HA3042 Taxation Law Tutorial Questions Homework Answer

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Question :

Assessment Task  Tutorial Questions Assignment

Unit Code: HA3042

Unit Name: Taxation Law

Assignment: Tutorial Questions Assignment (Individual)

Weighting: 50% Purpose:

This assignment is designed to assess your level of knowledge of the key topics covered in this unit

Unit Learning Outcomes Assessed:

  1. Identify the sources of taxation law and the framework in which taxation is administered
  2. Identify various types of taxation including income tax, consumption taxes, goods and services tax, taxes on capital and fringe benefits tax
  3. Identify and apply the fundamentals of calculating the taxable income and tax payable for individuals and business entities
  4. Analyse the taxation issues associated with straight forward international transactions
  5. Communicate knowledge of taxation law, through written and/or oral communication, and be able to demonstrate critical thinking and legal analytical skills.

Description:

Each week students were provided with three tutorial questions of varying degrees of difficulty. The tutorial questions are available in the Tutorial Folder, for each week, on Blackboard. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions from weeks 1 to 12 inclusive and submit these answers in a single document.

The questions to be answered are:

Question 1 – Week 6  Specific Deductions(7 marks)

In Year 1, Crocodile Pty Ltd has $600,000 of assessable income and $1,000,000 of deductions. In Year 2, Crocodile has $300,000 of exempt income, $200,000 of assessable income and

$500,000 of deductions.

In Year 3, Crocodile has $500,000 of assessable income, $200,000 of exempt income and

$200,000 of deductions.

Required:

Advise Crocodile of its taxable income or tax loss in each year.

Question 2  Week 8  Fringe Benefits Tax(7 marks)

Samit borrowed money from his employer amounting to $15,000 on the 2nd September, 2019 because of an emergency situation. His mother was unwell and she lives abroad. Samit needs to urgently send the money to his parents. Because Samit is a good employee, his employer lent him the money with no interest. Furthermore, on the 28th February, 2020 due to compassionate reasons shown by the company – his employer - , the company decided that he was only required to repay $5,000. The employer is GST registered.

Required:

Please advise Samit and his employer on the tax implications of the above transaction. Please refer to the relevant Tax legislation and other appropriate sources, including cases, if required.

Question 3 – Week 12 - Transfer Pricing(7 marks)

Please refer to the direct quotation below from the Australian Taxation Office (ATO) website: www.ato.gov.aufor this question. Consider the following extract:

“Base erosion and profit shifting (BEPS) refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally. This is done to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.”

Question 3 (Cont’d)(7 marks)

Please discuss whether taxing “Revenue” instead of “Profit” will solve the Transfer Pricing issue. You must elaborate your answer with appropriate analysis and justification

Required:

Note – Please use the following four (4) steps to answer this question:

  1. Identify the facts
  2. Identify the relevant Tax Laws and cases or other key Tax sources
  3. Apply the relevant laws and cases to the facts
  4. Provide a conclusion

Question 4 – Week 6  Capital Allowances(7 marks)

Butterfly Pty Ltd is a small business that utilizes the low value pool for its fixed assets for all its eligible assets. All depreciable assets are 100% used for business purpose, and the closing low value as at 30 June 2019 was $6,250. Shown below in the table is the asset register for Butterfly Pty Ltd as at 30 June 2019.

Asset
Cost
Opening Adjustable Value
Method
Effective Life
Decline in Value for This Period
Closing Adjustable Value
MacBook Pro
4,000
2,400
Diminishing Value (assume 40% rate)
5 years
960
1,440
MacBook Air
1,300
1,300
Diminishing Value
3 years
450
850
Office Equipment
10,000
7,000
Prime Cost
10 years
1,000
6,000
Furnitures
1,200
1,080
Prime Cost
10 years
120
960

Note - Butterfly purchased a printer on 8 May 2020 for $750 and Butterfly also purchased a TV for the meeting room on 2 June 2020 for $900

Required:

Calculate the “decline in value” of the depreciable assets that Butterfly can use as deductions for the

2019-2020 income year.

Question 5  Week 9  Partnerships(11 marks)

Alastair is a retired programmer. His wife Fransiska is a retired accountant. Both wish to remain active in their old age and they invest in a Doll shop that is to be managed by their daughter Sophie, who is aged 35. The three of them form a partnership of three called “Wishful’s Doll Shop”.

Alastair and Fransiska contributed $90,000 each to fund the purchase of the shop. The partnership agreement provides:

  • Both Alastair and Fransiska are to receive interest at the rate of 10% pa on each of their capital contribution of $90,000.
  • Sophie will receive a salary of $45,000 for the management of the shop, as well as superannuation contributions of $9,000.
  • A car will be leased by the business and provided to Carol. (100% used for business)
  • All profits and losses are to be shared equally between the three partners.

