ATL004 CTA2B Advanced 2021 Practice Exam 1 | 2022 latest update

Page 1 of 17 Questions and marks structure Part A Tax Planning and Anti-Avoidance, Tax Agent Services Act 2009 (Cth) and GST [36 marks] Question 1 [9 marks] Question 2 [4 marks] Question 3 [6 marks] Question 4 [9 marks] Question 5 [8 marks] Part B Corporate Tax Fundamentals Part A & B [32 marks] Question 6 [6 marks] Question 7 [7 marks] Question 8 [19 marks] Part C Fringe Benefits Tax [16 marks] Question 9 [13 marks] Question 10 [3 marks] Part D International Tax Fundamentals [16 marks] Question 11 [16 marks] Total 100 Marks Page 2 of 17 Part A Tax Planning and Anti-Avoidance; and GST [36 marks] All dollar amounts are in Australian dollars. Tim and Tom are two brothers living in Perth. The family owns a 100-hectare dairy farm in Esperance which is operated by their father as a sole trader, who was registered for GST. He is a widower. Tim and Tom have never shared in any profit distribution from the dairy farm. Tom jointly. The brothers move from Perth to Esperance WA, to attempt to manage the farm. The property has a large homestead in which the father lived, and all necessary sheds and equipment required to run a dairy business. The farm is situated on prime land and not long after the news gets around that their father had passed away, a property developer contacts the brothers with an offer to purchase the farm from them. The property developer intends to subdivide the land into lots of 5 hectares. The offer of $10 million is too good to refuse and the brothers decide to sell. There are at least three ways in which the brothers can dispose of the property from a GST perspective. Each has a different outcome. Identify the three GST treatments and explain their consequences. Type your answer to Question 1 What the marker was looking for Treatment 1 Materials reference Marking guide S.38-325 GSTA99 Sale of going concern 4.4.6 0.5 Both parties must be registered - can brothers register? Is this an enterprise? 4.4.6 1 Other aspects of SoGC to be considered all things necessary 4.4.6 0.5 Consequences of residential premises being on the land 4.4.4 1 Treatment 2 4.4.4 Section 38-480 GSTA99 Sale of farmland supplied for farming 4.4.4 1 Page 3 of 17 No requirement to be registered 4.4.4 0.5 Sub para (a) Has the property been used for farming for 5 years? 4.4.4 1 Sub para (b) Developer's intentions. 4.4.4 1 Consequences of residential premises 4.4.4 0.5 Treatment 3 Section 188-15 ITAA97 and 188-20 ITAA97 - Disposal of a capital asset 4.4.4 0.5 Definition of Current or Projected GST turnover 4.3.4 0.5 Supplies while not carrying on enterprise disregarded from turnover test 4.3.4 1 You run an accounting practice. You have a property development client which is resident in Singapore. Your client asks you to provide advice in respect of the taxation treatment of a proposed acquisition of land in Australia. You prepare your advice and issue the advice to your client in Singapore. a) Is your supply a taxable supply and should you include GST on your advisory fee? Provide legislative references to support you answer. b) Would the outcome be different if your client asked you to provide the advice to its lawyers in Perth who are negotiating the transaction? Type your answer to Question 2 What the marker was looking for Materials reference Marking guide Taxable supply - Yes or no 4.4.1 0.5 Section 38-190 GSTA99 item 2 or 3 4.4.1 0.5 Is the supply directly connected with real property? 4.4.1 0.5 Section 38-190 GSTA99 item 2 or 3 4.4.1 0.5 Where is the effective use or enjoyment? 4.4.1 1 Could subsection 3 apply? 