Taxation Law case studies

Case Study
Basil arrived in Australia on 28 August 2013 from his usual domicile in England. He obtained a working visa that permits him to work in Australia for three years. He is a specialist in information technology and is employed by Systems Ltd, a resident UK company that has secured a contract in Australia. His wife Sybil and two school aged children accompany him. For the present he proposes to rent accommodation in Brisbane but he may buy a property if he likes the country and spots a real estate bargain.

Basil is paid a base salary of $12,000 per month plus a rent subsidy of $600 per month. Half of the net (after tax) salary is credited to a Brisbane bank account, the balance to an account at the Bank of England. He is also provided with a fully maintained motor vehicle for his private use. His employer pays half his phone account. The amounts are $A125, $A460, $A440 and $A475 in September, December, March and June, respectively.

His England home, owned jointly with his wife Sybil, is rented out for $A800/month, in advance on the 1st of every month, and paid into the England bank account. Each quarter, interest is credited to the bank account in the joint names of Basil and Sybil.

Although Basil has an office at his place of work he has also set up a study in the spare room of his rental accommodation. He often uses the study on weekends and sometimes during the week in the evening for work related matters.

In December 2013 Basil received a performance award from his employer consisting of a fully paid trip for the family to Hong Kong. The trip is valued at $A10,000, is non-transferable and must be taken before August 2014. It has not been taken by June 30, 2014.

In October 1990 Basil acquired a parcel of speculative shares in an English company for $A14, 000. The price had not changed for some time and then in March 2014 suddenly jumped to $A23, 000 and Basil sold the shares immediately. In November 2013 he purchased Australian shares for $8,250 and sold them in April 2014 for $6,400.

At an auction in Brisbane in December 2013 he purchased four dining chairs that Sybil liked. The total price was $550. Later, a friend visiting their house saw the chairs and was sure they were Queen Anne antiques. He contacted a collector who inspected the chairs and offered Basil $14,000 for the set.

1. Is Basil a resident of Australia for tax purposes? [You should consider leading case authorities and rulings in your answer. Suggested maximum words: 500 words for this part.]

2. Assume Basil is an Australian resident. Advise him of his tax position and the assessability of the following. [Make sure you consider relevant cases, legislation and rulings in your answer: Suggested word allocation approximately 1000 words]

i) Salary and rent subsidy
ii) Motor vehicle, phone account and holiday
iii) English rent
iv) English shares and Australian shares
v) Chairs.
3. Advise Basil whether he is entitled to a deduction on any of his home office expenses. Note: consider both occupancy expenses (i.e. rental, rates and insurance) and running expenses (i.e. heating, cooling, lighting and depreciation) associated with the study. [You should consider leading case authorities and rulings in your answer. Suggested maximum words: 500 words]

Case Study Two (40 marks) (suggested word limit for this case study: 1000 words approximately)
Family Value Stores [FVS] is a large department store in a Brisbane. Sales are made on the following terms:
By what is called “take-now; pay-later”.

Required 1
Under the Lay-by sales conditions customers pay a non-refundable deposit of 10% and agree to pay off the balance within 12 months. The goods are taken from the store’s inventory and set aside at the time the deposit is made.

i) Should FVS return on a cash or accrual basis? Cite relevant case law.
ii) When is income derived in a lay-by sale?
iii) What is the tax treatment of a) the deposit; and b) progress payments?
iv) What is the tax treatment of the trading stock the subject of a lay-by?

Required 2

Under the ‘take now, pay later’ contract customers pay a 10% deposit and may take the goods on condition that a further 8% of the sale price is added to the balance owing which the customer then pays off in 12 equal monthly instalments. [See example] The contract notes that title passes to the customer at the time of sale and, if the customer defaults on any payment, the whole debt is immediately payable and recoverable.

Example: List price $3000; deposit $300; balance $3000 + (3000 x 8%) 240 – 300 = $2940/12 = $245 per month. [Total paid: $3,240]

For the year ended June 30 records show sales of $1,125,000:
Deposits received $112,500
8% interest charged 90,000
Progress payments received 700,000
Balance owing 515,000
(Cost of goods subject to contracts $690,000)

Advise FVS what income is derived and when and what tax consequences follow on default? (9 marks)

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