THE UNIVERSITY OF NEW SOUTH WALES

AUSTRALIAN SCHOOL OF BUSINESS

SCHOOL OF TAXATION AND BUSINESS LAW

LEGT 2751 BUSINESS TAXATION

TUTORIAL PROGRAM

SESSION 2

2012

ORGANISATION OF TUTORIALS

To complete this course a student must attend at least 80% of tutorials in the group to which he or she is allocated. This equates to 10 out of 12 tutorials (tutorials are run from Week 2 to Week 13). As provided in the student handbook, if you fail to attend the required 80% of tutorials, you may be refused final assessment (i.e. you may not be allowed to sit the final exam, which will of course result in failing the course). If you miss a tutorial due to medical reasons, you should provide your tutor with a medical certificate in the following class.

In the first tutorial, each student will be assigned a tutorial problem on which that student will be expected to answer questions in class as the tutor works through the solution to the problem. (You are not required to give a ‘presentation’ as such – i.e. you are not required to stand up in front of the class and give a step-by-step solution to the problem). A total of 10 marks will be awarded for your response to the problem. (Of course, attempting the tutorial problem each week, even if you are not assigned that question, will certainly help you in completing this course).

All students should come prepared to contribute to discussion of general discussion questions. To prepare for a tutorial in this course all students should: review material covered in lectures; read the required readings (text, legislation and cases) for the previous week that have been listed in the reading guide; and think about the issues raised by the tutorial problem and general discussion questions for that week. A total of 5 marks will be awarded for general tutorial participation. Please remember that attendance does not equal participation. It is not sufficient to simply attend the tutorials.

SUMMARY OF TUTORIAL PROGRAM

Tutorial 1 – Week 2How to answer a tax problemObjectives / overview of taxation

Tutorial 2 – Week 3Ordinary income

Tutorial 3 – Week 4Ordinary incomeStatutory income

Tutorial 4 – Week 5Capital gains tax

Tutorial 5 – Week 6Fringe benefits tax (no tutorial questions)

Tutorial 6 – Week 7Deductions - General

Tutorial 7 – Week 8 Deductions – Specific

Tutorial 8 – Week 9 Tax accountingTaxation of partnerships

Tutorial 9 – Week 10Taxation of trusts

Tutorial 10 – Week 11Taxation of companies

Tutorial 11 – Week 12Taxation of companies

Tutorial 12 – Week 13Goods and services tax

TUTORIAL ONE: WEEK 2

Analysing and answering a tax problem

A document entitled “Approach to answering a tax problem” has been placed on Blackboard. Students should read this material before the first tutorial.

General discussion questions (Sources of Australian tax law / Tax policy considerations)

1. What are the primary sources of taxation law in Australia?

2. What is the status of ATO Rulings, Determinations, and Guidelines?

3. What is the difference between a social good and a merit good? What are the arguments for a government using tax revenues to pay for such ‘goods’?

4. How does horizontal equity differ from vertical equity? Try to think of an example of each in Australia’s taxation system (either aspects of our tax system that meet or fail to meet these criteria).

TUTORIAL TWO: WEEK 3

ORDINARY INCOME

Tutorial problem

“Philip”

Philip is a student studying accounting at UNSW.

The following information relates to the financial year ending 30 June 2011.

From 1 July 2010 to 31 January 2011, Philip works as a waiter at a local restaurant and is paid $18.00 per hour. He works 3 x 5 hour shifts each week. In addition, he often receives tips from diners. The amount he receives varies, but is generally between $30 - $50 each shift. In September 2011, Philip’s employer gives him an “employee of the month” award. This award is given to an employee each month based on positive feedback received from customers. The award is a $200 bonus. In December 2010, all restaurant employees receive a Christmas gift from the restaurant owners. The gift is a bottle of wine valued at $70.

In November 2010, Philip received a prize for receiving the highest mark in the subject “Advanced Taxation”. The prize was a non-transferrable $100 gift voucher to the UNSW Bookshop.

In February 2011, Philip starts a graduate position with an accounting firm in the Sydney CBD. His annual salary is $65,400 inclusive of 9% compulsory superannuation. He signed the contract for the job in November 2010. He was offered a $2,000 sign-on bonus which was paid once he completed his first week of work.

