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Julie Hart had a difficult year in 2010/11. Her husband, Tom, suffered an industrial accident and was off work and on WorkCover for the entire year, receiving only $16 000. Her 22-year-old son who works as a bank teller needed hospital and medical treatment, which cost Julie $3000 net of any reimbursement. His illness reduced his adjusted taxable income to only $7000 for the year.

As Julie’s tax adviser, you would claim in her tax return:

a. A spouse rebate of $2286 plus a medical expense rebate of $200.

b. A spouse rebate of $2286 plus a medical expense rebate of $600.

c.No spouse rebate but a medical expense rebate of $200.

d.No spouse rebate and no medical expense rebat

e.

Question 5

After the death of his wife on 11 November 2010 following childbirth, Brown and his daughter (born

11 November 2010) moved to Mackay (Ordinary Zone B) on 8 February 2011. Brown’s wife did not have any adjusted taxable income. Brown’s taxable income for the 2010/11 tax year was $40 000, all from salary.

On the basis of the information above, which of the following three tax offsets is Brown entitled to claim?

I. A partial spouse rebate.

II. A child rebate.

III. A zone rebate.

Brown can claim:

a.Tax offset I only.

b.Tax offsets I and III only.

c.Tax offsets II and III only.

d.None of the three tax offsets.

Question 6

Julie Martin is aged 64 years. She is single and a self-funded retiree. Her income for the 2010/11 tax year only includes the following:

s cash investments of $31 000; and

s a dividend of $1000, from an Australian public company, which is franked to 40 per cent.

Martin’s tax offset (rounded to the nearest dollar) for the 2010/11 tax year would total:

a.$171.

b.$2401.

c.$3901.

d.$3999.

Simon Shoestring accepted a redundancy package on 31 January 2011 from his employer of over 40 years.

On that day, he received a payment of $78 500 made up as follows:

Annual leave$

s all accrued post–17 August 1993 21 500

Long service leave

s accrued pre–16 August 1978 2 000

s accrued after 15 August 1978 and pre–18 August 1993 20 000

s accrued post–17 August 1993 35 000

Assuming that Simon is paying tax at the top marginal rate and ignoring the Medicare levy, how much tax would Simon pay in respect of the above redundancy payments?

a.$11 520.

b.$22 995.

c.$24 727.

d.$31 125.

Question 8

Megan Cluey, aged 22, arrived in Australia on 12 October 2010 to take up permanent residence. Three months later, on 15 January 2011, she commenced her first real job when she joined Green Point Ltd—an environmentally aware oil company. Her income from Green Point for the year ended 30 June 2011 was $16 500.

Ignoring the effects of the Medicare levy and assuming she had no other income, what is Megan’s net tax payable for the year ended 30 June 2011?

a.$75.

b.$300.

c.$1575.

d.$1800.

Question 9

Hard Luck Harry has had a pretty rough year. It seems that almost every week he was taking his wife or children or relatives to the doctor or dentist for some form of treatment. During the year ending 30 June 2011, he incurred the following medical expenses net of any reimbursement.

s$550 having a cut stitched when his 26-year-old son ran into a tree on his roller blades.

s$400 having his 20-year-old daughter’s tooth reset after it was knocked out in a hockey game.

s$1600 emergency surgery on his wife to remove a splinter from her eye.

s$100 motor vehicle expenses in driving his children and wife to the hospital/dentist.

s$2000 hip reconstruction costs for Harry’s mother.

Both Harry’s children (who are studying at university full-time) and his mother still live in Harry’s spacious home. Harry’s mother is fully dependent upon her son.

What rebate is Harry entitled to in respect of these medical expenses for the year ending 30 June 2011?

a.$400.

b.$417.

c.$510.

d.$527.

Question 10

Libby and Michael are married. They have no children, but Libby has a child from a previous relationship. They have provided you with the following information in respect of Libby for the year ending 30 June 2011:

s$3700 salary income from a kindergarten where Libby works two mornings per week.

s$150 motor vehicle costs in driving to work.

s A fully franked dividend from BHP Billiton of $70 (franking credit of $30).

s$200 share of a net rental loss.

s$400 reportable superannuation contributions.

s$1000 child support payment to her ex-partner who is the custodial parent of the child.

