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CA ANZ Advanced Tax (Australia) study materials
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CA ANZ Advanced Tax (Australia) practice questions

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Question 1Australian tax system, tax administration and professional ethics

Which body is responsible for administering the federal tax laws, including the assessment and collection of income tax in Australia?

  1. The Australian Securities and Investments Commission
  2. The Administrative Review Tribunal
  3. The Reserve Bank of Australia
  4. The Australian Taxation Office Correct answer.

Explanation

The Australian Taxation Office is the statutory agency that administers federal taxation laws, including income tax, GST and the associated collection and compliance functions. It operates under the general direction of the Commissioner of Taxation, who is empowered by legislation such as the Taxation Administration Act 1953.

Question 2Australian tax system, tax administration and professional ethics

Under the Taxation Administration Act 1953, which official is vested with the general administration of the taxation laws?

  1. The Auditor-General
  2. The Secretary of the Treasury
  3. The Commissioner of Taxation Correct answer.
  4. The Treasurer

Explanation

The Commissioner of Taxation is the statutory office holder charged with the general administration of the taxation laws under the Taxation Administration Act 1953. The Commissioner has powers to assess, collect and administer tax, and can delegate functions to ATO staff.

Question 3Australian tax system, tax administration and professional ethics

A registered tax agent prepares and lodges a client's income tax return. Who is legally liable for the tax assessed on that return?

  1. The Commissioner, because the ATO issued the assessment
  2. The taxpayer, because the assessment is made on their taxable income Correct answer.
  3. Both the taxpayer and the agent, jointly and severally
  4. The registered tax agent, because they lodged the return

Explanation

Liability for tax follows the taxpayer whose taxable income is assessed; an agent acts as a representative and does not assume the client's tax liability merely by lodging. The agent may face separate sanctions or penalties for misconduct, but the primary assessment liability rests with the taxpayer.

Question 4Australian tax system, tax administration and professional ethics

What is the standard period within which the Commissioner may generally amend an assessment for an individual taxpayer to increase tax payable, under the amendment provisions in the Taxation Administration Act?

  1. One year from the date the return was lodged
  2. Four years from the date of the notice of assessment
  3. Two years from the date of the notice of assessment Correct answer.
  4. Ten years from the date the return was lodged

Explanation

For most individual taxpayers, the Commissioner generally has two years from the date of the notice of assessment to amend an assessment to increase the tax payable. Different periods apply to other entities and to fraud or evasion cases, which have no time limit.

Question 5Australian tax system, tax administration and professional ethics

A taxpayer disagrees with an objection decision made by the Commissioner. Which avenue is available for an independent merits review of that decision?

  1. A referral to the Australian Securities and Investments Commission
  2. A request for the Commissioner to reconsider the objection
  3. An application to the Administrative Review Tribunal Correct answer.
  4. A complaint to the Commonwealth Ombudsman

Explanation

After an objection decision, a taxpayer may generally seek merits review before the Administrative Review Tribunal or appeal to the Federal Court on a question of law. The Tribunal can review the merits and substitute its own decision.

Question 6Australian tax system, tax administration and professional ethics

Which statement best describes the accountant's confidentiality obligation when responding to an ATO request for information about a client?

  1. The accountant must publish the request to other clients for transparency
  2. The accountant must refuse all ATO requests unless a court order is produced
  3. The accountant should disclose only what the law requires or the client authorises, and should not volunteer unrelated client information Correct answer.
  4. The accountant may disclose any client information without restriction once the ATO asks

Explanation

Professional confidentiality requires the accountant to protect client information and disclose only what is legally compelled or authorised by the client. Responding to a lawful ATO request does not license disclosure of unrelated client matters.

Question 7Australian tax system, tax administration and professional ethics

An accountant discovers that a client has deliberately omitted income from a lodged return. Under professional ethics standards, what is the most appropriate initial course of action?

