Question 1
Background
Tommy Turtleneck, an Australian tax resident, derived the following amounts in the year ended 30 June 2011:
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Acquisition
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Arm's-length cost
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Sale date
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Proceeds
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date
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$
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$
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1.
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Sale of family car
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June 2006
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30,000
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June 2011
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35,000
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2.
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Sale of private motor bike
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July 2006
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10,000
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June 2011
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8,000
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3.
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Sale of painting from
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August 2006
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400
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June 2011
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80,000
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private collection
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4.
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Sale of trading stock
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May 2011
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80,000
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May 2011
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110,000
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5.
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Lottery win
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N/A
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N/A
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May 2011
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300,000
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6.
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Sale of depreciating asset
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April 2007
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Cost = 10,000
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June 2011
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3,000
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used 100% for business
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Adjustable value = 2,000
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7.
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Sale of shares in a
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April 2011
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70,000
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May 2011
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80,000
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company which were
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acquired for a commercial
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profit-making purpose
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8.
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Compensation for losing
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N/A
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N/A
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May 2011
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20,000
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his left leg in a shark attack
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9.
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Sale of his family home
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April 2002
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1,000,000
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June 2011
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1,500,000
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10.
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Sale of rental property
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April 1984
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400,000
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June 2011
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800,000
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Required
Calculate the capital gain/capital loss (if any) in relation to each of the above scenarios. Cite the relevant section reference for each scenario (where relevant, you must identify the specific provisions/subsections/ paragraphs/items, etc.).
Question 2
Betty Bottleneck, an Australian tax resident, ceased to be an Australian tax resident on 30 June 2011. At that time, she owned the following assets:
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Acquisition date
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Arm's-length cost
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Market value
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$
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$
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1.
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Wine collection (to drink)
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June 2006
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8,000
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80,000
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2.
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Rental apartment in Sydney
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July 2008
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500,000
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600,000
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3.
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Rental apartment in New Zealand
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August 1984
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450,000
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500,000
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4.
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Shares in listed company
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August 2010
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200,000
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260,000
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(1% shareholding)
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5.
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Stamp collection
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March 2005
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150,000
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110,000
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Required
Calculate the capital gain/capital loss (if any) in relation to each of the above scenarios assuming that no election is made. Cite the section reference(s) (apart from simply stating ‘section 104-160') which address(es) the relevant technical issue(s) - where relevant, you must identify specific provisions/subsections/paragraphs/items etc.
Question 3
Background
During the year ended 30 June 2011, Peter Pepperneck (a resident wage earner and passive investor) entered into the following transactions:
1. Received salary in advance (non-refundable) of $10,000 on 30 June 2011 for the month of July 2011.
2. Prepaid interest of $30,000 on 30 June 2011, on an investment loan for the period of 1 July 2011 to 31 May 2012.
3. Received $5,000 on 1 July 2011, representing an interest payment for the period 1 April 2011 to 30 June 2011.
4. Prepaid tax agent fees of $5,000 for the period of 1 July 2011 to 30 June 2014.
5. Spent $10,000 on an aborted takeover offer for shares in a company.
Required
Calculate Peter's taxable income/tax loss for the year ended 30 June 2011. Briefly explain all inclusions and exclusions and cite the relevant references (i.e. cases and/or section references to support your answer).
Explanations should be no more than three sentences and any calculations should be included.
Question 4
Background
During the year ended 30 June 2011, Paul Stiffneck, an Australian resident, entered into the following transactions:
1. Paul subdivided his home and sold his backyard (which comprised grass and gardens solely). He acquired his home in August 2009 for $1,000,000. He sold his backyard for $300,000. At the time, the entire block (including the house and the backyard) was worth $1,500,000, and the cost reasonably attributable to the backyard was $200,000.
2. Paul has a computer retail business which he operates as a sole proprietor and works in part time. He took a computer, which cost $5,000, out of stock and used it for personal enjoyment from then on. The computer retailed at $7,000.
3. As part of his employment duties as a stockbroker, Paul travelled from Sydney to Melbourne on 25 June 2011 to visit a client and paid $50 for his lunch (including a glass of wine and a tasty pasta) at a restaurant prior to the client meeting. Because he did not seek prior approval, he was not reimbursed by his employer for his lunch.
