QUESTION ONE – Residence and Source
Lesley is an English backpacker who comes toAustraliaon a working holiday with her husband Maxwell. Their intention is to stay six months and then return to theUK. However, she has found an office job here and would like to stay for at least twelve months. Maxwell is an artist and he has also found a job in an art gallery and is planning to have an exhibition of his works.
They both arrived on 17 January 2015 and do not intend to return until 30 April 2017 at the earliest. They do not own a house in theUKand were renting. Their personal effects are stored in theUKwith Lesley’s mother who also looks after Lesley’s cat, Oliver.
While inAustralia, Lesley and Maxwell rent an apartment in the city. They have also bought a second hand car as they like to explore the Victorian countryside in the weekends. They also plan to travel toNew Zealandbefore they return to theUK.
They have told you that they are fond of the beach side suburbs ofMelbourneand would like to buy a beach property there to live whilst inMelbourneand retain it as an investment property even if they do decide to return to theUK.
Advise Lesley and Maxwell whether they are regarded as Australian residents for the year ended 30 June 2017.
You are required to refer to relevant case law, legislation and tax rulings.
QUESTION TWO – General tax principles
Sanjay started work as a geologist for a mining company. He was to be based inBrisbanebut would be required to travel withinAustraliaand overseas when required.
Sanjay started with the company on 1st of February 2017.
His employment consisted of the following:
- Cash salary of $55,000
- Contributions to superannuation of $4,500 paid by the employer,
- Payment of his subscriptions to the Australian Geology Association of $250,
- A travel allowance of $1,200 to cover travelling for work purposes,
- A uniform allowance of $990 to cover the cost of having to dry-clean his work clothes and pay for his safety shoes,
Sanjay comes to you as the company accountant and wants you to explain the taxation consequences of the above assessable income and deductions.
QUESTION THREE – GST
FNZ Australia Pty Ltd is a company that carries on business inBrisbane. It operates a business of providing detailed research reports to financial advisers to assist them in providing financial advice to their clients. The business is registered for GST. Unless otherwise stated, all amounts below are inclusive of GST.
During the year ended 30 June 2017 the following monies were received and expenses paid from the company’s bank account:
Fees from clients $6,500,250
Bank interest on term deposit $15,269
Dividends received from investment in New Zealand $8,726
Salaries to staff $895,326
Bank fees $19,257
Consultants fees $168,824
Accounting fees $35,647
Legal fees $28,964
Purchase of luxury motor car $85,700
Purchase of computer $3,250
Payment of school fees for one of the senior
Executive’s children $16,500
Dividend received from New Zealand investment was fully franked.
The computer was only used 30% for private purposes and the balance of the time was for work purposes.
The outstanding debtors as at 30 June 2017 were $450,589. This amount is GST exclusive.
All providers of goods or services to FNZ Australia Pty Ltd provided tax invoices.
Effective life of cars generally – 8 years, computers generally 4 years.
Calculate the net GST payable or refundable by FNZ Australia Pty Ltd for the year ended 30 June 2017.
QUESTION FOUR - Tax Reconciliation required
Charcoal Foods Pty Ltd is a private company owned by Con and his wife Eva. They migrated from Greece 40 years ago. In Melbourne they established a successful chicken take away shop. They sold the shop in July 2008 for a significant sum. In 2014 an opportunity came up to set up a new retail shop in a newly built shopping centre in the south western suburbs of Melbourne. This business was established on 1 July 2016.
Con and Eva and their 2 daughters in law Liza and Danielle took the opportunity to set up a new business selling roast chicken, salads, chips and wedges.
The company is registered for GST.
For the year ended 30 June 2017 their accountant Nic prepared the following financial accounts. The figures in the financial accounts are exclusive of GST.
