Case Study one
Cheers Pty Ltd is an Australian resident company which is involved in the wine and beer industries where it owns a number of vineyards in South Australia and has two boutique breweries in Adelaide where it produces Southern Bitter and Port Lincoln Premium Lager.
Question 1:
Cheers in carrying on its business spends a significant amount of money on advertising because its market research indicates that advertising and sponsorship are the best way to develop awareness of its brands and to keep their customers engaged with the company. On 4th October 2013 the Federal Minister for Health made an announcement that the Federal Government was going to introduce legislation that would make it a lot more difficult to advertise alcohol on television during sporting events. The Ministers proposal included a suggestion that alcohol advertising during daytime cricket test matches and particularly the ashes series with the old enemy England would be banned and that alcohol advertising during televised evening rugby and rugby league games would only be allowed after 8pm. Cheers estimates that the restrictions on advertising while not stopping advertising outright would result in a reduction in exposure to its potential audience by around 40%. Cheers immediately reacted to the Ministers announcement by engaging consultants to lobby the Federal Government to re-consider the proposed changes. Cheers paid $245,000 in consulting fees and sponsored advertising to lobby against the proposed changes to the current advertising rules.
Required:
Provide advice to Cheers as to whether it can claim a deduction for the $245,000 in consulting fees and sponsored advertising to lobby against the proposed changes to the current advertising rules. Support your discussion with reference to appropriate authority.
Question 2:
Market research completed in 2013 by Cheers indicated that there was an emerging market in selling boutique light beers to young professionals both male and female. Cheers had developed Southern Bitter and Port Lincoln Premium Lager specifically for this lucrative market. Market research also indicates that such trends in consumption may not have longevity as the taste for beer in the young professional market changes regularly. The manager of these two brands, Elizabeth developed a business plan in November 2013 which suggested that the company invest significant amounts of money on advertising and promotion to quickly gain the lions share of the young professional market and then sell off the brands to a competing brewery and make a quick profit. Elizabeth implemented the plan and Cheers incurred $1,250,000 in advertising and promotional costs but as a result captured 67% of the beer market for young professionals in the first 4 months after the brands were launched. This came to the attention of Toncarl Ltd the largest brewer and distributor of beers in Australia and Toncarl entered negotiations with Cheers for the purpose of buying the rights to brew and sell Southern Bitter and Port Lincoln Premium Lager from Cheers. Cheers sold the right to brew and sell the beers for $15,000,000 to Toncarl on 15th June 2014.
Required:
Provide advice to Cheers as to whether it can claim a deduction for the cost of advertising and promotion of Southern Bitter and Port Lincoln Premium Lager. Comment on whether the $15,000,000 would be included in assessable income. Support your discussion with reference to appropriate authority.
Question 3:
Geraldine is a meat butcher who carries on a business in Toowoomba where she sells directly to the public and also supplies restaurants making deliveries in her delivery truck. Geraldine is a small business entity. Geraldine had the following outgoings in the year ended 30 June 2014:
Geraldine paid parking fines of $700 imposed by the local city council on her delivery truck. Geraldine needed to park illegally to get close to the businesses she was making deliveries.
Geraldine accrued $2,500 in annual leave in her financial statements for the year ended 30 June 2014 for her head butcher, Matthew. Matthew had three weeks of annual leave owing to him on 30 June 2014.
Geraldine made a payment of $6,000 on 29th June 2014 for council rates (a compulsory payment) for the period 1 July 2014 to 31 December 2014.
Geraldine made a payment of $1,200 on 1 June 2014 for an insurance premium for her business. The period of the insurance cover is 1 June 2014 to 31st May 2015.
Based on these outgoings what amount can Geraldine claim as tax deductions under s 8-1 Income Tax Assessment Act 1997 for the year ended 30 June 2014? Support your discussion with reference to appropriate authority.
Question 4:
Toni carries on a bakery business in Toowoomba where she sells directly to the public and also supplies restaurants making deliveries in her delivery truck. Toni is a small business entity. Toni had the following outgoings in the year ended 30 June 2014:
One of Tonis customers, Mrs Stevenson swallowed a small metal object that was in one of the cakes that Toni sold to Mrs Stevenson. Mrs Stevenson sued Toni for damages and Toni paid $6,000 to Mrs Stevenson on 16 April 2014. Toni paid her own legal costs of $5,000 related to legal advice on the claim on 12 April 2014.
