Tutorial Questions

BTF5965 Taxation law
Semester 1, 2015

Tutorial Questions

Tutorial 1 | Week 2, commencing 9 March 2015
Question 1
a) What is a tax?
b) What are the main tax policy objectives (or design criteria)?
c) How are these policy objectives reflected in:
i. the Commonwealth income tax system? ii. the Commonwealth Goods and Services Tax?
d) What structural features do most tax systems have in common?
e) What are the major forms of taxation administered by:
i. The State of Victoria (and other Australian States) ii. Local or municipal governments
f) Where can you find a copy of the Australian Constitution? How does the Constitution influence the system of State and Commonwealth taxes in Australia?

Question 2
a) How is tax liability created under the Commonwealth income tax system?
b)

What is meant by ‘self-assessment’’?

c) What powers does the Commissioner of Taxation (and/or the Australian Taxation Office) have to obtain information about a taxpayer’s affairs?
d) What penalties can apply if a taxpayer submits incorrect information to the ATO?
e) What remedies do taxpayers have if they wish to challenge a decision made by the ATO?

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Tutorial 2 | Week 3, commencing 16 March 2015
Question 3
Monash Property Pty Ltd (‘Monash Property’) is a developer of residential properties and also carries on the business of leasing / renting the properties it owns in Australia to tenants. Monash Property is registered for
GST and reports for GST on a monthly accruals basis.
For the month ended 30 April 2012, Monash Property made the following supplies to customers and tenants
(including GST where applicable) including the sale of real estate agency that it had operated under a separate business name (sold as a going concern):
Sales – New Residential Property
Sales – Existing Residential Property
Sales – Real estate agency
Rent Invoiced – Residential Property

$5,050,000
$3,300,000
$1,809,091
$ 300,000

Monash Property instructs you that they have owned the existing residential property (as sold) for the last eight years.
Monash Property purchased new computers from Computers Plus Pty Ltd during the month, and received the following request for payment:
C O M PU T ER S PL U S PT Y L T D
Tax Invoice
Customer:
Invoice Date:

Monash Property Pty Ltd
5 May 2012

Delivery Date:

Description
Laptop Computers (x 30)

5 April 2012

Cost

GST

Amount

$ 30,000.00

$ 3,000.00

$ 33,000.00

Total Amount Due

$ 33,000.00

This invoice includes GST of $3,000.00.

Required:
Citing all relevant legislation from A New Tax System (Goods and Services Tax) Act 1999, fully explain the
GST consequences of the above.
Source: Adapted from Semester 1, 2012 Examination

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Tutorial 3 | Week 4, commencing 23 March 2015
Question 4
Consider the situation of a student working at a local coffee shop on a casual basis who lives in a shared apartment with other students. The student has received the following amounts:
a) Hourly wages paid in cash
b) Tips from customers
c) Reimbursement for taxi fares for travel from the café to home late at night
d) A monthly payment from the student’s parents to contribute to general living expenses
e) A cash prize from Monash University for being the top student in taxation law
f) Cash prizes and reimbursements for playing football. He plays for his old school football club in the
Amateurs League. The club pays his equipment and travelling expenses, and supporters provide cash prizes for the best players each week. The student regularly wins these prizes as he is a star goal kicker.
Required:
a) Discuss whether the above items are likely to be “ordinary” income under general concepts
b) Consider the materials from lectures in week one on tax administration. What tax compliance obligations would the student have?

Question 5
Consider the following scenarios:
a) Proceeds from selling the copyright to a book. The recipient was an employee accountant who wrote a novel in her spare time over a number of years.
b) Proceeds from selling the copyright to a book, where the recipient is in the business of writing books and selling his copyright.
c) Profit realised on the sale of shares that have been held for a number of years for their capital growth.
Required:
Discuss whether the items above are likely to be “ordinary” income under general concepts.
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

Question 6
Marissa Simpson is a lecturer in computer programming at an Australian university. Her salary is $120,000 per annum and is paid fortnightly. Marissa requests that 50% of her salary be deposited into a bank account in her name and the remaining 50% into her husband’s bank account.
Marissa and her colleague Scott were approached by a software development company, Microtech to write a plagiarism detection program under the terms of a ‘software development contract’. The ‘software development contract’ stipulates that both Marissa and Scott will be paid $2,800 each per month and
Microtech will undertake all sales activities and receive all sales income until 31 July 2016, however it does not confer ownership of the software to Microtech.
Required:
Citing relevant case law and legislation to support your answer, advise Marissa Simpson as to whether the above transactions constitute assessable income for her.
Source: Semester One, 2013 Examination (Modified)

