The final exam comprises three (3) questions.
PLEASE NOTE THIS IS A SAMPLE ONLY
Some aspects of Taxation 1 have changed since this sample assessment was created. Therefore you should not rely on this sample alone in preparing for the final assessment. In general it is never recommended to rely solely on a sample exam for your revision.
Question 1
ABC Pty Ltd carries on a high quality retail perfume business in the duty free section of Melbourne Airport. It is the sole agent of seven international perfume products which it sells in its airport shop. In January 20XX, one of its seven perfume sole agencies that it conducted at its airport outlet, generating 30% – 45% of its total income, was cancelled by the Christian Dior Perfume Company. The company received $800,000 from the Christian Dior Perfume Company as a consequence of the loss of the contract.
REQUIRED
Advise the directors of ABC Pty Ltd as to tax consequences of receiving the compensation of $800,000. Students should refer to any appropriate legislation and case law.
Question 2
John Brown is a self-employed architect. He purchased a house in the outer suburbs of Melbourne in July 2019. He purchased the property because it had a room which he could modify and use to conduct his architectural business. The room made up 15% of the house area. He borrowed a large sum of money from the bank in order to help finance the purchase. He pays interest on this loan to the bank. He specifically purchased the house because the room he uses for his architectural business faces the street. After purchasing the house, he had a builder install a new door, which enabled clients to enter the room without going through the main living area. Unfortunately, the local council fined him $1,000 in January 2020 for not obtaining a building permit before he installed the door. After moving into the house he replaced the old carpet in the room with better quality carpets. He also furnished the room with an antique desk, which he uses for his work. He claims that the room is the sole base for his architectural business. The only income-earning activity that he performs outside of the room is when he occasionally travels to client’s premises and delivers design drawings. He uses the rest of the house for private purposes. In May 2020 he sold the house for almost twice the money he paid for the property. At the same time he also sold the antique desk for half the price he paid for it.
REQUIRED
Advise John on the tax consequences of the above facts, referring to appropriate legislation and case law (there is no need to make any calculations).
Question 3
Important Notice: Unfortunately this question format is not designed for the online assessment environment and you will not be expected to answer a question such a large/extensive question as this on the final assessment this semester. It has not been updated with current dates etc. Please ensure you refer to the assessment instruction page and revision module to ensure you understand the expectations of the final assessment for this semester.
There may be comparable questions requiring you to undertake a similar task of determining partnership net income, partner distributions, and individual taxpayer calculations, etc., however they will not be of the same length/depth to this.
For partnership questions, we recommend reviewing the Partnership topic in class activities and Knowledge check questions for relevant revision opportunities.
Please also disregard the dependent rebate (not covered this semester) and the unincorporated small business tax offset (not covered for partnerships this semester)
Tom and Mary are Australian residents in partnership as retailers of computer parts. The partnership records for the financial year ending 30 June 2017 disclose:
| Receipts: | |
| $200,000 | Gross receipts from trading |
| 20,000 | Bad debts recovered |
| 20,000 | Net Exempt Income |
| 10,000 | Not Assessable Not Exempt Income |
| 40,000 | Net capital gain(after discounting) from the sale of shares acquired in 2008 |
| 10,000 | Dividend 50% franked (The company paying the Dividend pays tax at 30%) |
| Payments: | |
| $100,000 | Purchases of trading stock |
| 50,000 | Partners’ salary – Mary |
| 20,000 | Partner’s salary – Tom |
| 2,000 | Interest on cash advance made to the partnership by Peter who is not a partner |
| 10,000 | Travelling expenses in respect of Tom travelling from home to work |
| 50,000 | Salaries and rent paid |
| 1,000 | Legal expenses in recovering bad debts |
| 5,000 | Borrowing expenses on a loan used to acquire an income earning building. The loan is for 6 years and began on 1 July 2015 |
| 3,000 | Painting business premises in June 2017 |
Other details:
- Tom and Mary share the residual profits and losses equally.
- Trading stock on hand 1 July 2016 $60,000
- Trading stock on hand 30 June 2017 using the LIFO method: $50,000(at market selling value), $45,000(at replacement cost), $40,000 (at cost price). Trading stock on hand 30 June 2017 using the FIFO method: $100,000(at market selling value), $80,000(at replacement cost), $70,000 (at cost price). The partners wish to minimise their tax liability for the year ended 30 June 2017.
- The partners made a partnership net trading loss of $15,000 in the income year ending 30 June 2016
- On 10 January 2017 Tom was robbed at gunpoint of the partners’ trading receipts of $20,000 while on the way to the bank.
- During the 2016/2017 income year Tom received a net salary of $20,000 as a part-time lecturer at Monash University, after PAYG of $5,000 tax was deducted from his salary by the university.
