Question

Neil is a director of HRM Pty Ltd (the ‘Company’), a concreting company. The company had the following transactions during the year ended 30 June 2019. How are the transactions treated for income tax purposes by HRM Pty Ltd? You can assume in this question that the numbers exclude GST, unless otherwise stated. 1. HRM Pty Ltd borrowed $500,000 from the Bank on 15 April 2019. 30% of the funds were used for personal purposes by Neil and the balance by the company. The bank charged the company an application fee of $5,000. Interest paid on the loan was $30,000. The loan is for seven years. 2. HRM Pty Ltd bought a second-hand commodore car. The company traded in a Toyota corolla and received $3,000 trade-in-value. The balance the company had to pay for the commodore car was $27,000. The new car was bought on 1 July 2018. The effective life of the new car is 6 years. 3. The old Toyota car had a written-down value at the date of sale of $2,000. 4. The company employed Deb, Neil’s wife as the receptionist. The company paid her a wage of $35,000. The reasonable wage for a receptionist on market-rate doing the same work is $50,000. 5. The company also donated $1,000 to a registered political Party during this year’s federal election. Page 2 of 3 REQUIRED: Explain to Neil the company director how each of the above items are treated for tax purposes. In your answer please carry out calculations where necessary and also refer to relevant case law and legislation. The company wishes to maximise its tax deductions. You are NOT required to calculate the company’s taxable income. [10 marks]

Answer 1