EXAM 3 June, questions and answers PDF

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Session One Examination 2014

LAW301 TAXATION LAW (PRINCIPLES)

Question Paper MAY NOT be retained by the Candidate WRITING DURING READING TIME IS PERMITTED ON ALL EXAMINATION MATERIALS

LECTURER:

AMANDA CARRIGAN

WRITING TIME:

3 hours 10 minutes

MATERIALS SUPPLIED BY UNIVERSITY:

2 x 12 page examination answer booklets

MATERIALS PERMITTED IN EXAMINATION:

Battery/Solar Calculator (no printer, nonprogrammable)

NUMBER OF QUESTIONS:

Part A: 15 Multiple Choice Questions; Part B 3 Short Answer Questions; Part C 4 Problem Questions (attempt any three (3) questions)

VALUE:

60 %

INSTRUCTIONS TO CANDIDATES: 1. 2. 3. 4.

Write your name and student number and sign in the space provided at the bottom of this page. This is an open book examination all materials may be brought in except electronic devices, not being calculators. This examination consists of fifteen (15) multiple choice questions, three (3) short answer questions and four (4) problem questions of which you must attempt any three (3) questions. The purpose of this examination is to enable candidates to identify the key issues relative to various items which affect taxpayers. It is expected that, in addressing themselves to the issues involved, candidates will refer to the relevant provisions of various Acts, decided cases, decisions of Administrative Appeals Tribunals, and Taxation Rulings.

STUDENT NAME: ……………………………………………... STUDENT NUMBER: …………………. STUDENT SIGNATURE: ……………………………………………………………………………………

Calculator model (if used):……………………………………………………………………………….

PART A MULTIPLE CHOICE QUESTIONS

(15 Marks)

STUDENTS ARE REQUIRED TO ANSWER ALL QUESTIONS IN PART A CIRCLE THE OPTION ON THIS EXAM PAPER OR WRITE THE QUESTION NUIMBER AND YOUR CHOICE IN THE ANSWER BOOKLET PROVIDED Question 1 Which of the following statements is most correct? a) A flat tax could also be described as a proportional tax. b) A progressive tax takes a decreasing proportion of income in the form of taxes as income rises. c) A regressive tax takes an increasing proportion of income in the form of taxes as income rises. d) The average rate of tax is the rate of tax payable on certain levels of income. Answer: A. A tax is proportional if it takes the same proportion of income at all levels so that all persons pay the same ‘flat rate’ of tax. A progressive tax takes an increasing proportion of income as incomes rises. A regressive tax takes a decreasing proportion of income as income rises. The average rate of tax is the average rate paid overall on total income. The marginal rate of tax is the rate of tax payable on certain levels of income. Question 2 In relation to the income tax formula, which of the following statements is least correct? a) You calculate your taxable income by adding up all your assessable income and adding up all your deductions and subtracting the total of your deductions from your assessable income. b) Assessable income includes ordinary income and statutory income, but does not include exempt income. c) There are general deductions, specific deductions and other deductions. d) Foreign resident (non-resident) taxpayers are generally required to include Australian source income when calculating their taxable income. e) Goods and services tax (GST) is generally disregarded when calculating the assessable income of a taxpayer. Answer: C Deductions fall into two categories; general deductions and specific deductions. Question 3

During the current income year Nicholas received salary and wages of $35,000, interest of $3,000, a gift from his parents of $5,000, a lump sum compensation payment for loss of mobility in fingers due to a work injury of $23,000 and commission income of $4,000. What is Nicholas’s assessable ordinary income? a) b) c) d)

$47,000 $38,000 $42,000 $35,000

Answer: C. A lump sum compensation for loss of mobility in fingers is capital. Everything else is income and the gift is received for no services and is not considered ordinary income in the hands of the taxpayer. Question 4 Which of the following is not a factor to consider in determining whether an amount is ordinary income in the hands of the recipient? a) b) c) d)

The quality or character of the payment from the perspective of the payer. The motive of the payer in making the payment. The receipt is a product of employment. The payment is made in the form of a lump sum.

