TAXATION 303 ASSESSMENT 2 – INCOME TAX RETURN GROUP ASSESSMENT (WORTH 30%) BLOCK 1 – 2021 DUE FOR SUBMISSION 18 th & 30th APRIL 2021 (23:00 AEST TIME) BACKGROUND TO THE ASSESSMENT This assessment is highly practical assessment that aims to • Ensure that you understand how working papers are collated • Expand your tax research skills • Improve your working knowledge of Excel and • Gives you practice in writing a letter of advice • Provides practice at client interview skills • Build and consolidate your tax knowledge You will be provided with a case study of a client and be required to put together a researched set of working papers, a two page letter of advice based on those working papers and a short video for your client. Assessment component Mark Allocation What is submitted? Working Papers with references 30 Marks Excel template Letter of Advice 10 Marks Word document through turnitin Video 20 Marks Video submitted and presented in class. Total Marks 60 Marks Divide by 2 to get mark out of 35 30 Marks This assessment covers the topics of Income and Deductions (Classes 1 – 8) and it assumes that you have completed all activities and tasks for these weeks. As these topics build on from earlier topics, some knowledge of previous topics is expected. The purpose of this assessment is for you to demonstrate your knowledge and understanding of the topics. Make sure that your answers are comprehensive enough in the workpaper component to achieve this. Remember, the marks will be mainly in the “why” of your answer, not so much in actually getting the answer write. CASE STUDY INFORMATION Background Information You have been asked to prepare the 2019/2020 individual tax return for Nick Elder (“Nick”). He is the sole director of Elders Clothing Pty Ltd which operates a fashion retail business. The company is owned equally and jointly by Nick and his wife Sarah. Nick’s DOB is 13th July 1970 whilst Sarah’s DOB is 9th Jan 1974. Sarah works as a teacher and earns $80,000 from this. Nick and Sarah have two young children. The family is covered by private health insurance with HBF. The policy was taken out on 1 May 2020 and the premium paid to the end of the year was $1030 and this attracted a rebate of $203 (Benefit code 30). The policy number is RDA181919. Employment Related Income Nick is paid a salary from Elders Clothing Pty Ltd and has provided you with the following details Elders Clothing Pty Ltd ABN 84 111 122 223 Gross Payments $200,000 Tax Withheld $63,200 Nick still has a HECS debt of $6,000 as at the end of 30 June 2020. In addition to the salary, Elders Clothing Pty Ltd pay the following for Nick; • Reimbursement of CAANZ fees of $1200. Nick is a trained accountant and he uses these skills as CEO of this business. • Payment of his mobile phone bill which totalled $900 for the year • Additional superannuation contributions of $5200. This is in addition to superannuation guarantee requirements. Nick owns a Mercedes which was purchased on 1 July 2019 for $88000. The car travelled 25,000 km during the year and Nick estimates that 70% of that travel is business related, although he does not have a log book. He pays for the following costs associated with the car Fuel $4000 Service $400 Registration $1000 Insurance $1300 Excess on insurance claim (balance paid by insurer) $500 Road tolls $200 He also paid the following costs during the year. • Dry cleaning of work suits of $500 • Vogue fashion magazine of $300 • Donations to the local soccer club where they get no advertising in return for $500 • Donation to a bushfire appeal go fund me page • Payment for an insurance policy that covers his income in the event of illness or death. The premium is paid directly from Nick’s bank account on a monthly basis and the total for 2019/2020 was $6000. 60% of this relates to life insurance with the balance relating to replacement of income in the event of a serious illness. Dividends and Investments During the year Elders Clothing Pty Ltd paid a fully franked dividend of $200,000 which represents the cash amount paid out. The company is an SBE and pays tax at 27.5%. The proceeds were used to repay a bank loan for a holiday home that Nick owned. The total interest paid on that loan during the 2019/2020 year was $15,000. In addition to the shares in Elders Clothing Pty Ltd, Nick has a number of other investments including • A $500,000 term deposit which expired on 2nd July 2020 at which time interest of $2,000 was paid. Of this interest, $1,800 was accrued to 30th June 2020. • Nick acquired 10000 shares in Afterpay Ltd on 2 nd July 2019 for $1.50 share and sold them on 1 st May 2020 for $3.40/share. He also owns 1000 Flight Centre Ltd shares which were acquired on 1 st August 2018 for $1.60/share which he sold in April 2020 for $0.60/share. • Nick inherited the following shares from his father who passed away on 15th July 2019. On finalisation of the estate, the shares were transferred to Nick in December 2019. The applicable shares were Share Date purchased by Nick’s father Number of shares Price paid per share Market value at date of death BHP 4 Jan 1985 2,300 $5.00 $18.40 CBA 4 Dec 2005 1,500 $10.50 $20.30 The CBA shares were sold on 3 rd Feb 2020 for $19/share and he had to pay brokerage of $30 to complete the sale. • During the year, he received fully BHP dividends of $1000 which was fully franked (using 30% tax rate). He elected to not receive the cash but instead participated in a dividend reinvestment plan and acquired a further 10 shares. Rental Property Nick owns an apartment on the Gold Coast (Unit 4, 285 Pacific Parade Bilinga Qld 4225) which is rented to their daughter for $200/wk (in advance). The market rent is $400/wk. The property was acquired on 1st Jan 2020 for $520,000 with settlement occurring on 1st March 2020 and his daughter moved in immediately. (Hint: consider issues of market rent here). In the first week of settlement, there was a significant amount of repairs made costing $3,000 to bring the property up to a more liveable standard. The building was originally constructed in 2001 and a quantity surveyor’s report commissioned at the time shows a construction cost of $120,000. Nick also purchased a washing machine for $1,200 which was installed on 3rd March 2020. Nick does not use low value pooling for depreciating assets and uses diminishing value as the basis for depreciation. Other costs paid in relation to the property include Stamp