ConTax Student e-Newsletter: March 2009
Sample Exam Questions
Gerard Stone and Rob Whait FTIA
Taxation Law discipline
School of Commerce
University of South Australia
Rob Whait FTIA graduated from the University of South Australia with a Bachelor of Commerce degree in
2001 and became a Chartered Accountant and Fellow of the Taxation Institute in 2003. Rob worked in public
practice and in commerce before joining the University of South Australia as Lecturer in Taxation in 2006.
His research interests include tax avoidance and tax compliance; income taxation and policy, and research
methodology.
Gerard Stone graduated from the University of South Australia with a Bachelor of Commerce. He is the
Program Director of the Bachelor of Commerce degree and a lecturer and tutor in Accounting and Tax at the
University of South Australia. Gerards research interests include:
The Small Business sector and its relationship with the Accounting profession.
Determinants of satisfaction of the Small Business clients of Accounting firms.
Communication between the Accounting and Small Business sectors.
Undertaking readability analysis of written communications provided to the Small Business sector by
Accountants.
Undertaking analysis of the preferred communications methods of the Small Business sector in its
communications with Accountants.
Question 1
Jane is employed as a marketing manager for a large chain of discount warehouses. During her
spare time she enjoyed mountain climbing and abseiling. One Saturday whilst abseiling, Jane
broke both of her legs and was unable to work for 2 months following the accident. Jane only had
10 days of sick leave available, but she had taken out an income protection insurance policy that
ensured that she got paid 90% of her usual fortnightly salary until she was able to return to work.
Must Jane include the receipts from the insurance company in her assessable income? Support
your answer with reference to relevant taxation law.
Suggested solution
Dixon v FCT is the authority for the principle that a receipt that substitutes for ordinary income
takes on the character of ordinary income.
Jane’s salary is income from employment and is therefore ordinary income under s.6-5(1). The
insurance payments that Jane received take on the character of ordinary income since they
substitute for her salary lost due to her accident and are therefore ordinary income under s.6-5(1).
The argument above has been applied in Tinkler v FCT to assess receipts from income protection
insurance as ordinary income.
Section 15-30 does not apply since that section only operates where the insurance receipt is not
ordinary income.
Question 2
Harriet Harrison is a self-employed physiotherapist specialising in providing therapy to the elderly.
Since she visits all her patients in their own home, she does not need consulting rooms for her
patients to visit. Instead she runs her business from her own home where she has converted a
unused bedroom into an office. She has furnished this office with appropriate office furniture and
equipment including a desk and chairs, bookcase, filing cabinet, telephone and fax machine, and a
computer with broadband Internet access. She also has bought some stationery. In addition to the
office expenses she also pays interest on a home loan.
Taxation Institute of Australia
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ConTax Student e-Newsletter: March 2009
Sample Exam Questions
Advise Harriet whether she can claim a tax deduction for any of these expenses. Support your
answer with reference to relevant taxation law.
Suggested solution
The facts say that Harriet is a self employed physiotherapist therefore she is carrying on a
business.
In Swinford v FCT a self-employed scriptwriter conducted his business from home and was
allowed to deduct the appropriate proportion of occupancy and running expenses. This is because
the area designated for his business constituted a business premises.
Likewise Harriet is also carrying on her business from home and has set aside one room to
conduct this business. Therefore Harriet may deduct the appropriate proportion of running costs
and occupancy costs associated with her business.
Office furniture (desk, chairs, bookcase, filing cabinet) and computer equipment, telephone and fax
machine – deduct the decline in value under s.40-25(1). Any private use must be apportioned in
accordance with s.40-25(2).
Telephone expenses, fax expenses, internet, stationery - proportion of taxable use of the running
costs are deductible - s. 8-1. These expenses may or may not have some private use depending
on Harriet’s pattern of use which cannot be deducted per s.8-1(2)(b).
Interest on home loan – a connection between the interest and the earning activity (a business) is
established by Swinford v FCT as noted above therefore taxable use portion of the interest is
deductible under s.8-1. The house is also a private residence therefore must apportion the interest
appropriately.
Question 3
Phones For You Pty Ltd is a retailer of mobile phones. On 21 May 2008 the company entered into
a contract for the purchase of some mobile phones for $20,000 from an overseas supplier. On 27
June 2008 the company received the invoice for these phones but a dispute had delayed
shipment. As at 30 June 2008 the order was still in transit although the company had received bills
of lading in respect of one quarter of the shipment.
Advise the company of the tax consequences, if any, of the goods in transit for the year ended 30
June 2008. Support your answer with reference to relevant taxation law.
Suggested Solution
The mobile phones are trading stock since they are held for the purpose of resale in the ordinary
course of the taxpayer’s business (s.70-10).
The issue is whether the goods are on hand in accordance with s.70-10.
To be “on hand”, Phones For You Pty Ltd must have dispositive power of the phones. Dipositive
power is the power to direct, control, and dispose it (authority FCT v Sutton Motors (Chullora)
Wholesale P/L).
Dispositive Power does not necessarily require the stock to be in the physical possession of the
taxpayer. Stock can be on hand when it is in transit, where the risk and property in the goods has
passed to the taxpayer (cite All States Frozen Foods P/L v FCT).
If a taxpayer holds legal title to stock, but they do not have the power to direct, control or dispose
of the stock, then it is not on hand (Farnsworth v FCT).
Taxation Institute of Australia
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ConTax Student e-Newsletter: March 2009
Sample Exam Questions
Bills of lading were received for $5,000 of the stock meaning that risk and title for that stock has
passed to Phones For You Pty Ltd. Thus, the company has dispositive power, making the phones
on hand at 30 June 2008.
