LAW601 Taxation Law Assignment Questions and Answers
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Question 1 Case Study 10 Marks
Alena and Wilson Hudson inherited 200 acres of property near a popular Ski Resort from their Aunt Dale. Aunt Dale paid $100 000 for the property at which was appraised at $200 000 at the time of her death. (The appraisal included $50 000 for an old house on the property). Alena, a national cross country ski member, was delighted. The property is near the Ski Hills where she trains and the old house had great personal value to her. She could use the house to stash her equipment, take warm-up breaks in between training runs and if she got caught in a snow storm, she could stay the night.
Wilson, who lived in another Province, was content to do nothing with the property for the time being. Instead he used his half interest in the property to secure a loan for $80 000 which he then invested in a dividend producing high tech shares. The shares paid $80 a year in dividend income.
Wilson deducted his $5000 interest payments as an expense related to the dividend income he received. Wilson has recently contacted Alena with a proposal for selling the property. He is willing to gift Alena his share of the old house and some acres surrounding it, if they sell the balance of the property to a developer. Wilson thinks that the house with a few acres has current market value of $70 000.
Because the property is near so the Ski Resort area, Wilson thinks that a sale to a developer would yield atleast $300 000 for the land alone, without the house. Alternatively, Wilson says that his real friend Edward, a real estate broker, is interested in working with them to file a sub division plan, and sell individual house lots to Ski enthusiasts. Edward suggests that with this alternative plan Wilson and Alena could earn in access of $400 000.
Required:
- Advice Alena on the tax consequences of Wilson’s proposed plan to gift her half interest in old house. (4 marks)
- Compare the tax consequences of the proposal to sell the land directly to the developer with the alternative plan to sell individual (6 marks)
Question 2 Taxation of Partnership 15 Marks
Donald, Ronald and Mick started a supermarket business in Fiji under a partnership agreement stating profit & Loss sharing ratio of 6:3:1.
During the financial year of 2020 the following transactions has taken place amounting to:
| $ | |
| Sales | 3,500,000 |
| Sales Returns | 69,050 |
| Purchases | 1,560,000 |
| Interest on investment | 35 000 |
| Advertising | 27,000 |
| Fuel-Motor Vehicle (For vehicles used in business) | 18,500 |
| Depreciation (For assets used in business) | 35,000 |
| Telephone | 14,500 |
| Goodwill Amortized | 6 000 |
| Freight Inwards | 2 000 |
| Utility | 12,000 |
| Rent (For renting the shop space) | 130,000 |
| FNPF | 55,000 |
| Salaries & Wages | 370,000 |
| Discount Received | 3 500 |
| Purchase Returns | 50 000 |
| Bank Charges | 9 000 |
| Interest on mortgage | 12,500 |
| Accrued Expenses | 5 500 |
| Insurance Premiums | 8 000 |
| Miscellaneous Expenses | 10,000 |
| Income Tax Payable | 15 000 |
Additional Information
- Closing stock 31/12/2020 $107,000
- Opening stock 1/1/2020 $45,000
- Tax Rate 20%
- Donald and Mick are resident of Fiji and Ronald is a non-resident
Required:
- Prepare the Profit and loss statement of partnership business. (10 Marks)
- Calculate Tax Liability of each partner for the year (5 Marks)
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