Revenue Law 2011 Taxation Law Australia Essay Example

  • Category:
    Law
  • Document type:
    Assignment
  • Level:
    Undergraduate
  • Page:
    5
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    3130

Revenue Law – 6417 – Winter Term, 2011

Question 1

Harry’s wife Christine worked 2 days a week and received $30,780 during the year ended 30 June 2011. The cost of travel from home to work was $1,120 and it cost her $185 in dry cleaning her non-uniform clothes. She also received a net capital gain of $500 from the sale of an antique chair. She donated $250 to the Red Cross.

What is Christine’s taxable income?

Expenses incurred exclusively on the employment (fare, dry cleaning) and donations are deductable. Capital gain is taxable.

Question 2

If shares in BHP Ltd are bought on 16 June 2000 and sold on 30 February 2011, a company is able to calculate its capital gain and assessable income based on:

  1. Not indexing the cost base and not applying a discount factor

  2. Indexing the cost base and not applying a discount factor

  3. Not indexing the cost base and applying a one-third discount factor

  4. Not indexing the cost base and applying a one-half discount factor

Question 3

Your client purchased an investment property for $450,000 in May 2009. They borrowed the sum of $450,000 by way of a mortgage and when they sold it they still had to repay the sum of $470,000. They sold the property for $500,000 two years later in May 2011. They have a capital loss from the sale of a caravan of $10,000 from the 2006-2007 financial year. What amount should be included in their assessable income as the net capital gain?

Capital gain can be use to write-off capital loss from other assets

Question 4

If you borrow money from a bank to help purchase an investment property and you are not able to find a tenant to rent the property for 3 years, can you still claim the interest expense as a deduction against your assessable income?

  1. case. JonesYes, because tax law does not require you to match expenses with gaining income in the same period as per the

  2. No, you must match the derivation of assessable income with claiming expenses in the same period.

  3. No, interest is not deductible as an expense in this situation.

  4. No, the interest expense forms part of the third element of the cost base for CGT purposes.

Interest on loan is always allowable irrespective of rent income that may be accruable from the property.

Question 5

established the following principle in determining whether gambling is a business and not a hobby:Evans v FC of T, Income from gambling activities will not be assessable income unless the ATO can show that it is a business and not merely a hobby. The case of

  1. You must keep a record of all winnings but not your losses.

  2. You must use a computerised system to base you gambling activity on.

  3. You must have a betting system, keep all records, be in a business associated with horses and not rely on luck.

  4. You must own at least 5 horses or be a professional horse trainer and that is all that is required.

The principle is interested in the business objective in the gambling and the records of every transaction. If a gambling meets the two criteria then it is subject to tax.

Question 6

Your client operates a very successful small retail business selling shirts. The main shirt manufacturer that supplies the shirts to your client is so happy with the volume of shirts being sold by your client that they have provided your client with an all-expense paid trip around the world for both your client and their spouse. The trip includes airfares and hotel accommodation. The value of the trip is $20,000. Your client now wants to know if there are any taxation implications with taking the trip?

  1. None, the value of the trip is tax free because it is not cash

  2. The portion of the cost of the trip being used by the spouse is tax free, but your client must pay tax on the balance pursuant to s 6-5

  3. The trip is a gift and not subject to income tax

  4. The value of the trip is assessable income and subject to income tax pursuant to s 21A, non-cash business benefits

Question 7

Your client, Home Brands Ltd, has made the following payments this financial year on behalf of the Managing Director; the School fees of $25,000, an overseas holiday for the family of $45,000, and specialist medical treatment at a cost of $6,000. The Company Accountant is unsure as to the correct taxation treatment for the expenses. What are the taxation consequences for the Company?

  1. The Managing Director will have to reimburse the company for the total amount and there are no tax consequences

  2. The company must show all amounts as being income to the Managing Director and not deductible to the company

  3. All expenses are fringe benefits and the company will have to pay FBT

  4. The company cannot claim a tax deduction for the expenses as they are of a private nature.

Question 8

The sale of shares by ABC Pty Ltd, purchased on 21 September 1985 results in which of the following capital gains tax treatment, assuming that there has been a profit on the sale?

