At – Mid-Semester Test - KnowledgEquity

2/25/24, 10:03 AM AT – Mid-Semester Test - KnowledgEquity
AT – Mid-Semester Test
YOU SCORED 10 OUT OF A POSSIBLE 15 [67%]
Question 1 Marks: 1
Sally started the 20X3-X4 tax year with no carry-forward losses. In both the 20X3-X4 and 20X4-X5 tax years, Sally had assessable
income of $100,000 and net exempt income of $1,000. In the 20X3-X4 tax year, her deductions were $105,000 and, in the 20X4-X5
tax year, they were $80,000.
What was Sally’s taxable income in 20X4-X5?
Answer Options
You answered C. The correct answer is C
USER SELECTION CORRECT ANSWER
A $15,000
B $16,000
C $17,000
D $20,000
Answer Explanation
In the 20X3-X4 tax year, Sally had $100,000 of assessable income, reduced by $105,000 of deductions, leaving a tax loss of $5,000.
However, the net exempt income of $1,000 is applied to reduce the tax loss to only $4,000. As such, Sally had a carry-forward tax
loss in the 20X3-X4 tax year of $4,000 (i.e. $100,000 - $105,000 - $1,000 = $4,000).
In the 20X4-X5 tax year, Sally had $100,000 of assessable income, reduced by $80,000 of deductions, initially leaving taxable income
of $20,000. Sally may also deduct the 20X3-X4 tax loss of $4,000 to further reduce taxable income.
However, the carry-forward tax loss must first be reduced by $1,000 for Sally's net exempt income in the 20X4-X5 tax year (i.e.
$4,000 - $1,000 = $3,000). This means that there is only a $3,000 carry-forward tax loss to deduct in the 20X4-X5 tax year.
As such, Sally's taxable income for the 20X4-X5 tax year is $17,000 (i.e. $100,000 - $80,000 - ($4,000 - $1,000) = $17,000) (s.36-
15).
Module: 2 > Part: C > 2.9 Specific deductions > Tax losses > Example 2.14 > Page: 115-117
Question 2 Marks: 1
Which of the following statements about small business entities (SBEs) is correct?
https://knowledgequity.com.au/course/australia-taxation/at-mid-semester-test 1/11
Answer Options
A All SBEs can take advantage of the CGT small business concessions.
B All CGT assets of CGT SBEs are eligible for the CGT small business concessions.
C All basic conditions in s.152-10 must be met in order to access the CGT small business concessions.
D All SBEs that have net assets over $6 million can take advantage of the CGT small business concessions.
Answer Explanation
There are 4 basic conditions provided for in s.152-10 that must all be met in order to access the CGT small business concessions.
1. A CGT event must happen to a CGT asset in the income year.
2. The CGT event would have resulted in a gain.
3. Generally, that the entity is a CGT small business entity (i.e. SBE with less than $2 million in aggregated turnover), or has net assets
of $6 million or loss.
4. The CGT asset is considered an active asset (i.e. used for a relevant period in the course of carrying on the business).
Not all SBEs can take advantage of the concessions. For example, an SBE with $2 million or more in aggregated turnover would be
excluded if it can't satisfy the net assets test.
Not all CGT assets are eligible, as they must meet the active asset test. For example, passive assets such as rental properties would
not be considered active.
SBEs with net assets over $6 million are only eligible if they meet the CGT SBE definition, having aggregated turnover of less than $2
million.
Module: 3 > 3.5 Calculating net capital gain/loss > CGT small business concessions > Page: 219-224
Question 3 Marks: 0
David, a resident individual, recently sold a CGT asset (that was not a collectable or personal use asset) and has prepared the
following information:
Cost base: $25,000
Reduced cost base: $22,000
Capital proceeds $24,000
Ownership period: 24 months
What is the net capital gain or loss for David?
Answer Options
You answered D. The correct answer is B
A $1,000 capital loss.
B No capital gain or capital loss.
C $1,000 capital gain.
D $2,000 capital gain.
Answer Explanation
B is correct. No capital gain or capital loss exists as the capital proceeds are less than the cost base but more than the reduced cost
base.
The capital proceeds of $24,000 are lower than the cost base of $25,000, so a capital gain does not exist.
The capital proceeds of $24,000 are higher than the reduced cost base of $22,000, so a capital loss does not exist.
Module: 3 > 3.4 Determining gain/loss from CGT event > Capital proceeds > Page: 197-199
Also see: How to calculate the gain/loss, Figure 3.6 (Page 196-197)
Question 4 Marks: 1
Joan is a tax practitioner working in public practice. Klarx Pty Ltd is one of Joan’s clients and its financial controller has advised Joan
that if Joan doesn’t claim certain deductions in the Klarx Pty Ltd company income tax return, then Joan will lose Klarx Pty Ltd’s
business.
What type of threat to the fundamental principles of ethics in APES 110 has Joan experienced?
Answer Options
A Familiarity threat to integrity.
B Advocacy threat to objectivity.
C Intimidation threat to objectivity.
D Self-interest threat to independence.
Answer Explanation