For the purposes of the spouse rebate, what is Libby’s adjusted taxable income for the year ending

30 June 2011?

a.$3200.

b.$3300.

c.$4000.

d.$4200.

Question 11

Lewis Baker is aged 75 years. He is a retired public servant and is single. For the 2010/11 tax year, Baker received: s a superannuation benefit in the form of an income of $28 500 from the Commonwealth Superannuation Fund (a complying superannuation fund); and

s a dividend of $850 from a public company in America, after withholding tax of 15 per cent had been deducted at source.

Based on this information, and ignoring the net tax result, what would be the total tax offsets available to Baker for the 2010/11 year:

a.$150.

b.$1650.

c.$2380.

d.$3880.

Terry Parker retired at age 60 as manager of a supermarket where he had worked for 13 years. During the 2010/11 tax year, he received a lump sum of $320 000 on retirement. This sum comprised:

Payment of accrued annual leave$4 000 Payment of accrued long service leave$50 000 Christmas bonus paid to all employees$6 000

Lump sum superannuation benefit from the employer’s superannuation fund $260 000

Which of the following statements is correct?

a.The entire amount is an employment termination payment under Divisions 80 to 83 of ITAA97.

b.The bonus of $6000 is assessable under s. 15-2 of the ITAA97 and the balance is an employment

termination payment under Divisions 80 to 83 of the ITAA97.

c.The bonus of $6000 is assessable under s. 15-2 of the ITAA97, the $4000 for accrued annual leave is

statutory income under Subdivision 83A of the ITAA97, and $310 000 is an employment termination

payment under Divisions 80 to 83 of the ITAA97.

d.The bonus of $6000 is assessable under s. 15-2 of the ITAA97, $4000 for accrued annual leave and

$50 000 accrued long service leave are statutory income under Subdivisions 83A and 83B of the ITAA97 respectively, and the $260 000 is a superannuation benefit under Division 301 of the ITAA97.

Question 13

During the 2010/11 tax year, Joe Brown received $200 as a fully franked dividend from an Australian public company and $360 in interest from a bank in the United States after deduction of $40 withholding tax.

Assume Joe Brown is an Australian resident with a marginal tax rate of 30 per cent. The tax payable on the dividend and interest income (calculated to the nearest dollar and including any tax offsets attributable to this income but ignoring the low income rebate and Medicare levy) is:

a.$77.

b.$80.

c.$117.

d.$221.

Question 14

An individual resident in the United States receives a fully franked dividend from a resident Australian company.

The Australian tax consequences are:

a.withholding tax paid/no franking credit.

b.withholding tax paid/franking credit.

c.no withholding tax paid/no franking credit.

d.no withholding tax paid/franking credit.

Mike Wilkinson is an Australian resident aged 56 years who is an independent consultant. In the 2010/11 tax year his fees from consulting came to $48 000 and he made an additional $12 000 in commissions. He also received interest of $4500 and made a capital gain of $11 000. Mike incurred $2500 in work-related expenses during the year.

Based on the above information what is Mike’s entitlement to a mature age worker tax offset for the year ending 30 June 2011?

a.$0.

b.$50.

c.$275.

d.$500.

Solutions

Question 1

Correct Answer: c

Foreign employment income of an aid or charitable worker employed by a recognised non-government organisation derived for a continuous service period of 91days or more and taxed abroad is exempt from Australian tax (s. 23AG).

Robinson’s Australian taxable income is $11 000.

$

Salary from White Cross10 000

Dividend from ICI England Ltd ($850 received plus $150 withholding tax) 1 000

11 000

References:Assessable income—Income from dividends

Assessable income—Foreign source salary and wages income

Question 2

Correct Answer: b

An employment termination payment is a payment received by a person on or after 1 July 2007:

s In consequence of the termination of that person’s employment; (s. 82-130(1)(a)(i)) or

s After another persons death, in consequence of the termination of the other person’s employment (s. 82-130(1)(a)(ii)).

To receive concessional tax treatment as an employment termination payment a payment must generally be received no later than 12 months after the termination, unless the Commissioner of Taxation considers that a later time is reasonable. A payment that fails the 12-month test is assessable income (s. 83-295).