Sales of chickens $1,234,052
Opening stock 0
Closing stock 18,000
Cost of sales $137,000
Gross profit $1,097,052
Administration expenses 485,375
Selling expenses 324,678
Total expenses 810,053
Net profit for accounting purposes 286,999
In preparing the accounts, Nic provided the following information:
This includes the following items:
Accounting depreciation $55,351
Provision for annual leave $19,752
Provision for wastage of food $13,578
Fine for breaching Health and Safety regulations $4,250
Prepaid rental for the shop (Note 1) $18,000
Wage to Brad (Note 2) $25,750
Loan application fee charged by Bank (Note 3) $4,500
Interest on loan $10,417
Repairs (Note 4) $25,780
Normal operating expenses $307,997
Total administration expenses $485,375
Selling expenses are made up of the following:
Bad debts (Note 5) $2,985
Purchase of consumables (Note 6) $7,953
Advertising in the local paper $12,758
Cleaning costs $22,589
Normal operating costs $278,393
Total selling costs $324,678
The company prepaid the 18 months rent for the shop for the period 1 July 2016 to 31 December 2017.
Brad is Liza’s young son aged 15. He is still at high school. The task he undertook was helping his grandmother Eva to prepare the salads after school. He only works for 2 hours a day for three days a week. The normal pay for a person to do this job would have been $6,670.
The company borrowed $250,000 from the bank. The bank charged a loan application fee of $4,500. The loan is for 10 years. The funds were borrowed on 1 July 2016.
The repairs consisted of the following:
- $800 to replace the shop window damaged by an act of vandalism. This was done on 1 January 2017.
- $1,600 to install a new awning at the front of his shop. This was done on 1 January 2017
- $15,000 spent on initial repairs to the freezer soon as moving into the shop on 1 July 2016.
- $4,300 spent to put in a sprinkler system to meet Fire Safety Regulations on 1 January 2017
- $4,080 on maintenance costs on the fryer, roaster and register caused by normal wear and tear on 1 January 2017.
Effective life for all items is 5 years
The bad debts represent a customer that they sold chickens to for a wedding on credit that refused to pay on the grounds that the chicken was too salty.
This represents the purchase of cleaning aids, serviettes and plastic forks.
In preparing the accounts Nic advises you that the following items were not taken into consideration in preparing the above financial accounts:
Fit out of shop:
Chicken Roaster purchased on 1 July 2016 at a cost of $55,600. The cost of installation was $6,696. The effective life of the machine is 5 years.
Counters and benches were installed on 1 July 2016 at a cost of $25,780. The effective life is 8 years.
Cash register purchased on 1 July 2016 at a cost of $3,750. The effective life is 6 years.
A minivan for deliveries - this was purchased on 1 January 2017. The cost was $18,750. The effective life is 8.5 years.
The above figures are inclusive of GST.
The value of the closing stock as at 30 June 2017 is:
Market value $11,890
In addition Con and Eva, Liza and Danielle consumed some chicken for their own consumption. The estimated personal consumption amount is $1,800.
In addition, $1,250 of chicken wings has been paid for on 30 June 2017, and is in transit on a truck from Ingham in Queensland to Sydney and would arrive in their shop on 1 July 2017. They had paid for the chicken wings and the cost has been taken up in the purchases figure in the financial accounts prepared by Nic.
Please calculate the taxable income for the company for the year ended 30 June 2017. You are required to provide a brief explanation each item and why it is included or excluded.
The company wishes to minimise its tax liability and claim the maximum tax deductions allowed under the tax law.
QUESTION FIVE – General tax principles
The following shareholders come to you for advice:
q A resident individual
q A non-resident individual living in Singapore
q A resident private company
During the year ended 30 June 2017 they all received the following income:
q Dividends from Australian Bank Ltd franked to 75%. The cash amount of the dividend was $8,500
q An unfranked cash dividend from Industrial Company Ltd of $7,200
q A cash dividend from Airbus Pte (a French based company) of $1,800. Foreign withholding tax of $200 has been deducted by the French Tax authorities.
q Rental profit from an Australian based property of $3,500
Assume that the resident individual is on the top tax rate of 45% plus the Medicare levy of 2%. The company tax rate is 30%.Australiahas a double taxation agreement withSingapore.
Calculate the Australian tax refund or tax payment for all three taxpayers.
QUESTION SIX – General tax principles
The Gardenias Family Trust is a discretionary family trust with 2 adult beneficiaries, Emma and Peter.
