What is the best business structure (trust, partnership or company)?

3108AFE Taxation Planning PROBLEM SOLVING ASSIGNMENT – 35%

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 will be required to provide “tax planning” advice to the client.

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Students are required to complete the File-Note and Business Letter of Advice

Students are provided comprehensive facts about a client seeking tax advice. Looking at these facts, identify the issues, the relevant law; apply the relevant law to the client’s facts; and provide a final conclusion in the File Note. The final conclusions will support or form the basis of your recommendations in the Business Letter of Advice.

File Note

  • Apply the law to the client’s facts and ensure that appropriate law has been identified and referenced to the Income Tax Assessment Act 1936, and Income Tax Assessment Act 1997. Use the STEP document to ensure all law is applied in the required format.
  • File-Note will be around 15 to 20 pages in length;
  • The recommendations in the File Note will support the advice provided in the in the Business Letter of Advice.

Business Letter of Advice

Students can express their understanding of the law and recommended tax advice (as supported in the File-Note) in the Business Letter of Advice. The assessment of the BLA will focus on the ability to express the operation of the tax system clearly in a language the client understands.

Check the marking criteria (Rubric) to ensure the BLA and File Note meet the requirements of the assessment, in terms of format and language.

Check the marking criteria (Rubric) to ensure the BLA and File Note meet the requirements of the assessment, in terms of format and language.

Students should refer to the assessment criteria (rubric) to understand how the Business Letter of Advice will be marked.

Don Clark, your Supervision from Clark Tax and Financial Services, provides the following information concerning the new client: Harry and Jess Byrne seeking tax planning advice.

Don has had a meeting with Harry and his wife Jess, to gather further information about the farming operations to date, future plans, financial affairs, salaries, investments, loans and any other information relevant for taxation purposes.

Don has asked you to review the information from the meeting and to prepare a ‘file-note’ that addresses the questions raised by Harry and Jess. The ‘file-note’ is a preliminary analysis undertaken by tax practitioners in identifying the issues, applicable tax law, and how the law applies to the client tax problem, and provide recommendations to the issues raised by the client.

The comprehensive analysis of the law in the “file-note” will then support the ‘business letter of advice’ which Don has asked you to prepare for the client. Don provides you with the following information recorded at the time of the meeting.

FACTS FROM MEETING

Harry Byrne (50 years old) and his wife Jess (40 years) plan to establish an organic fruit and vegetable business. Both Harry and Jess plan to build the business, look for opportunities to diversify before selling the operations as a going concern and retiring. Initially, the business operations will include both farming and retail sales. They plan to commence the business towards the end of this year.

Jess and Harry have leased 20 hectares of farmland (near Brunswick Heads) from Harry’s uncle, Gareth Right, for a nominal fee of $56,000 per year. The cost of the land under the lease is $700,000, of which one-third (1/3) of the land is Gareth Right’s private family home, where he and his wife, Jan and their two children: Jack (20 years) and Lucy (19 years) have lived since 1998. Though Gareth advises he plans to sell sometime in 2023, and has offered Jess and Harry first option to buy the entire property (including the farm house) from his family company, Right Farming Pty Ltd.

Jess and Harry have employed a farm manager, John Apple (on a salary of $70,000) to organise and trial different crops and growing techniques. John will be responsible in employing part-time workers to assist him in farming the land, growing crops, and preparing the fruit and vegetables for sale.

John maybe able to employ, Flint, Jess and Harry’s son, who is 17 years of age, and in his final year of high school. He is not employed and has no separate income. After he completes school, and he has expressed interest in working on the land before he commences University in 2021.

To finance the business operations, Harry and Jess will continue working in their respective jobs. Jess works part-time as a financial consultant, earning a salary of 80,000 per annum. Jess will continue working part time until 2023, so she can assist John, the farm manager.

Harry an investment analyst for AME Ltd, will continue working full time. He earns a cash salary of $500,000; and reportable fringe benefits of $50,000; and reportable superannuation of $5,000.

Assets owned in Harry’s name:

Harry owns a (negatively geared) investment property in Byon Bay (20 Bay Street) purchased in March 2016 for $1,200,000, with a mortgage of $900,000. (Market valuation was $2,800,000, at the end of 2020).

