Q. Exclusive Emerald Gems Pty Ltd ("EEG") is an Australian resident company that manufactures jewellery which it sells directly to retail shops around Australia. The business premises are located in Wetherill Park, Sydney.The company has two directors and shareholders, Mr and Mrs Smith who each hold 100 shares in EEG. These shares were acquired for $100 per share on 10 January 2004 by Mr & Mrs Smith when EEG was incorporated.

Balance Sheet of EEG as at 30 June 2017 is as follows:-

Assets Liabilities Cash at bank $120,000

Trade creditors $325,000

Accounts receivable $190,000

Bank loan $1,250,000

Inventory $165,000

Provision for doubtful debts $150,000

Plant & Equipment $210,000

Provision for annual leave $80,000

Loan to Mrs Smith $50,000

Shareholders Equity Business premises $1,310,000

Issued share capital $10,000

Residential premises $550,000

Retained earnings $780,000

Additional information:-

? EEG acquired the business premises on 1 May 2011 for $1,310,000 which included the administration office, factory and warehouse.

? The bank loan in the balance sheet was first obtained by EEG on 1 May 2011 and was used to purchase the business premises. The interest paid on this loan totalled $165,000 for the year ended 30 June 2017.

? The residential premises were acquired from Mr & Mrs Smith for $550,000 on 10 February 2015. However, a registered valuer had advised EEG that the market value of the premises was only $490,000 at the time.

REQUIRED:

A report to Mr and Mrs Smith responding to the issues (a) to (g) raised below. You are required to explain your answers AND refer to relevant statutory provisions, cases and/or rulings as applicable. [CGT small business concessions can be ignored].

(a) EEG decided to relocate its business operations to New Zealand from 1 July 2017 and entered into a contract to sell the business premises on 15 June 2017 for $1,810,000 with legal fees and agent fees on the sale totalling $45,000. The residential premises were also sold on the same date for $670,000 with legal fees and agent fees totalling $12,000. Both sales were settled and the proceeds received on 20 July 2017.

Assuming EEG had carry forward capital losses of $115,000 as at 30 June 2017, calculate EEG's the net capital gain or loss for the year ended 30 June 2017 as a result of the sale of both premises. (7 marks)

(b) The inventory balance of $165,000 recognised in the balance sheet was calculated using the cost valuation method in accordance with the trading stock provisions with Section 70-45 of the ITAA97. The market selling valuation of the trading stock is $245,000 and the replacement value is $190,000 as at 30 June 2017.

Stock ordered from a supplier in Malaysia is on a ship at sea as at 30 June 2017 and EEG has the bill of lading. Although the stock arrived in Australia on 25 July 2017, it has been included in the stock on hand balance at 30 June 2017.

Assuming EEG wants to maximise taxable income, explain to EEG the most appropriate valuation method to adopt for taxation purposes as at 30 June 2017. Also explain whether the stock ordered from Malaysia is correctly included in stock on hand as at 30 June 2017. (4 marks)

(c)EEG has set aside $150,000 for doubtful debts as at 30 June 2017 and $20,000 was written off in bad debts during the year. Also, EEG had set aside $80,000 for annual leave as at 30 June 2017 which is to be paid to employees in the future. The actual payments to employees during the year ended 30 June 2017 for annual leave amounted to $155,000.

Advise EEG on the income tax implications of the provision for doubtful debts and bad debt write offs and the employee annual leave liabilities/payments for the year ended 30 June 2017. (3 marks)

(d) The plant and equipment recognised in the balance sheet was acquired by EEG at a cost of $495,000. EEG made a decision to sell the plant and equipment to another business who paid $190,000 for it on 1 July 2017. The $210,000 that appears in the balance sheet represents the adjustable value of the plant and equipment.

Explain to EEG the tax implications in relation to the disposal of the plant and equipment. (3 marks)

(e) The loan of $50,000 to Mrs Smith was used by Mrs Smith to purchase in June 2012 a vintage motor vehicle built in 1959. The motor vehicle cost $50,000 and Mrs Smith planned to keep it as a long-term investment. Mrs Smith paid interest to EEG of $1,500 over the period of the loan up to including 21 June 2017. As a result of the decision to relocate the business to New Zealand, Mrs Smith sold the motor vehicle on 21 June 2017 for $77,000.

Explain to Mrs Smith the income tax implications of the loan and the sale of the motor vehicle on 21 June 2017. (2 marks). Ignore Division 7A of ITAA97.

(f) Mr and Mrs Smith decide to relocate to New Zealand on 31 July 2017 to oversee the setup of the business there and decide to reside there indefinitely. In addition to their shares in EEG as at 31 July 2017, Mr and Mrs Smith own their family home, a motor vehicle, and shares in ABC Limited, a large publicly listed company.

Explain the CGT consequences of the relocation to New Zealand assuming Mr and Mrs Smith would be considered foreign residents of Australia for the tax purposes from 31 July 2017. (3 marks)

(g) The business is flourishing and expanding rapidly in New Zealand and Mr and Mrs Smith receive an offer on 1 October 2017 to sell their shares in EEG for $500 per share.

