TAXAU118
EXAM PREPARATION WORKSHOP
Practice exam paper A
QUESTION PAPER
Questions and suggested solutions provided for learning purpose only
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EE
T
Taxation Australia (1) 2018 (TAXAU118)
LE
Time allowed – Three hours
(plus 15 minutes reading time)
CO
V
ER
April 2018
SH
Practice exam A
P
This open-book exam contains four (4) short-answer questions to a
total of 80 marks
M
All parts of the questions are unrelated, unless stated otherwise
EX
A
This paper contains 13 pages (including this page) (over to page 2)
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Question 1 (20 marks)
All amounts are GST-exclusive and in Australian dollars. Ignore the SBE provisions.
Finger Twirler Pty Limited (Finger Twirler) is an Australian resident company that imports
and manufactures novelty toys. The company commenced business on 1 July 2016. In the
income year ended 30 June 2017, Finger Twirler recorded an accounting profit of $980,000.
Extracts from Finger Twirler’s balance sheet, and profit and loss statement for the year ended
30 June 2017 are as follows:
Extract from Finger Twirler’s balance sheet
Description
Balance at
30 June 2017 $
Dr/(Cr)
Assets
1.
Inventory
Includes a shipment with a cost of $25,000, which was
ordered and paid for during June 2017 but remained in
transit as at 30 June 2017
275,000
2.
Prepaid annual leave
Two employees were paid in advance for annual leave due to
be taken during the first two weeks of July 2017
(Dr Prepayment Cr Cash)
11,000
3.
Accrued income
Non-cancellable orders taken from distributors but not yet
invoiced (DR Accrued income CR Sales)
27,000
4.
Other debtors
Includes amounts invoiced to neighbouring businesses for
their share of repairs to fencing adjacent to the company’s
business premises. The repairs will be undertaken and paid
for once all contributions are received
(DR Other debtors CR Repairs)
15,000
5.
Deposit
A non-refundable advance payment of exhibitor’s fees
relating to a trade show scheduled to be held in September
2017
20,000
Liabilities
6.
Annual
superannuation
Accrued statutory employee superannuation to 30 June 2017
(19,000)
7.
Warranty provision
Provision based on expected product returns and faults
(DR Warranty expense CR Warranty provision)
(24,000)
Question 1 continues, please turn over
Page 4 of 16 | Practice exam paper A
Taxation Australia
Question 1 (cont.)
Extract from Finger Twirler’s profit and loss account
Description
Balance at
30 June 2017 $
Dr/(Cr)
Income
8.
Dividend from100%owned New Zealand
company
A dividend from Finger Twirler’s 100%-owned New Zealand
company, paid out of trading profits with arm’s length New
Zealand customers
(9,000)
9.
Franked dividend
Received from an Australian company that is taxed at 30%,
franked to 50%. The dividend relates to shares held as an
investment (Dr Cash Cr Income)
(21,000)
10.
Employee
contributions
Amounts withheld from payroll as employee contributions
towards company cars provided
(5,000)
11.
Gain on equipment
A gain of $2,000 arising from an insurance claim for
equipment damaged by a power surge based on a carrying
amount of $80,000. The adjustable value for tax was $70,000
and the equipment was not replaced
(2,000)
30,000
Expenses
12.
Finance costs
Includes interest of $25,000 and borrowing costs of $5,000
on a five-year loan commencing on 1 October 2016.
The funds were used to finance additional working capital
13.
Penalties
This relates to the general interest charge for the late
payment of GST
14.
Accounting
depreciation – cars
Total calculated on two cars, each costing $100,000 on
1 July 2016, using the prescribed effective life of eight years
25,000
15.
Distributor incentives
10 laptop computers worth $900 each, purchased and given
to distributors as incentives for signing exclusivity contracts
9,000
16.
Legal costs
Includes $4,000 for the preparation of lease documentation
to let part of the company’s main premises. The remaining
$16,000 relates to the collection of doubtful debts
20,000
17.
