Australian Tax Law

Rebecca is very impressed with the tax return that your group has prepared for her. So much so that she has referred one of her major clients, Drew Richardson, to your group for taxation advice. Drew is 56 years of age. He has recently retired from his full-time job as a radiologist. He is an Australian resident for tax purposes and brings the following issue to your attention.

Background Information:

Drew advises you that he has approximately $3 million invested in the Australian sharemarket. Drew acquired these shares in August 2010. At any one time, Drew’s portfolio consists of around 35 to 40 different companies shares (combination of blue chip shares and small mining, biotech and pharmaceutical companies).

In August 2010, Drew borrowed $2.5 million from Macquarie Bank to fund the purchase of these shares. He is currently paying interest in respect of this loan.

Prior to retiring, Drew worked as a radiologist and did not know much about share investing. Two months after retiring, in order to better understand how the stockmarket works, in July 2010, Drew completed an intensive share trading course run by the Australian Stock Exchange.

Before investing his money into the market, Drew developed a detailed trading plan (in consultation with Rebecca). Drew conducts extensive research and analysis himself using a variety of resources including the internet, screening techniques, reading share investor magazines and reading over company reports and bulletins sent by his stockbroker.

Drew spends most of his day analysing charts and trends for companies that he currently owns shares in or intends buying and regularly monitors the share prices of his ‘favourite’ stocks using the ‘watchlist’ function on the internet. Even though he uses a stockbroker (Rebecca), Drew has also opened a trading account with ComSec (an online broker) which allows him to monitor the share prices of his favourite stocks on a daily basis. He uses a computer in a small office in his home to monitor the share prices and undertake trades, and when away from his office, Drew accesses the share prices using his Apple i-phone.

In fact, Drew has a reputation of being interrupted on the golf course by Rebecca to discuss whether to buy or sell particular shares.

Drew is a member of the Australian Shareholdersââ?‰?¢ Association and makes a special attempt to attend the Annual General Meetings of companies that he owns shares in. He keeps monthly summaries of his trades and maintains all ‘buy’ and ‘sell’ contracts. Drew enters all of his transactions into a computer program produced by the stockbroking company, TopShare. This program keeps track of all share transactions, including calculation of unrealised and realised gains and losses as well as franked and unfranked dividends received.

When receiving dividends, Drew generally reinvests these dividends and opts to receive additional shares in the company, rather than take the cash.

Drew advises you that during the 2011 income year, he completed 66 share transactions (ie. both buying and selling). While his intention is generally to hold shares long-term, if the price of a particular share rises by more than 15% to 20% since he first acquired it, he generally sells that share in order to make a ââ?¬Å quick buckââ?¬Â?. All realised profits are re-invested back into the sharemarket and used to buy additional new shares. For the first nine months of 2011, Drew advises you that he realised profits in the order of $90,000 to $100,000.

However, in recent times, due to the downturn in the Australian stockmarket, share prices have fallen considerably, meaning that Drew has not made many trades in the last quarter of 2011. Most of his shares are trading below what he bought them for, resulting in some significant unrealised losses.

Drew is quietly optimistic that the stockmarket will recover and that his shares will gradually increase in value. He tells you that once they increase above what he bought them for, he hopes to start selling the profitable shares again.

Required:

Drew specifically seeks your advice on the following matters:

(i) From a taxation viewpoint, what factors need to be taken into consideration in determining whether Drew is regarded as a share trader or a share investor?

(ii) What are the taxation consequences if Drew is regarded as a share trader?

(iii) Alternatively, what are the taxation consequences if Drew is regarded as a share investor?

(iv) Based on the given facts, in relation to the 2011 income year, Drew seeks your opinion as to whether he is a share trader or a share investor.

There is no need to perform any calculations as Drew has not provided with you with detailed figures.

Final Comments:

Students are expected to use language and terminology commensurate with professional business letters. Please use 1½ line spacing.

Please include each of the four questions that Drew has asked (above) as headings in your letter.

Furthermore, ensure that you make appropriate references to sections of the Income Tax Assessment Acts (1936) and (1997), relevant cases, Taxation Rulings and ATO Interpretative Decisions in your letter.

Do not quote references to paragraphs of the CCH Australian Master Tax Guide. This is not a source of taxation law and as such, should not be quoted or referenced by students.

