9/09/2020

FBT Revision Questions

Tutorial 9 Answers Question 1
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager. Her
salary package includes:
• The use of a gym. The gym is located several
FBT & CGT Revision kilometres from the premises of Aussie Models Pty Ltd.
The cost to attend the Gym is $1,950 per annum. No
and part of the cost would have been deductible to Julie
under the Income Tax Assessment Act 1997 or 1936
Tax Accounting &Trading Stock had she paid the amount. Aussie Models Pty Ltd is
entitled to claim the input tax credit for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax
payable (rounded to the nearest dollar) of the fringe benefit
1 for the FBT year ended 31 March 2018. 2

1 2

Type 1: Gross-up Type 2: Gross-up Question 1

FBT year Entitled to GST Not entitled to GST FBT Tax Rate Julie Duff accepts an offer of employment made by Aussie Models Pty
credits credits Ltd to be their new marketing manager. Her salary package includes:
Year Ended
• The use of a gym. The gym is located several kilometres from the
31 March 2014 2.0647 1.8692 46.5% premises of Aussie Models Pty Ltd. The cost to attend the Gym is
and prior years $1,950 per annum. No part of the cost would have been deductible
to Julie under the Income Tax Assessment Act 1997 or 1936 had she
Year Ended paid the amount. Aussie Models Pty Ltd is entitled to claim the
2.0802 1.8868 47%
31 March 2015 input tax credit for GST purposes.
Required:
Years Ended Advise Aussie Models Pty Ltd of the fringe benefits tax payable
31 March 2016 (rounded to the nearest dollar) of the fringe benefit for the FBT year
2.1463
and 1.9608 49% ended 31 March 2018.
31 March 2017
Answer
Residual Fringe Benefit with Taxable Value (“TV”) = $1,950
Year Ended All of the benefit is for private use as it is not deductible.
31 March 2018 2.0802 1.8868 47% This is a Type 1 Gross up as GST credits can be claimed.
and later years Grossed up Taxable Value = $1,950 x 2.0802 (Type 1) = $4,056
Fringe Benefits Tax Payable $4,056 x 47% = $1,906 4

3 4

Question 2
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager. Her salary
package includes:
• Reimbursement of her home cleaning expenses. The cost
is $4,200 per annum. No part of the expense would have
been deductible to Julie under the Income Tax Assessment
Act 1997 or 1936 had she paid the amount. Aussie Models
Pty Ltd is entitled to claim the input tax credit for GST
purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax
payable (rounded to the nearest dollar) of the fringe benefit for
the FBT year ended 31 March 2015.
5 Grossed up Taxable Value (GUTV) $4,200 x 2.0802 = $8,737 6
Question 2
Julie Duff accepts an offer of employment made by Aussie Models
Pty Ltd to be their new marketing manager. Her salary package
includes:
• Reimbursement of her home cleaning expenses. The cost is
$4,200 per annum. No part of the expense would have been
deductible to Julie under the Income Tax Assessment Act 1997 or
1936 had she paid the amount. Aussie Models Pty Ltd is entitled
to claim the input tax credit for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax payable
(rounded to the nearest dollar) of the fringe benefit for the FBT year
ended 31 March 2015.
Answer
Expense Payment Fringe Benefit: Taxable Value = $4,200
All of the benefit is for private use as it is not deductible.
This is a Type 1 Gross up as GST credits can be claimed.
Fringe Benefits Tax Payable (FBT) $8,737 x 47% = $4,106

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Question 3
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd. Her salary package includes:
• Reimbursement of her mobile telephone account. The
cost is $6,000 per annum. Julie would have been
entitled to claim a deduction for the full amount under the
Income Tax Assessment Act 1997 or 1936 had she paid
the amount. Aussie Models Pty Ltd is entitled to claim
an input tax credit for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax
payable (rounded to the nearest dollar) the fringe benefit
for the FBT year ended 31 March 2019.
7 8
Question 3
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd. Her salary package includes:
• Reimbursement of her mobile telephone account. The cost
is $6,000 per annum. Julie would have been entitled to
claim a deduction for the full amount under the Income Tax
Assessment Act 1997 or 1936 had she paid the amount.
Aussie Models Pty Ltd is entitled to claim an input tax credit
for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax
payable (rounded to the nearest dollar) of the fringe benefit for
the FBT year ended 31 March 2019.
Answer
Expense Payment Fringe Benefit
100% business use as entitled to claim a deduction
Exempt: No private use declaration s.20A
TV = Nil; GUTV = Nil and FBT = Nil

7 8

Question 4
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager. Her salary
package includes:
• Reimbursement of her home electricity account. The cost is
$1,200 per annum. No part of the expense would have
been deductible to Julie under the Income Tax Assessment
Act 1997 or 1936 had she paid the amount. Aussie Models
Pty Ltd is entitled to claim the input tax credit for GST
purposes.
Question 4
Julie Duff accepts an offer of employment made by Aussie Models Pty Ltd to
be their new marketing manager. Her salary package includes:
• Reimbursement of her home electricity account. The cost is $1,200 per
annum. No part of the expense would have been deductible to Julie
under the Income Tax Assessment Act 1997 or 1936 had she paid the
amount. Aussie Models Pty Ltd is entitled to claim the input tax credit
for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax payable (rounded to
the nearest dollar) of the fringe benefit for the FBT year ended 31 March 2016.

