Taxation ACC30005 Topic 8 Questions PDF

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Taxation ACC30005 Topic 8 Questions Question one For the year ended 30 June, Ratten Ltd, a resident public company with turnover of $70 mill, (and not part of any wholly owned group) reported a profit of $32,000,000 which comprised: Trading income Dividends Received from: Public Company (ABC) (80% franked) Public Company (XYZ) (Unfranked)

$31,000,000 $600,000 $400,000

Required: a) Calculate the tax payable by Ratten Ltd a) Calculation of tax payable Trading income ABC dividend income ABC franking credit (gross up 80%) XYZ company dividend income Taxable income

s6-5 s44(1) ITAA36 s207-20(1) s44(1)

31,000,000 600,000 205,714 400,000 32,205,714

Gross tax payable (30%) Less tax offset for franking credits s207-20(2) Net tax payable

9,661,714 (205,714) $ 9,456,000

This tax liability will be paid in the next income year and therefore has no effect on this year’s franking credits. However, the franking credits received this year from dividends from ABC will result in a franking account credit available this year Franking = Amount franked x (comp tax/ 1- comp tax) x franking %

b) One of Rattens shareholders, a resident single adult person, received a fully franked dividend of $14,000 plus a salary of $50,000. Assuming that the shareholder has no other income or deductions calculate the shareholders taxable income. c) Shareholders taxable income Assessable income Dividend 14,000 s44 ITAA36 Franking credit 6,000 s207-20 Salary 50,000 s6-5 Assessable income 70,000 Allowable deductions _nil_ Taxable income $70,000

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Question two Kim Pty Ltd, an Australian private company, has a franking account surplus of $80,000 on 30 June 2020. During the year ended 30 June 2021 the company recorded the following transactions: 

1 September 2020 – Kim Pty Ltd received a fully franked dividend $210,000 from Wild Ltd.

of



30 September 2020 – Kim Pty Ltd paid a $700,000 dividend franked to 80% to its shareholders.



15 December 2020 – Kim Pty Ltd paid its income tax $500,000 for the previous income year ending 30 June 2020.



30 April 2021 – Kim Pty Ltd paid fringe benefits tax of $125,000 for the Fringe Benefit tax year that ended on 31 March 2021.



3 June 2021 – Kim Pty Ltd received a $50,000 refund of income tax paid for the tax year that ended 30 June 2020.



14 June 2021 – Kim Pty Ltd received a dividend of $100,000 from a UK company, Nathan Ltd.

Required: a) Prepare a franking account for the year ended 30 June 2021 for Kim Pty Ltd based on the above information. Date 1 July 1 Sept 30 Sept 15 Dec 30 April

Type Balance FF dividend Paid 80% div Paid tax FBT

Debit

3 June 14 June Balance available

Tax refund O’seas div

50,000 Nil effect

Credit 80,000 90,000

240,000 500,000

Balance 80,000 cr 170,000 cr 70 000 dr 430,000 cr

Nil effect 380,000 380,000 cr

b) If Kim Pty Ltd paid a dividend of $84,000 to ordinary shareholders on 15 June 2021 calculate the required franking amount on the dividend. The benchmark percentage which is determined by the first distribution for the franking period, s.203-25. For a private company the benchmark period is the income year, s.203-45. Therefore the $84,000 dividend would have to be franked at 80% as this was the franking percentage of the first dividend for the year. There are sufficient credits in the franking account to pay the dividend 80% franked without incurring the franking deficit penalty

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Question three Judd Pty Ltd, a resident private company, was incorporated on 1 July 2019. From 1st July 2019 until 30th June 2021, it conducted a travel agency. The company incurred trading losses for taxation purposes of:

• •

$10,000 - year ended 30 June 2019; and $20,000 - year ended 30 June 2020

In July 2020, the company discontinued its travel agency business, restructured and acquired a hotel-motel. The company's shareholdings of ordinary shares at the close of each financial year were: Shareholders A B C D

2019

2020

2021

100 100 -_ 200

100 100 300 -_ 500

100 100 300 400 900

In the year ended 30 June 2021, the company reported taxable income of $25,000 before carried forward tax loss deductions. Required: Discuss whether Judd Pty Ltd can claim a deduction for any of its prior tax year losses. For a company to be able to claim a tax deduction for past year losses the company must satisfy either the continuity of ownership test or the similar business test, s.165-10, 16513 Each tax loss is carried forward and tested separately, recouping the oldest first. 2019 tax loss $10,000: In 2020: The COT is failed. A and B only hold 200 out of 500 issued shares in 2019, this represents a continuing ownership of only 40%.

