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Accounting Case Study

Fred, an executive of a British corporation special
ising in
management consultancy, comes to Australia to set u
p a branch of
his company. Although the length of his stay is not
certain, he
leases a residence in Melbourne for 12 months. His
wife
accompanies him on the trip but his teenage sons, h
aving just
commenced college, stay in London. Fred rents out t
he family home.
Apart from the absence of his children, Fred’s dail
y behaviour is
relatively similar to his behaviour before entering
Australia. As well
as the rent on the UK property, Fred earns interest
from
investments he has in France. Because of ill health
Fred returns to
the UK 11 months after arriving in Australia.
Requirement
Discuss whether Fred is a resident of Australia for
taxation
purposes.
Question 2 (5 marks)
Explain why the receipts in Egerton-Warburton & Ors
v DFC of T
(1934) 51 CLR 568 were assessable, but the receipts
in IRC v
Ramsay (1935) 1 All ER 847 were treated as capital
amounts.
Question 3 (10 Marks)
Your client is an investor and antique collector. Y
ou have
ascertained that she is not carrying on a business.
Your client
provides the following information of sales of vari
ous assets during
the current tax year. Based on this information, de
termine your
client’s net capital gain or net capital loss for t
he year ended 30
June of the current tax year.
(a)
Block of vacant land.
On 3 June of the current tax year
your client signed a contract to sell a block of va
cant land for
$320,000. She acquired this land in January 2001 fo
r
$100,000 and incurred $20,000 in local council, wat
er and
sewerage rates and land taxes during her period of
ownership
of the land. The contract of sale stipulates that a
deposit of
$20,000 is payable to her when the contract of sale
is signed
and the balance is payable on 3 January of the next
tax year,
when the change of ownership will be registered.
(b)
Antique bed.
On 12 November of the current tax year your
client had an antique four-poster Louis XIV bed sto
len from
her house. She recently had the bed valued for insu
rance
purposes and the market value at 31 October of the
current
tax year was $25,000. She purchased the bed for $3,
500 on
21 July 1986. Although the furniture was in very go
od
condition, the bed needed alterations to allow for
the
installation of an innerspring mattress. These alte
rations
significantly increased the value of the bed, and c
ost $1,500.
She paid for the alterations on 29 October 1986. On
13
November of the current tax year she lodged a claim
with her
insurance company seeking to recover her loss. On 1
6
January of the current tax year her insurance compa
ny
advised her that the antique bed had not been a spe
cified
item on her insurance policy. Therefore, the maximu
m
amount she would be paid under her household conten
ts
policy was $11,000. This amount was paid to her on
21
January of the current tax year.
(c)
Painting.
Your client acquired a painting by a well-known
Australian artist on 2 May 1985 for $2,000. The pai
nting had
significantly risen in value due to the death of th
e artist. She
sold the painting for $125,000 at an art auction on
3 April of
the current tax year.
(d)
Shares.
Your client has a substantial share portfolio whic
h
she has acquired over many years. She sold the foll
owing
shares in the relevant year of income:
(i) 1,000 Common Bank Ltd shares acquired in 2001 f
or $15
per share and sold on 4 July of the current tax yea
r for
$47 per share. She incurred $550 in brokerage fees
on
the sale and $750 in stamp duty costs on purchase.
(ii) 2,500 shares in PHB Iron Ore Ltd. These shares
were also
acquired in 2001 for $12 per share and sold on 14
February of the current tax year for $25 per share.
She
incurred $1,000 in brokerage fees on the sale and $
1,500
in stamp duty costs on purchase
(iii) 1,200 shares in Young Kids Learning Ltd. Thes
e shares
were acquired in 2005 for $5 per share and sold on
14
February of the current tax year for $0.50 per shar
e. She
incurred $100 in brokerage fees on the sale and $50
0 in
stamp duty costs on purchase.
(iv) 10,000 shares in Share Build Ltd. These shares
were
acquired on 5 July of the current tax year for $1 p
er share
and sold on 22 January of the current tax year for
$2.50
per share. She incurred $900 in brokerage fees on t
he
sale and $1,100 in stamp duty costs on purchase.
(e)
Violin.
Your client also has an interest in collecting mus
ical
instruments. She plays the violin very well and has
several
violins in her collection, all of which she plays o
n a regular
basis. On 1 May of the current tax year she sold on
e of these
violins for $12,000 to neighbour who is in the Quee
nsland
Symphony Orchestra. The violin cost her $5,500 when
she
acquired it on 1 June 1999.
Your client also has a total of $8,500 in capital
losses carried
forward from the previous tax year, $1,500 of which
are
attributable to a loss on the sale of a piece of sc
ulpture which
she sold in April of the previous year.
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Category: Sample Questions