Required: Answer
Advise Aussie Models Pty Ltd of the fringe benefits tax Expense Payment Fringe Benefit: Taxable Value = $1,200
payable (rounded to the nearest dollar) of the fringe benefit for All of the benefit is for private use as it is not deductible.
the FBT year ended 31 March 2016. This is a Type 1 Gross up as GST credits can be claimed.
9
GUTV = $1,200 x 2.1463 = $2,576 10
Fringe Benefits Tax (“FBT”) = $2,576 x 49% = $1,262

9 10

Question 5
FBT Loan Interest Rates
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager. Her
salary package includes: FBT Year ended 31 March Interest Rate
• An interest free loan of $225,000 on 1 April 2016. She 2014 6.45%
used $25,000 to purchase shares in Witch Bank and the
balance ($200,000) to pay off her debts to her family in 2015 5.95%
relation to her home renovation. Aussie Models Pty Ltd 2016 5.65%
is not entitled to claim the input tax credit for GST 2017 5.65%
purposes.
Required:
2018 5.25%
Advise Aussie Models Pty Ltd of the fringe benefits tax 2019 5.20%
payable (rounded to the nearest dollar) of the fringe benefit 2020 5.37%
for the FBT year ended 31 March 2017.
11

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Question 5 Question 6
On 17 December 2015 XYZ Pty Limited (“XYZ”) purchased a Commodore motor
Julie Duff accepts an offer of employment made by Aussie Models Pty Ltd to
car for $42,250. The car was for the exclusive use of one of XYZ’s star employees,
be their new marketing manager. Her salary package includes:
Joanne. Between the date of purchase and 31 March 2016 Joanne travelled 8,150
• An interest free loan of $225,000 on 1 April 2016. She used $25,000 to kilometres in the Commodore.
purchase shares in Witch Bank and the balance ($200,000) to pay off her The following expenses were incurred during the relevant fringe benefit tax year:
debts to her family in relation to her home renovation. Aussie Models Stamp duty on the purchase of the car $630
Pty Ltd is not entitled to claim the input tax credit for GST purposes. Registration $470
Required: Third party insurance $1,100
Comprehensive insurance $1,725
Advise Aussie Models Pty Ltd of the fringe benefits tax payable (rounded to
Maintenance and service $925
the nearest dollar) of the fringe benefit for the FBT year ended 31 March
Petrol $800
2017. The company paid all of the above expenses with the exception of petrol which was
Answer: paid for by Joanne. This amount was not reimbursed and Joanne provided the
required declaration to her employer. On the day of purchase a rear parking
Loan Fringe Benefit camera was fitted to the Commodore at a cost of $1,000. A logbook was kept
Taxable Value = $200,000 * 5.65% = $11,300 showing that Joanne travelled 6,400 kilometres during the relevant fringe benefit
tax year for business purposes. XYZ did not make an election under section 10 of
Only private part of the loan to pay off family debts taxable. the Fringe Benefits Tax Assessment Act 1986. XYZ is entitled to claim the input tax
This is a Type 2 Gross up as GST credits cannot be claimed. credit for GST purposes.
Required:
GUTV = $11,300 x 1.9608 = $22,157 13 Advise XYZ of the fringe benefits tax payable (rounded to the nearest dollar)14of
FBT = $22,157 x 49% = $10,857 the fringe benefit for the FBT year ended 31 March 2016.

13 14

Method 1 - Taxable Value of Car Fringe Benefit Question 6

• Section 9 - Statutory Formula Method Answer
(no election made under section 10) Car Fringe Benefit
Taxable Value = { [A*B*C] / D } - E No election made under section 10
A = Base value (including non-business So section 9 Statutory Formula Method applies:
accessories) TV = [(A * B * C) / D] – E
(depends on whether car is owned or leased and date first
provided) [(43,250 x 20% x 106 days)/366] - $800 = $1,705
B = Statutory fraction (20%) Don’t forget the leap year in 2016 so 366 days.
C = Number of days car is provided during the year Taxable Value = $1,705
D = Number of days in the tax year (365 or 366) This is a Type 1 Gross up as GST credits can
E = Recipient’s Payment be claimed.
 Any car expenses paid by the employee. GUTV is $1,705 x 2.1463 = $3,659
 Any amount the employee pays for the car benefit.
FBT Payable is $3,659 x 49% = $1,793 16

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Question 7
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager.
• Julie received an interest free loan of $225,000 on 1 April
2016. She used $225,000 to purchase shares in Witch Bank.
On 29 March 2017 Aussie Models Pty Ltd advised Julie she
didn't have to pay back $25,000 of the $225,000. Aussie
Models is not entitled to claim the input tax credit for GST
purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax
payable (rounded to the nearest dollar) of the fringe benefit for
the FBT year ended 31 March 2017.
17
Question 7
Julie Duff accepts an offer of employment made by Aussie Models Pty Ltd to be
their new marketing manager.
Julie received an interest free loan of $225,000 on 1 April 2016. She used
$225,000 to purchase shares in Witch Bank. On 29 March 2017 Aussie Models
Pty Ltd advised Julie she didn't have to pay back $25,000 of the $225,000.
Aussie Models is not entitled to claim the input tax credit for GST purposes.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax payable (rounded to
the nearest dollar) of the fringe benefit for the FBT year ended 31 March 2017.
Answer
Loan Fringe Benefit - Taxable value = $0 due to the otherwise
deductible rule as the loan was used to buy shares.
Debt Waiver Fringe Benefit - TV = $25,000
This is a Type 2 Gross up as GST credits cannot be claimed.
GUTV = $25,000 x 1.9608 = $49,020
FBT payable = $49,020 x 49% = $24,020 18

