Taxation Law: Tax Practice Assignment
Background information and Wiley Coyote's personal financial transactions for tax purposes:
Wiley Coyote is an astute businessman whose ventures have included Coyote Rocket Shoes Pty Ltd. which was very successful as were the various ancillary services that he provided such as rocket fuel, rocket repairs, shoe repairs, and osteopathy and chiropractic services through 10 clinics known collectively as the Rocket Science Pain Management Clinics.
Because he could foresee government restrictions being introduced in the future he sold the company in 2014 with the exception of the clinics which were far too lucrative for him to sell off. He owns 100% of the business and is a partner in a mobile telephone dealership called Rocketfone.
Wiley continues to tinker with rocket shoes and in May 2016 he made a net capital gain of $18,000 from the sale of used rocket shoes that he had purchased 2 years ago and refurbished in his spare time.
He is a shareholder in a company and from it received a partly franked dividend of $7,000 which had $1,000 of franking credits allocated to it. He is also a beneficiary of The Coyote Trust.
Personally Wiley is entitled to the following deductions:
- $1,000 (for the cost of a seminar he attended on How to Mix Rocket Fuel Safely),
- $700 (for the decline in value of a computer he uses for work-related matters),
- $560 (for repairs to equipment he uses in the refurbishment of the second hand rocket shoes he buys),
- $540 (for fees charged by his accountant for the preparation of his tax return for the previous income year), and
- $300 (donation to a charity that is a registered as a deductible gift recipient in payment of which Wiley receives 6 tickets in a car raffle).
Wiley paid $4,000 for private health insurance for he and his wife for the whole income year. PAYG withheld on Wiley's behalf amounted to $15,500.
Part B:
The business known as Rocket Science Pain Management Clinics had the following transactions in the 2015/16 financial year.
|
Receipts
|
$
|
|
Fees from cash patients
|
820,000
|
|
Fees from health funds
|
1,075,000
|
|
Sale of burn lotions* - cash received
|
46,800
|
|
Workers compensation receipts**
|
67,000
|
|
|
|
Expenses
|
|
|
Staff salaries (net of PAYG withholding)
|
640,000
|
|
PAYG withholding forwarded to the ATO
|
295,000
|
|
PAYG installments
|
165,000
|
|
Superannuation Guarantee Levy
|
84,000
|
|
Entertaining special customers at sport venues
|
2,000
|
|
Linen (towels, bed-sheets, pillow slips)(Effective life <12 months)
|
11,000
|
|
Laundry expenses (external services)
|
6,000
|
|
Aromatherapy oils and candles***
|
58,000
|
|
Artworks (each piece under $1,000, purchased 1/9/15)
|
8,000
|
|
Rent (includes $32,000, paid up to 31 July 2016)
|
286,000
|
|
Other expenses (all deductible)
|
63,000
|
* Debtors as at 30/6/15 $11,000
Debtors as at 30/6/16 $15,000
** Amounts owing by workers compensation insurance companies $13,000.
*** Stock as at 30/6/15 $ $3,000
Creditors as at 30/6/15 $1,000
Stock as at 30/6/16 $8,000
Creditors as at 30/6/16 $500
Used for family household $700
- In the year ended 30/6/15 Wiley had a tax loss of $3,800.
- Wiley accepted a bike for payment from a client. The bike had a market value of $250.
|
Asset
|
Date of
purchase
|
Method
|
Original
cost
$
|
Adjustable
value 30/6/15
$
|
Effective
life
|
|
10 clinic beds
|
1/7/14
|
Prime
|
45,000
|
36,000
|
5
|
|
10 desktop PCs
|
1/7/14
|
Diminish.
|
18,000
|
9,000
|
?
|
|
1 desktop PC 80% business use
|
1/7/14
|
Prime
|
1,500
|
1,000
|
?
|
|
Office furniture (each piece
>$1,000)
|
1/8/14
|
Prime
|
21,000
|
19,075
|
10
|
|
Clinic furniture (each piece
>$1,000)
|
1/3/15
|
Diminish.
|
15,000
|
14,000
|
10
|
|
Low Value Pool
|
|
|
|
6,000
|
|
Required:
(i) Showing your workings, determine the taxable income for 2015/16 of Rocket Science Pain Management Clinics; and
(ii) Determine the closing balance of the Clinics' Low Value Pool.
Part C:
Wiley Coyote also operates a mobile telephone dealership, Rocketfone, in partnership with Ralph Sheepdog from premises owned by Wiley. A partnership agreement specifies that all income and losses are to be shared in the ratio of 2:1. Transactions recorded by the partnership during 2015/16 were as follows.
|
Receipts
|
$
|
|
Income from trading
|
396,000
|
|
Fully franked dividends from Investopedia Ltd
|
28,000
|
|
Proceeds from sale of shares in Lamb Supreme Ltd*
|
7,000
|
|
|
|
|
Payments
|
|
|
Trading stock and overheads
|
84,000
|
|
Salary paid to Wiley
|
75,000
|
|
Salary to Anita Coyote**
|
45,000
|
|
Rent paid to Wiley (includes $30,000 paid on 30 June 2016 for 12 months in advance)
|
55,000
|
|
Interest paid to Ralph on loan
|
17,000
|
|
Interest on capital paid on Wiley
|
15,000
|
|
Interest on capital paid on Ralph
|
12,000
|
|
Superannuation contributed on behalf of Wiley
|
24,000
|
* the shares had been purchased in 2012 for $1,000
** The commissioner has issued a private ruling indicating that a salary of $45,000 was reasonable.
Required: With full explanation:
(i) determine the net income of the Rocketfone;
(ii) determine the distribution of the net income to the partners; and
(iii) list any other items that you believe should be considered in the preparation of Wiley's tax return.
Part D:
On 8 May 2011 Wiley Coyote established a family trust, The Coyote Trust, which operates a call centre, Beep Beep, that he had set up separately from his mobile telephone dealership. The trust deed has a discretionary clause and it provides that the net income of the trust is to be distributed as follows:
- 35 % to the nominated bank account of Wiley;
- 15% to the nominated bank account of Wiley's daughter Abby who is aged 21 and a fulltime student at university;
- 15% to the nominated bank account of Wiley's son Sandy who is aged 17 and employed fulltime in the call centre;
- 15% to the nominated bank account of Wiley's second son Jack who is aged 14 and a fulltime school student;
- 5% to the nominated bank account of the registered charity The Society for the Prevention of Cruelty to Roadrunners;
- 5% to be placed into a bank account nominated by Wiley to meet the future medical and upkeep costs incurred on behalf of Wiley's cat Lambchops;
- 5% to be retained by the trustee and held on behalf of any future grandchildren; and
- the remaining 5% to be distributed to any of the beneficiaries at the trustee's discretion.
- In the year 2015/16 the following transactions were recorded in the trust's books of account.
In the year 2015/16 the following transactions were recorded in the trust's books of account.
|
Receipts
|
$
|
|
Gross fees
|
545,000
|
|
|
|
|
Payments
|
|
|
Wages paid to Sandy
|
30,000
|
|
Salaries paid to casual staff
|
50,000
|
|
Deductible overheads
|
145,000
|
|
Gift to Desert Views (a DGR)
|
5,000
|
Required: Providing full explanation, determine the trust income and its distribution showing the sections of ITAA 1936 that would apply to each amount distributed. Note that the remaining 5% was not distributed by the trustee in accordance with the discretion available.