Question

Case study

Emily Baff is a 43 year-old marketing director employed by Rockwood Pty Ltd in Melbourne. Emily engages your services for the preparation of her 2017/18 tax return. On 04 August 2018 Emily sends you the email below. From: Emily Baff Sent: 4 August 2018, 9:00:43 AM To: Tax Accountant Subject: Tax return 2017/18 – Emily Baff Attachments: Emily Baff – Payment Summary 2017/18

Dear Tax Accounting Team,

As discussed, please find attached my 2017/18 payment summary. Also, below is additional information which may be of assistance in the preparation of my tax return.

? My health insurance policy number is 123456-78 and I have top hospital cover.

? Since I was promoted to my current Marketing Director position, Rockwood provided me with a Toyota Corolla at no cost (although I know the car cost them $25,000) except for fuel, which costs me $80 per month. I’ve been driving this car since 1 October 2017, to and from work and on the weekends, but not to visit clients (I prefer to take an Uber to visit clients so I can work during the trips).

? On 1 January 2017 I took a loan with Rockwood of $600,000 at an interest of 4% per annum. I used $400,000 to buy an investment property in Inverloch/VIC, and the rest I used to pay off my home mortgage.

? I signed the contract to purchase the Inverloch house on 10 August 2017 and it has been rented at $1,500 per month since 1 September 2017. On 1 October 2017 the tenants advised of a leak on the roof, so I had it fixed at a cost of $22,000. It was that expensive because 1/3 of the roof had to be replaced, and I paid this amount in full on 04 October 2017 when the service was completed.

? I also had a new air-conditioner installed at the master bedroom of the Inverloch property on 10 December 2017 at a cost of $4,000 (I have all the receipts for these expenses). As the tenants told me this air-conditioner was excellent, I actually bought a second one and had it installed in my own house in Richmond on 25 January 2018.

? On 15 May 2018 I sold 3,000 BHP shares for $10,000. I had bought those shares in 2014 for $6,000. Earlier this year (in February) I made a loss of $3,000 on the sale of all my ACACIA shares that I had purchased in December 2017. Luckily, in June this year the share marked recovered and I was able to sell my Orica shares (which I had bought in November last year for $4,000) at a capital gain of $5,000 on 30 June 2018.

? Last year I had a capital loss of $4,000. I am not sure what to do with it, could you please advise?

? Two years ago I bought an antique tea set with 4 teacups for $499. In March this year, I sold each cup separately for $200.

There is one more issue I need to discuss with you. In March this year, I spent $25,000 in legal fees while suing my previous employer who, during my employment time, consistently paid me 25% less than a male colleague who held an equivalent position and performed exactly the same functions as me. We ended up settling the dispute out of Court and I agreed to receive a payment of $350,000 in arrears and moral damages, which were paid in a lump sum on 15 June this year. This is a significant amount and I don't want to have trouble with the ATO. Could you please provide me with a separate letter of advice explaining the income tax consequences related to the legal fees I incurred and the payment I received? I look forward to hearing back from you with my completed tax return and supporting schedules; as well as the aforementioned letter of advice. Kind regards, Emily Baff Marketing Director – Rockwood Ltd [email protected] Required A) Prepare Emily Baff’s statement of taxable income and calculate her total tax liability (including Medicare Levy) for the year ending 30 June 2018. State all calculations and include any necessary explanatory notes and supporting schedules, applying legislation and case law.

B) Prepare a letter of advice outlining the tax consequences related to the legal fees incurred and the lump sum payment received by Emily in connection with the lawsuit for the year ending 30 June 2018, applying legislation and case law to support your letter.

(I need the solution for B)Prepare a letter of advice outlining the tax consequences related to the legal fees incurred and the lump sum payment received by Emily in connection with the lawsuit for the year ending 30 June 2018, applying legislation and case law to support your letter.)

Answer 1

Solution

The Statement of Taxable Income and Tax calculation

		AUD
Assessable income
Gross salary		100,000
Australian sourced rental income(1500 p.m x 10 months) (Sept 2017 to June 2018)		15,000
Australian Car Fringe Benefit		5,000
Remuneration from Previous Employer Since received in current year, taxed in current year)		350,000
Net capital gain on disposal of shares:
CGT on BHP(10000 - 6000) + on Orica (given at 5000)	9000
Capital Loss of Prior year (4000) + Capital loss of current year for ACACIA (3000)	(7000)
Net Capital gain	2000
50% CGT discount	(2000)	0
Total assessable income		470,000
Allowable deductions
Legal fees incurred to get the compensation from Previous employer		(25000)
Interest and repairs on investment property		(42000)
Charitable contributions		()
Total allowable deductions		(67,000)
Total taxable income		403,000
Tax on taxable income		154,582
Medicare levy (Since already has private policy and top hospital cover, none)		(0)
Foreign income tax offset		(0)
Franking credit		(0)
Total tax payable		154,582

Notes:

1. Refer Chapter 7 of Australian Tax Code- Car fringe benefits of Fringe benefits tax – a guide for employers. Also normally, as a thumb rule, travel to and from work is private use of a vehicle. The statutory rate right now is 20%, hence 20% of $25,000 cost is $5,000.

2. Increase in cost of BHP Shares: Since shares were held from 2014 to 2018, i.e. more than 12 months, 50% discount on gain is eligible. Refer Australian Tax Law's Working out your capital gains guidelines.

Gain = 10000-6000 = 4000 * 50% = 2000

3. Interest and repairs on investment property.

4% on 400,000 + Roof Expenses 22,000 + Air conditioner 4000 = 42000

4. Teacups can form part of the use assets of home like furniture hence there is no tax on the same.

5. Loan at some interest rate to employee is not taxable as a fringe benefit.

6. Tax calculation. Rates for year 2017-18.

Taxable income	Tax on this income
0 – $18,200	Nil
$18,201 – $37,000	19c for each $1 over $18,200
$37,001 – $87,000	$3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000	$19,822 plus 37c for each $1 over $87,000
$180,001 and over	$54,232 plus 45c for each $1 over $180,000
Resident tax rates 2017–18

After referring above, tax = $54,232 + ((403,000-180,000) x 45%) = 154,582.

B] Letter of Advice to "Emily" on compensation from previous employer in the current year.

As per Australian Tax Code, Individuals must declare all of their income in year in which they receive or enter in contract to receive.

"Salary and Wages" is a part of the Incomes Individuals Must Declare schedule, and lump sum payments do form part of the "Salary and Wages" sub-schedule.

As the law states, there are two common types of lump sum payments:

• When you leave a job, you may receive a lump sum payment for unused annual, long service leave or special leave you may have been entitled to have you not left your job.
• The second is a lump sum payment in arrears for money owed to you from an earlier income year.

Both of these lump sum payments are assessable in year you receive them.

Interpretation of above lines would mean that $350,000 received this year is covered in the second case above and is assessable for tax in this year itself, i.e. year ending June 2018.

As a principle of natural justice and reason, you will get deduction of $25,000 that you incurred for legal fees since they helped you to recover the above compensation from previous employer. So the net income in this particular case of compensation from previous employer will amount to 3, 25,000, which is also reflected in your statement of taxable income and calculation of tax above.