4.4.1 1 Page 4 of 17 A hotel complex was constructed in 2013 and operated as a hotel. The complex was later sold as the GST-free supply of a going concern to another hotel operator in 2016. The hotel complex is strata titled and made up as follows: Management and conference facilities 100 hotel rooms utilised as short stay hotel rooms 10 luxury apartments utilised as serviced apartments In 2020, the hotel was sold to a new operator, again as the GST-free supply of a going concern. However, at that time, the 10 luxury apartments were retained by the vendor as the vendor had been advised that a better return could be achieved by selling the 10 apartments on an individual basis. At all times until now, the operation of the hotel and serviced apartments However, the owner is only able to sell 5 of the apartments and decides to rent the other 5 as long term rentals. What are the GST consequences of the sale of the 5 residential apartments? Can the margin scheme be used? Does the vendor have any GST adjustments and if so under what section(s)? Type your answer to Question 3 What the marker was looking for Materials reference Marking guide Sale of apartments - taxable supply of new residential premises. Not previously sold as residential. 4.4.4 1 Margin scheme could apply. Each previous acquisition - SoGC. Never acquired as taxable supply. 4.4.4 2 No Division 135 GSTA99 adjustment at acquisition. No intent to provide residential accommodation. Commercial accommodation (taxable supply) contemplated. 4.4.6 1 Division 129 GSTA99 may come into play as there would be a change of creditable purpose if the decision is made to lease the premises as residential premises. This would result in an increasing adjustment. 4.4.6 2 Page 5 of 17 Global Manufacturing (GM) is a non-resident company. It wholly-owns Australian Manufacturing, an Australian-resident company. Australian Manufacturing (AM) has been operating for five years and has been very successful. It has always been profitable but now it needs additional funds to expand its operations. Initially, it is decided to issue ordinary shares to its parent GM to fund its expansion. After discussions with several parties including its tax advisors a number of options are proposed. These include: Issue ordinary shares to GM Issue RPS to GM which will be considered to be debt interests Issue RPS to GM which will be considered to be equity interests Borrow from a bank and pay interest Borrow from GM and pay interest Borrow interest-free from GM Engage in a sale and lease-back of a substantial asset. Both companies have engaged in long and protracted discussions with their its advisors and each of the options listed above were considered. It was decided that AM would issue RPS to the parent. They will be debt interests and the dividends are fully deductible. Additional facts to consider: A tax treaty is about to come into effect which will reduce the Dividend Withholding tax rate from 15% to nil The company had never paid dividends in the past as it had retained funds for use in expanding the business. Required: Do you consider that Part IVA might apply to this situation? a) You should discuss whether a scheme exists and if so, what is the scheme? (3 marks) b) What is the tax benefit under the annihilation limb? (1 mark) c) What is/could be the tax benefit under the reconstruction limb? If you consider there to be other funding mechanisms available, cite two reasons as to why the taxpayer could argue that they are not reasonable alternatives. (3 marks) d) What there a dominant purpose of achieving a tax benefit? Support your decision. (2 marks) Type your answer to Question 4 What the marker was looking for Page 6 of 17 Materials reference Marking guide Is there a scheme? What is it? Define a scheme. 2.2.4 1 Issuing Redeemable preference shares and paying dividends. 2.2.4 1 Wider scheme of considering different alternatives 2.2.4 1 Tax benefit - annihilation limb? Claim for deduction for "debt interest" 2.2.5 1 Tax benefit - reconstruction limb? 2 reasons Use other funding alternative to achieve same result - that is funding. 2.2.6 1 Bank borrowing - breach existing borrowing arrangements 2.2.6 Sale and lease back - stamp duty 2.2.6 2 Interest-free from parent Transfer Pricing problems 2.2.6 Dominant purpose? Dominant purpose would appear to be to arrange funding - not tax deductions. 2.2.7 1 Does not meet 8 criteria in s 177D(2) ITAA36. RPS are standard means of raising finance. 