MLC301 ASSESSMENT 2 2020 FEEDBACK DOCUMENT

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MLC301 ASSESSMENT 2 2020 FEEDBACK DOCUMENT Topics 3 and 4 Please note that these are suggested answers only and this document is to be used as a guide.

Please read this document and compare your submitted answers to this guide. I am more than happy to provide additional feedback for questions but please ensure you email me/comment on Cloud with specific matters that you seek clarification for. Please first compare your answers to this guide before requesting clarification.

There is specific feedback relating to your individual submission contained within your submission. If you look at ‘attempt feedback’ and also ‘question feedback’ you will see some notes specific to your submission. Please also see the specific feedback area under each question as sometimes the marker makes comments here.

If you are requesting further feedback and wish to email me then please email m.hope@deakin.edu.au and be specific regarding your query.

Answers were assessed on the veracity of argument, and the appropriateness of the argument in circumstances where questions could have been argued in the alternative. As such, this document neither accounts for every possible answer that may have been made, nor the manner in which it had to be made, but instead details the general approach and relevant law which should have been addressed for each question.

This document tries to provide an answer guide for alternative arguments that might have been considered. Because it deals with alternative or other possible arguments, the answer guides in this document are likely over the 150 +10% limit which was imposed.

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General Feedback Comments Some things generally noted

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It was great to see many comments from Assessment 1 being taken on board and implemented - attempts were generally better and there was good citation.

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This covered topics 3 and 4 but there seemed to be a lot of confusion between the two.

That is, sometimes students would say an amount is both deductible and can be in the cost base. So make sure it is one or the other.

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The general deductions provision under s 8-1 was well addressed.

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Most students did well with the specific deductions provisions.

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Cost base was generally well covered.

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Event A1 was identified well but events D1 and C2 raised some issues

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Often students missed marks as they did not read the question properly and therefore did not answer it correctly. Please take the time in assessments to read the question and work out exactly what you have been asked to address. Eg – question two says ‘address the CGT event, timing of the event, the capital proceeds, the cost base, and whether Div 115 applies’ but often one or two of these were not covered in the answer.

Some common mistakes •

Omitting to discuss the conditions of Div 40 before doing the calculations.

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CGT questions was where many marks lost because students did not cite the legislative sections but just did the calculations. Please make sure cite the ITAA97 for CGT it is very important.

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Conditions of the 50% discount need to be addressed before applying it.

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Students did not calculate the net amount – make sure you read the question

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‘Deductable’ incorrect and deductible is correct.

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Not using specific provisions where necessary – ensure support all statements with legislative and/or case references. However, there was generally better application of the law to the relevant facts

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Not stating event for CGT.

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Answer Guide Question 1 Discuss briefly, citing sections, whether the following amounts are deductible for the taxpayer (1 mark each). (i) (ii) (iii)

(iv)

The taxpayer incurred an amount of $1,800 in borrowing charges when applying for finance with WBank.

The taxpayer paid his accountant $300 in fees. This amount was for the accountant preparing the taxpayer’s income tax return.

The taxpayer is an employee at a law firm in town. He spends $40 getting a taxi to work as all public transport has been cancelled that day and does not want to be late for a client meeting.

The taxpayer is an accounting student and incurs $20 in taxi fares for travel between the supermarket where he works during the day as a cashier, and a nightclub where he works selling drinks in the evening.

Answer Guide (i) (ii) (iii) (iv)

Yes deductible – s 25-25 borrowing expenses Yes deductible – s 25-5 tax related expenses Not deductible – s 25-100(3) travel, as he travels from home no deduction Yes deductible – s 25-100 (2) as he produces assessable income at both

Question 2

For the below two transactions for Eddie state for each of them, if any, the CGT event, timing of the event, the capital proceeds, the cost base, and whether Div 115 applies. Where appropriate support your answer with legislative authority (2 marks each) (i)

Eddie runs a small mortgage broking firm and paid an amount of $40,000 as a premium to secure a lease in an office building in Burwood. This is in addition to both a bond paid and to the monthly rent. He paid the $40,000 and the first month of rent in January 2017. The lease expired in January 2020.

Answer Guide (i)

Note that the question says for Eddie. A lot of students answered this with an F1, but that is for the lessor (Eddie is lessee) so for him it is a C2 event on ending. A lot answered F1 because they used the response from seminar practice question so make sure careful here.

