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BAC318/BACC318 Taxation Law Questions: Written Assignment Answer

MELBOURNE POLYTECHNIC

TAXATION LAW 

BAC318/BACC318

SEMESTER ONE 2019


Written assignment

REQUIRED

This is an individual assignment.

There are two questions. You must complete both.

WORD LIMIT

The maximum word limit for both questions in total is 1,500.

REQUIRED:

In answering the question students are required to refer to relevant case law, sections of the Income Tax Assessment Act 1936 and 1997 and Tax Rulings issued by the Tax Office.  An analysis of the key issues is required.

PRESENTATION:

Students are required to include a bibliography of reference materials. Reference materials must be more than the lecture notes and prescribed textbook.

Students are required to follow Melbourne Polytechnic guidelines on referencing material.

Students are also required to sign and hand in a declaration that the work is their own and that they have not collaborated with another student in answering the question.

ASSIGNMENT QUESTIONS:

Question 1

Bob Jane Racing Pty Ltd carries on business as a motor racing promoter and finds that flooding as a result of poorly maintained drains by the local council has caused damage to sections of its track. Repair of the track would involve reconstruction of the long straight at a cost of $58,000. 

The council was sued by Bob Jane Racing Pty Ltd and was ordered to compensate the company $65,000.

The company decided instead to construct a bypass and reduce the length of the track by 300 metres. The bypass was constructed with exactly the same materials as the original track.

 The cost of the bypass was $85,000 which meant that the company only had to pay $35,000

Required:

Is the amount of $65,000 received by the company assessable income and why?

What amount if any would be allowed as a deduction under section 25-10 of the ITAA 1997?

Question 2

Neil a director of HRM Pty Ltd, a management consulting company. He has the following questions for you:

The company had the following transactions during the year ended 30 June 2019. How are they treated for income tax purposes by HRM Pty Ltd?

You can assume in this question that the numbers exclude GST unless otherwise stated.

  1. HRM Pty Ltd borrowed $502,000 from the Bank on 15 April 2019. 35% of the funds were used for personal purposes by Neil and the balance by the company. The bank charged the company an application fee of $5,020. Interest paid on the loan was $27,500. The loan is for seven years.
  2. HRM Pty Ltd bought a second hand commodore car. The company traded in a Toyota corolla and received $3,000 trade in value. The balance the company had to pay for the commodore car was $27,800. The new car was bought on 31/1/2019. The effective life of the new car is 8 years.
  3. The old Toyota car had a written down value at the date of sale of $1,964.
  4. The company employed Deb, Neil’s wife as the receptionist. The company paid her a wage of $35,000. The reasonable wage for a receptionist doing the same work is $40,000.
  5. The company also donated $1,000 to the Liberal Party during this year’s federal election.
  6. During June 2019, the company ordered a set of books and materials. These were printed overseas and as at 30 June 2019 they were still on a plane coming from Singapore. The cost of the books and materials is $25,735. When Neil conducted a stock take of the company’s inventory as at 30 June 2019 these items were not accounted for in the closing stock figure.
  7. During the year the company earned exempt income of $55,000 from a Government Grant. In the previous year ended 30 June 2018 it had carried forward losses of $75,000. There has been no change in the shareholding of the company since it was incorporated in 2012.

REQUIRED:

Explain to Neil the company director how each of the above items are treated. In your answer please carry out calculations where necessary and also refer to relevant case law and legislation. The company wishes to maximise its tax deductions.

Answer

Assignment tax Law

Answer to question no-1

1.1 Is the amount of $65,000 received by the company assessable income and why?

In this case, Bob had sued the council for the amount of damages which had incurred due to the mistake or issue of council to the race track from the ineffective drainage.  In the given case, damage was determined to be $58000. Council was ordered and responsible to pay the amounting of compensation around $65000 to Bob. In the given case, it was found that the race track was not destroyed and company decided to incorporate new track for amounting $ 85,000 without considering the repairing the old damaged race track. 

Would the $65000 be considered as assessable income and is s25-10 of the ITAA relevant?

After analyzing the case and taxation rules, it is considered that the company is Australian resident while considering it assessable for the taxation purpose. However, it provides services to clients for the race track use and make profit out of its services. 

Compensation loss of income or loss of capital?

As per taxation rules, payment made would be considered loss of capital instead of the loss of income  as it was used to repair and recover the cost of the  damages made to the track.  Therefore, the considered amount will not be accounted for the assessable income (ATO, 2019).

1) Not Statutory income: 

It is analyzed that statutory income is considered under the given heading of s15-15:- it is determined for the compensation for the assets which have been purchased after full filing the following condition 

  • Purchased after 20th September, 1985 
  • Not purchased for making profit 
  • Was not sold for the profit purpose

In the given case, it has been found that statutory income given under the capital gain tax S102-20, assets not disposed off, sold and not satisfying the CGT event provisions. 

The $ 65000 covers composite costs associated to the loss i.e. $ 58000. It is the actual damage incurred to the track and accompanied with the legal costing, laundry costing, and sundry repair charges. 

