LEGT2751 Midsem Solutions Essay

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LEGT2751 Midsem Solutions

Question one
Barry conducts a butcher shop in Gladesville. He purchases 10 whole sheep that have already been slaughtered for $110 each. He butchers the slaughtered sheep into various cuts such as chops, leg of lamb, shoulder of lamb and so on. His total sales receipts for the cuts from each slaughtered sheep are $440. His annual turnover is $76,000.

This year he spent $4400 (GST inclusive) on new knives and chopping boards. The GST consequences for Barry of these transactions are: (a) Barry is liable to be registered for GST. All the purchases are GST free and all the sales are GST free as purchases and sales of food. Hence Barry does not receive any input tax credits on the purchases and is not liable for GST on his sales.

(b) Barry is liable to be registered for GST. The purchase of the
slaughtered sheep carcasses is GST free as a purchase of food. Barry receives an input tax credit on the purchase of the knives and the chopping boards of $4400 x 10/11 x 10% = $400. However, the input tax credits cannot be refunded to Barry as his sales are GST free.

(c) Barry is liable to be registered for GST. The purchase of the slaughtered sheep was not a purchase of food as they had not yet been butchered into cuts but was input taxed. This means that no GST was payable on either of Barry’s purchases and hence Barry cannot receive any input tax credits. All of Fred’s sales are GST free.

(d) Barry is liable to be registered for GST. The purchase of the slaughtered sheep is GST free as a purchase of food. Barry receives an input tax credit on the purchase of the knives and chopping boards of $4,400 x 10/11 x 10% = $400. Barry’s sales are GST free and any excess input tax credits that Barry has are refunded to him.

(e) Barry is not liable to be registered for GST as his turnover less his annual expenses is less than the GST registration threshold. Hence Barry does not have to charge GST and cannot claim input tax credits.

Correct answer was (d)
QUESTION TWO
Cathy and Bruce are both residents of the newly independent country Utopia. Cathy had a taxable income in the year ending 30 June Y1 of $50,000 which was wholly derived from her salary as a teacher of English as a second language. Bruce had a taxable income in the same year of $100,000 which was wholly derived from interest in Utopian banks. Under the Euphorian tax system salary is taxed at the following rates: 10% for the first $10,000; 15% for the next $40,000; 20% on the next $60,000; and 45% on the remaining income. Income from interest is taxed at a rate of 5% from $1.

The Euphorian tax system is: (a) Consistent with horizontal equity as it taxes $1 of interest income differently from the way it taxes $1 of salary income.

(b) Consistent with vertical equity in the manner in which it taxes income
other than interest but inconsistent with horizontal equity in that it taxes interest income differently to the way in which it taxes other income.

(c) Consistent with vertical equity as it taxes someone with a larger amount of interest income at the same rate as it taxes someone with a lower amount of interest income.

(d) Inconsistent with vertical equity as it taxes someone on a lower income at the same rate or a higher rate as it taxes someone on a higher income and consistent with horizontal equity as a taxpayer deriving interest income is not similarly placed for tax purposes as a taxpayer deriving other income.

(e) Inconsistent with horizontal equity as it taxes interest income at a lower rate than it taxes salary income but consistent with vertical equity as taxing interest at a lower rate promotes savings.

Correct answer was (b)
QUESTION THREE
Glen Pty Ltd is an Australian resident company which had the following income and expenses for the year ending 30th June 2010 Income:
Non Assessable Non Exempt Income under ITAA36 s23AJ$20,000 Interest from Big Bank Ltd $ 5,000
Rent from investment property at Manly NSW$15,000
Franked dividend from shares in No News Ltd $70,000
Franking credit attached to No News Ltd dividend$30,000
Deductions:
Interest on loan used to acquire Manly property$10,000
Assuming that the interest on the loan used to acquire the Manly property is a valid deduction for Australian income tax purposes Glen Pty Ltd’s taxable income for the year ending 30th June 2010 will be: (a) $140,000 (being the sum of all its income items) less $10,000 (being its interest deductions) = $130,000

(b) $120,000 (being the sum of all its income items other than the non assessable non exempt income under s23AJ) less $10,000 (being its interest deductions) less its tax offset of $30,000 for the dividend calculated as $70,000 x 30/70 = $30,000. The end result of the calculation will be a taxable income of $80,000.

(c) $120,000 (being the sum of all its income items other than the non assessable non exempt income under s23AJ) less $10,000 (being its interest deductions) = $110,000.

(d) $120,000 (being the sum of all its income items other than the non assessable non exempt income under s23AJ).

(e) $90,000 (being the sum of all its income items other than the non assessable non exempt income under s23AJ and the franking credit of $30,000) less $10,000 (being its interest deductions). The end result of this calculation will be a taxable income of $80,000.

