3150AFE Taxation Planning for Advisors

Assessments 1 and 2

Jacob Packer, your supervisor from Packer Tax and Financial Services, (at 473 Logan Street, West End) provides the following information for the new client: Matt and Elliott Lark, who are both seeking tax planning advice, concerning their new business.

Matt (42 years of age) and Elliott Lark (38 years of age) are brothers who commenced a partnership, growing, and selling organic vegetables and supplying the produce at the farmers markets and select retail grocery stores in 2022. The business is registered under the name "Pure Organic Fruit and Vegetables". It was agreed at the time of forming the partnership that Matt would contribute towards the equity in setting up the business and Elliott, a horticulturalist, would be responsible in setting up and running the organic farm. Elliott will be part-time at the farm for the first two years, and thereafter full time. The business is registered for GST, and the Commissioner issued a private ruling confirming that Matt and Elliott are carrying on a business.

The farmland in Warwick, has been leased from the Matt and Elliott Lark's grandfather for a nominal fee of $21,000 per year. The property was purchased in 1980 for $120,000. The market value of the leasehold as of 1 July 2023 is $538,000. Matt and Elliott, hope to buy the 10 hectares of land from their grandfather in the foreseeable future.

To transport materials, seedlings and organic crops, the partnership purchased a Toyota Utility Truck (known as an 'ute') on 1 July 2022, for $54,741 (excluding GST). As at 30 June 2023, the Ute has a tax written down value of $56,649. The ute is only used for business purposes. The depreciation claimable each year (for taxation purposes) is $8,092. A second-hand tractor was purchased on 1 July 2022 for $50,000 (excluding GST), and the depreciation claimable each year (for taxation purposes) is $7,500.

Elliott

To earn extra income, Elliott works 20 hours per week in the neighbouring farm, earning $55,000 for income tax year in2023, and for 2024. It was agreed with Matt, that the "Pure Organic Fruit and Vegetables" business would initially pay Elliott a low salary for the first two years. It is projected that the salary will then increase, as business grows and income increases, as shown in the Table below.

Matt

Matt is contributing equity to pay for the running of the business. He is employed as a full-time lawyer with the Queensland Government, earning an annual salary of $210,000. In addition to his salary, his reportable fringe benefits amount was $45,000 in 2023, and reduced to $25,000 in 2024. For each year, his reportable superannuation contributions are $5,000 and his share of the investment losses of $25,000 is from the negative geared property in Byron he shares with his wife, Lucy. Matt says he intends to keep working as a lawyer and will assist in the business when required.

Business Plan

Matt and Elliott provide the following projected net income or net losses for the income years 2023 to 2027.

Projected Net Income or Net Loss

Year ended 30 June	Assessable Income	Deductions	Net income/Net loss	Elliott's Projected salary
2023	17,000	47,092	(30,092)	20,000
2024	38,000	70,092	(32,092)	20,000
2025	101,000	110,092	(9,092)	100,000
2026	434,000	130,092	303,908	100,000
2027	720,000	165,092	559,908	120,000

* Elliott's projected salary is not included in deductions.

Matt and Elliott advise you that in the income tax year commencing 1 July 2025, the business will expand its operations to "online" home deliveries of organic fruit and vegetables and expand the product range and sell fresh fruit juices and fruit salad. The new product lines will increase the assessable income by 25%.Within ten years, the business may diversify interstate with net income projected to exceed $1 million.

Equityand future diversification

To expand the business operations, additional equity will be required. In December 2025, George Regan, a cousin of both brothers has offered to join the business and contribute $900,000 for half ownership in the business. The equity will provide the capital to purchase of the land in Warwick and build a factory with full air-conditioning and refrigeration.

PERSONAL FACTS FROM MEETING

Matt (42 years) and Lucy (39 years) Lark

Matt Lark's spouse, Lucy does not work as she is a full-time parent to their 3 children. Jill turned 15 years old on 1 March 2024 and the twins: Lucas and Flynn turned 17 years on 31 December 2023. Both twins work at the markets, earning $6,000 for the 2023 year which will apply for 2024. (Superannuation does not apply for this assignment.)

Matt and Lucy own their own home in 20 Maryland Street, Cleveland purchased in December 2014 for $500,000 with no mortgage. (Market valuation was $1,700,000, at the end of 2023).

Matt and Lucy both own a (negatively geared) investment property in Byron Bay (20 Bay Street) purchased in March 2019 for $1,200,000, with a mortgage of $900,000. (Market valuation was $2,800,000, on 30 June 2023). The net loss from the property was $50,000.

Elliott (38 years) and Janice (34 years) Lark

Elliott and his wife, Janice own their residential property in South Brisbane, (203 Vulture Street) purchased in April 1989 for $500,000, with a mortgage of $100,000. (Market valuation of $1,250,000 on 30 June 2023). Janice was a lawyer earning $150,000 per annum. Janice had a baby girl, Ava, on 1 February 2024 and is undecided whether to return to her former employer.

George Reagan (44 years)

George, a company director of Coles Mining Ltd, earns $200,000 per annum and has no partner or children. George has offered to contribute equity into the business for half ownership (as stated above) when he joins in December 2025. It was agreed that Matt, Elliott and George will have equal ownership of the property. George wants to participate in the future decision making for the business and may join the business full time in 2027/2028. George has no partner.

Matt and Elliott Lark request advice on the following:

1. Year ended 2023.

Matt and Elliott have not submitted their individual income tax returns for 2023. They have asked if they were able to offset their share of net losses in the Partnership against their assessable income. They advise they have agreed for Elliott to be paid a salary of $20,000 from the partnership for his work in the business. They did not know how to record Elliott's salary which is shown separately in the above Table. The salary is not included in the deductions.

2. Year ended 2024.

In April 2024 income tax year, Matt and Elliott want to restructure or continue their 'partnership' business upon your recommendation.

3. Year ended 2025.

The business is performing well, and assessable income has increased.

4. Year ended 2026, 2027.

George, (Matt and Elliott's cousin) will contribute equity of $900,000 into the business in December 2025, which will be used to buy the farmland property in Warwick andbuild a factory with full air-conditioning and refrigeration. The online home deliveries have been extremely popular and together with the additional product lines, has meant a significant increase in assessable income for both income years for 2026 and 2027.

REQUIRED

Prepare advice for Matt and Elliott and recommend which tax structure (or combination of tax structures) will meet the future needs of the business considering:

• Which entity or individual will buy the Warwick farmland in December 2025?
• Offsetting of net losses:
  • Can the net losses be offset against Matt and Elliott's individual taxable income? or
  • Can the proposed tax entity offset the projected (business) net losses against future (business) net income in the income year ended 2026, 2027;
  • Advise Matt and Elliott which new tax structure (or combination of tax structures) will meet the plans for the business and satisfy future expansion of the business.
    • Can George Reagan contribute equity into the business (in the income year ended 2026), and achieve half ownership in the business?
  • Can the new tax structure (or combination of tax structures) minimise future taxable income, and tax payable for Matt and Elliott and their family. (Note Matt and Elliott want a general discussion on how they will minimise their tax payable and have not requested any tax calculations).

Following these steps to answer:

• Identify the objective,
• Identify the issue.
• Identify the law.
• What facts are relevant for the law to apply.

Students are to support their answers with reference to the Taxation Law (Income Tax Assessment Act, 1936 or 1997).