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HA3042 TAXATION LAW

TRIMESTER 2, 2015
INDIVIDUAL ASSIGNMENT 2
Assessment Value: 20%
Instructions:
• This assignment is to be submitted in accordance with
assessment policy stated in the Subject Outline and Student
Handbook.
• It is the responsibility of the student who is submitting the work, to
ensure that the work is in fact her/his own work. Incorporating
another’s work or ideas into one’s own work without appropriate
acknowledgement is an academic offence. Students should
submit all assignments for plagiarism checking on Blackboard
before final submission in the subject. For further details, please
refer to the Subject Outline and Student Handbook.
• Answer all questions.
• Maximum marks available: 20 marks.
• Due date of submission: Week 12 (Melbourne); Week 9 (Sydney
and Brisbane).
Question 1 (10 Marks)
Rubber Co manufactures tennis balls. On 1 January 2010, Rubber
Co purchased a new machine for $1.1m (inclusive of GST) which it
used to produce the tin cans in which its tennis balls were placed for
sale to retailers. At the time of acquiring the machine , Rubber Co
estimated that the machine would have an effective life of 10 years
before it needed to be replaced. Subsequently, on 1 January 2014,
as a result of new technology, a better quality machine became
available and Rubber Co decided to sell the original machine for
$330,000 (inclusive of GST) and purchase a new machine for $2.2m
(inclusive of GST).
Requirement:
What are the tax consequences of these arrangements under Div
40ITAA97?
Question 2 (10 marks)
Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells
bathtubs directly to the public. On 1 May 2014, Periwinkle provided
one of its employees, Emma, with a car as Emma does a lot of
travelling for work purposes. However, Emma’s usage of the car is
not restricted to work only. Periwinkle purchased the car on that
date for $33,000 (including GST).
For the period 1 May 2014 to 31 March 2015, Emma travelled
10,000 kilometres in the car and incurred expenses of $550
(including GST) on minor repairs that have been reimbursed by
Periwinkle. The car was not used for 10 days when Emma was
interstate and the car was parked at the airport and for another five
days when the car was scheduled for annual repairs.
On 1 September 2014, Periwinkle provided Emma with a loan of
$500,000 at an interest rate of 4.45%. Emma used $450,000 of the
loan to purchase a holiday home and lent the remaining $50,000 to
her husband (interest free) to purchase shares in Telstra. Interest
on a loan to purchase private assets is not deductible while interest
on a loan to purchase income-producing assets is deductible.
During the year, Emma purchased a bathtub manufactured by
Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to
manufacture and is sold to the general public for $2,600.
(a) Advise Periwinkle of its FBT consequences arising out of the
above information, including calculation of any FBT liability, for the
year ending 31 March 2015. You may assume that Periwinkle would
be entitled to input tax credits in relation to any GST-inclusive
acquisitions.
(b) How would your answer to (a) differ if Emma used the $50,000
to purchase the shares herself, instead of lending it to her husband?
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