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Semester One Final Examinations, 2019

LAWS3101 Income Tax Law

All amounts in this question exclude GST. The useful life of all assets are four years, and the diminishing value method applies when applicable.

David and Sue Masters are married and own an exclusive leather boot business called Williams Boots. They operate the business in a partnership. They each own a 50% interest in the partnership and share remaining profits and losses on a 50:50 basis.

The leather boots are manufactured in the Williams Boots factory in Longreach, a remote town in Central West Queensland. Williams Boots sells the boots online to customers in Australia.

David and Sue started the business 30 years ago, and see Williams Boots as a ‘family   business’  as  their  only  child,  Jonathan,   is  employed  as  a  sales representative at Williams Boots. Jonathan is married to Diana, a stay-at-home mum, and the couple have five young children who are all enrolled in primary school.

These are the facts relevant to Williams Boots for the 2018-2019 income year: Sales revenue totalled $21,500,000.

Purchases of raw material and supplies totalled $7,500,000.

Factory wages totalled $3,000,000.

Closing trading stock as at 30 June 2018 consisted of:

Raw material totalling $1,200,000

Work-in-progress totalling $90,000

Finished goods totalling $2,000,000

Closing trading stock as at 30 June 2019 consisted of:

Raw material at a cost price totalling $1,350,000. Due to an over-supply of cow hide leather across Australia, the replacement value of raw material totalled $1,250,000

Work-in-progress valued on the direct cost method totalled $80,000, and valued on the standard costing method totalled $100,000

Finished goods valued at cost price totalling $1,800,000

In October 2018, Prince Harrison, a member of the British royal family visited the Williams Boots factory as part of a well-publicised royal tour of Australia. David had the factory make a special commemorative pair of boots that he gave to Prince Harrison as a gift. The photo of David and Prince Harrison, with the Williams Boots business logo prominently displayed in the background, appeared in the world-wide media coverage of the royal tour. It cost $800 to manufacture the boots. The market selling value of the boots was estimated at $1,400.

The opening balance of the Williams Boots low value asset pool totalled $98,500 as at 1 July 2018.

On 1 August 2018, Williams Boots purchased a new industrial sewing machine for $6,500 and an industrial leather cutter for $950, and used these in the factory from that date.

These are the other Williams Boots expenses:

General business expenses totalled $5,300,000

Jonathan’s work entitlements consisted of a gross salary totalling $120,000 .

This amount was not included in the general business expenses above . All of the other Williams Boots sales representatives were each paid a gross salary totalling $45,000 (the cost of the other sales representatives’ salaries were included in general business expenses above)

Operating cost of the staff canteen that provides staff with hot lunches free

of charge on weekdays totalled $24,000

The cost of bottled water totalled $5,000. These were available to factory staff free of charge during the summer months when the temperature in Longreach often exceeds 40 degrees Celsius

Increase in the leave pay provision for the year totalled $120,000

A cash donation to the Australian Liberal Democratic Party (ALDP) totalled

$80,000. The ALDP  is  registered as a deductible gift  recipient and will contest the federal election in Australia

Fee paid to the company that operates the online sales platform for Williams

Boots totalled $2,500,000

Delivery  and  postage  costs  associated  with  the  online  sales  totalled

$1,000,000

In addition:

David and Sue were each paid a cash salary of $220,000

The cost of fuel to fill up David’s private car so that he could drive to work and back home on weekdays totalled $6,000

Interest on a five year long term loan owing to Sue totalled $70,910 Rent for the factory building totalled $640,000 (see information below)

These are the other facts relevant to David for the 2018-2019 income year:

David is the sole owner of the Williams Boots factory building. He built the factory in 2012 at a construction cost totalling $8,500,000. Williams Boots has a long-term rental agreement in place with David.

David’s running costs for the factory building totalled $150,000 during the 2018- 2019 income year.

