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Candidate number taxinstitute.com.au ASSIGNMENT BOOKLET Study Period 2, 2014 CTA2 Advanced SP2 2014 © 2014 The Tax Institute. These materials are copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Disclaimer Unless otherwise stated, the opinions published in these materials do not express the official opinion of The Tax Institute. The Tax Institute accepts no responsibility for accuracy of information contained herein. Readers should rely on their own enquiries before making decisions that touch on their own interests. All activities should be conducted in adherence to the federal Privacy Act and the National Privacy Principles. CTA2 Advanced V2 2014 THE TAX INSTITUTE 1 Introduction This booklet details the assignment requirements for CTA2 Advanced (CTA2) and the relevant administration procedures. The CTA2 assignment commences on page 6. Assessment requirements for CTA2 Assessment for CTA2 comprises: Assessment task Weighting Examination 50% (required 50% pass) Assignment 40%* (required 70% pass) Participation and attendance 10% (required 100% pass) *Note: The assignment is marked out of 100 marks and carries 40% of the total final marks. Your mark out of 100 will be converted to a mark out of 40. You are required to pass all assessment components to pass CTA2. The CTA2 assignment offers you the opportunity to demonstrate and consolidate the knowledge you have already gained in the course and other prior studies, and to deepen your understanding of the topics and related issues. Since tax professionals are expected to demonstrate knowledge of current legislation and regulations, better responses show evidence of current research which is then incorporated in your answers. While the course itself applies a six month rule, the assignment is your chance to show that you regularly read tax updates and you are aware of Bills, amendments and the proclamation of Acts and their application to the assignment scenarios. Note that, while you are encouraged to discuss issues relating to the assignment questions with others, you are expected to produce your own answers. Collusion and plagiarism are not permitted in your assignment. If it is demonstrated that you have engaged in plagiarism or colluded with others in producing your answers to the assignment you will be subject to disciplinary action. (Refer to the Consolidated Policies for the Graduate Diploma of Applied Tax www.taxeducation.com.au/policies and forms It is assumed that you have the required knowledge, skills, values and attitudes of a practising tax professional, gained through either professional experience or through formal study of the course/s. The CTA2 assignment takes a case study approach. The questions are intended to raise issues and stimulate thoughtful responses. The assignment covers a selection of topics taught across the CTA2 Advanced course, and to achieve a pass grade a deeper level of research is required. For this reason the (Online) Tax Research: Tips and Tricks session is mandated and must be viewed prior to commencing your assignment (refer to assignment procedures and conditions below). You need to address all the required sections in your assignment. As a guide, your response should have a maximum word count of 3,000 words. (There is no minimum word limit indicated.) ASSIGNMENT BOOKLET 2 THE TAX INSTITUTE (Online) Tax Research: Tips and Tricks Session Please note candidates studying CTA2 are required to view this research session before commencing their assignment. A candidate declaration is required to be submitted with the assignment listing the date of viewing (refer to assignment cover sheet). The Institute reserves the right to refuse to mark assignments for candidates where the declaration is not submitted or is found to be false. To view this session candidates must refer to the instructions and link via the candidate portal under the “assessment” area. After viewing this session via the internet and attempting the activities you will be able to: ? locate specific tax information and research commentary and analysis to assist your clients (and to complete your assignments) ? effectively utilise the internet as a research tool and apply best practice techniques for searching tax related websites ? implement effective internet browsing through applying advanced search tips and traps ? identify the list of a tax professional’s key website addresses and gain insight into searching each of these to get the best search results. We also provide candidates