WEEK 5 Case 1 1. Bill Brown earned a salary of $75,000 at Invicta Ltd for the year ended 30 June 2018. However, he elected to receive only $70,000, the unpaid balance being credited Bill Brown’s account in the company’s books on 30 June 2018 and paid to him on 6 September 2016. What is Brown’s taxable income for the year ended 30 June 2018? 2. Suppose that because of a good year’s profit results, the directors of Invicta declared a bonus to its employees of $8,000 on 28 June 2018. However, this was not credited to their accounts until 2 July 2018. How does this affect Brown’s tax liability for the 2018 income year? Ans. This question is concerned with the issue of derivation. Income is not assessable in the hands of a taxpayer for the purposes of ITAA97 s 6-5 unless it is derived. For people who earn a salary this is usually when the amount is paid to them. However, s 6-5(4) provides that income or money shall be derived by a person when otherwise dealt with on his or her behalf or as he or she directs. (1) Since Brown had earned the salary and had directed $5,000 of the amount to be credited to his account, the whole amount would be “derived” for the purposes of s 6-5 during the year ended 30 June 2018. (2) Under the second set of circumstances, the amount of $8,000 was not derived in the 2017/2018 tax year since it had not been paid to the employees. This is because the company did not credit the amount of $8,000 to their accounts until 2 July 2018. Case 2 Joe Wilson, a foreman with Carpet ltd, received a severe injury while driving a forklift at work on 1 February 2018. As a result of the injury, Wilson received the following amounts: Workers compensation Reimbursement of medical expenses by Carpet Ltd Damages for personal injury $4,800 $2,000 $10,000 Advise Wilson as to whether any of the amounts are assessable? Ans. Workers compensation refers to the amount of money that is paid to an employee/worker to reimburse the amount that was lost during periods where he/she was unfit to work. Under taxation law, workers compensation is said to be taxable. Thus the $4,800 is considered to be an assessable income which is subject to tax. Rest $2,000 & $10,000 which are Reimbursement of medical expenses by Carpet Ltd and Damages for personal injury is not considered as assessable income. WEEK 6 Case 1 For the year ended 30 June 2018, Johnson Ltd, a manufacturer of carpets, prepared an analysis of its receivable and debt provisions for the year: Accounts receivable 30 June 2015 30 June 2016 1,000,000 1,250,000 Cash received Provision for doubtful debts 4,000,000 150,000 100,000 Calculate the assessable income of Johnson for the year ended 30 June 2018 Ans. The income for the year would be determined on an accruals basis, see Carden's case ( C of T (SA) v Executor, Trustee & Agency Co of South Australia Ltd (1938) 63 CLR 108 ). Therefore, the increase in receivables would be regarded as income. Sales receipts 4000000 Add: Closing balance accounts receivable 1250000 Less: Opening balance accounts receivable (1000000) 250000 ASSESSABLE INCOME 4250000 The provision for doubtful debts has no effect in determining assessable income. However, if one assumes that the decrease in the provision for doubtful debts is due to a deduction being allowed because of the writing off of a bad debt pursuant to ITAA97 s 25-35, then there would be a reduction in the net assessable amount from $4,250,000 to $4,200,000. Case 2 Because of ill health Furlong sold his pharmacy in North Melbourne for $800,000 in March 2018. He had purchased the pharmacy in 1981. Furlong also received the sum of $50,000 from the purchaser for agreeing not to operate another pharmacy within 5km of his old pharmacy for five years. Advice Furlong as to whether the amount of $50,000 is assessable income. Ans. Normally, amounts received as a result of a restriction on the right to work would be regarded as being on capital account and not taxable (see Bennett v FC of T (1947) 75 CLR 480 and Scott v C of T (NSW) (1935) 35 SR (NSW) 215 ). This is because the loss of the right to work is seen as a loss of a capital asset. From a capital gains tax point of view, the question is whether the CGT provisions will apply. The decision of the High Court in Hepples v FC of T 91 ATC 4808 indicated such payments would not be subject to the capital gains tax provisions prevailing at the time. However, it is likely that a payment for a restrictive covenant would come within the provisions of ITAA97 s 104-35. In particular, the section states that CGT event D1 occurs if you create a contractual right or other legal or equitable right in another entity. Consequently, by entering into a restrictive covenant, Furlong will have created a contractual right in favour of the purchaser. The time of the event is when the contract is entered into or when the right is created. At the same time, the purchaser will have acquired an asset for an amount equal to the amount paid (plus any other related costs) for the restrictive covenant. Furlong’s capital gain will be the amount received ($50,000) less any incidental costs incurred in creating