Reference no: EM133185419
LAWS7031 Principles of Taxation - Western Sydney University
QUESTION 1 - Principles and Concepts
Home Improvements Pty Ltd ("HIPL") has been in the business of home renovation for over 30 years. Following the disruption to its business caused by the Covid-19 pandemic, HIPL sought out new sources of income. In early 2020 the articles of association of HIPL were amended to allow it to purchase land and improve any existing dwellings on the land and/or construct new dwellings on the land and either rent them out or sell them at a profit.
In May 2020, HIPL used funds from its own account and took out an additional loan to purchase land on which an old house stood. Rather than renovate the existing dwelling, HIPL decided to demolish the existing dwelling and construct two town houses on the land. Prior to completion in late 2020, the town houses were advertised for sale, but this did not eventuate in any sales. The two brothers, Tom and Tim, who owned all the shares in HIPL equally and were also its directors decided to rent out the two townhouses. However, they were unsuccessful in finding suitable tenants for the properties. In the end, Tom and Tim moved into each of the town houses with their respective families.
Wishing to return to their core business activity of home renovations and to capitalise on the phenomenal growth in the property market, Tom and Tim re-advertised the two town houses for sale in late 2021. Both townhouses were eventually sold in February 2022 for a large profit.
With reference to relevant legislation, case law and/or tax rulings, advise HIPL whether the large profits it made from the sale of town houses in 2022 during the current tax year ending 30 June 2022 could be taxed as ordinary income. (SLO1 and SLO2)
QUESTION 2 - FBT Calculation
Lucy is the Director of Clothes r Us Pty Ltd (CRU), a private company which is an importer and wholesale supplier of children's clothes to independent retailers in the Sydney region. Lucy owns most of the shares in CRU.
On 1 May 2021, CRU purchased a new car costing $90,000 (GST-inclusive)*. The car has a fuel consumption that does not exceed 7 litres per 100 kilometres.
The car was garaged at Lucy's house most nights.
The particulars for the year regarding the car and for which invoices are retained, including a log book, include:
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Stamp duty
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$320
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Registration & Insurance
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$900
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Petrol and oil
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$1,900
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Repairs & Maintenance $500
Total kilometres travelled (as per log book) 16,000 kms
Business kilometres travelled 8,000 kms
Lucy's contribution for petrol and oil $849
Lucy uses the car to travel from home to work in the mornings, and sometimes uses the car during the day to travel to meet with wholesale customers and market the new range of clothes being imported. Otherwise, the car is usually garaged at a parking station near CRU's offices. Lucy pays the parking fee of $20 a day and is reimbursed the cost by CRU. The parking fee is a deductible business expense.
On 1 July 2021, following resolution at the company's Annual General Meeting, CRU agreed to provide Lucy with a $20,000 loan at 2% pa to help pay the school fees for her eldest daughter. The articles of association of CRU prohibit the making of loans to directors.
Lucy also bought children's clothes from CRU for her two youngest children. She paid
$500 for the clothes which cost $200 to produce but are sold to wholesale customers for $900.
* CRU is entitled to claim an input tax credit in respect of the car purchase
Required: Advise CRU about the fringe benefits tax liability for the current FBT tax year ending 31 March 2022 arising from the above facts. (SLO1, SLO2 and SLO3)