C is correct. Joan has likely experienced an intimidation threat, where the member is deterred from acting objectively because of
actual or perceived pressures. The threat of losing future business is an attempt to exert undue influence over the member.
While it is possible that a self-interest threat exists, in terms of Joan protecting her future financial security, note that independence is
not a fundamental principle of ethics in APES 110.
Module: 1 > Part: A > 1.3 Ethical principles and behaviour > APES 110 Code of Ethics for Professional
Accountants > Table 1.4 > Page: 22-23
Question 5 Marks: 1
Alex is an Australian resident and has the following capital gains information for the 20X6-X7 tax year:
– Carry forward collectables tax loss of $2,500 from the 20X5-X6 tax year.
– Carry forward capital loss of $10,000 from the 20X5-X6 tax year.
– Gains from collectables of $2,000 that were held for a 6-month period ending in the 20X6-X7 tax year.
– Capital gains from sale of shares of $25,000 (undiscounted) that were held for a 2-year period ending in the 20X6-X7 tax year.
What is the net capital gain for Alex in the 20X6-X7 tax year?
Answer Options
You answered D. The correct answer is D
A $2,000
B $2,500
C $7,000
D $7,500
Answer Explanation
D is correct. Carry forward losses from collectables can be used to offset gains from collectables in the current year. The carry
forward collectables loss of $2,500 is offset against the current year collectables gain of $2,000, leaving a carry forward collectables
loss of $500.
Capital gains from the sale of shares can be offset against current year capital losses, and then against any carry forward capital
losses from prior periods. The undiscounted capital gain of $25,000 is offset against the carry forward capital loss of $10,000, leaving
a capital gain of $15,000.
As the shares were held for longer than 12 months, the 50% CGT discount can apply. The capital gain of $15,000 is reduced by 50%
to $7,500, which becomes the assessable net capital gain for Alex in the 20X6-X7 tax year.
Module: 3 > 3.5 Calculating net capital gain/loss > Page: 217-218
Also see: Collectables (page 193)
Question 6 Marks: 1
Pinkrock Pty Ltd is a small business entity (SBE) and plans to establish a media production business under a new, separate entity.
During the current tax year, Pinkrock Pty Ltd incurred the following expenses:
– Legal advice on the best entity structure for the new business, costing $2,250.
– Incorporation and consulting fees to set up the new entity, costing $1,250.
Which of the following best describes how Pinkrock Pty Ltd will treat the expenses for tax purposes?
Answer Options
Deduct the outgoings in full under s.8-1, as they are incurred in producing assessable income for a business and are not
A
on capital account.
Deduct the outgoings at 20% under s.40-880(2), as they are for a proposed business and meet the criteria for blackhole
B
expenditure with no other provisions to enable a deduction.
Deduct the outgoings in full under s.40-880(2A), as they are start-up expenses for a small business, even though there is
C
no current nexus to an income-producing activity.
Deduct the outgoings in full under s.40-BB, as the temporary full expensing provisions apply, which allows an immediate
D
deduction for such depreciating assets
Answer Explanation
C is correct. Under s.40-880(2A), small business entities are permitted to deduct the cost of setting up a proposed business in full,
instead of over 5 years. This includes expenditure relating to legal advice, incorporation fees and relevant consulting services.
The amounts are unlikely to be deductible under s.8-1 as they relate to a proposed business and incorporation fees may be capital in
nature. While the amounts may be deductible under s.40-880(2), it would be preferable to deduct them in full under s.40-880(2A).
The amounts are unlikely to be deductible under the temporary full expensing provisions, as they would not meet the definition of
depreciating assets.
Module: 2 > Part: D > 2.18 Capital allowance rules for small business entities (SBEs) > Blackhole
expenditure and start-up expenditure > Example 2.29 > Page: 154-155
Question 7 Marks: 1
Jonathon is a retired tax agent who no longer has a current tax agent registration. He has been asked by a friend, Fiona, to provide
taxation advice to assist with the running of Fiona’s small business. Jonathon subsequently provides Fiona with factual information
sourced from relevant taxation law for Fiona to review.
Is it likely that Jonathon has breached the tax agent service provisions under the Tax Agent Services Act 2009?
Answer Options
A Yes, he has provided taxation advice that is specific to Fiona's circumstances.
B Yes, he has provided taxation advice that Fiona is reasonably likely to rely on.
C No, he has provided general taxation advice and there is no indication that he has charged Fiona a fee.
D No, he has provided tailored taxation advice but has not represented Fiona in her dealings with the ATO.
Answer Explanation