Correct answer was (c)
QUESTION FOUR
Annie, an Australian resident, purchases a vacant block of land at Leura NSW on 1 July 2009 for $100,000. The conveyancing costs associated with the purchase were $2000. Annie borrowed $50,000 from Big Bank Ltd (an Australian resident bank) at 5% to assist in funding the purchase. In the year ending 30th June 2010 Annie paid interest on the loan from Big Bank Ltd of $2,500. In the same period Annie also paid council rates of $3,000 in respect of the Leura property.

The cost base of the land to Annie as at 30 June 2010: (a) $100,000 (being the purchase price) plus $2000 (being the conveyancing costs) plus $3000 (being the council rates) = $105,000.

(b) $100,000 (being the purchase price) plus $2000 (being the conveyancing costs) = $102,000.

(c) $100,000 (being the purchase price) plus $2000 (being the conveyancing costs) plus $3000 (being council rates) plus $2,500 (being interest paid to Big Bank Ltd) = $107,500.

(d) $100,000 (being the purchase price) plus $2000 (being the conveyancing costs) plus $2,500 (being interest paid to Big Bank).

(e) $100,000 (being the purchase price) plus $2,500 (being interest paid to Big Bank). Correct answer was (c)
QUESTION FIVE
In the facts in Question Four the reduced cost base of the land to Annie as at 30 June 2010 would differ from the cost base as at that date as follows: (a) Indexation for inflation would not be allowed in calculating the reduced cost base of the land. (b) Neither the interest nor the council rates would be included in calculating reduced cost base. (c)

The interest would not be included in calculating reduced cost base. (d) The council rates would not be included in calculating reduced cost base. (e) Only the purchase price of the land would be included in calculating reduced cost base. Correct answer was (b)

QUESTION SIX
A tax differs from a user charge in that:
(a) A user charge is applied to a particular good or service supplied by the government whereas a tax is not.

(b) A person paying a user charge would be prepared to pay for benefits to society as a whole whereas funds raised by taxes are not applied to particular goods or services provided by the government.

(c) A user charge is only ever applied to goods or services where particular users cannot be excluded from benefiting.

(d) A user charge is applied arbitrarily in cases of emergency whereas a tax is applied systematically and according to predetermined principles.

(e) Services such as health and education, can only be funded from taxation as particular users cannot be excluded from benefiting from them.

Correct answer was (a)
QUESTION SEVEN
For a taxpayer to make a creditable acquisition for GST purposes: (a) The taxpayer must have a turnover above the GST registration threshold. (b) The supply to the taxpayer must not be a GST free supply. (c) The acquisition must be solely for a creditable purpose. (d) The supply must be an input taxed supply.

(e) None of the above.
Correct answer was (e)
QUESTION EIGHT
In Brent v FCT the payment to Mrs Brent was:
(a) Income because she constructively received it when she said ‘Don’t pay me’.

(b) Income as a reward for services that she provided in telling her story.

(c) A capital receipt as the proceeds of the property she had in the story.

(d) Not income because she was not employed by the payer and was not in the business of authorship.

(e) Income as a gain from carrying on her business of authorship.

Correct answer was (b)
QUESTION NINE
If the facts in London Australia were to occur again today the result for shares purchased and sold after 1999 would be: (a) The profit on the sale of shares would only be taxed under the capital gains tax provisions. (b) The profit on the sale of the shares would be taxed under ITAA97 s6-5 and, assuming that the cost for s6-5 and capital gains purposes was the same, any capital gain would be reduced to zero under s118-20.

(c) The profit on the sale of the shares would be taxed under a combination of ITAA97 s6-5 and the trading stock provisions. (d) The profit on the sale of the shares would be taxed under the capital gains tax provisions as the shares were not purchased with the intention of resale at a profit. (e) The profit on the
sale of the shares would be taxed under ITAA97 s6-5 because of the first strand of reasoning in Myer Emporium. Correct answer was (b)

QUESTION TEN
In Federal Coke the Federal Court held that the receipt by Federal Coke was: (a) A mere gift or windfall gain because there was no privity of contract between Federal Coke and Le Nickel.

(b) Income because it would have been income if Bellambi had received it.

(c) Income to Bellambi because it was constructively received by Bellambi.

(d) Income to Federal Coke on the basis of the precedent in Heavy Minerals.

(e) Not income to Federal Coke because Australian tax law does not have a general reimbursement principle.

Correct answer was (a)
QUESTION ELEVEN
Under the decision in Westfield:
(a) A profit is income if the taxpayer had a purpose of profit making when it entered into the transaction in question.

(b) A profit from a transaction will only be income if the taxpayer had a profit making intention at the time the relevant asset was purchased.

(c) Interest payable over more than one income year is only deductible in the year to which it is properly referable.