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Question 8
Julie Duff accepts an offer of employment made by
Aussie Models Pty Ltd to be their new marketing
manager.
• Julie receives a thorough medical examination to
ensure she is healthy enough to commence work.
The cost is $2,000. Aussie Models Pty Ltd is not
entitled to claim an input tax credit for GST
purposes. The medical examination occurred on 4
March 2017.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits
tax payable (rounded to the nearest dollar) of the
fringe benefit for the FBT year ended 31 March 2017.19
Question 8
Julie Duff accepts an offer of employment made by Aussie
Models Pty Ltd to be their new marketing manager.
• Julie receives a thorough medical examination to ensure she is
healthy enough to commence work. The cost is $2,000.
Aussie Models Pty Ltd is not entitled to claim an input tax
credit for GST purposes. The medical examination occurred on
4 March 2017.
Required:
Advise Aussie Models Pty Ltd of the fringe benefits tax payable
(rounded to the nearest dollar) of the fringe benefit for the FBT
year ended 31 March 2017.
Answer
Residual Fringe Benefit
Exempt: Section 58M Exempt benefits--work-related medical
examinations etc.
TV = Nil; GUTV = Nil and FBT = Nil 20
Hint: Don’t forget to check the list of exemptions on Moodle!!

19 20

CGT Revision Questions Collectables / Personal Use Assets

Question 1 Collectables [Section 108-10(2) & (3)]
Amanda Rockwall won a seat in Parliament and transferred to (a) artwork, jewellery, an antique, or a
Canberra. Before moving, Amanda sold the following assets: coin or medallion; or
All assets were purchased on 1 July 2000 and sold on 30 June 2018. (b) a rare folio, manuscript or book; or
Item Purchase Price Sale Price (c) a postage stamp or first day cover;
Main residence $190,000 $160,000
Vacant land $65,000 $135,000
that is used or kept mainly for your (or your
associate's) personal use or enjoyment.
Antique $2,000 $5,500
First day cover $22,130 $20,000
Lounge $15,000 $14,950 Personal Use Assets [Section 108-20(2) & (3)]
A CGT asset (except a collectable or land) that
Required: is used or kept mainly for your (or your
Calculate the total amount to be included in Amanda’s assessable associate's) personal use or enjoyment.
income from these CGT events?
21
Certain debts are also included.

21 22

Question 1 Answer
Special Rules for Collectables and PUAs Item Purchase Price Sale Price Gain or Loss
Main residence $190,000 $160,000 Exempt
Vacant land $65,000 $135,000 $70,000 Gain
Collectables Personal Use Assets (PUAs)
Antique $2,000 $5,500 $3,500 Coll. Gain
Capital Gains and Losses from Capital Gains from Personal Use
First day cover $22,130 $20,000 $2,130 Coll. Loss
Collectables acquired for $500 or Assets acquired for $10,000 or less
Less are exempt are exempt Lounge $15,000 $14,950 Disregard
Section 118-10 Subsection 118-10(3)
Losses from Collectables can only Answer
All Losses from Personal Use Assets
be offset against gains from
Collectables
are disregarded Nil+$70,000+[$3,500 – (2,130)]+Nil = $71,370
Subsection 108-20(1)
Subsection 108-10(1) $70,000 + $1,370 (net collectable gain) = $71,370
Ownership Costs (see below) Ownership Costs (see below)
excluded from cost base of excluded from cost base of Personal
Apply Discount Method $71,370 x 50% = $35,685
Collectables Use Assets Net Capital Gain is $35,685
Subsection 108-17 Subsection 108-30
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Question 2
Element Details CB I.F. ICB RCB
On 15 January 1986 John bought an investment property. The
1 Acquisition Cost ▲ X ▲ ▲
property cost him $120,000. He spent $2,000 in stamp duty in Incidental Costs – Remuneration for services of a surveyor,
January 1986. He sold the property in October 2017 for $320,000 as 2 valuer, auctioneer, accountant, broker, agent, consultant or legal adviser
▲ X ▲ ▲

he intended to move overseas. He paid commission of $4,600 to the 2 Incidental Costs – Cost of Transfer ▲ X ▲ ▲
real estate agent and advertising costs of $400. These expenses 2 Incidental Costs – Stamp Duty ▲ X ▲ ▲
were paid in October 2017. 2 Incidental Costs – Advertising ▲ X ▲ ▲
2 Incidental Costs – Valuation ▲ X ▲ ▲
2 Incidental Costs – Search Fees ▲ X ▲ ▲
Required:
2 Incidental Costs – Borrowing Expenses ▲ X ▲ ▲
a)Calculate John’s cost base for Capital Gains Tax purposes.
2 Incidental Costs – Conveyancing Kits ▲ X ▲ ▲
b)Calculate John’s indexed cost base for Capital Gains Tax 3 Ownership Costs – Interest (include in ICB but do not index - do not include in RCB) ▲ ▲
purposes. 3 Ownership Costs – Insurance (include in ICB but do not index - do not include in RCB) ▲ ▲
c)Calculate John’s reduced cost base for Capital Gains Tax 3 Ownership Costs – Rates /Taxes (include in ICB but do not index - do not include in RCB) ▲ ▲
purposes. 3 Ownership Costs - Repairs (include in ICB but do not index - do not include in RCB) ▲ ▲

d)Calculate John’s Capital Gain or Capital Loss. 4 Capital expenditure to increase or preserve the asset’s value ▲ X ▲ ▲

