Income Tax Law Carrying on a business PDF

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Carrying on business practice questions...

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Income Tax Law Carrying on a business Most tax cases involve the ATO not wanting the tax payers to be carrying on a business. Why do you think this is the case? Because with the business, there will be allowable deductions reducing the tax payable to the government.

Is the taxpayer carrying on a business? -

Did u set up your online sales with the intention of being a business? Do you pay for your online-selling presence? Is your main intention to make a profit? Do you make repeated or regular sales?

Research ATO and list some factors that would determine whether you are carrying on a business of online selling https://www.ato.gov.au/Business/Starting-your-own-business/In-detail/Online-selling--hobby-or-business-/

Specific Types of Business receipts Receipts for Cancellation/variation of business contracts These receipts are ordinary income and assessable under s 6.5-1 Profits from isolated transactions Receipts are assessable under s 6.5-1 where the transaction was entered into with the purpose of making a profit Bounties and subsidies Assessable under s15-10 where received in relation to carrying on a business Insurance Recoveries Insurance payments for loss of trading stock, income or profits are assessable under s6-5(1) or s15-30 or 70-115 Refunds recoveries of deducted items Refunds recoveries of items of expenditure for which a deduction has previously been allowed are assessable income s6.5 (1) Example a bad debt written off is deductible. > If the bad debt is recovered for a debt previously written off as bad, then amount received is assessable income

Questions Questions 1 1 Bill Inglis, a resident taxpayer, had the following receipts during the 20/21 income year Interest from savings account jointly held with brother (TFN withheld 1,880) Income tax refund Insurance lump sum compensation for damage to arm after dog attack Workers' compensation receipts for 4 weeks after a work injury Interest Free Loan received as reportable fringe benefit Partly Franked dividend from DEF Ltd (Franking credit $1000 Gross Salary Entertainment allowance Cash prize for employee of month Interest from Bank Workers' compensation Franked dividend from DEE Ltd Franking credits Gross Salary Cash prize Entertainment Allowance Assessable Income

$2,000 $2,500 $3,000 $1,000 $50,000 $2,000 $2500 $63,000

$ 2,120 730 5,000 2,500 5,000 3,000 50,000 2,500 2,000

Question 2 Mark Carter, a resident taxpayer, had the following receipts during the 2021 tax year: Fully franked dividend from Ltd 5,500 UK dividend from ABC Ltd($230 tax withheld 2,300 Gross Salary (PAYG tax withheld $17,000) 64,000 Proceeds from term deposit (including interest of $600) 6,600 Rent received from investment property 22,400 Shift Allowance from work 1,400 Net Interest (TFN tax withheld $4,650) 5,350 Reportable Fringe Benefit – Holiday 4,000 Maintenance Payments from ex-spouse 9,200 Additional Information • Mark also had a further $3,500 of rental income outstanding as at 30 June 2021. • Mark had work and rental deductions amounting to $3,000 for the year. • Mark is single, aged 49, and has adequate hospital cover. Calculate Mark’s taxable income for the 2020/21 tax year. Fully Franked Dividend Franking Credit UK Dividend Gross Salary Proceeds from term deposits Rent received Shift Allowance Net Interest Assessable Income (-) Deductions Taxable Income Income Tax (-) LMITO Net Tax (+) Medicare Levy (-) Franking credits (-) Tax withheld (-) TFN withheld (-) PAYG withheld Net refund payable

$5,500 $2357 $2530 $64,000 $600 $22,400 $1,400 $10,000 $108,787 $3,000 $105,787 $24,848 $606 $24,242 $2116 $2357 $230 $4650 $17,000 2121

Question 3 Jeff Thomson owns a mixed business and will use the ATO’S estimates for estimating trading stock taken for own use. He has a wife and 2 children aged 6 and 3. $ Business receipts

968,200

Bank interest on joint account with wife Business loan from bank

100,000

Insurance recovery for loss of trading stock after storm damage at business premises Fully Franked dividends received

