Income Tax Case Study – QUESTION PAPER
The Assessment Information and Instructions for this assessment item is available on the course site in: Assessment >> Income Tax Case Study. As set out in section 5.5 of the course ECP, you will be required to undertake independent research to prepare your answer to the Income Tax Case Study. Specifically, you will be required to undertake independent research to prepare your answer to Question 2.
This is an individual assessment activity. Students must work alone and without the assistance or input of other students or other individuals.
Total marks for the Income Tax Case Study = 50 marks.
Total weighting of the Income Tax Case Study in your final mark for LAWS3101 = 20%.
- Prepare your answer to the Income Tax Case Study by typing up your responses in one Word document file. There are no specific font or font size requirements that apply. But it is recommended that you use a font size between 10 and 12 pt, a font type like Arial or Times new roman, and an A4 size portrait layout.
- You must submit your completed answers file to Blackboard Assignment before 2 pm on 7 October 2021 using the Income Tax Case Study SUBMISSION link in Assessment >> Income Tax Case Study.
- The total word limit for your answer is 1,800 (one thousand eight hundred) words. To be clear: any part of your answer that exceeds the word limit will not be marked. What is included in the word limit? Everything, including: headings; formulas; calculations; explanations; reasons; and in respect of your answer to Question 1, section and division numbers and case law references. What is excluded from the word limit? The footnotes in your answer for Question 2, prepared using the Australian Guide to Legal Citation. As a guideline, you should be able to complete your answer to Question 1 in approximately 1,000 words.
- In preparing your answer to Question 1, you must follow the same approach as that which is applied in tutorials, lecture examples and case studies. Therefore, you must show all your calculations and provide reasons for your answer. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts, and relevant case law. You should use the course material for Topics 1 to 7 as set out in the topic study guides to prepare your answer to Question 1. You must not use footnotes to prepare your answer to Question 1. You are not required to undertake independent research in preparing your answer to Question 1.
- You are required to undertake independent research to prepare your answer to Question 2. Therefore, you must consult, use and reference quality resources to prepare your answer. It is appropriate to use the ATO’s Legal Database and it is very important to use the UQ Library’s resources to prepare your answer to Question 2. It is not appropriate to base your answer to Question 2 on information that you find on the ATO’s general website.
Instructions continued next page
- You must reference your answer to Question 2 using the Australian Guide to Legal Citation (AGLC). Therefore, you will use footnotes to reference all of the sources that you use in writing up your answer to Question 2. As all of your source references for Question 2 will be included in the footnotes, you must not prepare a separate reference/source list or bibliography for your answer to Question 2. The AGLC is available online from the UQ Library site https://guides.library.uq.edu.au/taxation–law/related–guides. This is the pathway to access the AGLC: UQ Library >> Research tools & techniques >> Subject guides >> Laws >> Taxation Law >> Related guides. The purpose of the footnotes in Question 2 is to provide complete pinpoint references for your answer to Question 2. What is a pinpoint reference? An example of a pinpoint reference is a specific page number or a specific section number in a specific act. Therefore, the AGLC is not a reference style that allows you to add sources that you consulted generally. It is not appropriate to include parts of your answer in the footnotes as these will not be marked. Your footnotes for Question 2 are not included in the total word limit for this Income Tax Case Study.
QUESTION 1 30 MARKS
This question is about Jane Smith, an Australian resident individual. In preparing your answer to this question you should use the course material for Topics 1 to 7. Therefore, you are not required to undertake further independent research to prepare your answer to Question 1.
These are the facts relevant to Jane’s 2020–2021 income year:
- Jane owned a small residential housing complex comprising three townhouses. During May 2021, she sells all three of the townhouses. These are the sales details, the details about the total capital works deductions up to the date of sale for each townhouse and the details of the rent that she received for each townhouse during the 2020–2021 income year:
|Townhouse||Selling price||Total of all Div 43 ITAA97 capital works deductions claimed up to 30
|Div 43 ITAA97 capital works deductions for the 2020–2021 income year||Rent received during the 2020–2021 income year|
Jane originally purchased the vacant block of land upon which this complex is situated in July 2011 for $250,000. She obtained permission from the Brisbane City Council to develop and build a small residential housing complex on the land comprising the three townhouses.