25 5 Capital expenditure to protect the title to the asset ▲ X ▲ 26▲

25 26

Question 2(a) Answer The ABS changed the index reference base in September 2012 from 1989–90 to 2011–12.
As a result all CPI rates have been reset and the previous rates no longer apply.
From September quarter 2012 the new rates apply.
Cost base New CPI Rates - Quarter ending
Element 1 Cost of acquiring the asset $120,000 Year 31 March 30 June 30 September 31 December
Element 2 Incidental costs of acquiring the asset 2,000 1999 67.8 68.1 68.7 n/a
Element 2 Incidental costs of selling the asset 4,600 1998 67.0 67.4 67.5 67.8
1997 67.1 66.9 66.6 66.8
Element 2 Incidental costs of selling the asset 400 1996 66.2 66.7 66.9 67.0
Total cost base $127,000 1995 63.8 64.7 65.5 66.0
1994 61.5 61.9 62.3 62.8
1993 60.6 60.8 61.1 61.2
1992 59.9 59.7 59.8 60.1
Cost Base: $127,000 1991 58.9 59.0 59.3 59.9
1990 56.2 57.1 57.5 59.0
1989 51.7 53.0 54.2 55.2
1988 48.4 49.3 50.2 51.2
1987 45.3 46.0 46.8 47.6
1986 41.4 42.1 43.2 44.4
1985 n/a n/a 39.7 40.5
27

27 28

Question 2(b) Answer Question 2(c) Answer

Indexed cost base Reduced Cost base
Indexation factor (68.7 (Sept. 1999)/41.4 (March 1986)) = 1.659 Element 1 Cost of acquiring the asset $120,000
Rounded to three decimal places only. Element 2 Incidental costs of acquiring the asset 2,000
Element 2 Incidental costs of selling the asset 4,600
Element 1 Cost of acquiring the asset $120,000 Element 2 Incidental costs of selling the asset 400
Element 2 Incidental costs of acquiring the asset 2,000 Total reduced cost base $127,000
These two items can be indexed as they were incurred pre-Sept.
1999. Third element ownership costs are never included in the Reduced Cost
Base but there are no third element costs here so the reduced cost base
is the same as the cost base.
[(120,000 + 2,000) x 1.659] $202,398
Reduced Cost Base: $127,000
But the following two items cannot be indexed as they were
incurred after Sept. 1999 but are still included in the cost base.
Element 2 Incidental costs of selling the asset 4,600
Element 2 Incidental costs of selling the asset 400

Total indexed cost base is $202,398 + $4,600 +$400 = $207,398

29 30
Indexed Cost Base is $207,398

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Question 2(d) Answer Question 3

On 30 September 1996 John bought a property in Terrigal NSW to use as a
Net Capital Gain or Net Capital Loss holiday home. The property cost $145,000. He consulted his accountant
regarding the purchase and this advice cost him $300 in September 1996. In
Discount method addition, he paid stamp duty of $2,750 in October 1996. John used a loan to
Sale Proceeds $320,000 acquire the property and paid $545 stamp duty on the mortgage in October
Minus Cost Base $127,000 1996. The property was sold in September 2017 for $500,000. Costs
associated with the sale included commission of $9,750 paid to the real estate
Equals Gain of $193,000
agent who sold the property and advertising of $900. Both of these expenses
Minus 50% discount of $96,500 were paid in September 2017.
Equals Net Capital Gain under discount method $96,500 John incurred the following expenses in relation to his holiday home:
– Interest on the loan over the ownership period totalled $18,800.
Frozen indexation method
– Insurance costs over the period of ownership costing $2,950.
Sale Proceeds $320,000
– Stairs leading to the second storey were repaired at a cost of $2,000.
Minus Indexed Cost Base $207,398
– Rates and land tax of $4,325 were paid during ownership of the property.
Equals Net Capital Gain under index method $112,602
– Interest of $3,000 was paid since October 1996 when John obtained a
personal loan to refurbish the house at a cost of $31,500.
Choose discount method as it is the Lower = $96,500
Required:
Net Capital Gain is $96,500
31
(a) Calculate John’s cost base for Capital Gains Tax purposes. 32
(b) Calculate John’s reduced cost base for Capital Gains Tax purposes.

31 32

Question 3(a) Answer Question 3(b) Answer

Cost Base Reduced Cost Base
Element 1 Cost of acquiring the asset $145,000 Element 1 Cost of acquiring the asset $145,000
Element 2 Incidental costs of acquiring the asset 300 Element 2 Incidental costs of acquiring the asset 300
Element 2 Incidental costs of acquiring the asset 2,750 Element 2 Incidental costs of acquiring the asset 2,750
Element 2 Incidental costs of acquiring the asset 545 Element 2 Incidental costs of acquiring the asset 545
Element 2 Incidental costs of selling the asset 9,750 Element 2 Incidental costs of selling the asset 9,750
Element 2 Incidental costs of selling the asset 900 Element 2 Incidental costs of selling the asset 900
Element 3 Ownership costs 18,800 Element 4 Capital cost of improving the asset 31,500
Element 3 Ownership costs 2,950 Total Cost Base $190,745
Element 3 Ownership costs 2,000 Note: Never include Ownership Costs (3rd Element) in the
Element 3 Ownership costs 4,325 reduced cost base.
Element 3 Ownership costs 3,000 Reduced Cost Base is $190,745
Element 4 Capital cost of improving the asset 31,500
Total Cost Base $221,820
Ownership costs can be included because the property was
acquired after 20 August 1991 and it was not rental property.
33 34
Cost Base is $221,820

