Q1.
Joe Wilson, foreman with carpet ltd receive asevere injury while driving a forklift,work compensation 4800 ,reimbursement of shareholder the right to acquire one additional share in the company for each five share currently held.On 15 nov 2010,Alex exercised
medical expenses by carpet ltd 2000,damage for personel injury 10000.Ans-workers compensation,Payments made for workers
compensation are generally fully assessable under ITAA97 s6-5 as the payments replace lost earning during aperiod of
disability.However afixed sum received to compensate for the loss of limb,an eye is not assessable.Reimbursement of medical
expencses-This would not b income under ordinary concepts.However it would appear to be a benefit given by carpet ltd in relation to
the employment of or services rendered by Wilson,As such question arises whether it would be assessable under ITAA97 s15-2,it
would be benefit that,but para(g)of the definition of fringebenefit in FBTAAs136(1),would b a fringe benefit within the meaning of
that act.Accordingly,ITAA97 s15-2 would not apply.While it would appear to be an expenses payment fringe for the purpose
FBTAAs20,it would be an exempt benefit having regard to the provision of s58(1)of that act.Damages for personal injury-Damages
for personel injury would not be asseseeble under the provisions of ITAA97s6-5(for capital ltd the payment would not constitute a
fringe benefit,as itis an exempt benefit under FBTTAs58).The damages would not represent a capital gain fot the purposes of
ITAA97pt3-1,having regard to the provision of s118-37,which exempts from capital gains tax any sum received by way of
compensatation od damaged for any injury suffered by Wilson to his person or in his vocation.Taxation ruling TR 95/35,which
outlines the ATO approach to compensation payment for personal injury.
Q2.During 2010/11 Tomreceived cash payments of 100000 from tv quizshow .also received good worths 8000,he was invited to
another quizshow & received 5000.Ans.The question involves consideration of the issue of whether the amounts r assessable as the
proceeds of a business.If such activities r regarded as a business,they will b assessable under ITAA97 s 6-5.However if such activity
is regarded as ahobby,then the amount will not b assessable.Such as-the commercial nature of the activities.the frequency of the
transaction,size and scale of activities,existence of aprofitmotive,time put into such act & whether the activities r systematic n
organised.The determination of whether such an activity is a business or ahobby is a question of fact n depends on an assessment of
the various factors which may have different importance or weighting.Martin v FC of T(1953)90 CLR 470,Ferguson v fc of 79 ATC
4261 n Stone v FC of T 2005 ATC 4234.It may seem that notwithstanding the scale n frequency of Jones activity,it would not
constitute a business n the amounts would not b asessble.If the activity is seen as one off situation,this may b so.However the fact that
jones was invited to appear on another show n received 5000 could indicate that he has commenced biz.If this is the case,the amts
received would b assessable income.In taxatation ruling TR2005/1 the commissioner indicates that no one factor is decisive in
determining whether a business is being carried on.Rather it is necessary to lookat all the factors and circumstances relating to the
activities by the taxpayer.Q3.Kylie Grant sales representative with Pharacorp lts.Salary 80000,entertainment allowance 10000,Travel
allowances 500,telephone allowances750,Reimbursement of accommodation expen 10000,Reimbursemnt of meals while away frm
home.Ans.The salary,entertainment allowances,travel allowances n telephone r all assessable under ITAA97 s6-5 or ITAA97 s 15-
2,Grants assessable income is 95750(80000+10000+5000+750).The reimbursement of work related expences would not constitute
income to Grant under s 6-5.However the reimbursement of accommodation n meal expenses would b an expense payment benefit
which is taxable to the employer under FBTAAs20 but s24 would reduce the FBT liability on the basis of the otherwise deductible
rule,assuming the substantiation requirements r complied with.An exemption may apply in respect of the reimbursement of the
expenses for accommodation where the acc is provide as a result of the employee being required to live away from home.However to
qualify for the exemption it is necessary that employer obtains, adeclaration from the employee on an approved living away from
home declaration form indicating the reason for living away from home,the time involved n the normal residence of the
taxpayer.Q5.Mary Fellows,a resident of Australia received the following income for the year.49300 from sources in aus.the
equivalent of 30000 as salary while working overseas for four months(foreign income tax amounting to5000 had been deducted frm
this income,franked distribution of 10000 n dividend income of 850 from RTZ a London based com(15%withholding tax had been
paid)calculate assessable income n tax payable on the income.ANS.The assessable income of Mary for the ended
30june2011:Assessable pursuant to ITAA97s6-5 49300,assessable pursuant to ITAA97s6-59Not exempt pursuant to
ITAa36s23AG91AA)30000,distribution assessable under ITAA97s44(1)10000.Grossup for franking credit 4285,overseas
dividend(+withholding tax)1000=94585.As there are no deduction,assessable income equals taxable income.Aus tax payable is as
fallows:Tax payable on 94585 i.e 22946.45,plus:Medicare levy 1418.77.TAX Payable=24365.22 Less Credit for withholding tax
150,Imputation credit 4285,Overseas tax on foreign salary 5000=9435.Tax Payable is 14930.22.Generally the foreign tax offset is
based on the amt of the foreign tax paid.However this is limited to the amount of the Aus tax that would be payable on the overseas
incomeITAA97s770-75.
Mary Contrary is a resident, full-time employee. She provides you with the following information for the year ended 30 June:Salary
40,000 Superannuation contribution made by employer 6,000 Cash dividend received 3,500[fully franked] Share of trust income
1,500 Loss on the sale of shares (2,600)ExpensesDonation- Royal Children’s Hospital (150)Education expenses*(2,500)*Education
expenses:
The taxpayer is employed as an assistant accountant and is completing a BCom degree part-time. On completing the degree it is
expected the salary will rise to $47,500. The expenses are as follows:
Education materials 350Higher Education Funding Act payment (Former HECS)1,600University fee 250 Travel from workto
university 300 total=2,500
RequiredCalculate the taxable income assuming the taxpayer is an adult, resident, individual taxpayer. Indicate all relevant
provisions and authorities.Advise the taxpayer of the deductibility of the self education expenses. (You must cite relevant
authorities.).ANS .Salary s6-5 ordinary income(Brents case) 40000,super contribution:not income,not convertible into money,not
derived not a s15-2 benefit constable cases. Divdend s44 3500,Div 207 imputed amount 1500(Infutation credit).Share of trust income
s97 (1500).Mary is presently entitled & under no legal disability.Loss on sales 2600,not allowed-capital loses against future capital
gain s102-15. CGT section no are not normally expected.It would be expected that students can recognise.Higher education sec s26-
20,university fee not allowed unders8-1.Assesseable income(46500).Deduction Donation DIV 30 gift>2 (150).Education(650)S8-
1/82A. Taxable income 45700.ii.Self education expenses are not capital,Finn case(Finn is a more general authority.Hatchetts cases
concerned a formal course of study which concerned a formal course of study which is the issue in this question.Higher income is not
a requirement for deductibility(smith) but it is evidence of the connection between expenditure& assessable income.Its sufficient that
an employer encourages an employee to study.In Antsis(2009) the HCA allowed deduction in connection with study undertaken in
order to quality for the youth allowance.As a centrepoint,in Roberts an engineer denied deduction for overseas MBA after being
retrenched-held to be incurred for purpose of securing a new job,expences of getting/changing a job too soon-Meddalena.On the
limited fact in this case,its reasonable to conclude that course of study to obtain a graduate qualification in tax by an employee
accountant would came within s8-1.CPE sould satisfy s8-1-finn case .Educational materials are also deductible under s8-1 (text
books,photocopying )HECS/HEIF is not deductible s26-20.Travel xpmss from wok to uni r deductible.Travel between two places of
work is deductible:Lunneys Case but considered Payne.Aslo s25-100 Transport expencs-travel diretly btwn two places where income
producing activities r carried on.Othr amts r deductible subject to substantiation of travel eg cents/km for car.Note s82:only amt
exceed 250 is ductible i.e2500-1600-250=650.
Q6.Alan and Zeta carry on a consultancy business ‘A – Z Solutions’ in partnership. An agreement dated 24 June 1999 provides for a
salary of $40,000 to be paid to Zeta for managing the business and thereafter profits and losses to be shared equally.During 2012/13
assessable income was $250,000.Deductions claimed for the year were as follows:Office rent$12,000,Equipment leasing 24,000,Staff
salaries62,000,Zeta’s salary40,000,Interest 8,000=$146,000Notes:i) During the year Alan withdrew $20,000 and Zeta $25,000 for
living expenses. ii) The interest was paid to Alan for a loan to the partnership, at commercial interest rates, to provide working
capital.(iii) One member of the staff is Alan’s 18 year old daughter. She is paid $20,000. The Commissioner considers $12,000 is
reasonable for the services performed.Requiredi) Calculate the partnership s90 ‘net income’ andii) Calculate Alan’s the taxable
income. (You do not have to calculate tax liability.)Note: You must cite all relevant sections and authorities.Ans-Alan
Withdrraw(20000)Zeta Salary40000,withdraw(25000)i.e 15000.Deduction office rent s8-1 12000,leasing s8-1 24000,staff salary s8-
1,under s26-35 the commissioner may allow a deduction for so much consider reasonable where payment are to related entities. The
amount of 8000 appear excessive 4000. Zeta salary not deductible. Drawing are not deductible. Partnership cannot employ a partner.
Interest s8-1 8000,Interest deductible under s8-1 to the partnership & assessable to the partner as a lender under s6-5.Roberts & smith
case.Zeta income.Z salary 40000.share 56000,96000,A salary NIL share 56000 i.e 56000.Zeta income:Z salary 40000,share
56000=96000,A Salary nil,Share 56000=56000.s90 Ner profit=152000.Alan,Interest s6-5 8000,partnership share s92 56000=64000
Q7.Jack at all relevant times held dutch passport,During the time he was in Aus,Jack worked under contract as marine engineer on a
sea going dredge owned by an aus company.dredge was leased to Cyprus based com.d for use in carrying out work in Saudi
Arabia..he worked for d for nine months in Saudi Arabia..Is Jack areident or non resident of Australia?If Jack is a resident,would the
income received while working in Saudi Arabia be exempt from tax. Ans. While a taxpayer residence is usually determine by atax
taxpayers domicile(place of birth)a taxpayer may establish another place of residence as evidence by thgeir normal or usual place of
abode.Levene v IR commrs(1928)AC 217.On the facts it is clear that Jack was resident of aust for the last three months of the
2010/2011 tax year as he resided in aust during that time and had the intention of remaining in aust(ITAA36 s 6(1).Taxation ruling TR
98/17 also provide some guidance on the issue of a taxpayers residence.Contrast Jack circumstances with the facts in FC of T v
Applegate 79 ATC 4307.In Applegate case the tax payer intention was to remain overseas for an indefinite period of time.The
taxpayer wife accompanied him,he left no assets in Australia & obtained a resident permit in Vila..By contract Jack only intended to
be absent from aust for approx nine mnths of the year,his wife n son remained in aust,his bank acc was in aust n his accom in
saudiarabia was a temporary nature.After contrasting the two situation it would b difficult to conclude that Jack permanent place of
abode was anywhere but aust.Jack was resident of aust for the whole year.What was the source of jack income-the place where he
contracted for the work-Australia,the place where he performed the work-saudiarabia,the place where he was paid for the work-
cyprus.The courts in FC of T v French(1957)98 CLR 398 n T v Mitchum(1965)113 CLR 401 concluded that the identification of the
income sourse of income was in each case a conclusion of fact and in a case of wages for work the place of performance of that work
would be the sources of the wages.In this case the source of income would b Saudi Arabia. Pursuant to ITAA97 s6-5 income earned
by resident both within Australia n from overseas is assessable income.Sec 23AG will not apply to exept the income from aust tax as
the activities do not qualify for the exemptions contained in s23AG(1AA).However where tax is paid on the overseas income a forign
tax offset is available.Generally the foreign tax offset is based on the amount of the forign tax paid.However this is limited to the
amount of the aust tax that would be payable on the overseas income(ITAA97 s 770-75.Q8.As a result of car accident on the way to
her olace of employment in july2010,Nancywall aged 39 is serious injured.Aftereight weeks hospitalisatioin she is declared
permanent incapable of continuing her employment.She receives:Sick pay supplementation by employer-eight weeks-4000,proceeds
frm private sickness n accident policy-eight weeks @ 520 per wek-4240,guaranteed sum under an insurance policy for loss of aleg-
120000,gratuity on retirement due to incapacity by employer-20000,out of court settlement by third party insurance comp of driver of
other car involved in the car accident-340000,social security disability support pension-eight weeks-1286.ANs.Accident
compensation.Sick pay 4000-fully assessable(ITAA97 s 6-5(2)).Proceeds fromn the private sickness n accident policy r assessable.as
the purpose of the policy was to provide an indemnity against the income loss arising from the inability to earn income.The benefits r
of a revenue character n assessable under s 6-5(2).The benefits r also assessable under s15-30(FC of T v DP Smith 81 ATC
4114).Guaranteed sum for loss of leg:120000-not assessable(the premium on such policy is not deductible)n specifically excluded
from CGT s 118-37(1)).It is also specifically excluded as an ETP pursuant to the definition of employment termination payment in
ITAA97 s 82-135.The portion of the retirement gratuity.The payment would normally b regarded as an employment termination
payment n come under ITAA97 Div 82 n 83.However,s82-135 states the amts received for personal injury are not taxable as an
employee termination payment..Third party insurance settlement,not assessable n excluded frm CGT by ITAA97 s118-37.Social
security disability support pension:not assessable s52-10 item 6.2.Q9.CGT.On 1 april,Henry applegate purchase 2000 shares in
RSC ltd for 4.25 per share.On 1 june 1993,he also purchased 1000 shares in PHB at cost of 14 pershare.In order to purchase
aflat,henry sold some of his share on 2 dec 2010 at the following prices.1000RSC-8 pershare,500PHB-13 pershare,250PHB-12
pershare.Advise Henry Applegate of the CGT consequences of the share sales for the 10/11.ANS.The disposal of shares CGT asset
which were acquired after 19 sep 1985 will trigger cgt event A1(ITAA97 s 104-10).because the shares were acquired b4 and the CGT
event happened after 11.45 EST on 21 sep 1999,Henry Applegate has the choice of including in assessable income the CGT that
results from either.calculating the capital gain with cost base which include indexation frozen at 30 september 1999.calculating the
CGT without indexation and then reducing the notional capital capital gain by the relevant CGT discount 50% for individuals s 115-
5,115-10,15,20,25.Any capital losses r applied against the capital gains b4 the net capital gain is reduced by the CGT discount or
other concession s102-5(1)).1.Sale of RSC shares.1April 1987 acquired 2000 share in RSC @4.25.Indexed cost based=1.494*cost of
shares.Index cost:4.25*1000*1.494=6350,2december 2009 sale proceeds:1000 shares @8 pershare=8000.Capital gain=8000-
6350=1650,123.4/82.6(s960-275(2)).2.Sale of PHB shares.1 June 1993 acquired 1000 shares were sold at a loss.Count of shares were
sold at a loss.Count of shares sold:500*14=7000,250*14=3500=10500,Sales proceeds: 500*13=6500, 250*12=3000=9500 i.e Capital
loss 1000.3.Seeing that a capital loss arises from the sale of PHB shares,this may be offset against the capital gain on the RSC
shares.This gives a net capital gain as fallows,gain on RSC shares 1650,loss on PHB shares(1000),Net Capital Gain-650,under the
discount method,the capital gain on disposal of the shares in RSC is asfallows,Capital proceeds 8000,Cost base(1000 shares
*4.25)=4250,Notional capital gain 3750,less:capital loss from PHB(1000),Sub total 2750,less:cgt discount 50%(1375),NET Capital
Gain1375.Q10.Alex McKenzie purchased 55shares in Allright ltd on 1 Mrch 1985 for 1750.On 30 june2010,allright offered each
her right to acquire new share in allright n paid $1per share for each of her 100 share.At the time when she exercised this right,the
market value of the rights was 40c each n the market value of the shares was 1.50 per share.On 15 dec2010,Alex sold all her shares in
allright for 1.75 pewr share.What are the capital gains tax consequences.ANS.ITAA97 s 130-40 applies where allright ltd issues to its
shareholders right to acquire shares for no consideration.The rights r taken to b acquired by Alex Mc at the time of acquisition of her
original shares namely 1 march 1985(s130-45).As the rights r therefore pre CGT there will b no capital gains tax when the rights r
therefore pre CGT there will b no capital gains tax when the rights r exercised n in fact the exercising of the rights is not taken to b a
disposal of the rights for CGT purposes n any capital gain or capital loss from the exercising of the rightd is disregarded(s 130-
40(7)).When Alex exercise her right to acquire shares she is taken to have acquired the new shares at the time she exercise her
right,that is to 15 november 2010(s 130-45(2)),The amt paid as concideration for the acquisition of the new shares will b an amt equal
to the sum of the market value of the rights at the time of exercise(40) is the cost base of the new shares for CGT purposes(s130-
40(6)).On disposal of aa her shares on 15 december 2010 (CGT event A1),Alex will not b assessed on the capital gain on the 500
shares she acquired b4 20 september 1985.Alex will b assessed on the capital gain on disposal of her post-CGT shares,as
fallows.Capital proceeds 100 shares @1.75 per share=175,less:Cost Base 100 shares@1.40 pershares=(140),Capital Gain=35.There is
no indexation or CGT discount because the shares r sold within 12 months of acquisition. The net capital gain for the 2010/11 tax year
is therefore $35 unless there is a capital loss from other transaction that can b offset against the gain on the shares.PARTNERSHIP
Q11..Adam n his wife Zoe r retired teacher.They enter into a partnership with their daughter Hilda.They invested in a gift shop to be
managed by Hilda.Adam n zoe each contributed 40000 capital to purchase the business.The partnership agreement provides
that.Adam n zoe will each receive interest per annum on their capital contribution.hilda will receive a salary of 35000 per annum for
the management of the business n superannuation of 5000 will b paid into a superannuation fund for Hilda.The business will lease a
car that Hilda may use for private purposes,Profile n losses r to b shared equally between the three partners.The partnership records
show for the year ended 30 june.Sales,cost of sales(closing stock at cost) 130000,interest(Adam n Joe)8000, Salary-
Hilda35000,superannuation-Hilda 5000 ,lease of car8000,otherexpenses-all tax deduction 13600.Records show the car used 80% for
business purposes and 20%by Hilda.Calculate s90 partnership net income?Assume the s90net income is 100000,how would that
income b distributed to the partners,explain, how interest payment to partners r deal with tax purpose,what fringe benefits tax
concequences follow from the private use of the car by Hilda?ANS Income sales s6-5 240000.Expenses:cost of sales-s8-1/Div 70
130000, Interest-not deductible .This is a capital contribution,not an amount falling within tyhe refinancing principle of Roberts &
Smith case.The amount of 8000 is apreferential allocation of profit.Salary-H:not deductible.A preferential allocation of
profit.Superannuation-H:not Ditto.If its not a profit share(as it is dealt with here)it is a debit to drawing.Its deductibility to Hilda is not
an issue here.Car lease s8-1(*80%) 6400,Others s8-1 etc 13600 i.e section 90 net income 90000 ii.Assuming s90 income is
100000.A-Salary(nil),interest 4000,profitshare 17333,Z-salary (nil),Interest 4000,profitshare 17333,H-Salary
4000,Interesr(nil),Profitshare17334 :Total 100000.iii.Requires a discussion of the partnerships-not separate legal entities:partners
cannot employ/contract with themselves:interest on capital accounts(like salaries)is a preferential allocation of profit,assessable to the
partner via s92,not s6-5.The paradox of Roberts& smith cases-interest of borrowing to refinance funding provided under s6-5.iv.No
FBT consequences.To be a FB there must be an employment n partners cannot b employees of the partnership.Q12.Beta smash
replairs is a panel beating/smash repair business conducted as a sole proprietorship by bert.The bus commenced on 1 july 2010.In
addition to the repair service,Bert obtains or purchase wrecked vehicles in poor condition,rebuilds n plans to sell them.At the end of
the first year of operations none of these vehecles had been sold.At 30 june 2011 there were five rebuild vehicle on Berts
premises.Two of these were obtained for nothing three coast 55 each.During the year Bert purchased 50000 of vehicles parts of which
5000 remained on hand at 30june.Other repair cost n overheads amounted to 80000.Bert reckons that 70% of total cost relate to the
smash repair side of the business and the balance relates to rebuilding the six vehicles referred to above.Cost spread evenly over the
six vehicles n bert estimate that each car would sell for 12000 when complete.Required Bert of the income tax implication:i.What
items are trading stock.ii.The valuation options available.iii.All possible closing stock figures.Suppose that in June 2011 a vehicle was
brought in by a customer.She n Bert agreed as fallow.Bert would work on repairing the car as time permitted,look for a buyer n if
posiblke sell the car.Ownership was not transferred to bert and if he sold car,one third of the proceeds went to the customer and two
thirds.No work has yet commenced on this car.ANS.NOTE-This is not a question about repairs in terms of s25-10.The cars r neither
premises nor deoreciating assets(in Berts hand).Beta is carrying on a business,thye cars r trading stock so CGT does not apply(s118-
25).Customers car.Question is whether its Betas stock on hand.Test is one of dispositive power,Power to dispose of stock on ones
own behalf.where goods r delivered to an agent on consignment,the goods remain the property is not transferred.its reasonable to
conclude that the sixth vehicle is not betas stock on hand.Cost option-s70-45:means full absorption cost;average cost is
acceptable:Philip Morris.Purchase of tradind stock r deemed not to b of a capital nature:s70-25.Cost of stock on hand-1car on
consignment ,2cars @ Zero NIL,3 cars @ 500=5 Cars(1500).Parts:A service provider, tradesman or repairers who purchases materials
or parts to supply to customers is taken to hold those items as trading stock.TR98/8
Opening stock NIL ,purchase 50000-s8-1 deductible, Closing stock (@cost*)(5000)-s70-35 assessable=45000 (net deductible). Other
costs:OHEAD 8000*70% ,Deductible costs 56000, Inventory cost 24000,Stock 45000*70% ,deductible cost 56000 ,Inventory cost
13500,cars( inventory cost)1500:Total Deductible costs 87500, Inventory cost 39000.Stock(WIP)on hand at cost 39000.The market
selling option option of 12000 is not available until the cars are complete:no saleability,no market value-Barina
Corporation..Alternativly.Cost of Cars 1500,Parts 50000,O/head etc80000.Total 131500.Opening stocks NIL.Stock on hands
5000,WIP 39000.Total 44000=875000.ANS.Cars r trading stock,CGT n/a(s118-25),Spare parts r trading stock,stock not capital(70-
25),Customers car not on hand,cost option means full absorption costing,inc allocation of ohead.philip Morries,Market selling is not a
valuation option for WP:Barina Corp,Stock of parts on hand At cost(this is easy),WIP on hand 39000.
