Your client Olivia comes to see you in August 2015 asking for advice about various income tax issues that have arisen during the 2015 tax year, as well as issues in the future. You are required to analyse each issue and provide appropriate advice to her about the income tax implications.
She provides the following information;
a) Olivia established a small business selling lollies (Olivia’s Yummy Lollies) in 2000. She has operated this lolly shop ever since, but is considering selling the business. She could sell the business for approximately $340,000, but would incur agent and legal costs of $11,900.
b) She is also considering selling her family home. She purchased her home on 26 April
1990 for a cost of $580,000 and also incurred legal costs of $1,600 and stamp duty of
$21,000 in relation to the purchase. Olivia has lived in the house as her main residence the entire time, except for a period of 8 years between 1992 and 2000. The current market value of her home now is $840,000.
c) Olivia sold, on 20 June 2015, her 2,000 shares in Telstra for $12,400. Of these shares,
1,000 were originally acquired in November 1997 at a cost of $3.30 per share. There was a 1 for 10 bonus share offer in March 2008, which were issued from the company’s share capital account (not a dividend). The remainder of her Telstra shares were acquired in January 2000 for $8.00 per share. The brokerage costs for the sale of her shares was $50.
d) Olivia was sued by a customer of her lolly shop in October 2014 when they bit into a “gobstopper” lolly and broke 5 of their teeth. Her legal fees in fighting the lawsuit amounted to $3,100. The same customer made public comments that defamed Olivia and her business as a result of the “gobstopper” issue. Olivia was awarded $6,500 compensation by the court for this defamation.
In addition to the above transactions, Olivia had the following receipts and expenditure for the year ended 30 June 2015;
Gross income from ‘Olivia’s Yummy Lollies’ shop 180,000
Family Tax benefit (for her 15 year old daughter) 5,200
Cash received from deceased husband’s estate 15,000
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Deductible expenses for ‘Olivia’s Yummy Lollies’ shop 75,000
Monthly call costs on her mobile phone (80% business) 1,200
Income protection insurance 1,250
Life insurance 900
Interest on loan originally used to purchase her family home 9,000
Tax Agent fees 1,500
Superannuation contribution to her superannuation fund $4,000
Medical expenses for herself and her daughter (including $200 hospital costs, $190 doctor visits, $7,800 dental work, $720 physiotherapy,
$800 injections prior to an overseas holiday) 9,710
Amounts refunded by health fund and Medicare $2,400
Olivia’s PAYG instalments paid during the 2015 tax year 19,000
Olivia is 54 years old.
1. Advise Olivia about the tax implications of the compensation she received and legal fees incurred in relation the lawsuit brought by a customer. (4 marks)
2. Discuss the assess ability and deductibility of all the other items listed in the information. Calculate Olivia’s taxable income for the year ended 30 June 2015.
3. Calculate the tax payable/ (refundable) for Olivia for the year ended 30 June 2015, including all additional levies and tax offsets. You should address all levies or offsets that could apply to her. (6 marks)
You must support your discussion and interpretation with reference to legislation, cases or rulings in Australia. If you do not reference appropriately to the legislation, cases or rulings, marks will be deducted.
You need to explain your reasoning for your advice adequately so that Olivia understands the basis for your advice to her about these issues.