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2
Table of Contents
Page
Chapter 1 Introduction to the Taxation System 3
Chapter 2 Calculation of Income Tax 4
Chapter 3 Assessable Income - Personal 7
Chapter 4 Assessable Income - Business 11
Chapter 5 Capital Gains 15
Chapter 6 Deductions - General & Specific 28
Chapter 7 Trading Stock 47
Chapter 8 Tax Accounting 51
Chapter 9 Small Business Entities 59
Chapter 10 Partnerships 63
Chapter 11 Trusts 69
Chapter 12 Companies 78
Chapter 13 Taxation Administration 84
Chapter 14 Tax Planning & Anti-Avoidance 91
Chapter 15 Fringe Benefits Tax 102
Chapter 16 Goods and Services Tax 114
ISBN: 978 192 157 9875
Second Edition - January 2013
Published by
Tekniks Publications P.O. Box 210 Bondi NSW 2026 Phone: (02) 8012 3606 0424 151 753
www.tekniks.com.au
3
Chapter 1:
Introduction to the Taxation System
– Solutions
QUESTION 1.1 Preparing or lodging an approved form about a taxpayer’s liabilities, obligations or entitlements
under a BAS provision.
Giving advice about the taxpayer’s obligations under a BAS provision. Transacting any business with the Commissioner on behalf of a taxpayer in relation to their
obligations under a BAS provision.
QUESTION 1.2 A BAS service provider is either: A registered tax agent. A registered BAS agent. An employee who conducts BAS services for a company or partnership that is a registered BAS
agent.
QUESTION 1.3 No. He meets the experience and qualification requirements, but not the fit and proper person requirements, as he committed a prohibited act in the last five years.
QUESTION 1.4 Fines of up to $42,500.
QUESTION 1.5 Service Provided BAS Service? Installing computer accounting software without determining default GST and other codes tailored to the client.
No
Installing computer accounting software and determining default GST and other codes tailored to the client.
Yes
Reconciling BAS provision data entry to ascertain the figures to be included on a client’s activity statement.
Yes
Filling in the activity statement on behalf of an entity or instructing the entity which figures to include.
Yes
Coding tax invoices and transferring data onto a computer program for clients under the instruction and supervision of a registered BAS agent.
No
QUESTION 1.6 Cash basis Assessable income is $ 205,000. Accruals basis Assessable income is $210,000.
Cash received from cash sales and from debtors $ 205,000 plus Debtors balance at 30 June 2013 $ 30,000 less Debtors balance at 1 July 2012 25,000 5,000 210,000
4
Chapter 2:
Calculation of Income Tax – Solutions
QUESTION 2.1
$
( a ) Assessable Income 82,000 - 7,000 75,000
( b ) Taxable Income 75,000 - 10,000 65,000
( c ) Tax-free threshold 18,200
( d ) Tax-free threshold - non-residents 0
( e ) Tax on Taxable Income ($65,000) 3,572 + (32.5% x (65,000 - 37,000) 12,672.00 QUESTION 2.2
$
( a ) Tax on Taxable Income ($40,100) 3,572+ (32.5% x (40,100 - 37,000)) 4,579.50
( b ) Tax on Taxable Income ($86,250) 17,547 + (37% x (86,250 - 80,000)) 19,859.50
( c ) Tax on Taxable Income ($159,000) 17,547 + (37% x (159,000 - 80,000)) 46,777.00
( d ) Tax on Taxable Income ($205,000) 54,547 + (45% x (205,000 - 180,000)) 65,797.00
( e ) Tax on Taxable Income ($20,000) 19% x (20,000 - 18,200) 342.00
5
QUESTION 2.3
( a ) The low income tax offset is a non-refundable offset.
$
( b ) Low income tax offset on $55,000 445 - (1.5% x (55,000 - 37,000) 175.00
( c ) Low income tax offset on $17,000 < 37,000 445.00
( d ) There is no family threshold and the taxable income of the taxpayer is
the sole determinant of the offset.
( e ) Low income tax offset on $68,000 > 66,667 Nil
QUESTION 2.4
$
Bethany Low Income Tax Offset on $25,000 taxable income < $37,000 445.00
Irwin Low Income Tax Offset on $69,000 taxable income > $66,667 Nil
Rhys Low Income Tax Offset on $45,000 445 - (1.5% x (45,000 - 37,000)) 325.00
Zane Low Income Tax Offset on $20,000 taxable income < $37,000 342.00
Non-refundable tax offset - the full $445 while credited is effectively not refunded.
Jess Low Income Tax Offset on $30,000 taxable income < $37,000 445.00
Fringe benefits are not considered in the calculation
6
QUESTION 2.5
$
( a ) 5 months as a resident, therefore $13,464 + ((4,736 x 5)/12) 15,437
( b ) Tax on $25,000 19% x (25,000 - 15,437) 1,816.97
( c ) Medicare Levy 1.5% x 25,000 x 150/365 154.11
( d ) Low income tax offset < $37,000 445.00
( e ) Tax on $25,000 19% x (25,000 - 15,437) 1,816.97
Less Low income tax offset < $37,000 445.00
1,371.97
Medicare Levy 1.5% x 25,000 x 150/365 154.11
TAX PAYABLE 1,526.08
QUESTION 2.6
$
( a ) Taxable Income 33,000
( b ) Medicare Levy on $33,000 1.5% x 33,000 495.00
( c ) Nil - Medicare Levy does not apply to non-residents
( d ) Medicare Levy on $23,000 10% x (23,000 - 20,542) 245.80
( e ) Medicare Levy on $13,000 < $20,542 0.00
7
Chapter 3:
Assessable Income – Personal
– Solutions
QUESTION 3.1
$Gross Wages 78,000 + 19,000 97,000Bonus 6,000 + 4,200 10,200Reimbursement not assessable 0Travel Allowance 2,800Health Insurance Not assessable - fringe benefit 0Superannuation Not assessable 0ASSESSABLE INCOME 110,000 QUESTION 3.2
$Tips Consequence of employment 3,700Gross Wages 65,000 + 25,000 + 3,000 93,000Clothing Allowance 1,500
Shift Allowance Fully assessable 5,000Worker's Compensation Replacing assessable income 7,000Lump Sum Damages Personal injury, therefore capital 0ASSESSABLE INCOME 110,200
The full amount is assessable, regardless of the
amount expensed.
QUESTION 3.3
Gross Wages $60,000
Accrued Leave Not assessable until received 0Powerball winnings Windfall, not related to work activities 0Cash Prize Similar to a cash bonus 1,500Holiday Prize Fringe benefit, not assessable 0Gift from Colleagues Private, not related to work activities 0Reimbursement of Costs Not assessable, possibly a fringe benefit 0ASSESSABLE INCOME 61,500
Assessable even though paid into husband's
account.
8
QUESTION 3.4
$ $Rent received 27,420 + 2,130 29,550Water rates recovered 875Outstanding rent recovered 1,900Fully franked dividends 17,780 + 8,330 26,110Franking credits 26,110 x 30/70 11,190Unfranked dividend - NFI 28Unfranked dividend - TFN 2,033 + 1,767 3,800Interest - term deposit 51,834 - 50,000 1,834Interest - savings account 912
76,199Less: Rental Deductions 9,435TAXABLE INCOME 66,764
Tax on $66,764 3,572 + (32.5% x (66,764 - 37,000)) 13,245.30Medicare Levy (1.5% x 66,764) 1,001.46
14,246.76Less: Franking Tax Offset 11,190.00 TFN Withheld 1,767.00 12,957.00TAX PAYABLE 1,289.76
QUESTION 3.5 Mishka received a discount of (200 x 2.50) – 200 = $300. As the amount of discount received is under $1000 and Mishka taxable income is under $180,000, the amount is not assessable. QUESTION 3.6 Larissa received a discount of (600 x 1.50) – 0 = $900. As Larissa’s taxable income is over $180,000 she is unable to receive the $1,000 up-front tax concession. She is able to defer the $900 capital gain until she sells the shares or seven years after allotment, whichever occurs first.
9
QUESTION 3.7
$
Gross Salary 57,000
Gross Rent - Germany 18,000
TAXABLE INCOME 75,000
Tax on $75,000 3,572 + (32.5% x (75,000 - 37,000)) 15,922.00
Medicare Levy 1.5% x 75,000 1,125.00
17,047.00
Less: PAYG Withheld 14,000.00
Foreign Income Tax Offset - limit 5,850.00 19,850.00
TAX REFUNDABLE 2,803.00
Foreign Income Tax Offset limit
Tax on $75,000 3,572 + (32.5% x (75,000 - 37,000)) 15,922.00
Tax on $57,000 3,572 + (32.5% x (57,000 - 37,000)) 10,072.00
5,850.00
QUESTION 3.8
$
Gross Wages 39,200 + 15,300 54,500
Interest - Canada 5,200 + 1,300 6,500
TAXABLE INCOME 61,000
Tax on $61,000 3,572 + (32.5% x (61,000 - 37,000)) 10,772.00
Less: Low Income Tax Offset 445 - 1.5% x (61,000 - 37,000) 85.00
10,687.00
Add: Medicare Levy 1.5% x 61,000 915.00
11,602.00
Less: PAYG Withheld 15,300.00
Foreign Income Tax Offset - tax paid 1,300.00 16,600.00
TAX REFUNDABLE 4,998.00
Foreign Income Tax Offset limit
Tax on $61,000 3,572 + (32.5% x (61,000 - 37,000)) 11,372.00
Tax on $54,500 3,572 + (32.5% x (54,500 - 37,000)) 9,259.50
2,112.50
Foreign tax paid is less than the offset limit and will therefore be the amount.
10
QUESTION 3.9
$
Gross Wages 22,500 + 3,300 25,800
Dividends - New Zealand 2,800 + 700 3,500
TAXABLE INCOME 29,300
Tax on $29,300 19% x (29,300 - 18,200)) 2,109.00
Less: Low Income Tax Offset 445.00
1,664.00
Medicare Levy 1.5% x 29,300 439.50
2,103.50
Less: PAYG Withheld 3,300.00
Foreign Income Tax Offset - tax paid 700.00 4,000.00
TAX REFUNDABLE 1,896.50
Foreign Income Tax Offset limit does not apply as tax paid was less than $1,000. QUESTION 3.10
$
Business Income 79,270
Dividends - Japan 3,280 + 820 4,100
Rent - Norway 19,340
102,710
less: Business Deductions 9,240
Rental Deductions - Norway 5,330 14,570
TAXABLE INCOME 88,140
Tax on $88,140 17,547+ (37% x (88,140 - 80,000)) 20,558.80
Medicare Levy 1.5% x 88,140 1,322.10
21,880.90
Less: PAYG Instalments 14,280.00
Foreign Income Tax Offset tax - limit 6,252.05 20,532.05
TAX PAYABLE 1,348.85
Foreign Income Tax Offset Limit
Tax on $88,140 17,547 + (37% x (88,140 - 80,000)) 20,558.80
Tax on $70,030 3,572 + (32.5% x (70,030 - 37,000)) 14,306.75
6,252.05
11
Chapter 4:
Assessable Income – Business – Solutions
QUESTION 4.1 Sonya is clearly a resident of Australia for tax purposes. Sophie has a permanent
place of abode in Italy and lived in Australia for less than 183 days during the year. There is nothing indicating that she intends to take up permanent residency. Sophie is therefore a non-resident.
Although Buddy has been in Australia for less than 183 days during the year, the maintenance of a property which he returns to would be considered indicative that he resides in Australia. He is therefore a resident for tax purposes.
It would appear that Dan’s intention is to settle for the foreseeable future in Australia and would therefore be considered a resident for tax purposes. Enrolment in a course of student spanning longer than six months is also indicative of residency for tax purposes.
Yusuf is not a resident for tax purposes. The aspect of Yusef's family remaining in Iran is not generally consistent with the activities associated with residing in a particular place.
In this case, Markus is likely to be considered an Australian resident for tax purposes because of the way he has organised his personal life - bank accounts, 12-month lease on rental property, buying a car - reveals that he is well prepared for a lengthy or ongoing stay.
QUESTION 4.2
Sally Assessable S.6-5(3) non-residents are assessed on all
income received from Australian sources that
is not exempt income.
Clair Assessable S.6-5(2) residents are assessed all income
received which is not exempt income.
Leonard Assessable S.6-5(2) residents are assessed all income
received which is not exempt income.
Kirsty Non-assessable Non-residents are not assessed on foreign
income.
Belinda Assessable S.6-5(3) non-residents are assessed on all
income received from Australian sources that
is not exempt income.
12
QUESTION 4.3 As Simon is a resident for tax purposes, he is assessed on income from all sources
both in and outside of Australia. Therefore, his taxable income will include: 50,000 + 2,000 + 8,000 = $60,000
As a non-resident, Tania is assessed on income from Australian sources only. Therefore her taxable income will include only the rental income from Australian property (i.e. $13,000)
Mary is not a resident for tax purposes for the current year as she is domiciled in
New Zealand and was in Australia for less than 183 days. Therefore, her taxable income will include: 30,000 + 90,000 = $120,000
QUESTION 4.4
14
QUESTION 4.6
Troy $Income can be received via the extinguishing of a 25,000liability.
HarrisonConstructive receipt. 19,000
KarlNon cash business benefit - Section 21A. 8,000
RobThe sum of non-cash business benefits under $300 in an - income year are exempt.
PetrosFrequent flyer points are not assessable as they are not
- Shannon
Ordinary income from business. 32,800Len
Subsidies relating to the conduct of business are 36,000assessable.
ShellyThe coffee machine is a non-cash business benefit. Shelley may be 12,000able to claim a deduction under the capital allowance provisions.Outdoor umbrellas must be returned - not assessable. -
convertible into cash - they have no tradeable value.
15
Chapter 5:
Capital Gains – Solutions
QUESTION 5.1 If Ned elects to index the cost base of the shares in Meander Ltd; $Index 123.4/90.2 1.368
Cost base 1.368 x 4,925 6,737
Gain on shares in Boom Ltd 47,280 - 29,355 held < 12 months 17,925
Gain on shares in Thrive Ltd 15,420 - 9,170 6,250
Gain on shares in Meander Ltd 8,340 - 6,737 1,603
25,778
less: 50% Discount 50% x 6,250 3,125
NET CAPITAL GAIN 22,653
If Ned elects to discount the gain on shares in Meander Ltd;
Gain on shares in Boom Ltd 47,280 - 29,355 held < 12 months 17,925
Gain on shares in Thrive Ltd 15,420 - 9,170 6,250
Gain on shares in Meander Ltd 8,340 - 4,925 3,415
27,590
less: 50% Discount 50% x (6,250 + 3,415) 4,833
NET CAPITAL GAIN 22,758
Ned will choose to index the cost base of his shaes in Meander Ltd. That is, the
net capital gain will be $22,653. QUESTION 5.2 ( a ) Capital Gain – personal use asset.
( b ) Not subject to CGT - purchased pre-20 Sept 85.
( c ) No loss – the furniture is not antique, therefore it is a personal use asset, not a collectable
and capital losses from personal use assets are disregarded. Note that even if a loss was not realised, the cost of the furniture was below the personal
use threshold of $10,000 and therefore a gain would not be assessable.
( d ) Capital gain – collectable. The table is classed as an antique as it is over 100 years old.
( e ) Not subject to CGT – cars are excluded - s.118-5.
20
QUESTION 5.11
QUESTION 5.12
Collectables
Other method &
indexed
$ $ $Roaring Success exempt
Blue Chip Shares 5,000-4,300 700 700Underachieving 2,250-2,000
or 2,250-(2,000 x 1.494) 0123.4/82.6 = 1.494
Dud Shares 1,200-3,000 -1,800 -1,800Painting 6,000-5,000 or
6,000-(5,000 x 1.026) 870 870123.4/120.3 = 1.026
Jewellery 2,300-4,000 -1,700 -870Rare Hunting Rifle exempt; cost<$10,000
Ford Falcon exempt
Townhouse exempt - principal residence
Leather Furniture disregard - personal use loss
Holiday House 190,000-120,000
or 190,000-(120,000 x1.394) 22,720 22,720123.4/88.5 = 1.394
Losses b/f -2,500 -2,500-830 19,120 19,120
Net Gain 0 19,120less: Discount 50% x (19,120 - 19,120) 0NET CAPITAL GAIN 19,120
Capital Losses on collectables of $830 may be carried forward.
Personal /
Other use
22
QUESTION 5.14
QUESTION 5.15 ( a ) Capital gain – other use asset.
