3150AFE Taxation Planning for Financial Advisors
PROBLEM SOLVING ASSIGNMENT – 50%
This problem-solving assignment is designed to assess the learning outcome of students expressing their understanding of Australian taxation system in resolving hypothetical tax problem.
Students are required to complete the
- File-Note (25%) and
- Business Letter of Advice (25%)
Students are provided comprehensive facts about a client seeking tax advice. Prepare a File Note, and your findings in the File Note, on which entity or combination of entities are suitable to meet the client’s ‘objectives, that will support and form the basis of your recommendations in the Business Letter of Advice.
File Note
Looking at these facts, identify the issues, and relevant taxation law:
- Apply the relevant law to the client’s facts and reference to the Income Tax Assessment Act 1936, and Income Tax Assessment Act 1997.
- Use the STEP document to assist you in ensuring all law is applied in the required format and cross referenced to the law.
- File-Note will be around 15 to 20 pages in length.
- The recommendations in the File Note will support the advice provided in the Business Letter of Advice.
Business Letter of Advice
Students will be required to express their understanding of the law and recommended tax advice (as supported in the File-Note) in the Business Letter of Advice, which will need to be expressed clearly in a language the client understands.
Rubric
Check the marking criteria (Rubric) to ensure the BLA and File Note meet the requirements of the assessment, in terms of format and language.
Your Supervisor from Right Tax and Financial Services, provides the following information on a new client, seeking tax planning advice. .
FACTS FROM MEETING
Ron Ark is 44 years old, working full time as an investment analyst for AMD Ltd, earning a salary of $200,000, with reportable fringe benefits of $50,000 and reportable superannuation of $10,000 and rental income losses of $30,000 from an investment property located in Byron Bay. This property was purchased in March 2016 for $1,200,000, with a mortgage of $900,000, with a market valuation of $2,800,000, at the end of 2021. Ron is married to Linda Crushank (34 years old) and have no children.
Linda is a part-time financial analyst, who has been employed by NBC Pty Ltd for the past 10 years. In 2018, Linda decided to work as a consultant and formed her own company, Crushank Pty Ltd earning $180,000 per annum. She is contracted through Crushank Pty Ltd to NBC Pty Ltd on an hourly basis, which can vary week to week. Generally, she works no more than 15 hours per week. Cruskank Pty Ltd employs another analyst, Janine Mills, who works part-time 5 hours per week at NBC Pty Ltd and is paid $60,000 per annum. Crushank Pty Ltd total net income was $240,000, with expenses of mortgage interest of $5,000 and $2,000 for rates and electricity attributable to the converted garage, which is now the company’s office.
On 1 January 2022, Linda leased a 46-hectare farm at the back of Hastings Point for $9,000 pa from her uncle who acquired the land back in 2018 for $480,000. Ron has convinced Linda to use the land in legally farming industrial hemp, which can be extremely profitable. While working out their business plan and business structure, Linda plans to earn $10,000 per annum from leasing the land for horse agistment.
Ron’s believes there is a huge opportunity in Australia of legally farming industrial hemp for medical use. They found that Industrial Hemp (Hemp) is
made up of varieties of “Cannabis Sativa” that contain less than 0.3% Tetrahydrocannabinol (THC). Any THC levels above this makes the crop illegal. There are many other uses of the crop:
- The stem has an outer bark that contains the long, tough bast fibres, which can make hemp rope, textiles and clothing, and particleboard (MDF) and pet bedding, as well as plastics, and
- The seeds can be used to make oil, and soap.
In the initial stages Linda and Ron will grow the ‘industrial hemp’ crop for medical use, subject to strict government regulation and are planning to apply for a licence.
Ron and Linda have tested the crop, which was planted to ensure low levels of THC were achieved. The condition of being granted a licence, the business entity must ensure that the property where the crop is being grown is ‘secured’.
Linda Crushank and Ron Ark are undecided on which entity to run the business. Linda advises that her uncle has offered to sell the farm to them at cost price when they are ready to purchase. They have prepared the following net income/net loss forecast. They would like to work out their tax structure as soon as possible, as operations will need to commence in the 2023 income tax year.
Projected Net Income or Net Loss
| Year ended 30 June | Assessable Income $ | Deductions $ | Net income/Net loss $ |
| 2023 | 10,000 | 118,000 | (108,000) |
| 2024 | 18,000 | 121,000 | (103,000) |
| 2025 | 98,000 | 139,000 | (31,000) |
| 2026 | 240,000 | 232,000 | 8,000 |
| 2027 | 554,000 | 257,000 | 297,000 |
The projected deductions include:
- the annual licence fee,
- a farm manager’s salary ($80,000 pa)
- costs of fertilising, harvesting and irrigation,
- seed purchases cost (purchased 500kg of seed at $6.50 per kg);
- rental of machinery ($8,000 pa)
The farm manager will be responsible for the farming and processing of the crop. Linda plans to be involved in the business, because she works part time in Crushank Pty Ltd.
