Answer one of the following questions on tax law
Please answer all parts of
the question
All work presented for
assessment in this course must comply with the format outlined in
the University's Presentation of Academic Work publication.
All essays must be
accompanied by a signed official cover sheet ('Plagiarism
Declaration Form').
You MUST reference in the
body of the essay every time you use information from other people.
This requires you to keep a track of where you are taking
information from and then writing the reference up. You should
use the Harvard/APA style; and use the University’s new
Presentation of Academic Work. The Library’s website also has a
citation style guide site. If you plagiarise (intentionally OR
unintentionally) you will be given zero.
1,500 to 2000words.STUDENTS MUST CHOOSE ONE OF
THE FOUR QUESTIONS TO COMPLETE QUESTION 1:
John Jones is employed in a
part time capacity as lecturer in accounting at Central University.
His annual salary is $42,000 pa. Jones has arranged with his employer
for his salary to be paid on the 15th
day of every month
into his savings account with the State Bank Ltd. Jones uses the
savings account to meet household expenditure. Jones also has a home
mortgage loan with the State Bank.
Under a separate agreement
with the bank Jones has arranged for a balance of $5,000 to be
maintained in the savings account and any balance to be transferred
to his mortgage. He has also arranged for any interest on the savings
account to be offset against the mortgage interest. For the year
ended 30 June 2017 $300 was offset.
Jones also runs a small
practice providing accounting and taxation services to local
businesses. During 2016/17 he billed fees of $35,000 of which $30,000
has been received. An amount of $3,000 was also received from
outstanding accounts from the 2014/15 year. One of his clients is
Travelco, a local motel. In March 2017 Travelco provided Jones and
his wife with free return air tickets to Bali. Equivalent fares would
cost $2,000.
Jones’s wife Joan is an IT
expert. For several years John and Joan had been developing software
for an accounting package for use by small businesses. The system,
‘J-Accounts’, has been licensed and is used by 175 local
businesses at a cost of $100 per year [$17,500]. A national software
developer ‘Cashbooks’ has agreed to pay the Joneses $25,000 in
return for the exclusive rights to use the program for five years
after which time a new agreement for a further five years may be
signed.
Jones has an interest in
history, particularly commercial history. In 2005 he purchased 500
old share certificates from an acquaintance who practised in the area
of insolvency and liquidation. The total cost was $500. The
certificates related to old companies that had been liquidated during
the 1930s depression. They were very elaborate and ornate and Jones
thought that framed they could be marketable as a decorative feature
to hang in the offices of accountants and solicitors. In February
2017 he happened to mention the matter to Herman, a local decorator
and picture framer. Herman suggested that if properly framed,
numbered, and if an inscription was added, they could sell for $1000
each. The cost to Jones would be $100 per certificate. Herman agreed
to sell the items on a commission basis of 10%.
A local television station
runs a quiz show called ‘Who Wants to be Rich?’ Contestants are
selected randomly from the local telephone directory. Jones was lucky
enough to be selected and he appeared on the show for five nights,
answering every question and becoming ‘Grand Champion’. He won
$200,000 and a car valued at $30,000.
Required:
Advise John Jones of the tax
consequences of the above receipts. You should discuss what amounts
would be included in his assessable income or, if any item is not
assessable income, why that is so. Your answer should include a
discussion of the following:
Whether he return on a
cash or accrual basis.
Whether particular
amounts are ordinary income or statutory income
(including capital).
Under what sections of
the Acts the particular amounts are assessable.
How the quiz show
winnings are to be treated.
What are the tax
consequences of the share certificate proposal, if he
was to proceed with the plan?
What case law is relevant
to the issues raised?
QUESTION 2:
Identify the types of taxes
that apply to digital currencies (such as Bitcoin) in Australia at
the present time. In your answer you should list relevant ATO
Rulings/Determinations and discuss their application.
QUESTION 3: Part A
Allan and Betty were living
and working in Melbourne. They decided on a ‘tree change’, sold
their Melbourne home and purchased a large country house on a 10
hectare block in central Victoria. Betty works part-time as an
accountant and Allan as a locum doctor. Allan is popular with the
elderly patients in the town and regularly is given home-made cakes
and scones, along with his fee. On one occasion he treated a local
wine maker’s dog for snake bite when the vet was unavailable and
was given a dozen bottles of Lonarch Brae Shiraz in appreciation.
The wine had a retail value of $360.
Allan and Betty enjoy
gardening. They plan to establish a few hectares of grape vines and
begin growing vegetables. They attend a continuing education course
on organic farming and find in their second year they have a surplus
of produce. Betty started making marmalade and relish using her
mother’s recipes. Initially she gave them to neighbours but they
became so popular that she opened a stall at the Newtown Growers
Market held on the second Sunday of every month. Allan sold some of
the excess to a local supermarket and now regularly supplies three
retailers with sweet potatoes and pumpkin. They don’t keep records
as they never intended to make a profit but estimate that in a good
month gross receipts could be $500 to $600.Their neighbours have a citrus
orchard and throughout the year vegetables are swapped for oranges
and mandarins. This seems like such a good idea Allan and Betty
decide to set up a ‘barter’ system in the area. To join the
system a person must pay an up-front, one-off fee of $50 to Allan and
Betty as a charge for the keeping of administrative records.