( b ) Not subject to CGT – main residence - Sub div 118–B.
( c ) Capital Gain – the main residence exemption only extends to a maximum of 2 hectares - s 118 – 120(2).
( d ) Not subject to CGT – the main residence still applies where there is a temporary absence of up to 6 years - s118-145.
( e ) Where a family home is used partly for another purpose, part of the main residence exemption is lost - s118-190. Therefore, Waylon will have a capital gain of $18,000. Calculated as 30% x (600,000 – 480,000) = 36,000 less $18,000 discount.
23
QUESTION 5.16
$
P roceeds 600,000 / 1,000,000 x 1,600,000 960,000
less : C ost B ase 600,000 / 1,000,000 x 950,000 570,000
390,000
less : Discount 50% x 390,000 195,000NE T C AP ITAL G AIN 195,000
QUESTION 5.17
$
P roceeds 660,000/1,540,000 x 2,800,000 1,200,000less : C ost B ase 660,000
540,000less : D iscount 50% x 540,000 270,000NE T C AP ITAL G AIN 270,000
C O S T B AS E - MAIN R E S IDE NC EL and 900/1,800 x 760,000 380,000B uilding 500,000
880,000
C O S T B AS E - INVE S T ME NT P R O P E R T YL and 900/1,800 x 760,000 380,000B uilding 280,000
660,000
QUESTION 5.18
24
QUESTION 5.19
Collectables
Personal &
Other Use
Other Method
& indexed
BHP Shares 16,000 - 4,000 12,000
ANZ Shares 21,000 - 7,000 14,000
TAH Shares 11,000 - 16,000 (5,000) (5,000)
RIO Shares no CGT pre 20/09/85
WOW shares held less than 12 months
7,500 - 7,000 500 500
Griffith Property 24,446 24,446
Gold Coast property not sold
Curl Curl property Taxpayer's home exempt
Painting 700 - 1,800 (1,100)
Stamps 4,800 - 2,200 2,600
Personal Use Asset not allowable
Car exempt
Previous year capital losses (6,000) (6,000)
1,500 39,946 13,946
1,500
41,446
Less Discount 50% x (41,446 - 13,946) (13,750)
Net Capital Gain 27,696
BHP shares
Discount (16,000 - 4,000) x 50% 6,000
Indexed 123.4/ 79.8 = OR
16,000 - (4,000 x 1.546) 9,816
Choose Discount
Griffith Property
Discount Sale 480,000
less Costs
Purchase price 275,000
Stamp Duty 7,000
Road 9,000
Captital improvements 26,500
Selling Costs 4,500 322,000
158,000
Less 50% discount 79,000 79,000
Indexed Sale 480,000 OR
Less
Indexed 123.4/84 = 1.469
Cost 275,000 x 1.469 403,975
Duty 1.469 x 7,000 10,283
Road 123.4/107.9
9,000 x 1.144 10,296
Capital improvements 26,500
Selling costs 4,500 455,554 24,446
Choose indexation
25
QUESTION 5.20 There are four small business concessions in Division 152 to be considered:
Small business 15-year exemption; Small business 50% reduction;
Small business retirement exemption; Small business rollover.
Small business 15-year exemption: As McScaros has owned the business for less than 15 years, he is ineligible to apply this concession. Small business 50% reduction: If the conditions in Subdivision 152-A have been met, then McScaros is entitled to reduce his net capital gain by a further 50% (i.e. AFTER a discount of 50% has been deducted, if applicable). Small business roll-over: If McScaros was to continue conducting business in some form, he may choose the small business rollover concession. Subdivision 152-E provides capital gains rollover relief to owners of a small business where there is a disposal of active assets. To be eligible for this concession, the taxpayer must acquire replacement assets within a period commencing one year BEFORE the disposal and ending two years AFTER the disposal. Small business retirement concession: Depending on his age and circumstances, McScaros may also be entitled to the small business retirement concession, where the proceeds from the sale of a small business are used for retirement. Relief can be claimed by a person 55 years and older, up to a lifetime maximum limit of $500,000. If the retiree is aged under 55, then the capital proceeds must be rolled over to a superannuation fund or an approved deposit fund to be preserved until their superannuation preservation age.
26
QUESTION 5.21
2012/13 $
Gain on Sale of South Brisbane premises
(320,000 - 106,000) 214,000
Less: Discount (50% x 214,000) 107,000
107,000
Less: 50% small business active asset reduction 53,500
53,500
Less: Small business rollover - replacement assets 53,500
NET CAPITAL GAIN -
2013/14
Gain on Sale of Brisbane CBD premises
(198,000 - 170,000) 28,000
Less: Discount (50% x 28,000) 14,000
14,000
Less: 50% small business active asset reduction 7,000
7,000
Less: Small business rollover - replacement assets 7,000
NET CAPITAL GAIN -
Bronte is able to count either of the new premises purchased as replacement assets
as they were both acquired within one year prior to disposal and two years after
disposal of her South Brisbane premises.
Even though Bronte did not purchase premises to replace her Brisbane CBD outlet,
she is able to include the East Brisbane premises as a replacement asset. This is
because it was acquired within one year prior to the disposal. Accordingly, she is
able to rollover her 2013/14 gain also.
QUESTION 5.22
$
Gain on S ale of bus ines s (2,675,000 - 35,000) 2,640,000
Les s : D is count (50% x 2,640,000) 1,320,000
1,320,000
Les s : 50% s mall bus ines s active as s et reduction 660,000
660,000
Les s : S mall bus ines s retirement conces s ion 500,000
NE T C AP IT AL G AIN 160,000
Micah is able to apply both the 50% active as s et reduction and als o the retirement
conces s ion. The retirement conces s ion is limited to $500,000 which has the effect
that s ome of the capital gain will s till need to be inc luded in Micah's taxable
income.
27
QUESTION 5.23 Other Use No Discount
Disposal of shares originally acquired by the deceased pre CGT.
(5,000/20,000 x 170,000) - (5,000/20,000 x 140,000) $ 7,500 $ 7,500
Held less than 12 months so no discount
Disposal of shares acquired 9/12/10
(8,000/20,000 x 170,000) - 48,000 20,000
Disposal of shares acquired 12/5/12
(7,000/20,000 x 170,000) - 45,500 14,000 14,000
Held less than 12 months so no discount
Net Gain 41,500 21,500
less: Discount (50% x (41,500 - 21,500)) 10,000
NET CAPITAL GAIN 31,500
A pre-CGT asset is deemed to have been acquired by the beneficiary at market value as at the date of death.
QUESTION 5.24
Collectables Other Use No
Discount
$ $
* AAA Shares
Discount method (44,000 - 20,000) x 50%
$12,000 24,000
Frozen Indexation
Disposal 44,000
less Indexed Cost Base 29,880
20,000 x 123.4/82.6 (1.494)
14,120
BBB Shares 12,000 - 11,000 1,000
** Land 176,000 - 140,000 36,000 36,000
Held less than 12 months so no discount.
Jewellery 3,600 - 4,500 (900)
Motor Vehicle exempt
Net Gain 61,000 36,000
less: Discount (50% x 61,000 - 36,000) 12,500
NET CAPITAL GAIN 48,500
* Acquired before 21 September 1999. Therefore, both frozen indexation and discount methods are available. ** A pre-CGT asset is deemed to have been acquired by the beneficiary at its market value at the date of death. The loss from collectables (Jewellery) may only be applied against gains from collectables. Therefore collectable loss carried forward is $900.
28
Chapter 6:
Deductions - General & Specific – Solutions
QUESTION 6.1 ( a ) Yes – related to current source of assessable income. ( b ) No – the outgoing is related to a source of future assessable income. ( c ) No – outgoings relate to a hobby and therefore not a business. ( d ) No – outgoings relate to a possible acquisition of an income-producing asset and
are therefore not incurred in producing assessable income. ( e ) Yes – related to the derivation of assessable income (rent).
QUESTION 6.2 ( a ) Yes – incurred in the course of conducting business. ( b ) Yes – the manner in which a taxpayer chooses to conduct business has no
bearing on whether the expense is necessarily incurred. ( c ) Yes – the outgoing need not be logical nor effective for it to be necessarily
incurred.
QUESTION 6.3
EXPENSES DEDUCTION
SELF-EDUCATION EXPENSES $ $
Photocopying & Stationery 410 410
Course Fees & Textbooks 1,625 1,625
Childcare costs while studying 2,130 -
4,165 2,035
less: Threshold 250
MAXIMUM DEDUCTION POSSIBLE 3,915
DEDUCTION AVAILABLE 2,035
29
QUESTION 6.4
$
DEDUCTION USING ACTUAL COSTS
Decline in Value 120
Repairs 45
Electricity 74
Maximum deduction for home study 239 QUESTION 6.5
$
( a ) Stefan's office is a place of business. Therefore, he is
able to claim a portion of rent on the property. 3,600
20% x 18,000
( b ) Jo chooses to work from home and does not use her -
home as a 'place of business'. Therefore, she is unable
to obtain a deduction for home office expenses.
( c ) As she is not conducting business, Annice cannot claim a
deduction for a home office, but is able to obtain a deduction
for costs of a home study.
Decline in Value 2,700
Telephone 17% x 2,000 340
3,040
( d ) Don cannot claim any amounts as the room essentially has
a private and domestic nature. Using a room for private as
well as work purposes precludes any deduction for a
home study'.
30
QUESTION 6.6
$
( a ) Fully incurred in producing assessable income. 340
( b ) Effectively part of her self-education expenses. 490
( c ) The use of the funds is the key issue, not the basis for
secruing the finance. Darren has incurred interest in the 870
course of conducting business.
( d ) As with part ( c ), Phil has incurred interest in the course 3,200
of conducting business.
( e ) Even thought the funds were initially deposited into a business
account, the proceeds of the loan are used for private -
purposes and the interest is therefore not deductible.
( f ) Interest is deductible to the extent that the funds were used
for a taxable purpose. 400
12,000 / 30,000 x 1,000
QUESTION 6.7
( a ) Net wages paid. $215,000
( b ) Represents a legal commitment/obligation. 4,500
( c ) The withholding of PAYG represents the incurring of
wages by an employer. Note that PAYG withheld is
NOT a deduction to an employee that receives salary
or wages.
74,000
( d ) Payment of entitlements. 7,000
( e ) Whether the employee receives concessional tax
treatment is irrelevant.
15,000
( f ) Providing for future expenditure does not represent a
loss or outgoing incurred.
0
( g ) Allowances paid to employees are deductible. 3,400 QUESTION 6.8
( a ) No – just as the car expenses for home to work travel are not deductible, nor is the cost of parking related to such travel.
( b ) No – as per part ( a ) Note that no portion will be deductible as parking is not a car operating cost.
( c ) No – private.
( d ) Yes – general principles apply, Greta incurred the parking in the course of carrying out her employment.
31
QUESTION 6.9
$
( a ) Allowances are deductible. 4,000
( b ) Food that is incidental to staff meetings is not
considered to be in the nature of entertainment and is
therefore deductible.
3,400
( c ) Not considered to be entertainment. 26,000
( d ) Although entertainment, this is subject to Fringe
Benefits Tax. The cost of the benefit (entertainment)
and the Fringe Benefits Tax is deductible.
3,528
( e ) Meals bought for clients represent entertainment. As
there is no Fringe Benefits Tax paid on the meals,
there is no deduction allowed.
0
( f ) Small gifts that are not of a recurring nature are
deductible.
820
QUESTION 6.10
$
( a ) Deduction for wages is limited where the payments to
an associated person are considered to be excessive.
15,000
( b ) If there is no basis for any amount to be paid to an
associated person, there is no deduction.
0
( c ) Paying a higher level of wages does not necessarily
mean that the payment to an associated person is
excessive. Both of these wages are deductible in full.
97,000
( d ) Unless the amount is excessive, the amount paid is
deductible.
35,000
( e ) As her sister is partner in the partnership, the payment
represents an excessive payment to an associated
person.
5,000
32
QUESTION 6.11
$
( a ) Costs of establishing a business structure.
20% x 1,750
350
( b ) 20% is deductible in the year incurred. There is no
prorating of costs where incurred part of the way through
a tax year. Therefore, 20% x 1,890.
378
( c ) 20% deductible regardless of the fact that the business is discontinued.
736
( d ) 20% of set-up and feasibility costs are deductible in year incurred and each of the following 4 years.
5,500
QUESTION 6.12
$
( a ) The full amount was used within the tax year, therefore
fully deductible.
40,000
( b ) Statutory payments such as vehicle registration are
excluded from the prepayment provisions.
2,000
( c ) Only the portion that relates to the current year is
deductible this year (1/3 x 2,700).
900
( d ) Prepayments of salary and wages are excluded from the
prepayment provisions.
9,000
( e ) Payments of less than $1,000 are also excluded from the
prepayment provisions.
900
( f ) As the payment covers a period of longer than 10 years,
the eligible service period is deemed to be 10 years.
Therefore a deduction of 1/10 x $18,000 may be
claimed.
1,800
( g ) The current year portion is 4/12 x $1,200. 400
( h ) None of this cost relates to the 2012/13 tax year. 0
33
QUESTION 6.13
$
( a ) Where total work deductions are $300 or less,
taxpayers may claim a deduction without receipts or
other substantiation requirements.
140
( b ) A record on a payment summary for an employer is
sufficient evidence that the expenditure was incurred
by the taxpayer.
590
( c ) Where total work expenses claimed are greater than
$300, the entire amount must meet substantiation
requirements. Accordingly, Jarrod may claim up to
$300.
300
( d ) As she has paid for amounts of less than $10, totalling
$200 and recorded in a diary, she has met the
substantiation requirements for the $120 of magazines.
The other $370 of clothing for which she did have
receipts is also deductible.
490
( e ) Of the amounts that Barney has recorded in a diary, he
may only claim those amounts of $10 or less. That is,
12 issues of the $5 magazines. (480 + (12 x 5)).
540
QUESTION 6.14
$
( a ) The $300 threshold for work expenses without receipts
does not include car expenses. Sally therefore has
$275 of work deductions for the purposes of calculating
the $300 threshold. Her car expenses are also
deductible.
1,095
( b ) The $300 threshold for work expenses without receipts
also does not include travel or overtime meal expenses
for which an allowance was received. Tara therefore
has $243 of work deductions for the purposes of
calculating the $300 threshold. Her travel expenses
are also deductible.
813
( c ) Arnold did not receive a travel allowance. Accordingly,
his taxi fares are included in calculating his work
expenses for the purpose of the $300 threshold. As
such, Arnold is limited to $300.
300
34
QUESTION 6.15
( a ) Geraint has travelled less than 5,000 business related kilometres and has not
maintained a logbook. Therefore, he may only use the cents per kilometre
method.
( b ) Yvette has travelled 2,926 work related kilometres (28% x 10,450). As she
has not maintained a logbook, she may only use the cents per kilometre
method.
( c ) Helga has travelled 4,573 work related kilometres (47% x 9,730). She may
use either the logbook or cents per kilometre methods.
( d ) Jake has travelled 3,590 work related kilometres. Annualised, this would be
4,786 kilometres (3,590 x 12/9). As this is less than 5,000 and he has not
kept a logbook, he may only use the cents per kilometre method.
( e ) Gary may use either the one-third of costs method, the 12% of original value
method, and the cents per kilometre method.
( f ) Estelle may use either the 12% of original value method or the cents per
kilometre method. She cannot use the logbook method or one-third of costs
method without keeping a record of operating costs.
( g ) Sharona has travelled 1,745 work related kilometres. Annualised, this would
be 5,235 kilometres (1,745 x 12/4). As this is more than 5,000 and she has
kept a logbook, she may use any of the 4 methods prescribed in Division 28.
( h ) Max cannot claim a deduction for car expenses as the car was not 'held' by
him. His employer may claim all of the car costs as a deduction, but may be
liable for fringe benefits tax and also must include the costs paid for by Max
as assessable income. QUESTION 6.16
Eduardo's annual work kilometres are 8,348.
As he has not maintained records of his running costs, he may use either:
Cents per Kilometre 5,000km x 75c/km $ 3,750
12% of original value 12% x 57,466 6,896
Eduardo would therefore choose 12% of original value.
35
QUESTION 6.17
$
Cents per Kilometre
Subaru 5,000km x 74c/km x 4/12 1,233
Saab 5,000km x 75c/km x 8/12 2,500
3,733
12% of original value
Subaru 12% x 34,600 x 4/12 1,384
Saab 12% x 52,380 x 8/12 4,190
5,574
One-third of costs
Subaru 1/3 X 5,230 1,743
Saab 1/3 X 11,720 3,907
5,650
Logbook
Subarau 60% X 5,230 3,138
Saab 60% X 11,720 7,032
10,170
Nathan will use the logbook method.
