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HI6028Taxation Theory, Practice and Law Online Supplementary Assessment

 

HI6028Taxation Theory, Practice and Law
Online Supplementary Assessment

Trimester 1, 2020

 

 

 

Instructions:

This assessment consists of five (5) questions (with sub-sections).

Answer all questions in the answer boxes provided in this paper.

 

 

 

Assessment Weight:

This assessment accounts for 50 total marks.

Question 1          10 marks

Question 2          10 marks

Question 3          10 marks

Question 4          10 marks

Question 5          10 marks

Total marks        50 marks

 

 

 

 

 

Question 1                                                                                                                                          (10 marks)

With reference to relevant legislation and case law, determine if the following scenarios give rise to income for tax purposes:

  1. John is a pensioner and swapping his surplus free range eggs valued at $150 (for the year) with his neighbour Alex for surplus vegetables grown in his home garden.(5 marks)

 

ANSWER:  ** Answer box will enlarge as you type

According to the provisions of Income Tax Assessment Act 1997 and the rules of the Australian Taxation Office, barter transactions are taxable just like other regular transactions and income derived through barter transactions is assessable income. In this case, John is exchanging his surplus eggs with Alex’s vegetables which can be rightly said to be a barter transaction. Therefore, any income derived by John and Alex through these transactions will be their taxable income.

 

  

 

 

  1. David is a builder and helping John at weekends to build his home, doing so on the basis that David can have John's caravan towed trailer (which cost him $10,500 on 1 January 1997) when John moved into his current home. Assume the value of David's work was $11,000 and the caravan had a market price of $12,000 when John handed it over on 1 January in the current income year. (5 marks)

 

ANSWER: 

According to the rules of the ATO, barter transactions involve exchange of goods or services and any incomes derived through these transactions is taxable income while expenses incurred by the assessee in relation to these transactions are deductible. In case of barer transactions, the fair market value of is regarded as payment for goods or services. In this case, as David would receive caravan worth $12000 (as per market value) and he provided services worth $11000, he earned an income of $1000, which shall be considered as his taxable income.

 

 

 

 

Question 2                                                                                                                                          (10 marks)

With reference to relevant legislation and case law, discuss whether the following receipts are assessable or exempt income. Give reasons.

  1. Lucas is a full-time student and received a scholarship of $3,000 per annum from XYZ Engineering Solutions, conditional upon Lucas agreeing to accept employment with XYZ Engineering Solutions for at least three years after graduation. (7 marks)

 

ANSWER: 

Issue-

Is Lucas scholarship taxable

Rule-

ITAA 1997

Application-

There are two kinds of students studying on scholarships. One who is enrolled as a full-time student and another one who is enrolled as part-time. As per section 51-10, where a student is enrolled full time so he is exempted from tax but where a student is enrolled part-time, he is not. But this is subject to the condition as laid out in 51-35. It states that where a university or college give scholarship to a student on a condition that he shall be becoming his employee in the near future after completing his studies is not exempt from tax. This is laid out in clause (c).

Conclusion-

 So to conclude, Lucas is entitled to pay tax on $3000 as he does not fall under the category of exempted tax.

 

 

  1. Remuneration of $600 earned for part-time services as a member of the Australian Army Reserve. (3 marks)

 

ANSWER: 

As per section 51-5 of the ITAA 1997, where a person is a member of a naval reserve or army reserve or air force reserve, any payment made to such people is exempted from taxation. The only exception to this is that if the service is a full-time service, then that is not exempted from taxation.

So Lucas is enrolled part-time in Australian Army Reserve at $600, so that is exempted of taxation.

 

 

 

 

 

 

 

 

 

 

 

Question 3                                                                                                                                          (10 marks)

Silvia is a teacher employed by SCHE Education at their Melbourne campus. She lives in Pakenham with her family on the outskirts Melbourne about 60 kilometres from the campus. Silvia only attends the campus on Thursdays and Fridays when she takes her classes and the remaining three days a week she works from home. She prefers to work from home because she dislikes the long commute and because she feels that she can research more effectively from home. She only sees students in her office at the campus on Thursdays and Fridays. All student contact on the other days is via email.