Q13.Bea m Barry carry on an interior decoration bus,working bees as equal partrnrs,an agreement dated 24 Jun 1999 provides for a
salary of 4000 to b paid to Blea for managing the business n thereafter profits n losses to b shared equally.During 2008/9fees
amounted to 120000.Deduction claimd for the year as;Office rent 15000,equp leasing25000,staff salaries60000,Beas salary
40000=140000.During yr Beas drawing were 20000 n barys 25000 for living xpns.ANS.Assessebale income s6-5 120000,Dductions-
Rent s8-1 15000,Equipment lease s8-1 25000,Staff salries s8-1 60000,Bs salary non deductible,Drawing-non deductibile=Net Income
20000.Calulate the taxabla income Bea.Appropriation:Salary (bea) 20000,Barry nil,Profit s,Bea(n) Barry(n)=20000.The point is that
no loss is generated by allocating B the agreed 40000 salary.i.A partnership cant emply a partnet with the result that interest to Allan n
Anne is not deductible to the partnership but rather is an allocation of profit.It is not covered by the Roberts & Smith refinancing
principle.ii.Similarly ,Allanah is not an employee with the result that salary n super foe Allanah r not deductible to the partnership.The
amont of(35000+5000)40000 is n allocation of profit.iii.There r no fringe benefit tax consequences for the use of the vehicle simply
bcoz to b fbt,it must b in realation to an employee s136(1)definition of FBT and Allanah is not an employee.
Q14.David n daisy chain own a florist shop in partnership,trading as petal power.An agreement date 24 june1999 provides for
salary of 40000 to be paid to daisy n super contribution of 20000 paid for David n thereafter profits n losses to b shared
equally.During 2010/11 assessable income for the florist was 220000.Expenses for the year were:cost of stock sold 95000.equipmnt
leasing 24000,staff salaries 62000,daisy salary 40000,david super 20000,interest 9000=250000.Notes:During the year Daisy withdrew
2000 n David 25000 for living expenses.The interest was paid to daisy for a loan to the partnership, @commercial interest rates,to
provide working capital.Rqd 1.Calculation of s90 partnership net income.Ans.Assesseble income s6-5 220000,Deduction;Cost of
sales s8-1/div70 95000,leas equip s8-1 24000,salaries s8-1 62000,interest s8-1 smith&Roberts case 9000=190000 ,Drawing not
deductible ,salary & super not deductible. sect 90 income is 30000.ii.Daisys taxable income :It should b recognised that there
insufficient s90 income to meet the salary(40000)n supr(20000).On the authority of case s75 the amt may b pro rata i.e 20000 to
daisy,10000 to david.S92 salary 20000,profit share nil,Total20000,s6-5(interest) total 9000=29000.Rqd 2Advise citing relevant
authority whether the lagal fees are deductible under s8-1:Legal fes r deductible under s8-1 when they arise in the course of
conducting bus but expense securing protection frm competition r generally on capital acc.In Pech case(2001)the cost of proceedings
in connection with the unauthorised use of a trademark were deductible.It is considerd these fes r deductible.Rfrences to authority is
requiredLMagna Alloys,Duro Travel goods,snowden&willson or pech. If the court finds for the national florist chain, will the
damages b deductible to David n Daisy.Ans.Damages arising out of the operation of abussiness are deductible under s8-
1.Herald&weekly tims.This is not a s26-5.Damages in such actions r not penalties in terms of s26-5.It could b contended that,if the
legal expenses r deducbl,damages awarded in an unsuccessful defence would b on rvenue acc.iii.How would such damags b treated
in the hands of the national florist chain .Ans;At common law,compensation /damages generally take on the character of what they
replace.In this case damage to the national chain do not arise out of the course of their normal business n r not compensation for loss
of income or for the cancellation of a supply agreement.They r nor ordinary income in terms of s6-5.Q15.Europa ltd is a non
resident com that has many business act throughout the world.In 2010/11 it derived the following income,i.23000 in interest income
from investment it had in the uk.Ans.Not assessable,derived by non resident from sources outside aust s6-5(3).ii.5000 in devedends
received from an aust company in which it had a minor shareholding.Ans.Assessable s44(1)but subject to withholding tax n exept
s128 not required or expected.iii.35000 in income frm the sale of goods to an aust company.The negotiation in relation to the sale of
goods all took place in aust with contract being signed in aust n delivery of the goods by Europa ltd in aust.Ans.Asseble s6-5(3) the
income has an Australian source.iv.27000 in rental income frm a property it owned in newzd,This property was rented to an aust
com that was carrying on a biz in newzealand.Ans.Not assemble s6-5(3).The source of rent is where the property is
located.Q16.Little pty a resident private comp provide the following information frm its p/l account:Trading profit 320000,Cash
dividends recivd-frankd 100%14000,Rnt Income 12000. Profit 12000/346000.Notes. i.Incalculating trading profit the comp claimd
adeduction of 6500,provision of b/d.Th provision for b/d acc shows Opn Balc 34000.p fr this year6500=40500.Bad debt written off
4500=Closing Balance 36000..Ans Deduction not allowed for provision-not incurred:James flood,nelson development
laboratories.Deduction allowabl for bdt written off as bad s25-35-$4500.ii.In calculating trading profit the company claimed a
deduction for ntertainmnt expenss of 25000 as fallows.ntertainment of clients 13000,entertainmnent of staff 12000=25000.Ans.No
deduction under s8-1 for entertainment s32-5,exemption for amts treated as fringe benefits s32-20.Therfor 13000 not
deductible,12000 may b deductible n fbtable.iii.In calculating trading profit the company deducted the following.a.an amt of 10000
paid for traffic fines incurred by staff,legal cost of 1500were incurred in preparing a new lease document for property rented to
tenants.Ans.10000 not deductible s26-5,1500 deductible s25-20.Q17.For the end 30 june 12,Cutter ltd a resident manufc,reported
an operating profit of 750000in its financial acc.In preparing the financial statements,the accountant incorporated following:a.30000
had been writtenoff the goodwill arising from the acquisitioin of a biz in2003.Ans.Goodwill is acapital asset.It is specifically
excluded from Div40 capital allowances as an intangible asset n is not deductible under s8-1.It is not deductible under s40-880 bcoz
of s40-880(5)(f).An amt of 30000 needs to b added back.b.A provision had been raised in respect of future warranties equal to 2%
of sales.During yr sales were 5M.Ans.Provision r not deductible under s8-1 bocoz they r not incurred.James flood,Nelsen dev
lab.There is no presently existing obligation to pay the amt of(2%*5m)100000.It must be added back.c.The com borrow 200000 on
1jan12 to cover the purchase of some new plant.The loan is repayable in 10 yrs.The borrowning costs of 2000 were written off
immediately.Ans.Borrowing expenses r covered by s25-25,the amt deductible for tax purposes over 5 yrs as
fallows:181/1826*2000=198 (400*0.5=200)Add back 1800.d.Entertaimt expanses amounting to 40000 were debited.The amt
comprised.i.10000 entertaing clients n customer.ii.5000 for staff Christmas party.iii.8000 provided as fringe benefit to staff.iv.17000
food subsidy for staff canteen.Ans.Entertainmt is denied deductibility by s32-5:10000+5000=15000.The amt of 8000 provided as
FB is excluded by s32-20.The staff canteen is taken to b eligible dining facility in terms of s32-30.Add back 15000.Taxable
income:750000+30000+100000+1800+15000=896800. Q.18.Deduction.During the yr 10/11 tax yr, ABC ltd incurred the following
legal exp.1.11.10-4800 for preparation of doc assicitd with debenture issue. The debenture will mature in seven yrs when they will b
redeemed. The funds from the issue will b used for WC.3.5.11 $700 for amendmts to the com article of associn.Ans1.The issue of
debenture was undertaken to borrow money.According to ITAA97 s25-25,legal coss incurred in borrowing money used to produce
assessable income r deductible.The deduction is spread over the period of thye loan,the period of repayment or 5 yrs,whichever is the
least-in this instance,five yrs(1826days).The amt deductbl for tax year ended 30june11 is calculated as=4800/1826*242 days=636
s25-25(4).For the 10/11 tax yr deduct 636.Ans 2.The expend of 700 incurred on amendments to com articles r of a capital nature n
the expenditure is therefore not deductible under s8-1(1).Sun Newspaper ild n Associated newspaper ltd v FC of T(1936)61 CLR
337.However ITAA97 s40-880 provides a deduction over 5yrs for capital expenditure that is otherwise not deducl n that related 2 abiz
that is proposed to b carried on for a taxabl purpose.The deduct is allowed in equal propor over a period of 5 income ys starting in the
yr in which expdtre in incurred.Thus,ABC ltd should claim 700 for amendmt to com articles of association as deduction under s40-
880.The amt of deduct for the 10/11 tax yr should b 140(700*20).
Q19.Ray n Jayne purchased a resi rental property 2 yrs ago.During the current yr it was rented to lodger for 250pw.In june 10 R n J
receiv a phone call from their est agnt advising that lodger had disappeared owing six weeks rent1500 n that the property had been
left in a terrible mess.R nJ incurred following damages.Proff cleaning 600,Replace lounge room carpet 700,Repaint kitchen
400,Repair holes in wall900,New stove800.After the work was completed RnJ decided not to rent property again they plan to live
thereselves.Rqd 1.What deduction r allowd to RmJ for the expenditure. Ans.Repair is restoration to a former condition-Thomas
case arguably,if the rental activity was the cause of the disrepair,the relevant amts allowable under s25-
10.Cleaning,reainting,repairing walls are all repairs..Items such as carpets n stove r depreciating assets for the purpose of
Div40(2).Any loss on the old items is deductible balancing adjustment.ii.Is there a deduction for the 1500 outstandiing rent.
Ans.Property renting is not a biz n rental income is derived on a cash bsis.There can b no deduction for B/D under s25-35 becoz the
rent arrears has not formely been assessable income.However a debt is an asset for CGT purposes n if it cannot be recovered and is
abandoned there is C2 event and capital loss arises.Q20.Merchant com pty ltd is a resident private company carrying on the business
as wholesaler.During 2009/10 the following evnts occurred.i.On 1july 9the com purchased a building from which to operate n
borrow 200000 for 10 yrs to fund the purchase.it occured1200in borrowing expenses.Ans.Borrowing expenses r apportionable over
the period of the loan or 5 yrs whichever is the lesser s25-25.Deductn in2009/10 200/5=240.ii.The building was too large for the
company present purposes so it leased 25% to an unrelated com.Legal cost in drawing up the lesse were 850.Ans.Expenditure for
preparing registering or stamping a document for lease of property used for the product of income r deductible s25-20.Deduction in
2009/10:850.iii.In calculating net profit the taxpayer used a cost basis for the valuation of closing stck but a batch of items with a
cost of 16000 were valued at their net realisable value of 3000due to obsolescence.Ans.Taxpayers may elect to value trading stock
below cost,replacement value or market selling value when that is warrantd due to obsolesce n the value is reasonable s70-50.Net
realisable value appears reasonable,no adjustment is necessary.iv.In calculating net profit the com debited its p/l account with an
amt of 4500 for fines parking infringements by its deliver trucks.Ans.Fines n penalties imposed under an aust law r not deductible
s26-5.An amt of 4500 needs to b added back.v.The com recovered an amt of 1500 previously claimed as a deduction for bad debt
under s25-35.Ans.Recovery of a former bad debt is an assessable recoupment in terms of s20-20(3) in terms of item 1.4 in s20-30.
Q21.What is inhouse dining facility n what is its role in income taxation.Ans Is a canteen,dining room or similar facility,operated
mainly for providing foof to emp,not open to the public,employers expenses of providing food to employees in such a facility
deductible under s8-1 n expected from s32-5bys32-30.Q.How is it that there is no section of the acts that provides a deduction for
COGs but that amt commonly deductible?Ans.Through the combined operation of s8-1(purchase)(1)a&s70-35.Opening/closing
stock values a net amt equal to COGs is deductible under when the taxpayer values closing stock in consecutive years at the s70-40
cost option.c.How have the courts distinguis a repair n an improvement in terms of ITAA97s25-10.Ans.Reapir is restoration by
renewal of subsdiary parts of awhole.Renewel as distinguished from repair is reconstruction ofthe entirety.Lurcoll v
Wakely&Wheeler or Repair is restoration to a former condition,improvement adds some functional capacity.W Thomas&co(western
suburbs cinemas) Q.A capital loss cannt b offset against a rev gain but a rev loss can b offset against a capital gain.Ans.Capital
losses r carried forward n can b recouped against subsequent capital gains:s112-15.The first part of the statemt is true.a carry forward
loss in terms of Div36 is carried forward n offset(first against net exempt income)n then against assessable income includes a net
capital gain:s102-5.Therefore,the second part is also true.Q.when is expenditure incurred for the purpose of s8-1.Ans.Incurred
doesn’t mean only defrayed,discharge or borne but rather it includes encountered run into or fallen upon.But it doesn’t include aloss
which is no more than impending,threatened or expected.NewZeald Flax Investments.Flood there4 stands as authority for the
proposition that a liability must presently b existing in order to b incurred.The amts provided in(Nilsen Dev Lab)accounts to meet
employees long service leave entitle were not outgoings incurred bcoz there was no liability to make payments until the employees
either took leave or ceased employment-Coles Myer Finance ltd.Once event have occurred out of which a liability to indemnify an
insured arises it appears to me that within the meaning of s8-1 of the ITAA a loss or outgoing has been incurred,events have occurred
which hav subjected(RACV)to a liability n the extent of that liability is capable of reasonable estimate-RACV ins ltd.Q.How does
CGT treatment of a personal use asset differ frm the treatment of a collectable.Ans.Personal use assets r assets kept mainly for
personal use n enjoyment (other than land n building).PU assets wth a cost base less than 10000 r disregarded s118-10.Losses on PU
assets r disregarded s108-20.A collectable is an asset listed in s108-10(2) with a cost base of 500.Losses an collectable can b offset
only against gains on collectable s108-10.Q.22.The trustee of a resident,inter vivos,discretionary trust exercise his discretion as
indicated below.The s95 net income is 16000 comprising interest on bank deposit.Rqd.To whom would the assessment b issued.To
A,a 15 year old student 2000,To B,an 18 yr old unemployed 4000,To C,a 40 yr old non-resident6000,amt retained by trustee
4000.Ans.A:deemed presently entitled by s101,under an age legal disability.assess trustee s98,Div6AA rates.B:deemed presently
entitled by s101,no legal disability. Asses B:s97,normal rates.C:deemed presently entitled by s101:non resident,Assess
trustee,s98,appropriate rates(being 10% withholding tax-not requird.4000:present entitlement.assess trustee,s99A at 46.5%.ii.Under
what section would assessments b issued.Ans. In relation to the 4000 retainedby the trustee,describe briefly how ur answer to i
would change if the trust was formed as aresult of a deceasd estate.iiiWhat rates of taxes apply.Ans.If a deceased estate,the
commissioner has a discretion to assess under s99 at normal rates.Q23.Homewares pty ltd is a resident private com carrying on the
biz as a wholesaler.On 1july6 the com purchased a building from which to operate n borrow 200000 for 10 yrs to fund the purchase.It
incurred 1200 in bprrowing expenses.The building was too large for the company present purpose so it leased 25% to an unrelated
com.Legal cost in drawing up the lease were 850.RqD.Calculate the amts deductible for the borrowing expense n legal expense in
2006/7.Ans.Borrowing expense s25-25-deductible over period of loan or 5 yrs.1200/5=240.Lease:costs of preparing a lease s25-
20:$850.ii.Briefly explain the consequences of a com overfranking a dividend.Ans.Required to pay franking deficits tax that is a
tax offset .Q 23.Why Zed pty ltd a resident private com provides the following information from P/l acc.Trading profit 120000,cash
dividends received(Franked 100% 14000,Rent income 12000.Profit=146000.Rqd.Advise the company of the adjustment necessary for
tgax purpose of the following.i.In calculate trading profit the com claimed a deduction of 6500 provision for LSL.The provision for
LSL acc shows.opening balance 34000,provision for this yr 6500=40500:LSL paid 4500=Closing balance36000.Ans Provision for
LSL are not ductible:James flood or Nilsen dev lab.Under s26-10 a deduction is allowed for LSL paid.therfore 2000 needs to b added
back.ii.The company borrowed 200000on 1jan 8 to cover the purchase of some new plant.The loan is repayable over
10yrs.Borrowing costs of 2000 were written off immeditly.Ans.Under s25-25 borrrowing expenses over the period of loan or
10yrs.In the current yr 200 is allowable meaning 1800 must b added back.Q.What are the consequences to the com of the receipt of
the franked dividends.Ans.Dividends received r assessable under ITAA36 s44(1),the imputed amt is assessable under ITAA97 Div
207:14000+6000=20000.As a result 6000 needs to b added back.In addition, there is tax offset equal to the imputed amt.For com
receiving franked dividend, there. is a credit to their franking account equal to the imputed amt.Q24.Briefly explain why it is
necessary to distinguish between private n public comp 4 tax purposes.Ans.Twp reasons:First,in relation to carry forward
losses,companies must demonstrate they satisfy the continuity of ownership or biz test.(The commissioner may assume compliance 4
public companies s165.second, specific anti avoidance rules in ITAA36 Div367A(loans to SH/directors.excessive rumeration may b
deemed to b(nonfrankable dividends).Q.Ten years old twins kane n averil r the only beneficiaries of the kat family trust.Under the
terms of the trust deed,each is entitled to 50% of the trust net income.Financial details r:2006/7 trust loss(4000),7/8Assessble
income45000,Deduction44000,Net exempt income6000.Rqd. Advise the trustee of any tax oblgn.Ans.Section 95 trust net
income=(45000-44000=1000)The prior year loss must b offset against net exempt income=(6000-4000=nil loss)K&A both presently
entitled presently entitled to500 n under a legal disability.Assessble to the trustee:s98@Div6AArates.Q.25.What r the income tax
consequences of the following.a.Tomis owner of Tom the butcher.He take stock with a cost of 2000 n a mrket value of 3700 for
private use.Ans.Under s70-110,Toms assessable includes 2500.b.Beaus menswear offers customer a free shirt with every suit
sold.Ans In terms of s70-80,this is not a disposal outside the ordinary course od biz,there r no conseqns(Its simply a promotional
activity,normal app of s8-1/Div70 apply c.HP electro pty a com selling computers provides all employees with afree lap top
computer.Ans.This disposal is not covered by s70-80.The normal trading stock mechanism operate.(In other words,employee
remuneration package can comprise trading stock aswellas cash n other non cash benfits.The amts r deductible unless specifically
denied.Q26.Advise Kumar whether or not he would b entitled to deduction for 10000.Shortly after the tenants moved in a sec of the
upstairs floor collapsed n kumar was advised the buildg was infested with termites n it would b necessary to spend 30000 to hav the
celling/flooring replaced.kumar decided to use steel and specially treadted timber material to ensure there were no futher
problems.The work was completed on 1feb2011. Ans. Initial repairs r capital in nature.Western suburbs cinemas.There is no
deduction for national repairs.Rqd 2.Advise Kumar whether he would b entitled to adeduction to some or all of the
30000.Ans.Repairs is restoration by renewal of subsidiary parts of awhole.Lurcott v Wakeley & wheeler.Restoration of function is
the crircal factor but where the actions go beyond repair n provide additional adv,including the adv of lower future repair cost(western
Suburb cinemas)the amt is an improvements or capital.Rqd3.Suppose Kumar paid 1500 to apaest control com to treat the remaining
parts of thebuilding.Would he b allowed a deduction.Under wt sec.explain.Ans.Repair is nor defined in the act.It takes its meaning
from case law.This means that the amt of 1500 paid to the pest control com is not a repair in that it is not restoration or renewal of
subsidiary parts of a whole-Lurcott v wakely&wheeler.It is not restoratn of a thing to a conditn it formerly had-W
Thomas&co.However this probably obiter dicta n although we tend to speak in terms ofd repairs n maintenance it is not enough of
answer siply to say the amt is repair in terms of s25-10.The alternative is to seek a deduction under s8-1 n to b success that would
require establishing the amt was not capital in nature,The English authorities coild b helpful hers,especially Vallambrosa rubber ltd
wherein Lord Dunedin said capital exp is a thing that is goingto b spent once n for all income expd is a thing that going to recur
everyyear.Although termite treatment is not an annual expend,it is recurrent.Q27.Alan is a retired teacher.He n his wife Anne enter
into a partnership with their Allanah.The 3 of them invsted in gift shop manage by Allanah.Alan , Anne each contributd 50000 cap to
biz.agreement.Alan m Anne will receive 8% int pa on cap, Alanh will receive salary of 35000 pa for mgmt of biz n super of 5000 will
b paid into a super fund forAllanh.The businee will lease car.Profit nloss r to b shared equaly betweenn 3 partners .sales
240000 ,cos(closing stock) 130000,Interest-allan n Anne8000, Salry-Allanh35000,Super-Allnh5000,lease car8000,other expenses-all
tax deductible13600.Record show the car was used 80% for biz purposes n 20%Private.Ansi.Section 90 partnership net
income:Sales(s6-5)240000,COS(s8-1Div70)130000, Lease(s8-10)8000*80% =6400,Other s8-1=13600 =90000.ii.Allocation:Alan
s92(1 )Interest On capital (50000*8%)=8000, Share of residual(1/3rd*42000)=4000=18000 ,Anne s92(1):Interest on Capital
(50000*8%)=4000, Share of residual(1/3rd*42000)=14000=18000,Allanah s92(1):Salary 35000,Super 5000,Share of residual (1/3rd
42000 )=14000=54000 i.e 14000+14000+54000=90000.(90000-4000-4000-40000)=42000 .Q28. Vicki Verser is a resident,full time
employee.She provides you with the following information for 2009/10 Salary8000,Fringebenefitpackage 15000, superannuation
contribution made by her employer 6000,cash dividend received 3500(fully franked),Share of trust income 1500,,loss on the
share(2600);Expenses;Donation-Royal children hos(150),Education expenses(3500).Vicki is employed as an IT mgr n is amember of
the IT association of aust ,a professional education to members.Members must complete a minimum 20 hrs per yr of CPE n in
October 2009 Vicki attended a four day conference of the IT assocn in Hawaii,She arrange a package that included conference
fee(800),airfares (1600)n accomodn n meals(1100) for eight days.She spent the extra four days holidaying.Req i.Calculate the taxable
income assuming the tax payer is adult,resident,individual taxpayer.Ans. Salary-Ordinary income s6-5 8000,Fringe benefits-s23L non
assessable/non exempt income.Superannuation-not income derived-Constable case(not fringe benefit),Cash dividend s44-
3500,Imputed amount-Div207 -1500 (3500/70*30),Trust income-s97-1500,loss on Shares-capital loss,carried
forward:s102.Deduction:Donation(150), self education s8-1-$2950(Acc+meals) 1100,4days holiday=1100/8=137.5 perday*4 days of
conference.i.e 2950 .ii.Advise the tax payer of the deductibility of the self education expenses.Ans.Self education expenses r to b
considerd under s8-1,Firms case is authority for saying that expenses of keeping up to date in ones profession r allowable deduction
and r not capital in nature.Hatchett,Smith,Ansisis.Deductible travel expenses include those of attending a coversion.Accomodation n
meal expenses in connection with the convention r allowable deductions n fall within the exception in s32-35 (entertainment by way
of food ,drink ,travel).The private element of the travel is apportionable n not deductible(550),meaning that 800+1600+550=2950 is
deductible.The full air fare is deductible bcoz the objective purpose of the trip is to attend a conference.Substantion is required-a
travel diary or similar n written evidence of expenses.Note s82A does not apply.