Nathan's usage of his car has not altered materially since he maintained
the logbook. Therefore, the logbook may be applied to both the current
tax year and also to the new car.
QUESTION 6.18
Jerome's annual work kilometres are 9,000.
The logbook was maintained in 2007 and is no longer valid.
Therefore, Jerome may use either:
$
Cents per Kilometre 5,000km x 63c/km 3,150
12% of original value 12% x 21,750 2,610
One-third of costs 6,100 x 1/3 2,033
Therefore, Jerome will use the cents per kilometre method.
36
QUESTION 6.19 $ Petrol 4,180 Insurance Excess for Repairs 500 Parking Meters Deductible as travel - Insurance 1,475 Detailing of car 740 Parking Fines Fines not deductible - Bridge and Road Tolls Deductible as travel - Taxi Fares to clients Deductible as travel - Taxi Fare from Christmas party Private in nature - Conversion to LPG gas Capital in nature - Repayments on car loan Interest portion only 3,200 Third party insurance and registration 990 Decline in Value 26,880/8 x 200% 6,720
Total CAR expenses 17,805 Additional deductions will be available for travel (parking, tolls and taxi fares).
QUESTION 6.20 Private Business Travel from home to office and return 1,940 km Travel to clients and other meetings 2,875 km Travel to tax agent regarding business taxes 240 km Travel from office to college 470 km Travel from college to home 1,380 km Private travel on weekends 940 km
4,260 km 3,585 km
Business use = 3,585/(4,260 + 3,585) = 45.70%
37
QUESTION 6.21
$
Travel Expenses - parking at airport 380
Car Expenses - logbook method 8,006 8,386
Possible methods of determining car expenses included:
Cents per Kilometre 5,000km x 75c/km 3,750
12% of original value 12% x 57,466 x 9/12 5,172
One-third of costs 16,890 x 1/3 5,630
Logbook 16,890 x 47.40% 8,006
Annualised business Kms are 47.4% x 23,840 x 9/12 = 15,067 kms.
The operating costs of his car include:
Petrol and Repairs 2,850
Excess for insurance on repairs 600
Car Washes 930
Registration and Insurance 1,735
Decline in Value 57,466/8 x 200% x 9/12 10,775
16,890
Rory's business use % is calculated as 3,460/7,300 = 47.40%
38
QUESTION 6.22
( a ) $
operating costs
1,100 + 430 + 2,800 + 600 + 200 + (16,000/8) 7,130
Logbook Method 44% x 7,130 3,137
Cents per Kilometre 5,000 x 63c 3,150
12% of Original Value 12% x 16,000 1,920
1/3 of costs 7,130/3 2,377
Penni would choose cents per kilometre method
39
QUESTION 6.23
DEDUCTIONS $World Vision 600
School Building Fund 1,400
National PartyNot deductible for taxpayers who
derive business income. - 2,000
QUESTION 6.24
ASSESSABLE INCOME $Payroll Tax refund 3,600
DEDUCTIONS
PAYG Instalments not deductible - payment of income tax
Payroll Tax 76,300
Wages 215,000 + 690,000 905,000
Fringe Benefits Tax 39,400
Additional Tax not deductible - payment of income tax
Tax Agent Fee 7,200 + 1,900 9,100
QUESTION 6.25
$
Borrowing costs 600/5 x 8/12 80
Shortfall interest charge 100
Bad debts Portion written off only 5,000
Gifts Salvation Army 600
School Building Fund 350
QUESTION 6.26 DEDUCTIONS $
Employees Superannuation 37,500
Superannuation Guarantee not deductible -
Personal Superanuationfully deductible,
excessive amount over $25,000
subject to additional tax however
60,000
Accrued superannuation not deductible until paid -
97,500
40
QUESTION 6.27 $ Uniform 240 Casual clothing 0 Private Laundry of Uniform 70 Laundry of casual clothing 0 Private Watch 0 Private Parking fees 0 Private Donations: National Party 1,500 Political party (maximum) Red Cross 50 Sydney Hospital 200 Hurstville Rugby Club 0 Not a DGR Personal Superannuation Contribution 0 Not an eligible person Tax Agents Fees (210 + 150) 360 Street Directory 30 Speeding Fines 0 Excluded by s.26-5 Interview Costs 0 Not related to assessable income
QUESTION 6.28 $ Business Suits 0 Private Dry Cleaning 0 Private Laundry of Wife’s Uniform 0 Not related to assessable income
of Laurence Briefcase 200 Parking Meters 180 Corporate Uniform 300 No-doze tablets 0 Private Anti-perspirant 0 Private Taxi Fares 160 Tax Agents Fees 80 Legal Costs 0 Capital and Private Sunglasses 0 Private Sunscreen 0 Private
41
QUESTION 6.29 $ Protective Goggles 200 Overalls 150 Parking Fines 0 Excluded by s.26-5 Parking Meters 170 Telephone Calls 35 10% x 350 Donations 30 Raffle Tickets 0 Material Benefit gained Life Insurance Premium 0 Private Sunglasses 260 Protective for her work Meals with clients 0 Entertainment excluded by Div. 32 Private Health Insurance 0 Private Income Protection Insurance 790 Laundry 0 Private Clothing Lunchbox 0 Private Travel 690 Allowance expended Work Tools 190
QUESTION 6.30 $ Laundry 130 Calculator 0 More than $10; total work expenses more
than $300 Union Fees 310 Stationery 120 Less than $10, diarised Telephone Calls 90 Receipts unable to be obtained Industry Publications 45 Less than $10, diarised Meals 80 Allowance expended within reasonable
limits
QUESTION 6.31 Luggage $ 280 Support Stockings 0 Private Laundry of Uniform 135 Skin Care Products 80 Protection from work conditions Cosmetics 0 Private Child Care 0 Private Newspapers 0 Private Taxi Fares 0 Private – travel from home to work Repair of Trolley 50 Donation to Homeless Guy 0 Not a Designated Gift Recipient Union Fees 230 Watch 0 Private Customer Service Seminar 150
42
QUESTION 6.32 Protective Sunglasses $ 170 Works outside Personal Superannuation 0 Not an eligible person Pay TV Subscription 0 Private Sun Cream 45 Protection from work conditions Self Education 0 Not related to assessable income Election expenses 1,000 Limit for local government T-Shirt 0 Private Wet Weather Gear 130 Protective clothing Thermos Flask 0 Private Physiotherapy 0 Private Chiropractor’s Fees 0 Private Late Lodgement Fee 0 Fines not deductible Tax Agent’s Fees (180 + 120) 300 Both amounts deductible Membership – Master Builder’s 42 Limited under section 25-55
QUESTION 6.33
AS S E S S AB L E INC OME $ $
G ross Income 145,800
F ranked Dividends 11,200
F ranking C redits 4,800 161,800
DE DUC TIONS
T ravel 685
B orrowing C osts 480/3 x 9/12 120
B ank C harges 45
Interest on L oan 3,500
Investment Advice 370 4,720
TAXAB L E INC OME 157,080
43
QUESTION 6.34
AS S E S S AB L E INC OME $ $
G ross Income 1,638,940
DE DUC TIONS
Decline in Value 46,780
E mployees Wages 743,900 + 296,720 1,040,620
F ringe B enefits T ax 5,155
E ntertainment 5,380
Annual L eave P aid 14,780
R ent market value only 65,000
P ayroll T ax 19,430
E mployees S uperannuation 98,020
P ersonal S uperannuation 50,000
O ther O verheads 69,330 1,414,495
TAXAB L E INC OME 224,445
QUESTION 6.35 ASSESSABLE INCOME $ $
Gross Rent 28,400
Gross Salary 105,750 134,150
DEDUCTIONS
Borrowing Costs 1,250/5 250
Interest on Mortgage 22,380
Repairs to Glass Door 790
Strata Levies 3,010
Rates 1,570
Insurance 680
Agents Commission 2,135
Letting Fees 1,040
Capital Works - Balcony 5,155 x 2.5% x 11/12 118
Capital Works - Front Door 930 x 2.5% x 2.5/12 5
Car Expenses 140km x 74c 104
Decline in Value 3,090 35,172
TAXABLE INCOME 98,978
44
QUESTION 6.36
ASSESSABLE INCOME $ $
Sales 1,018,300
DEDUCTIONS
Rent 350,000 - 50,000 300,000
Advertising Levy 18,500
Purchase of Trading Stock 417,620
Decrease in Trading Stock 54,350 - 46,240 8,110
Wages and Superannuation 61,800
Car Expenses 10,454
Other Deductions 21,400 837,884
TAXABLE INCOME 180,416
CAR EXPENSES
Cents per kilometre 5,000 x 75c 3,750
Logbook 19,360 x 54% 10,454
One Third of Costs 19,360 x 1/3 6,453
12% of Original Value 12% x 57,123 6,855
QUESTION 6.37
$
( a ) 8,000/10 800
( b ) Deduction only for bus iness premises
( c ) 3,400/10 340
Deduction not pro-rated for part year
45
QUESTION 6.38
QUESTION 6.39
QUESTION 6.40
$
( a ) 200,000 x 2.5% x 12/12 5,000
( b ) Not an income producing building 0
( c ) 3,000 x 2.5% x 4/12 25
( d ) 215,000 x 2.5% x 2/12 896
46
QUESTION 6.41
CAPITAL WORKS $
Construction Costs
(10,000 + 220,000 - 20,000) x 50% x 2.5% x 12/12 2,625
Decline in Value 20,000/5 x 2 x 12/12 8,000
Electricity Mains 2,500/10 x 50% 125
10,750
Note - private driveway and landscaping not eligible for capital works. QUESTION 6.42
$
Immediate Write-off
Office Desk 900
IT Equipment 4,000
Computer System 3,200 x 75% 2,400
7,300
General small business pool
Opening Balance (20,000 + 25,000) x 30% 13,500
Total deduction for Decline in Value 20,800
General Small Business Pool - Closing Balance
20,000 + 25,000 - 13,500 - 2,000 = 29,500
47
Chapter 7:
Trading Stock – Solutions
QUESTION 7.1
( a ) Yes – goods held for resale.
( b ) No – the taxpayer is not conducting business.
( c ) Yes – the blocks of land are developed and resold in the ordinary course of business.
( d ) Yes – trading stock under the control of the taxpayer.
( e ) Yes – sold in the ordinary course of business.
( f ) Yes – held for use in manufacturing.
( g ) No – neither re-sold, nor used in manufacturing.
( h ) No – used to derive rental income. Not yet for resale. QUESTION 7.2
Shania $ $
Assessable Income
Sales 835,600
Increase in Trading Stock* 85,700 - 84,500 1,200 836,800
Deductions
Purchase of Trading Stock 382,100
Other Deductions 243,500 625,600
TAXABLE INCOME 211,200
* LIFO not permitted
Fern
Assessable Income
Sales 593,900
Increase in Trading Stock 71,300 - 67,200 4,100 598,000
Deductions
Purchase of Trading Stock 276,000
Other Deductions 203,000 479,000
TAXABLE INCOME 119,000
Demi
Assessable Income
Sales 728,800
Deductions
Purchase of Trading Stock 248,300
Decrease in Trading Stock 95,100 - 81,900 13,200
Other Deductions 369,200 630,700
TAXABLE INCOME 98,100
48
QUESTION 7.3
( a ) Trading stock is on hand. 89,000
( b ) Trading stock paid for and considered to be on hand. 53,400
( c ) Christi will not get a deduction until the trading stock is
considered to be ‘on hand’ – that is, she must have dispositive
power over it. (section 70-15)
Nil
( d ) Where trading stock is acquired ‘not at arm’s length’, the
market value is used. (section 70-20). Note that Fiona is
required to include the market value as assessable income.
61,500
( e ) As per part ( d ) 11,700
( f ) The loss will be reflected in reduced closing stock values and
therefore a deduction is reflected in the adjustment for closing
stock.
Nil
QUESTION 7.4 Given that the question has provided a single value for each amount of stock, this is assumed to be the cost price.
( a ) Assessable Income – disposal not in the ordinary course of
business; change of use (section 70-110)
$ 8,300
( b ) Assessable Income – disposal not in the ordinary course of
business; change of use (section 70-110)
Deduction also allowed as Sid is deemed to have acquired the
stock at the same value.
1,520
( c ) Assessable Income – disposal not in the ordinary course of
business. Deduction also allowed under section 30-15 for the
amount included as assessable under 70-90.
The result is therefore tax neutral.
29,000
( d ) Assessable Income – disposal not in the ordinary course of
business (section 70-90)
Warwick may claim a general deduction under section 8-1 as
promotional costs
5,000
( e ) Assessable Income
Jake’s household has 2 adults and 1 child as his other child is
under 4 years of age.
Therefore, stock taken is valued at (2 x 3,370) + (1 x 1,685)
8,425
( f ) Assessable Income
Melanie’s household has 2 adults and 1 child as her 17 year-old
son is classed as an adult.
Therefore, stock taken is valued at (2 x 1,300) + (1 x 650)
3,250
49
QUESTION 7.5
Assessable Income $ $
Sales 2,927,800
Stock not disposed in ordinary course of business 49,300 2,977,100
Deductions
Purchase of Trading Stock 1,385,680
Decrease in Trading Stock 458,470 - 401,800 56,670
Gifts 49,300
Other Deductions 582,370 2,074,020
TAXABLE INCOME 903,080
Note - The damaged stock is reflected in the adjustment for decrease in stock held.
QUESTION 7.6
Assessable Income $ $
Sales 854,900
Increase in Trading Stock 80,900* - 71,200 9,700
Stock not disposed in ordinary course of business
(3 x 4,030) + (2 x 2,015) 16,120 880,720
Deductions
Purchase of Trading Stock 432,600 - 40,000 392,600
Other Deductions 131,400 524,000
TAXABLE INCOME 356,720
* The damaged stock is reflected in the adjustment for increase in stock held.
50
QUESTION 7.7
Assessable Income $ $
Sales 329,800
Stock not disposed in ordinary course of business
(2 x 3,370) 6,740 336,540
Deductions
Purchase of Trading Stock 124,100 - (12,000 - 7,000) 119,100
Decrease in Trading Stock 9,300 - 8,900 400
Other Deductions 143,200 262,700
TAXABLE INCOME 73,840
51
Chapter 8:
Tax Accounting – Solutions QUESTION 8.1
When is income assessable for income tax purposes?
Income is assessable in the year it is derived. S.6-5(4) ITAA36 explains that income is considered to have been derived as soon as the amount is applied or dealt with in any way by you directly or on your behalf. Therefore, physical receipt of income is not essential in order for it to be assessable.
QUESTION 8.2
When are expenses deductible for income tax purposes?
Expenses are deductible in the year they are incurred. The taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. There must be a presently existing liability to pay an amount of money.
QUESTION 8.3
Briefly describe the two methods of accounting for income tax.
The cash basis means that income is derived when cash is received, or constructively received, by the taxpayer. This method applies to salary/wage earners, most investment income, and can be used by many small business taxpayers. Expenses are incurred when paid. Under the accruals basis assessable income is derived when the right to receive income arises. This will generally be when a business raises an invoice to a customer. Expenses are generally incurred when an invoice is received.
QUESTION 8.4
Explain what is meant by constructive receipt of income.
Constructive receipt is when income has not been received as cash but has been credited and made available to the taxpayer.
52
QUESTION 8.5
Penguin Coolers had an opening Debtors balance of $11,000 at 1 July 2012 and a closing balance of $34,000 at 30 June 2013. Cash received from cash sales and debtors for the year of income was $246,000. All amounts are net of GST.
Calculate assessable income for the year ended 30 June 2013 using the:
(a) Cash basis.
(b) Accruals basis.
Solution: Cash basis Assessable income is $ 246,000
Accruals basis Cash received from cash sales and debtors $ 246,000
Plus Debtors balance at 30 June 2013 34,000
Less Debtors balance at 1 July 2012 11,000
Assessable income is $ 269,000
QUESTION 8.6
Would the following taxpayers report income using the cash or accruals basis:
Taxpayer Cash/Accruals
Salary & Wage earner Cash
Sole practitioner lawyer Cash
Large accounting firm Accruals
Manufacturing company Accruals
QUESTION 8.7
Explain what is meant by presently existing liability.
