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CPA Australia Taxation study materials
CPA Australia Taxation study resources

CPA Australia Taxation practice questions

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Question 1Taxation

Under Australian tax law, which of the following best describes the treatment of a capital gain made by an individual who has held the asset for 14 months?

  1. The gain is exempt because it was held for more than 12 months.
  2. The whole gain is included in assessable income with no concession.
  3. The gain is taxed at a flat rate of 30%.
  4. Only 50% of the gain is included in assessable income for an individual. Correct answer.

Explanation

An individual who is an Australian resident and holds a CGT asset for at least 12 months may apply the 50% CGT discount, so only half of the capital gain is included in assessable income. The discount reduces the gain, it does not exempt it, and the remaining gain is taxed at the individual's marginal rates rather than a flat rate.

Question 2Taxation

A company purchases a depreciating asset for $22,000 (GST-exclusive) on 1 July and uses it wholly for a taxable purpose. It elects to use the simplified depreciation rules for small business. What immediate deduction is available for the asset's cost in the year of purchase?

  1. $2,200
  2. $0, because the asset must be depreciated over its effective life
  3. $11,000
  4. $22,000 Correct answer.

Explanation

Small business entities using the simplified depreciation rules can immediately deduct the cost of a depreciating asset costing less than the instant asset write-off threshold, which has been set at $20,000 or higher in recent years and, at the $22,000 level, falls within the current threshold. The asset is used wholly for a taxable purpose, so the full cost qualifies.

Question 3Taxation

Which of the following receipts is most likely to be ordinary income under section 6-5 of the ITAA 1997?

  1. A regular commission earned by a salesperson from an employer Correct answer.
  2. A prize won in a lottery
  3. A lump sum received for the sale of a business's goodwill
  4. A gift received from a relative

Explanation

Ordinary income under section 6-5 includes income from personal exertion, such as salary, wages, and commissions earned from employment. A commission regularly earned from an employer is a classic example of ordinary income.

Question 4Taxation

An employee receives a car fringe benefit. The employer uses the statutory formula method. Which statement correctly identifies the basis for calculating the taxable value?

  1. The taxable value equals the private kilometres travelled multiplied by a per-kilometre rate.
  2. The taxable value is calculated using the statutory fraction applied to the car's base value, reduced by any recipient contribution. Correct answer.
  3. The taxable value is the GST-inclusive cost of the car divided by its effective life.
  4. The taxable value is the actual running costs incurred by the employer.

Explanation

Under the statutory formula method, the taxable value is the base value of the car multiplied by the statutory fraction (which varies with the total kilometres travelled), reduced by any recipient contribution. The operating cost method uses actual running costs, while the cents-per-kilometre method applies to car expense deductions for individuals, not FBT.

Question 5Taxation

Which of the following is a requirement for a company to be classified as a base rate entity for an income year?

  1. Its aggregated turnover must be less than $50 million and no more than 80% of its assessable income is base rate entity passive income. Correct answer.
  2. Its aggregated turnover must be less than $250 million and it must be a resident company.
  3. Its aggregated turnover must be less than $2 million and it must be wholly owned by individuals.
  4. Its aggregated turnover must be less than $10 million and it must be a public company.

Explanation

A base rate entity must have aggregated turnover below the relevant threshold (currently $50 million) and no more than 80% of its assessable income must be base rate entity passive income. Meeting both conditions allows the company to access the lower corporate tax rate.

Question 6Taxation

A taxpayer sells an investment property in the current income year. Which cost base element includes the incidental costs of disposal, such as agent commission and legal fees on sale?

  1. The second element (incidental costs of acquisition)
  2. The third element (non-capital costs of ownership)
  3. The first element (acquisition cost)
  4. The second element as extended to incidental costs of disposal Correct answer.

Explanation

The second element of the cost base includes incidental costs of acquiring the CGT asset and of disposing of it, such as agent commission and conveyancing fees on sale. These costs increase the cost base and thereby reduce the capital gain.

Question 7Taxation

Which of the following payments to an employee would generally be exempt from fringe benefits tax?

  1. Reimbursement of the employee's private travel expenses
  2. A payment of an employee's private health insurance premium
  3. A payment of an employee's income tax liability
  4. A payment to a superannuation fund on behalf of the employee Correct answer.

