TAXATION LAW
REQUIRED:
In answering the question students are required to refer to relevant case law, sections of the Income Tax Assessment Act 1936 and 1997 and Tax Rulings issued by the Tax Office. An analysis of the key issues is required.
PRESENTATION:
Students are required to include a bibliography of reference materials. Reference materials must be more than the lecture notes and prescribed textbook.
Students are required to follow the University guidelines on referencing material.
Students are also required to sign and hand in a declaration that the work is their own and that they have not collaborated with another student in answering the question.
ASSIGNMENT QUESTIONS:
Question 1
John Smith is a veterinarian who practices as a sole practitioner from consulting rooms he owns in the northern suburbs of Melbourne. In July 2017 he was sued by a former patient for negligence. His lawyer advised him not to contest the case. However, the matter was widely publicised in the local paper. Unfortunately, the publicity led to a significant downturn in the number of patients attending his surgery. He therefore decided to defend the case and in the course of doing so incurred legal expenses of $50,000. Nevertheless, he was extremely pleased when a Supreme Court jury found there was no negligence on his part. Since the case was decided, there has been a steady increase in the number of patients attending his surgery.
In an attempt to attract more patients, he also spent $30,000 installing a new indoor toilet to replace the outside one. He spent $10,000 replacing all the carpets and $1,000 replacing the glass in a window broken by a patient's young child. He also purchased a second hand games machine for children to use in the waiting room. He purchased it for $1,000, but he had to spend $500 repairing it before it could be used. In order to assist the receptionist, he purchased a new computer for $2,000.
REQUIRED:
Advise John Smith as to whether the outgoings are tax deductible, referring to appropriate case law and legislation.
Question 2
Viktor is a director of Racing Parts Pty Ltd, a motor parts distribution company. He has the following questions for you:
The company had the following transactions during the year ended 30 June 2018. How are they treated for income tax purposes by the company?
You can assume in this question that the numbers exclude GST unless otherwise stated.
1. Purchased a Porsche Carrera motor vehicle for a cost of $135,000 on 10 October 2017. The car is used by the managing director 69% of the time for work purposes. The effective life of the car is 6 years. On 27 June 2018 the car was crushed by a container of vegetables. The insurance company wrote off the car and paid the company $99,000.
2. Purchased a canon photocopier for the office at a cost of $8,750 on 3 March 2018. The manufacturer advises that the machine can print 1,200,000 copies before being needed to be replaced. The company estimates that it will print 150,000 copies per year.
3. Carried out an extension to the warehouse where the vegetables are stored at a cost of $85,800. The work commenced on 28 August 2017 and was completed on 15 November 2017.
4. The company borrowed $502,000 from the Bank on 15 April 2018. 35% of the funds were used for personal purposes by Viktor and the balance by the company. The bank charged the company an application fee of
$5,020. Interest paid on the loan was $27,500. The loan is for ten years.
5. The company employed Simla, Viktor's wife as the receptionist. The company paid her a wage of $55,000. The reasonable wage for a receptionist doing the same work is $40,000.
6. During May 2018, the company ordered motor parts. These were made in Taiwan and as at 30 June 2018 they were still on a plane coming from Taiwan. The cost of the motor parts is $25,735. When Viktor conducted a stock take of the company's inventory as at 30 June 2018 these items were not accounted for in the closing stock figure.
7. During the year the company earned exempt income of $55,000. In the previous year ended 30 June 2017 it had carried forward losses of
$75,000. There has been no change in the shareholding of the company since it was incorporated in 2010.
Viktor also advises you that he wants to the company to maximise its tax deductions and minimise its taxable income.
REQUIRED:
Explain to the company how each of the above items is treated. In your answer please carry out calculations where necessary.