The Group

Joe Silkman, Colin Cotton, and David Cloth met many years ago when they were each doing their plastering apprenticeships. Just after gaining their qualifications, they formed a plastering business trading through a partnership where each of them had an equal third interest. After several years, they decided to branch out into residential building and formed Fabric Construction Pty Ltd. This is owned equally by each of their family trusts: the Silkman Family Trust, the Cotton Family Trust, and the Cloth Family Trust respectively. Angela Silkman (Joe's wife) is employed by Fabric Constructions Pty Ltd as the office administrator for the group.

Over the years, Joe Silkman has managed to save and invest more than his friends and has created the Silkman Superannuation Fund which is a SMSF. Joe and his wife Angela are the only members. The beneficiaries of the Silkman Family Trust are Joe, Angela, Nicole (their 19 year old daughter who is studying at university), Adam (their 13 year old son), and Silkman Investments Pty Ltd.

Fabric Constructions Pty Ltd

This company operates the residential building arm of the group and is highly profitable. It pays a salary of $50,000 to each of Joe, Colin, and David, as well as $80,000 to Angela. There are no other employees. For the 2019/2020 year, it made a profit of $900,000 before deducting salaries and associated superannuation costs. It had turnover of $28,500,000 in that year. During the 2019/2020 year, it paid a dividend of $350,000 before any franking credits and paid PAYG instalments of $54,000 for the 2019/2020 year including an amount of $4,500 in July 2020. The opening franking credit at 1 July 2019 was $100,000.

The Fabric Partnership

The plastering partnership completes all the plastering work for Fabric Constructions Pty Ltd and charges a market value fee for these services. It has an accounting profit of $150,000 and a turnover of $1,800,000 for 2019/2020. Included in the accounting profit is a payment of $24,000 in superannuation for Joe Silkman to the Silkman Superannuation Fund. The cheque for this was written on 30 June 2020 but did not get processed/received by the superfunds' bank account until the 1 July 2020.

On reviewing the draft accounts, you also notice the following transactions which had not been included in the profit and loss.

• New equipment costing $15,000 was acquired on 3 April 2020
• A new ute costing $25,000 was acquired on 2 January 2020
• Rent of $12,000 was prepaid for 6 months on 31 May 2020

Silkman Superannuation Fund

Joe and Angela Silkman are the sole members of this superannuation fund. The fund usually receives superannuation concessional contributions for both Joe and Angela from entities within the group as described above. In addition, Angela made a non-concessional contribution of $150,000 during 2019/2020.

You are also provided with the following information in relation to the 2019/2020 year for the Silkman superannuation fund.

• Interest income of $5,500
• Capital gain on shares held for three years of $10,000
• Dividend income of $4,000 from Telstra Ltd
• Life insurance premiums paid of $1,200

Silkman Family Trust

This trust is a shareholder of Fabric Constructions Pty Ltd. It also earns other rental income of $9,500. The estimated distribution to beneficiaries of the trust are:

Joe

15%

Angela

15%

Nicole

25%

Adam

5%

Silkman Investments Pty Ltd

40%

Silkman Investments Pty Ltd

This company is a beneficiary of the Silkman Family Trust and Joe is the sole director of the company. Shares in the company are held by Angela Silkman. The company also invests in its own right. It has several million in cash funds and has several million in prior year earnings retained. However, during the 2019/2020 year, there is a loss before any trust distributions of $5,000.

During the year, Nicole was looking to buy her first home so $400,000 and it was suggested that cash reserves could be used by Nicole for that purpose. She has no intention of paying this amount back.

REQUIRED

Part A

Draft a letter of advice to Joe and Angela addressing the following:

1. Prepare the franking account balance for 2019/2020 for Fabric Constructions Pty Ltd. Explain the impact on shareholders and the company on any issues that arise from this.
2. (5 Marks)
3. Calculate the 2019/2020 net tax payable for Fabric Constructions Pty Ltd.
4. (5 Marks)
5. Calculate the net trust income for the year ended 30June 2020.
6. (2 Marks)
7. Calculate and show the distribution to each beneficiary if the suggested percentages are used. Explain the tax implications for each of the beneficiaries, of their share of the trust income. Assume that no income streaming is used.
8. (7 Marks)
9. Discuss whether there is a better way to distribute the trust income for the 2019/2020 year. Explain your answer and provide new recommended distribution percentages.
10. (5 Marks)
11. Calculate the minimum tax payable for 2019/2020 for Silkman Investments Pty Ltd. Explain any elections made. Assume any distributions calculated in (e) are not used.
12. (3 Marks)
13. Discuss the tax implications of using the $400,000 for Nicole's first home, for both Nicole and Silkman Investments Pty Ltd.
14. (3 Marks)

Your answers should include appropriate legislative, case, or ruling references.

(Up to 2 marks will be deducted for failing to provide references and up to 2 marks for not providing an appropriate letter of advice format.)