33 34

Question 4 Question 4(a) Answer

On 30 September 1990 John bought a property in Terrigal NSW to use as a Cost Base
holiday home. The property cost $145,000. He consulted his accountant Element 1 Cost of acquiring the asset $145,000
regarding the purchase and this advice cost him $300 in September 1990. In
Element 2 Incidental costs of acquiring the asset 300
addition, he paid stamp duty of $2,750 in October 1990. John used a loan to
acquire the property and paid $545 stamp duty on the mortgage in October Element 2 Incidental costs of acquiring the asset 2,750
1990. The property was sold in September 2017 for $500,000. Costs Element 2 Incidental costs of acquiring the asset 545
associated with the sale included commission of $9,750 paid to the real estate Element 2 Incidental costs of selling the asset 9,750
agent who sold the property and advertising of $900. Both of these expenses Element 2 Incidental costs of selling the asset 900
were paid in September 2017. John incurred the following expenses in Element 4 Capital cost of improving the asset 31,500
relation to his holiday home:
Total Cost Base $190,745
Interest on the loan over the ownership period totalled $18,800.
Insurance costs over the period of ownership costing $2,950. Ownership Costs (3rd Element) cannot be included in the
Stairs leading to the second storey were repaired at a cost of $2,000. cost base as the property was acquired before 20 August
Rates and land tax of $4,325 were paid during ownership of the property. 1991.
Interest of $3,000 was paid since October 1990 when John obtained a
personal loan to refurbish the house at a cost of $31,500. Cost Base is $190,745
Required:
(a) Calculate John’s cost base for Capital Gains Tax purposes. 35 36
(b) Calculate John’s reduced cost base for Capital Gains Tax purposes.

35 36

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Question 4(b) Answer

Reduced Cost Base
Question 5
Amanda Rockwall won a seat in Parliament and transferred to
Element 1 Cost of acquiring the asset $145,000
Canberra. Before moving, Amanda sold the following assets:
Element 2 Incidental costs of acquiring the asset 300
All assets were purchased on 1 July 2000 and sold on 30
Element 2 Incidental costs of acquiring the asset 2,750
June 2018.
Element 2 Incidental costs of acquiring the asset 545
Element 2 Incidental costs of selling the asset 9,750 Item Purchase Price Sale Price
Element 2 Incidental costs of selling the asset 900 Main residence $290,000 $460,000
Element 4 Capital cost of improving the asset 31,500 Vacant land $64,000 $154,000
Total Cost Base $190,745 Sports Car $95,000 $105,000
Coin $6,000 $5,500
Vacuum Cleaner $18,150 $19,000
Note: Never include Ownership Costs (3rd Element) in the Sound System $16,000 $13,950
reduced cost base. In any event the property was acquired
before 20 August 1991 so there would not be any ownership Required:
costs included. Calculate the total amount to be included in Amanda’s
assessable income from these CGT events?
Reduced Cost Base is $190,745 37 38

37 38

Question 5 Answer Question 6

Item Purchase Price Sale Price Gain or Loss On 31 March 2015 Barry acquired an item of
Main residence $290,000 $460,000 Exempt jewellery for $2,650. Barry borrowed $2,400
Vacant land $64,000 $154,000 $90,000 Gain of the money from Eastpac Bank. The loan
Sports Car $95,000 $105,000 Exempt
Coin $6,000 $5,500 $500 Coll. Loss was a fixed interest loan on which he paid
Vacuum Cleaner $18,150 $19,000 $850 Gain interest of $1,945. Barry sold the jewellery
Sound System $16,000 $13,950 Disregard in October 2017 for $4,130.
Nil+$90,000+Nil+$850+Nil = $90,850
Note: Motor Vehicles are exempt from CGT. Required:
Note: $500 collectable loss was not claimed
because no collectable were gains available.
Calculate the Net Capital Gain, if any, to be
$90,850 x 50% = $45,425 Apply Discount Method included in the taxpayer’s assessable
Net Capital Gain is $45,425 39
income. 40

39 40

Question 6 Answer Question 7

On 31 March 2015 Barry acquired an item of jewellery
for $2,650. Barry borrowed $2,400 of the money from
Eastpac Bank. The loan was a fixed interest loan on
which he paid interest of $1,945. Barry sold the
jewellery in October 2017 for $4,130.
Required:
Calculate the Net Capital Gain, if any, to be included in
the taxpayer’s assessable income.
The jewellery is a collectable so no ownership
costs (e.g. interest) can be included in the cost
base. The discount method applies.
Capital Proceeds $4,130 less Cost Base $2,650
Equals a gain of $1,480 less the 50% discount
gives a Net Capital Gain of $740. 41
On 31 March 2010 Percy acquired lounge suite
for $11,500. Percy borrowed $10,400 of the
money from GRAB Bank. The loan was a fixed
interest loan on which Percy paid interest of
$3,145. Percy sold the lounge suite in October
2017 for $12,000.
Required:
Calculate the Net Capital Gain, if any, to be
included in the taxpayer’s assessable income.
42

