Taxation Law - Tax Practice Assignment
Assessment Description -
Learning Outcome: "Tax Practice Assignment" through the preparation of an individual ("I") tax return using the GovReports government reporting software package.
Details of the assignment: The assignment consists of four parts. The main Part ("Part A") requires the preparation and lodgement of an individual ("I") income tax return for George Smiley ("George") using GovReports.
The completion of Part A will require the input of data either contained in the following attachments to this document, or which you determine as a consequence of completing the other three parts of the assignment:
1. background information and George's personal financial transactions for tax purposes;
2. the financial records of his business Second Chance;
3. George's share of the net income of the partnership TelDrop; and
4. the amount distributed to George from The SmileyFamily Trust.
The other three parts of the assignment are:
Part B - thecalculation of the net income for tax purpose of Second Chance;
Part C - the calculation of and the distribution of the net income of TelDrop; and
Part D - basically the calculation of the tax payable by the trustee of The Smiley Family Trust.
Part A - Background information and George Smiley's personal financial transactions for tax purposes
George Smiley is a resident and is employed as the senior sales person in a store selling both new telephones and ancilliary equipment. He also owns a business, Second Chance, which sells second hand mobile telephones, and is a partner with Toby Esterhase in a lucrative business, TelDrop which repairs mobile telephones.
As a sales person, George received a salary of $85,000 in the 2015/16 financial year. PAYG withheld on George's behalf amounted to $15,500.
Personally George is entitled to the following deductions: $1,000 (for the cost of a seminar he attended on How to Succeed in Selling Second Hand Things), $700 (for the decline in value of a computer he uses for work-related matters), $560 (for repairs to equipment he uses in the refurbishment of the second hand sneakers he buys), $540 (for fees charged by his accountant for the preparation of his tax return for the previous income year), and $300 (donation to a charity that is a registered as a deductible gift recipient in payment of which George receives10 tickets in a car raffle). George paid $4,000 for private health insurance for he and his wife for the whole income year. He made a net capital gain of $18,000 from the sale of refurbished second hand sneakers that he had purchased 2 years ago. He is a shareholder in a company and received a partly franked dividend of $7,000 which had $1,000 of franking credits allocated to it. He is also a beneficiary of The Smiley Family Trust.
Part B - Second Chance
In his business George uses the accruals basis of accounting. He provides you with the following information for the year ended 30/6/2016. Second Chance is a small business. All amounts exclude GST.
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Receipts
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$
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Cash sales
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315,000
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Debtors (for credit sales, including the $10,000 owing at 30/6/2015)
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38,000
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Insurance proceeds: flood damage to stock
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7,000
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Insurance proceeds: storm damage to broken windows and carpets
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13,000
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Bank loan to make alterations to the store (Funds were borrowed on 1/10/2015. The loan is due for repayment on 30/9/2019.)
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33,000
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Bad debt recovered (debt written off in 2015/16)
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1,000
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Payments
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|
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Cash purchases
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80,000
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Creditors (for credit purchases, including the $23,000 owing at 30/6/2015)
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138,000
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PAYG instalments
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41,500
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Council rates - business
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6,000
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Legal expenses in relation to the bank loan
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2000
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Entertainment of suppliers and large customers
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1,660
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Repairs after storm damage to electronic testing equipment
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12,000
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Staff wages
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80,000
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Superannuation for staff
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7,600
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Alterations to the store (Note 1)
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45,000
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Cash drawings
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90,000
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Advertising (Note 3)
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27,000
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Other deductible expenditure
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10,000
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Stock on hand at 1/7/2015: $16,000; 30/6/2016: $19,000
Debtors at 1/7/2015: $10,000; 30/6/2016: $6,000
Creditors at 1/7/2015: $23,000; 30/6/2016: $25,000
Note 1: The alterations commenced on 1/9/2015 and were completed on 30/11/2015.
Note 2: Motor vehicle expenses, including decline in value, were $12,800. A log book kept for 12 weeks in 2015 showed business usage of 45%. George uses the log book method.
Note 3: George's records showed that he had taken telephones from stock which had cost $4,170.
Note 4: George advertises his store at the local movie-theatre. He entered into an eighteen-month contract on 1/5/2015 that cost $7,000. The amount pre-paid at 30/6/2015 on a previous contract was $4,000. This contract expired on 31/10/15.
Required: Showing all workings, calculate the net income of the business.
Part C - TelDrop
TelDrop opened for business on 1 July 2015. As per the partnership agreement, accounting profit/ loss is to be shared equally after adjusting for special partnership items. The following transactions were recorded in the partnership's cashbook in the year ended 30 June 2016.
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Receipts
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$
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Fees received
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580,000
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Bank loan
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55,000
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Loan from Toby
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45,000
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Interest on drawings - George
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500
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Interest on drawings - Toby
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980
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Payments
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Rent of the premises and sundry expenses (all deductible)
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152,000
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Salaries of the part-time technicians
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230,000
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Salary of George
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68,000
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Salary of Toby
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75,000
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Superannuation contributions for the part-time technicians
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21,000
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Bank loan repayments - principal
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2,800
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Bank loan repayments - interest
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1,500
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Interest on capital - George
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1,000
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Interest on capital - Toby
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1,000
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Interest on loan from Toby
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2,500
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Drawings - George
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15,000
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Drawings - Toby
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17,000
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Purchase of parts used in the business
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36,000
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The closing stock of parts used in repairs, such as screens,was valued at $13,000.
Required: Showing all workings:
1. Calculate the net income of the partnership for the year ended 30 June 2016; and
2. Distribute the net income of the partnership for the year ended 30 June 2016.
Part D - The Smiley Family Trust
The Smiley Family Trust (a family trust election having been made by the trustee) was created by George some years ago for investment purposes. The Trust Deed provides that all the trust's income may be either retained by the trustee or distributed to the beneficiaries.
In the year 2015/16 the trust derived trust net income of $68,000.
The trustee used his discretion to distribute the following cash amounts to the stated beneficiaries:
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George Smiley
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$41,000
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James Smiley
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George's brother
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17,000
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Scott Smiley
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James' 17 year old son
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5,000
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Jennifer Smiley
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James' 12 year old daughter
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5,000
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Mathew Smiley
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James' 1 year old son
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3,000
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The trustee also applied some of the remaining net income as follows:
- $5,000 was set aside to pay for any future veterinary care of the two horses "Hammer" and "Tongs" which had belonged to George's father, now deceased.
- $5,000 was paid for Scott's university fees, books and a new lap-top computer.
- $1,500 was set aside to help pay for Mathew's parents pay for his day care if they decide upon this course of action when he reaches 3 years of age.
- $500 was used to pay James' speeding fines.
Required: Showing all workings:
1. List any amounts for which there is no present entitlement as at 30 June 2016;
2. Determine the balance retained by the trustee as at 30 June 2016; and
3. Calculate the tax payable by the trustee for the year ended 30 June 2016.