the contractual right in favour of the purchaser. WEEK 7 WEEK 8 Case 1 John Granger is a Canadian engineer who moved to Melbourne on 1 January 2018 on a permanent residency visa to take up a position with BHP. John provides you with the following information for the 2017/18 year: Salary from Alcan in Canada up to 31 December 2017: $80,000 Interest from his Canadian bank account: $2,000, net of 10% Canadian withholding tax, received on 10 October 2017 Interest from his Australian bank account: $1,000, received on 3 June 2018 Rent from his Toronto apartment, received from March to June 2018: $12,000 (this amount was paid into his Canadian bank account and never brought into Australia) Salary from BHP Australia: $60,000 for the period between January and June 2018 Travel allowance: $5,000 paid in April 2018. What is John’s taxable income in Australia for the period ending 30 June 2018 is: Ans. John Granger’s taxable income in Australia includes income derived when he becomes a resident. Therefore, his taxable income for the year ending 30 June 2018 will be $78,000, including: • Interest from Australian bank account: $1,000 (s 15-2 ITAA97) • Rent from Toronto apartment: $12,000 (notwithstanding the fact that this amount was never brought to Australia, it is still taxable as John is a resident and therefore must be taxed on a worldwide basis—s 6-5 ITAA97) • Salary from BHP: $60,000 (s 6-5 ITAA97) • Travel allowance: $5,000 (s 15-2 ITAA97) The amounts derived before he became a resident (salary from Nokia and interest from German bank account) are not taxable in Australia. Case 2 All items of income below are assessable under s 15-2 ITAA97 in the current income year, except: a) Ian Salermo is a software engineer employed by Facebook Australia, which paid him a bonus of $5,000 on 15 July 2017 as a reward for his excellent performance. b) Greg Barth is a project manager at Exxon Mobil Australia and in the current year receives a $5,000 travel allowance from his employer. c) Lisa Marr works for Rolex and receives two wrist watches valued at $3,000 each. The watches were given to her by her manager as a thank you gift for her commitment and good performance during the current income year. d) Sue Mills and Eva Moore are partners in a travel agency and receive an $8,000 travel voucher from one of the airlines they deal with. Ans. The correct alternative is: ‘Sue Mills and Eva Moore are partners in a travel agency and receive an $8,000 travel voucher from one of the airlines they deal with.’ The travel voucher has been given to Sue and Eva as a result of a business relationship; therefore it is assessable under s 21(A) ITAA36. Section 15-2 ITAA97 only covers benefits in cash or other form (as long as convertible into cash) which are paid in relation to employment or services relationships. Non-cash benefits provided in relation to business relationships are covered by s 21(A) ITAA36. Case 3 Donald Drepper receives a gold watch from his employer, Starling Copper, in recognition of his 20th work anniversary. This gold watch can be purchased at retailers for $900; however, Starling Copper was able to obtain it for $400 through its business connections. The gold watch is: a) b) c) d) Non-assessable as it is not money. Assessable to Donald Drepper at $400 under s 15-2 ITAA97. Non-assessable as it cannot be converted into money. Non-assessable as it was given on personal grounds. e) Assessable to Donald Drepper at $900 under s 15-2 ITAA97. Ans. The correct answer is: ‘Assessable to Donald Drepper at $900 under s 15-2 ITAA97.’ WEEK 9 Case 1 Which of the following is not a factor to consider in determining whether an amount is ordinary income in the hands of the recipient? a. The payment is received regularly by the recipient. b. The receipt is a product of exploitation of property. c. The quality or character of the payment from the perspective of the payer. d. The receipt is a product of employment. Ans. The correct alternative is: ‘The quality or character of the payment from the perspective of the payer.’ In determining whether an amount is ordinary income for a recipient, the quality or character of the payment from the perspective of the recipient (not the payer) must be considered. Case 2 Elena Baron runs a small baking business from home, selling her baked goods at local markets on Sundays. On 1 October 2017 she invested $8,000 in an industrial refrigerator and $10,000 on an industrial oven, both of which were exclusively used in her business. In December 2017 her house and her commercial kitchen were destroyed in a flood, and as a result, she could not work and had no income for six months. As Elena held an income and assets protection insurance policy, on 1 May 2018 she received a lump sum payment of $800,000 from her insurer, covering the damage to her house and commercial kitchen, as well as the expected loss of profits during the time she was unable to work. Select the alternative that correctly classifies the insurance payment received by Elena: a. Capital in nature, assessable to Elena under s 102-5 ITAA97 after application of CGT rules, according to the