AUSTRALIAN TAX LAW

Kirsty Lim is a 46-year-old solicitor that owns her own legal practice as a sole trader (KL Law). Kirsty is on the top (45%) marginal tax rate. The following events all occurred in the current tax year:

Dividends

Kirsty receives the following dividends on 1 March 2021:

$8,000, fully franked, from DFJ Ltd.

$3,000, 50% franked, from ZZY Ltd.

Family Trust

Kirsty is also the trustee of the Lim discretionary trust that, for the current year, earned dividend income (unfranked) of $50,000 and rental income of $20,000. It paid interest of $10,000 on the loan used to purchase its rental property and shares. During the current tax year, it made the following distributions:

$20,000 to Mark (Kirstys son), a 21-year-old beneficiary.

$25,000 to Jane (Kirstys daughter), a 17-year-old beneficiary.

Larry Employee Solicitor

Kirstys law firm, KL Law, employs a solicitor called Larry, who is on a salary of $150,000. Larry arranges a salary sacrifice agreement with KL Law where, in exchange for giving up part of his salary, KL Law will pay for:

A laptop (that Larry can keep) that Larry intends to mostly, though not exclusively, use for work.

Extra superannuation contributions to Larrys superannuation fund.

The interest expenses on Larrys investment property loan.

GST Liability

KL Law is registered for GST and undertakes the following transactions for one of its GST periods Please assume that:

-Where GST applies, prices are inclusive of GST

-Where GST applies, unless told otherwise, a valid tax invoice has been supplied.

Purchases of fresh fruit from a major supermarket for the staff room: $1,000.

Purchase of a new laptop from a major department store: $2,000.

Annual bank credit card fee for the business credit card: $550

Payment of staff salaries: $300,000.

Payment of water utilities bill: $500.

Payment to plumber from a large plumbing company to fix leak in the office bathroom (no invoice supplied by plumber): $2,000.

Sales of services: $600,000.

Interest Rate Adjustments for Mortgages

Kirsty owns an investment property, as well as her own main residence. Each of the two houses were purchased with a mortgage. Both of the mortgages have an amount owing of $1m each. As the mortgages are both with the same bank, Kirsty enters into an arrangement with the bank: instead of paying 2.5% interest on each loan, she will pay 1.5% interest on her main residence loan and 3.5% interest on her investment property loan. The bank explained to her that this would be beneficial for her, because the interest on the investment loan is tax deductible, whereas the interest on the main residence loan is not.

Required: Discuss the tax implications for the following (disregarding the Medicare levy):

1. The possible application of ITAA 36, Part IVA, to the interest rate adjustments for the mortgages (6 marks).