with complimentary access to the ‘Effective Business Writing Skills’ podcast. Access to this resource is through the secure candidate portal under the ‘Assessment’ area. CTA2 Advanced – Assignment 2014 Due date: 2 December 2014 Due time: 5.00pm (your local time) Submission to: assignments@taxinstitute.com.au Word count maximum: 3,000 words (excluding figures and footnotes) Weighting of assignment: 40% CTA2 Advanced V2 2014 THE TAX INSTITUTE 3 Questions and marks structure Question 1 [20 marks] (A)(1) [6 marks] (2) [9 marks] (B) [5 marks] Question 2 [20 marks] (1) [6 marks] (2) [8 marks] (3) [2 marks] (4) [4 marks] Question 3 [20 marks] (A)(1) [4 marks] (2) [2 marks] (B)(1) [2 marks] (2) [12 marks] Question 4 [20 marks] (A)(1) [9 marks] (2) [4 marks] (B)(1) [5 marks] (2) [2 marks] Question 5 [20 marks] (A)(1) [8 marks] (2) [5 marks] (B) [7 marks] Total 100 marks ASSIGNMENT BOOKLET 4 THE TAX INSTITUTE Assignment procedures and conditions ? The assignment is to be submitted via the candidate portal on the LMS by 5.00pm (local time) on the due date. You should save your assignment as: ‘CTA2 Assignment – <<– candidate id number>>’ Once you have submitted your assignment you will be able to see your assignment submission via the LMS. ? (Online) Tax Research Tips and Tricks Session – Please note candidates studying CTA2 are required to view this research session before commencing their assignments. A candidate declaration is required to be submitted with the assignment noting the date of viewing (refer to assignment cover sheet). The Institute reserves the right to refuse to mark assignments for candidates where the declaration is not submitted or is found to be false. To view this session candidates must refer to the candidate portal for information. ? The assignment must be provided as a Word document and candidates must attach The Tax Institute cover sheet to their assignment. (A Word version of the cover sheet is provided with the assignment. This cover sheet needs to be inserted at the first page of your assignment document.) ? Candidates must not reference their name in the assignment (eg in footers). All assignments are issued to markers with candidate ID numbers only. If you are unsure of your candidate ID number please check with Institute staff. ? If an assignment exceeds the prescribed word limit, it will be left to the discretion of the marker as to whether a penalty will be imposed. This will be based on the extent of the breach of the word limit. Figures and footnotes are not included in the word limit. ? Please note: Neither the lecturers nor the Course Convenor can provide tax technical advice on completing the assignment. All other queries in relation to the assignment should be directed to the Course Convenor. Assignments are not returned to candidates. Candidates should keep a copy of their assignment on file for their record. Final marks for this assignment will be released approximately four weeks after the due date. ? Refer to ‘Consolidated Policies for the Graduate Diploma of Applied Tax’ on the website to find out about the consequences of failing the assignment www.taxeducation.com.au/policies and forms. As this is the last offering of CTA2 Advanced, last assignment transition arrangements will be advised. Note: All candidates should refer to the ‘Assignment Techniques’ and ‘Sample Assignment and answer guide’ resources provided under the ‘Assessment folder’ on the candidate portal. These resources will help develop effective writing techniques and assist with the approach to answering the assignment questions. CTA2 Advanced V2 2014 THE TAX INSTITUTE 5 Assignment Instructions for completing this assignment You are required to answer all five (5) questions. Please give reasons for all your advice and quantify your advice wherever possible. When answering questions, unless otherwise stated candidates are advised to apply the law applicable to the income year ending 30 June 2014. All amounts are in Australian Dollars unless otherwise indicated. ASSIGNMENT BOOKLET 6 THE TAX INSTITUTE Question 1 [20 marks] Zero Pty Ltd (Zero) has 20 shareholders each owning 100,000 ordinary shares. Adam has been a shareholder of Zero since its incorporation in 2010. Both Adam and Zero are residents of Australia. Zero’s balance sheet shows net assets of $5,150,000 represented by shareholders’ equity comprising a share capital account of $2,150,000 and retained earnings of $3,000,000. The share capital account was established when Zero was incorporated and comprises amounts received from shareholders