Introduction to Taxation Law - Professional Task (40%) Word limit: 2500 words maximum total (excluding footnotes & bibliography) Due Date: The assignment must be submitted online via Turnitin on Canvas by 5pm on Monday 6 May 2024. Armani Enterprises Pty Ltd, a company owned by the Armani family, amongst other investments, owns and operates a chain of profitable business clothing stores. Armani Enterprises Pty Ltd also has a small number of investments. Armani Enterprises Pty Ltd is an Australian resident company for tax purposes. The company's Senior Accountant, Joe is in the process of preparing income tax retums for the income year 2022/23, for the company and staff. He approaches a prominent firm Grauss ShillingsWorth (GSW) which employs a highly skilled team of tax lawyers and tax accountants. GSW is renowned for providing integrated tax solutions for their clients. GSW organises a meeting between Joe and one of GSW's tax partners. The CEO of Armani Enterprises Pty Ltd, Carlo, also attends the meeting. Shortly afterwards the parties sign an Engagement Letter which provides for Armani Enterprises Pty Ltd to engage the services of GSW. Armani Enterprises Pty Ltd seeks advice on the matters set out below: PART A During the 2022/23 income year, Armani Enterprises Pty Ltd incurred a number of losses/outgoings including: -$1.5 million for the purchase of trading stock . $2 million wages paid to employees $40,000 advertising expense (in previous years the advertising expense has consistently only been $20,000 per year, however in 2022/23 due to adverse impacts on demand as a result of increasing popularity of relaxed dress codes, the CEO felt it necessary to increase advertising in order to retain the company's market share) - $200,000 rent paid to occupy retail premises in shopping centres $25,000 in bad debts written off (after a major customer Steve died leaving no assets from which to recover the debt. Steve had previously purchased, on credit, a bulk order of business shirts from Armani Enterprises Pty Ltd.) Armani Enterprises Pty Ltd employs Carlo as the CEO. Carlo lives in Ryde and commutes daily to the company's headquarters in Sydney CBD where he is employed full-time. He receives a salary of $200,000 in the 2022/23 year of income, from his job as a CEO. Armani Enterprises Pty Ltd also provides him with a laptop (valued at $3000) to use for work. Carlo is an Australian resident for tax purposes. For the 2022/23 year of income, Carlo pays $700 membership fees for his membership of the Australian Entrepreneurial Professionals Association. He also pays $130 for an annual subscription to a professional entrepreneurial journal in 2022/23. In August 2022 Carlo takes both Joe and a client out for an extravagant three-course seafood lunch at a restaurant in the Four Seasons hotel to discuss a work matter. The lunch costs $600 and Carlo pays for everybody with the firm's credit card. Carlo is very hardworking and in addition to his full-time job, he also teaches art classes at a community college in Epping during the week, in the evenings. He travels from the company's headquarters in Sydney CBD, to the college in Epping to teach. During the 2022/23 year of income, he incurs travel expenses of $2,000 in travelling from the company's headquarters to the college in Epping. He receives $20,000 from teaching at the college during the 2022/23 income year. In December 2022, Carlo sees an advertisement in an Art Teachers' magazine about an art competition for art teachers. Carlo decides to enter as he has previously won several prizes in art competitions. Over the next few weeks Carlo paints a beautiful landscape of the south coast and submits his painting in the competition. He wins a cash prize of $30,000 and a non-transferable annual pass (valued at $500) to exhibitions at the Art Gallery of NSW. While exploring some local sales in January 2023, Carlo came across a bargain and purchased a 120-year old, antique, hand-painted, porcelain tea set for $1,130 (comprising a teapot (value $450). 4 cups with saucers (value $120 per cup with saucer), and a milk jug (value $200)). A few weeks later he received an offer of $1,800 for the set. He negotiated with the purchaser and sold each item separately ($700 for the teapot, $200 per cup with saucer, and $300 for the milk jug). PART B A couple of years ago, on 1 March 2021, Armani Enterprises Pty Ltd, acquired all of the shares in another company LandCo Pty Ltd. (Eight years earlier LandCo Pty Ltd had acquired two acres of land in the Central Coast. The purchase price of the land was $1 million. At the time of the purchase of the land, the minutes of the directors meetings recorded that the purpose of the purchase was to build single- storey beach villas for holiday rental to tenants. However, the work never actually began on the construction of beach villas.) Armani Enterprises Pty Ltd, in determining a purchase price for the shares in LandCo Pty Ltd, valued the Central Coast land at $1 million. LandCo Pty Ltd's previous business activities have not involved residential construction projects. Following the purchase of the shares in LandCo Pty Ltd, new directors were appointed to LandCo Pty Ltd. The new directors passed a resolution to seek a rezoning of the Central Coast land, aiming to construct 8 homes on the land and to sell each home at a profit. Land Co Pty Ltd submitted a rezoning application to the council which involved the payment of council fees of $5000 and also legal fees of $4000 in relation to obtaining legal assistance in the preparation of the rezoning application. The rezoning application by LandCo Pty Ltd was successful. Following the rezoning LandCo Pty Ltd obtained an estimate of the market value of the Central Coast land. The valuation of the land was $3 million. In January 2022 LandCo Pty Ltd commenced work on the building of the homes. On 1 March 2023 the building of the homes was completed at a total cost of $2 million. There was significant market demand for the homes and LandCo Pty Ltd sold each home for $2 million. PART C Armani Enterprises Pty Ltd had recently purchased a house and property in Strathfield as an investment, from a married couple, for $800,000 in September 2021. The house was badly run down, so the CEO decided that Armani Enterprises Pty Ltd should