Question 1 (11 marks)
Jack is an accountant for an international accountancy firm based in Fiji. He has investments in Fiji comprising of his own home, a rental property, shares in local companies and cash deposits in high interest-bearing bank accounts. On 1 February 2020, Jack was transferred to the firm’s Brisbane office on a temporary three-month secondment. The purpose of the secondment was to establish networks with existing Australian clients that have indicated the possibility of investing in Fiji. During the secondment period, Jack remained an employee of the Fiji office, and his salary was paid into his Fiji bank account. While Peter’s intention was to return to Fiji at the conclusion of his secondment, he sought and was successfully offered a permanent position in Brisbane. In early June 2020, he became an employee of the Brisbane office. His relocation involved purchasing an apartment in the Brisbane suburb of Ascot, renting out his own home in Fiji and transferring a sum of cash to a high interest-bearing bank account in an Australian bank. Discuss residency and source issues. (Maximum 500 words)
ANSWER: ** Answer box will enlarge as you type
The main issue is to determine if Jack and Peter are Australian residents for tax purposes. The reside test under s 6(1) (a) ITAA36 defines the term ‘resident’ based on a person’s behaviour while staying in Australia (Azzi 2018, p.165). First, reside test checks an individual’s intention or their purpose for living in Australia (Week 3 lecture notes, p.22). Jack’s purpose for staying in Brisbane was to connect with the firm’s clients from Australian, who showed interest in investing in Fiji. The company, therefore, transferred Jack to Brisbane office in February 2020 to temporarily stay there while fulfilling this duty. Secondly, the test investigates family and business or employment ties (Week 3 lecture notes, p.23). In this regard, Fiji remained Jack’s permanent home. He would stay in Brisbane for a temporary duration of three months and return to Fiji after concluding the secondment. Moreover, the company continued to recognise Jack as an employee of the Fiji office and even paid his salary into the Fiji account. Thirdly, reside test examines the maintenance and location of assets. While in Australia, Jack showed no intention to relocate from Fiji. As such, his major investments including his own home, local properties, shares held in local firms, and cash deposits to high-interest-bearing banks remained in Fiji. Based on the above findings, it is reasonable to argue that Jack is a foreign resident and foreign tax rates may be used to assess all his assessable income. Still, Jack may receive income exemptions for his foreign earnings as a resident from a foreign service that is eligible who works continually for at least 91 days in Brisbane (Week 5 lecture notes, p.8).
On the other hand, Peter is arguably an Australian resident. First, he has an intention to stay in Brisbane. Although Peter’s main purpose of going to Brisbane office was to fulfil the requirements of his secondment and would return to Fiji afterwards, he changed his later on mind and sought permanent residency in Brisbane. Even the judicial test for family, business, and employment ties (Week 3 lecture notes, p.23) still confirms that Peter is Australian resident. With Brisbane as Peter’s permanent residence, it is apparent that this is where he lives and will most likely bring in his close family members from Fiji. Besides, his employer now recognises him as an employee of the Brisbane office. In other words, his salary will now be sent to his bank account in Brisbane. Under the test for maintenance and location of assets (Week 3 lecture notes, p.24), Peter maintains his home in Fiji and has rented it out. He has also purchased an apartment in Ascot suburbs in Brisbane and invested some cash in high-interest-bearing bank that, located in Australia. Although he gets part of his income from Fiji (from rental payments), the factors that support his connection with Australia are stronger. Still, Peter is assessable on income from all these sources including the investments and salary from Brisbane and investment income from Fiji. If the tax for his overseas investments is already applied, he could get foreign income offsets.
Question 2 (7 marks)
Sam is an employee at a large land development company. He has negotiated car benefits with his employer. Sam was provided with the car for the period 1 April 2020 to 31 March 2021. The leased car value was $22,000 on 1 April 2020, and the car had only been leased for a year at that time. Sam is required to pay for any petrol and other maintenance costs, which he has determined to be $1,300 for the period 1 April 2020 to 31 March 2021.
