BULAW5916- Taxation Law and Practices
Question 1
Mohamad bought his home in 2010 and commenced operating a business from his home. He has a large office which occupies 15% of the house. Mohammad does not own any other property.
Mohammad estimates that 15% of his electricity and gas heating was used for the business in 2018-2019.
During each of the 2017-2018 and 2018-2019 financial years Mohammad had the following expenses in respect of the house:
Gas heating $ 750
Electricity $ 5,000
Rates and taxes $ 3,000
Mortgage repayments
Interest $10,000
Capital repayments $ 4,000
On 1 July 2018 one of Mohammad’s corporate clients unexpectedly made an offer to purchase the business for a good price. Included in the offer was ongoing employment for Mohammad and a workspace in the Adelaide office. Mohammad accepted the offer and immediately commenced his new role as an employee.
While he worked in the Adelaide office most days, Mohammad continued to work from his home office two days each week. He estimates that 7% of his electricity and gas heating was running while he worked in his home office whilst undergoing his new employment.
Required:
a) Advise Mohammad what expenses he can claim for the 2017-2018 financial year
b) Advise Mohammad what expenses he can claim for the 2018-2019 financial year
c) Assume that instead of selling his business Mohammad sold his house on 1 July 2019, making a capital gain of $100,000. Would all of that gain be assessable? Why or why not?
In your response give reasons and refer to sections of legislation and cases, where relevant.
Question 2
Elijah is a lawyer who works in Singapore. He is single and lives in Singapore with his parents. Until April 2018 his work did not involve travel. At that time, he accepted an offer from Legal Ease, his employer, to travel temporarily to Australia to provide legal advice to large numbers of former residents of Singapore setting up businesses in Melbourne, Adelaide and Hobart. Elijah enters Australia on 25 April 2018. He intends to spend three months travelling between the three cities, staying in various motels. Legal Ease asks him towards the end of the three months to take up a position in Hobart for a further nine months. In early July, he leases a serviced executive apartment for nine months near his workplace in Hobart. The apartment is his home base during his stay in Australia. He freights more clothing and some personal effects to Australia. Elijah’s parents visit him on two occasions. Although based in Hobart, his commitments require some limited travel. On average, Elijah travels at least once a week to meet clients outside Hobart.
Required:
Advise Elijah whether he is a resident of Australia for tax purposes (20 marks)
In your response give reasons and refer to sections of legislation and cases, where relevant.
Question 3
You must answer A and B
Mary works for Ace Ltd. She has the use of a company car for work purposes as her role requires her to deliver products to customers. Mary enjoys driving the manual Toyota Corolla and also drives it for private trips. Her employer is aware that she has sometimes uses the car for private purposes.
In late March 2019 Mary was involved in a skiing accident and broke her arm in two places. She was on sick leave for a while but was able to return to work on light duties on 15th May. Mary could not drive as she didn’t have full use of her arm, and couldn’t change the gears in the car. Mary started to use public transport to get to work. In August Mary’s doctor said it was OK for Mary to drive again, but by then Mary was so used to travelling on public transport and decided she did not wish to drive a car again.
Between 1st April and 1st October the company car was parked in the garage at Mary’s house. No one used it.
Required A:
Discuss whether Fringe Benefit Tax applies in the above circumstances.
Required B:
Discuss whether Jan is required to register for GST
Question 4 Multiple choice question
4.1.Kate borrowed $100,000 from the local bank on 30 June 2018 to be repaid over five years, at an interest rate of 10% pa. Interest is to be paid annually in arrears on 30 June (first payment being due on 30 June 2019). The purpose of the loan is to invest $50,000 in shares yielding very good dividends and to on-lend $50,000 to her brother Nicholas, at an interest rate of 4% pa.
What amount can Kate claim as a deductible interest expense, assuming that she paid $10,000 in interest to the local bank on 30 June 2019?
A. $10,000
B. $7,000
C. $5,000
D. $8,000
4.2.Which of the following statements describes characteristics that are LEAST likely to indicate that a business exists?
A. The taxpayer’s activities are well organised
B. The taxpayer expects that the expenses from the activity will be greater than the income derived from the activity over time
C. The activities of the taxpayer are sustained, and regular.
D. The production from the activity is well in excess of domestic consumption
4.3.A and B carry on business as partners. The partnership derives an income of $50,000 and incurs deductions of $30,000 (excluding A’s salary). The partnership agreement provides for a salary of $25,000 to A and thereafter profits and losses to be equally shared. What is the s90 net income/loss?
A. Loss of $5,000
B. Loss of $2,000
C. Net income of $20,000
D. Net income of $25,000
4.4.Ed is a foreign resident (non-resident) of Australia who works as a geologist for a large oil exploration company. During the current year he was located in the United States surveying potential oil deposits in the Gulf of Mexico. He was paid $75,000 for this work. In addition, Ed earned $15000 in rental income during the year from an investment property he owns in Brisbane. Ed has 24,000 shares in Telecom France and he received $3,000 in dividends from the French company during the year. Telecom France has no income-earning operations in Australia. What is the total amount of income earned by Ed that has an Australian source for the current year of income?
A. $93,000
B. $18,000
C. $78,000
D. $15,000
4.5.Which of the following statements gives the MOST correct definition of a repair for the purposes of s 25-10 of the Income Tax Assessment Act 1997?
A. To be a repair the item must be brought back to an identical condition to what it was originally.
B. Where an item is in perfectly good order and it is replaced this will be a repair.
C. Repair involves the restoration or replacement of subsidiary parts of an item.
D. Regular cleaning of an office building would be considered to be a repair.
4.6.During the income year ended 30 June 2019 Nicholas received salary and wages income of $35,000, interest income of $3,000, a net capital gain of $5,000, an exempt compensation payment of $23,000 and commission income of $4,000. What is Nicholas’s ordinary income that is assessable for the year ended 30 June 2019?
