Major Assignment
Due date: 21 September 2020
Total Marks Available: 50%
Length: Maximum 3500 words (excluding calculations)
This assignment consists of four (4) questions and assesses Learning Objectives 1, 3, 5 & 6. You are required to answer the questions associated with each scenario. Please limit your answers to the questions asked and to the facts provided. If you require further information in order to come to a conclusion, please state this in your answer and highlight how this further information would affect your conclusion.
Please see the attached Marking Criteria Sheet for details on how marks for this assignment will be awarded.
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Question 1
Emma, Sophie and Isla operate a bookshop in Toowoomba as a partnership, called the Good Read Partnership (GRP). They established GRP in 2015 and had a partnership agreement drafted by a solicitor. They jointly purchased a small shop premises on 1 May 2015 from which GRP still operates. GRP is registered for Goods and Services Tax (GST).
Under the partnership agreement Emma and Sophie work in the bookshop and are allocated a partner’s salary of $60,000 each per year. Isla is a chef and does not work in the business on a day- to-day basis. Emma and Isla both contributed a substantial portion of capital to the business for the purchase of the building, and the partnership agreement specifies they each receive $5,000 interest per year on their capital contribution. The partnership agreement states that after partners’ salaries and interest, the balance of the net income of the partnership is to be shared equally between all three partners. The partnership uses the cash basis to account for income and GST.
Isla wishes to sell her interest in the partnership on 30 June 2020. Emma and Sophie agree to purchase Isla’s interest in the partnership, each acquiring 50% of Isla’s interest so that Emma and Sophie remain equal partners.
GRP provides you with the following financial information for the year ended 30 June 2020, and the numbers include GST where applicable:
Book Sales $440,000 (Note 1)
Interest received $200
Partners’ salaries $120,000
Casual employee wages $22,000
Interest on partners’ capital $10,000
Interest on short-term loan from bank $3,000
Electricity, telephone and internet $27,500
Purchase of trading stock $198,000
GRP also owns the following assets as at 30 June 2020:
Land and Buildings at cost $395,000 Goodwill internally generated $150,000
Equipment and shop fittings $70,000 (Note 2)
Trading stock at cost $220,000
Note 1: Sales include a $7,700 (including GST) sale on credit to a local school on 25 June 2020. This amount had not been received at 30 June 2020.
Note 2: The equipment and shop fittings were purchased in 2015 for $150,000. The adjustable value for tax purposes and market value is $70,000.
Note 3: Trading stock has a market value of $440,000
Required:
1) Calculate the net income of the GRP partnership for the income year ended 30 June 2020. Show all calculations and reference relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office.
2) Discuss and advise Emma, Sophie and Isla as to the potential income tax consequences for each partner upon the sale of Isla’s interest on 30 June 2020. Assume any disposals of assets are at market value. Discuss the likely assessable or deductible amounts and any choices/elections available to the partners. Your discussion should include consideration of the capital gains tax consequences of the change of ownership, ignoring the Small Business CGT Concessions. Reference relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office. You do not need to show detailed calculations or the net income tax payable for any partners.
[Total 12 Marks]
Question 2
The Carter Family Trust is a discretionary trust which holds investments for the benefit of the Carter family. The Carter Family Trust made a ‘family trust election’ in the 2013 income year and named Scott Carter as the ‘test individual’. The beneficiaries of the trust are:
Beneficiary Age Resident for tax
purposes Income from sources other than the family trust
Scott Carter 55 Yes $150,000
Jenny Carter 55 Yes $17,000
Helena Carter 24 No – lives in UK $80,000
Carter Investments Pty Ltd (100% owned by
Scott and Jenny Carter) Yes Nil
In terms of distributions of income, the trust deed states: “where the trustee has not allocated income to beneficiaries under the trustee’s discretionary power within a reasonable time after year-end, the income shall be held equally for all beneficiaries who have reached 25-years of age by the relevant year-end.” Similar to the income distribution clause, the trust deed also gives the trustee a discretion to allocate capital to beneficiaries during the term of the trust, and stream dividends and capital gains to particular beneficiaries.
