ACC 30005 School of Business Law and Entrepreneurship

Question One (15 marks)  

In 1980, Meg Ryan, a doctor who lived and worked in Sydney, purchased a 25 -acre parcel of rural land on the outskirts of the city for $200,000. Over the years Meg used the property as a ‘hobby farm’ for growing fruit trees and as a ‘weekend retreat’ for relaxation. In recent years the surrounding area has become more developed and the property has increased in value.

Unfortunately, Meg has recently run into financial difficulties because of a malpractice legal suit and she is considering selling the property as a result.  

 

Required:

• Advise Meg as to whether she would be required to include any amount in her assessable income as a result of the sale.
• Would your answer be different if she had originally purchased the property with the intention of selling it at a profit when land prices had risen sufficiently?
• Would your answer be different again, if she decided to develop the property 3 years ago and had subdivided the land into 25 one-acre allotments and proceeded to construct roads and buildings on the land and sold the allotments separately over a period of one year?

Cite relevant case law and legislation to support your answer.

                                                                                                                               (15 marks)

 

Question Two (15 marks)  

Tony Richardson operates a hotel in Perth catering for overseas travellers. The hotel offers free bus pick-up from the airport for guests staying at the hotel. Mr Boscelli arrives from Italy and catches the bus to the hotel for an overnight stay. During his stay, Mr Boscelli purchases breakfast and asks that some food be prepared for his lunch, which he intends to eat down by the river. Mr Boscelli asks that it contain gourmet sandwiches and a bottle of wine.

When Mr Boscelli comes to check out, he only has Euros, and asks Tony if he could arrange to exchange these for Australian dollars, with which he then pays the bill. Mr Boscelli is so pleased with the service he has received that he gives Tony a tip.

 

Required:

Identify which of the above transactions are taxable, GST-free or input-taxed, and why. Is GST payable on the full amount of each supply? Refer to relevant legislation to support your answer.

                                                                                                                              (15 marks)       

 

Question Three (25 marks)  

Part A

Paul Smith Lives in suburban Melbourne and borrowed $1 million from State Bank in July 2020, at an interest rate of 10% per annum, to purchase a large parcel of vacant land near a proposed airport site. Paul planned on operating a motel business on the site. In August 2020 Paul engaged an architect to draw up plans for the construction of the motel. Paul approached his bank to raise the additional finance of $10 million to build the motel.

However, given the size of loan requested and his other financial obligations, the bank rejected his application. Paul then continued to approach other financial institutions but was unsuccessful in raising the funds required.

Paul subsequently incurred various advertising costs to find prospective partners who would invest in his business. Unfortunately for Paul, no prospective partners were found as it subsequently transpired that the construction of the airport would be delayed for several years. Eventually after 5 years Paul decided to abandon his plans and he sold the land.   

 Required:

Applying the IRAC principle and citing relevant case law and legislation to support your answer, advise Paul as to the deductibility, if any, of the loan interest for the purposes of s 8-1 of the Income Tax Assessment Act 1997.                                                                        

                                                                                                                                (13 marks)   

 

Part B

Consider each of the following independent transactions in the case of Oz Furniture Ltd, a retailer of furniture. The company's annual turnover is $632 million for the year ended 30 June 2021 making it a large business taxpayer.

During the 2020-21 income tax year, the company purchased the following assets for exclusive use in the business:

Item	Date of acquisition	Accounting useful life	Cost
(a) Desktop computer	13 July 2020	4 years	$3000
(b) Motor vehicle	9 September 2020	6 years	$82 000
(c) Copyright	1 December 2020	20 years *	$100 000
(d) Trademark	9 February 2021	20 years	$60 000
(e) Accounting software acquired	5 April 2021	4 years	$1440
(f) Commercial building	1 June 2021	30 years	$8 million

*The period that the copyright ends.

The company would like to use the same useful life values for taxation purposes for the depreciable assets as they are using for accounting purposes as shown in the table above.