Repairs
Includes $30,000 of structural rectification of the company’s
warehouse on 1 August 2016 (purchased on 1 July 2016),
and $20,000 for roof repairs. The repairs related to damages
caused by hailstorms on 1 April 2017. There were no
subsequent recoveries of these costs.
50,000
1,000
Assumptions: Items 1–17 are the only items that may give rise to tax adjustments for Finger Twirler (bearing in
mind that the above are extracts from the balance sheet and profit and loss account).
Question 1 continues, please turn over
Practice exam paper A | Page 5 of 16
Question 1 (cont.)
Required
By reconciling from Finger Twirler’s accounting profit of $980,000 to its taxable income,
calculate the correct tax adjustments (including nil adjustments) in respect of items 1–17.
Provide the most relevant section reference for each item.
20 marks
End of Question 1
Practice exam paper continues, please turn over
Page 6 of 16 | Practice exam paper A
Taxation Australia
Question 2 (20 marks)
Part A (12 marks)
For this part only, all amounts are GST-inclusive where applicable.
Bright Spark Pty Limited (Bright) is a resident Australian company that manufactures
electrical supplies for commercial and domestic applications. Bright exclusively supplies
wholesalers and is not a small business entity (SBE) taxpayer. Bright is registered for GST.
Bright provided the following benefits to Paul, the CEO, and his family during the nine
months ended 31 March 2017:
1. A selection of electrical supplies from Bright’s inventory which were installed into Paul’s
family home that was constructed during the year. The electrical supplies retail for $8,500
and Bright’s cost price was $5,500.
2. Reimbursements totalling $16,000 for meal entertainment with employees and clients
throughout the FBT year.
Paul has maintained a diarised record indicating that the expenditure related to:
–
Himself – 40%.
–
Other employees – 25%.
–
Clients – 35%.
3. A leased car with a market value of $87,000, which was provided to Paul from 1 October
2016. Lease instalments paid during the period to 31 March 2017 totalled $14,200, while
servicing and insurance totalling an additional $4,400 was also paid. Paul maintained
a valid logbook indicating that the car was used 70% for business purposes. Paul
contributed $2,600 in fuel towards the car.
4. On 15 February 2017, Bright paid $7,000 to an overseas agent for six days’ accommodation
in China for Paul to attend business meetings with component suppliers.
5. On 15 March 2017, Bright provided three laptop computers at a cost of $3,300 each. These
were provided to Paul, Julie (his spouse who is not an employee), and Alex (his son).
Paul and Julie used their computers entirely for work while Alex used his mainly for
video gaming
Question 2 continues, please turn over
Practice exam paper A | Page 7 of 16
Question 2 (cont.)
Required
Identifying any alternatives that minimise Bright’s tax liability, briefly
explain and calculate the consequences of the above benefits in
relation to:
(i) Fringe benefits tax (FBT) for the FBT year ended 31 March 2017.
(ii) Goods and services tax (GST) in the 12 months of the relevant
tax periods.
(iii) Income tax for the year ended 30 June 2017.
12 marks
Question 2 continues, please turn over
Page 8 of 16 | Practice exam paper A
Taxation Australia
Question 2 (cont.)
Part B (8 marks)
One of Bright Spark Pty Limited’s (Bright) senior executives, Kate, has decided to move
overseas to head up a subsidiary for Bright. Prior to this decision, Kate has lived in Australia
all her life. As part of her relocation package, Kate is entitled to professional advice on her
CGT situation in her year of departure.
You are the external tax adviser asked to provide this advice. In your departure interview
with Kate, you learn that she leaves on 1 February 2017. You also determine that she owns the
following CGT assets:
Asset
Date of acquisition Acquisition cost
$
AMP shares (ASX)
25 September 2001
35,000
20,000
14 October 2014
380,000
410,000
21 August 2000
36,000
100,000
Investment property in Adelaide
Shares in family company located
in Sydney – the company’s only
assets are shares listed on the ASX
Market value as at
1 February 2017
$
In addition to the above assets, Kate inherited a property from the estate of her deceased
uncle. At the time of her uncle’s death (i.e. 31 July 2015), the property had a market value of
$430,000, but after a delayed probate, it was worth $450,000. Kate sold it on 28 January 2017 for
$460,000. Kate is not sure when her uncle acquired the property but knows it was during the
early 2000s and for $130,000. The property was never used as a main residence by either Kate
or her uncle.