Explanation

Contributions to a complying superannuation fund for an employee are expressly excluded from the definition of a fringe benefit. This means they are not subject to FBT, although other tax rules may apply to superannuation contributions.

Question 8Taxation

A GST-registered business makes a taxable supply of goods for $11,000 including GST. What amount of GST is included in that price?

  1. $1,100
  2. $0, because the supply is input taxed
  3. $11,000
  4. $1,000 Correct answer.

Explanation

When a price is GST-inclusive, the GST component is calculated as the price multiplied by 1/11. For $11,000, the GST is $1,000 and the GST-exclusive value is $10,000.

Question 9Taxation

Which of the following best describes the tax treatment of a dividend received by a resident individual shareholder from a resident company that has franking credits attached?

  1. The dividend is taxed at the company rate regardless of the shareholder's marginal rate.
  2. The dividend is exempt from income tax in the shareholder's hands.
  3. Only the franking credit is included in assessable income.
  4. The dividend is included in assessable income and the franking credit is added, with a tax offset available for the credit. Correct answer.

Explanation

Under the imputation system, a resident shareholder includes both the cash dividend and the attached franking credit in assessable income, and receives a tax offset equal to the franking credit. This prevents double taxation of company profits distributed to shareholders.

Question 10Taxation

A taxpayer makes a personal superannuation contribution of $20,000 and intends to claim a deduction. Which condition must generally be satisfied?

  1. The taxpayer must be aged over 65.
  2. The taxpayer must be self-employed.
  3. The taxpayer must give the fund a valid notice of intent to claim a deduction and receive acknowledgement before lodging their return. Correct answer.
  4. The contribution must be made to an SMSF only.

Explanation

To claim a deduction for personal superannuation contributions, the taxpayer must notify the fund of their intention to claim a deduction using the approved form and receive acknowledgement from the fund. The notice must be given before lodging the income tax return and before the contribution is treated as a non-concessional contribution.

Question 11Taxation

Which of the following is generally deductible under section 8-1 of the ITAA 1997?

  1. A capital expense incurred to acquire a new factory
  2. Interest on money borrowed to purchase a rental property that produces assessable income Correct answer.
  3. A fine imposed for breaching environmental legislation
  4. A donation to a political party

Explanation

Interest on borrowed money used to acquire an income-producing asset is a revenue expense incurred in gaining or producing assessable income and is therefore deductible under the general deduction provision. Capital expenses, political donations, and penalties are not deductible under section 8-1.

Question 12Taxation

A resident individual has taxable income of $50,000 and receives a franked dividend of $7,000 with a franking credit of $3,000. What is the effect of the franking credit on their tax payable?

  1. It reduces tax payable by $3,000, and any excess may be refundable. Correct answer.
  2. It converts the dividend into exempt income.
  3. It increases tax payable by $3,000.
  4. It has no effect because the dividend is already taxed.

Explanation

The franking credit is included in assessable income and then applied as a tax offset against the shareholder's tax liability. If the offset exceeds the tax payable, the excess may be refundable for resident individuals.

Question 13Taxation

Which of the following transactions is most likely to be a supply for GST purposes?

  1. An employee's private sale of a used car
  2. A sale of goods by a GST-registered business in the course of its enterprise Correct answer.
  3. A gift of personal household items with no consideration
  4. A transfer of property under a court order with no consideration

Explanation

A supply made in the course or furtherance of an enterprise for consideration is a taxable supply if the supplier is registered and the supply is connected with Australia. A sale of goods by a GST-registered business in the course of its enterprise satisfies these requirements.

Question 14Taxation

Which of the following is a characteristic of a discretionary trust for tax purposes?

  1. The trust is taxed at the corporate rate.
  2. The trust must distribute all income annually to avoid tax.
  3. The trustee has discretion to determine which beneficiaries receive distributions of income and capital. Correct answer.
  4. Beneficiaries have fixed entitlements to trust income.

Explanation

In a discretionary trust, the trustee decides how income and capital are distributed among the beneficiaries, who do not have fixed entitlements. This flexibility allows income to be streamed to beneficiaries, subject to trust law and tax rules.

Question 15Taxation

A taxpayer incurs $5,000 of self-education expenses related to their current employment. Which of the following is generally required for the expenses to be deductible?

  1. The taxpayer must be reimbursed by their employer.
  2. The study must maintain or improve skills used in the taxpayer's current income-producing activities. Correct answer.
  3. The course must lead to a new qualification in an unrelated field.
  4. The expenses must be capital in nature.