There is a presently existing liability when a taxpayer is definitively committed to incurring expenditure. A contingent amount which is merely impending, threatened or expected is not a presently existing liability
53
QUESTION 8.8
Contrast the accounting and tax treatments of:
(a) Interest income (b) Entertainment expenses (c) Penalties and fines (d) Provision for annual and long service leave (e) Depreciation
Transaction Accounting treatment Tax treatment Interest income Recognised as revenue when
earned. Generally recognised as income when cash received.
Entertainment costs Recognised as an expense when incurred.
Generally not deductible, however employee entertainment is deductible when subject to FBT.
Fines and penalties Recognised as an expense when incurred.
Not deductible.
Annual and long service leave liabilities
Liability raised and expense recorded when the debt is owing to staff.
Deductible when paid.
Depreciation Recognised as an expense based on the estimated useful life of the asset.
Recognised as a deduction for the decline in value of a depreciating asset, based on the asset’s effective life (generally determined by the Commissioner).
QUESTION 8.9
When might prepayments be fully deductible when paid?
A prepayment may be deducted in full if:
Less than $1,000
Required to be paid by law (e.g. vehicle registration fees)
Payments of salary or wages Certain non-deductible research and development costs
54
QUESTION 8.10
The following data relates to Armstrong Pty Ltd for the year ended 30 June 2013:
Operating profit before Income Tax $ 260,000
Operating profit includes the following items:
Penalties and fines 5,000
Provision for Long Service Leave 15,000
Depreciation – Buildings 7,500
Depreciation – Machinery 25,000
Additional information:
Amount paid to employees for long service leave is $8,000. Building depreciation is not deductible under current tax legislation. Armstrong owns one item of machinery costing $100,000, purchased on 1 July 2012.
It is depreciated on a straight line basis at 25% for accounting and 30% for tax.
Prepare a schedule reconciling Accounting Profit with Taxable Income.
Accounting Profit
$ 260,000
Add: expenses not allowed as deductions for tax: Penalties and fines $ 5,000 Provision for long service leave 15,000 Depreciation – Buildings (accounting) 7,500 Depreciation – Machinery (accounting) 25,000 52,500 312,500 Less: Deductions allowed: Long service leave paid 8,000 Depreciation – Machinery (tax) 30,000 38,000 Taxable Income 274,500
55
QUESTION 8.11
The following information is taken from the records of Minelli Tyres for the year ended 30 June 2013:
Accounting Profit before Tax $ 84,500
Accounting profit includes the following items: Entertainment expenses 6,000 Exempt income received 13,000 Provision for annual leave 2,500 Depreciation – motor vehicles (accounting) 4,000 For tax purposes the following must be taken into account: Annual leave paid 3,000 Decline in Value – motor vehicles (tax) 5,000
Prepare a schedule reconciling accounting profit with taxable income.
Accounting Profit $ 84,500 Add: expenses not allowed as deductions for tax: Entertainment expenses $ 6,000 Provision for annual leave 2,500 Depreciation – motor vehicles (accounting) 4,000 12,500 97,000 Less: revenues not assessable as income for tax: Exempt Income received 13,000 84,000 Less: Deductions: Annual leave paid 3,000 Depreciation – motor vehicles (tax) 5,000 8,000 Taxable Income 76,000
56
QUESTION 8.12
NRE Pty Ltd has accounting profit of $83,000 but has non-deductible entertainment expenditure of $4,000 and made provision for employees’ annual leave of $1,000 that has not yet been paid.
Calculate the income tax expense and prepare the journal to record the tax payable for the year using the tax payable method.
Solution:
Accounting profit $ 83,000 Add: non-deductible expenditure 4,000 Add: provision for annual leave 1,000 Taxable income 88,000 Tax payable on taxable income @ 30% is: $ 26,400
30/06 Debit Income Tax Expense (P&L) $ 26,400
Credit Income Tax Payable (B/S) $ 26,400
QUESTION 8.13
Small Fry Pty Ltd has accounting profit of $56,000 which includes penalties and fines of $1,200 and has provided for a doubtful debt of $800 that has not been written off.
Calculate the income tax expense and prepare the journal to record the tax payable for the year using the tax payable method.
Solution:
Accounting profit $ 56,000 Add: non-deductible expenditure 1,200 Add: provision for doubtful debts 800 Taxable income 58,000 Tax payable on taxable income @ 30% is: $ 17,400
30/06 Debit Income Tax Expense (P&L) $ 17,400
Credit Income Tax Payable (B/S) $ 17,400
57
QUESTION 8.14
GPFR Limited has accounting profit of $455,000 but has non-deductible expenditure of $14,000 and provided for doubtful debts of $11,000 that has not yet been written off.
Calculate the income tax expense and prepare the journals to record the income tax for the year, using tax effect accounting.
Solution: Accounting profit $ 455,000 Add: non-deductible expenditure (permanent difference) 14,000 Add: allowance for doubtful debts (temporary difference) 11,000 Taxable income 480,000 Tax payable on taxable income @ 30% is: $ 144,000
30/06 Debit Income Tax Expense (P&L) 144,000
Credit Current Tax Payable (B/S) 144,000
Tax effect of temporary differences:
Allowance for doubtful debts $11,000 x 30% = $3,300
30/06 Debit Deferred Tax Asset (B/S) 3,300
Credit Income Tax Expense (P&L) 3,300
58
QUESTION 8.15
Big Wig Limited has accounting profit of $875,000
Accounting profit includes the following items: Entertainment expenses $ 12,000 Exempt income received 25,000 Provision for annual leave 10,500 Depreciation – motor vehicles (accounting) 7,000
For tax purposes the following must be taken into account: Annual leave paid 8,500 Decline in Value – motor vehicles (tax) 9,000
Calculate the income tax expense and prepare the journals to record the income tax for the year, using tax effect accounting.
Solution: Accounting Profit $ 875,000 Add: expenses not allowed as deductions for tax: Entertainment expenses (permanent diff) $ 12,000 Provision for annual leave (temporary diff) 10,500 Depreciation – motor vehicles (accounting) (temp diff) 7,000 29,500 904,500 Less: revenues not assessable as income for tax: Exempt Income received (permanent diff) 25,000 879,500 Less: Deductions: Annual leave paid 8,500 Depreciation – motor vehicles (tax) 9,000 17,500 Taxable Income 862,000 Tax payable on taxable income @ 30% is: $ 258,600
30/06 Debit Income Tax Expense (P&L) 258,600
Credit Current Tax Payable (B/S) 258,600
Tax effect of temporary differences:
Provision for annual leave – Annual leave paid (10,500 - 8,500) x 30% = $ 600
30/06 Debit Deferred Tax Asset (B/S) 600
Credit Income Tax Expense (P&L) 600
Depreciation (acc) – Depreciation (tax) (7,000 – 9,000) x 30% = - $600
30/06 Debit Income Tax Expense (P&L) 600
Credit Deferred Tax Liability (B/S) 600
59
Chapter 9:
Tax Accounting – Solutions QUESTION 9.1
$ $
Business Income 28,000
less: Deductions 1,400
TAXABLE INCOME 26,600
Tax on $26,600 19% x (26,600 - 18,200) 1,596.00
Less: Low Income Tax Offset 445.00
1,151.00
Medicare Levy 1.5% x 26,600 399.00
TAX PAYABLE 1,550.00
QUESTION 9.2
$ $Business Income 56,000
Gross Interest 1,360
57,360
Less: Deductions
Trading Stock purchases only 12,600
Car Expenses 6,300 x 72% 4,536
Decline in Value 5,305 22,441
TAXABLE INCOME 34,919
DECLINE IN VALUE
Facsimile Machine immediate deduction 820
Computer 15% x 7,300 1,095
Opening Balance - General SBP 30% x 11,300 3,390
5,305
Tax on $34,919 19% x (34,919-18,200)) 3,176.61
less: Low Income Tax Offset 445.00
2,731.61
Medicare Levy 1.5% x 34,919 523.79
TAX PAYABLE 3,255.40
* Note - the value of the car was adjusted for private use upon entry to the asset
pool. Therefore, no adjustment of the decline in value deduction is necessary.
60
QUESTION 9.3
$ $
Business Income 372,000
Less: Deductions
Wages 94,000 + 24,000 + 3,800 - 2,400 119,400
Rent 62,000
Decline in Value 4,320 185,720
TAXABLE INCOME 186,280
DECLINE IN VALUE
Photocopier 15% x 11,000 1,650
Opening Balance - General SBP 30% x 8,900 2,670
4,320
QUESTION 9.4
No concessions applied $ $Business Income 810,400 + 29,400 - 21,600 818,200
Increase in Trading Stock 6,200 - 3,400 2,800
Recoveries from suppliers 11,700
832,700
Less: Deductions
Purchase of Trading Stock 88,300 + 12,100 - 3,400 97,000
Wages 274,000
Lease Payments - Equipment 400,000 - 80,000 320,000
Other Deductible Expenses 68,200
Decline in Value 11,407 770,607
TAXABLE INCOME 62,093
DECLINE IN VALUE
Office Furniture & Equipment 32,000/8 x 150% x 12/12 6,000
Computer 7,000/4 x 200% x 6/12 1,750
Mobile Phone 500 x 18.75% 94
Opening Balance - LV pool 37.5% x 9,500 3,563
11,407
61
QUESTION 9.4 (continued)
Minimised taxable income $ $Business Income 810,400 + 29,400 - 21,600 818,200
Increase in Trading Stock < 5,000 0
Recoveries from suppliers 11,700
829,900
Less: Deductions
Purchase of Trading Stock 88,300 + 12,100 - 3,400 97,000
Wages 274,000
Lease Payments - Equipment 400,000
Other Deductible Expenses 68,200
Decline in Value 14,000 853,200
TAXABLE INCOME 0
TAX LOSS AVAILABLE TO CARRY FORWARD 23,300
DECLINE IN VALUE
Office Furniture & Equipment 32,000 x 30% 9,600
Computer 7,000 x 15% 1,050
Mobile Phone < $1,000 500
Opening Balance from LV pool 9,500 x 30% 2,850
14,000
Jacqui will elect to apply the following concessions:
Trading Stock
Capital Allowances
Prepaid Expenses
62
QUESTION 9.5 $ $
Business Income 55,800 + 2,600 58,400
Jewellery 400
Gross Interest - personnal account 500
Increase in Trading Stock 5,100
64,400
Less: Deductions
Purchase of Trading Stock 23,400 - 600 22,800
Car Expenses 2,300 x 74c 1,702
Decline in Value 2,150
Insurance 7,500
Other Deductions 2,700 36,852
TAXABLE INCOME 27,548
DECLINE IN VALUE
Mobile Phone immediate deduction 890
Mixing Equipment 15% x 8,400 1,260
2,150
Tax on $27,548 19% x (27,548 - 18,200)) 1,776.12
less: Low Income Tax Offset 445.00
1,331.12
Medicare Levy 1.5% x 27,548 413.22
TAX PAYABLE 1,744.34
QUESTION 9.6
$( a ) Rent Payments fully deductible 300,000
Insurance Payments fully deductible 72,000
Lease 270,000 - 150,000 = 120,000 120,000
( b ) Rent 300,000 - 60,000 240,000
Insurance 72,000 - 24,000 48,000
Lease 270,000 - 150,000 120,000
If prepayment is over 12 months after the end of the current
financial year end he can only claim proportion.
63
Chapter 10:
Partnerships – Solutions
QUESTION 10.1
Walt and Skyler are a partnership for tax purposes, as they are conducting business jointly, with a view to profit. They would be required to lodge a partnership tax return.
Although half of Veronica’s income is paid to her husband, they are not in
partnership. They are neither jointly conducting business nor in receipt of income jointly. It is also highly probable that the Commissioner would treat part of the salary to her husband as excessive and therefore not allow a deduction.
Sansa and Arya, although not a partnership under common law, are within the tax
definition of a partnership as they are in receipt of income jointly. It should be noted that they would not be required to lodge a partnership return, but merely to include their share of the income in their individual returns.
Although both Hammer and Tongs are made the offer together, there is no
partnership for tax purposes as they own separate property and remain independent of each other.
Celeste and Pheobe are a partnership for tax purposes as they are in receipt of income jointly. They would not be required to lodge a partnership return however, include their share of net rental income in their personal returns.
The members of a not-for-profit organisation are precluded from receiving
distributions of any surpluses. Therefore, their intent is not to carry on business with a view for profit and not a partnership for tax purposes.
The arrangement described here involves neither the receipt of income jointly, nor the conduct of business jointly. It is merely a strategic alliance where the two parties agree to refer work to each other. Therefore, there is no partnership for tax purposes.
64
QUESTION 10.2
Pierre Elise TOTAL
Interest on Capital 15,000 18,000 33,000
Partners Salaries 62,000 62,000
Interest on Drawings (5,000) (7,000) (12,000)
Share of Adjusted Net Income 85,500 85,500 171,000
(171,000 x 1/2) (171,000 x 1/2)
157,500 96,500 254,000
Partnership Net Income $ $
Assessable Income 470,000
Less: Deductions 216,000
254,000
Adjusted Net Income
Partnership Net Income 254,000
Add: Interest on Drawings 12,000
266,000
Less: Interest on Capital 33,000
Partners Salaries 62,000 95,000
171,000 QUESTION 10.3
Sue Prue Lou Emmet TOTAL
Interest on Capital 12,000 15,000 5,000 3,000 35,000
Partners Salaries 65,000 50,000 20,000 135,000
Travel Allowances 4,000 6,000 10,000
Share of Adj. Net Inc. 120,000 90,000 60,000 30,000 300,000
201,000 155,000 65,000 59,000 480,000
Partnership Net Income $ $
Assessable Income 780,000
Less: Deductions 300,000
480,000
Adjusted Net Income
Partnership Net Income 480,000
Less: Interest on Capital 35,000
Partners Salaries 135,000
Travel Allowances 10,000 180,000
300,000
65
QUESTION 10.4
Partnership Net Income $ $
Assessable Income
Gross Fees 287,000
Interest - Irrational Bank 5,350 + 4,650 10,000
Interest from advance to Grace 3,000 300,000
Less: Deductions
Rent 22,000
Salaries 45,000
Superannuation 4,500
Interest on Loans 6,700 + 2,900 9,600
Other Expenses 47,500 128,600
Partnership Net Income 171,400
Tom Cam Laurie Grace TOTAL
Partners Salaries 50,000 25,000 10,000 85,000
Interest on Capital 5,800 4,200 2,900 5,000 17,900
Interest on Drawings (800) (2,560) (2,880) (1,040) (7,280)
Share of Adj. Net Inc. 18,945 18,945 18,945 18,945 75,780
(75,780/4) (75,780/4) (75,780/4) (75,780/4)
73,945 45,585 18,965 32,905 171,400
TFN TaxCredits 2,006.09 1,236.70 514.51 892.70 4,650.00
Adjusted Net Income
Partnership Net Income 171,400
less: Partners Salaries 85,000
Interest on Capital 17,900 102,900
68,500
add: Interest on Drawings 7,280
75,780
Grace
Assessable Income
Share of Partnership Net Income 32,905
Franked Dividends 5,600 + 2,400 8,000
Deductions 40,905
Interest paid to partnership 3,000
Superannuation 6,000 9,000
Taxable Income 31,905
66
QUESTION 10.5
Partnership Net Income $ $
Assessable Income
Gross Income 920,000
Stock Taken by Owners(4,000 x 3) 12,000 932,000
Less: Deductions
Salaries & Superannuation 105,000
Borrowing Costs 1,500/5 x 6/12 150
Interest on Loans 18,000 + 4,000 22,000
Capital Works 400,000 x 2.5% x 6/12 5,000
Other Expenses 273,000 405,150
Partnership Net Income 526,850
Cleo Ralph Marie Claire TOTAL
Partners Salaries 78,000 40,000 118,000
Interest on Capital 9,000 6,000 3,000 18,000
Interest on Drawings (7,000) (4,000) (2,000) (13,000)
Share of Adj. Net Income 201,925 134,617 67,308 403,850
(403,850 x 3/6) (403,850 x 2/6) (403,850 x 1/6)
281,925 136,617 108,308 526,850
Adjusted Net Income
Partnership Net Income 526,850
less: Partners Salaries 118,000
Interest on Capital 18,000 136,000
390,850
add: Interest on Drawings 13,000
403,850
Marie Claire
Assessable Income
Share of Partnership Net Income 108,308
Net Capital Gain 15,000
Interest on Loan to partnership 4,000
Deductions 127,308
Car Expenses 63c x 4,000km 2,520
Taxable Income 124,788
Net Capital Gain
Gain on Building (570,000 - 210,000) x 1/6 60,000
less: 50% Discount 30,000
30,000
less: 50% concession for active asset * 15,000
15,000 *Refer to Chapter 32: Capital Gains – Special Topics.