Kate has carried forward capital losses of $12,000 from the disposal of shares during 2014 and
$8,000 from the disposal of an artwork during 2015.
Kate will not be an Australian resident during the period that she is away from Australia.
Required
(a) Assuming that no elections are made, calculate Kate’s net capital
gain (or loss) for the year ended 30 June 2017. Explain all inclusions
and exclusions.
(6 marks)
(b) Identify any elections or exemptions available to Kate.
(2 marks)
Assuming Kate can make any elections, explain the advantages or
disadvantages
8 marks
End of Question 2
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Practice exam paper A | Page 9 of 16
Question 3 (20 marks)
AusCo Pty Ltd (AusCo) is the head entity of a tax consolidated group. AusCo’s full operations
are structured as follows:
AusCo Pty Ltd
40%
100%
NZ branch
SubCo Pty Ltd
ForSub Ltd
AusCo and SubCo are Australian residents and have some of their income taxed at the general
company tax rate. ForSub is a tax resident of Hong Kong. AusCo also has a manufacturing
operation in New Zealand with a permanent establishment. AusCo is not a small
business entity.
The following transactions occurred in relation to the AusCo group in respect of the year
ended 30 June 2017:
• The opening balance of AusCo’s franking account was $6,500 credit.
• AusCo had sales of $8,250,000 and deductible business overheads totalling $8,415,000.
• On 1 July 2016, AusCo received a $15,000 dividend from SubCo.
• On 1 January 2017, AusCo received a $35,000 (net) dividend from its 40% shareholding in
ForSub. Hong Kong imposed a 10% withholding tax.
• On 31 March 2017, AusCo received fully franked dividends totalling $8,000 from shares in
listed companies (taxed at 30%) held as investments.
• On 15 May 2017, AusCo received a refund of $20,000 from the prior year’s income
tax assessment.
• On 30 June 2017, AusCo received fully franked dividends totalling $2,500 from shares in a
resident company taxed at 27.5% The shares are held by AusCo as an investment.
• The New Zealand branch earned the following income:
$
Sales to unrelated parties
1,850,000
Interest income
155,000
Total income
2,005,000
Less: Purchases
(1,975,000)
Net profit
30,000
• AusCo had prior year tax losses carry forward of $15,000 (there have been no changes in
shareholding since incorporation).
Question 3 continues, please turn over
Page 10 of 16 | Practice exam paper A
Taxation Australia
Question 3 (cont.)
Required
(a) Calculate the taxable income of AusCo for the year ended
30 June 2017. Show all workings and explain all exclusions, citing
references where applicable.
(10 marks)
(b) Calculate the minimum tax payable by AusCo for the year ended
30 June 2017.
(4 marks)
(c) Calculate the franking account balance for AusCo as at 30 June 2017.
Identify and calculate any additional tax payable. Show workings
and explain any exclusions.
(6 marks)
20 marks
End of Question 3
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Practice exam paper A | Page 11 of 16
Question 4 (20 marks)
Billy and Bob, both resident taxpayers, are partners in Buggy Buddies, a business that
specialises in the fabrication, assembly and resale of golf carts. Buggy Buddies is based in
Adelaide and has been in operation since 2007 utilising Billy’s interest in golf and Bob’s
expertise as a mechanical engineer. The partnership agreement of Buggy Buddies shows
an ownership ratio of 2:1, whereby Billy owns 33.33% and Bob owns 66.67%. Billy and Bob
both actively work in the business, which also employs other employees. Buggy Buddies is
classified as a small business entity (SBE).
On 31 March 2017, Billy and Bob sold the Buggy Buddies business for $1,325,000, comprised
as follows:
$
Trading stock
Plant and equipment
Goodwill
Sales proceeds
480,000
69,500
775,500
1,325,000
Both Billy (aged 47) and Bob (aged 43) intend to retire following the sale of the business.