Q29.Deduction.On 1 July Quick fix properties Pty ltd acquired an abandoned warehouse for conversion into rental units.78000 was
later spent by the com on upgrading the building to a reasonable working coindition.Advise Quick Fix on whether the 780000
expenditure is deductible for the company in the 10/11 tax year.Ans.Repairs.Non capital repairs made to plant or premises etc used
solely for the purpose of producing assessable income,r deductible under ITAA97 s25-10.The 780000is not deductible for quick fix
prop.bcoz it is not spent on repairs but rather on capital improvements.Improvements made to plant or premises r capital in nature n
may b depreciated.Fc of Tv western Suburbs cinemas(1952)86CLR 102.In Lurcott v Wakely n wheeler.Repair is restoration by
renewal or replacement of subsidiary parts of awhole.Renewal as distinguish frm repair is reconstruction of the entirely the question
of repair is in every case one of degree n test is whether the act to b done is the renewable or replacement of defective parts or the
renewal or replacement of substantially the whole.W Thomas n Co pty v FC of T(1965)115 clr,where it was held that a building was
the relevant entity,Walls n floors were only subsidiary parts of the whole.FC of T v western suburbs cinemas(1952)86 clr 102,where
the roof was only asubsidiary part of the whole.However there is an improvements the repair is not deductible under ITA97 s25-
10.Q30.Deduction.Smoking gun ltd a manufac of cigarettes,incurred expenditure of 320000 during the 2010/11 tax year in paying a
levy to an industry association to fund a public relatin campaign against regulatory legislation being introduce.The legislation would n
subsequently did affect the form n manner in whicjh the taxpayer n other com in the tobacco industry could advertise tobacco
products to the public.Is the 320000 expenditure deductible for the 10/11 tax year.Ans.Industrial levy.Because the proposed
legislation affected the whole of the tobacco industry,not just the interest of smoking ltd, n did not pose a threat to the existence of the
taxpayer biz but only affected the way in which smoking gun ltd conducted its business, the levy expenditure of 320000 is on revenue
account n is not of a capital nature.In paying the 320000 levy,smoking gun ltd did not gain an enduring advantages it merely
maintaind its existing position in the marketplace.Given that the expenditure was incident to the carrying on of the taxpayer biz n was
not undertaken to maintain or preserve an existing capital asset,it is fully deductible under ITAA97 s8-1(1).If the legislation had
proposed a total ban on the sale of cigarettes,then the expenditure may well have been of a capital nature n not deductible.Fc of T v
Rothmans of Pall Mall(Aust)ltd 92 ATC 4508 n contrast with ward n Coo ltd v commr of taxes(NZ)1923 AC 145 n Broken Hill
Theatres pty ltd v FC of T(1952)85 CLR423.Q31.Briefly indicate whether the following expenses are deductible to acom carrying on
biz,assum that all of the expenses were incurred during 10/11tax year.1.Stamp duty on a bank mortgage,the funds being used to
purchase for use in the biz.Ans.Bcoz the funds r used for income producing purpose,the stamo duty on the mortgage is deductible
under ITAA97 s25-25.2.Land tax on factory land.Ans.Deductible under s8-1(1)as a cost incurred in carrying on a biz.3.Legal n
accountancy expenses incurred in litigating an income tax appeal.Ans.Deductible under s25-5 provided the fee was paid to a
recognised professional tax adviser(defined in s995-1(1).Cost in objecting to an income tax assessment would b an expense in the
mgmt of tax affairs..A deduction would not b allowed if the expenditure incurred by the taxpayer had beed in connection with an
offence against an aust or foreign law s25-5(2)(d).4.Fees paid to a firm of public accountant in respect of negotiation conducted with
the Aust taxation off in relation to the com income tax affairs. Ans Deductible under the rules set out in (3)above.5.Cost incurred in
obtaining advise in relation to payroll n GST matters.Ans.deductible under s8-1(1) as a biz related expense.Note that s25-5 would not
apply bcoz it relates only to income tax affairs.6.Costs incurred in lobbying for a change in taxation laws.Ans.The answer would
depend upon the nature of the tax to whic the lobbying was directed.If it was income tax,which itself is not deductible,then the
expenditure in lobbying would also not b deductible.It is unlikely s25-5 could aply because lobbying for a change in taxation laws
doed not appear to fall within the ambit of s25-5(1).7.Loss incurred when the com cashier was robbed of the previous day sales taking
while on his way to deposit the taking at the bank.Ans.The loss is deductible under s8-1(1) Charles Moore & co(WA)pty ltd v FC of
T(1956)11 ATD147.Any recovery of the loss from insurance would be assessable.8.Lump sum paid by a common engaged in the
carring n haulage biz for transfer to it of licences frm Aust post to carry official mail on specified roiutes.Ans.The lump sum paid for
the transfer of licences is an expense of a capital nature n would not b deductible.9.Cost incurred by a pharmaceutical manufactured in
an unsuccessful research program to develop a new drug.Ans.If the pharmaceutical manufacturer is operating as a com, then ITAA36
s 73B applies.The research n dev activiyu does not have to result in a positive outcome b4 the taxpayer can claim the deduction.If the
pharmaceutical manufactur was not operating as a com, a deduction is allowable under ITAA97 s8-1(1)(b) if the expenditure is on
revenue account.!0.Bad Debts suffered by in respect of an advance to a customer.Ans.Bad debt would b deductible under s 8-1(1) as n
expense incurred in gaining assessable income.Section 25-25 would also apply if the qualkifying test were met.
Q32.Capital Gain.In oct 1998,Kim Richardson grandmother died.From the grandmom will she inherited a total of 600000 in cash n
jewellery.The jewellery had been acquired by the grandmom b4 1985 at a cost 36000.Its market value at the date of death was
114000.With the money she inherited,Kim Richardson in Nov1998.Purchased a flat in south yarra 420000,Acquired 2000 shares in
BHP for 24 per share.7 2000,Purchase a painting16500=508500.The following events all occurred during the 10/11 tax year for
Kim.1.On 1 August 2010 kim sold the south yarra flat in which she had lived since its acquisition in Nov1998,for 600000,n returned
to live with her parents in Malvern.2,On10 august 10,Kim received from BHP a 1 for 10 bonus issue fullypaid up untained share
capital acc.The market value of the shares was 51 per share.3.On 20 August 10,Kim sold for 120000 a peice of jewellery she had
received on her grandmoms death.Family records showed that the grandmom first acquired the jewellery in 1950 at accost of 6000 n
that its market value at the date of grand mom death was 30000.4.The painting purchase in Nov 1998 was stolen on 15 sep 2010.It
was not insured by Kim.5.On 18 sep 10,Kim sold all of her BHP shares,including the bonus shares for 39.75 per share less 0,75per
share brokerage.Advise Kim Richard of the CGT implications of the above transcaction that occurred during the 10/11 tax year,n
calculate the amt of capital gains to b included in her assessable income for that year. Ans.Jewellery:bcoz Kim grandmom died after
19Sep1985,but had acquired the jewellery b4 20sep1985,as the beneficiary Kim will be taken to have acquired the jewellery at the
date of her grandmothers dead(oct1998)for a considerertn equal to the market value of the jewellery at that date14000(ITAA97s128-
15).Sale of Flat As the south yarra flat was owned by Kim n used asher main residence frm the date of acquisition,no capital gain will
accrue to her on disposal of the flat s118-110.Bonus shares: since the bonus shares were issued from an unatainted share capital
account,the bonus shares r not assessable as dividend.Subdivision 130-A applies.The bonus shares are taken to b acquired at the date
of acquisition of the original shares.s130-15. The cost base of the bonus shares is determined by taking the cost of the original shares
n spreading it over the no of original shared n bonus shared together.Disposal of asset:Bcoz the collectable assets(i.ejewellery n
painting)n the BHP shares were axquired b4 11.45am on 21Sep1999 n the CGT event A1 occered after that time n asset were held for
12 months,Kim can choose to calculate the capital gain with accost base which includes indexation frozen at 30Sep19999 or calculate
the capital gain without indexation n then reduce the notional capital gain by 50%
.Disposal of collectable asset;Under the indexation mtd,CGT calculation r :Jewellery120000,Indexed cost base
30000*1.012)=(30360)Capital gain =89640,Painting,Cost base 16500,Capital proceeds(nil),Capital loss= 16500(123.4/121.9) s960-
275.Moreover the loss on the painting can b offset against the capital gain from the other collectable, the jewellery as fallow.Capital
gain on disposal of jewellery 89640,less:capital loss on disposal of painting(16500),NET CAPITAL GAIN FROM DISPOSAL OF
COLLECTABLE ASSET=73140.Under the discount mtd.CGT calculation as:Jewellaer:Capital proceeds 120000,Cost base
(30000)Notional Capital Gain=90000,less:Capital loss on disposal of painting(16500)Sub totala=73500,less cGT
Discount50%(36750)Net CAPITAL GAIN DISPOSAL of COLLECTAbles Assets=36750.Given that the capital gain on collectables
by the discount method is lower than the capital gain on collectablesd by the indexation mtd,KIM should choose to b assessed under
the discount method n would include 36750 in her assessable incomne..Disposal of BHP shares.:According to the indexation
mtd,CGT as fallows.Indexed cost base(72000*1.012)=72864,Add 75c per share brokerage(no indexation)1650,Sub
total=74514,Capital Gain(indexation method)87450.i.e123.4/121.9 s960-275)
Cost base shares: original number of share 2000,cost 72000. Bonus number of shares 200,cost NIL=2200,72000.Under the discount
mtd,CGT as:Capital proceeds 87450,Cost base(73650)=NOTional Capital Gain (13800)Less:CGT discount 50%(6900)/Net Capital
Gain(discount method)6900.Seeing as the capital gain on the BHP shares by the discount mtd is lower than the capital gain on the
BHP shares by the indexation method,Kim should choose the discount method n would include 6900 inher assessable income.Amount
to b included in Kim assessable income for the 10/11 tax yr is summarised as fallows.Net capital gain from disposal of collectable
assets 36500 Capaital gain from disposal of shares 6900.Net Capital gain=43650.
Q33.Hollywood purchase a house in Ballarat as a long term investment on 1 september11 at a cost of 500000.she left the house to a
tenant for 600 perweek.She provides the following info: a.A loan of 400000 was arranged on 1sep2011.Interest paid on the loan was
32000,loan fees n stamp duty on the loan were 9000.Ans.Interest expense.s8-1 deductible.32000.Borrowing expense: s25-
25=9000/5=1800*10/12=1500(or 9000*304/1827=1498).b.One of the bedrooms was repainted on 10 Dec at accost of
1400.Ans.Initial repair:Law shipping co-capital:s25-10(3).c.The timber floor in the laundry was replaced by a concrete floor on
1April 12 at accost of 4000.The floor was damaged by aleaking hot water system.Ans.Capital improvement-s25-10.Div 43 write off
.d.A new hot water service was installed in May 2012.The heater cost 3000 n has an effective life of 10 yrs.Ans.Div 40 asset:DVM-
200/10=20%*3000*2/12(61/366)=100.
Q34. J is an architect carrying out a consulting business as sole trader. He has two employees jill as a part time office worker and jack
as a full time draughtsman jays consulting fees for 2007/08 are 270,000 of which 260,000 has been received & 15,000 remains
outstanding . annual salary to employees 65,000. Req: should Jay return on a cash or accrual basis?
Solution: A discussion is required of the factors relevant to Cash v accrual, and carden’s, dunn’s or firstenburg’s cases must be
discussed it is reasonable conclusion that, given there is only little correspondence between income and outgoings (2,60,000
compared to 65,000), the reward is essentially for jay’s professional skill and a cash basis is appropriate. Alternative conclusions
would need to be convincingly argued.
(ii) Jay arranged with a builder to make some renovation to his private resident, the builder did not charge jay. In return, Jay provided
architectural services of approximately 16,000 at no charge to the builder. Jay had previously received building quotes for the work
performed as follows. Builder A 14,000, B 20,000, C 26,000
Req: Advice jay of the tax implications of the above arrangement. Solution: discussion required of ITAA36 s21 & 21A. under s6-5
jay is assessable on arguably 16,000, being the value of the services he provided or 20,000, being the average of the quotes for the
services provided to him.
Why Zed pty a resident private company provided information from P&L account: Trading profit 120,000, cash div rec frank
100%14,000, Rent income 12,000, profit 146,000. Req 1: necessary advice for Adjustment for tax purpose: (1)In calculation trading
profit company claimed deduction 6,500. provision for LSL which shown below. Opening balance 34,000, provision for this year
6500, LSL paid 4,500, closing balance 36,000. Solution 1: Provision for LSL is not deductible, James flood or Nilsen development
laboratories under s26-10 a deduction is allowable for LSL paid. Therefore 2,000 needs to be added back. Req 2: The company
borrowed 200,000 on 1st Jan 2008 to cover the purchases of the new plant . The loan is repayable over 10 years , borrowing cost 2000
were written off immediately.
Solution 2: Under s25-25 borrowing expenses are deductible over the period of the loan or 10 years in the current year 200 approx. is
allowable meaning 1800 must be added back. Req 3: What are the consequences to the company of the receipt of franked dividends?
Solution 3: Dividends received are assessable under ITAA36 s44 (1) the impute amount is assessable under ITAA97 DIV 207,
14,000+6000=20,000. As a result 6,000 needs to be added back. In addition there is a tax offset equal to imputed amount. For
companies receiving franked dividends there is a credit to their franking a/c equal to the imputed amount
Q35. Tom Tucker carries on business at a fast food outlet at the Central Cricket Ground.The business is a sole proprietorship. On an
annual basis, Tom tenders to the trustees of the ground for the right to operate during official fixtures. He leases a mobile kitchen and
employees several staff on a casual basis. Frozen food is purchased from
Food Wholesalers Pty Ltd under an arrangement whereby unopened packets may be returned. Unsold food from opened packets is
used in two ways: staff may consume what they wish, on the premises, at the conclusion of the final day’s trading. Any residual
foodstuff is taken by Tom and consumed by Tom and his family. Tom presents you with the following information relating to the
2011/12 season: Net Sales receipts 215000,Sub lease fees 2500=217500(Note 1),Gross purchased 95000(note 2),Tender cost750(note
3),license fee 6500 (note4), Vendors license1200 (note5),lease payments10800 (note6),Wages 32000 (note7). Provision for settlement
10000(note8).trading profit=61250. Notes: 1.Tom sublets the kitchen for five months during the football season for $500/mth. This
private arrangement is against the terms of his lease agreement.