Advise Sam’s employer as to the FBT consequences (using statutory formula method) arising out of the use of the car. You may assume that any benefits are Type 1 fringe benefits. (Maximum 300 words)
ANSWER:
In statutory formula method (Week 8 lecture notes, p. 11):
The Australian Taxation Office (2021) explains that a single statutory rate of 20% applies to all fringe benefits on cars after 10 May 2011, unless a pre-existing commitment is found. Numbers of kilometres travelled are not accounted for in this method.
Car’s value is $22,000. The employer should maintain the original base value of the car during the 1 year period when leasing it to Sam. That is, the employer will only change the car’s base value after fourth anniversary from that date when the car purchase happened (Australian Taxation Office 2021).
On number of days in use, Sam stays with the car from 1 April 2020 to 31 March 2021. Sam plans to give $1,300 for petrol and other maintenance costs.
Therefore, the taxable value in Sam’s case is:
If the employer makes changes to the pre-existing commitments, a new flat rate of 20% or relevant transitional rates should be considered (Australian Taxation Office 2021). Example is when the employer asks Sam to refinance the car or makes alterations that change the length of time the lease contract lasts. If any of this happens, the employer should apply the new flat rate of 20% or a transitional rate at the start of the following FBT year.
The employer should also remember that FBT applies to him or her directly. This means that if a new employer takes over, new commitment must be established. The new employer should apply the 20% flat rate or the relevant transitional rate immediately. Similarly, change of car attracts the establishment of new commitment with the lessee (Australian Taxation Office 2021). Here too, the 20% flat rate or other transitional rates apply immediately even with change of employer.
Question 3 (11 marks)
Divanee is a Neurosurgeon at the local hospital. However, the long hours have been very draining, and she has decided to take a leave of absence from the hospital and pursue her interest in blending coffee beans to find the perfect taste. She has incurred the following expenses:
a) Payment of $5,000 to the Australian Society of Neurosurgeons (Divanee has decided to maintain her membership during her leave of absence in case she decides to go back to work as a surgeon);
b) Donation of $500 to Medecins Sans Frontières (a registered Deductible Gift Recipient);
c) Donation of $1,000 to her local neighbourhood community house (a registered Deductible Gift Recipient). All donors are permitted to book the function room in the house for free up to 3 times per year. The normal booking fee would be $250;
d) She paid $500 for Newspapers which covered some health-related information; and
e) Travel cost $2,500 to attend a global conference in London.
Advise Divanee as to her income tax consequences arising out of the above information. (Maximum 400 words)
ANSWER:
The income tax amount id determined by taxable income, the tax rate, and the available tax offsets. While a taxpayer like Divanee has no power over the tax rate, her activities directly influence the taxable income amount and the tax offsets. Divanee’s taxable income comprises of assessable income and deductions (Ayers, Jiang, & Laplante 2009, p.19). If she gets more deductions, the level of taxable income drops but if deductions are fewer and she happens to have more assessable income the taxable income amount increases. The amount may become even larger in the absence of tax offsets. The impact of the above purchases on Divanee’s income, thus, depend on whether they are assessable income, deductions, or tax offsets. See the table below:
Type of purchase | Category |
Membership payment of $5,000 to the Australian Society of Neurosurgeons | Is an example of Mutual recept, or membership subscription, which is not income (Week 4 lecture notes, p.5) and is non-taxable – it is deductible |
Donation of $500 to a registered Deductible Gift Recipient - Medecins Sans Frontières | Divanee is an individual not a business, and she does not receive anything for the donations. This makes the donation non-taxable gift. It is deductible |
Donation to her local neighbourhood community house ($1,000) | As individual who does not receive as service or product in exchange for the donation, Divanee’s contribution is deductable. |
3 times free room booking and normal booking fee would be $250 | If Divanee books the room for the first, second, or third time, it will be free. However, she may have to pay afterwards. If the amount spent goes towards the establishment of assessable income, the amount may be deductable. |
Health-related Newspaper payments - $500 | If the topics she reads helps to increase her amount of assessable income, then this amount is deductable. Otherwise, the amount is taxable. |
Travel expenses to a global conference in London - $2,500 | Purpose for attending the conference is not is not explained. If her travel is business related; either for her career as neurosurgeon or her interest in blending coffee (for the purpose of generating assessable income), then the travel expenses are deductable. However, she must show the travel expenses in accordance with sub-div 900-D (Week 6 lecture notes, p.13) |
Leave payment | If the hospital pays Divanee during her leave, the salary is taxable. ITAA1997 excludes leave payment from deductions – as it is taxable (Week 6 lecture notes, p. 22). |
From the table, the only item that must be taxed is Divanee’s leave payment. She has several deductable, meaning that her income tax will be lower.