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Question 7
On 31 March 2010 Percy acquired lounge suite for
$11,500. Percy borrowed $10,400 of the money from
GRAB Bank. The loan was a fixed interest loan on
which Percy paid interest of $3,145. Percy sold the
lounge suite in October 2017 for $12,000.
Required:
Calculate the Net Capital Gain, if any, to be included in
the taxpayer’s assessable income.
The lounge suite is a personal use asset so no
ownership costs (e.g. interest) can be included in
the cost base. The discount method applies.
Capital Proceeds $12,000 less Cost Base $11,500
Equals a gain of $500 less the 50% discount gives a
Net Capital Gain of $250.
Question 1 – Tax Accounting - Derivation
You are required to indicate when the following types of
income will be derived. You must support your answer.
• Dividend paid to an individual share trader.
• Interest income credited into the account of an individual
customer of a Bank.
• Fees of a sole practitioner accountant who only employs a
secretary.
• Sales income of a sole trader operating a retail clothing
store.
• Fees of a large legal partnership.
• Two years back pay received by William on 6 July.
• Rent received on 30 June 2019 in respect of July 2019.
43 44

43 44

Question 1
Question 1
• Dividend paid to an individual share trader.
Dividends are derived when they are paid. • Fees of a sole practitioner accountant who only employs a secretary.
" paid " in relation to dividends or non-share dividends includes credited
or distributed. Section 6(1) ITAA 1936 Cash basis – Carden’s case (1938) 63 CLR 108 (Doctor); Firstenberg’s
Case 76 ATC 4141 (Lawyer), Dunn’s Case 89 ATC 4141 (Accountant)
Contrast Henderson’s Case 70 ATC 4016
• Interest income credited into the account of an individual customer of a Bank. (TR 98/1 Determination of income; receipts versus earnings)
Cash method – when received
TR 98/1 Determination of income; receipts versus earnings • Sales income of a sole trader operating a retail clothing store.
sets out the Commissioner’s views on which tax accounting method is The earnings (i.e. accruals) method is, in most cases, appropriate to
likely to provide a substantially correct reflex of income in a relevant year. determine income derived from a trading or manufacturing business.
The Commissioner considers that the receipts method is likely to be (TR 98/1 Determination of income; receipts versus earnings)
appropriate to determine:
• income derived by an employee
• Fees of a large legal partnership.
• non-business income derived from the provision of knowledge or the
exercise of skill Accruals basis – Henderson's case
• business income derived from the provision of knowledge or the exercise of (TR 98/1 Determination of income; receipts versus earnings)
skill in the provision of services
• income from investments (with the exception of interest derived from a
business of money-lending), or
• rent or royalties (except where they are business income).
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45 46

Question 1
Professional Fees
• Two years back pay received by William on 6 July.
Cash method – when received - TR 98/1 Determination of income; receipts
versus earnings sets out the Commissioner’s views on which tax accounting
method is likely to provide a substantially correct reflex of income in a relevant
Generally speaking:
year. The Commissioner considers that the receipts
appropriate to determine:
method is likely to be
Cash method is appropriate
•
•
income derived by an employee
non-business income derived from the provision of knowledge or the exercise of
where it is a Sole Trader with
•
skill
business income derived from the provision of knowledge or the exercise of skill
a few administrative staff in
in the provision of services support.
• income from investments (with the exception of interest derived from a business
of money-lending), or
• rent or royalties (except where they are business income). • Accruals method is
NB: Rebate of tax (ITAA36 s159ZR to 159ZRD) for lump sum payment
containing amounts that accrued in earlier income years appropriate where it is a
• Rent received on 30 June 2019 in respect of July 2019
Cash method – when received - TR 98/1 Determination of income;
Large Partnership
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Question 2
Professional Fees Dr Sabrina Moss, a self-employed dentist who operates her business as a
sole practitioner (employing a receptionist and a dental nurse) provides
you with the following information to prepare her taxation return for the
year ended 30 June 2019:
•Henderson’s Case 70 ATC 4016
•Cash received from patients in the tax year $650,000
•Private Health Fund payments for services
•Firstenberg’s Case 76 ATC 4141 provided to patients $135,000

•Account receivables as at 30 June 2018 $35,000

•Dunn’s Case 89 ATC 4141 •Account receivables as at 30 June 2019 $20,000

•Salaries paid to employees in the tax year $43,500

•Other expenses paid (assume deductible) $78,000
Required:
Discuss the taxation implications for Sabrina.

50

49 50

Answer to Question 2 Answer to Question 2

• Sole Practitioner with no professional Assessable Income
employees (i.e. Dentists) should operate Cash from patients 650,000
on a cash basis. Private Health Fund payments 135,000
(Ignore Account receivables)
• The only cash amounts received are the Total Assessable Income 785,000
cash from patients and the health fund
Deductions
payments.
Salaries 43,500
Other expenses 78,000
• Ignore accounts receivable as cash has
Total Deductions 121,500
not been received.
Taxable Income 663,500