Advise Philip as to whether any of the amounts or benefits he receives under the above transactions are ordinary income to him (i.e. do not consider statutory income provisions, FBT or CGT). Would your answer change if in relation to the prize received from the university, he was given $200 in cash rather than a gift voucher?

General discussion questions

1. Are any of the following receipts ordinary income? Why or why not?

A cash prize won in a lottery A cash prize won in an art competition (give any assumptions you have

made) A cash prize of $1,000 given to the owner of a small retail store for having the

greatest increase in sales of “Extreme Energy” (an energy drink) during a particular period. The prize was made available by the manufacturer of Extreme Energy.

A house provided to a security guard, rent free, which is situated on the employer's premises

TUTORIAL THREE: WEEK 4

ORDINARY INCOME AND STATUTORY INCOME

Tutorial Problem

Note: Students allocated the tutorial problem for this week must answer both Part 1 and Part 2

Part 1 – “Thomas”

Thomas Buckland, a top Western Australian State Australian Rules footballer, is approached by a Victorian club to play for them in the coming season. Thomas did not accept the offer, but agreed not to play for any other national club for two years. For this he received a lump sum of $50,000. Later that year, Thomas had several disagreements with his Western Australian club and as a result he decided to leave and play in Victoria for the club that had approached him earlier. The Victorian club paid $20,000 to release Thomas from his present contract. Assume this $20,000 was paid directly to the Western Australian club on the basis of instructions given by Thomas (i.e. Thomas instructed the Victoria club to pay the Western Australia Club).

Will any of the above amounts be considered income to Thomas (under either the ordinary or statutory income provisions?) You are not required to consider the capital gains tax provisions.

Part 2 – “Victoria”

Victoria holds patents for a new type of computer chip to be used in “robotic pets” and enters into an exclusive licensing agreement with a Japanese company for the manufacture and sale of such robotic pets in Japan. The licensing agreement provides for a payment of $5 for each robotic pet sold and for the payment by the Japanese company to Victoria of a lump sum of $50,000, described as a “non-refundable advance of royalties”. The Japanese company is entitled to credit royalty entitlements payable against this sum, but in fact no robotic pets are sold by the Japanese company, and the $50,000 is the only amount ever received by Victoria.

What amounts, if any, will be included in Victoria’s assessable income (under either the ordinary or statutory income provisions?) You are not required to consider the capital gains tax provisions.

General discussion questions

1. What two principles can be extracted from the decision in Myer Emporium?

2. What amounts are taxed under ITAA97 s15-20? Can a royalty that is taxable under s 6-5 be taxable under s 15-20?

3. What is the difference between ITAA97 s15-2 and ITAA36 s21 / s21A?

4. How, if at all, does consideration of ITAA 97 s15-2 affect your answer to the Tutorial 2 Tutorial Problem (“Philip”)?

TUTORIAL FOUR: WEEK 5

CAPITAL GAINS TAX

Tutorial problem

In 1984 Jones purchased eight hectares of land for a strawberry farm at a cost of $160,000. By 1999, the plantation was well established and producing strawberries of a good quality and deriving reasonable profits. As a result, on 1 October 1999, Jones bought another two hectares of land for $60,000. Costs associated with the purchase included stamp duty of $1,000 and legal fees of $800.

In 2008, the crop was exceptionally poor; coupled with this, import restrictions were altered allowing a greater quantity of strawberries to be imported. Since these conditions precipitated financial difficulties, Jones decided to sell the land. Attempts to sell the land as a whole were unsuccessful, although one agent did offer $200,000. Jones therefore decided to sell the land by subdivision.

After re-zoning and gaining council approval in June 2009, Jones spent $80,000 on the subdivision in October and November 2009. He finally sold the land for $400,000 in 1 June 2010 to a builder. Although the contract of sale was dated 1 June 2010, settlement was not effected until 1 October 2010.

Costs of disposal included agent’s commission of $6,000 and legal fees of $1,200.

Advise Jones on what amounts, if any, will be included in its assessable income (and in which tax year) as a result of these transactions. Consider both ordinary income provisions and capital gains tax.

