LEGL300: Jim Income Activities, John Accountant and a Tax Resident, Tom Ltd is Incorporated in Australia - Taxation law Assessment Answers

Part A Jim carries on income producing activities in two different locations. During the week he works as a barrister in Sydney in the central business district (CBD). Sometimes during the week he also has to go to courts located in various suburbs in Sydney to represent a client. On the weekends he works on his farm at Cooma. The farm is a commercial enterprise.

Advise Jim on the deductibility of travel costs in respect of the following travel:

1) driving from his office in the CBD to another court located in a suburb in Sydney

and then driving home; 2) driving from his office in the CBD directly to the farm in Cooma, with 4 big folders

of file he intend to review there; 3) driving from office in the CBD to home and then to the farm in Cooma.

Part B John, an accountant and a tax resident, has provided you with the following information relating to himself for the 2013 income year:

1. He sold a laptop for $500 on 30 June 2013. The laptop was purchased for $2,500 on 1 July 20011. He has self assessed the laptop to have an effective life of 3 years and he has used the straight line method of depreciation for tax purposes. He used the laptop 100% for work purposes.
2. On 12 November 2012, he sold his golf clubs for $15,000. He originally acquired them for $1,000 in 2007. The clubs had dramatically increased in value after Tiger Woodsautographed them in 2007 during his practice hit out in Australia at the golf course where Mark regularly plays.

3. He signed a contract to sell his rental property on 25 June 2013 for $400,000. The title to the property was transferred on 31 July 2013. The property originally purchased in 2007 for $300,000.

Advise Ian of the income tax consequences of each of the above items. Show your calculation process where appropriate and provide relevant case law, ATO rulings and section references to support your answer.

Part C Tom Ltd is incorporated in Australia. It is a retailer who sells clothes to the public. The following transactions occurred in the year ended 30 June 2013.

1. The company purchased $180,000 stock during the income year. The openingbalance of its stock was $120,000 and the closing balance was $160,000.

2. The company paid $10,000 bonus to its Chief Executive Officer.
3. The company also sells goods to customers on credit. During the year, a numberof customers owing a total of $15,000 defaulted on their accounts.

4. A competitor has recently applied to the council for permission to operate as a clothes retailer in the commercial building next to Tom Ltd. Tom Ltd incurred $30,000 in legal fees opposing the application. The action was successful.
5. During this year, Tom Ltd received $35,000 fully franked dividend; and paid $15,000 income tax. It also declared and paid $280,000 fully franked dividend to its shareholder (you can assume the open balance of franking credit account is zero).

Advise Tom Ltd of the Australian income tax implications of the above transactions. Provide relevant case law, ATO rulings and section references to support your answer.

PART A

1. Driving from his office in the CBD to another court located in a suburb in Sydney and then driving home

Deductibles are the reductions on the net taxable income of a taxpayer that are subtracted to lower the amount of tax that the individuals will eventually pay as tax. The deductibles result from the expenses that the taxpayer incurred while earning the assessable income. The general rule on vehicle and travel expense deductions is that you can only claim deductions for trips you made for business. If you use the same vehicle for business and personal travel, you will be allowed to claim deductions for the mileage covered on business trips only. The legislation on vehicle and travel expenses further specify that, if you make a single journey of which part of it is for business and the rest is personal, you need to determine what percentage of the journey was meant for business.

The information provided indicates that you make trips from your CBD office to the court in the Sydney suburb, then you head home from the Sydney suburb court. In this case scenario, first, you will need to determine the length of the journey between home and the CBD office. Since this portion of your travel is part of travel for work, vehicle expenses incurred here can be added to the deductibles. Then, you will also need to determine the length of the journey between the CBD office and the Sydney suburb court. This is referred to as direct travel between two workplaces. This fraction of your journey also forms part of your travel on business. It can therefore be included in the deductibles claims. The last section of the journey from the Sydney suburb court to home completes your daily travel itinerary and is part of your work-related travel. Hence, vehicle expenses incurred during your journey from the Sydney suburb office to your home can also be claimed for tax deductions. It is worth noting that the last portion of the daily itinerary where you travel from the Sydney suburb court to the home should not be interpreted as personal travel since you are travelling home. Rather, it is only logical that it is interpreted as work-related travel since there are on personal activities that are carried out during this period.

