Referencing Styles : Open Question 1 Your client, Mary worked 3 days a week and received $32,780 during the year ended 30 June 2014. The cost of travel from home to work was $1,120 and it cost her $185 in dry cleaning her non-uniform clothes. She also spent $1,500 on lunches when working. She also received a net capital gain of $5,000 from the sale of an antique chair. She donated $250 to the Red Cross. What is Mary’s taxable income? a) $29,725 b) $29,225 c) $37,530 d) $32,225 Question 2 If shares in Westpac Bank Ltd are bought on 6 August 1992 and sold on 30 February 2014, a company is able to calculate its capital gain and assessable income based on: a) Not indexing the cost base and not applying a discount factor b) Indexing the cost base and not applying a discount factor c) Not indexing the cost base and applying a one-third discount factor d) Not indexing the cost base and applying a one-half discount factor Question 3 Your client purchased an investment property for $450,000 in May 2012. They borrowed the sum of $450,000 by way of a mortgage and when they sold it they still had to repay the sum of $470,000. They sold the property for $500,000 two years later in May 2014. They have a capital loss from the sale of a caravan of $10,000 from the 2006-2007 financial year. What amount should be included in their assessable income as the net capital gain? a) $10,000 b) $15,000 c) $20,000 d) $25,000 Question 4 If you borrow money from a bank to help purchase an investment property and you are not able to find a tenant to rent the property for 3 years, can you still claim the interest expense as a deduction against your assessable income? a) Yes, because tax law does not require you to match expenses with gaining income in the same period as per the Jones case. b) No, you must match the derivation of assessable income with claiming expenses in the same period. c) No, interest is not deductible as an expense in this situation. d) No, the interest expense forms part of the third element of the cost base for CGT purposes. Question 5 The publisher of a builders’ trade magazine wins a prize at the annual Melbourne builders’ fair. The prize is not transferable and is not convertible to cash. The tax implications of the prize to the publisher will be covered under: (a) Section 6-5, ITAA97. (b) Section 23AG, ITAA97. (c) Section 21A, ITAA36. (d) Section 15-2, ITAA97. Question 6 Your client operates a very successful small retail business selling shirts. The main shirt manufacturer that supplies the shirts to your client is so happy with the volume of shirts being sold by your client that they have provided your client with an all-expense paid trip around the world for both your client and their spouse. The trip includes airfares and hotel accommodation. The value of the trip is $20,000. Your client now wants to know if there are any taxation implications with taking the trip? a) None, the value of the trip is tax free because it is not cash b) The portion of the cost of the trip being used by the spouse is tax free, but your client must pay tax on the balance pursuant to s 6-5 c) The trip is a gift and not subject to income tax d) The value of the trip is assessable income and subject to income tax pursuant to s 21A, non-cash business benefits Question 7 Your client, Home Brands Ltd, has made the following payments this financial year on behalf of the Managing Director; the School fees of $25,000, an overseas holiday for the family of $45,000, and specialist medical treatment at a cost of $6,000. The Company Accountant is unsure as to the correct taxation treatment for the expenses. What are the taxation consequences for the Company? a) The Managing Director will have to reimburse the company for the total amount and there are no tax consequences b) The company must show all amounts as being income to the Managing Director and not deductible to the company c) All expenses are fringe benefits and the company will have to pay FBT d) The company cannot claim a tax deduction for the expenses as they are of a private nature. Question 8 The sale of shares by ABC Pty Ltd, purchased on 21 September 1985 results in which of the following capital gains tax treatment, assuming that there has been a profit on the sale? a) A gain calculated by deducting the indexed cost base, frozen as at 30 September 1999, from the sale proceeds and included in the assessable income for the financial year of the sale b) 50% of the net capital gain included in the assessable income in the financial year of the sale c) Proceeds added to assessable income in the financial year of the sale d) Tax exempt, pre CGT Question 9 The non-capital costs of ownership, such as the cost of insurance, interest on money borrowed to purchase the holiday house and municipal rates on a holiday house, not used for income producing purposes is treated for tax purposes in the following way: a) As a tax deduction against other assessable income in each financial year b) Deducted from the third element of the cost base pursuant to s 110-25 which gives a higher capital gain c) Not part of the capital gains tax calculation. d) As a third element of the cost base of the holiday house pursuant to s 110-25 which is used to reduce the capital gain Question 10 If you are required to work overseas and you have to rent out your main residence for a period of 2 years, the following capital gains tax consequences apply: a) You must pay income tax on the amount of capital gain that was made during the 2 years of absence when the home is eventually sold b) You do not have a CGT consequence as you have already paid income tax on the rent you have received c) You do not have a CGT consequence as the home is still exempt for capital gains tax even when