ACCG 924, Taxation Law : Case study

Intenal Code: MAS5184 Taxation Law Please prepare a report to Mr and Mrs Smith responding to the issues (a) to (g) raised below. You are required to explain your answers AND refer to relevant statutory provisions, cases and/or rulings as applicable. [CGT small business concessions can be ignored]. (a) EEG decided to relocate its business operations to New Zealand from 1 July 2017 and entered into a contract to sell the business premises on 15 June 2017 for $1,810,000 with legal fees and agent fees on the sale totalling  $45,000. The residential premises were also sold on the same date for $670,000 with legal fees and agent fees totalling $12,000. Both sales were settled and the proceeds received on 20 July 2017. Assuming EEG had carry forward capital losses of $115,000 as at 30 June 2017,calculate EEG’s the net capital gain or loss for the year ended 30 June 2017 as a result of the sale of both premises. (7 marks) (b) The inventory balance of $165,000 recognised in the balance sheet was calculated using the cost valuation method in accordance with the trading stock provisions with Section 70-45 of the ITAA97. The market selling valuation of the trading stock is $245,000 and the replacement value is $190,000 as at 30 June 2017. Stock ordered from a supplier in Malaysia is on a ship at sea as at 30 June 2017 and EEG has the bill of lading. Although the stock arrived in Australia on 25 July 2017, it has been included in the stock on hand balance at 30 June 2017. Assuming EEG wants to maximise taxable income, explain to EEG the most appropriate valuation method to adopt for taxation purposes as at 30 June 2017. Also explain whether the stock ordered from Malaysia is correctly included in stock on hand as at 30 June 2017. (4 marks) 3(c) EEG has set aside $150,000 for doubtful debts as at 30 June 2017 and $20,000 was written off in bad debts during the year. Also, EEG had set aside $80,000 for annual leave as at 30 June 2017 which is to be paid to employees in the future. The actual payments to employees during the year ended 30 June 2017 for annual leave amounted to $155,000. Advise EEG on the income tax implications of the provision for doubtful debts and bad debt write offs and the employee annual leave liabilities/payments for the year ended 30 June 2017. (3 marks) (d) The plant and equipment recognised in the balance sheet was acquired by EEG at a cost of $495,000. EEG made a decision to sell the plant and equipment to another business who paid $190,000 for it on 1 July 2017. The $210,000 that appears in the balance sheet represents the adjustable value of the plant and equipment. Explain to EEG the tax implications in relation to the disposal of the plant and equipment. (3 marks) (e) The loan of $50,000 to Mrs Smith was used by Mrs Smith to purchase in June 2012 a vintage motor vehicle built in 1959. The motor vehicle cost $50,000 and Mrs Smith planned to keep it as a long-term investment. Mrs Smith paid interest to EEG of $1,500 over the period of the loan up to including 21 June 2017. As a result of the decision to relocate the business to New Zealand, Mrs Smith sold the motor vehicle on 21 June 2017 for $77,000. Explain to Mrs Smith the income tax implications of the loan and the sale of the motor vehicle on 21 June 2017. (2 marks). Ignore Division 7A of ITAA97. (f) Mr and Mrs Smith decide to relocate to New Zealand on 31 July 2017 to oversee the set-up of the business there and decide to reside there indefinitely. In addition to their shares in EEG as at 31 July 2017, Mr and Mrs Smith own their family home, a motor vehicle,and shares in ABC Limited, a large publicly listed company. Explain the CGT consequences of the relocation to New Zealand assuming Mr and Mrs Smith would be considered foreign residents of Australia for the tax purposes from 31 July 2017. (3 marks) (g) The business is flourishing and expanding rapidly in New Zealand and Mr and Mrs Smith receive an offer on 1 October 2017 to sell their shares in EEG for $500 per share. Assuming Mr and Mrs Smith are foreign residents as at 1 October 2017, advise the possible CGT implications if they accept the offer to sell their shares in EEG.