For the purposes of the letter, Drew currently resides at:

Mr Drew Richardson
49 Royal Terrace
Hamilton, QLD, 4007

Australian tax Law

QUESTION 1                                                                                        (12 marks)

Fast Ed is the owner of a new and second hand car business. He is really good at wheeling   and   dealing   in   the   car   selling   business   but   is   not   very   good   at understanding  the  tax  effect  of  some  of  his  deals.  Explain  the  tax  effect  of  the following activities. (Each subsection is worth 3 marks.)

a)  Fast Ed has several different cars in stock at year-end and is not sure how to value them or if he has different valuation options available. Explain in your own words the options Fast Ed has available to value his stock.

b)  Fast Ed gave Slick Sam, a creditor, a car, which was in stock. The car was given in exchange for a debt of $18,000 Fast Ed owed to Slick Sam. The car cost Fast Ed $17,000 and was on the showroom floor for sale for $19,000.

c)   Fast Ed really liked one of the cars that were traded in. He took it home for his daughter who now uses it everyday. He decides he is not going to sell this car and keep it for use in the family. He purchased the car for $19,000 and it could have been sold for $21,000

d)  Fast Ed decided to put some of the Ford hatchbacks on sale for only $18,000.
Ford had just announced a new model hatchback and it has great reviews. He was really concerned that customers would not consider buying the older models if he did not drastically reduce the selling price. Other dealers have told him they were ‘not moving’. The Ford hatchback had cost $22,000 and was originally selling for $28,000. At the 30 June Fast Ed had 3 in stock.

QUESTION 2                                                                                        (21 marks)

Various taxpayers receive the following amounts during the 2014/15 income tax year:

a)  Salary income of $50,000 and a bonus of $10,000 from an employer. b)  A prize of $2,000 for the best TV advertisement of the year.
c)   $500 received by an employee from an employer for costs incurred to travel to Sydney for work. The employee bought a return ticket on sale for only $120 and stayed with a friend while in Sydney. One of the conditions of the work related trip was that the employee could keep whatever remained of the $500 as long as the work required to be performed in Sydney was completed.
d)  An iphone worth $1,000 from a client.
e)  $10,000 awarded as damages for personal injuries incurred by an individual in a car accident.
f)     A taxpayer buys a share during the year for $5. On the 30 June, the taxpayer still owns the share but it is now trading at $7.50
g)  A taxpayer manages to ‘acquire’ some stolen televisions. He sells 15 of them and makes $10,000 during the tax year.

REQUIRED:
Discuss the assessability  or not of the above amounts. Each amount discussed is worth 3 marks.

QUESTION 3                                                                                        (6 marks)

Briefly  explain  in  your  own  words  (max  300  words)  what  a  progressive  tax  rate structure is.

QUESTION 4                                                                                        (6 marks)

Charles  is  an  accountant  and  is  keen  to  become  a  partner  in  one  of  the  big international accounting firms. In order to do so he knows that he needs to gain some international experience. He secures a position with another large accounting firm in the US  with  a contract  for 18 months.  He sells  his apartment  in August  2014  in Sydney and buys a similar apartment a few weeks later in New York. He joins the local gym and rugby team. He volunteers at the Lyons Club on weekends. He has one brother that lives in the UK and his parents have already passed away. Charles is not married and has no children.  At the end of the 18-month  contract,  Charles decides  he  would  like  to  gain  a  little  more  experience  and  extends  his  contract another 12 months.

REQUIRED:
With regards to the Domicile test, would Charles be considered a resident or not of Australia  for  the  2014/15  income  tax  year?  Discuss  the  factors  the  ATO  would consider in making their decision.

QUESTION 5                                                                                        (15 marks)

a)  Josh  owns  a boat  that  his neighbor,  Ben,  is interested  in buying  but Ben wants to try out the boat first. On the 1 January 2015 Jim agrees to hire the boat to Ben and the agreement provides that Ben will buy the boat at the end of three years unless Ben decides to buy the boat sooner. Josh agrees that, if Ben does buy it, Josh  will apply  the hire fees against  the agreed  purchase price. Some  months  later, Ben inherits  some money  and advises  Josh he would like to buy the boat. The sale is concluded on the 1 June 2015.

b)  Mark acquired an asset on 1 June 2008 for $50,000 and on the 29th  June
2015 the asset is destroyed by fire. The asset was not insured.

c)   On the 1st of June 2015 Joe grants Ashleigh the option to purchase his beach house in Byron Bay. Ashleigh pays $2,000 for the option.

d)  John purchased a property on 1 July 2009 for $250,000. The property was rented out between 1 July 2009 and 30 June 2010. From 1 July 2010, he used the property for his main residence until it was sold on the 30 June 2015 for $400,000. (Calculations to be performed in years and not days.)

e)  Steve acquires a home in July 2005 for $375,00. In March 2008 he converts the  separate  garage  into  an office  for his financial  planning  business  and commences business. The garage comprises 20% of the floor space of the home.  He sells  the property  in December  2014  for $700,000.  The market value  of  the  house  in  March  2008,  when  the  garage  was  converted  for income producing use was $500,000.

REQUIRED:
With reference to each of the above situations, outline the Capital Gains Tax consequences of the transactions. Each subsection is worth 3 marks.

