Details of the assignment: The assignment consists of four parts. The main Part ("Part A") requires the preparation and lodgement of a 2016/17 individual ("I") income tax return for John Ferguson ("John") using GovReports.
The completion of Part A will require the input of data either contained in the following attachments to this document, or which you determine as a consequence of completing the other three parts of the assignment:
1. background information and John's personal financial transactions for tax purposes;
2. the financial records of his business SailAway
3. the financial records of the partnership Sailing Grub; and
4. extracts from the financial records of The Ferguson Family Trust.
The other three parts of the assignment are:
- Part B - the calculation of the net income of SailAway;
- Part C - the calculation of and the distribution of the net income of Sailing Grub; and
- Part D - the calculation of the tax payable by the trustee of The Ferguson Family Trust.
Each of these parts is to be completed as separate exercises which will require students to show their workings, where necessary, and describe the reasoning behind their treatment of the items of data for taxation purposes. It is recommended that these parts be completed prior to the commencement of Part A.
The completion of John's "I" return using the GovReports system will require students researching the ATO's internet sites for instructions regarding the completion of an ‘I' return.
You should make sure you are familiar with the guidelines relating to the presentation of written work, late policy and academic integrity. You should also note the assessment marking matrix below which shows how marks will be allocated.
Part A
Background information and John Ferguson's personal financial transactions for tax purposes
John Ferguson is a resident who is employed as a sailing instructor at the Miranda Sailing Club, specialising in Olympic class Finn dinghys. He also owns a business, SailAway, which sells both new and secondhand boats and sailing equipment, and is a partner with Judy in a lucrative business, Sailing Grub, which teaches long distance sailors how to prepare food while sailing.
During the 2016/17 income year, John, as an instructor, was paid a salary of $84,000. On 3 August 2016 he was given full access to a car owned by the club which had cost the club $23,000 on 1 April 2011. John garaged this car at his home each evening and contributed $2,500 for fuel.
On 31 January 2017 he sold for $18,000 a collection of old sailing prints that he had purchased for himself in 2009 at a cost of $12,000. John holds 10,000 shares in the Best Sails Company and during the year received a dividend of 30 cents per share.He is advised by the company that the franking percentage was 28% franked at the company tax rate of 30%. He is also a beneficiary of The Ferguson Family Trust
Personally, John believes that he is entitled to the following deductions: $1,000 for the cost of a seminar he attended on Finn Sailing for Winners, $700 for the decline in value of a computer he uses totally for work-related matters, $340 for repairs to meteorlogical equipment he uses in the sailing school, $760 for fees charged by his accountant for the preparation of his tax return for the previous income year, $350 for protective clothing (sailing gloves),and $200 for a donation to a charity that is a registered as a deductible gift recipient in payment of which John receives 6 tickets in a car raffle.
John paid $4,000 for private health insurance for him and his wife for the whole income year. PAYG withheld on John's behalf amounted to $15,500.
Part B
SailAway
In his business John uses accrual accounting. He provides you with the following information for the year ended 30/6/2017. SailAway is not a small business. All amounts exclude GST.
|
Receipts
|
$
|
|
Cash sales of boats and fittings
|
127,000
|
|
Debtors from the sale of new and second-hand boats
|
338,000
|
|
Insurance proceeds: storm damage to boats and sails
|
7,000
|
|
: storm damage to broken windows and carpets
|
13,000
|
|
Bank loan to enable repairs to be made to a number of boats recently traded-in (Funds were borrowed on 1/10/2016. The loan, at 4.99%, is
due for repayment on 30/9/2021.)