Shareholder A B C D total

2019 100 100

2020 100 100 300

Continuity 100 100

200

500

200/500 = 40%

The SBT is passed. However, there is no taxable income to recoup the loss from, the $10,000 tax loss is carried forward under the SBT test. In 2021:

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The 2020 tax loss has been carried forward under the SBT. However, the SBT is now failed as the old business is ceased, s.165-13. The company now operates a hotel business. The $10,000 cannot be deducted in 2021. 2020 tax loss $20,000 In 2021: The COT is passed because A,B and C jointly hold 500 out of the 900 issued shares in 2021 which is a 55% continuing ownership of the 2020 tax loss.

Shareholder A B C D total

2019 100 100 300

2020 100 100 300 400 900

500

Continuity 100 100 300 500/900 = 55%

The 2020 tax loss of $20,000 may be deducted in 2021 to the extent there is sufficient assessable income. Taxable income before deducting tax losses Less 2020 tax loss Taxable income

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$ 25,000 (20,000) 5,000

Question four For the year ended 30 June 2021, James Pty Ltd, a resident private company, provides you with the following information. 2020 1 July 1 Aug 31 Aug 22 Sept

28 Oct 2021 14 March 12 June

$ Carry forward balance franking surplus Receipt of dividend (franked to 80%) Payment of fully franked dividend Successful appeal against the 2019 notice of assessment. Company received a refund cheque of the tax paid Payment of company’s PAYG tax installment

150,000 140,000 350,000 20,000

Receipt of fully franked dividend Payment of dividend franked 60%

105,000 350,000

80,000

Required: Calculate the balance in the franking account for the year ended 30 June 2021. Date July 1 Aug 31 Aug 22 Sept 28 Oct 14 Mar 12 June 30 June

Particulars Opening balance Dividend received $140,000 franked 80% Payment of fully franked dividend, $350,000 Refund of earlier years tax paid Payment of last years tax Receipt of fully franked div $105,000 Payment of dividend franked 60%, $350,000 Penalty (100% - 60%) $350,000 X3/7 X40%

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Dr

Cr

90,000

Balance 150,000 198,000 48,000 28,000 108,000 153,000 63,000

60,000

3,000

48,000 150,000 20,000 80,000 45,000

Question five Cripps Pty Ltd, a resident private company, began operations as a furniture retailer in Year 1. The company incurred operating losses of $40,000 in Year 1 and $20,000 in Year 2. Cripps Ltd made a profit of $55,000 in Year 3. The company changed its business at the end of year one and commenced business as an importer of furniture selling to other retail businesses. Shares in each year were beneficially owned by individuals as follows: Shareholders A B C and D Shareholder A B C D Total

Year 1 20 30 40 10 100

Year 2 30 30 40 0 100

Year 3 70 20 10 0 100

Required: Fully explain if (and when) Cripps Pty Ltd can claim their tax losses from Years 1 and 2 in year 3.(Consider the same share/same owners rule s 165-165 application in your answer)

In order to deduct prior year tax losses, Cripps Pty Ltd must satisfy either: the continuity of ownership test s.165-12 or the similar business test s.165-13 In this problem, we will need to consider the same shares rule, s.165165. Only shares held continuously by the same shareholders are counted for the COT. Shares that have been exchanged among existing shareholders effectively dilutes the continuity.

