Posted: July 17th, 2022

Assignment, Steve runs a business that manufactures a specialised type of extra strong glass

1.PART A
Required: Ignoring capital gains tax, discuss whether any part of the $4m constitutes ordinary income.

Steve runs a business that manufactures a specialised type of extra strong glass. This business has a number of customers. Steve buys the essential raw materials to make the glass from the only known supplier of such materials, Rare Ltd. If Steve was unable to purchase the materials from Rare, the factory would only be able to produce regular glass. Steve’s contract with Rare is of 8 years duration and has 6 years to run.

During February 2020, Rare Ltd informs Steve that it is cancelling the contract. As a result, Steve will not be able to sell the specialised glass to his customers. As compensation, Rare Ltd gives Steve $4 million. Rare Ltd’s internal documents indicate that $3 million of this was calculated on the basis of how much profit Steve’s business will lose due to being unable to sell such specialised glass to its buyers. The remaining $1 million is based on the loss of Steven’s reputation.

2.PART B
Required: Ignoring capital gains tax, discuss whether the following receipts constitute ordinary income:
• $12,000
• $1,500.

Samantha is a full-time IT employee. However, she likes to sing and one day would like to make her living from her singing abilities.

On weekends and evenings, she writes songs and records herself singing. Typically, she does this for 8-10 hours per week. Ordinarily, she uses her mobile phone and a tripod to record the videos but recently purchased professional studio recording equipment worth approximately $5,000. She uploads her recordings to YouTube, where she has a substantial following. Many of her songs are popular and have a few hundred thousand hits. She has earned $12,000 in the tax year due to such a high number of YouTube hits.

Samantha wishes to cash in on her growing popularity and so, capitalising on her fame, sells some of her old clothes and shoes on Ebay for $1,500 (substantially more than she would have received had she not been so famous).

3. PART A
Required: Discuss the Net Capital Gain for Simon for the 2019-20 tax year. In your answer, ignore any possible application of the small business concessions.

Where appropriate support your answer with legislative and case authority.

Simon bought his first house in April 2015 and paid $600,000 for it, as well as paying stamp duty in the amount of $30,000. After living in it for 2 years, he commenced renting it out in April 2017. At the time, its market value was $650,000. After it had been rented out for a year, Simon had the entire house repainted, during April 2018, at a cost of $5,000. At the same time, Simon also put in new decking in the backyard of the house (there was no decking there beforehand). This cost $3,000 in wood and other parts. Simon did the work on the decking himself. He estimates that the labour would have cost $7,000 had he paid someone else to do it.

In 2019, Simon paid $5,000 in legal fees. The next-door neighbour to the house disputed ownership of the some of the land that Simon’s house occupied. The neighbour was unsuccessful in their claim.

During February 2020, Simon sold the house to his sister for $800,000. He estimates that the market value at the time was $900,000.

Simon also inherited an apartment from his uncle in May 2017, which he immediately rented out. At the time, its market value was $500,000. His uncle had purchased the house in 1980 for $50,000 and had used it as a rental property. During May 2018, Simon took a $40,000 mortgage on this apartment, which he used to renovate the kitchen and bathroom. During May 2020, Simon sold this apartment for $700,000, with the purchaser agreeing to take over the remaining mortgage of $30,000 on the apartment.

During June 2020, Simon sold some shares for $250,000. These had been purchased in 2017 for $320,000.

4.Part B
Required: Assuming none of the transactions give rise to ordinary income, discuss the CGT consequences of the following for all of the named parties. In your answer, ignore any possible application of the small business concessions.

i) Amber inherited the following items during February 2018 from her aunt:

• House A, which had been purchased by her aunt in 2010 for $300,000 and used by the aunt as her main residence. As at February 2018, it was worth $600,000. Amber sold this house in June 2020 for $700,000
• House B, which had been purchased by her aunt in 2012 for $400,000 and used by her aunt as a rental property. As at February 2018, it was worth $700,000. Amber sold this house in June 2020 for $900,000.
• A piece of artwork that had been purchased by her aunt in 1982 for $50,000. Its market value as at February 2018 was worth $400,000. This artwork was destroyed in June 2020, and insurance paid Amber $350,000 due to this.

ii) Miriam purchased a house on 1 April 2016 for $400,000 and commenced renting it out immediately. On 1 April 2018, when it was worth $800,000, she moved into it and claimed it as her main residence. She sold it for $900,000 on 1 April 2020.

iii) Chris sold his shop to Di and, as part of the agreement, Di paid him $300,000 to not open up a competing shop within a 10 km radius of the existing shop for a period of 2 years. Chris and Di each incurred legal fees of $2000 for setting up this agreement.

iv) Kayla opened up a new store on 1 January 2014 and paid the owner of the building, Jessie, a $30,000 upfront payment for entering into the 3-year lease (expiring on 31 December 2017), as well as monthly rent of $4,000. When the 3 years had passed, the lease was renewed for another 3 years, and another premium of $30,000 was paid by Kayla to Jessie.

