Assignment details for LAWS20023 Australian Taxation Law

Length: There is no word limit. Marks awarded to each question are indicative of the amount of information required to comprehensively answer the question.

While the assignment is largely based on material covered, you are free to research and seek advice as widely as you find necessary - there are no limitations as to sources. However, sources should be appropriately referenced. Note that as the assignment is for assessment purposes, more is expected than just the calculations in a tax return. If there are any issues that require clarification by you, you should provide a brief discussion of the matter and justify any conclusions you may reach. Where there are figures provided without adequate justification, marks will not be awarded. All calculations are to be performed with reference to months and not days. The assignment is to be submitted online in Moodle. Submission must consist of one (1) document only. This document must be in Word format only ie .doc or .docx.

Question 1 Phoebe, aged 52, works for the Reef Protection Agency in Queensland and has done so for 18 years. Phoebe owns two rental properties. One is in Airlie Beach and the other is in Cairns.

Phoebe’s Cairns property is a little beach house, one of only a few on a secluded beach. She purchased the house in July of 1995 while on vacation in Cairns one year for $250,000. The current tenants are paying $2,400 per month.

Phoebe incurred the following expenses during the 2104/15-tax year in relation to her Cairns beach house:

• Repairing the verandah (completed 28th February 2015) $2,400

• Interest on loan $12,000

• Land tax $300

• Gardening maintenance fees $800

• 4 identical fans at $245 each (Note 1) $980

Note 1 – The fans were installed on the 30th of September 2014 by a qualified electrician and have an estimated useful life of 6 years.

The Airlie Beach property is a three-bedroom house overlooking the Whitsunday Islands for which she charges $2,000 per month in rent. She purchased the house in February of 1986 for $67,000 and it is now worth $450,000.

The Airlie Beach property has caused a little more trouble for her during the year. The tenants she had for many years were relocated to Gladstone on the 31st of October 2014. She struggled for 6 months to find new tenants with very little interest by prospective clients. She finally secured an elderly couple when she dropped the rent to $1,500 per month and they moved in on the 1st of May 2015.

Phoebe incurred the following expenses during the 2104/15-tax year in relation to her Airlie Beach property:

• Interest on loan $18,000

• Advertising costs $900

• Photography fees for professional photos of the house $600

• Flight for Phoebe and her friend to Airlie (Note 2) $800

• Hotel accommodation for both of them for 2 nights (Note 2) $500

Note 2 – Phoebe’s friend Ann who works at the agency with Phoebe travelled with her to Airlie Beach to inspect the property. Ann owns a number of rental properties and accompanied Phoebe to Airlie Beach to give her advise on how to best get her property rented.

a) Advise Phoebe on the income tax treatment for the current year on her two investment properties. Calculate the amount that should be included in Phoebe’s income tax return in relation to the two properties. (24 marks)

Your advice must be supported by reference to legislation, case law, and principles of tax law. It is not sufficient to merely state an amount is deductible or not. Where there are options available or assumptions to be made, please state the available options and/or assumptions made. Calculations to be performed based on months not days.

b) Explain in your own words, the term ‘negative gearing’ in the context of the Airlie Beach property. (6 marks)

Question 2 Sam, Matt and Ben are three brothers that are equal partners in a charter boat business that operates out of Brisbane. They offer day trips to Moreton Island and have earned $600,000 for the 2014/15-tax year. As their business has proven so popular, they had to hire a deckhand to help out on the boat, which cost them $60,000 for the year. The interest payments on the boat were $10,000, with the cost of fuel amounting to $20,000. Food, drinks and other guest related expenses cost the brothers $6,000. As Ben was the Captain and provided the entertainment that has made the day trip so popular the partnership decided to give Ben a bonus of $20,000.

Explain the income tax treatment of the above business and the tax consequences of the transactions for Ben. You are expected to calculate Ben’s total tax payable. (20 marks)

Your explanation and calculations must be supported by reference to legislation, case law, and principles of tax law.

Question 3 a) Fiona is given a rare painting from her mother valued at $60,000 as a present for her birthday, on the 1st May 2015. Her mother acquired the painting in 1990 for $5,000. (5 marks)

b) Eddie bought a three-bedroom house in Darwin in January 2003 and moved in straight away. Work however, transferred him to Melbourne and he had to move out in July 2004. He luckily was able to rent out his house immediately. Because he is able rent out his home so easily and receives a big salary increase in the move to Melbourne, Eddie purchases an apartment for himself in January 2005. As Eddie likes Melbourne so much and has no intention of moving back to Darwin he sells the Darwin property in January 2007. (8 marks)

c) On the 11th January 2014, in exchange for the sum of $40,000 John granted to Farm Ltd, an option to purchase his 100-acre farm just outside Adelaide for the sum of $800,000. John had purchased the farm 10 years ago. (4 marks)

d) Chris bought 12,000 shares in Qantas for 45 cents on the 1 August 2012 and they are now trading at $1.56. The same day he also purchased some shares in Westco for $5.20 but they are now trading at only $2.10. Chris is considering selling both his Qantas and Westco shares on the 1st August 2014. (8 marks)

What are the CGT consequences of the above transactions?

Question 4 (10 marks) From the Income Tax Assessment Act 1997, identify the statutory reference for: a) three exempt entities b) three assets that are exempt c) three situations in which a gain or loss is reduced d) one exempt transaction

Question 5 Jerry is an accountant that loves fishing. He owns a 50-foot sports fishing boat and also has a commercial fishing license. He is dedicated about going out every other weekend for three days. His son and two mates, John and Scott usually go with him. They are paid in fish for their efforts and all the extra fish they catch is sold to the local fish wholesaler. Jerry just likes to fish for any fish he can and is not bothered about making sure that he finds the fish with the best market value. Jerry has no business plan and is not particularly worried whether his costs are covered by the sale of his fish. Is Jerry conducting a business of fishing? (15 marks)