In your current role, you are responsible for providing taxation services to individual clients. You conducted an
Question:
In your current role, you are responsible for providing taxation services to individual clients. You conducted an initial meeting with two (2) clients (Stuart and Annie) to obtain and document all the relevant information which is required to prepare the relevant tax documentation.
The clients have requested that you provide a report of analysis of their tax position, and recommendations relating to client’s income tax liability, and recommendations regarding dividends payable, to provide the optimum tax treatment. And to analyse and optimise franking credits in relation to two shareholders.
Question 1
Baby Hub Pty Ltd (“Baby Hub”) is an Australian company. It conducts a business selling children’s toys.
Details of stock during the year were as follows: (All amounts are shown at cost value).
Required
• Calculate Baby Hub Pty Ltd’s income tax liability in respect of the income that it derived in the 2020-2021 year of income. (GST calculations are not required) (10 marks)
Question 2
Required
(a) Assume on 1 July 2020, the balance in Baby Hub Pty Ltd’s franking account was $50,000. On an excel spreadsheet, construct Baby Hub’s franking account for the 2019-20 financial year, and calculate the franking account balance as at 30 June 2021 and 31 October 2021. (3 marks)
(b) On1November2021,BabyHubPtyLtddeclaresadividendof $400,000. Assume that apart from the transactions in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that Baby Hub Pty Ltd can attach to this dividend. Assuming Baby Hub Pty Ltd does not want the franking account to go into deficit at the time the dividend is declared, advise Baby Hub Pty Ltd of the percentage to which it should frank the dividend. (2 marks)
(c) Assuming Baby Hub franks the dividend to the percentage you recommended in (b) above, comment on the tax treatment of the dividend to the following shareholders:
Liam: receives a dividend of $5,000. Liam is an Australian resident at the highest marginal tax rate.
Nocky: receives a dividend of $5,000. Nocky is a non-resident. The country in which Nocky resides does not have a double tax agreement with Australia.
Question 3
As noted in the facts, Baby Hub has a large quantity of stock of Toy B left on hand. The market value of the stock is now lower than the cost price. Baby Hub seeks your advice as to whether they can revalue the stock at a lower price. Briefly advise Baby Hub whether they are able to revalue the stock and if so, how they can value it.