The accounts for this income year show the following:

Income ($)
Sales (excluding GST)
590,000
Expenses ($)
Cost of goods sold
290,000
Interest on capital paid to Alasdair and Tracy
27,000
Salary to Carol
45,000
Superannuation to Carol
9,000
Lease payments on car (excluding GST)
8,500
Other deductible operating expenses (excluding GST)
34,000

Additional Information during the tax year:

  • Alastair won a lottery for $100,000 (This is the first time Alastair bought a lottery)
  • In his spare time Alastair also gives private tutoring for some programming languages.
  • During the year he earned $15,000 from this activity
  • Alastair lent $40,000 during the year as the business struggles in earlier months due to COVID- 19 lockdown. Alastair will receive 5% interest from the partnership on it.

Required:

With reference to the facts above:

  1. Calculate the net income of the partnership.
  2. What is the assessable income for Alastair during this tax year?

Question 6 - Week 11 - GST(11 marks)

Joshua Pty Ltd runs a furniture retailing business. During the tax year 19-20, Joshua provided customers with various loan arrangements to finance the purchase of furniture.

Total expenses relating to the loan arrangements (specific loan calculation software and computers) totaled $33,000 (inc. GST)

Joshua’s total expenses during the year (All expenses to run the business included the $33,000) were $2.2 million (inc. GST). Joshua Pty Ltd is registered for GST purposes.

Required:

Discuss Joshua’s Ability to claim the $3,000 Input Tax Credit?

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Answer :

Question 1: Calculation of taxable income and tax losses:

Year 1:

Particulars
Amount
Assessable income
$ 600000
Exempted income
0
Total income
$ 600000
Less: Deductions
($ 1000000)
Tax losses
($ 400000)

Year 2:

Particulars
Amount
Exempted income
$ 300000
Less: Tax-loss up to exempted income if tax loss is more than income
($ 300000)
Net exempted income
0
Assessable income
$ 200000
Less: Remaining tax loss of the previous year
($ 100000)
Net assessable income
$ 100000
Total income
$ 100000
Less: Deductions
($ 500000)
Tax losses
($ 400000)

Year 3:

Particulars
Amount
Exempted income
$ 200000
Less: Tax-loss up to exempted income if tax loss is more than income
($ 200000)
Net exempted income
0
Assessable income
$ 500000
Less: Remaining tax loss of the previous year
($ 200000)
Net assessable income
$ 300000
Total income
$ 300000
Less: Deductions
($ 200000)
Taxable income
$ 100000

Question 2: FBT of loan benefits:

The fact of the case:

  • Loan to an employee of $ 15000 in case of an emergency.
  • The loan is provided by the company is an interest-free loan.
  • As of 28th Feb 2020 the company has waived $ 10000 due to compassionate reasons.
  • Tax implication on employee and his employer due to loan benefits.

Taxation law:

As per the provisions of ITAA, 1997, the fringe benefits are liable for FBT for the employer in case of benefits provided to the employee other than the salary and employment benefits. The waiver of a loan is liable for FBT in case the waiver is arisen due to employment-related reasons. The interest benefits are also liable for FBT if the interest charged from the employee on the loan amount is less than the standard rate of interest.

The waiver of a loan is not considered as fringe benefits for the employer if there is a financial implication for recovery of debts. The employer has made all efforts to recover the amount. The reason for the waiver of the loan is not related to the employment relationship. The employee has no assets for recovery of loan amount and there is a waiver after the negotiation and discussion of management. However, there is no impact on the interest benefits provided to an employee on the loan amount (Grudnoff, & Richardson, 2018).

Application of taxation law on the case:

In this case, the loan is waived and the employee is required to pay only 5000 under the compassionate reasons which are related to the employment relationship. Therefore the waived loan amount of $ 10000 is considered fringe benefits and liable for the FBT for the employer. The employer is liable to pay FBT at the rate of 47% on the loan amount waived i.e. $ 10000 and FBT liability is $ 470. The employer also cannot claim the deduction of the loan waived to the employee.

The employer is also liable to pay FBT on the interest amount i.e. calculated at the standard rate of 5.37%. The interest amount in this case is:

$ 15000 * 5.37% * 180/365=$ 397

$ 5000 * 5.37% * 185 / 365 =$ 136

Total amount of interest benefits = $ 533

FBT on the interest benefits=$ 533 * 47%=$ 251

The employee is not liable to pay tax on the fringe benefits received from the employee however the employee is required to report the number of fringe benefits received in the tax returns submitted to the tax authorities.

Question 3: Transfer pricing issue:

Facts of the case:

The issue is related to the organization which is operating a business in different countries. The BEPS is the tax planning strategy in which the location of profit shifts for disappearing the tax to the locations where it is little or no real activity and the taxes are low that results in little or no overall corporate tax. The strategies in BEPS take advantage of a combination of features of home and host countries' tax system. The corporate tax is applicable on the income earned at the domestic level and the income which is taxed in more than one tax jurisdiction results in double taxation. The process is illegal as the tax authorities are not able to tax the income of taxpayers effectively (Oguttu, 2016).