 

Required:

 Calculate Oz Furniture Ltd.’s decline in value (i.e. depreciation) claim in respect of the abovementioned assets for the year ended 30 June 2021, bearing in mind that it wishes to use the depreciation method that will maximise the deduction that can be claimed. Please show and round all calculations to the nearest whole dollar and refer to relevant legislation to support your answer.                                                                      (12 marks)

 

Prime Cost	Calculation	Diminishing Value	Calculation
Desktop Computer	$3,000x(353/365)x(100%/4) =$725	Desktop Computer	$3000x(353/365)x(200%/4) =$1451
Motor Vehicle	$53760x(295/365)x(100%/6) =$7242	Motor Vehicle	$53760x(295/365)x(200%/6) =$14483
Copyright	$100,000x(212/365) x(100%/20) = $2904	Copyright	$100,000x(212/365)x(200%/20) =$5808
Trademark	$60,000x(223/365)x(100%/20) =$1833	Trademark	$60,000x(223/365)x200%/20) =$3666
Accounting Software	$1440x(278/365)x(100%/4) =$274	Accounting Software	$1440x(278/365)x(200%/4) =$548
Commercial building	(8,000,000/30years)x(30/365) =$21918	Commercial building	N/A

Total Depreciation = 1451+14483+5808+3666+548+21918=$47,874.00

          Total (13 +12= 25 marks)

Question Four (20 marks) 

 

Part A  

RTS Pty Ltd, a resident private company, was incorporated on 1 July 2018. From 1 July 2018 until 30 June 2020, it conducted a newsagency business. The company incurred the following trading losses for tax purposes:

• $30,000—year ended 30 June 2019, and
• $40,000—year ended 30 June 2020.

In July 2020, the company discontinued its newsagency business, restructured and acquired a family restaurant business. The company’s shareholdings of ordinary shares at the close of each financial year were as follows:

 

Shareholders	2019	2020		2021
	$		$                           $
A	200	200		200
B	200	200		200
C	—	600		600
D	—	—		800
	400		1000                     1800

For the tax year ended 30 June 2021, the company reported taxable income of $70,000.

Required:

Discuss the tax implications of the above events for RTS Pty Ltd. for the year ended 30 June 2021, citing relevant legislation and showing all calculations.

In order to deduct prior year tax losses, RTS Pty Ltd must satisfy either:

the continuity of ownership test s.165-12

or

the similar business test s.165-13

2019 tax loss $30,000:

In 2020

The COT is failed. A and B only hold 200 out of 500 issued shares in 2019, this represents a continuing ownership of only 40%.

Shareholder	2019	2020	Continuity
A	200	200	200
B	200	200	200
C		600
D
total	400	1000	400/1000 = 40%

The SBT is passed. However, there is no taxable income to recoup the loss from, the $30,000 tax loss is carried forward under the SBT test.

In 2021, the COT is failed due to share trades. There is no longer more than 50% of remaining shares held by the same owners as at the start of 2019.

 

Shareholder	Year 1	Year 3	Continuity (Yr 1-3)
A	200	200	200
B	200	200	200
C		600	0
D		800	0
total	200	1800	400/1800=22.22%

In 2021

The 2020 tax loss has been carried forward under the SBT. However, the SBT is now failed as the old business is ceased, s.165-13. The company now operates a family restaurant business.

The $30,000 cannot be deducted in 2021

2020 Tax loss $40,000

In 2021

The COT is passed because A,B and C jointly hold 1000 out of the 1800 issued shares in 2021 which is a 55% continuing ownership of the 2020 tax loss.

Shareholder	2020	2021	Continuity
A	200	200	200
B	200	200	200
C	600	600	600
D		800
total	1000	1800	1000/1800=55.55%

The 2020 Tax loss of $40,000 can be deducted in 2021 as there is sufficient income

Taxable income in 2021

                                                                                              $

Taxable income before deducting tax losses              70,000

Less 2020 tax loss                                                       (40,000)

                                    Taxable income                       $ 30,000

                                                                                                                       (12 marks)

Part B

The Short (living) trust derived $60,000 of interest income and $27,000 in fully franked dividends during the income tax year 2020/21.

The net trust income was distributed accordingly to the following beneficiaries:

(a) $40,000, including the franked distribution, to Sally, who is aged 62 and a resident and has no other income, with

 (b) the remaining amount distributed to Jack, a 42 year- old non-resident.

Required:

Calculate the s. 95 net income of the trust and the tax implications for Sally and Jack citing relevant legislation to support your answer.                                                                    

                                                                                                                                   (8 marks)

Trust Income

Interest                                                            $60,000

Franked Dividend                                           $27,000

Franking Credits         (27,000x(30/70))         $11,571.43

Net Trust Income                                          $98,571.43

 

• Sally: is presently entitled and is not under a legal disability.
• Sally will be assessed under s.97 at her marginal rate on her share of the net trust income ($40,000+(40,000/98,571.43)*11,571.43) $44,695.65
• Sally is entitled to a franking credit off set of $4,695.65

 