2. Tom’s opening and closing stock is nil. Gross purchases are accounted for in the
following way:
Purchase 95000, Sales78000, Returns10200, staff consumption1800, Tom consumption 4500=95000.
3. Tender costs include accounting fees, typing and other costs of complying with the trustee’s requirements. 4. The licence fee is an
annual levy payable to the trustees for the right of entry to the cricket ground and occupancy of an exclusive site. 5. Various licensing
requirements of local government. 6. Lease payments are $900 per month. An amount of $9,900 has been paid to 30 June with one
payment overdue. 7. Award payments amount to $29,000 but Tom always pays a bonus of around 10%. 8. On New Year’s Day
several customers complained that food consumed had made them ill and demanded a refund of their money. Tom suspects a quantity
of frozen chips was contaminated and is negotiating a refund from Food Wholesalers. (The matter is unresolved at 30 June.) One
customer has threatened to sue him. Tom’s solicitor has informed Tom that defending an action or settling out of court could cost
around $10,000. Required: Indicate how each item is to be treated for tax:-
(i) If the amount is assessable income you must cite the section of the Act (and
relevant case law). If an amount is not assessable income you must state the
reason.
(ii) If the amount is deductible you must cite the section of the Act (and
relevant authority). If the amount is not deductible you must state the reason.
Ans.1.Assessble income s6-5,it doesnot matter if the activity is illegal or ultravires. 2.Net purchase s8-1 84000 s8-1 deductible.Toms
consumption 4500 s70-110 assessble. Staff consumption is on inhouse property fringe benefit s41. FBTAA.Extent provided it is
consumed on the premises. But students wont know that n don’t need to know it. Alternatively in the context of s8-1,purchase of
trading stock that are subsequently used for private purposes could be denied deductibility under the negating limb. This issue is dealt
with under the trading stock provision the negating limb but the point is that there needs to b some mechanism to disallow(or
access)biz purchase that r not used for business.3. Routine operating cost s8-1 deductible.4.Issue is weather revenue or capital in
terms os s8-1. From Sun Newspaper,the consideration r i.nature of the advantages sought .ii.way it is used.iii.means adopted to get
it.Recurring operations expenses r deductible outlays that secure some seduring advantages are capital.This seems on annual,recurrent
operating expenses.5.Routine s8-1 deduction. 6.Incurred means not only paid but also encountered,run into or fallen upon
newzealand flax Investmnts. There is a liability to pay the full amount is incurred.7. The full amount is deductible.There is no
suggestion of related entities n it is not for the court or cpmmision to tell a taxpayers how to run a biz.8. The amount is not incurred in
term of s8-1.It is no more than threatened,impending or expected.NZ Flax,The boarder issue of the deductibility of legal expense n
damages coulkd b discussed. In general legal expanses will be on capital account when they relate to the taking over of a rival (John
Fairfax n Son)on designed to prevent competition (Sun Newspaper ,Broken Hill Theatres,Suraysia Broadcasters),They r on revemue
account when depending biz methods(Snowden n Willson)or depending directors (Magma Alloys)Generally legal costs are deductible
when encountered bcoz of the very act of biz.
Q36. During the 10/11 tasman ltd incurred the following expenditure.1.1 Nov 10, entertainment expenditure assosiated with the
launch of a new product-12000..Ans.Entertainment n other expense.The entertainment expenses of 120000 would not b deductible
under ITAA97 s32-5,unless they qualify under s32-45 as an outgoing incurred by the taxpayer for the purpose of promoting or
advertising to the public,goods or service provided by a biz carried on by the taxpayer,or were incurred in providing a fringe
benefit9s32-20).Such expenditure should stil satisfy the provision of s8-1(1) if it is to be deductible,i.e there must b nexus between
the expenditure must b necessarily incurred in carrying on biz to gain or produce such income(FC of T v Snowden & Wilson
ptyltd.).Where such expenditure is on capital acc, it would not satisfy the provision of s8-1(1).To extent that the entertainment exp is
incurred in launching a new product,it may b capital in nature if it relates to the biz entity or structure(sun newspaper ltd n associated
newspapers ltd v FC of T91938).
2. 12 December 2010 expenditure on a staff trainng seminar on motivation n sales psychology-2500 .Ans.Staff
motivation.Expenditure of 2500 on a staff motivation seminar would b deductible under s8-1(1) as expenditure incurred in carrying on
a biz.While it may not come within s8-1(1)a bcoz of the lack of a nexus between the expenditure n the income,it would qualify under
s8-1(1)b as expenditure necessary incurred in carrying on a biz for the purpose of gaining or producing such income.In determining
wt is necessary the decision in FC of T v Snowden n Willson would suggest that the expenditure need not b incurred out of legal
necessity, but rather bcoz it is prudent to do so.It would appear to b an exempt training seminar for the purposes of s32-35 n as such
the expenditure would not b disallowed under s32-5,thus 2500 would b deductible under s8-1.
3.4Jan2011:expenditure on agymnasium attached to work premises-120000
.Ans.Expenditure of 120000 on agymnasium attached to the work premiss could b precluded as entertainment expenditure under s32-
5. However the provision of an inhouse recreation facilty is excluded from s32-5 where it is located on the premises of the taxpayer n
is mainly operated for use by employees of the tax payer. As such the expenditure world b deductible s32-30,item 1-5. If the
gymnasium is abuilding,then a deduction may b claimed UNDER Div 43 at 2^1/2%pa.If expenditure is incurred on gymnasiuym
equipment,it may b depreciated under s40-25(1) n s40-25(7)a.
4. During the whole tax year expenditure on meals expenditure on meals provided to staff in the executive dining room-7000.Ans.
Meals in executive dining room.The expenditure of 7000 on meals in the executive dining room would b deductible as the
entertainment of employees is tax deductible if it provided a fringe benefit to the employee s32-20. If the facility was an inhouse
dining facility as defined in s32-55 then the expenditure would still b deductible n would remain an defined in s32-55,then the
expenditure would still b deductible n would remain an exept fringe benefit under s41 of the fringe benefits tax assessment act 1986.If
Tasman ltd provides food n drink to non employees it could.a.claim the cost as deductible(although under ITAA97 s32-70 an amt of
30 will b included as incomne in respect of each meal provided to a non employee or .b.choose not to claim the cost of the meal as a
deduction.The election should b exercised by the taxpayer on an annual basis.(Taxation Ruling TR97/17 about the Concept of
entertainment as it relates to the provision of food n drink)
Q37.George is married without any children.During the10/11 yr of income,George wife Jenny inherits a painting.The painting had
been acquired 20 yrs earlier by Jenny uncle. The market value of the painting at the date of the uncles death(1Aug2010)was
6500.Jenny sold the painting on 27 June 2011 for 7600, incurring 200 in expenses.Jenny works part time as a supermarket.She earned
2450 for the year n incurred 960 in net rental losses.Assuming Jenny has no other income,calculate George entitilemnt to a tax
offset,if any for the tax year ended 30 June 2011..
Ans.Tax offset:Since George has no dependent children, the maximum spouse rebate for the 10/11 tax year is 1863. The level of
George rebate depends on Jenny adjusted taxable income for the year.This is calculated. 1.By aggregating earning from casual
work(2450)n the net capital gain(90),i.e 7600-(6500+200).This gives a total of 3350.There is no indexation n the 50% CGT discount
option is not available in determining the net capital gain bcoz the asset was acquired n sold within 12 months.2.The net rental loss
(960) is not added back as it was not originally taken into account in calculating taxable income.This produces an adjusted taxable
income of 3350.George rebate is:
Maximum rebate 1863.Reduction for spouse adjusted taxable income (1/4*(3350-282)767.Rebate allowable (1096).Notes1.Although
the net capital gain of 900 is not incom,the definition of adjusted taxable income in a 159J(6)(a)expressly includes taxable income
which includes capital gains within the definition of adjusted taxable income.
Q38. On 1 sep 2010,Waterworks pty ltd made its first frankable distribution to its shareholder for the 10/11 tax yr.This amounted to
160000.Waterworks wants to pass on a 60000 franking credit to its shareholder for this distribution..Advise Waterworks of*the
maximum franking credit that it can attch to the distribution and*its benchmark franking percentage for the 10/11 tax year.
Ans.The maximum franking credit that Waterworks pty ltd can attch to its distribution is calculated according to the formula set out
ITAA97 s202-60(1)as fallows. Additionally,the franking % for a frankable distribution is calculated using the formula in s203-35 as
fallows.franklin credit allocated to the frankable distribution/maximum franking credit for the distribution*100.So waterworks
franking percentage under s203-35 for the 10/11 franking period is 87.50%(i.e60000+68571*100).If the company makes anymore
frankable distribution during the 10/11 franking pereiod,they should also b framked to 87.50%,or else penalties could arise.
Q39.At 30 June 10,River ltd had a franking account surplus balance of 12000.During the 10/11 tax yr,the following transaction took
place.a.10.7.10-received notification of successful appeal against the 2008 notice assessment n refund cheque of 5000.Refund of
income tax for the 2008 tax year of 5000=debit of 5000(dr5000.cr(-)balance 120000,7000.b.21.7.10-payment of June2010 PAYg
instalment 150000.Ans.Payment of June 2010 PayG instalment.(150000=cr)-cr150000.Blnc.157000.c.28.10.10-payment of
september2010 Payg instalment 155500.Ans.Payment of September 2010 Payg instalment.155500=cr of
155500. .cr155500,Blnc312500.d.paid an interim distribution of 720000,the distribution had a 100% franking %.Ans:1.11.10.Pyment
of an interim distribution of 720000*30/70=debit of 308571.dr(308571).BLNC3929.e.28.2.11-payment of December 2010 PAYG
instalment 155500.Ans.Payment of December 2010 PAYG instalment.155500-credit of 155500. cr155500.BLNC159429.f..5.3.11-
receipt of a distribution from an Australian public company of 25000.The distribution had franking %of 90%.Ans.Receipt of a
distribution frm an Aust public com of 25000.The Distribution had a franking % of 90%:25000*30/70*90%=cr of 9643.
Blnc169072..g.28.4.11-Payment of march 2011 PAYG instalment 1555000.Ans Payment of march 2011 PayG instalment:155500.Cr
of 155500. Blnc324572.1.5.11-paid a final distribution of 751000.The distributn had a 100% franking%Ans.Paid a final distribution
of 751000.The distribution had a 100% franking:751000*30?70=debit of 321857.Blnc.2715.
Notes:(1)A franking dr arises if a company receives a refund of income tax.The amt of the franking debit is reduced on an attribution
basis if a company is not a franking entity for the whole of the relevant income yr(ITAA97 s205-30).b sec205-15.c s205-30.d.s205-
15.e.The closing blnc of the franking acc as at 30 june 11 is carried forward n represents the opening blnc of the franking account on 1
july 2011/12 franking period.
s4-15: Tax Equation
Assessable income s6-5 (Ordinary & Statutory) minus Deductions. (General & Specific) = Taxable income (x Tax Rates Less
Offsets (credits) Plus Levies (Medicare) = Tax Payable (Residency; Exempt Income. Source; Derivation)
Medicare levy: applies @ 1.5% on taxable income to resident individuals (and some trustees).It does not apply on income below
[2010/11] $18,839 (and is phased in to $22,163). For pensioners, the threshold is $30,439. A Medicare surcharge applies to unmarried
individuals with [2010/11] income > $77,000 who do not have private medical coverage. A ‘flood levy’ will apply from 1/7/11:
0.5% > $50,000; 1.0% > $100,000. In the case of low income earners, no levy is payable for the 2011 income year for individuals
whose taxable income does not exceed $18,839 and a reduced levy is payable up to a taxable income of $22,163. This range is known
as the shading-in area and a levy of 10% for each dollar above $18,839 is payable. Example Hector has a taxable income of $20. 170
Medicare levy will be calculated as:10% x (taxable income- $18,839)= 10% X ($20, 170- $18,839)= 10% X $1331= $133.10
Offsets – also called rebates/credits: a number of tax offsets (such as imputation credits on franked dividends) apply:- low income
rebate [10/11] $1,500 for TI < $30,0000. It reduces by 4 cents for every $1 of income > $30,000 (and so has phased out completely at
$67,500). So, in effect, ‘tax free threshold’ is $16,000 for low income earners: [ie, tax on $6,000 = nil; tax on $10,000 x 15% = $1,500
– offset = nil].
Negative propositions; items that are not income by ordinary concepts: 1. Amounts not convertible into money are not income
Tennant v Smith (1892) 2. Capital does not have the character of income 3. Mere gifts are not income FCT v Cooke & Sherden
(1980 4. Proceeds of gambling and windfall gains are not income Martin’s case 5. Mutual receipts are not income Hayes v FCT
(1956)
Positive propositions; characteristics of income by ordinary concepts: 6. To be income, an amount must be beneficially derived
Constable’s case (1952) 7. Income is to be judged from the character it has in the hands of the recipient Just v FCT (1949) 8. Income
generally exhibits recurrence, regularity and periodicity Cooling’s case 9. Amounts derived from employment or the provision of
services is income Rowe’s case (1997) 10. Amounts derived from carrying on a business are income Ferguson’s case 11. Amounts
derived from property are income: interest (Steele’s case),rent(Yanchep Sun City Pty Ltd v C of State Taxation),annuity(Edgerton-
Warburton v FCT),royalty (Stanton v FCT) 12. Amounts received as substitutes for or compensation for lost income are themselves
income Tinkler v FCT 79 ATC 4641 Kelly’s case & Stone’s case suggest prizes won by professional sportspersons are likely to
be income The Doctrine of Precedent specifies that a court should apply the rulings of previous cases in situations where the facts
are the same. More specifically, a court is bound to do so if the previous case was tried in a higher court, in the same hierarchy ratio
decidendi is a legal rule derived from, and consistent with, those parts of legal reasoning within a judgment on which the outcome of
the case depends.It is a legal phrase which refers to the legal, moral, political, and social principles used by a court to compose the
rationale of a particular judgment.
Ordinary income – s 6-5 s 6-5(1) [ordinary income] – your assessable income includes income according to ordinary concepts,
which is called ordinary income. s 6-5(2) [Australian residents] – if you are an Australian resident, your assessable income includes
the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year. s 6-
5(3) [non-residents] – if you are a foreign resident, your assessable income includes: (a) the *ordinary income you *derived directly
or indirectly from all *Australian sources during the income year; and
Non-residents rates**: [2013/14]:0 – 80,000--Taxed @ 32.5%% [80,001 – 180,000---26,000 + 37% on income > 80,000;180,000
+ 63,000 + 45% on income > 180,000
ITAA97 s70-10: trading stock includes anything produced, manufactured or acquired that is held for ... sale..
s6(1): resident means (a) a person who resides in Australia and includes a person: (i) whose domicile is in Australia...
s6-5 assesses what is described as ‘ordinary income’ [or ‘judicial income’];
s6-10 covers ‘statutory income’ (and a series of provisions bring specific items into s6-10 – eg: s102-5 makes a net capital gain part
of assessable income.
Note: an amount that is both statutory and ordinary income is assessable only once: s6-25. It is assessable under the more specific
provision: [ a similar outcome is produced by the decision in Reseck’s case.]
statutory income: Statutory income comprises: i)Rewritten provisions in ITAA97 [s15 & s 20 ITAA97] ii) Remaining provisions of
ITAA36 s26; dividends [s44 -47 & ITAA97 Div 207] iii) Also includes capital gains tax [considered later].
iv) Employment Termination Payments [ETPs: ITAA97 s80 – 83] and Superannuation payments [ITAA97 Div 280+] The ITAA97
framework [s15 & s20] Statutory income under ITAA36 was found in s26. Much has now been rewritten;
some is found in Divs15 & 20 ITAA97 Div 15: Some items of assessable income: 15-2 Employment allowances/benefits s 26(e)
*15-3 Return to work payments s 26(eb)] *15-5 Accrued leave transfer payments s 26(ec)] *15-10 Bounties and subsidies s
26(g)] *15-15 Profit making undertakings s 26(a)/s25A] *15-20 Royalties s 26(f)]* 15-25 Receipts for lease repair obligations s
26(l)] *15-30 Insurance indemnity for income loss s 26(j)] *15-35 Interest on overpayments of tax s 26(jb)] *15-70
Reimbursed car travel s 26(eaa) With the exception of ss15-2, 15-15, 15-20 and 15-70, these provisions are self-explanatory.
Sections 15-2 and 15-15 (and their predecessors) have fascinating histories leading to the introduction of fringe benefits tax [FBT –
s26(e)] and capital gains tax [CGT – s26(a)] but now have only residual application. Section 15-70 assesses a specific employment
allowance (reimbursement for use of an employee’s car) Div 20: Amounts included to reverse the effect of past deductions For Div
20-A to apply there must be an assessable recoupment. Div 20-B Sale of formerly leased motor vehicles, Assessable income includes
the profit up to the lesser of the deductible lease payments or the notional depreciation (being cost minus sale price). For example Dr
How leases a car for 3 yrs at $400 mth; used 60% for income producing purposes. Cost of the car was $32,000. Agreed residual
$20,000. How acquires the car at the agreed residual and sells it for $26,000. What is assessable under s20-110? * profit: 26,000 -
20,000 = 6,000 • deductible amts 400 x 36 x 0.6 = 8,640 • notial dep’n 32,000 - 20,000 = 12,000 The lesser amount of $6,000 is
assessable. But If sold for $30,000 [profit $10,000] then $8,640 is assessable.
So, there are three schemes in operation for the taxation of employees: i) wages, salaries, supplements, bonuses etc are income
by ordinary concepts, assessable under s6-5 ITAA97. ii) Fringe benefits - where tax falls on the employer and benefits are
‘exempt’ income to employees - s23L [ITAA36]. iii) Retirement payments and superannuation are separately taxed.
Non-income, non-assessable & exempt income
*An amount that is neither ordinary nor statutory income is not assessable;*eg, mutual receipts. Do not describe such amounts as
‘exempt’ income. These are simply not income. Exempt income is a technical term.
*exempt income is an amount excluded from assessable income by statute, even though otherwise it is either ordinary or statutory
income.For example: lottery winnings are not income by ordinary concepts and no specific provision makes them statutory income.
So they are not assessable income because they are not income in the first place.However, salary paid to a member of the Australian
Army Reserve is income by ordinary concepts but it is specifically exempted from assessable income; s51-5. ASSESSABLE
Ordinary Income:Salary and wages•Retail sales income•Interest•Cash receipts for•services•Illegal transaction Statutory Income:
•Benefits - non cash•Dividends
•Royalties •Capital gains •Employment allowances (e.g. car) •Employment Termination Payments •Leave (e.g. holiday)payments
•Partnership income•Trust income.. NONASSESSABLE•Income from hobbies •Bequests under a will•Gambling wins •Gifts
unrelated to services rendered (e.g. birthday gifts) •Lottery wins (unless from investment related lottery).. EXEMPT•Government
co- contribution Exempt fringe benefits•Family Tax Assistance•Some overseas employment income•Payments to DFA personnel in
war zones•Payments to part- time DFA members• Some social security payments•(e.g. disability, careers)•Welfare (e.g. rent
assistance,•Maintenance payment ) NON-ASSESSABLE NON-EXEMPT•GST payable•Reportable Fringe•Benefits•Non
residentincome (interest,dividends) subject to withholding tax•Most foreign source income for temporary residents* (foreigninterest,
dividends, pensions, rent, etc)•Superannuation benefits paid from a taxed fund to recipients who are60 years or older atthe time of
receipt•Government contribution to a First Home Saver Account
Deduction; general deductions s8-1 ; specific deductions s8-5 (including:- Div 25: specific allowing & qualifying deduction; Div
26: specific denying deductions;ITAA97 Div 40: depreciation; Div 70: trading stock [etc]--- In regard to income provisions, the
specific provision applies: double taxation is precluded by s6-25 In regard to deductions, by virtue of s8-10***** income from
personal exertion means income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions ….received in the
capacity of employee or in relation to any services rendered, the proceeds of any business carried on by the taxpayer alone or as a
partner…but does not include
*interest, unless the taxpayer’s principal business consists of the lending of money…..**rents, dividends--*income from property
means all income not being income from personal exertion. Income CASES: FCT v Rowe
(1997) 97 ATC 4317**Are recoveries of formerly deductible amounts ipso facto income? Held: The High Court (unanimously) ‐
no such general principle. Was Rowe’s receipt income? Majority [4/3] said No.
