MLC301- Principles of Income Tax Law

Task

The purpose of this assessment is to give you feedback on your progress in this unit. The written answer format to a series of questions gives you the opportunity to briefly explain how the law applies to practical problems and also to show that you understand the basic concepts dealt with in these topics. This format is also good preparation of the final examination.

This test will be conducted on-line through CloudDeakin. The test will be marked and returned within the normal 15 working days in line with University policy. When marking is completed you will be able to access your result and an answer guide for each question, through CloudDeakin.

There will be 10 questions covering topic 2 only. You will be required to write short answer responses of no more than 150 words per question in response to each of the 10 questions. You must complete this assessment through CloudDeakin. Hard copy or emails will not be accepted under any circumstances. Please see the important points below for further information. 

1. Discuss the assessability for Susan of the receipt of the voucher.

Susan is a full time childcare worker in Collingwood. She loves her job, especially since her best friend Adam has enrolled his child in Susan’s childcare. Susan was pleased to be able to work while looking after Adam’s child. This year for Susan’s birthday Adam and Susan went out for dinner. At the end of the evening Adam gave Susan a card that read:‘Susan, thank you for your friendship. Thank you for also for putting in so much extra effort when teaching my child at childcare (you are so good at your job!). Happy Birthday and I hope you can use this gift to take a break from all your hard work. Love Adam’. Inside the card was a $300 Jetstar voucher which could be redeemed online for any flights, in any name.

2. Briefly explain whether the following are ordinary or statutory income for the taxpayer

I. A monthly annuity payment of $5 000 received by the taxpayer ($4 000 of this was the return of the capital component).

II. A dividend of $400 received by the taxpayer who is an individual resident of Australia.

III. The taxpayer’s receipt in Brent v FCT (1971).

IV. The receipt of $50 000 by the taxpayer (lawyer) who lived in Sydney, for agreeing to not work

for any other law firm in Melbourne other than EasyLaw Pty Ltd, should they ever move to Melbourne (the taxpayer never moved to Melbourne).

3. Discuss whether the following amounts are assessable income for Donuts of Melbourne Ltd:

• $50 000 rent from Donuts of Sydney Ltd 

• $2 800 000 payment from Hope Pty Ltd 

Donuts of Melbourne Ltd (‘DM’) had a large donut and cake store in Melbourne operating since January 2015. The directors of DM wanted to expand their business and decided to open a subsidiary store in Sydney called Donuts of Sydney Ltd (‘DS’). In February 2017, DS was incorporated and started trading in Sydney. DS rented a shop from DM and in this financial year DM received $50 000 in rent from DS. This was the only rental property that DM owned. In March 2018, DS required a loan from DM so they could buy more equipment, and DM subsequently loaned DS an amount of $4 000 000 (with a loan term of 8 years and interest payable at 9%). This loan agreement suited DM as they had already decided they wanted to move premises and they required an immediate amount of cash so they could pay an upfront amount to enter into a new lease agreement. As always planned, DM decided they would assign the right to interest on the loan to another entity, Hope Pty Ltd, in exchange for $2 800 000. In April 2018 DM received the $2 800 000.

4. Explain whether the following receipts are specifically exempt (please cite sections) from income tax

I. A club established for the encouragement of science that is located in Australia and is not carried on for the purposes of profit.

II. A tourism society (promoting the development of tourism) that is carried on for the purposes of profiting its individual members.

III. A family assistance payment (back to school bonus) paid to a Melbourne family.

IV. The receipt of a Prime Minister's Literary Award by a Deakin student.

5. Briefly explain whether the following receipt of $3 000 000 is ordinary income for the taxpayer 

The taxpayer purchased a large block of land for $500 000 on the outskirts of Melbourne. At the time of purchasing the land the taxpayer considered that he might be able to sell the land to a local shopping centre developer who he knew was looking to expand into the area. He also considered he could subdivide and sell the land in smaller blocks. He approached the shopping centre developer who stated that they were no longer interested in acquiring the land.

