Below is the question (i wrote some things but i am stuck (this is for calculations & law)
Trusts and Tax Administration (25 marks)
A trust was established by Antoinette Greene on 1 July 2015 for the benefit of her grandchildren. The trustee ABC Pty Ltd reported to you the following information about the trust for the tax year ended June 2022.
Income received by trust
$1,000,000 received from commercial rental properties
$700,000 received from private residential properties
$150,000 interest from high yield bank accounts
$10,000 full franked dividends from Coalition Pty Ltd
$17,000 unfranked dividends from United Pty Ltd
Expenses
$15,000 in bank fees
$750,000 repairs
$5,000 investor advice fees
Payments to Beneficiaries
· 30% of the net income of the trust to Leigh (granddaughter) aged 21 who is enrolled full time at university and has $22,000 gross income from her part time job.
· 20% of the net income of the trust to Angus aged 14 (grandson) who is enrolled full time at high school. The trustee made the payment directly to the Northern Grammar School for school fees for Angus.
· The remainder of the income was retained in the trust to grow the capital.
All answers must refer to relevant legislation, cases or Rulings to receive full marks.
A. The repair expenses included an unusual payment of $200,000 due to substantial rain damage to one of the investment residential properties held in northern NSW. The $200,000 included the following expenses. Due to flooding which required that all four ground floor units be drained via a water pump ($8,000). Further, each unit had to have all the carpet and linoleum flooring had removed and new vinyl tiling laid ($7,000), replastering and repainting of the ground floor walls ($6,000), and a brand new kitchen fit out of $35,000 each. The kitchen installer advised that the kitchens have an effective life of 15 years given their non-commercial use.
A. Required: Advise the trustee whether any of the repair costs are deductible and if not, how they should be treated for tax purposes? In giving this advice assume all expenses have been paid in full in the tax year and that the trustee prefers to maximise deductions. (8 marks)
SOME POINTS I HAVE WRITTEN TO ANSWER THE QUESTION WHICH MIGHT HELP
The issue in this fact scenario is whether the $200,000 in repairs are deductable and if not, how they are treated for tax purposes.
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows deductions for repairs to a premises if it is for income producing purposes. However, when the expense is capital in nature then s25-10(3) of the ITAA 1997 does not allow a deduction.
If the repairs are initial, replacement or improvements then they are non-deductable as developed by the courts.
Initial repairs are non-deductable and classified as damages to the property when it was bought. The repairs were completed to the property when substantial rain caused damage to the property after the property was purchased. Therefore, this is not applicable.
In Law Shipping Co Ltd v IRC (1923) 12 TC 621 connoted that the repairs were not deductable as it was undertaken to remedy the defects at the time the property was acquired.
Replacements: FCT v Western Suburbs Cinema Ltd (1952) 86 CLR 102:
Damaged ceiling repaired with newer better materials because the existing materials were
no longer available.
Held not deductible because;
1. Using the new materials was an improvement which ‘changed the character of the
asset’, and
2. The test is whether the actual expenditure incurred by the taxpayer constituted a
repair.
Improvements:
Where repair to property involves a replacement it is necessary to distinguish between;
1. The replacement of part of an asset – treated as a repair and deductible, or
2. The replacement of the whole of an asset – treated as a replacement and not
deductible as capital.
In Lindsay v FCT the taxpayer replaced a wooden slipway with a longer concrete slipway.
Held to be a capital expense as the new slipway ‘replaced’ the existing asset and was
not part of the asset (was also substantially different material!)
ITAA97 s25-10 provides that;
1) You can deduct expenditure you incur for repairs to premises (or part of premises), or
a depreciating asset that you held or used solely for the purpose of producing
assessable income.
2) If you held the property partly for that purpose, you can deduct so much of the
expenditure as is reasonable in the circumstances.
3) You cannot deduct capital expenditure under this section.
B. Calculate, taking into account your advice on the repair expenses, the net income of the trust for the 2021/2022 tax year. (2 marks)
SOME POINTS I HAVE WRITTEN TO ANSWER THE QUESTION WHICH MIGHT HELP
The “net income” of a trust, as calculated for income tax purposes under section 95 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936);
A trustee is not the default taxpaying entity as directed by ITAA36 s 96. The trustee is not personally liable, but is responsible for paying the tax out of the trust.
$1,000,000 received from commercial rental properties
$700,000 received from private residential properties
$150,000 interest from high yield bank accounts
$10,000 full franked dividends from Coalition Pty Ltd
$17,000 unfranked dividends from United Pty Ltd
Total s6-1 assessable income: $1,877,000
Expenses
$15,000 in bank fees
$750,000 repairs
$5,000 investor advice fees
(770,000) (all expenses included) Div 8 ITAA97 (NEED TO SEE FIRST REPAIR EXPENSES)
Net income from the trust year: $1,877,000 – $770,000 = $1,107,000
C. Calculate the tax payable for all beneficiaries and for the trust under this arrangement. (4 marks per taxpayer, 12 marks total).
SOME POINTS I HAVE WRITTEN TO ANSWER THE QUESTION WHICH MIGHT HELP
S96 not assessable to trust unless Act requires
Available for distribution $1,107,000
Leigh (granddaughter): 30% from trust – Aged 22 – full time uni
$22,000 income from part time job
(SEE WHAT DISTRIBUTION IS $) s97 ITAA36 trust income statutory
D. Antoinette as trustee wishes to challenge a decision by the Commissioner to not allow a deduction for repairs that the trust claimed in the 2019/20 tax year to another residential property damaged by bushfires. The Notice of Assessment (which did not include the amount for a deductible repair) was issued on 30 August 2020. Advise Antoinette, with reference to relevant tax cases, legislation and/or rulings whether and how they may challenge the Commissioner’s decision. (3 marks).
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