Question 1 (27 marks) Assignment Part 2 is the continuation of Assignment Part 1, involving the tax affairs of Hektor Aroma. In Assignment Part 1, you were required to calculate assessable income based on the information provided. For this second part, you should assume that his assessable income is $136,400 and take that as the starting point to deal with the following additional information (which is relevant for the year ending 30 June 2021, the 'current income year', unless otherwise stated) to determine Hektor's taxable income and tax payable including Medicare levy for the year ending 30 June 2021. 1. In the current income year, Hektor purchased the following items for the amounts specified for making coffee for sale in his business: Coffee beans Water Milk $20,000 $15,000 $9,500 He also purchased $3,000 in cakes and biscuits from his mum to sell either with the coffee or separately. In addition to these, Hektor was invoiced $500 for coffee beans on 20 June 2021. He did not pay that until 10 July 2021. Milk is a perishable item, even when refrigerated, so Hektor does not store significant quantities of it. Similarly, with the cakes and biscuits which are baked in small quantities every weekend and are generally sold out during the week. While water has a longer shelf-life, it simply is not practical to store large quantities of it. It is much easier to purchase a week's worth of milk and water at a time, store it in a refrigerator at his home and bring in the quantities he needs each day in an esky. While Hektor may not get the best price for milk and water, he believes that purchasing it this way saves him money in the long run due to less wastage. Hektor estimates that the amounts of these items that he had in storage at the end of the current and previous financial year would have cost him $75. While Hektor has a room set aside for roasting beans using his own methods and equipment, he does not have a bean storage facility due to the prohibitive cost of building an airtight and temperature-controlled environment and maintaining it. Once he has roasted the beans, he takes them to a special storage facility operated by a consortium of bean roasters who each pay a membership fee to operate the facility and store their beans there. Each roaster's beans are kept separate and Hektor can collect his beans at any time in the quantities that he needs. Hektor estimates that at the end of the current income year, he had beans costing $200 at home currently undergoing the roasting process while he had beans costing $3,000 in storage. At the end of the previous income year, he had beans costing him $100 at home being roasted and beans costing him $1,000 in storage. 2. Having attended business school, Hektor knows that branding is very important for building a successful business in the long-term. Part of building this brand involves wearing Espresso Love polo shirts while serving customers and while travelling to and from the cart during his working days. Sometimes he would wear the shirts at social functions where he knew he would meet new people with the aim of increasing public awareness of his coffee business. He has 7 shirts in total (so he could wear a clean one every day) which cost $300 to manufacture. Working outside means being exposed to the sun, especially in the summer. To protect his skin and reduce the risk of getting skin cancer, Hektor wore sunscreen costing him $50 and an Espresso Love hat that cost him $40. 3. One day, Hektor noticed that the coffee grinder was not working as efficiently as it used to. The coffee was grinding too coarsely which did not allow the flavour to be extracted from his carefully roasted beans. He had the grinder blades sharpened at a cost of $25. 4. Other business expenses incurred for the current income year amounted to $30,000. This amount is to be treated as deductible for the purpose of the assignment. 5. Hektor's PAYG Instalments for 2021 amounted to $9,000. He has private health insurance including hospital cover. Please ignore the private health insurance rebate. 6. Assume that all amounts herein are either exclusive of GST or are free of GST input tax credit entitlements, as appropriate. In other words, the effect of GST should be completely ignored. Similarly, with small business concessions. Required In your own words and on the basis of the provided information, calculate Hektor's taxable income and tax payable (including the Medicare levy) for the income year ending 30 June 2021. Justify your answers with reasonably arguable positions citing all relevant law. Please note the following: Do NOT treat this as an accounting exercise. This is a law exercise and marks are awarded for the use of the 'cite, describe, apply' approach. Issues are NOT weighted equally in marks. Issues that require more law to be applied have more marks allocated to them. The numbered points above may contain more than one tax issue. Information provided in one point may be relevant to other points. Use information provided in assignment part 1 where relevant and appropriate. 2021 Resident Individual tax rates Taxable Income 0-$18,200 $18,201-$45,000 $45,001 - $120,000 $120,001 - $180,000 $180,001 and over Tax on this income Nil 19c for each $1 over $18,200 $5,092 plus 32.5c for each $1 over $45,000 $29,467 plus 37c for each $1 over $120,000 $51,667 plus 45c for each $1 over $180,000 These rates do not include Medicare levy of 2% of taxable income for individual taxpayers. There is an additional Medicare levy surcharge that is payable if the taxpayer does not have private health insurance with hospital cover and has taxable income above a certain amount. Medicare levy surcharge is not payable by taxpayers who have private health insurance including hospital cover.