Question Jimmy operated his own shoe design and manufacturing business from a warehouse in the CBD....

 

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Question Jimmy operated his own shoe design and manufacturing business from a warehouse in the CBD. Jimmy purchased the warehouse on 1 July 2017 for $1.5 million, it had been constructed in 2009 and the cost associated with construction was $500,000. He also offered weekend classes in shoe design to up and coming designers. Students signed up for a 20-week course which was paid in advance. Jimmy offered refunds to students who cancelled their courses. Income received was kept in a suspended income account. At the end of each month the value of classes run that month were removed from the suspended income account and accounted as income. While many students bring their own materials, Jimmy maintains a stock of cotton, fabric and accessories which he buys from a number of suppliers. They give his 30 days credit which he always uses. The stock is used very quickly so Jimmy treats them as consumables rather than trading stock. Jimmy s income and expenses for the current year are as follows: Receipts Sale of shoes Jimmy had issued invoices totalling $2,280,000 but at 30 June 2018 he had only received $2,245,000. He also received $5,000 which related to invoices from the previous year Shoe design classes income. Cash received $60,000, of which $10,000 was for courses not yet taken Compensation payment for loss of business profits when he broke his ankle trying out a new style of shoe and couldn t work. Interest on savings account Dividends from Sparkles Galore Ltd (franking credits attached to the dividend were $1289) Unfranked Dividend from High Heels Pty Ltd Jimmy is a member of the army reserves and received wages for his duties undertaken for the year $ 2,250,000 60,000 40,000 1,345 5,890 2,000 10,000 Expenses Membership of Shoe Designers Association Purchase of materials for use in the classes. On 15 June 2018 Jimmy bought $1,500 of new materials for which he had not yet paid. Purchases of stock for use in manufacturing shoes Dixcleaning of army reserve uniform Purchase of uniforms for himself and his staff That was branded with the shops logo Motor vehicle expenses for Jimmy his records showed 80% business use Parking fines incurred whilst attending client premises Jimmy often took some work home with him and incurred the following expenses, he estimated that he spent around 30% of him time working from home Home electricity Home insurance Home Rates and taxes Donation to Red Cross Annual Shoe Designers Conference in Paris Travel expense to attend the conference included Airfares Accommodation Taxis Meals Sightseeing eg, Eiffel Tower 650 10,500 965,000 200 5,800 25,000 300 1,200 700 1,400 500 350 5,000 3.000 350 1,000 500 Wages for staff Payment to his sister for taking his place at the sewing classes whilst he was on holiday. If he had paid a casual from an employment agency it would have cost $2000 but he wanted to help out his sister and paid her a bit more. Superannuation for employees Personal superannuation Jimmy took out a loan on 1 September 2017 to help with the purchase of some new plant and equipment. He borrowed $27,300 of which $17,300 went towards the purchase of new plant and the rest he used as spending money on his holiday. The repayments were due on the 1st day of each month starting as from 1 October 2017 of $1500 consisting of $1300 capital and $200 interest. The costs associated with obtaining the loan were $400 and the loan was for 3 years 9.5% of gross wages On 30 June 2018 Jimmy prepaid the loan repayments for the next 12 months 1 July 2018 to 30 June 2019 Payment to his accountant for completing his income tax returns Advice from his legal advisor on the benefits of changing his structure from its current mode of a sole trader to a company Plant and equipment (see note 4) Notes: 890,000 3500 25,000 13,500 18,000 4,300 1,500 1. In the previous year Jimmy had incurred a loss of $29,000 after a deduction of $12,000 for superannuation for himself and a donation to World Vision $2,000. 