 

Silvia's home office and work library occupy 20% of the total space in her home. Her outgoings in relation to her home for the current financial year are as follows:

  • Rent – $31,200
  • Electricity and heating costs – $1,600
  • Cleaning lady – $2,500
  • Home telephone (10% of which is for university use) – $2,000
  • Mobile telephone bill (50% of which is for university use) – $1,250

 

Required:

Calculate how much of the above outgoings are a deductible expense for Silvia.

 

ANSWER: 

Details

Expense Type

Working

Deductions (Amount in $)

 

Rent

Work-related expense

No deduction is allowed for rent

0

 

Electricity and heating costs

Work-related expense

 20% * 1600

$320

 

Cleaning lady

Work-related expense

 20% * 2500

$500

 

Home telephone

Work-related expense

 10% * 2000

$200

 

Mobile telephone

Work-related expense

 50% * 1250

$625

 

Total

 

 

$ 1645

 

 

 

Question 4                                                                                                                                          (10 marks)

William is James’ employer. William paid the following payments on behalf of James.

 

Item

Payment by William

Tax deduction had James paid

 

$

$

Computer part

300

300

University fees

450

200

HELP charges

850

Nil

Taxi fares

300

100

 

Required:

Calculate is the taxable value for FBT purposes of the following payments. You must refer to relevant legislation and/or case law in your answer.

 

ANSWER: 

 

 

The otherwise deductible rule provides that the amount of income tax deduction that would have been available to the employee if the expenditure/payment would have been made by employee would be deducted from the gross value of fringe benefits so to arrive at the taxable value of fringe benefits. This rule is applicable to expense payment fringe benefits, property fringe benefits, and residual fringe benefits.

 

Fringe Benefit   Gross value (A)      Amount to be deducted (B   Taxable Value (A)-(B)       

Computer part         $ 300                      $   300                                              $0

(Property FB)

 

University fees           $450                             $200                                                        $250

(Expense payment

 FB)

 

HELP charges

(Residual FB)               $850                                $0                                                  $850

 

 

Taxi fares                     $  300                                 $100                                                     $200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 5                                                                                                                                          (10 marks)

Julian and Jenna carry on a partnership business and for the income year ended 30 June, the partnership net income was $38,000, as returned by their accountant. However, included in the deductions was a salary of $12,000 paid to Julian’s wife (who is not a business partner). The Commissioner disallows all but $2,000 of this amount.

 

Required:

  1. What authority, if any, does the Commissioner have in disallowing the claim for salary? (2.5 marks)

 

ANSWER: 

A commissioner is limited to the operation of tax law. A commissioner’s remedial power (CRP) is a discretionary power. CRP can only be used issues that arise in companies. It is limited to resolving issues depending upon an individual.

To as per that a commissioner does not have any authority to disallow a claim on salary.  

 

 

  1. What course of action, if any, is available to the partners in disputing the assessment?
    (2.5 marks)

 

ANSWER: 

There is a time limit of 60 days to raise an objection if any party is dissatisfied with the ruling of the commissioner of income tax. They can object on FBT, income tax, Australian business numbers etc. This limitation of time starts from the day when the assessment is handed to the party.

 

  1. Will Julian’s wife be required to pay tax on $2,000, or $12,000, for the current income year. Why? (2.5 marks)

 

ANSWER: 

Remuneration or the interest received by a partner is taxable as per Australian taxation laws. Hence $12000 which is paid as salary to Julian's wife is also taxable as per the laws. Australia does not recognise a joint tax return. They tax all people as individuals even though they are not related to the business. So as per that Julian’s wife is entitled to pay tax on whole 12000. 

 

  1. On what basis should future salary payments be made to Julian’s wife? (2.5 marks)

 

ANSWER: 

In future, if Julian's wife had to be paid so she must be paid from the individual income of the Julian which he earns in that year. Giving a portion of it out from the net income of their partnership if not a correct way to give her the salary. Had she been partner then the case would have been different. Deducting her salary from the books of accounts of the partnership business is not a valid way as it does not fall under the purview of tax deductions claimed by the partnerships as per Australian taxation laws. 

 

 

END OF SUPPLEMENTARY ASSESSMENT

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