Question 1 Amity has been employed as a tax advisor by the mid-tier private accounting firm YoungPWC and Associates in their Adelaide branch for 7…

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Question 1

Amity has been employed as a tax advisor by the mid-tier private accounting firm YoungPWC and Associates in their Adelaide branch for 7 years.  In January 2015 she was selected to be sent to Kiribati for two years to advise the Kiribati government on the design and implementation of a new VAT.  The placement was for a 2 year period with an option exercisable by Amity to extend the period for a further 3 years.

Amity jumped at the opportunity and left Australia in January 2015 with her husband Martin. Amity intended to stay in Kiribati for at least the initial 2 years and then make a decision about staying longer if the lifestyle was enjoyable, the work enjoyable and financially rewarding.

On first arriving in Kiribati, Amity and Martin took out a small mortgage on a house on the beach and planned to furnish it with furniture bought from the local furniture stores.  However, they underwent extreme culture shock when they discovered there were no local furniture shops selling anything they wanted and the cost of shipping their furniture over was prohibitive. They decided to sell the house after 4 months and take up a serviced apartment in the capital.

This was acceptable accommodation and it worked well enough as there were no children. They were able to take out 12 month rent agreements as there were many expats on one year placements. They made the apartment relatively homely with their few belongings.  However, Martin found getting any sort of reasonable employment was essentially impossible and started to get dispirited.

Amity’s salary was paid into an account she opened with the Asia-Pacific Bank. Amity and Martin kept their home in Adelaide and rented it out through agents for 12 month periods.

They discontinued their health insurance membership, however Amity maintained her Chartered Tax Advisor membership.  Their only relatives are their elderly parents who resided in Australia.

Martin contracted a form of food poisoning from eating a toxic fish and after only 18 months away the disenchanted couple returned to Adelaide at the beginning of July 2016.


Required (15 marks)

You are required to advise Amity on whether or not she was an Australian resident during the income year ended 30 June 2016 by reference to the relevant legislation and case law.


Question 2 (10 marks)

With reference to the characteristics of ordinary income and the concept of ordinary income discuss whether the following amounts are ordinary income:

a)    An employee dentist swapping dental work valued at $600 for a computer game with a client who sells computer games.  The market value of the game is $550, however it cost the client $300 to place in trading stock.

b)    A car valued at $15000 given as a prize to the 500 000thcustomer of a bank.


In your discussion you must reference AT LEAST two cases for each scenario.


Question 3 (10 Marks)


With reference to the relevant legislation and case law discuss whether the following would be deductible under s8-1 ITAA 97.

a)    Betty and Barney are a married couple and sell the family home for $450 000.  They purchase a two story building for $700 000 and use the ground floor as a business while they live in the top floor. Are they entitled to any interest deduction is relation to the $250 000 they borrowed?

b)   Robert borrowed $100 000 to purchase plant and equipment for use in his business.  After a period of time the plant and equipment were sold, however the loans were not paid out.  Will the interest on the loan continue to be deductible if:

i.        The business continues

ii.        The business has ceased


Question 4 (15 marks)

Lincoln is an Australian resident for the full year aged 30. He conducts a business as a sole trader as a video game designer and retailer.    During the 2016/17 year he had the following receipts, payments and other information.


Receipts

Sales                                                               $527 000

Proceeds from loan                                        $500 000

Lottery win                                                      $50 000


Payments

Trading stock purchases                               $275 000

Gross wages paid to employees                    $42 000

Total Loan repayment interest                        $21 890

PAYG instalments paid                                   $57 500

Rent on premises                                           $145 000

Other expenses –  all deductible                    $75 000


Other relevant information

Lincoln received $10 000 from a supplier as an incentive to display their game consoles in his window. He also received a fully franked dividend of $5400.

The value of the opening stock on 1/7/16 was $72 200, and the closing stock on 30/6/17 was $92 300

The $500 000 loan was taken out of 1/8/16 for 7 years.  $400 000 was utilized in the business and the remainder was used to renovate Lincoln’s house.  No income producing activities take place at Lincoln’s house.


Required


Question 4.1 (12 marks)

Calculate Lincoln’s assessable income and allowable deductions.  Support your analysis with relevant sections from the Income Tax Assessment Acts and/or case law references.


Question 4.2 (3 marks)

Calculate Lincoln’s taxable income and the balance of his assessment for the 2016/17 income year from the information provided.

Disregard the low income tax offset and Medicare Levy Surcharge.  Calculate the Medicare Levy.

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