LAW3131 Revenue Law and Practice II

Revenue Law

Order Description

A title page, contents page, or reference page are not required. Please use AGLC referencing style.
Australian sources to be used:
Income Tax Assessment Act 1997 (Cth)
Partnership Act 1891 (QLD)
Australian Tax Handbook 2015 (Thomson Reuters)
Australian Tax Casebook (CCH) 12th edition

This assignment consists of five (5) Questions.
You are required to answer the questions associated with each scenario. Please
limit your answers to the questions asked and to the facts provided. If you require
further information in order to come to a conclusion, please state this in your answer and
highlight how this further information would effect your conclusion.
You are required to provide legislative and case references. Please see the attached
Marking Criteria Sheet for details on how marks for this assignment will be awarded.
LAW3131 Revenue Law and Practice II
Page 2 of 14
Question 1
Annabel, Brenda and Claire, operate a hairdressing business in Toowoomba. They operate their business through a partnership, called the ABC Partnership. They started the business themselves and have carried on the business for 6 years.
Under the original written ‘Partnership Agreement’, Brenda is allocated a partner’s salary of $65,000 and Claire is to get a salary of $50,000. Annabel (Brenda’s mother) has other business interests so does not work in the business on a day-to-day basis, but provides input and advice where possible. The balance of the net income partnership income is to be equally shared between all three partners. The partnership uses the non-cash basis (accruals method) to account for income.
Brenda’s sister Danielle wishes to buy into the partnership having recently completed her apprenticeship. Annabel, Brenda and Claire each agree to sell a portion of their share of the partnership to Danielle so that all four become equal partners. The sale and transfer is to take place on 1 July 2015.
The Balance Sheet items for the end of the 2015 income tax year are as follows:
Land and Buildings $590,000
Goodwill $90,000
Fixtures and Fittings $20,000
Trading stock $7,000
Accounts receivable $2,000
$709,000
Notes:
? The land and buildings were purchased for $320,000 in 2010 when the business commenced.
? The fixtures and fittings were purchased in 2010 for $49,000. The balance sheet amount represents the adjustable value for tax purposes as well as market value.
? The trading stock is valued at cost in the balance sheet but has a market selling value of $20,000.
LAW3131 Revenue Law and Practice II
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1) Provide advice to Annabel, Brenda and Claire as to the potential tax consequences/considerations for each partner upon the sale of their portions of the partnership to Danielle on 1 July 2015. Assume that the disposal is at market value. You do not need to determine the net tax payable for any partners or perform any calculations; however you should discuss any potentially assessable amounts with reference to any relevant legislation, rulings or case law. You should also discuss any choices available to the remaining and prospective partners and provide advice as to what would be the best option and why. Your discussion should include consideration of the capital gains tax consequences of the change of ownership but you can ignore any Small Business CGT Concessions.
[Total 8 Marks]
LAW3131 Revenue Law and Practice II
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Question 2
The Weston Family Trust is a discretionary trust which carries on a number of investment activities for the benefit of the Weston family. The Weston Family Trust holds a number of income-producing assets such as land and buildings, shares and bank deposits. The Weston Family Trust made a ‘family trust election’ in the year 2011 and named Winston Weston as the ‘test individual’.
The trust had the following receipts for the year ended 30 June 2015:
Interest on investments $17,000
Gross Proceeds on sale of vacant land $400,000
Commercial Rental Income $35,000
Fully Franked Dividends $42,000
Note: the land had a cost base of $110,000 and was purchased in June 2009.
Due to the downturn in the economy, the Weston Family Trust made an income tax loss of $25,000 (not a capital loss) for the 30 June 2014 year.
The trustee of the Weston Family Trust (Winston Weston) has not yet made a resolution to distribute the income of the trust for the 2015 income year. The definition of trust income in the trust deed is in accordance with net income of the trust as per section 95(1) ITAA 36. The trust deed also gives the trustee power to distribute different classes of income to different beneficiaries.