Therefore, $5,000 is included in purchases pursuant to s. 70-15(2) and deductible under s.8-1.
Also, include $5,000 in closing stock calculated in accordance with 70-45(1) for the trading stock
adjustment required under s. 70-35.
Trust exam question
Susan Lawson was a solicitor in sole practice who had returned income on a cash basis. On her
death in November 2008, a trust was created under her will conferring the following fixed interests
in the net income of the trust estate:
William (widowed husband) $ 40,000
Albert 30,000
Belinda 20,000
In addition to the above fixed interests, the trustee of this trust estate has the discretion each year
to accumulate the balance of the net income or to distribute it amongst other eligible beneficiaries
as the trustee sees fit. The trustee made the following resolution on 29 June 2009:
‘It is resolved that the balance of the net income of the Estate of Susan Lawson for the year
ending 30 June 2009, after taking account of the fixed interests in this net income, be
distributed as follows:
Cate $ 15,000
David 10,000
Any remaining balance to be accumulated.’
For the year ending 30 June 2009, the trust returned a net income of $160,000 in terms of
subsection 95(1) of the 1936 Act. The bulk of this income was derived from extensive rental
properties which had been owned by Susan, but also included was an amount of $20,000 received
for fees owing to Susan at the time of her death. There were no outstanding debts owing by the
estate.
Additional information
(1) Albert is a son aged 26 and a resident of Mexico for the last 3 years where he is employed as a
computer consultant. He does not lodge income tax returns in Australia.
(2) Belinda is a daughter aged 19 who is a full-time student with a part-time job.
(3) Cate is a daughter aged 16 who is also a full-time student with a part-time job.
(4) David is a son aged 14 and fully occupied with school work.
Required
Explain how the net income of the trust, and the taxable incomes of the beneficiaries where
appropriate, will be assessed for income tax for the year ending 30 June 2009.
Reference should be made to the relevant tax law and rates, but calculations of tax are not
required.
Taxation Institute of Australia
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ConTax Student e-Newsletter: March 2009
Sample Exam Questions
A suggested answer
Professional fees owing at death: the amount of $20,000 is deemed to be income of the trust to
which no beneficiary is presently entitled in accordance with s.101A. See Single’s case.
Rent income: the balance of the net income of $140,000, comprising rental income, is available to
be distributed to presently entitled beneficiaries.
This income is legally available to be distributed because all debts have been settled (compared
with Whiting where the estate was still under administration).
Distribute fixed interests:
William
Resident, not under a legal disability and presently entitled to income.
Therefore, the distribution of $40,000 is included in his assessable income under s.97(1).
He bears sole responsibility for tax on that distribution.
Taxable income is taxed at ‘resident individual tax rates’.
Albert
The facts indicate that Albert is a non resident because he has a ‘permanent place of abode’
outside Australia in terms of the tests of ‘resident’ in s. 6(1) of the 1936 Act: see Applegate. He is
also presently entitled to income and not under a legal disability.
Therefore, the trustee is assessed on his distribution of $30,000 under s. 98(4) at ‘non resident
individual tax rates’. (As he does not lodge returns in Australia, there can be no application of s.
98A).
Belinda
Like William, she is presently entitled to income, resident and not under a legal disability.
Therefore, the distribution of $20,000 is included in her assessable income under s.97(1). She
bears sole responsibility for tax on that distribution.
Part-time income is assessable under s.6-5.
Taxable income is taxed at ‘resident individual tax rates’.
Other discretionary distributions:
A valid resolution to distribute other income was made in time by the trustee by 30 June 2009. This
deems present entitlement to income by the nominated beneficiaries in accordance with s. 101.
Cate
Resident and under a legal disability as a minor.
A ‘prescribed person’ per s.102AC as she is only working part-time as at 30 June, 2009. However,
this is ‘excepted trust income’ in accordance with s. 102AG(2)(a), so Div. 6AA penal tax rates do
not apply. Therefore, the trustee is assessed on her account under s. 98(1) at ‘ordinary resident
individual tax rates’.
The part-time income that Cate earns is assessable to her under s.6-5. This is excepted
assessable income (s.102AE(2)(a). Thus, again Div. 6AA penal tax rates do not apply; rather
‘resident individual tax rates’ apply.
Here, s.100(1) applies because Cate, as a beneficiary under a legal disability, has derived income
from another source (part-time work) during the income year. Thus, she is also liable to pay tax on
her trust distribution in her own return. Cate then claims a tax credit under s. 100(2) for the tax paid
by the trustee under s.98(1).
Taxation Institute of Australia
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ConTax Student e-Newsletter: March 2009
Sample Exam Questions
David
Resident and under a legal disability as a minor.
Prescribed person (s.102AC) as not working full time on 30 June, 2009, but again this is “excepted
trust income” under s.102AG(2)(a) and so Div. 6AA penal tax rates do not apply. The trustee is
assessed under s. 98(1) at ‘ordinary resident individual tax rates’.
As David does not derive income from any other source during the income year, s. 100 does not
apply.
Accumulated Income
The trustee is assessed on this $45,000 ($20,000 professional fees owing at death and $25,000
accumulated per resolution) under s. 99. The higher s.99A tax rates do not apply because this is a
testamentary trust: s.99A(2).
Therefore, the trustee is assessed at ‘resident individual tax rates’ as Susan died less than 3 years
before the end of the income year in question.
Taxation Institute of Australia
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