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Tax Planning Advice for Married Couple and Retirees

Case 1 – Married young couple

PART A: CASE 1 – Married young couple
Dan and Judith Murphy are an Australian married couple who live in Gold Coast, Queensland with their 3 children and Dan’s father.
Dan and Judith plan to purchase some assets and wonder which way is best to optimise their tax obligations on various investments. They have visited your office to seek advice to optimise their tax obligation in relation to the following investment situation.

1) Regarding Share Investment (17 Marks)
Dan and Judith jointly purchased shares in BHP Ltd on the 20th of June 2016 at a cost of $110,000. 
The shares have a market value on the 1st of June 2019 of $120,000. The shares have returned fully franked dividends of $28,000 each year over the past 3 years.
When Dan and Judith purchased the shares, they were both employed full-time. Judith now works part-time and is occupied with caring for the child and father in law.
Dan is an engineer who earns $150,000 per annum (net of all allowable deductions) from his sole trading work and Judith is a part time teacher, earning $10,000 per annum (net of all allowable deductions) from her teaching job.
They are considering selling the shares and re-acquiring them in Judith’s name only.

Assuming the share price is stable in June at a market value of $120,000 and with an increase to $121,000 in July, which of the following options would you recommend for them to minimise their tax obligations? Justify your answers.
a) Not to sell shares at all
b) Sell the shares on the 30th of June 2019 and re-acquire them on the 30 th of June 2019
c) Sell the shares on the 1st of July 2019 and re-acquire them on the 1 st of July 2019.

Determine which one of the above options would minimise total net tax payable for both options above for the tax year ended the 30th of June 2019 and 2020 (after medicare levy/surcharge and eligible tax offsets)? Calculate how much tax would be saved. They are not covered by private health insurance.

2) Regarding Rental property (15 Marks)
Dan wishes to purchase an apartment from which he can collect rent before making profit on the sale of the property in three years’ time. He intends to buy the property in July 2019 and sell it in July 2022. He has determined that he can afford to purchase a three-bedroom apartment costing $480,000 and has identified two suitable alternatives as follows;
Address of property                                                  1 Single St, Brisbane   32 Pam Ave, Brisbane
Purchase price (including stamp duty & legal costs) $580,000                     $580,000
Construction date                                                      built in 1971                built in 2001
Construction cost                                                      $47,000                        $230,000
Depreciable assets (fillings)                                       $7,000                          $29,000

Regarding Share Investment

Remaining effective life (use Prime cost) 4 years 10 years
Annual maintenance fees                                         $4,500                            $4,500
Annual council & water rates                                   $3,000                            $3,000
Annual interest on $400,000 mortgage                   $24,000                           $24,000
Annual rental income                                               $31,000                           $31,000
Expected selling price in July 2021                           $700,000                         $700,000
In each case, the values of the fillings and construction costs have been verified by certified valuer.

For each property advise Dan on following:
a) Provide an estimate of annual net rental income or loss
b) Provide an estimate of the net capital gain on sale in July 2022
c) Which property will minimise Dan’s total taxable income from the investment?

3) Regarding Business structure (18 Marks)
Dan Murphy is considering a change of his business structure from the sole trader to another structure commencing on the 1st of July 2019 (starting from a new financial year).
He has provided you with the following financial and other family details. Dan is earning $150,000 (net of deductions) per annum from his engineering business.
Judith earns $10,000 (net of deductions) from her teaching job.
They have the following family members living with them.
Robert Murphy: Dan’s father who is 70 years old. He has retired from his job as chief executive officer of Suncorp Ltd on the 15th of July 2019 (gross income was $2,000) and has not been earning any income since retirement. Judith takes care of him as his health has deteriorated recently.
 Jean Murphy: 19-year-old son. He is a full time university student, currently no income.
 Xavier Murphy: 15-year-old son, full time high school student
 Megan Murphy: 2-year-old daughter.

Dan is considering the following options.
Remaining Sole trader stucture
Partnership with Judith in equal profit sharing ratio
Australian registered private company
Discretionary Family Trust

Please advise which business structure would you recommend in order to minimise tax on the client’s income.
Comment on the tax implications of each business option considered. 

PART B: CASE 2 – Taxpayers at retirement age
Inder Muller, aged 58, recently retired from his employment as chief accountant of Moon Light Pty Ltd, after 17 years and 4 months of service. Inder’s wife Belinda, aged 59, is currently running a small newsagency. Inder and Belinda visited you to seek an advice on various retirement planning options specified below. Inder and Belinda both are covered by private health insurance.

1) Regarding Inder’s Termination payment (16 Marks) 
Inder received the following payments from his employer Gross salary from employer from the 1st of July 2018 to 30th of May 2019 $57,000
Genuine redundancy payment received on the 30th of May 2019 $73,000
Unused annual leave $26,000
Unused long service leave $12,800
Advise Inder how much tax is payable on the above termination payments. Assume no deductions to claim.

You must clearly identify any ETP tax offset.

2) Regarding Inder’s Termination payment & Superannuation (16 Marks)
Inder currently has superannuation valued at $582,000 with the Suncorp (complying Super fund).
The total amount includes the following elements;
Tax free component               $25,000
Element untaxed in the fund $207,000
Element taxed in the fund     $350,000

Advise him what would be the tax consequences of withdrawing his super prior to his retirement age, including all options available to him.

3) Regarding Belinda’s Business (18 Marks)
Belinda has started the newsagency business 3 months ago. She would like to get an advice on the tax benefits available for her new business.
The expected business turnover for the financial year ending 30th of June 2019 is $500,000 including GST.
She has purchased the following assets for the business.
Photocopy machine for $5,500 including GST on the 15th of Feb 2019 and was ready to use on the 1st of March 2019.
Motor vehicle purchased on the 1st May 2019 for $68,800 including GST, to be used solely for business purposes.
She wishes to opt for the Small Business Entity (SBE) option but Inder is unsure whether this is the good choice for them and what benefits will become available when choosing the SBE.

Advise Belinda and Inder the following.
Eligibility for SBE;
Concessions for trading stock;
Asset pools; and
Capital gains tax concession. 

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