  1. Ignore the matter because the return has already been lodged
  2. Lodge an amended return without informing the client
  3. Advise the client of the error, recommend voluntary disclosure, and decline to assist with any concealment Correct answer.
  4. Report the client to the ATO immediately without any discussion

Explanation

Ethical standards require the adviser to inform the client of the error and recommend correction through voluntary disclosure, while refusing to be associated with misleading information. The adviser should not act on the client's behalf in a way that conceals the omission.

Question 8Australian tax system, tax administration and professional ethics

A tax agent charges a fee calculated as a percentage of the tax refund obtained for a client. Which statement best reflects the professional and legislative concerns with this arrangement?

  1. It is permitted only for companies, not individuals
  2. It is acceptable if disclosed to the ATO in writing
  3. It may breach prohibitions on charging fees based on a refund and raises independence concerns Correct answer.
  4. It is encouraged because it aligns the agent's interests with the client's

Explanation

Legislation restricts registered agents from charging fees calculated by reference to a tax refund, and percentage-of-refund fees also compromise the independence expected of a professional adviser. Independence requires that advice not be shaped by a personal stake in the outcome.

Question 9Australian tax system, tax administration and professional ethics

Which of the following best describes the purpose of the Tax Practitioners Board?

  1. To set the rates of income tax each year
  2. To hear appeals against tax assessments
  3. To register and regulate tax agents and BAS agents Correct answer.
  4. To prosecute taxpayers for tax evasion

Explanation

The Tax Practitioners Board registers tax agents and BAS agents and regulates their conduct through a code of professional conduct. It handles complaints and can impose sanctions such as suspension or termination of registration.

Question 10Australian tax system, tax administration and professional ethics

A taxpayer receives a notice of assessment showing tax payable. By what date must the taxpayer generally pay the amount if they do not dispute it?

  1. Immediately upon receiving the notice
  2. Only when the ATO issues a formal demand
  3. On the date specified in the notice, which is generally at least 21 days after the notice is issued Correct answer.
  4. Only after the end of the following financial year

Explanation

The notice of assessment specifies a due date for payment, which is generally at least 21 days after the notice is issued. Payment obligations arise from the notice itself, not from any later demand.

Question 11Australian tax system, tax administration and professional ethics

Which penalty regime generally applies when a taxpayer makes a false or misleading statement in a return due to a failure to take reasonable care?

  1. A base penalty of 25% of the shortfall amount, subject to reductions for disclosure Correct answer.
  2. Criminal prosecution is automatic
  3. No penalty applies if the statement was unintentional
  4. A penalty equal to 100% of the tax avoided in all cases

Explanation

The shortfall penalty regime applies base penalties according to the behaviour involved; failure to take reasonable care generally attracts a 25% base penalty. The penalty can be reduced for voluntary disclosure and cooperation, and increased for obstruction.

Question 12Australian tax system, tax administration and professional ethics

A taxpayer voluntarily discloses a shortfall to the ATO before being notified of an audit. How does this generally affect the shortfall penalty?

  1. It increases the penalty because disclosure admits fault
  2. It eliminates any penalty in every case
  3. It has no effect on the penalty amount
  4. It generally reduces the base penalty, with a larger reduction for disclosure before notification of an examination Correct answer.

Explanation

The penalty regime provides reductions for voluntary disclosure, and the reduction is greater where disclosure occurs before the taxpayer is notified of an examination. The base penalty is discounted rather than automatically eliminated.

Question 13Australian tax system, tax administration and professional ethics

Which of the following statements about the general interest charge is correct?

  1. It replaces all shortfall penalties
  2. It is a fixed administrative fee unrelated to time
  3. It is calculated on a daily compounding basis on amounts unpaid after the due date Correct answer.
  4. It applies only to companies

Explanation

The general interest charge accrues on unpaid tax and is calculated on a daily compounding basis using the prescribed rate. It compensates the revenue for late payment and applies across taxpayer types.