67
QUESTION 10.6
Partnership Net Income $ $
Assessable Income
Sales 640,000
Stock Taken by Owners (3,370 x 3) 10,110 650,110
Less: Deductions
Lease of Equipment 65,000
Salaries 245,000
Superannuation 29,000
Interest on Loans 13,000
Purchase of Trading Stock 295,000
Decrease in Trading Stock 2,400
Other Expenses 98,000 747,400
Partnership Net Income (Loss) (97,290)
Arabica Mocha Java TOTAL
Interest on Capital 15,800 14,500 30,300
Interest on Drawings (4,000) (6,000) (10,000)
Share of Adj. Net Loss (39,197) (39,197) (39,196) (117,590)
(117,590/3) (117,590/3) (117,590/3)
(27,397) (45,197) (24,696) (97,290)
Adjusted Net Income
Partnership Net Income (Loss) (97,290)
less: Interest on Capital 30,300
(127,590)
add: Interest on Drawings 10,000
(117,590)
Arabica
Assessable Income
Interest on Loan to Partnership 4,000
Lease Payments Received on Shop Fittings 65,000 69,000
Deductions
Decline in Value 54,000
Share of Partnership Net Loss 27,397
Superannuation not deductible - deductions - 81,397
already exceed assessable income
TAXABLE INCOME 0
Note - although Java drew a salary from the partnership, this is not considered for
the allocation of a net loss.
68
QUESTION 10.7
Partnership Net Income $ $ $
Assessable Income
Gross Fees 47,000
Less: Deductions
Restaurant Hire 14,000
Casual Wages 4,200
Superannuation 400
Interest Expense 800 + 1,200 2,000
D.I.V. Opening Bal. 30% x 600 180
Additions 15% x 2,000 300
Low Cost Items 350 21,430
Partnership Net Income 25,570
Joffrey Stannis TOTAL
Partners Salaries 15,000 15,000
Interest on Capital 1,500 500 2,000
Share of Adj. Net Income 5,713 2,857 8,570
(8,570 x 2/3) (8,570 x 1/3)
7,213 18,357 25,570
Adjusted Net Income
Partnership Net Income 25,570
less: Partners Salaries 15,000
Interest on Capital 2,000 17,000
8,570
Stannis
Assessable Income
Share of Partnership Net Income 18,357
Interest from investments 10,000
Interest from Partnership Loan 1,200
TAXABLE INCOME 29,557
Tax on Taxable Income 19% x (29,557 - 18,200) 2,157.83
Medicare Levy 1.5% x 29,557 443.36
2,601.19
less: Low Income Tax Offset 445.00
TAX PAYABLE 2,156.19
69
Chapter 11:
Trusts – Solutions
QUESTION 11.1
$ $
On behalf of Doug (s98)
Tax on $85,000 17,547 + (37% x (85,000-80,000)) 19,397.00
Medicare Levy 1.5% x 85,000 1,275.00
Medicare Levy Surcharge 1% x 85,000 850.00 21,522.00
On behalf of Graham (s98)
Tax on $45,000 45% x 45,000 20,250.00
Medicare Levy 1.5% x 45,000 675.00 20,925.00
On behalf of Steve (s98)
Tax on $30,000 19% x (30,000-18,200) 2,242.00
Medicare Levy 1.5% x 30,000 450.00 2,692.00
On balance (s99A)
Tax on $25,000 45% x 25,000 11,250.00
Medicare Levy 1.5% x 25,000 375.00 11,625.00
Note: When assessed under section 99A there is no threshold for Medicare Levy and the Medicare Levy is charged on entire amount.
70
QUESTION 11.2
Tax payable by Trustee $ $
On behalf of Lena (s98)
Tax on $60,000 3,572 + (32.5% x (60,000-37,000)) 11,047.00
Medicare Levy 1.5% x 60,000 900.00
11,947.00
less: Franking Tax Offset 60,000/90,000 x 18,000 12,000.00
Low Income Offset 445 - 1.5% x (60,000-37,000) 100.00 12,100.00
TAX PAYABLE Nil
On behalf of Rick (s98)
Tax on $15,000 < 18,200 -
less: Low Income Tax Offset N/A
Franking Tax Offset 15,000/90,000 x 18,000 3,000.00 3,000.00
TAX PAYABLE Nil
Note: Excess franking credits of a beneficiary are not refunded to the trustee
in section 98 assessments.
On balance (s99)
Tax on $15,000 < 18,200 -
less: Franking Tax Offset 15,000/90,000 x 18,000 3,000.00
TAX REFUNDABLE 3,000.00
Note: Excess franking credits in section 99 assessments are refundable
to the trustee.
Tax payable by Rick
Tax on excepted income ($15,000) < 18,200 -
Tax on eligible income ($14,700) 45% x 14,700 6,615.00
Medicare Levy 1.5% x 29,700 445.50
7,060.50
less: Low Income Tax Offset N/A -
Franking Tax Offset 3,000.00
s.100 Credit for tax paid by Trustee - 3,000.00
TAX PAYABLE 4,060.50
71
QUESTION 11.3
Beneficiary Present Legal Who Section(s) Amount
Entitlement Disability Assessed Applicable ( $ )
Candy Y N Candy 97 72,000
Dandy Y Y Trustee 98 63,000
Landy Y Y Trustee 98 / 101 43,000
Balance N N/A Trustee 99A 2,000
180,000 Tax payable by Trustee $ $
On behalf of Dandy (s98)
Tax on $63,000 3,572 + (32.5% x (63,000 - 37,000)) 12,022.00
Medicare Levy 1.5% x 63,000 945.00
12,967.00
Less Low Income Offset 445 - 1.5% x (63,000 - 37,000) 55.00
12,912.00
On behalf of Landy (s98)
Tax on $43,000 45% x 43,000 19,350.00
Medicare Levy 1.5% x 43,000 645.00
19,995.00
On balance of trust net income (s99A)
Tax on $2,000 45% x 2,000 900.00
Medicare Levy 1.5% x 2,000 30.00
930.00
Tax payable by Landy
Tax on eligible income ($81,000) 45% x 81,000 36,450.00
Medicare Levy 1.5% x 81,000 1,215.00
Medicare Levy Surcharge < 84,000 -
37,665.00
less: s.100 credit 19,995.00
TAX PAYABLE 17,670.00
72
QUESTION 11.4
Beneficiary Present Legal Who Section(s) Amount
Entitlement Disability Assessed Applicable ( $ )
Luis Y N Luis 97 80,000
R. Prim Y Y Trustee 98 15,000
R. Proper Y N R. Proper 97 15,000
M. Next Y Y Trustee 98 98,000
Balance N n/a Trustee 99 42,000
250,000
Tax Payable by Trustee $ $
On behalf of R. Prim (s98)
Tax on $15,000 < 18,200 -
less: Low Income Tax Offset N/A -
-
On behalf of M. Next (s98)
Tax on $98,000 17,547 + (37% x (98,000 - 80,000)) 24,207.00
Medicare Levy 1.5% x 98,000 1,470.00
25,677.00
On balance (s99)
Tax on $42,000 3,572+ (32.5% x (42,000 - 37,000) 5,197.00
Tax Payable by R. Prim
Tax on eligible income ($13,000) 45% x 13,000 5,850.00
Tax on excepted income ($15,000) < 18,200 -
Medicare Levy 1.5% x 28,000 420.00
6,270.00
less: Low Income Tax Offset N/A
s.100 credit 0.00 -
TAX PAYABLE 6,270.00
73
QUESTION 11.5
$ $
Assessable Income 139,000
less: General Deductions 48,000
Tax Losses b/f 50,000 98,000
TRUST NET INCOME 41,000
QUESTION 11.6
$ $
Franked Dividends 28,000
Franking Credits 28,000 x 30/70 12,000
Rent Received 96,500 136,500
less: Deductible Expenses Paid 7,500
Capital Allowance Deductions 9,000 16,500
TRUST NET INCOME 120,000
Beneficiary's entitlements as follows: Franking
Credits
Trust Net
Income
Eldine 6,000 60,000
Tasmin 4,800 48,000
10,800 108,000
No present entitlement 1,200 12,000 12,000 120,000
74
QUESTION 11.7
$ $
Assessable Income
Interest 126,000
Franked Dividend 1,400
Franking Credits 1,400 x 30/70 600
Deductions 128,000
Tax Agents Fee 1,000 1,000
TRUST NET INCOME 127,000
BeneficiaryPresent
Entitlement
Legal
Disability
Who
Assessed
Section(s)
ApplicableNet Income
Franking
Credits
$ $
Susie Y N Susie 97 50,800 240
Simon Jnr N n/a
Steve Y Y Trustee 98 25,400 120
Balance N n/a Trustee 99 50,800 240
127,000 600
Tax payable by Trustee $ $
On behalf of Steve (s98)
Tax on $25,400 19% x (25,400 - 18,200) 1,368.00
Medicare Levy 1.5% x 25,400 381.00
1,749.00
less: Low Income Tax Offset 445.00
Franking Tax Offset 25,400/127,000 x 600 120.00 565.00
1,184.00
On balance (s99)
Tax on $50,800 3,572 + (32.5% x (50,800 - 37,000) 8,057.00
less: Franking Tax Offset 50,800/127,000 x 600 240.00
7,817.00
Tax Payable by Steve
Tax on excepted income ($30,400) 19% x (30,400 - 18,200) 2,318.00
Medicare Levy 1.5% x 30,400 456.00
2,774.00
Less: Franking Tax Offset 25,400/127,000 x 600 120.00
Low Income Tax Offset < 37,000 445.00
s.100 credit 1,184.00 1,749.00
TAX PAYABLE 1,025.00
75
QUESTION 11.8
Beneficiary Present Legal Who Section(s) Amount
Entitlement Disability Assessed Applicable ( $ )
Sally Y N Sally 97 50,000
Francine Y Y Trustee 98 14,000
Tony Y Y Trustee 98/101 13,000
Adam Y Y Trustee 98 7,000
Balance N n/a Trustee 99 16,000
100,000
Tax payable by Trustee $
On behalf of Francine (s98)
Tax on $14,000 < 18,200 -
less: Low Income Tax Offset limited to -
-
On behalf of Tony (s98)
Tax on $13,000 < 18,200 -
less: Low Income Tax Offset limited to -
-
On behalf of Adam (s98)
Tax on $7,000 < 18,200 -
less: Low Income Tax Offset limited to -
-
On balance (s99)
Tax on $16,000 < 18,200 -
Tax payable by Tony
Tax on $47,000 3,572 + (32.5% x (47,000-37,000)) 6,822.00
Medicare Levy 1.5% x 47,000 705.00
7,527.00
less: s.100 credit -
Low Income Tax Offset 445 - 1.5% x (47,000 - 37,000) 295.00
PAYG Withheld 4,500.00 4,795.00
TAX PAYABLE 2,732.00
Note: - Tony is NOT a prescribed person as he is engaged in full-time employment. Therefore, Division 6AA rates do not apply.
76
QUESTION 11.9
Beneficiary Present Legal Who Section(s) Amount
Entitlement Disability Assessed Applicable ( $ )
Sam Y N Sam 97 135,000
Meg Y N Meg 97 27,000
Brad Y Y Trustee 98/101 49,500
Terri Y Y Trustee 98/101 33,000
Balance N n/a Trustee 99A 25,500
270,000
Tax Payable by Trustee $ $
On behalf of Brad (s98)
Tax on $49,500 3,572 + (32.5% x (49,500 -37,000)) 7,634.50
Medicare Levy 1.5% x 49,500 742.50
8,377.00
less: Low Income Tax Offset 445 - 1.5% x (49,500 - 37,000) 257.50
8,119.50
On behalf of Terri (s98)
Tax on $33,000 45% x 33,000 14,850.00
Medicare Levy 1.5% x 33,000 495.00
15,345.00
less: Low Income Tax Offset Not Available 0.00
15,345.00
On balance with no present entitlement (s99A)
Tax on $25,500 25,500 x 45% 11,475.00
Medicare Levy 25,500 x 1.5% 382.50
11,857.50
Tax Payable by Terri
Tax on eligible income $33,000 45% x 33,000 14,850.00
Tax on excepted income $12,000 < 18,200 0.00
Medicare Levy 1.5% x 45,000 675.00
15,525.00
Less: PAYG Withheld 440.00
Low Income Tax Offset N/A 0.00
Franking Tax Offset 500.00
s.100 Trustee Credit 15,345.00 16,285.00
TAX PAYABLE (REFUND) -760.00
77
QUESTION 11.10
$
Unfranked Dividends 70,000
Interest 110,000
Net Capital Gain 50% x (60,000 - 20,000) 20,000 TRUST NET INCOME 200,000
Beneficiary Present Legal Who Section(s) Total Cap.Gain Other
Ent. Dis. Assessed Applicable Income Income
$ $ $
Scrat Y N Scrat 97 50,000 5,000 45,000
Bernice Y N Bernice 97 40,000 4,000 36,000
India Y Y Trustee 98 50,000 5,000 45,000
Lina Y Y Trustee 98 40,000 4,000 36,000
Balance N n/a Trustee 99A 20,000 2,000 18,000
200,000 20,000 180,000
$
On behalf of India (s98)
Tax on $50,000 3,572 + (32.5% x (50,000 - 37,000)) 7,797.00
Medicare Levy 1.5% x 50,000 750.00
8,547.00
Less: Low Income tax offset 445 - 1.5% x (50,000 - 37,000) 250.00
8,297.00
On behalf of Lina (s98)
Tax on $40,000 45% x 40,000 18,000.00
Medicare Levy 1.5% x 40,000 600.00
18,600.00
On balance with no present entitlement (s99A)
Tax on $22,000 * 22,000 x 45% 9,900.00
Medicare Levy 22,000 x 1.5% 330.00 10,230.00
* No CGT discount is allowed where a Trustee is assessed under s.99A ITAA36.
Lina
Share of Trust Net Income (other income) 36,000.00
Gross Wages 10,000.00
Net Capital Gain ((4,000 x 2) - 2,500) x 50% 2,750.00
Taxable Income 48,750.00
Tax on eligible income $38,750 45% x 38,750 17,437.50
Tax on excepted income $10,000 < 18,200 -
Medicare Levy 1.5% x 48,750 731.25
18,168.75
Less: s.100 Credit 18,600.00
Low Income Tax Offset N/A -
TAX PAYABLE (REFUND) 431.25-
78
Chapter 12:
Companies – Solutions QUESTION 12.1 The company passes the continuity of ownership test. Only 40% of shares were sold (those belonging to Amy). Therefore there is 60% common ownership of shares between 2011/12 and 2012/13. QUESTION 12.2 There were 53% of the shares sold during 2010/11.
There was only 47% common ownership between 2009/10 and 2012/13. Accordingly, the company has not satisfied the continuity of ownership test.
The transfer of share ownership took place on 7 July 2010.
Therefore only 47% of the shares were under common ownership and control for the whole of 2010/11 and 2012/13. Accordingly, the company has not satisfied the continuity of ownership test.
There were no changes of ownership between 2011/12 and 2012/13. The
company satisfies the continuity of ownership test for these years.
As the company has satisfied the same business test it would be able to claim a deduction for all the years listed.
QUESTION 12.3 The company satisfies the same business test between 2009/10 and 2010/11. The
opening of the second outlet does not result in the company failing to satisfy the same business test as it is merely an expansion of the company’s existing business.
The company does not satisfy the same business test between 2010/11 and
2011/12 as it has entered into new types of transactions.
The company satisfies the same business test between 2010/11 and 2011/12 as it has merely contracted its business from two outlets to one conducting the same business.
The company does not satisfy the same business test. Although 2009/10 and 2012/13 involved operating from one outlet, there were changes between these years. The company was therefore not operating the same business for the entire period.