Year 1 tax loss of $40,000 Continuity of Ownership test (COT) in Year 2 Shareholders have been trading amongst themselves which will dilute share ownership according to the ‘same shares same owners’ rule. S.165-165 In Year 2, the 10 shares sold by D to A have changed hands and not are counted as continuing ownership. However, 90% remains and the COT is satisfied as it exceeds 50%. Shareholder

Year 1

Year 2

A B

20 30

30 30 Page 6

Continuity (Yr 1-2) 20 30

C D total

40 10 100

40 0 100

40 0 90%

There is no taxable income in Year 2 in order to recoup the Year 1 tax loss, so it is carried forward to Year 3. In Year 3, the COT is failed due to further share trades. There is no longer more than 50% of remaining shares held by the same owners as at the start of Year 1. Shareholder

Year 1

Year 3

A B C D total

20 30 40 10 100

70 20 10 0 100

Continuity (Yr 1-3) 20 20 10 0 50%

However, the business continuing test is satisfied if the importing and retailing of furniture is considered the same under the SBT and also if the business changed after year 1 prior to the disqualifying change in ownership during Year 3. The full $40,000 may be deducted against the Year 3 assessable income. Year 2 tax loss of $20,000 The COT is satisfied in Year 3 because 60% of original shareholding from Year 2 remains. Shareholder

Year 2

Year 3

A B C D total

30 30 40 0 100

70 20 10 0 100

Continuity (Yr 2-3) 30 20 10 0 60%

Only $15,000 of the Year 2 tax loss may be deducted because there is insufficient assessable income to recoup all of both Year 1 and 2 tax losses. Oldest losses are applied first. Taxable income in Year 3 $ Taxable income Year 3 55,000 (prior to deducting tax losses) Less Year 1 tax loss (40,000) Less Year 2 tax loss (15,000) Taxable income NIL Page 7

Year 2 tax loss carried forward

5,000

Textbook question Chapter 11

11.11, 11.13

11.11 For the year ended 30 June 2020, Green Acres Pty Ltd, a small business entity taxpayer, derived a taxable income of $120 000, excluding the following transactions:

The taxable income of $120 000 was arrived at after deducting the following items:

Notes (a) The opening balance of provision for doubtful debts was $14 200. The closing balance of provision for doubtful debts was $12 800. Bad debts can only be claimed as an income tax deduction when the bad debt is written off. The company uses the provisioning method in providing for doubtful debts. (b) Client entertainment is not allowable as an income tax deduction. (c) Fines and penalties are not allowable as an income tax deduction. (d) There was no tax depreciation for the 2020 income year as the company adopted the simplified depreciation regime and claimed all of its SBE tax depreciation relating to depreciable assets owned in a previous income year. Required Calculate Green Acres Pty Ltd’s taxable income and tax payable for the year ended 30 June 2020. Assume that Green Acres Pty Ltd paid PAYG instalments during the 2020 income year to the ATO totalling $28 000. Assume that the company has a base rate entity tax rate of 27.5%. Round all calculations to the nearest whole dollar. The reconciliation of net profit before tax as per the Profit and Loss Statement to the taxable income of Green Acres Pty Ltd for the year ended 30 June 2020 is as follows: Page 8

$ Taxable income Add: Non-tax deducible expenses Bad debts expense Accounting depreciation on plant and equipment Entertainment - clients Fines and penalties

120,000 5,400 16,800 4,200 660 147,060

Less: Amounts deductible for taxation purposes Bad debts written off ($14,200 + $5,400 - $12,800)

(6,800) 140,260

Add: Amounts assessable for taxation purposes Add: UK dividend (gross amount, being $1,700 + $300) Add: Unfranked dividend from Minatour Pty Ltd Add: CSR Ltd dividend Add: CSR Ltd gross up for franking credit ($3,500 x 30/70 x 100%) 2020 Taxable income

2,000 10,000 3,500 1,500 $ 157,260

Tax on taxable income @ 27.5% Less: Foreign withholding tax in respect of UK dividend Less: Franking credit in respect of CSR Ltd franked dividend Less: PAYG instalments paid during the 2020 income year Balance of tax owing in respect of the 2020 income year

$43,246 (300) (1,500) (28,000) $

13,446

11.13 Jane Harris is getting married. Harris Holdings Pty Ltd want to give Jane $50 000 towards the wedding. Harris Holdings Pty Ltd is a private company for tax purposes and is owned by Andrew and Melissa Harris equally. The Balance Sheet of Harris Holdings Pty Ltd for the year ended 30 June 2020 is as follows: $ Assets Cash at bank

25 000 Page 9

Amounts owing by Jane Harris Property, plant and equipment (net of depreciation)

