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SAMPLE Examination Paper – 2023

INCOME TAX LAW

Total Duration: 180 mins

QUESTION 1

From the following you are required to calculate Chloe’s taxable income (if any) for the income year ended 30 June 2023, giving brief reasons to support your calculation.

Chloe is an Australian resident adult individual who is employed in Adelaide at the Women’s and Children’s Hospital (W&CH) as a paediatrician.  Her employment duties include being involved in the health of new-born babies, infants and children and she specialises in neonatal surgery.  

During the income year ended 30 June 2023, Chloe derived and received the following amounts:

1.  Salary totalling $130,000 from the W&CH from which $40,000 Pay As You Go tax instalments were withheld.  

2. Car allowance of $3,000 from the W&CH for work related travel.

3. $20,000 received by way of a royalty as portion of the proceeds paid to Chloe as the owner of a patent of a new technology developed for neonatal surgery procedures.

4. Dividends totalling $5,000 paid to Chloe in respect of shares owned by her in BHP Limited.  The dividends have franking credits totalling $1,200.

5. $450,000 from the sale of a rental property owned by Chloe on September 2022.  Chloe had bought the property on 15 September 2000 for $120,000 as a long-term investment.

6. Rent totalling $2000 from that rental property.

During the 2022-23 income year, Chloe paid and incurred these outgoings and has kept “written evidence” for each of them:

1. Car expenses of $5,500, consisting of $2,200 for fuel and oil, $1,300 for registration and insurance and $2,000 for lease payments all of which were of a non-capital nature.  During the income year the car travelled 15,000 kms of which 4,000 kms were for work purposes. Chloe has kept a logbook and receipts for the expenses.

2. Home office expenses of $4,500 incurred for work purposes.  These expenses included $4,000 which was a proportion of interest paid on a loan used to build her family home and $500 on electricity charges.

3. Non-capital expenses totalling $4,500 incurred in attending the 2022 Association of Pediatric Surgeons Conference held in the Alsace, France between 3-6 August 2022. These expenses include $1,000 for conference registration fees, $3,000 for travel and accommodation costs, and $500 for meals away from home. Chloe has kept receipts for all these expenses and travel records. Chloe’s time at the conference was devoted to advancing her knowledge in her specialised field and she believed that attending the conference would increase her chances of becoming the Head of Paedeatrics at the W&CH.

4. Relating to her rental property:

1. $8,000 on updating the bathroom with a new shower, vanity and spa bath prior to putting it on the market for sale.  

2. $3,000 on painting the interior of the property prior to putting it on the market for sale.

3. Payments totalling $12,000 for interest on a loan of $300,000 that had been used by Chloe to fund the purchase by her of the rental property.

5. An annual subscription fee of $600 to the Journal of Paediatric Surgery which is a journal that presents original contributions as well as a complete international abstracts section to provide the most current source of information and references in paediatric surgery.

QUESTION 2

From the following, you are required to calculate Manta Pty Ltd’s:

1) taxable income (if any) for the income year ended 30 June 2023, giving brief reasons to support your calculation; and

2) income tax liability (if any) for that income year.

Manta Pty Ltd is an Australian resident private company that operates a seafood restaurant from leased premises at Glenelg in South Australia. The directors and shareholders of the company are Daniel and Sonia Hughes.  The company’s books of account for the income year ended 30 June 2023 show the following amounts:

The following additional information is provided:

1. Manta Pty Ltd is a “small business entity”.

2. The “Gross Sales” include an amount of $200,000 which was received from a related entity from the sale of prawns and lobsters.  This transaction was not in the ordinary course of business and the market value of that trading stock was $400,000.

3. Trading stock on hand at 1 July 2022 totalled $40,000, and at 30 June 2023 totalled $50,000.

4. The “Miscellaneous Profit” comprises a receipt from the disposal by the company of a building that they had bought during the income year.  They bought the building with the intention of renovating the building and then selling it to make a quick profit.

5. The “Other Receipt” comprises the total sale price of some commercial kitchen equipment that had formed part of the depreciating assets of the company.  The commercial kitchen equipment had a tax adjustable value of $5,000.

6. All of the “Advertising”, “Electricity”, “Insurance”, “Rent”, “Rates” and “Telephone” were all regular outlays to meet the continuous demand of operating the business.  Further, the Insurance was paid on 1 June 2023 and relates to insurance cover for the one-year period from 1 June 2023 to 1 June 2024.

