$1$

ACCT$3001$ T$42024$ Advanced Taxation

Assessment $2$ Case study letter of advice

Weighting $30\%$

Due date: $11$:$59$ pm$,$ Friday $27$ September $2024($mid week $5)$

Overview

Assessment $2$ is designed to represent providing tax advice to real$-$life client. You are

required to provide advice as to the most appropriate structure for a new client business

after completing an analysis of the appropriateness of each of the potential structures.

This is a common advice scenario for tax accountants and is a key part of tax planning.

Assume that you are the accountant who has been asked to provide structuring advice. You

will provide advice via a formal letter to your clients. You will need to undertake tax research

and apply the research to the case.

Case information

Assume that all amounts in the case study are GST exclusive.

Background

Michelle Ricci and Sam Russo are cousins. They grew up in an extended family of small

business owners, watching the dedication and hardship of their parents and uncles and

aunties running restaurants and other food related businesses. Now in their late $30$s$,$ they

have decided to combined their passion for food with their Italian heritage, to start a

business $($with a working title RicciRusso$),$ selling speciality$/$high$-$end Italian food and

ingredients $($pastas$,$ sauces, herbs, olives etc$)$ to restaurants and cafes $($from the families$$

long association with restaurants, they are confident there is a gap in the market for these

products$).$ They will use savings and money they inherited from their grandparents

$($$$500,000$ each$)$ to fund their new venture. Michelle and Sam asked two of their other

cousins if they would like to join them in the business, but these two cousins are not quite

ready to join.

Michelle studied law at university and currently works as a solicitor at a law firm. She

currently earns $$190,000$ per year. Michelle is married with two small children and her

husband $($Ian$)$ is also a solicitor. They own their own home $($with a mortgage$).$ Michelle and

Ian have approximately $$400,000$ in superannuation $($currently in a retail fund$).$

Sam completed a marketing degree and works for an advertiser. He currently earns

$$140,000$ per year. Sam is still single but has plans to start a family someday. Sam also

owns his home $($with a mortgage$).$ Sam$$s parents are older than Michelle$$s and Sam

provides his parents some financial support. Sam has approximately $$250,000$ in

superannuation $($in a retail fund$).$

They have come to you for advice on how to best structure their new business.

$2$

Initial discussions

You meet with Michelle and Sam for initial discussions. You realise both are financially

conservative, not wanting to waste their inheritance, and wanting to ensure their personal

assets are not put at unnecessary risk $($they are aware that may new business ventures fail

financially in the first few years$).$ It is intended that Michelle will take on the management of

the business and Sam will oversee marketing and sales. For the first year, they will go parttime in their $$day jobs$($as an accountant and advertiser respectively$)$ as they get the

business off the ground and in year $2,$ they will give up their day jobs completely to work in

the business fulltime. As they will be given up secure jobs, they will need to be paid from

the business to meet their living needs $$ they estimate they will need $$50,000$ each in year

$1$ and $$100,000$ each per year, from year $2$ onwards $($any excess funds from the business

above these amounts can reinvested in the business to drive growth$).$ They will need a

commercial warehouse for storing their stock $($from which they will sell to restaurants and

cafes directly$).$ Rather than renting a warehouse, they also see long$-$term value in

purchasing a small warehouse from which they will operate the business from. They are

prepared to purchase a good$-$sized warehouse to suit their needs for the next $5$ years as the

business grows which will cost $$300,000$ to purchase.

Michelle has prepared some initial preliminary budgets as follows:

Year $1$ Year $2$ Year $3$

Assessable Income $500,0001,300,000$ $$2,800,000$

Allowable deductions$*(700,000)(1,000,000)(1,960,000)$

Net gain$/($loss$)(200,000)300,000840,000$

$*$ The budgeted deductions do not include the funds Michelle and Sam will draw from the business. In

addition to the $$300$k in capital costs for the warehouse, they are also budgeting for another $$50$k in capital

costs to start the business $($e$.$g$.$ equipment purchases etc$).$ The budgeted deductions include any

associated deductions on capital costs $($e$.$g$.$ decline in value$).$

They are conscious that they will need to get their cousins $($or someone else$)$ involved as

investors in the future to provide additional capital to achieve their growth targets.

They have contacted you for advice as to what structure they should use for their business.

From discussions with family and friends, they are aware that in people in Australia use the

following structures