Question 1 Andrew has come to you to prepare his income tax return for the year ended 30 June 2018. He provides you with the following information: (1) He is 59 years old and is presently e

Question 1

Andrew has come to you to prepare his income tax return for the year ended 30 June 2018. He provides you with the following information:

(1)          He is 59 years old and is presently employed, as a part-time book keeper, by a small accounting firm in Perth. His gross salary was $45,500, from which $7,882 was withheld by his employer for PAYG withholding tax deductions purposes.

Gross salary from her employer of $45500

(1)        s.6-5(1) applies – ordinary income.

(2)          He has been undertaking, as a part time fee paying student at Edith Cowan University, a degree specialising in tax law. He is guaranteed a promotion and increase in salary on completion of this qualification. In the current income tax year, he incurred $4,900 as self-education expenses.

(3)          Since 1 July 2015, he has been operating a retail clothing store, as a sole proprietor. He has provided you with the following information regarding his retail clothing business:

(i)           With the consent of the Australian Tax Office (ATO), the cash basis of accounting applies to him.

(ii)          He had sales of $48,790 which he has received during the current income tax year.

(iii)         During the income tax year, he purchased $10,000 worth of clothes of which $4,500 remained unpaid by him as at 30 June 2018 although the clothes had been delivered and invoices issued to him by his suppliers and no dispute has arisen.

(iv)         On 1 July 2017, the opening value of his trading stock for tax purposes was $75,000. His stock at hand at 30 June 2018 was $65,000. The stock was valued at cost.

(v)        On 1 July 2016, he purchased a pick-up truck (1.5 tonne carry load) at a cost of $60,000 for daily use in his business. The truck has an estimated effective life of 4 years and was depreciated using the diminishing value method. The truck was used 100% for business purposes.

He sold the truck for $35,000 on 30 June 2018.

[For the purposes of this part of the question, there were 365 days in each income tax year]

(vi)     On 1 July 2017, he purchased a 2.5 litre Volvo car for a total price of $85,000 (cost of car - $82,000; stamp duty - $2,000; dealer delivery charges - $1,000).  It is estimated that the car has an effective life of 8 years. He depreciated the car using the diminishing value method.   

During the 2017/2018 tax year, the following expenses were incurred:

Petrol                                                              $5,200

3rd Party Insurance & Registration          $1,000

Comprehensive Insurance                                    $3,000

Repairs & Servicing                                                $10,000

Wheel Alignment                                         $800

Speeding tickets                                          $300

However, he did not keep any written evidence of these expenses. The car only travelled 27,000 km in total for the tax year.

            (The car is a “car” as defined in Section 995-1(1) of ITAA 1997)

(4)       He also owns a small printing business in Subiaco, Perth. 

On 31 August 2014, he purchased the most technologically advanced printing machine from Hi Tech Ltd (“Manufacturer”) for $45,000. The machine is used exclusively for the business and has an effective life of 6 years.

On 1 January 2016, he incurred expenses of $6,000 in upgrading the printing machine to take advantage of the latest available technology. The expenses qualify as “Second Element of Costs”.

On 1 January 2017, he incurred further expenses of $4,000 in upgrading the printing machine to take advantage of the latest available technology. The expenses qualify as “Second Element of Costs”.

The printing machine was depreciated using the Prime Cost             method.

[For the purposes of this question, the number of days for the relevant periods is as follows:

(i)         From 31 August 2014 to 30 June 2015               304 days;

(ii)        From 1 July 2015 to 30 June 2016                       365 days;

(iii)       From 1 January 2016 to 30 June 2016                181 days;

(iv)       From 1 July 2016 to 30 June 2017                       365 days;

(v)        From 1 January 2017 to 30 June 2017                181 days;

(vi)       From 1 July 2017 to 30 June 2018                       365 days]

            He has received $15,000 from his printing business during the current income tax year.

During the income tax year, he paid private health insurance premium of $2,500 to Medibank for his own benefit.

Advise Andrew on his tax liability (including Medicare) for the year ended 30 June 2018 (assuming that he wishes to legally minimise his income tax liability) based on the information above.                                                                                                                                                                          

                                                                                                            (15 marks)

Question 2

Tom has come to you to prepare his income tax return for the year ended 30 June 2018 and provided you with the following information:

(1)       On 1 July 1997, he purchased a residential house in Mt Lawley in Perth, Western Australia, for $200,000. He moved into the house immediately as his main residence.

On 1 July 1998, he moved out of his house to live with his parents in Melbourne. From that date he rented the house until 30 June 2004. On 1 July 2004, he moved back into the house as his main residence.

From 1 July 2010 he rented the house again until 30 June 2017.

            An atrium was constructed in the house on 1 June 2002 for $85,000.

While perusing his records, he discovered that during the period when the house was rented out (1 July 1998 to 30 June 2004), he had only claimed (as a deduction) $10,000 of the $10,500 interest on the loan he took to finance the purchase of the house.

            On 1 July 2017, he sold the house for $490,500.

(2)       He purchased a first day cover entitled “Rhodesia Running” for $2,000 on 3 September 2017. On 21 June 2018, he sold it at an auction by Stanley Gibbons (stamp auctioneers) for $15,000.

(3)       On 1 January 1989, he purchased an antique chair for $20,000. On 21 June 2018, he sold the chair for $5,000.

(4)       On 1 January 2010, he purchased a yacht for $150,000 for his personal use and enjoyment. On 29 June 2018 he sold the yacht for $100,000.

(5)       On 1 July 2012, he purchased a motor boat for $50,000 for his personal use and enjoyment. On 1 January 2017, he paid $5,000 as interest for a loan he took to purchase the motor boat. On 29 June 2018, he sold the boat for $75,000.

(6)       On 2 August 2017, he purchased shares in Aqua Ltd. For $10,000. He incurred $200 agent’s fees on purchase.

            On 30 June 2018, he sold the shares for $25,000.

(7)       On 1 December 1998, he purchased shares in Xerox Ltd. For $50,000. He incurred $1,500 agent’s fees on purchase.

            He sold all these shares on 2 May 2018 for $70,000.

Tom is a property investor who purchases residential property to rent out to private

(8)       He has a total of $8,500 in capital losses carried forward from the previous tax year of which:

(i)         $5,500 is attributable to a loss on the sale of shares in BHP Ltd.;

(ii)        $2,000 is attributable to a loss on the sale of a yacht which he purchased for his personal use and enjoyment; and

(iii)       $1,000 is attributable to a loss on the sale of an antique table.

Calculate the net capital gain or loss for Tom for the year ended 30 June 2018.

                                                                                                            (15 marks)