ACCY963 - CASE STUDY – T1 2019
There are two parts to this case study with each part having a different submission date.
CASE STUDY – FACTS (PART ONE)
Eva and Ian are a married couple, with no children, aged 53 and 51 respectively. Ian runs an IT consulting business in the Sydney CBD. The business was set up as a company “Goodwill Net Pty Ltd” on 29 September, 1986. Ian has continued to be Goodwill’s CEO since its incorporation. Of the total 10,000 shares of Goodwill, Ian holds 40% and Eva has 60%. Ian and Eva are both directors of Goodwill Net Pty Ltd and Eva is the chairperson of Goodwill’s board. Ian specialises the research & development in IT projects whereas Eva is responsible for general management and marketing. Goodwill’s office in the CBD is owned by the couple as joint tenants and they lease it back to Goodwill Net Pty Ltd. Details of the property’s rental income and expenses incurred are outlined in the tables below.
Ian’s normal remuneration consists of $180 500 salary (from which $50 000 is deducted as PAYG), plus the provision of a new fully maintained motor vehicle worth $100 000 for private use (private use is estimated at $40 000 per year) and payment of Ian’s family private health insurance of $8 000 per year.
Eva is a fashion designer who works at home and sells products via her on-line shop, “Essentials by Eva”. She has not incorporated her business but operates as a sole trader. Details of her business income and expenses (including motor vehicle expenses) are outlined below. Eva has converted the triple garage of their home into a workshop and office where she undertakes all her work related activities. The workshop has separate power and a separate phone number from that of the house. The workshop comprises approximately
15% of the total area of the house. Eva is also a casual teacher in the creative arts course at the local TAFE. In the current year ending 30 June 2019, TAFE paid her $35 000 from which $2 000 was deducted as PAYG instalments. She also won a lottery prize of $15 000 on 5 May 2019.
Ian undertakes a substantial amount of work from home and has a room set aside in the house which is used solely as his office. He also uses this office to work on his Master of Professional Accounting degree which he is undertaking at the University of Wollongong. This office comprises approximately 5% of the total area of the home.
In terms of assets, Ian and Eva have a variety of investments mainly in real estate, financial market, the shares in Goodwill Net Pty Ltd and superannuation in a complying self-managed fund. As well as owning shares in Goodwill, Lidia invested her inheritance by making a loan to the company and as at 30 June 2019, the company still owed $950 000 on this loan. Lidia has not charged interest on this loan in the past. On 20 August 1997, the couple jointly bought shares in a mining company, AHP, for $300 000. On 1 July 2018 they sold the shares for $120 000 cash, plus the buyer assumed their liability o $20 000 owing on the shares. On 5 April 2019, a piece of artwork worth $10 000 was stolen from their house. The painting was a special gift from an Italian friend and it was worth $7 000 when it was gifted on 1 July 1998. The panting was not insured. Another gift that the couple received is a valuable stamp given by Eva’s grandmother on 1 May
1997 which had a market value of $30 000 at the time. On 9 May 2019, the couple sold the stamp for $50 000 in cash and a car worth $10 000. On 15 May 2019, Eva and Ian gifted an oil painting to a close friend. The current market value of the painting is $10 000. They purchased the painting on 30 September 1988 for $9 000.
Ian and Eva seek advice from you in respect of calculating their tax liabilities and planning their tax situation for future periods.
The couple provides the following financial information:
1. Goodwill Net Pty Ltd – key Information for year ended 30 June 2019
Consulting Fees (turnover) $ 2 000 000
Profit before tax $ 750 000
Loan from Eva $ 950 000
Capitalised Research and Development- Health Management System $ 1 250 000
Overall Net Assets $ 5 450 000
Personal information of Eva and Ian
2. Balance sheet, other income and interest expenses (all assets are owned/ held jointly except where indicated).
Assets (not including assets of Eva’s business which are disclosed separately in Table 5)
Home and contents $3 000 000
Holiday house in Brisbane (rental income this financial year $12 000) $920 000
CBD office of Goodwill Net Pty Ltd
but used by Goodwill Net Ltd – rental income this financial year $85 000) $1 500 000
Investment property (rental income this financial year $37 000) $980 000
Bank account (interest earned this financial year $3 500) $90 000
Shares in Goodwill Net Pty Ltd (fully franked dividends of $38 500
paid this financial year) - ownership of shares 40% Ian, 60% Eva $900 000
Loan to Goodwill Net Pty Ltd – Eva only, not joint (no interest loan) $900 000
Superannuation- Eva (after-tax return of $90 000) $1 200 000
Superannuation- Ian (after-tax return of $80 000) $1 000 000
Total assets $10 450 000
Liabilities and interest expenses
Mortgage on home/main residence (interest paid this financial year, $26 400) $ 850 000
Mortgage on investment property (interest paid this financial year, $39 600) $ 900 000
Mortgage on CBD office (interest paid this financial year, $24,000) $ 500 000
Mortgage on holiday house (interest paid this financial year, $12 000) $ 690 000
Personal Credit card (interest paid this financial year $1 680) $ 10 000
Total liabilities $2 950 000
3. Other expenditure
In addition to their interest and loan repayments, the couple incurred the following expenses during the year:
Expenditure Eva Ian
Work related expenses see table 5 $ 5 400
Travelling to and from home $ 1 800
Self-education $ 8 800
Donations $ 950 $ 0
Living costs $22 000 $22 000
Expenses (not including interest) related to holiday home – Total of $18 800
Expenses (not including interest) related to investment property- Total $6 600
Expenses (not including interest) related to CBD property- Total $22 500
Tax agents’ fees $770 $990
Rates and taxes paid for home/main residence - $8,100
Electricity, cleaning, gas expenses paid for home/main residence- $11,200
4. Additional information
o All of the assets are jointly owned in the names of Eva and Ian except where otherwise indicated.
o The investment property is available for rent all year and this year however, due to a change in tenants, it was rented out for nine (9) months.
o The holiday home was available for rent for 10 months of the year but, due to the weather, was only rented out for six (6) months.
5. Eva’s Business Information
Details Amount
Sales $206 800
Purchases of stock (no inventory kept) 90 000
Purchases of design magazines and journals 1 800
Subscriptions to fashion journals 1 200
Electricity bills 3 800
Phone and internet bills 1 320
Textile painting 24 000
Other work expenses 5 500
Total motor vehicle cash expenses (including fuel, rego, repairs and maintenance and insurance) 2 000
Motor vehicle details:
Cost- including GST (1 July, 2016): $70 000
(depreciation is based on the diminishing value method, effective life 8 years)
Loan/Finance outstanding as at 1/7/2018: nil
Total Km travelled 1/7/2018- 30/6/2019: 20 000km
Business % as shown by logbook: 30%
ASSETS: Low value pool, book value as at 1/7/18 $25 000
(no assets have been added or removed from this pool),
However, Eva purchased a digital sewing machine on 15 April 2019 at a cost of $18 000
LIABILITIES: Business credit card, balance as at 30 June 2019: $14,000 (interest for the 2018-19 tax year was $960)
REQUIRED:
PART 1- TO BE SUBMITTED IN WEEK 5 LECTURE
a) Calculate the capital gain or loss (if necessary) for the relevant transactions on behalf of Eva and Ian for the 2018-19 income tax year.
10 marks
b) Calculate the net tax payable/refundable for the current year for both Eva and Ian and briefly justify any inclusions in the calculations in the “Reasons for inclusion” column (refer to legal sections where relevant). Please format your answer in the form of the following table (obviously with extra rows as necessary).
Item Eva Ian Reasons for inclusion
Salary income Amount$$ Amount$$ income from ordinary concepts s 6-5 ITAA1997
Other income and expenses (itemised individually under this heading)
Deductions (itemised individually under this
heading)
Taxable income
(then individually list and calculate all other items which impact on tax
payable/refundable)
Tax payable (refundable) (this amount should be the result from adding/subtracting all other relevant amounts)
40 marks