2.2.7 1 Samantha Sly was a registered tax agent. She was also the only director of Sly Tax Agents Pty Ltd. The company was an associated company tax agent. The company and Samantha Sly had been operating the tax agent business for 10 years. Over the last 5 years the company had failed to lodge its own income tax returns, fringe benefits tax returns, and BAS by relevant due dates. Court orders to lodge these returns were not adhered to. Samantha Sly had not met her personal tax obligations either. The Tax registration. Samantha Sly proposed that she would appoint Stewart Straight to be a director of the company. He would apply for registration as a tax agent. Stewart has provided the TPB with a complete list of all of his experience and his educational background, which includes seminars, engagement in continuing professional development activities, and his previous employment as a finance and administration manager, to support his application. Required: Page 7 of 17 Do you consider that Part IVA might apply to this situation? a) Discuss which elements of TASA 2009 the TPB would have applied when deciding to terminate your answer. (4 marks) b) Advise Samantha Sly of any rights of appeal or review against this decision by the TPB (1 mark) c) Under ? Discuss the requirements he must meet to have his application approved. (2 marks) d) Do you think his application would be approved? Support your answer. (1 marks) Type your answer to Question 5 What the marker was looking for Materials reference Marking guide Part a) A tax agent must act with honesty and integrity. Section 30-10 (1), (2), & (3) TASA2009. 1.2.1 2 Includes complying with taxation laws in the conduct of the agent's personal affairs 1.2.1 1 Company tax practitioner - each director must be a fit and proper person. 1.2.1 1 Part b) Samantha and the company can appeal to the AAT s 70-10(a) - (i) TASA2009 TASA2009 1 Part c) Division 1, Part 2, Schedule 2 TASA Regulations: Relevant tertiary qualifications (degree or diploma); or relevant work experience plus relevant Board approved courses Membership of RTA plus 8 from 10 years full-time relevant work experience 1.2.2 2 Part d) No. Experience is not relevant, and courses are not relevant tertiary qualifications. 1 Page 8 of 17 Part B Corporate Tax Fundamentals Part A & B [32 marks] Sunset and Horizon are spouses. On 1 July 2001, they established a company, Cruisy Cruises Pty Ltd (CC) with 10 shares, held 50% each. CC is an Australian resident entity. CC operates as a registered travel agent and offers customers assistance in finding their cruise of a lifetime. CC initially performed very well and had consecutive years of profits. However, after the global financial crisis in the late 2000s and increased competition, the last 10 or so years have seen declining profits and the financial years produced losses. At 30 June 2020, there were $9,500,000 of unused, carry-forward, income tax losses. There were no capital losses. leanliness of a certain cruise line. Mermaid had some great ideas for CC and Sunset and Horizon thought these ideas were sure to turn around the declining fortunes of CC. To ensure the ideas resulted in increased revenues it was decided that Mermaid should be financially incentivised to help CC. As a result, the following transactions occurred on 1 July 2019 (and, at that time, CC had a market value of $2,000,000): CC issued an additional 30 shares, 15 each to Sunset and Horizon. The shares were issued at market value. Whilst Horizon paid CC $750,000 cash for her additional shares, Sunset did not. It was agreed between Horizon and Sunset that Sunset would owe $750,000 to CC. The loan owing by Sunset to CC was not documented and the verbal agreement between Sunset and CC was that no repayments and no interest were required during the period of the loan, provided the principal was repaid by 30 June 2023. Note that at the time of lodgement of the 30 June 2020 tax return, none of this loan had been repaid. From the new shares received, Horizon sold 5 shares to Mermaid. Sunset sold 15 of her shares to Mermaid (this sale not only assisted in incentivising Mermaid but provided some cash to Sunset to help repay the loan owed to CC). All shares in CC carry the same entitlement to voting, dividend and capital rights. The shareholding can be summarised as follows: Shareholder Incorporation to 30 June 2019 Number of shares Incorporation to 30 