In your current role, you are responsible for providing taxation services to individual clients. You conducted an initial meeting with two (2) clients (Stuart and Annie) to obtain and document all the relevant information which is required to prepare the relevant tax documentation.

The clients have requested that you provide a report of analysis of their tax position, and recommendations relating to clients income tax liability, and recommendations regarding dividends payable, to provide the optimum tax treatment. And to analyse and optimise franking credits in relation to two shareholders.

Question 1

Baby Hub Pty Ltd (Baby Hub) is an Australian company. It conducts a business selling childrens toys.

Details of stock during the year were as follows: (All amounts are shown at cost value).

Opening stock Toy A $210,000 Toy B $160,000 Purchases Closing during year stock $510,000 $260,000 $610,000 $510,000 Sales during the year were $700,000 (Toy A) and $350,000 (Toy B). Of the sales, $150,000 represented invoices issued in the month of June 2021 for which payment had not been received as at 30 June 2021. Other income received by Baby Hub for the year included: A dividend of $100,000 received from Jumbuck Bank Ltd (an Australian resident public company for tax purposes) franked to 50%. An unfranked dividend of $50,000 from Toy Best Ltd (an Australian resident public company for tax purposes) A non-portfolio dividend of $60,000 from Baby Hub Can Ltd, Baby Hubs wholly owned subsidiary resident in Canada. The non-portfolio divided of $60,000 was non-assessable non-exempt income to Baby Hub Pty Ltd under ITAA 1936 s23AJ. Baby Hub also holds 10 units in the Toddler Toy Unit Trust. Under the terms of the unit trust Baby Hub is entitled to distributions of 10% of the income of the unit trust. The income of the trust estate for the year ended 30 June 2021 was $220,000, and the net income of the trust estate was $200,000. Salaries for Baby Hub staff for the year were $120,000. Other deductible expenses for the year were $150,000. Unfortunately, during the year, a child suffers an eye injury whilst playing with Toy B, and Baby Hub is sued as a result. Baby Hub is denying liability, but so far has incurred $25,000 in legal fees. As at 30 June 2021, the lawsuit has not been settled. Due to the bad publicity surrounding Toy B, Baby Hub is now faced with a large volume of stock that is unlikely to be sold. For the year ending 30 June 2021 Baby Hub Pty Ltd paid a total of $120,000 in instalments of tax (you can assume these were made in equal instalments). Any final payment of tax required for the 2020-21 income year is paid on 31 October 2021. Assume all figures are GST exclusive.

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ASSESSMENT 2 BRIEF

Required

Calculate Baby Hub Pty Ltds income tax liability in respect of the income that it derived in the 2020-2021 year of income. (GST calculations are not required) (10 marks)

Question 2

Required (a) Assume on 1 July 2020, the balance in Baby Hub Pty Ltds franking account was $50,000. On an excel spreadsheet, construct Baby Hubs franking account for the 2019-20 financial year, and calculate the franking account balance as at 30 June 2021 and 31 October 2021. (3 marks)

(b) On1November2021,BabyHubPtyLtddeclaresadividendof $400,000. Assume that apart from the transactions in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that Baby Hub Pty Ltd can attach to this dividend. Assuming Baby Hub Pty Ltd does not want the franking account to go into deficit at the time the dividend is declared, advise Baby Hub Pty Ltd of the percentage to which it should frank the dividend. (2 marks)

(c) Assuming Baby Hub franks the dividend to the percentage you recommended in (b) above, comment on the tax treatment of the dividend to the following shareholders:

• Liam: receives a dividend of $5,000. Liam is an Australian resident at the highest marginal tax rate.

• Nocky: receives a dividend of $5,000. Nocky is a non-resident. The country in which Nocky resides does not have a double tax agreement with Australia. (2 marks)

  Question 3

  As noted in the facts, Baby Hub has a large quantity of stock of Toy B left on hand. The market value of the stock is now lower than the cost price. Baby Hub seeks your advice as to whether they can revalue the stock at a lower price. Briefly advise Baby Hub whether they are able to revalue the stock and if so, how they can value it. (3 marks)

Opening stock $210,000 $160,000 Purchases during year $510,000 $610,000 Closing stock $260,000 $510,000 Toy A Toy B Sales during the year were $700,000 (Toy A) and $350,000 (Toy B). Of the sales, $150,000 represented invoices issued in the month of June 2021 for which payment had not been received as at 30 June 2021. Other income received by Baby Hub for the year included: A dividend of $100,000 received from Jumbuck Bank Ltd (an Australian resident public company for tax purposes) franked to 50%. An unfranked dividend of $50,000 from Toy Best Ltd (an Australian resident public company for tax purposes) A non-portfolio dividend of $60,000 from Baby Hub Can Ltd, Baby Hub's wholly owned subsidiary resident in Canada. The non-portfolio divided of $60,000 was non-assessable non-exempt income to Baby Hub Pty Ltd under ITAA 1936 s23AJ. Baby Hub also holds 10 units in the Toddler Toy Unit Trust. Under the terms of the unit trust Baby Hub is entitled to distributions of 10% of the income of the unit trust. The income of the trust estate for the year ended 30 June 2021 was $220,000, and the net income of the trust estate was $200,000. . Salaries for Baby Hub staff for the year were $120,000. Other deductible expenses for the year were $150,000. Unfortunately, during the year, a child suffers an eye injury whilst playing with Toy B, and Baby Hub is sued as a result. Baby Hub is denying liability, but so far has incurred $25,000 in legal fees. As at 30 June 2021, the lawsuit has not been settled. Due to the bad publicity