Advise Baldrick as to what his taxable income or loss

Reference no: EM132555774

Question 1 - Baldrick bought an investment property on 1 July 2018 for $2,000,000. He rented out his property from 1 July 2018. He borrowed $1,800,000 on the same day from the bank to buy the property. The term of the loan was 8 years. The building was originally constructed in 2001 at a cost of $900,000. He received rent in cash from his tenants during the year ended 30 June 2019 in the amount of $93,000. Included in this amount was a payment of $9,000 on 30 June 2019 as rent for the month of July 2019.

Baldrick incurred the following expenses during the year ended 30 June 2019 in relation to the property:

State Government Land Tax $22,500

Loan Repayments ($52,000 principal and $130,000 interest) $182,000

Real Estate Agent's fee to evict a tenant for non-payment of rent $2,300

The front window was badly damaged at the time of acquisition and replaced on 4 July 2018 $2,800

A new refrigerator was purchased on 1 March 2019 $3,800

Loan application fee (paid on 1 July 2018) $2,000

Legal costs for the loan to buy the property (paid on 1 July 2018) $2,600

Legal costs for buying the property (paid on 1 July 2018) $4,600

Stamp duty on the purchase of the property (paid on 1 July 2018) $95,000

Baldrick wants to minimise his taxable income for this year. Assume all depreciating assets, if any, have an effective life of 6 years. He does not wish to use the SBE election.

Required - Advise Baldrick as to what his taxable income or loss is for the year ended 30 June 2019.

You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculations.

Question 2 - Edmund Pty Ltd (an Australian resident private company) is wholly owned by Melchett Pty Ltd, another Australian resident private company. All the shares in Melchett Pty Ltd are owned by George, an Australian resident.

During the year ended 30 June 2019 the following events occurred in relation to Melchett Pty Ltd:

1 July 2018 Opening balance of franking account $60,000

4 July 2018 Payment of dividend franked to 55% $480,000

3 August 2018 Payment of Payroll Tax $170,000

28 September 2018 Payment of income tax $27,000

31 January 2019 Refund of income tax $460,000

22 February 2019 Receipt of dividend from company outside the group, franked to 90% $280,000

2 March 2019 Payment of dividend franked to 30% $420,000

31 March 2019 Payment of income tax $44,000

2 May 2019 Refund of Land Tax $150,000

4 May 2019 Payment of Fringe Benefits Tax $3,000

30 June 2019 Payment of dividend franked to 65% $380,000

Required - Prepare the franking account for Melchett Pty Ltd for the year ended 30 June 2019 and indicate the consequences for Melchett Pty Ltd of the final balance of the franking account and of any beaches of the Benchmark Rule.

Question 3 - Mrs Betty Blue runs a restaurant business in Sydney as a sole trader. Her net profit from the business is around $200,000 per year. She has no other income. Her husband, Barry, is not working because he is a house husband who looks after the family. Betty and Barry have three children, Peter (aged 15 at school with no income), Paul (aged 17 working full-time on $30,000 per year) and Mary (aged 19 at business college with no income).

From your knowledge of the taxation of different entities discuss the advantages and disadvantages (purely from a tax perspective) of Betty switching from running her business as a sole trader to each of the following different structures:

(a) Partnership

(b) Company and

Reference no: EM132555774

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