12,000

Cash Drawings

78,000

Value of trading stock as 30 June 2020

15,900

Value of trading stock at 30 June 2021

22,700

10,500

Required: Calculate Jeff’s assessable income for the year ended 30 June 2021

Business Receipts Bank interest Insurance recovery for loss of trading stock Fully Franked Dividend Franking Credits Increase in trading stock Stock for own use Assessable Income

• • •

$968,200 $2,840 $12,000 $10,500 $4,500 $6,800 $11,150 $1015,990

Tax withheld and TFN withheld are to be added to total income earned and minus as a tax offset. When the receivable is given need to calculate Sale: Sales = Total received + Closing stock Opening stock. ATO rates to be followed for stock taken for personal use if mentioned.

Question 4 Bill Baker, a single resident taxpayer, aged 34, owns a computer supplies shop. During the 2021 tax year, the following amounts were deposited into his business bank account $ Proceeds of a business loan from East Pac Bank X 350,000 Receipts from accounts receivable Y 820,000 Capital X 50,000 Income Tax Refund from 2020 tax year X 9,000 Insurance Recovery for loss of income after a fire destroyed his shop Y 90,000 Insurance Recovery for shop repairs Y 9,000 Insurance Recovery for his computer system which was destroyed in X 30,000 floor(Equal to Book Value) Stock own use X 1,000 Subsidy from supplier for promoting and referring their products Y 14,000

• • • • • •

• As at 30 June 2020, Bill had accounts receivable of $38,000. • As at 30 June 2021, Bill had accounts Receivable of $42,000. Bill does not have private health insurance During the year, Bill received $5,000 of Electricity as a contra with one of his clients. All deductions available to Bill totalled $690,000 Bill has paid $71,000 of PAYG instalments during the year. Opening stock $1500, Closing stock $2,500 All figures are net of GST where applicable.

Required Calculate Bill’s taxable income for the 2020/21 tax year. Sales (820,000 - $38,000 + $42000) Insurance Recovery for loss of income Insurance Recovery for shop repairs Stock own use Subsidy Electricity Increase in closing stock Assessable Income (-) Deductions Taxable Income Income Tax (+) Medicare Levy (+) Medicare Levy Surcharge (-) PAYG withheld Net Tax Payable

$824,000 $90,000 $9,000 $1,000 $14,000 $5,000 $1,000 $944,000 $690,000 $254,000 $84,967 $5,080 $3,175 $71,000 $22,222

Question 5 Miles Adderton conducts business and holds investments in real estate, shares and cash. He received the following amounts for the year ended 30 June 2021 $ Receipts form Customers Y 623,400 Insurance Recovery for loss of income following fire at premises Y 90,000 Commissions from suppliers Y 14,300 Proceeds of business loan X 220,000 Gift from wife to assist with business cash flow X 25,000 Ledger account balances from Miles business disclosed the following: Accounts receivable as 30 June 2020 For calculation of sales income Accounts receivable as 30 June 2021 Trading stock held at 30 June 2020 Trading stock held at 30 June 2021 Cash drawings during the year Stock taken as drawings during the year Amounts received relating to investments included: Fully franked dividends Unfranked dividends Proceed from term deposit Interest in savings account(held jointly with his brother Mark and sister Isabel)

22,380 25,950 49,320 57,490 X 55,000 Y 3,800

Y 66,500 Y 11,300 X 21,800 Y (3150) 9,450

Required: Calculate Miles’s assessable income for the year ended 30 June 2021 Receipts from Customers Insurance recovery for loss of income Commission from suppliers Increase in trading stock Stock taken Fully Franked Dividend Franking Credit Unfranked Dividend Interest in saving accounts Assessable Income

$626,970 $90,000 $14,300 $8170 $3,800 $66,500 $28,500 $11,300 $3,150 $852,690...