Question: Nick operates his own business selling pool equipment and materials as well as servicing swimming pools. Sales of equipment and materials were paid for at the time of sale. However, pool services were carried out by his staff and these invoices were generally paid within 30 days. During the year ended 30 June 2013 Nick received $810,000 in cash for sales of equipment and materials and for pool services. Service calls which had been made during the year ended 30 June 2012 but paid for in the year ended 30 June 2013 were $28,000 (and are included in the $810,000 above). At 30 June 2013 unpaid pool services totaled $41,000.
Purchases during the year ended 30 June 2013 were $210,000 and at the end of the year ended 30 June 2013 his stock on hand was $105,000 (valued at cost). Nick's closing stock for the year ended 30 June 2012 was $128,000. Nick took 12 containers of Chlorine from his stock for his own private swimming pool during the year. These containers cost him $240 each and had a market value of $300 each. Nick also gave away another 12 similar containers of Chlorine to his friends during the year.
In the year ended 30 June 2012 Nick had an overall loss from all his activities of $75,000 (there were no capital losses). Included in this loss of $75,000 was a donation to charity of $4,000. Nick earned exempt income during the year ended 30 June 2013 of $9,000.
In May 2012 the business had been burgled and part of the premises was set on fire. The insurance company finalised Nick's claim during the year ended 30 June 2013 and Nick received $36,000 for lost profits while the building was being repaired as well as $300,000 for structural damage to the premises.
On 4 July 2012 Nick made a donation to the Australian Democrats Political Party of $2,250 and also bought $500 worth of tickets in a raffle for charity.
Expenses related to the business during the year ended 30 June 2013 were as follows:
- Accounting fees 3,200
- Alarm system 7,900
- Telephone expenses 25,000
• Wages - staff 275,000
Nick also bought a rental property on 1 July 2012 for $900,000. He borrowed $600,000 of this money on the same day from the bank to buy the property. The term of the loan was 7 years. The property was leased on 1 July 2012. He received rent in cash from his tenants during the year ended 30 June 2013 in the amount of $65,000. Included in this amount was a payment of $6,000 cash on 29 June 2013 as rent for the month of July 2013. Nick also incurred the following expenses during the year ended 30 June 2013 in relation to the property:
- Repairs to badly worn staircase - repairs were carried out on 1 July 2012 $6,000
- Council Rates $1,400
- Insurance $1,600
- Land Tax $2,000
- Agent's Commission for collecting rent $3,900
• Repayments of the loan (made up of $4,000 principal and $32,000 interest) $36,000
• Repairs to a light fitting - damage caused by an earthquake on 2 July 2012 $750
- Loan application fee (paid on 1 July 2012) $1,200
- Stamp duty on the mortgage for the loan (paid on 1 July 2012) $850
- Stamp duty on the purchase of the property (paid on 1 July 2012) $29,500
- Building a second storey on the property on 1 January 2013 $101,000
• Dishwasher $1,600
Required:
Calculate Nick's taxable income or loss for the year ended 30 June 2013.
Nick wants to minimise his taxable income for this year. Assume all depreciating assets, if any, have an effective life of 5 years and were purchased on 1 July 2012 unless otherwise stated.
You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculation. You must apply the law to the facts in the question paper and provide YOUR OWN analysis of the issues and write a comprehensive answer to the question.
Rationale
This assignment has been designed so that you can:
- gather and integrate your knowledge on the topics covered thus far;
• investigate in depth the cases, rulings and legislation that are fundamental to taxation law;
• demonstrate your ability to apply that knowledge to a hypothetical, practical situation;
- exercise critical and reflective judgement;
• demonstrate your ability to conduct research using provided materials as well as other legal
- resources;
- develop your written skills; and
- demonstrate time management skills.
Students should be able to identify and apply legislation and case law to the issues identified as well as demonstrate the ability to analyse the issues fully and discuss the application of taxation principles