Question 14Australian tax system, tax administration and professional ethics

An accountant is asked by a client to backdate an invoice to shift income into an earlier year. What is the appropriate professional response?

  1. Comply if the amount is immaterial
  2. Comply, because the client instructs the treatment
  3. Refer the request to another adviser without comment
  4. Decline, because preparing or endorsing a false document breaches integrity and the law Correct answer.

Explanation

Creating or endorsing a document with a false date to alter tax outcomes breaches the integrity principle and may constitute an offence. The adviser must decline and explain the correct treatment to the client.

Question 15Australian tax system, tax administration and professional ethics

Which of the following best describes the accountant's obligation under the code of professional conduct regarding conflicts of interest?

  1. Conflicts may be ignored where the client is a related party
  2. Conflicts only matter in audit engagements
  3. Conflicts are irrelevant if the fee is agreed in advance
  4. Conflicts must be identified, disclosed and managed, or the engagement declined Correct answer.

Explanation

Professional standards require identification of threats to objectivity arising from conflicts, disclosure to affected parties, and appropriate safeguards or withdrawal. Ignoring a conflict compromises objectivity and the public interest.

Question 16Australian tax system, tax administration and professional ethics

A taxpayer is dissatisfied with an assessment and wishes to object. Within what period must the taxpayer generally lodge the objection?

  1. Two years after the notice of assessment
  2. 14 days after the notice of assessment
  3. 60 days after the notice of assessment Correct answer.
  4. There is no time limit

Explanation

An objection must generally be lodged within the period specified in the taxation legislation, commonly 60 days after the notice of the assessment or decision. The Commissioner may accept a late objection in certain circumstances.

Question 17Australian tax system, tax administration and professional ethics

Which statement correctly describes the ATO's general power to access information under the taxation law?

  1. The ATO has statutory powers to require information and access premises, subject to statutory safeguards Correct answer.
  2. The ATO may only access information with the taxpayer's written consent
  3. The ATO has no information-gathering powers
  4. The ATO may access information only through a court subpoena

Explanation

The taxation law confers formal information-gathering powers, including notices requiring information and access to premises under warrant or with consent. These powers operate subject to statutory conditions and review.

Question 18Australian tax system, tax administration and professional ethics

A registered tax agent repeatedly lodges returns without reasonable care, resulting in shortfalls. Which consequence is most consistent with the regulatory framework?

  1. The Tax Practitioners Board may investigate and impose sanctions, including suspension or termination of registration Correct answer.
  2. The agent's clients are automatically prosecuted
  3. No action is possible because agents are unregulated
  4. The agent automatically becomes personally liable for all clients' tax

Explanation

The Tax Practitioners Board administers a code of professional conduct and can investigate and sanction registered agents for failures such as lack of reasonable care. Sanctions can include suspension or termination of registration.

Question 19Australian tax system, tax administration and professional ethics

Which of the following is the primary source of the Commissioner's power to make a private ruling?

  1. The Taxation Administration Act 1953 Correct answer.
  2. The Corporations Act 2001
  3. The Reserve Bank Act 1959
  4. The Income Tax Assessment Act 1997 only

Explanation

The private ruling system is established in the Taxation Administration Act 1953, which sets out who may apply, the effect of rulings and the binding nature on the Commissioner. Rulings provide certainty about how the law applies to a specific arrangement.

Question 20Australian tax system, tax administration and professional ethics

A client asks an accountant to sign a declaration on a return that the accountant knows contains an unsubstantiated deduction. What should the accountant do?

  1. Refuse to sign until the position is corrected or the deduction is removed Correct answer.
  2. Sign and note the concern in a private file
  3. Sign only if the client provides a written indemnity
  4. Sign the declaration because the client is responsible for the content

Explanation

A preparer should not sign a declaration that asserts the return is correct when known to be unsupported. The adviser must require correction before signing, reflecting honesty and compliance with the law.

