Question:
Peter Smith carries on business as a fast food outlet at Paterson Stadium (“Stadium”) in Perth during the football season. He carries on his business as a sole proprietor.
Every year, Peter tenders to the Management of the Stadium for the right to operate during official football fixtures.
He leases a caravan converted to a mobile kitchen and employs several staff on a casual basis. He usually purchased frozen food from Edible Food Pty Ltd under an arrangement whereby unopened packets may be returned. Unsold food from opened packets is used in two ways. First, staff may consume what they wish, on the premises, at the conclusion of the final day’s trading. Second, any residual foodstuff is consumed by Peter.
Peter, learning that you are a qualified tax adviser, presents you with the following information relating to the 2013/2014 income tax year:
Sales receipts 220,000
Sub-lease fees 3,000 Note 1
Refunds (500) Note 2
222,500
Gross purchases 95,000 Note 3
Tender costs 750 Note 4
Licence fee 6,500 Note 5
Vendor’s licences 1,200 Note 6
Lease payments 10,800 Note 7
Cooking materials 3,700
Wages 32,000 Note 8
Provision for settlement 10,000 Note 9
159,950
Trading profit 62,550
Notes:
1. Peter sublets the caravan for five months during the football season for $600 per month. This private arrangement is against the terms of his lease agreement with the lessor. See further Note 7.
2. On New Year’s Day, several customers complained that food they had bought from his caravan and consumed had made them ill and demanded refunds for the money paid. Peter refunded $500.
Peter suspects a box of frozen pies was contaminated and is negotiating a refund from Edible Food Pty Ltd. The matter remains unresolved at 30 June 2014. Peter is more concerned with a threat from one ill customer to sue him for damages. See Note 9.
3. Peter’s opening and closing stock is nil. Gross purchases are accounted for in the following way:
Purchases 95,000
Sales 78,500
Returns (to suppliers) 10,200
Staff consumption 1,800
Peter’s consumption 4,500
95,000 95,000
4. Tender costs include accounting fees, typing and other costs of complying with the requirements of the Management of the Stadium.
5. The licence fee is an annual levy payable to the Management of the Stadium for the right of entry to the ground and occupy a site. It is levied on all commercial users of the ground.
6. Various licensing requirements of local government.
7. Lease payments are $900 per month. An amount of $9,900 has been paid to 30 June 2014 with one payment overdue.
8. Award payments amount to $29,000 but Peter always pays a bonus of around 10% to his staff.
9. Peter’s solicitor has informed him that defending an action or settling out of court could cost between $5,000 to $15,000. See further Note 2.
He also provided you with the following information:
1. On 1st January 2011, he purchased his house, which is his principal place of residence, at Mt Lawley for $400,000. Until then, he was renting an apartment in Perth.
He paid $3,500 for stamp duty, transfer fees, borrowing expenses and legal fees at the time of the purchase.
He moved into the house on the date of purchase and lived there until 30th June 2011. From 1st July 2011 to 31st December 2013, when he went around Australia in a rented camper van, he rented his house to his friend Jack.
On 1st January 2014, he moved back into his house when he came back to Perth and lived there until 31st January 2014. From 1st February 2014 to 31st March 2014, when he went on a tour of the Asia Pacific region, he rented his house again to Jack. Upon his return on 1st April 2014, he moved back into his house.
On 15 June 2014, he sold his house for $800,000. He paid $5,000 for legal fees at the time of the sale. He did not own any other principal place of residence during the times he was away.
2. On 2 August 1991, he purchased a holiday home in Albany for $150,000. He incurred $10,000 stamp duty on purchase and $1,000 as loan application fees for the bank loan he obtained to purchase the property.
In all the years of ownership of the holiday home, he paid the total amount of $50,000 for interests on the loan, rates, taxes, insurance and repairs on the property.
On 1 January 2000, he spent $6,000 installing a pergola at the back of the holiday home.
On 23 February 2009, he incurred $3,000 on legal fees preventing the Shire of Albany from compulsorily acquiring part of the front yard of the holiday home to make a footpath.
On 30 June 2014, he sold the holiday home for $950,000. He incurred the following expenses when he sold the property:
(i) real estate agent’s fee: $5,000
(ii) stamp duty on sale: $2,000
(iii) advertising costs: $500
(iv) valuation fees (chattels): $300
(v) search fees (for encumbrances): $200
(vi) mortgage discharge fees: $600
3. He acquired the following shares at the following times and prices:
(i) shares in A Ltd on 1 December 2013 for $5,000;
(ii) shares in B Ltd on 1 August 2009 for $5,000;
(iii) shares in C Ltd on 1 September 2009 for $5,000.
He sold all these shares on 2 May 2014 at the following prices:
(i) shares in A Ltd for $6,000;
(ii) shares in B Ltd for $7,000;
(iii) shares in C Ltd for $4,000.
4. He also purchased a first day cover entitled “Rhodesia Running” for $450 on 3 July 2000. On 21 June 2014, he sold it at an auction by Stanley Gibbons (stamp auctioneers) for $5,000.
5. He has unapplied carried forward losses of $5,500 (for ordinary assets), $2,000 (for personal use assets) and $1,000 (for collectables) from previous financial years.
Advise Peter on his income tax liability for the year ended 30 June 2014 (assuming that he wishes to legally minimise his income tax liability) based on the information above.