Three (3) hours plus ten (10) minutes reading time Fifteen (15) multiple choice questions plus Three (3) case study questions

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1 H> MACQUARIE University This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room. SEAT NUMBER: FAMILY NAME:.. OTHER NAMES:... STUDENT NUMBER: ROOM:. FORMAL EXAMINATION PERIOD: SESSION 3, JANUARY 2016 EXAMINATION DETAILS: Unit Code: Unit Name: Duration of Exam (including reading time if applicable): Total No. of Questions: BUSL320 REVENUE LAW Total No. of Pages Thirteen (13) (including this cover sheet): Three (3) hours plus ten (10) minutes reading time Fifteen (15) multiple choice questions plus Three (3) case study questions GENERAL INSTRUCTIONS TO CANDIDATES: Candidates are required to obey all instructions provided by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered the final examination venue. Candidates may not write or mark the exam materials in any way during reading time. Candidates may only access authorised materials during this examination. A list of authorised material is available on this cover sheet. If it is alleged you have breached these rules at any time during the examination, the matter may be reported to the University Discipline Committee for determination. EXAMINATION INSTRUCTIONS: 1. There are two parts to this exam. All questions must be answered. 2. Part A. Fifteen multiple choice questions: 15 marks Record your answers on the PINK computer sheet provided. Make sure that you record your FAMILY name first and then your other names on the computer sheet. You MUST also record your student ID number on the answer sheet. Use pencil on the pink answer sheet. 3. Part B. Three case study questions: 45 marks Use SEPARATE answer booklets for each question. Your responses to the questions must be written in PEN - NOT in pencil. MATERIALS PERMITTED: Candidates may bring into the examination room: Two A4 sheets (handwritten only) of own prepared notes which may be written on both sides. These must be handed in together with the answer scripts AT THE END OF the examination. Non-programmable calculators (no text retrieval capacity). The Core Tax Legislation and Study Guide text in book form (no photocopies or loose pages). o No notes are permitted in the Legislation book. o Tags indicating only the section numbers and section titles are however permitted, o The highlighting of parts of the text is also permitted. MATERIALS NOT PERMITTED: The use of dictionaries in any form.

2 PART A - MULTIPLE CHOICE QUESTIONS (15 QUESTIONS X 1 MARK = 15 MARKS) Answer questions on the pink General Purpose Answer Sheet only. Read each question carefully before answering. There is only one correct answer for each question. If more than one answer may seem correct then the most correct answer is what is required. Answers are correct to the nearest whole dollar. QUESTION 1. Ashley is an adult individual aged 25. She is a beneficiary of three trusts as follows: The trustee of the Garett Trust (a discretionary trust) had made a distribution of $10,000 income in Ashley s favour on 30 June The trustee of the Brendon Family (a discretionary trust) trust had made a distribution of $17,000 in Ashley's favour on 30 June 2015 but Ashley cannot access the funds until she turns 27. She can however, leave the amount in her will should she die before reaching 27 years. The trustee of John Sinclair s deceased estate made a distribution of $2,000 on 30 June 2015 in Ashley s favour but at the time the distribution was made the deceased estate had substantial debts that the trustee had not provided for. Based on this information, what amount is Ashley presently entitled to for the year ended 30 June 2015? A. $10,000 B. $2,000 C. $17,000 D. $19,000 E. $27,000 QUESTION 2. Which of the following statements is least correct? A. GST is payable on taxable supplies. B. GST is payable on input taxed supplies. C. Entitlement to input tax credits arises in relation to creditable acquisitions. D. GST is payable on taxable importations. E. Entitlement to input tax credits arises in relation to creditable importations. 2