2. Jimmy has paid $57,000 in PAYG instalments against his business income for the financial year ended 30 June 2018 3. Opening stock was valued at $150,000 and the closing stock as at 30 June 2018 was based on several methods a) Cost $165,000 b) Market $175,000 c) Base Value $145,000. Jimmy wished to minimise his profits on the business 4. Jimmy was depreciating plant and equipment as per below and during the year additional plant was purchased and existing plant sold or scrapped. Plant on hand Item Office Furniture Computer Sewing Machine A Coffee Machine Plant A Purchases Item Plant B Plant C Sewing Machine B Sales Item Plant A Sewing Machine A Cost $ 4,600 1,000 10,000 6,000 7,000 OAV at 1.7.2017 1,500 700 Purchase date 1.10.2017 16.1.2018 5.5.2018 Sale date 1.10.2017 5.5.2018 8,000 4,000 5,000 Price $ 3,500 5,800 8,000 Rate 10% diminishing value 40% diminishing value 20% diminishing value 20% diminishing value 20% prime cost Effective life 4 years 5 years 6 years Sale price $ 7,500 4,000 1. Jimmy sold off some of his assets during the financial year so he could buy the warehouse for his business. A) Sale of vacant land on 28 May 2018 The land had been bought on 28 October 1984 at a cost of $95,000. Stamp duty of $2,358 was paid at purchase. Rates and taxes of $15000 were paid during ownership. He paid $10,000 to the agent for the sale of the land and $1299 in settlement fees, these were both paid on 28 May 2018. The land had been bought by Jimmy with the intention of building a factory for his business. B) Sale of shares in public company on 23 September 2017 The shares had been bought on 3 March 2017 for $48,000 Brokerage on purchase and sale was 1% payable at the time of the transaction. 290,000 55,000 C) Sale of holiday house on 12 August 2017 The house had been purchased on 22 November 2005 for $290,000. He had paid interest during his period of ownership which totalled $40,000. Stamp Duty of $6,320 had been paid at purchase. At purchase He arranged to have a new kitchen fitted at a cost of $23,000. This was paid on 15 January 2006. During the period of ownership He had a dispute with his neighbour over the boundary of the property and on 1 March 2011 He paid his lawyer $2,500 for resolving the dispute. Jimmy had a previous capital loss of $15,000 from the sale of shares in 2017. 400,000 Required: Calculate Jimmy s taxable income and his net tax payable including Medicare Levy for the year ended 30 June 2018. Please provide reasons for any exclusion of items from your answer. Question Jimmy operated his own shoe design and manufacturing business from a warehouse in the CBD. Jimmy purchased the warehouse on 1 July 2017 for $1.5 million, it had been constructed in 2009 and the cost associated with construction was $500,000. He also offered weekend classes in shoe design to up and coming designers. Students signed up for a 20-week course which was paid in advance. Jimmy offered refunds to students who cancelled their courses. Income received was kept in a suspended income account. At the end of each month the value of classes run that month were removed from the suspended income account and accounted as income. While many students bring their own materials, Jimmy maintains a stock of cotton, fabric and accessories which he buys from a number of suppliers. They give his 30 days credit which he always uses. The stock is used very quickly so Jimmy treats them as consumables rather than trading stock. Jimmy s income and expenses for the current year are as follows: Receipts Sale of shoes Jimmy had issued invoices totalling $2,280,000 but at 30 June 2018 he had only received $2,245,000. He also received $5,000 which related to invoices from the previous year Shoe design classes income. Cash received $60,000, of which $10,000 was for courses not yet taken Compensation payment for loss of business profits when he broke his ankle trying out a new style of shoe and couldn t work. Interest on savings account Dividends from Sparkles Galore Ltd (franking credits attached to the dividend were $1289) Unfranked Dividend from High Heels Pty Ltd Jimmy is a member of the army reserves and received wages for his duties undertaken for the year $ 2,250,000 60,000 40,000 1,345 5,890 2,000 10,000 Expenses Membership of Shoe Designers Association Purchase of materials for use in the classes. On 15 June 2018 Jimmy bought $1,500 of new materials for which he had not yet paid. Purchases of stock for use in manufacturing shoes Dixcleaning of army reserve uniform Purchase of uniforms for himself and his staff That was branded with the shops logo Motor vehicle expenses for Jimmy his records showed 80% business use