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MA 613 Taxation Law and Its Implications in Given Questions Assessment Answer

Melbourne Institute of Technology Pty Ltd

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Master of Professional Accounting

MA 613

Taxation Law

Individual Assessment


Total Marks:20 marks


Unit learning outcomes assessed:

  1. Appreciate and understand the factors influencing the creation and interpretation of income tax legislation and their relationship to accounting concepts and practice
  2.  Explain and discuss income tax law in Australia and more particularly the taxation of capital gains, fringe benefits tax, goods and services tax and small business tax concessions.
  3.  Explain and demonstrate how to calculate the taxable income for different types of taxable entities.
  4. Apply technical knowledge and analytical skills to evaluate and solve tax problems.

Instructions to Candidates

  1. This is an individual assessment.
  2. Please complete all questions.
  3. You may discuss with your group members while you are completing this assessment.
  4. Part A (12 Marks)

Q1. (4 Marks)

X, aged 42 and a qualified lawyer, is in the process of completing his income tax return for the income year ending 30 June 2020. He seeks your assistance/advice on how to deal with the following transactions in his tax return:

On 15 October 2019, X sold all his shares in X1 Ltd, a company listed on the Australian Stock Exchange. He bought the shares on 7 July 2010 for $50,000 and sold them for $150,000. X purchased the shares with the purpose of making a profit from their sale. (X did receive dividends during the time he owned the shares). X advised his stockbroker to place the sale proceeds in a cash management trust that had its headquarters in Hong Kong. This trust was paying 15% interest per annum on short-term deposits and many Australian investors were using the trust. X thinking was to hold the money temporarily in the cash management trust while he decides what to do with the funds in the long-term. Unfortunately, on 30 December 2019, X’s stockbroker (Y) advises X that the proprietors of the cash management trust were professional fraudsters and that they had defrauded numerous investors of millions of dollars. In short, X’s $150,000 has also been stolen and there is no chance of getting any of the money back . Between 2009 and 2020, X only bought and sold other shares around five times. As at 30 December 2019, X was still thinking about the long-term use of the $150,000. X received an interest payment from the fund of $5,500 on 15 November 2019. X has a net capital loss of $20,000 from the 2015-16 income year.

Q2 (4 Marks).

X is a beneficiary in a family discretionary trust (Happy Family Trusts (HPT) that X’s parents established 30 -years ago. The HPT owns three investment properties and two small businesses. Like many discretionary trusts, the trustee of the HPT has an absolute discretion to pay profits to any beneficiary listed in the schedule to the trust deed. X is listed as one of the beneficiaries in the schedule. The HPT had an accounting profit of $250,000 for the financial year ending 30 June 2020. The net income (taxable income) under s 95(1) of the ITAA 1936 for the income year ending 30 June 2020 was $300, ,000. The difference was mainly attributable to lower tax depreciation (compared to accounting) on depreciating assets. The difference was not due to any capital gains/capital profits. The trustee exercised his discretion on 29 June 2020 in favour of  X (and other beneficiaries). X was allocated $50,000 out of the profits for the year. This amount was paid into X’s bank account on 29 August 2020.

Q3 (Marks).

X has always worked during his adult years. For the last 20 -years, he has worked in the Finance and Banking law for a major law firm Freeheels. X decides to change his career path and now wants to work in taxation law. His employer Freeheels agrees to transfer him to the Taxation Law division but only on strict conditions as the company does not normally allow an established employee lawyer with considerable expertise in an area to change their area of specialty, and effectively start from “scratch”. One of the conditions is that X must immediately enrol in the Master of Taxation degree at the University of Sydney and that he undertakes four  taxation law subjects over the next two years. X agrees. Unfortunately for X , the firm insists that X meets all his own costs of the degree, aside from textbooks. For the income year ending 30 June 2020, the course fees (both courses were undertaken in  the last semester 2019 and Semester  One, 2020) came to $25,000 and the textbooks came to $1000. Another condition imposed by the firm is that X’s salary will decrease by 20% when he starts in the Tax Division  (i.e. Ron’s salary will drop from $200,000 to $160,000). X  started in the Tax division in February 2020. If  X should fail any course in his Master of Taxation,  he will take a further salary drop of 10%. After two years in the Tax division, X’s salary will return to its normal level (i.e. $200,000).

On 25 May 2020, X  presents his receipts for the textbooks he purchased ($1000 to the accounts department of Freeheels, and that department paid the amount ($1000) on the receipts into X’s normal bank account (where  salary is deposited).

X also advises that he had $50,000 in net capital losses for the 2018-19 income year (from a sale of shares). These are the only losses available to X.

Advise X on the income tax consequences of the above transactions, events, etc. Your advice must be supported by relevant tax legislation, tax cases and/or tax rulings tax principles and examples.

PART B (Marks).