3 QUESTION 3. Will-I-Am carries on a plumbing business and employs four plumbers. He incurred the following expenditure in the current year. Paid his accountant $1,400 to prepare his financial statements to enable his income tax return to be prepared and lodged by his accountant Paid his accountant $500 to prepare a cash flow budget for the next three years to determine the liquidity of his business over that period of time. Paid his accountant $600 for advice on the operation of the goods and services tax (GST) in his business. Based on these expenses, what amount can Will-I-Am claim as a tax deduction under s 25 5 ITAA97? A. $500 B. $1,100 C. $1,400 D. $2,500 E. $2,000 QUESTION 4. Salim is registered for GST and he purchased a piece of equipment for his business from an un-registered entity and paid $33,000 to the supplier. He will use the item 80% of the time in his business and 20% of the time for private purposes. What input tax credits can he claim? A. $3,000 B. $2,400 C. $600 D. Nil E. $33,000 QUESTION 5. Vanessa has a car that she uses 70% of the time in earning her assessable income. She purchased it on 1 April 2011 at a cost of $45,000 and the adjustable value of the car on 29 June 2015 was $24,000. She sold the car for $17,000 on 29 June What amount should Vanessa include in her assessable income or claim as an allowable deduction as a result of selling the car? A. $4,900 as a deduction. B. $7,000 as assessable income. C. $24,000 as assessable income. D. $21,000 as a deduction. E. $7,000 as a deduction. 3

4 QUESTION 6. A partnership has a tax loss in the current financial year of $50,000 and had a loss of $60,000 in the previous financial year. There are two partners in the partnership that share equally in the profits and losses of the partnership. What is the loss to be distributed to each partner in the current year? A. $110,000 B. $55,000 C. $25,000 D. $50,000 E. Nil QUESTION 7. Quill Ltd carries on a publishing business and owns a magazine that it publishes monthly. It had the following expenditure during the year ended 30 June The company paid $35,000 to a managing director to encourage him to terminate his contract of employment early, because he was performing unsatisfactorily. In a recent magazine article one of the stories made a defamatory remark about a well-known movie star and the company had to pay $50,000 compensation to the movie star. # $12,000 was stolen by thieves from one of the company s safes and the money was not recovered. The money had been collected from and recorded as sales of the magazine. Based on the above losses or outgoings, what amount will be deductible under s 8-1 ITAA97? A. $50,000 B. $85,000 C. $12,000 D. $97,000 E. $47,000 QUESTION 8. Which of the following is most likely to be taxable food for GST purposes? A. Milk sold in a supermarket. B. Tea bags sold in a supermarket. C. Salted peanuts sold in a supermarket. D. Fruit juices containing at least 95% fruit juice sold in a supermarket. E. Natural spring water sold in a supermarket. 4

5 QUESTION 9. Mr. Rajneesh operates a retail business and has incurred the following expenses during the current year of income. e Repainting of the interior had become faded. of the business premises costing $1,700. The old paintwork Concreting of a car park at his business premises at a cost of $5,000. The car park previously consisted of loose gravel. Servicing costs of $600 performed on his motor vehicle that is used 60% of the time for business purposes. One of his cash registers was smashed by robbers during the year and it would have cost $300 to have it repaired. Instead, Mr. Rajneesh installed a new cash register costing $2,400 on 1 May No insurance moneys were received. What amount can Mr. Rajneesh claim for repairs under s ITAA97? A. $7,600 B. $2,360 C. $7,360 D. $2,600 E. $2,060 QUESTION 10. A private company had the following transactions in relation to its franking account: Opening credit balance on 1 July 2014 of $23,000. Received a dividend of $70,000 on 4 September 2014 with $25,000 franking credits attached. Paid income tax instalment of $27,000 on 28 October Received a refund of tax of $7,800 on 27 November Paid income tax instalment of $20,000 on 28 February Paid a dividend of $49,000 fully franked on 23 March Paid income tax instalment of $15,000 on 28 April What is the closing credit balance of the franking account on 30 June 2015? A. $110,000 B. $81,200 C. $53,200 D. $28,800 E. $58,200 5

