Question Description

Jim Lee and his wife Mary Lee are the two directors of the private company, Darwin Accounting Services Pty Ltd. On 1 July 2003 a Deed of Settlement was executed establishing the Darwin Accounting Services Trust. The trust accounts for the consulting business for the year ending 30 June 2018 disclose the following:

Receipts

Consulting receipts $524,000

Interest see note (iv) 1,800

Exempt income 40,000

Capital gain from the sale of shares in an Australian company see note (v) 40,000

Dividend from BHP fully franked 16,540

Expenses

Rent 40,000

Salaries to employees including 127,000 PAYG Withholding of $18,000 paid to ATO

Salary to Jim Lee including PAYGW $23,000 95,000

Salary to Mary Lee including PAYGW $15,000 50,000

Payment of Jims golf club subscription 1,000

Superannuation contributions for employees 15,674

Superannuation contributions for Jim and Mary (50% each) 50,000

New computer system (effective life 4 years) 19,000

New motor vehicle for Jim and Mary (viii) 86,500

Notes - Additional Information Darwin Accounting Services Trust

(i) The Trust is a discretionary trust and Jim and Mary have as the trustees full discretion as to how the net trust income will be distributed.

(ii) The trust is registered as a Small Business Entity (SBE).

(iii) The Trust is registered for GST and all figures are exclusive of GST.

(iv) Net interest of $1,800 from Singapore after withholding tax of $200 was withheld.

(v) The trust purchased the shares in January 2018 and sold them on 31 May 2018.

(vi) On 10 January 2018 one of the employees was robbed at gunpoint of the consulting receipts of $26,000 while on the way to the bank.

(vii) In the income year ending 30 June 2017, the trust made a loss of $120,000 in respect of the consulting business. The reason for the loss was a negligence action brought by an unhappy client who received negligent tax advice relating to capital gains tax. The business was sued for $3 million and the insurance company only paid a portion of the damages.

(viii) The vehicle has an effective life of 8 years and is used 100% for business purposes.

The trustees resolved to distribute the net trust income as to 50% to Jim and 50% to Mary. It is important that you take note of the separate items of income when accounting for the distribution. This means that the capital gain, dividend and exempt income are treated as retaining their original characteristics after distribution.

Jims individual personal records reveal the following:

Receipts

$90,000 Salary paid by the trust

$ 6,000 Rental income from a rental property . Distribution from the trust, amount to be determined from the above figures

Expenses

$8,000 Interest on money borrowed to purchase the income producing property

14,000 Medical fees for Jim and Mary

3,500 Motor vehicle costs associated with Jim using his own car for work purposes using the cents per kilometre method

1,500 Professional membership fees

Notes - Additional Information Jims individual activities (i) In the income year ending 30 June 2018, Jim made a trading loss of $36,000.

(ii) Jim made a capital loss of $12,000 from the sale of shares on 20 June 2005.

(iii) The trust paid Jims expenses of $3,000 to attend an accounting conference in New Delhi.

(iv) Jim and Mary have private hospital insurance.

REQUIRED

1. Calculate the trust net income for the year ended 30 June 2018.

2. Then calculate Jims share of the net income from the trust and his own personal tax liability for the income year ended 30 June 2018.