Parking fines incurred whilst attending client premises Jimmy often took some work home with him and incurred the following expenses, he estimated that he spent around 30% of him time working from home Home electricity Home insurance Home Rates and taxes Donation to Red Cross Annual Shoe Designers Conference in Paris Travel expense to attend the conference included Airfares Accommodation Taxis Meals Sightseeing eg, Eiffel Tower 650 10,500 965,000 200 5,800 25,000 300 1,200 700 1,400 500 350 5,000 3.000 350 1,000 500 Wages for staff Payment to his sister for taking his place at the sewing classes whilst he was on holiday. If he had paid a casual from an employment agency it would have cost $2000 but he wanted to help out his sister and paid her a bit more. Superannuation for employees Personal superannuation Jimmy took out a loan on 1 September 2017 to help with the purchase of some new plant and equipment. He borrowed $27,300 of which $17,300 went towards the purchase of new plant and the rest he used as spending money on his holiday. The repayments were due on the 1st day of each month starting as from 1 October 2017 of $1500 consisting of $1300 capital and $200 interest. The costs associated with obtaining the loan were $400 and the loan was for 3 years 9.5% of gross wages On 30 June 2018 Jimmy prepaid the loan repayments for the next 12 months 1 July 2018 to 30 June 2019 Payment to his accountant for completing his income tax returns Advice from his legal advisor on the benefits of changing his structure from its current mode of a sole trader to a company Plant and equipment (see note 4) Notes: 890,000 3500 25,000 13,500 18,000 4,300 1,500 1. In the previous year Jimmy had incurred a loss of $29,000 after a deduction of $12,000 for superannuation for himself and a donation to World Vision $2,000. 2. Jimmy has paid $57,000 in PAYG instalments against his business income for the financial year ended 30 June 2018 3. Opening stock was valued at $150,000 and the closing stock as at 30 June 2018 was based on several methods a) Cost $165,000 b) Market $175,000 c) Base Value $145,000. Jimmy wished to minimise his profits on the business 4. Jimmy was depreciating plant and equipment as per below and during the year additional plant was purchased and existing plant sold or scrapped. Plant on hand Item Office Furniture Computer Sewing Machine A Coffee Machine Plant A Purchases Item Plant B Plant C Sewing Machine B Sales Item Plant A Sewing Machine A Cost $ 4,600 1,000 10,000 6,000 7,000 OAV at 1.7.2017 1,500 700 Purchase date 1.10.2017 16.1.2018 5.5.2018 Sale date 1.10.2017 5.5.2018 8,000 4,000 5,000 Price $ 3,500 5,800 8,000 Rate 10% diminishing value 40% diminishing value 20% diminishing value 20% diminishing value 20% prime cost Effective life 4 years 5 years 6 years Sale price $ 7,500 4,000 1. Jimmy sold off some of his assets during the financial year so he could buy the warehouse for his business. A) Sale of vacant land on 28 May 2018 The land had been bought on 28 October 1984 at a cost of $95,000. Stamp duty of $2,358 was paid at purchase. Rates and taxes of $15000 were paid during ownership. He paid $10,000 to the agent for the sale of the land and $1299 in settlement fees, these were both paid on 28 May 2018. The land had been bought by Jimmy with the intention of building a factory for his business. B) Sale of shares in public company on 23 September 2017 The shares had been bought on 3 March 2017 for $48,000 Brokerage on purchase and sale was 1% payable at the time of the transaction. 290,000 55,000 C) Sale of holiday house on 12 August 2017 The house had been purchased on 22 November 2005 for $290,000. He had paid interest during his period of ownership which totalled $40,000. Stamp Duty of $6,320 had been paid at purchase. At purchase He arranged to have a new kitchen fitted at a cost of $23,000. This was paid on 15 January 2006. During the period of ownership He had a dispute with his neighbour over the boundary of the property and on 1 March 2011 He paid his lawyer $2,500 for resolving the dispute. Jimmy had a previous capital loss of $15,000 from the sale of shares in 2017. 400,000 Required: Calculate Jimmy s taxable income and his net tax payable including Medicare Levy for the year ended 30 June 2018. Please provide reasons for any exclusion of items from your answer.

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