7. The “Repairs” were incurred to replace the old laminate bench top of the bar area in the restaurant.  The old bench top was chipped and worn.  The replacement bench top is made of granite which is a considerably stronger and more durable surface than laminate.

8. “Depreciation” related to plant and equipment that are depreciating assets used solely for the company’s business, and the amount was calculated using methods and rates equivalent to tax diminishing value and acceptable for tax purposes.

9. The “Lease Document Expenses” were incurred for preparing and registering a lease of the premises in July 2022.

10. The “Fines” were incurred as a result of the company not complying with regulatory requirements under the Liquor Licensing Act 1997 (SA) that applies to restaurants and bars.

11. The “Salary and Wages” included $80,000 paid to Daniel Hughes who worked full-time in the company’s business.  It also included wages of $80,000 paid to Sonia Hughes who did not perform any services for the company.

QUESTION 3

Part 1

Your friend’s mother Jean, a retiree aged 60 years, had planned to build a home at Victor Harbor to retire.  However, she recently decided to return to England to support her aged mother.  Jean sold all of her assets (other than clothing and some personal but non valuable items) stored at her fully furnished temporary rental.  Her asset sales have been productive over a 6-month period up to July 2023, yielding her in excess of $1m in cash. 

It is now September 2023 and Jean is ready to return to her homeland and wants to finalize her taxation obligations but is unsure of her CGT obligations associated with her 2022-2023 income tax return.  She is concerned she might have to include something in the order of $445,000 for all of her capital gains/losses.  You have interviewed Jean and found the following relevant facts re asset sales below.

(1) Sale of jewellery

Jean had jewellery she inherited from her aunty in America.  Its market value when received in June 2010 was $15,000.  Jean sold the jewellery via Gumtree in June 2023 for only $5,000.

(2) Sale of antiques

Jean had just started to collect some antiques she thought would suit a room in her retirement home.  3 antiques were all purchased in June 2013 to celebrate the decision to retire and live at Victor Harbor.  All the antiques were sold in June 2023

- A set of 5 antique books purchased for $1,500 and sold for $2,000

- An antique bookcase purchased for $1,500 and sold for $1,600

- An antique buffet purchased for $2,000 and sold for $1,500

(3) Sale / donation of non-antique furniture and household items

Jean sold household furniture and household effects (which were not antique) for $11,000 to a 2^nd hand merchant just before she left her home to go to the temporary rental accommodation.  What items Jean couldn’t sell she donated to the Salvation Army.

(4) Sale of car

She purchased her car for $30,000 on 1 July 2010 and sold it on 30 June 2023 for $10,000.

(5) Sale of shares

Jean sold her shareholding of 10% on 30 May 2023 in Cafe Supplies P/L for $30,000, which was purchased in March 1990 for $10,000.  The fair market value of the private business is $300,000. Jean also sold BHP shares on 30 May 2023 for $35,000, which were purchased in August 2022 for $40,000.

(6) Sale of land at Victor for intended retirement home

Jean sold a block of vacant land at Victor Harbor in August 2023 for $310,000, but had entered into the contract on 1 June 2023.  The block of land was originally purchased to build her retirement home, but given her recent change in plans needed to be sold.  The land was purchased on 1 July 2022 for $250,000 and acquisition costs amounted to $10,000.  Selling costs of $15,000 included commission and legal fees and conveyancing fees.  Other costs included council rates, water rates and interest totalling $10,000.

(7) Sale of the family home

Jean’s family home at Prospect was sold at auction for $600,000 on 1 June 2023, and settlement was on 1 July 2023.  The home was bought on 1 February 1987 for a cost of $200,000.  Fees on purchase of $12,000 included stamp duty, legal fees, conveyancing and transfer fees and borrowing expenses.  Selling costs of $18,000 included commission, legal fees and conveyancing.  Renovations and extensions carried out in June 1998 amounted to $100,000.

(8) Prior year capital losses

Jean advises her prior year capital losses are $5,000.

Required

You are to advise the net capital gain (or loss) Jean is to include in her 2022-2023 tax return and provide a full explanation citing relevant statute law to support your answers.

CAPITAL GAINS TAX INDEX NUMBERS

CAR EXPENSE “CENTS PER KILOMETRE RATES” for 2022-23

For the 2022-23 income year the rate is 78 cents/km.

CAR LIMIT

For the 2022-23 financial year is $64,741.

RESIDENT INDIVIDUAL INCOME TAX RATES for 2022-23

The above rates do not include the:

· Medicare levy of 2%