Taxation Law and Practice - Question 1

ABC Pty Ltd sells upmarket washing machines. It had $200,000 stock on hand at the beginning of the 2017/2018 financial year. It purchased $50,000 of additional trading stock during the income year. The closing stock on hand was $130,000.

At the beginning of the 2018/2019 financial year ABC Pty Ltd had $130,000 stock on hand. It did not purchase any stock during the year as it was having financial difficulties. In fact, in September 2018 ABC gave two washing machines to a creditor as payment in full of the debt it owed to that creditor (ABC owed the creditor $2,000). Each washing machine had cost ABC $1,000 and ABC would usually sell each washing machine for $1,750.

ABC did not sell any stock during the 2018/2019 financial year. Towards the end of that year, a flood swept through the warehouse and all stock was destroyed. ABC did not purchase any replacement stock.

Required:Advise ABC of the tax implications for each of the 2017/2018 and 2018/2019 financial years based on the information above. Where appropriate, support your answer with legislative authority.

Taxation Law and Practice - Question 2

If you answer question 2, please answer question 2(a) and (b)

Fred has been unemployed for six months. He has been using the Jobs R Us Pty. Ltd. employment agency for the past four months to try to find employment. In March of this year, a new case manager, Bert, was given the task of finding a job for Fred. Within a week, Bert, had found Fred a full time job. Fred bought a $500 gold watch and gave it to Bert to say thank you.

Advise Bert as to whether the watch is assessable income. Refer to case law and legislation in your answer. 10 marks

Gifts within Australia are generally not taxable based upon the provisions currently existent within the ITAA36 and the ITAA97. However, Section 78A of ITAA36 includes provisions that disallow certain gifts from being allowable deductions. It is important to understand the different characteristics that make up a gift, as neither the statutes nor any Taxation Rulings put forward an explicit definition of a gift. The judgement passed in the matter of “FCT v McPhail (1968) 117 CLR 111” outlines gifts as those generally understood in ordinary parlance. The general rule of law considers gifts to comprise of 4 important characteristics, which include a transfer of the beneficial interest in property, voluntary nature, arising of the transfer by way of benefaction and no receiving of any benefit or advantage in way of return.

Considering the characteristics, gold watch received by Bert amounting to $500 would not have any specific imposition of liability when calculating his assessable income. While Bert received the watch for assisting Fred in getting a job, there are no statutory or contractual obligations that are in place. Fred had the complete choice of giving the gift to Bert and decided to make the gift out of his free will.

In addition to Bert’s fortnightly salary, his employer pays his telephone and internet package of $120 per month, and as a reward for being Employee of the Month for June, Bert received a $500 bonus.

Advise Bert of the tax consequences of the above employment package. Refer to case law and legislation in your answer

The $500 bonus received by Bert in addition to his fortnightly salary would be considered as an addition to the salary amount and be taxed in accordance to his marginal tax rate. Salary is defined in section 136(1) of FBBTAA which includes the remuneration for personal exertion. The Australian Taxation Office states that salary includes the normal regular pay, bonuses, parental leave pay and other aspects. Naturally, the bonus amount of $500 would be considered a part of his salary that he received for his efforts during that month.

However, the $120 per month paid for the telephone and internet package would be considered as an allowance. It is important to note that allowances are considered as assessable income and increase the gross income of the employee. However, the work related expenses or the amount Bert uses from the $120 to meet professional obligations would be deductible from his assessable income as a general deduction under section 8-1 of ITAA 97.

Taxation Law and Practice - Question 3

On 6 November 1985, Patricia bought a property in South Yarra. This property included two old tennis courts next to the house, which were in poor condition. She purchased the property for two reasons:

  • So that she and her family could live in the house; and
  • So that she could build two apartments on the land where the tennis courts were, and sell them at a profit.

After Patricia purchased the property, the tennis club next door to her property in South Yarra offered to buy the old tennis courts from her, but only if Patricia restored them to good condition. Patricia accepted the club’s offer rather than going ahead with her plan to build and sell the apartments.

