Tax Law Exam Practice Questions and Solutions - Taxation Law Exam

This document presents a set of practice questions and detailed solutions designed to aid in the preparation for a Taxation Law exam. The content covers the calculation of tax liabilities for individuals, including the computation of taxable income, income tax payable, and Medicare levy. The first question focuses on Jo's tax liability for the year ended 30 June 2019, involving various income sources and deductions. The second question addresses Dave's tax liability, incorporating capital gains from the sale of assets and capital loss. The solutions include working notes that explain the tax slab rates and marginal tax rates. The third question delves into the computation of net income for the Nadine Family Trust and discusses the distribution of distributable net income to beneficiaries to minimize tax liability. The assignment concludes with a reference list.

Taxation Law exam ( Practice
question)

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
QUESTION 2.............................................................................................................................4
QUESTION 3.............................................................................................................................5
REFERENCES...........................................................................................................................8

QUESTION 1
Jo's tax liability for the year ended 30 June 2019
Receipts $
Professional fees
35000
0
Sales of do it yourself wills 35000
Income from part time military services (exempted income) 0
Dividend received from an Australian resident company fully franked 7000
Net salary received from part time job 24000
Interest on bank deposits 5000
Rental income from an investment property 10000
Gambling wins
10000
0
Total
53100
0
Payments
Office rent 18000
Cost of do it yourself 15000
Salary paid to employee secretary 50000
Purchase of new calculator 290
Cost of meals and entertainment for clients 1400
Train fares for travel to and from work 1200
Rates on family home 2200
Tax agent's fees for preparing returns 1000
Rate paid on above mentioned investment property 2000
Interest paid on loan 15000
Cost of painting the investment property after purchase 5000
Cost of extending the bathroom in investment property 15000
Total
12609
0
Gross income
40491
0
Less: Carried forward losses 10000
Net taxable income
39491
0
Tax liability
Income tax payable
15080
6
Medicare levy payable @2% 7898
Income after tax & Medicare levy
23620
6
Marginal tax rate 45%
Working note:
This means for an annual income of $394,910 Jo pay: $

No tax on income between $1 - $18,200 0
19c for every dollar between $18,201 - $37,000 3572
32.5c for every dollar between $37,001 - $90,000 17225
37c for every dollar between $90,001 - $180,000 33300
45c for every dollar over $180,000 96709
Income tax payable 150806
Tax slab rate for computing income tax is:
T a x a b l e i n c o m e M a r g i n a l t a x r a t e
$0 - $18,200 0%
$18,201 - $37,000 19%
$37,001 - $90,000 32.5%
$90,001 - $180,000 37%
$180,001+ 45%
(Stewart, 2018)
QUESTION 2
Dave's tax liability for the year ended 30 June 2019
Particulars $
Salary income 90001
Winning raffle ticket 35500
Capital gain on sale of two-storey
residence 332500
Capital gain on sale of residential land 200000
Capital gain on sale of painting 14775
Capital gain on sale of shares 22500
Total income 695276
Less: capital gain loss form previous year 25000
Capital loss in current year 70000
Total taxable income 600276
No tax on income between $1 - $18,200 0
19c for every dollar between $18,201 -
$37,000 3572
32.5c for every dollar between $37,001 -
$90,000 17225
37c for every dollar between $90,001 -
$180,000 33300
45c for every dollar over $180,000 189124
Income tax payable 243221
Medicare levy payable @2% 12005.52
Add: Capital gain tax (Note) 253416.75
Total tax liability 526468.72

Note
The 12-month ownership rule:
Purchase price 170000
Selling price 850000
Capital gain 665000
Taxable capital gain
(665000*50%) 332500
Capital gain tax payable @45% 149625
Selling price 500000
Purchase price 100000
Capital gain 400000
Taxable capital gain 200000
Capital gain tax payable @45% 90000
Sold price 30000
Purchase price 450
Capital gain 29550
Taxable capital gain 14775
Capital gain tax payable @37% 5466.75
Sales value 40000
Purchase price 110000
Capital loss 70000
Sales value of shares 90000
Purchase price 45000
Capital gain amount 45000
Taxable capital gain amount 22500
Capital gain tax amount @37% 8325
Note: 50% of the capital gain is provided as discount and the tax is calculated on the
remaining 50%. Under section 102-20 of the Act, CGT is appliable to gains or losses when
such event happens.
The capital gain tax refers to the amount which the individual or the business firm is
required to pay in respect to the amount earned as the capital gain from eth selling of the
assets. It can be applicable to the shares, contractual rights and other collectibles above a
certain value (Capital gains tax. 2021). In accordance with the Australian taxation system,
CGT is operated by treating capital gain as taxable in the year in which the asset is sold or

disposed of. In case if the asset is held for more than 12 months, then the gain is discounted
by 50% or 33.3% for superannuation funds. In addition to this, capital loss is offset against
the capital gain and it can also be carried forward for indefinitely.
QUESTION 3
a.
Computation of net income of Nadine Family
Trust
Salary of Nadine 180000
Receipts
Rent from the investment properties 60000
Interest from a bank account 6000
Unfranked dividend 3000
Total 249000
Payments
Accounting expenses for tax return 4000
Repairs to investment properties 5000
Interest on loan 14000
Legal expenses 1000
Total 24000
Net income 225000

b.
The distributable net income involves the income allocation to the beneficiaries of
the trust. It results into providing reliable income source while minimizing the amount of
income taxes which is being paid by the trust. It is determined using the trust’s income
reduced by the capital gain or loss and then adding up the exemptions. The amount which is
distributed to the beneficiaries is considered to be from the current year’s income first and
then from the accumulated principle amount.
The best way of distributing the trust law income to the beneficiaries is through the
way of percentage or the fixed proportion or by referring to a specific amount. The
distributable income must be first distributed among the Brad and Nadine equally or in a
specific proportion and then it should be distributed among their children in an equal
proportion.
Nadine can distribute the net income in the following ways in order to minimize the tax
liability
John: $18200 -$6000 = $12200
Kim: $18200 - $2000 = $16200
Amy: $416 for avoiding child tax @68%
Brad: $0 ($45000-$12200-$16200-$416 -$16184)

REFERENCES
Books and Journals
Stewart, M., 2018. Personal Income Tax Cuts and the New Child Care Subsidy: Do They
Address High Effective Marginal Tax Rates on Women's Work?. Tax and Transfer
Policy Institute, Australian National University.
Online
Capital gains tax. 2021. [Online]. Available Through:<
https://www.ato.gov.au/general/capital-gains-tax/ >.