FCT v Cooling 90 ATC 4472--
Was a ‘lease incentive’ ordinary income?Held: The Full Federal Court: amount was assessable income.[Ten years later the issue was r
econsidered in Montgomery’s case and the High Court held 4/3 that the receipt was income.
“the ordinary concepts and usages of mankind.” Scott v C of T (NSW) (1935)--- ‐
Generally income’s seen as:* as remuneration for employment or provision of
personal services;* as a reward from carrying on a business;* as a return on investments. * self education: Finn’s case not capital
s25- 5: Tax related matters: deduction available for managing tax affairs & complying with related Commonwealth laws provided
paid to *recoginsed tax adviser s995-1 but not tax itself, interest on money borrowed to pay tax* (or penalties) or capital
expenditure.
s25-10: Repairs: deduction for expenditure incurred.... for repairs [not of a capital nature] to premises, plant & machinery.... held,
occupied or used solely for the purpose of producing assessable income.
s25-20: Lease documents: deduction for costs of preparing lease documents for property used solely for income producing purposes.
s25-25: Borrowing expenses: write off: <$100; amortise over life of loan or 5 yrs max. Also, s25-30: expenses to discharge a
mortgage securing loans used for business is deductible.
S23L Fringe Benefits: non assessable/non-exempt income superannuation- not income derived constable’s case.fringe benefit tax
rate 46.5%
25-35: Bad debts: must be a debt must be bad [not doubtful] must be written off in year of income must have been assessable.
s25-45: Embezzlement: money stolen by agent/employee [other theft maybe deductible under s8-1] recovered amounts are
assessable recoupments: Subdiv 20-A.
s25-50: Pensions, gratuities, allowances: paid to employees or former employees to the extent in consideration for past services.
s25-55: Payments to associations: max $42 for membership of trade or professional assns; other amounts maybe s8-1.
s25-60: Election expenses: cost of contesting state or federal elections, but not entertainment expenses: s25-70.
s25-75: Rates & land tax: deductible for property used to produce mutual receipts.Rates on income producing property
(factories,rental units etc)are deductible unders8-1.
s25-100: a *transport expense between two places of employment is deductible.
s30: Gifts & contributions: gifts of $2 or more to bodies listed in s30-15.
s32: Entertainment: s32- 5 disallows under s8-1 expenses in respect of *entertainment [ s32- 10: entertainment by way of food,
drink, recreation, accommodation or travel] critical word is ‘entertainment’; is not always associated with provision of food & drink:
eg; morning & afternoon teas for employees is not entertainment.
s32-20 to 50 exceptions i) entertainment provided as a fringe benefit: s32-20 [so costs deductible but FBT payable] ii) food & drink
in an ‘in-house dining facility’ [ s32-55 (staff canteens), but not parties etc] iii) eligible seminars [min 4hrs duration; food & drink
‘reasonable’ but not ‘business meetings’] iv) exempt seminars are not business meetings if 4+ hrs, for training etc and conducted on
property of people in the business of providing seminars. v) exemption for those in business of providing entertainment etc and public
advertising & promotion.
Specific denying provisions: s26-5: Penalties • s26-10: Leave payments until paid • s26-20: Higher Education Contribution
payments • s26-25: Interest & royalties w/holding tax • s26-30: Relatives’ travel • s26-35: Related entities • s26-40: Maintaining
family • s26-45: Club expenses • s26-50: Leisure facilities • s26-52&53: Bribes • s26-54: Illegal activities • s26-55: Limit on
deductions • s26-60 - 95: Superannuation & venture capital issues.
Substantiation; substantiation applies to *car expenses(Div 28) 0.74c/km [medium car], log book *work expenses Subdiv 900-B
written evidence (receipt, invoice etc)* travel expenses Subdiv 900-D incurred by individuals and partnerships [but not companies
and trusts]
Depreciation: - Div 40 Capital Allowances; Div 43 Capital Work: s40-25. Apportioned deductions are allowable for assets held in
part for non-taxable purposes (or held for less that a full year). Depreciating asset is an asset that has a limited effective life and is
reasonably expected to decline in value over the period of use. - land and trading stock are specifically excluded; - in general,
intangibles are excluded; [but certain mining rights and intellectual property are covered] - plant & equipment is the best known
category of depreciating assets; [but plant used exclusively in R&D excluded]. - buildings & structural improvements are excluded
but may qualify fordeductions under Div 43; - fixtures on land are treated as separate assets, whether or not they can be removed. -
fittings such a carpets, blinds and hot water service in rented property are depreciating assets so replacement of them is a Div 40
matter, not a repair under s25-10. [If < $300, immediate deduction – s40-80.]..(if % not given then, 100/life of asset.) Example:
suppose asset acquired for 10,000, rate 30% DVM. In 1st yr, not used for income related purposes; 2nd yr used 80%; 3rd yr 50%.Yr 1
10000 x 0.3 = 3000 x 0 = 0….Yr2 7000 x 0.3 = 2100 x 0.8 = 1680 deductible…Yr3 4900 x 0.3 = 1470 x 0.5 = 735 deductible…Yr4
3430……. Simplified Tax System - SBEs •With effect from 2012/13, SBE have an immediate write-off for assets (including motor
vehicles) with a value less than $6,500: s328-180.•For motor vehicles with a cost greater than $6,500, there is an immediate write-off
of $5,000.
Depreciation methodThere is a choice open to taxpayers to use the PRIME COST [ie: straight line] or DIMINISHING VALUE
method. The ratio between the two is 2.0 [1.5 pre 2006] [Post 10/5/06]*.(life of the asset is 5yrs) then Prime cost= 100/5 and
DVM=200/5 In addition, from time to time investment allowances may be available that are in addition to normal depreciation
allowances.*Pre 10/5/06 the DVM rate calculated as 150/life [being 30% in the above example]. There may still be pre 2006 assets
on a depreciation schedule.
Trading stock: opening stock deduct from sales income and add closing stock. Purchases: s8-1 deductible. c/s assessable s70-35.
s70-10: includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the
ordinary course of a business; includes livestock. s70-50 option: taxpayers may adopt a lower value for closing stock if, due to
reasons of obsolescence or other special circumstances it is warranted. The valuation must be ‘reasonable’. s70-15: a deduction is not
allowable until stock becomes ‘on hand.’ s70-100: changes in interests. Where there is a change in the ownership interests of trading
stock - such as a variation of membership in a partnership - provided there is a continuing 25% interest, the parties can elect to treat
the transfer as if no disposal took place. s70-105: upon the death of an owner deceased’s assessable income up to the date of death.
s70-110: upon ceasing to hold an item as trading stock, (but continuing to own it) the taxpayer is deemed to have sold it for cost and
immediately reacquired for the same amount.
Balancing Adjustments on Disposal: If termination value < adjustable value deduction; If termination value > adjustable value
assessable (unless ‘relief’ is available)
For depreciating assets used 100% for taxable purposes: (i) If TV > COST: Assessable: TV – Adj Val..(ii) If COST < TV > Adj Val:
Assessable: TV – Adj Val..(iii)If TV < Adj Val: Deductible: Adj Val – TV.
Cars subject to depreciation limit: If the asset is a car subject to the ($57,466: 10/11) cost limit, any balancing adjustment is
reduced by the formula: Car limit/Actual cost.
Example: 10/10/Yr1 car cost $60,000 – 100% business use: 18/7/Yr2 sells for $50,000 For simplicity assume PC method 20%.. Yr1
57,466 x 0.2 x 264/365 = 8,313…Yr2 57,466 x 0.2 x 18/365 = 567…Decline in value [depn] 8,880…Adjustable value
48,586…Termination value: 50,000 x 57,466/60,000= 47,888 Deductible balancing adjustment: 48,586 – 47,888 = $698.
Buildings & Structural Improvements: Div 43 [ATL 12-400 – 12-440] Div 43 provides for a capital write-off of 2.5% or 4%
(depending on when construction commenced) for capital expenditure for capital works. ‘Capital works’ is not defined but the
Division applies to: - buildings and structural improvements - extensions, alterations and improvements to these.• 2.5% applies if
construction commenced before 22/8/84 or after 15/9/87; • 4% applies if construction commenced after 21/8/84 or before 16/9/87.
Dividends: Company taxable income 1000…Tax @ 30% 300…After tax income 700. Assume 700 distributed as franked dividend to
natural s/holder:Cash dividend [s44] 700….Imputed amount [Div 207] 300…1000. If dividend is franked the unfranked amount 30%
has to be added to make it assessable income.eg:7000*30/70=3000.
s90: partnership: [6-5/8-1] s90: profit and loss : s92 (profit/loss): ‘net income’ calculated as if the partnership was a taxpayer: ie,
assessable income - allowable deductions [except c/f losses]. A partnership carrying on a business and will (generally) derive income
on an accrual basis. Partners derive income when the accounts are closed and an allocation is made to them – usually, 30 June. Salary
to partners not deductable. Superannuation contribution not deductable. Cost of sales s8-1/Div 70. • Refer s6(1) definition: Partnership
means an association of persons (other than a company…) carrying on business as partners [common law definition] or in receipt of
ordinary or statutory income jointly; [extended tax definition] ~ So, joint bank accounts, joint ownership of rental properties etc not
partnerships at general law but are made so for tax (because passive investment in bank accounts, shares or rental properties is not
‘carrying on a business’). One can’t pay a ‘salary’ to the other: FCT v McDonald Partnerships are not separate legal entities. Partners
are jointly and severally liable for the debts of the partnership. So, a partnership cannot employ a partner. This means that a
distribution called ‘partner’s salary’ is an entitlement to a preferential allocation of profit. It is not deductible in calculating the
partnership net income • Advantages: sharing risk, capital etc; splitting of income for tax. [But penalties for uncontrolled partnership
income; s94.. s91: partnership return; but partnership not a taxpayer. [Partners themselves pay income tax and CGT. Partnerships
cannot make a capital gain.] ** s90: partnership ‘net income’ calculated as if the partnership was a taxpayer: ie, assessable income -
allowable deductions [except c/f losses]. A partnership carrying on a business and will (generally) derive income on an accrual basis.
Partners derive income when the accounts are closed and an allocation is made to them – usually, 30 June s92: partners’ assessable
income includes relevant shares of net income/losses; exempt income retains it character: s92(3). Note: partner’s drawings are not
income. o s94: anti-avoidance provision. If partners do not have ‘real and effective control and disposal’ of their shares in partnership
net income, penalty rates of tax apply. • Two ongoing issues: partners salaries and interest allocations. • Salaries/interest: - legal
position -- not separate legal entities -- so, partners can’t be employees -- so, partnership can’t pay salary -- payments not s8-1
deductible/s6-5 assessable; they come via s92; ie: ‘salary’ is a profit allocation
Partnership appropriations: Suppose A & B in partnership; agree to share profits 50/50 after salary to A 5,000: s90 net income
10,000 ‘salary’ share total A 5,000 2,500 7,500 B - 2,500 2,500
s90 10,000.
Trust: ‘Trust’ not defined in ITAA, but ‘trustee’ is: ITAA: 6(1)] a device by which one person [trustee] holds property for the benefit
of another [beneficiary]. A trust imposes a personal, equitable obligation on the trustee to deal with property for the benefit of others
[beneficiaries]. It is characterised by separation of legal and equitable ownership. Overview of provisions of Div VI [ITAA36]:
• s95: defines ‘net income’ to be assessable income minus allowable deductions calculated as if the trustee was a taxpayer [contrast
with partnerships – losses remain in the trust]. • s96: the trustee in not taxed except as provided by s98 or s99/99A [ie: as the
representative of a beneficiary or because nobody is entitled to the income].
• s97: taxes the presently entitled beneficiary under no (age) disability. • s98: taxes the trustee in place of the beneficiary where a
beneficiary is presently entitled but under a legal (generally, an age) disability or is a nonresident. • s99/99A: where nobody is
presently entitled, taxes the trustee. • s99B: safety net provision; taxes amounts not assessed under s97, 98, 99 or 99A. deemed
presently entitled by s101.
Trust income [s95] Interest 3,400 Dividends 14,000 50% franked Assessable: s6-5 3,400 s44 14,000 Div 207 3,000 ÷ 4 = $ 750
credits 20,400 ÷ 4 = $5,100.Difference between Partnership, Trust and company:Capital: under s102 losses carried forward to next
year,
• Professional fees :Fees for services are derived when they give rise to recoverable amounts where the taxpayer is carrying on a
business (Henderson ), if paid in advance, when they are ‘earned’ (Arthur
Murray ) but if the amounts are essentially reward for personal services, the fees are derived when received (Carden, Firstenberg,
Dunn ). • Property rent: Property rent (as distinct from chattel leasing) is derived when it is received. It follows that rent in arrears is
not derived. • Chattel leasing: The hiring out of plant or equipment is clearly the carrying on of business and so an accrual basis
applies. • Prepayments Under the Arthur Murray principle, prepayments for goods or services are derived when that service to which
they relate is provided • Dividends Dividends are derived when paid. ITAA36 s 44 assesses dividends ‘paid’ ‘credited or
distributed’(Brookton Co-operative Society Ltd v FCT. • Wages and salaries (including directors fees, commissions, bonuses etc)
Payments of this nature are derived when received; Brent v FCT (1971). • Interest Interest is also derived when received unless
acural.
- s6-5 ordinary income was assessable when received; - s8-1 general expanses, s25-5 tax related expenses and s25-10 repairs were
deductible when paid or when incurred - a depreciation system operated on the pooling of assets and allowing an accelerated rate;
amount s <$1000 are immediately deductible; - trading stock on hand did not need to be taken into account where its change in value
is not more than $5000 (ie, all purchases are deductible, even if unsold). 6. Exempt incomes6-15(2) If an amount is *exempt income,
it is not assessable income. s6-20 An amount of *ordinary income or *statutory income is exempt income if it is made exempt from
tax by a provision of this Act.Three categories:- a) entities that are exempt: s11-5 s50-5 to 50-45 b) certain income that is exempt:
s11-10 s23L ITAA36 (being fringe benefits etc) c) certain income derived by certain entities: s11-15 (largely) now in s 51, 52.
a) exempt entities: in general, charitable, educational, religious organisations; trade unions and employer organisations, hospitals,
public educational institutions, local government etc. 50-45: exemption for non-profit organisations conducted for the promotion of
game or sport, music, art, science or literature or community services.
CGT: CGT does not apply to assets acquired before 20 September 1985:;; s102-5 includes in assessable income any net capital gain
- net capital gain = current CG – current capital loss – previous capital loss - meaning that capital losses can be offset only against
capital gains - a net capital loss = current capital loss – current CGs. Discounting CGs: for CGs after 21 Sept 1999 a CGT discount
applies [Div 115] – provided the asset is held for 12 months - for individuals, and trustees (with exceptions) a 50% discount applies to
the (unindexed) CG - for superannuation funds a 1/3rd discount applies - no discount applies to companies (but individuals and
trustees receive a 50% discount on capital gains on sale of shares in companies) - a 50% discount also applies to beneficiaries of a
trust but a trust’s discounted gain must be ‘grossed-up’ - capital losses must be applied against capital gains before the discount is
applied - prior to 21/9/99, the cost base of an asset was indexed (and tax was ‘averaged’) but indexation ‘frozen’ at Sept 1999.CGT
event A1 (a traditional capital gain or ordinary gain) arises when: CAPITAL PROCEEDS (from) DISPOSAL (of an) ASSET
(exceeds the) [INDEXED] COST BASE A capital loss arises when: CAPITAL PROCEEDS (from) DISPOSAL (of an) ASSET
(are less than the) [REDUCED] COST BASE.
Discount: post Sept 99, individuals/trusts discount CG by 50%* (provided held for 12mths); Superannuation fund 331/3; N/A to
companies and no indexation. Capital losses [capital proceeds < (reduced) CB] are carried forward (indefinitely) and offset against
future gains. Example On 1/4/87 H purchased 2000 shares in ABC Ltd @ $4.25/sh. **On 1/6/93 1000 shares in DEF Ltd @ $14/sh.
**Sold on 2/12/09 the following: *1000 ABC @ $8 * 500 DEF @ $13
* 250 DEF @ $12 Disregarding indexation: ABC: Proceeds 8,000 ::CB 4,250 ;;Capital gain 3,250 ***DEF: Proceeds 6,500 + 3,000 =
9,500 *** CB [750 x $14] = (10,500) ** Capital loss (1,000) ** Net CG: 3,750 – 1,000 = 2,750 x 50% = 1,375 **Note if discount
applied before netting, CG = 875 [( 3,750 x 50%) – 1,000]### refer s108-5 ‘asset’ is any form of property or a legal or equitable
right that is not property.. ‘exemptions’ - most motor cars [s118-5] [other exclusions include trading stock; s118-25; main residences;
s118-110] But, these as still assets in terms of s108-5!!! s108-20 personal-use assets with CB < $10,000 ‘exempt’.. [s108-10]
collectables: art, jewellery, rare books, stamps, coins, antiques* with a CB > $500~ capital loss can only be offset against a gain on a
collectable asset. *antiques? object of artistic or historic significance > 100yrs old. ~ P-U assets and collectables may comprise a
set: s108-15 & 25. s106-5: a partner has a fractional interest in partnership assets.. gain = capital proceeds - (indexed) cost base
[of asset] changes in ownership covered by s104 & 109 assets sold, gifted or transferred, destroyed or newly created are
disposals/acquisitions; Cancellation or surrender of an asset [eg, a debt, share] is a C2 event>>Death itself does not trigger a
disposal; s128 (but subsequent disposal of inherited assets may produce capital gains.
Cost base - s110-25 *5 elements: - 1st element: acquisition costs [consideration for purchase] - 2nd : incidental acquisition costs [fees,
commissions etc] - 3rd: non-deductible costs of ownership [except P-U& collectables] - 4th: capital expenditure to enhance or
preserve the value of asset - 5th: capital expenditure to establish or defend title to the asset. not part of the cost base: [s110-40 to 45]
- recouped expenditure [Div 20 – unless recoupment was assessable] - deductible costs of acquisition or ownership - deductible
capital expenditure - GST input credit amounts - [bribes to officials, entertainment and penalties [s26-5] are also excluded]
Example: suppose R purchased 2 hectares of land on 8/10/88 for $280,000. On 18/2/2008 sold 1ha for $220,000 (remaining land of
equal value). Legal and other acquisition costs were $12,000; disposal costs $2,000. Under s112-30 the cost base of the land sold is
apportioned as follows: CB of land x capital proceeds from CGT event Capital proceeds + mkt value of remainder 280,000 + 12,000
[= 292,000] x 220,000:: 220,000 + 220,000 = 146,000
ie: half the CB because half the land was sold and the blocks were identical.. Discount method Capital proceeds 220,000::CB
[146,000 + 2,000] 148,000:: 72,000:: Less discount 36,000 ::Capital gain 36,000 Indexation method [for illustration purposes only]
[Because the land was purchased before 1999, R has a choice of discount or indexation of the CB until 1999. Indexation is
based on the quarterly Consumer Price Index.] Capital proceeds 220,000
ICB: 146,000 x 123.4/92.0 = 195,786 + 2,000 2,000:: Capital gain 22,214 [no discount] Example (Indexing factor)Asset acquired
10/11/87 for $25,000 and sold 513/2011 for $55,000.Index Figure is: -CPI for quarter ending 30. 9. 99/
CPI for quarter in which expenditure was incurred =123.4/85.5 - 1.4432 (indexing figure is rounded to 3 decimal places) =
1.443 :::CGT Events A1 occurs if a taxpayer disposes of an asset. Disposal occurs if there is a change of ownership. B1 occurs
when use or enjoyment passes before title at the time the other entity first obtains use or enjoyment. C1 occurs if an asset is lost or
destroyed when compensation is first received. If no compensation, when the loss is discovered or the destruction happens. C2
cancellation or surrender: occurs if a taxpayer’s ownership of an intangible CGT asset ends by the asset being redeemed, cancelled,
released, discharged, satisfied, abandoned, surrendered or forfeited or expiring; eg the exercise or D2 happens if an entity grants or
renews an option. F1 happens if a lessor grants or extends a lease. H1 occurs where a deposit is forfeited because a transaction
does not proceed. For the person who loses the deposit either C1 or C2 occurs. I1 occurs when an individual or company ceases to
be a resident. If an entity becomes an Australian resident, the first element of the CB of any post 85 assets is its market value at the
time, ie: the taxpayer is taken as having acquired the asset on becoming a resident. K4 event K4 is triggered when a person
ventures as trading stock an asset previously owned. Interacts with Div 70 – trading stock provisions (covered later). K7 balancing
adjustments: applies post July 2001 when a ‘balancing adjustment event’ happens to a depreciated asset. Interacts with Div 40 –
depreciation (covered later). ‘Exemptions’ [Gain/Loss disregarded]- Div 118, residency exemption s118-110. The ‘limb’
convention emerged in analysis of the former s51(1) ITAA36, from which this provision derives and the meanings of critical words
and phrases is also derived from court decisions on the former s51(1) with its two positive and one negating limb. As a general rule,
s8-1 provides: losses and outgoings incurred in the course of operations directed to the production of assessable income are allowable
deductions. . Positive limbs ~ Judicial analysis: in the course of examining the general deduction provisions, the courts have said the
limbs are - • not mutually exclusive • in actual workings the second adds little to the first • but, second limb requires a different test
[ie: is taxpayer carrying on business?] • so, employees cannot use 2nd limb s6(1) definition of business excludes employee. First
limb
~ Judicial analysis has also developed some ‘unlegislated tests’: i) ‘incidental & relevant’ - Ronpibon Tin ii) ‘essential character’ -
Charles Moore. Expenditure must possess an essential character of a ‘business’ expense. Second limb
~ business test - Ferguson: whether there’s a business is a question of fact.