Australian tax Law

QUESTION 1                                                                                        (12 marks)

Fast Ed is the owner of a new and second hand car business. He is really good at wheeling   and   dealing   in   the   car   selling   business   but   is   not   very   good   at understanding  the  tax  effect  of  some  of  his  deals.  Explain  the  tax  effect  of  the following activities. (Each subsection is worth 3 marks.)

a)  Fast Ed has several different cars in stock at year-end and is not sure how to value them or if he has different valuation options available. Explain in your own words the options Fast Ed has available to value his stock.

b)  Fast Ed gave Slick Sam, a creditor, a car, which was in stock. The car was given in exchange for a debt of $18,000 Fast Ed owed to Slick Sam. The car cost Fast Ed $17,000 and was on the showroom floor for sale for $19,000.

c)   Fast Ed really liked one of the cars that were traded in. He took it home for his daughter who now uses it everyday. He decides he is not going to sell this car and keep it for use in the family. He purchased the car for $19,000 and it could have been sold for $21,000

d)  Fast Ed decided to put some of the Ford hatchbacks on sale for only $18,000.
Ford had just announced a new model hatchback and it has great reviews. He was really concerned that customers would not consider buying the older models if he did not drastically reduce the selling price. Other dealers have told him they were ‘not moving’. The Ford hatchback had cost $22,000 and was originally selling for $28,000. At the 30 June Fast Ed had 3 in stock.

QUESTION 2                                                                                        (21 marks)

Various taxpayers receive the following amounts during the 2014/15 income tax year:

a)  Salary income of $50,000 and a bonus of $10,000 from an employer. b)  A prize of $2,000 for the best TV advertisement of the year.
c)   $500 received by an employee from an employer for costs incurred to travel to Sydney for work. The employee bought a return ticket on sale for only $120 and stayed with a friend while in Sydney. One of the conditions of the work related trip was that the employee could keep whatever remained of the $500 as long as the work required to be performed in Sydney was completed.
d)  An iphone worth $1,000 from a client.
e)  $10,000 awarded as damages for personal injuries incurred by an individual in a car accident.
f)     A taxpayer buys a share during the year for $5. On the 30 June, the taxpayer still owns the share but it is now trading at $7.50
g)  A taxpayer manages to ‘acquire’ some stolen televisions. He sells 15 of them and makes $10,000 during the tax year.

REQUIRED:
Discuss the assessability  or not of the above amounts. Each amount discussed is worth 3 marks.

QUESTION 3                                                                                        (6 marks)

Briefly  explain  in  your  own  words  (max  300  words)  what  a  progressive  tax  rate structure is.

QUESTION 4                                                                                        (6 marks)

Charles  is  an  accountant  and  is  keen  to  become  a  partner  in  one  of  the  big international accounting firms. In order to do so he knows that he needs to gain some international experience. He secures a position with another large accounting firm in the US  with  a contract  for 18 months.  He sells  his apartment  in August  2014  in Sydney and buys a similar apartment a few weeks later in New York. He joins the local gym and rugby team. He volunteers at the Lyons Club on weekends. He has one brother that lives in the UK and his parents have already passed away. Charles is not married and has no children.  At the end of the 18-month  contract,  Charles decides  he  would  like  to  gain  a  little  more  experience  and  extends  his  contract another 12 months.

REQUIRED:
With regards to the Domicile test, would Charles be considered a resident or not of Australia  for  the  2014/15  income  tax  year?  Discuss  the  factors  the  ATO  would consider in making their decision.

QUESTION 5                                                                                        (15 marks)

a)  Josh  owns  a boat  that  his neighbor,  Ben,  is interested  in buying  but Ben wants to try out the boat first. On the 1 January 2015 Jim agrees to hire the boat to Ben and the agreement provides that Ben will buy the boat at the end of three years unless Ben decides to buy the boat sooner. Josh agrees that, if Ben does buy it, Josh  will apply  the hire fees against  the agreed  purchase price. Some  months  later, Ben inherits  some money  and advises  Josh he would like to buy the boat. The sale is concluded on the 1 June 2015.

b)  Mark acquired an asset on 1 June 2008 for $50,000 and on the 29th  June
2015 the asset is destroyed by fire. The asset was not insured.

c)   On the 1st of June 2015 Joe grants Ashleigh the option to purchase his beach house in Byron Bay. Ashleigh pays $2,000 for the option.

d)  John purchased a property on 1 July 2009 for $250,000. The property was rented out between 1 July 2009 and 30 June 2010. From 1 July 2010, he used the property for his main residence until it was sold on the 30 June 2015 for $400,000. (Calculations to be performed in years and not days.)

e)  Steve acquires a home in July 2005 for $375,00. In March 2008 he converts the  separate  garage  into  an office  for his financial  planning  business  and commences business. The garage comprises 20% of the floor space of the home.  He sells  the property  in December  2014  for $700,000.  The market value  of  the  house  in  March  2008,  when  the  garage  was  converted  for income producing use was $500,000.

REQUIRED:
With reference to each of the above situations, outline the Capital Gains Tax consequences of the transactions. Each subsection is worth 3 marks.