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QUESTION 12.4 $ $
Net Profit per Financial Report 381,500
Add: Franking Credits 3,500 x 30/70 1,500
Accg Depreciation 87,000
Fines and Penalties 3,000 91,500
473,000
Less: Decline In Value 101,000
Tax Losses Recouped 2011/12 only 20,000 121,000
TAXABLE INCOME 352,000
Tax on $352,000 105,600.00
Less: Franking Tax Offset 1,500.00
TAX PAYABLE 104,100.00
QUESTION 12.5
$
Market research costs into viability general deduction 130,000
Costs of patenting the titanium scooter 1/5 x 75,000* 15,000
Expansion of production processes general deduction 340,000
Deductions Available 485,000
Research costs relating to production 590,000 x 45% 265,500
Refundable Tax Offset 265,500
* Blackhole Expenditure
QUESTION 12.6
Date Debit Credit
01-Jul-12 Opening Balance 0
15-Oct-12 PAYG Instalment Paid 14,000 14,000 cr
15-Dec-12 Tax Refund 9,500 4,500 cr
12-Mar-13 Dividend Received 3,500 x 30/70 x 100% 1,500 6,000 cr
08-May-13 Dividend Paid 7,000 x 30/70 x 100% 3,000 3,000 cr
Transaction Balance
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QUESTION 12.7
Date Debit Credit
01-Jul-12 Opening Balance 857 cr
02-Sep-12 Dividend Paid 3,500 x 30/70 x 100% 1,500 643 dr
15-Dec-12 Tax Paid 6,000 5,357 cr
02-Jan-13 Dividend Paid 10,500 x 30/70 x 100% 4,500 857 cr
05-Mar-13 Dividend Received 21,000 x 30/70 x 100% 9000 9,857 cr
Transaction Balance
QUESTION 12.8
Date Debit Credit
01-Jul-12 Opening Balance 5,429 cr
08-Aug-12 Dividend Paid 4,000 x 30/70 x 80% 1,371 4,058 cr
03-Dec-12 Tax Paid 3,000 7,058 cr
08-Feb-13 Dividend Paid 2,500 x 30/70 x 80% 857 6,201 cr
10-Apr-13 Dividend Received 6,000 x 30/70 x 50% 1,286 7,487 cr
Transaction Balance
QUESTION 12.9
Date Debit Credit
01-Jul-12 Opening Balance 1,500 cr
01-Sep-12 Paid Dividend 8,400 x 30/70 x 100% 3,600 2,100 dr
07-Apr-13 Tax Paid 4,800 2,700 cr
Transaction Balance
Note – the penalties and the unfranked dividend do not result in a franking account entry as neither involves acquiring or using tax credits. QUESTION 12.10
Date Debit Credit
01-Jul-12 Opening Balance 2,914 cr
07-Dec-12 Tax Paid 2,600 5,514 cr
19-Jan-13 Dividend Received 12,600 x 30/70 x 100% 5,400 10,914 cr
08-Mar-13 Dividend Received 8,050 x 30/70 x 65% 2,243 13,157 cr
Transaction Balance
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QUESTION 12.11 CREDIT entry of $5,000 – recorded on 1 July 2012.
DEBIT entry of $3,000 – recorded 5 November 2012.
CREDIT entry of $14,000 x 30/70 x 50% = $3,000 – recorded 18 February 2013.
NO ENTRY REQUIRED until the dividend is actually paid.
QUESTION 12.12 The Benchmark Rule prevents Naïve from franking in the manner indicated. Essentially, all frankable distributions within a franking period (6 months) must be franked to the same extent which is the benchmark rate (determined by the first frankable distribution of the year). The April dividend is at a rate above the benchmark rate. The company will be subject to Overfranking Tax of:
(100% - 60%) x $10,000 x 30/70 = $1,714.29 The June dividend is at the rate below the benchmark rate. The company will be required to make a debit entry to its franking account to the amount of:
(60% - 0%) x $10,000 x 30/70 = $2,571.43 The benchmark rule operates so that the company is either made liable for any shortfall of tax or is penalised in the form of the debit entry. The individual shareholder is not affected directly. QUESTION 12.13
Date Debit Credit
1-Jul-12 Opening Balance 7,200 cr
12-Sep-12 Dividend Received 20,300 x 30/70 x 100% 8,700 15,900 cr
2-Dec-12 Tax Paid 4,100 20,000 cr
1-Feb-13 Paid Dividend 4,550 x 30/70 x 80% 1,560 18,440 cr
19-Mar-13 Paid Dividend 7,000 x 30/70 x 100% 3,000 15,440 cr
27-Apr-13 Received Dividend 14,000 x 30/70 x 90% 5,400 20,840 cr
Overfranking Tax will be payable as a result of the dividend paid on March 19.
The amount payable will be $7,000 x 30/70 x (100-80)% = $600.00
Transaction Balance
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QUESTION 12.14
Date Debit Credit
01-Jul-12 Opening Balance 3,943 cr
01-Aug-12 Paid Dividend 18,900 x 30/70 x 100% 8,100 4,157 dr
07-Dec-12 Tax Paid 5,900 1,743 cr
14-Jan-13 Received Dividend 17,500 x 30/70 x 100% 7,500 9,243 cr
19-Jan-13 Paid Dividend 4,200 x 30/70 x 20% 360 8,883 cr
19-Jan-13 Underfranking Debit 4,200 x 30/70 x (100-20)% 1,440 7,443 cr
Note - there are separate entries for the payment of the underfranked dividend
as well as the penalty debit entry to the extent of the underfranking.
Transaction Balance
QUESTION 12.15
Date Debit Credit
1-Jul-12 Opening Balance 0
12-Dec-12 Tax Paid 15,000 15,000 cr
24-Jan-13 Paid Dividend 14,000 x 30/70 x 100% 6,000 9,000 cr
17-Feb-13 Tax Refund 5,000 4,000 cr
27-Jun-13 Paid Dividend 10,500 x 30/70 x 100% 4,500 500 dr
Transaction Balance
Franking Deficit Tax of $500.00 will be payable as there is a debit balance on 30 June
2013. As the debit balance is less than 10% of the total credits (i.e. $500 < 10% x
$15,000), there will be no penalty reduction of the ensuing credit for Franking Deficit Tax
in 2012/13. QUESTION 12.16 Franking Deficit Tax of $213.00 will be payable.
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QUESTION 12.17
Date Debit Credit
01-Jul-12 Opening Balance 4,200 dr
12-Jul-12 Franking Deficit Tax Liability 4,200 -
21-Jul-12 PAYG Instalment 5,900 5,900 cr
20-Aug-12 Received Dividend 20,650 x 30/70 x 100% 8,850 14,750 cr
15-Oct-12 PAYG Instalment 5,900 20,650 cr
01-Dec-12 Tax Refund 11,000 9,650 cr
15-Jan-13 Paid Dividend 13,300 x 30/70 x 80% 4,560 5,090 cr
15-Apr-13 Underfranking Debit 7,750 x 30/70 x (80-0)% 2,657 2,433 cr
There are no additional taxes payable.
Transaction Balance
QUESTION 12.18
Date Debit Credit
1-Jul-12 Opening Balance 11,000 cr
15-Jul-12 PAYG Instalment 8,900 19,900 cr
29-Aug-12 Received Dividend 16,100 x 30/70 x 60% 4,140 24,040 cr
11-Oct-12 PAYG Instalment 8,900 32,940 cr
21-Dec-12 Tax Refund 19,950 12,990 cr
14-Feb-13 Paid Dividend 11,200 x 30/70 x 75% 3,600 9,390 cr
3-May-13 Underfranking Debit 6,650 x 30/70 x (75-0)% 2,138 7,252 cr
28-Jun-13 Paid Dividend 17,850 x 30/70 x 100% 7,650 398 dr
Franking Deficit Tax of $398.00 will be payable.
Also payable will be overfranking tax of 17,850 x 30/70 x (100-75)% = $1,912.50
Transaction Balance
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Chapter 13:
Taxation Administration – Solutions
QUESTION 13.1
Al is required to lodge a return by 31 October 2013.
Brianna is required to lodge a tax return, as she is a minor with income over $416. The return is required to be lodged by 31 October 2013.
Drew would be required to lodge a return as he has incurred a loss for the year, the
due date will again depend on the agent. As there is no tax payable on his return, this is likely to be on or around 15 May 2014.
Although Fritz’s taxable income is less than $6,000, PAYG has been withheld from his gross wages, he will be required to lodge a return by 31 October 2013.
QUESTION 13.2
Oscar is potentially liable for a late lodgement penalty of $220 (lodged in the 2nd period of 28 days after the due date). However, if Oscar does not have a tax liability or a poor lodgement record, then the Commissioner will not enforce the penalty.
Patrice is potentially liable for a late lodgement penalty of $440 (lodged in the 4th period of 28 days after the due date). Patrice should have applied for an extension of time setting out her reasons.
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QUESTION 13.3
Salary and wages Employers are required to complete PAYG Payment Summaries for each recipient of
salary and wages, retain a copy and forward copies to the recipient and to the ATO. The Payment Summaries include the recipient’s TFN as well as the payer’s ABN.
Accordingly, the Commissioner is able to match information contained in these summaries with information disclosed on tax returns.
Partnership Losses Partnerships are required to lodge income tax returns which include a schedule
showing each partner’s TFN, share of net partnership income or loss, franking credits and any other tax credits. The Commissioner is then able to match this data from the partnership return with the partner’s own tax returns.
Superannuation Contributions Complying superannuation funds are obliged to complete a Members Contributions
Statement which details contributions received, the ABN of the employer and the TFN of the taxpayers who the contributions relate to. The Commissioner then assesses the fund on contributions received on the basis on the information provided.
Business receipts All businesses are required to complete period Business Activity Statements. The
data contained on these statements should reconcile with data included on the business annual income tax return.
Trust Distributions As with partnerships, trusts are required to complete a schedule on their tax return
which states the taxable distribution and TFN for each beneficiary. On such a return, the Trustee is also required to provide a code which indicates the status of the beneficiary for the purposes of determining who and how the distribution is to be assessed.
QUESTION 13.4
The ATO is obliged to notify a taxpayer both verbally and in writing of upcoming audit activity. They are also obliged to notify the taxpayer’s adviser. The taxpayer may then decide whether to have their adviser present during any audit activity at their premises or at the ATO. The ATO officers are required to identify themselves showing proof of authority to act on behalf of the Commissioner. If they do not provide this, they are not entitled to remain on the premises. The taxpayer’s records may not be taken without a court order or warrant. The ATO officers are permitted to make copies. Where original records are permitted to be taken, a receipt is to be issued to the taxpayer detailing the nature of the records taken. Where an interview takes place, a record is to be kept and is to be signed by both parties as an agreed record of the interview.
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QUESTION 13.5
Section 263 allows the Commissioner and his delegates ‘full and free access’ at all times to all buildings, places, books, documents etc for the purposes of administering the Act. However, there is a requirement that this power of access not be misused or used excessively. It is unlikely that there would be reasonable justification for the late evening visit, especially as the premises are also the taxpayers’ home. Tracey and Nathan are also entitled to ask for and see identification from the officer. Ideally, Melvin should have arranged a meeting with the taxpayers at a suitable time. Under section 263, the Commissioner and their officers are not required to give advance notice. However, Melvin should have identified himself immediately. Melvin is entitled to both access and also to make copies of the documents requested. The exception is the prudential audit papers which are privilege between the taxpayers and their advisor. As in Question 24.7, the taxpayer’s records may not be taken without a court order or warrant. Melvin should not have taken the records from the bin. There is a further issue here that Tracey and Nathan are only required to have kept records (for any financial year) for five years from the date of receiving their assessment. Section 264 allows the Commissioner to demand the provision of requested records and documents. Failure to comply with a notice under this section may lead to prosecution. Such a notice must identify the specific documents required.
QUESTION 13.6
Idol is permitted to negotiate a settlement where it will facilitate recovery of tax. However, he is not permitted to offer immunity from prosecution as part of the settlement, especially on the drug offences which have nothing to do with the ATO. Also, settlements will generally involve the penalty and interest components, not the primary tax payable and should not be made if the matter is clear cut. The Commissioner is able to demand access any records relating to Biggs’ income both in and outside of Australia. As a practical matter, however, it is extremely difficult for the Commissioner to enforce information requested from overseas (under Section 264A).
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QUESTION 13.7
Part of the self-assessment regime is that the ATO will issue assessments on the basis of information provided. However, there are various other measures to ensure that returns are correct. The interest could be matched with information provided by the financial institutions which hold Bond’s investments. The capital gains are not as simple to trace, but an audit of Bond’s bank accounts may draw attention to the disposals. Bond clearly has not taken reasonable care. The issue is more whether or not the ATO could find him to have acted recklessly or with deliberate disregard of the law. As the returns would involve false and misleading statements, Bond may face prosecution or administrative penalties. Slandersome may face cancellation of his registration as well as possible liability for some or all of Bond’s penalties. QUESTION 13.8
Options available to Steve include:
Seeking the advice of another tax agent. Seeking a Private Ruling from the Commissioner. If this is unfavourable, Steve may
appeal against the ruling. Steve may also check to see whether the matter is addressed in an existing Public
Ruling. QUESTION 13.9
Sophie 21 November 2013 – 21 days after the due date for the return. This is the earliest
possible date. The Commissioner often sets due dates later than this. Payable Pty Ltd 1 December 2013 – Payable Pty Ltd is a full self-assessment taxpayer. Dianne 22 November 2013 – Dianne’s amended assessment reduced her tax payable, so the
due date does not change. Lodging an objection does not defer a taxpayer’s liability (see Chapter 27: Objections, Appeals and Reviews).
QUESTION 13.10 The onus is on the taxpayer to ensure that the Commissioner receives payment of a tax liability. Irrespective of why the cheque wasn’t banked, Dan is still liable for the full amount of $6,150. He may lodge an objection against the general interest charge of $250, but as Dan is required to keep a record of his payment, he would need to be able to prove that the payment was actually made.
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QUESTION 13.11 Pauline Yes – Pauline has paid her income tax liability more than 14 days before it was due. Toby No – PAYG instalments do not attract early payment interest. Leanne No – Leanne paid her liability less than 14 days before it was due. QUESTION 13.12 Tyrion can apply for an extension of time for payment. He is likely to be granted an
extension if he can show that payment will cause hardship or if the Commissioner is convinced that his appeal raises arguable questions of law or fact.
Such an extension will require him to pay ALL of the undisputed amount ($8,400)
and half of the disputed amount ($10,000) at the assessment due date. QUESTION 13.13
Kenny cannot be released from his current PAYG amounts withheld by his employer.
He may be released from all other amounts if he was able to demonstrate that payment would cause serious hardship.
QUESTION 13.14 The Commissioner could issue an assessment requiring immediate payment. While
Shifty could then object to the due date, the passing of the due date is significant as the Commissioner may then seek recovery in court or via a third party notice.
The Commissioner may then also seek a Mareva (freezing) injunction preventing Shifty from disposing of his assets.
The Commissioner may also issue a Departure Prohibition Order which makes it illegal for Shifty to leave the country while the order remains in force.
QUESTION 13.15
The Commissioner may attempt to recover the liability in court.
The Commissioner may issue third party notices to Ed’s employer, the financial institutions holding his accounts, and any other current or future creditor of Ed.
The Commissioner may seek a Mareva (freezing) injunction. A Mareva injunction is a court order preventing the taxpayer from disposing of any of their assets. There is no indication that Ed is a sufficient risk to warrant doing this.
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QUESTION 13.16 ( a ) Where a taxpayer has relied on instructions contained in the Individual tax return
instructions (formerly Tax Pack) in preparing their return, the Commissioner will not apply penalties and will only seek to recover the tax shortfall and the General Interest Charge.
( b ) If Dana had used a tax agent, the Commissioner would be likely to apply a Base
Penalty Amount of 25% for lack of reasonable care. QUESTION 13.17 ( a ) As the shortfall is less than $1,000 and has been voluntarily disclosed, the
Commissioner would reduce the penalty to nil. ( b ) If Dolph notified the Commissioner prior to the conduct of the audit, he would have
the penalty reduced by 20% therefore 25% - (25% x 20%). The penalty would be 20%.
It is possible that the Commissioner may deem the notification to have taken place prior to the notification of audit – that is, reduce the penalty to nil.
( c ) 25% x $800 = $200.00
( d ) This form of deceit would most likely represent taking steps to hinder the
Commissioner and would result in the Base Penalty Amount being increased by 20% (i.e. 25% + (25% x 20%) = 30%. Therefore, 30% x $800 = $240.00).
He may also be prosecuted for falsifying, concealing, destroying or altering records with intent to deceive or obstruct – an offence which carries penalties of up to $5,500 and/or 12 months imprisonment. He would almost certainly have made a false or misleading statement to a tax officer in doing so, and may be prosecuted for that.
QUESTION 13.18
Daniel will be required to pay the assessed tax of $40,000 as well as a penalty of $30,000 (calculated as 75% x $40,000) as well as the Shortfall Interest Charge. QUESTION 13.19
Tonia would need to object in writing in the prescribed format setting out her reasons why she believes the Commissioner’s tax decision (the amended assessment) to be incorrect.
