Comprehensive Tax Analysis Report: Ruby Delights Pty Ltd - ACCT 3001

This report provides a detailed tax analysis and advice for Ruby Delights Pty Ltd, covering various aspects of Australian taxation. It includes calculations for net tax payable, preparation of the franking account, and the calculation of net tax payable on dividend income. The report advises on corporate...Read More

ACCT 3001 Advanced
Taxation

TABLE OF CONTENT
Letter of Advice...........................................................................................................................3
REFERENCES................................................................................................................................8
APPENDIX......................................................................................................................................9
Calculation of net tax payable of Ruby delights Pty Ltd.............................................................9
Preparation of franking account for Ruby Delights Pty Ltd for 2020/2021 year........................9
Calculation net tax payable on dividend income from Ruby delights Pty Ltd..........................10

Letter of Advice
Accountant
Ruby Delights Pty Ltd
98 Shirley
PIMPAMA QLD 4209
Australia
12th May 2022
To
Mr Colin Rudman and Mrs Elana Rudman
Ruby Delights Pty Ltd
98 Shirley
PIMPAMA QLD 4209
Australia
Dear Mr Colin and Mrs Elana
It is to inform you that I have received your email and I have completed Ruby Pty Ltd. tax
analysis and calculations. On the basis of calculation and analysis of taxation position of Ruby
Pty Ltd, the following points are advised to you:
1. After computing the net tax payable of Ruby Pty Ltd, it has been identified that in the year
2021, the company need to pay net tax of $524040 (see appendix for detail calculation). It
means when the 2020/2021 tax return is lodged, the company need to pay the tax amount of
$339040 to Australian Tax Office (ATO). In Australia corporate tax is second largest tax
revenue for government after personal taxes. All the companies are subject to corporate tax rate
of 30% except small and medium business. Basically, there was no corporate tax issue for the
company because they are paying the corporate tax with basic tax rate i.e., 26% (INCOME TAX
ASSESSMENT ACT 1997 - SECT 165.210). Also, the prior year loss of the business is set off
against the current year corporate taxable income of the company. However, one of the
corporate tax issue with the company is that they have no interest expenses because of no loan
and debt (Taxation ruling 98/1 Income Tax assessment Act, 1997). The interest expenses on

business loan and debt is tax-deductible in Australia that reduces the taxable income of the
company. Hence, it is advised to Ruby Pty Ltd that they should borrow money from the market
in order to expand business and also proper tax planning. It is because the interest income on
debts will reduce the taxable income of corporate.
2. Basically, there are no income or capital tax consequences for the company whose
shareholders sell its shares again to company. However, a buyback of shares might result into
the franking credit debit arising. It is generally to the extent the company franks its dividend
component. In Australia family trust pays zero tax on income that they generated within the
trust because they distributed all dividend income among beneficiary. In this sense, it can be
said that the sale of Masters Family Trust to Rudman Family trust will not affect the tax of
Ruby Delight Pty ltd. On the other hand, the tax consequence of this sale of shares in Ruby
Delight Sty Ltd over shareholders of the company is such that their shareholdings will increased
by 50%. It means previously, Rudman Family trust has shareholding of only 50% but now they
became the sole shareholder of company (C of T (SA) v Executor Trustee (Carden's Case)
(1938) 63 CLR 108). The impact of this action over Master Family trust is that they have earned
capital gain which leads to higher capital gain taxes. On the other hand, the impact of this action
over Rudman Family trust is that their dividend income will increase.
3. After preparing franking credit account for Ruby Delight Pty Ltd, it is identified and analysed
that the closing balance of company franking credit account is $317789.20 after PAYG
payment. A corporate tax entity in Australia is allowable to allocate the franking credits among
the shareholders of company via attaching credits to the distribution the company will make.
The company basically allocate maximum franking credits on the basis of applicable corporate
tax rates. For example, in the case of Ruby Delight Pty Ltd, they are passed the basic corporate
tax rate test which indicate that the company need to pay corporate tax at the rate of 26% only.
Hence, the company has allocated the franking credit at the rate 26% among the shareholders. A
franking credit is also known as imputation credit paid by the companies to their shareholders
along with the dividend payments in order to eliminate the issue of double taxation for investors
(ATO Tax Ruling 1999/9). Hence, in the given case it is advisable to Ruby Delight company
that they also need to provide or allocate the franking credit amount to each investor along with
the dividend payment of $600000.
4. On the basis of calculation of each beneficiary net payable amount, it has been identified that