Answer: A. Income is tested from the recipient’s view, not the payer’s view (Federal Coke, McNeil). Payer’s motive may be relevant (Scott). Receipt from employment will make the amount ordinary income (Dixon). Form of payment may determine if the amount is income (Re Coward). Question 5 Milos is a sales representative for Ozzie Publishing. During the year Milos received the following: Salary Entertainment allowance Travel allowance Telephone allowance Reimbursement of accommodation while working Reimbursement of meals while travelling for working Milos has assessable income for the year of: a. b. c. d.

$50,000 $60,000 $65,750 $77,750

$ 50,000 10,000 5,000 750 10,000 2,000

Answer: C Salary is assessable under s6-5; allowances under s15-2. Allowances are not fringe benefit. Reimbursements for work related expenses are exempt income: s23L(1A).

Question 6 Daniel bought a house on 15 September 1985 for $70,000. He used the house as a main residence at all times until he sold it for $280,000 on 25 September 2008. Assuming that Daniel had no other CGT events occurring during the year and had no carried forward capital losses, what is Daniel’s capital gain/(loss) on the disposal? e) f) g) h)

$210,000 gain. $158,830 gain. Nil gain or loss. Gain exempt under s 118-110 ITAA97.

Answer: C For the main residence exemption to apply there must otherwise be a capital gain. Here the house was purchased prior to 20 September 1985 so any gain or loss will be disregarded by operation of CGT event A1. So there’s no gain for s 118-110 of the ITAA97 to apply. Question 7 2) Robert, an Australian resident, has a carried forward ordinary capital losses of $9,000 and carried forward collectable losses of $7,000. In the current income year, he sold land for $46,000 (acquired 2 years ago for $20,000) and an antique for $2,000 (acquired for $550 on 5 years ago). What is his net capital gain or loss for current income year? a) b) c) d)

$17,000 $1,450 $5,725 $8,500

Answer: D

Proceeds – cost base Less c/f losses Gross capital gain Less 50% discount Net capital gain / (loss)

Land 26,000 (9,000) 17,000 (8,500) 8,500

Antique (collectable) 1,450 (7,000) (5,550) (5,550) loss carried fwd.

Question 8 Jerry has one employee and during the FBT year Jerry paid $3,000 of expenses (on which GST was paid) on behalf of his employee. Assume no concessional tax treatment applies. What is the reportable fringe benefit amount on the basis of this payment?

e) f) g) h)

$3,000 $6,194.10 $1,395 $5,607.60

Correct answer: D The employee’s “individual fringe benefits amount” is more than $2,000 so there is a reportable fringe benefit amount (s 135P(1)). The reportable fringe benefits amount is calculated as: Individual fringe benefit amount × 1.8692 = 3,000 x 1.8692 = 5,607.6

Question 9 Sarah runs a business in selling IT equipment. She also provides IT consultancy services which normally lead to sales of IT equipment. The following information relates to the current income year: Cash sales

$20,000

Trade debtors

$10,000

Work in progress: consultancy (billable only when work is done)

$5,000

Profit from sale of office (she decided to rent her office space to free up capital for her business)

$50,000

Which of the following is false? a) b) c) d)

Cash sales are assessable in the current year. Work in progress – consultancy is assessable in the current income year. Trade debtor sales are assessable in the current year Both cash sales and trade debtors amounts are assessable under s.6-5

Answer: B A is true as cash sales are assessable ordinary income when received by an accruals taxpayer. B is false because an amount is derived only when it matures into a legal debt: Henderson. C is true. Sarah is an accruals taxpayer as she relies on circulating capital to earn income: Barrat. D is true as they are both ordinary business income: Californian Copper.

Question 10 Jane works as a waitress in Bob’s restaurant. Which of the following is false? a) Tips received by Jane are assessable income.

b) Salary received by Jane is assessable income. c) Bonuses received by Jane for outstanding performance are not assessable income. d) Study support payments received by Jane from Bob are assessable income. Answer: C A is true as Jane is assessable under s.6-5 or s.15-2. B is true. Personal exertion income is assessable under s.6-5. C is false because bonuses are assessable either under s.6-5 or s.15-2. D is true as this would be assessable under s.15-2: Smith.