C is correct. Tax agent services generally relate to providing advice on tax liabilities, obligations or entitlements that the client is
reasonably expected to rely on (s.90-5 TASA). However, all indications are that Jonathon has only provided factual information
relating to taxation laws for Fiona to review. This can likely be linked to providing general taxation advice only, rather than tailored
taxation advice that is specific to Fiona's tax liabilities, obligations or entitlements.
In addition, in order to breach the TASA provisions for providing tax agent services if unregistered, Jonathon would have needed to
charge Fiona a fee, which doesn't seem to be the case (s.50-5 TASA).
Module: 1 > Part: A > 1.2 Tax Practitioner Board and tax practitioners > Tax agent > Page: 13-14
Question 8 Marks: 0
Amanda purchased a commercial office building on 1 July 20X6. During the 20X6-X7 tax year, Amanda incurred the following
expenses:
– 7 July: Replaced front door due to wear and tear from the previous owners ($1,750).
– 25 November: Replaced five carpet tiles where a staff member had just spilt a drink that stained the floor ($350).
– 14 February: Installed a window on a previously fully-enclosed brick wall ($2,400).
What is Amanda’s deductible amount for repairs under s.25-10 for the year ended 30 June 20X7?
Answer Options
You answered B. The correct answer is A
A $350
B $2,100
C $4,150
D $4,500
Answer Explanation
A is correct. The replacement of the front door would likely be an initial repair, taking place only 7 days after purchasing the property,
especially as it is noted as caused by wear and tear from previous owners. This would be a capital improvement, rather than
deductible as a repair under s.25-10.
The replacement of 5 carpet tiles is likely to be a repair, as it restores the carpet to the former state prior to being damaged (without
being an 'initial repair'), and would be deductible under s.25.10 ($350).
The installation of a window would be unlikely to be a repair, as it changes the functionality of the building, and would be an
improvement or renovation. This would be a capital expenditure and not deductible under s.25-10.
Module: 2 > Part: C > 2.9 Specific deductions > Repairs > Figure 2.6 > Page: 112-113
Question 9 Marks: 1
Angela is a resident individual and held a shareholding in an Australian company, WaterWorx Ltd. She acquired the shares for
$1,000,000 on 20 June 1990, had $100,000 in costs of ownership, and disposed of the shares for $2,000,000 in the current tax year.
What is the indexed cost base for Angela’s shareholding?
Answer Options
A $931,150
B $1,100,000
C $1,203,000
D $1,303,000
Answer Explanation
C is correct.
The indexed cost base is calculated as follows:
Step 1 - Add elements 1, 2, 4 and 5 of cost, which is provided as $1,000,000.
Step 2 - Index these costs by the CPI, which is calculated as:
$1,000,000 x (68.7 / 57.1)
= $1,000,000 x 1.203
= $1,203,000.
Note that 68.7 represents the closing CPI for the September quarter 1999 (the last available for indexing) and 57.1 represents the
closing CPI for the June quarter 1990. Note that we take the indexation factor to 3 decimal places (rounding up if the fourth decimal
place is five or more), so 68.7 / 57.1 equates to 1.203.
Step 3 - Add element 3 of cost (unindexed) -- however, this only applies to assets purchased after 20 August 1991. As the asset was
not acquired after this date, the $100,000 is not included in the cost base and indexed cost base.
The indexed cost base is therefore $1,203,000.
Module: 3 > 3.4 Determining gain/loss from CGT event > Indexed cost base > Page: 202
Question 10 Marks: 1
David is a resident individual who carries on a business as a sole trader selling clothing. His cash received from sales for the year is
$300,000. His opening accounts receivable is $150,000 and closing accounts receivable is $200,000. He also received $30,000 of
interest on his personal savings with another $3,000 accrued but not paid or credited at 30 June.
What is his assessable income this year?
Answer Options
A $330,000
B $333,000
C $380,000
D $383,000
Answer Explanation
C is correct. David will be using the accruals basis to recognise his business sales as he has trading stock. This will be his cash
collections from sales of $300,000, plus his $50,000 increase in accounts receivable (i.e. closing balance of $200,000 less opening
balance of $150,000).
David will use the cash basis for his personal investment income and the bank has only paid or credited $30,000 of interest. The
accrued amount is therefore not included in assessable income.
The total assessable income is therefore $380,000 (i.e. $300,000 + $50,000 + $30,000).
Module: 2 > Part: B > 2.4 Ordinary income > Page: 86-97
Also see: Cash or Accruals basis, Table 2.3 (page 101-103)
Burner Farms is a foreign company that has set up an Australian subsidiary called Lights Out. Burner Farms directs Lights Out from
overseas, with board meetings taking place overseas once a year.