Patricia spent $80,000 on preparing the tennis courts for sale. This involved a great deal of work. She had to resurface the tennis courts, and build a new fence between her house and the tennis courts. She then sold the tennis courts to the tennis club in the current tax year for $200,000.

Required: Please discuss whether Patricia would be assessable on the $200,000. Where appropriate, refer to case law and legislation in your answer

The property refers the house and the land on which the house was built along with the two old tennis courts. Any acquisition of an asset after September 1985 are subject to CGT impositions, and considering that the tennis courts were sold within the current tax year, the 50% deduction clause would not be applicable and the entire amount would be considered for the assessable income. Sec 25.10 of ITAA97 states that deductions are allowable when repair expenditures are incurred in the year of income and the expenses are not of capital in nature. The case study presents that the tennis courts were in a poor condition and it could be assumed that they were not usable. The tennis courts were bought by Patricia along with the house with the objective of building two apartments that she could see for a profit.

While the $80,000 would be considered for the purposes of the assessable income, the amount required to for making the tennis courts usable in terms of the fact and degree of the expenditure towards restoring them would be allowed for a deduction. The additional expense incurred in building the fence between her house and the tennis courts would be considered as an improvement as it was not related to repairing or restoring the tennis courts to the purposes they are meant for. The costs for the fence would be considered within the taxable income along with the $200,000 while the cost for the repair of the tennis courts would be deducted. A relevant case law in this regard is the judgement passed in “Lurcott v Wakely & Wheeler [1911] 1 KB 905” where the nature and extent of the work done for repairs was considered.

Taxation Law and Practice - Question 4

Bert spends $10.60 a day travelling to work, and a further $65 a day sending his daughter Belle to a childcare centre. Bert has just received the monthly account for the childcare centre totalling $1,625, which he needs to pay immediately.

Bert owns a newspaper publishing company. He has paid a membership fee with respect to his personal membership of the World Association of Newspapers, amounting to $3,300, and he has bought a new computer for $2,200 that he keeps in his study at home.

Bert has recently purchased a beach house near Geelong. The property has been rented out to Bert’s sister since he purchased it. He took out a 25-year loan to finance the purchase. His interest payments are $7,200 a year. Bert also claims lawn-mowing expenses of $100 per month with respect to his beach house.

Required: Advise Bert about the deductibility of the above expenses. Where appropriate, refer to case law and legislation in your answer

The case study presents that Bert spends $10.60 on travelling to work along with an additional $65 for sending his daughter to a childcare. Furthermore, the monthly childcare centre bill came to $1,625 that was required to be paid immediately. As per the provisions contained in Section 900.30 of ITAA 96, work related expenses are any losses or outgoings that are incurred in the production of salary and wages. Therefore, the $10.50 would be allowed for deductions when calculating Bert’s assessable income. The sum that Bert pays for the child care amounting to $1,625 could be allowed for deductions considering that it included components of FTB or family tax benefits. Family tax benefits are described in Section 3 of A New Tax System (Family Assistance) (Administration) Act 1999 where subsidies are allowed for certain child expenses based on their circumstances and the income of the family.

The next transaction involves Bert paying membership fees of $3,300 to the World Association of Newspapers. It is important to note that the membership is directly linked to the source of his income, which is a newspaper publication company. Section 25-55 of ITAA 97 states that payments may be deducted for membership to a trade, business or a professional association. The maximum amount would be $42. Furthermore, the computer that he bought for $2,200 was purchased for his study at home. However, the amount of the $2,200 that was used for business purposes, which is the newspaper publishing company, would be allowed for a deduction as a business related expense. If the usage of the computer included both business and private purposes, only the business portion of the expenses would be allowed for a deduction as per the Australian Taxation Office.