51 52

Question 3 Answer to Question 3

Frank Williams, a self-employed solicitor conducts his legal business in a
terrace he owns in Haymarket Sydney. He employs a secretary, three
personal assistants and 9 qualified solicitors. He provides you with the
• Sole Practitioner with 9 professional employees (i.e.
following information to prepare his taxation return for the year ended 30 solicitors) should operate on an accruals basis as (it
June 2019:
is assumed) most of the income is not generated by
•Cash received from clients $6,250,000 the principal’s personal services.
•Account receivables as at 30 June 2018 $255,450
• Must include in assessable income the accounts
•Account receivables as at 30 June 2019 $600,555
•Salaries paid to employees in the tax year $2,360,000 receivable as at 30 June 2019 as income has been
•Interest on loan to buy the terrace $55,350 earned and is not included in the cash received.
•Other expenses (assume deductible) $78,000
• Must deduct from the assessable income the
Required: accounts receivable as at 30 June 2018 as this is
Discuss the taxation implications for Frank. assessable in the previous year. Apart from that
amount, the cash payments are assessable.
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Answer to Question 3
Losses and Outgoings Incurred
Assessable Income
Cash from clients 6,250,000
• The principles for Incurred are different
Add accounts receivable 30 June 2019 600,555
from Derived.
Less accounts receivable 30 June 2018 (255,450)
Total Assessable Income 6,595,105 • The fact that the cash method is
appropriate for derivation does not
Deductions
mean that Taxpayer must use the cash
Salaries 2,360,000
Interest 55,350
method for expenses.
Other expenses 78,000 • Refer to Taxation Ruling 97/7 for
Total Deductions 2,493,350 examples.
Taxable Income 4,101,755

55 56

Incurred
• The courts have been reluctant to attempt an
exhaustive definition of ‘Incurred'.
• A Taxpayer incurs an expense when it
completely subjects itself to that expense - Coles
Myer case is an exception.
• A Taxpayer incurs an expense when a Presently
Existing Liability arises.
• Whether there is a presently existing liability is a
legal question in each case, having regard to the
specific circumstances.
Incurred
The following general rules may assist in defining
when an amount is incurred:
• a taxpayer need not actually have paid any
money to have incurred an outgoing provided
the taxpayer is definitively committed in the
year of income.
• it is not sufficient if the liability is merely
contingent or no more than pending,
threatened or expected, no matter how certain
it is in the year of income that the loss or
outgoing will be incurred in the future.
• it must be a presently existing liability to pay a
pecuniary sum.

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Incurred Question 4 - Tax Accounting - Incurred

General rules (continued) :
• a taxpayer may have a presently existing
liability, even though the liability may be
defeasible by others.
• a taxpayer may have a presently existing
liability, even though the amount of the liability
cannot be precisely ascertained, provided it is
capable of reasonable estimation.
• in the case of a payment made in the absence
of a presently existing liability the expense is
incurred when the money is paid.
IHI Limited is an insurance company. Their accounts for the year ended 30
June 2019 showed the following items:
• $10,000 Provision for doubtful debts (e.g. debts that may become
bad in the future).
• $50,000 Provision for long service leave for employees.
• $60,000 Provision for annual leave for employees.
• $80,000 Advertising contract signed on 1 February 2019. This
contract provided that 8 TV advertisements at $10,000 each would be
shown for IHI Limited on the first day of each month from 1 February
2019 but each payment of $10,000 was only payable once each
advertisement was shown.
Required:
Advise IHI Limited which items are deductible for the year ended 30 June
2019.

60

59 60

10

Answer to Question 4
• $10,000 Provision for doubtful debts - may become bad in the future
• Only BAD debts are deductible under section 25-35. Bad debts can be
deducted when they satisfy the bad debt rules.
• $50,000 Provision for long service leave for employees.
• $60,000 Provision for annual leave for employees.
• Provisions for long service and annual leave are incurred only when
the Taxpayer has paid the expense.
• FCT v James Flood Pty Ltd
• Nilsen Development Laboratories Pty Ltd & Ors v FCT
So these items are not deductible under section 8-1 ITAA 1997 as they
have not been incurred.
Also refer to section 26-10 ITAA 1997
61 62
Question 5 – Trading Stock
Based on the definition contained in section 70-10 of the
Income Tax Assessment Act 1997, which of the following
items would be considered trading stock and why?
•land owned by a rental property owner,
•clothes for sale in a fashion retail shop,
•land owned by a developer,
•shares purchased by an investor, and
•shares purchased by a share trader.
63
63 64
Answer to Question 5
Based on the definition contained in section 70-10 of
the Income Tax Assessment Act 1997, which of the
following items would be considered trading stock and
why?
•shares purchased by an investor, and
Shares are not trading stock as the land is NOT held for
the purposes of manufacture, sale or exchange in the
ordinary course of business
•shares purchased by a share trader.
Shares are trading stock as the land is held for the
purposes of manufacture, sale or exchange in the
ordinary course of business
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9/09/2020
Answer to Question 4
• $80,000 Advertising contract signed on 1 February 2019.
This contract provided that 8 TV advertisements at $10,000
each would be shown for IHI Limited on the first day of each
month from 1 February 2019 but each payment of $10,000
was only payable once each advertisement was shown.
• FC of T v Ogilvy & Mather
• The liabilities are only pending until the showing of the
advertisement. The payments have only been incurred when
the advertisement has been shown.
• So as only 5 advertisements have been shown as at 30 June
2019, only 5 amounts of $10,000 (i.e. $50,000) are
62
deductible under section 8-1.
Answer to Question 5
Based on the definition contained in section 70-10 of the
Income Tax Assessment Act 1997, which of the following
items would be considered trading stock and why?
•land owned by a rental property owner,
Land is not trading stock as the land is NOT held for the
purposes of manufacture, sale or exchange in the ordinary
course of business
•clothes for sale in a fashion retail shop,
Clothes are trading stock as the clothes are held for the
purposes of manufacture, sale or exchange in the ordinary
course of business
•land owned by a developer,
Land is trading stock as the land is held for the purposes of
manufacture, sale or exchange in the ordinary course of
business
64
Bringing Trading Stock to Account
• Step 1
A 100% deduction for the acquisition
of trading stock is allowed.
Section 8-1 and section 70-25
• Step 2
Trading stock adjustment (either
assessable income or deduction) is made
in order to defer the deduction for trading
stock until disposal of the stock.
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Specific Anti-Avoidance Measures Section 70-35