Assuming Mr and Mrs Smith are foreign residents as at 1 October 2017, advise the possible CGT implications if they accept the offer to sell their shares in EEG.(3 marks)

ACCG 924 Session 2 2017 (Word limit 1,500 words) Case Study (25%) The case study will potentially cover lecture topics 2 to 7 and related tutorial questions, and is due to be lodged via turnitin and ilearn by 11pm 6 October 2017. YOUR CASE STUDY MUST BE TYPED. NO HAND WRITTEN SUBMISSIONS WILL BE ACCEPTED. THE ASSIGNMENT COVER SHEET TO USE WILL BE AVAILABLE ON ILEARN FOR THIS UNIT. The case study requires students to provide a detailed analysis of a fact situation below applying the taxation laws to arrive at a conclusion and/or recommendations. Guidelines to marking the case study will be provided on ilearn after the case study marks are returned to students. No extensions will be granted. There will be a deduction of 10% of the total available mark from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late in submission - 20% penalty). This penalty does not apply for cases in which an application for disruption of studies is made and approved. No submission will be accepted after solutions have been posted. BACKGROUND INFORMATION Exclusive Emerald Gems Pty Ltd (\"EEG\") is an Australian resident company that manufactures jewellery which it sells directly to retail shops around Australia. The business premises are located in Wetherill Park, Sydney. The company has two directors and shareholders, Mr and Mrs Smith who each hold 100 shares in EEG. These shares were acquired for $100 per share on 10 January 2004 by Mr & Mrs Smith when EEG was incorporated. Balance Sheet of EEG as at 30 June 2017 is as follows:- Assets Cash at bank $120,000 Accounts receivable $190,000 Inventory $165,000 Plant & Equipment $210,000 Loan to Mrs Smith $50,000 Business premises $1,310,000 Residential premises $550,000 Liabilities Trade creditors $325,000 Bank loan $1,250,000 Provision for doubtful debts $150,000 Provision for annual leave $80,000 Shareholders Equity Issued share capital $10,000 Retained earnings $780,000 1 Additional information: EEG acquired the business premises on 1 May 2011 for $1,310,000 which included the administration office, factory and warehouse. The bank loan in the balance sheet was first obtained by EEG on 1 May 2011 and was used to purchase the business premises. The interest paid on this loan totalled $165,000 for the year ended 30 June 2017. The residential premises were acquired from Mr & Mrs Smith for $550,000 on 10 February 2015. However, a registered valuer had advised EEG that the market value of the premises was only $490,000 at the time. REQUIRED: Please prepare a report to Mr and Mrs Smith responding to the issues (a) to (g) raised below. You are required to explain your answers AND refer to relevant statutory provisions, cases and/or rulings as applicable. [CGT small business concessions can be ignored]. (a) EEG decided to relocate its business operations to New Zealand from 1 July 2017 and entered into a contract to sell the business premises on 15 June 2017 for $1,810,000 with legal fees and agent fees on the sale totalling $45,000. The residential premises were also sold on the same date for $670,000 with legal fees and agent fees totalling $12,000. Both sales were settled and the proceeds received on 20 July 2017. Assuming EEG had carry forward capital losses of $115,000 as at 30 June 2017, calculate EEG's the net capital gain or loss for the year ended 30 June 2017 as a result of the sale of both premises. (7 marks) (b) The inventory balance of $165,000 recognised in the balance sheet was calculated using the cost valuation method in accordance with the trading stock provisions with Section 70-45 of the ITAA97. The market selling valuation of the trading stock is $245,000 and the replacement value is $190,000 as at 30 June 2017. Stock ordered from a supplier in Malaysia is on a ship at sea as at 30 June 2017 and EEG has the bill of lading. Although the stock arrived in Australia on 25 July 2017, it has been included in the stock on hand balance at 30 June 2017. Assuming EEG wants to maximise taxable income, explain to EEG the most appropriate valuation method to adopt for taxation purposes as at 30 June 2017. Also explain whether the stock ordered from Malaysia is correctly included in stock on hand as at 30 June 2017. (4 marks) 2 (c) EEG has set aside $150,000 for doubtful debts as at 30 June 2017 and $20,000 was written off in bad debts during the year. Also, EEG had set aside $80,000 for annual leave as at 30 June 2017 which is to be paid to employees in the future. The actual payments to employees during the year ended 30 June 2017 for annual leave amounted to $155,000. Advise EEG on the income tax implications of the provision for doubtful debts and bad debt write offs and the employee annual leave liabilities/payments for the year ended 30 June 2017. (3 marks) (d) The plant and equipment recognised in the balance sheet was acquired by EEG at a cost of $495,000. EEG made a decision to sell the plant and equipment to another business who paid $190,000 for it on 1 July 2017. The $210,000 that appears in the balance sheet represents the adjustable value of the plant and equipment. Explain to EEG the tax implications in relation to the disposal of the plant and equipment. (3 marks) (e) The loan of $50,000 to Mrs Smith was used by Mrs Smith to purchase in June 2012 a vintage motor vehicle built in 1959. The motor vehicle cost $50,000 and Mrs Smith planned to keep it as a long-term investment. Mrs Smith paid interest to EEG of $1,500 over the period of the loan up to including 21 June 2017. As a result of the decision to relocate the business to New Zealand, Mrs Smith sold the motor vehicle on 21 June 2017 for $77,000. Explain to Mrs Smith the income tax implications of the loan and the sale of the motor vehicle on 21 June 2017. (2 marks). Ignore Division 7A of ITAA97. (f) Mr and Mrs Smith decide to relocate to New Zealand on 31 July 2017 to oversee the setup of the business there and decide to reside there indefinitely. In addition to their shares in EEG as at 31 July 2017, Mr and Mrs Smith own their family home, a motor vehicle, and shares in ABC Limited, a large publicly listed company. Explain the CGT consequences of the relocation to New Zealand assuming Mr and Mrs Smith would be considered foreign residents of Australia for the tax purposes from 31 July 2017. (3 marks) (g) The business is flourishing and expanding rapidly in New Zealand and Mr and Mrs Smith receive an offer on 1 October 2017 to sell their shares in EEG for $500 per share. Assuming Mr and Mrs Smith are foreign residents as at 1 October 2017, advise the possible CGT implications if they accept the offer to sell their shares in EEG. (3 marks) 3