5. PART A
Required: Advise Katie as to:

a) the deductibility of the $20,000; and
b) whether the $1,200 and $1,000 are deductible as specific deductions.

Where appropriate, support your answer with legislative and judicial authority.

Katie owns a retail store (as a sole trader) that repairs smartphones and laptops. To save costs, Katie often uses substandard equipment to repair such items. One of her employees, being tired of such unethical behaviour, quits and threatens to go to the newspapers about Katie’s practices, which would substantially damage the reputation of Katie’s store.
To persuade the ex-employee not to go to the newspaper, Katie gives him $20,000. Katie’s accountant is unsure if this amount is capital or not.
Katie’s also borrows $100,000 to fund an expansion of her shop. This was for a 10 year loan with borrowing costs of $1,200.
During the year, Katie also lent $1,000 to an established customer (they did not owe the shop any money for the shop’s services). Unfortunately, this money has not been repaid and has been written off.

6.PART B
Required: Briefly advise Dan as to the deductibility of the $10 000, $4000, $20 000, and $3000 amounts.

Where appropriate, support your answer with legislative and case authority, as well as calculations.

Dan works as a junior pharmacist in Melbourne. He was caught inappropriately taking some prescription drugs to use for recreational purposes. As a punishment, he had to pay a $10,000 fine. Further, he had to, as part of his punishment, undertake community service (unpaid) in a health centre in Ballarat, about 2 hours from Melbourne. He would undertake this for 3 nights a week and go there straight from his pharmacy work. There were travel costs from the pharmacy to the work centre for the tax year in the amount of $4,000.

Dan also owned a rental property. To increase his rental income, he spent $20,000 installing a wall into one of the large bedrooms, to split it into 2 smaller bedrooms. He also paid $3,000 to have the carpets in the living room removed, and the floorboards previously underneath the carpet polished.

7.Required: Advise Sport Pty Ltd as to the trading stock implications for the tax year.

Sport Pty Ltd is a retailer that sells sporting shoes and clothes. The following information applies to the relevant tax year:

• Purchases of new sports shoes and clothes for sale: $120,000.
• Sales of sports shoes and clothes: $300,000.
• Closing stock value for end of year prior to the relevant tax year: $400,000.
• Trading stock values at end of relevant tax year:
o sports shoes: cost of $100,000, replacement value $90,000, market selling value $200,000; and
o sporting clothes (non-footwear): cost of $200,000, replacement value of $220,000, market selling value $300,000.

8.PART A

Required: Advise Jake of the tax payable due to the receipt of the dividends.

Jake receives the following dividends on 1 August 2020:

• $8000, fully franked from ABC Ltd.
• $3000, 50% franked, from DEF Ltd.
Jakes is on the top (45%) marginal tax rate. Ignoring Medicare Levy, calculate the impact of the dividends on Jake’s tax liability.

9.PART B

Required: Advise as to the tax implications for these facts regarding the Kim Family Trust. You do not need to calculate the exact amount of tax payable.

The Kim Family Trust is a discretionary trust that, for the current year, earned dividend income (unfranked) of $50,000 and rental income of $20,000. It paid interest of $10,000 on the loan used to purchase its rental property and shares. It has a corporate beneficiary, K Pty Ltd. During the current tax year, it made the following distributions:

• $20,000 to Mark, a 21-year-old beneficiary.
• $25,000 to Jane, a 17-year-old beneficiary.

10.PART A

Required: Advise E Pty Ltd regarding the Fringe Benefits Tax implications of the facts below. You are not required to calculate the actual FBT liability.

E Pty Ltd is an engineering firm that employs Naomi, who is entitled to a salary of $150,000. She reaches a salary sacrifice arrangement with E Pty Ltd where, in exchange for giving up part of her salary, E Pty Ltd will pay for:

• A laptop (that she can keep) that she intends to mostly use for work.
• Extra superannuation contributions.
• The interest expenses on her investment property loan.

11.PART B

Required: Advise Newtech as to the GST implications for the following transactions:

An IT development firm, Newtech, which is registered for GST, undertakes the following transactions for the GST period (where GST applies, prices are GST inclusive):

• Purchases of fresh fruit from a major supermarket for the staff room: $1000.
• Purchase of a new laptop from a major department store: $2000.
• Payment of staff salaries: $300,000.
• Payment of water utilities bill: $500.
• Sales of services: $600,000.

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