Reference no: EM131628005 , Length: 2000 Words

Income Taxation Law & Practice

The Faculty of Business

Part A

James Cookie is a ship's officer employed by Sails International Inc, a company incorporated in Bermuda that owns cruise boats and operates passenger cruises in the Pacific Ocean.

James owns a house in Sydney which was formerly his family home but his estranged wife and children now live in Singapore. James rents the house to his cousin and family. The house is let fully furnished; the furniture belongs to James. Whenever he is in Sydney, James stays in the house and has his own room in which are stored his personal belongings. In the current income year James spent 80 days in the house. The remainder of the time was spent on a cruise ship except for 20 days spent visiting his children in Singapore.

The ship on which James serves visits a variety of ports, mainly in the South Pacific. James's employment contract was negotiated and signed in Hong Kong.

Required 1: For Taxation purposes, is James a resident of Australia? What is the source of his salary from Sails International? Required 2: If James sold his house, would he be entitled to the main residence exemption in Subdiv 118-B?

Part B

On 1 July 2012 Lee commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2012/13 he had a small client base of local builders and private referrals and billings (fees) of $75,000.

During the year Lee submitted a design as part of a national competition for the Citadel, the centrepiece of an urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises on Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2013/14 his billings were $1.75 million.

Required Should Lee return on a cash or accrual basis in 2012/13 and 2013/14?

You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following:

- What factors affect the choice of a cash or accrual basis?

- Does Lee have a choice of the basis he adopts?

- Does the Commissioner of Taxation have a right to insist on a particular basis?

- Should Lee's basis be the same in both years?