Question 21Assessable income, deductions and trading stock

Under the core provisions, which statement best describes the relationship between assessable income and the two statutory categories it comprises?

  1. Assessable income consists of ordinary income and statutory income, and non-cash benefits are always ordinary income.
  2. Assessable income consists of ordinary income and statutory income, but amounts that are neither ordinary nor statutory income are not assessable. Correct answer.
  3. Assessable income consists only of amounts that a taxpayer actually receives in cash during the income year.
  4. Assessable income includes ordinary income but excludes statutory income because statutory income is taxed separately.

Explanation

Section 6-1 provides that assessable income is made up of ordinary income and statutory income. Section 6-10 confirms that amounts which are neither ordinary income nor statutory income are not assessable income and are not exempt income. This two-category structure underpins the entire income tax base.

Question 22Assessable income, deductions and trading stock

A sole trader sells goods for $8,000 and, in the same transaction, allows the customer a $500 discount for early payment. What amount is included in assessable income from the sale?

  1. $0 until the customer pays in full.
  2. $8,000, because the gross invoice price is the income.
  3. $7,500, because assessable income is measured by the net amount actually derived. Correct answer.
  4. $500, because only the discount represents a realised gain.

Explanation

Ordinary income from business is measured by the gross proceeds of the sale less any discount or rebate allowed to the customer. The taxpayer derives only the net amount of $7,500, which is what is included in assessable income. Gross invoicing figures are not the correct measure.

Question 23Assessable income, deductions and trading stock

Which of the following is the best test for determining whether a receipt is ordinary income from a business?

  1. Whether the receipt is received in cash rather than in kind.
  2. Whether the receipt is recorded in the accounting records as revenue.
  3. Whether the receipt is regular, expected and comes from the business's ordinary operations. Correct answer.
  4. Whether the receipt is large enough to exceed a materiality threshold.

Explanation

Ordinary business income is typically characterised by regularity, expectation and a connection to the business's ordinary operations. Isolated or extraordinary receipts may instead be capital or a windfall. Accounting classification and form of payment are not determinative.

Question 24Assessable income, deductions and trading stock

A taxpayer receives a lump sum from a former employer in settlement of a claim for lost salary. How is the amount generally treated?

  1. As neither assessable nor exempt, so it is ignored.
  2. As a capital receipt because it is a lump sum.
  3. As ordinary income because it substitutes for income the taxpayer would have derived. Correct answer.
  4. As exempt income because it arises from a legal settlement.

Explanation

Where a lump sum is paid to compensate for lost income, it takes the character of the income it replaces and is ordinary income. The fact that it is paid as a single payment does not convert it into capital. The underlying nature of the compensation controls.

Question 25Assessable income, deductions and trading stock

Which statement correctly describes the general deduction provision?

  1. A loss or outgoing is deductible only if it is necessarily incurred in carrying on a business.
  2. A loss or outgoing is deductible to the extent it is incurred in gaining or producing assessable income, subject to the positive limbs and negative limbs. Correct answer.
  3. Any loss or outgoing incurred in the course of carrying on a business is automatically deductible.
  4. A loss or outgoing is deductible if it is reasonable in amount, regardless of its connection to income.

Explanation

Section 8-1 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business. The deduction is then subject to the negative limbs, including capital, private and domestic expenditure. The connection to assessable income is the central requirement.

Question 26Assessable income, deductions and trading stock

A business incurs $3,000 of legal fees in defending a claim that a supplier breached a trading contract, resulting in lost profits. How is the expenditure generally treated?

  1. Capital, because legal costs are always capital.
  2. Deductible only if the business wins the case.
  3. Not deductible, because the claim involves a third party.
  4. Deductible, because the expenditure relates to the business's income-producing operations. Correct answer.

Explanation

Legal costs incurred in connection with the business's income-producing operations, such as enforcing trading contracts, are generally deductible under s 8-1. The character of the expenditure follows the character of the matter to which it relates. The outcome of the litigation does not determine deductibility.

