Problem
Smart Tech Ltd ('ST'), a resident company (which is not a base rate entity) is owned equally by Cinderella (a non-resident shareholder) and Maxwell (a resident shareholder). ST had a deficit of $60,000 in its franking account as at 30 June 2021 and was also required to pay franking deficit tax in July 2021. Following a thorough tax audit from ATO, ST had to pay an additional tax of $78,000 on 15 September 2021 in respect of its 2019/2020 tax year. ST paid fully franked dividend distributions totalling $32,000 on 1 October 2021.
ST does not wish to incur franking deficit tax, but its shareholders want to receive another fully franked distribution on 15 June 2022.
Maxwell is the managing director of ST. He had been paid a salary of $300,00 and was provided a company car during 2021/2022 year:
- The car cost $80,000 GST exclusive and was provided to Maxwell on 1 January 2021. Maxwell garaged the car at his home each night during the 2021/22 FBT year. During the FBT year, Maxwell travelled 80,000 kilometers in the car. The odometer and logbook records showed 20,000 kilometers were for business purposes while 60,000 kilometers were for private purposes. The operating costs of the car (not including deemed depreciation and deemed interest) were $20,000 (GST inclusive). Maxwell did not make any contribution but provided all the necessary documents to his employer to calculate his FBT liability.
Maxwell acquired and disposed the following assets during the income year 2021/2022:
- On 15 June 1996, Maxwell purchased a vintage car for $65,000. The car was sold at auction on 30 September 2021 for $250,000.
- With the proceeds from the car, Maxwell purchased a painting for $15,000 and a piece of stamp for $1,000 on 15 October 2021. Maxwell sold painting for $11,500 and the piece of stamp for $1,500 on 1 June 2022.
- Maxwell acquired an apartment in Sydney on 15 March 2017 for $900,000. He had paid $45,000 in stamp duty, $3,000 for a valuation report and $2,100 fees to a lawyer on acquisition of the property. Maxwell planned to make the apartment available for rent immediately but was advised that the apartment could not be rented out until the apartment's internal walls were to be painted (at a cost of $20,000) and the balcony railing was replaced (at a cost of $35,000). After the work was carried out, Maxwell rented the apartment to a tenant in November 2017 for $1,100 a week. Interest on a loan to purchase the apartment was $2,500 per month for the first ten years of the loan. On 1 April 2022, Maxwell entered into a contact to sell the apartment for $1,300,000. He also paid $6,500 agent fees on the sale of the property.
- Maxwell has a carry forward capital loss of $30,000 as at 30 June 2021 from the sale of publicly listed companies' shares he held.
Task
Show all working citing relevant authorities.
1. Calculate the maximum fully franked dividend distribution that Smart Tech can pay on 15 June 2022 without incurring any franking deficit tax
2. Advise and calculate ST's FBT liability arising from the provision of the benefit provided (car) to Maxwell for the 2021/2022 FBT year.
3. Calculate the reportable fringe benefit amount for the 2021/2022.
4. Explain and calculate the capital gains tax consequences for Maxwell from acquiring and disposal of his assets.
5. Calculate Maxwell's taxable income.