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Semester Two Final Examinations, 2021

LAWS3101 Income Tax Law

PART A                                                                                                         10 MARKS

Part A consists of one question. In this question, ignore Goods and Services Tax.

Joe Walsh and Antoine Dufour operate a guitar retail business as a partnership. These are the transactions of the partnership for the 2020–2021 income year ending 30 June 2021:

• Sales revenue totals $14 million.

• Runnings expenses comprising staff salaries, rent for the business premises, advertising expenses, and telecommunication costs total $3 million.

• Staff superannuation guarantee contributions total $23,000.

• The purchase cost of trading stock totals $7 million.

• The value of closing trading stock on 30 June 2020 totals $800,000.

• The value of closing trading stock on 30 June 2021 are as follows:

o Cost price, $1,823,000

o Market selling value, $2,950,000.

• In accordance with the partnership agreement:

o Joe manages the business and is paid a salary totalling $250,000.

o The partnership pays $10,000 into Antoine’s superannuation fund as a voluntary superannuation contribution on his behalf.

o The remaining profits are shared 50:50 between Joe and Antoine.

You are required to:

a. Calculate the net income of the partnership for the 2020–2021 income year. Show all your calculations and provide reasons for your answers, referencing relevant sections and divisions of the Income Tax Assessment Acts and relevant case law. (7 marks)

b. Calculate Antoine’s taxable income for the 2020–2021 income year. Show all your calculations and provide reasons for your answers, referencing relevant sections and divisions of the Income Tax Assessment Acts. (3 marks)

PART B                                                                                                             40 MARKS

Part B consists of seven separate questions. Treat each question as a stand-alone question. Bronwyn Murray operates a clothing store in Brisbane as a sole trader. This business specialises in selling evening gowns and cocktail dresses to members of the public and it is registered as an enterprise for Goods and Services Tax (GST). Bronwyn comes to you for advice about seven separate questions in relation to her 2020–2021 income year ending 30 June 2021, and her Fringe Benefits Tax year ending 31 March 2021.

Question 1                                                                                                       3 Marks

A Brisbane-based charity, which is registered as a deductible gift recipient (DGR), contacts Bronwyn and asks her to gift an evening gown to them. This charity loans evening gowns to Year 12 high school students who cannot afford to buy dresses for their formal end-of-year dinner, so that they can dress up and attend this milestone event of their school careers. Bronwyn agrees to anonymously gift an evening gown from her end-of-season winter sale to this DGR on 31 July 2020. The cost price of this gown is $330. The original market selling value of the gown is $890. This gown is marked down to $450 in the end-of-season winter sale.

You are required to:

Advise Bronwyn by discussing all of the income tax implications for her of making this gift. Provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts and relevant case law. In providing your answer to Question 1 you must ignore GST.

Question 2                                                                                                    1 Mark

Bronwyn is a finalist in the Brisbane City Council’s ‘Businesswoman of the Year’ competition. She attends a gala event on 1 September 2020 where the winner is announced. Bronwyn takes one of the evening gowns in the store for herself and wears it to the gala event. The cost price of this evening gown is $700, and its market value is $2,000.

You are required to:

Advise Bronwyn by discussing the income tax implications of her decision to take the evening gown for herself. Provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts. In providing your answer to Question 2 you must ignore GST.

Question 3                                                                                               5 Marks

Following on from the facts described in Question 2:

On the day of the gala event Bronwyn has her hair and make-up done professionally and she hires a professional photographer at a cost totalling $2,300, to take photographs of her in the evening gown that she wears to the gala event. Bronwyn uses the photographs in her new summer season marketing campaign for her business. Bronwyn has a summer season and a winter season marketing campaign every year, as fashions and dress designs change continuously.

You are required to:

Discuss whether Bronwyn will be able to claim the cost of the photographer as a deduction under s 8-1 ITAA97 against her assessable income for income tax purposes, or whether she will be denied a deduction under s 8-1 ITAA97 because the cost is capital in nature. Provide reasons for your answer taking into account relevant judicial tests, referencing relevant case law. In providing your answer to Question 3 you must ignore GST.

Question 4                                                                                           14 Marks

Bronwyn does not use the provisions of Div 328 ITAA97 to claim capital allowances. The turnover of her business is less than $20 million annually.

The value of Bronwyn’s low value pool on 1 July 2020 is $6,450.

During the 2020–2021 income year Bronwyn purchases the following capital assets:

• On 1 October 2020 she purchases a notebook computer for $1,200 (GST inclusive). She uses the notebook computer from that date to find and order trading stock for her business (60% of the time), and for the remainder of the time (40% of the time) she uses the notebook computer to watch movies online in her free time. The effective useful life of the asset is 3 years.