Distributions have been made in previous years to the following beneficiaries;
o Weston Investments Pty Ltd (corporate entity of which Winston, Emily and Sophie Weston are the equal shareholders).
o Winston Weston (aged 55 with likely income from other investments for 2015 of $150,000)
o Emily Weston (aged 50 with likely income from investments and capital gains for 2015 of $17,000)
o Sophie Weston (aged 6 years of age with no other income). The terms of the trust deed state that any distributions of income made to Sophie are to be retained within the trust until such time as she reaches the age of 18 or if she dies before reaching the age of 18, the amount accumulated should be distributed equally to other living beneficiaries on the day of her death.
LAW3131 Revenue Law and Practice II
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1) Calculate the net income of the Weston Family Trust for the year ended 30 June 2015. Ensure that you discuss fully whether the loss from the 2014 income year will be available to utilise in the 2015 year. Support your answer with relevant authority. If there is any further information you would require or advice you would like to give, please state this in your answer.
2) Based on your calculation of net income provide advice to the trustee as to the optimum distribution of the net income to each beneficiary to minimise the overall amount of tax paid by the beneficiaries and by the trustee in the year ended 30 June 2015. State your reason as to why you have made that advice. Support your answer with reference to any relevant authority. Remember – there is not exactly correct answer here, it is about your ability to make reasonable decisions based on the facts and outcomes.
[Total 10 Marks]
LAW3131 Revenue Law and Practice II
Page 6 of 14
Question 3
Part A
Gary and George operate a restaurant in Brisbane. The business has been operating for 6 years through a company, Indulgent Pty Ltd, which at the time of its incorporation (1 July 2010) had 800 issued shares. Gary and George were equal shareholders in the company at this time and Gary was the sole director.
Indulgent Pty Ltd reported an income tax loss for the year ended 30 June 2014 of $62,000.
In order to raise additional capital, a further 600 shares were issued to Gary’s friend Matt on 1 July 2014. Matt has been using his restaurant management background to analyse the business’s performance and has convinced Gary and George to consider expanding their business to include a mobile food truck to capitalise on recent trends. There are no concrete plans at this stage to expand the business, but it is a possibility towards the end of the 2015 income year. Due to the additional capital and better financial management the company expects a net profit in the 2015 year.
1) Provide advice as to whether or not the losses from previous years will be available to offset against the taxable income of Indulgent Pty Ltd in the 2015 income year (discussing and applying both applicable tests). You must make reference to any relevant legislation, case law or rulings.
LAW3131 Revenue Law and Practice II
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Part B
The clients have also requested advice on the payment of a second dividend during the current income year, so have provided the franking account information for Indulgent Pty Ltd for the income year ended 30 June 2015.
? Indulgent’s franking account had a balance of $12,000 credit as at 1 July 2014.
? Indulgent Pty Ltd did not make any PAYG instalments during the year as its instalment rate was 0% due to the prior year losses.
? Indulgent Pty Ltd declared a fully franked dividend of $17 per share on 20 December 2014. Payment was made to shareholders on 25 December 2014.
? Indulgent Pty Ltd wishes to declare a second dividend on 28 June 2015 of $14 per share. Payment will be made to shareholders on 29 June 2015.
1) Discuss the extent to which Indulgent Pty Ltd may frank the second dividend it wishes to declare on 28 June 2015. You must make reference to any relevant legislation in support of your calculations.
[Total for Part A and Part B is 10 Marks]
LAW3131 Revenue Law and Practice II
Page 8 of 14
Question 4
Two new clients have made an appointment to see you regarding purchasing a business. Paul (aged 29) and Brendan (48) are friends who wish to purchase a gym together. The gym business is called Fit Life and is being offered for sale for $850,000. The purchase price is made up of the following assets:
Goodwill (including client memberships) $700,000
Depreciable Plant and Equipment $150,000
Paul and Brendan wish to operate the business together with equal involvement in all aspects of the business. Neither Paul nor Brendan are currently working so both are available to work full-time in the business. Brendan has mentioned a desire to retire at age 60.
