Each student must select one question from Part A and B. (Two in total)
Part A: (Maximum word limit 500)
Select one of the three questions for Part A
What does tax law mean by derivation?
Explain what the meaning of the word is and how you determine what is the appropriate method taxpayers should use to “derive” their income.
Bob Jane Racing Pty Ltd carries on business as a motor racing promoter and finds that flooding has caused damage to sections of its track. Repair of the track would involve reconstruction of the long straight at a cost of $58,000. The company decided instead to construct a bypass and reduce the length of the track by 300 metres. The bypass was constructed with exactly the same materials as the original track.
The cost of the bypass was $32,000
What amount if any would be allowed as a deduction under section 25-10 of the ITAA 1997?
Would it make any difference if different and more long lasting material was used?
What effect do the words” to the extent that” have in the operation of section 8-1 of the ITAA 1997?
Part B (No word limit)
Choose one question from part B
On 30 June 2015 Shane disposed of the following assets:
- A holiday house. The house was purchased on 1 March 2005 for $200,000 and was sold for $610,000. At the time of acquisition Shane spent $2,000 on surveyor’s cost and $10,000 on stamp duty. On 1 February 2006, Shane spent $100,000 adding a second floor to the house. On 15 June 2008 he spent $20,000 in a successful court action to establish that his neighbour’s new fence had encroached on Shane’s property by 15 centimetres. In the previous income year he had rented the property out to tenants for a total of six months during school holiday periods. At all other times he used the holiday house personally. During the period that he owned the holiday house he had paid a total of $80,000 in interest, rates and insurance. He had claimed $10,000 of the $80,000 in respect of interest, rates and insurance as a tax deduction in his personal tax return in respect of the six months that he had rented the holiday house. When Shane sold the holiday house, he incurred $8,000 on advertising expenses and legal expenses.
(b) Shares in ABC Ltd. The shares were purchased on 20 January 2011 for $30,000 and sold for $50,000.
- A painting. He had bought the painting on 1 October 2006 for $8,000. The painting was damaged in 2008 and he had it repaired for $2,000. He gave it to his brother on 30 June, at which time it had a market value of $20,000.
(d) Shane collects expensive wine as an investment. On 1 January 2011, he purchased a bottle of Grange Hermitage wine at a wine auction for $8,000. He sold it for $12,000.
(e) Shane purchased an old piano at an antique shop for $16,000 on 1 March 2007. The piano was manufactured in 1950. He sold it for $8,000.
(d) A BMW motor car. The car was purchased for $150,000 on 1 July 2004 and sold for $160,000.
Shane has an unused carry forward capital loss from the sale of shares 5 years ago of $40,000. He also has an unused carry forward loss from the sale of a rare coin 3 years ago of $20,000.
Calculate Shane’s net capital gain or net capital loss for the income year ending 30 June 2015.
Students should refer to appropriate provisions of the Income Tax Assessment Act 1997 (Cwth) and the Income Tax Assessment Act 1936 (Cwth).
Neil a director of HRM Pty Ltd, a management consulting company. He has the following questions for you:
The company had the following transactions during the year ended 30 June 2015. How are they treated for income tax purposes by HRM Pty Ltd?
You can assume in this question that the numbers exclude GST unless otherwise stated.
- HRM Pty Ltd borrowed $502,000 from the Bank on 15 April 2015. 35% of the funds were used for personal purposes by Neil and the balance by the company. The bank charged the company an application fee of $5,020. Interest paid on the loan was $27,500. The loan is for ten years.
- HRM Pty Ltd bought a second hand commodore car. The company traded in a Toyota corolla and received $3,000 trade in value. The balance the company had to pay for the commodore car was $27,800. The new car was bought on 31/1/2015. The effective life of the new car is 8 years.
- The old Toyota car had a written down value at the date of sale of $1,964.
- The company employed Deb, Neil’s wife as the receptionist. The company paid her a wage of $55,000. The reasonable wage for a receptionist doing the same work is $40,000.
- The company also donated $1,000 to the Liberal Party during last year’s federal election.
- During June 2015 the company ordered a set of books and materials. These were printed overseas and as at 30 June 2015 they were still on a plane coming from Singapore. The cost of the books and materials is $25,735. When Neil conducted a stock take of the company’s inventory as at 30 June 2015 these items were not accounted for in the closing stock figure.
- During the year the company earned exempt income of $55,000. In the previous year ended 30 June 2014 it had carried forward losses of $75,000. There has been no change in the shareholding of the company since it was incorporated in 2012.
Explain to the company how each of the above items is treated. In your answer please carry out calculations where necessary and also refer to relevant case law and legislation. The company wishes to maximise its tax deductions.
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