HI6028 Taxation Law Theory and Practice

HI6028 Taxation Law Theory and Practice
Trimester 1, 2018 Group Assignment
Holmes Institute

Assignment Part A

RIP Pty Ltd is a resident private company carrying on the business of undertaker/funeral director. It operates out of premises comprising office facilities, a chapel and assembly area and professional rooms. Its other assets include a fleet of motor vehicles.

For the year ended 30 June 2016 the company reported a net profit of $2.45m. Its income arises from the provision of funeral services financed as follows:

• Fees payable under a ‘net, 30 days’ invoice.
• Fees payable under several external insurance contracts to which bills are issued under a ‘net, 30 days’ arrangement. For instance, some funeral costs are paid by the Transport Accident Commission, others are paid out of private life assurance plans.
• Fees received from RIP Finance Pty Ltd, a company providing credit under an instalment repayment plan.
• Amounts paid under a funeral plan in which clients make periodic contributions to meet future funeral costs. ‘Easy Funeral Plan’ is a fixed price contract. When the agreed amount is paid, the client is guaranteed a ‘deluxe funeral arrangement’. If the contract price in not fully paid at date of death, the deceased’s estate is billed under (i) or (iii), above. The amount is not refundable or transferable. At 30 June the credit balance Easy Funeral Plan is $225,000.

From time-to-time amounts paid pursuant to the Easy Funeral Plan are not drawn upon. The clients might die abroad or remains not be recovered and no funeral service is provided. No refund issues arise.

At 30 June, the company transfers from Easy Funeral Plan amounts estimated to have arisen in connection with defaulting members (ie, members who have ceased making scheduled payments and who are not expected to make up arrears). These are credited to a ‘Forfeited Payments Account’ that has a balance at 30 June of $16,200.

Required

[Note: it is necessary to refer to appropriate case law on the issues.]

1. Refer to the decision in Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314. In your own words, briefly describe the facts, issues and conclusion in that case. [Note: Case reports and extracts of Arthur Murray are widely available or the decision may be accessed via www.hcourt.gov.au]
   • Advise RIP Pty Ltd when income is derived (i) generally, and (ii) when it derives its income from funeral services and related activities.
   • Does the Arthur Murray principle apply to the company’s accounting treatment of amounts in Easy Funeral Plan? Explain.
   • Does the Commissioner or any taxpayer have a choice in the method of accounting for tax?
2. Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv).

Assignment Part B

1. RIP Pty Ltd holds a stock of three types of caskets as well as a range of accessories (such as religious and secular icons). In June 2016 the company prepaid $25,000 for material to be delivered in August 2016. The company obtained considerable discounts for the advance purchase.
2. A fully franked cash dividend of $21,000 was received from RIP Finance Pty Ltd.
3. An amount of $57,000 was paid on 1 March 2016 for two year's rental of storage space. The lease expires on 28 February 2018. In the company’s financial accounts an amount of $9,500 was expensed and $47,500 capitalised.
4. On 1 June 2016 the managing director of RIP commenced three months long service leave and was paid $22,000 in advance. In the company’s accounts the amount was debited against a Provision for Long Service Leave Account.
5. In 2013 the company’s Board of Directors decided existing accommodation was inadequate and it resolved to construct a purpose built facility. In that year $250,000 was paid for preliminary architectural designs. In 2014 land costing $1.25m was acquired and $50,000 paid to demolish an existing structure. Construction of the new premises commenced on 1 September 2014 at a cost of $2.5m. Fitting and equipment was installed on 1 June 2015; operations began on 1 August 2015. On-site car parking costing $125,000 was completed on 30 September and landscaping of the site was completed on 31 January 2016 at a cost of $40,000.

Required

Advise the company about the following:

[You must refer to appropriate sections of the legislation and relevant case law.]

• The nature of trading stock, generally, whether the caskets and accessories would be trading stock for tax purposes and how the amount of $25,000 is treated for tax purposes.
• What adjustments (if any) should be made to the company’s reported profit for tax purposes in regard to items (b), (c) and (d).
• What deductions (if any) are available for expenditure set out in item (e). Explain.

