Naalti who is 40 years of age carries on an computer manufacturer and repair business in Melbourne. Naalti brings her income to account on a cash basis.
Naalti has come to you for advice regarding the following issues and wants you to prepare her tax return for the year ended 30 June 2016.
The following additional information set out in Annexure A relate to Naalti’s financial position for the year ended 30 June 2016.
Annexure A
ISSUE 1 (2 marks)
The following happened during the 2015-16 financial year
o Cash received from clients in 2015-16 amounted to $420,000
o Trading stock on hand at 1 July 2015 was $80,000 valued at ‘cost’
o Trading stock on hand at 30 June 2016 was $100,000 valued at ‘cost’
o On 31 May 2016 Naalti received $5,000 advance fees for services not yet rendered to a particular client at the end of the 2015-16 financial year
Calculate Naalti’s assessable income, and give your reasons if you consider any amounts should be excluded from assessable income.
ISSUE 2 ( 2 mark)
The following happened during the 2015-16 financial year:
o On 1 April 2016 Naalti received a $28,000 dividend franked to 50% from ANZ Bank Ltd.
o On 1 April 2016 Naalti received a $14,000 fully franked dividend from Tabcorp
Calculate the total amount of assessable income Naalti derived from her investment activities during the 2014-15 financial year.
ISSUE 3 (2 marks)
On 1 July 2015 Naalti purchased a factory in outer Melbourne. On 3 July 2015 she paid $30,000 to repair a large crack in the wall that’s been there for the past 6 years.
Advise Naalti what deductions (if any) she can claim in respect of the $30,000 repairs.
ISSUE 4 ( 1 mark)
On 15 March 2016 Naalti was advised that an overseas rival company which had developed a more efficient computer monitor was planning to seek a license to set up business in Melbourne and sell their computer monitors in Australia. As this could potentially reduce Naalti’s profits, she incurred $60,000 in legal fees in opposing the granting of the license to the rival company.
Advise Naalti what deductions (if any) she can claim in respect of the $60,000 legal fees.
ISSUE 5 ( 4 marks)
During the financial year Naalti incurred the following specific expenses. She is not sure whether they are a tax deductible expense and the amount she can claim.
o On 10 May 2016 Naalti made a $8,000 provision for long service leave in respect of her employees.
o $3,000 parking fines incurred by her staff while delivering computer equipment to customers during business hours.
o $15,000 payment to obtain the resignation of a managing director having proved to be unsatisfactory.
o $6,000 feasibility study on the viability to open a new factory site in Adelaide. The venture did not go ahead.
Advise Naalti whether each of the specific expenses listed above are or are not a tax deductible expense, and the amount she can claim.
ISSUE 6 ( 1 mark)
On 20 December 2015 Naalti received a $1,700 dividend payment from a company in England. 15% withholding tax (amounting to $300) was deducted from this amount. She is not sure whether the dividend is assessable or exempt in Australia and amount that’s assessable.
Advise Naalti of the tax consequences of the $1,700 dividend payment she received from England and the 15% withholding tax (amounting to $300) that was deducted from this amount.
ISSUE 7 ( 1 mark)
On 1 October 2015 Naalti took out a loan over eight years to finance the purchase of a sports car for her personal use and enjoyment. She borrowed $100,000 from the ANZ Bank and was charged interest at the rate of 10% per annum. The cost of establishing the loan was $6,000.
Advise Naalti of the tax consequences of the above transactions.
ISSUE 8 ( 2 marks)
Under a remuneration package that Naalti entered into with one of her employees she agreed to pay her employee:
o $8,000 school fees for her employee’s 16-year old daughter who attends a private school
o A $15,000 cash bonus for finishing a project on time.
Advise Naalti of the tax consequences of the above transactions.
ISSUE 9 ( 1 mark)
On 15 August 2015 Naalti travelled to Perth to attend an architecture Conference, as she wanted to explore the possibility of opening up a new income earning activity in the field of Architecture. When she returned she enrolled for the Master of Architecture degree at Computer manufacturer and repair business MIT. Naalti incurred $500 airfare and $600 accommodation.
Advise Naalti of the tax consequences of the above transactions.
ISSUE 10 ( 4 marks)
Briefly discuss the capital gains tax consequences of each of the following transactions.
A. On 21 April 2016 Naalti sold an investment property for $400,000. She purchased the property on 17 August 2010 and paid $100,000 for it. Calculate the amount of capital gain (if any) her made that’s liable to tax.
B. On 18 May 2016 Naalti sold her gold ring. The sale price was $6,000. She purchased the gold ring on 2 July 2009 for $11,000. Calculate the amount of capital gain or capital loss and discuss the tax consequences of your decision.
