Tax (AU)
Assessment 2, Part B
Question – Part (a) (13 marks)
All amounts are in Australian dollars and GST-exclusive, unless otherwise stated.
The Chuck-Oodle Partnership (COP) is a resident partnership with Dougie and Ollie as equal partners. It operates a
consulting business in Australia. COP had an aggregated turnover of $30 million for the income year ended 30 June
2022. For the same income year, its accounting profit was $3,000,000. Below is an extract from the partnership’s net
income reconciliation, which COP has provided for that period. COP has made all relevant income tax elections required
to minimise its net income.
Chuck-Oodle Partnership
Tax reconciliation for the year ended 30 June 2022
$
$
Notes
3,000,000
Profit/(loss) per financial statements
Add
Building insurance expense
48,000
The entire expense is a prepayment made
on 30 June 2022 for the period 1 July to
31 December 2022. The expense has been
recorded in the profit and loss.
Salary expense
65,000
Relates wholly to Dougie's salary entitlement
under the partnership agreement and recorded as
an expense.
Contractor expense
15,000
The contractor has not provided a tax file number
or Australian business number. COP does not
intend to withhold any amount of its pay-as-yougo obligations from the payment.
128,000
Total addbacks
Subtract
Capital gain
(45,000)
COP sold land for $400,000. It had bought the
land for $355,000 in 2014. The profit of $45,000
was recorded as revenue.
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Chuck-Oodle Partnership
Tax reconciliation for the year ended 30 June 2022
$
Purchase of work in progress
(WIP)
$
(22,000)
Notes
COP purchased $22,000 of WIP from another
business on 31 August 2021, which it recorded on
its balance sheet. It billed $16,000 of work by
30 June 2022. It expects to bill another $2,000 by
31 August 2022 and the remaining $4,000 by
30 September 2022.
Total to subtract
Partnership net income/(loss)
(67,000)
3,061,000
Required
a) Identify whether COP has correctly or incorrectly adjusted each item in reconciling accounting profit to
partnership net income for the income year ended 30 June 2022.
b) For each incorrect adjustment:
‒
explain the correct income tax treatment for the income year ended 30 June 2022
‒
provide a key legislative section reference to support your explanation.
You do not need to recalculate partnership net income.
13 marks
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Question – Part (b) (40 marks)
All amounts are in Australian dollars and GST-exclusive, unless otherwise stated.
You are a tax advisor in an accounting firm, Majestic Accountants (MA). You have been asked to advise on the
following client situations relating to the income year ended 30 June 2022.
The clients (and their respective situations) are not connected to one another, and all are Australian tax residents.
1. Dionne (12 marks)
Dionne was an equal partner in the Highgrove Partnership, which she established with Chaz as equal partners in 1983.
The partnership carried on a business of producing perfumes and had never been a small business entity.
In April 2022, Dionne and Chaz decided to incorporate their business, so that Dionne could sell her interests in the
business to Camille at market value. At the time of incorporation, the Highgrove Partnership held only two assets on its
balance sheet. Each partnership asset was transferred into a separate Australian company (Trademark Co and Land
Co, respectively), with each company's shares owned equally by Dionne and Chaz (ie 50/50 shareholders).
Partnership
Cost (at date of purchase or creation)
Market value (in April 2022)
Transferred to:
Trademark
$5,000 (created in 1984)
$100,000
TrademarkCo
Land
$440,000 (purchased in 2019)
$500,000
LandCo
asset
Each of Trademark Co and Land Co issued ordinary shares to Dionne and Chaz equal to the market value of the
partnership asset it acquired. Dionne and Chaz took all necessary action to minimise the tax impact of transferring the
assets.
Required
Explain to Dionne the income tax impact of the partnership asset transfers on the sale of her shares in
TrademarkCo and LandCo for the income year ended 30 June 2022. Provide a key legislative section reference
to support your answer.
12 marks
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2. George (14 marks)
George is a 17-year-old school student who holds a 20% interest in the Lily Trust. The Lily Trust is a unit trust
voluntarily established and managed in Australia by its trustee. George does not derive any other investment income.
The Lily Trust derived net income of $25,000 for the income year ended 30 June 2022, which consisted of the following:
•
$20,000 rental income from a property located in Australia.
•
$3,500 cash dividend, which was franked to 100% and received from a company with a corporate tax rate for
imputation purposes of 30% with only Australian-sourced profit.
For the income year ended 30 June 2022, the trustee made a valid resolution to distribute 20% of each component of
the income of the trust estate to George.
Required
Explain the income tax consequences to George of receiving the distribution for the income year ended 30 June
2022. Provide a key legislative section reference to support your answer.
14 marks
3. Windsor Pty Ltd (Windsor) (14 marks)
Windsor Pty Ltd (Windsor) is an Australian resident company. Windsor has been carrying on a sales and investment
business since the income year ended 30 June 2017. It has no connected or affiliated entities. Windsor only holds
investments in Australian companies where it can own 10–15% of the total shareholdings.
Windsor has provided the following information about its operations for the income year ended 30 June 2022:
•
Sales income of $8 million and related expenses of $3 million.
•
Interest income of $5 million from the investment business and related expenses of $2 million.
•
Unfranked dividend income of $7 million from the investment business and no related expenses.
Windsor's General Manager is unsure of the corporate tax rate that will apply to Windsor for the income year ended 30
June 2022.
Required
Determine and explain Windsor's corporate tax rate for the income year ended 30 June 2022. Show and explain
all workings. Provide a key legislative section reference to support your answer.
14 marks
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