Theodore is a sole trader, who runs a primary production business on a property in Central Queensland. He has run this business since 2000.
Theodore presented the following information to you, his tax accountant for the year ended 30 June 2021.
Receipts for the year: $
- Livestock trading (from livestock trading account) to be calculated
- Bank interest $13,000
- at the start of the year, there were 30,000 cattle at a cost of $18 per beast.
- Proceeds from sale of 10,000 cattle at local sale yards for $32 per beast
- during the year Theodore purchased a further 800 cattle at $15 per head from a neighbouring farm
- there was a natural increase of 250 head and 36 deaths
Expenses for the year:
- hay bought to feed cattle $3,000
- Purchase of shed to store hay.
Shed was purchased on the 14th of September 2020 $50,000
- The farm equipment is 100% used for the cattle business
- Theodore elects to value livestock at cost for the year of income
Based on the information supplied above, calculate Theodore’s taxable income for the year 2021 income tax year. As part of this calculation, you should prepare a livestock trading account. You must show all calculations, and, where appropriate, include references to relevant legislation, case law, and ATO guidance materials.
Theodore, who is aged over 55, is considering retirement. As he has no children, he is considering selling all the major assets of the farming business and the land. The net value of these CGT assets is less than $3 million.
Theodore wishes to minimise any CGT consequences resulting from the sale of these assets. Briefly discuss which, if any, of the small business CGT concessions applies in this situation. You may assume that Theodore’s business satisfies the conditions of being a “small business entity”.
Theodore’s wife, Helen, is a marriage celebrant. Following Theodore’s retirement from the farming business, the couple plan to incorporate three companies through which they intend to run a wedding business. Helen will run the business, with Theodore only helping from time to time. They propose to incorporate:
- Weddings on the Farm Holdings Pty Ltd, which will own all the assets (the couple plan on buying a much smaller rural block of land on which to hold “country style” weddings), including intellectual property and so on.
- Weddings on the Farm Pty Ltd will be enter into contracts with employees and clients; and
- Weddings on the Farm Catering Pty Ltd will enter catering contracts with local restaurants.
Weddings on the Farm Pty Ltd and Weddings on the Farm Catering Pty Ltd will be wholly owned subsidiaries of Weddings on the Farm Holdings Pty Ltd.
- Discuss, with reference to relevant legislation, whether the companies are eligible to consolidate for income tax purposes. Is this something you would recommend to Helen and Theodore? In your answer, you should consider the implications, costs and benefits of consolidation. (5 marks)
- Discuss, with reference to relevant legislation, whether the companies are eligible to group for GST purposes. Again, is this something you would recommend to Helen and Theodore? In your answer, you should consider the implications, costs and benefits of grouping. (5 marks)
Theodore and Helen are also shareholders of Waterworks Pty Ltd. On 1 December 2020, Waterworks Pty Ltd made its first frankable distribution to the shareholders for the 2021 income tax year. This amounted to $200,000. The company passed on a $60,000 franking credit to its shareholders for the distribution. Waterworks is not a base rate entity.
- Calculate the maximum franking credit that Waterworks can attach to the distribution
- Calculate the benchmark franking percentage for the 2021 income tax year