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Cut and Chop Pty Ltd (‘Cut and Chop’) is a resident Australian company that manufactures knives and cooking utensils from premises located in Sydney, NSW. The current shareholders and directors, Mr and Mrs Parisi, each hold 50 shares in Cut and Chop that were acquired on 1 June 2000, when Cut and Chop was incorporated. The 100 issued shares in Cut and Chop had an issue price of $2000 per share.
Balance Sheet of Cut and Chop as at 30 June 2015 is as follows:
Assets
Accounts Receivable $180,000
Cash $90,000
Depreciable assets $210,000
Trading stock $180,000
Loan to Mr Parisi $85,000
Business premises $1,950,000
Residential premises $510,000
Liabilities
Bank Loan $1,995,000
Trade Creditors $275,000
Provision for employee leave liabilities $60,000
Provision for doubtful debts $185,000
Shareholder Equity
Issued share capital $200,000
Retained earnings $490,000
Additional information
1. Cut and Chop acquired ownership of the business premises including administration office, warehouse and factory on 1 June 2009 for $1.95 million.
2. The residential premises were acquired from Mrs Parisi for $510,000 on 1 January 2014 however a registered valuer had advised Cut and Chop that the market value of the premises was only $450,000 at the time.
3. The bank loan recognised in the balance sheet was obtained by Cut and Chop on 1 June 2009 and was used to purchase the business premises. Interest paid on this loan as at 30 June 2015 totalled $210,500.
Required
Please prepare a report (maximum 1,500 words) to Mr and Mrs Parisi responding to the following issues a) to g) raised.
Please explain your answers and refer to relevant statutory provisions. (Ignore the CGT small business concessions)
a)
Cut and Chop has made a decision to relocate its business operations to Fiji from 30 June 2015
and as a result on 1 June 2015 Cut and Chop entered into a contract to sell the business premises
for $2.65 million (legal fees and agents fees on sale totalled $55,000) and the residential premises
for $710,000 (legal fees and agents fees on sale totalled $15,000). The sales were finalised on
both properties on 10 July 2015.
Assuming Cut and Chop had carry-forward capital losses of $120,000 as at 30 June 2014 calculate
the net capital gain or loss to be included in assessable income for the year ended 30 June 2015
as a result of the sale of both premises. (7 marks)
b)
The trading stock balance of $180,000 recognised in the balance sheet was calculated using the
market selling valuation method in accordance with Section 70-45 of the ITAA1997. Alternatively,
as at 30 June 2015, the cost value of trading stock is $350,000, whilst the replacement value is
$195,000.
Knives ordered from a supplier in the UK is on a ship at sea as at 30 June 2015 and, whilst Cut and
Chop do have the invoice and ‘bill of lading’ to collect the order when it arrives, they did not
receive delivery of the goods until 1 August 2015. The knives have been included in the balance
of stock on hand at 30 June 2015
Assuming Cut and Chop wishes to minimise taxable income explain to Cut and Chop the most
appropriate valuation method to adopt for taxation purposes as at 30 June 2015. Also explain
whether the knives ordered from the UK are correctly included in stock on hand as at 30 June
2015 (4 marks)
c)
Whilst Cut and Chop had set aside $60,000 for long service, annual and sick leave as at 30 June
2015 (to be paid to employees in the future) the actual payments to employees in relation to
leave entitlements were $297,000 during the year ended 30 June 2015.
In addition although Cut and Chop had set aside $185,000 for doubtful debts as at 30 June 2015
no bad debts were written off during the year.
Advise Cut and Chop on the income tax implications of employee leave liabilities/payments
and doubtful debt/bad debt provisions for the year ended 30 June 2015. (3 marks)
d)
The depreciating assets recognised in the balance sheet were acquired at a cost of $415,000 by
Cut and Chop. Cut and Chop made a decision to sell the depreciating assets to a competitor who
paid $120,000 on 30 June 2015 for the lot. The $210,000 that appears in the balance sheet reflects
the depreciating assets adjustable value.
Explain to Cut and Chop the tax implications in relation to the disposal of the depreciating assets
on 30 June 2015. (3 marks)
e)
The loan of $85,000 to Mr Parisi was used by Mr Parisi to purchase (in May 2011) a historical
motor vehicle built in 1952. The historical motor vehicle cost $85,000 and Mr Parisi planned to
keep it as a long term investment. Mr Parisi paid interest to Cut and Chop of $800 over the period
of the loan up to and including 20 June 2015. As a result of the decision to relocate the business
Mr Parisi sold the motor vehicle on 20 June 2015 for $155,000.
Explain to Mr Parisi the income tax implications of the loan and the sale of the motor vehicle
on 20 June 2015. (2 marks) Ignore Division 7 ITAA 1997.
f)
So Mr and Mrs Parisi can oversee the set-up of a new manufacturing facility in Fiji and its ongoing
operation they decide to relocate to Fiji on 31 August 2015 to reside there indefinitely. In addition
to shares in Cut and Chop as at 31 August 2015 Mr and Mrs Parisi own their family home, a motor
vehicle and an antique collection.
Explain the CGT consequences of the relocation to Fiji assuming Mr and Mrs Parisi would be
considered non-residents of Australia for tax purposes from 31 August 2015? (3 marks)
g)
Due to the growth in the business of Cut and Chop Mr and Mrs Parisi receive an offer on 1
September 2015 to purchase their shares in Cut and Chop for $3,000 per share.
Assuming Mr and Mrs Parisi are non-residents as at 1 September advise of the possible CGT
implications if they accept the offer to purchase their shares in Cut and Chop. (3 marks)
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