Rudman Family trust need not pay any tax on their income because this is a trust. As per ATO
rule, the trust need not pay tax on their income. However, on the other hand, they allocate the
net income of trust i.e., dividend in the present case among the beneficiary based on their
sharing rate. Further. Colin, Elena, Nicole and Adam Rudman net tax payable (see appendix)
are $10228.4, $13307.9, -14835.89 and 7702.36 respectively. Colin is receives salary plus
dividend income on which they need to pay tax as per individual income tax bracket. Further,
Elena is also employee of Ruby Delight Pty Ltd from where she earns salary plus divided
income from Rudman Family trust on which they need to pay income tax. Nicola's income
includes only dividend income on which they need to pay income tax. Basically, they receive
franking credit as well along with the dividend amount from the company which they can
further claim against its income tax liabilities. However, Adam age is below 18 years hence
their dividend income is charged at special rate as per Australian Tax rule. The last beneficiary
of Rudman Family trust is Rudman Investment Pty Ltd whose only income of the year is
dividend income received from company on which they paid the tax at the rate 30% (see
appendix for calculation). The net tax payable of Rudman Investment Pty Ltd for the year 2021
is $12973.2 after the franking credit tax offset. The beneficiary of company can claim for
franking credit as tax offset in the year they receive dividend income from the company as per
ATO rule (Section 98 ITAA 1936. Trust Taxation).
5. The individual equal or above 18 years and that have not made request under First Home
Super Saver Scheme are entitled to purchase its first home. In the present case, Nicola is going
to purchase its first home using its cash reserve which she will not pay back. In Australia, the
first home buyer get various of benefits under different schemes (First home super saver
scheme, 2021). For example, in order to purchase its first home in Australia, Nicola can claim a
grant of $10000 under the First Home Owner Grant. However, it does not put huge impact over
the tax paid by Nicola because it mainly reduces the GST of the individual who buys houses for
the first time. Hence, it can be said that using this grant will not have impact on Nicola income
tax but on their GST. Further, it is advisable to Nicola to purchase this house using the First
Home Saver Account Scheme. It is because this scheme is a tax effective way to save the
deposit for their first home along with the combination of government contribution as well as a
low tax rates. The investment earning that accrue under this account will be taxed at 15% in
Australia but on the other hand, the withdrawal of super fund contribution is tax-free which

means Nicola need not pay tax on withdrawal of $400000.
The tax implication of purchasing first home with the use of cash reserve over Nicola is such
that their tax expenses will decrease by due to deduction of $240000 in the tax year. It is
because in Australia, for the first home buyer, the deduction is allowable against depreciation
which is equivalent to 60% of the total price of property. However, using the cash reserve for
the purpose of first home purchase is also good but with the use of FHSS scheme, Nicola able
to reduce its tax more than because in cash reserve she has to pay tax as per normal tax bracket.
In addition, the tax implication of using the cash reserve of Rudman Investment Pty Ltd will
leads to reduction in the cash reserve amount which the company will not receive back and also
do not get any interest income (Income Tax Assessment Act 1997). The tax implication of such
action is that the investment company tax expenses will reduce. But it is also important to
known that this action of both Nicola and Rudman Investment Pty Ltd is illegal and is a part of
tax evasion. For this, both may be penalized by the ATO when it comes under the eye of
Australia Tax officer. Hence, on this ground, it is advisable to both Nicola and Rudman
Investment Ltd that Rudman can provide amount of $400000 to Nicola for the purpose of
purchasing first home but as a loan which Nicola need to refund it to company with interest rate
as per market rate. Also, it is advisable to Nicola to either use First Home Super Saver Scheme
for the purchase of its first home rather than using cash reserve. This scheme is also one of the
best and tax effective way where their tax expenses will also reduce.
Your Sincerely.
Accountant
Ruby Delights Pty Ltd

REFERENCES
Online
Income Tax Assessment Act 1997. [Online]. Available through:<
https://www.legislation.gov.au/Details/C2017C00336>
First home super saver scheme, 2021. [Online]. Available through:<
https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/First-Home-
Super-Saver-Scheme/>
Taxation ruling 98/1 Income Tax assessment Act, 1997. [Online] Available
throughhttps://www.ato.gov.au/law/view/view.htm?docid=%22txr/tr20213/nat/ato/00001%22
C of T (SA) v Executor Trustee (Carden's Case) (1938) 63 CLR 108. [Online]. Available
throughhttps://www.ato.gov.au/law/view/document?DocID=JUD
%2F63CLR108%2F00004
INCOME TAX ASSESSMENT ACT 1997 - SECT 165.210. [Online]. Available through:<
https://www.legislation.gov.au/Details/C2017C00336>
ATO Tax Ruling 1999/9. [Online]. Available through:<
https://www.ato.gov.au/law/view/view.htm?docid=%22txr/tr20213/nat/ato/00001%22>
Section 98 ITAA 1936. Trust Taxation [Online] Available through:<
https://www.ato.gov.au/general/trusts/>