Business Plan
Ron and Linda will continue working full time to provide the cashflow for the new business. The forecast business plan is as follows:
- The business is projected to make net losses for the first three years.
- Net income should be earned from the 4th year onwards; and
- Operations to make hemp rope, textiles and clothing, and particleboard (MDF) and pet bedding will happen in 4th year (2026) onwards.
- A machine, called a decorticator, costing $500,000, will need to be purchased in 2025, to process the crop into the three separate products: fibre (and barbs), seed.
- By 2028, Ron and Linda, plan to export all goods and believe net income will exceed $800,000 p.a.
Asset and Future diversification
- Linda’s uncle would like to sell the farm to Linda and Ron at cost price. They have sufficient funds to purchase the farm at cost price. But additional funds will be required for future expansion of the business. This will need to be raised either by equity or bank finance.
- As stated above, the business plan is to diversify into producing other hemp products such as hemp rope, textiles, clothing, soap etc commencing in 2026 with the prospect of exporting in the future to the United States as there is little competition.
- To meet further diversification may require buying the farm next door, which is around the same size as the uncle’s farm. That is, 47 hectares and available for sale at market value for $700,000.
Future equity or finance
- This will require additional capital either by equity or finance, to purchase the decorticato machine, and for the future diversification of the business
- Toby Adams (42 years old), Ron’s cousin, is a venture capital investor earning around $150,000 a year. He has expressed interest in contributing capital, on the proviso that Toby has at least half ownership in the business. Toby has expressed interest in being involved in the future diversification and running of the business. Toby is married to Sue (35 years) with two young children: Grace (6 months old) and Jack (5 years old).
Personal assets
Ron and Linda Ark
On 2 February 2019, they purchased (in joint names) their residential home in Nathan for $1,575,300 (mortgage $500,000). At the end of 2021, the property was valued at $2,500,000.
Toby and Sue Adams
Toby and Sue purchased (in joint names) their residential home in South Brisbane, (203 Vulture Street) in April 1999 for $700,000, with a mortgage of $300,000. At the end of 2021, the property was valued at $1,950,000. Sue is a part-time lawyer earning $95,000 per annum. Sue is currently on maternity leave and undecided whether she will return to her employment as a lawyer and has expressed interest in being involved in the business.
Ron and Linda Ark request advice for the following:
- Ron and Linda need to apply for the license to grow the ‘industrial hemp’ for medical purposes. They plan to commence their business in 2023 and advise they can use their joint bank account: R & L Ark to pay for expenses and bank income from agistment fees.
- For 2023 – 2025, Ron and Linda will continue in their current professions. They have asked with the business structure; will they be able to offset the net losses in 2023-2025 against their taxable income?
- Ron and Linda require a business structure that will:
- minimise future tax payable for Linda and Ron and
- raise future equity to meet future diversification of the business.
Outline how the new structure can/will minimise future taxable income for Linda and Ron. (They want a general discussion and have not requested detailed calculations.)
- Linda and Ron need to know who will own the land holdings when acquired from Linda’s uncle and the proposed additional land holdings.
REQUIRED:
From the above information, prepare:
- File Note (25%) taking into account the information supplied by Ron and Linda.
- If taxation law/criteria in the law cannot be satisfied for the above circumstances, consider how it is possible for Ron and Linda to satisfy the taxation law? What advice can be given? This is to be discussed in the Business Letter of Advice.
The file note is not included in the word count and must demonstrate to your supervisor how you have reached your recommendations.
As stated above, the File Note should be around 15-20 pages in length. Only File Notes and taxation law relevant to the facts of the question, will be marked.
- Business Letter of Advice (25%)
Since this is a business letter of advice addressed to the client, you need not have comprehensive referencing to taxation law to support your advice. Refer to the marking criteria in the Rubric.
Most importantly follow the required format for the BLA as discussed below and outlined in the Course Website. Your letter (including appendices) should be up to 1,500 words. Your advice should include how the taxation law/criteria in the law can be satisfied if certain course of action is
taken by Ron and Linda.
If required, you may detail further information required from Ron and Linda.
The BLA required format:
- “Our Understanding” set out the facts as you understand them;
- “Executive Summary” provides a summary of all key recommendations;
- “Understanding of the law” will the client understand “what is being recommended” and “why “?
- Careful with your use of language – in the BLA, will your client understand the advice or is it too technical and confusing? With a BLA, comprehensive referencingto the Income Tax Assessment Act is NOT required to support your recommendations.
Refer to the L@G Course Site for further details in setting out the File Note and the Business Letter of Advice.
