• April 1st, 2016

Income tax law

Paper, Order, or Assignment Requirements

please apply the appropriate australian legislation for the cases where is needed. provide sufficient explanation and calculation where is needed. thanks

 

Part 1

Dale Teal and her husband Trent Teal have the following tax related information

Sole trader Activities

Dale was born on 01/11/1966 and runs a successful holistic health business with the

following details

Cash receipts from sale of trading stock for the year 110 000

Cash receipts from holistic health services 100 000

Amounts received in advance as at 30/6 (not included in cash receipts) 15 700

(Dale has a policy of refunding these amounts if clients choose not to go through with the

treatment)

Invoices issued but not paid 12 000

Opening trading stock 37 500

Closing trading stock 30 000

Wages paid to part time staff 56 112

Rent expenses paid 15 600

Legal expenses incurred in renewing the lease 1 750

Superannuation Guarantee paid for all employees 5 190

WorkCover payments 3 065

Tax Agent’s Fees 6 50

Bank/Merchant Fees 7 00

Business Insurance (continuity insurance) 2 950

Business Phone 1 780

Scented oils etc used up 11 150

Electricity 4 000

Postage, printing & stationery 1 600

Work related car expenses during the year

• Fuel 6 280

• Registration 1 280

• Insurance 1 550

• Repairs & Maintenance 1 950

• Interest on loan 2 520

The car is a 3.0 litre non rotary hatchback and she travelled 7700 business kilometres in

  1. The original purchase price was $26 000 and it was used 85% of the time for

business purposes.

2

(Dale has all of the necessary paperwork to substantiate claims and receipts)

Other Information

Her home phone bills totalled $1,200 with 55% business use.

Dale paid $7,390 during the year for income protection insurance to ensure an income

stream if she should be unable to work. She also paid a further $755 for life insurance

providing a capital payment on her death or diagnosis of terminal illness.

Dale has a HELP debt of $45 000

Employee activities

Dale is also a prison guard at a high security facility with Blackhand, a private enterprise

noted for its involvement in conflict areas. Blackhand is registered for GST and able to

claim GST credits

Salary 85 000

PAYG withholding 14 200

Dale also received a mobile phone valued at $800 which she uses 100% of the time for

prison guard related activities.

Dale has a $25 000 interest free loan with her employer which she has used to buy ASX

listed shares in her name.

Dale’s employer provides her with private health cover valued at $5000 but this cover

does not cover Trent or the children.

Other information

Dale is presently entitled to a distribution from a discretionary family trust. She received

$23 400 from the trust with $4700 in associated franking credits. She also had a number

of CGT events during the year. She owns all these assets herself.

• She sold a rental property purchased on 15/5/96 for $180 000 on 27/3/14 for

$340 000

• She sold a stamp she picked up at a garage sale for $5 on 15/7/13 on 25/8/13 for

$25000. Dale has an expert knowledge of stamps and recognised it as a very

rare stamp she could quickly sell to a collector.

• She sold a boat acquired on 1/11/04 for $17 500 on 1/4/14 for $9 000.

• She sold 500 shares acquired on 1/4/12 for $10 000 on 1/4/14 for $2 000

• She sold a diamond ring acquired on 5/2/00 for $750 on 1/5/14 for $4000

• She sold 1000 shares acquired on 3/4/84 for $10 000 on 1/4/14 for $2000

• She sold 2500 shares acquired on 25/5/96 for $18 000 on 1/6/14 for $18 750

Dale and Trent have a shared bank account which paid $2180 interest

Dale and Trent also own a share portfolio of ASX listed shares which paid franked

dividend of $14350 and unfranked dividends of $4000.

Dale made a contribution to Trent’s superannuation fund of $1000. Trent has no other

income other than described.

3

Personal Information

Dale and Trent have 3 children in primary school.

During the year Dale paid 4 PAYG Instalments to the ATO of $8,500 each

Dale has also received $350 000 from a deceased estate and would like some advice as

to her investment options. She has heard a family discretionary trust can be used to

reduce or eliminate the tax she pays on the interest earned. The interest is expected to

be $16 000.