carry out work on it to improve its resale value. Armani Enterprises Pty Ltd accordingly carried out work on the property to replace old fences (cost $2,000), repaint the house (cost $3,000) and replace the mouldy ceiling in every room and replace several decaying walls (cost $18,000). Armani Enterprises Pty Ltd also installed under floor heating in the bathroom and bedrooms (cost $5,000). On 1 February 2023, Armani Enterprises Pty Ltd entered into a contract to sell the property to 75-year-old Tina (Carlo's long-time trusted cleaner) for $1 million (the market value of the property is $3 million). PART D Several years ago, the company's CEO, Carlo purchased a house near the beach which he only makes available for use by his nephew Jimmy, and Jimmy's family. The purchase price was $3 million and Carlo was required to pay $230,000 stamp duty on the transfer. He borrowed money from a bank to fund the purchase price and paid $400,000 in interest on the loan. In February 2023, he also paid $80,000 to a builder to renovate the bathrooms. In addition he paid $50,000 in legal fees to make an objection blocking a proposed development nearby which would have obstructed the house's charming beach views. On 7 June 2023 Carlo entered into a contract of sale of the property to a third party at the market value of $4 million. Settlement occurred in August 2023. Required: Prepare GSW's Memorandum of Advice. Advise Armani Enterprises Pty Ltd. Carlo and Joe regarding the following in relation to the 2022/23 income year: A) the income tax implications and any potential FBT implications, arising from the facts in PART A. (25 marks) B) any relevant income tax and/or capital gains tax implications, regarding the sale of property arising from the facts in PART B. In your answer make sure you show your calculation of any relevant amount included in LandCo's assessable income in relation to the sale of property. (5 marks) C) any relevant income tax and/or capital gains tax implications in relation to the sale of the Strathfield property to Tina, arising from the facts in PART C. In your answer make sure you identify any relevant CGT Event, identify each element of the cost base and show your calculation of any relevant capital gain/loss. (5 marks) D) the capital gains tax (CGT) implications in relation to the sale of the beach house, arising from the facts in PART D. In your answer make sure you identify any relevant CGT Event, identify each element of the cost base and show your calculation of any relevant capital gain/loss. (5 marks) Note: Students are required to answer ALL parts of the assignment question. In your answers to the above, make sure you apply the HIRAC methodology and refer to any relevant cases, legislative provisions, tax rulings and principles of tax law. As this is a research assignment, students are also expected to go beyond the course content and conduct independent research in order to answer the assignment question (see also Assignment Guidelines). Guidelines - Assessment 2 Professional Task (see also subject outline for further information) Please note: -As this is a research assignment, students will be required to go beyond the course materials and to conduct independent research in order to answer some aspects of the assignment question. -The content in the course topics upto the end of Deductions II (see program in the subject outline) will also provide useful guidance in relation to the assignment. -Students are not required to address possible issues in relation to the further/subsequent topics listed in the subject outline (except to the extent that there is any overlap with the above). -Useful references may also include (but are not limited to): Income Tax Assessment Act 1997 (Cth) s8-1, Div 32, Part 3-1, Income Tax Assessment Act 1936, Fringe Benefits Tax Assessment Act 1886 (Cth) s58X, Taxation Rulings: TR 97/17, Cases: FCT v Whitfords Beach (see also prescribed text at [8.180]-[8.200]) -Students are required to follow HIRAC to address the key issues arising from the facts eg. "Is the [Sy] amount/benefit received, included in the taxpayer's assessable income?", "Is the [$x] expense incurred, deductible to the taxpayer under s8-1. ITAA97?", "what are the CGT implications arising from CGT Event A1?" etc -Students should identify the relevant key cases, legislation, tax rulings and principles of tax law, in relation to each key issue. -Students should also include any relevant calculations regarding particular key issues, however students are not required to calculate the overall income tax payable by the taxpayer for the income year. -Students may assume, as per the facts, that Armani Enterprises Pty Ltd, LandCo Pty Ltd, Carlo, Joe and all other relevant persons are Australian residents for tax purposes. Accordingly, there is no need to discuss tax residency in your answer. Structure/format -Make sure you follow the HIRAC methodology (see "Concise Guide to Answering Tax Law Problem Questions" and "Example illustrating HIRAC methodology" on Canvas) -Use separate headings for each relevant key issue eg. "Is the [Sy] amount/benefit received, included in the taxpayer's assessable income?" -Students must not exceed the maximum word limit by more than 10% -Use at least 11 point font size (use one consistent font - Arial 11 or Times New Roman 12) Referencing -Make sure you include case citations for any cases referred to in your response eg. Brent v FCT (1971) 125 CLR 418 Case citations may be found easily in the Prescribed Textbook (see Table of Cases in the textbook) or on the Lexis Advance Pacific database which can be accessed via the UTS Library website -Make sure you refer to any relevant specific sections of legislation for each key issue eg. s6-5, Income Tax Assessment Act 1997 (Cth) -Referencing style should be consistent throughout the response. For this assignment, students may use either: - AGLC (see links below): https://www.lib.uts.edu.au/referencing/agle https://law.unimelb.edu.au/mulr/agic/about or alternatively APA referencing (see https://www.lib.uts.edu.au/referencing/apa) Don't forget -Make sure you proofread your assignment & correct any spelling/grammar errors before handing it in -Don't forget to attach a completed UTS Law Assignment Cover Sheet for Online Submissions to the front of your assignment