Internal Code: 1IEBH
Description: Case Study requiring preparation of workpapers, calculation of taxable income and income tax payable, preparation of an individual tax return, and a letter of advice.
Your client (use your own name as the client name) comes to see you in August 2018, asking to prepare an income tax return for the year ended 30 June 2018. The folder of receipts, invoices and other paperwork provided reveals the following information;
Your client is employed as a sales agent for a real estate company called Best Real Estate Pty Ltd. The payment summary from Best Real Estate Pty Ltd shows the following:
▪ ABN 91 089 780 218
▪ Gross Payments $120,000
▪ Tax Withheld $32,032
▪ Travel Allowance (in relation to attending Real Estate
Conference in Perth for 5 days) $2,011
▪ Reportable superannuation contributions $15,000
Your client owns a Lexus IS350. They purchased the car on 2 July 2017 for $84,160. The car travelled 36,000 kms during the year and your client has indicated that about 82% is work related but they have not kept a log book. Your client pays for all the running costs for the vehicle. During the year these costs included:
Your client uses a mobile phone for contacting clients when buying and selling houses. It was purchased in May 2017 for $1,029 and is used 80% for work purposes. In addition to this a monthly amount of $60 is paid by your client each month on a plan that includes calls, texts and internet use.
Due to the investigation into the banking sector, on 8 March 2018 your client sold 750 shares in Commonwealth bank for $76.17 each. Brokerage fees on the sale were $115. Of these shares, 500 were originally acquired in September 1991 at a cost of $6.70 per share. There was a 2 for 10 bonus share offer in March 2008, which were issued from the company’s share capital account (not a dividend). The remaining Commonwealth Bank shares were acquired in July 2008 for $38.54 per share. Dividend statements from Commonwealth Bank show fully franked dividends paid as follows:
Your client also sold some shares that were inherited from their grandmother. The grandmother passed away on 31 August 2017 and the shares were transferred to your client on 17 November 2017. The 2,000 Qantas shares were originally acquired by the grandmother in July 2008 for $3.02 each. The value of these shares in August 2017 was $5.72 per share and the value in November 2017 was $5.84 per share. They were sold by your client in February 2018 for $5.22. Total brokerage of $20 was paid in relation to the sale of these shares.
Your client purchased a townhouse at Main Street, Beachville NSW 2478 during the year to rent out and earn income from. A contract was entered into to purchase the property on 12 February 2018 for $350,000 and settlement took place on 15 March 2018. Your client used the proceeds from the above sales of shares and personal savings to pay for the townhouse, but needed to borrow $200,000 for the remainder of the purchase price, stamp duty ($11,240) and legal costs ($1,050). In order to obtain the loan, your client paid borrowing expenses of $450 on 15 March 2018.
The building was originally constructed in 2009. A Quantity Surveyor’s report commissioned at the time of purchase shows the construction cost of the unit was $110,000. The quantity surveyor also identified the following items included in the purchase for depreciation purposes:
As the townhouse was in a state of disrepair, your client undertook some repair and renovation work so that the townhouse was not available for rent until the end of April 2018. Rent of $370 per week was received from then until 30 June 2018. The following expenditure was incurred 31 March 2018:
Your client has decided to use the diminishing value method of depreciation where applicable.
Other costs paid in realtion to the property before 30 June 2018 include:
▪ Purchase of suits for work (to look professional for clients) $960
▪ Costs of attending 5-day Real Estate Conference in Perth – your client’s
16-year-old daughter accompanied your client on this trip (accommodation $1,425, meals $1,250, taxis $180) $2,855
▪ Personal contributions to Superannuation made by the taxpayer $4,100
(Mysuper Account #45362102)
▪ Donations were made to:
The Cancer Council $800 o The RSL Art Union Prize Home $50
▪ Subscription to “Your Investment Property” magazine $100
▪ Cost of having a registered tax agent prepare 2017 income tax return $245
▪ Your client has an insurance policy that covers their income in the event of an accident or
death. The total premium for 2017/18 was $2,600 of which 25% relates to the replacement of income in the event of an accident. The remainder relates to the death component.
▪ In August 2017 your client was injured playing football, breaking their foot, which required
surgery and rehabilitation. The total costs incurred for surgery, rehabilitation and doctor appointments during the year were $8,670. Your client has commenced legal proceedings to recover these costs from the person who caused the injury.
▪ Your client does not have any private health insurance.
▪ Your client’s date of birth is 12 February 1964 and is single but has a 16-year-old daughter.
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