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Assumptions

Bank interest is not taxed as it is taxed at source-withholding tax which is final

Franked dividends and credits are taxed at the company

Capital gains are taxed a withholding tax at source which is final

1. Tax planning

This entails the arrangement of the tax affairs of Scott in such a way that he pays minimum tax. This uses the concept of tax avoidance, which is legal as compared to tax evasion, which is illegal. In this Scott will anticipate the tax implications of all the business decisions and then using the existing tax laws, selects the course of action which will result minimal tax (Hoover, 2000).

Delay Payments

Scott may delay his payments until after end of June in the event that he is experiencing financial cash flow difficulties. Wages and salaries that are paid to employees after end of June 2012 remain deductible in the tax year 2011/12 as long as the employment services where provided before 30^th June. Bonuses on the other hand remain deductible even if they are post 30th June payments. His payroll tax liability may also be reduced by use of salary packaging exempt fringe benefits, provision of zero fringe benefits and payments of dividends to associates rather than wages.

Hire purchase vs. cash settlements

Hire purchase transactions unlike cash are more attractive in tax avoidance. Presently, businesses that use cash based transitions claim GST progressively on hire purchase transactions. The new law however, stipulates that cash taxpayers will be in line with the accrual tax payers in claiming GST upfront.  This only applies to those transaction entered into on or after 1^st July 2012.

 New Carbon law

Increased instant asset write-off threshold

As from 1 July SMEs will be in a position to write-off depreciating assets whose value is below $6,500 in the year of income in which the asset is under use or installed. Thus as a tax avoidance Scott may delay purchase of assets till this time.

Streamlined pooling provisions

With effect from 1 July the SMEs long life pool will be no more. Thus, assets (apart from buildings) will be depreciated at a rate of 30%. The balance of ones long life pool and the general SME pool as 30 June will be carried forward and added as the opening balance in 2012/13 tax year.

Special rules for cars

As from 1 of July 2012 SMEs had been in a position to write off $5,000 of any car whose cost was $6,500 or even more in the financial year the car is under use. This applies to both new and used cars. The remaining value of the car is to be depreciated at 15% in year one and 30% in later years. This therefore can be a benefit to those purchasing when this window is open (Ellentuck, 2002).

Lease vs buy

Scott will make a decision whether to purchase an asset and earn capital allowances or lease the asset and enjoy the lease tax shield. The option that will be preferable to him will be used.

Debt vs equity financing

Scott will weigh between an option of financing the organization using debt capital or equity financing. Using debt financing, he will have interest expenses being allowable expenses or equity where dividends are not allowable.

He will also decide if he will produce for local consumption where goods attract a value added tax charge or produce for export only where exports are zero-rated.

Others include

SMSF double deduction

Avoid the traps for personal deductible contributions

Direct a transitional termination payment into superannuation

Split contributions to keep superannuation below $500,000

Get a 100 per cent co-contribution 

Building the spouse’s superannuation

In the financial markets, spouse’s contribution provides a guaranteed 18% return on investments up to $3000. A low-income earning spouse will attract a non-refundable offset of up to $540.

Salary sacrifice with the new tax rates

2. Tax-effective structure

Sole trader – It is cheap easy and simple to establish. However, incase of loss all is borne by the sole trader.

Partnership – Under this there should be a drawn up agreement, as whilst all gains are shared, a party may end up bearing the debts or liabilities o the other.

Company- this is based on the principle of separate legal existence. In this losses are used to offset future profits while the profits are taxed at the corporate 30%. However, a shareholder cannot use the profits unless paid out to him inform of wages or dividends and taxed at ones marginal tax rate. Strict laws on taking money as loan or drawings also exist (Wiener, 1998).

Trust – This can take the form of a discretionary trust where entitlement to capital and income is at the discretion of trustees, or a unit trust where the allocation of income and capital is on set percentages. The major benefits in trusts is protection of personal assets that are not in the fund and in the vent of bankruptcy a court cant force a trust to pay funds held by it to creditors. They also save tax by distributing income splitting to other relatives and that church-gifs can be given out of the pre-taxed income (Dailey, 1997.)

I would recommend Scott to adopt a company as his effective tax structure. This is due to the tax benefits associated with establishing a company as compared to the rest. A company enjoys many capital allowances, and tax benefits as compared to individuals who despite the graduated tax scale have fewer benefits to enjoy.

4. Capital gain

Managed fund- equities

Market price = $60000

Cost = $70,000

Capital loss to be offset against profits = $10,000*50% = $5000

Investment unit

Present cost = 290 000

Initial cost =190 000

Capital gain = 100 000-2000 = 98 000*50% = $49,000

The gain will be added to the taxable income of Scott while the loss will offset the taxable profit for the year.

Long-Term Capital Gains

Scott will be paying taxes on capital gains realized on investments in stock markets. Where the shares do not perform, such losses are carried to offset taxable income while gains are taxed at the graduated scale of income tax. Where he hold stocks for more than a year this will attract more favorable taxes as a final 15% tax rate is applicable. Besides, it will attract no tax where the taxable income is below a certain set limit.

Qualified Dividends

Dividends follow similar tax structure to capital gains. These are further classified into ordinary and qualified dividends. The ordinary are taxed at the graduated income tax scale where as the qualified are taxed at a fixed rate or tax-free.

Thus, Scott will decide the option to exercise by either selling the shares for a capital gain or holding the security for dividends.

5. Margin loan = $300,000

LVR = 70%

Portfolio = $428,600

New value after fall = $400,000

(a) Let p be the minimum amount that they must sell and repay

300 000 – p = 0.7(400 000 – p)

300 000 – p = 280 000 -.7p

.3p = 20 000

p = $66 667

Thus they must resell and repay at = $66 667

(b)  Proving the answer

233 333/333 333 =0 .7

Thus, LVR of 70% is well used in the resell and repayment option.