ACC311 : Taxation Law and Practice - Case Study Report Assessment Answer

November 03, 2018
Author : Sara Lanning

Solution Code: 1DFC

Question: Taxation Law and Practice

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Taxation Law and Practice

Question 1 (25 marks):

Dan Brown, aged 35, is a single father with a 2 year old son – Ryan – of whom he has shared care. Ryan had $100 assessable income for the current tax year.

Dan is an eligible beneficiary of the Fibonacci Family Discretionary Trust.  The trustees decided to distribute a cash amount of $15,000 to Dan for the current tax year.

Dan also receives $5,000 fully franked dividends.  Dan has a $36,000 HELP debt.

Dan received $98,000 (gross income) from employment at ABC Ptv Ltd for the period 1 July 2015 to 30 June 2016.  The correct amount of PAYG has been withheld.

Dan did not receive a Parenting Payment from Centrelink.

Dan reports interest income of $675.

Dan advises of investment expenses of $300.

Dan receives rental income of $20,800 from an investment property.  The associated expenses are:

  • Mortgage repayments: $15,000
  • Repairs: $2,000
  • Rates: $2,000
  • Insurance: $200

Dansold a parcel of 100 Telstra shares on 1 January 2015 for $1,500. He had purchased these shares on 1 January 2005 for $500. His brokerage costs of buying and selling were $100 in total.

Dan made donations (for which he presents tax invoices and receipts) to the value of $500.

Dan does wear a uniform to work.

Dan salary sacrificed $2,000 to Superannuation.

Dan pays premiums on an income protection insurance policy equivalent to $900 per year.

Dan does not have Private Health Insurance.

Required:

Task # Task Description Marks
1 Calculate the net tax payable/ refund situation for Dan for the current tax year (include references, calculations & assumptions) 10
2 Complete the current year Income Tax Return for Dan 10
3 Prepare a letter of advice to Dan explaining his current year Income Tax Result. 5

 

Question 2 (15 marks):

Scarlet Robin Pty Ltd is a resident commercial cleaning company registered with the following information:

TFN:       564 879 231

ABN:      76 124 965 308

ACN:      89 556 234 557

The following is the financial information for the year ended 30 June 2016.

GST (where it is applicable) has not been removed from the following amounts.

Depreciation (for tax purposes) was reported to be $5,500 for the current year.

Income:

Sales 445,000
Exempt income 10,000
Dividends (fully franked) 21,260
Interest received 1,800
Compensation from a client who failed in a legal suit to obtain damages from Scarlet Robin Pty td for alleged floor covering damage. 6,000
Net capital gain 7,000

 

Expenses:

 

Advertising (print, net, signage, flyers) 2,900
Bad debts 1,500
Bank Charges 150
Capital expenditure (qualifies for immediate deduction) 2,500
Cost of sales 5,000
Sub-contractor expenses 20,000
Depreciation expenses 4,000
Electricity 500
Entertainment 1,500
Environmental protection (disposal of cleaning chemicals) 600
Fines (speeding and parking tickets) 600
Insurance – commercial building & contents & stock 1,500
Interest expenses within Australia 2,000
Lease expenses within Australia 5,000
Motor Vehicle 3rd Party insurance 550
Motor Vehicle expenses (petrol & maintenance) 6,000
Motor Vehicle Registration 1,000
Rent expenses 20,800
Stationery & Office supplies 400
Tea, coffee, sugar & milk for staff use 200
Telstra (Phones & Internet) 2,350
Wages 60,000

 

Required:

Task # Task Description Marks
1 Calculate the net tax payable/ refund situation for Scarlet Robin Pty Ltd (include references, calculations & assumptions) 10
2 Complete the current year Income Tax Return for Scarlet Robin Pty Ltd 5

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Solution: Taxation law and practice

QUESTION 1

TASK 1: The net tax payable/ refund situation for Dan for the current year

To determine the net tax payable by Dan we must first find his net assessable income for the current year.

The following table presents assessable incomes for Dan for the current year.

Income Amount
Cash received from the Fibonacci Family Discretionary Trust AUD 15,000
Franked dividends received AUD 5,000
Gross income AUD 98,000
Interest income AUD 675
Rental income AUD 20,800
Sale of shares AUD 1,500-500-100
Ryan's assessable income AUD 100
Contribution to super AUD 2000
Total assessable income AUD 142,475

The following table presents deductible expenses for Dan for the current year.

Expense Amount
HELP debt AUD 36,000
Investment expenses AUD 300
Total expenses arising from rental property investment AUD 19,200
Donations AUD 500
Income protection insurance AUD 900
Total deductible expenses AUD 56,900

To determine Dan's net tax payable we will use the formula:

 Net tax payable = flat rate tax + additional tax for every extra AUD 1

 Where the current personal flat rate tax for incomes between AUD 80,0001-180,000                       is AUD 17,547 plus 37c for every AUD 1 above AUD 80,000 ("Current Australian Income Tax rates | Exfin - The Australian Expatriate's Gateway", 2016).

