Your client Jacob comes to see you in December 2016 asking to prepare his income tax return for the year ended 30 June 2016. He is also seeking your taxation advice in relation to some other issues. He provides the following information;
Jacob wants to sell his current home and purchase a new home to live in. He purchased the house on 31 October 1987 for a cost of $190,000 and also incurred legal costs of $1,900 and stamp duty of $4,850 in relation to the purchase. Jacob has lived in the house as his main residence since then, except for a period from 31 December 2006 to 31 December 2014. The market value of the house at 31 December 2006 was $290,000.
In order to sell this house, Jacob needs to undertake some repair work as follows;
Repainting the whole house $6,200
Building a fence to make the front of the house more presentable $3,600
Repairing the front porch that has begun to fall down $2,400
He has found a perfect house to buy, so may have to buy it before he sells his first house, meaning there may be a period of time where he owns two houses. He could sell his first house for $480,000.
During the year Jacob saved a boy from a shark attack while he was patrolling his local beach in his capacity as a volunteer lifesaver. The boy’s parents gave Jacob an Apple watch worth $650. He was also given a medal for bravery for saving this boy.
In addition to the above transactions, Jacob had the following income and expenses for the year ended 30 June 2016;
Salary (occupation – teacher) 72,000
Franked dividends from Telstra shares 2,850
Holiday received for opening a new savings account with his bank 3,200
Family Tax Benefit for his 10yr old son (Jacob is a sole parent)
Purchase of work clothing and shoes 450
Use of private car for school activities – See additional information below
Costs of studying a masters of teaching in order to obtain a promotion
This total includes $1,850 for a laptop purchased 1/2/16 3,650
Superannuation contributions for himself 3,000
Tax Agent fees
PAYG withholding from his salary 15,900
Jacob used his CX-9 (purchased in June 2013 for $42,000) for school activities. During the year he travelled 25,000 km, of which 5,600 were for school purposes. Running expenses include;
Registration and insurance $1,700
Speeding fine $450
Repairs and services $750
Prepare a Letter of Advice to Jacob that outlines/discusses/explains the following:
1. The tax implications of the sale of his first house and purchase of new house, including any exemptions available and noting any additional information you may require from Jacob. Calculate the assessable gain, if any. (10 marks)
2. The tax implications of the expenditure on his house. (5 marks)
3. The tax implications of receiving the apple watch and bravery medal. (4 marks)
4. The assessability and deductibility of all the other items listed in the information as you calculate Jacob’s taxable income for the year ended 30 June 2016. (10 marks)
5. The tax payable/ (refundable) for Jacob for the year ended 30 June 2016, including all additional levies and tax offsets. (7 marks)
Jacob is an astute taxpayer and questions every piece of tax advice given to him. To ensure Jacob is satisfied with your advice, you will need to provide adequate (but concise) explanations about the income tax treatment of all these items above.
As such, you will need to support all your discussion and interpretation with reference to legislation, cases or rulings. Referencing the Master Tax Guide will not be appropriate as this is not the authority, but rather assists your understanding of the legislation, cases and rulings. Also, copying entire sections of legislation, cases or rulings will not be appropriate as Jacob wants your advice provided in a way he can understand.
If you need to make assumptions in the absence of specific information that will be provided by Jacob later, you may need to make a decision that moves in a particular direction, but provide a brief explanation if another course of action is appropriate.
Your advice should be provided formally in a professional letter addressed directly to Jacob (not an essay about him), addressing each issue as necessary. Remember, quantity does not always equate to quality, so be concise in your response.
A total of 4 marks (i.e. 10% of the marks available for the assignment) will be allocated to these areas of referencing, formatting and presentation, so make sure you earn these marks as well.
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