Exempt income s6-10: It does not satisfy the exempt income.   

NANE S6-11: Does not satisfy non assessable nonexempt provisions

2) Not Ordinary income

It is the payment of the amount of compensation paid to the business which was not ordinary income and assessable in context with the s 6-5 of the ITAA 

It does not consider the receipt off the income given and not on going, not in the normal course of the operation or process of the business. It does not include the amount of compensation provided to the permanent damages to the capital assets which was changed and improved (ATO government, 2019),

3) Compensation was given for the replacement of the assets

It is analyzed that the capital nature for the partial loss of the crucial element given in the business to provide revenue.  This was considered to be the permanent capital in nature as it is found that track was not repaired but it was improved. Therefore, will be considered for the capital nature. It is the loss incurred in the process.  As in the case held of Glenborg Union Fireclay v IR Commissioner (1922), it is found that the expenses incurred for the improvement will be considered capital in nature (ATO, 2019).

As in the case held of Sun Newspapers Ltd and associated newspapers ltd v FCT (1938) , all the expenses made for the improvement of the assets will be considered capital expense and will be bound to be justified for the capital gain and loss.  The track is capital assets and will be liable for the depreciation given under Div 43 and TR 97/25 (Sandiq,2019,p522) (austlii) (ATO; 2018). However, normal expenses would not be counted for the capital expenditure (ATO government, 2019),

Therefore, $ 65000 compensation would be CGT provision and assets would be compensated. 

The compensation assets proceed to the GGT assessment when the asset is sold or disposed of. 

 The amount of compensation $ 65000 was unspecified as it is likely to that the payment would be considered as capital by ATO (ATO, 2019).

However, $7000 will be considered specifically for the cost of the damage or income under s6-5 and s 25-10. 

Now in the end, it could be inferred that track was not repaired but improved as capital items therefore, principles laid down in cases W Thomas Pty Ltd v FCT (1965) (TR 27/23) (Sandiq, 2019, p 470-471,) It is found that $ 85000 will be counted for the deprecation amount as the same assets have been counted for the capital gain or losses in the event of Capital gain tax (ATO, 2019). 

Answer to question no-2

2.1

After assessing the case, it is found that deduction given from the positive limb Nexis Test given under the S 8-1 of the ITAA 1997 has shown that HRM private company would have deduction of 75% of the cost of the loan as considered expenses (ATO, 2019).

The incurred cost would be $ 157 (5020/5)*76/365*.75

Considered charges for the application fees.

 $27500*.75=$20625 (This will be the interest cost for the tax purpose. 

2.2; 

It is analyzed that HRM company could deduct the depreciation charged on the car amounting to the $ 3396 for the assessment year 31/01/2019- 30/06/2019 (ATO, 2019). 

Computation would be made as given below.

27800+$3000)161/365*2/8) 

Or

Depreciation charged for the 5 months- $7700

This is the allowable depreciation as per the rule with Div 40 ss40-70of the ITAA, 

The given positive limb would be considered as allowable deductions. 

The written down value method would be considered best method as compared to the prime value method which would amounting to the cost of $1698 (ATO, 2019).

 2.3; 

The total gain on the sale of the assets would be $1036 and same will be assemble income.

Purchased – WDV

$ 3000- 1964= 1036 (ATO government, 2019),

2.4

As given s 109, the negative limb of ITAA s8-1 considered for the deduction for the company which fall under the heading of the wages paid to the family (ATO, 2019).

In the given case, Neil’s wife is employed as receptionist and doing work for the wags amounting to $ 35000. It is deductible income if she is capable of doing the job (Australia taxation, 2019).

In the another case, if company fails to justify the amount of payment in terms of the equal pay for the set equal efforts and training  then the considered amount would be treated as payment of the fully franked dividend (ATO, 2019).

2.5;

In this case, $ 1000 was donated by the given company to the liberal party. This amount will not be considered as tax deductible amount. It is found that only personal deductions are tax deductible. In the given case, if Neil wants to take the deduction then he will make the payment of donation to himself as per the negative limb s8-1; s26-22 of the ITAA  

2.6; A

In the case held of the Frozen food v FCF, it was found that if a person legally owned the stock but does not have hard copy of certificate then it would be counted in the valuing stock.  The amount of $ 25735 will be included in the computation of the closing stock. This value of the stock at the end of the year would be higher than the beginning value of the stock in the year. The differences in the value would be assessable income and will be considered allowable deduction. As per the section of ITAA, the amount of deduction would be $70.35 (ATO, 2019).

2.7;

After assessing the case, it is found that $ 75000 need to be carried forward loss must be used to offset the % 55000 exempted income in the first year before considering it for other income. Nonetheless, Taxpayer Company could choose the year in which deduction of the carry forward loss need to be paid and avoid the exempt income offset for the given year. There would not be structural change to the given company as it is incorporated as new company. (s36-10; s36-17, ITAA 1997)

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