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QUESTION 13.20 An objection against an assessment does not remove the taxpayer’s obligation to
pay any tax outstanding. Lionel should either request an extension for payment or make the payment. The Commissioner will however generally accept 50% of the tax in dispute where it is genuinely arguable.
As it is more than 60 days after the objection was lodged, Lionel may serve a
written notice requiring the Commissioner to make a decision on the objection. If he still has no response 60 days after the service of the notice requesting a decision, the objection is deemed to have been disallowed.
Following either a notified or deemed disallowance of the objection, Lionel may
then follow the normal avenues of review or appeal. QUESTION 13.21 As the amount of tax in dispute is more than $5,000 Harry is not entitled to a
review in the STCT which requires a fee of $81.
He may apply to the AAT for a review of the decision within 60 days. A fee of $816 is required, but this is refunded if Harry wins his case and is awarded costs.
Alternatively, he may appeal to the Federal Court against the decision. A filing fee
of $938 is required, plus $1,875 settling fee and $747 daily hearing fee. QUESTION 13.22 The Commissioner is obliged to refund all of these amounts to Stefan, a total of $11,500. Additionally, under s.9 of the Taxation (Interest on Overpayments and Early Payments) Act, Stefan is entitled to receive interest on the refunded amounts from the date paid up to the date refunded. Interest rates are reviewed quarterly, and are based on the monthly average yield of 90-day Bank Accepted Bills. That is, exactly 7% less than the General Interest Charge. QUESTION 13.23 Daenerys’s appeal requires a fee of $81. This fee is non-refundable, even if Daenerys wins her appeal. The appeal must be applied for within 60 days of the objection being disallowed. After Daenerys applies for a review by the STCT, a conference is scheduled where a representative of the Tax Office attends and an outcome is negotiated. Daenerys may represent herself, or have professional counsel with her. An applicant to the STCT is not entitled to any further reviews or appeals.
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Chapter 14:
Tax Planning & Anti-Avoidance
– Solutions QUESTION 14.1
( a ) Tax evasion – Roy has intentionally disregarded taxation law which requires him to include all of his ordinary and statutory income as assessable income.
( b ) Tax planning – Wendy has legally arranged her affairs to minimise her taxable
income. ( c ) Tax avoidance – While the salary might ordinarily be a means of minimising tax, it
is probable that the size of the transaction solely exists to obtain a tax advantage. There is a specific provision to prevent this type of tax avoidance. The commissioner will only allow a reasonable salary to be deductible.
( d ) Tax evasion – Evasion does not specifically need to relate to amounts paid or
received, it can involve disregarding taxation law with respect to any record, calculation or transaction which affects taxable income or tax payable.
( e ) Tax avoidance – By distributing a share of partnership net income to their son who
has not contributed to the business in any way, Mick and Michelle, while technically following the tax legislation, are artificially attempting to create a tax advantage. Division 6AA (high tax on minors) would apply here to reduce any benefit of this type of tax avoidance.
( f ) Tax evasion – Evasion can also involve incorrectly claiming a rebate or offset. It is
merely another form of disregarding taxation law. ( g ) Tax planning – Simon and Denise have legally arranged their affairs to minimise
tax. ( h ) Tax evasion – Again, the falsifying of stock figures is another form of evasion as it
is disregarding the correct basis of determining taxable income. ( i ) Tax avoidance – While Wendy has arranged her affairs to minimise tax, it involves a
series of contrived transactions solely to obtain a tax advantage.
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QUESTION 14.2
( a ) If this amount is excessive for the work performed, section 26-35 will operate to limit the deduction to what the Commissioner considers to be a reasonable amount for remuneration to associated persons.
( b ) This is clearly an artificial arrangement, and the Commissioner would rely on the
general anti-avoidance provisions contained in Part IVA to disallow deductions for the net rental losses.
( c ) Section 26-35 applies here by disallowing deductions for excessive amounts paid
to associated persons. ( d ) Section 94 applies to partnership distributions which represent ‘uncontrolled
partnership income’. By applying additional tax to these amounts, the provision removes the tax benefit from artificially splitting partnership income.
( e ) Section 165 operates to limit the offsetting of company losses where the
underlying owners of the company are substantially different between the loss year and the income year. This is achieved by the dual operation of the Continuity of Ownership Test and the Same Business Test. Both tests would be failed.
( f ) Division 35 applies to prevent individuals from offsetting net business losses
against other forms of income where the ‘business’ is deemed to be ‘non-commercial’ in its operation.
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QUESTION 14.3
If Justin does not sell any of his shares, his taxable income for the 2012/13 tax year will include:
$
Unfranked Dividends 10,000
Gross Salary 70,000
Net Capital Gain (50% x 15,000) 7,500
TAXABLE INCOME 87,500
If Justin sold shares in POQ Ltd: Capital Loss c/fwd = 15,000 – 16,000 = $1,000 Taxable income = $80,000 Justin could reduce his taxable income by selling his shares in either POQ Ltd or NFI Ltd and offsetting the resulting capital loss against the existing capital gains. If Justin still wanted to invest in each company, he could realise the loss on POQ Ltd and use the sale proceeds to buy the shares again at approximately the same price as they were sold at. QUESTION 14.4
Selling any of her shares will not reduce Amy’s taxable income. It will simply allow her to offset the capital losses realised during the year. Amy might consider selling her shares in Smoking Ltd and then re-acquiring them soon after.
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QUESTION 14.5
$ $
Rent Income 32,000 32,000
less: Deductions
Levies 3,500 3,500
Rates 2,000 2,000
Interest on Mortgage 29,000 29,000
Decline in Value 8,000/4 2,000 30,000/10 3,000
Capital Works - 2.5% x 160,000 4,000
36,500 41,500
Annual Net Rental Loss (4,500) (9,500)
Capital Proceeds 600,000 600,000
less: Cost Base 480,000 468,000
120,000 132,000
less: 50% discount 60,000 66,000
Net Capital Gain 60,000 66,000
Cost Base
Purchase Price 480,000 480,000
less: Capital Deductions
Capital Works - 3 x 4,000 12,000
- 12,000
480,000 468,000
Net Rental Loss 2012/13 (4,500) (9,500)
Net Rental Loss 2013/14 (4,500) (9,500)
Net Rental Loss 2014/15 (4,500) (9,500)
Net Capital Gain 2015/16 60,000 66,000
TOTAL TAXABLE INCOME 46,500 37,500
1 Vintage Rd. 2 Progress St.
Purchasing 2 Progress Street will result in less taxable income over the period of
ownership.
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QUESTION 14.6
If Ron and Miranda do NOT sell their shares:
2011/12 Miranda Ron
$ $
Salary / Wages 150,000 10,000
Franked Dividend 1/2 x 28,000 14,000 14,000
Franking Credit 1/2 x 28,000 x 30/70 6,000 6,000
TAXABLE INCOME 170,000 30,000
Tax on taxable income 50,850.00 3,600.00
Medicare Levy 2,550.00 450.00
less: Low Income Tax Offset (1,500.00)
less: Franking Tax Offset (6,000.00) (6,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 47,400.00 (3,450.00)
2012/13
Salary / Wages 150,000 10,000
Franked Dividend 1/2 x 28,000 14,000 14,000
Franking Credit 1/2 x 28,000 x 30/70 6,000 6,000
TAXABLE INCOME 170,000 30,000
Tax on taxable income 50,847.00 2,242.00
Medicare Levy 2,550.00 450.00
less: Low Income Tax Offset (445.00)
less: Franking Tax Offset (6,000.00) (6,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 47,397.00 (3,753.00)
TOTAL NET TAX PAYABLE 94,797.00 (7,203.00)
TOTAL NET TAX PAYABLE FOR FAMILY 87,594.00
96
QUESTION 14.6 (continued)
If Ron and Miranda sell their shares in June 2012:
2011/12 Miranda Ron
$ $
Salary / Wages 150,000 10,000
Franked Dividend 1/2 x 28,000 14,000 14,000
Franking Credit 1/2 x 28,000 x 30/70 6,000 6,000
Net Capital Gain 1/2 x (50% x (120,000 - 110,000) 2,500 2,500
TAXABLE INCOME 172,500 32,500
Tax on taxable income 51,775.00 3,975.00
Medicare Levy 2,587.50 487.50
less: Low Income Tax Offset (1,400.00)
less: Franking Tax Offset (6,000.00) (6,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 48,362.50 (2,937.50)
2012/13
Salary / Wages 150,000 10,000
Franked Dividend - 28,000
Franking Credit - 12,000
TAXABLE INCOME 150,000 50,000
Tax on taxable income 43,447.00 7,797.00
Medicare Levy 2,250.00 750.00
less: Low Income Tax Offset - (250.00)
less: Franking Tax Offset - (12,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 45,697.00 (3,703.00)
TOTAL NET TAX PAYABLE 94,059.50 (6,640.50)
TOTAL NET PAYABLE FOR FAMILY 87,419.00
97
QUESTION 14.6 (continued)
If Ron and Miranda sell their shares in July 2012:
2011/12 Miranda Ron
$ $
Salary / Wages 150,000 10,000
Franked Dividend 1/2 x 28,000 14,000 14,000
Franking Credit 1/2 x 28,000 x 30/70 6,000 6,000
TAXABLE INCOME 170,000 30,000
Tax on taxable income 50,850.00 3,600.00
Medicare Levy 2,550.00 450.00
less: Low Income Tax Offset (1,500.00)
less: Franking Tax Offset (6,000.00) (6,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 47,400.00 (3,450.00)
2012/13
Salary / Wages 150,000 10,000
Franked Dividend - 28,000
Franking Credit - 12,000
Net Capital Gain 1/2 x (50% x (120,000 - 110,000) 2,500 2,500
TAXABLE INCOME 152,500 52,500
Tax on taxable income 44,372.00 8,609.50
Medicare Levy 2,287.50 787.50
less: Low Income Tax Offset (212.50)
less: Franking Tax Offset - (12,000.00)
Tax Payable / Refundable (excl. PAYG tax withheld) 46,659.50 (2,815.50)
TOTAL NET TAX PAYABLE 94,059.50 (6,265.50)
TOTAL NET PAYABLE FOR FAMILY 87,794.00
Total tax if they retain jointly owned shares 87,594.00
Total tax if they sell and re-acquire shares in June 2012 87,419.00
Total tax if they sell and re-acquire shares in July 2012 87,794.00
The best option is to sell and re-acquire shares in June 2012.
98
QUESTION 14.7
Barry and/or Kerry Any further income distributed to Barry or Kerry will be
taxed at the highest marginal rate (45% plus Medicare
Levy).
Pedro and/or Selina As minors, Pedro and Selina will be taxed at 45% on any
income distributed (plus Medicare Levy). They are able to
receive $416 before any tax is payable. Any income above
this will attract either 66% or 45% tax (plus Medicare Levy)
No distribution Any retained net income will be taxed in the hands of the
Trustee at 45% plus Medicare Levy. Therefore the trustee should make discretionary payments to Pedro and Selina of not more than $416 each. The remainder of $4,168 can either be distributed to Barry and/or Kerry or retained in the trust as the resulting tax will be the same at 45% (plus 1.5% Medicare Levy).
99
QUESTION 14.8
$
Amber Amber will be taxed at normal resident rates on any
income. She is therefore able to receive up to
$12,000 before she is taxed at a rate higher than
32.5% (plus 1.5% Medicare Levy) (80,000 – 68,000)
LITO is not affected.
12,000
Rose
Rose can earn $7,000 ($37,000 - $30,000) before
additional income will effectively attract in excess of
32.5% tax (plus 1.5% Medicare) as the low income
tax offset shades out between $37,001 and $66,667
at 1.5 cents per $1 (or 1.5%).
Note: Rose or Honey both would be taxed at 19%
(plus 1.5% Medicare Levy) and lose no LITO at an
income below to or equal to $37,000.
7,000
Violet Although Violet is a minor, she is engaged in full-time
employment and is therefore not subject to Division
6AA rates. Accordingly, her tax situation is similar to
Amber’s. She is able to receive up to $12,000
(80,000 – 68,000). For this example we have
distributed the residual amount of $917.
917
Jade As a minor, Jade will be taxed at Div 6AA rates. She
will be able to receive $416 before any tax is payable.
416
Cerise Cerise is also a minor engaged in full-time study.
Only the first $416 of eligible taxable income is tax-
free. Anything over this amount will be taxed at
either 66% or 45%.
416
Honey
As Honey is subject to an entitlement for a carer’s
allowance, she is an excepted person under Division
6AA. That is, the general resident rates of tax apply
to all of her income. She may therefore receive up to
$37,000 before tax is applied at a rate higher than
32.5% (plus 1.5% Medicare Levy).
37,000
57,749
100
QUESTION 14.9
The formula for calculating the maximum co-contribution for the 2012/13 year is:
$500 - {[(assessable income + reportable fringe benefits) - $31,920] x 0.03333}
= $500 – [$40,500 - $31,920] x 0.03333
= $500 - $285.97
= $214.03
If Jim can afford it, he should contribute $428.06 (2 x $214.03) as an after tax contribution to receive the co-contribution of $214.03 (remembering co-contribution is $0.50 per $1.00). QUESTION 14.10
Tax saving on extra $15,000 superannuation = $15,000 x (38.5% - 15%)
= $3,525
38.5% - being the marginal tax rate of 37% + Medicare Levy.
15% - being the superannuation contributions tax.
QUESTION 14.11 ( a ) Negative gearing is the process where a person borrows money to invest and the
costs of the investment are greater than the income received. ( b ) Negative gearing is a strategy that provides immediate tax benefits, with the
intention of generating long term capital gains. In a given year, as the costs are higher than the income received, this creates a tax loss which can be offset against other income or carried forward to be used in later years.
QUESTION 14.12 Five methods that are commonly used by criminals to evade taxation obligations or fraudulently use the system to obtain an improper financial benefit:
identity crime.
secret offshore dealings.
high-volume, low-value suspect transactions.
credit and refund fraud.
illicit tobacco growing and trading.
101
QUESTION 14.13 ( a ) False: Project Wickenby is a separate taskforce which involves other agencies
including the Australian Federal Police. ( b ) True: Integrity of the Australian financial and regulatory systems is a key aim of
Project Wickenby. ( c ) False: Often the schemes are complex and the promoters are intelligent and well
informed. Evidence can be well hidden. ( d ) True: These are examples of the arrangements under investigation by Project
Wickenby.
QUESTION 14.14 Gathering and analyzing intelligence on risks and threats to the tax system. Investigating suspected cases with a view to prosecution, often jointly with law enforcement agencies. Working with the Australian Federal Police and the Commonwealth Director of Public Prosecutions to restrain and confiscate assets obtained from tax-related crime, by using the powers of Proceeds of Crime Act 2002. Complementing criminal investigation work with civil audit work and the application of tax penalties. Publicising the outcomes of this work to raise community awareness. Sharing information across partner agencies to achieve whole of government outcomes in tackling tax crime.
QUESTION 14.15 The ATO looks at various ratios to compare against industry benchmarks. The ATO also uses data matching to compare if one entity’s records correspond to another entities records.
QUESTION 14.16 Refund Scams – are usually in the form of an email purporting to be from the ATO and offering a tax refund. Generally, they link to a fake ATO website and ask for personal and credit card details. Phishing Scams – obtain personal details such as usernames, passwords, TFNs and credit card details. They do this by masquerading as a trustworthy entity such as the ATO in an electronic communications such as emails. Phone Scams – typically involve unsolicited phone calls from persons claiming to be from the ATO and offering a tax refund. Email/Money transfer Scams – typically involve an email is circulating claiming to be from the ATO and advising that money is to be transferred into your account.
102
Chapter 15:
Fringe Benefits Tax – Solutions QUESTION 15.1
$
Type 1 benefits 78,340 x 2.0647 161,748
Type 2 benefits 11,440 x 1.8692 21,383
Grossed up value 183,131
Tax @ 46.5% 85,155.92
less: Instalments Paid 24,100 + 24,100 + 24,100 72,300.00
FBT Payable 12,855.92
QUESTION 15.2
TYPE 1 BENEFITS $ $ $
Telephone Account 1,940
Holden 9,415 11,355 x 2.0647 23,444
TYPE 2 BENEFITS
Loan 2,450
Volkswagen 3,380
School Fees 10,825 16,655 x 1.8692 31,131
GROSSED UP VALUE 54,575
Tax @ 46.5% 25,378.31
FBT PAYABLE 25,378.31
QUESTION 15.3
( a ) 7,267 Benefit provided by employer to associate of
employee (3,520 x 2.0647).
