T1, 2015 ASSIGNMENT 2
Due date: Friday Week 10
This assignment is to be submitted by the due date in both soft-copy (Safeassign – Bb) and hard copy.
The assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook
It is the responsibility of the student submitting the work to ensure that the work is in fact his/her own work. Ensure that when incorporating the works of others into your submission that it appropriately acknowledged.
Maximum marks: 20 (20%)
Part One: Fringe Benefit Tax (10 Marks)
Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2013, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST).
For the period 1 May 2013 to 31 March 2014, Emma travelled 10,000 kilometres in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2013, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.45%. Emma used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.
During the year, Emma purchased a bathtub manufactured by Periwinkle for $1300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.
(a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2014. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST-inclusive acquisitions.
(b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband?
Part Two: Ordinary Income ( 5*2 = 10 Marks)
Consider the following situations and discuss whether or not they are income in ordinary concepts:
A cash prize for being the best student in income tax law received by a student who also receives a Youth Allowance from the government.
A gratuity (not being superannuation) received by a widow from her husband’s former employer in recognition of her husband’s services.
An honorarium received by a student for acting as honorary secretary of a small country town football club.
A bonus received by an employee for a suggestion adopted by the management.
Peter is a farmer with 15 hectares of land on which he has grown oranges since 1960. He inherited the land from his father in that year. The farm has gradually been surrounded by urban development and, three years ago, following complaints from the neighbours about pesticides, he decided to sell the land.
Two years ago Peter contracted with a consulting engineer and surveyor who prepared a subdivision plan and who applied to the local council for rezoning. Peter was not directly involved in the plan or the rezoning, which was granted by the council later that year. Nearly all expenses were paid by Peter, although he had to borrow $120,000 to cover some incidental expenses.
Following completion of the development the land went on sale through a real estate firm and to date 150 of the 200 blocks have now been sold for residential housing. Blocks sell for an average of $150,000 each.
Advise Peter as to his tax liability, if any.