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Semester Two Examinations, 2022

LAWS3101 Income Tax Law

Answer Question 1 and Question 2 in the same exam answer booklet.

QUESTION 1                                                                                      15 MARKS

This question is about Fringe Benefits Tax (FBT) for the FBT year ending 31 March 2022. All of the amounts in this question includes Goods and Services Tax (GST) where relevant. The employer uses the statutory formula method to calculate the taxable value of a car fringe benefit. The employee provides the employer with all the relevant information and documentary evidence.

John Smith is employed as a sales representative. His employer, Company Pty Ltd (‘Company’), imports fitness equipment and sells these to gymnasiums across Queensland. During this FBT year, Company provides John with the following benefits:

a. The use of a leased car from 1 April 2021. Company enters into the lease agreement on 1 April 2021 at a lease cost of $800 per month when the leased car value is $70,000. John keeps a logbook that indicates he uses the car 65% of the time for work purposes. John is entitled to use the car for non-work purposes. During this FBT year, Company pays $14,000 to fill the car with fuel. During this FBT year, John pays $2,000 to fill the car with fuel. Company does not reimburse John for these costs. (3 marks)

b. Company reimburses John $1,985 for the cost of all of his mobile phone call charges. Based on itemised bills from his mobile phone service provider, John uses his phone 70% of the time to make work-related calls. (3 marks)

c. Company purchases a gift basket comprising chocolate and wine at a cost totalling $290 and presents John with this gift to celebrate his achievement when he is selected to represent Australia in table tennis at the 2022 Commonwealth Games. (2 marks)

d. Company reimburses John $3,600 for the cost of his private patient hospital insurance. (2 marks)

e. John purchases a treadmill from Company for $6,800. Company imported the treadmill at a cost of $9,000 and usually sells it for $15,000. (5 marks)

You are required to:

Calculate the fringe benefit taxable amount of each of the benefits separately. The taxable amount of each fringe benefit is equal to the taxable value multiplied by the relevant gross up. Clearly categorise each fringe benefit, show all your calculations, provide reasons for your answers, reference relevant sections of the Fringe Benefits Tax Assessment Act 1986, and provide explanations for reductions and exemptions. Distinguish between each benefit in your answer by using the corresponding alphabet letters ‘a’, ‘b’, ‘c’, ‘d’ and ‘e’.

QUESTION 2                                                                                   10 MARKS

This question is about Goods and Services Tax (GST). Decorating Pty Ltd (‘Decorating’) operates an interior decorating business in Australia. Decorating is registered as an enterprise for GST and uses the accruals basis to report its GST obligations monthly. All of the amounts in this question includes GST where relevant. These are the transactions of Decorating for June 2022:

a. Decorating issues invoices totalling $990,000 to its clients. Of these invoices, $180,000 remain unpaid on 30 June 2022. (2 marks)

b. Staff salaries total $50,000. Staff superannuation guarantee contributions total $5,000. Interest paid on a bank overdraft totals $8,000. (2 marks)

c. Decorating purchases a luxury passenger vehicle on 1 June 2022 for $87,000 and gives the use of the car to the managing director as a fringe benefit employment entitlement. The managing director only uses the car for private purpose. (2 marks)

d. Decorating sends one of its interior designers on a business trip to Italy to view a range of couches. The cost of the return flight from Sydney to Rome, Italy totals $3,000. Decorating wants to purchase a new couch for the reception area of its Sydney office. Based on the report that the interior designer submits, Decorating purchases a couch from the Italian manufacturer at a purchase cost totalling $15,000. Decorating airfreights the couch to Australia, paying an international airfreight company $1,250. Import duties total $750. The couch arrives at Decorating’s Sydney office on 20 June 2022. (4 marks)

You are required to:

Discuss the GST implications of all these transactions. Show all your calculations, provide reasons for your answers, and clearly categorise each GST transaction. Distinguish between these transactions in your answer by using the corresponding alphabet letters ‘a’, ‘b’, ‘c’ and ‘d’.

Answer Question 3 and Question 4 in the second exam answer booklet.

QUESTION 3                                                                             22 MARKS

This is a two-part question (Part A and Part B) about Income Tax. In this question, ignore GST (Goods and Services Tax). Nick Christos operates a tennis coaching and tennis equipment retail business as a sole trader. His business is called Pro-Tennis.

Part A                                                                                      (17 marks)

These are the transactions of Pro-Tennis for the 2021–2022 income year ending 30 June 2022:

• Closing trading stock was valued at $25,000 on 30 June 2021.