for the issue of shares by Zero. Zero pays franked dividends on 1 December and 1 June each year. On 1 December 2013 Zero paid a dividend of $70,000 and allocated franking credits of $21,000 to the dividend. Zero currently has a franking account surplus of $80,000. Zero is considering distributing $250,000 to its shareholders on 1 June 2014 as follows: ? $100,000 from retained earnings (5c per share), which is consistent with the quantum of distributions paid by Zero for the last 5 years; and ? $150,000 from the share capital account (7.5c per share). This is the first time that Zero has considered such a distribution. The proposed distribution has resulted from Zero’s determination of excess capital for future business needs. Zero is proposing to allocate franking credits of either $21,000 or $42,857 to the distribution from retained earnings and to allocate no franking credits to the distribution from the share capital account. You should ignore the potential application of section 45B ITAA36. Required (1) Advise Zero and Adam how the proposed distributions will be treated for income tax purposes. You do not need to quantify your advice. [6 marks] (2) Advise Zero and Adam of the consequences of Zero’s proposals for: (a) allocating franking credits of: (i) $21,000 (ii) $42,857 to the distribution from retained earnings (b) allocating no franking credits to the distribution from the share capital account. Provide reasons for your advice and quantify, showing all workings, where possible. [9 marks] CTA2 Advanced V2 2014 THE TAX INSTITUTE 7 At the end of the current year of income further analysis determined that Zero’s share capital account comprised the following entries: Date Details Entry Balance 01.07.2006 Amount received from subscriptions for shares 2,000,000 Credit 2,000,000 Credit 10.07.2012 Transfer under debt/equity swap 100,000 Credit 2,100,000 Credit 10.07.2013 Transfer from asset revaluation reserve 50,000 Credit 2,150,000 Credit 01.06.2014 Return of capital 150,000 Debit 2,000,000 Credit Required Advise Zero and Adam of the income tax consequences of the entries made during the year ended 30 June 2014 in Zero’s share capital account. Quantify your advice showing all workings. [5 marks] ASSIGNMENT BOOKLET 8 THE TAX INSTITUTE Question 2 [20 marks] Maddie Pty Limited (Maddie) operates a small retail shop specialising in kitchen equipment and dining accessories. Maddie has a turnover of approximately $9,000 per week and employs 2 sales staff. Maddie currently leases shop premises in a complex of 20 similar sized shops from Loaded Pty Limited (Loaded) for $2,000 per week. Loaded acquired and developed the shopping complex in approximately 1995 and is now selling part of the complex. Loaded has offered Maddie the opportunity to buy the shop for $2,000,000. Maddie will need to borrow from the bank to fund the acquisition of the shop. In an endeavour to continuously offer new and innovative products, Maddie has: ? sourced 100 handmade coffee cups from Sandy. Sandy is a mechanic who has recently taken up pottery on his weekends. One of Maddie’s sales staff saw one of Sandy’s coffee cups and asked if he could make more for the shop. This will be Sandy’s first order and whilst he is happy being an occasional potter on the weekends he isn’t interested in giving up his job as a mechanic. Maddie will acquire the coffee cups from Sandy at $5.00 each and is intending to sell the coffee cups at $25.00 each; ? acquired 100 miniature hour glasses from a large Australian wholesaler for $3.00 each. Maddie is proposing to sell 50 of the hour glasses for $15.00 each and use the remaining 50 hour glasses for a promotion which rewards customers who spend more than $200.00 in a single purchase; and ? created a special catering pack, comprising a cheese board, cheese knife and a block of locally produced cheese. Maddie normally sells the cheese board for $55.00 and the cheese knife for $35.00. Maddie does not sell the blocks of cheese separately. The special catering pack sells for $70.00. Required (1) Explain whether Maddie, Loaded and Sandy are required to be registered for GST. [6 marks] (2) Advise Maddie how the lease of the shop and the acquisition of the shop including any borrowings would be treated for GST purposes. Include in your advice any options that may be available to Maddie and Loaded in respect of the acquisition of the shop. [8 marks] (3) Advise Maddie how the acquisition of the miniature hour glasses should be treated for GST purposes. [2 marks] (4) Explain to Maddie how GST on the