General discussion questions

1. What are the CGT consequences that arise in the following situations:

1. Frank enters into a contract to sell pre CGT land to Effie2. Effie enters into a contract to sell post CGT land to Anne3. Michael defaults on a contract to purchase Alex’s main residence and

forfeits the deposit that he paid under the contract.4. Garry disposes of trading stock and depreciated plant to Robert on 1

December 2010.

2. How, if at all, does consideration of the capital gains tax provisions affect your answer to Part 1 of the Tutorial 4 Tutorial Problem (“Thomas”)?

TUTORIAL FIVE: WEEK 6

FRINGE BENEFITS TAX

No tutorial problem will allocated in this week.

This tutorial will consist of a discussion by the tutor outlining the basics of FBT. Topics covered in the mini lecture will include:

Key design features of FBT (UTL 7.7 and 7.17 to 7.23) Definition of fringe benefit (UTL 7.8 to 7.16) Determining the taxable value of fringe benefits (UTL 7.24 to 7.27) Exempt fringe benefits (UTL 7.55) Reconciliation with income tax (UTL 7.56 to 7.59)

The discussion by the tutor will be followed by a class discussion of the following general discussion questions.

General Discussion Problems

1. If the facts in Payne v FCT (1996) 32 ATR 516 were to recur today, would KPMG be subject to FBT on the taxable value of the frequent flyer benefits?

2. Diane is employed by an accounting firm. Her employer offers her the opportunity of salary packaging a car. Diane chooses a car with a lease value of $45,000. Lease payments are $200 per week. Diane estimates that she will always garage the car at home each night and will drive 20,000 kilometres per year, only 10% of which will be on business. The running costs for the car (in addition to the lease payments – e.g. fuel, insurance, registration, tyres etc) are estimated at $120 per week. Assume that the car will be provided on 1 July 2011 for the 2011-12 year. Which method of valuing the car fringe benefit would be more advantageous to Diane?

TUTORIAL SIX: WEEK 7

GENERAL DEDUCTIONS

Tutorial problem

Toxical Pty Ltd was incorporated on 1 July 2004 in Sydney by a group of chemical engineers for the express purpose of carrying on a business of treating toxic chemicals for various businesses in Sydney.

The company came across a new business opportunity of developing toxic chemical processing plant on a disused industrial site on the NSW Central Coast. The company purchased the site for $4,000,000 in December 2009. On 1 September 2010, after obtaining the appropriate planning permits form the local government authorities, the company began to prepare the site for business use.

Shortly afterwards, a local Central Coast environmental protection group lobbied for the development to be stopped in order to protect local wildlife from noxious chemical run-off from the site. After a series of legal proceedings, the planning permits for the development were held to be invalid in March 2011, and Toxical Pty Ltd decided to abandon the Central Coast investment all together.

The company was liable for the following expenses with regards to the project for the 2010/2011 tax year:

1. $200,000 in clean-up expense for pre-existing pollution on the site2. $250,000 in legal fees in defending the proceedings brought by the

environmental group3. $40,000 to defend a criminal prosecution action against one of Toxical Pty

Ltd’s directors who assaulted one of the environmental protestors at a rally on the site in November 2008

Advise Toxical on whether any of the above amounts will be deductible under ITAA97 s8-1.

General Discussion Questions

1. Refer back to the Week 4 Tutorial Question (“Philip”). You are provided the following additional facts in relation to the tax year ended 30 June 2011.

During the year, Philip incurred the following expenses: Travel expenses: $1,200: made up as follows:

o $440 was the cost of public transport getting to and from his restaurant job

o $100 cost of public transport attending graduate job interviewso $500 cost of public transport getting to and from his accounting jobo $160 cost of taxi fares travelling to client premises from his accounting

job (he would leave from the office and return to the office after visiting the client)

Restaurant uniform: $60, made up as follows:o $40, a pair of plain black pants bought at a department storeo $20, a polo shirt with the logo of the restaurant of it purchased through

the restaurant

Suits: $2,000. Philip purchases new suits before starting his job at the accounting firm. Although his company does not have a uniform, he is expected to wear a suit on all days except casual Fridays.