June 2019 % shares held 1 July 2019 to 30 June 2021 Number of shares 1 July 2019 to 30 June 2021 % shares held Sunset 5 50% 5 12.5% Horizon 5 50% 15 37.5% Mermaid 0 0% 20 50% Total 10 100% 40 100% began to improve and, in 2021, CC had a bumper year. Sales were the highest they have ever been and, early on, there was significant excess cash to invest in global share markets. Mermaid, whose ideas generated better results than forecasted was sent by CC on a Page 9 of 17 24- . The value of this cruise was $240,000. Mermaid did not work at all during the cruise and used it to totally relax and enjoy. It is noted that none of the shareholders are employees in the company. It is further noted that CC has a distributable surplus in excess of $1,500,000 at all times from 1 July 2019 to 30 June 2021. This distributable surplus exists as the market value of assets and goodwill owned by CC is higher than that recorded in their balance sheet. A summary of income tax losses is as follows: $ 2018 $ 2019 $ 2020 1 July opening balance 0 4,000,000 8,500,000 Losses incurred 4,000,000 4,500,000 1,000,000 Utilised losses 0 0 0 30 June closing balance 4,000,000 8,500,000 9,500,000 The results for the year ended 30 June 2021 were as follows: Notes $ Sales revenue 1 3,000,000 Dividend revenue (all shareholdings 10%) 2 7,000,000 Operating expenses 3 (1,000,000) Expenses related to the personal cruise for Mermaid (240,000) Net profit before tax 8,760,000 Notes: 1. Sales revenue represents assessable income for income tax purposes 2. Dividend revenue is made up of: Franked dividends totalling $6,000,000, franked to 100% at the corporate tax rate of 30% Partially franked dividends totalling $700,000, franked to 60% at the corporate tax rate of 26% Unfranked dividends totalling $300,000 Franking credits are not included in the $6,000,000 of revenue noted above 3. Operating expenses are fully deductible for income tax purposes You are a tax agent and the shareholders of CC have asked you to advise on the following three questions. Advise CC and its shareholders (who are competent business people but not very familiar with taxation law) of any income tax consequences of: the loan to Sunset for the year in which the loan was made; and the cruise provided to Mermaid in the year to 30 June 2021. Provide two (2) key legislative references to support your answer. Page 10 of 17 Type your answer to Question 6 What the marker was looking for Materials reference Marking guide Division 7A 6.1.3 Max 0.5 marks for any of the following references: s 109D(3) ITAA36, s 44(1) ITAA36 or s 202-45(g)(i) ITAA97 0.5 Loan to Sunset is not repaid by year end or lodgement date 0.5 The amount of $750,000 represents a loan to a shareholder and $750,000 will be a deemed dividend under Div 7A ITAA36 1.0 Assessable to Sunset in individual ITR 0.5 Will be unfranked income in ITR 0.5 Any one of: s 109C(3) ITAA36, s 44(1) ITAA36 or s 202-45(g)(i) ITAA97 0.5 Payment includes an amount paid for or on behalf of a shareholder and therefore $240,000 paid for cruise will be a deemed dividend under Div 7A ITAA36 1.0 Assessable to Mermaid as unfranked income 1.0 In BOTH cases, the deemed dividend is not limited by the distributable surplus 0.5 Advise whether CC will be able to access all or part of the income tax losses of $9,500,000 in the year ended 30 June 2021. Do not consider either the same or similar business tests in your advice. Provide two (2) key legislative references to support your advice. Type your answer to Question 7 Page 11 of 17 What the marker was looking for Materials reference Marking guide Accessing Prior year losses 5.3.2 max of 1 mark for any of the following references (0.5 mark per reference) s165-10 ITAA97, s165-12 ITAA97, s165-165 ITAA97 1 COT Requires same persons 50% 1 Test period from 1/7/17 to 30/6/21 1 Same share test applies 1 Under same share test only 10 shares are the same at 30 June 2021 1 Under same share test only 25% same shareholding 1 COT failed, cannot use losses 1 a) Ignore your answer to Question 7. Assume that CC can choose to access the full amount of $9,500,000 of income tax losses for the year ended 30 June 2021 as it passes