Taxation Law & Practice - Tekniks Publicationstekniks.com.au/taxlaw/resources/Resources/1 Solution...

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Taxation Law

& Practice

2013 Edition

James Cooper

John Taggart

Geoff Cliff

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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

http://www.tekniks.com.au/

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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

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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

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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


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


Foreign Income Tax Offset - tax paid 1,300.00 16,600.00


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


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


Foreign Income Tax Offset - tax paid 700.00 4,000.00


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


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


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

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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.

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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

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QUESTION 4.5

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


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.

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QUESTION 5.3

QUESTION 5.4

17

QUESTION 5.5

QUESTION 5.6

18

QUESTION 5.7

QUESTION 5.8

19

QUESTION 5.9

QUESTION 5.10

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

21

QUESTION 5.13

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

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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

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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


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


* 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


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


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


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




* LIFO not permitted

Fern

Assessable Income

Sales 593,900

Increase in Trading Stock 71,300 - 67,200 4,100 598,000

Deductions




Demi

Assessable Income

Sales 728,800

Deductions





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


Gifts 49,300

Other Deductions 582,370 2,074,020


Note - The damaged stock is reflected in the adjustment for decrease in stock held.

QUESTION 7.6


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



* The damaged stock is reflected in the adjustment for increase in stock held.

50

QUESTION 7.7


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



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

$ $


less: Deductions 1,400


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


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

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


* 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

$ $


Less: Deductions

Wages 94,000 + 24,000 + 3,800 - 2,400 119,400

Rent 62,000



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

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


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


Insurance 7,500



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


1,331.12

Medicare Levy 1.5% x 27,548 413.22


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


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



Less: Deductions 300,000

480,000

Adjusted Net Income


Less: Interest on Capital 35,000

Partners Salaries 135,000

Travel Allowances 10,000 180,000

300,000

65

QUESTION 10.4


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


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


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


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



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




390,850


403,850

Marie Claire

Assessable Income


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


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


Decrease in Trading Stock 2,400


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)


(117,590)

Arabica

Assessable Income

Interest on Loan to Partnership 4,000

Lease Payments Received on Shop Fittings 65,000 69,000

Deductions


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


Joffrey Stannis TOTAL


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




8,570

Stannis

Assessable Income


Interest from investments 10,000

Interest from Partnership Loan 1,200


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



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


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


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


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


72

QUESTION 11.4



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 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 -


73

QUESTION 11.5

$ $


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


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


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


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


75

QUESTION 11.8



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 -


-

On behalf of Adam (s98)

Tax on $7,000 < 18,200 -


-

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


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



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.

79

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


Tax on $352,000 105,600.00

Less: Franking Tax Offset 1,500.00


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

80

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-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


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

81

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


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

82

QUESTION 12.14

Date Debit Credit


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.

83

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


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

84

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.

85

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).

87

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.

88

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.

89

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.

90

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.

91

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.

92

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.

93

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


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.

94

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.

95

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






less: Low Income Tax Offset (445.00)



TOTAL NET TAX PAYABLE 94,797.00 (7,203.00)

TOTAL NET TAX PAYABLE FOR FAMILY 87,594.00

96


If Ron and Miranda sell their shares in June 2012:

2011/12 Miranda Ron

$ $

Salary / Wages 150,000 10,000



Net Capital Gain 1/2 x (50% x (120,000 - 110,000) 2,500 2,500







2012/13

Salary / Wages 150,000 10,000

Franked Dividend - 28,000

Franking Credit - 12,000




less: Low Income Tax Offset - (250.00)

less: Franking Tax Offset - (12,000.00)



TOTAL NET PAYABLE FOR FAMILY 87,419.00

97


If Ron and Miranda sell their shares in July 2012:

2011/12 Miranda Ron

$ $

Salary / Wages 150,000 10,000









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




less: Low Income Tax Offset (212.50)

less: Franking Tax Offset - (12,000.00)



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.

http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=10#P222_18906

http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=10#P298_22488

http://www.ato.gov.au/individuals/content/00092180.htm

http://www.ato.gov.au/corporate/content.asp?doc=/content/88713.htm&page=75#P1134_156767




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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


(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).


( f ) 1,000 If Jenny had diarised 4 weeks of toll usage, she could

have applied the otherwise deductible rule.


( 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

$ $


(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 $ $


(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


(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


112

QUESTION 15.23

Tarago $ $


(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



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


(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



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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