Relevant tax laws and cases:

As per Division 13 and current transfer pricing rules in sub-division 815-B, the taxation issues of BEPS in which profits are shifted to the countries in which there is low tax implication to avoid tax. The amount on which tax is applicable is revenue in place of profits. There is the involvement of withholding tax on the amount paid by the party to the taxpayer which imposes the tax on the revenue part and reduces the tax of profit shifting. The OECD has worked for reducing the causes of BEPS and tax the profits of organizations in the tax jurisdiction in which it is earned. The actions taken are prevention of abuse of double taxation treaty, prevent the artificial avoidance of permanent establishment, and assurance that the transfer pricing outcomes are for the value creation (González-Barreda, 2018).

Application of tax laws:

Based on the above rules, and the objective of preventing tax avoidance, there is taxation rules applicable to the revenue instead of the profits of the taxpayer. The payer is liable to deduct the tax before making payment to the recipient which increases the recording of revenue income in particular tax jurisdiction. For the avoidance of cases of BEPS, the tax implication of revenue instead of profit is the effective measure taken by the tax authorities.

Conclusion:

 The case concludes that the taxing of revenue income is the best solution for avoiding the transfer pricing issues that arise in BEPS. The OECD and new rules of transfer pricing increase the application of this law system. The payer of revenue income is liable to withhold the tax on the amount paid to the recipient and required to report to the tax authorities which help in identifying the revenue income generated in a particular tax jurisdiction.

Question 4: Decline in value of the depreciable assets:

Calculation of depreciation and decline in value:

Assets
Opening Adjustable value
New Asset purchased
Method
Calculation
Decline in value
Closing Adjustable value
MacBook Pro
 $  1,440.00 
 $               -   
 Diminishing 
 1440 * (365/365) * (200% / 5) 
 $     576.00 
 $         864.00 
MacBook Air
 $     850.00 
 $               -   
 Diminishing 
 850 * (365/365) * (200% / 3) 
 $     566.67 
 $         283.33 
Office Equipment
 $  6,000.00 
 $               -   
 Prime Cost 
 10000 / 10 
 $  1,000.00 
 $      5,000.00 
Furniture
 $     960.00 
 $               -   
 Prime Cost 
 1200 / 10 
 $     120.00 
 $         840.00 
Low-value pull asset
 $  6,250.00 
 $  1,650.00 
 Diminishing 
 6250 * 37.5% + 1650 * 18.75% 
 $  2,653.13 
 $      3,596.88 


  • The formula of depreciation or decline in value under the diminishing method are as follows:

Base value * (no. of days assets held / 365) * (200% / assets effective life)

  • The low-value pool assets are depreciated at the rate of 37.5% and if the new assets are added during the year then the depreciation rate applicable is 18.75% on that assets. The low-value pool is applicable only on the assets having a value less than $ 1000 (Tran, & Wende, 2017).

Question 5: Partnership income and income of partner:

a) Calculation of net income of the partnership firm:

Particulars
Amount
Sales income
$590,000 
Less: COGS
($290,000)
Less: Salary to Carol
($45,000)
Less: Superannuation contribution of Carol
($9,000)
Less: Lease payment on a car
($8,500)
Less: Other deduction operating expenses
($34,000)
Less: Interest on a loan provided by Alastair (40000*0.05)
($2,000)
Net income of partnership firm
$201,500 


  • The partner’s salary is not allowed as expenses from the partnership firm’s income.
  • The interest on capital is not allowed to deduct from the income of the partnership firm.
  • The interest on the loan provided by the partner is allowed expenses from the partnership firm.

b) Calculation of assessable income for Alastair:

Particulars
Amount
Interest income on capital (90000 * 0.10)
$9,000 
Share in profit of partnership firm (201500 - 9000 - 9000 - 45000 - 9000)/3
$43,167 
Interest income on loan
$2,000 
Income earned from tutoring of programming language
$15,000 
Total assessable income of Alastair
$69,167 


  • Profit of partnership firm liable to share among partners is calculated after deducting other payments to partners such as interest on capital of $ 18000 (9000 + 9000), Salary to Sophie of $ 45000 and superannuation contribution for Sophie of $ 9000.
  • The income from the lottery is income from a hobby that is not incurred regularly and income from a hobby is not taxable as per ITAA, 1997. Therefore the income from a lottery of $ 100000 is not considered for calculating the assessable income of Alastair.

Question 6: Claim of the input tax credit in GST:

The fact of the case:

  • Joshua Pty Ltd has the business of sale of furniture for which the company provides loan arrangements to finance the purchase of furniture.
  • The company has total expenses of $ 2.2 million including the expenses incurred for the loan arrangement of $ 33000 which is including GST.
  • The question raised whether the company can claim the input tax credit for the GST paid on a loan arrangement of $ 3000 ($ 33000 * 10 / 110).

Application of taxation law:

The GST input credit is available for the expenses that are incurred to earn the income from the business and run the business effectively. The GST input credit is related to expenses incurred for run the business and the expenses on which credit is booked are incurred for effective processing of business and earn income from business such as benefits to employees, advertisement, loan facility to customers, etc. which has relation with the business and helps in increase the business income.

In this case, the loan arrangement is done so that it is easy for the customers to purchase the furniture and the loan arrangement is for the benefits of the business of furniture. The loan arrangement increases the sales of furniture and helps in business. Therefore the company can claim the input tax credit on the GST paid on the expenses incurred related to loan arrangement.