LAWS7012 | Business Taxation Assignment – Semester 1 | 2015 Important facts to note: 1. The assignment is worth 40% of the assessment in this course. 2. The assignment is based on one (1) scenario. 3. There are three (3) questions in the assignment about the scenario. 4. You must answer all three questions. 5. As far as possible, headings have been inserted into the scenario to provide you with some guidance in answering the three questions. These headings are: 'Part A', 'Part A (continued)', 'Part B' and 'Part C'. But, you should consider all the information presented in the scenario when you prepare your answers to all three questions. 6. Put clear headings into your assignment so that it is easy to identify which part you are answering. 7. Submitted assignments must be of a professional standard. When awarding a mark for each question, consideration will be given to the standard of presentation. A professional presentation contains no spelling, grammatical or formatting errors. 8. You must submit your assignment before 4.00pm on Thursday, 23 April 2015. 9. You must submit your assignment electronically via the Turnitin link [LAWS7012 | 2015 – Semester 1] in the Assignment Submission folder in the Assessment area of the course website in Blackboard. 10. As you submit your assignment online, you do not require a separate cover sheet. Refer to documentation in the Assignment Submission folder on the naming requirements of the assignment file. A paper copy of the assignment should not be submitted to the BEL Collaborative Learning Centre. Paper copies will not be marked. 11. There is no prescribed word limit for this assignment and no penalties will be applied for students who exceed the suggested word limit. It would be possible to prepare a full and comprehensive answer in approximately 4,000 words. 12. You must retain a paper copy of your submitted assignment. 13. Be aware of and abide by the university's policy on plagiarism. More detailed information on this issue can be found in: a. UQ Student Integrity and Misconduct Policy http://ppl.app.uq.edu.au/content/3.60.04-student-integrity-and-misconduct b. On-line Academic Integrity Tutorial https://www.uq.edu.au/integrity/Login.aspx?ReturnUrl=%25252fintegrity c. Law School Resource | Avoiding plagiarism http://www.law.uq.edu.au/?page=103927 14. Before submitting your assignment, review Sections 5.3, 5.5 and 6.1 of the Course Profile for information on assessment procedures. In particular, note the following about late submissions: Where a non-examination item of assessment (including essays, assignments, take-home tests, etc.) is not submitted by the due date and time, a penalty will be levied at the rate of 10% of the marks available for the assessment item per day that the assessment is overdue. 1|Page Example: Where a piece of assessment is due at 4pm on Monday, assessment submitted after 4pm Monday but before 4pm on Tuesday will receive a 10% penalty. Assessment submitted more than 5 days after the due date and time will receive zero marks. Example: Where a piece of assessment is due at 4pm on the 10th, any work submitted after 4pm on the 15th will receive zero marks. If the 5th day following the due date is a Saturday or a Sunday, assessment will be accepted until 9am on the following Monday. Example: A piece of assessment is due at 4pm on Monday the 9th. In the normal course of events, to receive any marks, a student must submit their assessment by 4pm on Saturday the 14th (the 5th day following the due date) at the latest. As the 5th day is a Saturday, the student may submit anytime up to 9am on Monday the 16th. No extension granted may exceed 14 days. The purpose of the assignment: This Business Taxation assignment examines a student's ability to conduct research into taxation issues and to provide advice to a client that clearly demonstrates an appropriate understanding of key taxation issues. Predominantly, these include residence and source, ordinary income, statutory income, tax administration, capital gains tax and some aspects of deductions and capital allowances. Your approach to each part of the question: When you answer the three questions you should consider all of the information in the scenario. Part A and Part B of the assignment requires that you clearly identify the relevant tax issues, reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related tax cases and/or rulings of the Australian Taxation Office and relevant information made available by the Australian Taxation Office. A suggested format to answer Part A and Part B is the traditional ILAC approach:- 1. Identify the relevant issue(s). 2. State the relevant law. 3. Apply the relevant law to the facts provided. 4. Reach a conclusion based on the application of the law to the facts. Part C of the assignment requires that you calculate taxable income for a taxpayer for the 2015 year of assessment. Your calculation must contain sufficient explanations and references to all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related tax cases and/or rulings of the Australian Taxation Office. 2|Page Other useful pointers: You can review past year examples of Business Taxation assignments in the Assessment folder of the course website. These examples demonstrate some of the better formats used to present answers, however they do not necessarily contain the correct answer. Marking guide and Criteria: The overall assignment answers will be graded according to the following criteria: 1. Correct identification of the relevant taxation issue(s). 2. Correct application of relevant taxation laws. 3. Correct referencing of relevant legislation, cases and Australian Taxation Office Rulings. 