Question 27Assessable income, deductions and trading stock

Which of the following is a negative limb that denies a deduction under s 8-1?

  1. Outgoings of a private or domestic nature. Correct answer.
  2. Outgoings necessarily incurred in carrying on a business.
  3. Outgoings incurred in gaining assessable income.
  4. Outgoings that are recurrent in nature.

Explanation

The negative limbs in s 8-1(2) deny deductions for capital outgoings, private or domestic outgoings, outgoings incurred in producing exempt income and certain other outgoings. Private or domestic expenditure is therefore excluded even if it has some connection to income. Recurrent business outgoings are generally deductible.

Question 28Assessable income, deductions and trading stock

A retailer's trading stock at the start of the year is $20,000, purchases are $80,000, and closing stock is $30,000. What is the cost of goods sold for the year?

  1. $80,000
  2. $90,000
  3. $70,000 Correct answer.
  4. $50,000

Explanation

Cost of goods sold is opening stock plus purchases less closing stock: $20,000 + $80,000 - $30,000 = $70,000. This figure is deducted in working out taxable income. Closing stock is taken into account because it has not been sold.

Question 29Assessable income, deductions and trading stock

A taxpayer incurs $2,200 of self-education expenses directly related to their current employment. Which statement best reflects the deductibility position?

  1. The expenses are fully deductible because they relate to employment.
  2. The expenses are not deductible because they are private in nature.
  3. The first $250 of the expenses is not deductible, so $1,950 is deductible. Correct answer.
  4. The expenses are deductible only if the employer reimburses them.

Explanation

Section 82A historically reduced self-education deductions by $250, and the reduction continues to apply to the relevant category of expenses. Where the expenses are otherwise deductible under s 8-1, only the excess over $250 is claimed. Expenses connected with gaining assessable income remain deductible in principle.

Question 30Assessable income, deductions and trading stock

Which statement best explains the treatment of a capital gain made by an individual on the disposal of an investment property?

  1. The gain is ordinary income because it is a profit.
  2. The gain is included only if the property was held for less than 12 months.
  3. The net capital gain is included in assessable income as statutory income. Correct answer.
  4. The gain is exempt because it is capital in nature.

Explanation

A net capital gain is included in assessable income as statutory income under the capital gains tax provisions. Capital gains are not ordinary income, but the statute brings them into the tax base. The 12-month holding period affects concessions, not whether the gain is included.

Question 31Assessable income, deductions and trading stock

A business receives a government grant to purchase new manufacturing equipment. How is the grant most likely to be treated?

  1. As neither assessable nor exempt, so it is ignored.
  2. As a capital receipt that may reduce the cost base of the asset or be otherwise dealt with under the capital gains provisions. Correct answer.
  3. As exempt income because it is a government payment.
  4. As ordinary income in full in the year received.

Explanation

A grant received for the purpose of acquiring a capital asset generally takes on a capital character. It is typically applied to reduce the cost of the asset or is dealt with under the capital gains provisions, rather than being ordinary income. The purpose of the grant is central to its character.

Question 32Assessable income, deductions and trading stock

Which of the following best describes the treatment of a bad debt written off by a business that previously included the income from the debt in assessable income?

  1. The debt is not deductible because it is a capital loss.
  2. The debt is deductible only if the debtor is declared bankrupt.
  3. The debt is deductible because it was previously returned as income. Correct answer.
  4. The debt is deductible only in the year the debt was originally created.

Explanation

A bad debt is deductible where the amount was previously included in assessable income and is now written off as bad. The deduction prevents the taxpayer from being taxed on income that will never be received. The debtor's bankruptcy is not a statutory precondition.

Question 33Assessable income, deductions and trading stock

A company pays a $50,000 premium to take a lease of business premises for five years. How is the premium generally treated?

