Emily runs her own business selling jewellery. She purchases the jewellery directly from jewellery makers in various countries and sells the jewellery in various upscale markets in Victoria. She uses the cash basis for tax accounting purposes.
The transactions described below, took place relevant to her 2016-2017 income year: a. Emily purchased $5,000 worth of jewellery on 1 June 2016 from a jewellery maker in Ethiopia. The jewellery was loaded on to a ship the next day and under the terms of Emily’s agreement, she takes ownership, control and risk of the jewellery once they are loaded on to the ship in Ethiopia. Half of the jewellery was delivered to Emily on 3 July 2016. The rest of the jewellery was not delivered to Emily, but was delivered directly to a customer in New Zealand on 29 June 2016. The customer had placed the order to purchase the jewellery from Emily on 15 June 2016 and paid for it on 7 July 2016
b. Emily gave 10 pieces of jewellery to a creditor, Jewels R Us Pty Ltd, in satisfaction of a $700 debt on 1 September 2016. The pieces cost Emily $500 on 1 August 2016 and have a market selling value of $1,000.
c. Emily took 12 pieces of jewellery out of her stockpile to give away as Christmas gifts in December 2016 to her family and friends. The jewellery pieces cost $300 and have a market selling value of $600. She purchased these pieces in her previous income year.
d. The first half of the income year has been very good for Emily and she decided to sell all of her remaining stock at a substantial discount at the end of January 2017 so that she could replenish her stock with new designs. In a three-day sale, Emily sold all of her existing stock for $15,000. The stock had cost her $5,000 and she would normally have sold them for $24,000.
e. Following the sale, Emily replenished her stock with new designs from Sri Lanka during March 2017. These pieces cost her $100 each and she would normally sell them to customers for $175 each. However, she sold 8 of these pieces to friends and family for only $100 as she wanted the jewellery to be “seen”. She also kept two of the pieces for herself
f. At 30 June 2017, Emily had counted her stock items. In respect of 20 specific pieces of jewellery in stock, she noted that the pieces had cost her $220 each and she usually sold them for $275 each. She has determined that the same supplier is now selling those pieces of jewellery for $50 each. But, due to bad publicity surrounding the country of origin of the jewellery, she was likely only to be able to sell the items for $10 each in the future
You are required to:
Discuss the Income Tax consequences of the transactions above on Emily’s 2016-2017 income year. Provide reasons for your answers and reference to the Income Tax Assessment Acts, relevant case law and rulings from the Australian Taxation office.