4. Appropriate use of guidelines and documents prepared by the Australian Taxation Office. 5. Correct calculations of any amounts of assessable income, if applicable. 6. Submitted assignments must be of a professional standard. That is, the answer should contain no spelling, grammatical or formatting errors. 0-2 Answer demonstrates a fundamental misunderstanding of the taxation issues contained in the assignment and does not answer the questions asked. 3-16 Answer is partially incomplete; it includes a partially correct approach to the taxation issues and would be acceptable if the answer was completed. 17-30 Answer includes a correct interpretation of some of the relevant taxation issues. The answer contains insufficient referencing to the relevant provisions of the Income Tax Assessment Acts, or the answer contains insufficient identification of any relevant cases and/or Australian Taxation Office Rulings. If applicable, it contains calculation errors. 31-38 Answer includes a correct interpretation of most of the relevant taxation issues. The answer contains sufficient referencing to the relevant provisions of the Income Tax Assessment Acts, and the answer contains some identification of relevant cases and/or Australian Taxation Office Rulings. If applicable, it contains minor calculation errors. 39-40 Answer includes a correct interpretation of all of the relevant taxation issues. The answer contains all pertinent referencing to the relevant provisions of the Income Tax Assessment Acts, relevant cases and/or Australian Taxation Office Rulings. If applicable, it contains no calculation errors. Total available marks for the assignment | 40 marks. The weighting given to each part of the assignment question is as follows: Question A Question B Question C = 35% = 20% = 45% 100% Assignments will be marked online and made available to students before the end of the semester. A detailed model answer will be made available. 3|Page Assignment Part A Your client, Ben Kaunda, was born in Kenya in October 1961. He qualified as a chartered accountant in 1985 and was employed as a partner at the Nairobi offices of a global professional services firm specialising in external audit. Ben was paid a substantial salary so he was able to travel the world. On his first trip to Australia in December 1998, he fell in love with Brisbane and vowed that he would live there one day. From that moment on, he started to think of himself as an Australian. Though many years had passed since he first visited Brisbane, Ben applied for a skilled independent migrant visa (subclass 175) on 1 January 2010 and the visa was approved on 1 May 2010. Under the conditions of the visa, Ben, his wife and daughter (who was 14 years old at the time) were allowed to live and work unrestricted in Australia as they were granted permanent residence in Australia under their subclass 175 visas. In order to activate their permanent resident visas, the family had to make an initial entry into Australia before 1 November 2010. If they wanted to remain in Australia from then on, they could. However, under the conditions of their visas, once they made an initial visa entry into Australia, they could enter and leave Australia unrestricted as they were permanent residents of Australia. If they did not to settle permanently in Australia by 1 May 2015, their permanent resident visas would lapse and they would not be allowed entry into Australia if they had not secured Australian citizenship or another visa by that date. Ben, his wife and daughter became Australian citizens on 26 January 2013. From June 2010 to September 2010, in anticipation of their move to Australia, Ben sold most of his and his family's assets in Kenya, including their family home. He did not sell the family's household and personal items, nor his valuable African fertility mask collection as they wanted to take these items with them to Australia. During this period he also opened a bank account in Australia with the Specialist Bank. On 1 October 2010, he transferred $1,200,000 to this account which represented nearly all his life savings. He invested these funds at a fixed interest rate of 5% per annum. The money was available on call. He accepted all the standard terms and conditions set by the Specialist Bank when he opened the bank account and all interest earned was reinvested in the account. Ben earned interest from his Specialist Bank account as follows (assume it is earned equally on a day by day basis): • Year ended 30 June 2011 • Year ended 30 June 2012 • Year ended 30 June 2013 • Year ended 30 June 2014 • Year ended 30 June 2015 $48,000 $20,000 $25,000 $28,000 $40,000 On 1 October 2010, the family made their initial entry into Australia to activate their permanent resident visas and they spent two months in Brisbane living in short term rental accommodation. During this trip, they travelled around the city to find an area that they liked and could settle in. They quickly decided to settle in the suburb of North Lakes. They purposefully sought out Kenyan expats in North Lakes through Facebook and the Kenyan community in the suburb embraced them. Ben and 4|Page his family were grateful for the enduring friendships they were able to establish during this visit to Australia. As the family made a firm decision to settle in North Lakes where their new friends lived, Ben purchased a five bedroom unit in an exclusive new development in North Lakes on 1 November 2010 from a property developer. The all-inclusive price of the unit was $880,000 (this price included the land, construction expenditure and