eventually sold d) None of the above, the home is exempt even if it was rented out for a period of 10 years or more Question 11 If you are working for an accounting firm and undertaking the CPA program of professional study, what amount of the following expenses are tax deductible to you? HECS - $14,000, travel from work to the CPA office for tutorials - $2,400, and text books - $250 a) $16,650 b) $14,250 c) $16,400 d) $2,650 Question 12 Your client, Home Brands Ltd, has provided all of the sales staff with new company uniforms to be worn at work. The Company Accountant is unsure as to the correct taxation treatment for the expenses. Will the employee have to pay income tax on the cost of the uniform or is it a fringe benefit? a) The employee will not have to pay tax as it will be a fringe benefit provided by the employer b) The employee will have to pay tax on the value of the uniform under s 15-2, ITAA 97 c) The employee will not pay tax on the value of the uniform and it is not a fringe benefit d) The employee will have to include the value of the uniform as statutory income. Question 13 Tan is an employee of ToolsPlus, a manufacturer of high quality automotive tools. Tan has recently negotiated the following remuneration package with his employer. · Salary of $150,000 per annum. · Payment of his mobile telephone bill of $2,000 per annum. The telephone is used 100% for business purposes. · The payment of Tan’s children’s school fees of $22,000 per year. · The provision of a portable computer valued at $2,300. · A bonus based on performance that is $10,000 this financial year. Tan’s assessable income this year, based on the above information, is: (a) $186,300 (b) $184,300 (c) $172,000 (d) $160,000 Question 14 If a taxpayer with a small accounting practice accounts for their income using a cash basis, would the taxpayer be better or worse off as a result of changing to an accruals basis the next financial year in the following circumstances: a) Worse off as a result of paying tax on assessable income including amounts invoiced in the current year as well as cash paid from the previous year b) Better off by paying less tax because the amount of assessable income is less because of the accruals system c) Better off because they only pay income tax on the amount of assessable income invoiced in the current year and pay no tax on cash collected from the previous year d) Better off because they pay income tax only on all cash received even if using the accruals method and having sent invoices to clients. Question 15 Section 15-15, which includes income made from a profit making undertaking or scheme, is only applicable in a range of limited situations. It only applies in the following circumstances: a) Assets only purchased after 20 September 1985 b) Assets that have been purchased with the principle object of being used for recreation because the land is next to a beach resort. c) Assets sold at a profit where s 6-5 or s 6-10 do not apply d) Assets acquired prior to 20 September 1985 and sold as a result of the carrying on or carrying out of a profit making undertaking or plan. Question 16 You are looking to relocate your accounting practice to larger premises but are concerned that new partitions will cost you at least $45,000 to install in new premises. You have found a new building that would be suitable but you are not prepared to spend the money on new office partitions. The owner of the building is prepared to pay you a lump sum of $75,000 if you sign a 6-year lease. What are the taxation consequences of accepting the $75,000? a) You must pay income tax on the amount of $75,000 as a capital gain b) You do not have a CGT consequence and you do not have to pay income tax on the lump sum amount c) You do have to pay income tax on the lump sum amount pursuant to s 6-5, even though it was an isolated and one-off transaction. d) None of the above, as the High Court decision in FC of T v Montgomery, held that money from lease incentive payments is not assessable income. Question 17 Your client collects antique furniture. Your client purchased some antique chairs in May 2005 for the sum of $14,000. Your client sold the chairs in August 2013 for $40,000. You have a carry forward capital loss of $18,000 from the sale of shares in July 2003. What is your net capital gain from the transaction and the amount that you would include in your assessable income for the current financial year? a) $4,000 b) $26,000 c) $8,000 d) $13,000 Question 18 Home Beautiful Pty Ltd is an architectural business. During the year, on 9 September 2013, the company purchased a motor vehicle for $93,000 (including GST). The managing director uses the car solely for business purposes. Will the cost of the car be a tax deduction for the company? a) It will be deductible as an employment expense and treated as a fringe benefit. b) An allowable deduction under s 8-1, ITAA 97. c) The cost of the car is not deductible in full as it is not a fringe benefit as there is no personal use involved. d) It will be treated as a depreciating asset up to the luxury car limit of $57,466 and the depreciation deduction will be claimed by the company. Question 19 Your client has made a capital gain on the sale of the family home that they bought for $165,000 in April 1996 and sold for $450,000 in December 2013. During the period of ownership, your client left the house for a period of 9 years while they lived in China. During that time the house was not rented but used by a relative rent-free and your client did not own any other home. The capital gain that is attributable to the period of absence from the family home is $180,000. How much of the capital gain must be included in your client’s assessable income? a) $180,000 b) $90,000