Taxation Law: Tax Planning Assignment Solution - University Name

This document provides a detailed solution to a tax planning assignment, addressing several key areas of taxation law. The solution begins with the computation of total taxable income for Nodoubt Pty Ltd, including assessable income and allowable deductions. It then analyzes prepaid expenditure, determining the eligibility for immediate deductions under the 12-month rule for Forsure Pty Ltd, and calculating the apportioned deductions for prepaid interest. The assignment further examines non-commercial business losses for David, applying division 35 rules and commerciality tests. It also covers trust losses, specifically the Valley View Trust, and determines the applicability of loss carry-forward rules. The solution delves into the tax implications of trading stock, depreciating assets, and goodwill for Ben and Sam, respectively. Finally, it explores capital gains tax (CGT) exemptions and rollovers for Nick, advising on the 50% active asset reduction and retirement exemptions.

Running head: TAXATION LAW
Tax Planning
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................2
Answer to question 3:.................................................................................................................4
Answer to question 4:.................................................................................................................6
Answer to question 5:.................................................................................................................7
Answer to question 6:.................................................................................................................9
Answer to question 7:.................................................................................................................9
References:...............................................................................................................................11

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Answer to question 1:
Computation of Total Taxable Income:
Computation of taxable income
In the books of Nodoubt Pty Ltd
For the Year Ended 30th June 2019
Particulars Amount ($) Amount ($)
Assessable Income
Sales Revenue 540000
Total Assessable Income 540000
Allowable Deductions
Cost of Goods Sold
Opening Stock 50000
Add: Purchase 65000
Less: Closing Stock 40000 75000
Decline in Value (Note 1) 42000
Other deductible expenses 180000
Total Allowable deductions 297000
Total Taxable Income 243000
Notes:
Note 1
Computation of Pool Decline in Value
For the year ended 30/06/2019
Second hand Machine 6750
(36,000 x 0.1875 x 100%)
Opening balance of Pool 35250
(94000 x 0.375)
Total Decline in Value Fully Deductible 42000
Answer to question 2:
According to the “section 82 KZM” and “section 82 KZMD of the ITAA 1936”
provides that there are special rules associated for the prepaid expenditure. The Australian
Taxation Office provides an explanation relating to the summary of rules stated under the 12-

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month period1. Prepaid expenses that are subjected to the tax shelter rules is considered for
apportionment over the period of ten years or the eligible service period whichever is less.
The prepaid expenditure that is incurred by the small business entity are considered for
immediate deduction under the 12-month rule if the;
a. Expenses has the eligible service period for the 12 month or less
b. The period comes to an end not less than the last day of the income year after the year
in which the expenditure was occurred.
Requirement 1:
The prepaid interest expenditure of $20,000 is not eligible for immediate deduction
for Forsure Pty Ltd because the eligible period of service is greater than 12 months and the
prepaid expenses does not meet the 12-month rule2. The business paid the expenses to cover
the period from 1st 2019 to 30th April 2020 (425 days). Instead the deduction for the expenses
should be apportioned over the eligible service period which are as follows;
2018-19 (1st May 2019 to 30 June 2019)
= $20,000 x 60 / 425 = $2,824
2019-20 (1st July 2019 to 30th June 2020)
= $20,000 x 304 / 425 = $14,306
Therefore, the total deduction that is allowed proportionately over the 2018-19 and
2019-2020 will be $17,129.
1 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
2 Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).