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Tutorial 4 | Week 5, commencing 30 March 2015
Question 7
a) Tiny Tangaroa is a forestry consultant employed by a company incorporated in New Zealand, called
Waokumutu Ltd. Tiny was born in NZ and has worked there throughout his career. He currently lives in
Auckland with his wife and two school age children. Waokumutu recently acquired the right to harvest certain native forests in South West Tasmania and Tiny has been offered a key role in managing this project from 1 July 2015. The new role does not require Tiny to move permanently to Australia, but will allow him to visit the Tasmanian operation on a fly-in-fly-out basis for one week and return every second week to the head office in Auckland (where he would continue to work exclusively upon the
Tasmanian project). Waokumutu will pay all travel expenses and a salary of NZ$100,000 per annum, to be paid directly to Tiny’s personal bank account in Wellington. As an incentive to accept the position,
Waokumutu will also provide an inducement of $50,000 paid to Tiny in advance. Tiny would be expected to carry out this role for at least three years, and he will be provided with a one bedroom apartment in Hobart as his base whilst in Australia. He also holds some investments in New Zealand including a bank term deposit and some shares in NZ listed companies.
Advise Tiny whether he will be liable to Australian income tax as a result of the above arrangements.
b) Twenty-five percent of the shares in Waokumutu Ltd are held by a resource company incorporated in
Australia, called Gondwana Ltd, with the remaining 75% held by New Zealand residents. Waokumutu does not have any operations in Australia, other than the recently acquired Tasmanian project. Tiny
Tangaroa will be the operational manager for the new forestry project and all correspondence will be directed to Journal & Ledger, a firm of accountants located in Hobart, who follow instructions from the
Waokumutu head office in Auckland. Tiny will engage local Tasmanian timber contractors to harvest trees and transport the timber to a local pulp mill for processing into woodchips, andthen stockpiled at a nearby port before export to Japanese buyers.
Advise Waokumutu Ltd whether it will be liable to Australian income tax as a result of the above arrangements. c) As a major shareholder in Waokumutu Ltd, Gondwana Ltd has the right to nominate one director to the
Waokumutu Board and it has selected one of its directors, Barry McKenzie, to take up this role. Barry was born in Australia and has never lived overseas for any extended periods in the past. He now plans to lease out his home in Melbourne and move with his family to Auckland for at least two years. Barry will continue to be employed by Gondwana during this period and will continue to receive a salary of
$300,000 per annum from the Australian company. Barry’s employment contract states that Barry is not allowed receive any other remuneration through providing personal services for the duration of the contract. For this clause, Gondwana agreed to pay Barry $50,000, payable when Barry ends his contract.
Barry also owns sizeable portfolio of shares listed on the Australian Stock Exchange, from which he receives dividends, and occasional profits or losses on trades.
Advise Barry of the Australian income tax consequences of his move to New Zealand.

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Tutorial 5 | Week 6, commencing 13 April 2015
Question 8
Michael is a mechanic, who owns his own car repair workshop, ‘MT Motors’ and in his spare time, he collects car parts and stores them in the front garden of his house where he resides with Jacqueline. Due to the number of parts collected, Jacqueline is upset that the parts are destroying her garden and without
Michael’s knowledge, she begins to sell the parts on eBay, an internet based retail store. Initially, Jacqueline sold a few car parts every month; however the quantum of sales increased such that Jacqueline was receiving a steady income stream.
By the end of the financial year, Jacqueline sold $12,000 worth of car parts. eBay provided Jacqueline with monthly sales accounts (this was a standard feature of the eBay store), although she never looked at the accounts. For the income year ended 30 June 2014, Jacqueline’s store received very high customer satisfaction ratings and consequently eBay awarded her a prize of a return airline ticket to Bali worth $2,000 which was non-refundable and non-transferable.
One day, Michael was looking for car parts to buy on the internet, and inadvertently found Jacqueline’s eBay store. In a fit of rage, Michael went to the police to have Jacqueline charged with theft, as he never authorised her to sell his car parts, which were his own personal property. The police dismissed his claims and as Michael was returning home, he realised there was a viable business opportunity and took over
Jacqueline’s eBay store. In the period ending 30 June 2014, he purchased $10,000 worth of car parts of which $2,000 worth of stock went to car repairs and $7,000 worth of stock was sold to customers on eBay.
Required:
Citing all relevant legislation and case law, advise Jacqueline and Michael of the likely income tax implications that may arise out of the above facts.
Source: Semester One, 2012 Examination (Modified)