• Jack: is presently entitled and is not under a legal disability.
• $53,875.78 to Jack, will be taxed at non-resident rates and this tax will be assessed to the trustee of The Short (living) Trust, under sections 98(2A) and 98(3) of ITAA36 as he is a non-resident;
• Jack is not entitled the tax free threshold as a non-resident
• Jack is not entitled to franking credit off set
• The interest withholding rate is 10%
• Jack is not subject to the Medicare Levy and is not entitled to the low-income tax offset or LMITO

Total (12 +8= 20 marks)

Question Five (10 marks) 

Bob Briggs is 43 years old and a self-employed builder and 2021 was a good year for his business. He tells you he has $300 000 in excess funds which he decides to put into his self-managed super fund (SMSF) before 30 June 2021. Bob also tells you that he has not contributed anything to this SMSF in the previous three years.

Bob has been told by a friend that he could claim $100,000 in a tax deduction (without any further taxes) for superannuation contributions and he wants to do this in his 2021 tax return. Bobs taxable income for 2021 (before his superannuation contribution) was $180,000

 

Required:

Advise Bob of the tax consequences of putting $300,000 into his SMSF for the year ended 30 June 2021. Show calculations and cite relevant legislation to support your answer.

                                                                                                                                (10 marks)

As per the above it is clear bob is an eligible taxpayer (s290-165 ITAA97) and therefore able to claim deductions he makes to his SMSF.

According to s290-150 ITAA97 bob is allowed to claim a tax deduction for concessional contributions to his SMSF of up to $25,000 per year (s 291-20 ITAA97)

Bob must notify his superannuation fund of the amount that he intends to claim as a deduction as per s290-170 ITAA97

The before-tax (concessional) cap is $25,000, therefore the excess amount Bob contributes to his superfund will not be assessable income of the fund ($275,000) (s.292-90 ITAA97)

The after-tax (non-concessional) cap is $100,000, if the after-tax contribution cap is exceeded, the excess will be taxed at 47%. Luckily for Bob because he is under 65 and assuming his fund balance is below $1.4 million he is able to make up to $300,000 in non-concessional contributions in 2021 provided he has not exceed his aggregate non-concessional contributions cap over a 3-year period – which is hasn’t (he has not made any contributions in the last three years). Therefore, no tax will apply to his $275,000 non-concessional contribution.

Question Six (15 marks)

• On 13 May 2021 XYZ Pty Ltd purchased a disused warehouse for $1,500,000. Due to the need to install heavy manufacturing equipment on the floor, XYZ spent $400,000 in resurfacing and strengthening part of the floor. XYZ is unsure as to whether the amount may be claimed as a deduction.

 

Required:

Advise XYZ of what course of action it should take. Discuss the relevant legislation and case law to support your answer

                                                                                                                                (8 marks)

S25-10 allows the taxpayer to claim a deduction for repairs to premises, part of premise, or a depreciable asset insofar as it is held or used for producing assessable income. Whether the above is deductible under s25-10 depends on if it meets the definition of a repair. A repair generally reflects some activity of restoration or renewal of decay, worn out or broken parts, or re-fixing what is lose or detached, as opposed to maintenance.

Clearly, resurfacing and strengthening part of the floor to install heavy manufacturing equipment is not a repair, but rather an improvement (capital improvement) as it will become functionally better and be able to hold more weight. Therefore, a deduction is denied under s25-10(3).

In the case of FCT v Western Suburbs Cinemas Ltd (1952) the taxpayer, a theatre, replaced the ceiling that was in a state of disrepair with different and better material due to the unavailability of original materials. It was held that the outgoings amounted to a capital improvement and were not deductible. This is very similar to the above where resurfacing and strengthening part of the floor would result in a capital improvement and not deductible under s25-10.

XYZ would be able to claim a capital works deduction in accordance with Div 43 or form part of the cost base of the CGT asset.

(2)    Suppose XYZ claimed the cost of $400,000 as a deduction for the tax year 2020/21 and, upon a subsequent audit, the Commissioner disallowed the deduction and issued an amended assessment.

Required:

What penalties may be imposed on XYZ? Discuss the relevant legislation and case law to support your answer

XYZ will be liable to pay the shortfall of tax, as the $400,000 deduction would have decreased taxable income and overall tax payable. Penalties for tax shortfalls include:

• Failure to take reasonable care – 25% of tax shortfall
• Recklessness – 50% of tax shortfall
• Intentional disregard of the law - 75% tax shortfall

Assuming XYZ failed to take reasonable care and did not recklessly or intentionally disregard the law the company will be liable for an additional 25% of the tax shortfall.