100,000 with the bank, what income, if any, does Smith derive? 2. Jones works in the public service. To date he has paid $20 per week to have his children accommodated in his employer’s child care centre. Together with some of his fellow employees, Smith decides not to take a $20 per week pay increase on condition that he receives free child care for his children.

❑

What, if any, are the tax implications?

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: [A6.5]. [Q6.6]

D Out commenced a university course and received $32 per week pursuant to a teachers’ training scheme. After 15 weeks he resigned from the scheme and was required to repay all allowances received. By the end of the relevant income year he had repaid all the allowances received.

❑

Assuming that no amount qualifies as exempt income, will Out be assessable on any amount for the income year? Answers: [A6.6].

[Q6.7]

A Ticka carries on a professional accounting and audit practice at Jesmond. Prior to accepting audit engagements, Ticka provides prospective clients with a statement of how fees will be billed. It provides, among other things, that: Fees, which will be billed as work progresses, are based on the time required by the staff who are assigned to the engagement, plus out of pocket expenses. At 30 June of the current income year, Ticka’s staff had completed about two-thirds of an audit of SA Ink Pty Ltd.

❑

Briefly discuss what amount of audit fees are deductible for SA Ink Pty Ltd for the year ended 30 June, given the following information: Work completed; fees billed (paid after the end of the income year) Work completed; fees not yet billed (estimated) Work outstanding (estimated) Agreed audit fee

$ 50,000 40,000 35,000 125,000

Answers: [A6.7]. © 2018 THOMSON REUTERS

101

[Q6.8] [Q6.8] ❑

Tax Questions and Answers 2018 The following foreign source income relates to an Australian resident for the current income year. How will the A$ equivalent be calculated for Australian tax purposes? 1. Business income of US$100,000, for the period 1 July to 31 December. 2. A £10,000 dividend, paid on 30 April. 3. Interest of HK$10,000, paid on 1 June. 4. Tax of NZ$30,000, paid on 30 June, in respect of income derived during the year ended 30 June. Answers: [A6.8].

[Q6.9] ❑

Which of the following types of income, if any, can be effectively alienated for income tax purposes without assigning the underlying property? 1. Dividends. 2. Interest on fixed deposits. 3. Accrued interest on debentures. 4. Royalties.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

5. Trust income received from a discretionary trust. 6. Partnership income. 7. Wages earned but not yet received. 8. Rental income. 9. Directors’ fees. 10. Life interest in a trust estate. Answers: [A6.9]. [Q6.10] A large firm of accountants carries on business in partnership. An extract from their records discloses: ❑ Sundry debtors 1 July (start of year) Cash received from clients during year Estimated value of work in progress at 30 June (end of year) Sundry debtors 30 June (end of year) ❑

$ 200,000 1,500,000 80,000 300,000

If all accounts are collected within 30 days, calculate the income derived by the partnership for the year ended 30 June. Answers: For tutorial use. No answers provided.

102

© 2018 THOMSON REUTERS

[Q6.13]

Tax accounting

[Q6.11] Ivan Brown works as a lecturer at an Australian university and during the current calendar year receives the following payments: [T] (a) $12,000, received on 30 June, being salary for the period 1 July to 31 December. Brown was leaving Australia on 30 June for six months paid leave in the USA. (b) $3,000, received on 30 June, being his employer’s contributions towards his and his family’s air fares. The actual air fares were $4,500 (being $1,500 × 3). (c) $1,000 received into Brown’s bank account on 7 July, being back pay for the period 1 January to 30 June. ❑

Comment on the assessability of these three amounts and indicate in which income year, if any, they are assessable. Give reasons. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q6.12] Bill Posters operates a fuel supply business selling home heating oil in 44 gallon drums. The oil sells for $115 if the customer does not have [T] a drum to exchange or $100 where the customer does have a drum to exchange. Where customers pay $115, Posters says he will pay $15 for the return of empty drums brought to his premises or $10 if he has to collect them. At 30 June, Posters’ books of account reveal the following:

Sale of oil Deposit on drums Less refunds on drums Total ❑

$ 100,000 15,000 115,000 3,000 112,000

Posters asks you how much he is required to include in his income tax return. Advise him. Answers: For tutorial use. No answers provided.

[Q6.13] Discuss when income is derived in the following situations: [T] ❑ 1. B Luck invests $100,000 in Sphynx Building Society. According to the terms of investment interest at 5% pa is payable on 1 May every year. However, a receiver was appointed two years ago and to date Luck has not yet received any income. 2. W Germ is a wheat farmer who, on 1 May during the current income year, signs a contract to supply the Wheat Board with 1000 tonnes of

© 2018 THOMSON REUTERS

103

[Q6.14]



Tax Questions and Answers 2018

wheat for $175 per tonne. Germ will harvest and ship the wheat in September. Answers: For tutorial use. No answers provided. [Q6.14] TownBank Pty Ltd is a large financial institution which is concerned about certain transactions. It contacts you for advice as to the taxation [T] implications of the transactions for both the institution and its clients. ❑