APPENDIX
Calculation of net tax payable of Ruby delights Pty Ltd
Particulars Details Amount ($)
Assessable Income
Sales Revenue 15000000
Add: Job keeper Payment 350000
Total assessable income 15350000
Allowable Expenses or
Deductions
Cost of goods sold (15000000 * 60%) 9000000
Salary paid to Elena 80000
Other overhead cost 2500000
Wages to other staffs 2240000
Salary paid to Colin (Directors
fees)
50000
Superannuation contribution (2240000 + 80000 + 50000) *
9.5% - 26000
199150
PAYG Instalment 350000
Total allowable expenses 14419150
Corporate Taxable Income 930850
Less prior year losses 150000
Net taxable income 780850

Corporate tax payable @ 26% 780850 * 26% 203021
Net Tax Payable 203021
Preparation of franking account for Ruby Delights Pty Ltd for 2020/2021 year
Franking Account
Date Transaction details Debit ($) Credit ($)
01/07/20 Opening Balance 200000
01/12/20 Fully franked dividend
paid ($600000 / (1-
0.26) - $600000
210810.8
01/12/20 PAYG Instalment paid
($335000 - $24500)
328600
Balance 317789.2
Calculation net tax payable on dividend income from Ruby delights Pty Ltd
Rudman Family Trust
Particulars Details Amount ($)
Dividend Income 600000
Franking credit 210811
Total income 810811
Distributed among beneficiary
Colin 600000 * 15% 90000
Elena 600000 * 15% 90000
Nicole 600000 * 25% 150000

Adam 600000 * 5% 30000
Rudman Investments Pty Ltd 600000 * 40% 240000
Note* The family trust of Australia do not pay any tax on income within the trust such as
dividend income. They basically distribute all its dividend income among the beneficiary who
are taxed at their personal tax rates.
Colin, Elena, Nicole and Adam Rudman net tax payable
Particulars Colin Elena Nicole Adam
(Minor)
Dividend
Income
(including
franking credit
@ 26%)
90000 / 74 *
100
= 121622
90000 / 74 * 100
= 121622
150000 /74 * 100
= 202703
30000 / 74 * 100
= 40541
Salary 50000 80000 - -
Total
assessable
income
171622 201622 202703 40541
Less prior year
loss
0 0 60000 0
Net Taxable
income
171622 201622 142703 40541*
Tax on taxable
income
0 - $18200 0.00% 0.00% 0.00%

$18201 -
$45000
19.00% = $5092 19.00% =
$5092
19.00% =
$5092
$45001 -
$120000
32.50% =
$24375
32.50% = $24375 32.50% = $24375
$120001 -
$180000
37.00% =
$19100.14
37.00% = $22200 37.00% =
$8400.11
$180000 and
above
45% = $9729.9
Total tax
payable
48567.14 $61396.9 $37867.11
Less Franking
credit tax
offset
31622 $31622 52703
Less PAYG
withheld
6717 $16467 -
Tax Payable
(Refundable)
10228.14 $13307.9 -14835.89
Note* In case when beneficiary is minor i.e., below the age of 18 years, in that case the trustee
pays the tax at higher tax rates
Tax Bracket Tax rate calculations
$0 - $416 0 0
$417 - $1307 66.00% 588.06
$1308 and above 45.00% 17655.3
Total tax payment 18243.36

Less Franking credit offset 10541
Net Tax payable 7702.36
Calculation of net tax payable of Rudman Investment Pty Ltd
Particulars Details Amount
Dividend Income 240000 / 74 * 100 324324
Less Deductions 0
Taxable Income 324324
Corporate tax rate 30.00%
Total corporation tax 97297.2
Less Franking credit offset 84324
Net Tax payable 12973.2
Note* Rudman Investment Pty ltd is a beneficiary of Rudman family trust that pays dividend to
its beneficiary. There is no other source of income for company except dividend income.