Question 9
Your client is a small IT consulting business consisting of a husband and wife as the principals and two employees. From the time the business was established, 1 July 2010, it has been accounting for tax purposes on a cash basis. For the current financial year your client has decided to account on an accruals basis as the size of the business is increasing. As at 30 June it has $40,000, which was paid to it from the previous financial year and this amount was not included in its assessable income for that year. Must it be included in the current financial year?
Would your answer be different if your client had deliberately told the customer not to pay its account for
$40,000 until after 30 June?
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

Question 10
If your client owns a small business selling designer clothes and sells dresses on a “lay-by” system, when are they said to have derived their income? Is it when the final payment is made or when the first payment has been made?
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

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Tutorial 6 | Week 7, commencing 20 April 2015
Question 11
Following on from the facts in question 6, in April 2013, Marissa was advised that her lecturer position was going to be made redundant due to Government funding cutbacks. Marissa subsequently entered into an arrangement with Scott where Scott paid Marissa a lump sum of $70,000, and Marissa assigned Scott her future rights to payments from Microtech.
It was subsequently discovered by Marissa that Scott copied (that is, plagiarised) the software programming code from a rival competitor that offered a similar plagiarism detection program. Once plagiarism was proven, Microtech cancelled the contract with Marissa and Scott. Owing to the negative publicity arising from plagiarism, Marissa took legal action against Scott which were ultimately settled on terms that Scott would:  transfer all his rights and future entitlements arising from the software to Marissa;
 pay Marissa $30,000 for damage to her reputation; and
 pay Marissa $20,000 for damage to the value of her interest in the software.
Marissa subsequently decided to redevelop and sell the software. To do this, Marissa re-wrote Scott’s plagiarised portion and to maximise the value of the software, she added additional features to the software.
On 30 June 2013, Marissa sold the software to a commercial publishing firm for $30,000.
Citing relevant case law and legislation to support your answer, advise Marissa Simpson as to whether the above transactions constitute assessable income for her.
Source: Semester One, 2013 Examination (Modified)

Question 12
Two years ago Peta purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons:
1. so that she and her family could live in the house; and
2. so that she could build three units on the tennis courts and sell them at a profit.
In the current tax year the tennis club next door offered to buy the old tennis courts, but only if Peta first restored them to good condition. Peta decided to accept the club’s offer instead of going ahead with her plan to build and sell units. Peta spent $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000.
Ignoring capital gains tax, discuss whether the receipt of $600,000 is ordinary income under s 6-5.
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

Question 13
Your client has purchased an investment apartment that has a rent guarantee from the developer of 5% pa for a period of four years. During the current financial year your client has been unable to rent the apartment, so she is relying on the rent guarantee payment to compensate her for not being able to find a tenant. The developer is due to pay the amount as a lump sum and your client is not sure whether the amount is income.
Advise her.
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

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Tutorial 7 | Week 8, commencing 27 April 2015
Question 14
Joshua Ball is a salaried investment banker. On 1 January 1980, Joshua purchased a vacant block of land in
Clayton at a cost of $80,000. On 1 October 1990, when the land was valued at $220,000, Joshua built a house on the land costing $325,000. The construction was funded by a bank loan and since completion, the property has been rented out and Joshua has paid $87,000 in bank interest.
Due to poor neighbourly relations, Joshua sold the property for $770,000. A contract of sale was signed on
15 June 2014 and the estate agent charged Joshua $3,000 in advertising costs, and $20,000 in sales commission. Settlement is expected to occur on 25 July 2015.
Joshua also incurred the following transactions during the 2014/15 year:


Sale of a painting on 1 April 2015 for $125,000. The painting was purchased by Joshua on 11 January
1988 for $27,000; and



Sale of a boat for $30,000 on 1 July 2014. Joshua purchased the boat for $27,000 on 4 July 2013 and incurred $1,000 of delivery fees at that time.

