Question:
For the 2017 tax year Maria completes the following transactions: i. Sells an investment real estate property for $950,000 and incurred the following expenses: a. Legal fees of$4,500 b. Real Estate sales commission of $45,000 c. General advertising and selling costs of $2,500 ii. The above property was originally acquired in 2010 for $350,000 and at the time Maria incurred the followingexpenses a. Legal fee $1,500 b. State Government stamp duty of $9,500 iii. The property was rented for the duration of ownership except for a period of 18 month in which time Maria completed a renovation on the property. The costs of the renovation were $250,000. During this same period the property incurred the following expenses:
a. Land tax of $3,500 b. Water and council rates of $3,500
c. Bank interest on loan of $19,500 d. Maria’s Tax Accountant advised that as the property had not been rented during this period the above expenses could not be claimed as deductions in Maria’s tax return.
iv. Maria completed two other transaction during the 2017 tax year. Maria sold another investment property that had been a bad investment decision. Maria had failed to complete a building inspection and subsequently found the property infected with termites.
Maria sold the property having owned it for less than 12 months for a capital loss of $180,000. A friend of Maria’s informed him of a stock on the share market that had great potential. Subsequently Maria bought and sold shares in the stock over a six month period and made a capital gain of $255,000. Based on the above facts, what capital gains tax events have occurred? Calculate the net capital gain or loss? Set out your answer outlining the steps involved and classify the cost base elements. Make reference to the tax legislation to support all parts of your answer. (Note: for the purposes of this question ignore any effect that deductions for the capital cost of the rental property under Div 43 might have on the costbase.)
[Total for question: 10 marks] COPYRIGHT RESERVED Question 2 DO ALL PARTS All answers are to be supported by reference to legislation and /or case law where relevant. Maria is in Partnership with a professional colleague and they run a successful business. For the 2017 tax year the partnership had a profit of $325,000. The Partnership Agreement specifies that the Maria and his colleague have equal interest in the Partnership. The Partnership Agreement also reflects a clause allowing Maria to pay himself a wage of $150,000 for his daily management of the business in addition to her half share of profits. Note that the above profit of $325,000 has had Maria’s wage of $150,000 deducted from it.
a. Calculate the net income of the partnership with reference to tax legislation; 1 marks b. Calculate the net income allocation to each partner with reference to tax legislation and Taxation Rulings (where relevant). 2 marks Maria also runs a successful business with some friends. At the time of commencing the business, their tax accountant advised them to run the business through a trust structure. For the 2017 tax year the Distribution Minutes of the Trust reflected a beneficial distribution to Maria of $170,000 of the trust’s law income. Maria is a healthy 28 year old entrepreneur with no disabilities and resident of Australia. c. Discuss whether you believe Maria has any present entitlement to any of the trust law income citing tax legislation and case law (where relevant) 2 marks d. Provide the correct classification of the above distribution under tax law income and support your answer with reference to tax legislation.
Advise who would be taxed and at what rate. 2 marks As a result of Maria’s entrepreneurial activities he was able to invest in a private company some years ago. For the 2017 tax year Maria receives a $135,000 dividend from the company. The directors of the company declared the dividend be partially franked at a benchmark franking percentage of 65%. Maria’s marginal tax rate is 45%. e. Advise what section this dividend is taxed under 0.5 marks f. Calculate Maria’s taxable income and resulting tax position (tax refund or tax payable). Include relevant tax legislation to support your answer. Ignore theMedicare levy. 2.5 marks
Answer:
The CGT event as per section 100-20 of the ITAA 97 are:
- Sales of shares;
- Sales of investment property; and
- Sales of real estate property
The cost related to disposal and acquisition of assets are included within the cost base as per section 110-25 (3) of the ITAA97.
The cost related renovation should be added back with the cost of property as per section 110-25(4) of ITAA 97.
The calculation of capital gain is performed in accordance with the section 100-45 of the ITAA 97.
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Statement showing calculation of Capital gain
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Particulars
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Amount
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Amount
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Real estate property
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$950,000.00
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legal fees
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$4,500.00
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real estate agent commission
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$45,000.00
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Selling and distribution
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$2,500.00
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Net capital proceeds
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$898,000.00
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Cost of the property
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$350,000.00
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legal fees
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$1,500.00
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Stamp duty
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$9,500.00
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cost of renovation
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$250,000.00
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Cost base
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$611,000.00
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Gross capital gain
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$287,000.00
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Less:
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Discount @ 50%
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143500.00
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Net capital gain
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$143,500.00
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Loss on sales of investment property
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$180,000.00
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Capital gain on sales of shares
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$225,000.00
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Total Net capital gain
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$188,500.00
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Answer to Question 2 a)
The salary paid to the partner are not considered as actual expenses and are not deducted in determining the net income of the partnership as per the taxation Ruling 2005/7 under para 7.
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Calculation of Net Income
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Particular
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Amount
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Profit of partnership
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$325,000.00
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Wages of partner
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$150,000.00
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Net Income
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$475,000.00
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The partner’s income include profit from partnership based up on their agreed proportion as per section 92(1) of the income tax assessment act 1936.
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Net income allocation to each partner
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Particulars
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Amount
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Net Income
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$475,000.00
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share proportion
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50%
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Net income allocated to partner
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$237,500.00
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The beneficiaries are taxable on the income distributed by the as per section 97-1 of the Income Tax Assessment Act 1997. The trust income is included in the assessable income and tax is paid based on the normal tax rate that are applicable.
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Calculation of dividend
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Particulars
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Amount
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Dividend received
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$135,000.00
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Gross dividend
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$190,812.72
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Section of dividend taxed
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$55,812.72
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Calculation of Tax payable
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Particular
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Amount
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Net Income from partnership
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$237,500.00
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Dividend Income
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$135,000.00
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Total Assessable income
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$372,500.00
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Tax payable
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$140,857.00
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Franking credit
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$55,812.72
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Net Tax payable
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$85,044.28
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