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Taxation Law Assignment Analysing Case Of Income Tax


Part A
Suman was a resident of Australia and gained a number of assets over the 40 year since his graduation. These were:

  1. On 1st September 1985 he bought his home at Strathfield for $250,000 and lived there with his wife and children until he sold it on 1st June 2021 for $3,200,000. He had spent $650,000 to renovate and extend his home. Living next door to Suman is a difficult neighbour who pursued Suman through the court of law for an illegal driveway that Suman had erected without the Council’s approval. To this end the neighbour had a good day in court and was awarded legal costs to the tune of $27,000 against Suman.
  2. On 1st March 2004, Suman had bought a vacant block of land for $190,000 and since that date, he has paid rates and taxes totaling $70,000 on the block of land up to 30th June 2021. His incidental costs in buying and selling the land amount to $69,000. On 11 June 2021, Suman sold the vacant block of land for $1,250,000.
  3. On the 1st July 2012, he had some spare money in his bank account which he used to buy 1,000 BHP shares for $25 per share. He sold them all on the 30th May 2021 for $39.82 per share. Suman is not normally a long term share investor because he enjoys generating his primary earnings from his daily share trading and he is very good at it.
  4. Suman’s Uncle died on the 1st Jan 2021 and left Suman a bequest of $280,000 which he received on the 31 March 2021 He then invested the entire inheritance on a rare vintage Ferrari on 31 May 2021. A friend of Suman made a very attractive offer to buy the Ferrari for $350,000. Suman was unable to resist this offer and subsequently sold the Ferrari to his friend on 6 June 2020.

Explain how you would calculate Suman’s income and the amount of all deductions that would be allowed for the year ending 30 June 2021.

QUESTION 1 (Cont.)
Part B
One of Suman’s customers bought some computer equipment for $27,000 on credit on 21 June 2020 but could not pay the account, which was issued on the 30 June 2020. The customer went bankrupt in December 2020. Suman wrote off the debt on 1 June 2021.

In February 2021, Suman was awarded workers compensation for $375,000 for the serious injuries sustained from his workplace from the insurance company

In April 2021, Suman decided to use the compensation money to purchase an apartment for $550,000. He lived in the apartment for 12 months then rent it out. Suman engaged a managing agent to manage the apartment and pays the agent 7% of his rental income of $5,500 for the agent’s commission for 30 June 2021.

In June 2021, Suman decided to take a night off and go to Star City Casino. It was his lucky night. He won $250,000 playing the card game “BlackJack”. His friends told him it was “beginners luck”. But “beginner luck” quickly took a wrong turn in bad luck when he lost the entire $250,000 in playing the pokies machines in the next few weeks.

Suman had to lodge a tax return for the year ended 30 June 2021 and seek your advice as to how to calculate his taxable income.

Explain how you would account for these events from the perspective of the Income Tax return for the year ending 30 June 2021.

You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculation. You must apply the law to the facts given in this question and provide YOUR OWN analysis of the issues. Calculations must be included where relevant.


Taxation Law Assignment Question 1

  1. Any assets purchased on or before September 20, 1985 are termed as pre-CGT asset and the sale of these assets does not attract any CGT. For such assets, any capital gains or losses are disregarded. The house at Strathfield was purchased by Suman on 1st September 1985 and hence is a pre-CGT asset. As a result, further computations of capital gains/(losses) are not required as from a CGT perspective, the sale of this house would have no implications for the taxpayer (Suman).
  2. The cost base of the vacant land needs to be computed as per s. 110-25 ITAA 1997.

    Cost base of vacant block = $190,000 + $70,000 + $69,000 = $329,000

    Selling price of vacant block = $1,250,000

    The sale of vacant block is A1 CGT event as per s. 104-10 ITAA 1997.

    Capital gains on disposal of vacant block = $1,250,000 - $329,000 = $921,000

    Since Suman is an individual taxpayer and holding period exceeds one year, hence discount method (s. 115-25) would provide 50% concession in capital gains.

