Both Part A and B are to be submitted together as a single Microsoft Word document.
Part A [20 Marks]
You have recently started working for In The Black Accountants (ITBA) in the small business accounting and tax area. You are asked to identify and calculate the following taxpayerâ€™s assessable income, deductions and tax payable / refund position for 2013/14. This includes noting the relevant statutory provisions and any leading law cases.
The ITBA Manager has asked you to prepare you work papers in the same order as you would complete an Individual Tax Return with clear headings and summaries.
Your working papers are to show any assumptions you have made and any further information you wish to ask Thor.
The taxpayerâ€™s information is as follows:
Thor Odinson is a 48 year old Australian resident of Lyons in Darwin. Sadly Thorâ€™s love interest, Jane, left him two years ago to marry Thorâ€™s brother Oki. Thor and Jane had no children. Thor has been too heartbroken to start another relationship since Jane left him.
On 20 January 2014 Thor sold his dog wash and kennel business (sole trader) including the premises for $850,000 (excluding GST). Thor had acquired the business on 1 July 2009 for $350,000 (excluding GST). The sales contract included the following:
1. Goodwill $150,000
2. Stock $30,000
3. Restrictive covenant $50,000
The restrictive covenant included in the sale contract related to Thor agreeing not to open another dog wash business in Darwin for the next 3 years.
For 2013/14, up to the date of sale, Thorâ€™s dog wash and kennel business accounting records had an operating profit of $255,000 which included depreciation of $24,000; bad and doubtful debt expenses of $4,500; $7,000 accounting costs on structural advice on a new business venture which never eventuated; and speeding fines of $280. For tax purposes the actual bad debts written off were $2,500 and tax depreciation was $18,000.
On 21 December 2013 Thor received $33,000 as compensation from TIO Insurance for the theft and subsequent trashing of his old Porsche sports car. The car loss had occurred on 21 May 2013. Thor originally acquired the car from a second hand dealer in Melbourne on 28 April 1986. The car was only used by Thor on weekends when he liked to fire up the engine and drive his Porsche to the Cool Spot, a café in Fannie Bay, to have a cooked breakfast with his elderly father Odin.
Thor deposits his business sale proceeds, car insurance payout and any other surplus cash he has into his Westpac cash management account and at 30 June 2014 Westpac paid directly into his account $7,000 interest. Thor has had this cash management account for many years and he keeps forgetting to provide his Tax File Number and so in 2013/14 the bank has withheld 10% of the interest ($700 withholding tax).
Thor has a small Australian share portfolio and their transactions for the 2013/14 were as follows:
1. 1,000 Marvel shares (purchased on 1 May 1984 for $1 each), sold on 3 August 2013 for $4 each. Brokerage was $50 on purchase and $200 on sale.
2. 3,000 GoGoGadget shares (purchased 5 August 1990 for $2.50 each), sold on 28 November 2013 for $1.00 each, to prevent further loss. Brokerage was $250 on purchase and $200 on sale. A final fully franked dividend was received during the year of $320.
3. 100 Proto shares (received from his motherâ€™s estate), sold on 2 August 2013 for $50 each. (Thorâ€™s mother, Frigga, originally purchased these shares on 2 September 1982 for $0.20 each and they had a market value of $16.50 each at the time of Friggaâ€™s death on 2 July 2011.) The brokerage fee on sale was $80.
4. 4,850 Norse shares (purchased 8 August 2012 for $3 each), sold on 5 June 2014 for $5.80 each. Brokerage was $100 on purchase and $280 on sale.
Thor has a residential rental property (5 Baloney Street, Fawkner, Melbourne) which in 2013/14 earned $21,000 rent (the property has been continuously rented since acquisition).
Thor paid the following in relation to this rental property:
1. Council rates $2,100
2. Water and sewerage $2,000
3. Repairs to main bedroom (replaced carpet with the same) $700
4. Property management fees $4,500
5. Insurance $750
6. Gardening (removal of a large fig tree) $1,100
7. Interest on loan $3,800
8. Repaint exterior of house $3,000
9. Paint roof (first time painted to reflect heat in summer) $1,500
Thor has been able to claim a capital works deduction on the Baloney Street rental propertyâ€™s dwelling of 2.5% of the $240,000 original construction costs.
On 2 March 2014 the Australian Government paid Thor $12,000 for the compulsory acquisition of a strip of land in the backyard of his residential rental property (5 Baloney Street) for a cable easement. Thor had originally acquired the Baloney Street rental property on 27 July 1993 (as a new dwelling). The Government has paid the current market value for this compulsory acquisition.
Thor also has a small cottage in the Asgard region of Denmark which he rented to a Lego factory work for most of 2013/14. The net rental income was AUD $7,200.
When Thor sold his business he began working for Haulage Australia as a truck driver carting rock from a quarry outside of Darwin to the new gas plant site being built in the Darwin wharf precinct. Thorâ€™s Employee Payment Summary shows he earned $45,000 (gross) and $6,855 PAYG Withholding Tax was withheld.
Thorâ€™s employer Haulage Australia provided him with a uniform, which included one pair of safety boots, which Thor was required to wear. Thor found he personally needed to buy a second pair of boots for work which cost him $220 (including GST) and a good quality pair of sunglasses for $176 (including GST). Thor washed his uniforms twice a week which worked out to be 38 washes for 2013/14.
Thor is very committed to regularly donating to youth charities and he has deductible donations of $800 for 2013/14.
â€¢ Thor has already paid $45,000 PAYG Instalment Tax for 2013/14;
â€¢ Thor has a carried forward capital loss totalling $7,300 which is made up of $4,300 capital loss from last yearâ€™s share sales and a $3,000 capital loss from the sale of Friggaâ€™s jewellery two years ago (which Thor inherited);
â€¢ Doggie Wash, a supplier of Thorâ€™s dog wash and kennel business gave Thor, in August 2013 for being a good customer, a season ticket to the Darwin Cup Greyhound Races which was non transferrable. Thor noted this season ticket was selling for $280.
â€¢ Fido Products, who supplied Thorâ€™s business with dog leads, in July 2013, gave Thor a three day V8 entry pass worth $330 which could not be resold or used by anyone else as Fido Products knew Thor loved fast cars;
â€¢ Thor refuses to have private hospital health insurance; and
â€¢ Thor lived in Darwin for the whole of 2013/14.
Part B [10 Marks]
Thor is thinking about leaving Australia in 2014/15 with his father Odin to live in Asgard (Denmark). Thor owns his home in Lyons (Darwin) and heâ€™s wants to know whether for tax purposes he should rent his home to his friend Erik, at a below market rent as they are mates, or give it to an agent to rent or sell it.
Thor is very bitter about his separation with Jane and he is estranged from his brother Oki (they have not seen each other for over a year even though Oki lives in Darwin). Thor just wants to leave Australia and heâ€™s not sure if he will ever return.
Separately from doing his 2013/14 tax return Thor asks your employer ITBA to give him some tax advice on what would be the best way to structure his tax affairs if he leaves Australia and what he should be aware of.
Your employer asks you to prepare a working paper in point form addressing this matter and to include any relevant legislation, tax rulings and case law (remember to explain why the case or statute reference is relevant). You are encouraged to think widely and to make suggestions â€“ for example perhaps Thor should divest himself of his Australian real property etc.).