During the 2018-2019 income year, David sold his valuable first edition Banjo Peterson poetry book for $20,000. He originally purchased the book in October 1986 at a cost totalling $1,600.  He  insured the  book against theft.  Insurance premiums  over  the  years  that  David  owned  the  book  totalled  $4,000.  David invested  the  entire  proceeds  of  $20,000  in  his  superannuation  fund  as  a concessional superannuation contribution in the 2018-2019 income year.

A few years ago, on 1 October 2012, David purchased a hot air balloon for $50,000, but he never used it as he never took hot air balloon flying lessons . As a result, he entered into an option contract with his friend Tony on 1 February 2019, as Tony wanted to  buy  David’s  hot air balloon for $75,000 as stipulated  in the option contract. Tony paid David $15,000 to enter into the option contract. Tony exercised the option on 30 June 2019.

As at 1 July 2018, David had unapplied capital losses from previous income years totalling $8,400.

QUESTION 2                                                                                                        20 MARKS

ANSWER QUESTION 2 IN A SEPARATE ANSWER BOOKLET All amounts in this question include GST when applicable.

Louisa Hamilton is the managing director of Outback Hats Pty Ltd. The company manufactures a well-known brand of Australian country hats, called Auskubras, in a factory in Winton, a remote town in Central West Queensland. Outback Hats Pty Ltd is registered for Goods and Services Tax (GST).

During  the  Fringe  Benefits  Tax  year  ending  31  March  2019,  Louisa’s  work entitlements consisted of:

Gross salary and superannuation guarantee payments totalling $180,000

The use of a car owned by Outback Hats Pty Ltd. The car, a four-wheel drive

vehicle, was purchased on 1 August 2018 at a cost totalling $96,000. Louisa uses the car to drive to work on weekdays. Louisa lives on her own beef cattle farm, situated 80 kilometres west of Winton. She also uses the car over weekends to inspect boreholes on her farm and to collect veterinary supplies for her 8,000 head of cattle. Louisa paid all of the fuel costs for the car totalling $10,000. She keeps a logbook that indicates 30% of the 25,000 kilometres she travelled with this particular car until 31 March 2019 was related to her farm business. Outback Hats Pty Ltd had the car serviced at a large car dealership at a cost totalling $4,500

Three free Auskubra  hats  that  she wore with  her  business  attire. The manufacturing cost of the hats totalled $3,000. The usual selling price of the hats to members of the public totalled $6,600

The exclusive use of an Outback Hats Pty Ltd laptop computer for work purposes. The laptop computer was imported from the United States of America on 1 December 2018. The supplier’s invoice totalled an equivalent $1,450 in Australian dollars

Five return airline tickets to Brisbane so that Louisa could visit her children who are enrolled in a private boarding school in Brisbane. The cost of the tickets totalled $4,650 on 1 February 2019

A cash reimbursement of $20,000 on 1 February 2019, for the cost of school fees for Louisa’s children

A  copy  of a  business  management  book written for  executives  of  hat manufacturing companies. Louisa downloaded the book in electronic format to  her laptop computer from an online  platform  in the  United States of America on 1 March 2019. Outback Hats Pty Ltd paid for the download at a cost totalling $190

A cash reimbursement of $1,100 for the cost of airport lounge membership that Louisa uses when she travels for work purposes

A  cash  reimbursement  of $5,500 towards the  cost  of  meals and  hotel accommodation. Louisa spent 45 days away from Winton on Outback Hats Pty Ltd business. She always stayed in hotels owned by one hotel group, as she was a member of the hotel group’s Frequent Guest Loyalty Program

You are required to:

a.   Calculate the Fringe Benefits Tax (FBT) payable by Outback Hats Pty Ltd for the FBT year ending 31 March 2019. Your answer must address each of Louisa’s work entitlements. Show all your calculations, provide reasons for your answers, and clearly categorise each fringe benefit.                           (13)

b.   Calculate the GST refundable to Outback Hats Pty Ltd in relation to Louisa’s work  entitlements.  Your  answer  must  address each of  Louisa’s  work entitlements. Show all your calculations and provide reasons for your answers. (7)