Group Taxation Law Case Study on Oscar Warehouse & Plumbers

In accordance with the University's graduate qualities, this assignment is offered as a group assignment to promote the development of collaborative work skills. The assignment may be undertaken individually or in a group comprising up to four students. There are no other limitations on forming a group. Thus students from different tutorials and also internal and off-campus students may form groups. Groups may also be different from assignment 1. Students are strongly advised to form groups wherever possible.

Please take care with the presentation of your assignment. As well as technical content, the assessment will also take account of organization, neatness and expression.

Please note that extensions for this assignment will be granted only in extraordinary circumstances and approval must be obtained from the course co-ordinator before the due date. Extraordinary circumstances do not include the early date for submission or that other assignments are due at about the same time. Late assignments will not be accepted.

Assignment 2 is the continuation of assignment 1, involving the tax affairs of Oscar Waterhouse and his plumbing business among other activities. In assignment 1 you were required to calculate assessable income based in the information provided. For the purpose of this assignment you should take that amount of assessable income as $1,079,000. Taking that amount as the starting point, you are required to deal with the following additional information in respect of the year ending 30 June 2014 in order to determine Oscar's taxable income and tax payable for that year. Note that there may be matters in the first assignment relevant to this assignment.

1. Oscar values his trading stock on hand each year at cost. His trading stock on hand at 30 June 2013 amounted to $250,000 and at 30 June 2014 it amounted to $200,000. However at 30 June 2014 there was an additional amount of imported stock costing $20,000 which he had not taken possession of because it was still on board ship, Oscar had ordered this stock in May 2014 and received bills of lading for this stock on 23 June 2014. Oscar's trading stock purchases for the year ending 30 June 2014 amount to $260,000, but do not include the stock on board the ship.

1. As part of a salary package provided to an employee, Oscar has included a car which the employee is entitled to use privately and garages at home Oscar leased the car, and provided to the employee, on 1 August 2013 for $700 per month. If Oscar bought the car, it would have cost him $36,000. Fuel and maintenance costs may be taken to be $400 per month. Appropriate log book records reveal that for the year ended 31 March 2014 the employee travelled a total of 12,000 kms, including 3,000 km on business. The employee has contributed amounts of $120 per month to the fuel and maintenance costs. $40 per month of these amounts has been has reimbursed to the employee. Note: for the purpose of this assignment, assume that the FBT year of tax coincides with the income year.

1. Oscar bought a new car for himself for $90,000 on 1 October 2013 for both business and private use. The car is taken to have an effective life of five years. Oscar's records show that for the period to 30 June 2014 private use amounted to 50%. Registration and insurance costs paid on acquisition were $2,200 and fuel costs amounted to $4,000 to 30 June 2014

1. Oscar has provided salaries to employees totalling $300,000. Included in these salaries are: (1) an amount of $10,000 entered into a provision for annual leave on 30 June 2014 for leave entitlements accrued to that date; and (2) an amount of $50,000 paid to Oscar's wife for working in the business on weekends and at other times as needed. The Commissioner has determined that payment of $30,000 is appropriate for the work done by the wife. In addition to the above amounts, Oscar has withdrawn $3,000 per fortnight from the business for living expenses during the year.

1. Oscar is a member of the master Plumbers Association who membership fees of $500 fall due on 1 June each year. Oscar paid his fees on 5 July 2014. Oscar is also a member of a leading horse racing club because of his interest in horses. Membership of this club costs $600 per annum, payable on 1 September. A friend has advised him that he should claim this cost as a tax deduction because he meets customers and suppliers at the club and makes business arrangements there.

1. In order to buy his new car, Oscar borrowed $60,000 on 1 October 2013 for a term of six years. Bank fees for the loan were $600. Interest charged on the loan to 30 June 2014 amounted to $3,000.

1. Oscar has private medical and hospital insurance for himself and his family. During the year he paid $6,000 for his own medical treatment, by a legally qualified medical practitioner, and dental expenses of $3,000 for his 17-year old daughter.

