CORPFIN 6003: Tax, Estate And Wealth Planning - The University Of Adelaide - Corporate Finance

Internal Code: MAS6941

Corporate Finance:

Bob Wen sold his business in May 2017 and he wants advice about his possible capital gains tax liability in light of the following facts: Bob Wen sold his business in May 2017 and he wants advice about his possible capital gains tax liability in light of the following facts: 1)  Bob started his business in 2004 when he purchased the building freehold for $800,000 and he has run his business consultancy business continuously in these premises since then until the business was sold in May 2017. 2) In May 2017, at the time the business was sold, the amount owing on a business loan for this business was $1.5 million. 3)The business has had a current annual turnover of $2,900,000 (excluding GST). This figure has remained virtually the same over the last 3 years. 4) Bob sold his business for $6,500,000 (excluding GST). 5) Of this $6,500,000, $4,000,000 relates to the building and the remaining $2,500,000 relates to the other business assets including goodwill. 6) The written down value of the business plant and equipment at the time of the business sale was $500,000 and $500,000 of the $2,500,000 shown above for the other assets is allocated to purchase this plant and equipment at the written down value. 7) Bob’s wife, Lucy, runs a florist business, in her own name, which has total net assets of $250,000. Bob and Lucy consult each other regularly about the decisions concerning the running of both businesses. 8)Bob owns a portfolio of shares with a current market value of $240,000. 9)Bob also holds 35% of the shares in RWZ Pty Ltd, a private company that owns and runs a catering business. The total net assets of RWZ Pty Ltd have a fair market value of $1,000,000. 10)Bob is also a beneficiary in the Wen Family Trust and he informs you that he has only received modest distributions from this trust in the previous 4 years. The amount of these distributions were $3,000 in 2014 (when the trust had net income of $10,000) and $5,000 in 2015 (when the trust had net income of $15,000). The net assets of this Trust as at May 2017 were $400,000. 11) Bob also estimates that 25% of his home is used for running his business and that the home is presently worth $800,000. Bob currently has a loan of $200,000 against this property. 12)Bob is aged 52 and he may buy another business in the future. Question: Based on the above information provide advice, with supporting reasoning, to Bob of what his net capital gain is likely to be, after applying all the various discounts and concessions that he may be eligible for. Question 2: The bookkeeper for Redoubt Pty Ltd has provided you with the following information relating to the financial year ending 30 June 2017 (all amounts shown are GST-exclusive). 1. The opening stock balance as at 1 July 2016 was $40,000 (the stock was valued at market value). 2. The closing stock values as at 30 June 2017 are $20,000 (using cost); $30,000 (using replacement cost) and $50,000 (using market value). 3. The company has a balance of plant and equipment in the general Small Business Entity (SBE) pool as at 1 July 2016 of $82,000. 4. The company purchased a second-hand machine on 1 May 2017 for $24,000. 5. The company had sales of $410,000 for the year ended 30 June 2017. 6. The company made purchases of trading stock of $60,000. 7. The company disposed of an old machine on 1 August 2016 for $5,000. 8. The company had other tax-deductible expenses of $140,000. Assuming the company is eligible to use the small business entity system and also that it wishes to minimize its taxable income, calculate the likely taxable income of Redoubt Pty Ltd for the tax year ending 30 June 2017. 1) The Farmers Trust is a discretionary trust (not a family trust) set up on 1 July 2013 that operates a sports clothing business. For all relevant years, the trust has had the same trustee, JGB Pty Ltd. 2) John and Carly each hold one share in JGB Pty Ltd and no other shares have been issued to this date. No beneficiaries hold fixed interests in the trust. 3) The assessable income of the trust for the year ended 30 June 2017 is $180,000. In the year ended 30 June 2015 the trust incurred a loss of $20,000 and for the year ended 30 June 2016, the trust incurred a loss of $30,000. 4) However, for the year ended 30 June 2014, the trust had a net income of $50,000. This net income was distributed to John- 20%; Carly-20%, Bob-20%, Gary-20% and Edwin 20%. The only other beneficiary, Doris, did not receive any distribution in that year. 5) For the year ended 30 June 2017, the trustees propose to distribute a third of the trust net income to each of John, Carly, and Doris.