Given the facts as set out below, prepare your advice. (a) On 1 June TownBank regularly issues a bill of exchange to one of its clients, a steel producer (Steel Co), for $100 million. On the issue date it deposits in Steel Co’s account $95 million. In 90 days Steel Co deposits in TownBank’s account the $100 million. (b) On 1 July of the current income year it enters into a lease arrangement with Steel Co whereby it leases to Steel Co a major item of plant for a 10-year period. It expects to make a profit over this period of $1 million.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Answers: For tutorial use. No answers provided. [Q6.15] Too True to be Good Pty Ltd is the successful tenderer for the construction of an athletic village at Homebush Bay in Sydney. The village will cost [T] $100 million to build and the company expects to make a profit of around $15 million (though this depends upon good weather, good industrial relations and low inflation throughout the construction process). If the village will take five years to build: ❑

(a) When will the company derive the $15 million profit?

❑

(b) How would your answer differ if you were told that: (i) no payments were to be received until completion of the project; (ii) half the payment was received at the outset and the balance was paid on completion; (iii) little work (5%) is likely to be done in the first year; in years 2–4 about 20% pa will be done; and the balance of the work will be done in the final year.

❑

(c) How would your answer differ if you were informed that the last time the company embarked on a project of this nature a loss was incurred?

❑

(d) How would your answer differ if you were told that the company was liable for defective work for a period of seven years after completion of the project and that past experience suggests that on average this costs the company about 1% of the construction cost? Answers: For tutorial use. No answers provided.

104

© 2018 THOMSON REUTERS

Tax accounting

[Q6.18]

[Q6.16] An Australian resident borrows from a Swiss bank in Swiss francs. The money is used to buy an investment condominium (home unit) in Hawaii. [T] Rental income from the condominium is remitted to Australia on the last day of each quarter. Interest on the Swiss loan is payable on 30 June each year. ❑

Consider what conversion rates should be used in respect of the rental receipts and interest payments. Answers: For tutorial use. No answers provided.

[Q6.17] AK Punctcha is a medical practitioner who operates on her own account. At 30 June of the current income year, fees received amounted to [T] $150,000 and debts outstanding were a further $20,000. On advice from a person she met at a nightclub, Punctcha decides to assign the book debts to her brother in Taiwan. ❑

Advise Punctcha whether there are any advantages for tax purposes. Answers: For tutorial use. No answers provided.

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[Q6.18] [T] ❑

❑

1. On 15 June of the current income year JL Hooker buys a house to be let for rental purposes. On 20 June he engages a firm of real estate agents to manage the property for him. On 29 June it secures a tenant who pays a bond of $500 and the first month’s rent of $1,000. On 3 July Hooker receives from the agent a cheque for $930 (being the $1,000 less commission of $70). For the year ended 30 June how much income, if any, has Hooker derived? 2. At a cost of $100,000, Adam purchases a block of land in his own name. He is then struck by a car and goes into a coma for six years. During this time his wife at a cost to herself of $120,000 builds a house on the land and rents it out.

❑

For tax purposes, whose income is it? 3. Sly, Sly and Sly carry on business as solicitors. Their annual fees are in the order of $7 million. During the year they incur expenses on behalf of clients (eg application fees, filing fees, etc). When they bill their clients they recover these fees from their clients. At 30 June in the current income year some $34,000 has been paid out for clients but as the work has not been completed, the clients have not been billed.

❑

In which year will these expenses be claimed? Answers: For tutorial use. No answers provided.

© 2018 THOMSON REUTERS

105

[Q6.19]



Tax Questions and Answers 2018

[Q6.19] Which of the following amounts are included in taxable income for the year ended 30 June 20X2? [T] ❑ 1. An accountant who operates as a sole trader invoices a client in June 20X2. Payment is received in July 20X2. 2. An accounting firm, with 20 partners and 130 employees, undertakes work in June 20X2. The account is issued in June and paid in July 20X2. 3. An employee who is going on long service leave receives a payment in June 20X1 to cover leave for the months of July, August and September 20X1. The employee does not bank the cheque until July 20X1. 4. A dividend received by shareholders in October 20X1. The dividend relates to company income for the year ended 30 June 20X1. Answers: For tutorial use. No answers provided.

Small Business Entities

Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Useful References

• Sadiq et al, Principles of Taxation Law 2018 (Thomson Reuters, 2018) Chs 14 and 17. • Cooper et al, Income Taxation: Commentary and Materials (8th ed, Thomson Reuters, 2017) Ch 12. • Deutsch et al, The Australian Tax Handbook 2018 (Thomson Reuters, 2018) Ch 25.

[Q6.20] Your client has heard that small business entities have a number of concessions available. His financial statements for the financial year show the following:

Net profit (after depreciation $17,000) Accounts payable Accounts receivable Turnover 106

$ 150,000 25,000 55,000 500,000 © 2018 THOMSON REUTERS

[Q6.21]

Tax accounting Opening stock Closing stock Depreciable assets at 1/7 (WDV,