Thereafter people register their goods or services to be bartered.
For example, Suzie is a retired hairdresser and will provide
hairdressing services at her home. No money changes hands. Suzie
would receive a credit to her account of 15 to 20 ‘barts’ that
she can exchange for goods or services of equal value from other
registered participants in the scheme (fruit, vegetables, child
minding, lawn mowing etc.).
Required: (a) Advise Allan of
any income tax consequences of para 1, above. (b) Citing relevant
case law, explain how a hobby is to be distinguished from a business. (c) Advise Allan and
Betty of any income tax implications arising in paras 2 and 3above. (d) Advise the
participants in the barter scheme of any income tax implications.Part B
On 1 October 2010 Alex
purchased a large block of land near the beach at a cost of $250,000
financed by an interest-only loan. Other costs in respect of the land
purchase were: Stamp duty 6,800
Legal costs of conveyance
2,500 Water rates – included in contract 380 Council rates –
included in contract 900 Originally Alex’s intention was to hold
the land as an investment but in 2016 he decided to take unpaid leave
from his employment and build a house on the block. The plan was to
engage building contractors and perform unskilled labouring himself.
On completion the house would be rented.
The following costs were
incurred:
1 April 2016
Establishment fee for interest-only bank loan 1,500
2 April 2016 Development
application fee to local Council 4,200
20 April 2016 Legal fees
arising out of an appeal against the
Council’s refusal of
the development application 16,000
15 May 2016 Architectural
fees 6,500
May – July 2016
Building materials 120,000
Building contractor’s
payments 60,000
Alex’s labour: based on
Alex’s time at $25/hr over
three months 13,000
The house was completed in
September 2016 and rented out until 30 June 2017. Interest paid over
the period September 2016 to 30 June 2017 was $14,600. Total
interest paid however was $122,500.
On 15 July 2017 Alex obtained
a qualified valuer’s appraisal of the property which put the value
of the land at $350,000 and the house $350,000. The valuation cost
$4,000.
In October 2017 Alex sold the
property to his cousin Matthew for $650,000.
Required:
1. Advise Alex whether the
amount of $650,000 is ordinary income, assessable under s6-5 or
whether any amount is assessable under s15-15.
2. Assuming the proceeds of
sale is not income by ordinary concepts (or s15-15 assessable),
calculate the cost base of (a) the land and (b) the house for Capital
Gains Tax purposes. Explain what amounts are included and excluded.
Cite relevant provisions of the legislation.
Assume the cost base of
the property is $600,000. Calculate the Capital Gain. Cite relevant
legislation,
QUESTION 4
Part A:
Housing affordability is a
goal of governments and opposition parties in Australia. A topic of
discussion in the media is whether negative gearing combined with the
capital gains tax discount (‘tax concessions’) increases
speculative activity in the housing market – to the disadvantage of
the first home buyer.
Required
Identify and evaluate key
arguments both for and against retaining these tax concessions if
housing affordability is to be achieved. In your response you must
explain what is meant by negative gearing and how capital gains
arising from property investment are treated. You should refer to
sections of legislation, tax rulings and cases where relevant.
Part B:
Jai is 50 years old, currently
employed and planning to retire when he is 70. As part of his plans
for retirement Jai recently sold the large home he has lived in for
many years – planning to purchase a smaller home to live in and
also an investment property. After paying expenses associated with
the sale and repaying his home loan Jai was left with $200,000 cash.
Jai has placed an offer of $200,000 with a real estate agent to
purchase a home which will be Jai’s principal place of residence.
Jai has also placed an offer of $150,000 to purchase an investment
property to be used for rental income. Jai does not have enough funds
to complete the sales on both properties, but his bank manager has
approved a loan for the shortfall of $150,000 at an interest rate of
5% per annum.
In order to prepare loan
documentation, the bank manager needs to know whether Jai will: a)
use the $200,000 cash to pay for his new home and use the borrowed
funds of $150,000 to purchase the investment property;
b) use $150,000 of the cash to
pay for the investment property and then pay for his new home with
the remaining $50,000 cash and the borrowed funds of $150,000; or c)
pay for his new home by using $100,000 of the cash and $100,000 of
the borrowed funds; and pay for the investment property by using the
remaining $100,000 cash and the balance of the borrowed funds
($50,000).
Required:
Assume Jai’s goal is to take
advantage of negative gearing opportunities and receive the most
favourable tax treatment. Advise Jai which of the three options –
a), b) or c) - would best achieve this goal. Give reasons for your
answer.
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