(d) An assignment of a right to future income from property without assigning the underlying property itself generates a non taxable capital gain

(e) Except in the case of annuities, an assignment of a right to future income from property without assigning the underlying property itself will be ordinary income as compensation for the future income.

Correct answer was (b)

QUESTION TWELVE
David, an Australian resident, resides in a mansion at Darling Point that he owns subject to a mortgage of $2 million to That Bank Ltd. David purchases a home unit at Bronte on 19th January 2006 for $300,000 and purchases 1000 shares in That Bank Ltd (an Australian resident bank) for $300 per share on the same day. On 1 July 2010 David purchases a terrace house in Redfern for $300,000. In late 2010 David finds himself unemployed and in desperate need of cash.

To prevent That Bank from selling his Darling Point home under a mortgagee’s power of sale Paul sells the home unit at Bronte for $400,000 and the terrace house at Redfern for $400,000 and the shares in That Bank for $200,000. All sales take place on 27th December 2010. For capital gains tax purposes David will obtain the most tax advantageous result if: (a) He offsets the capital loss on the That Bank Ltd shares against the capital gain on the Bronte home unit first.

(b) If he offsets the capital loss on the That Bank Ltd shares against the capital gain on the Redfern Terrace first.

(c) If he apportions the capital loss on the That Bank Ltd shares against the capital gain on both properties equally.

(d) If he carries the capital loss forward as a net capital loss and offsets it against future capital gains on other assets.

(e) If he changes his residence for tax purposes to a low tax jurisdiction such as Hong Kong. Correct answer was (b)
QUESTION THIRTEEN
The ‘merit goods’ argument for taxation suggests that:
(a) That services such as health and education, should either be provided or subsidised by government as market prices paid for them would only reflect benefits that the consumer receives and would not reflect benefits that the wider community receives.

(b) That services such as health and education, should be provided by government as particular users cannot be excluded from benefiting from them.

(c) That services such as health and education should only be provided by government as market prices paid for them would only reflect benefits that the consumer receives and would not reflect benefits that the wider community receives.

(d) That taxes, such as taxes on carbon, should be introduced to counteract market failure which allows activities (such as pollution) which have no merit to continue.

(e) That defence, policing and the court system should be provided by government as private provision of these services would be an affront to sovereignty.

Correct answer was (a)

QUESTION FOURTEEN

Alec purchases vacant land at Kiama (on the New South Wales South Coast) on 1 September 1985 for $20,000. On 1 February 2010 he sold the land to Emma for $200,000. The CGT consequences for Alec of the sale on 1 February 2010 are:

(a) CGT event A1 does not happen because the land was a pre CGT asset to Alec. CGT event D1 happens because Alec has created contractual rights in Emma.

(b) CGT event A1 happens and Alec is taxed on the capital gain of $180,000 but is allowed a discount of 50% which reduces his capital gain to $90,000.

(c) CGT event A1 happens and Alec is taxed on the capital gain of $180,000 but is allowed a discount of 50% which reduces his capital gain to $90,000. Because Alec is taxed under CGT event A1 he is not taxed under CGT event D1.

(d) CGT event A1 happens for Alec but the capital gain is disregarded. CGT event D1 also happens for Alec but the capital gain is disregarded because the land was a pre CGT asset.

(e) CGT event A1 happens but the capital gain is disregarded because the land was a pre CGT asset to Alec. As CGT event A1 happens CGT event D1 does not happen.

Correct answer was (e)

QUESTION FIFTEEN
In Californian Oil Products the receipt for cancellation of the contract was:

(a) A windfall gain because there was no privity of contract between Californian Oil Products and the payer.

(b) A capital receipt because the contract as a structural asset of the recipient company’s business.

(c) Ordinary income because the contract was structural asset of the recipient company’s business and the payment was deductible to the payer.

(d) A capital receipt because it was compensation for loss contracts for sale of the company’s products in the ordinary course of its business.

(e) A capital receipt because the company went into liquidation as a result of the cancellation of the contract.

Correct answer was (b)

QUESTION SIXTEEN
The key distinction between the facts in Rolls Royce v Jeffrey and those in Moriarty v Evans Medical Supplies was: (a) The taxpayer in Rolls Royce v Jeffrey was giving up an existing market whereas the taxpayer in Moriarty v
Evans Medical Supplies was not.

(b) The taxpayer in Moriarty v Evans Medical Supplies was giving up an existing market while the taxpayer in Rolls Royce v Jeffrey was exploiting markets were it was unable to produce itself.

(c) The payments in Moriarty v Evans Medical Supplies were lump sums whereas the payments in Rolls Royce v Jeffrey were partly lump sums and partly triggered by use.

(d) The taxpayer in Moriarty v Evans Medical Supplies was exploiting a market where it was unable to produce itself whereas the taxpayer in Roll Royce v Jeffrey was giving up an existing market.