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Requirement 2:
The prepaid employee bonus of 50,000 is eligible for immediate deduction. This is
because the expenses meet the eligible service period rule and does not exceed the 12-month
rule3. It ends before the final day of the income year after the year in which the expenditure is
incurred and the prepaid expenses meets the 12-month rule.
Requirement 3:
The prepaid advertisement expense of $800 will be considered for immediate
deduction for Forsure Pty Ltd because the expenses meet the eligible service period rule and
does not exceed the 12-month rule.
Answer to question 3:
There are special rules that are applicable on the individuals that incurs loss from the
non-commercial business activities. According to “division 35” if an individual is either
carrying on the non-commercial business and where the individual’s deduction for the
income year exceeds the income from that activity then as a general rule the excess amount is
not allowed for deduction from the assessable income of the taxpayer unless any one of the
commerciality test is met or there is any application of exception rules4.
“Section 35-10” states that it is applicable on the taxpayers to allow for the losses to
be carried forward for indefinite period and offset against the taxable income from the similar
3 Sadiq, Kerrie. Australian Taxation Law Cases 2019. Thomson Reuters, 2019.
4 Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian
taxation law 2018. Oxford University Press, 2018.

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activity for the next income year in which the activities were occurred and 1 one of the four
commerciality test is met5. The four commerciality test are as follows;
a. Assessable income test: Under “section 35-30” Assessable income from the activity
for the income should be at least $20,000.
b. Profit Test: Under “section 35-35” The activity should have the profit for at least 3
years out of the last five years together with the current year.
c. Real Property Test: Under “section 35-40” the total value of the real property or the
interest in the real property that is used on a constant basis should have the value of at
least $500,000.
d. Other asset test: Under the “section 35-45” the total value of the other assets that is
used for a continuous basis in the activity should be at least $100,000.
In the current case of David, it can be stated that the non-commercial loss rules would
be applicable because David does not meet any of the four commercial test. The taxable
income test is not satisfied by David because the income that is made from the business is
only $15,000 which is less than $20,000. Furthermore, the profit test is not relevant in case of
David because it is only the first year of business. David does not meet the real property test
as well because the value of the shed in which he operates his business is $30,000 which is
less than the $500,000 criteria. Finally, the other test is also not satisfied by David because
the value of business tool is only $10,000 which is less than $100,000. The taxable income of
David is calculated below;
Computation of Total Assessable Income
In the books of David
5 Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J.
Australasian Tax Tchrs. Ass'n 13 (2018): 307.

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For the year ended 2019
Particulars Amount ($)
Assessable Income
Gross Wages 80000
Total Assessable Income 80000
Allowable Deduction
Loss from business 10000
Total Taxable Income 70000
Answer to question 4:
As held in the case of “Doherty v FCT (1933)” losses that are incurred by a trust
remains in the trust and cannot be considered for distribution to the beneficiaries. A
beneficially is not allowed to offset any part of the trust loss against the taxable income to
lower their tax liability in relation to the other sources of income. The trust loss might be as
an alternative be carried forward within the trust and can be offset against the taxable income
while calculating the tax net income of the trust in the future years. This is done in
accordance with the losses that are carried forward under the “provision 36-15 of the ITAA
1997”. “Schedule 2F of the ITAA 1936” restricts the situations where the previous year and
current year losses of the trust can be claimed as the specific deduction while calculating the
net of the trust6. There are three broad categories of trust that are identified for the purpose of
trust loss which are as follows;
a. Fixed Trust
b. Non-fixed trust
c. Excepted trust
6 Cavenagh, Jennifer, et al. "Australian legislation concerning matters of international law
2016." Australian Year Book of International Law 35 (2018): 353.

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Excepted trusts generally comprises of the family trust and this trust is not subjected
to trust loss rules under “schedule 2F”, “section 272-100 of the ITAA 1997”.
The Valley View Trust is the discretionary trust and not the family trust and to apply
for the losses it is required to satisfy any of the four test. By looking first at the patter of
distribution trust Valley View Trust, the lowest distribution over three years has been 50%
with Jack 30% and Jill 30%. As a result, it is more than 50% and the pattern of distribution
test is met. With no individual is holding more than 50% either jointly or individually fixed
stake the 50% stake is not applicable in the case of Valley View Trust.
Furthermore, there has been no kind of change in the trustee nor has been any kind of
change in the control. Therefore, the control test is met. With no such income is injected into
the trust by any external person the income injection test appears to be irrelevant for Valley
View Trust. Valley View Trust does not fail any of the four test that are applicable for the
non-fixed trust. Therefore, the trust can claim the previous year losses of $20,000 and
$30,000 to lower the net income of the trust for the income year 2019 from $220,000 to
$170,000.
Answer to question 5:
If the vendor entity sells the item of trading stock out of the ordinary business course,
the purchaser entity purchasing the item is regarded as the having purchased the item for the
amount included into the selling entity’s taxable income under the “section 70-90” based on
the market value. Even though trading stock is treated as the CGT asset since it is a form of
property, any capital gains or capital loss that is made from the sale of trading stock will be
disregarded under “section 118-25”7.
7 Robin, H. Australian Taxation Law 2019. Oxford University Press, 2019.

