Reference no: EM133578734

Taxation Law

Assessment - Statement of Advice

Your Task
Your task is to analyse client information outlined in the three different case studies below and present the findings in three Statement of Advice (approximately 2,000 words).

You are required to prepare Smart Solutions Pty Ltd's taxation return.
1) You are required to provide advice and tax calculations to Julia and John (directors of Smart Solutions Pty Ltd) regarding the tax payable by the company.
2) You are required to calculate the capital gains tax for Julia and Smart Solutions Pty Ltd.
3) You are required to complete the franking account and tax implications on dividend received by Smart Solutions Pty Ltd shareholders.

For each question you are expected to:
1) identify the facts and issues for each case
2) apply the relevant legislation and/or case law.

Learning Objective 1: Research information about each question using tax cases and tax legislation.

Learning Objective 2: Determine the main issues and make recommendations for each case.

Learning Objective 3: Calculate taxes for an individual, a trust and a company.

Assessment Instructions

Statement of Advice 1 - Prepare a tax return for an entity (Australian private company)

In your current role, you are responsible for providing taxation services to individual/business clients. You conducted an initial meeting with two (2) clients (Julia and John Smart, both Australian residents) to obtain and document all the relevant information which is required to prepare the relevant tax documentation.

Both Julia and John are directors of Smart Solutions Pty Ltd, an Australian resident private company with a corporate tax rate for imputation purposes of 30% for the 2021/22 income year.

The clients have requested that you evaluate their tax position and provide recommendations relating to income tax liability and the optimum tax treatment.

Smart Solutions Pty Ltd sells coffee machines using accrual basis accounting for tax purposes. Receipts and payment details as at 30 June 2022 are as follows (ignore GST and small business concessions).

Receipts Cash received for Sales (note 1)	$278,000
Dividend received (note 2)	$8,720
Payments Purchases of inventory (note 3)	$97,000
Net wages paid to employees	$57,890
PAYG withholding paid to the ATO	$12,780
Superannuation paid (note 4)	$4,987
PAYG instalment paid the ATO (note 5)	$5,210
Fringe benefit tax paid to the ATO	$11,210
Income tax refund (note 6)	$30,000
Purchase of motor vehicle (note 7)	$52,000
Other deductible expenses	$26,900
Notes

Note 1) All sales during 2022 income year were on credit. Account receivable balances were as follows.

Date		1 July 2021	30 June 2022
Accounts receivable		$17,600	$19,800

Note 2) Dividend income received by Smart Solutions Pty Ltd for the year included:
• On 30/8/2021, a dividend of $3,600 received from Australian Bank Ltd (an Australian resident public company for tax purposes) franked to 60%.
• On 28/2/2022, an unfranked dividend of $5,120 from Lowest Ltd (an Australian resident public company for tax purposes).

Note 3) All inventory purchases during 2022 tax year were on credit. Account payable and inventory balances were as follows.

Date	1 July 2021	30 June 2022
Accounts payable	$5,280	$5,830

Inventory (trading stock) on 1 July 2021	$7,100
Inventory (trading stock) on 30 June 2022
-    at cost	$8,400
-    at market selling	$8,600
-    at replacement	$8,500

Note 4) As per the ledger balances on 30 June 2022, Superannuation payable for June quarter was amounted to $1,727. The payment is due by 28 July 2022.

Note 5) As per the ledger balances on 30 June 2022, PAYG instalment liabilities payment and payable information are as follows.

24/8/2021 PAYG instalment paid for June  quarter 2021                  $ 860

25/11/2021 PAYG instalment paid for September quarter 2021 $1,450

28/2/2022 PAYG instalment paid for December quarter 2021 $1,450

26/5/2022 PAYG instalment paid for March  quarter 2022                                                                     $1,450

June quarter 2022 was amounted to $1,450. The payment will be paid on 25 August 2022.

Note 6) The tax refund was paid on 25 February 2022.

Note 7) The motor vehicle (Toyota Hatchback) was used to deliver coffee machines. Both directors wish to use the taxation effective life to depreciate the machine.

Required

1) John wishes to minimise the income tax for 2021/22. Calculate Smart Solutions Pty Ltd's net tax liability in respect of the income that it derived in the tax year 2021/22.

2) Advise assessability of receipts and deductibility of payments with explanations (Sales, Dividend income, Trading Stock, PAYG withholding, PAYG instalment, Superannuation guarantee, fringe benefits, Dividend paid and motor vehicle purchase). Include section numbers and/or cases in your explanations.

Statement of Advice 2 - Advice on company franking account and distributions (10 marks for technical and calculation accuracy; refer to marking rubric for more guidance)

Julia and John seeking your advice regarding Smart Solutions Pty Ltd's franking account. (Please note: use all figures/information provided from Statement of Advice 1 above to construct the franking account for 2021/22. Opening balance is provided below).

Required
1) 1 July 2021, the balance in Smart Solutions Pty Ltd's franking account was $18,721. Construct Smart Solutions Pty Ltd's franking account for the 2021/22 financial year. You also need to calculate the franking account balance as at 30 June 2022.

2) Smart Solutions Pty Ltd wishes to pay a final fully franked dividend of $40,000 on 30 June 2022. However, Julia and John are concerned about the franking account to go into deficit. Calculate and advise the maximum frankable distribution amounts that Smart Solutions Pty Ltd can pay as fully franked dividend. What are the tax consequences if Smart Solutions Pty Ltd goes ahead and pays $40,000 fully franked dividend on 30 June 2022?

3) Assuming Smart Solutions Pty Ltd paid $40,000 fully franked dividend on 30 June 2022 (only dividend paid for the year), comment on the tax treatment of the dividend to the following four
(4) shareholders:

• Julia and John Smart receive a dividend of $15,000 each. They are Australian residents at the highest marginal tax rate.

• $5,000 to Justin Smart, the son of Julia and John, who has been studying in London for three years and is a foreign resident.

• $5,000 to Leaf Pty Ltd, an Australian private company with a 30% company income tax rate.

Advise how each of the above four shareholders of Smart Solutions Pty Ltd would be taxed on the distribution received in 2021/22.

Statement of Advice 3 - Advice on net capital gains

Since 1997 John and Julia have invested in various Australian shares. Julia acquired the shares in her own name whereas John had his company Smart Solutions Pty Ltd acquire his share portfolio. On 20 August 2022 both Julia and John made a decision to dispose of their Australian shares and the proceeds and purchase prices information are as follows.

Julia's share portfolio

Shares	Purchase date	Costs	Proceeds
Mega Mining Ltd	1 April 1997	$8,000	$12,400
Global Media Ltd	10 June 2000	$15,000	$90,000
Watson Tel Ltd	17 May 2013	$34,000	$33,500
Qantas Ltd	8 January 2022	$17,900	$21,000

Smart Solutions Pty Ltd share portfolio

Shares	Purchase date	Costs	Proceeds
Xero Ltd	28 March 2018	$45,000	$62,000
Qantas Ltd	26 June 2022	$21,600	$28,800

Other information
Julia has a capital loss of $600 carried forward from sale of painting during 2018.

Required

1) Advise both Julia and John on the CGT consequences of their share sales.

2) Calculate net capital gains for the 2021/22 tax year. You must provide all methods available for her and choose the best method to minimise net capital gains for Julia and John (Smart Solutions Pty Ltd).