TAX ADMINISTRATION ISSUES s161; requires lodgment of a tax return (additional returns may be required by s162 & 163) ~
s166; from the return and any other information the FCT shall make an assessment. ~ s166A; for companies, the lodgment of a return
is a deemed assessment ~ s169A; for individuals, the FCT may rely on the return an issue an assessment ~ s174: Notice of
Assessment.betterments assessment [default assessment] s167:- the FCT may issue an assessment without a return based on
expenditure patterns and life style. Enormously difficult to contest. amendment of assessments: s170 [30-600 – 30-690] from
2004/05, for most individuals and small businesses, 2yrs is the standard period for the amendment of an assessment a 4yr
amendment period applies to business taxpayers (other than ‘small business entities’] trustees, taxpayers entering tax avoidance
schemes and high risk’ taxpayers for fraud evasion, there is an unlimited time period for amendment generally, taxpayer may
object/appeal against an assessment for the same period as the FCT may amend. interest is charged on outstanding tax under
s170AA deductible under s25- 5] penalties applied under the Tax Administration Act [TAA] [not deductible] or by courts.Tax
Shortfall [less tax paid than was properly payable] – attracts a tax shortfall penalty depending on the nature of the offence, degree of
culpability and repeat offences. Also, a ‘shortfall interest charge’ applies to the unpaid tax. Tax Rulings [ATL 48 090 – 135] - rulings
issued pursuant [TAA]s14AAA [public] s14AA [private]. Also ‘product’ rulings and ‘oral’ rulings ~ legally binding if they relate to
tax liability i) public rulings apply generally ~ rulings are legally binding on the FCT if they are favourable to a taxpayer [favourable:
if lower tax] ~ not affected by a contrary court decision [but may be withdrawn] public rulings [IT, TR, TD] relate to classes of
persons or arrangements; not specific taxpayers usually issued in draft form for public comment cannot be appealed [but can request
a private ruling that can be appealed disregard of public rulings can attract penalties; depends on whether ‘reasonably arguable’ ii)
private rulings are taxpayer-specific taxpayer specific; legally binding on FCT application must set out facts, authority etc objections
may be lodged if unfavourable disregard of ruling 25% base penalty. FBT and Income tax FBs [or exempt FBs] are ‘exempt’
[non-assessable/non-exempt] income to the employee under s23L. s23L(1) Income derived by a taxpayer by way of the provision of a
fringe benefit is not assessable income and is not exempt income… 23L (1A) Income derived by a taxpayer by way of the provision
of a benefit (other than a benefit to which s15-75…applies, that, but for para (g) of the definition of fringe benefit in s136(1) [of
FBTAA] would be a fringe benefit is exempt income of the taxpayer. s23L(2) Where: (a) in a year of income, a taxpayer derives
income consisting of one or more non-cash business benefits (within the meaning of s21A); and (b) the total amount that is applicable
under s21A…does not exceed $300; the income is exempt income. Consider the following salary package: Salary $70,000;
Annual bonus 5,000; Allowance 1,200 ; Employer contribution; To superannuation 11,250 ; Provision of fully Maintained car
6,000 = Total $93,450 ANS Salary - income by ordinary concepts: s6-5; excluded by FBTAA s136(f); Bonus - probably also
ordinary income, but it satisfies s15(2) if not income; Allowance - ditto ;Refer to s6-25 the more specific provision applies and the
amounts are taxed only once;Super - not ordinary income, not convertible to money (at this time) nor is it derived (Constable’s case;
not s15(2) benefit. Is it a fringe benefit? Refer to definition s136 FBTAA ---> excluded from definition of FB;Therefore, not taxable
anywhere at this point. Vehicle - a car fringe benefit, therefore ‘exempt’ via s23L… . Calculation of Tax Note: the FBT rate is
46.5% (post 1/4/2006); the FBT year runs from 1 April to 31 March. i) determine value from Subdiv B ii) ‘gross-up’ under
s136AA:aggregate FB amount x 1 [= 1.8692; ignoring GST*] 1 – FBT iii) apply FBT [@46.5%] to that grossed-up taxable value. iv)
cost of providing FBs is a routine deduction to an employer except where
specifically denied]; FBs are a part of an employee’s remuneration package. FBT is also deductible under s8-1**To come within the
definition of fringe benefit [s136(1)], there must be i) a benefit; ii) provided during the year;; iii) by an employer or associate; iv)to an
employee or associate; v) in respect of the employment of the employee**. Main Fringe Benefits * Car benefits * Loan (and Debt
waiver) benefits * Expense Payment Benefits * Housing benefits * Property Benefits * Residual Benefits * Living-Away-From-
Home Allowance Benefits Note: if an employee (or associate) receives any of these benefits (even if the benefit is an exempt benefit),
the amount is made nonassessable, no-exempt income under s23L.
MCQ.Beau's boutique is a small retail store returning on a cash basis. Based on the following information, which of the statements
below is correct? Salary income 120000opening stock25000 purchases 70000closing stock (cost) 30000. Ans assessable income
totals 125000
Q4.Elle ply ltd carries on business as a manufacturer of furnishings and an interior designer. The company returns on an accrual basis.
In the year ended 30 June 2010the following occurred:*cash sales of furniture 75000 purchases of trading stock 34000 fees received
for decorating advice 140000 debtors(ac receivable) 8000 service fees as yet unbilled 16000 closing trading stock on hand(cost)
90000 opening stock 6000 staff salaries 60000 dividends paid 40000. What is elles taxable income? Ans132000
Q5.Bev is employed by a chemical company as an industrial chemist. Her remuneration is made up of the following amounts: salary
65000 annual bonus 4000 uniform allowance 600 membership fee 450=$70050 Bev,s assessable income for the year is Ans $69600
Q6.On 30 sep 2009 big co. Ltd(not a small business entity) purchased a second hand machine for its factory at a cost of $42000.
Transportation costs were $1000 and it cost a further $2000 to dismantle and remove the old machine. The life of the machine is
seven yrs. On 7 oct 2009 the machine broke down and had to be repaired at a cost of $4000 what is the cost for the purposes of
depreciation under div40? Ans$47000
Q7.which of the following are depreciating assets for div 40 purposes? 1) cars owned by a car dealership provided to staff as fringe
benefits and aold at 30000km 2)A bridge at the entrance of a wine makers vineyard 3) land used for primary production . 4) Goodwill
Ans: none of them.
Q8.little co pty. ltd is a resident private company. In 2008/9 it incurred a tax loss of $10000.its shareholding in2008/9 and 2009/10 is
as follows: 2008/9 A.35% B.25% C.40%=100%. 2009/10 A. 25% B.20% C.15% D.40%=100% In 2009/10 the company has taxable
income of 25000 and wishes to apply the carry forward loss of $10000 against . Which of the following statements correctly states the
position with respect to such carry forward losses? 1) little cannot claim the carry forward loss because it fails the continuity of
ownership test. 2)little has satisfied the continuity of ownership test. 3)little has not satisfied the continuity of ownership test because
D had no shareholding in 2008/9. 4) little needs to fail the continuity of ownership test before it can claim the loss under the same
business test. Ans: 2 and 4
Q9.which of the following are assets for capital gains tax purposes under s108-5? 1)shares 2)goodwill 3)trading stock 4)main or
principal residence Ans: All of the items
Q10.An individual taxpayer has a carry forward capital loss of $5000 in march 2010 the following assets were sold:
Item cost purchased sale price
Block of vacan land 35000 may 2007 45000
Caravan 7000 april 2004 10000
Antique furniture 2000 june 2005 1000
What net capital gain arises in 2009/10? Ans: 2500
Q11.which of the following would be regarded as entertainment for the purposes of div 32? A) A restaurant meal of a food writer 2)
theatre attendance by a film critic 3) meals on overnight business travel. 4) Entertainment provided as a fringe benefits 5) food
provided at a business lunch Ans:5
Q12.which of the following statement about deductibility of gifts under div 30 are correct?1) A gift can be in the form of money or
property ,but not trading stock . 2) A gift of property valued at less than 5000 must be purchased within 12 months of the gift 3)if a
gift is property , the deductible amount is the lesser of its cost to you or its market value at the time of the gift.4) the total value of the
gift must be 20 or more. Ans:2,3 and 4
Q13.A taxpayer who carries on a business purchased an office building on 1 july. Which of the following can be deduced in full in
that yr? Ans:D insurance on the building
Q14.Bill owns a medium sized motor car that at times is used in the course of his employment. During 2009/10 he travelled 2250km
for employment related matters. His employer reimbursed him at a rate of $0.75per km. Bill estimates that during the yr 15% of the
total distance travelled for employment related purposes and he was reimbursed $13000. Under the substantiation rules bill is entitled
to a deduction of (to the nearest dollar) Ans: $1665 {being the prescribed rates for 2250km for a medium car}
Q15.Bea leases a car that is used 100% for income producing purposes. At the end of the lease period, Bea acquires the car at its
agreed residual value. One yr later Bea sells the car at a profit of 2000 which of the following correctly states the tax consequences of
the arrangement?Ans: the lease payments are deductible under s8-1
Q16.which one of the following would be trading stock?Ans: spare part for a furnace held by a brick manufacturer.
Q17.Alpha pty ltd is a resident private company. Its summary financial data for the yr is as follows: Cash dividends received (fully
franked) 14000, trading income 400000, opening stock , opening stock cr 15000, purchase cr 98000, closing stock (at cost) (13000)
100000, operating expenses 150000 income tax expense 51000 dividends paid fully franked) 15000, franking ac bal (cr) 20000.
Alphas taxable income for the yris :Ans:170000
Q18.ABC ltd a resident public company has net profit of $1.5m and taxable income of $1.4m. Which of the following statements
would explain the difference? Ans : the company received $100000 non assessable, non exempt income.
Q19. A resident company has the following franking ac details at 30 june: opening bal 100 cr, credits 2009/10 200, debits 2009/10
350,closing bal 50 dr. Which of the following statements best states its tax position?Ans : the company must pay franking deficits
tax of $50 and there is a tax offset of $35.
Q20.which of the following statements about companies, partnerships and trust is (are) true? A) partnership is defined in the tax acts
but trust is not. B) company does not include a partnership , but companies may form partnerships with other entities. C) prima facie a
company listed on the stock exchange is a public company for tax purpose. D) for tax purposes , a company is a private company if it
is not a public company. E)all the statement are true. Ans: E
Q21.which of the following statement is true of partnerships and companies? AnsD.losses are retained in companies but
distributed in partnerships.
Q22.which of the following would be a partnership at general law? Ans: X and Y carry on business as window cleaners
Q23.A and B carry on business as partners. The partnership derives assessable income of $50000 and incurs deductions of $30000.
The partnership agreement provides for a salary of $25000 to A and thereafter profits and losses to be equally shared what is the s90
net income/loss? Ans: Net income $20000.
Q24.The trustee of the jones family trust, a resident discretionary trust, exercises its discreation to apply $10000 to the benefits of 19
yrs old jones junior. Which of the following correctly states the facts conseqeunces? 1) jones junior is deemed presently entitled by
ITAA 36 $101. 2) jones junior is assessable under ITAA 36 $97 on $10000. 3) jones junior is prescribed person interms of ITAA 36
102 AC. 4) jones junior is deemed presently entitled by ITAA 36 $95A. Ans :1 and 2
Q25. Kate borrowed 50000 from the local bank on 30 june 2009 for a period of 5 yrs at an interest rate of 10%. Interest is to be pain
aannully in areas on 30 june (1st payment being due on 30 june 2010). The purpose of the loan is to invest 25000 in shares yielding
very good dividends and to on lend. 25000 to her brothers nicholas, at an interest rate off 4%, what amount can kate claim as her
interest expense in the current year assuming that she paid 10000 to the local bank on 30 june 2010.Ans: 3500
Q26. Alpha & co. Is a large retailer, during the year ended 30 june the following amount were received ; 40000 for an insurance
company as compensation for loss of trading stock; 35000 as consideration for the disposal of a depreciating asset that had an
adjustable value of 45000. 20000 as an incentive to enter into a lease of new shop premises. Which of the following amount
is …...BA’s assessable income Ans:60000
mean power pty ltd is a company producing electricity by wind power in march 2011 the company agreed to pay joe Farmer $70000
per yr on 1 April for 10 yrs to permit it to build a windmill on farming property. What is joe farmer’s tax position? Ans: an amount of
$7000is taxable annually (for10 yrs).
Tom is employed by a wholesale company as an account manager. His remuneration package is made up of the following amounts:
salary $7000 annual bonus $5000 employer contribution to an industry superannuation fund:$6750 fringe benefits package to the
value of:$18250 total:$100000 tom’s assessable income for the yr is Ans$75000
Q4.Smart Alex is a retail menswear store. Based on the following information, which of the statements below is correct? Sales income
120000, opening stock 25000 purchase 70000, closing stck(cost)30000 Ans :Assessable income total$125000
Q5.Hector Wu is an interior designer who commenced business as a sole trader on 1 July 2010 and returns on an accrual basis. He
provides decorating advice and sells item of furniture. In the yr ended 30june 2011 the following occurred:*cash sales of furniture:
$75000, purchaseof trading stock:$34000*trading stock on hand(cost) $9000 *fees received for decorating advice $140000 *debtors
ac receivable $8000 *service fees as yet unbilled $60000 * wu’s drawings $40000 what amt should Wu include in his taxable income
Ans:$138000.
Q6.jayco pty ltd is a resident private company. It’s summery financial yr date from the yr is as follows:trading
income=400000: cash dividends received=10500:opening stock1500: purchase=98000:closing stock(13000)=100000:operating
expenses=150000:45000:dividend paid=15000:franking account(cr)=2000 Ansjaycoz taxable income is 165000
Q7. Which of the following is not an allowed business deduction for tax purposeoeAns: a business owner membership fee of a
recreational club
Q9. Which of the following is not allowable deduction for tax purpose. Ans audit fees incurred by a private company
Q10. Which of the following outgoing is not deductiable expense under s8-1 Ans the cost of food and drink paid by a professional
footballer to enable him to gain weight to improve his prospectus of being a better player and ean more income.
Q11. Which of the following would b regarded as entertainment for the purpose of DIV 32. An food provider at business lunch.
Q12. Tempt &co provides staff to business in the hospitality industry. The firm employees 3 full time staff members.during the yr
ended 30 june the following expenses were incurred by tempt&co –reimbursement of 13000$ paid to staff to cover travel and
accommodation expense incurred by the staff in carrying out their normal employment duties; food and drink cost$6000 paid to
entertain prospective business clients; food , drink and accommodation cost of$ 2300 for the firms a manager to attend a business
related conference?
Ans: deductible amt is 28000.
Question 13: which statement abt substantiation of expenses is correct?
Ansemployes need the substantiate the work expenses.
Q14. Which of the following abt deductibility of gifts under Div 30 is true? Ans: the gift of propery value is less than $5000 must be
purchased with in 12 months of the gift. If a gift is property the deductible amt is the lesser of its cost to you or its market value at the
time of the gift: the value of the gift must be $2 or more.
Q15, which of the followings are depreciating assets for divison 14 purpose..Ansnon of them.
Q16 on 30thsept 2010 big co ltd purchased the 2nd hand machine for its factory at the cost of 42000. Tarsportationcost were 1000 and
its cost 2000to dismantle n remove old machine. On 1st day of operation the new machine broke down and had to be repaired at the
cost of $4000. What is the cost of for depreciation purpose under d40.Ans is 47000.
Q 17 an item of depreciating plant is purchased on 1stjuly at 40000. It is depreciated at 40 % of diminishing balance basis and is used
80% for business purpose. What is the ant deductible in the 2nd yr. of ownership.Ans: 7680.
Q18 which of the following is trading stock?Ans sub devided land held by land developer.
Q19 abc ltd has 20 items of trading stock on hand at 30 june. Each item has cost of $1 replacement cost of $2, and market selling price
of $4. 5 items r beyond their used by date and hav zero salvage value. Assuming abc wishes to minimize its taxable income it should
value closing stock on hand at? Ans: $15
Q20 a private company had the following transaction in relation to if franking accounts: opening credit balance on 1 stjuly 2010 of
23000 received a devident of 70000 on 4thsept 2010 with 25000 frankin credit attached: paid income tax installment of 27000 on
28thoct 2010: received a refund of tax 7800 on 27 nov 2010. Paid income tax installment 620000 on 28 thfeb 2011: paid a devident of
49000 fully on 23rd march 2011: paid income tax installmet of 15000 on 28thapril 2011. What is the closing balance of franking
account on 30thjune 2011. Ans:81200.
Q21which of the following couldn’t be devident for tax purpose under s44 ans: frequent flyer point assured by the share holder by the
Qantas discount on purchased made by shareholder in the company store: cash payment of $10 in respect of $10 remeable preference
share
Q22: alanpurched a rental property on 4thjuly 2010 an immediately rented it out. In 2010/2011. He incurred the following expenses
what is the cost baed of the asets on purchased price= 450,000. Stampduty=15750 legal fees to transfer titel=1700: mortgage interest
=24000: borrowing expenses =2700.asvertising for tenant =500.extention to kitchen =25000.councilrate 1800. Ans:492450.
Q23 a purchased property in2005 for 120000:over5 yrs capital allowance of 12000 were deductible. The property was sold in 2011
for 80000. Ans :capital loss is 28000
Q24 margret at a garage sale at her home on 5th may 2011 and sold the following items what is her net capital gain. Sales of 2005
kawasaki motor 18000 accuried for 10500 in 2005. Sales of a painting for 750 :acried for 550 in 1999 : sales of piece of jewelery for
1900 given by her mothe r in 1981 and then value at 600 :sales of a painting for 5000. The painting were in herited by her father who
died on 24 june 2001. Her father purched the painting for $400 in 1993.Ans $100.
Q25 desemond has the following carry forward capital losses- losses on collectale =4000; ordinary shares=capital losses=7000. In
2010/11 he sold the following;land costing 25000 1stjune 2002; sold 36000 may2011;painting costing 5600 in july 2003; sold 24000
june 2011. What is desmond’s net capital gain for 2010/11 Ans;9200
Q26.on 1 july Mai started working as a public accountant. During the yr c received 65000 in fees and at june 30 outstanding fees were
25000.unbilled work in progress at 30 june was 15000. Mai received a leather case valued at 200 from a greatful client. Her
accessable income for the yr is Ans;65000
Q27 pomb ltd is a uk resident company that makes electrical components in the uk and export them. In the current yr it sent 200000 of
components to an Australian importer. Worldwide exports were 1million. The Australian agent paid pomb franchise fee 75000.
Pombaccessable income is ans;75000
Q28.bev is employed as an industrial chemist. Her remuneration is made up of following amounts; salary=65000; annual
bonus=4000; uniform allowance=600;membership fees 450; accessable income for the yr is ans;69600.