Explanation

Self-education expenses are deductible where the study maintains or improves the skills and knowledge required in the taxpayer's current income-producing activities, or is likely to lead to increased income from those activities. Study that opens up a new field of employment is generally not deductible.

Question 16Taxation

Which of the following best describes the tax treatment of a net capital gain made by a complying superannuation fund?

  1. The fund is taxed at 30% with no discount.
  2. The fund is exempt from tax on capital gains.
  3. The fund is taxed at 15% on the net capital gain, with a one-third CGT discount for assets held at least 12 months. Correct answer.
  4. The fund is taxed at the individual's marginal rate.

Explanation

A complying superannuation fund is taxed at 15% on its assessable income, including net capital gains. For CGT assets held for at least 12 months, a complying fund is entitled to a one-third CGT discount rather than the 50% discount available to individuals.

Question 17Taxation

A company has an aggregated turnover of $40 million and 85% of its assessable income is passive income. Which corporate tax rate applies?

  1. 25% because turnover is below $50 million
  2. 30% because the passive income test is failed Correct answer.
  3. 15% because the company is a base rate entity
  4. 0% because passive income is exempt

Explanation

To be a base rate entity, a company must have aggregated turnover below $50 million and no more than 80% of its assessable income must be base rate entity passive income. Here passive income is 85%, so the company fails the passive income test and is taxed at the full 30% rate.

Question 18Taxation

Which of the following is a requirement for an expense to be deductible as a repair under the general deduction provisions?

  1. The repair must restore the asset to its original condition without improving it. Correct answer.
  2. The repair must relate to an asset used to produce exempt income.
  3. The repair must be capital in nature.
  4. The repair must be an improvement that increases the asset's value.

Explanation

A repair restores an asset to its former condition, or replaces part of it, without changing its character or adding to its value. Repairs to income-producing assets are generally deductible, while improvements and initial repairs are capital.

Question 19Taxation

A resident individual sells shares held for 8 months and makes a capital gain of $10,000. What amount is included in assessable income from that gain?

  1. $5,000
  2. $10,000 Correct answer.
  3. $2,000
  4. $0

Explanation

The 50% CGT discount requires the asset to have been held for at least 12 months. Because the shares were held for only 8 months, no discount applies and the full $10,000 gain is included in assessable income.

Question 20Taxation

Which of the following best describes the tax treatment of a non-complying superannuation fund?

  1. It is taxed at 15% on its assessable income.
  2. It is taxed at the individual's marginal rate.
  3. It is taxed at 45% on its assessable income. Correct answer.
  4. It is exempt from tax.

Explanation

A non-complying superannuation fund is taxed at 45% on its assessable income, reflecting its failure to meet the complying fund requirements. This compares with the 15% rate for complying funds.

Question 21Taxation

A taxpayer derives rental income from a property and incurs interest on a loan used to purchase the property, plus council rates and insurance. Which of the following correctly describes the deductibility of these expenses?

  1. Only interest is deductible; rates and insurance are capital.
  2. Only rates and insurance are deductible; interest is never deductible.
  3. All are generally deductible as expenses incurred in producing assessable rental income. Correct answer.
  4. None are deductible because the property is an investment.

Explanation

Interest, council rates, and insurance are all expenses incurred in producing assessable rental income and are generally deductible under section 8-1. The interest is deductible to the extent the borrowed funds were used to acquire the income-producing property.

Question 22Taxation

Which of the following statements about the tax treatment of a partnership is correct?

  1. Each partner includes their share of partnership net income in their own assessable income. Correct answer.
  2. Partnership income is exempt from tax.
  3. Partners are taxed at the corporate rate on partnership profits.
  4. The partnership is a separate taxable entity that pays tax on partnership income.

Explanation

A partnership is not a separate taxable entity for income tax purposes. Instead, each partner includes their individual share of the partnership's net income in their own assessable income and is taxed at their applicable rates.

Question 23Taxation

A small business entity with aggregated turnover of $15 million uses the simplified depreciation rules. It purchases a depreciating asset for $25,000. Which statement is correct?

  1. The asset is exempt from depreciation.
  2. Only 50% of the cost is deductible.
  3. The asset must be depreciated over its effective life because it exceeds the instant asset write-off threshold. Correct answer.
  4. The full $25,000 is immediately deductible because it is below the instant asset write-off threshold.

