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1 SECTION A

ALL FIVE (5) QUESTIONS (QUESTIONS 1 TO 5) MUST BE ATTEMPTED IN ONE (1) BOOKLET. EACH QUESTION IN SECTION A IS WORTH 4 MARKS.

QUESTION 1 Justin is a real estate agent working as an employee of Sell My House Pty Ltd. On 1 st October 2016 Justin purchased a camera drone for $2,600 so he could take aerial photographs of properties to be used in the property’s marketing campaign. Given the rapid improvements in technology in this area Justin estimated he would need to replace the camera drone in 2 years. On 1st April 2018 Justin sold the drone for $350 and on the same day purchased a replacement for $3,000. Justin believes this new drone will last 3 years. Justin has always tried to maximise his deduction claim each year. Considering Justin uses his drone exclusively for work purposes, select the most correct statement for the 2018 year. (a)

Using the diminishing value method, Justin can claim a total depreciation deduction of $499 (rounded), but must also include an assessable balancing adjustment of $188 (rounded).

(b)

Using the diminishing value method, Justin can claim a total depreciation deduction of $1,154 (rounded), but must also include an assessable balancing adjustment of $350.

(c)

Using the diminishing value method, Justin can claim a total depreciation deduction of $992 (rounded), but must also include an assessable balancing adjustment of $188 (rounded).

(d)

Justin is an employee. He should make his employer reimburse him for the cost of the camera drone and therefore cannot claim any deductions connected with the expense.

(e)

Depreciation is deductible under s 8-1 of the Income Tax Assessment Act 1997.

Which is the correct answer? Provide reasons for your answer. [TOTAL: 4 MARKS]

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2 QUESTION 2

Rebecca is a social worker employed by a women’s shelter. Rebecca has noticed an increase in clients who have been the victim of domestic violence. Rebecca enrols in a Graduate Certificate in Domestic Violence at QUT to help educate her on how to best support and counsel these clients. Rebecca lives in Keperra and works full time in Rosalie. She attends classes at QUT 2 nights per week. Rebecca normally catches the bus to work, but on the days she goes to University at night she drives to work and pays $15 for parking. She then drives to University and pays a further $12 for parking. She then drives home. There is public transport available to and from the University which would be much cheaper but Rebecca does not feel safe catching public transport at night. Select the most correct statement.

(f)

Because the university study is directly relevant to Rebecca’s current employment, costs associated with her study, including travel to and from University, will likely be deductible.

(g)

Rebecca can generally claim a deduction for expenses incurred in travelling between her work and University, but not from University to home because subsection 25-100(3) of the Income Tax Assessment Act 1997 denies a deduction for travel if it is between a place where the taxpayer resides.

(h)

It is not up to the Commissioner of Taxation to determine how taxpayers should spend their money. Therefore, the fact there was a cheaper option available to Rebecca (i.e. to catch public transport) is irrelevant to determining deductibility. Because Rebecca chooses to use her car for safety reasons, the cost of parking at both her place of work and at the University will be deductible.

(i)

Both (a) and (b) are correct.

(j)

All (a), (b) and (c) are correct.

Which is the correct answer? Provide reasons for your answer. [TOTAL: 4 MARKS]

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3 QUESTION 2

Leading Start Pty Ltd (LS) is a newly established business offering childcare services. LS is registered for GST. LS charges $110 per child per day for the provision of care. Childcare fees for the 2018 financial year totalled $220,000. In the 2018 financial year LS incurred the following expenses: Renting commercial premises:

$110,000 (GST inclusive)

Staff wages: Electricity:

$66,000 $550 (GST inclusive)

Toys and supplies:

$9,900 (GST inclusive)

Equipment (cots):

$4,400 (GST inclusive)

Select the most correct statement. (k)

LS will have GST payable of $20,000 and will have an entitlement to $17,350 input tax credits.

(l)

LS should not have registered for GST. Childcare is a GST free supply. Providers of GST free supplies cannot register for GST.

(m)

Only the cash (also known as the receipts) method of accounting can be used to determine an enterprise’s GST payable or input tax credit entitlement.

(n)

LS will have no GST payable and will be entitled to $11,350 input tax credits.

(o)

Both (c) and (d) are correct.

Which is the correct answer? Provide reasons for your answer. [TOTAL: 4 MARKS]

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4 QUESTION 3

Which of the following statements is correct in relation to Part IVA of the Income Tax Assessment Act 1936?

(p)

If Part IVA applies, the tax benefit that flowed from that scheme is cancelled. Because the taxpayer does not get the tax benefit the Commissioner cannot double-dip and also impose an administrative penalty.

(q)

Part IVA is a provision of "last resort", which means it does not apply unless the taxpayer's claim is otherwise allowable.

(r)

To prove a transaction is a sham, the Commissioner must rely on Part IVA, because there are no specific anti-avoidance provisions which address sham transactions.

(s)

To satisfy Part IVA, the Commissioner must only establish that a tax benefit was derived from a scheme. It is irrelevant whether or not obtaining the tax benefit was the sole or dominant purpose of the scheme.

(t)

Once it has been established that Part IVA applies to a scheme, the tax benefit that flowed from that scheme is cancelled.

Which is the correct answer? Provide reasons for your answer. [TOTAL: 4 MARKS]

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5 QUESTION 4

Big Ideas Pty Ltd (BI) is a marketing business. During FBT year ending 31 st March 2019 BI provided the following benefits to its employees:



a yearly Broncos membership valued at $1,800 was provided to an employee, Sarah.



An employee Dean, received weekly tennis lessons for his son, valued at $2,500.