( b ) Excluded The taxable value of $850 is less than $2,000.
( c ) 12,897 Benefits provided to an associate are recorded on
the payment summary of the employee
(6,900 x 1.8692).
( d ) Nil Only benefits provided during the FBT year (1 April
to 31 March) are reported on the Payment
Summary of that year. This benefit will be reported
on Paula’s 2013/14 Payment Summary.
103
QUESTION 15.4
$
( a ) 150 Expense payment benefit of $500 reduced by $350
under the ‘otherwise deductible’ rule.
( b ) Nil Benefit entirely subject to ‘otherwise deductible’ rule.
( c ) 2,800 Expense payment benefit, entirely for private purposes.
( d ) 5,670 The value of the course fees and textbooks are reduced
by the ‘otherwise deductible’ rule. The HELP
contributions are not 'otherwise deductible'. QUESTION 15.5
( a ) Exempt Newspapers provided for use at employer’s premises are
exempt.
( b ) Exempt Recreation facilities are exempt. Also, if it is not possible
to identify the recipient of a benefit, then the benefit is
not subject to FBT.
( c ) Exempt Minor and infrequent benefits are exempt – Section 58P
(less than $300 per recipient).
( d ) Exempt Even though there were also Christmas benefits, each
benefit is considered separately for the purposes of
applying the minor and infrequent provision.
( e ) Not Exempt Each employee will have received an $840 benefit
(This benefit is recurring – not exempt).
( f ) Exempt Section 47(2).
104
QUESTION 15.6
$
( a ) 45,000 Cost base is inclusive of GST.
( b ) 99,000 There is no car cost limit where valuation for fringe benefits
tax is concerned (luxury cars use original cost).
( c ) 22,000 Where that car has been held for 4 or more years as at the
first day in the FBT year (i.e. 1 April 2012), the cost base is
reduced to 2/3 of the original cost.
( d ) 28,450 As at 1 April 2012, the car been held for less than 4 years.
The full cost is used as the cost base.
( e ) 25,000 The original cost to the employer is used, not the cost to the
car’s original owner.
( f ) 37,000 Registration and insurance is not included in determining the
cost base of a car.
( g ) 41,700 The cost of any non-business accessories is included in the
cost base.
QUESTION 15.7
%
( a ) 17 Total kilometres of between 25,000 and 40,000.
( b ) 20 Business and private kilometres are not considered. The
statutory percentage is based solely on total kilometres
travelled during the year.
( c ) 13 The car was held for only 121 days during the FBT year. The
kilometres travelled were 14,150. Annualised, this would
have been:
14,150 x 365/121 = 42,684
( d ) 11 Total kilometres travelled were:
87,290 – 56,830 = 30,460
( e ) 7 Total kilometres travelled were:
132,275 – 95,010 = 37,265
Annualised, this would be:
37,265 x 365/329 = 41,343
105
QUESTION 15.8
( a ) 353 days The car was not available for private use while being repaired.
(365 – 12)
( b ) 253 days The car was not available for private use. This was not due
to the recipient being overseas, but due to the car being
garaged at the employer’s premises. (274 – 21)
(1 July 2012 to 31 March 2013 less 21 days)
( c ) 365 days Although Janice did not use the car for the full year, it was
available for private use and her associate (her son) used the
car for 9 days. QUESTION 15.9
$
( a ) 1,700 Running costs paid for by the recipient reduce the taxable
value of the benefit. Note that these additional running costs
are deductible to the employer and the contribution is also
assessable income.
( b ) 3,000 Actual monetary contributions towards the running costs also
reduce the taxable value. The contribution is assessable
income to the employer.
( c ) 1,050 Running costs contributed by the recipient includes:
120 + 370 + 560 = 1,050
Note that tolls and fines are not car operating costs.
QUESTION 15.10
Toyota Camry $
Taxable Value (38,000 x 20% x 365/365) - 0 7,600
106
QUESTION 15.11
$
BMW (85,000 x 7% x 365/365) - 0 5,950
Holden (2/3 x 34,000 x 26% x 365/365) - 2,300 3,593
Peugeot (49,000 x 17% x 151/365) - 1,200 2,246
Taxable Value of car benefits 11,789
Type 1 Benefits 11,789 x 2.0647 24,341
FBT Payable @ 46.5% 11,318.57
Annualised kilometres for Peugeot: 12,300 x 365/151 = 29,732
QUESTION 15.12
(a) Operating Cost Method
Private kilometres 7,600 - 5,400 2,250
Private use % * 2,250 / 7,650 29.41%
Operating Costs $ $
Petrol etc 5,600
Deemed Interest 64,000 x 7.40% 4,736
Deemed Depreciation 64,000 x 25% 16,000 26,336
Value of Benefit ** (29% x 26,336) - 0 7,637.00
(b) Statutory Formula Method
(64,000 x 17% x 365/365) - 0 10,880.00
(c) Jackson Limited will choose the operating cost method
as it results in a lower taxable value and therfore a lower
FBT liability.
(d) While Linda is not directly responsible for the payment of the
FBT, it is usual for an employer to consider all costs of providing
a benefit when determining an employee's remuneration package.
As the benefit is over $2,000, the employer must report the
grossed up taxable value on her Payment Summary.
107
QUESTION 15.13
Private kilometres 3,920 - 1,200
2,720
Private use % 2,720/3,920
69%
Cost base 16,000 + 800
16,800
Operating Costs Petrol, rego, insurance and service
3,800
Deemed Interest 16,800 x 7.40% x 151/365 514 Deemed Depreciation 16,800 x 25% x 151/365 1,738 6,052
Value of Benefit (69% x 6,052) - 0
4,176
QUESTION 15.14
Mercedes:
$
Statutory Formula Method
(2/3 x 120,000 x 20% 365/365) - 1,400 14,600
Operating cost Method Running costs
8,700
Deemed Interest
24,800 x 7.40% x 365/365
1,835
Deemed Depreciation 24,800 x 18.75% x 365/365 4,650 15,185
Value of Benefit (55% x 15,185) - 1,400
6,952
Ford: Annualised km 24,560 x 365/335
26,759
Statutory Formula Method
(44,000 x 17% 335/365) - 0
6,865
Operating cost Method Petrol Etc
7,900
Deemed Interest
44,000 x 7.40% x 335/365
2,988
Deemed Depreciation 44,000 x 25% x 335/365
10,096 20,984
Value of Benefit (7% x 20,984) - 0
1,469
Nissan: Statutory Formula Method
(35,000 x 11% x 365/365) - 0
3,850
Operating cost Method - not available as a valid logbook was not maintained.
TYPE 1 BENEFITS Mercedes 6,952
Ford 1,469
Nissan 3,850 12,271 x 2.0647 25,335
FBT Payable 46.5%
11,780.98
108
QUESTION 15.15
$
( a ) 464 Expense payment benefit (Type 2)
( b ) 396 If the employer pays the fine, it is still a fringe benefit
even though it wasn’t the employee that incurred the
fine.
(Expense payment fringe benefit - Type 2)
( c ) Exempt As it is not recurring, this amount would be exempt as
minor and infrequent.
( d ) 934 Tolls are a benefit separate from any car benefit.
(Expense payment fringe benefit – Type 1)
( e ) 728 The otherwise deductible rule applies (1,213 – 485).
(Expense payment fringe benefit – Type 1)
( f ) 1,000 If Jenny had diarised 4 weeks of toll usage, she could
have applied the otherwise deductible rule.
(Expense payment fringe benefit – Type 1)
( g ) Nil Entirely reduced by the otherwise deductible rule.
109
QUESTION 15.16 Private use % 2,260/6,470 34%
Annualised km 24,500 x 365/243 36,800
$ $
Statutory Formula Method
(57,000 x 17% x 243/365) - 0 6,451
Operating Cost Method
Petrol, Registration and Insurance 7,700
Servicing 620
Lease Payments 1,150 x 8 9,200 17,520
Value of Benfit (34% x 17,520) - 0 5,957
Type 1 Benefit
Alfa Romeo 5,957
Tolls 700 6,657 x 2.0647 13,744
Type 2 Benefit
Fines 1,340 x 1.8692 2,505
16,249
FBT PAYABLE x 46.5% 7,555.80
QUESTION 15.17
Value of Benefit
12,000 x (7.40% - 4%) x 121/365 135
QUESTION 15.18
Value of Benefit
15,000 x (7.40% - 3.0%) x 365/365 660
Where the loan is used for purposes where the interest would have allowed as a deduction if borrowed commercially, the benefit is reduced under the ‘otherwise deductible’ rule.
110
QUESTION 15.19
Loan to Maddy $ $
30,000 x 7.40% x 121/365 736
Loan to Grigg
200,000 x (7.40% - 3%) x 274/365 6,606
Loan to Bree
Benefit has nil taxable value - loan used entriely for a taxable purpose.
Loan to Lisa
40,000 x (7.40% - 4%) x 182/365 678
35,000 x (7.40% - 4%) x 183/365 597 1,275
Taxable Value of Loan Benefits 8,617
Type 2 Benefits
Loans 8,617 x 1.8692 16,106
FBT Payable x 46.5% 7,489.29
QUESTION 15.20
As the average cost daily rate ($6.00) is below the prescribed threshold of $7.83 there is no value attached to the benefit.
QUESTION 15.21
Salary
Exempt Superannuation
Exempt
Holiday
5,500 Type 1
Honda Statutory Formula (59,700 x 11% x 365/365) - 5,100
1,467 Type 1
The operating cost method is not available as logbook not kept.
Telephone Bills
2,300
less: Otherwise Deductible 65% x 2,300 1,495 805 Type 1
Type 1 Benefits
$
$
Holiday
5,500 Honda
1,467
Telephone Bills
805
7,772 x 2.0647 16,046
FBT Payable
x 46.5% 7,461.39
111
QUESTION 15.22
Holden $ $
Statutory Formula Method
(38,000 x 17% x 365/365) - 500 5,960
Operating Cost Method (15% x 17,312) - 500 2,097 Type 1
Running Costs 5,000
Deemed Interest 7.40% x 38,000 2,812
Deemed Depreciation 25% x 38,000 9,500
17,312
Private Use 4,000 / 26,000 15%
Ford
Statutory Formula Method
(2/3 x 29,000 x 7% x 365/365) - 0 1,353 Type 2
Operating Cost Method (54% x 8,970) - 0 4,843
Running Costs 6,800
Deemed Interest 7.40% x 6,700 495
Deemed Depreciation 25% x 6,700 1,675
8,970
Private Use 23,000 / 42,000 54%
Mobile Phone Exempt
Loan 50,000 x (7.40% - 3%) x 151/365 910 Type 2
Lunch Minor & Infrequent - less than $300 per head
Private Travel 1,500 Type 1
Golf Membership Not received during 2012/13 FBT year.
Type 1 Benefits $ $
Holden 2,097
Private Travel 1,500
3,597 x 2.0647 7,426
Type 2 Benefits
Ford 1,353
Loan 910
2,263 x 1.8692 4,229
11,655
x 46.5% 5,419.58
less: Instalments Paid 4,000.00
FBT Payable 1,419.58
112
QUESTION 15.23
Tarago $ $
Statutory Formula Method
(55,000 x 20% x 154/365) - 1,500 3,141 Type 1
Operating Cost Method valid logbook not maintained
Hilux
Exempt Vehicle - Private use that is solely travel to and from work is exempt
for utilities, trucks, taxis and panel vans.
Loan
100,000 x (7.40 - 2.0)% x 306/365 4,527
50,000 x (7.40 - 2.0)% x 59/365 436 4,963 Type 2
Private Travel 11,000 Type 1
Laptop Computer exempt.
Concert Ticket Minor & infrequent.
Taxis exempt (see utility).
Type 1 Benefits $ $
Tarago 3,141
Private Travel 11,000
14,141 x 2.0647 29,196
Type 2 Benefits
Loan 4,963 x 1.8692 9,276
38,472
x 46.5% 17,889.48
less: Instalments Paid 11,800.00
FBT Payable 6,089.48
QUESTION 15.24
Type 1 Benefit $15,000 x 2.0647 30,970
Less Capping threshold 17,000
Aggregate non-exempt amount 13,970
Therefore, FBT payable is:
13,970 x 46.5% 6,496.05
113
QUESTION 15.25
$ $
Salary and Superannuation Exempt
Gym Membership 2,400 Type 1
Porsche
Statutory Formula Method
(170,000 x 14% x 365/365) - 5,100 18,700 Type 1
Operating Cost Method (37% x 59,180) - 5,100 16,796
Running Costs 5,100 + 7,100 12,200
Deemed Interest 7.40% x 145,000 10,730
Deemed Depreciation 25.00% x 145,000 36,250
59,180
Medical Bills 2,500 Type 2
Handheld computer Exempt
Entertainment Allowance Exempt
Train ticket 3,000 Type 1
Loan
60,000 x 7.40% x 92/365 1,119
50,000 x 7.40% x 92/365 932 2,051 Type 2
Type 1 Benefits $ $
Gym Membership 2,400
Porsche 16,796
Train Ticket 3,000
22,196 x 2.0647 45,828
Type 2 Benefits
Medical Bills 2,500
Loan 2,051
4,551 x 1.8692 8,507
54,335
x 46.5% 25,265.65
less: Instalments Paid 15,200.00
FBT Payable 10,065.65
114
Chapter 16:
Goods and Services Tax – Solutions
QUESTION 16.1
Give three examples of circumstances that would give rise to the entity being required to adjust its GST liability.
Discounts provided or received
Goods returned to suppliers or from customers
Bad debts written-off or recovered
QUESTION 16.2
What is an example of an adjustment event?
A supplier provides a 5% early payment discount on an invoice where the GST credit
has already been claimed. The GST attributable to the discount (5% x 1/11th)
represents an increasing adjustment.
A customer returns goods worth $110. GST of $10 was previously paid on the
original sale so this must now be reversed. The business will record a $10
decreasing adjustment in the current period.
A bad debt of $550 is written-off in the current period. The GST paid on the original
sale needs to be reversed which represents a $50 decreasing adjustment.
QUESTION 16.3
What are the GST tax periods and is there any choice available?
Quarterly – most entities have a quarterly period Monthly – Some entities may elect to have a monthly tax period but this is not compulsory unless the entity’s GST turnover (total sales or fees received) is above $20 million, or the entity has been notified by the ATO to do so because of poor payment history or general compliance. Annual – Small Business Entities whose turnover is below $2 million can elect to account for the GST on an annual basis.
115
QUESTION 16.4
What are the two methods available for accounting for GST? Cash or accruals (non-cash) An entity is able to account for GST on a cash basis if its annual turnover is equal to or below $2 million. In this case there is a GST liability or obligation when payment for a good or service is actually received. Alternatively, an input tax credit for the GST can only be claimed when payment is made by the entity to a supplier of a good or service. An entity which accounts for the GST on an accruals basis will have a GST liability or obligation when it issues an invoice to its consumers. Input tax credits will be claimed by an entity only when it receives an invoice from its suppliers or payment for the good or service has been made.
QUESTION 16.5
From the following information calculate Net GST Payable/Refundable for Abbot’s News agency (under the accruals method). All figures include GST. Tax invoices issued - $9,350
Tax invoices received - $5,940 Goods returned from customers - $902
Goods returned to suppliers - $616
GST on sales (net of returns) (9,350 – 902) / 11 = 768
GST on purchases (net of returns) (5,940 – 616) / 11 = 484
Net GST Payable $ 284
QUESTION 16.6
Which of the following is NOT a GST supply? ( d ) Output taxed supplies.
QUESTION 16.6
Who of the following bear the cost of the GST? ( c ) End consumers.
QUESTION 16.7
A tax invoice must contain:
( a ) The words ‘ tax invoice’.
( b ) Date of issue.
( c ) The amount payable including the GST or the GST amount.
( d ) All of the above.
116
QUESTION 16.8
From the following list who is NOT required to register for the GST? ( b ) A non-profit body with annual turnover of $75,000.
QUESTION 16.9
Which of the following is not GST-free? ( c ) Electrical goods.
QUESTION 16.10
GST collected from customers is recorded as: ( d ) Liability.
QUESTION 16.11
The GST paid to suppliers is recorded in which account? ( b ) Input tax credit control.
QUESTION 16.12
The GST can be described as a: ( a ) Broad-based tax.
( b ) Consumption tax.
( c ) Indirect tax.
( d ) All of the above
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