  1. Deductible over the term of the lease as a revenue expense. Correct answer.
  2. Deductible only if the lease is for less than 12 months.
  3. Fully deductible in the year paid because it is a business expense.
  4. Not deductible because lease premiums are always capital.

Explanation

A premium paid to obtain a lease is generally a revenue outgoing that is deductible over the term of the lease. The benefit is spread across the period to which it relates. Immediate deduction in full or complete denial are both incorrect.

Question 34Assessable income, deductions and trading stock

A taxpayer owns shares held as an investment and receives a dividend with franking credits attached. Which statement best describes the treatment of the franking credit for a resident individual?

  1. The franking credit is included in assessable income and may be offset against tax payable. Correct answer.
  2. The franking credit is exempt income.
  3. The franking credit is ignored because it is not cash received.
  4. The franking credit is deductible from the dividend.

Explanation

For a resident individual, the franking credit attached to a dividend is included in assessable income and is also available as a tax offset. This prevents double taxation of company profits distributed to shareholders. The credit is not ignored simply because it is not paid in cash.

Question 35Assessable income, deductions and trading stock

A taxpayer incurs $1,500 in fines for breaching workplace safety laws. How is the expenditure treated?

  1. Deductible only if the fine is below $2,000.
  2. Deductible because it arises from business operations.
  3. Not deductible because fines and penalties are excluded by statute. Correct answer.
  4. Deductible as a cost of doing business in the year paid.

Explanation

Fines and penalties imposed for breaches of the law are not deductible, reflecting the public policy that the cost of unlawful conduct should not be subsidised by the tax system. The exclusion applies regardless of the business context. There is no small-fine threshold.

Question 36Assessable income, deductions and trading stock

A business uses the accruals basis. It provides services worth $10,000 in June but is not paid until August. In which year is the income derived?

  1. In the year the services are provided, because the right to receive the income arises then. Correct answer.
  2. Half in each year, because the income straddles two years.
  3. Never, because the income is not yet received.
  4. In the year payment is received, because income is only derived when cash is received.

Explanation

Under the accruals basis, income is derived when the right to receive it arises, which is generally when the services are performed. The later receipt of cash does not defer derivation. Splitting the income across years is not the correct approach.

Question 37Assessable income, deductions and trading stock

Which statement best describes the treatment of an outgoing incurred to establish a new business structure, such as incorporation costs?

  1. Capital in nature and generally not deductible under s 8-1, though specific provisions may apply. Correct answer.
  2. Deductible over five years in all cases.
  3. Exempt from any tax treatment.
  4. Deductible in full as a business expense.

Explanation

Costs of establishing a business structure are capital in nature and are generally excluded from deduction by the negative limb in s 8-1(2)(a). Specific provisions may allow deductions over time, but the general rule denies an immediate deduction. Such costs are not exempt; they are simply not deductible under the general provision.

Question 38Assessable income, deductions and trading stock

A taxpayer sells trading stock for $15,000 that cost $9,000. Which amount is included in assessable income and which is deductible?

  1. $15,000 included as income; $9,000 deducted as cost of goods sold. Correct answer.
  2. $9,000 included as income; $15,000 deducted.
  3. $15,000 included as income; nothing deducted.
  4. $6,000 included as income; nothing deducted.

Explanation

Proceeds from the sale of trading stock are included in assessable income, and the cost of the stock sold is deducted in working out taxable income. The net effect is that the $6,000 gross profit is taxed. Only the net profit is not the correct measure for both sides of the transaction.

Question 39Assessable income, deductions and trading stock

Which statement best explains the deductibility of interest incurred on a loan used to purchase a rental property?

  1. The interest is not deductible because it relates to a capital asset.
  2. The interest is deductible because it is incurred in gaining assessable rental income. Correct answer.
  3. The interest is deductible only against capital gains.
  4. The interest is deductible only if the loan is repaid within the year.