|
11,000
|
|
Bad debt recovered (debt written off in 2014/15)
|
4,000
|
|
Payments
|
|
|
Advertising (Note 1)
|
6,500
|
|
Cash drawings
|
90,000
|
|
Cash purchases of trading stock
|
78,000
|
|
Council rates - business
|
6,000
|
|
Creditors from purchase of trading stock
|
138,000
|
|
Entertainment of suppliers and high-end customers
|
15,660
|
|
Income tax instalments for the business
|
41,500
|
|
Legal expenses in relation to the bank loan
|
2000
|
|
Motor vehicle expenses (Note 2)
|
6,400
|
|
Repairs to storm damage
|
18,500
|
|
Staff wages
|
80,000
|
|
Superannuation for staff
|
7,600
|
|
Repairs to boats traded-in (Note 3)
|
15,000
|
|
Other payments including interest (all deductible)
|
33,000
|
Trading stock on hand at 1/7/2016: $16,000; 30/6/2017: $68,000
Debtors at 1/7/2016: $12,000; 30/6/2017: $6,000
Creditors at 1/7/2016: $23,000; 30/6/2017: $25,000
Note 1: John advertises his store in the sailing club magazine. He entered into an eighteen- month contract on 1/5/2016 that cost $6,500. The amount pre-paid at 30/6/2016 on a previous contract was $4,000. This contract expired on 31/10/16.
Note 2: Cash payments on running the business's utility vehicle totalled $6,400. The utility had been purchased on 1 July 2015 at a cost of $30,000 and it is estimated it will have a life of 12 years. A log book kept in early 2016 showed business usage to be 80%.
Note 3: The repairs were made to prepare the boats for sale. The amount excludes interest.
Note 4: John's records showed that he had taken sailing gloves from stock which had cost $350.
Showing all workings, calculate the taxable income of SailAway 20 marks
Part C
Sailing Grub opened for business on 1 July 2016. The accounting profits and losses are to be shared equally. The following transactions were recorded in the partnership's cashbook in the year ended 30 June 2017.
|
Receipts
|
$
|
|
Fees received
|
350,000
|
|
Bank loan
|
55,000
|
|
Loan from Judy
|
45,000
|
|
Interest on drawings - John
|
500
|
|
Interest on drawings - Judy
|
750
|
|
|
|
|
Payments
|
|
|
Rent of the training venue and sundry expenses such as utilities (all deductible)
|
35,500
|
|
Cost of food used in cooking classes
|
5,600
|
|
Salary of part-time chefs
|
125,000
|
|
Salary of John
|
35,000
|
|
Salary of Judy
|
60,000
|
|
Superannuation contributions for part-time chefs
|
11,876
|
|
Bank loan repayments - principal
|
2,800
|
|
Bank loan repayments - interest
|
1,500
|
|
Interest on capital - John
|
1,000
|
|
Interest on capital - Judy
|
1,000
|
|
Interest on loan from Judy
|
2,500
|
|
Drawings - John
|
6,000
|
|
Drawings - Judy
|
12,000
|
|
John's attendance at a seminar on Cooking at Sea
|
1,000
|
Showing all workings, calculate John's net income from the partnership for the tax year ended 30 June 2017.
The Ferguson Family Trust
Part D
The Ferguson Family Trust (a family trust election having been made by the trustee) was created by John some years ago for investment purposes. The Trust Deed provides that all the trust's income may be either retained by the trustee or distributed to the beneficiaries.
In the year 2016/17 the trust derived trust net income of $45,000
The trustee used his discretion to distribute the following cash amounts to the stated beneficiaries:
|
John Ferguson
|
|
$10,000
|
|
David Ferguson
|
John's brother
|
10,000
|
|
Henry Ferguson
|
David's 17 year old son
|
2,000
|
|
Allison Ferguson
|
David's 12 year old daughter
|
2,000
|
|
Peter Ferguson
|
David's 1 year old son
|
1,000
|
The trustee also applied some of the remaining net income as follows:
- $3,000 was set aside for the future restoration of an old sailing boat.
- $2,000 was paid for Henry's university fees, books and a new lap-top computer.
- $1,500 was set aside to help pay for Peter's day care when he reaches 3 years of age.
- $1,234 was used to pay David's speeding fines.
Showing all workings, calculate the gross tax and Medicare Levy payable by the trustee (if any) for the year ended 30 June 2017.