  1. A gain calculated by deducting the indexed cost base, frozen as at 30 September 1999, from the sale proceeds and included in the assessable income for the financial year of the sale

  2. 50% of the net capital gain included in the assessable income in the financial year of the sale

  3. Proceeds added to assessable income in the financial year of the sale

  4. Tax exempt, pre CGT

Question 9

The non-capital costs of ownership, such as the cost of insurance, interest on money borrowed to purchase the holiday house and municipal rates on a holiday house, not used for income producing purposes is treated for tax purposes in the following way:

  1. As a tax deduction against other assessable income in each financial year

  2. Deducted from the third element of the cost base pursuant to s 110-25 which gives a higher capital gain

  3. Not part of the capital gains tax calculation.

  4. As a third element of the cost base of the holiday house pursuant to s 110-25 which is used to reduce the capital gain

Question 10

If you are required to work overseas and you have to rent out your main residence for a period of 2 years, the following capital gains tax consequences apply:

  1. You must pay income tax on the amount of capital gain that was made during the 2 years of absence when the home is eventually sold

  2. You do not have a CGT consequence as you have already paid income tax on the rent you have received

  3. You do not have a CGT consequence as the home is still exempt for capital gains tax even when eventually sold

  4. None of the above, the home is exempt even if it was rented out for a period of 10 years or more

Question 11

If you are working for an accounting firm and undertaking the CPA program of professional study, what amount of the following expenses are tax deductible to you?

HECS — $14,000, travel from work to the CPA office for tutorials — $2,400, and text books — $250

a) $16,650

b) $14,250

c) $16,400

d) $2,650

Question 12

Your client, Home Brands Ltd, has provided all of the sales staff with new company uniforms to be worn at work. The Company Accountant is unsure as to the correct taxation treatment for the expenses. Will the employee have to pay income tax on the cost of the uniform or is it a fringe benefit?

  1. The employee will not have to pay tax as it will be a fringe benefit provided by the employer

  2. The employee will have to pay tax on the value of the uniform under s 15-2, ITAA 97

  3. The employee will not pay tax on the value of the uniform and it is not a fringe benefit

  4. The employee will have to include the value of the uniform as statutory income.

Question 13

is authority for the following legal principle:Scott v FC of T, The High Court decision in

  1. You must pay income tax on an amount of money given to you if you are employed and the client gives you the money as a gift

  2. You do not have to pay income tax on a gift of money you have received from a former client if you have ceased to advise the client and you have no direct contact with the client.

  3. You do have to pay income tax on the gift, as it was part of the rendering of professional services.

  4. None of the above, all gifts of money are exempt no matter how it is given or by whom, even if it is given as a result of employment or a business relationship.

Question 14

If a taxpayer with a small accounting practice accounts for their income using a cash basis, would the taxpayer be better or worse off as a result of changing to an accruals basis the next financial year in the following circumstances:

  1. Worse off as a result of paying tax on assessable income including amounts invoiced in the current year as well as cash paid from the previous year

  2. Better off by paying less tax because the amount of assessable income is less because of the accruals system

  3. Better off because they only pay income tax on the amount of assessable income invoiced in the current year and pay no tax on cash collected from the previous year

  4. Better off because they pay income tax only on all cash received even if using the accruals method and having sent invoices to clients.

Question 15

Section 15-15, which includes income made from a profit making undertaking or scheme, is only applicable in a range of limited situations. It only applies in the following circumstances:

  1. Assets only purchased after 20 September 1985

  2. Assets that have been purchased with the principle object of being used for recreation because the land is next to a beach resort.

  3. Assets sold at a profit where s 6-5 or s 6-10 do not apply

  4. Assets acquired prior to 20 September 1985 and sold as a result of the carrying on or carrying out of a profit making undertaking or plan.

Question 16

You are looking to relocate your accounting practice to larger premises but are concerned that new partitions will cost you at least $45,000 to install in new premises. You have found a new building that would be suitable but you are not prepared to spend the money on new office partitions. The owner of the building is prepared to pay you a lump sum of $75,000 if you sign a 6-year lease. What are the taxation consequences of accepting the $75,000?

  1. You must pay income tax on the amount of $75,000 as a capital gain

  2. You do not have a CGT consequence and you do not have to pay income tax on the lump sum amount

  3. You do have to pay income tax on the lump sum amount pursuant to s 6-5, even though it was an isolated and one-off transaction.

  4. held that money from lease incentive payments is not assessable income.FC of T v Montgomery, None of the above, as the High Court decision in

Question 17

Your client collects antique furniture. Your client purchased some antique chairs in May 2000 for the sum of $14,000. Your client sold the chairs in August 2010 for $40,000. You have a carry forward capital loss of $18,000 from the sale of shares in July 2003. What is your net capital gain from the transaction and the amount that you would include in your assessable income for the current financial year?

Capital gain can be use to write-off capital loss from other assets

Question 18

ILJ Pty Ltd is an architectural business. During the year, on 9 September 2010, the company purchased a motor vehicle for $93,000 (including GST). The managing director uses the car solely for business purposes. Will the cost of the car be a tax deduction for the company?

a) It will be deductible as an employment expense and treated as a fringe benefit.

b) An allowable deduction under s 8-1, ITAA 97.

c) The cost of the car is not deductible in full as it is not a fringe benefit as there is no personal use involved.

d) It will be treated as a depreciating asset up to the luxury car limit of $57,466 and the depreciation deduction will be claimed by the company.

