Sample exam question 6 - August 2015

Go Explore is the name of a popular retailer, supplying camping, fishing and outdoor equipment.

Go Explore is the trading name of Go Explore Pty Ltd which is a private company, incorporated in Australia.

Go Explore is seeking to expand and will be meeting with potential financiers in the near future.  As a result, it wants to maximise its taxable income as part of a broader picture of showing the best results it can.

You have a discussion with the CFO (who has no real idea about stock valuation for tax purposes) and that discussion involves talking with the CFO about the different methods of stock valuation available for income tax purposes.  You do not talk about obsolescence as you know (and have confirmed) it not an issue for Go Explore as they keep fairly low stock levels and the stock turnover is generally good.

The CFO advises that whilst some stock lines actually cost more than their market or replacement values, some cost significantly less.  The following information was provided to you:

Stock line	Units on Hand	Cost per Unit	Market Selling Value per Unit	Replacement Value per Unit
Kids Neon Blue Fishing Rod	400	$10	$15	$10
Self-inflating mattress	650	$60	$55	$58
Super warm sleeping bags	500	$70	$73	$75

You are not sure about the logic of the replacement value of the sleeping bags being higher than the market selling value but the CFO advises that it is soothing to do with the “super cold snap happening down south” which means that the suppliers have put up their price”.  90% of sales by Go Explore are from Brisbane and they cannot sell these super warm sleeping bags at high prices.

Go Explore has lots of other stock lines as well but wants to value these at cost as it does not have details on the other values.  The value of the closing stock (not including the stock lines detailed above) at cost totals $680,000.

All stock for the current year has been valued at cost for accounting purposes and in the prior year ‘cost’ was also used for both accounting and tax numbers.  Prior year closing stock was costed at $610,000.

Other results for the current year were:

Sales	$3,600,000
Purchases	$2,800,000
Operating Costs	$400,000

Go Explore is registered for GST and all amounts above are GST exclusive.
Required

a) What did your discussion with the CFO about the different methods of stock valuation involve? What were the key points you made?    (4 marks)

b) Calculate the taxable income of Go Explore Pty Ltd for the current year assuming that they wish to maximise their taxable income.  Show all workings.    (7 marks)

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Sample Exam Question 5 - July 2015

In 2013, Bruce, a retired Brisbane City Council town planner introduced the managing director of Apartment Towers Pty Ltd (AT) to the owner of a large vacant riverfront block of land in St Lucia. Bruce was able to facilitate the sale of the land and subsequent council approval to allow AT to build a luxury apartment building on this land. Bruce did not receive any cash payment for assisting AT.
Upon completion of the apartment building in November 2014, Bruce is transferred ownership of one of the luxury apartments, valued at $1,400,000.

Does Bruce have to return any amount as assessable income for the year ended 30 June 2015? Provide reasons for your conclusion.

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Sample exam question 4 - June 2015

Doctor House worked as an employee doctor for Princeton Medical Enterprises.  Prior to leaving Perth to move to Sydney on 30 June 2014 he sold the following assets:

• The family home on 1 April 2014.  The home was bought on 31st January 1996.  The house cost $200,000 and renovations totalling $85,000 were carried out in June 2000. Stamp Duty on the purchase was $10,000 which was paid on 2nd February 1996 and commission on sale $25,000 paid on 1st April 2014 - $990,000
   
• Shares in Medical Supplies Pty Ltd on 10 November 2013. The shares had cost $55,000 in January 1995. - $50,000
    
• A vacant block of land on 1 June 2014.  The block had cost $235,000 on 28 June 2013.  Stamp duty on purchase was $20,682 and commission paid on sale was $10,350.  Interest of $13,000 was paid in respect of the loan which had been taken out to finance the purchase. - $345,000

Doctor House had a capital loss from the previous year of $5,900.  In addition, during the current year he had a loss of $7,900 from renting out a factory unit in a Perth suburb. 

 

Doctor House had a salary of $285,000 in addition to a salary of $5,000 from the Naval Reserve in which he was an officer.  Dry-cleaning costs totalled $185 for white medical coats and $53 for the Naval Reserve uniforms.

During the year he received the following dividends from several companies he had invested in –
Medical Limbs Ltd – Fully Franked Dividend with franking credits of

$4286 attached - $10,000

 

Blood Bank Ltd – Unfranked Dividend - $2,500

 

Pills Galore Pty Ltd – Partially Franked Dividend ($1500 franking credits

attached) - $5,000

 He had incurred the following costs whilst working –

a) Subscriptions to “Weekly Medical” a journal for health professionals - $250

b) Fees paid to Medical Association - $2,500

c) Raffle tickets for a hospital charity - $100

d) Costs associated with attending a medical conference - $4,589

Doctor House intended to start his own medical practice in Sydney and intended to use a family trust.  He paid his accountant $1,500 for advice on how to structure his business and a further $800 to prepare his current year’s tax return.

