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LAW 6001 Taxation Law: Individual Taxpayer Assessment 2 Answer

ASSESSMENT 2 BRIEF

Subject Code and Title
LAW 6001 Taxation Law
Assessment
Assessment 2: Case Study (Individual Taxpayer)
Individual/Group
Individual
Length
(2000 Words +/- 10%)
Learning outcomes

  1. Effectively apply taxation law in determining the tax outcome in various client’s scenarios
  2. Critically assess differences between the tax treatment of individuals, partnerships, companies and trusts and evaluate the effectiveness of each structure in meeting various client needs.
  3. Analyse, evaluate and recommend taxation strategies to develop comprehensive solutions in order to maximise client financial outcomes.
  4. Research, interpret and effectively communicate complex taxation concepts and recommended taxation strategies to clients in an industry compliant forma

Context:

This assessment assesses your research skills, your ability to synthesise an original piece of work to specific content requirements and your ability to produce a comprehensible piece of advice while addressing the client’s needs.

It also assesses your written communication skills. The ability to deliver to a brief is an essential skill in the workplace. Clients often approach advisors seeking solution to a combination of scenarios, including advice on the tax implications of a particular arrangement within the Australian tax jurisdiction. It is therefore important to be able to identify all the issues presented by an arrangement and to think about the potential consequences of different approaches to addressing the client’s needs.

Instructions:

  • You will be expected to identify and discuss tax implications of the various issues raised.
  • In the case study, the taxpayer’s assessable income, allowable deductions must be identified and recorded in the Excel Workbook (2019 Individual Tax Return) where applicable (only blue coloured cells are required to be filled) as per the information provided in the case study.
  • In addition, a report (Word document, approx. 2,000 words) must be submitted, summarizing all the calculations of the assessable income; allowable deductions and taxable income of the taxpayer including identifying and discussing them. E.g., how the amounts of income & deductions have been derived. If any receipts and payments are not assessable or deductible, the reasoning for non-inclusion of these in assessable income or deductions as per relevant legislation or cases should be provided.
  • Critically analyse the following case study. With respect to each task:
    • Review relevant case law and legislation (ITAA1936, ITAA1997)
    • Apply the law to the facts of the case study
    • Reach a conclusion/ give practical advice to your client.
  • You will be assessed in accordance with the Assessment Rubric.
  • This case study must be presented as an individual effort. The case study requires individual research. It is expected the student will research relevant literature, including decided cases, and select appropriate additional resources.
  • Your case study is not just a list of answers. The reasons for your conclusions and recommendations must be based on your research into the relevant cases and legislation.
  • The format of the report should be a business report, using APA referencing style.
  • You are expected to submit both files: Individual Tax Return Excel file, Business report in the Word format

Case Study: Comprehensive Individual Tax Return

Eric Zhang, a resident taxpayer aged 59, runs a sole trading business selling imported food items. His business is registered for GST. He also works on a casual basis as an import/export agent for Blue Marlin Pty Ltd (ABN: 89 125 678 968). He has a rental property in Lakemba, Sydney. Eric is taking care of his wife Linda Wang, who has lost the eye sight in her left eye 9 months ago, on the 1st of October 2018 as a result of a car accident. Eric is solely taking care of Linda.

Personal Information

Name: Eric Zhang TFN: 300 001 000

Date of Birth: 15 July 1974

Address: 23 Market Street, Newtown NSW 2200 Contact: 0456 587 987 (Work: 02 9578 3648)

Bank account: BSB 225887 Account 378458 Eric is not covered by a private hospital cover.

Spouse: Linda Wang

Date of Birth: 30 July 1989

Currently receives disability pension from Centrelink $9,200 for the 2019 tax year. She has no deductions to claim for the 2019 tax year.

Income/Expense Information

Eric and Linda have a joint term deposit account at ANZ. Total interest received from the joint account was $500 for the 2019 financial year.

Eric has paid $400 to a registered tax agent for preparing his tax return for 2018 tax year.

In addition to the above, the following information relates to his employment (Part A), business income/expenses (Part B) and rental receipts/payments (Part C). All expenses have been substantiated unless it states otherwise.

Part A: Regarding his employment

Employer: Blue Marlin Pty Ltd (ABN: 11 235 365 874)

Gross wages for the 1st of July 2018 to the 30th of June 2019: $7,800 (PAYG withheld: $200)

He also received $2,000 shift allowance and $800 reimbursement for work related software fees from his employer.

Eric received a car from employer as a fringe benefit (showing as reportable in his PAYG summary, valued $60,000 not exempt from FBT)

Work related allowable deductions to claim (telephone & stationery) $300

Part B: Regarding his Business

During the year, Eric has had the following transactions in relation to sales, purchases, and inventory (trading stock. Eric did not choose the Small Business Entity option.

Cash received from accounts receivable for credit sales

$85,000

Cash paid to accounts payable for purchases of trading stock

$43,000

Inventory (trading stock) on 1 July 2018

$7,100


Inventory (trading stock) on 30 June 2019

-at cost
$8,400
-at market selling
$8,600
-at replacement
$8,500

The closing stock values include $5,000 worth stock in transit from overseas paid for and owned but not received until the 15th of July 2019.