The third transaction involves the payment of an interest of $7,200 on the loan of a rental property along with $100 as lawn mowing expenses of the property. Part IV A of the ITAA 36 allows for certain amounts as allowable deductions, which includes investment loan interest related payments. However, the $100 required for lawn mowing expenses would not be deductible under Section 25-10 of ITAA 97 as they would be considered as maintenance expenses and the aspect requires attention to prevent any future of possibility of anything going wrong. The $100 therefore could not be claimed for as an allowable deduction.

Taxation Law and Practice - Question 5

If you answer question 5, please answer all 10 parts. Each part is worth 2 marks. Please click on only one check box option in answer to each of these parts. For example, if you think the answer is A, please click on the checkbox next to A

TaP Plumbing Pty. Ltd. had $200,000 stock on hand at the beginning of the 2018/2019 financial year. It purchased $50,000 of additional trading stock during the income year. The closing stock on hand was $130,000. What are the tax implications for the 2018/2019 financial year?

  • Net deduction $50,000
  • Correct Net deduction $130,000
  • Net deduction $70,000
  • Net deduction $120,000

Which of the following statements about the taxation of trading stock is correct?

  • Purchases of trading stock are treated as capital for tax purposes
  • When trading stock is purchased and a deduction is claimed under s70-5(2)(a), the amount of the deduction depends on whether the trading stock is valued at cost, market selling value or replacement value
  • Correct For the purposes of s70-35, trading stock should always be valued at cost to obtain the lowest tax bill
  • Correct For the purposes of s70-35, the taxpayer can give trading stock a closing value of either cost, market selling value or replacement value

Which of the following items would not be trading stock under s70-10?

  • Land held by a property trust
  • Confidential documents held by a research company
  • Seeds purchased for sale by a plant nursery

Which of the following are not trading stock?

  • Bees kept for use in a honey production business
  • Horses used in a city horse carriage tour business
  • Correct Undeveloped land owned by a land developer
  • Partly finished computers of a computer manufacturer

For the purposes of the Goods and Services Tax (GST), when a registered business makes an input taxed supply it means that:

  • It is liable for GST on the supply, but it is not entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • It is liable for GST on the supply, and is entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • It is not liable for GST on the supply, and is entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • Correct It is not liable for GST on the supply, and is not entitled to an input tax credit on GST paid on its business inputs affecting that supply

For the purposes of the Goods and Services Tax (GST), when a registered business makes a GST-free supply it means that:

  • It is liable for GST on the supply, but is not entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • It is liable for GST on the supply, and is entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • Correct It is not liable for GST on the supply, and is entitled to an input tax credit on GST paid on its business inputs affecting that supply
  • It is not liable for GST on the supply, and is not entitled to an input tax credit on GST paid on its business inputs affecting that supply

Cheng runs an accountancy practice, and has purchased a photocopier for $5,000 to use in his practice. The amount of GST included in the purchase price is:

  • $500.00
  • $454.55
  • $475.55
  • Correct $50.00

Which of the following statements is correct?

  • If an employer provides a benefit to anyone other than an employee, the benefit cannot be a fringe benefit
  • If anyone other than an employer provides a benefit to an employee, a fringe benefit does not arise
  • Correct All of the above statements are true
  • All of the above statements are false

The decision in Myer leads to the principle that ordinary income:

  • Correct Includes receipts from a business transaction that is undertaken with an intention to profit
  • Correct Includes receipts from all transactions undertaken by a business whether they are capital or revenue
  • Includes profits from the realisation of a capital item
  • Includes all interest earned from a loan to another subsidiary of a parent company

Jake bought a house in July 2018. It was in fairly good condition, but needed painting. Jake rented out the house for 10 months, and then painted all the walls.

The painting is:

  • Correct Deductible under s25-5
  • Not deductible due to being an “initial repair”
  • Not deductible, as painting something is not really repairing it
  • Not deductible as the walls are an entirety

Taxation Law and Practice - Question 6

If you answer question 6, please answer all 10 parts. Each part is worth 2 marks. Please click on only one check box option in answer to each of these parts. For example, if you think the answer is A, please click on the checkbox next to A

Regarding capital gains tax, which of the following statements is correct?

