BLO2206 TAXATION LAW AND PRACTICE
SEMESTER 2 – 2013
INSTRUCTIONS TO STUDENTS
Length: Total word length should be approximately 3,000 words. It is in the discretion of students the word length for each answer.
Marking: Mark allocation is set out for students in the introductory work notes. The answer is to be an individual piece of work. This is not a group assignment.
Due Date: To be submitted on Wednesday 18 September via webct by 5 pm. A hard copy must also be submitted. The date of receipt is the webct submitted copy.
Referencing: A student can select any proper method for referencing. However, the same referencing style must be used throughout the paper.
Plagiarism A student who plagiarizes will have their assignment returned with a zero mark. Students should familiarize themselves with the university policy on plagiarism. Answers may be submitted to Turnitin for purposes of checking for plagiarism.
Both question 1 and 2 must be answered. Each question carries 15 marks
Fine Furniture Supplies is in the business of leasing and selling Oasis Furniture imported from Sweden. In January 2012, Fine Furniture entered into a contract with Chevron Ltd, a furniture retailer, to supply Oasis furniture over a period of two years. The agreement provided for a fixed price on each various times sold within the two-year period, and also for a free warranty period of 18 months.
Because of a change in tariff regulations in November 2012, the price of Oasis furniture increased by an average of 25%. As a result, Fine Furniture indicated that it wished to terminate the agreement with Chevron Ltd from 1 December 2012. The termination of the agreement forced Chevron to purchase furniture from another supplier at a higher price.
Chevron began an action to sue Fine Furniture for damages of $700,000, being compensation for the increased cost of having to buy its furniture elsewhere. The action by Chevron was discontinued when Fine Furniture paid to Chevron $400,000 to settle the matter.
Advise Chevron as to whether the amount received as compensation constitutes assessable income, and if so what type of assessable income it would be.
If you think you need further information, explain what that information is and why it is needed.
Old Owl Pty Ltd was a small, very profitable, boutique beer brewing business. In 2011 the company decided to expand its business. It decided it would do this in an offshore market, namely in China.
Roberta Manning commenced as a clerk with Old Owl Pty Ltd in 2007. Whilst working for this company she also was doing an economics degree at Melbourne University. She was awarded her degree in 2009. In 2010 she resigned her position with Old Owl and set up a company, Berta consultancy Pty Ltd. The business was run from the home of Roberta. The primary focus of the company’s business was economic analysis. Part of the business also involved writing a newsletter on share market developments. This newsletter was sent to annual subscribers. You can assume Berta Pty Ltd satisfies the Results Test in Division 87 at all times.
Roberta, through her company Berta Pty Ltd, was hired as an economic consultant to the Brewery company Old Owl Pty Ltd. In October 2011 Old Owl Pty Ltd contracted with Berta Pty Ltd. The contract was for Berta to provide consultancy services for its expansion into China. The agreement was to commence in January 2012. To satisfy this consultancy Roberta was required to move to China until the brewery business was well established. This could be anywhere between 2 and 10 years.
On 2 January 2012 Roberta moved to Beijing to fulfill her consultancy commitments. Allan, her husband, went with her. They sold their house in Melbourne. Roberta continued to write the newsletter on share developments from China and send it from China electronically to subscribers, all of whom were in Australia. Berta continued to accept consultancy business in Australia from other than Old Owl. Roberta completed these consultancies however from China.
Roberta suffered from asthma. As a result of the air pollution in Beijing, Roberta’s asthma became severe. Accordingly, Roberta and her husband decided to leave China. They arrived back in Australia on 1 April 2013. Before leaving however, Roberta employed a local economist to fulfill Berta Pty Ltd’s contractual obligations to Old Owl. This employee commenced duties on 1 March 2013, to enable the employee to be trained by Roberta. Berta Pty Ltd paid the Beijing employee in Chinese currency (RMB).
Below is the financial information for Berta Pty Ltd.
1/7/11 to 30/6/12
Receipts From $ Reason for Payment
Old Owl 60,000 Advices given to 31/12/10
Old Owl 60,000 Contract payment from 1/1/11
Newsletter 5,000 5 clients equal (installments quarterly)
Cave Services Pty Ltd 3,000 Advices given to 31/12/10
Other 2,000 Advice to various individuals (1/7/10 – 31/12/10)
Salary - Roberta 70,000
Salary - Alan 50,000
1/7/12 to 30/6/13
Old Owl 120,000 Contract payment (monthly payments)
Newsletter 5,000 5 clients installments quarterly
Australia/China foundation 22,000 Advices given
Salary - Roberta 70,000
Salary - Alan 50,000
Accommodation costs in China 10,000 They had a 5 year lease on an apartment
Chinese salary 4,000 For May and June 2013.
Roberta left Australia in a hurry to commence business in China. She never therefore completed her tax return . This is the same for her husband. For the 2011/2012 and the 2012/13 financial years Roberta has asked you to determine what the assessable income is, for Australian tax purposes, for herself, her husband and the company Berta Pty Ltd.
NOTE: In giving this advice, if you think you need further information explain what the information you need is, and why you need it.