Toni is married to Grant and Toni borrowed $50,000 from the National Bank and purchased shares in Grants name and he will get the dividends. Toni paid interest of $2,000 on the loan for the bank in the year ended 30 June 2014.
Required:
Based on this information what amount can Toni claim as a tax deduction under s 8-1 Income Tax Assessment Act 1997 for the year ended 30 June 2014? Support your discussion with reference to appropriate authority.
Question 5:
Ling is a civil engineer who carries on her own consulting business in Toowoomba and had the following transactions which are relevant to determining her allowable deductions for the year ended 30 June 2014:
Ling paid $6,800 in child care expenses during the year to put her daughter in child care to enable Ling to carry on her business.
Ling paid $63,000 to a civil engineering company, Emerald Pty Ltd to get the agreement of Emerald not to offer consulting services in Toowoomba for the next five years.
Ling paid for the cost of food and accommodation being $150 for staying overnight at the Metropole Hotel in Brisbane while attending a civil engineering conference.
Required:
Based on this information what amount of expenses can Ling claim as deductions in the year ended 30 June 2014? Support your discussion with reference to appropriate authority.
Question 6:
Lynda is an insurance assessor who uses her car to travel to inspect buildings and properties damaged by fire and flood. She maintains a log book which indicates that her private use of the car is 30%. She incurred the following expenses in the year ended 30 June 2014 in relation to her car:
She purchased a second-hand car for $27,000 on 1 September 2013 but at the time she purchased the car it needed to be re-painted because the paintwork was damaged. The cost of repainting was $1,500 and she paid this amount prior to using the car. The car has an effective life of 8 years.
She paid for the cost of fuel and oil as well as the cost of servicing the vehicle during the year of $3,700.
She paid interest on a loan to purchase the car of $2,500 during the year.
Required:
Based on these expenses what amount can Lynda claim as a tax deduction for the car in the year ended 30 June 2014? Ensure that you calculate depreciation/capital allowances. Support your discussion with reference to appropriate authority.
Question 7:
Katie carries on a smash repair business, employing 3 qualified staff, where she repairs cars that have been involved in a crash. At 30 June 2014 she provides the following information in relation to her trade debtors/accounts receivable:
Katie estimates that around 10% of her trade debtors or $4,800 of her trade debtors will not pay her for work done and invoiced. The 10% is based on Katies experience of bad debts in the past. Total debtors at 30 June 2014 were $48,000.
Katie has identified that Jack Buckley who owes her $2,300 for repairs to his car has just been made a bankrupt and so she made a written note on 25 June 2014 that she considers that she will not receive any amount from Jack. Katie has not removed Jack from the trade debtor balance at 30 June 2014.
Katie had written off a debt of $1,700 as bad in the 2013 year for John Ford because he had told her that he could never pay the money and that he did not have any assets. Fortunately for John he received $20,000 from the estate of his Aunt Sybil who died on 14 August 2013 and John paid Katie the $1,700 owing on 23 May 2014.
Required:
Based on this information what amount can Katie claim as a tax deduction for the year ended 30 June 2014? Will she have to include any amount in assessable income? Support your discussion with reference to appropriate authority.
Case Study Two
Question 1:
Susanne signed a contract 14 October 2013 to purchase a residential rental property from her mother Gertrude and settlement took place on 14 December 2013. The market value of the property at the time of the contract was $400,000 but Susanne only paid $300,000 to her mother for the property. In addition Susanne paid legal fees of $2,500 to her lawyer to prepare the contract and transfer the property and $8,100 in stamp duty to the State Government at the time of purchase. The property needed to be repainted prior to being leased to tenants and Susanne paid $11,000 to have the property full painted, inside and outside. The property was rented to tenants on 1 March 2014 when the repainting had been completed.
Required:
Based on this information what is the cost base of the property to Susanne? Support your answer with reference to appropriate authority.
