Mick started his business in 2008 when he purchased the building premises freehold for $600,000 and he has run his financial planning business continuously in these premises since then until the business was sold in May 2017.
THE UNIVERSITY OF ADELAIDE
COMMLAW 3501
BUSINESS TAX & GST III
Assignment
This Assignment contains 9 questions and all 9 questions must be answered.
The assignment will be marked out of 40 and is worth 30% of your final assessment in this subject. The Assignment must be submitted by no later than 2pm on Monday May 22nd 2017.
Question 1:
Mick Green sold his business in May 2017 and he approaches you for advice about his possible capital gains tax liability in light of the following facts:
• Mick started his business in 2008 when he purchased the building premises freehold for $600,000 and he has run his financial planning business continuously in these premises since then until the business was sold in May 2017.
• Just before the sale of the business Mick owed Westpac Bank $1.4m for a business loan.
• The business has had a current annual turnover of $3m (excluding GST).
This figure has remained virtually the same over the last 3 years.
• Mick has received an offer to sell his business including any goodwill for $6.5m (GST excluded).
• Of this offer amount of $6.5m, $4m relates to the building and the remaining $2.5m relates to the other business assets including goodwill.
• The written down value of the business plant and equipment is $200,000 and $200,000 of the $2.5m shown for the other assets is allocated to plant and equipment.
• Mick’s wife, Amy, runs a florist business, in her own name, which has total net assets of $800,000. Mick does not consult Amy about decisions concerning the running of his business and Mick is not permitted to become involved in the running of Amy’s business.
• Mick holds a portfolio of shares with a current market value of $110,000.
• Mick also holds 60% of the shares in RTZ Pty Ltd, a private company that owns and runs a catering business. The net assets of RTZ Pty Ltd have a fair market value of $300,000.
• Mick is also a beneficiary in the Green Family Trust and he informs you that he has only received modest distributions from this trust in the previous 4 years. The amount of these distributions were $5,000 in 2013 (when the trust had net income of $12,000) and $6,000 in 2014 (when the trust had net income of $20,000). The net assets of this Trust as at June 2017 were $400,000.
• Mick also estimates that about 20% of his home is used for running his business and that the home is presently worth $600,000. He currently has a loan of $200,000 against this property.
• Mick is aged 52 and he may buy another business in the future.
Required:
Advise Mick, after applying all the various discounts and concessions that he may be eligible for, what his net capital gain is likely to be on the sale of his financial planning business.
Total marks this question = 7
Question 2:
The Advent Trust is a discretionary trust (not a family trust) set up on 1 July 2013 that operates a sports clothing business.
For all relevant years, the trust has had the same trustee, T Pty Ltd. Jim and Cathy each hold one share in T Pty Ltd and no other shares have been issued to this date. T Pty Ltd only acts as a trustee company and has no other role.
No beneficiaries hold fixed interests in the Advent Trust.
The trust net income for the year ended 30 June 2017 is $440,000.
For the year ended 30 June 2017, the trustee proposes to distribute 25% of the trust net income to each of Jim, Cathy and Bob and Dianne.
In the year ended 30 June 2014 the trust had net income of $60,000. This net income was distributed to Jim- 30%; Cathy-20%, Bob-20%, Candy-20% and Eddie 10%. The other beneficiary (Dianne) did not receive any distribution that year.
However, for the year ended 30 June 2015 the trust incurred a loss of $30,000 and for the year ended 30 June 2016 the trust incurred a loss of $10,000.
Required:
(a) Can the trust apply its losses for the years ended 30 June 2015 & 2016 respectively to reduce the trust net income in 2017?
3 marks
Also during the year ended 30 June 2017 the trust entered into the following transactions (all amounts are GST-exclusive and the Trust is eligible to enter the Small Business Entity Tax System and chooses to enter and use the SBE depreciation system):
? The trust purchased a new machine for use in the business for $80,000 (effective life 10 years) on 1 July 2016.
? The other plant held by the trust had an opening written down value as at 1 July 2016 of $60,000 (effective life of this plant was also 10 years).
? Apart from the depreciation deductions noted above, the Advent Trust had other allowable deductions of $10,000.
Required:
(b) Calculate the expected trust net income of the Advent trust and therefore the amount that will be distributed to each of the eligible beneficiaries in accordance with the information shown above for the year ended 30 June 2017.
2 marks
Total marks this question = 5
Question 3:
Deb & Roger each hold 50% of the issued shares in DR Pty Ltd (‘DR’) and have done so since the company was formed in 1995 when they each subscribed
$600,000 for their shares in this company (total issued capital = $1,200,000).
DR carries on a mining supplies business.
