2020 Answer guides Topics 5, 6, 7 PDF

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CAF010 Taxation Law 2020 Answer Guide Topic 5-7...

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Selected answer guides Topic 5,6 & 7 (There are no question for Topic 8)

Question 5.4 Div 70 requires that increases in the value of trading stock from opening to closing are assessable (vice versa) and therefore to obtain the lowest taxable income it is necessary to select the lowest closing value. Sales – assessable (s 6-5) Purchases – deduction (s 8-1) Net

1,500,000 900,000 600,000

Change in the value of trading stock Opening stock Closing stock - Hats (50,000 x $3) - Confetti (40,000 x $7) - Balloons (6,000 x $2) - Whistles (9,000 x $13) Assessable

0 150,000 280,000 12,000 117,000

559,000

559,000 1,159,000

Question 6.2 Dividends are assessable under s.44 but any imputation credit is added to this and is also assessable. This is called grossing up. The dividend imputation credit can be calculated as: Div x (Co. tax rate/ (1- Co. tax rate)) If the Co. tax rate is 30% then the franking credit is: Div x (0.3/0.7) However, if the dividend is not fully franked this credit needs to be multiplied by the percentage franked. Once the tax is calculated on the grossed-up dividend the final tax is reduced by the imputation credit. This imputation credit is just prepaid tax that the company has paid and therefore is allowed as a credit. The shareholders dividend is grossed-up because the shareholder is effectively taxed on the company’s pre tax income - the dividend plus the company tax already paid.

Shareholders tax position 1. Fully franked dividend of $6000 Assessable s.44 Imputation credit, 6000 x (.3/.7) x 100% Grossed up div assessable Tax, 8571 x 0.45 Less imputation credit Final tax due 2. Unfranked dividend of $1000 Assessable s.44 Imputation credit, 1000 x (.3/.7) x 0% Grossed up div assessable Tax, 1000 x 0.45 Less imputation credit Final tax due 3. Interest free loan of $10,000 Deemed dividend - Div 7A Cannot carry a franking credit Grossed up div assessable Tax, 10000 x 0.45 Less imputation credit Final tax due 4. 55% franked dividend of $3000 Assessable s.44 Imputation credit, 3000 x (.3/.7) x 55% Grossed up div assessable Tax, 3707 x 0.45 Less imputation credit Final tax due

6000 2571 8571 3857 2571 1286

1000 0 1000 450 0 450

10000 0 10000 4500 0 4500 3000 707 3707 1668 707 961

5. Free holiday This could be a deemed dividend under s 109C if it is paid in cash and it could not be franked but only if they are an associate of a private company. However, if the co. purchases the tickets and gives them to the shareholder it would be a dividend under s.6(1) if it is paid out of profits. It is not a FB as the recipient is not an employee. 6. Dividend paid out of the share capital account Not a dividend because it is not paid out of profits and is just a return of capital.

Question 7.3 Is it a benefit – yes use of Co. car for private use From employer etc- yes To Employee etc – Yes In respect of employment. - Although the son is an employee here it is difficult to see whether the car is provided primarily for the business purposes, i.e. due to the duties performed or as part of the package, or it is allowed to use because of the family relationship, i.e. mere for private use that is not somehow related to the employment. However we were told that the company deducts these expenses. So it might be assumed that all related substantiation rules are met and the car is made available for the private use of the son as employee. As a result there is a FB under s 136(1) How is it taxed - Under sec 7(1) to become a “car benefit” it is required that in respect of employment a car is held by an employer and is applied to or available for the private use of an employee. In our case the car is a part of the company utility (held by father-employer), and it is available for the son (who is employed by family company) to make the regular private use.

Question 7.4 Flowers. Is it a benefit – It could be argued that there is no benefit to the spouse of the deceased but the definition in s 136(1) is very broad and would include any property. However, if the flowers were just placed on the grave and never passed to the spouse there would not be a benefit. From past employer etc- yes To and associate of the past employee etc – Yes In respect of employment – again if the employer claims a tax deduction of the flowers they are proving the nexus to income tax as well as FBT. If they did not claim a deduction it would not be in respect of employment. Fellow employees $1,000 Is it a benefit – yes From past employer etc- No Therefore this is not a FB Employer’s $1,000 Is it a benefit – yes From past employer etc- yes To and associate of the past employee etc – Yes In respect of employment – again if the employer claims a tax deduction of the $1,000 they are proving the nexus to income tax as well as FBT. If they did not claim a deduction it would not be in respect of employment. Question 7.6

Determine the GST liability, input tax credit and net amounts arising from each of the following transactions. Assume that all transactions occurred after 1/7/2000 and that all appropriated documentation is supplied. 1.

A timber merchant quotes $200 excluding GST for the sale of wood to a furniture manufacturer. The timber is later purchased at this price. There is confusion here is about what the timber is sold for therefore it is important to recognize the use of the word “price” which has a particular meaning in GST – Price is the amount excluding GST and Value is the amount including GST. It does not matter if your answer was based on an amount of $200 or $220 but it does matter that you see the problem and discuss it. Is there is a taxable supply? – are all 5 attributes of s 9-5 are present? There is no mention of the business being registered so this will effect your answer. Assuming the taxpayer is registered and the sale price in $220 the net amount is: net amount = $20 (1/11 x 220) The net amount would be $18.18 (1/11 x 200) if the sale amount was $200

2.

The timber acquired in (1) above is used to make a table that is sold to a furniture retailer for $400 excluding GST. There is a taxable supply – all 5 attributes (assuming registered for GST) of s 9-5 are present and there is a creditable acquisition s 11-5. The net amount is: Net amount = $40 (1/11 x 440) GST - $20 input credit = $20

3.

The table purchased by the retailer in (2) is sold to an individual consumer for $590 including GST. There is a taxable supply – all 5 attributes of s 9-5 are present and there is a creditable acquisition s 11-5. Net amount = $53.64 (1/11 x 590) GST - $40 input credit = $13.64

Remember: as the sale price is GST inclusive, the GST is 1/11 of the $590. The end consumer incurs the full cost of the $590 and therefore pays the full GST collected by the ATO $53.64). 4.

How would your answer differ in (3) above if the table was purchased by a secondary school to be used as part of its process of supplying an educational programme. The situation for all businesses is the same but because the school is making a GST-free supply under s 38-85, the school is entitled to an input tax credit of $53.64, reducing the cost of the table to $536.36 and no GST is collected by the ATO.

5.

How would your answer differ in (3) above if the table was purchased by a bank and was used in the process of supplying financial services. The situation for all businesses is the same but because the bank is making an input taxed supply under s 40-5 they are not entitled to an input tax credit and therefore the total cost of the table is $590 and the GST collected on the sale remains a $53.64....