BI is registered for GST. Select the most correct answer. As a result of just the above two transactions – (u)

Sarah will have to declare $1,800 assessable income in her 2019 year income tax return and Dean will have to declare $2,500 in assessable income in his income tax return.

(v)

Only Dean will have to declare a reportable fringe benefit amount in his 2019 year income tax return.

(w)

Both Dean and Sarah will need to declare a reportable fringe benefit amount in their 2019 year income tax returns.

(x)

Fringe benefits tax is a tax that is paid by the receiver of the benefit. As the receivers, both Sarah and Dean will have to pay tax on the benefits received.

(y)

BI will have to have an FBT liability of $2,021.

Which is the correct answer? Provide reasons for your answer. [TOTAL: 4 MARKS]

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6

SECTION B

ALL THREE (3) QUESTIONS (QUESTIONS 6 TO 8) MUST BE ATTEMPTED IN A NEW BOOKLET. MARKS FOR QUESTION 6 TO 8 ARE AS INDICATED. Orchid Pty Ltd (Orchid), a resident Australian company which specialises in pool chlorinator production, is completing paper work for the 2018 income tax year. Orchid is not a small business entity. The following circumstances are brought to you as a tax professional acting for Orchid.

QUESTION 5 Orchid struggles to attract young parents as employees to the company and, therefore, has constructed a childcare facility within the premises. Construction costs totalled $640,000 and the facility has the capacity to care for 45 children. Employees of the company will not be charged for daily care of their children. The cost of the same care at other day care facilities is $80/day. The centre is open for five days a week over 40 weeks of the year and the cost of running the centre is $150,000. What are the Fringe Benefits Tax implications for Orchid (and the employee) of this activity? (3 marks)

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7

QUESTION 6

Orchid has identified the following transactions:-



PAYG instalment of $39,000 was made on 25th July 2017



Income tax payment of $68,000 was made on 8th August 2017



A frankable distribution of $21,500 was received on 29th September 2017. This had a franking percentage of 65%



A frankable distribution of $41,000 was paid by Orchid to its shareholders on 24th December 2017. This had a franking percentage of 90%.



A large amount has been paid by Orchid to the wife of one of Orchid’s shareholders. No interest is payable on the loan and it doesn’t need to be repaid for 8 years.



A loan was made to another company, Hoot Pty Ltd, in the ordinary course of business on ordinary commercial terms. Hoot Pty Ltd is not a related entity of Orchid.

Provide a statement of advice to explain to Orchid the impact of each of these transactions on the company’s franking account. Include calculations where appropriate. (7 marks)

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8 QUESTION 7

Joe Peters is an employee of Orchid and is employed on a permanent full time basis. Joe’s employment agreement states that he is to receive $100,000 per annum exclusive of superannuation. In the 2018 income year Joe was paid $120,000, $20,000 of which consisted of overtime payments. The Commissioner of Taxation has recently conducted an audit of Orchid for the year ended 30 th June 2018 and discovered that it has not made any contributions into Joe’s superannuation fund. Explain to Orchid what the amount of any superannuation guarantee charge would be as a result of the audit. Identify the different components of the charge in your answer. (5 marks)

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9

SECTION C

THIS QUESTION (QUESTION 9) MUST BE ATTEMPTED IN A NEW BOOKLET. MARKS FOR QUESTION 9 ARE AS INDICATED.

QUESTION 8 Olive has asked you to calculate her taxable income for the year ended 30 th June 2018. Olive has had no CGT events between the years 2013-2017 and has provided you with the following information.



In the 2013 income year Olive had a capital loss of $10,000 due to the sale of Eastpac shares. She also had a capital loss of $5,000 on the sale of her grandmother’s antique dining setting in the same year.



Olive sold her Kia motor vehicle on 23rd March 2018 for $1,000. Olive paid $16,500 when she purchased the car in 2002 and has advised the expenses incurred in maintaining the car have been $12,000 for the full period of ownership.



Olive sold shares in Northpac on 20th July 2017 for $25,000. Olive had acquired these shares on 5th December 2010 at a cost of $4,000. Olive had $200 brokerage fees for the purchase and $8000 for the sale.



Olive sold an antique gold medal for $1,000 that she had inherited from her grandmother. Olive’s grandmother had acquired the medal in December 1980 for $50. The medal had a market value of $400 when she died in 2014. There was no expenditure associated with the medal. Olive signed a contract to sell her property on 19 th June 2018 for $700,000. The contract settled on 4th July 2018 with real estate agent and legal fees totalling $23,000. The property was acquired as a vacant lot of land on 20th August 1985 for $30,000. Olive built a dwelling on the property for $250,000 on 25th March 2015. Olive advises that the expenses for the property since building the dwelling were interest of $15,000 and council rates of $50,000. The dwelling added substantial value to the property and it is estimated that 50% of the sale price was attributable to it. Olive never lived in the property and had earned rental income (and claimed any allowable deductions for it) since its construction.

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10

Question 9 continued

In addition to the above Olive is a business partner in a partnership business with Patricia. The partnership runs a home day care centre. The partnership made a profit of $75,000 for the year ended 30th June 2018. This profit was calculated after payments of $15,000 to Olive and $25,000 to Olive’s business partner, Patricia, by way of a salary and after the repayment of $5,000 in interest to Olive, who had advanced money to the day care centre. The advance from Olive was used by the partnership as working capital. The net income of the partnership is to be split evenly. Calculate Olive’s taxable income for the year ended 30th June 2018. You should provide full reasons and calculations for your answer. (15 marks)

END OF PAPER

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