HI6028 Taxation Theory, Practice & Law
T2 2018 Individual Assignment
Holmes Institute

Question 1

You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:

(a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:

1. 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase.
2. 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase
3. 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.
4. 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.

(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999.

Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.

Required:

Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Question 2

Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.

On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.

During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.

Required:

1. Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions.
2. How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?

HI6028 Taxation Theory, Practice & Law
 T3 2018 Individual Assignment

Instructions:

This assignment is to be submitted by the due date in soft-copy only (Safe assign – Blackboard).

The assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook.

It is the responsibility of the student submitting the work to ensure that the work is in fact his/her own work. Ensure that when incorporating the works of others into your submission that it is appropriately acknowledged.

Question 1

Daniel and Olivia Smith operate a mixed business called Brekkie and Lunch and OZ Bottle Shop at 50 York Street Sydney. They visit you in order to prepare their 2017 partnership tax return. During your first meeting they provide you with their cash receipts and cash payments journals, their business bank statements and a file contain all their business invoices and receipts relating to the transactions in their book. Details of the transactions are as follows:

Transactions $
Business Sales (Cash) 150,170
Debtors cash payments 32,800
Car expenses 3,310
Electricity bill 1,470
Council rates 517
Business insurance 1,250
Mobile bills 704
Union fees 284
Account charges ( ANZ Bank) 595
Repair expenses 1,490
Loan repayment 8,500
Drawings 6,000
Purchase of fixed Asset 3500
Cash Purchases 31,155
Repayment to Credits 128,678

After careful consideration of the working papers from last year’s return, you establish:

1.  $
   Debtors at 1st July 2016 3,925
   Debtors at 30th June 2017 3,010
   Creditors at 1st July 2016 6,500
   Creditors at 30th June 2017 7,010
   Stock on hand 1st July 2016 9,120
   Stock on hand 30th June 2017 9,750
   

2. Some of the creditors were paid directly from the cash receipts account. Overall, $31,155 of stock was purchased in this method. Additionally, $5,600 in cash has been used for private purposes.
3. The owners have taken $3,200 from Bottle Shop items for private use.
4. There was a $3,000 reduction in the loan repayment, as this was the loan principal. The business loan repayment was $8,500.
5. The business has two cars: a van used 90% for business purposes and a SUV used 60% for business purposes. The cost of maintaining the van was $1,260 and the SUV $2,050.
6. Repairs and maintenance expenses are as follows:

    $
   1st October 2016- air-condition installation 1,200
   1st December 2016- shop painting 150
   1st April 2017- refrigerator motor replacement 140
   

7. Asset purchases are as follows:
   1st August 2016- new restaurant freezer $3,500
   A trade-in of $500 was permitted on the old unit
8. The depreciation schedule as at 30th June 2017:
   

    Cost $ Adjusted value $
   Restaurant freezer 8,000 1,480
   Restaurant refrigeration 14,600 3,580
   Shop fittings structure 7,800 2,965
   kitchen electrical appliances 3,900 754
   Car – Van 16,500 1,550
   Car - SUV 42,200 10,350
   

   All of the above discussed business assets of Brekkie and Lunch and OZ Bottle Shop were purchased before 27 February 1992 and Daniel and Olivia Smith have chosen to use the depreciation rates published by the ATO. Any new assets will have a useful life of 10 years and the Daniel and Olivia’s partnership business will use diminishing value method to depreciate their business depreciable assets.

9. Daniel and Olivia live on the business properties, but 90% of mobile bills, 80% of electricity expenses and 60% of council rates relate to the Brekkie and Lunch and OZ Bottle Shop. The insurance premium paid is completely related to their business. Daniel and Olivia have a separate insurance for their personal goods.

From the information supplied, prepare the working papers and determine the net income for the partnership for the year ended 30 June 2017.

Question 2

John is a senior executive with a printing company. As part of his remuneration package his employer pays for his child’s school fees at a private school costing $15,000. His employer also provides him with accommodation in a Sydney apartment throughout the FBT year. John must pay $100 of rent per week for the apartment. The market value rent for the apartment is $800 per week.

Advise John’s employer of the FBT consequences of John’s remuneration package.