Explanation

The instant asset write-off applies only to assets below the threshold (currently $20,000 for the relevant period). An asset costing $25,000 exceeds the threshold, so it must be depreciated over its effective life under the simplified depreciation rules, with the general small business pool rules applying.

Question 24Taxation

Which of the following is generally considered a fringe benefit under the Fringe Benefits Tax Assessment Act 1986?

  1. An employer-provided car available for the employee's private use Correct answer.
  2. A reimbursement of a work-related expense incurred for the employer's benefit
  3. A contribution by an employer to a complying superannuation fund for an employee
  4. A payment of salary and wages to an employee

Explanation

An employer-provided car that is available for the employee's private use is a car fringe benefit and is subject to FBT. Salary, superannuation contributions, and reimbursements of expenses incurred wholly for the employer's benefit are excluded from the FBT regime.

Question 25Taxation

A taxpayer receives a lump sum payment for agreeing to a variation of a contract that restricts their future activities. Which of the following best describes the tax character of the payment?

  1. It is ordinary income because it is a payment for services.
  2. It may be capital in nature if it relates to the disposal or variation of a capital asset or right. Correct answer.
  3. It is taxed at a flat rate of 47%.
  4. It is always exempt from tax.

Explanation

A payment received for the variation or termination of a capital asset or right, such as a restrictive covenant or contract, may be capital in nature and dealt with under the CGT provisions rather than as ordinary income. The character depends on what the payment is for.

Question 26Taxation

An Australian resident individual has a capital loss carried forward from a prior income year. In the current year the taxpayer makes a capital gain on the disposal of listed shares. How is the carried-forward capital loss applied?

  1. It is applied against the taxpayer's other assessable income where the capital gain is insufficient to absorb it.
  2. It is forfeited if not applied against a capital gain in the year the loss was incurred.
  3. It is applied against the capital gain after the 50% CGT discount has been applied, with any excess carried forward.
  4. It is applied against the capital gain before any discount percentage is applied, and any excess is carried forward again. Correct answer.

Explanation

Capital losses can only be offset against capital gains, never against ordinary assessable income. Under the CGT discount rules the loss is applied to the gross capital gain before the discount percentage is calculated, and any unapplied balance is carried forward indefinitely.

Question 27Taxation

A GST-registered business purchases a new passenger motor vehicle for $66,000 including GST, with no private use. The vehicle is used solely for business purposes and is not a commercial vehicle. Assuming the business accounts for GST on a non-cash basis, what GST credit is available?

  1. $6,000, because the GST credit is limited to the amount of GST actually charged on the invoice.
  2. $6,000, because the GST credit is limited to the car limit, which is reviewed annually.
  3. $6,000, because the GST credit is capped at one-eleventh of the car limit, regardless of the price paid. Correct answer.
  4. $6,000, because the GST credit on a car is capped at the luxury car tax threshold.

Explanation

For a passenger car that is not a commercial vehicle, the GST credit is limited to one-eleventh of the car depreciation limit for the year, regardless of the actual GST charged. Where the price exceeds the car limit the credit is capped accordingly.

Question 28Taxation

An employer provides an employee with a laptop computer that is used predominantly for work purposes. Which fringe benefits tax outcome generally applies?

  1. The laptop is exempt only if the employee reimburses the employer for its cost.
  2. The laptop is a fringe benefit subject to FBT at the top marginal rate with no reduction.
  3. The laptop is exempt because all work-related equipment is exempt from FBT.
  4. The laptop is an exempt benefit because portable electronic devices used primarily for work are exempt. Correct answer.

Explanation

The FBT law exempts portable electronic devices provided primarily for use in the employee's employment, subject to limits on the number of items per year. The exemption turns on predominant work use, not on reimbursement.

Question 29Taxation

A company is a base rate entity for the current income year. Which statement correctly describes its corporate tax rate?

  1. It is taxed at the lower base rate entity rate, provided no more than 80% of its assessable income is passive income. Correct answer.
  2. It is taxed at the lower base rate entity rate regardless of the proportion of passive income it derives.
  3. It is taxed at the full company rate because companies can never access a reduced rate.
  4. It is taxed at the lower rate only if it is a small business entity using the cash basis.

Explanation

The base rate entity test requires both an aggregated turnover below the prescribed threshold and that no more than 80% of assessable income is passive income. Meeting both conditions allows the reduced corporate rate.