Question 11 Peta received $30,000 from Bob for services rendered. Which of the following is false? a) The amount is assessable to Peta if Bob is her employer. b) The amount is assessable to Peta if she was not an employee but it was received under a contract of service. c) The amount is not assessable to Peta if there is no contract of service between Jane and Bob. d) The amount is assessable to Peta even though she performed the services to Sarah. Answer: C A is true because salary is personal exertion income: Dixon. B is true because it is personal exertion income: Dixon. Alternately, s.15-2 applies. C is false because you don’t need a contract of service to derive personal exertion income: Kelly. D is true because the services need not be rendered to the payer: Dixon, Kelly.

Question 12 Which of the following is false? a) Ordinary income must be money or money’s worth. b) The Cooke & Sherden principle does not apply to benefits caught by s. 15-2. c) Payment received by an employee from its employer for successfully completing a course is assessable under s. 15-2. d) Payment received by an employee from its employer for successfully completing a course is assessable under s. 6-5. Answer: D A is true because of Cooke & Sherden. B is true because of Payne. C is true because of Smith. D is false because it is not for personal exertion. Question 13 Fiona works for three employers and has received fringe benefits from all three employers, two of which were reported on her payment summaries for the year ended 30 June 2014 being $5,700 and $8,300. The other fringe benefit had a taxable value of $1,600 but was not

reported on her payment summary. What is Fiona’s adjusted fringe benefits total for the year ended 30 June 2014? a) b) c) d)

$14,000. $7,490. $9,090. $15,600.

Answer: B The adjusted fringe benefits total of a taxpayer for a year of income (s6(1) ITAA36) is the amount worked out by using the formula: Taxpayer’s reportable fringe benefits total x (1-FBT rate) FBT rates is the rate of tax set by the FBTAA for the FBT year (currently 46.5%, and reportable fringe benefits total has the same meaning as in the FBTAA Question 14 Edward is a skilled engineer and is currently working for Equip Ltd and received $50,000 in salary from his current employer, as well as a fringe benefit with a taxable value of $3,000 for the year ended 30 June 2014. A former employer, Unity Ltd, paid Edward $5,000 in the year ended 30 June 2014 because it underpaid him for the former employment. Edward will commence employment with United Ltd (a new employer) on 4 July 2014 and United paid him$6,000 as an advance of salary on 24 June 2014. Based on these receipts, what amount should Edward include in his assessable income from personal exertion for the year ended 30 June 2014? a) b) c) d) e)

$61,000 $53,000 $64,000 $55,000 $56,000

Answer: A Income will be assessable from personal exertion where it is paid for past or future services, paid by a third party or is the product of an isolated act of service. Fringe benefits are not included in the assessable income of an employee – s. 231L ITAA36. Question 15 In relation to business income, which of the following statements is most true? a) The proceeds from the mere realisation of an investment or an income earning property are not always ordinary income. b) The proceeds from the sale of land purchased in 1986 to carry on a farming business will be ordinary income. c) The value of a shop fit-out received by a lessee as a lease incentive will always be ordinary income. d) If a business earns an amount from an unusual or one-off transaction it will not be assessable income. e) Australian courts tend to take a narrow view of the scope of a business. Answer: A

The mere realisation of a capital asset will not always be ordinary income but if the capital asset/investment was purchase after 19 September 1985 it is likely to be subject to capital gains tax.

Part B

Short Answer Questions

(5 Marks each)

STUDENTS ARE REQUIRED TO ANSWER ALL QUESTIONS IN PART B Question 1

(5 marks)

With reference to legislation and case law discuss why it is important to identify whether ordinary income or statutory income is exempt or non-assessable non-exempt income.

Question 1 Answer Guide Students should give definition for non-exempt and non-assessable non-exempt income and identify the tax treatment of both. It is important to distinguish between “exempt income” and “non-assessable non-exempt income” because although both are not included in assessable income, “exempt income” is taken into account in determining the amount of a prior year tax loss that can be utilised in the current year (s 36-10 ITAA97). Additionally, capital gains and losses made on assets used solely to produce exempt income are disregarded under s 118-12 ITAA97. Whereas only capital gains and losses on certain types of “non-assessable non-exempt” income are disregarded under this section.

Question 2

(5 marks)

Discuss the positive and negative elements of the definition of “fringe benefit” with reference to the positive and negative elements of the definition. In your answer consider the following three situations: a) A benefit provided by a company to a former employee. b) A benefit provided by a company to a present employee. c) A benefit provided by a company to a customer.