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• • •

CGT Event C2 for Eddie (s 104-25) ending intangible asset being the lease Timing is January 2020 (3 years later at the end of agreement) Capital proceeds (s 116-20) = $0 ) Reduced cost base (s 110-55) = $40 000.

(He has a capital loss of $40,000) •

(ii)

No discount as loss (Div 115)

Eddie took some additional work advising banks on how to better run their loan services. After a year he decided he wanted to work less so he advised the banks he would no longer work with them. One bank, QBank, realised that Eddie had come into contact with highly sensitive information. In April 2020 (when he ceased advising) the bank paid Eddie $60,000 for agreeing not to disclose any of their sensitive information.

Answer Guide • • •

CGT Event D1 for Eddie (s 104-35) creating contractual rights Timing is 1 April 2020 Capital proceeds (s 116-20) = $60,000 Cost base (incidental costs)(s 110-25) = $0 (He has a capital gain of $60,000)

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No discount as D1 excluded event (s 115-25(3))

Question 3

Discuss the deductibility of the following two expenses for Jacob (4 marks total): (i)

$1,200 expense (1 mark); and

(ii)

The highest deduction he can take for the $3,000 machinery this financial year (ignoring any small business write-offs) (3 marks).

Jacob works as a labourer/tradesman on various job sites. His work is very physical and this year he decides he needs to be better prepared for his work environment. He spends $1,200 on a gym membership so that he can stay fit and be able to perform his job to the best of his abilities.

On 1 February 2020, on the way home from his worksite, Jacob passes the local hardware store to purchase a new item of machinery for his work. The machine cost $3,000 and has an effective life of 3 years. He estimates that he will use the machine 70% for work and the remainder of the time he will use it to do odd jobs at his home.

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Answer Guide The recreational club membership (gym) is not deductible. While it may seem there is a nexus with his work, there is a specific provision that denies the deduction: s 26-45 recreational club expenses.

Regarding the machine, this needs to be depreciated under Div 40: – – – – –

The machinery is a depreciable asset (s 40-30) We use diminishing value method (s 40-70)(he has a choice under s 40-65) use DV this gives the highest deduction.

The days held is 151 days (will accept 150 as leap year this year) Effective life is 3 years ( s 40-94) Cost is $3,000 but make sure reduce deduction by private component (70% work and 30% private)

Either option is ok below. One is for leap year and one without – no penalty for not realizing it is a leap year.

3,000 x (151/365) x (200%/3) x 0.7 = 579 3,000 x (150/365) x (200%/3) x 0.7 = 575

Question 4

Discuss the deductibility for the below amounts of $4,000 and $12,000 and $1,500 incurred by Lucy (4 marks).

Lucy is an architect who works from home in Kew. She has a designated workplace which occupies a quarter (25%) of the floorspace of her house. This home workspace has a separate entrance from the remainder of the house (at the rear) and is divided into two sections. One section is a formal meeting room for advising clients (who access this area through the separate entrance) and the other is for her architectural drawings. Her family are not allowed into these spaces and the spaces cannot be accessed through the main part of the house.

This year, in relation to the total expenses for her Kew home, Lucy incurs $4,000 in electricity expenses and she also incurs $12,000 in interest payments on her mortgage.

She also contributes $1,500 to an Australian political party called ‘Aussie Homeowners Association’ as their policies promote increased tax incentives for architects.

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Answer Guide $4,000 and $12,000 Here there needs to be a distinction drawn between working from home for convenience or as a legitimate place of business (necessity). As the workspace has a separate entrance, no private usage, and is separated from the house it seems it is a place of business and not just convenience (Handley, Swinford).

This means she can take a portion of occupancy and running expenses i.e a portion of both the $12,00 interest and the $4,000 electricity is deductible under s 8-1 It must be apportioned (on a reasonable basis) (ensure cite Ronpibon Tin) Floorspace is an option here (note in might affect main res but this is not required to be discussed in answer). So 25% seems reasonable based on facts which is $3,000 interest and $1,000 electricity. If another approach to apportionment used then consider this, as long as it is reasonable approach $1,500 Donations to political parties (this is an Australian political party) are prevented under s 26-22 so not deductible

Question 5

Showing workings and citations, calculate Betty’s net capital gain or loss (assuming she has no other CGT events) as a result of the sale of the Rye House (4 marks).

Betty entered into a contract for the purchase of a house in Rye on 20 September 1987 and settlement was on 1 December of the same year (‘Rye House’). She purchased the Rye House for $300,000 and at that time incurred legal costs of $1,500. She decided to rent the house out straight away.