Question 30Taxation

A taxpayer operates a business from home and uses one room exclusively for business purposes. Which approach best supports a deduction for occupancy costs such as mortgage interest and rates?

  1. Claim nothing, because occupancy costs of a residence are never deductible.
  2. Apportion the occupancy costs on a reasonable basis, such as floor area used for business, and claim that proportion. Correct answer.
  3. Claim the costs only if the taxpayer also claims the main residence CGT exemption in full.
  4. Claim the full amount of mortgage interest and rates because the room is used exclusively for business.

Explanation

Occupancy expenses for a home-based business are deductible to the extent the home is used for income-producing purposes, normally apportioned by floor area or usage. Claiming a deduction may affect the main residence CGT exemption for the business portion.

Question 31Taxation

An Australian resident individual receives a fully franked dividend from an Australian company. What is the effect of the franking credit on the shareholder's tax position?

  1. The franking credit is included in assessable income but cannot be used as an offset.
  2. The franking credit is included in assessable income and then allowed as a tax offset against the tax payable on that income. Correct answer.
  3. The franking credit is refundable to all shareholders regardless of their residency status.
  4. The franking credit is excluded from assessable income and reduces the tax payable directly.

Explanation

The grossed-up amount, including the franking credit, is included in assessable income and the credit is then applied as a tax offset. Excess credits may be refundable for certain resident shareholders.

Question 32Taxation

A taxpayer sells an asset acquired in 2010 and makes a capital gain. Which cost base element includes the incidental costs of disposal, such as brokerage and legal fees?

  1. The first element, being the money paid to acquire the asset.
  2. The third element, being costs of owning the asset.
  3. The second element, being incidental costs of acquiring the CGT asset or of the CGT event. Correct answer.
  4. The fifth element, being costs to establish, preserve or defend title.

Explanation

The second element of the cost base captures incidental costs incurred in acquiring the asset or in relation to the CGT event, including brokerage and legal fees on disposal. The first element is the acquisition consideration itself.

Question 33Taxation

A company makes a loan to a shareholder who is also an employee. The loan is not made in the ordinary course of business and is not subject to a complying loan agreement. What is the likely tax consequence?

  1. The loan is deductible to the company and assessable to the shareholder as ordinary income.
  2. The loan is ignored for tax purposes because it is recorded as a loan in the company's books.
  3. The loan may be treated as a dividend to the extent of the company's distributable surplus, and may also give rise to a fringe benefit. Correct answer.
  4. The loan is treated as salary and wages subject to PAYG withholding.

Explanation

A loan to a shareholder that is not made in the ordinary course of business and is not under a complying loan agreement can be deemed a dividend under the private company distribution rules. Where the shareholder is also an employee, the loan may additionally be a fringe benefit.

Question 34Taxation

A partnership of two individuals derives business income. How is that income taxed?

  1. The partnership is a separate taxable entity and pays tax on the net income at the company rate.
  2. The partnership net income is taxed only when it is physically distributed to the partners.
  3. The partnership pays tax on behalf of the partners and the partners receive franked distributions.
  4. Each partner includes their share of partnership net income in their own assessable income and is taxed at their own rates. Correct answer.

Explanation

A partnership is not a taxable entity; it lodges a return disclosing net income, and each partner includes their individual share in assessable income. Tax is then payable at each partner's marginal rates.

Question 35Taxation

An individual makes a personal superannuation contribution and wishes to claim a deduction for it. Which condition must be satisfied at the time of the contribution?

  1. The contribution must be made to a self-managed superannuation fund only.
  2. A valid notice of intent to claim a deduction must be given to the fund, and the fund must acknowledge it. Correct answer.
  3. The individual must be aged under 65 at the end of the income year.
  4. The contribution must be made by the individual's employer on their behalf.

Explanation

To deduct a personal contribution the member must give the fund a valid notice of intent to claim a deduction and receive acknowledgement, generally before lodging their return. Concessional contribution caps and work tests may also apply.

Question 36Taxation

A business is registered for GST and makes a taxable supply. Which of the following best describes when GST becomes payable on the supply?

  1. GST is payable on the earlier of the invoice date or the receipt of consideration, depending on the accounting basis used. Correct answer.
  2. GST is payable when the supplier lodges its business activity statement.
  3. GST is payable only when the customer pays in full, regardless of the accounting basis.
  4. GST is payable at the end of the financial year in which the supply is made.