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As evident in the current situation of Ben who purchased the book retailing business
from Andrew the purchase of trading stock represents an interest of having the high market
value. Ben in this circumstances can maximise the deductible opening value of the trading
stock and minimise his taxable income on the succeeding sale.
Under “section 40-35” every item of the property plant and equipment would be
treated as the depreciating asset since it constitutes an asset that has the limited effective life
and it is reasonably anticipated to fall in value over the period of time. The purchase under
the “section 40-25 (1), ITAA 1997” can claim a specific deduction for the amount that is
equivalent to the decline in value of the depreciating asset which is held during the year for
assessable purpose. Similarly, in the current situation Sam can obtain a specific deduction
under “section 40-25 (1), ITAA 1997” for the decline in value of the property plant and
equipment.
Sam also bought a goodwill that valued $10,000. Under “section 8-1 (2)(a) of the
ITAA 1997” cost involved in purchasing the goodwill is regarded as the non-deductible
capital expenses. Therefore, Sam will not be allowed to claim deduction under “section 40-
880” because it is an outgoing of capital in nature and non-deductible expense.
Answer to question 6:
As stated by the ATO the taxpayers are allowed to claim CGT exemption and rollover
reliefs that helps them in disregarding or deferring the capital gains from the active asset that
is used in the business8. The concession includes the following
a. 15-year exemption of active asset held for 15 years
8 Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). Australian Taxation Law
Select 2019: Legislation And Commentary. Oxford University Press, 2019.

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b. 50% active asset reduction from the capital gains on the asset owned for 12 months or
more.
c. Retirement exemption for the sale of asset till a lifetime limit of $500,000.
d. Rollover of active asset
As evident in case of Nick he sold the business for $4,200,000 and with respect to the
ATO provision Nick is advised to obtain a 50% active asset reduction for the building
because the building has been held for more than 12 months. Additionally, the capital gains
from the sale of business equipment and plant can be exempted till the limit of $500,000
because Nick is currently under 55 years. Therefore, Nick satisfies the basic eligibility
conditions as the net assets is not more than $6 million and it is solely used for producing
business income.
Answer to question 7:
As per the “section 9-5, ITAA 1997” the sale of business is regarded as the taxable
supply if the vendor is registered or required to be registered. However, the supply of the
going concern will be treated as GST-free if the vendor and the purchaser agree in writing
regarding the supply of going concern and the vendor supplies the purchaser with all the
things. Similarly, in case of Sally she sells the motel business to Helen based on the agreed
written contract. With respect to the above context Sally will not be liable for GST as the sale
of business constitute a supply of going concern under the written agreement and hence no
GST will be payable by Sally.

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References:
Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).
Cavenagh, Jennifer, et al. "Australian legislation concerning matters of international law
2016." Australian Year Book of International Law 35 (2018): 353.
Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J.
Australasian Tax Tchrs. Ass'n 13 (2018): 307.
Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to Australian
taxation law 2018. Oxford University Press, 2018.
Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). Australian Taxation Law
Select 2019: Legislation And Commentary. Oxford University Press, 2019.
Robin, H. Australian Taxation Law 2019. Oxford University Press, 2019.
Sadiq, Kerrie. Australian Taxation Law Cases 2019. Thomson Reuters, 2019.
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).