Questions 1-4

TABL2751 - TRIMESTER 2 2019 PAST EXAM QUESTIONS Note that the questions below often refer to earlier years as they are from old exam papers. o For companies, you can assume a tax rate of 30%% Please note in your actual exam you will be required to determine whether a company is a base rate entity based on the information provided. However, when these questions were used, all companies were subject to a 30% tax rate. o For individuals, you can use the current (i.e. 2019 year) tax rates. QUESTION ONE (suggested time: 60 minutes) Funzone Pty Lid ("Funzone") is an Australian company. It conducts a business selling children's toys. Details of stock during the year were as follows: (All amounts are shown at cost value). Opening stock Purchases during year Closing stock Toy A $200,000 $500.000 $250.000 ToY B $150.000 $600 000 $500 000 Sales during the year were $700.000 (Toy A) and $350.000 (Toy B). Of the sales, $150,000 represented invoices issued in the month of June 2011 for which payment had not been received as at 30 June 2011. Other income received by Funzone for the year included: . A dividend of $100.000 received from Kangaroo Bank Lid (an Australian resident public company for tax purposes) franked to 50% An unfranked dividend of $50,000 from Green & Gold Ltd (an Australian resident public company for tax purposes) Funzone also holds 10 units in the Toy Chest Unit Trust. Under the terms of the unit trust Funzone is entitled to distributions of 10% of the income of the unit trust. The income of the trust estate for the year ended 30 June 2011 was $220,000, and the net income of the trust estate was $200,000. Salaries for Funzone staff for the year were $120.000. Other deductible expenses for the year were $150,000. Unfortunately, during the year. a child suffers an eye injury whilst playing with Toy B. and Funzone is sued as a result. Funzone is denying liability, but so far has incurred $25,000 in legal fees. As at 30 June 2011. the lawsuit has not been settled. Due to the bad publicitysurrounding Toy B. Funzone is now faced with a large volume of stock that is unlikely to be sold For the year ending 30 June 2011 Funzone Pty Ltd paid a total of $120,000 in instalments of tax (you can assume these were made in equal instalments). Any final payment of tax required for the 2010-11 income year is paid on 31 October 2011. Assome all figures are GST exclusive REQUIRED a) Calculate Funzone Pry Lid's income tax liability in respect of the income that it derived in the 2010-2011 year of income. 8 marks b) Assume on 1 July 2010, the balance in Funzone Pty Lid's franking account was $50,000. Construct Funzone's franking account for the 2010-11 financial year, and calculate the franking account balance as at 30 June 2011 AND 31 October 201 1. 4 marks c) Onl November 2011, Funzone Pty Lid declares a dividend of $400,000. Assume that apart from the transactions in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that Funzone Pty Ltd can attach to this dividend. Assuming Funzone Pty Lid does not want the franking account to go into deficit at the time the dividend is declared, advise Funzone Pty Ltd of the percentage to which it should frank the dividend 3 marks d) Assuming Funzone franks the dividend to the percentage you recommended in (c) above. comment on the tax treatment of the dividend to the following shareholders: Adrian: receives a dividend of $5,000. Adrian is an Australian resident at the highest marginal tax rate. Joseph: receives a dividend of $5,000. Joseph is a non-resident. You can the country in which Joseph resides does not have a double tax agreement with Australia. 4 marks e) As noted in the facts, Funzone has a large quantity of stock of Toy B left on hand. The market value of the stock is now lower than the cost price. Funzone seeks your advice as to whether they can revalue the stock at a lower price. Briefly advise Funzone whether they are able to revalue the stock and if so, how they can value it. 3 marksQUESTION TWO (suggested time 60 minutes) Theta Lid ("Theta") is an Australian resident company that carries on business as a clothing retailer. Details of Theta's income during the year is as follows: . Sales: $900.000. * A dividend of $50,000 received from Sigma Lid (an Australian resident public company for tax purposes) franked to 50%. The dividend was declared on 1 August 2012 and received on 15 September 2012. A fully franked dividend of $80,000 from Delta Ltd (an Australian resident public company for tax purposes). The dividend was declared on 30 November 2012 and received on 5 January 2013. Theta holds 10%% of the units in the Alpha Unit Trust. Under the terms of the trust deed. Theta is entitled to 10% of the income from the Alpha Unit Trust. For the year ended 30 June 2013, the income of the Alpha Unit Trust was $150,000. The net income of the trust was $180,000. Per the trust deed. 10% of the income was distributed to Theta on 30 June 2013. Theta had the following expenses during the year. . $160.000: staf salaries and superannuateon In addition, the company made a provision for annual and long-service leave of $20,000. $95,000: other expenses (all deductible under ITAA97 s 8-1). $80,000: rental of business premises $250.000: purchases of trading stock. (Trading stock was valued at $90,000 (cost price) on 30 June 2012. Closing stock (at cost) was $80,000). (Theta has always used the cost method of valuing stock for tax purposes and has no intention of changing this practice). In addition to the above expenses, on 1 October 2012, there was a break-in at one of the clothing stores. $1,000 in cash was stolen. Two large windows were smashed, and having the glass replaced cost $600. As at 1 July 2012 the balance in Theta's franking account was $10.000. On 28 July 2012. Theta makes their final PAYG instalment for the 2011-12 year of $20,000. On 31 October 2012, Theta receives