Lights Out is not incorporated in Australia, but carries on business in Australia. Its senior management team runs the day-to-day
business from Australia and they have real authority and autonomy over how the business operates, including high-level decisions
affecting strategic focus, executive hiring, policies and transactions. The voting power in Lights Out is controlled by shareholders who
are foreign residents.
Is Lights Out likely to be considered an Australian resident company?
Answer Options
A Yes, as it is an Australian subsidiary and carries on business in Australia.
B No, as it is not incorporated in Australia and its voting power is controlled by non-residents.
C Yes, as it carries on business in Australia and its central management and control is in Australia.
D No, as board meetings are held overseas and so central management and control is not in Australia.
Answer Explanation
C is correct. To be considered an Australian resident under s.6(1), the company must: - be incorporated in Australia, OR - if not
incorporated in Australia, carry on business in Australia AND ---have its central management and control in Australia; OR ---have its
voting power controlled by Australian residents.
Lights Out is not incorporated in Australia. However, it is carrying on a business in Australia. Even though Board meetings take place
overseas, the central management and control of the company is likely to be in Australia (where the senior management team is
located). They are the ones providing the high-level decisions on the company's policies, direction and transactions and it is likely
that the overseas board is simply 'rubber-stamping' those decisions, especially since they only meet once per year. See Bywater
Investments Ltd & Ors and Hua Wang Bank Berhad, as well as Malayan Shipping Co Ltd .
Module: 2 > Part: A > 2.2 Residency for companies > Page: 81-82
LMN Pty Ltd carries on a furniture retail business and has annual turnover of approximately $60 million.
Which of the following expenses are deductible in the current tax year?
Answer Options
You answered D. The correct answer is D
A $12,000 prepayment of rent wholly relating to the next tax year.
B $48,000 provision for accrued annual leave, with no leave having been paid in the current tax year.
C $95,000 purchase of inventory, to be manufactured and delivered by the supplier in the next tax year.
$40,000 promotion costs, including food and drink, for a floor show promoting products to the public at a shopping centre
D
in the current tax year
Answer Explanation
D is correct. Food and drink expenses would normally be considered non-deductible entertainment as they are not part of
promotion/advertising expenses. However, an exception exists for provision of entertainment to the public (s.32-45), meaning that the
food/drink expenses at the public promotional activity at the shopping centre is deductible.
A is incorrect because the expenditure must be apportioned over each tax year during which the services are provided (ITAA36, s.
82KZM). LMN Pty Ltd is not eligible for the SBE concessions (these prepayment concessions are only available to entities with a
turnover of under $50 million).
B is incorrect because employee annual leave payments are not deductible until the year paid (s.26-10).
C is incorrect because trading stock is not deductible until on hand so cannot be deducted till the next tax year (s.70-15).
Module: 2 > Part: C > 2.10 Limitations to deductibility > Table 2.4 > Page: 122-125
Also see: Accounting for trading stock (page 161)
Hughes Pty Ltd is not a small business entity. Hughes Pty Ltd has an annual aggregated turnover of $60 million and has the following
records relating to its low-value pool:
– Closing balance on 30 June 2022 of $8,450.
– On 1 July 2022, allocation of a low-value asset that had been depreciated using the diminishing value method with opening
adjustable value of $650.
– Purchase of a new depreciating asset on 18 August 2022 for $2,000 (effective life of 10 years).
Assume all depreciating assets have a 100% taxable use, and that Hughes Pty Ltd wishes to maximise its deductions.
What is the decline in value of the depreciating assets for the 2022-23 tax year?
Answer Options
You answered C. The correct answer is D
A $3,690.63
B $3,812.50
C $5,290.63
D $5,412.50
Answer Explanation
D is correct.
We can calculate the decline in value of the low-value pool as follows:
- There are no new low-cost depreciating assets, so the 18.75% of each low-cost asset allocated to the pool in the year is not
necessary.
- We take 37.5% of the sum of: (i) the pool closing balance for the previous year, and (ii) the opening adjustable value of low-value
assets allocated to the pool at the start of the year. ($8,450 + $650) x 37.5% = $3,412.50.
Therefore, the decline in value for the low-value pool is $3412.50.
The new depreciating asset can be immediately written off under the Temporary Full Expensing provisions, giving a deduction of
$2,000.
As a result, the total deduction available is $3,412.50 + $2,000 = $5,412.50.