4. As part of his employment duties as a stockbroker, Paul is required to subsidise his employer whenever one of his clients defaults on their payment. The ‘fine' is equal to any commission Paul may have received in respect of that client. This is designed to ensure that Paul does an appropriate amount of due diligence before accepting work from a client. After one of his clients went into administration in April 2011, Paul was ‘fined' $10,000 by his employer.
Required
Calculate the assessable/deductible amount for each of the above transactions. Show your workings. Briefly explain your answer and cite the relevant references (i.e. cases and/or section references).
Question 5
Count Drac Ula, a Romanian citizen, recently arrived in Australia with his wife and three children. He is a very wealthy businessman with vast interests in real estate in Transylvania. Although a Romanian citizen, he has spent the last 10 years in Italy expanding his business interests. Count Drac Ula has been able to obtain a four-year temporary visa in Australia for him and his family. His purpose in entering Australia is to expand his European franchise to Australia. He arrived in Australia on 17 January 2011, but his family only arrived on 23 April 2011. Upon his arrival in Australia, he immediately enlisted the assistance of a real estate agent to find him suitable accommodation for himself and his family. He commenced his business operations one month after his arrival.
During the 2011 income year, Count Drac Ula entered into a number of transactions in relation to his business:
1. Prior to arriving in Australia, he incurred costs totalling $100,000 conducting a feasibility study as to whether it would be viable to expand his franchise into the Australian market. This was incurred on 1 July 2010.
2. He signed a three-year lease with the landlord of a newly constructed office tower for
his business. The landlord offered him the following lease incentives for signing the
lease:
> A three-month rent-free period.
> Premium tickets to a major sporting event. The tickets cannot be transferred to anyone else and are solely for the benefit of Count Drac Ula and his family.
3. He signed a number of licensing agreements with several manufacturers under which he will receive a sum of money in return for giving the manufacturers the right to use his ‘technology' (patent) relating to certain blood products. In particular, he granted
the following licences to different manufacturers:
> An exclusive licence to Manufacturer A, which has the exclusive right to use Count Drac Ula's patent in New South Wales for 10 years. In return, Count Drac Ula will receive a $200,000 lump sum.
> An exclusive licence to Manufacturer B, which has the exclusive right to use Count Drac Ula's patent in Victoria for 10 years. In return, Count Drac Ula will receive a royalty.
> A non-exclusive licence to Manufacturer C, to use Count Drac Ula's patent in Queensland for 10 years. The grant of a non-exclusive licence to Manufacturer C in Queensland means that Count Drac Ula is free to grant further non-exclusive licences to other manufacturers in Queensland (i.e. Manufacturer C does not have the exclusive use of the licence in Queensland). In return, Count Drac Ula will receive $20,000 lump sum.
Assume that Count Drac Ula has some carried forward capital losses in the amount of $200,000.
4. Count Drac Ula has an office for his business; however, he works from his home two days per week because he wants to help his young children settle down in Australia. He has incurred electricity expenses, rent and telephone expenses on his home.
Taxation (1) 2012 • Project 11
5. Count Drac Ula made a $5,000 donation to his children's school building fund, which is endorsed as a deductible gift recipient. In return, the school reduced his school fees by $1,000 and provided free school uniforms to his children.
6. Count Drac Ula initially provided his family castle in Romania as security to his bank for a loan that he took out to set up his Australian business. During the income year, he repaid the loan and incurred costs totalling $3,000 to discharge the mortgage.
7. He received a refund of the following deductible business expenses which he has incurred:
> Fees paid to a registered tax agent for managing his income tax affairs.
> Sales commission overpaid to his sales agents.
Required
(a) Explain to Count Drac Ula whether he is a resident of Australia for income tax purposes. Cite relevant references (i.e. cases and/or ATO rulings) to support your answer. Ignore double tax agreements and temporary resident issues.
(b) Explain to Count Drac Ula the key income tax consequences for him for each of the above transactions. Cite relevant references (i.e. cases and/or section references) to support your answer.