Q29.BA and co is a large retailer.during the yr following were received;35000frm an insurance company as compensation for trading
stock loss;40000 as consideration for the disposal of a depreciating asset that had an adjustable value of 45000; 25000 an incentive to
inter a lease Ans; accessable income=60000
Q30 which of the following are exempt income; Ans fee received by a public university form full fee paying students.
Q31.beaus boutique is a retail store returning on accrual basis. Based on the following which statements are correct; sales
income=120000; sales refund=2000; net sales=118000; opening stock=25000; purchases=70000; closing stock=30000 Ans;
accessable income=125000.
Q32 lee is an interior designer started working as a sole trader on 1 july 2008 and returns on accrual basis. She provides decorating
advice and sells furniture. In yr ended 30 june 2009 following occurred; cash sales of furniture=75000;purchase of trading
stock=34000; fee received for decorating adivice 14000; debtors =8000; service fees as yet unbilled=16800; trading stock on
hand=9000; staff salaries=60000;lei’s drawings=40000.Ans; accessable income 219000.
Q33 refer to info in Q32 what is li’s taxable income.Ans; 138000.
Q24. The truistee of the jones family trust, a resident discretionary trust, exercises its discretion to apply $10,000 to the benefit of 19
yrs old jones junior. Whioch of the following correctly states the tax consequences? 1) Jones junior is deemed presently entitled by
ITAA36 s 101. 2) Jones junior is assessable under ITAA36 s97 on $10000. 3) Jones junior is a prescribed person in terms of ITAA36
s102AC. 4)Jones junior is deemed presently entitled by ITAA36 s95A(2). Ans: 1 and 2.
Q25. Kate borrowed $50000 from the local bank on 30 june 2009 for a period of five yrs at an interest rate of 10%pa. interest is to be
paid annually in arrears on 30 june (first payment being due on 30 june 2010). The purpose of the loan is to invest $25000 in shares
yielding very good dividends and to on-lend $25000 to her brother Nicholas, at an interest rate of 4%pa. what amount can kate claim as
her interest expense in the current yr assuming that she paid $10,000 to the local bank on 30 june 2010? Ans: $3500.
Q1. Alpha &co is a large retailer. During the yr ended 30 june the following amounts were received: *$40000 from an insurance
company as compensation for loss of trading stock; *$35000 as consideration for the disposal of a depreciating asset that had an
adjustablevalue of $45000. *$20000as an incentive to enter into a lease of new shop premises, which of the following amounts is
included in BA’s assessable income? Ans: $60,000.
Q2. Clean power pty ltd is a company producing electricity by wind power in march 2011 the company agreed to pay Joe Farmer
$7000 per yr on 1 april for 10 yrs to permit it to build a windmill on joe’s farming property. What is Joe farmer’s tax position? Ans:
An amount of $7000 is taxable annually (for ten yrs).
Q3.Tom is employed by a wholesale company as an account manager. His remuneration package is made up of the following amounts:
salary $70000 annual bonus $5000 employers contribution to an industry superannuation fund: $6750 fringe benefits package to the
value of : $18250 total: $100,000 Tom’s assessable income for the yr is : Ans: $75,000
Q4. Smart Alex is a retail menswear store. Based on the following information, which of the statements below is correct? Sales income
120000, opening stock 25000 Purchases 70000, closing stock (cost) 30000 Ans : Assessable income totals $125,000.
Q5. Hector Wu is an interior designer who commenced business as a sole trader on 1 july 2010 and returns on an accrual basis. He
provides decorating advice and sells item of furniture. In the yr ended 30 june 2011 the following occurred: *cash sales of furniture:
$75,000, purchases of trading stock; $34000 *trading stock on hand (cost) $9000 *fees received for decorating advice $140,000
*debtors ac receivable $8000 *service fees as yet unbilled $16000 *staff salaries $60,000 * Wu’s drawings $40,000 what amount
should Wu include in his taxable income? Ans: $138,000.
Q6.jayco pty ltd is a resident private company . its summary financial year data for the year is as follows:trading income = 400000;
cash dividends received = 10500; opening stock = 15000; purchase = 98000; closing stock (13000)=100000; operating
expenses=150000; tax expense= 45000; dividends paid= 15000; franking account(Cr)= 20000 ANS jaycoz taxable income is 165000
Q7.which of the following is not an allowable business deduction for tax purpose ANS a business owners membership fee of a
recreational club.
Q9Which of the following is not allowable deduction for tax purpose. ANS audit fees incurred by a private company
Q10 Which of the following outgoings is not a deductible expense under s8-1 ANS the cost of food and drink paid by a
professional footballer to enable him to gain weight to improve his prospects of being a better player n earn more income.
Q11 Which of the following would be regarded as entertainment for the purpose of DIV 32 ANS food provided at business lunch.
Q12 Temp & co provides staff to business in the hospitality industry. The firm employs 3 full time staff members. During the year
ended 30 june the following expenses were incurred by temps&co – reimbursements of $13000 paid to staff to cover travel and
accommodation expenses incurred by the staff in carrying out their normal employment duties; food and drink costs of $6000 paid to
entertain prospective business clients ; food and drink costs of $8000 paid to entertain staff . the expenses are considered to be fringe
benefit; food n drink cost of $4700 paid for morning and afternoon tea and coffe consumed by staff and clients ; food , drink and
accommodation costs of $2300 for the formz amanger to attend a business related conference ANS deductible amount is $28000
Q13 Which statement about substantiation of expenses is correct ANS Employees need to substantiate work expenses
Q14Which of the following about deductibility of gifts under DIV 30 is true ANS a gift of property valued at les than $5000must
be purchased within 12 months of the gift; if a gift is property , the deductible amount is the lesser of its cost to you or its
market value at the time of the gift ; the value o the gift must be $2 or more
Q15 Which of the following are depreciating assets for DIV 40 purpose ANS none of them.
Q16 On 30 sep 2010 big co ltd purchased a secondhand machine for its fatctory ta the cost of $42000. Transportation cost were $1000
and it cost $2000 to dismantle n remove old machine. On first day of operation the new machine broke down and had to be reapired a
cost of $4000 What is the cost of machine for depreciation purpose under DIV 40 ANS $47000.
Q17 An item of depreciating plant is purchased on 1st july at $40000. It is depreciated at %40 on the diminishing balance basis an is
used 80% for business purpose . what Is the amount dudeuctuble in the second yr of ownership. ANS $7680
Q18 Which of the following is trading stock ANS subdivided land held by land developer.
Q19 ABC ltd has 20 items of trading stock on hand at 30 june. Each item has a cost of $1, replacement cost of $2 and market selling
price of $4. Five items are beyond their use-by date and have zero salvage value. Assuming ABC wishes to minimize its taxable
income it should value closing stock on hand at : ANS $15
Q20 A private company had the following transactions in relation to its franking account : opening credit balance on 1 st july 2010 of
$23000; received a dividend of $70000 on 4th sept 2010 with $25000 franking credits attached; paid income tax instalment of $27000
on 28th oct 2010; received a refund of tax of $7800 on 27th nov 2010; paid income tax instalment $20000 on 28th feb 2011; paid a
dividend of $49000 fully on 23th march 2011; Paid income tax instalment of $15000 on 28 th April 2011. What is the closing balance
of the franking account on 30 une 2011 ANS $81200
Q21 Which of the following could not be a dividend for tax purposes assessable under s44 ANS – frequent flyer points assured by a
shareholder in Qantas ; discount on purchases made by a shareholder in the companyz stores ; a cash payment of $ 10 in
respect of a $10 redeemable preference share.
Q22 Alan purchased a rental property on 4th july 2010 and immediately rented it out. In the year 2010/2011 he incurred the following
expenses. What is the cost base of the asset purchase price = 450000; stamp duty= 15750; legal fees to transfer title = 1700 mortgage
interest = 24000; borrowing expense 2700; advertising for a tenant= 500; extension to kitchen = 25000; council rates= 1800 ANS
492450
Q23 A purchased property in 2005 for $120000; over 5 years capital allowance of $12000 were deductible . the property was sold in
2011 for $80000. Capital loss is $28000
Q24 Margaret had a garage sale at her home on 5th may 2011 and sold the following items . what is her net capital gain? --sale of
20005 kawasaki motor for $18000, acquired for $10500 in 2005; sale of a painting for $750 ; acquired for $550 in 1999; sale of a
piece of jewelery for $1900 given by her mother in 1981 and then valued at $600; sale of a painting for $5000. The painting was
inherited by her late father who died on 24th june 2001. Her father purchased the painting for $400 In 1993 ANS $100
Q25 Desmond has the following carry forward capital losses – losses on collectables = 4000 ordinary= capital losses = 7000 . in
2010/11 he sold the following : land costing $25000 in june 2002; sold $36000 May 2011; painting costing $5600 in july 2003; sold
$24000 june 2011. What is desmonds net capital gain for 2010/11 ANS $9200
Q1 On 1st july Mai started working as a public acoountant. During the year she received $65000 in fees and at june 30 outstanding
fees were $25000. Unbilled work in progress at 30 june was $15000. Mai received a leather case valued at $200 from a grateful
client . Her assessable icome for the year is ANS 65000
Q2 Pomb LTD is a uk resident company that makes electrical component in the UK and export them . In the current year it sent
200000 of components to an Australian importer. Worldwide exports were $1m. The Australian agent paid Pomb franchise fee
$75000. Pombs assessable income is $75000
Q3 Bev is employed as an industrial chemist. Her remuneration is made up of following amounts : salary =$65000 ; annual bonus =
$4000; uniform allowance = 600; membership fees =450 Assessable income for the year is $69600
Q4 BA & CO is a large retailer. During the year following were received; $35000 from an insurance company as compensation for
trading stock loss; $40000 as consideration for the disposal of a depreciating asset that had an adjustable value of $45000;$25000 an
incentive to enter a lease. Assessable income = 60000
Q5 Which of the following are exempt income; ANS fees received by a public university form full fee paying students
Beaus Boutique is a retail store returning on accrual basis. Based on following which statements are correct; sales income = 120000;
sales refunds= (2000);
Net sales = 118000; opening stock= 25000; purchases= 70000; closing stock= 30000. Assessable income = $125000
Q7 Li is an interior designer started working as a sole trader on 1st july 2008 and returns on accrual basis. She provides decorating
advice and sells furniture.in yr eneded 30june 2009 following occurred: Cash sales of furniture=$75000; Purchase of trading
stock=$34000; fees received for decorating advice=140000 Debtors=$8000; service fees as yet unbilled=$16800; Trading stock on
hand= $9000; Staff salaries= $60000; Li’s drawings =$40000. Assessable income:219000
Refer to info in Q7 . What is Li’s taxable income ANS $138000
Q9Jayco private is a resident company .. its summary financial data is : Trading income= $400000; cash dividends received=
$10500; opening stock= $15000; Purchases =$98000; closing stock ($13000); operating expenses = 150000; tax expense= $45000;
Dividends piad = $15000; Franking account balance =$20000 ; taxable income = $165000
Q10 An item of depreciating plant is purchased on 1st july at a cost of $15000.Its depreciated at 40% on the diminishing value basis
and is used 80% for business purpose. What is the deductible amount ANS $2880
Q11 Which of the following would be classified as “depreciating assets” under s40-30 ANS an automated drive thru carwash;
portable bulidings used as sleeping quarters for mine workers; carpets in a rental property
Q12 Jo buys a luxury car at a cost of $114360 on 1st july to use 100%in income producing activites. It has useful life of 8 years and
diminishing value method of depreciation is used and is sold on 30th june for $100000 Assuming a depreciation cost limit of $57180.
Which of the following are correct.ANS the depreciation rate is %25; depreciation expense is $14295; there is an assessable
balancing charge of $7115
Q13 Bill uses a med sized motor car for employment. His employer reimburses him at a rate of $0.75/ km. Bill estimates that during
the yr 15% of the total distance travelled was for employment and he was reimbursed $1687.50 by employer. The total cost for the yr
is $13000. Under the substantiation rule bill is entitled for a deduction of ANS $1553 (being the prescribed rates for 2250km for a
medium car)
Q14 Which of the following statements about deductibility of gifts under Div 30 are untrue. Ans a gift can be in the form of money
or property but not in the form of trading stock.
Q15 A taxpayer purchases an office building. Which of the following can be deduced in full in the yr expended ANS insurance on
the building.
Q16 Which of the following regarding as entertainment for the perpose of DIV 32? Food provide at a business lunch.
Q17 Which of the following statement about companies partnership and trust is untrue? All the statements are true.
Q18 ABC LTD a resident public company has net profit of 1.5m and taxable income of 1.4m which of the following statement would
explain the difference? The company received non assessable, nonexempt income.
Q19 A resident company has the following franking account details at 30 june (opening bal 100cr)(Credit 2007/08 200,debits 2007/08
350, Closing bal 50dr)which of the statement best states its tax position? The company must pay franking deficits tax of 50 and
there is a tax offset of 35. 20 A and B carry on business as partners. The partnership drives assessable income of 50000 and incurs
deduction of 30000 the partnership agreement provides for a salary of 25000 to A and there after profit and losses to be equally
shared? What is the s90 net income/loss? Net income 20000
Q21 A tax payer has three items of trading stock on hand with a cost of $1 replacement cost of $2 and market selling price of $3 .
Which of the following best statement of the total value of stock on hand? Any value between 3 and 9
Q22 Which of the following statement is true of partnership and trust? Losses are retained in trust but distributed in partnership
Q23 Elle purchased and sold within the past 12 months the following Purchase price sale price
Diamond ring (private use only)
Set of gold clubs (private use)
Trading stock
Dep assets (no private use)
Antique vase (private use only)
Elle has carry forward capital loses on collactable from last year of 2000 what is elle net capital gain/loss 360, 000, some other
amount
Q25 Emma had a garage sale at her home on 5 may 2009 and sold the following items for which of the following transactions would
she be liable for capital gains tax? Sale of painting for 750 acquired for 550 in 1999.
Q1 Gul LTD is a nonresident company that has many business activities throughout the world. It earned 23000 in interest income
from investment it had in UK. It earned 5000 in dividents received from an Australian company in which it had a minor shareholder .
Gul also earned 35000 in income from the sale of goods to an Australian company. Earned 27000 in rental income from property
owned in New Zealand . On above assessment what amount is assessable s6-5 of income tax assessment 40,000
Q2 Kate has been carring on her consulting engineer business for the past 10 years. She employs a number of people in her business.
Full time secretary 25000,market rate 26000, Part time consulting engineer paid 45000, market rate 44000, full time cleaner 56000
market rate 23000. Kate cliam salaries $93000
Q3 A consulting returning on an accrual basis contracts on 1 june 2007 to compile a report for a free of 30000. The client is to be
billed for the work upon the completion with payment due in 30 days . The work is undertaken during the period . Payment received
in 12 july 2008?
On 15 june 2008 when an invoice is issued.
Q4 Which of the following statement about Arthur Murray is true?
The accounting treatment of of advance payments on confirm the judicial view that these payments were not income.
Q5 Which of the following amounts is assessable under to s6-5? An amount received by way of testimonial following a
professional cricketer retirements.
Q6 Which of the following statements is most correct?Tax evasion occurs where a tax payer deliberately does not report all of
their assessable income.
Q7 Which of the following statement about deductibility of gifts under DIV 30 untrue?A Gift can be in the form of money or
property , but not trading stock.
Q8 An item of depreciating plant is purchased on 1 july cost was 10000 and depreciated at 40% on diminishing balance basis and
used 80% for business purpose . What amount is deductable in the second year of ownership? 1920
Q9 BAT family trusts is an inter vivos discretionary trust, summary financial data for 2007/08 Tax loss 5000, cash dividends received
21000, allowable deductions
25000 Nil
Q10 A person may be a resident for part of the year and a nonresident for other parts of the year. The above statement is true
Q11Which of the following statement about entertainment expenses is not true
Food and drinks reasonably incidental to a business meeting is an allowable deduction.
Q12 Which of the following statement is true of partnerships and companies? Losses are retained in companies but distributed in
partnerships.
Q13 Which of the following amount is deductible in calculating s90 partnership net income? Cost of preparing a s91 partnership
tax return
Q14 A resident company has the following franking account details as 30 june (operating bal 100cr, credits 200, debits 350, closing
bal 50 dr) which of the following statement best states in tax p[osition? The company must pay franking deficit tax of 50 and there
is a tax offset of 35
Q15Which of the following statement about trust Is true? All of the statements are true
Q16 Kate is involved in buying and selling cotton and has a manufacturing in indonasia where she process raw cotton into cotton t-
shirts into sale in Australia and America. Purchased 1000 bales of cotton from australia to sell to indonasia. Prior to exporting the
cotton to Indonesia a Newzealander importer purchased the 1000 bales on tidy profit. What is the source of income from sale of cotto
to peter? Australia
Q17 Which of the following statement about GST legislation is most correct? The supplier of the good or service is liable to remit
GST to the ATO.
Q18 Mister hire LTD is a hire company which is registered for gst and hires out equipments to the public . It hired out set of tools to a
customer charging 110 for the hire equipment and security deposit 220. What is GST liability as a result of this hiring engagements?
$10
Q19 The net P&L figure shown in the financial account of a company will not need to be adjusted to calculate the taxable income of
the company for which of the following items Annual leave actually paid.
Q1 Which one of the following is allowable business deduction for tax purpose? A provision for unreported accidents debited to
an insurance company’s profit and loss accounts
Q2 Which of the following is an allowable business deduction for tax purpose? A business owner’s membership fees of
recreational club
Q3 Which of the following would not be an allowable deduction for self-education? Costs of a business degree incurred by a part
time employee of mac burger
Q4 which if any of the following is not an allowable deduction for tax purpose? A fine imposed on a taxi driver for speeding Cost of
repairs in May to the roof of the factory purchased in April Borrowing expenses of 500 in connection in a business loan granted on
30th June None of the amounts are deductible
Q5 Which of the following is trading stock? A demonstration car owned by a new dealer
Q6 Asif conducts a retail business. On 1st march 2008 he purchased a new building from which to conduct his business . The building
was too large for his present purpose so he leased 25% of the floor space . Expenses of 600 were incurred drawing up the lease
documents and 1500 of the borrowing expenses were incurred on the bank loan to purchase the building. To the nearest dollar what
amount is deductible in 2007/08? 700
Q7 The green finger gardening club a mutual body derived following amounts during 2007/08? Membership subs $21000, Temporary
members subs $4000, Interest (from building) $3000, sale of brochures $2000? 5000
Q8 Which of the following statement about repairs is correct? Repairs are restoration or renewal of a subsidiary part of an
entirety.
Q9 Corner store provides the following information about its trading stock? Opening stock $15000, Purchases $90000, Closing stock
(cost) $10000 The amount that would be an allowable deduction for the trading stock is $95000
Q10 A prepayment for trading stock is not an allowable deduction because
It is incurred under s8-1 but qualified as s70-15 (in that it must be on hand)
Q11 Which of the following is trading stock? Subdivided land held by a land developer.
Q12Which of the following statement about entertainment expenses is not true?
Food and drink reasonably incidental to a business meeting is an allowable deduction.
Q13 A taxpayer who carries out a business can deduct which of the following cost in cost in connection with an in-house facility?
Cost of free meal provided to employees in the premises.
Q14 A tax payer has three items of trading stock on hand with a cost of $2 replacement cost of $4 and market selling price of $6
which of the following is best statement total value stock on hand? Any of the above values
Q15 On 1 Aug 2007 Haulage LTD purchased a new prime mover heavy haulage vehicle with a list price of $120,000 addition costs
were , Stamp duty $5000, Registration $1000, Insurance $800, dealer delivery fee. What is its cost for depreciation purpose? 128000,
126000, 128000, some other amount
Q16 An item of an depreciable equipment with a cost of $10,000 is purchased on 1/7/07 it has an estimate life of 8 yrs and is used
wholly for income producing purpose. Assume the diminishing value method is used what would dep for the year 2007/08? 2500
Q17 An item of dep equipment with a cost of $8000 was purchased in 1/7/06 . It was used 80% for income producing perpose and is
dep at 25% on the diminishing value method. It is sold on 30/06/08 for a consideration of $4000 What is the opening adjustable value
for 2007/08? 6000
Q18 What is the deductable balancing adjustment in 2007/08? $400
Q19 J&J PTY company with jack and jill each holding %50 of its shares . in 2005/06 the company made a tax loss of 20000 . In
2006/07 jack sold all his shares to bill and the company had taxable income of 40000 the company carried out the same business in
both years. Which of the following state tax consequence? The loss of 20000 can be offset because of the continuity of business
test is satisfied
Q20 Which of the following is not assessable as dividend to a shareholder? Return of a capital
Q21 Over now PTY LTD is a private company in the course of liquidation after the sales of the assets and discharge of the liabilities
its financial position is as followed (Assets) cash 20000, Paid up capital 10000, retained earnings 10000. The liquidator makes final
distribution of 20000. Which state tax consequences An amount of 10000 is deemed to be a dividend
Q22 Which of the following statement is true of partnership and companies? Losses are retained in companies but distributed in
partnership.
