Taxation Questions


Nick Mitchell sold his business in April 2018 and he wants advice about his possible capital gains tax liability in light of the following facts: 

 Nick started his business in 2006 when he purchased the building freehold for $600,000 and he has run his business consultancy business continuously in these premises since then until the business was sold in April 2018.

 Nick sold his business for $5,200,000 (excluding GST).

 Of this $5,200,000, $4,200,000 relates to the building and the remaining $1,000,000 relates to the other business assets including goodwill.

 The written down value of the business plant and equipment at the time of the business sale was $300,000 and $300,000 of the $1,000,000 shown above for the other assets is allocated to the value of the plant and equipment at the written down value at the date of sale.

 In April 2018, at the time the business was sold, the amount owing on a business loan for this business was $1 million.

 The business has had a current annual turnover of $2,400,000 (excluding GST). This figure has remained virtually the same over the last 3 years.

 Nick’s wife, Lulu, runs a cleaning business, in her own name, which has total net assets of $350,000. Nick and Lulu consult each other regularly

about the decisions concerning the running of both businesses.

 Nick also owns a portfolio of shares with a current market value of $480,000.

 Nick also holds 45% of the shares in SBW Pty Ltd, a private company that owns and runs a catering business. The total net assets of SBW Pty Ltd have a fair market value of $500,000. The next largest shareholder owns 30% of this company.

 Nick is also a beneficiary in the Mitchell Family Trust and he informs you that he has only received modest distributions from this trust in the previous 4 years. The amount of these distributions were $4,000 in 2015 (when the trust had net income of $20,000) and $5,000 in 2016 (when the trust had net income of $12,000). The net assets of this Trust as at April 2018 were $300,000.

 Nick also estimates that 20% of his home is used for running his business and that the home is presently worth $600,000. Nick currently has a loan of $100,000 against this property.

 Nick is aged 62 and he may buy another business in the future.

Required:Based on the above information provide advice, with supporting reasoning, to Nick of what his net capital gain is likely to be, after applying all the various discounts and concessions that he may be eligible for.

Question 2

The bookkeeper for No-doubt Pty Ltd has provided you with the following information relating to the financial year ending 30 June 2018 (all amounts shown are GST-exclusive).

The company had sales of $540,000 for the year ended 30 June 2018. 

The opening stock balance as at 1 July 2017 was $50,000 (the stock was valued at market value). 

The closing stock values as at 30 June 2018 are $40,000 (using cost); $60,000 (using replacement cost) and $80,000 (using market value). 

The company has a balance of plant and equipment in the general Small Business Entity (SBE) pool as at 30 June 2017 of $94,000. 

The company purchased a second hand machine on 1 May 2018 for $36,000. 

The company made purchases of trading stock during the year of $65,000. 

The company disposed of an old machine on 1 August 2017 for $5,000. 

The company had other tax deductible expenses of $180,000. 

Required:Assuming the company is eligible to use the small business entity system and also that it wishes to minimise its taxable income, calculate the likely taxable income of Redoubt Pty Ltd for the tax year ending 30 June 2018.

Question 3

The Valley Trust is a discretionary trust (not a family trust) set up on 1 July 2014 that operates a building consulting business. For all relevant years, the trust has had the same trustee, VVT Pty Ltd.

John and Doris each hold one share in VVT Pty Ltd and no other shares have been issued to this date. No beneficiaries hold fixed interests in the trust.

The assessable income of the trust for the year ended 30 June 2018 is $220,000.

In the year ended 30 June 2016 the trust incurred a loss of $20,000 and for the year ended 30 June 2017 the trust incurred a loss of $30,000.

However, for the year ended 30 June 2015 the trust had a net income of $40,000. This net income was distributed to John- 30%; Doris-30%, Bob-20%, Gary-10% and Edward 10%. The only other beneficiary, Cathy, did not receive any distribution in that year. For the year ended 30 June 2018, the trustees propose to distribute a third of the trust net income to each of John, Doris and Cathy.

Required:Can the trust apply its losses for the years ended 30 June 2016 & 2017 respectively to reduce the trust net income for the year ended 30 June 2018?

Question 4

Amery Pty Ltd has a balance sheet as at 30 June 2018 which shows the following:

Assume that all assets are shown at their fair market values and the loan is secured only against the land.

Required:What amount of stamp duty would apply if Robert, who has no prior existing holding of shares in this company, acquires 60% of the issued shares in Amery Pty Ltd for their fair market value? Assume that the transaction takes place on 1 May 2018 and that the land is non-residential and non-primary production land.

Question 5

Jack Black has been employed as a plumber for some 10 years but on 1 July 2017 he set up his own company, No Drips Pty Ltd, to provide plumbing services to the public. During the year ended 30 June 2018, No Drips Pty Ltd only provided services to Suburban Plumbers Pty Ltd under a contract arrangement whereby No Drips Pty Ltd was paid $60 per hour as a full and final payment and that Suburban Plumbers Pty Ltd paid all and any liability insurance. Jack is also not required to supply any of his own tools as these are always all supplied to him by Suburban Plumbers Pty Ltd. For the year ended 30 June 2018, No Drips Pty Ltd received $68,000 in fees from Suburban Plumbers Pty Ltd (no GST applies to this income as Jack is not registered for GST).

Jack wants to know if he can claim any of the $11,000 in interest costs on his home mortgage (he says he uses his home 20% for business purposes and that he has not other business premises). He also wants to know if he can claim any of his council rates ($1,000) and property insurance ($800) on his home. He also wants to pay his wife $10,000 in salary for helping him with the bookkeeping for his plumbing business.

Required:Advise Jack as to whether the personal services income rules apply to him and then as to whether he can claim any of the expenses mentioned?

Question 6

DB Pty Ltd is a business with an annual turnover of $11m pa and it has sought advice about the deductibility of the following expenses (assume all amounts are net of any GST):

The business prepaid insurance expenses for the period 1 May 2018 to 30 April 2019 for $12,000. 

The business prepaid $120,000 representing a retiring employee’s salary for the period 1 June 2018 to 31 May 2020. 

The business paid $900 on 1 June 2018 for an advertising campaign that will run for the next 10 months. 

The business also prepaid rental expenses of $44,000 on 30 June 2018 for the period 1 July 2018 to 30 June 2020. 

Required:Advise DB Pty Ltd how much, if any, each of the payments listed above would be deductibility for income tax purposes for the year ended 30 June 2018.

Question 7

Ben purchased a bookshop from Andrew on 24 June 2018 for $100,000.

The $100,000 was made up of (a) books for sale of $60,000; (b) furniture and plant and equipment of $30,000 and (c) goodwill of $10,000.

Ben gives you a Settlement Statement for the sale (this statement sets out the details of the sale price) that shows:

Sale price of the business $100,000, comprising:

Required:Assuming Ben is eligible to use the Small Business Entity tax system, what tax issues will arise in respect of this purchase to Ben? In your advice to Ben, please advise whether he can claim any depreciation deductions on this purchase in the year of the purchase and if so, what amount that might be?