Q1. (3 Marks)

Y, an Australian resident, is the sole shareholder of ABC Pty Ltd, an Australian resident company. In this income year, ABC Pty Ltd made an interest free loan of $100,000 to Y. By the income year end, the company waived 40% of the loan. The balance of the loan remains outstanding by the company’s lodgement date. The company’s distributable surplus for the income year is $50,000.

Advise the tax implications of the above transaction for Y. How will your answer be different if the shareholder of ABC Pty Ltd is a wholly owned subsidiary of another company incorporated in Australia? Provide examples.

Q2. (5 Marks).

Explain ATO Tax Termination TD 2007/28 Div 7A: “present legal obligation” for ITAA 1936 s. 109Y (2): Income Tax: What is a “present legal obligation” of a private company for the purposes of Subsection 109Y (2) of Division 7A of Part III of the Income Tax Assessment Act 1936? Refer to the relevant legislation, explanatory memorandum and cases.


Part A:

Question 1

Issues related to CGT assets:

Issue 1: In the current case for Mr. X sold the share for $ 150000 on 15th October 2019 that was acquired on 7 July 2010 against an amount of $ 50000. There is a capital gain because a CGT event of disposal of a CGT asset is occurring according to Sec. 104-10 A1. Wherever gain is occurred because of a CGT event such as a capital gain for the individual and taxed accordingly (Australian taxation compliance and office, 2020). 

For the calculation of tax, there are two methods provided by the ITAA, 1997

Tax calculation according to the Discount method

Sale proceeds $ 150000
Cost base$ 50000
Net gain$ 100000
Discount 50%$ 50000
Capital gain liable for tax$ 50000

Tax calculation according to the indexation method

Since the asset is acquired after 21 Sept 1999 than the said assets are not eligible for indexation and this method will not apply (Australian taxation compliance and office, 2020).

Issue 2: X invest cash proceeds from sale transaction to a cash management trust for the interest of 15% per annum, the cash management trust is fraud and they have defrauded many investors including Mr x and the amount of investment is lost. Loss/ stolen of CG asset is also a CGT event according to sec 104-25 thus there is also a calculation of capital gain/capital loss (Australian taxation compliance and office, 2020).

Sale proceeds NIL
Cost base$ 150000
Net gain/ (Loss)($ 150000)

This loss is adjustable with the capital gain on the sale of shares. 

Issue 3: Interest received from the trust is a normal income and it is taxed accordingly. Capital losses are quarantined and cannot be used to adjust with normal income. Capital losses can only be set off with capital gains. Thus, the amount received of % 5500 as interest from the trust is taxed separately  (Australian taxation compliance and office, 2020).

Issue 4: Net capital loss of $ 20000 can be quarantined and forwarded it can only be set off with the other capital gains in the current case the current loss is in excess from current capital gain so it should be forwarded and not set off  (Australian taxation compliance and office, 2020).

Question 2: 

Family discretionary trust:

A discretionary trust is a trust where the trustee can exercise discretion about who, within the nominated beneficiary, will benefit from trust income and capital from year to year.  Trust is not a separate entity. Beneficiaries of the trust are liable to pay tax on the trust income but in some cases, trustees are also liable to pay taxes on trust income.

The tax is charged at the ordinary tax rates and profits are calculated following the provision of section 95 of ITAA 1936 (Australian taxation compliance and office, 2020).

According to section 97 of ITAA 1936, a beneficiary is liable to pay taxes on trust income if he fulfills all the conditions I.e. Beneficiary entitled to the income, He is not under a legal disability or he should be a resident. It should also be noted that the beneficiary is taxed on the income part for which they are entitled whether the said income is received or not (Australian taxation compliance and office, 2020).

In the present case of X and Happy Family trust, it is seen that there is an accounting profit of $ 250000, and profit calculated according to section 95 is $ 300000 for the year ended 30 June 2020. So the tax should be charged on the profit calculated following section 95 of ITAA 1936 (Australian taxation compliance and office, 2020).

The next issue that arises for Mr. X about charging of tax on their entitled amount of $ 50000 that in which tax period the tax is charged on the amount of $ 50000. In the current case, the trustees exercise their discretion on 29 June 2020 which is in the financial year 2019-2020 and the amount paid into X's bank account is on 29 August 2020 that is in the financial year 2020-2021. According to section 97 of ITAA 1936 tax is charged in the period in which discretion is used irrespective of the time of payment or receiving of profits (Biddle, Fels, & Sinning, 2018).

Question 3: 
Tax consequences on an employee:

The amount received by the employee from its employer against the services provided by him is considered as income of the employee and the employee is required to file return against this income.

The employer is required to withhold tax on the salary provided to employees and submit to the tax department.

The non-cash benefits provided by the employer to employee is considered as fringe benefits such as reimbursement of expenses incurred by the employee. The employer is required to pay fringe benefits tax on such amount.

In case an employee sacrifices its salary due to certain arrangements between employer and employee than the tax is levied on the amount received by the employee after the sacrificed amount.  If the employer pay certain fringe benefit against such sacrifice than that amount is liable for FBT and employee is required to show fringe benefit under ITR (Australia, & Au, 2020).