The life benefit termination payment may be made up of two components—the tax-free component (s. 82-140) and the taxable component (s. 82-145).

The taxable component of a life benefit termination payment is the amount of the payment after deducting the tax free component (s. 82-140). The taxable component is included in assessable income, but the employee is entitled to a tax offset that puts a ceiling on the tax rate that may apply (s. 82-10(2)-(4)).

The tax rate depends on the age of the employee and the amount received:

s Tax does not exceed 15 per cent on the amount up to the ETP cap amount ($160 000 for the 2010/11 tax year indexed annually s. 182-160) if the taxpayer has reached preservation age (currently 55 years) on the last day of the tax year;

s Tax does not exceed 30 per cent up to the employment termination payment cap amount if the taxpayer is below preservation age; and

s In all cases, tax is payable at the top marginal rate of 45 per cent on amounts in excess of $160 000. Medicare levy is also added where appropriate.

In James’ case the tax free component only comprises the pre–July 1983 segment as there is no invalidity segment.

Therefore, the pre–July 1983 segment =Number of pre–July 1983 days/ Total number of days of employment

=2191 / 12 418 × $400 000

=$70 575

The taxable component=$400 000 – $70 575

=$329 425

Therefore, James pays tax at 15% on the first $160 000 = $24 000 + 45% on the remaining ($329 425 – 160 000) $169 425 = $76 241.

Total tax liability = $100 241.

Reference:Assessable income—Payments on termination of employment

Question 3

Correct Answer: a

To qualify as a medical expense an amount must be paid in respect of the taxpayer or a dependant who is a resident (see s. 159P).

The taxpayer’s daughter, aged 26, does not qualify as a dependant and the provision of a mouthguard is not the provision of services for the ‘supply, alteration or repair of artificial teeth’. (See definitions in s. 159P(4) of

‘dependant’ and ‘medical expenses’.)

The taxpayer’s 16-year-old son is a dependant and a payment in respect of a hearing aid is a medical expense (see paragraph (e) in definition of medical expenses in s. 159P(4)).

Reference:Family situation rebates—Medical expenses rebate

Correct Answer: d

Julie Hart’s son is not a dependant for the purposes of s. 159P(4) medical expenses rebate as he is not a student and her husband’s adjusted taxable income is too high to enable Julie to claim the spouse rebate.

To qualify for a medical expense rebate the unreimbursed expenses must exceed $2000 in 2010/11 and be paid in respect of the taxpayer, the taxpayer’s spouse, a child less than 21 years of age, or a resident dependant or notional dependant.

Under s. 159P(4), medical expenses in respect of Julie and Tom (if any) would qualify, but not medical expenses in respect of her 22-year-old son because he is not a dependant.

References:Family situation rebates—Medical expenses rebate

Family situation rebates—Dependant rebate

Question 5

Correct Answer: a

As a sole parent with a dependant child Brown is entitled to the Family Tax Benefit Part B from when he became a sole parent. As the Family Tax Benefit Part B is only claimed from 12 November 2010, he would be entitled to a partial spouse rebate for the period 1 July–11 November 2010 (134 days). There is no actual rebate claimable for a child or student. There is a notional child rebate used for the purpose of determining entitlement to the zone and housekeeper rebates and medical expense rebate. However, Brown is also not entitled to the zone rebate because he did not reside in a zone for the required 183 days during the year (s. 79A(3B) ITAA36).

References:Family situation rebates—Dependant rebate

Family situation rebates—Zone rebate

Family Tax Benefits

Question 6

Correct Answer: c

Tax offsets available to Martin are:

$ Franking credit $1000 × 40% × 30/70 = 171 Senior Australian’s tax offset maximum rebate (2010/11)2230

Less: Reduction as taxable income is above shade-out threshold

($32 171– 30 685 × 0.125) (186)2415 Low income rebate1500

Less: Reduction as taxable income is above $30 000

($32 171– 30 000 × 0.04) (87)1413 Total tax offsets3999

References:Rebates to prevent double tax—Franking credit tax offset

Correct Answer: b

Payments in respect of unused annual leave are included in assessable income by Subdivision 83-A of ITAA97. Payments in respect of unused long service leave are included in assessable income by Subdivision 83-B of ITAA97. However, in respect of long service leave accruing prior to 16 August 1978, only 5 per cent of the $2000 received is assessable (s. 83-80). Accordingly, the amount included in assessable income would be $76 600 (78 500 – 2000 + 5% × 2000).