architect fees). Ben received a document from the property developer which indicated that the capital works construction expenditure for the unit was $770,000. Building works commenced on 1 December 2010. The building works for all the units were completed on 1 February 2011. The development was registered on 15 February 2011 and settlement date was 1 March 2011. Conveyancing fees and legal fees to purchase the property amounted to $12,000. When Ben purchased the unit, he had in mind that he could rent the property out during any absences. Whilst he owned the unit, Ben rented the property out three times (for a total of 518 days) as follows: While in Brisbane, Ben also met with executive placement agencies to find a job. Ben shared his concerns about his prospects of finding a job in Brisbane with his wife. The economy in Brisbane was in recession and the Kenyan Institute of Chartered Accountants was not recognised by Chartered Accountants Australia and New Zealand. So if he wanted to find employment as a partner in an audit firm, he needed to pass a series of conversion exams in Australia. He therefore enrolled for the conversion courses and the family had no real option but to return to Kenya on 1 December 2010. Upon returning to Kenya, Ben and his family lived in short term rental accommodation. Ben cancelled the family's gym membership and his membership of the Nairobi Country club. He notified his daughter's school that they would be leaving Kenya for Australia and moved her to an international school in Nairobi so that she could be better prepared for the Australian schooling system. Upon returning to Kenya, the family also kept in close contact with their new group of friends in North Lakes through Skype and Facebook. From a career perspective, because he knew he was going to move to Brisbane, Ben entered into an agreement with his firm in Nairobi from 1 December 2010 in terms of which he could work on a short term renewable three month contract as general audit staff member until he moved to Australia. From then on, whatever money he and his family had left every month after paying their living expenses was transferred to Ben's Australian bank account. Ben returned to Australia to study and sit for the chartered accountancy conversion exams from 1 May 2011 to 30 June 2011. His wife accompanied him. They lived in the family's North Lakes unit Period Rent received during the rental period Insurance, body corporate fees, rates, water and electricity costs incurred during the rental period 1 March 2011 – 30 April 2011 $5,000 $1,000 1 July 2011 – 31 December 2011 $14,000 $4,000 1 October 2014 to 30 June 2015 $20,000 $6,500 5|Page during that time. They never felt alone in Australia as they visited with their North Lakes friends and attended church there. Ben and his wife returned to Nairobi on 1 July 2011. Toward the end of 2011 Ben heard that he passed his conversion exams and he registered as a chartered accountant in Australia. On 1 January 2012, Ben, his wife and daughter arrived in Australia and started living in the North Lakes unit again. On 2 January 2012 Ben started a new job as a partner in a global audit firm in Brisbane. The firm paid him a monthly salary of $18,000. Part B Ben's daughter, Thandeka, quickly adjusted to life in North Lakes as she thought of herself as Australian since the family's first visit to Brisbane in 2010. She adjusted so well that she started publishing an online North Lakes suburb newsletter from 1 July 2012. The newsletter started off as a way for Thandeka to share her experiences living in North Lakes, but it soon became a useful way for local community organisations to advertise their services free of charge. Thandeka published the newsletter whenever she could between her schoolwork. She used the basic computer skills that she was taught at school and free software to put the newsletter together on her own personal computer that she got for her birthday. After completing her schooling in December 2012, Thandeka began working as a barista taking late night shifts six days a week. This meant that she was often very tired when she put together the newsletter. So it was only later on that she realised that some of the advertisers in the newsletter were not community organisations, but businesses advertising their goods and services. To make it fair for everyone, from 1 January 2014, she posted her bank account details on her newsletter's website and asked non-community organisations to pay a voluntary $100 into her bank account for every advertisement they wanted placed in the newsletter. She also registered her newsletter's trademark on 1 January 2014. This cost her $120. Thandeka was very surprised when she looked at her bank account at the end of January 2014 and discovered that a total of $1,000 was deposited into her bank account by businesses advertising in the newsletter. The newsletter became well-known after she was interviewed on a radio station in February 2014. But, when she checked her bank account at the end of each month, the amounts deposited into her bank account varied significantly from month to month. Because the amounts varied so much, she felt it was not worth reconciling the amounts that she received to the advertisements placed by businesses in the newsletter. She received a further $3,000 in total that was deposited into her bank account for the period 1 February 2014 to 30 June 2014 She continued to work as a part-time barista and published her newsletter from a spare bedroom in the family's home until 30 June 2014. The spare bedroom was sizeable as it comprised 15% of the floor space of the family's home. When Thandeka started the publication, Ben fitted additional desk and storage space in the spare bedroom that cost $5,000. On 1 July 2014 Thandeka moved to Sydney after marrying the son of a newspaper tycoon. 