For the year ended 30 June 2020, Harry incurred rental income losses of $120,000.

Assets owned in Jess’s name:

Jess owns a (positively geared) investment property in South Brisbane, (203 Vulture Street) purchased in April 1989 for $500,000, with a mortgage of $100,000. (Market valuation of $1,950,000 on 30 June 2020).

For the year ended 30 June 2020, the net income earned from the property was $12,000.

The family home at Byron Bay (1 Logan Street) purchased in 2002 for $860,000 is in Jess’s name, with a mortgage of $250,000. (Market valuation of $3,600,000 on 30 June 2020).

Assets purchased for the farming operations

Harry and Jess plan to purchase the following assets (for the 2022 income year):

  • Secondhand tractor purchased for $70,000 (exc GST). Depreciation that will be claimable for taxation purposes – $8,000.
  • Hoe and farming equipment for 28,000. Depreciation claimable for taxation purposes – $5,600.

Projected Net Income or Net Loss

For the first few years, farm produce was sold to the local markets. Gross sales of fruit and vegetables was: $15,000 in 2020 (excluding GST) and $18,000 (excluding GST) in 2021. (Don advises that no net income/loss was earned in 2020 and 2021 because Harry and Jess were trialing farming fruit and vegetables before deciding to establish an organic fruit and vegetable business.)

The expansion of the business will mean net losses for the next three years before net income (profits) will be earned. Jess and Harry provide you with the following projected net losses and net income:

  • 2022: ($200,000)
  • 2023: ($120,000)
  • 2024: ($ 80,000)
  • 2025: $90,000
  • 2026: $290,000
  • 2027: $370,000
  • 2028: $520,000

Equity and future diversification

In the future, Harry and Jess plan to buy the farm from Harry’s uncle (Gareth) and convert the farmhouse to fruit and vegetable market, including a vegan restaurant. Friends of Jess and Harry advise they should diversify in the future and extend the farmhouse, so it is suitable for a wedding venue, which is extremely lucrative in Byon Bay.

Harry and Jess will need to raise finance by the end of 2024, so they can buy the farmland from Gareth, and allow for capital works in renovating and extending the farmhouse, to include the restaurant and allow for wedding venue.

They would prefer to raise the funds by equity. One option is to allow Harry’s brother, Russell to join the business. Russell, a financial adviser has expressed interest in the business and contributing financially. Russell is 48 years old and is married to Sue (45 years) a full-time mother to Lucy (15 years old) and Jack (17 years old). Jess and Harry believe they will need to raise at least $800,000. They prefer going into business with family than applying for a bank loan but are concerned in losing control of the business. Harry had indicated that Russell would join the business sometime in the 2025 tax year. Russell has indicated he would like ownership in the business.

Harry and Jess request advice on the following:

Harry and Jess request advice on the most appropriate business structure to meet the various stages of their business plan. In the initial stages (first three years) Harry and Jess will continue earning their professional income to fund the financial commitments of the business. Harry and Jess ask whether the business structure can:

“….. offset the initial losses of the business (for the first three years) against their income.”

That is, they would like advice on whether they can offset the initial losses of the business (for the first three years) against their professional and other income and then set up an appropriate business structure to meet their future plans.

The advice to Harry and Jess must take into account:

  • Offset projected losses (earned by the business) for the years ended 2022, 2023 and 2024;
  • Tax structure must consider the significant increase in future net income from 2025 year and
  • Raise future capital by equity; and
  • Outline how the new business structure can/will minimise future tax payable for the business and for Harry and Jess (Harry and Jess have not requested detailed tax calculations.)

Consider which tax structure/tax structures will most likely meet the client’s request, advising the client why other tax structures were unsuitable. Download the marking criteria in the Rubric, and ensure all criteria has been met.

Required

For the above advice required, prepare a Business Letter of Advice for Harry and Jess Byrne. The advice in the BLA must be supported in a File Note.

Is your BLA in the 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.

File-Note format ?

The ‘file-note’ must demonstrate student’s ability to problem solve taxation hypotheticals by:

  • identifying the issue and relevant law; and
  • apply the law to Jess and Harry. Use the STEP schemas to assist in identifying and applying the law. All law referred to must be referenced to the Income Tax Assessment Act, 1936 Act or 1997 Act.

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