6 QUESTION 11. Mr Wong works for Coastal Constructions Ltd and incurred credit card expenses of $3,300 including GST. All of these expenses are private in nature. Coastal Constructions paid the $3,300 on behalf of Mr Wong on 4 February This is the only benefit provided by Coastal for the FBT year ended 31 March Mr Wong gave Coastal all the relevant invoices to enable Coastal to claim the relevant input tax credits. What is the company s FBT liability as a result of paying the credit card expenses? A. $6, B. $3, C. $3, D. $1,551 E. Nil QUESTION 12. Which of the following expenses is not deductible under the second positive limb of s 8-1 ITAA97? A. Legal expenses incurred to collect outstanding debts by a company carrying on a retail business. B. An employee claiming a work-related expense. C. Salary and wages paid to employees by a primary producer carrying on a business. D. Public liability insurance incurred by an individual carrying on a consulting business. E. Advertising costs paid by a trust operating a retail business. QUESTION 13. Mister Hire Ltd is a hire company which is registered for GST and hires out equipment to the public. It hired out a set of tools to a customer charging $110 for the hire of the equipment and a security deposit of $220. The tools were returned in a good state and the security deposit was returned to the customer. What is the GST liability of Mister Hire Ltd as a result of this hiring arrangement? A. $110 B. $330 C. $10 D. $30 E. $20 6

7 QUESTION 14. In the year ended 30 June 2014 Pearl Ltd, a private company, brought to account its debtors of $40,000 as assessable income. The ownership of the company was held by two other private companies, Jade Ltd and Sapphire Ltd, in the ratio of 60% held by Jade and 40% held by Sapphire on 30 June Sapphire sold all its shares in Pearl Ltd to the shareholders of Jade on 1 July On 30 June 2015 Pearl Ltd wrote off $5,000 in bad debts in calculating its taxable income. Pearl Ltd commenced a completely new business on 1 July In relation to the above facts, which of the following statements is most correct? A. Pearl Ltd can claim a deduction for bad debts of $5,000 because the company has maintained the same beneficial ownership. B. Pearl Ltd cannot claim a deduction for bad debts of $5,000 because the company has not maintained the same beneficial ownership. C. Pearl Ltd can claim a deduction for bad debts of $35,000 because the company has maintained the same beneficial ownership. D. Pearl Ltd can claim a deduction for bad debts of $5,000 because the company has satisfied the same business test. E. Pearl Ltd cannot claim a deduction for bad debts of $5,000 because the company has not satisfied the same business test. QUESTION 15. Harriett, an Australian resident individual for taxation purposes, received a partially franked cash dividend of $3,360 (franked to 50%) from Equity Ltd on 23 May What amount should she include in her assessable income? A. $3,360 B. $4,080 C. $4,800 D. $720 E. Nil 7

8 PART B Each question in this part MUST be answered in a separate booklet. 8

9 PART B - Three (3) case study questions (Total = 45 MARKS) All questions must be answered. Answer each question in a separate booklet QUESTION 1 (15 Marks) Herringbone Pty Ltd is a resident private company. The following information has been extracted from its financial records for the year ended 30 June 2015: $ Net operating profit 800,000 Distribution from an Australian subsidiary company - 20% franked 100,000 A portfolio dividend received from a UK company after deducting withholding tax 4,250 Distribution from a resident public company - 60% franked 10,000 Distribution from a resident private company - 70% franked 7,000 For the 2014/15 tax year, it paid instalments of tax under the PAYG system as follows: July 2014: $110,000 October 2014: $120,000 February 2015: $125,000 April 2015: $130,000 Herringbone Pty Ltd paid a fully franked distribution of $800,000 to its shareholders. As at 1 July 2014, Herringbone Pty Ltd had a surplus of $14,000 in its franking account. REQUIRED: i. Calculate the tax payable by Herringbone Pty Ltd for the tax year ended 30 June (8 marks) ii. Prepare the company s franking account for the year ended 30 June (7 marks) Important: You must provide reasons that explain and support your answer. Failure to provide reasonable explanations will result in very low marks. *** Answer this question in a separate booklet *** 9

