Taxation, Theory, Practice & Law

T1 2016 ASSIGNMENT 2T1 2016 ASSIGNMENT 2Due date: Week 10Maximum marks: 20 (20%)Instructions:This assignment is to be submitted by the due date in both soft-copy(Safeassign – Bb) and hard copy.The assignment is to be submitted in accordance with assessmentpolicy stated in the Subject Outline and Student Handbook.It is the responsibility of the student submitting the work to ensurethat the work is in fact his/her own work. Ensure that whenincorporating the works of others into your submission that itappropriately acknowledged.Case study 1: Capital Gains TaxDave Solomon is 59 years of age and is planning for his retirement. Following a visit tohis financial adviser in March of the current tax year, Dave wants to contribute funds tohis personal superannuation fund before 30 June of the current tax year. He has decidedto sell the majority of his assets to raise the $1,000,000. He then intends to rent a cityapartment and withdraw tax-free amounts from his personal superannuation accountonce he turns 60 in August of the next year. Dave has provided you with the followingdetails of the assets he has sold:(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid$70,000 to purchase the property and received $850,000 on 27 June of the current taxyear, after the real estate agent deducted commissions of $15,000. The residence wasoriginally sold at auction and the buyer placed an $85,000 deposit on the property.Unfortunately, two weeks later the buyer indicated that he did not have sufficientfunds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May ofthe current tax year. The real estate agents then negotiated the sale of the residence toanother interested party.(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. Thepainting was sold at auction on 31 May of the current tax year for $125,000.(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased theboat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a localboat broker for $60,000.(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listedmining company. He purchased these shares on 10 January of the current tax year for$75,000. He borrowed $70,000 to fund the purchase of these shares and incurred$5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the sharesand $250 in stamp duty on the purchase of these shares. Dave has contacted the ATOand they have advised him that the interest on the loan will not be an allowablededuction because the shares are not generating any assessable income.Dave has also indicated that his taxation return for the year ended 30 June of the previousyear shows a net capital loss of $10,000 from the sale of shares. These shares were the onlyassets he sold in that year.(a) Based on the information above, determine Dave Solomon’s net capital gain or netcapital loss for the year ended 30 June of the current tax year.(b) If Dave has a net capital gain, what does he do with this amount?(c) If Dave has a net capital loss, what does he do with this amount? (10 marks, max. 1000 words).Case study 2: Fringe Benefits Tax Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directlyto the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with acar as Emma does a lot of travelling for work purposes. However, Emma’s usage of thecar is not restricted to work only. Periwinkle purchased the car on that date for $33,000(including GST).For the period 1 May 2015 to 31 March 2016, Emma travelled 10,000 kilometres in thecar and incurred expenses of $550 (including GST) on minor repairs that have beenreimbursed by Periwinkle. The car was not used for 10 days when Emma was interstateand the car was parked at the airport and for another five days when the car wasscheduled for annual repairs.On 1 September 2015, Periwinkle provided Emma with a loan of $500,000 at an interestrate of 4.45%. Emma used $450,000 of the loan to purchase a holiday home and lent theremaining $50,000 to her husband (interest free) to purchase shares in Telstra. Intereston a loan to purchase private assets is not deductible while interest on a loan topurchase income-producing assets is deductible.During the year, Emma purchased a bathtub manufactured by Periwinkle for $1,300.The bathtub only cost Periwinkle $700 to manufacture and is sold to the general publicfor $2,600.(a) Advise Periwinkle of its FBT consequences arising out of the above information,including calculation of any FBT liability, for the year ending 31 March 2016. You mayassume that Periwinkle would be entitled to input tax credits in relation to any GSTinclusive acquisitions.(b) How would your answer to (a) differ if Emma used the $50,000 to purchase theshares herself, instead of lending it to her husband?(10 marks, max. 1000 words).