Explanation

The timing of GST on a supply depends on whether the entity accounts on a cash or non-cash basis, and generally attaches to the earlier of invoicing or payment. It is not deferred to the BAS lodgement date.

Question 37Taxation

A taxpayer incurs legal fees in defending a claim that a business asset is subject to a mortgage. Which cost base element is most likely relevant?

  1. The fourth element, being capital costs to increase the asset's value.
  2. The fifth element, being costs incurred to establish, preserve or defend title to the asset. Correct answer.
  3. The third element, being non-capital costs of owning the asset.
  4. The second element, being incidental costs of acquisition.

Explanation

Costs incurred to establish, preserve or defend title to a CGT asset fall within the fifth element of the cost base. Incidental acquisition costs belong to the second element and ownership costs to the third.

Question 38Taxation

An employer provides an employee with a novated lease arrangement for a car. Which statement best describes the FBT treatment?

  1. The provision of the car under the novated lease is generally a car fringe benefit, with the taxable value calculated using a statutory or operating cost method. Correct answer.
  2. The arrangement is treated as salary and wages and is not a fringe benefit.
  3. The arrangement is exempt because the employee bears the lease payments through salary sacrifice.
  4. The arrangement is exempt because the car is used for private purposes.

Explanation

A novated lease involves the employer providing a car to an employee, which is generally a car fringe benefit. The taxable value is determined under either the statutory formula or the operating cost method.

Question 39Taxation

A taxpayer receives a payment for agreeing to a restrictive covenant over future employment activities. How is the payment generally treated?

  1. The payment is treated as a capital amount relating to the restriction of activities and may be assessable under the capital gains tax provisions or as ordinary income depending on the circumstances. Correct answer.
  2. The payment is treated as a non-assessable capital receipt in all circumstances.
  3. The payment is always exempt because it relates to personal services.
  4. The payment is always treated as a capital gain and is never assessable as ordinary income.

Explanation

Payments for restrictive covenants can be assessable as ordinary income where they are a product of employment or services, or may fall under CGT as a capital receipt depending on the facts. The characterisation is fact-dependent.

Question 40Taxation

A small business entity with aggregated turnover below the threshold uses the simplified depreciation rules. It purchases a depreciating asset costing less than the instant asset write-off threshold. What is the result?

  1. The asset can be immediately written off in the year it is first used or installed ready for use. Correct answer.
  2. The asset must be depreciated using the prime cost method only.
  3. The asset must be depreciated over its effective life using the diminishing value method.
  4. The asset is not depreciable because it falls below the threshold.

Explanation

Under the simplified depreciation rules, a small business entity can immediately deduct the cost of a depreciating asset below the instant asset write-off threshold in the year it is first used or installed ready for use.

Question 41Taxation

A taxpayer's employer provides a reimbursement of expenses incurred for a business trip. Which statement best describes the FBT treatment?

  1. An expense payment fringe benefit may arise, but the otherwise deductible rule can reduce the taxable value to nil where the employee would have been entitled to a deduction. Correct answer.
  2. The reimbursement is treated as salary and wages and is not a fringe benefit.
  3. The reimbursement is always a fringe benefit with no reduction available.
  4. The reimbursement is always exempt from FBT regardless of the nature of the expense.

Explanation

Reimbursement of an employee's expenses can create an expense payment fringe benefit. The otherwise deductible rule reduces the taxable value by the amount the employee could have claimed as a deduction.

Question 42Taxation

A resident individual sells shares held for eight months and makes a capital gain of $10,000. What amount is included in assessable income from the gain?

  1. $5,000, because the 50% discount applies to all capital gains of individuals.
  2. $10,000, because the discount only applies to real property.
  3. $10,000, because the 50% discount requires the asset to be held for at least 12 months. Correct answer.
  4. $0, because gains on shares held under 12 months are exempt.

Explanation

The CGT discount for individuals requires the asset to have been held for at least 12 months before the CGT event. Shares held for eight months do not qualify, so the full gain is included.

Question 43Taxation

A taxpayer incurs interest on a loan used to purchase a rental property, together with council rates and repairs. Which statement best describes the treatment of these expenses?