Q23 An individual taxpayer has a carry forward capital loss of 5000. In March 2007/08. Sold assets were Block of vacant land (cost
35000, Purchase May 2007, Sale price 45000) caravan (cost 7000, April, 9000) Antique furniture (2000, June 2005, 1000) which net
capital gain arises in 2007/08? $5000
Q24 Which of the following would be partnership at general Law? X and Y carry on business as window cleaner.
Q25 Which of the following statement is true? Only the administrative appeals tribunal cans review an exercise of the
commissioner’s discretion. 26 A and B carry on a business as a partners . The partnership drives assembles income of 10000 and
deduction of 4000 the partnership agreement provides for a salary of 7000 to A and therefore profit and losses to be equal shares.
What is the s90 net income/loss? Net income 6000
Q27 Two franking account debits arise upon which of the following? Receipt of a tax refund by amendment and payment of
franked dividend.
Q28 For tax purpose private and public company must be distinguished for which of the following reason
Certain loans and payments to persons associated with private companies may be deemed dividends
Q29 Which of the following statement about trust is true? All of the statements are true
Q30 For Gst perpose to say that a supply is input taxed means what? There is no Gst payable and no input credit
available.Q.Which of the following outgoing is not a deductible under s8-1 of the Income tax assessment 1997.The cost of food and
drinks paid for by a professional footballer to enable him gain weight to improve his prospects of being a better player n earn
more income.Q.Which of the following expens is least likely to b deductible under s8-1 of the ITAA1997.An amt of 25000 paid for
a feasibility study prior to the commenced of a biz.The business never commence operation.Q.Which one of the following would
be classified as revenue expenses n be deductible under s8-1 of ITA1997.Legal cost paid by a builder after she was sued for
compensatn for faulty work on a building which she built for a client.Q.Which of the following expenses would not b deductible
under the second positive limb of s8-1 of theITAA.An employee claiming a work related expense.
MCQ
Q1.which of the following statements are correct? 1.A cash dividend paid out of an asset revaluation reserve is not assessable income.
2.A royalty (in its ordinary meaning) is assessable under s 15-20 if it is of a capital nature. 3.Companies that are are not incorporated in
aus cannot be residents for tax purposes 4.Aforeign exchange gain made on the purchase of trading stock is assessable income Ans.
1,2and 4
Q2. which of the following is (are) exempt income? 1.fees received by a public university from full-fee-paying
students.2.unemployment benefits received from the commonwealth government. 3.youth allowance received by a student in full-time
study. 4. Salary for part-time service in the naval reserve. Ans.1,and 4only
Q3. Beau’s boutique is a small retail store returning on a cash basis. Based on the following information, which of the statements
below is correct? Salary income 120,000 opening stock 25,000 purchases 70,000 closing stock(cost) 30,000. Ans assessable income
totals $125,000
Q4.Elle ply ltd carries on business as a manufacturer of furnishings and an interior designer. The company returns on an accrual basis.
In the year ended 30 june 2010 the following occurred:*cash sales of furniture $75000 purchases of trading stock $34000 fees received
for decorating advice
2870$140000 debtors (ac receivable) $80003920service fees as yet unbilled $16000 closing trading stock on hand (cost)
$9000 opening stock $6000 staff salaries $60000 dividends paid
10300 $40000. What is Elle’s taxable income? Ans $132,000
10000
Q5. Bev is employed by a chemical54000 company as an industrial68000
chemist. Her remuneration is made up of the following amounts: Salary
$65000 Annual bonus 4000 uniform 14600 allowance 600 membership17500 fee 450= $70,050 Bev,s assessable income for the year is :Ans
$69,600 2890 4200
Q6. On 30 sep 2009 big co ltd (not a small business entity) purchased a second hand machine for its factory at a cost of $42000. salary to Shayne. Calculate the s92 interests in the partnership net income for Cheryl and Shayne.
Transportation costs were $1000 and it cost a further $2000 to dismantle and remove the old machine. The life of the machine is seven - Solution. Section 90 partnership net income 600,000 Interest and salary are not deductible to the partnership; Roberts & Smith does
yrs. On 7 oct 2009 the machine broke down and had to be repaired at a cost of $4000 what is the cost for the purposes of depreciation not apply. Allocated: Cheryl 15,000 + 275,000 = 290,000 Shayne 35,000 + 275,000 = 310,000 = 600,000
under div40? Ans: $47000.
Q7.which of the following are depreciating assets for div 40 purposes? 1)cars owned by a car dealership provided to staff as fringe PART B In November 2012 Sheryl transferred ten dozen bottles of champagne from her private cellar to the partnership for sale
benefits and sold at 30,000km 2)A bridge at the entrance of a wine maker’s vineyard 3)land used for primary production. 4)Goodwill through the shop. The wine cost $7,200 when purchased in 2008 and was all sold for $15,000 in January 2013.
Ans: none of them. Required 3: Advise what tax consequences follow.
Q8.little co pty ltd is a resident private company. In 2008/9 it incurred a tax loss of $10,000.its shareholding in 2008/9 and 2009/10 is - Solution:.When a taxpayer ventures as trading stock an item she already owns, s70-30 operates to deem is sold and immediately
as follows: 2008/9 A. 35% B. 25% C.40% D.--= 100% . 2009/10 A. 25% B.20% C.15% D.40% =100% In 2009/10 the company has reacquired at its cost or market value.
taxable income of $25000 and wishes to apply the carry forward loss of $10000 against it. Which of the following statements correctly Since the item here is a personal use asset (and not a 'see), no capital gain accrues to Cheryl if she elects to value it at $15,000 and no
states the position with respect to such carry-forward losses? 1) little cannot claim the carry-forward loss becoz it fails the continuity of assessable amount arises to the partnership when sold.
ownership test. 2)little has satisfied the continuity of ownership test. 3)little has not satisfied the continuity of ownership test becoz D
had no shareholding in 2008/9. 4)little needs to fail the continuity of ownership test before it can claim the loss under the same PART C:In December 2012 Shayne took two dozen bottles of quality Australian shiraz from the shop's stock for consumption at a
business test. Ans: 2 and 4 private New Year's Eve party. The wine cost $900 and had a market value of $1,400.
Q9. which of the following are assets for capital gains tax purposes under s108-5? 1)shares 2)goodwill 3)trading stock 4)main or Required 4: Advise what tax consequences follow.
principal residence Ans: All of the items - Solution .Section 70-110 applies. Shayne is deemed to have sold it for cost and immediately reacquired it for the same amount.
Q10An individual taxpayer has a carry forward capital loss of $5,000 in march 2010 the following assets were sold:
Item cost Purchased Sale Price OUESTION 18 1. Family Hotels Pty Ltd [Hotels] is a resident private company that operates a chain of hotel/motels. The company
Block of vacan land 35,000 may 2007 45,000 makes good profits and is looking to expand its business interests. One option under consideration is purchase of the shares in Dealer
Caravan 7000 april 2004 10,000 Pty Ltd, [Dealer] (a resident private company), a used car business that has accumulated revenue losses.
Antique furniture 2000 june 2005 1000 Plan A is to acquire the shares in Dealer outright and use Hotels' superior management to trade out of difficulties. Plan B is to acquire
What net capital gain arises in 2009/10? Ans: $2500 the shares in Dealer and transfer several hotels under licence to Dealer and recoup the losses against the new income stream.
Q11.which of the following would be regarded as entertainment for the purposes of div 32? A)A restaurant meal of a food writer Required: Advise hotels of the tax consequences of the alternative plans.
2)theatre attendance by a film critic 3)meals on overnight business travel. 4)entertainment provided as a fringe benefit 5)food provided SOLUTION: Issue is the possible application of Div 165 and its continuity requirements for recouping past losses in the case of
at a business lunch Ans: 5 private companies. If Plan B is adopted there is a disqualifying change in shareholding, The 'continuity of business' alternative cannot
Q12.which of the following statements about deductibility of gifts under div 30 are correct? 1)A gift can be in the form of money or be satisfied because the company plans to enter into a transaction of a type it had not previously carried on. Plan A will be effective
property, but not trading stock. 2)A gift of property valued at less than $5000 must be purchased within 12 months of the gift 3)if a gift
provided exactly the same business is carried on and no new transactions are entered into. (ecdae-cdada0ik tu
is property, the deductible amount is the lesser of its cost to you or its market value at the time of the gift. 4) the total value of a gift
must be $20 or more. Ans: 2,3 and 4 das)
Q13. A taxpayer who carries on a business purchased an office building on 1 july. Which of the following can be deduced in full in
that yr?Ans: D insurance on the building
Q14. Bill owns a medium sized motor car that at times is used in the course of his employment. During 2009/10 he travelled 2,250km Question 19. Federated Press Ltd is the publisher and distributor of Mag Wheel and Wheels Mag, periodicals aimed at the motoring
for employment related matters. His employer reimbursed him at a rate of $0.75 per km. Bill estimates that during the yr 15%of the enthusiast. As part of a promotional exercise, Federated Press announced a completion under which the registered newsagent who
total distance travelled was for employment related purposes and he was reimbursed $13000. Under the substantiation rules bill is recorded the greatest volume of sales won a four-wheel drive vehicle. Joe J aloppy, proprietor of Newtown News & Tatts was the
entitled to a deduction of (to the nearest dollar) Ans: $1665 [being the prescribed rates for 2,250km for a medium car ] winning agent.
Q15 Bea leases a car that is used 100% for income producing purposes. At the end of the lease period , Bea acquires the car at its Required: Advise Joe of any income tax consequences.
agreed residual value. One yr later Bea sells the car at a profit of $2000 which Solution:The issue is whether the prize is a windfall gain or the product of the taxpayer's income producing activities. Cooke &
Sherden is relevant as are Kelly and Stone's cases.
QUESTION 16 (a)Kerry proposed to purchase a block of four flats he intended to rent to tenants. Before the purchase she contracted In regard to C&S, there is a relevant services relationship between Joe and the publisher that would satisfy sl 5-2 Wit is concluded the
with a building inspector to assess the building and advise what expenditure would be required. The inspector advised that $10,000 amount is not ordinary income. The facts differ from C&S in this regard and convertibility is not an issue either.
would be required for plumbing, roofing and painting. The building was purchased on 1 September 2013. The plumbing, roofing and Participating newsagents are in a similar position to Kelly. If they performed well enough, they earned a prize. It is not a case such as
painting work was finished and the first tenant commenced on 1 October 2013. Required 1: Advise Kerry whether or not she would Scott where the payment was referable to personal qualities.
be entitled to a deduction for $10,000. [You should refer to appropriate cases.] In regard to Stone it is clear that Joe is carrying on a business and that (using Kirby J's analysis) intermittent and irregular prizes
(b)Shortly after the first tenants moved in, a section of the upstairs floor collapsed and Kerry was advised the building was infested
with termites and it would be necessary to spend -n • $30,000 to have the ceiling/flooring replaced. Kerry decided to use steel and become income when the 'unifying ingredient' of a business is added. (acdeb-bcbbc)das tu v)
specially treated timber material to ensure there were no further problems. The work was completed on 1 February 2014. Required 2: The prize is income by ordinary concepts, assessable under s6-5. ITAA36 s21 operates to deem money value to have been received.
Advise Kerry whether she would be entitled to a deduction to some or all of the $30,000. [You must refer to case law Required 3: Convertibility is not an issue but would be accommodated by s21A if it was.
Suppose Kerry paid $1,500 to a pest control company to treat the remaining parts of the building. Would he be allowed a deduction?
Under what section(s)? Explain.
Solution: Required 1: Initial repairs are capital in nature: Law Shipping Co [Western Suburbs Cinemas/Thomas. There is no
deduction for notional repairs.
Required 2. Repair is restoration by renewal of subsidiary parts of a whole: Lurcott v Wakeley & Wheeler. Restoration of function is
the critical factor but where the actions go beyond repair and provide additional advantages, including the advantage of lower future
repair costs [Western Suburbs Cinemas] the amount is an improvement or capital. The use of specially treated materials seems to be
an improvement. Required 3. `Repair' is not defined in the Acts. It takes its meaning from case law. This means that the amount of
$1500 paid to the pest control company is not a repair in that it is not 'restoration or renewal of subsidiary parts of a whole' — Lurcott
v Wakely & Wheeler. It is not 'restoration of a thing to a condition it formerly had' — W Thomas & Co. This conclusion is not
without its difficulties since it would be prudent to anticipate future maintenance requirements. In Thomas & Co Windeyer J
acknowledged this and said preventative expenditure provided one instance of the difficulty of limiting deductible expenditure to
defects arising from the taxpayer's operations. His Honour quipped: 'a stitch in time is as much a repair as the nine it saves'. However,
this is probably obiter dicta and although we tend to speak in terms of `repairs and maintenance' it is not enough of an answer simply
to say the amount is a repair in terms of s25-10.
The alternative is to seek a deduction under s8-1 and to be successful that would require establishing the amount was not capital in
nature. The English authorities could be helpful hers, especially Vallambrosa Rubber Co Ltd wherein Lord Dunedin said: 'capital
expenditure is a thing that is going to be spent once and for all income expenditure is a thing that is going to recur every year'.
Although termite treatment is not an annual expenditure, it is recurrent.

QUESTION 15 a) Farmer Brown is a primary producer producing wheat and wool. He has not previously derived income from sources
other than primary production. In March 2014 he was approached by Sunshine Festivals Pty Ltd, a company conducting music festivals
with a proposition to lease 100ha of his property for a period of four weeks in November 2014. The company undertakes to remove all
equipment at the conclusion of the festival and restore the landscape to its original condition, at their cost. An agreement is reached to pay
Farmer Brown $5,000 in April 2014 to secure the deal and another $5,000 at the conclusion of the 2014 festival. A further amount of
$1,000 is paid for an option to use the property in 2015.
Required: Advise Farmer Brown whether some or all of the payments are assessable income in 2013/14.
b) Family Hotels Pty Ltd [Hotels] is a resident private company that operates a chain of hotel/motels. The company makes good profits
and is looking to expand its business interests. One option under consideration is purchase of the shares in Dealer Pty Ltd, [Dealer] (a
resident private company), a used car business that has accumulated revenue losses of $1m.- Plan A is to acquire the shares in Dealer
outright and use Hotels' superior management to trade out of difficulties. - Plan B is to acquire the shares in Dealer and transfer several
hotels under licence to Dealer and recoup the losses against the new income stream. Required: Advise Hotels of the tax consequences of
the alternative plans. c) Farmer Jones carries on the business of primary production but in recent years has been running at a loss. He still
owes a considerable mortgage debt to Country Bank Ltd. He decides his best option is to lease the farm for $70,000pa. Under the terms
of the lease agreement the money is to be paid monthly directly to Country Bank Ltd. In 2013/14 the $70,000 amount comprises $20,000
interest and $50,000 principal.
Required: Advise Farmer Jones on the tax consequences.
SOLUTION (a)Although the transaction is unusual, isolated it is entered into with the intention of makingp profit and therefore ordinary
income: Cooling; Coles-Myer Finance; California Copper.
Characterising the April payment of $5,000: it may be seen as a 'booking fee', derived when received (since the earning is complete) or
simply a rent — also derived when received. The balance is derived in November.
The amount of $1,000 is a CGT Event D2 (or D1 acceptable).
(b) Issue is the possible application of Div 165 and its continuity requirements for recouping past losses in the case of private companies.
If Plan B is adopted there is a disqualifying change in shareholding, The 'continuity of business' alternative cannot be satisfied because
the company plans to enter into a transaction of a type it had not previously carried on. Plan A will be effective provided exactly the same
business is carried on and no new transactions are entered into.
(c) The amount of $70,000 s6-5 assessable, constructively derived or deemed to be derived by s6-5(4).
Renting the farm will mean that Brown is no longer carrying on a business. The amount of $70,000 is property income but that does not
mean Brown is excluded from s8-1(1)(b). The issue is whether there is a nexus with assessable income generally or with the previous
business activity.
In Amalgamated Zinc HCA held there had been a complete cessation of the activity out of which the obligation arose
But, in Placer Pacific the FCA said: `Provided the occasion for the loss or outgoing is to be found in the business operations directed to
gaining or producing assessable income, that loss or outgoing will be deductible...'
In Brown, for example, interest continued to be deductible after the business was sold.
On this authority interest continues to be deductible: s8-1.

QUESTION 14 PART A
In 2005 Tern and Timmy Tempranillo established a boutique wine retailing business in partnership. An agreement signed in 2005
provides a salary of $30,000 be paid to Tern and thereafter profits and losses be shared equally.
For the year ended 30 June 2014 the Profit & Loss Account showed the following:
Sales $1,500,000 Cost of sales 1,200,000 Expenses [Tax Deductible] (200,000) Net Profit $ 100,000
Required 1: (i) Briefly explain the legislative scheme dealing with trading stock. (ii) In what circumstances will the accounting amount
of $1,200,000 be tax deductible?
Required 2: Assuming s90 partnership net income is $100,000, calculate the s92 interests in the partnership net income for Tern and
Timmy.
PART B In November 2013 Tern transferred ten dozen bottles of champagne from her private cellar to the partnership for sale through
the shop. The wine cost her $7,200 when purchased in 2008 and was all sold for $15,000 in January 2014.
Required 3: Advise what tax consequences follow. In December 2013 Timmy took two dozen bottles of quality Australian shiraz from
the shop's stock for consumption at a private New Year's Eve party. The wine cost $900 and had a market value of $1,400.
Required 4: Advise what tax consequences follow.
Solution:Part A Required 1: (i)Trading stock defined in s70-10 Deemed not to be capital: s70-25 Purchases deductible: s8-1 subject to
being 'on hand': s70-15 Changes on the value of stock 'on hand' taken into account: s70-35
(ii) An amount equal to accounting 'cost of goods sold' is effectively tax deductible when both opening and closing stock are valued at the
s70-45 'cost' option
Required 2: Section 90 partnership net income 100,000 Salary is not deductible to the partnership. Allocated: Terri 30,000 + 35,000 =
65,000 Timmy 35,000 = 35,000 = 100,000
Required 3: When a taxpayer ventures as trading stock an item she already owns, s70-30 operates to deem it sold and immediately
reacquired at its cost or market value. Since the item here is a personal use asset (and not a 'see), no capital gain accrues to Cheryl if she
elects to value it at [market value] $15,000 and no assessable amount arises to the partnership when sold.
Required 4 Section 70-110 applies. Stock is deemed to have been sold at its cost and immediately reacquired it for the same amount.
Partnership's assessable income will include that amount which would be a Drawing for Timmy.

QUESTION 17 PART A In 2005 Cheryl Shiraz established a boutique wine retailing business. She operated the business in
partnership with her husband, Shayne. Profits and losses are shared equally.
For the year ended 30 June 2013 the Profit & Loss Account showed the following:
Sales Cost of sales Expenses [Tax Deductible] Net Profit
$2,000,000 1,200,000 (200.000) $ 600,000
Required 1: (i) Briefly explain the legislative scheme dealing with trading stock. (ii) In what circumstances will the accounting
amount of $1,200,000 be tax deductible?
- Solution: (i)Trading stock deemed not to be capital: s70-25 Purchases deductible: s8-1 subject to being 'on hand': s70-15 Changes
on the value of stock 'on hand' taken into account: s70-35 (ii) An amount equal to accounting 'cost of goods sold' is effectively tax
deductible when both opening and closing stock are valued at the s70-45 'cost' option

Required 2: The partnership agreement provides for the payment of $15,000 interest to Cheryl on her capital investment and $35,000