Textbooks: $300. Textbooks relating to his final semester at university.

Can he claim a deduction for any of the above expenses? Why or why not?

2. Is a taxpayer who is travelling on business able to obtain a s8-1 deduction for meals and accommodation? On what grounds?

TUTORIAL SEVEN: WEEK 8

SPECIFIC DEDUCTIONS

Tutorial problem ‘Prints Pty Ltd’ is an Australian printing company that prints brochures, business cards, large advertising posters etc.

The company owns three commercial grade printers. All printers are secured to the factory floor to secure them and to reduce the risk of injury to workers. All three machines had been installed in the factory on 1 July 2009, the cost of each was as follows:

1. Printer 1 $40,0002. Printer 2 $20,0003. Printer 3 $50,000

Each machine has an effective life of 5 years. Since the printers were installed, they have been depreciated using the prime cost method.

On 15 August 2011, the company spends $10,000 on modifications to Printer 3 so it can print on a thicker type of cardboard. Unfortunately on 1 September 2011, one of their employees thought it was Printer 1 that was modified, and attempted to use the thicker card in Printer 1. The cardboard jammed the printer and caused significant damage to the internal mechanics of the machine. The company was advised that to repair the printer would cost $15,000, and instead decided to purchase a new printer at a cost of $85,000. The purchase was made on 15 September 2011. It has an effective life of 8 years and the company diminishing value method of depreciation. The company borrows $70,000 from AusBank to help fund the purchase of the machine at a rate of 5% (interest only loan). A $1,000 loan application fee was payable in relation to the loan. The loan was provided on 10 September 2011.

Other expenses for the 2011-12 year included:

$350,000 on staff salaries and superannuation. In addition, the company has a provision for long-service-leave of $30,000. No employees are currently entitled to long service leave and no long service leave payments were made during the 2011-12 year.

$15,000 on consumables (paper, cardboard, toner etc). $72,000 on factory rental.

Giving reasons, calculate the deductions the company can claim for the year ending 30 June 2012 (ensure you include under which provision(s) the deduction(s) can be claimed).

TUTORIAL EIGHT: WEEK 9

TAX ACCOUNTING / TAXATION OF PARTNERSHIPS

Tutorial problem

George and Jane (husband and wife) are both Australian resident taxpayers. They open a bookstore in Kensington in 2008. The facts below relate to the 2010-11 tax year.

Sales for the year were $480,000. The bookstore makes sales on cash and credit. Of the $480,000 sales made in the year, $90,000 is yet to be received. Included in this $90,000 that has not been received is $10,000 relating to an order of textbooks shipped to a coaching centre. The coaching centre is refusing to pay the invoice, as they claim that the books (which were delivered in January 2011) were not the most up-to-date editions. Further, an additional $70,000 (not included in the $480,000) was received in cash in the 2010-11 tax year that related to sales in the 2009-10 tax year).

Details of trading stock are as follows:

Closing stock (30/06/2010): $150,000 (cost) Purchases: $200,000 Closing stock (30/06/2011): $80,000 (cost)

$120,000 (replacement value)$150,000 (market value)

The closing stock valuation did not include a shipment of books at a cost of $10,000 which had been purchased under a CIF (cost insurance freight) contract on 1 June 2010. As at 30 June 2011 the ship carrying the books was still at sea. George and Jane were unclear as to whether to include the cost of this shipment in the valuation of their trading stock on hand as at 30 June 2011.

Expenses incurred during the year included: Jane was paid a salary of $40,000 (including any required superannuation) as

she worked full-time at the store. George and Jane also employed two casual employees, with a total cost for

wages and superannuation of $18,000. $100,000 in other deductible expenses

The partnership agreement states that after paying Jane a salary of $40,000 (as stated above), the profits will be split 60% to Jane and 40% to George.

George has a full-time job with a salary of $70,000 per annum (excluding superannuation).

Assume that apart from what is stated in this question, there are no other factors that impact on the taxable income of George or Jane (i.e. they have no other income or deductions).

Calculate the taxable income of both George and Jane for the 2010-11 tax year, assuming they wish to minimise their taxable income.