As such, the taxpayer decided that he would build a recreational facility on the land. He worked closely with the council to subdivide and arrange for the connection of necessary services such as pathways, power, sewerage and gas. He did not use an agent, and he kept prices down by sourcing material and contractors himself. He constructed a pool, a gym, and a yoga centre on the land. The development expenses were $1 500 000. Once it was completed the taxpayer decided to sell the facility to the local council for $3 000 000.

6. Consider the tax treatment of the following receipts:

I. $70 (1 mark)

II. $5 000 (1 mark)

III. $2 000 (2 marks)

Christine works at a small accounting firm in the suburbs. While checking her payslip at work, Christine realised that she had been underpaid an amount of $5 000 for work she had  one for clients. She had also spent $70 on office supplies and wanted payment to cover those costs. Christine reported these issues to her boss. Christine was so upset by these payment errors that she told her boss she was going to resign from work, and take them to court so she could recover her lost pay. Her boss decided he did not want to incur legal fees and decided to pay Christine the $5000. He also gave her $70 to cover the money she had spent on office supplies. Christine was also paid by her boss an additional $2 000 for agreeing to not make any additional claims against the accounting firm.

7. Discuss the assessability of the $30 000 amount for River 

River Pty Ltd (‘River’) owned land in Victoria through which a large river flowed. River ran a business operating steamboat cruises and they also had a camping ground on their land on whichvisitors could stay.

A small landscaping company called Rock Pty Ltd (‘Rock’) approached River asking if they could remove some river rocks from their land (which they would then sell to landscaping clients). River agreed and entered into an arrangement with Rock where they could take as many rocks per month as they wished, at a cost of $150 per kilogram. There was no maximum that could be taken, but there was a minimum of 5 kilograms per month stipulated in the contract.

This financial year River received $30 000 in payments from Rock.

8. Discuss the tax consequences for the following amounts:

I. The $300 000 received by Mary

Mary was a chef at a local restaurant. A large newspaper called FoodNews came to the restaurant to try Mary’s food, and subsequently published an article stating that Mary’s cooking gave all her customers food poisoning. This article was found to be untrue, it was published as payback by the newspaper for an earlier disagreement they had with Mary. As a result of the article, Mary lost her job and could not be hired again as a chef for a long time. She sued FoodNews and received a lump sum payment of $300 000.

II. The $75 000 received by Coffey

Coffey Pty Ltd (‘Coffey’) had 5 forward selling contracts for the distribution of ground coffee. One of these contracts was with Café Pty Ltd (‘Café’) for a term of 3 years, representing about 30% of Coffey’s annual profit. This year, Café cancelled their contract with Coffey and paid them $75 000. Coffey were worried that they would not be able to continue trading without this contract, but luckily they were able to find another distributor quickly.

9. Consider whether Lucy is in a business for tax purposes and whether she has any assessable income as a result (4 marks)

Lucy is employed as a part time cleaner and wants to make some extra money. She decides to make her own liquor (alcohol) and sell it online and to restaurants. Lucy does not care that she does not have a licence for this, and she immediately commences implementing her plan to make the alcohol.

Lucy prints cards and drops off flyers in her neighbourhood advertising her product. She buys the necessary equipment and products and sets up a storage area in her home. She spends about 15 hours a week making this product. Lucy receives many responses to her advertising; one in particular is from a nearby restaurant.

By agreement with the restaurant, Lucy provides 4 bottles of alcohol a week for the restaurant and in return, she is given 5 free meal vouchers a week. The meal vouchers can only be redeemed by Lucy or her immediate family and Lucy calculates that these vouchers have a value of approximately $200.

10. With reference to the Federal Coke case, discuss how the Commissioner of Taxation could have applied section 6-5(4) of the Income Tax Assessment Act 1997, and how this may have affected the outcome of the case.