Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

Semester Two Final Examinations, 2019

LAWS3101 Income Tax Law

ANSWER ALL QUESTIONS

QUESTION 1                                                                                                    40 MARKS

All the amounts in this question include GST (Goods and Services Tax) where applicable. You may assume that the relevant taxpayers are in possession of valid tax invoices where applicable.

Andy Baker was employed as a sales consultant at an exclusive fashion store in Brisbane for twenty years. On 30 June 2018, Andy wins $20 million in a lottery. He resigns from his job the next day.

A month later, Andy enters into negotiations with the shareholders of Silk Creations Pty Ltd (‘SC’). Andy wants to purchase all of their shares in SC from them.

SC manufactures handmade evening gowns, and qualifies as a small business entity (SBE) for income tax purposes.

The following information is relevant to part a. of the question:

The shareholders agree that Andy can appoint a chartered accountant to conduct a due diligence review of SC to determine the market value of their shares.

Andy incurs the cost, believing that he will be able to claim the cost of the due diligence review as a deduction for income tax purposes.

The chartered accountant completes the due diligence review. He presents his report and an invoice totalling $8,000 to Andy on 1 September 2018.

Based on the chartered accountant’s report, Andy makes an offer to the shareholders of SC. The shareholders accept the offer and agree to sell all their shares to Andy. On 1 October 2018, the shares are transferred into Andy’s name.

The following information is relevant to part b. of the question:

Andy’s first decision as the sole shareholder and sole director of SC, is to advertise and fill the position of financial controller. Andy appoints Diane Forbes to the position on 1 December 2018.

Andy and Diane fall in love. Diane resigns from SC, effective 31 March 2019.

Andy and Diane get married on 1 April 2019.

During her employment at SC, Diane receives the following work entitlements:

 A cash salary totalling $80,000.

 Superannuation guarantee contributions totalling $7,600, paid into Diane’s superannuation fund.

 Cash reimbursements totalling $650 for the cost of broadband data at her private home, so that she could access SC’s computer network after hours and over weekends. Diane gave SC the relevant written declaration that she used the broadband data 60% of the time for work purposes.

 The use of a new $80,000 Mercedes Benz car, exclusively for her private purposes. SC leased the car for a cost totalling $3,400 per month. The lease commenced on 1 December 2018, and was terminated when Diane resigned on 31 March 2019. During Diane’s employment, SC spent $960 to fill the car with fuel. Diane paid SC $200 to cover the cost of fuel while she was on annual leave.

 A cash reimbursement totalling $240 for the cost of a dinner at an exclusive restaurant. Diane was present at, and hosted the dinner for, the managing partner of the accounting firm that provides SC with income tax advice. SC applies Div 9A of the Fringe Benefits Tax Assessment Act. Diane did not attend any other business meals during her employment at SC.

 The use of a new mobile phone on a 12-month mobile phone contract. SC entered into the mobile phone contract on 1 December 2018 at an all-inclusive cost totalling $190 per month. Diane used the phone 40% of the time for work purposes, and gave SC the relevant written declaration. When Diane resigned, she returned the mobile phone to SC. SC cancelled the mobile phone contract a few months later.

 A cash reimbursement of $398 for bank interest she incurred on her personal credit card to pay for her wedding dress.

The following information is relevant to part c. of the question:

After Diane resigns, Andy appoints an independent bookkeeping firm to prepare SC’s monthly accounts and business activity statements. SC accounts for GST on the accruals basis. These are the relevant transactions for April 2019 upon which the independent bookkeeping firm has to base SC’s GST calculation for April 2019:

 Evening gowns sold to Australian retailers for a sales value totalling $1,400,000.

 Evening gowns sold and exported to exclusive clothing stores in Europe for a sales value totalling $88,000. SC paid the cost of airfreight totalling $2,400.

 Purchases in Australia of Australian made fabric and sewing cotton totalling $220,000.

 Purchases of rare silk from a supplier in India totalling $33,000. SC paid for the airfreight costs totalling $1,800 and international freight insurance totalling $200.

 Interest on SC’s overdraft totalled $9,375.

 Rent for business premises in an industrial area of Brisbane totalled $26,000 and was paid to a large commercial property company.

 Tuition fees totalling $4,500, paid to a TAFE college on behalf of an employee who enrolled in a diploma course in fashion design.

 Catering fee paid to an events management company for the cost of a staff cocktail party held one evening after work at SC’s offices, totalled $3,850. The catering fee covered the cost of food, alcohol and a bar service.

 SC sold an expensive evening gown to a staff member for $440. The usual selling price for this evening gown is $880.

 A new industrial sewing machine was purchased for a cost totalling $33,000. SC paid the supplier in three equal instalments of $11,000 each at the end of April, May and June 2019.

