Question 1
Mary Contrary is a resident, full-time employee. She provides you with the following
information for the year ended 30 June:
Salary 40,000
Superannuation contribution
made by employer 6,000
Cash dividend received 3,500
[fully franked]
Share of trust income 1,500
Loss on the sale of shares (2,600)
Expenses
Donation
- Royal Children's Hospital (150)
Education expenses* (2,500)
*Education expenses:
The taxpayer is employed as an assistant accountant and is completing a BCom degree part-time. On completing the degree it is expected the salary will rise to $47,500. The expenses are as follows:
Education materials 350
Higher Education Funding Act payment (Former HECS) 1,600
University fees 250
Travel from work to university 300
2,500
Required
(i) Calculate the taxable income assuming the taxpayer is an adult, resident, individual taxpayer. Indicate all relevant provisions and authorities.
(ii) Advise the taxpayer of the deductibility of the self education expenses. (You must cite relevant authorities.)
Question 2
Alan and Zeta carry on a consultancy business ‘A - Z Solutions' in partnership. An agreement dated 24 June 1999 provides for a salary of $40,000 to be paid to Zeta for managing the business and thereafter profits and losses to be shared equally.
During 2014/15 assessable income was $250,000.
Deductions claimed for the year were as follows:
Office rent $12,000
Equipment leasing 24,000
Staff salaries 62,000
Zeta's salary 40,000
Interest 8,000 $146,000
Notes:
i) During the year Alan withdrew $20,000 and Zeta $25,000 for living expenses.
ii) The interest was paid to Alan for a loan to the partnership, at commercial interest rates, to provide working capital.
(iii) One member of the staff is Alan's 18 year old daughter. She is paid $20,000. The Commissioner considers $12,000 is reasonable for the services performed.
Required
i) Calculate the partnership s90 ‘net income' and
ii) Calculate Alan's the taxable income. (You do not have to calculate tax liability.)
Note: You must cite all relevant sections and authorities.
Question 3
For the year ended 30 June 2014, Cutter Ltd, a resident manufacturer, reported an operating profit of $750,000 in its Financial Accounts. In preparing the financial statements, the accountant incorporated the following information:
a. $30,000 had been written off the goodwill arising from the acquisition of a business in 2009
b. A provision had been raised in respect of future warranties equal to 2% of sales. During the year the sales were $5m.
c. The company borrowed $200,000 on 1 January 2014 to cover the purchase of some new plant. The loan is repayable in 10 years. The borrowing costs of $2,000 were written off immediately.
d. Entertainment expenses amounting to $40,000 were debited. The amount comprised:
i) $10,000 entertaining clients and customers;
ii) $5,000 for the staff Christmas party;
iii) $8,000 provided as fringe benefits to staff;
iv) $17,000 food subsidy for the staff canteen.
Required Calculate the company's taxable income for the year ended 30 June 2009. [You should indicate what adjustments (if any) have to be made to the company's reported net profit. Cite section numbers and case law authority.)
Question 4
(i) Explain briefly why it is necessary to distinguish between income and capital.
(ii) Briefly state the different capital gains tax treatment for the sale of an ordinary asset, a personal-use asset and a collectible.
(iii) Briefly explain what consequences follow if a company has a debit balance in its Franking Account at 30 June.
Part B - 10 multiple choice questions
[Note: multiple choice questions have been provided throughout the term for practice. The following questions are provided just as a reminder of the type of question that may be asked.]
(1) Which of the following is not trading stock?
A Goats bred commercially to provide cashmere
B A standing crop of wheat produced by a primary producer
C A dairy herd owner by a dairy farmer
D Shares held by a share dealer
E Land in the course of development by a real estate business
(2) Mai provides the following information for the year ended 30 June:
Salary $45,000
Bonus 1,000
Share of partnership loss (2,000)
Capital loss (4,000)
Her assessable income is:
A $46,000
B $45,000
C $44,000
D $40,000
E Some other amount
(3) Alan purchased a rental property on 4 July 2013 and immediately rented it out. In the year 2013/14 he incurred the following expenses. What is the cost base of the asset?
Purchase price 450,000
Stamp duty 15,750
Legal fees to transfer title 1,700
Mortgage interest - 4/7/14 to 30/6/14 24,000
Borrowing expenses 2,700
Advertising for a tenant 500
Extension to kitchen 25,000
Council rates 1,800
A $523,230
B $496,530
C $520,930
D $492,450
E $494,230
(4) If a dispute over an assessment concerns an exercise of the Commissioner's discretion, a taxpayer should appeal to:
A The Administrative Appeals Tribunal
B The Federal Court of Australia
C The Commonwealth (Taxation) ombudsman
D The High Court of Australia
E There are no grounds for such appeals.