50 000 190 000 265 000

Total Assets Liabilities Accounts payable Bank loan

12 000 100 000 112 000

Total Liabilities

$ 153 000

Net Assets Shareholder’s Equity Share capital Retained profits

5000 148 000 $ 153 000

Total Shareholder’s Equity

On 1 January 2019, Harris Holdings Pty Ltd lent Jane $50 000. A written loan agreement was drafted stating that the loan was required to be repaid within five (5) years. The loan is interest-free. This loan is shown as a receivable (under current assets) in the balance sheet above Jane does not hold any shares in the company. Furthermore, she is not employed by the company in any capacity whatsoever. The retained profits of Harris Holdings Pty Ltd on the date the loan was made (i.e. 1 January 2019) was $36 000. The retained profits of the company as at 30 June 2019 was $42 000.

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Required (i) What are the income tax consequences in respect of the loan made by Harris Holdings Pty Ltd to Jane for the years ended 30 June 2019 and 30 June 2020? From 4 December 1997, Division 7A (comprising sections 109B to 109ZE of the ITAA (1936)) operates to automatically deem certain loans made by private companies to a shareholder or a shareholder’s associate as dividends. If the loan is not repaid by the date of lodgement of the company’s income tax return, the amount of the loan is deemed to constitute an unfranked dividend in the hands of the shareholder receiving the money. We are told that Harris Holdings Pty Ltd is a private company for tax purposes. The loan made by the company to Jane on 1 January 2019 constitutes an amount lent to an associate of a shareholder. The definition of “associate” in Section 318 includes a relative. Jane is the daughter of the two shareholders (ie. her parents). However, Section 109N allows an exception to Division 7A for loans that meet minimum interest rate and maximum term criteria. For loans to fall under Section 109N they must satisfy the following criteria before the earlier of the lodgement date or the due date for lodgement of the company’s income tax return:  the loan must be made under a written agreement  the rate of interest payable on the loan for years of income after the year in which the loan was made must equal or exceed the benchmark interest rate for the relevant year set by the Reserve Bank of Australia  the term of the loan must not exceed the maximum term of the loan as defined in section 109N(3), that is 25 years where there is a registered mortgage over real property of not more than 91 per cent of the value of the property, otherwise, the maximum term of the loan is 7 years, and  minimum yearly repayments calculated in accordance with section 109E must be made. We are told that the loan to Jane Harris on 1 January 2019 was interest-free. Despite being in the form of a written loan agreement with repayments, the loan does not meet all of the exclusions listed in Section 109N. Hence, it will be considered a Division 7A loan. However, the deemed dividend amount cannot exceed the company’s distributable surplus as at the end of the year of income in which the loan is made (Section 109Y). According to Section 109Y(2), a company’s distributable surplus is broadly calculated as follows: Distributable surplus = (net assets – non-commercial loans – Paid-up capital – repayment of non-commercial loans) Essentially, the distributable surplus of the company is its retained profits plus Page 11

any reserves. 30 June 2019: We are told that the retained profits (distributable surplus) of Harris Holdings Pty Ltd at 30 June 2019 was $42,000. Unless the Commissioner considers that the book values for assets are not fairly stated, then the amount of the loan that will be deemed an unfranked dividend to Jane will be limited to $42,000 of the $50,000 loan. This is the case even if the company has a higher distributable surplus in a future year. As Division 7A applies to the loan, Jane will be deemed to have received an unfranked dividend of $42,000 which needs to be included in her assessable income (Section 202-45(g)).

30 June 2020: Although the loan is still outstanding in 2020, no amount is deemed to be a dividend under Division 7A because no loan was made in that income year. The fact that the company now has a higher distributable surplus of $148,000 at 30 June 2020 is irrelevant. In order for Division 7A to apply in a particular income year, a loan must have been made in that income year (s. 109D(1)(a)).

(ii) How would your answer change if, instead of an interest-free loan, the interest payable on the loan was equal to the benchmark interest rate published by the Reserve Bank of Australia? If the interest rate on the loan was equal to the benchmark interest rate published by the Reserve Bank of Australia, instead of being an interest-free loan, then Division 7A would not apply

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