The following information is relevant to part d. and part e. of the question:

Andy still has significant cash funds left over from his lottery winnings after paying for the shares he acquired in SC.

He asks a friend to settle a discretionary trust called the ‘Baker Family Trust’. The beneficiaries of the Baker Family Trust are Andy, Diane, and their elderly parents. The trustee of the Baker Family Trust is Baker Family Trustee Pty Ltd. Andy and Diane each own 50% of the shares in Baker Family Trustee Pty Ltd.

The Baker Family Trust is not registered as an enterprise for GST. The trust adopts the prime cost method and establishes a low-value pool for capital assets, if applicable.

On 1 April 2019, Andy gifts $5 million in cash to the Baker Family Trust. The trustee purchases a unit complex on 1 May 2019. The unit complex is fully tenanted. The previous owner of the unit complex provides the trustee with the necessary supporting documents to prove that the original construction costs of the unit complex totalled $2.7 million in 2013. These are the transactions relevant to the Baker Family Trust for the 2018–19 income year:

 Rent received totalled $120,000.

 Bank interest received totalled $10,000.

 Public indemnity insurance premiums paid to a large insurer totalled $3,000.

 Building maintenance and cleaning expenses totalled $12,000.

 The cost of repairs to common areas used by all the tenants totalled $9,000.

 Council rates, land taxes, water and waste removal charges totalled $22,000.

 The trustee purchases a new hosepipe, with an effective life of two years, on 15 May 2019 for the tenant’s car wash area, at a cost that totalled $250.

 The trustee purchases a new electronic notice board for the unit complex’s foyer on 1 June 2019 at a cost that totalled $800. The effective life of the notice board is four years.

On 30 June 2019, the trustee exercises its discretion to make Diane’s mother presently entitled to $50,000. The remainder of the income of the trust was retained to fund the future expenses of the trust.

You are required to:

a. Discuss the overall income tax treatment of the cost of the due diligence review from Andy’s perspective. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections of the Income Tax Assessment Acts and relevant case law, if applicable. (4)

b. Calculate the fringe benefits tax payable by SC for the year ending 31 March 2019 to provide Diane’s work entitlements. Your answer must address each of Diane’s work entitlements separately. Show all your calculations, provide reasons for your answers, reference relevant sections of the Fringe Benefits Tax Assessment Act, provide explanations for reductions applied to taxable values, and clearly categorise each fringe benefit. (13)

c. Calculate the GST payable by, or refundable to SC for April 2019. Show all your calculations and provide reasons for your answers. (12)

d. Calculate the net income of the Baker Family Trust for the 2018–19 income year. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections of the Income Tax Assessment Acts and relevant case law, if applicable. (10)

e. Calculate the income tax liability of the trustee of the Baker Family Trust for the 2018–19 income year, if any. Show all your calculations and the rate of tax applied, if applicable. (1)

Additional exam information

2018–19 income tax rate for companies is 30%

2018–19 income tax rate for base rate entities is 27.5%

2018–19 income tax rates for Australian resident individuals are:

Taxable income Tax on this income

0 – $18,200                                                   Nil

$18,201 – $37,000               19c for each $1 over $18,200

$37,001 – $90,000               $3,572 plus 32.5c for each $1 over $37,000

$90,001 – $180,000             $20,797 plus 37c for each $1 over $90,000

$180,001 and over               $54,097 plus 45c for each $1 over $180,000

QUESTION 2 15 MARKS

Complete your answer to Question 2 in a separate answer booklet

Angie Li is employed as a teacher. During the 2018–19 income year, she had the following receipts:

 Gross salary                                                                                                          $90,000

 Fully franked dividends from a very large listed Australian retail company                     $3,900

 Proceeds from the sale of her share investment in Invest Long Term Pty Ltd on 14 April 2019. Angie acquired the shares in March 2006 for a purchase cost of $75,000. Duties payable when she purchased the shares totalled $1,000. Brokerage fees when she sold the shares totalled $1,500                                                                                               $126,000

 Proceeds from the sale of a painting on 31 May 2019. Angie purchased the painting on 1 December 2018 for $3,000. She decided to sell the painting as it did not fit into the colour scheme of her home.                                $3,750

During the 2018–19 income year, Angie incurred the following expenses:

 Public transport costs to travel to work and back home                             $4,350

 The cost of supplements to enhance her concentration at work. She purchased these on the advice of her nutritionist           $2,000

 The cost of sunscreen and a pair of sunglasses that she used at work, as Angie was a physical education teacher and spent a lot of time outdoors during work hours                                              $400

 Tax agent’s cost to lodge her 2017–18 income tax return                           $120

 Annual membership fee paid to the Australian School Teachers Association.                           $200

You are required to:

Calculate Angie’s taxable income for the 2018–19 income year. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections of the Income Tax Assessment Acts and relevant case law, if applicable. (15)