Module: 2 > Part: D > 2.14 Capital allowances for non-small business entities > Low-value pool (ITAA97,
Subdivision 40-E) > Page: 141
Also see: Temporary 100 per cent asset write-off for business use (pages 147-148)
Bronwyn operates a retail shop selling office supplies. On 30 June, her stocktake indicated the following items:
Item Qty Cost (ea) Replacement price (ea) Market selling price (ea)
Calculators 100 $30 $35 $70
Printer cartridges 75 $125 $140 $250
Monitors 50 $250 $175 $275
Due to technology enhancements, the calculators can no longer be sold at their previous market price and instead need to be
discounted to $20 each to clear excess stock.
Assuming that Bronwyn wishes to minimise her taxable income for the current year and does not wish to use the small business entity
trading stock concessions, what is the value of closing stock this year?
Answer Options
You answered B. The correct answer is A
A $20,125
B $21,125
C $23,875
D $24,875
Answer Explanation
A is correct. The adjustment for stock movement under s.70-35 takes into account the value of closing stock. In order to minimise
taxable income, Bronwyn may choose the lowest of cost, replacement and market selling price to value closing stock under s.70-45.
The calculators could be valued at $20 each using the obsolete stock provision in s.70-50 based on reasonable business judgement
($2,000). This is because the information on obsolescence has been provided subsequent to the stocktake (i.e. new facts). The
calculators cannot be sold for their previous market price - they need to be heavily discounted to sell. So, the previous market selling
price is effectively now irrelevant. When we think about ‘reasonable’ in these circumstances, we don't just compare to the previous
market price; we might also compare to the cost and what the business reasonably believes the new ‘value’ of the stock is (i.e. what it
can be sold for, if at all).
The printer cartridges would be valued using cost ($9,375) and monitors using replacement value ($8,750).
Total closing stock = $2,000 + $9,375 + $8,750 = $20,125.
Module: 2 > Part: E > 2.22 Valuation of trading stock > Trading stock valuation options > Example 2.33 >
Page: 162-164
Jo runs an architecture business as a sole trader. This business employs a few junior architects, and operates on an accruals basis.
As a result, income is generally recognised for tax purposes when the business has a legal right to receive the income.
Jo’s business has a major contract, which is nearing completion at the end of the current tax year, at which time the business would
be entitled to receive $100,000 from the customer. However, due to some unexpected, non-life threatening medical expenses, Jo
expects to have cashflow challenges and wishes to delay her tax liability. Jo has no intention of paying any less tax in the medium-
term, merely of deferring the current year’s tax liability. Consequently, Jo and her customer agree to vary the contract, so that it now
involves an extra minor task for her business to undertake, meaning that the contract will only completed early in the next tax year.
The result of this contract modification is that the payment to Jo is only recognised in the following tax year.
Which of the following statements about Part IVA is correct in this situation?
Answer Options
You answered C. The correct answer is D
A Part IVA will not apply as there is no scheme.
B Part IVA will not apply as there is no tax benefit.
Part IVA will not apply as the dominant purpose upon entering and carrying out the scheme was not to obtain a tax
C
benefit.
D Part IVA will potentially apply to this transaction.
Answer Explanation
D is correct as there is a scheme, a tax benefit, and the scheme was entered into with the purpose of obtaining a tax benefit. The
scheme can be defined in a variety of ways, but would typically involve modifying the contract with the customer, and earning money
under the new contract. There is a tax benefit, as a tax benefit includes lowering assessable income as compared to the situation if
the scheme had not been entered into (s. 177C(1)(a)). Here, due to the scheme, the amount of $100,000 has not earned in the current
tax year. The fact that it will be earned in the next tax year does not negate this.
Further, the purpose that the scheme was entered into was to obtain the tax benefit (s. 177D). While Jo does not intend to reduce her
collective long-run tax burden, the purpose of entering into the scheme was to obtain a tax benefit - that of lowering her assessable
income in the current tax year.
A, B and C are all incorrect given all three elements are present in these facts.
Module: 1 > Part: B > 1.12 General anti-avoidance provisions > Part IVA of the Income Tax Assessment
Act 1936 > Page: 65-66