(e) None of the above.

Correct answer was (b)
QUESTION SEVENTEEN
If the facts in Cook v Sherden were to occur again today:
(a)ITAA 1936 ss21 and 21A in combination would determine that the value of the consideration paid to Cook and Sherden was the arm’s length value of the holidays disregarding the fact that the holidays were not transferable reduced by any the non deductible entertainment percentage and any amount remaining would be taxed as a business gain under ITAA 1997 s6-5.

(b)The prize would be taxed under ITAA36 s21 and s21A in combination as these sections would mean that the arm’s length value of the holidays, disregarding the fact that they were not transferable, would be included in Cook and Sherdan’s assessable income. (c)ITAA36 ss21 and 21A in combination would determine that the value of the consideration paid to Cook and Sherden was the arm’s length value of the holidays disregarding the fact that the holidays were not transferable and ITAA07 s15-2 would tax the amount so determined.

(d)ITAA36 ss21 and 21A in combination would determine that the value of the consideration paid to Cook and Sherden was the arm’s length value of the holidays disregarding the fact that the holidays were not transferable and the amount so determined would be taxed as a business gain under ITAA97 s6-5. (e)Cook and Sherdan would not be taxed as the soft drink manufacturer would pay Fringe Benefits Tax on at the rate of 46.5% on the grossed up taxable value of the holidays. Hence the benefits to Cook and Sherdan would be exempt income under ITAA 1936 s23L. Correct answer was (a)

QUESTION EIGHTEEN
Under the first strand of reasoning in Myer Emporium:
(a) All gains from commercial transactions entered into by taxpayers who are otherwise in business will be ordinary income.

(b) Interest payable over more than one year is only deductible in the year to which it is properly referable.

(c) The change in the share ownership of the company was a critical evidentiary factor in establishing that the purpose of the company had changed.

(d) A profit from a transaction outside the ordinary course of the taxpayer’s business will be income because to be in business a taxpayer must have a purpose of profit making from a transaction.

(e) None of the above.

Correct answer was (e)

QUESTION NINETEEN
ITAA97 s15-20 taxes:

(a) Amounts that are royalties only under the extended meaning of ‘royalty’ in ITAA97 that are not ordinary income.

(b) Amounts that are not royalties under the ordinary meaning of ‘royalty’ but that are ordinary income under the gain from property principle.

(c) Amounts paid to non residents that are royalties within the extended meaning of ‘royalty’ in ITAA97.

(d) Amounts paid to non residents that are within the ordinary meaning of ‘royalty’ but that are not ordinary income.

(e) Amounts that are royalties under the ordinary meaning of ‘royalty’ that are not ordinary income.

Correct answer was (e)
QUESTION TWENTY
Rupert was employed to coach a women’s American football team that plays in the fledgling Sydney competition. Rupert’s contract was for a 5 year term under which he was entitled to payment of $20,000 per month. After 12 months the women in the team complain about Rupert’s style of coaching and Iron Lady Pty Ltd (the company which owns the team) decides to terminate his contract.

Iron Lady Pty Ltd arranges for Rupert to be employed at a lesser salary of $15,000 per month by their wholly owned subsidiary Gridiron Pty Ltd to coach a men’s American football team in the Sydney competition for four years.

Iron Lady Pty Ltd also agrees to pay Rupert each month the difference (namely $5000 per month) between the amount he was entitled to under his contract with them and the amount he will be entitled to under the contract with Gridiron Pty Ltd. Iron Lady Pty Ltd also pays Rupert $20,000 for agreeing not to coach another women’s American football team for the next four years. The $5000 per month and the $20,000 lump sum paid to Rupert by Iron Lady Pty Ltd will be likely to be characterised as:

(a) Capital receipts as they are payment for giving up valuable rights.

(b) The payment of $5000 per month would be ordinary income as it is paid for the same term and with the same periodicity as the payment he was entitled to under his original contract and given these factors he would regard the payment as adding to the income that he relied on to support himself. The payment of $20,000 would be a capital receipt as a receipt for giving up
valuable rights.

(c) The payment of $5000 per month would be ordinary income as it is paid for the same term and with the same periodicity as the payment he was entitled to under his original contract and given these factors he would regard the payment as adding to the income that he relied on to support himself. The payment of $20,000 would be a capital receipt and would be taxed as a capital gain under CGT event D1 as contractual rights have been created in another entity.

(d) Not ordinary income because Rupert would not rely on it as he has sufficient income from his contract with Gridiron Pty Ltd.

(e) Assessable as statutory income under s15-2 as a benefit provided in respect of employment or services and as ordinary income under s6-5 which would mean that the rules about statutory income would prevail.

Correct answer was (c)

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  • Date: 27 April 2016

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