• On 1 December 2020 she purchases a steam iron for $250 (GST inclusive) that she uses exclusively in her business from that date to steam new trading stock items when she unpacks these. The effective useful life of the asset is 3 years.

• On 1 March 2021 she purchases a delivery truck for $65,000 (GST inclusive) that she uses from that date to collect trading stock from suppliers. The effective useful life of the asset is 7 years. She incurs the following running expenses in relation to this truck from 1 March 2021 to 30 June 2021:

o Fuel                                                                                    $2,340

o Insurance                                                                            $770

o Annual vehicle registration paid to Queensland Transport          $1,500

You are required to:

a. Calculate the GST refundable to Bronwyn for the period 1 July 2020 to 30 June 2021 arising from all of the information in Question 4. Show all your calculations and provide reasons for your answer. (4 marks)

Present your answer in the following table format:

Description                                   $

b. Calculate and discuss the income tax consequences arising from all of the information in Question 4. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts. (10 marks)

Present your answer in the following table format:

Description                                   $

Question 5                                                                                       8 Marks

Rita Kelly is one of Bronwyn’s fulltime employees.

On 1 December 2020 Rita borrows $10,000 from her employer, interest-free. By 31 March 2021, Rita has not repaid any amount of this loan.

Rita’s boyfriend invites her to dinner at an exclusive Brisbane restaurant so that they can celebrate Valentine’s Day as a couple on 14 February 2021. Rita purchases an expensive cocktail dress from Bronwyn on 14 February 2021 for $800 (including GST) to wear to the dinner. This evening gown would usually be sold for $3,000 (including GST), and cost Bronwyn $1,500 (including GST) to purchase.

Rita offers to learn how to drive the new delivery truck that Bronwyn purchased (see Question 4), so that she can help Bronwyn to collect trading stock from suppliers as part of her job. Rita takes driving lessons from an Australian-wide truck driver training school, paying $1,680 (including GST) for the lessons on 31 March 2021. Bronwyn reimburses Rita for the full cost of the driving lessons on 31 March 2021.

These are the only fringe benefits that Rita gets from Bronwyn during the Fringe Benefits Tax year ending 31 March 2021.

You are required to:

Calculate the FBT payable by Bronwyn for the FBT year ending 31 March 2021. Show all your calculations, provide reasons for your answer, reference relevant sections of the Fringe Benefits Tax Assessment Act 1986, provide explanations for reductions applied to taxable values, and clearly categorise each fringe benefit.

Present your answer in the following table format:

Description                                Taxable value $             Gross up              Taxable amount $

Question 6                                                                                              5 Marks

In Question 6, all of the amounts include GST where relevant.

In April 2021 Bronwyn travels to Spain to attend five fashion shows to keep up to date with the latest fashion trends and to meet with potential overseas suppliers. She incurs the following expenses in relation to this overseas trip:

• The cost of a return flight ticket from Brisbane to Madrid airport in Spain             $3,400

• The cost of a yellow fever injection that is administered by her medical doctor at a general practice in Brisbane. It is a requirement to enter Spain to have an up-to-date yellow fever injection                 $50

• The cost of a new travel suitcase that she purchases from a large retailer in Brisbane. She packs her clothing and personal belongings for the trip into this suitcase                         $275

• The cost of hotel accommodation in Spain                        $2,500

After returning to Australia, she receives an email from a Spanish actress that she met at one of the fashion shows that she attended during her overseas trip to Spain. The actress purchases an expensive evening gown from Bronwyn for $5,950. Bronwyn sends this evening gown to her at her address in Madrid using international airmail at a cost totalling $120.

You are required to:

Discuss the GST implications for Bronwyn of each of these transactions and events. Show all your calculations and provide reasons for your answer.

Question 7                                                                                                 4 Marks

After her overseas trip to Spain (see Question 6), Bronwyn is considering importing a new collection of evening gowns from a supplier in Spain. This supplier provides her with the following quotation that details all of the costs Bronwyn will have to pay this supplier if she accepts the quotation and places the order:

Spanish Gowns of Distinction 1 Barcelona Drive, Madrid, Spain Quotation date – 20 June 2021

Quotation number 7751 – Quotation valid until 22 June 2021

All costs in Australian Dollars (AU$)

Total cost of 135 evening gowns from our Spanish Dream collection                                 $127,000

International airfreight and insurance costs to transport the gowns to Brisbane International Airport by 29 June 2021                      $3,000

Total price                                $130,000

You are required to:

Calculate and discuss the GST implications for Bronwyn if she accepts the quotation and places the order. Show all your calculations and provide reasons for your answer.