(5) Which of the following entertainment expenses are not deductible?
A Food and drink provided in an ‘in-house dining facility'.
B Food and drink provided to an employee as a fringe benefit.
C Food and drink incidental to an ‘eligible seminar'.
D Food and drink provided at a business lunch.
E Morning and afternoon tea provided by an employer
(6) Which of the following is not exempt income in terms of s11?
A Wages of a part-time member of the Army Reserve
B Alimony payments made to a former spouse.
C Education bursaries paid to full-time students.
D Mutual receipts received from members of a social club.
E Income of the University of Ballarat
(7) Which of the following would be trading stock for tax purposes?
i) DVDs and videos held by The Movie Shop for hire to customers
ii) Blue gums growing in a plantation
iii) A stock of spare parts held by an airline company
A (i) only
B (i) and (ii) only
C (ii) and (iii) only
D (iii) only
E None of the items
(8) During the year a grocery store incurred the following expenses. What amount would qualify as a repair in terms of s25-10?
Rewiring a freezer due to an electrical fault $1,000
Servicing a delivery vehicle used 80% for business $ 500
Repainting the side wall $ 600
Concreting the car park surface (previously unsealed) $3,500
A $5,600
B $2,100
C $2,000
D $1,500
E Some other amount
(9) BIG Ltd has a nil balance in its franking account at the beginning of the year. During the year the following occurred:
• received a $2,100 cash dividend, fully franked
• paid $10,000 in tax instalments
• paid a fully franked dividend of $14,000
At 30 June the balance in the company's franking account would be:
A $4,900 credit
B $4,000 credit
C nil
D $1,900 debit
E Some other amount
(10) Which (if any) of the following statements about partnerships is correct?
i) Partners' drawings are deductible in calculating the s90 net income;
ii) If each of two partners elected to value trading stock by a different method the s90 net income would be different for each partner;
iii) When a company is a member of a partnership if does not have to satisfy the continuity of ownership or business test to recoup past years losses.
A (i) only
B (ii) only
C (ii) and (iii)
D (i) and (iii)
E None of the statements are correct
Some Additional Revision Questions
Question 1
Roy Roberts and Sue Smith carry on a manufacturing business as R&S Components Pty Ltd.
Required 1
During the 2012/2013 income year the company manufactured 100 cartons of Teftoffel, a component used in the motor vehicle production industry. Usually the items are produced as ordered but at 30 June 2013 ten [10] cartons are on hand. If R&S elect to value closing stock at cost, what would that value be given the following financial information?
Total direct labour $ 70,000
Total direct materials $ 80,000
Factory overheads $200,000
Administrative expenses $ 40,000
Required 2
On 1 May 2013 R&S received an order and payment for ten cartons of Teftoffelex - a new product that required some modification their production system. The customer agreed to contribute to the cost of modifications. The contract provided for supply in August 2012 and the advance payment of the agreed price as follows:
Capital contribution to modifications $10,000
10 cartons @ $7,000 $70,000
$80,000
Advise the company on the tax treatment of the $80,000 and whether the Arthur Murray principle applies.
QUESTION 2
Mad Mike's is a discount store selling household goods to the wholesale and to the public. The following events occurred during 2011/12:
i) In November 2011 an electrical fault in the store's warehouse caused a fire that destroyed trading stock costing $150,000. The company recovered $125,000 from its insurance company.
ii) In March 2012 Mad Mike's received compensation of $100,000 in connection with cancellation of a contract to supply Unreliable Pty Ltd. The compensation represented around 5% of Mad Mike's annual sales receipts.
iii) Food and drink costing $1,200 was provided free at a public ‘sausage sizzle' to promote the store.
iv) Following the sausage sizzle, the store was fined $750 by the Newtown Municipal Council for providing food without Council's permits.
v) The store's accountant attended an evening seminar on the GST and planned tax changes. The seminar was run by CPA and was conducted at a city hotel's seminar facilities. It ran from 5.30pm to 7.30pm when there was a 45 minute break for dinner and concluded at 9.30pm. The cost, including meal and refreshments was $1,100.
Required
Citing relevant legislation and case law, advise Mad Mike's on the assessability/deductibility of events (i) to (iv).