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 companys 2019/20 tax return.

On 4 September 2020 Jahi sends you the email below:

From: Jahi Jani Sent: Monday , 7 Sept 2020, 10:12 am To: Tax Accountant Subject: Tax return 2019/20 Joyous Journeys Pty Ltd

Dear Tax Accounting Team,

Please prepare my companys tax return.

You see, I intend to lodge my own personal tax return on my.gov.au..

I already know how to use taxcalc.com.au and should have a reasonable approximation of my tax liability. In addition, the Commissioner of Taxation issues me a Notice of Assessment, so my tax liability will be confirmed when I receive that.

Below, I provide relevant details that should be of assistance to you in the preparation of my companys tax return for the 2020 income year.

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 2019. My first thought was to sell it privately as we already have a family car that meets all of my familys private needs. But I changed my mind 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 including my ambitions, 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 companys annual review documents with ASIC.

3. Limousine Services income

I am pretty sure you know whats involved in my simple business. On 10 January 2020 I registered the limousine in the companys name and I got the keys from my Grandpas 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 clients who are 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 $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 $125,000 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 havent 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 dont think that needs to be included in the companys 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 companys income, because the net dividends of $850 were credited into the companys bank account ($150 tax had been withheld by the company in India). 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 companys 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 grandpas 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
  • 5 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 didnt go over the cap). The only fringe benefits I received from the company are my wages and super - I didnt 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

The company 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 didnt cover the cost. It was only one panel that needed fixing the dent, and the bumper bar that was replaced to return it to its original condition, but the cost was enormous, as Joyous Journeys had to pay $5.000.

However, on March 21 the 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 companys completed income tax return.

Thank you very much.

Kind regards,

Jahi Joni

Director, Joyous Journeys Pty Ltd

Required

1. Prepare a report (1,200 words) to put into Jahis file which you can use as background in discussion with the Partner, and subsequently when you need to provide further advice to Jahi.

Format of your report. You must:

• address the 9 main issues raised using the same numbering system / headings listed above in Jahis email.
• adopt a report style approach using 3 headings, and apportion the column width similarly
• do not provide 3 equal width columns - the issue is only a small number words, the amount only has numbers in it, no words, but the Law is the substantive column which is why it is the widest column.

Issue

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

Amount ($) Effect on taxable income / tax liability