During the current year Doctor House had to work a number of nights as his employer operated a 24 hour emergency clinic.  His travel to the clinic occurred in a number of different circumstances which are set out below.

• Travel from home to work and return for daytime shifts - $3,600
• Travel from home to work and return for night shifts (when there was no public transport available) - $2,100
• Travel from home to work and return at nights when he was called in after having already worked a day shift - $800
• On very busy nights he was contacted at home and would give instructions over the phone to nursing staff then he would drive in and continue treating the patients.  Cost of this travel from home to work and return - $930

Required

Calculate Doctor House's taxable income and net tax payable including Medicare.

  

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Sample exam question 3 - May 2015

76 marks

The Woof Woof Family Trust was settled by a friend of the family Miss Kitty. The trust operates a business of manufacturing luxury dog beds for sale to owners of pampered pets. The trust has also invested in shares from which it derives dividend income.
For the current year ended 30 June 2014, the trust derived the following income:

Net trading income (after expenses) from sale of dog beds - $250,000

Dividends franked to 100% with attached franking credits of $21,429 - $50,000

Capital gain on the sale of the goodwill of a branch of the business
(after applying both the general and active asset discount) - $55,000

Capital gain on the sale of some shares that have been owned
for more than 12 months (after applying the general discount) - $5,250

Interest received on bank term deposits - $3,500

At the annual meeting the trustee of the trust resolved to distribute the net income of the trust for the year ended 30 June 2014 as follows:

1. Hooch who is 41 years old is specifically entitled to all the capital gains. Hooch has a carried forward capital loss of $14,000.  He has no other income and no CGT events for the current year.

2. Lassie who is 17 years old is specifically entitled to all the franked dividend income and attached franking credits. Lassie is also to receive 20% of the other income. Lassie had left school in December 2013 and had started working full- time since February 2014 as an intern veterinary nurse whilst studying for her veterinary degree at the University. Her salary from her employer was $27,500 (PAYG withheld of $2,200).  Lassie also received interest of $2,000 from monies she invested from a legacy left to her from her grandmother’s deceased estate.

3. 15% of the other income is to be accumulated for Benji who is 10 years old until he reached the age of 21. However, if he dies before attaining that age, his share would be given to charity.  During the year the trustee paid $10,500 towards Benji’s school fees.

4. Snoopy who is 16 years old is to receive 20% of the other income. Snoopy had a part-time job from which he earned wages of $7,000 during the year. No PAYG withholding tax had been deducted from his wages. Snoopy also received dividends of $2,200 with franking credits of $943 attached.  The dividends were from shares bought for Snoopy by his grandfather when he won a scholarship to a prestigious high school.

5. Scooby Doo who is 45 years old is to receive 45% of the other income. He has no other income.

Required:

1. Calculate the net income of the trust, the Division 6E net income of the trust, setting out the income excluded from the Division 6E net income.
(11 marks)

2. Calculate the taxable income and net tax payable for each of the beneficiaries and/or the trustee. Explain and state under which sections of the legislation the beneficiaries and/or the trustee will be assessed.
(65 marks)

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Sample exam question 2 - April 2015

Your answers to the following questions should be concise and should be supported by reference to relevant taxation law.

Question:

Jimmy Opaque claims that he has been advised by ‘a person in the know’ at his local sporting club that he should put his business into a trust and then he can reduce his income tax by spreading his income among his family, while retaining full control of his business and income. Jimmy’s adviser has told him that all he has to do is obtain a pre-printed trust deed (which the adviser can provide) and fill in the blank spaces, showing that he is the trustee of his business and providing him with the discretionary power to distribute all the business income to his family as beneficiaries. ‘It’s as easy as that,’ says the excited Jimmy. Comment on the advice which Jimmy has received.

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Sample exam question 1 - March 2015

Your answers to the following questions should be concise and should be supported by reference to relevant taxation law.

Question:

Owing to competition from a nearby food mall, Polly’s pie shop had to close down permanently at the end of the previous income year. However, in the current income year Polly is still required to make repayments on a loan she had taken out three years ago to provide working capital for the business. These loan repayments amount to $12,000 for the current year, comprising principal of $8,000 and interest of $4,000. Advise Polly whether she may deduct any of these amounts for income tax.

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