Explanation

Interest on borrowings used to acquire an income-producing asset is generally deductible because the outgoing is incurred in gaining assessable income. The capital nature of the asset does not prevent deduction of the interest, which is a recurrent revenue outgoing. Repayment of the loan is not a condition of deductibility.

Question 40Assessable income, deductions and trading stock

A company makes a provision for long service leave for employees. When is the amount generally deductible?

  1. When the provision is recognised in the accounts.
  2. When the employee becomes entitled to the leave.
  3. Never, because leave is a private matter for employees.
  4. When the leave is actually taken or paid, subject to specific provisions. Correct answer.

Explanation

Deductions for employee entitlements such as long service leave are generally allowed when the liability is discharged by payment, subject to specific provisions. A mere accounting provision does not ordinarily give rise to a deduction. The timing rules ensure the deduction matches the actual outgoing.

Question 41Assessable income, deductions and trading stock

A taxpayer incurs $4,000 on repairs to a rental property that restore it to its original condition after tenant damage. How is the expenditure treated?

  1. Not deductible because repairs relate to a capital asset.
  2. Deductible as a capital works deduction over 40 years.
  3. Deductible only if the property is sold in the same year.
  4. Deductible as a repair because it restores the property to its previous condition. Correct answer.

Explanation

Repairs that restore an income-producing asset to its original condition, without improving it or replacing an entire asset, are generally deductible. Tenant damage restoration is a typical example. Capital works deductions apply to construction costs, not to routine repairs.

Question 42Assessable income, deductions and trading stock

A business incurs a loss on the sale of a depreciating asset used in its business. How is the loss generally treated?

  1. As a capital loss that can only offset capital gains.
  2. As exempt income.
  3. As a deductible loss in working out taxable income, subject to the capital allowances provisions. Correct answer.
  4. As a loss that is never recognised for tax purposes.

Explanation

A loss on the disposal of a depreciating asset used in a business is generally brought to account under the capital allowances provisions and is deductible in working out taxable income. It is not treated as an ordinary capital loss subject to the capital gains rules. The balance of the asset's adjustable value is relevant.

Question 43Assessable income, deductions and trading stock

A taxpayer receives a non-cash benefit from an employer that is convertible into cash. Which statement best reflects the assessability of the benefit?

  1. It is always exempt income.
  2. It may be assessable as ordinary income because it is convertible into cash. Correct answer.
  3. It is not assessable because no cash is received.
  4. It is assessable only if the employer elects to include it.

Explanation

Non-cash benefits that are convertible into cash can be treated as ordinary income because the taxpayer has the capacity to turn them into money. The absence of a cash payment does not prevent assessability. The employer does not choose whether the benefit is assessable.

Question 44Assessable income, deductions and trading stock

A business changes its method of valuing trading stock from cost to market value. Which statement best describes the position?

  1. The taxpayer may elect to value stock at cost or market value, but the choice is subject to consistency and the specific rules in the trading stock provisions. Correct answer.
  2. Only market value may ever be used.
  3. Only cost may ever be used.
  4. The taxpayer may choose either cost or market value each year without restriction.

Explanation

The trading stock provisions permit stock to be valued at cost, market value or replacement value, but the choice is constrained by the rules and consistency requirements. A taxpayer cannot switch methods arbitrarily each year to minimise tax. The specific provisions govern the available elections.

Question 45Assessable income, deductions and trading stock

A taxpayer incurs expenditure to defend the title to an income-producing asset in court. How is the expenditure generally characterised?

  1. Revenue, because it is a recurring legal cost.
  2. Deductible in full as a business expense.
  3. Exempt from any tax treatment.
  4. Capital, because it relates to establishing or defending title to a capital asset. Correct answer.

Explanation

Expenditure incurred to establish, defend or protect title to a capital asset is generally capital in nature and not deductible under s 8-1. The expenditure relates to the asset's ownership structure rather than to income production. Specific capital gains provisions may treat such costs as part of the cost base.

