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Avoid the Hustle

Australian Taxation Law;

Category: Law

question are indicative of the amount of

information required to comprehensively answer

the question.

While the assignment is largely based on material covered, you are free to research

and seek advice as widely as you find necessary – there are no limitations as to

sources. However, sources should be appropriately referenced.

Note that as the assignment is for assessment purposes, more is expected than just the

calculations in a tax return. If there are any issues that require clarification by you,

you should provide a brief discussion of the matter and justify any conclusions you

may reach. Where there are figures provided without adequate justification, marks

will not be awarded.

All calculations are to be performed with reference to months and not days.

The assignment is to be submitted online in Moodle. Submission must consist of

one (1) document only. This document must be in Word format only ie .doc or

.docx.

Question 1

Phoebe, aged 52, works for the Reef Protection Agency in Queensland and has done

so for 18 years. Phoebe owns two rental properties. One is in Airlie Beach and the

other is in Cairns.

Phoebe’s Cairns property is a little beach house, one of only a few on a secluded

beach. She purchased the house in July of 1995 while on vacation in Cairns one year

for $250,000. The current tenants are paying $2,400 per month.

Phoebe incurred the following expenses during the 2104/15-tax year in relation to her

Cairns beach house:

• Repairing the verandah (completed 28th February 2015) $2,400

• Interest on loan $12,000

• Land tax $300

• Gardening maintenance fees $800

• 4 identical fans at $245 each (Note 1) $980

Note 1 – The fans were installed on the 30th of September 2014 by a qualified

electrician and have an estimated useful life of 6 years.

The Airlie Beach property is a three-bedroom house overlooking the Whitsunday

Islands for which she charges $2,000 per month in rent. She purchased the house in

February of 1986 for $67,000 and it is now worth $450,000.

The Airlie Beach property has caused a little more trouble for her during the year.

The tenants she had for many years were relocated to Gladstone on the 31st of October

2014. She struggled for 6 months to find new tenants with very little interest by

prospective clients. She finally secured an elderly couple when she dropped the rent

to $1,500 per month and they moved in on the 1st of May 2015.

Phoebe incurred the following expenses during the 2104/15-tax year in relation to her

Airlie Beach property:

• Interest on loan $18,000

• Advertising costs $900

• Photography fees for professional photos of the house $600

• Flight for Phoebe and her friend to Airlie (Note 2) $800

• Hotel accommodation for both of them for 2 nights (Note 2) $500

Note 2 – Phoebe’s friend Ann who works at the agency with Phoebe travelled with

her to Airlie Beach to inspect the property. Ann owns a number of rental properties

and accompanied Phoebe to Airlie Beach to give her advise on how to best get her

property rented.

a) Advise Phoebe on the income tax treatment for the current year on her two

investment properties. Calculate the amount that should be included in Phoebe’s

income tax return in relation to the two properties. (24 marks)

Your advice must be supported by reference to legislation, case law, and principles of

tax law. It is not sufficient to merely state an amount is deductible or not. Where there

are options available or assumptions to be made, please state the available options

and/or assumptions made. Calculations to be performed based on months not days.

b) Explain in your own words, the term ‘negative gearing’ in the context of the

Airlie Beach property. (6 marks)

Question 2

Sam, Matt and Ben are three brothers that are equal partners in a charter boat business

that operates out of Brisbane. They offer day trips to Moreton Island and have earned

$600,000 for the 2014/15-tax year. As their business has proven so popular, they had

to hire a deckhand to help out on the boat, which cost them $60,000 for the year. The

interest payments on the boat were $10,000, with the cost of fuel amounting to

$20,000. Food, drinks and other guest related expenses cost the brothers $6,000.

As Ben was the Captain and provided the entertainment that has made the day trip so

popular the partnership decided to give Ben a bonus of $20,000.

Explain the income tax treatment of the above business and the tax consequences

of the transactions for Ben. You are expected to calculate Ben’s total tax payable.

(20 marks)

Your explanation and calculations must be supported by reference to legislation, case

law, and principles of tax law.

Question 3

a) Fiona is given a rare painting from her mother valued at $60,000 as a present for

her birthday, on the 1st May 2015. Her mother acquired the painting in 1990 for

$5,000. (5 marks)

b) Eddie bought a three-bedroom house in Darwin in January 2003 and moved in

straight away. Work however, transferred him to Melbourne and he had to move

out in July 2004. He luckily was able to rent out his house immediately. Because

he is able rent out his home so easily and receives a big salary increase in the

move to Melbourne, Eddie purchases an apartment for himself in January 2005.

As Eddie likes Melbourne so much and has no intention of moving back to

Darwin he sells the Darwin property in January 2007. (8 marks)

c) On the 11th January 2014, in exchange for the sum of $40,000 John granted to

Farm Ltd, an option to purchase his 100-acre farm just outside Adelaide for the

sum of $800,000. John had purchased the farm 10 years ago. (4 marks)

d) Chris bought 12,000 shares in Qantas for 45 cents on the 1 August 2012 and they

are now trading at $1.56. The same day he also purchased some shares in Westco

for $5.20 but they are now trading at only $2.10. Chris is considering selling both

his Qantas and Westco shares on the 1st August 2014. (8 marks)

What are the CGT consequences of the above transactions?

Question 4

(10 marks)

From the Income Tax Assessment Act 1997, identify the statutory reference for:

a) three exempt entities

b) three assets that are exempt

c) three situations in which a gain or loss is reduced

d) one exempt transaction

Question 5

Jerry is an accountant that loves fishing. He owns a 50-foot sports fishing boat and

also has a commercial fishing license. He is dedicated about going out every other

weekend for three days. His son and two mates, John and Scott usually go with him.

They are paid in fish for their efforts and all the extra fish they catch is sold to the

local fish wholesaler. Jerry just likes to fish for any fish he can and is not bothered

about making sure that he finds the fish with the best market value. Jerry has no

business plan and is not particularly worried whether his costs are covered by the sale

of his fish.

Is Jerry conducting a business of fishing? (15 marks)