LEGL602 TAXATION LAW
THOMAS MORE LAW SCHOOL
SEMESTER 2, 2018
INSTRUCTIONS:
Students are reminded that there are two assignments in LEGL602. This is the first assignment, being a group assignment of 30 marks. Each group must have either 2 or 3 people. Choose your team members carefully. Students must notify the lecturer in a timely manner and provide substantiating documentation of any problems in relation to group work.
All assignments must be typed in Arial, size 11, 1½ spacing, justified (align to both left and right), have the standard cover sheet and be signed by the student(s) stating that the work is original. While referencing sources used for this assignment, you must follow the Australian Guide to Legal Citation (AGLC) (the footnote system).
The maximum length for this assignment is 1,500 words.
Students must submit this assignment via Turnitin no later than Friday, 12/10/2018 (week 10) at 11:59pm. Penalties will be imposed for late submission without prior permission.
Question 1 (25 marks):
Bloomingdale Florists Pty. Ltd. is an Australian Retail Company which operates a florist shop in Sydney. It is an Australian Resident Private Company for Tax Purposes. It is also a Small Business Entity for tax purposes. The Accounting Profit and Loss Statement for the year ended 30 June 2018 is as follows:
$
Sales 600,000
Exempt income 10,000
Less: COGS
Opening stock 50,000
Purchases 40,000
Closing stock 60,000
COGS 30,000
Gross Profit 580,000
Less: Operating expenses
Advertising 14,000
Bank Charges/Fees 5,000
Accounting Depreciation 12,000
Fringe benefits tax 5,000
Gifts 20,000
Electricity and heating 30,000
Provision for Long Service Leave 20,000
Provision for Doubtful Debts 17,000
Borrowing Expenses 3,000
Rent 50,000
Repairs 15,000
Stationary 8,000
Wages to employees 200,000
Director’s salary 50,000
Fines for misleading advertising 5,000
Net Profit $126,000
Additional Information
(1) The actual long service leave paid in cash during the year was $10,000.
(2) The bad debts written off during the year were $15,000.
(3) The repairs of $15,000 consisted of painting the company premises for $5,000 and replacing the rotting wooden office windows with new steel windows for $10,000.
(4) The Gifts were as follows: $
• Royal Sydney Hospital 10,000
• Paramatta Eels League Club $10,000
(5) Capital allowances for tax purposes amount to $10,000.
(6) For accounting purposes the company values its closing stock using the LIFO Method.
The Opening stock value for tax purposes was $50,000.
The FIFO Method however produces the following results for stock value at the end of the year:
$
Cost Price 52,000
Replacement Price 53,000
Market Selling Value
54,000
(7) The company borrowed money from the bank to acquire the new depreciating assets. The loan was for 3 years and was taken out on 1 July 2017. The total borrowing costs of $3,000 were claimed as an accounting expense.
(8) The company had outstanding trade debts from retail sales of $20,000 on 30 June 2018. These were included in the sales figure in the Profit and Loss Statement.
(9) For the year ending 30 June 2018, the company received the following dividends which are not included in the profit and loss statement:
• Dividend from an Australian Resident company (80% franked) $9,000 • Dividend from an Australian Resident company (100% franked) $5,000
• Dividend from a Foreign Resident company (No tax withheld) $1,000
(10) The Tax Commissioner has made a ruling regarding the Director’s salaries and considers $40,000 to be a reasonable salary.
(11) Prior years’ income losses:
The company has $20,000 unabsorbed income losses from the year ending 30 June 2017. The shareholding of the company has not changed since that time. However in July 2016 the company acquired a market research company.
REQUIRED:
Demonstrate the calculation process to determine the Company's Taxable Income and Tax Payable Liability for the year ended 30 June 2018. Note - You must give reasons for your inclusion or exclusion of any of the above listed items. If you fail to explain your inclusion or exclusion of any item, you will lose marks.
For example:
$1,000 Tax Agent’s Fees – s. 25-5, and a brief discussion of the law in this context.
Question 2 (5 marks):
On 16 September 1982 Matchstick Ltd acquired 50 hectares of rural land in Toowoomba. At the time the land was zoned agricultural, but the directors were aware that in the future that the land could be rezoned to permit subdivision and that there were rumours that the government was considering building a highway to connect the area with Brisbane. The directors of the company stated that the land was acquired for the business of growing trees and retention as a long-term investment and not for resale at a profit. The trees on the land were to be grown and sold to match stick manufacturers. The company entered into several forward supply contracts with various match stick manufacturers.
The growing and sale of wood proved to be very successful and in 2005 the company purchased another 40 hectares of land adjacent to the original 50 hectares. Unfortunately, the demand for the company’s wood began to diminish due to the decline in the number of people smoking and concerns about the environment. In August 2017, Strike a Light Pty Ltd, one of the manufacturers to whom Matchstick Ltd supplied wood, paid Matchstick Ltd $1,000,000 in exchange for Matchstick Ltd’s agreement to terminate the contract. This contract represented 80% of Matchstick Ltd’s sales of wood to all suppliers.
In November 2017, at the next annual general meeting, the shareholders of Matchstick Ltd decided that the tree growing business was no longer sufficiently profitable to justify the company’s continued involvement in that business. At the same time, the land had become available for development, as the zoning rules had changed to permit subdivision. The directors of Matchstick Ltd therefore decided to take the necessary steps to have the land rezoned for leasing the subdivided land to agricultural and industrial tenants on long-term leases. Consequently, the Directors decided to subdivide the land, install water and electricity and set aside land for a small shopping centre. After completing these activities in February 2018, the directors changed their mind and instead of leasing the land they sold all the land and by June 2018 had realised a profit of $10,000,000.
REQUIRED:
Advise the directors of Matchstick Ltd as to the income tax consequences of receiving the compensation of $1,000,000 and the profit from the sale of the land for $10,000,000.
In your answer please refer to the appropriate legislation, case law and tax rulings.