General discussion questions

1. When is a partner taken to derive income from a partnership?

2. Assume that a husband and wife own a rental property (in equal shares). They sign a partnership agreement stating that any profits will be split 80/20. Is this valid for tax purposes? Why or why not?

TUTORIAL NINE: Week 10

TAXATION OF TRUSTS

Tutorial problem

John is the trustee of a discretionary resident trust estate created by deed. The Deed names John, his wife Jane, and their three children Sophie (currently 15 years old), Harry (19 years old), and Henry (22 years old) as beneficiaries. All are Australian residents for tax purposes with the exception of Henry, who is a non-resident living in England.

For the year ended 30 June 2012, the income of the trust estate was $80,000 and the net income of the trust estate was $100,000.

John decides to distribute the income of the trust as follows:

John: $20,000. John has $70,000 of income from other sources. Jane: $20,000. Jane has $180,000 of income from other sources. Sophie: $5,000. Sophie has no other income. Harry: $10,000. Harry has $50,000 of other income, none of which is

Australian sourced. Henry: $15,000. Henry has $20,000 of other income.

John does not distribute the remaining $10,000.

Required:

What will be the tax payable (by either the beneficiary or the trustee) in respect of the above distributions? (For simplicity, you can ignore the Medicare surcharge and any tax offsets).

What are the tax consequences of deciding not to distribute the remaining $10,000?

Suggest to John how the income should be allocated to minimise tax payable by the family as a whole (you do not need to provide calculations, just some general advice).

General Discussion Questions

1. Compare the definition of ‘net income of the partnership’ in ITAA36 s90 with the definition of ‘net income of the trust estate’ in ITAA36 s95. What differences do you note between these definitions? Why do you think those differences exist?

2. What is the difference between the quantum and proportionate approach to allocating trust income?

TUTORIAL TEN: Week 11

TAXATION OF COMPANIES (Part 1)

Tutorial problem

During the 2011/12 tax year, West Ltd provides you with the following information concerning its franking account:

30.06.2011 – balance of franking account: $50,000 21.07.2011 – payment of June 2011 PAYG instalment: $200,000 30.09.2011 – received a distribution from an Australian resident public company

of $320,000. The distribution had a franking percentage of 70%. 28.10.2011 – payment of September 2011 PAYG instalment: $200,000 15.11.2011 – tax refund of $40,000 relating to the 2010/11 tax year 28.2.2012 – payment of December 2011 PAYG instalment: $200,000 01.03.2012 – received an unfranked distribution from an Australian resident

private company of $20,000 28.04.2012 – payment of March 2012 PAYG instalment of $200,000. 15.06.2012 – paid a fully-franked dividend of $3,000,000.

Required:Given the above information, prepare West Ltd’s franking account for the 2011/12 tax year. Ensure you calculate the balance of the franking account at 30 June 2012. Would you have recommended the company franked the 15.06.2012 dividend to a percentage of less than 100%? If so, why? What franking percentage would you have recommended?

General discussion questions 1. What is meant by the classical system of company taxation? What is the main

criticism of this system?

2. Why does the dividend imputation system require companies to maintain a franking account? Wouldn’t it always be possible to gross up the whole amount of dividends received by shareholders using the c/1-c formula (where c is the current corporate tax rate) and give shareholders a tax credit equal to the amount of the gross up?

TUTORIAL ELEVEN: Week 12

TAXATION OF COMPANIES (Part 2)

Tutorial problem

Giant Beans Pty Ltd (“the company”) is an Australian resident private company for tax purposes. The company manufactures and sells bean counters.

In the 2010-11 income year, the company makes a profit of $1,300,000 made up as follows: a trading profit of $1,050,000 from its business of manufacturing and selling bean

counters a dividend of $100,000 received from Aus Bank Ltd (an Australian resident public

company for tax purposes) franked to 50%. a non-portfolio dividend of $150,000 from Beanstalk Ltd, its wholly owned

subsidiary. Beanstalk is a tax resident in Greece. The non portfolio divided of $50,000 was non assessable non exempt income to Giant Beans under ITAA 1936 s23AJ (this is a provision that will be discussed briefly in the Week 13 lecture – for the purposes of this question you only need to understand that the non-portfolio dividend is NANE income).