The Carter Family Trust holds a number of income-producing assets such as land and buildings, shares and bank deposits. The trust derived a net income for tax purposes of $182,500 for the year ended 30 June 2020. This included the following amounts:
Rental income $34,500
Interest received $5,000
Net capital gain (after 50% discount) $90,000
Fully franked dividends $35,000
Franking credits $15,000
Due to a downturn in the markets, the Carter Family Trust had made an income tax loss of $35,000 (not a capital loss) for the 30 June 2019 year.
1. Discuss whether the loss from the 2019 income year will be able to be offset in the 2020 year. If there is any further information you would require or advice you would like to give, please state this in your answer. Reference relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office.
2. Assume the trustee of the Carter Family Trust (Scott Carter) has not yet made a resolution to distribute the income of the trust for the 2020 income year. Based on the net income, provide advice to the trustee as to how the income of the trust should be distributed to each beneficiary to minimise the overall amount of tax paid by the beneficiaries and by the trustee in the year ended 30 June 2020. Explain your answer with references to relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office. You do not need to calculate tax payable, but comment on applicable marginal tax rates to support your decisions.
[Total 10 Marks]
Question 3
Surf Gear Pty Ltd (SGPL) has been operating retail clothing stores in Brisbane and the Gold Coast since 1 July 2012. On incorporation there were two (2) equal sharesholders, Mick and Stephanie, owning 100,000 shares each.
SGPL incurred tax losses of $50,000 in the year ended 30 June 2019. To raise additional capital SGPL issued 200,000 shares to Laine on 1 July 2019.
SGPL had always operated a website displaying images of its clothing and store locations. The additional capital provided for an upgrade to SGPL’s website technology, giving customers the ability to chat to sales staff, subscribe to newsletters, and to purchase products online. From 1 July 2019 the company transitioned to selling most of its products online in response to changing shopping trends. During the COVID-19 crisis all its sales are online during the lockdown restrictions.
The existing premises are used as retail outlets, as well as to process online orders and allow click and collect for its customers. The company intangible assets, the logo and brand, do not change.
Required:
Discuss whether the tax losses from the year ended 30 June 2019 can be carried forward and offset against any taxable income in the year ended 30 June 2020. Your answer should include references to relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office.
[Total 8 Marks]
Question 4
John Quinn is an electronics engineer working on large infrastructure projects. John is employed by JQ Engineering Pty Ltd (JQE) as the company’s principal engineer. John and his wife, Carrie, hold 50% each of the issued capital of JQE. Carrie is also employed by JQE on a part-time basis to complete administration work, but at this stage there are no other employees.
JQE does not own a separate business premises, however, a room in John and Carrie’s house is used as an office. JQE purchased the necessary office and computer equipment. Services are usually provided by John at the client’s premises using the client’s office space and equipment. Occasionally John works from the home office and Carrie uses the home office for JQE’s administration work.
During the year ended 30 June 2020 JQE had three contracts to supply specialist electrical engineering services on infrastructure projects, with total fees from each contract below:
RTZ Ltd $80,000
CNM Ltd (a subsidiary of RTZ Ltd) $46,000
Airport Corp Ltd $34,000
These contracts required the work to be carried out by JQE’s employee John Quinn, and JQE issued invoices based on an hourly rate agreed with the clients. If JQE took longer than the agreed time to complete the projects JQE was not entitled to invoice for the additional hours. JQE did not advertise for these clients as there as there are only a few large companies and government organisations that require JQE’s services.
John and Carrie recently heard that the Australian Taxation Office was auditing another contractor working on the Airport Corp Ltd project in relation to the personal services income (PSI) rules.
Required:
1. Provide advice to JQE as to whether the specific anti-avoidance provision relating to personal services income (PSI) is likely to apply to JQE. Discuss any relevant tests that might apply to JQE. Also discuss the income tax consequences for JQE, John and Carrie if the PSI rules do apply.