    Taxable capital gains from vacant block disposal = ($921,000/2) = $460,500

  3. Cost base of BHP shares = $25 * 1000 = $25,000

    Proceeds from sale of BHP shares = $39.82 * 1000 = $39,820

    Capital gains from sale of shares = $39,820 - $25,000 = $14,820

    Since Suman is an individual taxpayer and holding period exceeds one year, hence discount method (s. 115-25) would provide 50% concession in capital gains.

    Hence, taxable capital gains from sale of shares = ($14,820/2) = $7,410

  4. As per s. 118-110 ITAA 1997, the vintage Ferrari would be considered as a collectible item for CGT purposes. The sale of this vintage car would result in A1 CGT event.

    Capital gains on the sale of vintage car = $350,000 - $280,000 = $70,000

This is short term capital gains and hence no concession would be available on this capital gains.

The workers compensation has been received to compensate for the loss of income. As a result, it would assume the character of income and would be assessable income. Thus, the proceeds to the tune of $375,000 would be assessable.

The amount paid to the agent to manage the property would be deductible under s. 8-1 ITAA 1997 since the underlying property would produce assessable income in the form of rent. Amount paid to the agent on June 30, 2021 = (7/100)*$5,500 = $385

As per s. 25-35 ITAA 1997, the taxpayer can claim deduction for a bad debt which has been written off but the deduction is available in the same year when the debt is actually written also. Also, it is imperative that the amount should have been recognised as revenue in the earlier tax years. Assuming that $27,000 was recognised as assessable income during 2019-2020, the same amount would be deductible this year.

With regards to the winnings in black jack, considering the inconsistent performance, it is evident that the taxpayer does not have skills and thus, any amount won during blackjack would be attributed to luck and therefore would be exempt.

Taxable income for Suman for the year ending on June 30, 2021 = $375,000 – ($27,000 + $385) =$347,615

Question 2

Taxable income = Assessable income – Deductible expenses

Computation of Assessable Income

Gross salary for taxpayer = $175,000

Fully franked dividend = $21,000

Dividend franking credit = $21,000/(1-0.3) - $21,000 = $9,000

Unfranked dividends = $6,000

All the above items would be assessable income as per s. 6-5 ITAA 1997.

Hence, assessable income for Jonathan = $175,000 + $21,000 + $9,000 + $6,000 = $211,000

Computation of Deductible Expenses
Work related expense = $7,500 (Deductible as per s.8-1 ITAA 1997 assuming it has not been reimbursed)

Electricity bill expense = 0.35*$4,700 = $1,645 (Only work related occupancy expenses deductible when working from home as per s. 8-1 ITAA 1997)

Professional membership expense = $1,200 (Deductible as per s. 8-1 since directly related to field of expertise)

Decline in value of laptop as per prime method = $3,500*0.9*(365/365)*(1/3) = $1,050

Hence, deductible expense for Jonathan = $7,500 + $1,645 + $1,200 + $1,050 = $11,395

Computation of Taxable income and Tax payable
Taxable income for Jonathan for year 2020-2021 = $211,000 - $11,395 = $199,605

Basic income tax liability for Jonathan = $51,667 + 0.45*(199,605-180,000) = $60,489.25

Medicare Levy = (2/100)*$199,605 = $3,992.10

Medicate Levy Surcharge is being levied assuming that the taxpayer does not avail private medical insurance.

MLS = 1.5%*$199,605 = $2,994.08

Total tax liability for Jonathan = $60,489.25 + $3,992.10 + $2,994.08 = $67,475.43

Amount of tax deduction available = PAYG ($58,700) + Franking credit ($9,000) = $67,700

Amount of tax refundable = $67,700 - $67,475.43 = $224.57

The sale of the house has led to A1 CGT event as per s. 104-10 ITAA 1997. This implies that the resultant capital gains/(losses) need to be computed using the following formula.

