Principles of Income Tax Law
1. Discuss the deductibility of the $70 000 expense for Paper Co.
Paper Co (the taxpayer) imports and manufactures specialty paper products for printing and design. In 2018, Paper Co was required to defend itself and its directors in legal proceedings. Paper Co had been charged criminally with paying bribes to officials to allow them to import certain paper products from Indonesia. The charges were eventually dropped against Paper Co, but they had already incurred $70 000 in fees to their lawyer to defend against the charges in court.
2. Explain, citing sections, whether or not the following expenses can be incurred in the cost base for each of the following situations. Note that all assets are post CGT.
I. The cost of repairing a damaged drainpipe caused by a storm to the taxpayer's rental property.
II. Expenses paid to the auctioneer on the sale of the taxpayer's property.
III. Land tax expenses on a property that was purchased in 2011 and sold for a loss in 2017.
IV. An apartment gifted (for no consideration) to the taxpayer. The apartment was valued at $400000 at the time of transfer. It was later sold at a profit.
3. Showing workings, calculate Claude's net capital gain or loss (assuming he has no other CGT events).
Claude purchased a home in Kew on 1 September 1999 for $300 000 incurring legal costs of $10,000 at that time. Settlement was on 1 October 1999. In March 2012 Claude spent $12 000 on legal fees defending the boundary to his property in a dispute against his neighbour. In December 2017 Claude was tired of fighting with his neighbour and he decided to sell the property. He sold the property for $600 000 and the purchaser also gave him a small boat valued at $40 000.
4. Calculate the highest deduction for depreciation available for Matthew for the financial year ended 30 June 2017. Please ignore the small business immediate write off for the purposes of this question.
Matthew has owned an accounting business for many years. On 1 May 2017 he purchases a new projector for presentations to his clients. The projector cost him $8 000 and has an effective life of 6 years. He takes the projector home on weekends to watch movies with his children so he estimates that the projector is used 90% for business purposes, and 10% private purposes.
5. Discuss briefly, citing sections, whether the following are deductible.
I. The cost of a golf club membership incurred by an accountant who likes to take clients to play golf each Friday
II. The travel costs incurred by the taxpayer with the identical facts to those in FCT v. Collings (1976).
III. An amount of $5 000 held in a savings account by the taxpayer as he anticipates having to pay long service leave for a staff member in the next financial year.
IV. Borrowing expenses incurred by the taxpayer in relation to a business loan to finance the purchase of a new factory.
6. Showing workings, calculate Lucy's net capital gain or loss for House A (assuming she has no other CGT events).
Lucy purchased House A in Perth on 1 February 2012 for $450 000 and moved into it straight away. On 1 January 2013 Lucy decided to move to Melbourne where she rented House B for herself. She decided to get tenants to move into House A. The market value of House A at that time was $500 000. Lucy soon had enough of Melbourne and decided to move back to House A in Perth on 1 February 2017. She sold House A for $600 000 on 5 March 2018 and incurred $3,000 expenses from advertising the house for sale.
7. Consider whether the $50 000 is deductible for the taxpayer.
The taxpayer is a large eco-caravan hirer in regional Victoria. During the current tax year they made a lump sum payment of $50 000 to the Victorian Government to be the only government accredited eco-caravan provider in Victoria for the next 2 years. As a result, the Victorian
Government agreed to promote the eco-caravans as part of its tourism campaigns. Tourists were still able to hire any type of caravan they wanted when traveling through Victoria, but they would receive a special discount if they hired this particular eco-caravan as a result of the advertising campaign.
8. For the following transactions sate for the taxpayer the CGT event, whether there is a capital gain/loss, and whether the Division 115 discount is available.
I. The taxpayer, Century Pty Ltd, owned a factory that was destroyed by fire and they received $500 000 as an insurance payout in March 2018. They purchased the factory for $200 000 on 22 September 1999.
II. The taxpayer, Marcia, entered into a contract in January 2015 with her former employer agreeing not to work as a tax consultant within 300km of Melbourne for a period of 3 years. Marcia was paid $120 000 on entering into this agreement.
9. Discuss the deductibility of the $1 000, $4 000 and $450 amounts for Joey.
Joey is a lawyer who has an office in Melbourne city. On Friday he takes care of his children and works from home in Brunswick. He has converted one of the bedrooms into a home office and it occupies about 10% of the floor space of his house. This financial year he incurs the following expenses: $1 000 internet costs, $4 000 interest payments on his mortgage, and a $450 accountant fee paid to his accountant for preparing his income tax return.
10. Showing workings, calculate Steph's overall net capital gain or loss (consider both the house and the shares but assume she has no other CGT events).
In March 2012 Steph inherited a house from her friend who had passed away on 1 October 2011. The house had a market value of $500 000 at that time. Steph's friend had bought the house on 21 September 1984 for $150 000 incurring $500 in legal fees on purchase. Steph decided she did not want to live in the house so she rented it out until March 2018 when she sold it for $700 000. At the same time, she sold a parcel of shares in HBank for $25 000 which she had purchased for $50 000 in June 2016.
Attachment:- Study guide.rar