During the year ended 30 June 2017 the activities of the trust gave rise to the following:
Loss from rental property ($6,000)
Interest income from Term Deposits $4,000
Cash received from fully franked dividends $14,500
The trustee of the trust resolved to distribute 50% of the trust income to Emma.
Emma also has the following income:
Net salary of $30,000 from which tax instalments of $2,400 have been deducted under PAYGW
Her work related expenses were $275. She has private health cover with hospital cover.
She is also looking after her invalid father, who receives an invalid pension, and who lives in a granny flat at the back of her house. He also derived other income of $7,500 for the year.
Assume Emma and her invalid father s’ Adjusted Taxable Income (ATI) is the same amount as their Taxable Income.
Assume Emma is a resident for tax purposes.
A) Calculate the taxable income and tax refund or tax payment for Emma for the year ended 30 June 2017
B) Would your answer differ if the Gardenias Family Trust made a rental loss of $36,000?
QUESTION SEVEN - CGT
As at 30 June 2017, Joe Buck had disposed of the following assets:
(a) A holiday house. The house was purchased on 1 March 2012 for $200,000 and was sold for $600,000. At the time of acquisition Joe spent $2,000 on surveyor’s cost, $15,000 on stamp duty and $3,000 for a valuation. On 1 February 2013, Joe spent $100,000 adding a second floor to the house. On 15 June 2014 he spent $20,000 in a successful court action to establish that his neighbour’s new fence had encroached on Joe’s property by 15 centimetres. He annually rented the property out to Mr Ratso Risso for a total of six months during school holiday periods. At all other times he used it personally. During the period that he owned the house he had paid a total of $80,000 in interest, rates and insurance. He had claimed $20,000 of the $80,000 in respect of interest, rates and insurance as a tax deduction in his personal tax return in respect of the six months that he had rented the property in the 2016/17 financial year
(b) A rare folio/manuscript he bought at Sotheby’s Auctions on 1 January 2015 for $12,000. He sold for $22,000.
(c) A painting that he had bought on 2 February 2011 for $20,000. He had recently had the painting valued at $40,000. He gave it to his daughter as a wedding present on 30 January 2016.
(d) A house and land. He had bought the property as vacant land on 1 June 1984 for $100,000. He completed the building of a house on the land on 30 May 2007 at a cost of $200,000. He sold the house and land for $800,000. Independent valuations indicate that the value of the land at the date of sale was $500,000.
Joe has unabsorbed net capital losses from previous years. The unabsorbed losses are:
(i) $15,000 capital loss from the sale of a rare coin
(ii) $220,000 capital loss from the sale of shares.
Joe had no other assessable income for the income year ending 30 June 2017. He made a trading loss of $25,000 in respect of the operation of his 10 years in the supermarket business for the year ending 30 June 2017.
Calculate Joe’s net capital gain and his taxable income for the year ending 30 June 2017.
QUESTION EIGHT – Not Reconciliation style question, full tax statement required
Your client, Bill Jones runs a small financial planning business in the suburb of Gowrie, Canberra. The business is structured as a discretionary trust with his company, GWC Pty Ltd as the trustee of the “Jones Family Trust”. Bill Jones and his wife Mary are the two Directors of the trustee company. The trust not only has an ABN and TFN but is also registered for GST. All amounts below are exclusive of GST.
198,000 Consulting income
17,000 Rental income from an income producing investment apartment
1,000 Interest on Bank deposits.
8,000 Fully franked dividend
15,000 Body Corporate fees on income producing property
25,000 Part-time employee salary
5,000 Interest on money borrowed to purchase the income producing investment apartment
5,000 Borrowing expenses relating to a new loan to acquire the investment apartment. The loan is for 10 years and began on 1 July 2016
1,100 Fees paid to a registered Tax Agent
14,000 New item of plant purchased 1 July 2016 with an estimated life of 20 years
1,200 New item of plant purchased 1 January 2017 with an estimated life of 3 years
1,000 Travel to and from work
(a) The Trust has a carry forward tax loss from an earlier income year of $25,000.
