77938 Introduction To Taxation Law Assignment

Question 1 (25 marks)

The Bridgerton family runs a construction, demolition and excavation business through Star Constructions Pty Ltd (Star). The company accountant, Greg, is in the process of preparing income tax returns for the company and staff, and seeks advice on the following matters:

1. A couple of years ago, Star purchased a small suburban cinema as an investment for $2 million. The cinema was badly run down, so Star carried out work on it to improve its resale value. Star accordingly carried out work on the cinema to replace old projectors with upgraded high-tech projectors (cost $7,000), repaint the walls (cost $5,000) and replace the dirty, worn out carpet (cost $5,000). Star recently sold the property to a third party for $9 million. Star incurred $5,000 legal fees and $25,000 (transfer) stamp duty in relation to the sale.
2. Star employs Greg as the accountant for the business. Since the business has a branch in Newcastle, Greg has to work 3 days per working week (Monday to Wednesday) in the Sydney office, and the remaining 2 days per working week (Thursday to Friday) in Newcastle. During the 2021/22 income year he incurs $1,500 travel expenses in travelling from home to the Sydney office and back home again, and $3,500 travel expenses in travelling from home to the Newcastle site and back home again. Greg currently does most of the work relating to the Newcastle branch from a spare room in his apartment in North Sydney because Star does not have suitable office space at the Newcastle site. The room takes up about 10% of the floor area of the entire apartment. Greg uses the room exclusively for work-related purposes, including phone calls to clients. Greg incurs additional electricity expenses of $700 as a result of using the room for work-related purposes, and he pays $45,000 rent for the entire apartment for the 2021/22 income year.
   Greg also pays $700 membership fees for his professional membership of the Chartered Accountants Association for the 2021/22 income year.
   Star does not reimburse Greg for any of these expenses.
3. In his spare time, the CEO, Barry, plays for an elite basketball team in an interstate competition. During the 2021/22 income year, Barry had a very good season, and won several "best and fairest player awards (total value $5,000) for his performance. Barry was unaware of the possibility of winning these awards, because the sponsoring body that made the awards available only became involved with the competition towards the end of the season.
4. Star is also the trustee of a family discretionary trust which carries on a business of providing travel booking services for holidays in the South Pacific. In the 2021/22 income year, the trust estate earned income calculated under trust law principles of $100,000. The net income of the trust estate, calculated under s 95 ITAA36 was $97,000 On 30 June 2022, the directors of Star resolved to distribute the trust law income as follows:
   • $20,000 to Milie, who has been a resident throughout the 2021/22 income year and who is not under a legal disability.
   • $20,000 to Molly who has been a resident throughout the 2021/22 income year and is aged 12 years.
   • $20,000 to Mandy who has been a foreign resident throughout the 2021/22 income year and who is not under a legal disability
   • $10,000 to Martina (aged 22) who has been a resident throughout the 2021/22 income year and was admitted to a psychiatric institution in June 2022 after claiming to have been involved in an alien encounter following the landing of a UFO. The directors have resolved to hold the remaining $10,000 in the trust, pending Martina's recovery.
5. In the 2021/22 income year, Star made three frankable distributions. The first distribution ($1 million) is franked at 50%, the second distribution ($2million) is franked at 70%, and the third distribution ($1 million) is franked at 40%, (Assume a corporate tax rate for imputation purposes of 30%). Required: Advise Star, Greg and Barry regarding the income tax implications arising from the above facts in relation to the 2021/22 income year. In your answer make sure you refer to any relevant cases, legislative provisions, tax rulings and principles of tax law. (25 marks)

Required:

Advise Star, Greg and Barry regarding the income tax implications arising from the above facts in relation to the 2021/22 income year. In your answer make sure you refer to any relevant cases, legislative provisions, tax rulings and principles of tax law. (25 marks)