Posted: September 8th, 2015

Taxation law.

QUESTION 1      


Fast Ed is the owner of a new and second hand car business. He is really good at

wheeling and dealing in the car selling business but is not very good at

understanding the tax effect of some of his deals. Explain the tax effect of the

following activities. (Each subsection is worth 3 marks.)



  1. a) Fast Ed has several different cars in stock at year-end and is not sure how to

value them or if he has different valuation options available. Explain in your

own words the options Fast Ed has available to value his stock.


  1. b) Fast Ed gave Slick Sam, a creditor, a car, which was in stock. The car was

given in exchange for a debt of $18,000 Fast Ed owed to Slick Sam. The car

cost Fast Ed $17,000 and was on the showroom floor for sale for $19,000.


  1. c) Fast Ed really liked one of the cars that were traded in. He took it home for

his daughter who now uses it everyday. He decides he is not going to sell this

car and keep it for use in the family. He purchased the car for $19,000 and it

could have been sold for $21,000

  1. d) Fast Ed decided to put some of the Ford hatchbacks on sale for only $18,000.

Ford had just announced a new model hatchback and it has great reviews.

He was really concerned that customers would not consider buying the older

models if he did not drastically reduce the selling price. Other dealers have

told him they were ‘not moving’. The Ford hatchback had cost $22,000 and

was originally selling for $28,000. At the 30 June Fast Ed had 3 in stock.



QUESTION 2        


Various taxpayers receive the following amounts during the 2014/15 income tax year:


  1. a) Salary income of $50,000 and a bonus of $10,000 from an employer.
  2. b) A prize of $2,000 for the best TV advertisement of the year.
  3. c) $500 received by an employee from an employer for costs incurred to travel

to Sydney for work. The employee bought a return ticket on sale for only $120

and stayed with a friend while in Sydney. One of the conditions of the work

related trip was that the employee could keep whatever remained of the $500

as long as the work required to be performed in Sydney was completed.

  1. d) An iphone worth $1,000 from a client.
  2. e) $10,000 awarded as damages for personal injuries incurred by an individual

in a car accident.

  1. f) A taxpayer buys a share during the year for $5. On the 30 June, the taxpayer

still owns the share but it is now trading at $7.50

  1. g) A taxpayer manages to ‘acquire’ some stolen televisions. He sells 15 of them

and makes $10,000 during the tax year.


Discuss the assessability or not of the above amounts. Each amount discussed is



QUESTION 3        


Briefly explain in your own words what a progressive tax rate

structure is.



QUESTION 4        


Charles is an accountant and is keen to become a partner in one of the big

international accounting firms. In order to do so he knows that he needs to gain some

international experience. He secures a position with another large accounting firm in

the US with a contract for 18 months. He sells his apartment in August 2014 in

Sydney and buys a similar apartment a few weeks later in New York. He joins the

local gym and rugby team. He volunteers at the Lyons Club on weekends. He has

one brother that lives in the UK and his parents have already passed away. Charles

is not married and has no children. At the end of the 18-month contract, Charles

decides he would like to gain a little more experience and extends his contract

another 12 months.


With regards to the Domicile test, would Charles be considered a resident or not of

Australia for the 2014/15 income tax year? Discuss the factors the ATO would

consider in making their decision.


QUESTION 5      


  1. a) Josh owns a boat that his neighbor, Ben, is interested in buying but Ben

wants to try out the boat first. On the 1 January 2015 Jim agrees to hire the

boat to Ben and the agreement provides that Ben will buy the boat at the end

of three years unless Ben decides to buy the boat sooner. Josh agrees that, if

Ben does buy it, Josh will apply the hire fees against the agreed purchase

price. Some months later, Ben inherits some money and advises Josh he

would like to buy the boat. The sale is concluded on the 1 June 2015.


  1. b) Mark acquired an asset on 1 June 2008 for $50,000 and on the 29


2015 the asset is destroyed by fire. The asset was not insured.


  1. c) On the 1


of June 2015 Joe grants Ashleigh the option to purchase his beach

house in Byron Bay. Ashleigh pays $2,000 for the option.


  1. d) John purchased a property on 1 July 2009 for $250,000. The property was

rented out between 1 July 2009 and 30 June 2010. From 1 July 2010, he

used the property for his main residence until it was sold on the 30 June 2015

for $400,000. (Calculations to be performed in years and not days.)


  1. e) Steve acquires a home in July 2005 for $375,00. In March 2008 he converts

the separate garage into an office for his financial planning business and

commences business. The garage comprises 20% of the floor space of the

home. He sells the property in December 2014 for $700,000. The market

value of the house in March 2008, when the garage was converted for

income producing use was $500,000.



With reference to each of the above situations, outline the Capital Gains Tax

consequences of the transactions.

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