Section 70-20
Non-Arm’s Length Transactions Trading Stock Adjustment
(Cecil Brothers P/L v FC of T (1964) 111 CLR 430)
Closing Stock > Opening Stock
=
Assessable income

Closing Stock < Opening Stock

=
Deduction

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Disposition outside the

Valuation Ordinary Course of Business
• Section 70-45 If the Taxpayer disposes of stock outside the
1. Cost ordinary course of the business (e.g. stock is given
2. Market Selling Value to a friend) the Taxpayer must include the market
value of the stock as income.
3. Replacement Value Section 70-90
Taxpayer can chose any of the above methods.

The entity acquiring the trading stock acquires it for

• Section 70-50 market value
Section 70-95
4. Obsolescence

69 70

Question 6
Answer to Question 6(a)
Bobby Brown manufactures men's sports coats. Bobby provided the following
information for the year ended 30 June 2019. Income
•Sales for the year amounted to $1,645,060;
•Bobby gave 3 coats to his friends;
•Bobby gave 35 coats to the local registered charity;
• Sales income of $1,645,060 is assessable under s.6-5.
•During the year Bobby purchased cloth for $815,000. Included in that amount was
$340,000 for cloth purchased from a company controlled by Bobby’s wife. Bobby • 3 Coats given to friend assessable at market value
could have purchased that cloth direct from the supplier for $190,000;
•Factory rental $105,000;
under s.70-90 (3 x $150) $450 as a disposal outside the
•Tailor’s wages $145,000; ordinary course of business.
•Advertising $432,000;
•Salesmen's salaries $585,000;
•Opening stock consisted of 1,690 coats at a cost of $45 each; and
• 35 Coats given to charity assessable at market value
•At the end of the year Bobby held 500 unsold jackets. He prefers to value stock at under s.70-90 (35 x $150) $5,250 as a disposal outside
cost ($88.50) and uses an absorption costing method. He uses a first in first out the ordinary course of business.
system of inventory valuation. Assume that the market value of the coats is $150
each.
Required:
Discuss the tax implications of the above.
Would your answer in (a) above change if Bobby used market value to value his
stock. 71

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Answer to Question 6(a) Answer to Question 6(a)

Deductions Trading Stock Adjustment
• Purchase of $475,000 ($815,000 minus $340,000) worth of
cloth at arm’s length is deductible under Section 8-1 and Opening stock = 1,690 x $45 = $76,050.
Section 70-25.
• But $340,000 worth of cloth was purchased from a related Closing Stock = 500 x $88.50 = $44,250
company so only market value of $190,000 is deductible
under Section 70-20.
Trading Stock adjustment
• Total purchases deductible is ($475,000 + $190,000)
$76,050 minus $44,250 = $31,800.
$665,000
• Selling costs of $432,000 in advertising and $585,000 in
salesmen’s salaries are deductible under section 8-1. This is deductible under s.70-35(3) as opening stock is greater
• Factory Rental ($105,000) and Tailors’ Wages ($145,000) than closing stock.
are also deductible under section 8-1.

73 74

Answer to Question 6(a) Answer to Question 6(b)

Income: Sales $1,645,060
• If Bobby uses market value to value his stock the only
Disposal of stock outside business
(3 @ $150 = $450) + (35 @ $150 = $5,250) 5,700
change from part (a) will be the trading stock
Total Assessable Income $1,650,760
adjustment.
Deductions:
Purchases: • It is assumed for the purpose of the question that
($815,000 - $340,000 + $190,000) $665,000 Bobby’s opening stock figure will not change because
Trading Stock Adjustment he is bound to use last year’s closing stock of $76,050.
O/S (1,690 * $45) $76,050
Minus C/S (500 * $88.50) $44,250 31,800 • Closing stock is now 500 x $150 = $75,000.
Factory Rental 105,000
Tailor’s Wages 145,000 • The stock adjustment is $76,050 - $75,000 = $1,050.
Advertising 432,000
Salesmen’s Salaries 585,000
• This is deductible under section 70-35(3) as closing
Total Deductions 1,963,800
Carry Forward Loss ($313,040)
stock is less than opening stock.

Market value of gift of coats to charity of 35 x $150 = $5,250 is not deductible under s.26-55 as
there is a loss situation.

75 76

Answer to Question 6(b)

Income: Sales $1,645,060
Disposal of stock outside business
(3 @ $150 = $450) + (35 @ $150 = $5,250) 5,700
Total Assessable Income $1,650,760
Deductions:
Purchases:
($815,000 - $340,000 + $190,000) $665,000
Trading Stock Adjustment
O/S (1,690 * $45) $76,050
Minus C/S (500 * $150) $75,000 1,050
Factory Rental 105,000
Tailor’s Wages 145,000
Advertising 432,000
Salesmen’s Salaries 585,000
Total Deductions 1,933,050
Carry Forward Loss ($282,290)

Market value of gift of coats to charity of 35 x $150 = $5,250 is not deductible under
section 26-55 as there is a loss situation

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