On the same day Billy and Bob sold the business, Billy also sold the business premises for
$525,000. Billy originally purchased the premises in 2007 for $380,000. Billy has claimed
$95,000 of capital works deductions on the premises in prior years based on construction costs
of $250,000 at 4% per annum.
Question 4 continues, please turn over
Page 12 of 16 | Practice exam paper A
Taxation Australia
Question 4 (cont.)
The statement of profit or loss and the balance sheet (prepared for management purposes
only) for Buggy Buddies for the period ended 31 March 2017 are as follows:
Statement of profit or loss
Date
Description
Amount
$
Income
Sales
General sales within the ordinary course of business
1,981,500
1,981,500
Total income
Expenses
COGS and
general operating
expenses
565,050
Accounting
depreciation
For tax purposes, the partnership has elected to apply the SBE concessions.
On 30 June 2016, the general SBE pool balance was $90,000 and there were
no additions during the 2017 income year
20,000
Interest
Interest expense comprises interest on borrowings which were distributed to
Bob (refer to balance sheet note) to repay his partner’s equity on 30 June 2016
6,500
Motor vehicle
lease and
operating
expenses – Billy
The partnership leased two cars on behalf of Billy and Thornton (the
production manager). Each car was leased with a value at the inception
of lease of $45,000 (including GST) in 2012. Billy maintained a logbook
indicating 90% business use
15,000
Motor vehicle
lease and
operating
expenses –
Thornton
Thornton did not maintain a logbook and incurred a further expense of
$1,000 in fuel cost, which is not included in the partnership profit and loss
17,000
Rent
Buggy Buddies operate their business premises from a property owned by
Billy. The rent is at an arm’s length market value
50,000
Salaries
This includes salary payments of $70,000 each to Billy and Bob
Total expenses
Accounting
profit
585,000
1,258,550
722,950
Question 4 continues, please turn over
Practice exam paper A | Page 13 of 16
Question 4 (cont.)
Balance sheet
Date
Description
30 June
2016
$
31 March
2017
$
Cash at bank
Bank account used for day‑to‑day operations
160,000
178,000
Plant and
equipment
(WDV)
There were no additions or disposals of plant and equipment.
The movement represents depreciation only
89,500
69,500
Trading stock
Stock on hand at cost. Movement during the year included the
provision of a golf cart to Mal who is employed as the retail
manager. The golf carts cost Buggy Buddies $1,750 each to
fabricate and have a lowest selling price of $4,500 each
464,000
480,000
713,500
727,500
Assets
Total assets
Liabilities
Bank Loan
On 1 July 2016, the partnership borrowed $130,000, interest only
at 6.4% p.a., and distributed the funds to Bob as a repayment of
equity
130,000
130,000
Trade creditors
Stock purchases
448,000
475,000
Total liabilities
578,000
605,000
Net assets
135,500
122,500
65,500
182,500
70,000
(60,000)
135,500
122,500
Equity
Billy
Bob
Bob On 1 July 2016, the partnership borrowed $130,000, interest
only at 6.4% p.a., and distributed the funds to Bob as a repayment
of equity the period ended 31 March 2017 as and when they were
credited
Total equity
Question 4 continues, please turn over
Page 14 of 16 | Practice exam paper A
Taxation Australia
Question 4 (cont.)
Required
(a) Calculate the net income of Buggy Buddies for the year ended
30 June 2017 by preparing a reconciliation from accounting profit to
net income of the partnership as and when they were credited.
(6 marks)
(b) Based on all information, calculate Billy’s minimum taxable income
for the year ended 30 June 2017. Include and explain any available
elections and show all workings.
(10 marks)
(c) Calculate the taxable value of fringe benefits provided by Buggy
Buddies’ during for the FBT year ended 31 March 2017. Explain all
inclusions/exclusions.
(4 marks)
20 marks
End of Question 4
End of practice exam paper
Practice exam paper A | Page 15 of 16
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