Case study:
Mandy Johnsen is a 45-year-old Manager/ Chauffeur who is employed by Hummer Fun Pty Ltd in Sydney. Mandy requests your services for the preparation of her company’s 2019/20 tax return. Mandy has already lodged her own personal tax return on my.gov. au.
You are required to prepare the company’s tax return.
On 11 September 2020 Mandy presents you with the relevant information for the preparation of her company’s tax return for the 2020 income year.
Company Tax Return
- Hummer inheritance
Mandy received a Hummer from her uncle who passed away on 15 November 2019. Rather than selling the hummer privately, Mandy decided to make some money by starting up her own small business using the Hummer. She decided that she would be the manager and chauffeur. Mandy’s residence is her working base. The market value of the limo was $80,000 on 20 January 2020 when the business started.
- New Hummer Fun business costs
Mandy consulted Lawrence Lawyers and they suggested, that she should set up a Small Business Entity in the form of a company, and register the Hummer in the name of the company. The consultation expense was $2,000. Accordingly, on 18 January 2020 Mandy purchased a company online using Ultimate Company Services and registered the company as Hummer Fun Pty Ltd, for a cost of $700. Registration was confirmed on the day, and Mandy applied and received an ABN and TFN with the ATO using my.gov.au at no cost.
- Hummer hire Services income
The business involved hiring the Hummer for special events, parties and other daily hire bookings. On 20 January 2020 Mandy registered the limousine in the company’s name and received the keys from her uncle’s estate lawyer and launched the business. The company makes its income from the hiring services. However, Hummer Fun is a premium service business that suits a fairly limited clientele, where the price is set up front with the clients who are prepared to pay the high premium, given it is more expensive than other hiring services. The business was fairly slow at first relying on Mandy’s online advertising, word of mouth, and party pick-ups and drop-offs. The business picked up when the services started to be sought out also by Politicians, hotels and businesspeople, that required a highly confidential service, and word of mouth can be powerful business driver. During prom season and graduation there are many special pickup requests.
From January to June Hummer Fun received on average $6,000 per week from the long hours of service. Mandy believes that her company is a personal services business and that this is not income from her personal services, but does it matter anyway?
For example, all up until 30 June 2020 the company received $130,000 in receipts that were mainly on credit. But as at 30 June 2020 the Hummer Fun had outstanding fees of $5,000 from some of the regular customers and they know they owe the company, Mandy has no given them a bill as she takes a fairly casual approach but thinks she should include those outstanding fees.
Some of my customers even paid some tips for the service services, $2,000, commenting that they were delighted with her personal services, but I don’t think that needs to be included in the company’s income given it was for her personal services - is that right? Finally, there were a few who gave her some exceptional gifts in regard to their appreciations of the services and these included, 3 Perfumes valued at $250 each, a $100 EBay voucher, and even a couple of boxes of Belgium chocolates valued at $200.
- Investment Earnings
Mandy’s uncle also left her some shares he owned in England. Naturally, the shares were changed into Mandy’s name in England, but she mixed up her bank account details and gave the British solicitor the bank account details of Hummer Fun. As such, she must of course now declare that as the company’s income, because the net dividends of $950 were credited into the company’s bank account ($250 tax had been withheld by the company in England). In addition, the company received interest of $200 in its bank account from the local MNM Bank. Additionally, uncle had left Mandy cash and the Johnston lawyer suggested that Mandy should purchase some investments and put them into the company’s name which she did. Consequently, she put them into a blue chip public company. Mandy also had a friend who had a new business, so she also invested on behalf of the company into her friend’s small business Marvel Co P/L. Marvel Co P/L paid Hummer Fun fully franked dividends of $3900 while Large Co Ltd paid a dividend of $4,500, being 60% partially franked.
- Business expenses
Hummer Fun which has its own bank account paid for the following business costs.
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· Motor vehicle Duty on Uncle’s Hummer
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$3,000
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Registration
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$2,000
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Insurance
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$3,000
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Services
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$2,000
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Car washes
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$1,000
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Petrol
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$6,000
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· Professional Cleaning of Limousine
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$1,000
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Council parking fines
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$1000
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Dry Cleaning Uniform
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$800
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Chauffeur Suit, including
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$1,500
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- Chauffeur salary and Super
Hummer Fun gave Mandy a salary at a market rate and paid her $32,000, of which she received $24,000 in her bank account and the Commissioner of Taxation received $8,000 PAYGW. The company also paid superannuation into her nominated Superannuation account which was one she had with her previous employer. The company was careful only to pay $25,000 (so they didn’t go over the cap). The only fringe benefits she received from the company were her wages and super – she didn’t realise there was so much more advantage to be taken from using salary sacrificing, so we will need to deal with that next financial year.
- Hummer repairs and subsequent insurance payout
Hummer Fun needed to be repaired because unfortunately it was involved in a minor accident. The appraisers decided it was Mandy’s fault and the insurance company didn’t cover the cost. It was only one panel that needed fixing the dent, and the bumper bar that was replaced to return it to its original condition, but the cost was enormous, as Hummer Fun had to pay $7.000.
However, on May 15 the Hummer was written off in an accident caused by a Bus when Mandy and her client had stopped at a coffee house. Mandy received
$80,000 compensation from the insurance company, as she had insured it at market value.
- Purchase of new Hummer
Mandy used the $80,000 from the insurance company as a deposit to purchase a brand new Hummer for $120,000 (including stamp duty). She borrowed $40,000 from APP bank on 17 April 2020 over a 5-year loan and associated bank fees were $150. The interest only for 3 months (17 April – 17 June 2020) was $1,300. The registration was $1200 and insurance $2200.
- Taxable income and tax liability of my company
Based on the above information, what would be the taxable income and the tax liability of the business?
Required
- Prepare a report (1,200 words) to put into Mandy’s file which you can use as background in discussion with the Partner, and subsequently when you need to provide further advice to Mandy.
- address the 9 main issues raised using the same numbering system/ headings listed above.
- adopt a report style approach using 3 headings, and apportion the column width similarly.
- The 3 columns should not be equal width - the issue is only a small number words, the amount only has numbers, but the Law is the substantive column which is why it is the widest column.
- You can also use the how to solve a taxation question that I uploaded on Moodle or simply add more columns to this one and customise as appropriate.
