Your client Sally comes to see you in August 2016 asking for advice about various income tax issues that have arisen during the 2016 tax year, as well as issues in the future. You are required to analyse each issue and provide appropriate advice to her about the income tax implications.
She provides the following information;
a) Sally established a small business selling shoes (Sally’s Sensational Shoes) in January 2002. As she established it herself, the only costs were legal and accounting advice totalling $2,700. She has operated this shoe shop ever since, but is considering selling the business. She could sell the business for approximately $240,000, but would incur agent and legal costs of $8,700.
b) With $220,000 of the net proceeds from the sale of her business, she is considering purchasing a house to rent out to tenants (as a nest egg for her future retirement). The house she is really interested in will cost approximately $300,000, so she will need to take out a loan of $120,000 for the purchase and additional costs. In addition to the purchase price, she estimates that she will incur the following costs soon after purchase;
• Stamp duty and legal fees on purchases $9,990 • Borrowing costs on the loan $1,300 • Replacing carport attached to the house, that is currently falling down $7,400
In addition to the above transactions, Sally had the following receipts and expenditure for the year ended 30 June 2016;
Gross income from ‘Sally’s Sensational Shoes’ shop 180,000 Franked dividends from Commonwealth Bank (100% franked) 1,200 Bonus shares from Lithium Australia NL (from share premium account) 50 Income from Army Reserves (part-time service) 3,400 Cash received from grandfather 12,000
Deductible expenses for ‘Sally’s Sensational Shoes’ shop 75,000 Monthly call costs on her mobile phone (70% business use of this total) 800 Laptop purchased 1/2/2016 (85% business use) 1,480 Life insurance 1,200 Interest on loan used to pay Sally’s 2015 tax liability 2,000 Tax Agent fees 1,750 Superannuation contribution to her superannuation fund $5,200 (Continued next page)
Medical expenses for herself and her dependent daughter (including $200 hospital, $190 doctor visits, $5,200 dentist, $720 for glasses and $800 massage) 7,110 Amounts refunded by health fund and Medicare $2,850 Sally’s PAYG instalments paid during the 2016 tax year 24,947
Sally is 53 years old.
1. Advise Sally about the tax implications of the sale of her business, including any
exemptions/concessions available and conditions that she must meet in order to access
them. Calculate the potential assessable gain, if any and advise Sally which of these
concessions would be most suitable for her. (10 marks)
2. Advise Sally about the tax implications of purchase of the rental property and the items of
associated expenditure. Also advise her about future assessable income and allowable
deductions in relation to the property. (10 marks)
3. Discuss the assessability and deductibility of all the other items listed in the information as
you calculate Sally’s taxable income for the year ended 30 June 2016. (10 marks)
4. Calculate the tax payable/ (refundable) for Sally for the year ended 30 June 2016, including
all additional levies and tax offsets that could apply to her. (6 marks)
Sally is an astute taxpayer and questions every piece of tax advice given to her. To ensure Sally is satisfied and your advice will not be questioned in the future, you will need to provide adequate (but concise) explanations about the income tax treatment of all these items above.
As such, you will need to support all your discussion and interpretation with reference to legislation, cases or rulings. Referencing the Master Tax Guide will not be appropriate as this is not the authority, but rather assists your understanding of the legislation, cases and rulings. Also, copying entire sections of legislation, cases or rulings will not be appropriate as Sally wants your advice provided in a way she can understand.
It may be necessary to make assumptions in the absence of specific information that will be provided by Sally later, so you may need to make a decision that moves in a particular direction, but provide a brief explanation if another course of action is appropriate.
Your advice should be provided formally in a professional letter addressed directly to Sally (not an essay about her), addressing each issue as necessary. Remember, quantity does not always equate to quality, so be concise in your response.
A total of 4 marks (i.e. 10% of the marks available for the assignment) will be allocated to these areas of referencing, formatting and presentation, so make sure you earn these marks