Southern Fried Ltd is a large food production company. The company accountant, Ernest, is in the process of preparing income tax returns for the company and staff, and seeks advice on the following matters: The company has faced major constraints in attracting customers during the Covid lockdown due to the inability to entice customers through the delicious smell of deep fried food, pumped into public areas. Since its former marketing strategy is no longer proving to be effective, and due to intense price competition from other major food production companies, Southern Fried is forced to increase its advertising expenditure quite significantly compared to previous years. In previous years, the advertising expense was only around $50,000 per year. In 2021/22, it came to $150,000. The directors of Southern Fried however felt that this was necessary in order to retain market share. The directors of the company are hoping that the advertising budget can return to its normal level in the next income year. During the 2021/22 income year, Southern Fried made three frank able distributions. The first distribution ($1m) is franked at 70%, the second distribution ($2m) is franked at 80%, and the third distribution ($1m) is franked at 50%.(Assume a corporate tax rate for imputation purposes of 30%).

In October 2021, Southern Fried’s CEO, Colonel takes a trip to Texas after meeting a native Texan, Pollyanna, on the Internet and promising to visit her. Colonel spends two weeks in Texas sampling authentic southern fried foods at restaurants as part of the company’s product development project, and takes Pollyanna along with him to the restaurants. The total cost of their meals is $1200, and the total cost of Colonel’s travel, airfares and accommodation for the trip is $5,000. Colonel is also a potential beneficiary of the Southern Family Trust (SFT), a discretionary family trust which carries on a business of providing project management services in relation to major projects in Australia. SFT is an Australian resident trust. The beneficiaries are Sanders and his wife Sally, and their two children, Colonel(30 years) and Bill(25 years). Sanders is a foreign resident for tax purposes. Sally, Coloneland Bill are Australian residents for tax purposes. The Trustee is a close family friend. During the 2021/22income year, the trust estate earned income calculated under trust law principles of $206,000. The Trustee allocated the trust law income under a trustee resolution made on 15 July 2022, as follows: Beneficiary, Share: Colonel40% Bill30% Sanders10% Sally20% SFT’s tax law income (net income calculated under s95 ITAA36) for the 2021/22income year was $214,000.The SFT trust deed also includes a default distribution clause which provides that: “In the event that the Trustee does not exercise the power to accumulate or to distribute all or part of the income prior to midnight on 30 June in the relevant income year, then the undistributed or unaccumulated income will automatically be distributed to beneficiaries Sanders, Sally, Colonel and Bill in equal shares.”

Required: 

Advise Southern Fried, Ernest and Colonel regarding the income tax implications arising from the above facts in relation to the 2021/22income year. In your answer make sure you refer to any relevant cases, legislative provisions, tax rulings and principles of tax law.

Answer rating: 100% (QA)

The staff sales is being kept out of the accounting records ie staff sales is not recorded in the books of accounts As a result of this the financial ... View the full answer