- Frank and his brother both contribute $10,000 each to the maintenance of their father. Their father is a permanent resident of Australia and received adjusted taxable income of $4,282 for the year ending 30 June 2017. Their father is an invalid and receives a disability support pension.
- Tom has an unabsorbed $5,000 capital loss from the sale of shares from the 2015/2016 income year. He also has an unabsorbed $2,000 capital loss from the sale of a painting from the 2014/2015 income year.
- Tom has a carry forward Division 36 loss from a previous income year of $15,000
- During the tax year Tom made a gift of $1,000 to his the Collingwood Football Club and a gift of $1,000 to the Red Cross.
- Tom is not a member of a Private Health Fund and does not have private hospital insurance.
- All figures are exclusive of GST. GST can be ignored for this question.
REQUIRED
Calculate Tom’s Assessable Income from the partnership and then calculate his taxable income and Net Tax Payable for the income year ending 30 June 2017. Figures can be rounded to the nearest dollar.
You should briefly explain your treatment of items in this question:
ItemExplanation
$4,000 Conference expense Deductible – s. 8-1, revenue expense incurred in the production of assessable income. – Finn v FCT
Question 4
Heidi had been a radio host on “Mornings with Heidi” for a Melbourne radio station. Heidi was becoming increasingly popular among the listeners and began to catch the attention of competing stations. In September of the current tax year, Heidi was offered a lump sum of $150,000 to encourage her to join a particular radio station on their afternoon shift, “Drive”. Heidi accepted the offer. She received the $150,000 and began working for the station in January of the current tax year. As well as the $150,000, Heidi is paid a $140,000 annual salary, is provided with a car, mobile phone and an annual travel allowance of $15,000.
REQUIRED:
Discuss the tax implications of the amounts provided to Heidi. Your answer should include references to appropriate legislation, case law and tax rulings. Calculations are not required.
Question 5
Julian operates an art gallery in Walhalla. During the current tax year, Julian travelled to Melbourne for two days to attend his friend’s birthday party and meet his tax agent (Tracey) to discuss the compliance work for the business. He stays one night at a hotel. While he was meeting with Tracey, Tracey asked Julian about some expenses listed in the gallery’s accounts during the year. Julian explained that the council advised him that he was required to repair faulty wiring, reposition existing electrical outlets and install new power points, mains and switchboards after a recent inspection. Tracey requested Julian provide the receipts and documentation relating to the expenditure. Tracey also queried Julian about a sum of money sitting in the suspense account. Julian explained that it related to deposits paid on three of the paintings by a customer. They have agreed to make weekly payments over eight weeks and collect the paintings at the time of the final payment.
REQUIRED:
Advise Julian of the tax implications of his situation. Your answer should include references to appropriate legislation, case law and tax rulings. Disregard GST.
Question 6
Andre and Peter own pre-CGT land that they have used for deer farming. Over the past decade, the council has made a decision to rezone the land in and around the area to facilitate further plans for urban development in the area. Andre and Peter’s land have been rezoned from rural to light industrial.
Andre and Peter had the property valued and the valuer estimated the land to have a market value of approximately $1 million dollars. Andre and Peter intend to subdivide and sell the land. In order to facilitate the subdivision, Andre and Peter engaged with a surveyor for costing of the subdivision. Related documentation outlines:
25 Lots, meeting minimum dimensions according to the industrial zoning
Land allocated for road widening and drainage
Waste water, sewer connections
Utility connections
Green spaces to comply with environmental protections
Andre and Peter arranged for the requisite permits from council as well as payment of application and other fees. Andre and Peter also arranged for the environmental, bushfire and indigenous assessment to be carried out. To fund these activities, Andre and Peter obtained a loan.
Prior to these activities, Andre and Peter had not been involved in any subdivision or property development activities and do not intend to do so in future. Andre and Peter have also engaged a real-estate agent to undertake the sale of the lots. The agent will receive commission based on the sale price obtained for the land. Andre and Peter will either sell the lots individually or to a single purchaser if the opportunity presents itself.
REQUIRED:
Advise Andre and Peter of the tax consequences in regard to the events outlined, by answering the following three questions:
Whether the proceeds from the above subdivision activities will be assessable as: ordinary income under section 6-5 ITAA 1997; or, statutory income pursuant to the capital gains tax (CGT) provisions in ITAA 1997. (9 Marks)
In respect of your response to (1), briefly indicate the difference in treatment that would arise. (3 Marks)
In respect of your response to (1) and (2), briefly reflect on the impact of Andre and Peter being in a partnership. (4 Marks)
Your answer should include references to appropriate legislation, case law and tax rulings. Disregard GST and disregard section 15-15 ITAA 1997.
(9 + 3 + 4 = 16 marks)
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