the similar business test. If relevant, assume for this part of the question that the company tax rate to apply to CC for the year ended 30 June 2020 is 26%. Calculate the taxable income of CC for the year ended 30 June 2021. Show all workings (12 marks) b) Assume for this part of the question that the company tax rate to apply to CC for the year ended 30 June 2021 is 26%. Calculate the resulting tax payable/refundable for CC for the year ended 30 June 2021 and quantify any losses available to carry forward at 30 June 2021. Show all workings. (2 marks) c) Advise CC on whether it would qualify for the 26% company tax rate for the year ended 30 June 2021. Show all workings (5 marks) Type your answer to Question 8 What the marker was looking for Materials reference Marking guide Page 12 of 17 Taxable income/tax payable calculation 6.1.4,5.3.2, 5.4.1 (a) Taxable income calculation Sales $3,000,000 1 Dividends $7,000,000 1 Franking credit 1 - $6,000,000 * 0.42857 = $2,571,420 1 Franking credit 2 - $700,000 * 60% * 0.35135 = $147,567 1 Operating expenses $1,000,000 1 Personal cruise non-deductible (no nexus with AY) 1 Taxable income before losses $11,718,987 1 Recognise losses 'cap' because of franking credits 1 Correct calculation of cap: - Franking credits $2,718,987 1 - Equivalent in income (2,718,987/26%) = $10,457,642 1 Use losses up to (11,718,987 10,457,642) = $1,261,345 1 Taxable income after losses = $10,457,642 1 (b) Tax payable: Tax at 26% $2,718,986.92 0.5 less franking credits $2,718,986.92 0.5 Tax payable $0 0.5 Losses c/f $8,238,655 (9,500,000 - 1,261,345) 0.5 (c) Tax rate for this entity: Turnover $50m 1 BRE passive income = $9,718,987 (7,000,000+2,571,420+147,567) 1 Total assessable income = $12,718,987 (passive income + sales $3m) 1 BRE passive income = 76% 80% 1 Therefore, tax rate = 26% 1 Page 13 of 17 Part C Fringe Benefits Tax [16 marks] Alexa has been employed as a sales representative for over 5 years with a food wholesaler called Crafty Pty Ltd (CPL). CPL is registered for GST and is not a small business entity. In addition to her salary and superannuation guarantee contributions, Alexa received the following remuneration benefits during the 2021 FBT year: 1. Motor vehicle CPL has provided the same car to Alexa since 1 February 2014 use every day of the 2021 FBT year. CPL leases the car. A valid logbook kept during the 2021 FBT year established the business use to be 65%. If CPL had instead purchased the car when the lease was taken out, the cost price would have been $45,000 (including duties tax of $1,300, and GST of $3,800). Total running costs for the car during the 2021 FBT year were $10,800 (GST included), of which Alexa contributed $500. If relevant, the running costs do not include deemed interest or 20 was $5,370. 2. Mobile phones CPL reimbursed Alexa for the cost of 2 smart phones that she purchased during the 2021 FBT year. The first phone cost $1,800 and Alexa used it 70% for work purposes. The second cost $1,500, and 10% of the expenses Alexa incurred in operating the phone were otherwise deductible to her under s 8-1 ITAA 1997. Both phones were provided under a salary packaging arrangement and Alexa could keep the phones if she resigned. 3. Superannuation - CPL made an additional $10,000 in superannuation contributions during the 2021 FBT year for Alexa, which caused Alexa to breach her concessional contributions cap by $3,000. 4. Loan: CPL provided Alexa with an interest-free loan of $70,000 on 1 November 2020. Alexa used 40% of the loan to pay for l fees and medical expenses, and the remainder to purchase shares in Alpha Pty Ltd: a company that regularly pays franked dividends. Alexa was yet to repay any of the principal. Assume all relevant documentary evidence is provided by Alexa to CPL. Calculate the FBT taxable value (if any) of each of the benefits provided by CPL to Alexa for the 2021 FBT year. Ensure that you consider both the statutory formula method and operating cost basis method for the car benefit. Explain your answer, including reasons for any exclusions, and assume CPL wishes to minimise any FBT payable. Use the format in the table below when answering this