The gym is currently operated through a private company, Fitness for Life Pty Ltd which has two equal shareholders and 100 issued shares. There is also an opportunity to purchase the commercial shed that the business operates from. The commercial shed is available for sale for $1 million. The shed is currently owned by the same persons through a separate entity, Fitness Property Pty Ltd. The same owners hold equal portions of the 100 shares in Fitness Property Pty Ltd.
Brendan holds his share of the purchase price in cash from the sale of another business, whereas Paul currently has $150,000 available in cash.
Brendan is married to Alice (aged 57) and they have three children aged 7, 9 and 17 years. Brendan and Alice own their own home that has a market value of $900,000 and mortgage of $300,000. They also have two rental properties with a total market value of $1,200,000 and associated mortgages of $400,000.
Paul is single and has no children. He owns his own home with a market value of $400,000 and a mortgage of $150,000.
? You are required to provide advice to Paul and Brendan as to which business structure would be most appropriate based on the above information. You should include in your considerations advice on whether Paul and Brendan should consider purchasing shares in the existing companies who hold the assets, or purchasing the assets separately. You should provide advice in relation to at least two business structure options; however you should also make a recommendation as to which option you believe is most appropriate.
LAW3131 Revenue Law and Practice II
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? The advice should be provided in the form of a letter of advice (see Study Desk for example).
? You should base your letter of advice on the range of issues which would be relevant in making a decision (i.e. taxation consequences, liability, cost to set-up and maintain, succession, anti-avoidance considerations.) Please note the assessment criteria for this aspect of the assignment and limit your letter to a maximum of 2 pages. You may submit up to 2 pages of supplementary explanations not designed to be sent to the client, however this is optional.
[Total 15 Marks]
LAW3131 Revenue Law and Practice II
Page 10 of 14
Question 5
Jonathan recently graduated from USQ with an Accounting degree and has started a bookkeeping business in Toowoomba. With his knowledge of tax planning gained in his studies he has incorporated a company to operate his business through. The company is called Fast Books Pty Ltd. The company has 100 issued shares and he and his wife hold 50 of the issued shares each. As Jonathan is not a registered tax agent, he has made an appointment to see you regarding lodging his tax return for the 2015 income year. He has provided you with the following details for the 2015 income year:
Gross Income
Bookkeeping services income $130,000
Expenses
Travel expenses $12,000 *
Stationary expenses $ 1,000 *
Depreciation on computers $ 2,000
Purchase of MYOB software $ 750
Purchase of QuickBooks software $ 700
Subscription fees for MYOB $ 150
Salaries $ 7,800* $ 24,400
Net Profit $105,600
*Travel expenses are calculated using the log-book method. You confirm a valid log-book was kept showing 80% business use of the motor vehicle and total expenses of $15,000
* You confirm depreciation has been accurately calculated using diminishing value method for Jonathan’s computers taking into account appropriate private use of the home computer.
*Jonathan pays his wife $150 per week as a salary to answer phones and send invoices to clients.
* Jonathan purchased copies of MYOB and QuickBooks software during the income year, but also has an update and support subscription for MYOB which is a monthly fee.
Jonathan has advised he would like any after tax profits from the company to be paid as dividends to himself and his wife.
Upon requesting further details of his income, Jonathan provides you with the following report:
Summary of Income Amounts
Receipts from ABC Accounting $108,000
Receipts from XYZ Accounting $ 13,000
Receipts from Construction Pty Ltd $ 5,000
Receipts from Coffee Shop Pty Ltd $ 4,000
$130,000
Jonathan confirms that none of his clients are related to each other. He provides you with an example invoice provided to one of his clients. He is also able to confirm that 60% of his work related travel relates to travel to ABC Accounting and 40% relates to XYZ Accounting. The remaining two client’s work is done at his home office.
LAW3131 Revenue Law and Practice II
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? You are required to provide advice to Jonathan regarding his likely taxable income position for the 2015 income year. You should provide advice in relation to Fast Books Pty Ltd as well as Jonathan and his wife individually. Make reference to any relevant legislation, case law or rulings in your analysis. You do not need to calculate a final taxable income or tax payable figure. However, you should identify any further information that would be required from Jonathan in order to make a final decision.