In May 2020 Betty decided to sell the Rye House so that she could start a business.

She incurred marketing (advertising fees) of $5,000 relating to the sale. She ultimately decided to sell the house to her brother for $800,000. Market value at the time was $950,000 but she wanted to give her brother a good deal as he did not have a lot of money.

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Answer Guide

Disposal of the Rye house triggers CGT event A1 (s 104-10).

Cap Proceeds Cost Base Cap Proceeds S 116-30

950,000*

*We need to take market value substitution for capital proceeds (use $950,000) as transaction was not at arms-length with her brother (‘give him a good deal’) s 116-30

CB Element 1 s 110-25 CB Element 2 s 110-35

300,000 1,500 5,000

Totals 950,000 306, 500 Gain Apply discount (Div 115). Students need to apply discount and cite section or division

643,500 643,500 321,750

Question 6

Advise DipGirl Pty Ltd as to the deductibility of both the $50,000 and $3,200 amounts (4 marks) DipGirl Pty Ltd (DGPL) is a surfwear brand which manufactures clothing and surfboards for retail sale. This year, to engage more surfers with their brand, DGPL pays the local council for exclusive rights to run an annual surfing competition at Shells Beach. This is the first time DGPL have entered into such an arrangement and it cost them $50,000. The arrangement will give them exclusive use of the beach for their annual surf event (as part of the contract no other major surf events are able to be held at Shells Beach for the next 3 years). They are not sure if they will enter into another contract at the end of the 3 years.

DGPL have hired some extra staff to help prepare for their surf event. They anticipate that next year (2021) these staff will have accrued annual/recreational leave of $3,200 in total. They put the $3,200 into a savings account hoping to take a deduction for the amount this year.

Answer Guide $50,000 The issue for s 8-1 is whether this payment is incidental and relevant to carrying of the business and then whether it is excluded because it is capital in nature.

Under the second positive limb of s 8-1 (s 8-1(1)(b) ITAA97) there is a clear nexus with carrying of the business as the expense is appropriate and adapted to this enterprise (Herald and Weekly Times). Expenditure is incidental and relevant (Herald

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and Weekly is best case for this) and also has essential character. The positive limb is satisfied.

The expense will be not be deductible under the negative limb if it is capital.

Important point is that students cite Sun Newspapers and discuss the concept of process (deductible) v structure (capital).

The expense will be capital if it alters the profit yielding structure which can be considered through the application of Sun Newspapers. Firstly, the character of the advantage sought – is this a lump sum payment to secure the rights which suggests it has enduring benefit (and looks capital).

The ‘means’ adopted were a lump sum payment which points to it being capital. One lump sum of $50,00 giving the rights for 3 years.

Consider the ‘manner’ the benefit was to be used and whether this was part of the normal part of the business operations. This is the first time it is paid so if it was ongoing would look process based but as this is the only time, seems capital.

Could consider securing a monopoly: Broken Hill Theatre and looks capital As length of agreement is 3 years it may be argued that this indicates shorter term and therefore revenue, however, once off lump sum suggests capital (however many payments made to various places). Cite BP Aust in support of it being revenue or Strick in support of capital.

Either a capital or revenue conclusion is acceptable if well supported with cases. $3,200 Cannot deduct this as the leave is not yet taken (s 26-10) can deduct next year when staff go on leave

Question 7

Advise UniLyfe as to the likely tax treatment of the $100,000 expense on legal fees (4 marks) UniLyfe are a magazine publisher who publish a magazine for students in Victoria about life at university. This year, they publish a story about Howard University which alleges that the institution is dangerous and not well maintained. These allegations are not true, as recent investigations into Howard University have shown it is in the top 5 safe Universities in Victoria. As a result of the false story Howard University enrollment drops by 30% and file a legal claim in court against UniLyfe for damages.

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UniLyfe defends this claim against them and spends $100,000 on legal fees. This is the second lawsuit that UniLyfe has had to defend themselves against in the past two years.

Answer Guide Need to consider whether the expense of $100,000 is incidental and relevant to the UniLyfe business and therefore satisfy the positive limb. It is the second positive limb under s 8-1(1)(b) that is relevant as this is a business taxpayer.

Herald and Weekly Times case is the most relevant here – similar facts.

Students should consider the incidental and relevant test (Amalgamated Zinc; Herald and Weekly Times) and they might also consider the essential character test but this is not as good a fit as the other test (Charles Moore; Lunney).