However, certain payments in respect of unused annual leave and unused long service leave are rebatable. Amounts received for leave accrued prior to 16 August 1978 are not subject to this rebate as only 5 per cent is taxed. Amounts received in relation to leave accrued between 16 August 1978 and 17 August 1993 are eligible for a rebate which has the effect of limiting tax to 30 per cent (plus Medicare levy). This rebate is also applicable to leave accrued after 17 August 1993 where the payment resulted from a bona fide redundancy, early retirement scheme or invalidity. In this question, as the payments resulted from redundancy, a rebate is applicable to all post–16 August 1978 accrued long service leave and annual leave.

Accordingly, the net amount of tax paid would be calculated as:

Answer A limits tax to 15 per cent and not 30 per cent. Answer C treats the pre–16 August 1978 component of the long service leave as fully assessable and subject to the rebate. Answer D assumes the rebate does not apply to the post–17 August 1993 components.

$ Annual leave 21 500

Long service leave

—pre–16 August 1978 (5% of $2 000)100 —post–15 August 197855 000

76 600 Tax thereon @ 45%34 470 Less rebate*11 475 Tax payable 22 995

*

Calculation of rebate:

Tax payable including rebatable amounts

Less tax payable excl. rebatable amounts (Tax on $100 @ 45%) Tax attributable to rebatable amounts

Less maximum tax on rebatable amounts ($76 500 × 30%) (s. 83-85) Rebate

$ 34 470

45 34 425 22 950 11 475

Reference:

Assessable income—Unused leave payments

Question 8

Correct Answer: b

Where a taxpayer becomes or ceases to be a resident, the tax-free threshold is pro-rated. The tax-free threshold is calculated by multiplying $500 (the monthly amount of the total annual tax-free threshold of $6000) by the number of months the taxpayer was a resident (including the month in which he/she became a resident and/or ceased to be a resident). No additional threshold applies for income derived during the period the person was a non-resident.

The threshold is either the amount calculated or $6000, whichever is less.

In this case, Megan became a resident during October 2010. Therefore, the number of months of residence is nine (October 2010 – June 2011). The tax-free threshold is therefore $4500 (9 × $500).

Megan’s taxable income is $16 500. Tax payable on this amount is $1800 calculated as ($16 500 – $4500) × 15%. This is further reduced by the application of the low-income rebate of $1500.

Therefore, the total amount of tax payable by Megan in the year ending 30 June 2011 is $300.

Answer A is incorrect as it ignores the tax-free threshold adjustment:

($16 500 – $6000) × 15% – $1500 = $75

Answer C is incorrect as it ignores both the tax-free threshold adjustment and the low-income rebate:

($16 500 – $6000) × 15% = $1575

Answer D is incorrect as it ignores the low-income rebate:

($16 500 – $4500) × 15% = $1800

References:Determining taxable income and tax payable

Rebates that effectively increase the tax threshold of recipients—Low-income rebate

Question 9

Correct Answer: a

A rebate for medical expenses is available under s. 159P. All of the expenses are eligible medical expenses except for the motor vehicle costs and the cost of the mouthguard. Note also that Harry’s 26-year-old son is not a dependant of Harry. Generally, to qualify for the medical expenses rebate, payment must be made to a legally qualified doctor, nurse or chemist in respect of an illness or operation. Payments to a dentist are also included. The payment for the mouthguard is not rebatable as it is not in respect of a dental service or dental treatment.

T he rebate applies to any eligible medical expenses incurred by the taxpayer in respect of the taxpayer and his or her resident dependants. ‘Dependant’ includes:

s the legal or de facto spouse of the taxpayer;

s a child of the taxpayer under 21 years of age;

s a person for whom the taxpayer is entitled to a dependant’s rebate; and

s a child or student (under 25 years of age) in respect of whom the taxpayer qualifies for a notional dependant’s rebate (s. 159P(4)).