a refund of $8,000 in relation to the 2011-12 year. For each quarter in the 2012-2013 year (i e. quarters ending 30 September 2012; 31 December 2012: 31 March 2013: 30 June 2013): Theta makes a PAYG instalment of $15,000. Any final payment of tax (or any refund due) for the 2012-13 year is paid'refunded on 1 October 2013.Assume all of the above figures are GST exclusive. You can ignore any GST consequences for the purpose of answering the below questions. Required (answer all parts): a) Calculate Theta's tax liability for the year ended 30 June 2013. Ensure you provide an explanation of your treatment of each transaction (1? marks) bj Calculate the franking account balance as at 30 Jume 2013 AND 1 October 2013. (4 marks) c) On 2 October 2013, Theta declares a dividend of $500,000. Assume that apart from the transactions previously stated in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that Theta can attach to this dividend Assuming Theta does not want the franking account to go into deficit at the time the dividend is paid. advise Theta of the percentage to which it should frank the dividend (2 marks) d) Assume Theta franks the dividend to the percentage you recommended in (c) above. comment on the tax treatment of the dividend to the following shareholders: . Jack: receives a dividend of $10,000. Jack is an Australian resident at the highest marginal tax rate. . Jill: receives a dividend of $8,000. Jill is a non-resident. You can assume the country in which Jill resides does not have a double tax agreement with Australia. (4 marks) QUESTION THREE (suggested time: 45 minutes) Drew is an Australian resident taxpayer who is a qualified electrical engineer. He is employed by a large Australian public company. ElectricAir Lid. Drew is paid a salary of $110,000 per year, and Electric Air also pays the 9.5% compulsory superannuateon contribution imposed on employers, into the superannuateon fund chosen by Drew. On 1 July 2017, Drew enters into a salary sacrifice agreement with his employer. Under this agreement, Ben will $10,000 of his $1 10,000 salary, which his employer will contribute to his nominated superannuateon fund ElectricAir pays Drew's private health insurance at a cost of $2,500 per annum ElectricAir also pays for an annual gym membership at a cost of $1,300 per annum and Drew's annual membership fee to the Institute of Electrical Engineers, at a cost of $700 per annum. All of these costs were incurred by ElectricAir on 1 July 2017.Drew incurred the following expenses in the year ended 30 June 201 8: . Donation to the Australian Red Cross (a deductible gift receiptent): $500 Train fares to and from work: $1,600 Taxi fares to attend client meetings: $400. These costs were reimbursed by his employer. Mobile phone bills: $900. Drew estimates that 20%% of his mobile phone usage is work related. Drew is also a beneficiary of a discretionary trust. For the 2017-18 year, the income for the trust available for distribution was $80.000. The net income of the trust for tax purposes was $90,000. On 28 June 2018. Drew is told by the trustee of the trust that he has been allocated/distributed $20,000 of the trust's income for the 2017-18 year. The remainder of the income is to be retained in the trust. You should assume all amounts listed in the above question are inclusive of GST (if GST is applicable). Required: ") Calculate Drew's taxable income for the year ended 30 June 2018. You should explain the reason for including or excluding the amounts referred to in the facts in the calculation of taxable income. 12 marks b) What are the tax consequences to the trustee of retaining $60,000 (re. the trust income that was not distributed to Drew) in the trust? 2 marks c) Calculate Electric Air's fringe benefits tax (FBT) liability for the FBI year ended 31 March 2018 showing the basis of your calculation. 6 marks QUESTION FOUR (suggested time 38 minutes) Alexander McNeil is a lawyer based in Sydney. He commences a new job with Cyan Lid on 1 July 2012. His base salary is $80,000 per annum plus 9% compulsory superammiation. On 30 June 2013, Cyan Ltd announces that he will receive a bonus of $8,000 in his next pay (to be paid on 10 July 2013) for his outstanding performance during the 2012-13 year. Alexander is married to Jeri. Approximately three years ago, Jeri and Alexander started a business as a partnership, providing management consulting advice to small businesses. The partnership agreement states that any profits (or losses) are to be distributed 60% to Jeri and 10% to Alexander. Additionally. as Jeri is primarily responsible for running the business, she receives a salary of $60,000.Business income of the partnership for the 2012-13 year was $250,000. Expenses for the year (all related to the business) were $180,000- this includes the $60.000 salary paid to Jeri. Jeri owns a small share portfolio. She sells the following shares during the year Shares Date Purchase cost Date sold Sales price purchased Chip Lid 1 March 2008 $5.000 1 September $12,000 2012 Dale Lid 1 February 2012 $10,000 1 September $16.000 2012 You can assume there were no other costs associated with the purchase or sale of the shares. Jeri has always held her shares as a passive investor - that is, she has never been considered a share trader. On 1 October 2012, Jeri sold a painting she had purchased on 1 March 2009. She purchased the painting for $8,000, and sold it for $6.000. The only cost associated with the sale was $50 to advertise the painting for sale in a local newspaper. Assume all of the above figures are GST exclusive. You do not need to consider GST in answering the below questions. Part A Calculate the net income of the partnership for the year ended 30 June 2013. (4 marks) Part B Calculate Alexander's taxable income for the year ended 30 June 2013. (4 marks) Part C Calculate Jeri's taxable income for the year ended 30 June 2013