Therefore, Dan's net tax payable = AUD (17,547 + 0.37 x (142,475 – 80,000))

= AUD (17,547 + 0.3 x 62,475)

= AUD (17,547 + 18,742.5)

= AUD 36,289.5

TASK 2: Lodging income tax return for Dan for the current year

TASK 3: Letter of advice to Dan explaining his current year income tax result

Dear Mr. Dan,

RE: ADVICE ON YOUR CURRENT YEAR INCOME TAX RESULT

I am honoured to have this opportunity to give you my advice regarding your tax results.

First, I would like to clarify that these tax estimates are based purely on the information you provided. The ruling on declaring tax liability proposes several penalties if you happen to knowingly omit relevant information that will result to understating your tax liability. I would also like to clarify that this is just my opinion and that the ultimate decisions are upon the ATO (James, Sawyer & Wallschutzky, 2015).

You presented the following relevant facts regarding your income and expenditure: You are a single father and a beneficiary of the Fibonacci Family Discretionary Trust from which you received AUD 15,000 for the current financial year. Apart from your gross salary income of AUD 98,000, you also received rental income of AUD 20,800 with associated expenses totaling to AUD 19,200. You have also sold some shares from which you received an income of AUD 900. You made a contribution of AUD 2,000 to super which will be taxed at 15%.

From the information you provided, your tax liability is 36,289.5. This is the amount of tax you are required to remit to ATO for the current year. However, you can make a tax refund claim for some expenses you incurred to offset your tax liability for the next financial year. According to the information you provided, the expenses for which you can claim refunds include the AUD 500 donation, AUD 19,200 worth of expenses incurred in rental property investment and other investment expenses of AUD 300. Currently, you can reduce your tax liability by reducing your contribution to superannuation. These estimations and opinions have been made based on the current tax rulings. You need to lodge these returns before July 31st to avoid penalties.

If you have further questions regarding this advice do not hesitate to contact me.

QUESTION 2

TASK 1: Net tax payable/ refund situation for Scarlet Robin Pty Ltd

To find the net tax payable for Scarlet Robin Pty we must first find the total assessable income for the current year. The net assessable income will normally include monies received from the sale of goods and services; plus other amounts received outside the course of regular business but related to the business such as compensations, lease payments, dividends and similar transactions. It is important to note that when determining the net assessable income, we use the gross earnings, that is, all amounts received and not just the profit made ("Home page | Australian Taxation Office", 2016).

The following is the assessable income for Scarlet Robin Pty Ltd

Income Amount
Dividends (fully franked) AUD 10,000
Interest received AUD 21,260
Compensation from a client who failed in a legal suit to obtain damages from Scarlet Robin Pty td for alleged floor covering damage. AUD 6,000
Net capital gain AUD 7,000
Total assessable income AUD 44,260

The assessable income is the total income from salary, business and any other profit-oriented transaction that attracts a tax liability as per the GST regulation. The debt owed by Mr. Dan is not included until it is forgiven; then it can be considered as an income which will be liable to tax.

To determine the tax payable by Scarlet Robin Pty Ltd, we will use the following formula:

Tax payable = Assessable income tax x tax rate; where the current tax rate for the income year 2015-16 for companies is 28.5% ("Home page | Australian Taxation Office", 2016).

Therefore the payable tax for Scarlet Robin for the current year = AUD 44,260 x 0.285

= AUD 12,614.1

The following are the tax-deductible expenses for Scarlet Robin Pty Ltd

Assumptions

  • Scarlet Robin has all the receipts, where applicable, that can be presented as proof of expenses incurred
  • Scarlet Robin has kept proper diary entries for small expenses not exceeding AUD 200; and all other expenses for which evidence cannot be obtained (Productivity Commission & Productivity Commission, 2015)

Expense Amount
Advertising (print, net, signage, flyers) AUD 2,900
Bad debts AUD 1,500
Bank Charges AUD 150
Capital expenditure (qualifies for immediate deduction) AUD 2,500
Cost of sales AUD 5,000
Subcontractor expenses AUD 20,000
Depreciation expenses AUD 4,000
Electricity AUD 500
Entertainment AUD 1,500
Environmental protection (disposal of cleaning chemicals) AUD 600
Fines (speeding and parking tickets) AUD 600
Insurance – commercial building & contents & stock AUD 1,500
Interest expenses within Australia AUD 2,000
Lease expenses within Australia AUD 5,000
Motor Vehicle 3rd Party insurance AUD 550
Motor Vehicle expenses (petrol & maintenance) AUD 6,000
Motor Vehicle Registration AUD 1,000
Rent expenses AUD 20,800
Stationery & Office supplies AUD 400
Tea, coffee, sugar & milk for staff use AUD 200
Telstra (Phones & Internet) AUD 2,350
Wages AUD 60,000
Total deductible expenses AUD 139,050

These are the expenses upon which tax refunds can be claimed. However, it is important to note that the refund will come into effect in the following tax year and can be used to offset the tax liability for that year.

TASK 2: Completed current year income tax return for Scarlet Robin Pty Ltd

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