Question 4 (7 marks)
Over the last 6 months, Rohan acquired the following assets:
- an engagement ring which cost $5,000
- a ceramic antique vase (for $3,000),
- a painting (for $8,500),
- a Television (for $15,000),
- Australia Bank’s shares (for $5,000).
Last week he sold these assets as follows:
- an engagement ring which cost $6,000
- a ceramic antique vase (for $1,000),
- a painting (for $2,500),
- a Television (for $11,000) and
- Australia Bank’s shares (for $25,000)
Calculate his net capital gain or net capital loss for the year. (Maximum 300 words)
ANSWER:
Capital gains result from appreciation in asset value while capita loss is characterised by a decline in the value of the asset (Minas, Lim & Evans 2018, p. 634). To derive the net capital gain or loss, the basis (or amount paid for the asset) is deducted from the proceeds from sales. That is:
Net capital gain (or loss) = Earnings from asset sale – basis
So, 6 months ago, Rohan bought an engagement ring, ceramic antique vase, painting, television, and shares at Australian bank. The total basis for all these capital assets is as follows:
=$(5,000 + 3,000 + 8,500 + 15,000 + 5,000 = $36,000
Proceeds from sale of assets:
=$(6,000 + 1,000 + 2,500 + 11,000 + 25,000) = $45,500
Rohan’s net capital gain = $(45,500 – 36,000) = $9,000
Rohan will pay tax on this gain according to his individual income tax rate. For a capital gain to become an ordinary income, it should have a contract, a tree, and a fruit (Week 4 lecture notes, p.13). In the case above, the purchase of the assets initiated the contract and Rohan held the items for 6 months. The tree in this scenario could be the goodwill of business, and the fruits are the earnings from the sale of the assets.
Question 5 (7 marks)
What is a base rate entity? And what rates of tax are payable by these entities? (Maximum - 200 words)
ANSWER:
In section 23AA of the Income Tax Act 1986, a company is considered a base rate entity within an income year if the base rate entry passive income accounted for a value less than or equal to 80% of the assessable income. A company may also be called a base rate entry if the total turnover within an income year des not reach the threshold, which is set currently at $50 million (Federal Register of Legislation 2017). To be a base rate entity and get access to the lower tax rates, a company must be a small business (ATO 2021). Some companies in this category may not have been in existed in the last income year.
The tax rates payable by entities in this category vary from one income year to the next. For instance, the company tax rate for base rate entity was 27.5% in income years 2017-18 and 2019-20 then this tax rate changed to 26% in 2020-21 and 25% for income years 2021-22 and over (ATO 2021). The not-for-profit base rate entities also get limits so they do not pay tax on the first $788 for income year 2020-21 and $762 for 2021-22 and later years.
Question 6 (7 marks)
In what circumstances can a taxpayer challenge an assessment outside the ordinary appeal process. Discuss based on statutory and common law. (Maximum 200 words)
ANSWER:
A taxpayer may challenge an assessment if the activity focuses on statutory income that is either exempt or non-assessable non-exempt. Several categories of income are found under the exempt income. The first class, s 11-5, exempts income from institutions such as public educational, religious, charitable, and scientific organisations (Week 5 lecture notes, p.7). Associations for employers and employees, local government agencies, and municipal corporations’ incomes are also exempt. The second class exempts income from non-cash business gains lower than $300, allowances offered to defence force members, veteran payments, and educational scholarships, among others.
On the other hand, statutory or ordinary income only becomes non-assessable non-exempt if a provision in ITAA97, ITAA36, or a different Commonwealth law states it as such (Week 5 lecture notes, p.9). Examples of items in this category, according to Sub Div 11(B) of s 6-23 ITAA97 include some forms of superannuation benefits, eligible redundancy payments, GST posed on taxable suppliers, and income which is fringe benefit, among others. The common law sets out the conditions and requirements that income must fulfil to be considered as either exempt or non-assessable non-exempt income.