A. $42,000
B. $47,000
C. $38,000
D. $35,000
4.7.Noel is a solicitor (lawyer) who operates his own business in Toowoomba providing legal advice to businesses. He has four employees. He incurred the following expenses during the current year of income.
- A set of law reports containing all decided cases relevant to commercial law purchased for $3,600 on 1 November 2018. The reports will be used in the firm for many years to come.
- An annual payment of $250 for a weekly commercial law newsletter paid on 4 February 2019.
- Professional indemnity insurance premium (for one year) of $3,500 paid on 1 July 2018.
- Travelling costs of $400 paid to a prospective employee to attend an employment interview during the 2018/2019 financial year. The prospective employee flew from Sydney to Toowoomba and Noel reimbursed the costs of the travel.
- Morning teas provided to employees during the 2018/2019 year cost $1,700.
What is the total amount that is deductible under s 8-1 of the ITAA97 for the above expenditure during the 2018/2019 financial year?
A. $9,450
B. $4,150
C. $5,850
D. $3,750
4.8.Which of the following expenses would NOT be deductible under the second positive limb of s 8- 1 of the ITAA97?
A. Legal expenses incurred by a company carrying on a retail business.
B. An employee claiming a work-related expense.
C. Salary and wages paid to employees by a primary producer carrying on a business.
D. Public liability insurance incurred by an individual carrying on a consulting business.
4.9.Under a contract of employment Jill Smith, a sales consultant, received the following employment benefits in 2019/2020: salary of $90,000; entertainment allowance of
$3,000; and the sole use of a fully maintained company car with an estimated benefit of $10,000. Jill’s employer pays the necessary fringe benefits tax. What will be the total amount on which Jill will be assessed?
A. $103,000
B. $93,000
C. $13,000
D. $90,000
4.10.For the year ended 30 June 2020, Masher Ltd, a resident manufacturer, reported an operating profit of $750,000 in its Financial Accounts. In preparing the financial statements, the accountant incorporated information that $30,000 had been written off the goodwill arising from the acquisition of a business in 2010. Which of the following statements about this is LEAST correct?
A. Goodwill is a capital asset
B. Goodwill is an intangible asset
C. Goodwill cannot be deducted under s8-1
D. Goodwill is deductible under s40-880
Question 5 Multiple choice question
5.1.Kate is registered for GST. She made a taxable supply and received a sale price of $1,540. What is the value of the taxable supply?
A. Nil
B. $1,540
C. $140
D. $1,400
5.2.Which of the following statements about the taxation of trading stock is LEAST correct?
A. Purchases of trading stock are treated as income for tax purposes
B. Confidential documents held by a research company are not trading stock under s70-10
C. For the purposes of s70-35, trading stock should always be valued at cost
D. For the purposes of s70-35, the taxpayer can give trading stock a closing value at either cost, market selling value or replacement value
5.3.Which of the following statements about GST registered entities is MOST correct:
A. They must have annual turnover above the threshold of $75,000
B. They charge GST on taxable importations, if they have any
C. They charge GST on their GST-free supplies, if they have any
D. They charge GST on their input taxed supplies, if they have any
5.4.Daniel purchased a new rental property on 3 July 20018 and immediately rented it out earning $520 per week in rental income. He paid the following amounts in relation to the property:
$
Purchase price 400,000
Stamp duty on purchase 3500
Legal fees to transfer title to him 1300
Interest paid on loan to purchase the property 28000
Loan establishment costs 700
Extension to main bedroom 14000
Rates paid to local council 1500
What will be Daniel’s cost base of the rental property for CGT purposes based on the above expenditure?
A. $449,000
B. $447,500
C. $446,800
D. $418,800
5.5.Which of the following statements in relation to goods and services tax (GST) is LEAST correct?
A. GST is a consumption tax.
B. GST is levied on the income of a taxpayer.
C. GST is a tax on final consumption.
D. GST is similar to value added taxes applied in other countries.
5.6.Which of the following are NOT CGT assets?
A. Trading stock held by a retailer.
B. A main residence held by an individual.
C. A right to free speech enjoyed by an individual.
D. A depreciating asset held by a manufacturer.
5.7.Kate, an Australian resident individual for taxation purposes, received an unfranked cash dividend of $7,000 from Unity Ltd on 25 June 2019. What amount should she include in her assessable income as a result of receiving the dividend?
A. $3,000
B. $4,000
C. $7,000
D. $10,000
5.8.An item of depreciating plant is purchased on 1 July at a cost of $10,000. It is depreciated at 40% on the diminishing balance basis and is used 80% for business purposes. What amount is deductible in the second year of ownership?
A. $4,000
B. $3,200
C. $2,400
D. $1,920
5.9.Assume a corporate tax rate of 30%. Consider the following situations. Which would involve a franking debit entry?
A. A company pays income tax of $300.
B. A company paid a $35,000 cash dividend franked to 80%.
C. A company receives a dividend of $700, which has a franking percentage of 10%.
D. A company pays a PAYG instalment of $600.
5.10.Miss Jones lodged a tax return in July 2019 but was unhappy when her taxable income was assessed by Australian Tax Office as being higher than she had stated in her tax return. She is determined to dispute that assessment. Which of the following statements is MOST correct?
A. Miss Jones must lodge her objection within 3 years of the service of notice of assessment of the original assessment.
B. Miss Jones must lodge her objection within 60 days of the service of notice of amended assessment.
C. Miss Jones may lodge her objection by contacting the ATO and verbally explaining her reasons for disputing the assessment.
D. All the available answers are correct.