(b) Stock at beginning of the year was valued at $20,000
Stock at end was: Cost $16,000
Market selling value $19,000
Jones does not make an election under S.328-285 (2) of ITAA97.
(c) Bill Jones and his wife Mary have resolved to distribute 50% of the taxable income of the trust (and the imputation credits) to Bill and the balance to Mary.
Bill Jones – Personal Tax details
2,000 Exempt income from part-time military service
2,000 Private Health fund refund
6,000 Fully franked dividend received from an Australian company
2,000 Rates on his principal residence
5,000 Doctors fees for Bill Jones
3,000 Doctors fees for Bill Jones’s wife, Mary
6,000 Maintaining Bill Jones’s invalid father (receives pension) who is a permanent resident of Australia and has a separate ATI of $1,000 from other income.
(q) Bill Jones has a carry forward tax loss from an earlier income year of $1,000.
(b) Bill Jones and his family are members of a private health fund and have private hospital insurance.
You must first calculate the taxable income of the trust for the year ended 30 June 2017 and then calculate Bill Jones’s tax refund or tax payment for the year ended 30 June 2017. Do not calculate the tax refund or tax payment for Mary Jones. You should explain your treatment of each item in this question. Figures can be rounded to the nearest dollar.
Assume Bill and his invalid father s’ Adjusted Taxable Income (ATI) is the same amount as their Taxable Income.
Assume Bill is a resident for tax purposes.
QUESTION NINE – General tax principles
Wendy works as an assistant accountant for Lee Shirts Pty Ltd. Wendy is divorced from her husband and lives with her daughter, Sue. Wendy does not have private health cover. Wendy’s personal records reveal the following:
$45,000 Net salary from employment with Lee Shirts Pty Ltd ($8,000 has been deducted as PAYG withholding)
$1,000 Dividend from BHP shares franked to 75 per cent.
7,500 Medical expenses for Wendy and her daughter, Sue, aged 6 years.
5,200 Maintaining Wendy’s invalid mother Elizabeth (who receives an invalid pension). During the period 1 July 2016 to 30 June 2017 Elizabeth derived $2,500 from a tax-exempt invalid pension and $500 from a capital gain.
700 Fees for membership of Accounting Association
Calculate the tax refund or tax payment for Wendy for the 2016/17 Income year
Assume Wendy and her invalid mothers’ Adjusted Taxable Income (ATI) is the same amount as their Taxable Income.
Assume Wendy is a resident for tax purposes.
QUESTION TEN – Not Reconciliation style question, full tax statement required
Barry Hall and Brett Stoker are adult Australian residents. On 1 July 2005 they formed a partnership called “Bash and Biff” to run a sports supply business. The partnership supplies football wear and equipment to football clubs inAustralia. The business is registered for GST. All amounts below are exclusive of GST.
The partnership accounts for the business for the year ending 30 June 2017 disclose the following financial details:
The following receipts and expenses are exclusive of GST unless otherwise stated.
Gross trading receipts $3,900,000
Capital gain from sale of shares held in an Australian internet company 20,000
– see note (ii) below
Cash dividend from BHP 10,500
See note (iii) below
Interest income from Bank of China 11,250
See note (iv) below
Salary to Barry 65,000
Interest on loan of funds by Brett 10,000
Salaries paid to employees 950,000
Rent and power 30,000
Purchase of trading stock (also see note (v) below) 620,000
Superannuation to staff 85,500
Superannuation paid on behalf of Barry 25,000
Purchase of treadmill and exercise bikes (see note (vi) below) 180,000
Interest on bank overdraft 18,623
Provision for long service leave (see note (vii) below) 25,984
Provision for bad debts (see note (viii) below) 22,000
Notes - additional information in respect of the partnership.
(i) The partnership agreement stipulates that Barry and Brett share profits and losses in respect of both income and capital gains and losses on the basis of 3/5 to Barry and 2/5 to Brett.
(ii) The partners purchased the Australian internet company shares in January 2006 and sold them on 31 May 2017.
(iii) The dividend was declared by the company to be 65% franked.