  1. Interest and rates are deductible as general deductions, while repairs to the property are deductible under the repair provisions if they restore the asset without improving it. Correct answer.
  2. Interest is deductible only against the rental income if the property is positively geared.
  3. All three expenses are capital in nature and are added to the cost base.
  4. Council rates are never deductible because they are a personal expense.

Explanation

Interest and rates incurred in producing rental income are deductible under the general deduction provision. Repairs are deductible where they restore the property's function without amounting to an improvement or initial repair.

Question 44Taxation

Which of the following best describes the treatment of a non-complying superannuation fund?

  1. It is taxed at the top corporate rate on its assessable income, including contributions and earnings. Correct answer.
  2. It is taxed at the concessional rate of 15% on all income.
  3. It is exempt from tax because it is a superannuation fund.
  4. It is taxed at the marginal rates of its members.

Explanation

A non-complying superannuation fund is taxed at the highest corporate rate on its assessable income, which includes contributions and investment earnings. This contrasts with the concessional 15% rate for complying funds.

Question 45Taxation

A taxpayer makes a payment to a related party for services at a price significantly above market value. Which tax risk is most relevant?

  1. The payment is treated as a gift and is not deductible.
  2. The payment is automatically deductible because it was actually incurred.
  3. The deduction may be limited or adjusted under the general anti-avoidance provisions if the arrangement is considered to have a dominant purpose of obtaining a tax benefit. Correct answer.
  4. The payment is exempt from GST because the parties are related.

Explanation

Non-arm's length arrangements can attract the general anti-avoidance provisions where a tax benefit is obtained with a dominant purpose of gaining that benefit. A deduction is not guaranteed merely because an amount was incurred.

Question 46Taxation

Which of the following payments to an employee is generally exempt from fringe benefits tax?

  1. A payment of an employee's gym membership.
  2. A payment made to a complying superannuation fund on behalf of the employee. Correct answer.
  3. A payment of an employee's private electricity bill.
  4. A payment of a cash bonus to the employee.

Explanation

Employer contributions to a complying superannuation fund are exempt from fringe benefits tax because they are dealt with under the superannuation rules. Cash bonuses are salary and wages, and private expenses are fringe benefits.

Question 47Taxation

A company makes a distribution to shareholders that is recorded as a loan repayment but is not supported by a genuine loan. How might the distribution be characterised for tax purposes?

  1. It is ignored for tax purposes because it is recorded as a loan repayment.
  2. It is treated as salary and wages subject to PAYG withholding.
  3. It is always treated as a return of capital and is never assessable.
  4. It may be treated as a dividend under the private company distribution rules if there is a distributable surplus. Correct answer.

Explanation

Payments or credits to shareholders that are not genuine loan repayments can be deemed dividends under the private company distribution rules where a distributable surplus exists. The label used in the accounts does not control the tax outcome.

Question 48Taxation

Which of the following is a requirement for an expense to be deductible as a repair under the general deduction provision?

  1. The expense must increase the value of the asset.
  2. The expense must relate to an asset acquired in the same income year.
  3. The expense must restore the asset to its previous condition without improving it or replacing an entire asset. Correct answer.
  4. The expense must be capital in nature.

Explanation

A repair restores an asset to its previous condition without adding to its value or replacing an entire unit. Improvements and initial repairs are capital and not deductible as repairs.

Question 49Taxation

A taxpayer derives income from a business and also has a capital gain. Which statement best describes the order in which losses are applied?

  1. Revenue losses are applied against capital gains before ordinary income.
  2. Capital losses are applied against capital gains, and any excess is carried forward, while revenue losses are applied against assessable income. Correct answer.
  3. Capital losses are applied against business income before capital gains.
  4. All losses are pooled and applied against total assessable income without distinction.

Explanation

Capital losses can only be offset against capital gains, whereas revenue losses are offset against assessable income. The two streams are kept separate, and unused losses carry forward.

Question 50Taxation

A GST-registered business makes a taxable supply of goods for $11,000 including GST. What amount of GST is included in the price?

  1. $1,000, calculated as 10% of the GST-exclusive price.
  2. $110, calculated as 1% of the GST-inclusive price.
  3. $1,100, calculated as 10% of the GST-inclusive price.
  4. $1,000, calculated as one-eleventh of the GST-inclusive price. Correct answer.

Explanation

Where a price is GST-inclusive, the GST component is one-eleventh of the total. For $11,000 inclusive, the GST is $1,000 and the GST-exclusive value is $10,000.