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End of Semester Examination – Past Exam Paper 2 (Modified)

ACCT90016: Taxation for Business Decision Making

IMPORTANT NOTE: Most of the marks originally allocated have been increased as shown below to better reflect the quality of analysis expected as per guidance during the weekly study Qs workshops] 

Question 1 [each part worth 5 marks each.]

Leatherwood Pty Ltd (‘the company’) is a leather goods manufacturer. Its factory is in Footscray, a suburb of Melbourne. It has an aggregate turnover of $50 million and is an Australian resident for tax purposes. It is registered for GST purposes. It sells its products to leather goods retailers in Victoria and to the public through a factory outlet situated in Carlton.

During the year of income 2021/22, the company has been involved in the following events.

Your task:

Explain, giving reasons, the taxation implications for the company arising from each event. If you need more facts be sure to indicate those that are needed and consider the potential tax consequences if those facts apply.

FOR THIS QUESTION YOU CAN IGNORE ANY GST IMPLICATIONS THAT MAY BE APPLICABLE.

a) The company provided a loan to one of its employees. It charged the employee interest of 2% per annum. The employee used 50% of the loan to purchase a property which she would rent out to tenants and 50% to have a garage built at her own home.

b) The company was required to pay a bank in Malaysia $100,000 by way of interest on money it borrowed from the Malaysian bank for business purposes.

c) As the company had decided to increase its manufacturing capacity, it purchased another factory for $400,000. It then spent $100,000 fixing the roof of the factory so that the factory could be used for its required purpose.

d) The company received $100,000 from a supplier which had breached its contract to supply leather to the company.

e) The company received $500,000 from a New South Wales leather goods manufacturer in exchange for the company’s promise not to set up a manufacturing centre or sell its products in New South Wales for 5 years.

f) The company allowed its employees to purchase its leather goods at a 50% discount to what it charged the public at its factory outlet.

g) In February 2017 the company disposed of a leather cutting machine which it had acquired in 2014. It had been claiming deductions for the decline in value of the machine since it was first used. It sold the machine for $9,000.  

h) The company came to the conclusion that several outstanding debts owed to it by customers would be impossible to recover. 

 [Total marks for question 8 x 5 marks = 40 marks]

Question 2 [each part worth 3 marks.]

During the year of income 2021/2022 Robert Rogers, a pharmacist, disposed of the following assets. Rogers is a resident of Australia for tax purposes.

Your task:

Explain the tax implications arising from each disposal. If you need more facts be sure to indicate those that are needed and consider the potential tax consequences if those facts apply.

a) He sold a vacant block of land that he had acquired in June 1984 for the purpose of building a new home for his family. The land is in Melbourne. The house was never built. He had paid $50,000 for the land and sold it for $200,000.

b) He sold a postage stamp from his stamp collection for $4,000. He had acquired the stamp in 2015 for $350.

c) He sold his yacht for $20,000. He had acquired the yacht in 2010 for $35,000.

d) In February 2022, he sold a rental property that he had purchased in October 1999. The cost base of the property is $250,000 and he sold it for $350,000.

[Total marks for question 2 = 4 x 3 marks = 12 marks]

Question 3 [each part worth 3 marks.]

(a) Explain why is it important to know when trading stock is ‘on hand’?

(b) Explain the concept of ‘present entitlement’ and ‘legal disability’ as it applies to the taxation of trust income. 

[Total marks for question 3: 2 x 3marks = 6 marks]

Question 4 [each part worth 3 marks.]

a) For the purposes of GST, explain why it is important to distinguish between a ‘taxable supply’, a ‘GST-free supply’ and an ‘input taxed supply’. 

b) Bill runs a business which only involves selling fresh fruit and vegetables to customers. He is registered for GST purposes. His business operates from premises which he rents and in the relevant year he paid rent of $22,000 (GST inclusive). Explain the GST implications from these facts. 

c) In 2021/2022 ABC Ltd, a business registered for GST, collects $50,000 in GST and pays $40,000 in GST. What are its obligations in these circumstances?

[Total marks for question 4: 3x 3marks = 9 marks]

Question 5 [each part worth 4 marks.]

a) The Fringe Benefits Tax Assessment Act 1986 (Cth) contains a rule which recognises that the value of a taxable fringe benefit used fully or partially for ‘business’ purposes should be subject to less FBT liability than one used solely for private purposes. Identify the rule and indicate when it applies.

b) Explain the difference between the ‘cash’ and ‘accruals’ method of tax accounting and whether a taxpayer is completely free to choose either of the methods 

c) Liu Wang, an Australian resident, has shares in XYZ Ltd, an Australian resident company. In 2021/2022 she received dividends from the company. These shares were described as ‘fully franked’. Explain what this description means and what are the tax implications for Liu Wang arising from the receipt of such dividends. 

d) The facts and finding of the court in the case Inland Revenue Commissioners v Duke of Westminster [1936] AC 1 illustrate an important principle of statutory interpretation.

What is the principle of statutory interpretation used by the court in that case?

If the arrangement entered into by the Duke of Westminster had been entered into in Australia today (and assuming the rules surrounding the surtax applied in Australia) would the court result be the same? If so, why? If not, why not? Give reasons for your prediction 

[Total marks for question 4 x 4 marks = 16 marks]