2. Provide advice as to what steps, if any, JQE can take to reduce the risk of the PSI rules being applied by the ATO. Focus on actions that can be taken using the existing business structure of JQE.
3. The advice should be provided in the form of a letter of advice. See the Study Desk for an example letter and consider that John and Carrie do not have technical tax knowledge.
4. Submit up to 2 pages of supplementary explanations to substantiate or support your letter of advice. This is not designed to be sent to the client and should include references to relevant sections of the Income Tax Assessment Acts, relevant case law or rulings from the Australian Taxation Office.
[Total 20 Marks]
LAW3131 – Revenue Law & Practice B
Semester 2, 2020
Major Assignment Marking Criteria Sheet
Question 1 – Partnership 12 Marks N/A F C B A HD
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in relation to the partnership sale. 0 1 1.5
Application
Demonstrated level of understanding of the relevant law in the calculation of net income of the partnership.
0
1
1.5
2
2.5
3
Demonstrated level of understanding of the relevant law in their discussion of the tax effects of the sale of each of the partnership assets and application of choices/elections. 1 2 3 4 5 6
Conclusions
The student has drawn appropriate and valid conclusions in relation to their advice given to the partners upon the partnership sale.
0
1
1.5
Question 2 – Trusts 10 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in relation to the trust loss and distributions to beneficiaries. 0 0.5 1
Application
Demonstrated level of understanding of the relevant law in their application to the facts in relation to the utilisation of trust losses.
0
1
1.5
2
2.5
3
Demonstrated level of understanding of the relevant law in their application to the facts in advising on the distributions to beneficiaries.. 0 1 2.5 3 4 5
Conclusions
The student has drawn appropriate and valid conclusions in relation to the utilisation of the trust loss, and the distributions to each beneficiary.
0
0.5
1
Question 3 – Companies 8 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant legal issues, legislation and case law in determining whether losses can be utilised. 0 1 1.5
Application
Demonstrated level of understanding of the relevant law in their application to the facts in relation to the utilisation of prior year losses.
0.5
2
2.5
3.5
4
5
Conclusions
The student has drawn appropriate and valid conclusions in relation to the utilisation of the prior year loss.
0
1
1.5
9
Question 4 – Personal Services Income 20 Marks
Identification of legal issues, legislation and case law
The student has identified the significant relevant client issues, legislation and case law relating to the PSI rules. 0 0.5 1 1.5 2
Application
Demonstrated level of understanding the relevant issues, legal concepts and law in their application to the facts, including:
- Applicable tests
- Consequences of application of PSI rules
- Actions to reduce the risk of PSI rules applying
1
2.5
5
6.5
8
10
Conclusions
The student has drawn appropriate and valid conclusions and recommendations for the client.
0
.5
1
1.5
2
Format
Adherence to the correct conventions of a business letter of advice and overall presentation of the letter.
0
1
1.5
2
2.5
3
Expression.
Overall clarity of expression, use of grammar and appropriateness of the language and terminology for a client letter of advice.
0
1
1.5
2
2.5
3
TOTAL (out of 50)
Important! Grade Descriptors;
HD – the student has shown a very high level of demonstrated ability in relation to the stated criteria by covering all valid points in a clear and succinct manner. The student may have also demonstrated an ability to think beyond the facts and recognise the broader implications of the facts, missing facts or alternate arguments.
A – The student has show a high level of demonstrated ability in relation to the stated criteria by either covering all valid points or by covering the majority of valid points in a clear and succinct manner. The student may have very briefly or occasionally shown ability at the HD level.
B - The student has show a good level of demonstrated ability in relation to the stated criteria by covering most of the valid points. The student may have made some minor incorrect statements or missed some minor points.
C - The student has show a satisfactory level of demonstrated ability in relation to the stated criteria by covering the main valid points. The student may have made a number of minor incorrect statements but did make incorrect statements in relation to major points.
F - The student has not shown a satisfactory level of demonstrated ability in relation to the stated criteria by missing some main points or by making incorrect statements in relation to major points. N/A – The student has not addressed or attempted to address this criterion.
10