supply of the special catering pack should be calculated. [4 marks] CTA2 Advanced V2 2014 THE TAX INSTITUTE 9 This page has been left intentionally blank. ASSIGNMENT BOOKLET 10 THE TAX INSTITUTE Question 3 [20 marks] Patrick is a high wealth individual who has a wide range of investments. Patrick wants to restructure his affairs to enable the transfer of his accumulated wealth to his three sons and to ensure that the accumulated wealth is protected from liabilities. Patrick states that he wants inventive solutions, is adamant that he does not want any unnecessary tax liabilities to result from the restructuring and wants to be absolutely sure of the tax treatment of any proposed transactions before implementation. Required (1) Outline your key duties in advising Patrick of the income tax consequences and considerations of any proposed transactions. [4 marks] (2) What action would you propose to address Patrick’s statement that he wants to be absolutely sure of the tax treatment of the proposed transactions before implementation. [2 marks] Simon is a management consultant. Having worked for large corporate entities for most of his professional life Simon recently resigned from his employment to set up a partnership with his wife Helen. Simon and Helen are equal partners in the partnership. The partnership provides consulting services specialising in mergers and acquisitions. Simon uses his extensive experience and expertise in providing the consulting services and Helen undertakes the administration such as issuing invoices and keeping the books and records. The partnership operates from a study in their family home. Simon has used his network of contacts to secure engagements and therefore the partnership has not needed to advertise its services in any way. The partnership’s standard engagement letter requires the partnership to provide assistance and advice as and when required which is determined by an individual designated by the client. The partnership is required to supply all telephone and computers used in providing the services. Fees are calculated on an agreed rate per hour basis and vary depending on the hours actually provided by Simon. CTA2 Advanced V2 2014 THE TAX INSTITUTE 11 For the year ended 30 June 2014, income and expenses of the partnership were as follows: Income Notes Fees Big Co Limited (Big Co) $168,000 1 Massive Co Limited $ 40,000 Little Pty Limited $5,000 Interest $1,000 Dividends $2,000 Expenses Travel $2,925 2 Telephone $960 Stationery $240 Net income $211,875 Notes 1. Big Co provided office space which Simon used for the term of the engagement. 2. Travel comprises car expenses for travelling from Simon’s home to Big Co’s offices. Required (1) Briefly explain whether Part IVA would apply to the formation of the partnership by Simon and Helen. [2 marks] (2) Provide Simon and Helen with a detailed explanation of the income tax treatment of the partnership’s income and expenses for the year ended 30 June 2014. [12 marks] ASSIGNMENT BOOKLET 12 THE TAX INSTITUTE Question 4 [20 marks] Smallfry Pty Limited (Smallfry), an Australian incorporated and resident company, disposed of its 20% shareholding in Solidplane PLC (Solidplane), a foreign incorporated and non resident company, during the current income year to an overseas buyer for USD690,000. The contract for sale was entered into on 10 January 2014 and settlement and payment took place on 2 February 2014. Smallfry originally acquired the shares in Solidplane in 2010 for AUD150,000. Solidplane’s business comprises the derivation of royalties from the licence of intellectual property that it develops at its main office. Solidplane also owns a small investment property in rural NSW. At the time of disposal the market value of Solidplane’s total assets was as follows: USD Land and buildings in foreign country (main office) 1,024,000 Land and buildings in Australia (investment property) 200,000 Plant and equipment at the main office 150,000 Intellectual property (used primarily to derive royalty income) 1,500,000 Cash at bank in foreign country 76,000 Goodwill 500,000 Total assets 3,450,000 There are no recognised company accounts available for Solidplane. Smallfry was advised that it is required to pay income tax in Solidplane’s country of residence in respect of the sale of shares in Solidplane. As required, the overseas buyer has withheld an amount from the sale proceeds and remitted that amount to the revenue authority in Solidplane’s country of residence. Exchange rates were as follows: AUD USD 10 January 2014 1.00 