Question 1 continued next page
Jane entered into a contract with a large construction company that built the townhouses for her. The construction was completed in December 2011 at a total construction cost of $1 million. Directly after the construction was completed, she immediately advertised the townhouses for sale as planned. Unfortunately, she was unable to find buyers for the townhouses so that she could return a profit. Consequently, in June 2012, she put all her attempts to sell the townhouses on hold. She did not claim an immediate deduction for the costs that she incurred during the 2011–2012 income year against her assessable income. She was then able to find tenants for all three townhouses and commenced renting these out from 1 July 2012, claiming Div 43 capital works deductions from that date as set out in the table above.
In April 2021, she decides to advertise the townhouses for sale again. This time around, she is able to easily find buyers for the townhouses due to the property boom in Brisbane, paying $50,000 in sales commission to a real estate agent in relation to the sale of all of the townhouses.
These are the other facts relevant to Jane’s 2020–2021 income year:
- On 1 July 2020 Jane sells the retail shopping centre that she owns for $15 million. This shopping centre is situated in Greenslopes, a suburb of Brisbane.
Jane originally purchased the vacant block of land on which the shopping centre was built in April 1992 for $2 million. The land remained vacant until February 2001 when Jane entered into a contract with a large construction company to build the retail shopping centre for her. The construction was completed on 30 June 2002 at a cost totalling $5 million that comprise the following items:
|•||Building construction cost||$4,500,000|
|•||Sealed roads and sealed car parks||$350,000|
All of the retail spaces in the shopping centre were tenanted from 1 July 2002. She claimed the relevant tax allowances on this complex from this date until 30 June 2020.
- On 31 January 2021 Jane sells all of her shares in OzBitcoin Ltd for $1,675,000. This company is listed on the ASX. Jane originally purchased the shares on 15 April 2020 for $500,000. She paid $10,000 in brokerage fees when she purchased the shares, and $15,000 in brokerage fees when she sells the shares. The reason why Jane sells the shares is because the company has not declared any dividends and the most recent directors’ report indicates that the company will also not pay any dividends in the next financial year.
- Jane purchased a grand piano in April 2020 for $12,500. She wanted to learn how to play the piano as a hobby. On 1 February 2021, the piano is severely damaged by water leaking from a pipe in the ceiling above the piano in Jane’s home. Her insurance company informs Jane that the piano has no market value and that it was written off because it was too expensive to repair. Jane receives an amount of $8,000 from her insurance company on 13 March 2021 in settlement of her claim. The piano was specified as a valuable item in her insurance policy, and she spent a total of $800 on insuring the piano against loss and damage.
Question 1 continued next page
- On 31 May 2021 Jane sells her first edition stamp collection for $30,000. She purchased this stamp collection from her brother on 1 April 2017 for a nominal value of $50. The market value of the stamp collection was $12,000 on 1 April 2017. Jane’s brother sold the stamp collection to her when he sold all of his belongings in Australia, purchased a yacht, and embarked on a solo voyage around the world.
- On 30 June 2021 she sells a painting that hung in her home for $5,000. She originally purchased the painting five years ago for $25,000.
- On 1 July 2020 Jane has unapplied capital losses carried forward from previous income years totalling $1,000,000. These capital losses arose when Jane sold share in a private company at a loss.
You are required to:
Advise Jane on the income tax implications of all these events and transactions in reference to her
2020–2021 income year. To do so, you have to prepare and present the calculation of Jane’s taxable income for the 2020–2021 income year. Aim to minimise her taxable income. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts and relevant case law, meeting the criteria as described in the relevant topic study guides. Do not use footnotes in preparing your answer to Question 1. Present your answer in a table format using the example below. (30 marks)
QUESTION 2 20 MARKS
To prepare your answer to Question 2, you are required to undertake independent research to produce a quality answer that has the following attributes:
- Clarity of answers and arguments, identifying the key principles, key legal questions, key taxation issues, and economic and other considerations that support your answers.