1. On 1 November 2013 Oscar leased additional premises. The costs of taking out the lease, including preparation costs and stamp duty, amounted to $1,000 and the monthly rent is $2,000.

1. Oscar has decided to incorporate his business from the beginning of the 2014/2015 year. The cost of legal advice and documentation concerning incorporation amounted to $4,000 and was paid in May 2014.
2. Other business expenses incurred for the year amounted to $200,000. This amount is simply to be treated as deductible for the purpose of this assignment.

Required

On the basis of the provided information, calculate Oscar's total taxable income and tax payable (including Medicare Levy) for the year ending 30 June 2014.

Oscar uses diminishing value for depreciation and has made an election under s. 10(1) of the Fringe Benefits Tax Assessment Act 1986.

As for the first assignment, please note that this assignment is not an accounting exercise but a test of your understanding of the relevant tax law, which must be clearly stated. Therefore, you should identify each issue and concisely apply the relevant provision(s) of the legislation and any supporting case law in arriving at your decision concerning its treatment. Necessary calculations should be neatly set out. You should refer to the guidelines on answering tax questions and referencing tax law on the course home page and apply them as appropriate.

Oscar Waterhouse, a sole trader runs a plumbing business. He supplies his business services to both the trade and retail customers.

Calculation of assessable income

1. Accrual method is the most convenient and appropriate for accounting as per the statement of Gibbs J in Brent v. FCT 71 ATC 4195.
2. Before calculation there has to be classification among the incomes into ordinary income and statutory income.

• Payments received for plumbing services ($480,000) – This income is incurred through the business activity and falls within the ambit of the 'income from personal exertions' as defined under S.6(1) and hence an ordinary income.
• Services billed, but payments not received as at 30 June 2014 ($40,000) -This income is not yet 'derived' by the tax payer andcannot be included in the assessable income.
• Sales receipts for plumbing supplies ($500,000) – Therefore, it is the nature of the income is the basis to decide. Here the income is received out of carrying business activity and the regularity of the income brings it under the head of an ordinary income.
• Sales billed, but payments not received as at 30 June 2014 ($20,000) – There is no transaction took place as there is no sale. So it cannot be included in assessable income.
• Fully franked company dividends received ($14,000) – Here the dividend received by the company is franked. The New Business Tax System (Imputation) Act 2002 specifies that the amount of franked dividend is to be included to the calculation of assessable income as a statutory income.
• Reimbursement from a private health fund ($3,000) – The amount received here cannot be deemed within the purview of the term 'income' as defined under S.995-1(1) of the 1997 Act.
• Insurance payment received for theft of plumbing parts held for sale ($7,000) – This amount is considered as statutory income under S.26 (j) and hence assessable income under s.15-30.
• Amount received for his services from Radio channel ($6,000) – The income here is incurred out of personal service hence assessableon accrual basis.
• Amount received by insurance company for loss of income ($65,000) – Only $25,000 is received for loss of income and assessable. The income of $15,000 received for medical expenses is rebate under s.159P(1) and the amount of $25,000 received for the loss of the body part is personal injury cannot be included in assessable income.
• Amount received byboard ($16,000)  – The income comes under the ordinary income and the travel allowance of $4000 is considered as statutory income under S.15-2(2) and hence assessable.
• Amounts received through gambling ($91,000) – Even though Oscar runsorganized activities of gambling, the income cannot be considered as assessable.In the case FCT (1936) 56 CLR 196 Evatt J. held where betting is carried as a business activity it may fall under Income tax act. But in Martin v. FCT (1953) 90 CLR 470 the question arose before the court where betting was carried as 'part-time' activity of a farmer in a systematic manner. The court held that such activity cannot be considered as a business. Here also though Oscar carries gambling in a systematic way and has shares in race house his business is plumbing activity. Thus the amount cannot be included in assessable income.