The current net value of 100% of the shares in DR is $5 million and a buyer has appeared in June 2017 prepared to pay this amount.
The $5 million is made up of business premises worth $4.6 million, goodwill valued at $1 million and $400,000 for the plant and equipment and there is a $1 million loan against the business.
Roger is also a 50% partner in an accountancy practice and his 50% interest was recently valued at $450,000 (the value of the total partnership practice is therefore $900,000). He also has personal superannuation assets valued at $600,000.
Deb and Roger jointly own their own home (current value is $800,000 with a loan of $200,000). They do use part of this home (10% per floor area) for conducting the mining company business.
Deb also owns a 45% shareholding in a company which operates a restaurant. The 45% shareholding is worth $450,000. No other shareholder owns more than 40% of the shares of this company that operates the restaurant business.
Deb and Roger are both aged 61 and are seeking to retire and are now seeking your advice as to any CGT consequences if they were to dispose of the DB shares.
Total marks this question = 5
Question 4:
Barry Strong purchased a new machine for use in his business on 1 May 2017. The invoice from the supplier showed the following expenses:
• Machine Cost $14,000
• Delivery Fee $600
• Installation Fee $1,400
$16,000
Assuming that the machine has an effective life of 4 years, and that Barry is not entitled to use the small business entity system, what decline in value is he entitled to claim for the year ended 30 June 2017?
Total marks this question = 2
Question 5:
Cynthia, a non-resident for tax purposes of Australia derived the following income from Australia during the 2017 income tax year.
i. Salary of $60,000 from JT Pty Ltd, an Australian resident company. Cynthia worked in Australia for the months of January-June 2017.
$19,500 tax was deducted from the salary payments made to Cynthia.
ii. A fully franked dividend of $4,000 from CBA. The dividend had $1,714 in imputation credits attached to it.
iii. An unfranked dividend of $2,000 from Macquarie Bank.
Required:
Calculate what Cynthia’s Australian taxable income is likely to be for the year ended 30 June 2017 and discuss any withholding tax obligations that may apply to any of these payments made from Australia to Cynthia.
DO NOT TRY AND WORK OUT HER AUSTRALIAN TAX PAYABLE.
Total marks this question = 3
Question 6:
Martin is an employee earning $120,000 a year. Martin has also during the 2017 year planted 3 acres of olive trees on a block in the Adelaide Hills. The land is valued at $450,000 as at 30 June 2017 and the trees at $60,000.
He has not derived any income yet from the olives (the trees will take 3 years to mature and bear any fruit of commercial quality) nor does he use any other assets in this activity but he has incurred expenses of $20,000 including interest of $10,000.
Required:
Discuss any issues in regard to Martin’s deductibility of interest expenses and other expenses in relation to Martin’s olive project.
Total marks this question = 3
Question 7:
In no more than 300 words, if you could change one thing about Australia’s income tax system what would it be? Critically review this proposed measure as to whether it would satisfy requirements to be a useful tax measure in terms of fairness, equity and efficiency.
Explain. Your answer must be in relation to an income tax measure or issue and not on any GST, FBT or any State tax issue.
Total marks this question = 5
Question 8:
(a) ANE Pty Ltd is registered for GST and purchased a block of land from Carl Jones (who was not registered for GST, nor required to be) in 2002 for $350,000. No GST was paid or claimed on the purchase of this property. In April 2017, after having constructed a new house on the property, the property was sold for $1.4m.
(a) Required:
Does GST apply to the sale of this property?
If ANE is seeking to minimise its GST liability on the sale of this property what is the lowest GST liability that will apply to this sale? Please explain pointing out what other requirements are required for lower GST to apply
3 marks
(b) ABC Pty Ltd owns an old home in the suburb of Goodwood that it has used to run its business of carpet cleaning for 10 years. This home is run down but could still be lived in. Top-phone Enterprises is looking to buy this dwelling and they plan on using it run their telephone sales business. The current market value of this home, even in its present condition, is $550,000.
Required:
Will GST apply to this sale of this property at Goodwood?
3 marks
Total marks this question= 6
Question 9:
Ronald Green is a resident of the USA and he advises you that on 1 May 2014 he sold for $20,000 his 500 shares in Imperial Pty Ltd, a private company incorporated in Australia. He tells you his holding in this private company amounted to 25% of the total shares on issue and that the only asset held by this private company was land located in Adelaide. Further, he tells you he has made a capital gain of $10,000 on these shares but has heard from a friend that he is no longer subject to any tax on any capital gains made on the sale of these shares.
Required:
Advise Ronald of what the correct Australian tax treatment is in relation to his capital gain made on the sale of his shares in Imperial Pty Ltd.