Capital gains/(Losses) = Selling Price – Cost base

In order to determine the cost base of an asset, s. 110-25 highlights the five elements which are included in the cost base of the asset. The cost base of the investment property is computed below.

Element 1: Purchase price = $595,000

Element 2: Incidental costs while buying and selling

Stamp Duty = $27,900

Legal costs = $4,700

Element 3: Ownership costs

Interest cost (assuming that it has not been deducted already) = $208,000

Fines = $25,000

Element 4: Capital costs

Property Renovation = $48,000

Element 5: Preservation of Title

Legal costs = $28,000 - $15,000 = $13,000

Hence, cost base of the house = (595,000 + 27,900 + 4,700 + 48,000 + 25,000 + 13,000 + 208,000) = $921,600

Selling price of the house = $2,500,000

Capital gains on the disposal of house = $2,500,000 - $921,600 = $1,578,400

Since Keri is an individual taxpayer and the holding period of the property is greater than one year, hence as per discount method (s.115-25 ITAA 1997), 50% concession would be available to taxpayer.

Hence, taxable capital gains = ($1,578.400/2) = $789,200

Thus, the contribution to the taxable income of Keri would be $789,200 and the exact amount of tax levied would be dependent on the marginal tax rate applicable.

Question 3
Step 1: Computation of Net income of Partnership
The income of the partnership needs to be determined as per s. 90. In this regards, the following points are noteworthy.

  • As established in Re Scott v FCT (2002), the salary given to partners is not a partnership expense as partnership is not a separate legal entity from the partners.
  • As per TR95/25, any interest paid on capital contributed by partners is not expense for partnership.
  • Since partners cannot be employees of partnership, hence concessional superannuation contributions are not expense for partnership.

Considering the above, the partnership net income as per s.90 is computed below.

Sales = $865,000

Deductible expense for partnership = Cost of goods sold ($356,000) + Rent Expense ($28,000) + Bad debt expense ($21,000) + Other deductible operating expenses ($59,000) = $464,000

Net income of partnership = $865,000 - $464,000 = $401,000

Step 2: Distribution of partnership income between partners
Before distribution of income, the various expenses which were not deducted earlier need to be deducted.

Hence, amount available for distribution to partners = $401,000 – Interest paid on capital contribution by partners ($8,000) – Salary of partners ($65,000 + $65,000+ $105,000) – Superannuation contribution ($19,600 + $19,600 + 12,000) = $106,800

Share of Ali from the partnership income = 0.7*$106,800 = $74,760

Step 3: Computation of Ali’s taxable Income
The taxation treatment of the various receipts for Ali is explained below.

  • Salary from partnership ($65,000 + $105,000) = $170,000 – Assessable as per s. 6-5 ITAA 1997 since it is ordinary income
  • Interest received from partnership ($4,000) - Assessable as per s. 6-5 ITAA 1997 since it is ordinary income
  • Concessional superannuation contribution ($19,600 + $12,000) = $31,600 – As this is related to employment, hence the receipts would be ordinary income and thereby assessable.
  • Profit share from partnership ($74,760) – This is business income and hence would be ordinary income. As a result, this amount is assessable as per s. 6-5 ITAA 1997.
  • Lottery Winnings ($30,000) – There is no skill involved here and this is derived only due to luck of the taxpayer. As a result, the winnings would be exempt from income tax.
  • Dividend fully franked ($40,000) – Dividend along with franking credit would be

    ordinary income and thereby assessable as per s. 6-5 ITAA 1997.

    Amount of franking credit = 40,000/(1-0.3) – 40,000 = $17,143

Hence, total assessable income for taxpayer Ali = $170,000 + $4,000 + $31,600 + $74,760 + $40,000 + $17,143 = $337,503

Allowable deductions for Ali = $ 5,600 (As per s. 8-1 ITAA 1997)

Hence, taxable income for Ali for income year = $337,503 - $5,600 = $331,903


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