(iv) The Bank of China withheld AUD $1,250 from the gross interest
(v) In addition to the purchase of trading stock deduction in the figures above, there was also $370,000 trading stock at the beginning of the financial year. The trading stock at the end of the year was valued as:
Market value $860,000
Replacement value $846,000
(vi) The Treadmill was purchased on 1 July 2016 for $65,000 and the Exercise Bikes on 1 January 2017 for $115,000. The effective life for the equipment is 8 years. The figures are exclusive of GST. The items are used 100% for business purposes.
(vii) During the year the partnership paid out long service leave to staff of $13,507.
(viii) During the year the partnership wrote off as bad debts $6,849.
Calculate the taxable income of the partnership Bash and Biff for the year ended 30 June 2017.
The partners advise you that they wish to claim the maximum deductions and reduce the profit as much as possible of the partnership.
Calculate the share of the taxable income of the partnership for both Barry and Brett for the year ended 30 June 2017.
For each item you must give a brief reason that explains your inclusion or exclusion of any of the above items.
You must justify your answers by referring to case names and legislation.
QUESTION ELEVEN - CGT
During the 2016/17 financial year Carol disposed of the following assets:
(a) A holiday house. The house was purchased on 1 October 2011 for $350,000 and sold for $450,000. The contract of sale was entered into on 5 May 2017 and settlement is to take place on 5 June 2017. The stamp duty and legal fees at the time of acquisition were $20,000. The advertising and estate agent’s fees at the time of disposal were $8,000. On 1 April 2012, Carol spent $15,000 adding a second bathroom to the house. Carol rented the house out for 6 months, from 1 October 2016 to 1 April 2017. During this period she derived rent of $10,000. At all other times she kept it for private use by her family. During the period that she owned the house she had paid a total of $75,000 in interest, rates and insurance. She had claimed $15,000 of the $75,000 as a tax deduction for the year ended 30 June 2017.
(b) Vacant Land. Carol sold vacant residential land originally purchased on 16 June 1984 for $100,000. She initially intended to build a house on the land, but lacked the finance to do so. The land was sold for $500,000. The contract of sale was entered into on 28 May 2017 and settlement is to take place on 30 August 2017.
(c) A Harley Davidson motor cycle. The motor cycle was purchased by Carol for use by her husband for $130,000 on 1 July 2008. It was a special and rare motor cycle with only 4 made in 1956 and based on the ‘Easy Rider’ film. It was sold for $220,000 on 12 December 2016.
(d) A painting purchased for $20,000 on 1 May 2002, sold $30,000 on 30 April 2017.
(e) A horse. Carol used the horse for recreational purposes. Carol had bought the horse on 1 May 2006 for $6,000. She sold the horse to a horse trainer for $16,000 on 26 March 2017.
(f) On 1 July 1996, Carol purchased a house for $300,000, which she used as her main place of residence. On 1 July 2000 she left Australia to take up a job in London. During her stay inLondonshe did not buy a house, but instead lived in rented accommodation. She returned to Australia and began living in the house again on 30 June 2006. During her absence fromAustralia, a friend lived in the house and paid Carol rent of $12,000 per year. Her friend also paid all the outgoings on the house such as the rates, insurance and electricity. The house was sold for $600,000 on 26 May 2017.
(g) Carol bought BHP shares 2 June 2011 $45,000 sold on 2 May 2017 for $90,000.
Carol has capital losses she is carrying forward from previous years of $15,000 from the sale of an antique and $30,000 from the sale of some shares.
Calculate Carol’s net capital gain for the year ending 30 June 2017.
QUESTION TWELVE - GST
Janet Lee and her husband, Rick run a car restoration business under their own names. They are registered for GST.
The following figures are GST inclusive.
During the quarter from 1 April 2017 to 30 June 2017 they derived the following income:
Proceeds received from sales $98,750
Staff salaries $13,000
Rent of commercial premises $12,600
Tea and coffee for staff $185
Consumables for cars $850
Bank fees $375
School fees for their daughter $19,800
Dentist fees for their son $1,320
PAYGW paid on salaries to staff &