C. On 19 July 2015 Naalti sold 1,000 BHP shares for $45,000 that she purchased on21 March 1985 for $10,000. Calculate the amount of capital gain (if any) she made that’s liable to tax.
D. On 18 April 2016 Naalti sold a very rare and much sought after car to a keen collector for $250,000. She acquired the car on 15 February 2011 for $175,000 and spent $20,000 improving the engine. The purchase and sale costs amounted to $10,000. Calculate the amount of capital gain (if any) she made that’s liable to tax.
E. On 11 May 2016 Naalti sold her party dress that she likes wearing to a close friend. She purchased the dress on 21 March 2012 and paid $2,000 for it. The sale price was $9,800. Calculate the amount of capital gain (if Computer manufacturer and repair business any) she made that’s liable to tax.
F During the year ended 30 June 2016 Naalti made a $10,000 capital gain on sale of a parcel of NAB shares that she had owned for 8 years, and a $30,000 capital gain on sale of a parcel of BHP shares that she had owned for 5 months. Calculate the amount of the capital gain (if any) that’s liable to tax.
G On 15 October 2011 Naalti purchased her main residence consisting of 12 rooms of equal size. Three rooms were used to run her computer business. Naalti sold the property on 18 May 2016 and made a $100,000 capital gain on disposal. Calculate the amount of capital gain (if any) that’s liable to tax.
H. On 13 February 2016 Naalti sold a parcel of shares for $20,000. She purchased the shares on 7 June 2011 and paid $80,000 for them. Calculate the amount of capital gain or capital loss and discuss the tax consequences of your decision.
Required
This assignment may be completed in groups of two to four.
(1) With respect to each numbered issue, advise where appropriate what expenditure Naalti can legally claim or income or capital gain she must include as part of her assessable income. All your answers must be supported with relevant sections of the ITAA (and where appropriate) relevant case law and income tax rulings. Your answers should be based on legislation and tax rates applicable to the 2015-16 financial year.
(2) Your group assignment must not exceed a length of 2000 words and must be typed.
(3) The group assignment must be Computer manufacturer and repair business submitted
Late group assignments will be penalised at the rate of 10% per day, that is, an assignment is marked out of 90% for 1 day late, 80% for 2 days late, etc. and after 5 working days, assignments will attract zero marks
You must
· Provide a progress report of your group assignment in class in week 9
· Submit a substantially completed draft copy of your group assignment for inspection in class in week 10.
(4) Your answer to each identified issue must be clear and concise and in point form. Also all necessary calculations must be provided.
(5) Students can complete their group assignment in groups of two to four.
(6) Groups will do a question and answer session of their Research Assignment to demonstrate their understanding of key issues in the Week 11 class which will be a further assessment task of 10 marks, In total the Research Assignment will constitute 30 marks being 20 marks for Computer manufacturer and repair business the written report and 10 marks for the oral presentation.
Administration Issues
Assignment Submission
The group assignment must be submitted by students on line via their Moodle site for this unit on or before 28 May 2017. The group assignment must have a completed declaration/cover sheet .
Return of Assignments
All group assignments will be marked and returned to students within 7 days of the due date for the submission of assessment by the student.
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Issue 9
According to subdivision 900-B of the Income Tax Assessment Act (ITAA 1997), a business owner or employer may make a claim for domestic travel allowance expenses that was incurred while undertaking business operations such as incidentals, drinks, food and accommodation. These business expenses are normally covered by the allowance. The business expenses should be in accordance with Taxation Ruling TR 2004/6 income tax: substantiation exception for reasonable travel and overtime meal allowance expenses(Burman, 2009). It is important to note that setting the reasonable amount is the prerogative of the payer and the payee. For the business expenses to be claimed it must have been incurred while undertaking business or work-related purposes and be deductible under the income tax law. Also, the amount of the expense claimed must not exceed the amount that was actually spent. Looking at issue 9, Naalti’s business expense incurred was due to business-related purposes and are deductible under the income tax law.
The advice to Naalti is to keep a record for………………………………………………………………………………………………………………………………………………………………………………………………………………………………….
………………………………………………………………………………………………………………………………………………………………………… Computer manufacturer and repair business ……………………………………………………….
References
Burman, E. L. (2009). Taxing Capital Gains in Australia: Assessment and Recommendations. Sydney. AU: Thomson Reuters.
Monk, E. (2016, March 16). Capital Gain Tax: A Guide to Calculate How Much will you Pay. Retrieved from The Telegraph: http://www.telegraph.co.uk/tax/capital-gains/capital-gains-tax-how-much-will-you-pay/
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