duty on property purchase $25,000 Legal fees on property purchase $3,000 Body corporate fees $1,700 Council rates $930 Water rates $560 Loan repayments – principal component $1,200/mth Loan repayments – interest component $320/mth Fees paid to bank to establish the bank loan which runs for 15 years $980 ADDITIONAL GUIDELINES PART A – EXCEL WORKPAPERS There are a number of sheets in the excel template and it is important that you complete these in the order presented. Please note the following in relation to this part of the assessment; • Each item addressed in the case study should be addressed with a conclusion as to its tax treatment as well as appropriate tax referencing explaining why. The workpapers need to be complete so that they can be reviewed in a future audit and by a manager in an accounting firm. • The ultimate aim is to calculate taxable income and tax payable for Nick. This will form the basis of your letter of advice in Part B • In the section for tax payable and offsets, include all levies and offsets considered. PART B – LETTER OF ADVICE • Your letter of advice should include a summary of Nick’s overall tax position and the key tax issues and recommendations that you have for him. Think about the sorts of information that you would like to hear if you were Nick as a guide to what you should include in your content. • The letter should be a maximum of two (2) page in length. This excludes any references and appendices eg 2 pages plus references and appendices. • Your letters of advice should be prepared and presented in a professional manner, which means professional looking format, correct spelling and grammar, as well as correct referencing to legislation, cases and rulings only (ie no MTG or study guide or lecture slide references). Marks will be deducted if you do not do this. Refer to the examples of referencing style used in Tax provided in the lecture slides. REQUIRED A) Using the excel template provided, prepare a set of fully referenced workpapers for the preparation of the 2019/2020 income tax return. (30 Marks) B) Prepare a letter of advice to Nick summarising his overall tax position and key tax issues he should be aware of. You should also discuss recommendations for improving their future tax position. (10 Marks) C) Prepare a short 3 minute video for Nick summarising their tax position and key issues arising from it as well as answering a short tax question that he has asked you. (20 Marks) (Note: a maximum of 5 Marks may be lost for a lack of or inappropriate referencing.) • Assume that Nick is a sophisticated taxpayer and questions every piece of tax advice that she receives. Therefore, you will need to provide sufficient (but concise) explanations. • It may be necessary to make assumptions in the absence of specific information that will be provided by Nick later. Therefore, you may need to make a decision as to assessability or deductibility, but provide a brief explanation if another course of action is appropriate. • At a minimum, your letter of advice should include a) Formatting components of a letter eg your name and address, date, recipients address, greeting, complimentary close and your signature and title b) Executive Summary (which incorporates the final advice) c) Introduction d) Discussion/Analysis e) Final advice and recommendation Additional reference material on how to complete letters of advice has been provided on Moodle. PART C – SHORT VIDEO In this part, you are required to record a short group video using your phone. A link to the video is to be provided to your tutor and it is to be presented in class. In relation to the video, • This should be no more than 3 minutes in length. • You will be addressing Nick and providing a) a summary of the overall tax position, details of some of the key items and some recommendations to improve his tax position in the future. Think about some of the items you would like to hear if you were the client speaking to your accountant. And b) Answer to one of the following questions (each group will be allocated a different question) i) Elders Clothing Pty Ltd is considering buying a new motor vehicle that is 100% for business for one of the staff (ignore FBT implications). The vehicle will cost $60,000 inc GST and will be brought in April 2021. Ignore FBT implications and assume that Elders Clothing Pty Ltd is an SBE taxpayer. Nick would like to know how this would be treated for tax. ii) Elders Clothing Pty Ltd has ordered a shipment of clothing from Italy worth $50000 which is on a boat in the ocean on 30 June 2020. They are responsible for the insurance if the boat sinks. Their current stock excluding the stock on the ship is $600,000 exc GST. 20% of this is old stock they are unlikely to be able to sell. What value of closing stock should the company include in their 2019/2020 tax return? iii) Elders Clothing is looking to repaint their business premises at a cost of $80,000 (exc GST). Nick would like to know how this would be treated for tax. • Every member of the group needs to present in the video and it is the group’s responsibility to ensure that the technology is working during the presentation. ALLOCATION OF MARKS AMONGST GROUP MEMBERS Each group member will be allocated the same mark apart from individual components where noted in the marking rubric (ie in the video component). However, there will be an opportunity for students to adjust the marks of non-performing group members by completing a peer evaluation of your group members. This will be confidential and should be emailed to your tutor individually and confidentially. Details of this form are available on Moodle. HOW TO SUBMIT THE ASSESSMENT? There are three different submission points located on Moodle, one for each part of the assignment. TAX REFERENCING AND ACADEMIC INTEGRITY This is a GROUP assessment and should be based on your own group’s research. Evidence of copying from other students or elsewhere will be subject to SCU Academic Integrity processes. Please also remember that Taxation follows its own referencing style. There will be additional information provided via collaborate to go through this. You do NOT need to follow Harvard referencing or provide a formal bibliography. Instead, all referencing should be intext referencing back to applicable legislation, case law and rulings. References to the ATO website or textbooks ARE NOT appropriate and no marks will be awarded for these.