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ABC Sport Pty Ltd is a distributor of golf and tennis equipment based in Melbourne.It has recently experienced a reduction in projected sales, primarily because a major supplier, who supplied 40% of...

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ABC Sport Pty Ltd is a distributor of golf and tennis equipment based in Melbourne.It has recently experienced a reduction in projected sales, primarily because a major supplier, who supplied 40% of the sporting goods that ABC Sport distributed to its customers, cancelled a contract to supply sporting goods to ABC Sport. ABC Sport received $200,000 compensation from the supplier for the cancellation of the supply contract. Although a new supplier was found, John Smith, who is both the accountant and the Managing Director of ABC Sport, decided that more was needed to be done to improve sales and make the company more efficient. On 1 August 2016, John visited Brisbane for four weeks to examine the possibility of relocating some of the ABC Sport stores to Brisbane, where the weather is warmer for a longer period of time each year and accordingly, potential clients would have more time to play golf and tennis. The cost of this trip was $6,000. After returning to Melbourne, the company spent $125,000 analysing whether the relocation of some of the ABC Sport stores to Brisbane was desirable.

John was paid a salary of $100,000 a year and ABC contributed to John’s superannuation fund. ABC Sport also paid for his son’s school fees of $20,000 a year and provided John with a car for both business and private use. John regularly leaves his youngest son at the child care centre that ABC Sport provides for employees free of charge. ABC also gives John a new set of golf clubs each year and pays for his annual membership subscription to CPA Australia.

On 2 April 2017, the Board of Directors resolved to relocate some of the stores to Brisbane.By June 2017, production of golf clubs in Brisbane had commenced.

Prior to moving to Brisbane, John sold the family home, which was bought in 2000. At the time of purchase, the land was vacant and in 2006, John constructed a home on the property, which the family has lived in ever since. Prior to that, the family lived in rented accommodation. John was a keen yachtsman and in 1984 he had purchased an ocean racing yacht for $500,000. He sailed the yacht in a number of Sydney to Hobart races. In 2012, he installed a new mast in the yacht at a cost of $600,000. He decided not to take the yacht to Brisbane, and sold it for $2,000,000 in September 2016. At the time of sale, the mast was valued at $500,000. Johnalso sold a small houseboat for $8,000. He had purchased it for $12,000 in 2008 and the family used it for recreational purposes on the Murray River. John was an expert horse rider and had purchased a horse for $14,000 in 2009. He trained the horse and competed in equestrienne events as a hobby. He decided not to take the horse to Brisbane, and sold the horse for $30,000 shortly before moving to Brisbane. He also gave his mother an antique table he had purchased for $12,000 in 2006 from an antique shop in Melbourne. The table had been manufactured in 1922. At the time he gave it to his mother, it was valued at $18,000.

In 1982, John had purchased a 10 hectare block of land near Wandin, east of Melbourne, for $300,000. The family regularly spent the weekend at the property, and both John and his daughter kept their horses there. In 2014, the land was rezoned for residential development and became very valuable. John therefore decided to sell the property. He obtained a council permit to subdivide the land. However, when the decision was made to move to Brisbane, John did not continue with the subdivision and sold the land to a local property developer for $3,000,000.

In June 2017 ABC Sport was fined $50,000 for a breach of the Trade Practices Act.


REQUIRED:

Advise ABC Sport and John on the taxation issues arising from the above fact situation. Reference should be made to appropriate legislation, case law and rulings.

Answered Same Day Apr 20, 2020 LAW2453

Solution

Abr Writing answered on Apr 26 2020
143 Votes
Student Name
1. ABC Sports Pty Tax Obligation
ABC Sports Pty LTD distributes tennis and golf equipment in Melbourne. The business has decreased due to the loss of business to his equipment supplier. The supplier ended the contract of supplying ABC Sports Pty LTD with equipment and paid a compensation fee of $ 200,000 due to a
each of contract. The contract was terminated and ABS Sporty Pty LTD entered into a contract with another supplier[footnoteRef:1]. Despite getting another supplier the business is still going down because the initial supplier took most of ABC customers. According to the Australian tax law, the $ 200,000 received by ABC as a compensation for the termination of the contract can be classified as ordinary income for the business. Ordinary income is, therefore, taxed differently with the assessable income according to the Australian law. In taxing the ordinary income rate for marginal tax for an individual is applied in this case. The Australian Tax Office indicates that ordinary income is any income that is received by an individual or organization and it's not part of the organizational long-term gain of capital. Its viewed as a one-time payment that an organization receives from either of its sources[footnoteRef:2]. This includes the income that is given to an organization for the end of contract, commissions, interests, and dividends (Enste, 2018). [1: Ma
ury v. Madison, 5 U.S. 137, 2 L. Ed. 60, 2 L. Ed. 2d 60 (1803).] [2: McCulloch v. Maryland, 17 U.S. 316, 4 L. Ed. 579, 4 L. Ed. 2d 579 (1819).]
The compensation of ABC Sports Pty LTD is the classified under the business ordinary income. The tax obligation that is applied in this compensation is the tax is related to the business ordinary income. Therefore, ABD should declare the compensation of $200,000 under the ordinary income when filing a tax return. This income tax is low as it falls under the lowest threshold of the tax-free category.
Complying to the tax and superannuation obligation of an individual is an essential element to determine the success or a failure of a particular business. These obligations should be adhered to by the business owner and the employees as well. The role of the employees is to ensure that the employer does their part which is paying the tax and superannuation. The employee is supposed to give an evidence of these function of the employer when they are filing the tax returns at the end of the financial year. ABC Sports Pty Ltd has both contractors and employees at different levels. Therefore, understanding the superannuation and tax obligation is very essential to ensure that the organization follows all superannuation and tax laws as required by the tax policies. These would help the organization understand its obligations in the tax payment for its employees as well as its own tax payment. Also, the organization will understand better the need to pay superannuation for its employees. The following are the tax obligations that ABC Sports Pty Ltd needs to put into considerations and understand how they are operated. The following are the major tax obligations that the company should be concerned with (Pinto, 2010).
i. Pay as You Go (PAYG) withholding
Pay as You Go withholding is a requirement that is legal to withhold certain amount of income in business for the tax purposes. ABC Sports Pty Ltd is required to withhold tax for all the payment it makes to its employees[footnoteRef:3]. When paying John his salary ABC Sports Pty Ltd is required by the Australian Tax Office to withhold all taxes that should be charged to John. It’s the responsibility of the ABC Sports Pty Ltd to pay tax to the Australian Tax Office on behalf of employees. All other contract workers also their tax payment should be withheld. In this case no worker who under the payment of ABC Sports Pty Ltd should be left out in the withholding of the tax amount. Every new employer signed in ABC Sports Pty Ltd should also be reported and registered with Australian Taxation Office before the payment of the employee is withheld. Also, in case a contract or termination of the employee contract or employment happens ABC Sports Pty Ltd should also ensure that it reports to the Australian Taxation Office. This is to ensure that the organization is able to keep the entire taxation records up to date with the records of the Australian Tax Office. [3: Everson v. Board of Ed. of Ewing, 330 U.S. 1, 67 S. Ct. 504, 91 L. Ed. 711 (1947).]
ABC Sports Pty Ltd has also an obligation to withhold also any payment amount to any business that they are working with who do not quote their ABN in their invoice and attach required taxation documents. All the amount of money that is withheld by the ABC Sports Pty Ltd should be paid to the Australian Tax Office. So, in this case ABC Sports Pty Ltd should hold...
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