Is there a nexus with the production of income? This would be a yes, based on Herald and Weekly as the newspaper is both the source of income and liability (defamation claim). Might note that although they are unexpected or not intended can still meet the test (also meet essential character test)(Charles Moore, Magna Alloys).

Regarding the negative limbs, students might consider capital – marks can then be awarded based on strength of argument if this is the case. But full marks cannot be attained without referring Herald and Weekly as above. Defending reputation could be capital (Sun Newspapers). If conclude capital then it is not deductible.

Question 8 Explain, citing sections, whether or not the following expenses can be incurred in the cost base for each of the following situations. Note that all assets are post CGT (1 mark each). (i) (ii) (iii) (iv)

Payment of $3,000 remuneration to an auctioneer on the sale of a property.

The market value of a Rolex watch ($30,000) given to the seller (along with $500,000 cash) as consideration by the purchaser for the purchase of the property.

An amount of $1,500 in transfer costs relating to a house sold for a loss in 2001.

Cost of $10,000 for a complete bathroom renovation because part of the bathroom walls were rotten and needed replacement.

Answer Guide

(i) (ii)

Yes in cost base - Element 2 (s 110-25(3)) – s 110-35 specifically lists this item Yes in cost base – Element 1 (s 110-25(2)) includes money and market value of property given. Modification is not required as it is just covered in Element 1

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(iii) (iv)

Yes in cost base – Element 2 - (s 110-25(3)) – s 110-35. It does not matter that sold for a loss, as it is not element 3 Yes in cost base – Element 4 – not a repair under s 25-10 because it is complete reno and therefore capital

Question 9

Showing workings and citations, calculate Claire’s net capital gain or loss (assuming she has no other CGT events)(4 marks).

Claire purchased a small townhouse in Footscray on 1 January 2009. She lived in the property until 1 January 2015 at which time she decided to move to Adelaide to study medicine. She was so pleased to hear that at the time she was moving, market value for her Footscray house was $600,000. She had originally bought the house for $300,000 and was surprised at the value increase. While Claire was in Adelaide she rented a small cottage near her university, and she also rented out her Footscray home to tenants. She graduated her medicine degree on 1 January 2020 and moved back into her Footscray home the same day. She decided she wanted to buy a larger house and sold the Footscray property for $800,000 in April 2020 and incurred $3,000 in legal expenses at that time.

Answer Guide Disposal of the Footscray house triggers CGT event A1 (s 104-10).

Cap Proceeds Cost Base Cap Proceeds S 116-20 Cost Base Element 1 s 110-25 Cost Base Element 2 s 110-35

800,000

Totals

800,000

300,000 3,500

303, 000

497,000

However, need to consider main residence.

The absence provision applies (s 118-145) as she was away for less than 6 years and did not acquire another main residence Therefore, s 118-110 disregards the gain and gain is $0

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Question 10

Showing workings and citations, calculate Beau’s net capital gain or loss for each of the below (calculate each separately assuming he has no other CGT events)(2 marks each). (i)

In January 2007, Beau purchased a diamond ring for $300. He was hoping to restore the ring and sell it for a higher price, but he instead decided to sell it unrestored. Beau sold the ring to a friend for $500. The market value at the time of sale was $1,000 but he didn’t want his friend to spend too much money.

(ii)

On 1 March 2015 Beau’s father passed away and left Beau a house. Beau’s father had purchased the house on 15 August 1985 and never lived there. He purchased the property for $250,000 and spent $10,000 on a renovation in the same year. When Beau’s father passed away the property had a market value of $600,000. Beau did not want to live in the property and he decided to sell it in February 2017 for $700,000.

Answer Guide (i)

The ring is a collectable (jewellery) under s 108-10.

The disposal triggers CGT Event A1 s 104-10.

We need to take market value modification for capital proceeds (s 116-30) as not at arm’s length and is therefore $1,000. The cost base (110-25) is $300.

CG is $700 but we disregard this as the acquisition cost for collectable was less than $500 (s 118-10) and therefore no assessable income.

(ii)

Beau’s father purchased the house pre-CGT. This means that we take market value as Beau’s acquisition cost (element 1, 110-25(2)) as a result of s 12815(4)(Item 4).

The capital gain would be $100,000 ($700,000 – $600,000) but as Beau sold it within 2 years, we disregard the gain as it keeps its pre-cgt status as per s 118-195.

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