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LAWS19034 Taxation Law And Practice

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Case Study

Married couple, Rob and Jane White acquired a 120 hectare farm property in Central Queensland twelve years ago. Their partnership agreement shows that they agree to share their profits and losses in the ratio of Rob 60% and Jane 40% respectively.

Rob and Jane presented their financial details to you, as their tax accountant for the year ended 30 June 2017.

Receipts for the tax year:

  • Livestock trading (from livestock trading account)        to be calculated
  • Proceeds from the sale of 200 cattle                                  $ 163 000
  • Agistment fees received                                                      $   7 800

Livestock Details:

  • On 1 July 2016, there were 312 cattle at a cost of $80 600
  • During the year, Rob and Jane bought a further 70 head of cattle at $275 per head
  • There was a natural increase of 95 head and 41 cattle deaths
  • 5 cattle were slaughtered for rations (from opening stock)

Expenses for the year:

  • Hay bought to feed cattle                                                          $  5 600
  • Repairs and servicing of farm equipment                                  $  1 300
  • Construction of new fencing                                                      $  8 000
  • Salary to Rob                                                                              $ 20  000
  • Salary to Jane                                                                             $ 20 000

Other information:

  • The opening balance of Rob and Jane’s small business depreciation pool is $51 000
  • Their small business pool comprises of farm equipment that Rob and Jane bought in the year ended 30 June 2017
  • The farm equipment is 100% used for the cattle business
  • Their partnership elects to value livestock at cost for the year of income

Rob and Jane want to sell their business in the coming financial year, ending 30 June 2018. They have been approached by a number of interested buyers. Their business broker has advised them that they have a good chance of selling the cattle business together with their farm equipment and trading stock for $5 million. It is envisaged that the profits arising from the sale of the cattle business arises mainly from the goodwill of the business and the 120 hectares of land. It is anticipated that trading stock will be disposed of at market value at the time of sale which will be higher than the cost price of the cattle. It is estimated that the farm equipment could be sold for $40 000. The cattle business obtained a bank loan five years ago which was secured over the 120 hectares of land. The outstanding amount on this business loan is estimated to be $600 000 at the time of sale.

Rob and Jane look forward to retirement as they are both over 55 years old. With the proceeds of the farm, they intend to downsize and buy two houses, one which they will use as an investment property, and the other which they will use as their primary residence. With the remainder of the money, they intend to set up a trust for their two sons – Jacob (22 years old) and Nicholas (14 years old), with Rob acting as trustee.


1. On the basis of the information provided, determine the net partnership income or loss for the year ended 30 June 2017. You must show all calculations and explanations supported from the ITAA (1997). You may either use the reconciliation or tax approach to come up with your net partnership/losses. 
2. Advise Rob and Jane of the capital gains implications of the intended disposal of the farm in the coming year. Also advise them as to the potential capital gains implications of acquiring the two properties. You are notrequired to do any calculations for this question. (Hint: consider the difference in the intended uses of the two properties they wish to purchase. Also consider whether this business may be considered to be a small business enterprise and the tax benefits arising from this.) 
3. Advise Rob and Jane on the tax implications, if any of the trust that is intended to be set up for their two sons. Clearly explain and support your arguments with reference to legislation.
4. Primary producers may opt to use income averaging when managing their tax affairs. Give a brief explanation of what this is and why it was introduced.   
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