• The purchase cost of trading stock totals $295,000. Nick purchases all of his trading stock from one wholesaler. This wholesaler gives Nick new graphite tennis racquets valued at $2,200 free of charge so that he can try these out when he coaches tennis. These racquets are part of a new range that the wholesaler plans on launching during the 2023–2024 tennis season.

• Receipts from the sale of trading stock total $760,000. In addition to these sales receipts, Nick sold a tennis racquet to his brother for $50. The market value of this racquet was $350 and it cost $180 (this cost is already included in the purchase cost of trading stock in the previous point in this question).

• Closing trading stock was valued as follows on 30 June 2022:

Stock item

Number of items on hand

Cost price per item

Market selling value per item

Replacement value per item

Tennis racquets

150

$180

$290

$240

Tennis balls

5,000

$3

$4

$2

• Receipts from tennis coaching totals $600,000. Nick is the head-coach, drawing a salary of $195,000. He employs five other fulltime coaches. Their employment entitlements comprise of wages totalling $300,000 and superannuation guarantee payments into their elected super funds totalling $30,000.

• Nick prepays the rent for the tennis courts where coaching takes place on 1 June 2022 for 12 months, for the period starting on 1 July 2022. The prepayment totals $60,000.

• Nick pays a catering company $12,000 to prepare food for Pro-Tennis’s annual Christmas party. The party is held at the tennis courts where coaching takes place and everyone who gets tennis coaching from Pro-Tennis can attend the party free of charge.

• Nick has a low value pool with an opening balance of $3,200 on 1 July 2021. He purchases a new printer on 1 October 2021 to print coaching schedules (60% of the use) and to print recipes for healthy meals he prepares at home. The printer cost him $275. He also purchases an automated tennis ball tracking machine on 1 February 2022 for a cost totalling $900. Nick and his staff use this machine when they coach clients. The machine breaks down in May 2022 and Nick pays $230 to repair it.

You are required to:

Calculate Nick’s taxable income for the 2021–2022 income year. Show all your calculations. Provide reasons for your answer. Your answer should reference relevant sections of the Income Tax Assessment Acts and relevant case law. Present your answer in a two-column table with the following headings:

Description                                        $

Part B                                                                                             (5 marks)

Nick wants to grow his business. To fund his expansion plans, he makes an offer to Isla Thompson to become a partner in his business. These are the terms of his offer:

• Isla will make a capital contribution of $2 million and she will be entitled to receive interest on capital totalling $100,000 each year.

• Nick will be entitled to a salary of $250,000 each year.

• The partnership will make a $50,000 contribution into Nick’s self-managed superfund each year.

• Isla and Nick will split the remainder of the profits as follows: 65% to Nick and 35% to Isla.

You are required to:

Discuss the income tax implications for the business, for Isla and for Nick, if Isla accepts the offer. Provide reasons for your answer. Your answer should reference relevant sections of the Income Tax Assessment Acts and relevant case law. Ignore any capital gains tax implications in your answer.

QUESTION 4                                                                                8 MARKS

This is a question about Capital Gains Tax that relates to four A1 disposal events that occur in the 2021–2022 income year of Jennifer Armstrong that ends on 30 June 2022. These are the events:

• Jennifer sells her 1969 Ford Mustang car for $67,000. She originally purchased this car on 1 September 1997 at an auction for $25,000.

• Jennifer sells a painting that hung in her family home for $10,000. She originally purchased the painting on 1 July 2012 for $3,000. Before she sold the painting, she had it appraised by an art valuer who charged her $600 for this valuation. Jennifer insured the painting, spending $1,000 on insurance over the period of her ownership.

• Jennifer sells a parcel of shares for $88,000, incurring brokerage fees of $800 when she sells the shares. She originally purchased these shares on 1 August 2021 for $75,000, incurring brokerage fees of $700 when she purchases the shares.

• On 1 July 2021, Jennifer had unapplied carry forward capital losses from the disposal of collectables totalling $1,400, and unapplied carry forward capital losses from the disposal of CGT assets of $4,000.

You are required to:

Calculate Jennifer’s net capital gain that will be included into her assessable income under s 102-5 Income Tax Assessment Act 1997. The purpose of your calculation is to determine her lowest possible net capital gain. Provide reasons for your answer, correctly classify each asset, explain any exemptions, detail the component parts of cost base, and apply the correct method statement to aggregate gains and losses.