Eric has taken home some food items from the stock purchased for consumption by his family at total value of $2,500.

Ledger balances were as follows (GST inclusive)


1 July 2018
30 June 2019
Accounts receivable
$17,600
$19,800
Accounts payable
$5,280
$5,830


Additional cash receipts included:

  • Volume rebates from overseas suppliers$3,500
  • Insurance recovery from the insurance company due to extensive damage caused by a hailstorm and included
  • Compensation for loss of income$7,900
  • Repairs carried out on shop caused by storm damage$2,700
  • Medical costs incurred by Eric form injuries$900
  • Capital contributed by Eric to expand the business$10,000 Cash payments included:
  • Cash Drawings by Eric$3,000
  • Fines for breach of Australian Customers regulations$900
  • Net wages to employees$12,000
  • PAYG withheld from employees and paid to the ATO$2,900
  • Superannuation for employees$1,230
  • Superannuation guarantee charge$190
  • Fringe benefit tax$850
  • Lease payments on shop fittings and plant equipment$940
  • PAYG instalments for Eric’s personal tax commitments$2,500
  • Fee for maintenance of computer systems –

Covering the period 1/4/2019 to 30/9/2019$1,680

  • Other tax deductible operating expenses$9,200
  • Decline in value (see note 1)$ ?

Other information regarding Eric’s Business

Note 1) Eric uses plant and equipment in his business as follows.

Eric wishes a maximum deduction for 2018/19 tax year. Ignore SBE concession. You must show

clearly decline value to claim this year and closing adjustable value balance of the each asset in the word report.

Assets

Cost ($)

Purchase date

Effective life

Adjustable vale
(30/6/2018)

Business usage

DIV
method

Mobile phone
3,000

1/6/2017

4 years

2,188

60%

Diminishing
Value
Office
Furniture

15,000

1/6/2017

10 years

13,375

100%

Prime Cost

Laptop
Computer

4,000

1/8/2018

3 year


100%


Printer
150
1/3/2019
2 years

100%

Part C: Regarding his Rental property

Eric purchased a house as a residential investment property on the 1st of July 2018. Purchase price of the property was $300,000 comprised of the following payments. All amounts include GST where applicable.

  • Land and buildings$276,800
  • Depreciable assets adjustable value on the 1st of July 2018 (See Note 1)
-Carpets
$5,000
-Hot water system electric
$1,200
-Ceiling fans
$1,600
-Barbecue (fixed)
$1,400
-Window blinds internal
$8,000
-Window curtains
$6,000

$300,000

The previous owner provided a statement to Eric certifying that the property was constructed and completed on the 1st of January 1990 at a construction cost of $100,000. The house was in good condition except that the outside walls required complete repair.

Eric recorded the following receipts and payments for the 2018/19 tax year in respect of the rental property:

Receipts

Rent received (net of agent commission withheld $1,250) by 28 June 2019$23,750 Compensation from Rental bond board for tenants who left and

did not pay the rent they owed (see note 2)$1,300 Rent in advance from new tenants on 29 June for the period 1 July to 30 July 2019$3,000 Insurance recovery for storm damage to roof$2,100

Payments

Mortgage repayments to Westpac Bank – principal                                                                                           $4,500

– interest                                                                                                                                                             $23,800

Loan application fees to Westpac Bank for a 10-year mortgage loan

to buy the house – paid on approval of the loan 1 July 2018                                                                              $825

Council & Water rates                                                                                                                                          $3,400

Building Insurance premium                                                                                                                                 $850

Payment to solicitors – for lease preparation fees                                                                                                $150

– to eject tenants for non-payment of rent                                                                                                           $375 

Repairs– to paint the outside walls of the house,                                                                                                $1,100

carried out on 10 July 2018  

Construction costs of brick room to store garbage                                                                                              $6,000 

bins and gardening equipment, carried 

out on 1 May 2019          

Garden hose and attachments                                                                                                                               $165 

Travel costs to the rental property for                                                                                                                    $830

inspections (see Note 3)  

Pest control costs to eliminate cockroach infestation                                                                                             $280 


Payment to a registered tax agent – preparing 2017/18                                                                                        $170

tax return  

Payments to the Australian Taxation Office 

- Additional tax on an amended assessment                                                                                                         $400 

- Fine for the late lodgement of 2017/18 tax return                                                                                                $760 


Other information

Note 1) Eric will use the Commissioners estimate of effective life for calculation decline in value which can be found under “Residential Property Operators”. 

Note 2) The rental bond board were only able to pay part of the money owed by the tenants. A further amount of $650 is outstanding. Eric is attempting to recover this amount by legal means. 

Note 3) Eric lives in Sydney, he took a flight to Brisbane to inspect the property and meet with the real estate agents and tenants. Required Eric wishes to minimise his income tax for 2018/19. Calculate Eric’s taxable income for 2018/19. You are required to enter income and deduction details where applicable in the tax return form provided in the excel sheet. Submit all workings of EACH income & deductions of calculations and any tax offsets available for Eric in a word format (written report) including relevant section numbers as per ITAA36/ITAA97. In your report, clearly advise whether Eric is eligible to claim a dependant tax offset (invalid and invalid carer tax offset).

Answer

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