Dale is covered by private health insurance, however the policy does not cover Trent or

the children.

Required

• Complete all necessary labels in Dale’s Income Tax Return

• Identify any fringe benefits Dale has received and determine the value which needs

to be reported on her tax return. Show all fringe benefits tax calculations

• Calculate the balance of her assessment

• Prepare a statement of advice for Dale explaining your decisions and calculations

based on the legislation and relevant case law.

• Calculate Dale’s taxable income

• Provide advice on the use of the family trust arrangement to minimise Dale’s tax, with

reference to possible implications to Trent’s tax position.

4

Part 2

A client has approached you, as their tax advisor, with some questions about starting a

business. They have an interesting business concept with a 2 year planning phase, 5 years

operation and then sale of a subsidiary company. The client plans to set up a parent

company, borrow money through the company structure, and loan the money at a

commercial rate to a 100% owned subsidiary company. There are no planned changes in

the shareholdings in either company in this 7 year time period. It is planned the subsidiary

will pay interest and dividends to the parent company.

The business model involves the sale of the subsidiary company by shares to the least

competent tender applicant and its subsequent repurchase at a significantly lower price than

sale price after 2 – 3 years, refinancing the company’s existing loan if necessary. This plan

requires significant borrowings with associated expenses including interest

The business model involves the sale of the subsidiary early in the relevant financial year

after five years of operation. It is expected the sale will generate losses due to the

continuing interest expenses in the year of sale and the relevant years following the sale as

the loans will not be paid out, only the necessary loan commitments will be paid. The losses

will then be utilised to maximise the time before the repurchased subsidiary has a taxable

income.

Formulate, with reference to appropriate legislation and case law, a concise explanation of:

• the principles determining whether interest expenses are deductible prior to

commencing business activities, during the life of the business and after the sale of

the business. In particular explore the effect refinancing may have on the

deductibility of interest expenses,

• the deductibility of the losses after repurchase

• whether you would be subject to the promoter penalty regime if you recommended

the client undertake their plan.

(Ignore GST and stamp duty issues)

5

Part 3

Amity has been employed as a tax advisor by the mid-tier private accounting firm YoungPWC

and Associates in their Adelaide branch for 7 years. In January 2013 she was selected to be

sent to Kiribati for two years to advise the Kiribati government on the design and

implementation of a new VAT. The placement was for a 2 year period with an option

exercisable by Amity to extend the period for a further 3 years.

Amity jumped at the opportunity and left Australia in January 2013 with her husband Martin.

Amity intended to stay in Kiribati for at least the initial 2 years and then make a decision about

staying longer if the lifestyle was enjoyable, the work enjoyable and financially rewarding.

On first arriving in Kiribati, Amity and Martin took out a small mortgage on a house on the

beach and planned to furnish it with furniture bought from the local furniture stores. However,

they underwent extreme culture shock when they discovered there were no local furniture

hops selling anything they wanted and the cost of shipping their furniture over was prohibitive.

They decided to sell the house after 4 months and take up a serviced apartment in the capital.

This was acceptable accommodation and it worked well enough as there were no children.

They were able to take out 12 month rent agreements as there were many expats on one year

placements. They made the apartment relatively homely with their few belongings. However,

Martin found getting any sort of reasonable employment was essentially impossible and started

to get dispirited.

Amity’s salary was paid into an account she opened with the Asia-Pacific Bank. Amity and

Martin kept their home in Adelaide and rented it out through agents for 12 month periods.

They discontinued their health insurance membership, however Amity maintained her

Chartered Tax Advisor membership. Their only relatives are their elderly parents who resided

in Australia.

Martin contracted a form of food poisoning from eating a toxic fish and after only 18 months

away the disenchanted couple returned to Adelaide at the beginning of July 2014.

6

Required

You are required to advise Amity on whether or not she was an Australian resident during

the income year ended 30 June 2014 by reference to the relevant legislation and case law.

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