4 marks
Total marks for this assignment = 40 marks
COMMLAW 3501
BUSINESS TAX & GST III
Assignment
This Assignment contains 9 questions and all 9 questions must be answered.
The assignment will be marked out of 40 and is worth 30% of your final assessment in this subject. The Assignment must be submitted by no later than 2pm on Monday May 22nd 2017.
Question 1:
Mick Green sold his business in May 2017 and he approaches you for advice about his possible capital gains tax liability in light of the following facts:
• Mick started his business in 2008 when he purchased the building premises freehold for $600,000 and he has run his financial planning business continuously in these premises since then until the business was sold in May 2017.
• Just before the sale of the business Mick owed Westpac Bank $1.4m for a business loan.
• The business has had a current annual turnover of $3m (excluding GST).
This figure has remained virtually the same over the last 3 years.
• Mick has received an offer to sell his business including any goodwill for $6.5m (GST excluded).
• Of this offer amount of $6.5m, $4m relates to the building and the remaining $2.5m relates to the other business assets including goodwill.
• The written down value of the business plant and equipment is $200,000 and $200,000 of the $2.5m shown for the other assets is allocated to plant and equipment.
• Mick’s wife, Amy, runs a florist business, in her own name, which has total net assets of $800,000. Mick does not consult Amy about decisions concerning the running of his business and Mick is not permitted to become involved in the running of Amy’s business.
• Mick holds a portfolio of shares with a current market value of $110,000.
• Mick also holds 60% of the shares in RTZ Pty Ltd, a private company that owns and runs a catering business. The net assets of RTZ Pty Ltd have a fair market value of $300,000.
• Mick is also a beneficiary in the Green Family Trust and he informs you that he has only received modest distributions from this trust in the previous 4 years. The amount of these distributions were $5,000 in 2013 (when the trust had net income of $12,000) and $6,000 in 2014 (when the trust had net income of $20,000). The net assets of this Trust as at June 2017 were $400,000.
• Mick also estimates that about 20% of his home is used for running his business and that the home is presently worth $600,000. He currently has a loan of $200,000 against this property.
• Mick is aged 52 and he may buy another business in the future.
Required:
Advise Mick, after applying all the various discounts and concessions that he may be eligible for, what his net capital gain is likely to be on the sale of his financial planning business.
Total marks this question = 7
Question 2:
The Advent Trust is a discretionary trust (not a family trust) set up on 1 July 2013 that operates a sports clothing business.
For all relevant years, the trust has had the same trustee, T Pty Ltd. Jim and Cathy each hold one share in T Pty Ltd and no other shares have been issued to this date. T Pty Ltd only acts as a trustee company and has no other role.
No beneficiaries hold fixed interests in the Advent Trust.
The trust net income for the year ended 30 June 2017 is $440,000.
For the year ended 30 June 2017, the trustee proposes to distribute 25% of the trust net income to each of Jim, Cathy and Bob and Dianne.
In the year ended 30 June 2014 the trust had net income of $60,000. This net income was distributed to Jim- 30%; Cathy-20%, Bob-20%, Candy-20% and Eddie 10%. The other beneficiary (Dianne) did not receive any distribution that year.
However, for the year ended 30 June 2015 the trust incurred a loss of $30,000 and for the year ended 30 June 2016 the trust incurred a loss of $10,000.
Required:
(a) Can the trust apply its losses for the years ended 30 June 2015 & 2016 respectively to reduce the trust net income in 2017?
3 marks
Also during the year ended 30 June 2017 the trust entered into the following transactions (all amounts are GST-exclusive and the Trust is eligible to enter the Small Business Entity Tax System and chooses to enter and use the SBE depreciation system):
? The trust purchased a new machine for use in the business for $80,000 (effective life 10 years) on 1 July 2016.
? The other plant held by the trust had an opening written down value as at 1 July 2016 of $60,000 (effective life of this plant was also 10 years).
? Apart from the depreciation deductions noted above, the Advent Trust had other allowable deductions of $10,000.
Required:
(b) Calculate the expected trust net income of the Advent trust and therefore the amount that will be distributed to each of the eligible beneficiaries in accordance with the information shown above for the year ended 30 June 2017.
2 marks
Total marks this question = 5
Question 3:
Deb & Roger each hold 50% of the issued shares in DR Pty Ltd (‘DR’) and have done so since the company was formed in 1995 when they each subscribed
$600,000 for their shares in this company (total issued capital = $1,200,000).
DR carries on a mining supplies business.
The current net value of 100% of the shares in DR is $5 million and a buyer has appeared in June 2017 prepared to pay this amount.