Question 2 Answer Guide

The benefits that are liable to FBT are provided to current, prospective or former employees as well as associates of employees but not to customers of the employer. FBT will not apply in the option C. The positive limbs of the definition of fringe benefit are contained in paragraphs (a) to (ea) of the s 136(1) definition. Under the positive limbs, a fringe benefit arises where: • a benefit is provided during, or in respect of, the year of tax • by an employer, an associate of the employer, or a third party under an arrangement with the employer or associate of the employer • to an employee or an associate of the employee • in respect of the employment of the employee.

In essence these are the elements of the definition that bring a benefit within the application of the fringe benefits tax rules.

The negative limbs of the definition of fringe benefit are contained in paragraphs (f) to (s) of the s 136(1) definition. Various benefits are exempt from FBT (eg salary or wages, benefits under employee share schemes and most superannuation contributions and termination benefits). In addition consideration of a capital nature for, or in respect of, a legally enforceable contract in restraint of trade or personal injury to a person and certain amounts of deemed dividends are not considered to be fringe benefits.

Question 3

(5 Marks)

Tony has owned a large property on which there are many tall pine trees. Tony intends to use the land for grazing sheep and therefore wants to have it cleared. He discovers that a logging company is prepared to pay him $2,000 for every 100 metres of timber they can take from his property. Apart from any capital gains tax issues, discuss how Tony would be assessed on the receipts from this agreement with the logging company with reference to legislation and case law. Would your answer be different if he was simply paid a lump sum of $60,000 for granting the logging company a right to remove as much timber as required from his property?

Question 3 Answer Guide Students need to set out the principles of ordinary income and capital.

Under the first arrangement, it is likely that Tony will be assessed on the receipts as royalty payments. This is because the facts are similar to the case of McCauley v FC of T (1944) 69 CLR 235. In this case a taxpayer owned land upon which there were trees growing. Although he was a dairy farmer and had not intended on growing and selling trees, he entered into an agreement whereby he sold the right to cut and remove the standing timber for a specific price per every 100 feet of timber. The court held that the amounts received were royalties and thus assessable income. If Tony were to receive a lump sum payment of $50,000 for granting the logging company a right to remove as much timber as required, it is likely that the receipt would be capital in nature and therefore not ordinary income. This is because in the case of Stanton v FC of T (1955) 92 CLR the taxpayer entered into an agreement to sell the timber on the land, through an arrangement which gave the purchaser the right to cut and remove the timber from the land. The court found that although there were similar facts, the McCauley decision did not apply. The payment was not a royalty because the amount to be paid was not related to the quantity or value of timber removed. There was essentially the sale of a capital asset (the timber) at a fixed price and therefore was capital in nature.

PART C

(Each Question is Worth 10 Marks)

ANSWER ANY THREE (3) OF THE FOLLOWING QUESTIONS

QUESTION 1

(10 marks)

Jason is a permanent resident of Australia. He was born in Brazil and he spends most of the year working off the coast of Indonesia on an oil rig for a Chilean company. Jason has retained his Brazilian citizenship although he has been recruited for the Chilean job in Australia and signed a contract with the company in Australia. For the last four years, Jason’s wife has lived in Australia with their two children. The couple purchased a home in Australia three years ago. Jason and his wife have a joint bank account with the Commonwealth Bank and Jason’s salary is paid directly into this account. All of the family’s other investments, including a share portfolio that generates substantial dividend income, remain in Brazil. Jason gets one month off from work every third month and, on these occasions, he meets with

his family either in Australia or on holidays around South America (usually in Brazil where his parents reside). Required: Discuss whether Jason is a resident of Australia and how his salary and investment income would be taxed. Question 1 Answer Guide A threshold issue is whether Jason is a resident of Australia for tax purposes. Under the ordinary “residence” test in s 6(1)(a) ITAA36 of the definition of “resident”, the question is one of fact and degree. There is a reasonable argument that Jason is a resident of Australia because, on balance, Australia seems to be the place where it could be said that Jason lives or has an abode with some degree of permanence. His immediate family lives in Australia. They maintain a bank account in Australia and...