The company incurred a tax loss of $100,000 in the 2008-09 income year. During the 2008-09 income year, 90% of the shares in the company were owned by Jack and 1210% were owned by Jill (both Australian resident individuals). On 1 September 2009, Jack sold 60% of his shares to Bill (a non- resident individual). Once Bill purchased the shares in September 2009, he started to look at ways to make the business more profitable, and from December 2009, Giant Beans has allowed customers to purchase products online from the company website. Prior to this, bean counters were only sold through Giant Bean shops in various locations in Australia. Due to the online sales, 2 stores (out of a total of 10) were shut down in March 2010.

PAYG instalments paid during the year ended 30 June 2011 were as follows: Qtr ended 30 June 2010: $40,000 paid 28 July 2010 Qtr ended 30 September 2010: $30,000 paid 28 October 2010 Qtr ended 31 December 2010: $30,000 paid 28 February 2011 Qtr ended 30 March 2011: $30,000 paid 28 April 2011

Between 1 July 2011 and 31 October 2011, the following occurred: PAYG instalment of $30,000 for the qtr ended 30 June 2011 paid on 28 July

2011; PAYG instalment of $30,000 for the qtr ended 30 September 2011 paid on 28

October 2011; Any final payment of tax required for the 2010-11 income year (or any refund

due to the company) is paid / (received) on 31 October 2011.

On 1 November 2011, Giant Beans Ltd declares a dividend of $1,300,000. Assume that the balance in the franking account on 1 July 2010 was $15,000. Apart from the transactions in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that J Beans Pty Ltd can attach to this dividend. Assuming J Beans Pty Ltd does not want the franking account to go into deficit at the time the dividend is declared, advise J Beans Pty Ltd of the percentage to which it should frank the dividend.

How will the tax treatment of the dividend received by Bill differ from the dividend received by Jack and Jill? (You can assume Bill is a resident of a country that does not have a DTA with Australia). You can assume that J Beans Pty Ltd franks the dividend to the percentage you recommend.

General discussion questions

1. Assume a company has a franking account balance of $60,000. It pays a dividend of $120,000 and attaches $60,000 of franking credits. Is this allowed? What would be the consequences of a company doing this (from both the company and the shareholder point of view)?

2. What happens if a resident individual has excess franking credits (i.e. their tax liability is less than their total franking credits)? How does this differ from a resident company taxpayer that has excess franking credits from dividends received?

TUTORIAL 12: Week 13

GOODS AND SERVICES TAX

Tutorial problem

Fast Food Pty Ltd operates a take away food outlet, with some tables on the premises. You are given the following information on sales/purchases for the month of August show the following:

Sales of hot food $80,000Sales of soft drinks $10,000Purchases of ingredients (all purchased as fresh food) $20,000Purchase of soft drinks for resale $6,000Rent $8,000Wages $12,000Containers, knives, forks etc for serving food $1,500

Calculate the GST payable / refundable by Fast Food Pty Ltd for the month of August (you can assume they account for GST on a cash basis). Assume that all substantiation requirements can be met.

(Remember that GST is based on the value of the taxable supply – you should not need to ask whether the amounts shown are GST inclusive or not).

What would happen if Fast Food Pty Ltd had mistakenly forgotten to charge GST on some of their sales? Would there be any liability for GST?

General discussion questions

1. What input tax credits, if any, are available in respect of the following: (You can assume all parties, if required, are registered for GST).

(a) A fax machine, costing $1,100, purchased by a partnership of accountants carrying on practice in a large country town

(b) A mobile phone costing $770 purchased by a dentist for use by his daughter who has just started boarding school.

(c) A computer system costing $11,000 purchased by a bank to run the banks financials services for fee paying customers

2. What GST, if any, is payable in respect of the following? (You can assume all parties, if required, are registered for GST).

(a) Purchase, for $5,000, of a photocopier for use in an accounting practice(b) Private health insurance premiums of $2,000(c) Goods worth $77,000 sold to a manufacturer in Japan(d) Family day care payments of $22/day in respect of a three-year-old child, both

parents of whom work.

3. Explain the difference between a GST-free supply and an input-taxed supply, and provide an example of each.