Question 2:
Damien, a resident purchased a vacant block of land in Adelaide in March 2005 for $500,000 and paid stamp duty on acquisition of $17,000. The land was valued by a professional valuer in June 2013 to be worth $1m and Damien entered into a contract in September 2013 to sell the land for $1m with the purchaser paying a non-refundable deposit of $50,000. Settlement of the contract was to be in December 2013 but by that time the market value of the land had dropped substantially and the purchaser cancelled the contract and Damien retained the forfeited deposit. Damien continued to market the property through his real estate agent and signed a contract to sell the property by contract entered into in May 2014. Damien received cash of $525,000 and a property worth $200,000 upon the sale of the vacant block of land. Damien incurred real estate agent fees of $15,000 to sell the property.
Required:
Provide advice to Damien in relation to the application of capital gains tax to the sale of his vacant land including the receipt of the forfeited deposit. Calculate his net capital gain on the assumption that this is Damiens only CGT event in the current year but Damien did have a capital loss from the sale of shares in Telstra in 2012 of $130,000. Support your answer with reference to appropriate authority.
Question 3:
Nash, a resident purchased a residential property on 1st August 2012 for $520,000 paying stamp duty of $20,000 and legal fees of $2,200 on the purchase. The dwelling on the property was in a very poor state of repair and Nash decided that it would be best to have the property demolished and tried to sell parts of the house to scrap merchants but was unable to receive any offers. Accordingly, he proceeded to engage a demolition firm, Demolish U Pty Ltd (Demolish) to remove the existing building on the property. Nash paid Demolish $35,000 to have the house removed which included substantial costs to have the asbestos professionally removed. The property was 1,000 square metres in size and after the demolition and land clearing Nash proceeded to engage engineers to draw up plans to subdivide the block into two blocks of 400 and 600 square metre in size. The engineers charged Nash $15,000 in professional fees and the local council charged Nash $22,000 in fees to subdivide the block. Nash engaged his real estate agent Donna to sell the 400 square metre block and a contract was signed on 23rd March 2014 to sell the 400 square metre block for $475,000 incurring real estate agent fees of $8,800 to sell the block. Donna indicated that the market value of the remaining 600 square metre block was $600,000. Nash has his own main residence and at no time did he reside in the property being sold. Nash expects that in the future he will build a new home for himself on the 600 square metre block that he has retained.
Required:
Provide advice to Nash as to the application of capital gains tax to the acquisition of the property, the demolition and removal of the building, the subdivision and subsequent sale of the 400 square metre block. Calculate the relevant capital gain/loss on the sale of the 400 square metre block. Assume that the purpose of removing the existing property was to enable the subdivision to take place and effectively make the property more valuable. Assume also that the land is not trading stock and is kept as a capital gains tax asset. Support your answer with reference to appropriate authority.
Question 4:
Tom and his family purchased a small home on South Street, in Toowoomba for $135,000 on 9 November 1999 incurring $3,500 in stamp duty and $700 in legal fees at the time of the purchase. They used the property as their main residence at all times until 20 January 2008 and at which time Tom and his family moved to Sydney to allow Tom to commence a three year contract for the Urban Bank. The market value of the Toowoomba property was $230,000 at that time. They did not purchase a new home in Sydney but stayed in a property provided by Urban Bank. While they were away from Toowoomba they rented the Toowoomba property to tenants who paid $450 per week in rent. On their return to Toowoomba on 5 January 2011 then recommenced to live in the property but soon felt that the property was too small for their requirements so they purchased a new home on East Street on 10 October 2011 for $560,000 and moved into that property on that date and rented out the South Street property. Tom felt that the property market had peaked in Toowoomba in the 2014 income year and he sold the South Street property for $350,000 on 15 March 2014 incurring real estate agent fees of $6,700 on the sale. Tom and his family expect to live for many years in East Street property and do not expect to sell it.
Required:
Provide advice to Tom as to the application of capital gains tax to the disposal of the South Street property. Consider any exemptions and concessions that may be applicable to the calculation of the gain/loss on disposal. Support your answer with reference to appropriate authority.