Joshua had a loss from the sale of a stamp collection in the amount of $50,000 from the 2009/10 income year. Required:
Showing all calculations and citing relevant legislation to support your answer, advise Joshua Ball of his net capital gain / loss for the income tax year ended 30 June 2015.
Source: Semester 1, 2013 Examination (Modified)

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Tutorial 8 | Week 9, commencing 4 May 2015
Question 15
Skyler White is employed as a financial controller for a large carwash business, named A1 Car Wash (A1).
During the 2014/15 fringe benefits tax (FBT) year, A1 provided Skyler with a total remuneration package in the amount of $116,490, plus the mandatory employer superannuation contribution. Skyler’s package consisted of the following:


Salary: $75,000 per annum.



Superannuation: in addition to the superannuation guarantee contribution, A1 contributed an additional
$5,000 to Skyler’s account in her industry complying superannuation fund



Professional membership: A1 paid Skyler’s Institute of Chartered Accountants annual membership fee of $550



Exclusive use of an employer-provided car. A1 leased a Ford Falcon vehicle from 1 April 2011 at which time its purchase price was $45,000. The annual lease payments are $10,000. During the FBT year, the car travelled 17,000 km of which 2,000 km was work related. The licence, insurance and service costs totalled $1,200. Skyler paid for petrol in the amount of $1,270



Study expenses for a Master’s degree in Business Administration: $18,000 in course fees and $1,500 for textbooks 

Laptop computer costing $2,500: provided to Skyler to allow her to mainly work from home and for study purposes



Pay-TV: A1 reimbursed 70% of Skyler’s annual subscription to the Stan Online television service. The annual subscription cost was $1,200



Mobile phone account including associated data charges: provided for work purposes in the amount of
$1,900 for 2014/15. Skyler also regularly uses the phone for private purposes (approx 30% of calls).

Required:
a) Advise A1 of its FBT liability for the benefits provided to Skyler for the year ending 31 March 2015.
Show all calculations and cite relevant legislation to support your answer.
b) Advise A1 of the total cost of remunerating Skyler.

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Tutorial 9 | Week 10, commencing 11 May 2015
Question 16
Fatty’s Foods imports frozen fruit for distribution to a major Australian supermarket. In the last financial year, the company’s accounts recorded the following transactions:
a) Provision for employee annual leave entitlements: $45,000
b) Fines imposed by a foreign customs authority for non-payment of custom tariffs: $10,000
c) Travelling expenses for a production manager who attended a two day conference on food technology:
$6,000. The manager also spent an extra four days relaxing at a resort hotel
d) Following on from the food technology conference, market research expenses were incurred to investigate the feasibility of developing a new system of supply chain management. Fatty intends to market this system to other importers
Required:
Citing relevant case law and legislation to support your answer, advise Fatty’s Foods as to the deductibility of any of the above expenditure for the purposes of s 8-1 of the ITAA 1997.

Question 17
Jake is an accountant who migrated to Australia three years ago. As part of establishing himself in Australia, he intends to invest in the property market. As Jake is not familiar with the Australian property market, he engaged the assistance of a property broker to assist with finding a suitable investment property. The broker charged an upfront fee of $5,000. Six months later, the broker located a vacant block of land and suggested that Jake develop three townhouses on it. The cost of the land ($1 million) and estimated development costs
($900,000) exceeded Jake’s budget and he decided to undertake the venture with a business partner. The agreement with the business partner was that Jake would purchase the land and the partner would incur all development costs. The profits from the eventual sale of the townhouses, expected to be in 18 months, would be split equally between Jake and the partner. Jake established a $1 million line of credit facility with his bank which would enable him to access the required funds as necessary. The interest rate on the facility was
8.5% per annum and Jake provided the title to the land as security for the funds.
a) Advise Jake as to the deductibility of the property broker’s fee and bank interest charges under s 8–1 of the ITAA97.
b) Following on from (a), shortly after the land was purchased, Jake’s business partner declared bankruptcy. Jake was unable to find another suitable business partner and subsequently sold the land at auction at a loss for $900,000. With sale proceeds being insufficient to discharge his borrowings, Jake continues to pay interest charges on the remaining $100,000 owed to the bank.
Advise Jake as to the deductibility of the interest charges incurred after the land was sold?
c) Following on from (b), would your response to the deductibility of the bank interest charges change if
Jake borrowed the money from the bank and provided the title to his residential home as security for the line of credit facility? Assume that the value of Jake’s residential home exceeds $1 million.
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

