LAW301 – CASE STUDY ASSIGNMENT– Semester 1 2023
CASE STUDY – FACTS
Eva and Ian are a married couple, with no children, aged 52 and 50 respectively. Ian runs an accounting & consulting business in the Sydney CBD. The business was set up as a company “Goodwill Accounts Pty Ltd” on 29 September, 1996. Ian has continued to be Goodwill’s CEO since its incorporation. Of the total 50,000 shares of Goodwill, Ian holds 60% and Eva has 40%. Ian and Eva are both directors of Goodwill Accounts Pty Ltd and Eva is the chairperson of Goodwill’s board. Ian specialises in business consultancy and accounting whereas Eva is responsible for general management and marketing. For the current income tax year, the business has made $2,000,000 total income and $ 850,000 net profit, and distributed the cash dividends (fully franked) $52,500 between Ian and Eva according to the ownership ratios.
Ian’s normal remuneration consists of $200 500 salary, from which $35 000 is deducted as PAYG. Eva is also a fashion designer who works at home and sells products via her on-line shop. She operates as a sole trader. Details of her business income and expenses (including car expenses) are outlined below. Eva has converted one garage of their home into a workshop office where she undertakes all her work related activities. The workshop has separate power and a separate phone number from that of the house.
Ian undertakes some work from home in a study area within their house. He also uses this office to work on his Master of Professional Accounting degree which he is undertaking at the University of Sydney. The tuition fee for the current income tax year is $20,000.
Ian and Eva jointly own an investment property located at the centre of Melbourne valued at $980,000, the rental income of which for the current income tax year amounts to $36,000. This Melbourne apartment was available for rent all year and this tax year however, due to a change in tenants, it was rented out for nine (9) months.
Ian and Eva seek advice from you in respect of calculating their tax liabilities and planning their tax situation for future periods. They both have the private health insurance cover.
The couple provides the following financial information:
Goodwill Accounts Pty Ltd – key Information for year ended 30 June 2023
Consulting Fees (turnover) $ 2 000 000
Net profit $ 850 000
Loan from Eva $ 950 000
Capitalised Research and Development- Special Information System $ 1 250 000
Overall Net Assets $ 5 550 000
Personal information of Eva and Ian
Balance sheet, other income and interest expenses (all assets are owned/ held jointly except where indicated).
Assets (not including assets of Eva’s business which are disclosed separately in Table 5)
Home and contents $3 000 000
CBD office for Goodwill Accounts Pty Ltd $1 500 000
Investment property Melbourne (rental income this year $36 000) $980 000
Bank account (interest earned this financial year $3 500) $90 000
Shares in Goodwill Account Pty Ltd (fully franked dividends of $52 500
paid this financial year) – ownership of shares 60% Ian, 40% Eva $900 000
Superannuation- Eva (after-tax return of $90 000) $1 200 000
Superannuation- Ian (after-tax return of $95 000) $1 000 000
Total assets $ 8 670 000
Liabilities and interest expenses
Mortgage on Melbourne investment property (interest paid this year, $39 600) $ 900 000
Personal Credit card (interest paid this financial year $1 680) $ 10 000
Total liabilities $1 000 000
Other expenditure
In addition to their interest and loan repayments, the couple incurred the following expenses during the year:
|
Expenditure |
Eva |
Ian |
|
Work related expenses |
see table 5 |
$ 5 400 |
|
Self-education |
$20 000 |
|
|
Living costs |
$22 000 |
$22 000 |
|
Expenses (not including interest) related to investment property- Total $6 600 |
$ 3 300 |
$ 3 300 |
|
Tax agents’ fees |
$ 770 |
$ 990 |
Additional information
All of the assets are jointly owned in the names of Eva and Ian except where otherwise indicated.
The investment property is available for rent all year and this year however, due to a change in tenants, it was rented out for nine (9) months.
Eva’s Business Information
|
Details |
Amount |
|
Sales |
$206 800 |
|
Purchases of stock (no inventory kept) |
90 000 |
|
Purchases of design magazines and journals |
1 800 |
|
Electricity bills |
3 800 |
|
Phone and internet bills |
1 320 |
|
Other work related expenses |
5 500 |
|
Motor vehicle details: Total Km travelled for work purposes for the income tax year: 5,000 Eva’s used the cents per km method to calculate car expense |
|
|
LIABILITIES: Business credit card, balance as at 30 June 2022: $14,000 (interest for the 2022-23 tax year was $960) |
required:
Calculate the net tax payable/refundable for the current year for both Eva and Ian and briefly justify any inclusions in the calculations in the “Reasons for inclusion” column (refer to legal sections where relevant). Please format your answer in the form of the following table (obviously with extra rows as necessary).
-
Item
Eva
Ian
Reasons for inclusion
Salary income
Amount$$
Amount$$
income from ordinary concepts s 6-5 ITAA1997
Other income and expenses (itemised individually under this heading)
Deductions (itemised individually under this heading)
Taxable income
(then individually list and calculate all other items which impact on tax payable/refundable)
Tax payable (refundable) (this amount should be the result from adding/subtracting all other relevant amounts)