  • Correct The sale of a motor vehicle may result in a capital gain or a capital loss
  • When the disposal of property is by gift, the capital proceeds are taken to be nil
  • Correct Net capital losses are not deductible against any assessable income other than a capital gain
  • Correct When an asset is sold with capital proceeds received in instalments, the capital gain will be apportioned among the years when the capital proceeds will be received

Which of the following is not a personal-use asset?

  • ☐ A holiday home on one hectare of land
  • ☐ A set of golf clubs
  • ☐ An option to acquire a personal use asset
  • Corect A debt relating to a personal use asset

Jack Jones was a farmer. His father was also a farmer. Jack Jones received a gift of 50 cattle from his father. The cattle had cost his father $10,000 and at the date of the gift the cattle had a market value of $17,500.

Which amount is assessable to the father for the gift?

  • Nil
  • Correct $7,500
  • $10,000
  • $17,500

Consider the following items:

  • An engagement ring, which cost $5,000;
  • A second-hand car purchased for $2,000;
  • Shares in BHP;
  • A painting hung in the foyer of your accounting firm;
  • A holiday house at Byron Bay

Which of the following statements is correct?

  • (ii) and (iv) are CGT assets
  • Correct Only (iii) and (iv) are CGT assets
  • None are CGT assets
  • (iii), (iv) and (v) are CGT assets

Jay sells his business and assets to Kay. At a cost of $1,000, Kay has drawn up an agreement that she will not operate a similar business within a 100 km radius for a period of five years. On the date of sale the agreement is signed. What CGT event will occur with a cost base of $1,000?

  • A1- Disposal of a CGT asset
  • C2- Cancellation or surrender of a CGT asset
  • Correct D1- Creation of contractual rights in another entity
  • There are no CGT consequences

ABC Ltd. is a company that owns a pine tree plantation. During the current year, ABC Ltd. expended $50,000 on fertilisers, sprays, etc. to maintain trees that would not yield income for another 10 years. The $50,000 is:

  • Correct To be apportioned over the life of the trees as it is not all related to the current year under s8-1
  • An allowable deduction under s8-1 because it is incidental and relevant to the earning of future income
  • A capital improvement that can be depreciated under Div 43
  • Not an allowable deduction under s8-1 because there is no assessable income at the current time from these trees

A depreciating asset used 80% for income-producing purposes has an adjustable value of $12,000. It has a termination value of $9,600. What is the balancing adjustment?

  • Nil
  • $4,800 deductible
  • $1,920 deductible
  • Corect $2,400 deductible

Jo is a dentist and a lecturer. She works at the community dental service in the mornings, attending to patients. At midday, she catches a bus to the local university where she lectures in dental hygiene. At the end of the day, she takes the train home. Which of the following statements is most correct?

  • The bus fare is deductible
  • The train fare is deductible
  • Correct Both fares are deductible
  • Neither fare is deductible

Which of the following expenses is deductible under s8-1 of ITAA97?

  • Correct Child minding expenses incurred to enable a mother to go to work
  • Correct Travel expenses from home to work to enable the taxpayer to get to work. The taxpayer’s home is not regarded as a place of work
  • Correct Travel expenses incurred by a full-time university student to enable him to get to his job at the end of the lecture. The job is unrelated to his studies
  • The cost of attending a two-day seminar incurred by a professional accountant to enable her to keep up with changes in accounting standards

Sarah runs her own public relations business. Which of the following expenses incurred by Sarah in the current financial year is deductible?

  • Salary costs of $300,000
  • $7,500 in meal expenses relating to entertaining clients
  • Salary costs of $5,000 in relation to employing her daughter who worked with Sarah for one week as part of her university training
  • Correct All of the above

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Taxation Law Assignment Help

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