principle of McLaurin (1961), as it reflects compensation for loss of property and income paid in an un-dissected lump sum. b. Income in nature, assessable to Elena under s 6-5 ITAA97, according to the principles of Allied Mills (1989), as it reflects compensation for loss of the income she would expect to receive had the flood not occurred. c. Income in nature, assessable to Elena under s 15-30 ITAA97, according to the principles of Dickenson (1958), as it reflects a substantial damage to her income-producing structure. d. Capital in nature, not assessable to Elena, as it reflects compensation paid for the loss of property, according to Van den Bergs (1935). Ans. The correct answer is: ‘Capital in nature, assessable to Elena under s 102-5 ITAA97 after application of CGT rules, according to the principle of McLaurin (1961), as it reflects compensation for loss of property and income paid in an un-dissected lump sum.’ Case 3 Singh Pty Ltd is a small graphics business which is a small business entity. In the 2017/18 year, it acquired a printing press at a cost of $15,000 and a photocopier at a cost of $3,000. The maximum deduction that can be claimed by Singh Pty Ltd in relation to the assets above in the 2017/18 year is: Ans. Based on Ato’s policies, for the deductions of small business, they can claim a deduction for most costs incurred. In order the maximum deduction allowed to go in a year is 20,000 per asset but since in this case here they are getting only 18,000 per asset as maximum deduction per year. WEEK 10 Case 1 Transatlantic Pty Ltd is a large corporate entity with annual turnover of $80 million. What is the maximum deduction to be claimed by Transatlantic Pty Ltd at the end of the current income year in relation to the following items? A delivery truck costing $20000 acquired on 1 July 2017 (effective life self-assessed as five years), Legal costs of $5000, incurred by June 2018 in relation to a lawsuit that involved defending the title to an income-producing block of land. Ans Case 2 Which of the following options is not widely recognized as a general deduction? a) b) c) d) e) Energy bills paid by AmBev Beverages Ltd. Rent of business premises paid by Morris & Partners. Travel allowance paid by Millers Ltd to its employees. Repairs to a heating system in a restaurant. Accounting fees paid by Baker & Maximillian Legal Services Ltd. Ans. The question requires us to examine whether the following options are considered as general deductions. General deductions refer to those deductions (under s8-1) which can be deducted from assessable income as they are incurred in the normal course of business activities in order to produce income. It is important that they are not capital in nature. - - Electricity bills, rent paid for business premises, travel allowance and accounting fees (salary) can be considered as a ‘General Deduction’ under s8-1 ITAA and hence they are not the correct answer. However, repairs are considered as ‘Specific Deductions’ under s25-10 ITAA. Case 3 Assuming that all expenses below were incurred in the current year, select the correct alternative: a) Ingrid can claim under s 25-10ITAA97 the amount of $15000 spent on the renovation of her home bathrooms. b) Bob can claim under s 25-10ITAA97 an amount of $54000 spent on replacing the entire wooden fencing around his sheep grazing farm with electric fences to keep predators away. c) Grant can claim under s 25-10ITAA97 an amount of $3000 spent on repairing the malfunctioning cooling system in his pub. d) Edgar can claim under s 25-10ITAA97 a total of $18000 spent building a new car port at his investment property. e) Julia can claim under s 25-10ITAA97 an amount of $20000 spent replacing all the roof tiles at her business premises with a color bond ultra-strong steel roof. Ans. The correct answer is option ‘C’ beause under s 25-10 ITAA97 as the cooling system was malfunctioning and the amount of 3,000 was spent in order to restore it to its previous capabilities. WEEK 11 Case 1 Select the incorrect alternative: a) A company incorporated in Canada, which carries on business in Australia and has central management in Australia, is an Australian resident. b) The worldwide taxation principle applies to Australian resident taxpayers. c) An Australian resident corporate entity may claim a non-refundable foreign credit tax offset for withholding tax paid overseas. d) An Australian corporate entity that derives interest from overseas where withholding tax applied at the source must include only the net interest in its assessable income. e) Non-resident are taxed according to the source principle. Ans. a) Option (a) is not the answer because according to the ITAA 1936, section 6(1) a company is considered to be a resident of Australia even if it is incorporated in a foreign country( in this case Canada) as long as the central management prevails in Australia/carries on business in Australia or the shareholders in Australia have voting power. b) Worldwide taxation principle states that no matter where the income is generated, Australian residents are taxed on that income. The residents also receive