The $5 million is made up of business premises worth $4.6 million, goodwill valued at $1 million and $400,000 for the plant and equipment and there is a $1 million loan against the business.
Roger is also a 50% partner in an accountancy practice and his 50% interest was recently valued at $450,000 (the value of the total partnership practice is therefore $900,000). He also has personal superannuation assets valued at $600,000.
Deb and Roger jointly own their own home (current value is $800,000 with a loan of $200,000). They do use part of this home (10% per floor area) for conducting the mining company business.
Deb also owns a 45% shareholding in a company which operates a restaurant. The 45% shareholding is worth $450,000. No other shareholder owns more than 40% of the shares of this company that operates the restaurant business.
Deb and Roger are both aged 61 and are seeking to retire and are now seeking your advice as to any CGT consequences if they were to dispose of the DB shares.
Total marks this question = 5
Question 4:
Barry Strong purchased a new machine for use in his business on 1 May 2017. The invoice from the supplier showed the following expenses:
• Machine Cost $14,000
• Delivery Fee $600
• Installation Fee $1,400
$16,000
Assuming that the machine has an effective life of 4 years, and that Barry is not entitled to use the small business entity system, what decline in value is he entitled to claim for the year ended 30 June 2017?
Total marks this question = 2
Question 5:
Cynthia, a non-resident for tax purposes of Australia derived the following income from Australia during the 2017 income tax year.
i. Salary of $60,000 from JT Pty Ltd, an Australian resident company. Cynthia worked in Australia for the months of January-June 2017.
$19,500 tax was deducted from the salary payments made to Cynthia.
ii. A fully franked dividend of $4,000 from CBA. The dividend had $1,714 in imputation credits attached to it.
iii. An unfranked dividend of $2,000 from Macquarie Bank.
Required:
Calculate what Cynthia’s Australian taxable income is likely to be for the year ended 30 June 2017 and discuss any withholding tax obligations that may apply to any of these payments made from Australia to Cynthia.
DO NOT TRY AND WORK OUT HER AUSTRALIAN TAX PAYABLE.
Total marks this question = 3
Question 6:
Martin is an employee earning $120,000 a year. Martin has also during the 2017 year planted 3 acres of olive trees on a block in the Adelaide Hills. The land is valued at $450,000 as at 30 June 2017 and the trees at $60,000.
He has not derived any income yet from the olives (the trees will take 3 years to mature and bear any fruit of commercial quality) nor does he use any other assets in this activity but he has incurred expenses of $20,000 including interest of $10,000.
Required:
Discuss any issues in regard to Martin’s deductibility of interest expenses and other expenses in relation to Martin’s olive project.
Total marks this question = 3
Question 7:
In no more than 300 words, if you could change one thing about Australia’s income tax system what would it be? Critically review this proposed measure as to whether it would satisfy requirements to be a useful tax measure in terms of fairness, equity and efficiency.
Explain. Your answer must be in relation to an income tax measure or issue and not on any GST, FBT or any State tax issue.
Total marks this question = 5
Question 8:
(a) ANE Pty Ltd is registered for GST and purchased a block of land from Carl Jones (who was not registered for GST, nor required to be) in 2002 for $350,000. No GST was paid or claimed on the purchase of this property. In April 2017, after having constructed a new house on the property, the property was sold for $1.4m.
(a) Required:
Does GST apply to the sale of this property?
If ANE is seeking to minimise its GST liability on the sale of this property what is the lowest GST liability that will apply to this sale? Please explain pointing out what other requirements are required for lower GST to apply
3 marks
(b) ABC Pty Ltd owns an old home in the suburb of Goodwood that it has used to run its business of carpet cleaning for 10 years. This home is run down but could still be lived in. Top-phone Enterprises is looking to buy this dwelling and they plan on using it run their telephone sales business. The current market value of this home, even in its present condition, is $550,000.
Required:
Will GST apply to this sale of this property at Goodwood?
3 marks
Total marks this question= 6
Question 9:
Ronald Green is a resident of the USA and he advises you that on 1 May 2014 he sold for $20,000 his 500 shares in Imperial Pty Ltd, a private company incorporated in Australia. He tells you his holding in this private company amounted to 25% of the total shares on issue and that the only asset held by this private company was land located in Adelaide. Further, he tells you he has made a capital gain of $10,000 on these shares but has heard from a friend that he is no longer subject to any tax on any capital gains made on the sale of these shares.
Required:
Advise Ronald of what the correct Australian tax treatment is in relation to his capital gain made on the sale of his shares in Imperial Pty Ltd.
4 marks
Total marks for this assignment = 40 marks
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