Justin's parents operate a restaurant business through a family trust, The Pepper Family Trust, which had the following receipts and expenses for the year ended 30 June 2011 (the business uses the accruals basis to account for their income):
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Receipts
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Business income - cash amounts received in the period 1 July 2009 to 30 June 2011
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$550,000 (incl GST)
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Business income - accounts invoiced but not payment not received in the period 1 July 2010 to 30 June 2011 (for catering jobs)
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$44,000 (incl GST)
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Interest income
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$3,000
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Dividend Income (franked to 70%)
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$30,000
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Expenditure
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Operating costs of restaurant
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$406,685 (incl GST)
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New oven costing $8,800 (incl GST) was delivered was delivered on 25 September 2010, but could not be installed until 1 October 2010. The effective life was 10 years. Other costs incurred at the time of delivery were: transit fees $220 (incl GST), transit insurance $110 (incl GST), and installation costs of $330 (incl GST).
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$9,460 (incl GST)
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Restaurant goods delivered on 29 June 2011, but were not paid for until 10 July 2011.
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$11,000 (incl GST)
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Taxation service for preparation of income tax return by a registered tax agent
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$1,100 (incl GST)
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Justin's father, John, is the trustee of the trust and decides to distribute the trust's income to the following beneficiaries (without distinguishing between the different types of receipts):
- Mandy Pepper, age 14 (who has no other income): $3,000
- Justin Pepper, age 26 (who also has $2,000 of interest income): $78,000
- Salt Co Pty Ltd (which has the other income listed below): the balance
- Unfranked dividends from a resident private company $16,000, and
- Partly franked dividends of $2,000 (franked to 60%).
In relation to the above facts about the Pepper Family Trust answer the following:
(A) Discuss and calculate the 'Net Income' of the Pepper Family Trust for the 30 June 2011 income year. Assume that the Trust is not a small business entity and uses the diminishing value method.
(B) Determine the taxable income and tax payable for each of the beneficiaries for the 30 June 2011 income year.
(C) Advise the trustee John, of the consequences if he had decided to retain the $78,000 in the trust for future expansion of the business rather than making Justin presently entitled to it.
For each task, please ensure that you provide full workings and explanations, and that you specify section references to support your conclusions. Include comments on amounts, if any, which are excluded from the net income calculation.