Sealy Pty Ltd (Sealy) is an Australian resident company for tax purposes. The shares in Sealy are owned by Harry Sealy (80%) and Rhonda Sealy (20%). Both Harry and Rhonda are Australian residents for income tax purposes. Aside from the company, Harry has no other source of income. Rhonda has a part-time job and she obtained $35,000 from this job during 2020-21. She also has deductions of $2,000 in relation to this job. Sealy's main activity is running a take-away sandwich shop in the forecourt of the Peak 25 Towers building in the Sydney Central Business District (CBD). However, the company also owns some shares in other companies, and it also holds some non-share investments. For the 2020-21 income year, Sealy has entered into/been involved in the following transactions:

1. Received a distribution of $18,526 (85% franked) from WDC Ltd on 28 July 2020. WDC Ltd is an Australian resident company;

2. Paid a company tax instalment of $63,500 under the Pay-As-You-Go (PAYG) instalment system on 31 July 2020,

3. Paid an interim dividend of $98,600 on 19 October 2020 to Harry and Rhonda. The distribution was 76% franked;

4. Paid a company tax instalment of $57,000 under the PAYG instalment system on 24 November 2020;

5. Paid a company tax instalment of $59,000 under the PAYG instalment system on 28 February 2020;

6. Paid a company tax instalment of $25,687 under the PAYG instalment system on 27 April 2020;

7. Payment of fringe benefits tax on 23 May 2020 of $6,800 in respect to the 2020-21 FBT year; and

8. Payment of a final dividend of $313,000 to the shareholders, Harry and Rhonda on 28 May 2020. On the advice of Sealy's new tax accountant, this distribution was 78% franked.

Sealy's franking account on 30 June 2020 had a deficit balance of $29,689. Debits for that year were $322,031, and credits for the year were $292,342. Sealy also owns three percent (3%) of the units in a small private unit trust (General Property Trust (GPT)). GPT is a property trust that invests in small commercial properties in CBD areas of New South Wales. Sealy received its distribution from GPT on 30 October 2020 in respect to the 2020-21 financial year. The distribution statement stated that GPT's trust law income for the 2020-21 year was $500,000 and its taxable income was $480,000. Also, on 23 September 2020, Sealy received its distribution ($12,800) from last financial year (2018-19). The PAYG instalments paid on 24 November 2020, 28 February 2020 and 27 April 2020 were the only PAYG instalments paid in respect to the 2020-21 income year. Aside from the above transactions, the only other transactions relating to Sealy arose from principal in its bank account. Sealy derived interest of $3,100 for the 2020-21 income year. Sealy's assessable income from the take-away sandwich shop was $1,390,000 for the 2020-21 income year. Aside from the transactions listed above, Sealy's deductions from the business for the year were $955,870.

Required

1. Advise Sealy on the implications arising from its franking account for the 2018-19 year. Fully explain your advice by reference to tax legislation and tax principles. Show calculations if required.

2. Construct Sealy's franking account for the 2020-21 year. Provide a brief explanation for your entries to the franking account.

3. Advise Scaly of any consequences arising from its franking account for the 2020-21 year. Fully explain your advice by reference to tax legislation and tax principles. Show calculations if required.

4. Calculate Sealy's liability to the ATO for the 2020-21 income year. Explain your calculations by reference to tax legislation and tax principles.

5. Advise Rhonda of the tax implications to her of receiving the 28 May 2020 dividend. Explain your advice. Show calculations if required.

Answer rating: 100% (QA)

1 Adv ise Se aly on the implications arising from its frank ing account for the 2018 19 year Fully explain your advice by reference to tax legislation and tax principles Show calculations if required ... View the full answer