0.9295 2 February 2014 1.00 0.9300 CTA2 Advanced V2 2014 THE TAX INSTITUTE 13 Required (1) Determine how the sale of the shares in Solidplane will be treated for Australian income tax purposes. Show all workings and include in your determination any action that Smallfry should take to minimise tax payable (where permitted by law) in respect of the sale and the consequence of not taking that action. [9 marks] (2) Advise Smallfry how the amount withheld by the overseas buyer from the sale of shares in Solidplane will be treated for Australian income tax purposes. [4 marks] Tamalia is a US citizen and an executive of a US company specialising in architectural consultancy. Tamalia moved to Australia in August 2013 to set up a branch of the US company. The length of Tamalia’s stay was not certain and Tamalia leased an apartment close to Melbourne central business district for twelve months. Tamalia’s husband accompanied her but her teenage son remained in the US to attend college. Tamalia has a family home in the US which is left vacant during their time in Australia. As Tamalia is a keen cyclist and is interested in theatre she joined a local Melbourne cycling club and got involved in a local amateur dramatic society. Tamalia’s husband commented that their daily life in Australia was relatively similar to that in the US. Satisfied with the progress of the branch, Tamalia and her husband return to the US in June 2014. However, Tamalia continued to maintain an interest bearing Australian bank account to cover various personal Australian costs that were expected to arise after her return to the US. Ignore double tax agreements. Required (1) Advise Tamalia whether she is likely to be a resident of Australia for income tax purposes. Give detailed reasons for your advice. [5 marks] (2) Explain how interest derived from the Australian bank account should be treated for Australian tax purposes following Tamalia’s return to the US. [2 marks] ASSIGNMENT BOOKLET 14 THE TAX INSTITUTE Question 5 [20 marks] All amounts are GST inclusive. Four Pty Ltd (Four) operates a profitable engineering business and has approximately 15 employees. A new car was purchased by Four and provided to the managing director on 1 April 2014. Details relating to the car for the full FBT year are as follows: AUD Cost of car 100,000 Business accessories 500 Registration 590 CTP 532 Insurance 1,800 Stamp duty 3,834 Dealer delivery 4,000 Petrol 500 Service costs 600 The car travelled 3,000 km during the FBT year of which 50% was business related. Tris is 24 years old and has been employed by Four, based in their Sydney office, for 18 months. Tris still lives at home with her parents as she is saving to purchase her first apartment. Four has commenced a new project in Queensland and has asked Tris to work in Brisbane for the next eight (8) months. Four will provide Tris with an allowance of $20,000 to cover the cost of leasing an apartment in Brisbane during the assignment. Although it will mean eight months away from family and friends, Tris is keen to undertake the assignment as the work will be interesting and she is hoping it will lead to a bonus. To celebrate winning the tender on the new project all of Four’s employees were taken out to lunch at an up market restaurant. The lunch, including alcohol cost $5,000. No other fringe benefits were provided by Four during the FBT year. CTA2 Advanced V2 2014 THE TAX INSTITUTE 15 Required (1) Determine which method of calculating FBT payable on the managing director’s car Four should use for the current FBT year to ensure that it pays the lowest amount of FBT possible (where permitted by law). Explain your answer and show all workings. [8 marks] (2) Explain to Four and Tris how the allowance that it proposes to pay to Tris will be treated for tax purposes. [5 marks] Use the facts in Part A and assume that instead of paying Tris the allowance, Four reimbursed Tris $15,000 for rental costs she incurred in leasing an apartment in Brisbane. Required Calculate the total FBT payable by Four for the current year. [7 marks] END OF ASSIGNMENT ASSIGNMENT BOOKLET 16 THE TAX INSTITUTE This page has been left intentionally blank. CTA2 Advanced V2 2014 THE TAX INSTITUTE 17 Candidate number: ? ? ? ? ? ? Assignment word count: ? ? ? ? (Online) Tax Research: Tips and Tricks Session Viewing Declaration (insert date and time of viewing): _________________________________ Office check: ? ASSIGNMENT COVER SHEET Study Period 2, 2014 CTA2 Advanced SP2 2014

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