Question 19

Your client has made a capital gain on the sale of the family home that they bought for $165,000 in April 1996 and sold for $450,000 in December 2010. During the period of ownership, your client left the house for a period of 9 years while they lived in China. During that time the house was not rented but used by a relative rent-free and your client did not own any other home. The capital gain that is attributable to the period of absence from the family home is $180,000. How much of the capital gain must be included in your client’s assessable income?

  1. $180,000

Question 20

established the following principle:Arthur Murray (NSW) Pty Ltd v FC of T,The High Court, in the case of

  1. Income received in advance is derived as soon as the service is paid for in full

  2. Income received in advance is derived as soon as the full price of the dance lessons are paid by the customer and placed in a bank account

  3. Income received in cash is income even if the services have not been provided

  4. Income received in advance is derived only after the services have been provided

Question 21

You bought a yacht on 1 January 2006 for $350,000 and used it to sail around Australia for a period of three and a half years. During this period you rented out your main residence. You sold the yacht on 30 June 2011 for $200,000. What are the CGT implications, if any?

  1. The yacht is exempt from CGT because was a main residence for three and a half years

  2. The yacht is a collectable and the capital loss of $150,000 can be used to reduce other collectable capital gains

  3. The yacht is a personal use asset and the loss can be discounted by 50% giving a capital loss of $75,000

  4. The yacht is a personal use asset and the loss is disregarded

Question 22

A company declares at the annual general meeting in May 2011 that it will pay a dividend to its shareholders. The dividend is actually paid to the shareholder in August 2011. When should the amount of dividend be included in the shareholders assessable income?

  1. 2009-2010 financial year

  2. 2011-2012 financial year

  3. 2010-2011 financial year

  4. None of the above, the dividend is not assessable income

Question 23

What is the allowable time period that a taxpayer is able to own two main residences without paying income tax on the capital gain when one home is sold?

  1. 12 months

Question 24

How old does an antique have to be before it is regarded as a collectible, and not a personal use asset, for CGT purposes?

  1. Only 1 year

  2. No particular period

  3. 100 years

Question 25

An individual taxpayer makes a capital loss of $5,000 on the sale of a rare manuscript and a capital gain of $4,500 from the sale of BHP shares that they held for 6 months. What is their net capital gain for the financial year?

  1. A net capital gain of $2,250

  2. A net capital loss of $500

  3. A net capital loss of $9,500

  4. A net capital gain of $4,500

Question 26

A taxpayer buys a very old Rolls Royce motor car at a cost of $125,000 on 24 May 2007. The car was made in the UK in 1936. He sells the motor car on 12 June 2011 for $100,000. What is the amount of his capital loss on the sale of the car that he can use to offset other capital gains?

Question 27

“Self-assessment”, as a system of preparing your annual tax return for lodgement with the Australian Taxation Office (ATO) means:

  1. A taxpayer does not have to lodge a tax return unless they want a refund of tax

  2. A taxpayer calculates the amount of tax that they should pay and lodges the tax return on the basis that the ATO accepts the information provided

  3. The taxpayer lodges their tax return and the ATO asks for an explanation of all items shown as a tax deduction

  4. The ATO requires all evidence of tax deductions and capital gains to be attached to the tax return

Question 28

Bill Roberts is an investor in the stock market and works full time as a Quantity Surveyor. He bought some BHP shares for $25,000 in May 2000 to hold as a long-term investment. On the advice of his broker, he decided to sell the BHP shares. The shares were sold in March 2011 for $50,000. Bill has a $20,000 capital loss from shares, which he made in the 2001 income year. Assuming that Bill calculates his capital gain in the most tax effective way, the amount of capital gain required to be included in Bill’s assessable income is:

Question 29

If you are required to work overseas and you have to rent out your main residence for a period of 5 years, the following capital gains tax consequences apply:

a) You must pay income tax on the amount of capital gain that was made during the 5 years of absence when the home is eventually sold

You do not have a CGT consequence as you have already paid income tax on the rent you have receivedb)

c) You do not have a CGT consequence as the home is still exempt for capital gains tax even when eventually sold

d) None of the above, the home is exempt even if it was rented out for a period of 10 years or more

Question 30

Your client has just purchased an investment property that needed repairs and maintenance before it could be rented out. Your client spent $20,000 replacing the roof and $16,000 on a new kitchen and bathroom. They now seek your advice as to how these expenses will be treated for taxation purposes?

  1. The total amount of $36,000 will be tax deductible pursuant to s 8-1

  2. The total amount of $36,000 will be deductible as a repair, s 25-10

  3. The total amount will not be deductible as a repair, because it is a capital expense as it will be regarded as an initial repair

  4. The total amount will not be deductible immediately, but it will be over 5 years