The amount incurred by the employee for the increment of salary and to earn an income is deductible from the income of the employee while calculating the taxable income of the employee.

As per section 102-5(1), the capital loss can be set off against capital gains only, not against other income.

Taxable income of Mr. X as per provision:

The taxable income of Mr. X for the income year ended 30th June 2020:

Salary Income from 01st July 2019 to 31st January 2020 ($ 200000* 7/12)$ 116667
Salary Income from 01st Feb 2020 to 30th June 2020 ($ 160000 * 5/12)$ 66667
Total Salary income of Mr. X for the year ended 30th June 2020$ 183334
Less: The amount of course fee paid by Mr. X($ 25000)
Net Taxable income of Mr. X for the year ended 30th June 2020$ 158334
Fringe benefit paid by the company to Mr. X during the year
Expenses of textbooks reimbursed by the company$ 1000

Source:- (Computed as herewith)

Note: The amount of capital loss related to the income year 2018-19 $ 50000 on the sale of shares is not deductible from the income of Mr. X. As per the provision of Section 102-5, the amount of capital loss can be set off against capital gain only (Biddle, Fels, & Sinning, 2017).

Part B:

Question 1:

Legal provision:

As per the division 7A of Income-tax assessment act, 1936 the loan provided by the private company to shareholders or an associate of shareholders is considered as dividend up to the amount of distributable surplus amount for that income year (Merganovski, 2018).

The total amount of dividend is more than the distributable surplus then the amount of dividend as per division 7A is calculated as follows:

Loan amount treated as dividend * Distributable surplus / Total loan provided to shareholders

A written statement is required that must contain the loan provided by the private company is considered as a provisional dividend. The private company must issue this written statement to the shareholders for getting the dividend is reduced. The shareholder has to show this amount as an unfranked dividend. 

In case of debt forgiveness by the private company in respect of a debt taken by a shareholder or an associate of a shareholder may be treated as a dividend paid to a shareholder under division 7A up to the limit of distributable surplus (Australian taxation compliance and office, 2020).

Applicability of provision:

In this case, Y is the sole shareholder of ABC Pty Ltd. The company provided an interest-free loan of $ 100000/- to Y. During the income year, the company waived 40% of the loan amount. The amount of distributable surplus is $ 50000 during the income year (Australian taxation compliance and office, 2020).

As in the given case, Y is sole shareholder, therefore the complete amount of loan amount that is waived by the company is considered as provisional dividend up to distributable surplus.

The amount of loan waived is $ 40000 is considered as deemed dividend as the amount of loan waived is less than a distributable surplus. Y have to show the amount of $ 40000 is shown as an unfranked dividend in its ITR (Fringe benefit taxation, 2020).

When ABC Pty Ltd is a wholly-owned subsidiary of another company incorporated in Australia:

In case ABC Pty Ltd is wholly owned subsidiary of another company and ABC Pty Ltd provide loan to Y is not considered as a loan to the shareholder as in this case, Y is not the shareholder of ABC Pty Ltd and this loan amount is not considered as a provisional dividend for the company whether company waived off the loan amount (Capital Taxation and compliance, 2020).

However, if Y is an employee of ABC Pty Ltd than it is considered as a fringe benefit to the employee, and the provision of FBT applies to the company and Y.

Question 2:

Present legal obligations and relevant legislation:

As per subsection 109Y (2) of Division 7A of Part III of ITAA 1936, the present legal obligation of the private company is the payable liability and enforce presently or at the future date as per applicability of certain law. The unpaid amount of present legal obligation is deductible for calculation of the distributable surplus for that particular period. The provision made by the company for a future obligation is not considered under the present legal obligation.

The Commissioner may accept the present legal obligation as on 30 June, notwithstanding the payment date of the tax and legal obligation is after 30 June. The amount is considered as a present legal obligation for calculation of distributable surplus calculation under subsection 109Y (2) of the ITAA 1936 (Australian taxation compliance and office, 2020).

Explanatory Memorandum:

In the ITAA 1936, section 109Y is introducing to bring a statutory concept of distributable surplus that replaces the concept of profit in section 44 of ITAA 1936. The distributable surplus is calculated by considering the net value of assets of the company subtracting by present legal obligation. The present legal obligation is to be found as per paragraph 35 and 36 of the Taxation law Amendment Bill (No. 3), 1998 (Taxation and Capital Taxation and compliance, 2020).


The case related to present legal obligation and the distributable surplus is Commissioner of Taxation v H [2010] FCAFC 128.

In this case, the tax liability that arises due to the non-payment of the loan amount by the shareholder to the private company is considered as income of the company. The fact of the case that the commissioner considers the loan amount involve cash transaction as there is no loan agreement with the shareholders (Australian taxation compliance and office, 2020).

For calculation of Distributable Surplus calculation, this amount is considered as income of the company, and the tax liability arising on such income is considered as the present legal obligation of the private company for calculating the distributable surplus whether the payment is made in future.

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