question: Category of benefit Type-1 or Type-2 Discussion/ Reference Calculations Type your answer to Question 7 Category of benefit Type-1 or Type-2 Discussion/ Reference Calculations Page 14 of 17 What the marker was looking for Materials reference Marking guide 3.1-3.5; 3.9; 3.11; 3.19; 3.21 Car Car benefit - given in question N/A Base value = $29,133 [2/3 [0.5marks] x ($45,000-$1,300 [0.5 marks])] 1 Recipient's payment = $500 0.5 SF = $5,327 [($29,133 x 20% x 365/365) - $500] 1 Car expenses = $10,800 (no deemed expenses included as vehicle was leased, not owned by employer) 1 OC = $3,280 [($10,800 x (100% - 65%) [0.5 marks] - $500 [0.5 marks]] 1 Choose OC method as it produces less FBT payable 0.5 Type 1 0.5 Mobile phones First mobile phone is an exempt benefit: s 58X FBTAA - mainly for work purposes 1 Second mobile phone is an expense payment benefit 0.5 TV of second mobile phone is $1,500 1 No application of the otherwise-deductible rule because the second phone is a capital outgoing when - n would otherwise be available. 1 Second phone is Type 1 0.5 Superannuation Entire $10,000 is not a fringe benefit. CC cap is irrelevant. 1 Loan Loan benefit 0.5 Difference between benchmark interest on loan and actual interest charged = $3,360 [($70,000 x 4.8%) (Nil)] 0.5 Page 15 of 17 Part-year apportionment of interest = $1,390 ($3,360 x 151/365) [Also accept 152 days] 0.5 OD amount $834 ($1,390 x 60%) 0.5 Taxable value = $556 ($1,390 - $834) N/A Type 2 0.5 Calculate the FBT payable by CPL (if any) on the remuneration benefits provided to Alexa for the 2020 FBT year. Show all calculations. Type your answer to Question 10 What the marker was looking for Materials reference Marking guide 3.6 Sum of type-1 benefits = $4,780 ($3,280 + $1,500) Grossed up type-1 = $9,9433 ($4,780 x 2.0802) 1 Sum of type-2 benefits = $622 Grossed up type-2 = $1,049 ($556 x 1.8868) 1 FBT = $5,166.24 (47% [1 mark] x ($9,943 + $1,049)). Mark awarded for the correct FBT rate. 1 Page 16 of 17 Part D International Tax Fundamentals [16 marks] All dollar amounts are in Australian dollars. All dollar amounts are in Australian dollars. Brie is an Australian resident. She provides the following information about the current income year: She owned an investment residential property in a foreign country (Foreign Country) that derived net rent of $10,000. The property was bought in 2016 for $160,000 and sold in April this year for $400,000. She owns a 5-hectare farmland in Foreign Country. She derived net income of $50,000 from carrying on an agistment (stabling and taking care of horses) business on the farm. She paid foreign tax on the income of $15,000 and on the capital gains of $67,000 She has no other income. Required: a) Calculate the income tax payable by Brie. Ignore the Medicare levy and any double tax agreement (DTA). (8 marks) b) Assume that the farm amounts to a permanent establishment and that Australia has a DTA with DTA. Ignore the OECD Multilateral Instrument Act. (3 marks) c) Assume Country on a loan she took out to buy the farm. The loan is debt interest under Division 974 ITAA97. Explain the Australian income tax issues arising from Brie paying interest to the foreign bank. Ignore the DTA (5 marks) Type your answer to Question 11 What the marker was looking for Materials reference Marking guide Part (a) 7.1,7.1.4 Rent $10,000 (no need to gross-up for foreign tax, net amount after expenses given) 1 Agistment income $50,000 1 Capital Gains $240,000 1 Page 17 of 17 Less: discount $(120,000) 1 Taxable income $180,000 1 Tax Payable $51,667 Foreign income tax offset: Foreign tax paid $82,000 1 Less amount referable to discount gain ($33,500 - half of tax paid on foreign capital gain) 1 Cap: tax on $180,000 - tax on $0 = $51,667 0.5 Net tax payable $3,1677 (or consequential) 0.5 Part (b) Foreign country has right to tax - attributable to PE 7.4 1 Australia can also tax 1 Australia will provide relief for double tax (FITO) 1 Part (c) 7.10; 7.12 Interest deductible / debt deduction 1 B subject to thin capitalisation 1 IWT (issue considered / raised) 1 IWT NA (correct conclusion) 1 Reason: Interest connected to PE 1 END OF PRACTICE EXAM 1