Topic: Revenue Law
There are four question/case. Answer them one by one, and answer them relate the revenue law theories.
You are the accountants for the ‘Lee Family Trust’ which carries on business as IT consulting to Government agencies. In the 2006 trust tax return an amount of $400,000 was claimed as a tax deduction being a contribution to an offshore non-complying superannuation fund. The net trust profit was $400,000 which was distributed to the various beneficiaries as shown in the figures below:
Bill Lee (aged 10 years) the first 643
Janet Lee (aged 14 years) the next 643
Lee Investments Pty Ltd the next 20,000
Church ‘ABC’ the next 200,000
Mr and Mrs Lee equally the next 150,000
Church ‘ABC’ the balance
$400,000
As a result of the contribution to the non-complying superannuation fund being disallowed by the Commissioner of Taxation in 2009, namely $400,000, the Commissioner amended the assessments originally provided to the beneficiaries. This meant that the trust now had a net profit of $800,000 and the beneficiaries were assessed on the additional amounts on the basis of applying the ‘proportionate’ method as shown below:
Bill Lee (aged 10 years) the first 1,300
Janet Lee (aged 14 years) the next 1,300
Lee Investments Pty Ltd the next 40,000
Church ‘ABC’ the next 400,000
Mr and Mrs Lee equally the next 300,000
Church ‘ABC’ the balance
$800,000
Your clients are most concerned because Mr and Mrs Lee and their company Lee Investments Pty Ltd now have to pay income tax on an additional amount of $150,000 and 20,000 respectively, whereas the Church, being tax exempt would face no additional tax burden. Your clients argue that the appropriate beneficiary to receive the additional $400,000 was the Church as the trust resolution allowed for a residuary beneficiary. Using the ‘quantum’ approach, the Church would have received the additional money. You now need to advise your clients on the following matters:
What is the difference between the ‘proportionate’ and ‘quantum’ methods for dealing with the difference between the net income of the trust calculated using financial accounts and tax accounting?
What method is preferred by the accounting profession, the ATO and the courts?
What method do you think the High Court of Australia will choose?
What advice do you give to your clients about their new tax liability?