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HI3042 Taxation Law

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Questions 

1. Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997.

  • The cost of moving machinery to a new site
  • The cost of revaluing assets to effect insurance cover
  • Legal Expenses incurred by a company opposing a petition for winding up
  • Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyancing, discharge of a mortgage, and general legal advice relating to a client’s business operations. (The Solicitor account does not separate the costs for various matters.)

2. Big Bank Ltd operates nationally with more than 50 branches, a 10-storey head office and numerous call centres. It is registered for GST purposes. Big Bank has for many years provided loans and deposit facilities to customers in Australia. Last year it launched a new product, Big Bank home and contents insurance policies. It was a significant step for Big Bank and required it to change some of its computerised accounting systems due to the fact that GST needed to be charged on the new product.

Big Bank budgeted to spend $1,650,000 (including GST) on advertising campaigns last year. Of that sum, $550,000 was allocated to a television advertising campaign specifically promoting Big Bank home and contents insurance policies. The other $1,100,000 was allocated to a general advertising campaign, including television, radio and print media advertisements promoting Big Bank to the public as the bank that is “Here for You”.

When Big Bank Ltd launched Big Bank home and contents insurance policies, it forecast that its home and contents insurance business would constitute 2% of its entire enterprise. Big Bank has been proved correct in its forecasts. The other 98% of its enterprise is made up of its traditional loans and deposit facilities businesses.

Last month, the advertising consultants issued their tax invoice for $1,650,000.

Discuss Big Bank's ability to claim input tax credits with respect to its advertising expenditure of $1,650,000.

3. The following are the current year details of Angelo’s income, expenses and the foreign tax he paid. All of Angelo’s foreign income amounts have been converted to Australian dollars.

Gross income

$

Employment income from Australia

44,000

Employment income from United States

12,000

Employment income from United Kingdom

8,000

Rental income from property in United Kingdom

2,000

Dividend income from United Kingdom

1,200

Interest income from United Kingdom

800

Total gross income

68,000

 

Expenses

$

Medical expenses

5,000

Expenses incurred in deriving employment income from Australia

4,000

Expenses incurred in deriving employment income from United States

900

Expenses incurred in deriving rental income from United Kingdom

500

Gift to a deductible gift recipient

400

Interest (debt deductions) incurred in deriving dividend income

140

Expenses (debt deductions) incurred in deriving interest income

60

Total expenses

11,000

 

Foreign tax paid

$

Employment income from United States

3,600

Dividend income from United Kingdom

120

Interest income from United Kingdom

80

Rental income from United Kingdom

600

Total foreign tax paid

4,400

 
Determine Angelo’s foreign tax offset.
 
4.  Johnny and Leon are adult partners in a business selling sporting goods.
 
The partnership records, excluding GST, for the current income year disclose the following:
 

Receipts ($):

 

400,000

Sales of sporting goods (see Note 3)

10,000

Interest on bank deposits

21,000

Dividend franked to 60% received from an Australian resident company

10,000

Bad debts recovered

50,000

Exempt income

30,000

Capital gain from the disposal of shares acquired in 2009 and sold in June this income year (see Note 4)

Payments ($):

 

10,000

Salary to Johnny

15,000

Salary to Leon

16,000

Fringe benefits tax

2,000

Interest on capital provided by Johnny

4,000

Interest on loan made by Johnny to the partnership

3,000

Johnny's travelling expenses from home to work and return (see Note 5)

2,000

Legal fees for the renewal of lease of the office building

1,200

Legal expenses for preparation of a partnership agreement

700

Legal expenses for preparation of new lease of business premises

500

Debt collection expenses paid to a solicitor

500

Council rates on business premises

25,000

Staff salaries (see Note 6)

30,000

Purchase of sporting goods supplies

20,000

Rent on retail shop

30,000

Provision for doubtful debts (see Note 10)

10,000

Business lunches (see Note 11)

 

Notes

1.

Partnership profits and losses are shared between Johnny and Leon on an equal basis.

2.

The partnership is registered as a Small Business Entity (SBE).

3.

On 1 January this income year the partners discovered that an employee had stolen $3,000 cash in respect of money received from sales to customers.

4.

Johnny and Leon made a capital loss of $15,000 from the disposal of shares acquired in 2006 and sold in 2011.

5.

Johnny often takes work home as he finds it convenient to plan the next day's work in his home study.

6.

Staff salaries include $10,000 paid to Johnny's son Johnny Jr for washing the partners' cars. The Commissioner considers $5,000 to be a reasonable commercial rate for washing the cars.

7.

Stock at beginning of the year was: $20,000.

8.

Stock at end of the year was: Cost $16,000

 

(a)

Market selling value $18,000

 

(b)

Replacement $17,000

9.

Johnny and Leon did not make an election under s 328-285 of ITAA97.

10.

Johnny and Leon are owed $30,000 by a debtor who is bankrupt. They believe it is very unlikely that they will recover any money from the debtor, and do not take any action to recover the money.

11.

Johnny and Leon spent $10,000 on business lunches with overseas buyers at expensive restaurants.

12.

In the last income year, Johnny and Leon made a net partnership loss of $40,000.

13.

Johnny and Leon wish to minimise their tax liabilities for the income year.

 
Calculate the net income for the partnership for the income year.
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