credit for the taxation paid in other countries. Thus this is not the answer. c) Withholding tax refers to a system in which the tax is deducted from the source before it is received by the recipient. Tax credit refers to a situation in which the tax payer is subjected to a lower tax rate, due to the tax paid oversees. Thus this statement is correct and not the answer because Australian residents can claim a tax credit for withholding tax paid overseas. d) Australian residents are supposed to include their income derived from all over the world in terms of the amount that is to be paid in Australia. However, they are also allowed to claim a tax credit on the withholding tax overseas, and it is not only the income that should be included. Hence the statement is false and is the answer. e) The statement is correct and not the answer. Case 2 Select the alternative that contains only depreciating assets: a. b. c. d. Land, sheep and tractors at Edendale Sheep Farm. Cash register, refrigerators and glass-top counters at The Ice-cream Parlour. Irrigation system, land and apples at Red Apple Farm. Display counters, cash registers and electronic products for sale at Electroshop Pty Ltd. The question is in relation with depreciation. Ans. a) This option is not correct as it includes land and that always appreciates in value. b) This is the correct option as all items mentioned are allowed to claim a capital allowances. c) This option is not correct as it includes land and that always appreciates in value. d) The following option is not correct as it forms a part of trading stock, and that is not depreciable. Case 3 Jack owns and runs Luxe Drivers, a limousine shuttle service in Melbourne. On 1 July 2017 he purchased a luxury Cadillac limousine for 86,000, which is used 100% for business purposes during the year and has an effective life of eight years. Assuming that luxe drives does not qualify for the small business concessions of Div 328- D ITAA97, select the alternative that contains the maximum deductions for depreciation that can be claimed by the business on the ….. Ans. There is a limit for the maximum car cost that a business can claim for 2017-2018. In the year 2017-2018, the limit was 2. If the company uses the ‘double-declining’ method of accounting: The depreciating percentage = 100/8 = 12.5% * 2 = 25% Thus, the maximum depreciation amount = $57,581 * 0.25 = $14,395.5 WEEK 12 Case 1 Select the incorrect alternative: a) A general law partnership can only exist where a business is being carried on in common by two or more persons for the purpose of making a profit. b) A general partnership can exist without a written agreement between the partners. c) A partnership is a flow through vehicle for tax purposes. d) Partners are jointly and severely liable for the partnership debts. e) Tax partnerships require that a business is being run in common. Ans. The correct statement is option ‘E’ as in partnership; each and every partner does not need to contribute equally to the business. For example, there may be sleeping partners who do not contribute equally to the management of the business. Case 2 Lenny Smith and his sister Margaret Smith carry on business in partnership, sharing profits and losses equally. Lenny is a resident of Australia and Margaret is a non-resident throughout the 2017/18 tax year. For the year ended 30 June 2018, the gross income of the partnership was $340,000 of which $100000 was derived from sales outside Australia. Expenses incurred in deriving the business income were as follows (all tax-deductible and all in Australian dollars): Expenses relating to Australian source income Cost of goods sold : 80000 Operating expenses: 20000 Other expenses : 15,000 Expenses relating to non-Australian source income: ******* Ans. The question is in relation to partnership. Since we have to calculate the share of Lenny Smith’s partnership, and he is a resident of Australia, the world-wide income is taxable and all expenses are deductible. Income of the partnership Expenses relating to Australian-source income including:COGS Operating Expenses - 3, 40,000 (80,000) (20,000) Other Expenses Expenses relating to Non-Australian source income including:COGS Operating Expenses Other Expenses Total taxable income Lenny’s share - (15,000) (51,000) (7,000) (11,000) $1, 56,000 $78,000 Case 3 Emily Brun purchased a painting in September 1989 for $3,200. The painting was stolen on 11 November 2017 and was not separately insured, so Emily received only $200 from the insurance company on 4 February 2018. Considering the facts described above, select the incorrect alternative: a. b. c. d. The loss of the painting triggers CGT Events C1 The date of the CGT Event will be 4 February 2018 The date of the CGT Event will be 11 November 2017 Emily will have a capital loss of $3,000 Ans. The statement ‘C’ is the correct answer as the date of the CGT event is not 11th November 2017 (the date the asset was stolen) WEEK 13 Case 1 Max Oswell retired from his employment at Sims Ltd on the 30 June 2018 at the age of 65. Max had worked in the firm for the past 45 years and accumulated