10 QUESTION 2 (15 marks) Lara had worked as a public servant for 12 years. By January 2014, she was tired of her job and decided to open a restaurant on the South Coast of New South Wales. The restaurant opened in July Lara s expenses in the 2014/15 year were: $35,000 for rent of the restaurant building, $20,000 for painting, furnishing and cleaning of the building, $15,000 for advertising in national and local newspapers, $2,000 for dining room equipment, $40,000 for food and drink, and $25,000 for wages. $5,000 for electricity and heating. Kevin, a market gardener, contracted to supply Lara with fresh vegetables in return for a free meal for him and his family each Friday night. Most of Lara s income is expected to come from diners at her restaurant, but she also enters into a contract with a regional airline to supply in-flight meals. Worried that the early years of the business may be slow, she commenced a business baking cookies with special local ingredients for export to Japan. Lara has an extensive network of former work colleagues who promised to visit her restaurant. She is grateful for their support and provides them with meals at GST-exclusive prices. Lara also provides her parents with a free meal every Saturday night. Prepare a report for Lara that explains the GST consequences arising from these events. Important: You must provide reasons that explain and support your answer. Failure to provide reasonable explanations will result in very low marks. *** Answer this question in a separate booklet *** 10

11 QUESTION 3 (15 marks) Wendy Yu is the marketing manager of Octopus Pty Ltd, an advertising agency. On 1 April 2014, her employer leased a new BMW series 1 sedan that was provided to her, as part of her salary package. The lease and other running costs of $2,050 per month were paid by Octopus Pty Ltd on Wendy s behalf. During the FBT year ended 31 March 2015, Wendy had incurred an additional contribution of $850 towards the running costs of the car. During the FBT year ended 31 March 2015, the BMW travelled 26,000 km, of which Wendy s log book indicates 50% related to business travel. During this period, Wendy received the following benefits under her employment contract: 1) Entertainment allowance $3,000 (GST Inclusive) p.a. 2) Home telephone rental and charges up to maximum of $1,500 (GST Inclusive) p.a. Wendy used the home phone 50% for work related purposes. 3) A low interest loan of $100,000 provided to Wendy on 1 July The interest rate on the loan was 3.8%. Wendy used the money to partially finance the purchase of her principal place of residence. 4) Lap-top computer provided for use on work related projects at home. Cost $3,000 (GST inclusive) Note: Octopus Pty Ltd is registered for GST REQUIRED: a) Would all the components of Wendy s remuneration package give rise to fringe benefits? If so, identify the type(s) of fringe benefits provided. (3 marks) b) Explain as to whether any part of her remuneration package would be eligible for a different tax treatment. (5 marks) c) Where relevant, calculate the fringe benefits tax payable in respect of the particular remuneration component for the FBT year ended 31 March (Please show all workings). (7 marks) Important: You must provide reasons that explain and support your answer. Failure to provide reasonable explanations will result in very low marks. *** This Question Must Be Answered in a Separate Booklet *** *** END OF EXAMINATION *** 11

12 INFORMATION YOU MAY FIND USEFUL The general rates of income tax (not including Medicare levy) applicable to RESIDENT INDIVIDUAL taxpayers for the tax year: Taxable income Tax on this income ; 0-$18,200 Nil ; $18,201-$37,000 Nil + 19% of excess over $18,200 $37,001 - $80,000 $3, % of excess over $37,000 j $80,001 -$180,000 $17, % of excess over $80,000 $180,001 + $54, % of excess over $180,000 The general rates of income tax (not including Medicare levy) applicable to NON RESIDENT INDIVIDUAL taxpayers for the tax year: Taxable income :...o- $80,000 $80,001 - $180,000 $180, Tax on this income 32.5% on the excess over Nil $26, % of excess over $80,000 $63, % of excess over $180,000 The general rates of income tax (not including Medicare levy) applicable to resident individual taxpayers who are MINORS (under the age of 18 years) and not excepted persons for the tax year: Other income $0 - $416 Nil Tax rates $417-$1,307 Nil + 68% of the excess over $416 $1,308 or more 47% of the total amount of income that is not excepted income Company tax rate for the tax year: 30% Car depreciation limit for : $57,466 12

13 FRINGE BENEFITS TAX The statutory rates for the different periods are: Statutory Rate Annualized number of whole kilometres travelled during FBT year Existing Contracts New contracts entered into after 7.30pm on 10 May 2011 From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April , ,000-24, ,000-40, Over 40, FRINGE BENEFITS TAX RATE for the FBT year ending 31 March 2015: 47% GROSS-UP RATES FOR FRINGE BENEFITS TAX: Type 1: Type 2: STATUTORY/ BENCHMARK INTEREST RATE for the FBT year ending 31 March 2015: 5.95% 13