- Quality and depth of research, using resources such as peer reviewed journal articles, books about taxation principles, Australian-focused books about taxation, Australian government reports, relevant reports from other bodies, relevant statements by government departments, and statute law. You are not required to research any case law.
- Correct application of the AGLC to include pinpoint references in your answer. What is a pinpoint reference? An example of a pinpoint reference is a specific page number or a specific section number in a specific act. See the text box at the end of this question paper for an example of the application of the AGLC.
Question 2 continued next page
This is the marking criteria for Question 2:
|Correct, complete, referenced answer for Part (a)||Max 2 marks|
|Correct, complete, referenced answer for Part (b)||Max 2 marks|
|Marking criteria for Part (c):|
|Clarity of answers and arguments, identifying the key principles, key legal questions, key taxation issues, and economic and other considerations that support your answers||Max 10 marks|
|Quality and depth of research||Max 4 marks|
|Correct application of the AGLC to include pinpoint references||Max 2 marks|
You are required to answer the following questions:
This is a short answer question. You are required to reference your answer using the AGLC.
There are four universally accepted cannons of taxation. What are these cannons (name these cannons)? What is the name of the person who developed these cannons in 1776? (2 marks)
This is a short answer question. You are required to reference your answer using the AGLC.
The 2009 Henry Review into Australia’s Future Tax System was one of the most comprehensive reviews of the tax and transfer system in Australia. The Henry Review Panel was tasked with ‘designing a future tax and transfer system’ for Australia. In meeting its terms of reference, the Review Panel had to make judgments about the trade-offs that arise between five specific goals (also referred to as ‘design principles’) of the tax and transfer system. What are these specific goals or design principles that the Review Panel used (name these) in formulating its Final Report? (2 marks)
This is a discussion question. You must choose one of the following questions to answer.
Do you think that multinational companies operating in Australia pay the right amount of tax in Australia?
In Australia, sportspersons and farmers benefit from income smoothing tax policies such as income averaging, forced livestock sale deferrals and farm management deposits that help them to save tax.
Do you think these policies are justified and appropriate? (16 marks)
Example of the application of the AGLC on the next page
Example of the application of the AGLC
|It is widely accepted that 95 per cent of all farms in Australia are family owned and operated. Australian Bureau of Agricultural Resource Economics and Sciences (‘ABARES’) data suggest that partnership structures are dominant, sole traders make up roughly 20% of family farms, and trusts and corporate structures are used to a lesser extent. As a result, most of the participants in farm businesses are taxed using the marginal tax rates applicable to individuals. A major concern for farm businesses that are also small businesses is the cost to comply with various taxation and other laws.
It goes without saying that the higher their taxable profit from farming, the higher the basic income taxes payable by participants each year. While not unique to farming, primary producers face the risk that the variability of their business income and profitability that can lead to very high taxes in ‘good’ years which in turn has a negative cash flow impact on farm businesses. These high rates of tax and high levels of income for tax purposes in some years, may not be representative of the true level of income and profitability over a longer period.
In the first instance, taxation laws provide for income averaging for primary producers that dates back to 1938. The objective of long-term averaging of primary producers’ income tax liabilities is to reduce or increase annual income tax liabilities:6
to bring it closer to what it would have been if worked out using a special rate of income tax. That rate (the comparison rate) is based on the income tax that you would pay for the current year on the average of your taxable income for up to the last 5 income years.
END OF INCOME TAX CASE STUDY
 Commonwealth, Agricultural Competitiveness (Green Paper, 2014) 38.
 Parliamentary Joint Committee on Corporations and Financial Services, Family Businesses in Australia – Different and Significant: Why They Shouldn’t be Overlooked (Report, March 2013) 33–4, 37–8.
 Commonwealth, Review of Business Taxation: A Tax System Redesigned (Final Report, 1999) 575.
 RL Deutsch et al, The Australian Tax Handbook 2021 (Thomson Reuters, 2021) 1142.
 Donovan Castelyn, Helen Hodgson and Lisa Marriott, ‘Income Equalisation: Is All fair in Primary Production and Tax Law?’ (2019) 34 Australian Tax Forum 401, 422. 6 Income Tax Assessment Act 1997 (Cth) s 392-5(1).