a total employment period of 16,436 days, of which 12,784 days related to service post-30 June 1983. Max received an employment termination payment of $750,000 as his only source of income for the 2017/18 tax year. The amount of tax payable—excluding the Medicare levy and rounded to the nearest dollar—on the employment termination payment for the 2017/18 tax year is: Ans. According to ATO, if a portion of the employment termination payment is given in relation to work done prior to 1 July 1983 it can have a free component. In Australia, an individual reaches their preservation age subsequent to the age of 60. The first $180,000 is taxed at 15% while the remaining is taxed at 45%. Thus, the amount of income that will be taxed for Max would be: Number of days of employment before 1st July 1983 to which ETP relates / Total number of days of employment to which ETP relates. 3,652 / 16,436 * 750,000 = $166,646 Taxable income = 750,000 – 166,646 = $583,354 583,354 =180,000 * (0.15) =403,354 * (0.45) 27,000 181,509.3 Total tax payable = $208,509.3 Case 2 Lisa Blake is a computer consultant who provides her services through her private company, L B Computing Pty Ltd. During the 2017/18 income year, the company entered into a contract with a government department to provide Lisa’s services to its IT section. The income and deductions of LB Computing for the 2017/18 tax comprise the following: • Personal services income: $150,000 • Superannuation contributions paid to a complying super fund: $60,000 • Investment income: $30,000 • Taxation and company fees; $4,500 Applying the method statement in s 86-20(2) ITAA97, the assessable income attributable to Lisa for the 2017/18 tax year is: This case is in relation to the personal services income. The assessable income for Lisa would be = $1, 50,000 ($ 60,000) $ 90,000 The taxation and company fees (maintenance fees) are not included in deductions as the amount is lesser than other income earned by the firm (investment income). Case 3 In the current income year, Jane Winner has total assessable income of $57,000 and total allowable deductions of $5,000. How much low income tax offset is Jane entitled to claim? Ans. The following case is in relation to low income tax offset. It refers to a kind of credit that is given to low income earning individuals as long as they are residents of Australia. The maximum tax offset of $445 applies if your taxable income is $37,000 or less. This amount is reduced by 1.5 cents for each dollar over $37,000. If an individual’s taxable income is lower than 66,667, they are eligible for a low income tax offset. The individuals taxable income = 57,000. Any deductions given in the question are not taken into consideration as we only consider the assessable income given. For the 37,000, the individual will get an exemption of 445 and for the remaining amount of 20,000, he can claim (0.015 * 20,000) = 300. Hence the total deduction is 145. 1) Engineer employed • salary • travel allowance • car allowance • employer superannuation contributions. Taxable income for the current income year? Salary + travel allowance + car allowance You cannot claim a deduction for superannuation contributions paid by your employer directly to your super fund from your before-tax income 2) Sole practitioner as result of an accident was unable to work. Was covered by an income protection insurance policy. Received a loss of profits insurance payment His business profits in the year were Received office rental fees. Assessable income is: Insurance payment + business profits + rental fees 3) Low income offset with deductions Which in determining whether an amount is ordinary income!!!! Whether the amount is product of employment, service rendered or carrying on of a business. The character of payment is on the hands of the recipient. The form of receipt, whether periodic or a lump sum amount. The motive of the person making the payment, although it is very rarely used now. CGT rules Deductions 1) A small business, it acquired an asset A large business, asset and related expenses What is the maximum deduction? Which of the following options is not widely recognised as a general deduction? 2)A sole practitioner enrols in an MBA course at the local university at a cost paid rental fees qualifies for the small business entity concessions, how much is she entitled to claim as one-off deductions? 3) The conditions for the bad debts deduction of s 25-35 ITAA97: COMPANY (week 1) Assume that a company has a taxable income of $1000 and that it pays a dividend equivalent to 60% of the after tax (tax rate 40%) profits are distributed by the company to an individual shareholder who is subject to tax at the rate of 46.5%. Compute the net tax payable on the taxpayer. Answer :167.4 RESIDENCY https://www.ato.gov.au/printfriendly.aspx?url=/Individuals/International-tax-for-individuals/Indetail/Residency/Examples-of-residents-and-foreign-residents/ https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/ Does working outside Australia change your tax residency? Discuss. What factors are considered to determine your tax residency?