6|Page Part C Even though Ben and his wife missed Thandeka terribly after she moved out, Ben was excited to have the use of the spare bedroom back. He could now move his fertility mask collection that he brought from Kenya into the spare bedroom after storing it in the garage. He removed the desk and storage space in the spare bedroom and had custom recessed wall spaces built that cost $9,000. From 1 August 2014, he proudly displayed the masks in the spare bedroom. Ben originally purchased the collection on 1 November 1997 from an art dealer for an equivalent of $55,000 (in Australian dollar terms). The collection consisted of a full set of twelve Maasai Mara fertility masks and the collection's value lay in the fact that it was a complete set. Kenyan folklore had it that the owner of a complete set of masks would be blessed with a large family and great riches. Ben had only one purpose when he purchased the collection, to keep the collection as a long term investment, purchased specifically in expectation of capital appreciation. The market value of the collection was as follows: • 1 May 2010, • 1 October 2010, • 1 May 2011, • 1 January 2012, Part A (continued) and Part C $95,000 $110,000 $135,000 $150,000 Because the house became too quiet after Thandeka got married, Ben decided to take up a six month secondment to his firm's offices in Dublin, Ireland. The Dublin office was run independently from the Brisbane office. He obtained a six month visa from the Irish Garda National Immigration Bureau and started his employment in Dublin on 1 October 2014. The visa conditions allowed Ben and his wife to live and work in Ireland for six months. One of Ben's main reasons for taking the secondment was that he would only be liable for tax in Ireland and at a significantly lower tax rate than the tax rate applicable to him in Australia. When they arrived in Ireland, Ben and his wife entered into a six month lease for a beautiful country property outside Dublin. They made friends at the Africa-Ireland club, a club for African expats living in Dublin and had a very busy social live. At the end of his six month secondment, Ben had earned a salary (in Australian dollar terms) of $135,000. Irish income tax of $13,000 (in Australian dollar terms) was deducted from this salary. He did not receive a salary from his Brisbane firm while on secondment in Ireland. At the end of the six month secondment, Ben and his wife felt that they could not go back to Australia before experiencing the beauty of Europe in summer. Therefore, Ben took the drastic step of resigning from his firm in Brisbane, effective 31 March 2015 and he and his wife started touring through Europe. Based on conditions in Ben's employment contract, the firm paid him an amount of $120,000 as a golden handshake on 31 March 2015. 7|Page Part C As Ben and his wife did not want to worry about their worldly possessions in Australia while touring through Europe, they decided to sell many of their assets during the 2015 income year and keep the cash in the Specialist Bank account. The assets sold were: • Ben's 8-wheeler campervan that he and his wife used to explore outback Queensland. The sale price was $123,000. He originally purchased it for $136,000. During his ownership of the campervan he spent $2,000 to insure it and $800 to register it. • His fertility mask collection, sold to an art dealer for $100,000. While he kept the masks in his garage, he insured the collection with an insurance company. He incurred insurance premiums of $800. • The unit in North Lakes, for $1,200,000. The contract for the sale was signed on 30 April 2015. Settlement date was 1 July 2015. He paid the estate agent who found him a buyer $35,000 on 1 July 2015. His solicitor charged him $5,700 for legal services related to the sale of the unit which he paid on 1 July 2015. From 2 January 2012 to 30 September 2014, Ben used the study in the unit (10% of the floor space) for work purposes when he had to work after hours. It was more convenient to use his study than to work at the firm's Brisbane offices. BASED ON ALL OF THE INFORMATION, YOU ARE REQUIRED TO: A. Explain whether Ben would be liable for Income Tax in Australia. If he is liable for Income Tax in Australia, explain which receipts, if any, are assessable income. Calculations of tax payable are not required. The relevant rates of taxation that will be applied are not required. Your answer must reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related tax cases and/or rulings of the Australian Taxation Office and relevant information available from the Australian Taxation Office. B. Explain whether Thandeka would be liable for Income Tax on the money deposited into her bank account related to her online newsletter. Your answer must reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related tax cases and/or rulings of the Australian Taxation Office. C. Calculate Ben's taxable income for 2015 year of assessment. Your answer should include exact dollar amounts and where applicable any relevant rates of taxation that will be applied to this income. Calculations of tax payable are not required. Explain how the taxation will be collected. Assume that Ben's wife has no income of her own. Your answer must contain sufficient explanations and reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related tax cases and/or rulings of the Australian Taxation Office. 8|Page