Statement of Advice 1 Prepare a tax return for an entity (Australian private company) (10 marks

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Statement of Advice 1 – Prepare a tax return for an entity (Australian private company) (10 marks for technical and calculation accuracy and relevance and 10 marks for writing style; refer to marking rubric for more guidance.) In your current role, you are responsible for providing taxation services to individual/business clients. You conducted an initial meeting with two (2) clients (Julia and John Smart, both Australian residents) to obtain and document all the relevant information which is required to prepare the relevant tax documentation. Both Julia and John are directors of Smart Solutions Pty Ltd, an Australian resident private company with a corporate tax rate for imputation purposes of 30% for the 2021/22 income year. The clients have requested that you evaluate their tax position and provide recommendations relating to income tax liability and the optimum tax treatment. Smart Solutions Pty Ltd sells coffee machines using accrual basis accounting for tax purposes. Receipts and payment details as at 30 June 2022 are as follows (ignore GST and small business concessions).

Receipts

Cash received for Sales (note 1) $278,000 Dividend received (note 2) $8,720 Income tax refund (note 6) $10,000

Payments

Purchases of inventory (note 3) $97,000 Net wages paid to employees $57,890 PAYG withholding paid to the ATO $12,780 Superannuation paid (note 4) $4,987 PAYG instalment paid the ATO (note 5) $5,210 Fringe benefit tax paid to the ATO $11,210 Purchase of motor vehicle (note 7) $52,000 Other deductible expenses $26,900

Notes Note 1) All sales during 2022 income year were on credit. Account receivable balances were as follows. Date 1 July 2021 30 June 2022 Accounts receivable $17,600 $19,800

Note 2) Dividend income received by Smart Solutions Pty Ltd for the year included: • On 30/8/2021, a dividend of $3,600 received from Australian Bank Ltd (an Australian resident public company for tax purposes) franked to 60%. • On 28/2/2022, an unfranked dividend of $5,120 from Lowest Ltd (an Australian resident public company for tax purposes).

Note 3) All inventory purchases during 2022 tax year were on credit. Account payable and inventory balances were as follows. Date 1 July 2021 30 June 2022 Accounts payable $5,280 $5,830 Inventory (trading stock) on 1 July 2021 $7,100 Inventory (trading stock) on 30 June 2022 - at cost $8,400 - at market selling $8,600 - at replacement $8,500

Note 4) As per the ledger balances on 30 June 2022, Superannuation payable for June quarter was amounted to $1,727. The payment is due by 28 July 2022. Note 5) As per the ledger balances on 30 June 2022, PAYG instalment liabilities payment and payable information are as follows. 24/8/2021 PAYG instalment paid for June quarter 2021 $ 860 25/11/2021 PAYG instalment paid for September quarter 2021 $1,450 28/2/2022 PAYG instalment paid for December quarter 2021 $1,450 26/5/2022 PAYG instalment paid for March quarter 2022 $1,450 June quarter 2022 was amounted to $1,450. The payment will be paid on 25 August 2022.

Note 6) The tax refund was received on 25 February 2022.

Note 7) The motor vehicle (Toyota Hatchback) was purchased on 1 March 2022 and used to deliver coffee machines. Bothdirectors wish to use the taxation effective life to depreciate the Motor vehicle.

Required 1) John wishes to minimise the income tax for 2021/22. Calculate Smart Solutions Pty Ltd’s net tax liability in respect of the income that it derived in the tax year 2021/22.

2) Advise assessability of receipts and deductibility of payments with explanations (Sales, Dividend income, Trading Stock, PAYG withholding, PAYG instalment, Superannuation guarantee, fringe benefits, Dividend paid and motor vehicle purchase). Include section numbers and/or cases in your explanations.

Statement of Advice 2 – Advice on company franking account and distributions (10 marks for technical and calculation accuracy; refer to marking rubric for more guidance) Julia and John seeking your advice regarding Smart Solutions Pty Ltd’s franking account. (Please note: use all figures/information provided from Statement of Advice 1 above to construct the franking account for 2021/22. Opening balance is provided below).

Required 1) 1 July 2021, the balance in Smart Solutions Pty Ltd’s franking account was $18,721. Construct Smart Solutions Pty Ltd’s franking account for the 2021/22 financial year. You also need to calculate the franking account balance as at 30 June 2022.

2) Smart Solutions Pty Ltd wishes to pay a final fully franked dividend of $40,000 on 30 June 2022. However, Julia and John are concerned about the franking account to go into deficit. Calculate and advise the maximum frankable distribution amounts that Smart Solutions Pty Ltd can pay as fully franked dividend. What are the tax consequences if Smart Solutions Pty Ltd goes ahead and pays $40,000 fully franked dividend on 30 June 2022?

3) Assuming Smart Solutions Pty Ltd paid $40,000 fully franked dividend on 30 June 2022 (only dividend paid for the year), comment on the tax treatment of the dividend to the following four (4) shareholders: • Julia and John Smart receive a dividend of $15,000 each. They are Australian residents at the highest marginal tax rate. • $5,000 to Justin Smart, the son of Julia and John, who has been studying in London for three years and is a foreign resident. • $5,000 to Leaf Pty Ltd, an Australian private company with a 30% company income tax rate. Advise how each of the above four shareholders of Smart Solutions Pty Ltd would be taxed on the distribution received in 2021/22.