The rebate is equal to 20 per cent of the net medical expenses in excess of $2000 and is calculated as follows: ($400 + $1600 + $2000 – $2000) × 20% = $400.

Answer B is wrong as it includes the cost of the mouthguard. Answer C is wrong as it includes the son’s medical expenses (ineligible as Harry’s son is not a dependant). Answer D is wrong as it includes both the mouthguard costs and Harry’s son’s medical costs.

Reference:Family situation rebates—Medical expenses rebate

Question 10

Correct Answer: a

From 2009/10 separate net income has been replaced by the concept of ‘adjusted taxable income’ as defined in s. 159J (6)(a). It is important to note that adjusted taxable income is not the same as taxable income. Adjusted taxable income is calculated by the total of the following amounts:

s Taxable income;

s Reportable superannuation contributions;

s Total net investment loss from financial investments (rights, options and like investments) and rental properties;

s Adjusted fringe benefits (i.e. reportable fringe benefits adjusted down for FBT paid by the employer);

s Income from certain tax-free pensions and benefits from Centrelink or Veterans Affairs;

s Income from foreign employment that is exempt;

minus the annual amount of any child support/maintenance the taxpayer or taxpayer’s partner pays. Therefore, Libby’s adjusted taxable income will be:

Answer A: Taxable income = $3700 + $70 + $30 + $400 reportable superannuation contributions = $4200 – child support payment $1000 = $3200. (The $200 share of net rental loss is not added back because it has not been originally subtracted when calculating Libby’s taxable income. Refer to Example 7.13 to distinguish between the different treatments of the net rental loss.)

T he alternative answers are calculated as follows:

Answer B: $3700 + $200 + $400 – $1000 = $3300 (wrong as the franked dividend and gross-up is excluded and the net rental loss is included incorrectly).

Answer C: $3700 + $100 + $200 = $4000 (wrong as the superannuation contribution and child maintenance payment are excluded and the rental loss is included incorrectly).

Answer D: $3700 + $100 + $400 = $4200 (wrong as the child maintenance payment is excluded).

References:Family situation rebates—Dependant rebate

Assessable income—Income from dividends

Question 11

Correct Answer: d

The tax offsets available to Lewis Baker are:

$ Superannuation benefit is tax free (i.e. an income stream for >60 years) 0

Foreign tax credit ($850/.85 = $1000 less $850 received)150

Senior Australians tax offset full amount as the super benefit is tax free 2230

Low-income rebate1500

Total tax offsets3880

The alternative answers are calculated as follows:

Answer A: $150 FTC only.

Answer B: $1650 = $150 FTC and the low income rebate $1500 only.

Answer C: $2380 = $150 FTC + SATO $2230 only.

References:Rebates that effectively increase the tax threshold of recipients—Senior Australians tax offset Rebates that effectively increase the tax threshold of recipients—Low income rebate

Assessable income—Income from dividends

Assessable income—Superannuation benefits

Question 12

Correct Answer: d

The bonus is statutory income under s. 15-2 ITAA97 (formerly ITAA36 s. 26(e)) because it is a bonus received in respect of employment and it is not a fringe benefit. It is also not received by a person ‘in consequence of the termination’ of employment (s. 82-130(1)(a)(i) ITAA97). The annual leave and the long service leave pay are statutory income under Subdivisions 83A and 83B of the ITAA97 respectively and are specifically excluded from the definition of an ETP (s. 82 -135 ITAA97). Finally, the lump sum superannuation benefit is taxed separately under Division 301, ITAA97 and is also specifically excluded from the definition of an employment termination payment (s. 82 -135, ITAA97).

References:Assessable income—Superannuation benefits

Assessable income—Unused leave payments

Assessable income—Payments on termination of employment

Question 13

Correct Answer: b

$

Dividend (fully franked)200

Gross up for franking credit $200 × 30/7086

Interest360

Gross up for withholding tax40

Assessable income686

Tax payable $686 × 30% = 205.80

Less franking credit86.00

withholding tax credit40.00

126.00

79.80

Tax payable (to the nearest dollar). $80

References:Assessable income—Income from dividends

Rebates to prevent double tax

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