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2/25/24, 10:03 AM AT – Mid-Semester Test - KnowledgEquity

YOU SCORED 10 OUT OF A POSSIBLE 15 [67%]

What was Sally’s taxable income in 20X4-X5?

1. A CGT event must happen to a CGT asset in the income year.

2. The CGT event would have resulted in a gain.

Cost base: $25,000

Reduced cost base: $22,000

Capital proceeds $24,000

Ownership period: 24 months

What is the net capital gain or loss for David?

A $1,000 capital loss.

B No capital gain or capital loss.

C $1,000 capital gain.

D $2,000 capital gain.

USER SELECTION CORRECT ANSWER

A Familiarity threat to integrity.

B Advocacy threat to objectivity.

C Intimidation threat to objectivity.

D Self-interest threat to independence.

A Yes, he has provided taxation advice that is specific to Fiona's circumstances.

– 14 February: Installed a window on a previously fully-enclosed brick wall ($2,400).

What is the indexed cost base for Angela’s shareholding?

The indexed cost base is calculated as follows:

Step 1 - Add elements 1, 2, 4 and 5 of cost, which is provided as $1,000,000.

Step 2 - Index these costs by the CPI, which is calculated as:

$1,000,000 x (68.7 / 57.1)

The indexed cost base is therefore $1,203,000.

What is his assessable income this year?

Is Lights Out likely to be considered an Australian resident company?

A Yes, as it is an Australian subsidiary and carries on business in Australia.

A $12,000 prepayment of rent wholly relating to the next tax year.

– Closing balance on 30 June 2022 of $8,450.

USER SELECTION CORRECT ANSWER

We can calculate the decline in value of the low-value pool as follows:

Therefore, the decline in value for the low-value pool is $3412.50.

As a result, the total deduction available is $3,412.50 + $2,000 = $5,412.50.

Printer cartridges 75 $125 $140 $250

Monitors 50 $250 $175 $275

Total closing stock = $2,000 + $9,375 + $8,750 = $20,125.

A Part IVA will not apply as there is no scheme.

B Part IVA will not apply as there is no tax benefit.

D Part IVA will potentially apply to this transaction.

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