taxation laws

T???TI?N L?W – ??S? STUDY
Case study
The case study will require students to provide a detailed analysis of a fact situation applying the taxation laws to arrive at a conclusion in the form of a piece of
advice. This Assessment task relates to the following Learning Outcomes:
Identify, analyse and apply the law relating to income taxation.
Explain the relevant tax laws and related legal precedents and apply them to a problem orfact situation.
Determine a particular taxpayer’s final income tax,GST and FBT liability.
Present verbally and in writing conclusions as to the tax implications arising from a particular set of facts.

Case study question

Cut and Chop Pty Ltd (‘Cut and Chop’) is a resident Australian company that manufactures knives and cooking utensils from premises located in Sydney, NSW. The current
shareholders and directors, Mr and Mrs Parisi, each hold 50 shares in Cut and Chop that were acquired on 1 June 2000,when Cut and Chop was incorporated. The 100 issued
shares in Cut and Chop had an issue price of $2000 per share.
Balance Sheet of Cut and Chop as at30 June 2015 is asfollows:
Assets Liabilities
Accounts Receiv able $180,000 Bank Loan
$1 .995,000
Cash $90,000 Trade Creditors $275000
Depreciable assets $210,000 Provision for employee leave liabilities $60,000
Trading stock $180,000 Provision for doubtful debts $185,000
Loan to Mr Parisi $85,000 Shareholder Equity
Business premises
$1 .950,000 Issued share capital $200 .000
Residential premises $510,000 Retained earnings $490,000
Additional information
1. Cut and Chop acquired ownership of the business premises including administration office,warehouse and factory on 1 June 2009 for $1.95
million.
2. The residential premises were acquired from Mrs Parisi for $510,000 on 1 January 2014 howev er a registered valuer had advised
Cut and Chop that the marketvalue of the premises was only $450,000 at the time.
3. The bank loan recognised in the balance sheet was
obtained by Cut and Chop on 1 June 2009 and was used to purchase the business premises. Interest paid on this loan as at 30 June 2015
totalled $2 0500.
Required
Prepare a report (maximum 1 .500 words) to Mr and Mrs Parisi responding to the following issues a) to raised.
Explain your answers and refer to relevant statutory provisions.
a) Cut and Chop has made a decision to relocate its business operationsto Fiji from 30 June 2015 and as a result on 1 June 2015 Cut and Chop
entered into a contract to sell the business premisesfor $2.65 million (legal fees and agents fees on sale totalled $55,000) and the
residential premises for $710,000 (legal fees and agents fees on sale totalled $15,000). The sales were finalised on both properties on 10
July 2015.
Assuming Cut and Chop had carry-fonNard capital losses of $120,000 as at 30 June 201 4 calculate the net capital gain or loss
to be included in assessable income forthe year ended 30 June 2015 as a result of the sale of both premises. (7 marks)
b) The trading stock balance of $180,000 recognised in the balance sheet was calculated using the market selling valuation method in accordance with
Se$c1ti§gggé45 of the ITAA1997. Alternatively, as at 30 June 2015,the cost value of trading stock is $350,000, whilst the replacement value Is Knives ordered from a
supplier in the UK is on a ship at sea as at 30 June 2015 and, whilst Cut and Chop do have the invoice and ‘bill of Iading’to collect the order when it arrives,they
did not receive delivery of the goods until 1 August 2015. The knives
have been included in the balance of stock on hand at30 June 2015
Assuming Cut and Chop wishes to minimise taxable income explain to
Cut and Chop the most appropriate valuation method to adoptfortaxation purposes as at 30 June 2015. Also explain whetherthe knives
ordered from the UK are correctly included in stock on hand as at 30 June 2015 (4 marks)
c) Whilst Cut and Chop had set aside $60,000
for long service, annual and sick leave as at 30 June 2015 (to be paid to employees in the future) the actual payments to employees in
relation to leave entitlements were $297,000 durin the ear ended 30 June 2015.
In addition although Cut and Chop had set aside £85,000
for doubtful debts as at 30 June 2015 no bad debts were written off during the year.
Advise Cut and Chop on the income tax implications
of employee leave liabilities/payments and doubtful debt/bad debt provisionsforthe year ended 30 June 2015. (3 marks)
d) The depreciating assets recognised in the balance sheetwere acquired at a cost of $415,000 by Cut and Chop. Cut and Chop made a decision to sell the depreciating
assetsto a competitor who paid $120,000 on 30 June 2015 for the lot. The $210,000 that appears in the balance sheet reflects the depreciating assets adjustable value.
Explain to Cut and Chop the tax implications in relation to the disposal of the
depreciating assets on 30 June 2015. (3 marks)
e) The loan of $85,000 to Mr Parisi was used by Mr Parisi to purchase gin Maal 2011) a historical motorvehicle built in 1952. The historical motor vehIcle cost $ 5.00
and Mr Parisi planned to keep it as a long term investment. Mr Parisi paid interest to Cut and Chop of $800 over the period of the loan up to and including 20 June
2015. As a result of the decision to relocate the business Mr Parisi sold the motor vehicle on 20 June 2015 for $155 000.
Explain to Mr Parisi the income tax implications of the loan and the sale of the motor vehicle on 20 June 2015. (2 marks) Ignore Division 7 ITAA1997.
1′) So Mr and Mrs Parisi can oversee the set-up of a new manufacturing facility in Féji and its ongoing operation they decide to relocate to Fiji on 31 August
2015 to reside there indefinitely. In addition to shares in Cut and hop as at3 August2015 Mr and Mrs Parisi own theirfamily home, a motorvehicle and an antique
collection.
Explain the COT consequences of the relocation to Fiji assuming Mr and Mrs Parisi would be considered non-residents ofAustralia fortax purposesfrom 31 August2015? (3
marks)
g) Due to the growth in the business of Cut and Chop Mr and Mrs Parisi receive an offer on 1 September2015 to purchase their shares in Cut and Chop for $3,000 per
share.
Assuming Mr and Mrs Parisi are non-residents as at 1 September advise of the possible CGT implications if they acceptthe offerto purchase their shares
in Cut and Chop. (3 marks)
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