2. Driving from his office in the CBD directly to the farm in Cooma, with 4 big folders of files he intends to review there

This case scenario may look confusing with regard to classifying the travel from the CBD to the farm in Cooma. Even though this farm is not within your daily work-related travel, the farm is a commercial enterprise; and as such, commercial activities conducted at the farm are liable to taxation. Assuming that the farm generates assessable income, it will be considered as part of your work. Furthermore, you travel from the CBD court to this farm with the intention of reviewing files which are part of your work. This can also be interpreted as part of your work and therefore, you can claim deductions for the travel expenses incurred in this part of your journey. ATO legislation allows a claim for deduction if you need to carry your bulky work tools that you could not leave at the office. The four big folders you carry with you to your farm shall be interpreted as the bulky work tools that you must carry away from the workplace.

3. Driving from the office in the CBD to home and then to the farm in Cooma.

Driving from the CBD office to home is a work-related travel if you travel directly between the two places. If you make stopovers between the two locations during your journeys, it cannot be considered as a work-related travel. However, assuming that from the CBD office you drive directly to your home, you will be allowed to claim for deductions for vehicle expenses incurred in this period.

The drive from home to the farm in Cooma will be interpreted as a work-related travel only if your intention for travelling is an operation required by the farm. You will not be eligible for a vehicle and travel expense deduction just because the farm is a commercial enterprise. The income and deduction legislation on travel between home and work and between workplaces specifies that you cannot claim a deduction for a travel happening outside your regular work hours. Therefore, for example, if you go from home to the farm to see your workers, you cannot make a claim for deduction of the vehicle expenses incurred here.

PART B

1. Income tax consequences of selling the laptop

The sale of the laptop or any tool or equipment used for your work is regarded as disposal of an asset. Asset disposal is a capital gains tax (CGT) event if interpreted using the ruling on CGT consequences on capital gains. Therefore, this sale will attract a capital gains tax which you will be required to declare. Since the transaction was made on 30th June, it belongs to the 2013 tax year and therefore, you will be required to declare it in your 2013 tax returns. We need to find your tax consequence; that is what you are required to remit to the ATO as tax resulting from a CGT event.

To find your tax liability, first, we will need to determine the CGT proceeds that resulted from the disposal of the asset. Then, we will consider depreciation of the asset based on the straight line method to make a depreciation claim on your income tax. From the information provided we can see that there was a capital loss. We shall therefore calculate the capital proceeds for the purpose of determining assessable income as follows:

Capital gains proceeds = ($2500 - $500) = -$2000

The negative CGT proceeds mean that there was a capital loss rather than a capital gain. A capital loss cannot be claimed be claimed against an income, but rather, you will be allowed to include it in your tax deductions for the following tax year. Your tax liability will be estimated as follows:

Taxable income * Income Tax rate

= 500 * 28.5 %

= $ 142.5

This is the amount of tax that you will be required to pay as tax from the sale of the laptop

2. Tax consequence upon selling the golf clubs

The ATO rulings on CGT tax consequences will interpret the sale of the golf clubs as income resulting from the sale of an asset. Therefore, the transaction will attract a capital gains tax. To determine your tax liability, we will find the proceeds from the sale of the clubs then apply the appropriate tax rate. The proceeds from the sale of the club were $ 15,000 - $1,000 = $14,000. Therefore, your tax liability will be:

$14,000 * $28.5% = $3,990

3. Tax consequence upon contract to sell the rental property

Before calculating the CGT proceeds and hence the tax consequence of this CGT event, it is important to note that the CGT event is regarded to have happened upon signing the contract and not upon its settlement unless the asset transfer does not involve a contract. In the latter case, we will consider the CGT event to have happened when you cease being the owner of the asset. To determine your tax liability we will apply the relevant tax rate on the proceeds from the CGT event. Therefore, the tax liability will be:

CGT Proceeds * Tax Rate

= ($400,000 - $300,000) * 28.5%

= $28,500

This is the amount of tax that you will be required to pay upon the sale of the house.

PART C

1. Tax implication on sale of stock

The sale of the stocks is regarded as a CGT event and is therefore liable for a capital gains tax. You will be required to pay an income tax if you made any sales during the income year. From the information provided, you made sales of the stock worth $160,000 - $120,000. Therefore, your tax liability will be:

$40,000 * 10% = $4,000

2. Tax implication on payment of bonus

Upon payment of the bonus to the CEO, the CEO will be required to pay taxes as this is regarded as an income.

3. Tax implication with regard to credit defaulters

If your debtors default, you will undergo a loss in that income year. Therefore, you can make a claim for tax deduction in the following year.

4. Tax implication on payment of legal fees

You can claim a deduction for the payment of the legal fees because the fees were work-related expenses and the action were successful.

5. Tax implication upon receiving fully franked dividends

You will be required to pay tax on receiving the fully franked dividends as they are regarded as assessable income under the ruling on taxation of dividends.