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Tutorial 10 | Week 11, commencing 18 May 2015
Question 18
Following on from question 16, part (c), would your response to the deductibility of the bank interest charges change if, instead of buying the block of land himself, Jake on-lent the funds to his sister at an interest rate of
3% and Jake’s sister purchased the block of land in her name?
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

Question 19
You are near completion of your Monash University degree and have been applying for graduate positions.
The application process is often lengthy and includes online applications, psychometric testings, attendances at group assessment events and panel interviews. You have been successful in obtaining a graduate position and required to relocate to another Australian city to work at your employers premises, where you are required to wear in formal business suit.
Consider what deductions you may be able to claim:
a) During the application process (where your income comes from casual work in a field unrelated to your studies and you are in receipt of government support (eg Youth Allowance))
b) During the application process (where your income comes from part-time work in a field related to your studies) c) Once you have commenced work.

Question 20
The Matsushima Motor Co Ltd (‘MM’) is the Australian subsidiary of a Japanese car manufacturing company. It imports cars from its Japanese parent and sells them in Australia. MM has been enjoying considerable sales success in Australia and was rapidly overhauling local car manufacturers in sales volume.
Due to the threat to local employment if this situation continued, the Australian government announced its intention to impose a quota on the annual number of cars which could be imported from Japan and sold in
Australia, given that such a system did not previously exist.
In the current income year MM spent $950,000 on placing advertisements in the Australian media attacking the quota system and demanding its repeal. The advertisement asked the Australia public to petition parliament to preserve their freedom of choice in obtaining the quality, low cost car which MM had been importing and selling. The amount spent was five times the company’s normal annual advertising expenditure. Required:
Citing relevant case law and legislation to support your answer, advise Matsushima Motor Co Ltd as to the deductibility of any of the above expenditure for the purposes of s 8-1 of the ITAA 1997.
Source: Semester One, 2013 Examination

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Tutorial 11 | Week 12, commencing 25 May 2015
Question 21
Digby owns a bookstore. He undertakes the following activities:
a) replastering and repainting a wall which had been damaged due to a leak costing $20,000;
b) recarpeting the whole shop as the old carpet had worn out due to normal wear and tear costing $5,000;
c) installing a new payment counter with new display signs costing $8,000; and
d) repainting the front of the store with a new type of glossy paint to make it more attractive to walk-in customers costing $3,000.
Required:
Advise Digby of his tax consequences arising from the above information.
Source: Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015).

Question 22
Jack and Jill jointly own and run a bed and breakfast business. The business is run through their partnership,
J & J Bed and Breakfast. Jack and Jill also own an investment property together which they purchased in equal proportions. During the year, they undertook the following transactions:
a) Purchased furniture for their bed and breakfast business for $3,000 on 21 December 2014. The furniture is expected to last for seven years.
b) Purchased a printer for their bed and breakfast business for $700 on 30 April 2015. The machine is expected to last for three years.
c) Purchased an air-conditioner for their investment property for $2,000 on 15 March 2015. The airconditioner is expected to last for eight years. Jack and Jill contributed to the purchase price of the airconditioner equally.
d) Constructed an additional accommodation unit at the rear of the premises. Jack and Jill entered into a contract to build the unit with Bob the Builder on 1 July 2014, construction commenced on 1 September
2014 and was completed on 1 March 2015. The total costs of building the unit was $60,000 and this included demolition of an existing structure at a cost of $10,000.
Required:
Advise Jack and Jill of their income tax consequences arising out of the above for the year ended 30 June
2015.
Source: Adapted from Sadiq et.al, Principles of Taxation Law (Thomson Reuters, 2015)

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Question 23
Paul Lambert has a full-time job as a butcher and a part-time job playing the piano in a band. He has incurred the following expenses and seeks your advice on the following matters:
a) Paul’s travelling expenses from his home to his full-time employment are $4100 and his travelling expenses in connection with this part-time job amount to $3700. Lambert’s part-time job requires attendance at many different venues during the year and he also transports some of the bands equipment
b) Paul purchased a book of raffle tickets for $400 from a door to door collector on behalf of a charitable organisation. The door to door collector gave Paul a hand written note acknowledging receipt of the money but not specifying further details.
Required:
a) Advise Paul whether the above expenses are deductible for income tax purposes.
b) What documentary evidence would Paul need to substantiate his deductions.

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