(7 marks)
LAW3131 Revenue Law and Practice II
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LAW3131 – Revenue Law & Practice II
Semester 2, 2014
Major Assignment Marking Criteria Sheet
Question 1 – Partnership 8 Marks
N/A
F
C
B
A
HD
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in relation to the partnership variation.
0
0.5
1
Application
Demonstrated level of understanding of the relevant law in their discussion of the tax effects of the sale of each of the partnership assets.
0
1
1.5
2
3
4
Demonstrated ability to provide advice to partners in relation to any tax choices available in the partnership sale.
0
0.5
1
1.5
2
Conclusions
The student has drawn appropriate and valid conclusions in relation to their advice given to the partners upon the partnership sale.
0
0.5
1
Question 2 – Trusts 10 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in relation to the trust loss and distributions to beneficiaries.
0
0.5
1
1.5
2
Application
Demonstrated level of understanding of the relevant law in their application to the facts in relation to the utilisation of trust losses and net income.
0
1
1.5
2.5
3
3.5
Demonstrated level of understanding of the relevant law in their application to the facts in advising on the distributions to beneficiaries..
0
1
1.5
2
2.5
3
Conclusions
The student has drawn appropriate and valid conclusions in relation to the utilisation of the trust loss, and the distributions to each beneficiary.
0
0.5
1
1.5
LAW3131 Revenue Law and Practice II
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Question 3 – Companies 10 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in determining whether losses can be utilised and discussing the franking account.
0
0.5
1
1.5
2
Application
Demonstrated level of understanding of the relevant law in their application to the facts in relation to the utilisation of prior year losses.
0
1
1.5
2.5
3
3.5
Demonstrated level of understanding of the relevant law in their application to the facts in discussing the franking account.
0
1
1.5
2
2.5
3
Conclusions
The student has drawn appropriate and valid conclusions in relation to the utilisation of the prior year loss and the franking account.
0
0.5
1
1.5
Question 4 – Business Structuring 15 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant client issues, legislation and case law.
0
0.5
1
1.5
2
Application
Demonstrated level of understanding of the relevant entity issues, legal concepts and practical business aspects in the application to the facts and design of structures presented.
1
2
3
4
5
6
Format and Expression
Adherence to the correct conventions of a business letter of advice and overall presentation of the letter
Overall clarity of expression, use of grammar and appropriateness of the language and terminology for a client letter of advice.
0
1
2
2.5
3
4
Conclusions
The student has drawn appropriate and valid conclusions and recommendations for the client.
0
1
1.5
2
2.5
3
LAW3131 Revenue Law and Practice II
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Question 5 – Personal Services Business 7 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law relevant to the facts.
0
0
0.5
0
0
1
Application
Demonstrated level of understanding of the personal services income rules in the application to the facts.
0
1
2
2.5
3
4
Conclusions
The student has drawn appropriate and valid conclusions and advised of relevant further information required.
0
0
.5
1
1.5
2
TOTAL (out of 50)
Legend;
HD – the student has shown a very high level of demonstrated ability in relation to the stated criteria by covering all valid points in a clear and succinct manner. The student may have also demonstrated an ability to think beyond the facts and recognise the broader implications of the facts, missing facts or alternate arguments.
A – The student has show a high level of demonstrated ability in relation to the stated criteria by either covering all valid points or by covering the majority of valid points in a clear and succinct manner. The student may have very briefly or occasionally shown ability at the HD level.
B – The student has show a good level of demonstrated ability in relation to the stated criteria by covering most of the valid points. The student may have made some minor incorrect statements or missed some minor points.
C – The student has show a satisfactory level of demonstrated ability in relation to the stated criteria by covering the main valid points. The student may have made a number of minor incorrect statements but did make incorrect statements in relation to major points.
F – The student has not shown a satisfactory level of demonstrated ability in relation to the stated criteria by missing some main points or by making incorrect statements in relation to major points.
N/A – The student has not addressed or attempted to address this criterion.