QUESTION Fred Mak is a tax agent who works as a sole practitioner. Fred used to work with your supervising tax agent Alex Wally when they were new graduates at a Big4 firm, and they have known each other for many years. Fred has received a sanction from the Tax Practitioners Board for breaching the Code of Professional Conduct set out in the Tax Agent Services Act 2009 (TASA) where he is required to work under the supervision of another registered tax agent. Alex is supervising Fred. Fred has sought advice from Alex in relation to his client Lucy Liu. Lucy works as a senior executive at a major Australian Bank, earning a salary of $350,000 per year. Fred and Alex attended a meeting with Lucy last week. She wants her tax return prepared for the 2023 income year. Alex has given you his notes from the meeting and wants you to memorandum explaining the tax implications of Lucy's income and expenditure during the 2023 income year. He also wants you to calculate Lucy's income tax payable for the 2023 income year. Lucy also asked questions about her children's tax affairs (daughter Millie and son Tom), as well as for her father Trevor and her aunt Clare. Alex wants your advice on the issues raised in respect of Millie, Tom, Trevor and Clare as well. Fred has also asked Alex about some issues that he has encountered in his tax practice to do with the Tax Practitioners Board and the ATO. Alex wants you to consider these issues in your memorandum.

Share Investments Lucy has a large share portfolio. She holds the shares for the dividends and any capital gains that may arise.

Norman Harvey Limited

Lucy acquired 10,000 shares in Norman Harvey Ltd in July 2010 for $5.50 per share. She borrowed money to purchase the shares. In the 2023 income year she received $1,400 in partly (50%) franked dividends. The interest payable on the loan was $3,000 in the 2023 income year.

ABC Limited In 2015, Lucy acquired 25,000 shares in ABC Limited, an online sales business, for $0.65 per share. The incidental costs of acquisition of the shares were $140. ABC Limited has not paid any dividends during the time Lucy owned the shares due to poor trading conditions. In the 2023 income year, for the first time, Lucy received a capital return of $0.15 per share from ABC Limited.

Lucy's Daughter Millie's Tax Affairs Lucy also asks Alex a question about her daughter Millie's tax affairs. Millie is 16 years old. In the 2023 income year, Millie receives $12,000 income from a discretionary family trust created by her grandmother (who is still alive). Millie also earns $16,000 working weekends at Sephora, and $4,000 being her share of the profit from a second-hand bookstore which Millie operates in equal partnership with her two school friends also aged 16, out of her parent's garage. Lucy would like to know about the tax implications of the above transactions for Millie. Lucy's Son Tom's Tax Affairs Tom is an employee of XYZ Limited. On 1 December 2022, the company introduced a non-discriminatory employee share scheme to all employees whereby Tom has the opportunity of acquiring 20,000 $1 ordinary shares in XYZ for $3.60 per share, a 10% discount on the current market value of $4 per share. Tom takes advantage of this opportunity on 10 December 2022 and acquired the shares at $3.60 per share. He then sold the shares on 20 June 2023 for $9.00 per share. The shares offered under the employee share scheme are not at real risk of forfeiture. The incidental costs of disposal of the shares is $200. Lucy would like to know about the tax implications of the above transactions for Tom. Lucy's Father Trevor Trevor receives a superannuation lump sum of $500,000 at age 60. His superannuation lump sum includes a tax free component of $300,000, and a taxable component in the fund of $200,000. Assume that the payment is from a superannuation fund that is a taxed fund. Lucy would like to know about the tax consequences for Trevor arising from the receipt of the superannuation lump sum. Lucy's Aunt Clare Clare has just received an amended assessment that shows a significant increase in her taxable income and tax payable. She thinks the ATO is being very heavy handed in their approach to her and is treating her unfairly. Lucy wants to know whether Clare can challenge the amended assessment - could she claim that it is invalid and excessive? What are her options for challenging the assessment? In relation to each avenue of challenge, at a basic level, what does Clare need to show? Fred's Activities as a Tax Agent The TPB conducted aa further investigation into Fred's conduct and, as a result of this investigation, received evidence that: a number of taxpayers whose 2016 and 2017 tax returns were lodged by Fred were subject to ATO audits. As a result of these audits, the ATO made significant adjustments to claims in these returns, including for work-related expense deductions and tax offsets, and imposed administrative penalties on these clients. These decisions were based on findings that various claims were made by Fred without any nexus to a work-related activity, were not reasonably substantiated and/or were unsupported estimates. In one case, Fred had created a logbook in order to respond to an ATO request for substantiation during the audit Fred had accessed the taxation records of taxpayers on the ATO Tax Agent Portal on three occasions without authorisation. Fred is worried that these actions would constitute further breaches of the Code of Professional Conduct but he is unsure which Items apply. He is also worried that the TPB may terminate his tax agent registration. Advise Fred about whether he has breached the Code of Professional Conduct and whether the TPB would be justified in terminating his tax agent registration.

Required Using legislation and case law: (a) Explain to Lucy whether: i. Any amounts in respect of the above-mentioned transactions would or would not be included in her assessable income under the income tax legislation for the 2023 income year; ii. Any of the amounts in the above-mentioned transactions would or would not be allowable deductions to her under the income tax legislation for the 2023 income year. Show calculations where appropriate. A calculation of Lucy's net capital gain/loss for the 2023 income year may be required. If you need to make certain assumptions, state them in your answer. (b) Calculate Lucy's taxable income and income tax payable for the 2023 income year. If you need to make certain assumptions in performing the calculation, state them in your answer. (c) Provide advice on the tax issues faced by Millie, Tom, Trevor,