Question 46Assessable income, deductions and trading stock

A sole trader derives $90,000 of gross business receipts and incurs $70,000 of allowable deductions. She also earns $8,000 of interest from a term deposit. What is her taxable income for the year?

  1. $28,000 Correct answer.
  2. $90,000
  3. $98,000
  4. $20,000

Explanation

Taxable income is assessable income less allowable deductions under s 4-15. Assessable income includes both the business receipts and the interest, giving $98,000, and deducting $70,000 leaves $28,000. Interest is ordinary income under s 6-5 even though it arises outside the business.

Question 47Assessable income, deductions and trading stock

Which characteristic is most consistent with an outgoing being revenue in nature rather than capital?

  1. It is incurred once to acquire the profit-yielding structure of the business.
  2. It relates to the acquisition of goodwill or a permanent asset.
  3. It is recurrent and incurred in the ordinary course of earning income. Correct answer.
  4. It creates an enduring benefit that survives the current income year.

Explanation

The distinction between revenue and capital turns on matters such as recurrence, the nature of the benefit obtained and whether the outgoing relates to the business structure or its operations. Recurrent outgoings incurred in the ordinary course of producing income are generally revenue and deductible under s 8-1. Outgoings that establish or preserve an enduring structure are capital and are denied by the negative limb in s 8-1(2)(a).

Question 48Assessable income, deductions and trading stock

A business taxpayer incurs $6,000 of interest on money borrowed to acquire a depreciating asset used solely in its business. Which statement best describes the treatment of the interest?

  1. The interest is deductible only to the extent the asset is used to produce interest income.
  2. The interest is deductible only if the taxpayer elects to capitalise it into the asset cost.
  3. The interest is not deductible because the borrowed funds acquired a capital asset.
  4. The interest is deductible under s 8-1 as it is incurred in gaining assessable income. Correct answer.

Explanation

Interest on borrowed money is deductible under s 8-1 where the funds are used for income-producing purposes. The fact that the borrowed money bought a capital asset does not make the interest itself capital; the interest is a separate recurrent outgoing. The asset's decline in value is dealt with under the capital allowance provisions, but the interest remains a s 8-1 deduction.

Question 49Assessable income, deductions and trading stock

A taxpayer pays $3,000 to an accountant to prepare an objection against an income tax assessment disputing the amount of tax payable. How is the expenditure treated?

  1. Deductible over five years as a capital cost of protecting the taxpayer's business.
  2. Deductible in full, because the expense relates to managing the taxpayer's tax affairs. Correct answer.
  3. Non-deductible, because it relates to disputing a tax liability rather than producing income.
  4. Deductible only to the extent the objection succeeds in reducing the assessment.

Explanation

Expenditure incurred in managing a taxpayer's own tax affairs, including preparing and lodging an objection against an assessment, is deductible under s 25-5. The deduction is available because the cost relates to the administration of the tax law affecting the taxpayer. The outcome of the objection does not change the character of the expense.

Question 50Assessable income, deductions and trading stock

A manufacturer values closing trading stock at cost, which is $40,000, while its market selling value is $35,000 and its replacement cost is $38,000. Under the trading stock rules, what is the most favourable closing stock value the taxpayer may adopt, and what is the effect on taxable income?

  1. $38,000 at replacement cost, which reduces taxable income by $2,000 relative to cost.
  2. $0, because stock that has fallen in value may be written off entirely.
  3. $35,000 at market selling value, which reduces taxable income by $5,000 relative to cost. Correct answer.
  4. $40,000 at cost, which produces the highest closing stock value and therefore the highest taxable income.

Explanation

Section 70-45 permits closing stock to be valued at cost, market selling value or replacement cost, and the taxpayer may choose the value that produces the lowest taxable income. Since the closing stock value is subtracted in working out the change in stock, the lowest permissible value reduces taxable income. Market selling value of $35,000 is the lowest of the three permitted values, saving $5,000 compared with cost.