Case study:

Jahi Jani is a 43 year-old chauffer who is employed by Joyous Journeys Pty Ltd in Melbourne. Jahi engages your services for the preparation of his company's 2019/20 tax return.

On 4 September 2020 Jahi sends you the email below:

Company Tax Return

1.Limousine inheritance

It was a great surprise to me that I received a limousine from my grandfather who passed away on 1 December 2020. My first thought was to sell it privately as we already have a family car that meets all of my family's private needs.But my intentions changed, because I was without work (having been made redundant in early December) and I needed to make some money for the family, so I thought to myself, why not start up my own small business using the Limo and I will be a chauffeur.My residence is my working base and I start work from the moment I leave my driveway, until I return home, so that is very convenient.The market value of the limo was $60,000 on 10 January 2020 when the business started.

2.New business costs -

I consulted Johnathon Lawyers in the first week of January and they recommended to me after considering partnership, trust and company structures and my personal circumstances, that I should set up a Small Business Entity in the form of a company, and register the vehicle in the name of the company. Their advice cost me $1,000.

Accordingly, on 9 January 2020 I purchased a company online using Shelf Company Services and registered my company as Joyous Journeys Pty Ltd, for a cost of $690.Registration was confirmed on the day, and I then applied and received an ABN and TFN with the ATO using my.gov.au at no cost.I look forward in future for you lodging my company's annual review documents with ASIC.

3.Limousine Services income

I am pretty sure you know what's involved in my simple business. On 10 January I registered the limousine and I got the keys from my Grandpa's estate lawyer and commenced the business.The company makes its income from my services attending to calls and moving people around to their homes and appointments.However, I have a premium service business that suits a fairly limited clientele, where I set the price upfront with the client who is prepared to pay higher charges, given it is more expensive than taxi and uber drivers.My business was fairly slow at first relying on my advertising on the internet, word of mouth, and airport pick-ups but I got a lucky break when my services started to be sought out also by Parliamentarians and businesspeople, that required a highly confidential service, and you know, word of mouth can be powerful business.At times I have special pickups also that I receive from all of the taxi companies, who contact me directly on my mobile on a needs basis, as my number is listed in their VIP bookings.

From January to June my company received on average $4000 - $5,000 per week from the long hours I work providing a limousine service. In short, I believe my company is a personal services business and that this is not income from my personal services, but does it matter anyway?

For example, all up until 30 June 2020 the company received $105,000 in receipts that were mainly on credit, very little being paid in cash.But as at 30 June 2020 the company had outstanding fees of $5,000 from some of the regular customers and they know they owe Joyous Journeys, but I take a fairly informal approach and so I haven't given them a bill, but to be honest, I guess we need to include those outstanding fees.

Some of my customers even gave me some tips for my services ,$2,000, commenting that they were delighted with my personal services, but I don't think that needs to be included in the company's income given it was for my personal services -is that right?.Finally, there were a few who gave me some exceptional gifts in regard to their appreciations of my services and these included, 3 bottles of Rampur Rampur Indian whiskey valued at $100 each bottle, a $200 Myer voucher, and even a couple of boxes of Cohiba Behike Club cigars valued at $260.

4.Investment Earnings

Grandpa had also left me some shares he owned in India.Naturally, the shares were changed into my name in India, but I mixed up my bank account details and gave the Indian solicitor the bank account details of Joyous Journey. So I realise that I must of course now declare that as the company's income, because the net dividends of $850 were credited into the company's bank account.In addition, the company received interest of $150 in its bank account from the local JNZ Bank.Furthermore, grandpa had left me cash and the Johnathon lawyer recommended I purchase some investments and put them into the company's name which I did.Accordingly, I put them into a blue chip public company but I had a friend who was keen to start up a new business, so I also invested on behalf of the company into his small business Tiny Co P/L.Tiny Co P/L paid Joyous Journeys fully franked dividends of $2900 while Large Co Ltd paid a dividend of S3,500, being 60% partially franked.

5.Business expenses

My company which has its own bank account paid for the following business costs.

Motor vehicle Duty on grandpa's limousine$2,500

Registration$1,000

Insurance $2,000

Services$1,200

Car washes $500

Petrol$5000

Professional Cleaning of Limousine $800

Council parking fines $500

Dry Cleaning Uniform $500

Chauffeur Suit, including $1000

o5 shirts, 3 pants, shoes, 2 ties and chauffeur cap.

6.Chauffeur salary and Super

Joyous Journeys gave me a salary at market rate and paid me $27,000.The company also paid superannuation into my nominated Superannuation account which was one I had established with my previous employer. The company was careful only to pay $25,000 (so they didn't go over the cap).The only fringe benefits I received from the company are my wages and super - I didn't realise there was so much more advantage to be taken from using salary sacrificing, so we will need to deal with that next financial year.

7.Limousine repairs and subsequent insurance payout

My limousine needed to be repaired because unfortunately it was involved in a minor accident.It was considered by the assessors as my fault and the insurance company didn't cover the cost.It was only one panel that needed fixing the dent, and the bumper bar that was replaced to give me back my limousine in its original condition, but the cost was enormous, as I had to pay $5.000.

However, on March 21 my grandpa's limo was written off in an accident caused by a Council Truck when a client and I had stopped at a coffee house.I promptly received $60,000 compensation from the insurance company, so its just as well I had insured it at market value.

8.Purchase of new limousine

I used the $60,000 from the insurance company as a deposit to purchase a brand new luxury Mercedes Benz C200 for $110,000 (including stamp duty).I borrowed $50,000 from JNZ Financial Services on 1 April 2020 over a 5 year loan and associated bank fees were $900.The interest only for 3 months (April - June 2029) was $1,000. The registration was $1000 and insurance $2500

9.Taxable income and tax liability of my company

Based on the above information, what would be the taxable income and the tax liability of the business?

That should be all you need for your deliberations.I look forward to hearing back from you about my company's completed income tax return.

Thank you very much.

Kind regards,

Jahi Joni

Director, Joyous Journeys Pty Ltd

Required:

address the 9 main issues raised using the same numbering system / headings listed above in Jahi's email.

answer the questions using 3 headings

1) Issue

2) Law that applies, including Reasons (& Common Law/Tax Ruling)

3) Amount ($)

Effect on taxable income / tax liability