BX3112 Taxation Law of Marias Tax Account

1. For the 2017 tax year Maria completes the following transactions:

i. Sells an investment real estate property for $950,000 and incurred the following expenses:
a. Legal fees of$4,500
b. Real Estate sales commission of $45,000
c. General advertising and selling costs of $2,500
ii. The above property was originally acquired in 2010 for $350,000 and at the time Maria incurred the followingexpenses
a. Legal fee $1,500
b. State Government stamp duty of $9,500
iii. The property was rented for the duration of ownership except for a period of 18 month in which time Maria completed a renovation on the property. The costs of the renovation were $250,000. During this same period the property incurred the following expenses:
a. Land tax of $3,500
b. Water and council rates of $3,500
c. Bank interest on loan of $19,500
d. Maria’s Tax Accountant advised that as the property had not been rented during this period the above expenses could not be claimed as deductions in Maria’s tax return.
iv. Maria completed two other transaction during the 2017 tax year. Maria sold another investment property that had been a bad investment decision. Maria had failed to complete a building inspection and subsequently found the property infected with termites. Maria sold the property having owned it for less than 12 months for a capital loss of $180,000. A friend of Maria’s informed him of a stock on the share market that had great potential. Subsequently Maria bought and sold shares in the stock over a six month period and made a capital gain of $255,000.

Based on the above facts, what capital gains tax events have occurred? Calculate the net capital gain or loss? Set out your answer outlining the steps involved and classify the cost base elements. 

2. Maria is in Partnership with a professional colleague and they run a successful business. For the 2017 tax year the partnership had a profit of $325,000. The Partnership Agreement specifies that the Maria and his colleague have equal interest in the Partnership. The Partnership Agreement also reflects a clause allowing Maria to pay himself a wage of $150,000 for his daily management of the business in addition to her half share of profits. Note that the above profit of $325,000 has had Maria’s wage of $150,000 deducted from it.

a. Calculate the net income of the partnership with reference to tax legislation

b. Calculate the net income allocation to each partner with reference to tax legislation and Taxation Rulings (where relevant). 

Maria also runs a successful business with some friends. At the time of commencing the business, their tax accountant advised them to run the business through a trust structure. For the 2017 tax year the Distribution Minutes of the Trust reflected a beneficial distribution to Maria of $170,000 of the trust’s law income. Maria is a healthy 28 year old entrepreneur with no disabilities and resident of Australia.

c. Discuss whether you believe Maria has any present entitlement to any of the trust law income citing tax legislation and case law (where relevant) 

d. Provide the correct classification of the above distribution under tax law income and support your answer with reference to tax legislation. Advise who would be taxed and at what rate.

As a result of Maria’s entrepreneurial activities he was able to invest in a private company some years ago.For the 2017 tax year Maria receives a $135,000 dividend from the company. The directors of thecompany declared the dividend be partially franked at a benchmark franking percentage of 65%. Maria’s marginal tax rate is 45%.

e. Advise what section this dividend is taxed under 

f. Calculate Maria’s taxable income and resulting tax position (tax refund or tax payable). Includerelevant tax legislation to support your answer. Ignore theMedicare levy. 

The cost base should include the cost of disposal and acquisition of assets as per section 110-25(3) of ITAA 97.

Thesection 110-25(4)of the ITAA 97 provides that the renovation cost should be added to the cost base of the property.

The section 100-45 of the ITAA 97 provides detailed calculation of Capital gain.

Statement showing calculation of Capital gain
Particulars	Amount	Amount
Real estate property	$950,000.00
legal fees	$4,500.00
real estate agent commission	$45,000.00
Selling and distribution	$2,500.00
Net capital proceeds		$898,000.00
Cost of the property	$350,000.00
legal fees	$1,500.00
Stamp duty	$9,500.00
cost of renovation	$250,000.00
Cost base		$611,000.00
Gross capital gain		$287,000.00
Less:
Discount @ 50%		143500.00
Net capital gain		$143,500.00
Loss on sales of investment property		$180,000.00
Capital gain on sales of shares		$225,000.00
Total Net capital gain		$188,500.00

 

2.a)The net income of the partnership does not include salary paid to partner as per thetaxation Ruling 2005/7 under para 7.

Calculation of Net Income
Particular	Amount
Profit of partnership	$325,000.00
Wages of partner	$150,000.00
Net Income	$475,000.00

 

b) Theincome of the partners shall include the partnership profit as per section92(1) of the income tax assessment act 1936.

Net income allocation to each partner
Particulars	Amount
Net Income	$475,000.00
share proportion	50%
Net income allocated to partner	$237,500.00

Calculation of dividend
Particulars	Amount
Dividend received	$135,000.00
Gross dividend	$190,812.72
Section of dividend taxed	$55,812.72

f)

Calculation of Tax payable
Particular	Amount
Net Income from partnership	$237,500.00
Dividend Income	$135,000.00
Total Assessable income	$372,500.00
Tax payable	$140,857.00
Franking credit	$55,812.72
Net Tax payable	$85,044.28