Question 1

Alistair has a discretionary trust and this last year (2020); he has distributed $10,000 of the trust net income to his 8 year old son. At what rate of tax will this income distributed to the 8 year old son be taxed?

Accepted Answer

A)  At ordinary marginal rates 
B)  At a flat rate of tax equal to the company tax rate 
C)  At Division 6AA rates (top marginal rate plus Medicare levy) 
D)  No tax will apply as the amount is below the tax-free threshold

Question 2

What is tax planning? Select the best answer.

Accepted Answer

A)  Reducing tax by making choices or elections provided for under the Act 
B)  Making an appointment to meet your tax advisor 
C)  Thinking about lodging you tax return 
D)  Developing a scheme to reduce tax payable 
E)  Saving up to pay your tax bill

Question 3

Which of the following are tax benefits in accordance why s 177C(1)? Select all that apply

Accepted Answer

A)  Any reduction in tax payable 
B)  Not including income that should have been if it were not for a scheme 
C)  Deducing expenditure that would not be if it were not for a scheme 
D)  Obtaining a tax offset that would not be available if it were not for a scheme

Question 4

Why are shams legally ineffective?

Accepted Answer

A)  Legal rights and obligations that were intended did not eventuate 
B)  The taxpayers did not engage a lawyer to execute the transaction 
C)  The taxpayers do not have enough business experience to do things properly 
D)  Part IVA applies to them so that any tax benefits are cancelled

Question 5

Elle started a business selling books from a shop (the shop is leased) in July 2019. She tells you that she has had a very tough year and that her total sales for the year were only $18,000 and that with expenses of $26,000 the shop has in fact made a loss of $8,000 for the year. Elle estimates that the value of her trading stock and plant and equipment come to only $62,000 and that the market value of the building (out of which she operates the book shop) as at 30 June 2016 is $350,000. Elle also received bank interest of $20,000 and has no other income and expenses for the year ending 30 June 2020. What is Elle's likely taxable income?

Accepted Answer

The answer of Elle started a business selling books from...

Question 6

BTO Australia Ltd, an Australian resident company, has entered into an arrangement to pay its parent company, BTO Ltd, a significant global entity company resident in the Cayman Islands, a large ($100 million) fee each year for marketing and administrative services. This arrangement will have the effect of reducing BTO Australia Ltd's tax payable and also shift large profits to the Cayman Islands, a jurisdiction with a very low tax rate. What avoidance rule is this arrangement likely to be subject to?

Accepted Answer

A)  Transfer pricing 
B)  The diverted profits tax 
C)  The multinational anti-avoidance laws 
D)  The general anti-avoidance rules

Question 7

How is law different from ethics? Select all that apply.

Accepted Answer

A)  Law mandates certain conduct, but ethical guidance is not mandatory 
B)  The law prescribes penalties for noncompliance, but ethics does not 
C)  Laws are often enacted for a specific purpose, but ethics has no specific purpose 
D)  Laws are more effective in regulating behaviour 
E)  All of the above

Question 8

Tax evasion is ?

Accepted Answer

A)  Legal 
B)  illegal 
C)  Legal but not ethical 
D)  OK if you can get away with it

Question 9

Which of the following is not one of the eight criteria to determine purpose as set out in section 177D (2) ITAA36?

Accepted Answer

A)  The manner in which the scheme was entered into or carried out 
B)  The subjective intent of the taxpayer 
C)  The form and substance of the scheme 
D)  The time at which the scheme was entered into and the length of the period during which the scheme was carried out

Question 10

Jack maintains a bank account in a false name and omits to include the interest from this account in his income tax return. Jill, a registered tax agent, assisted Jack to set up this account. Is there likely to be a breach of the Tax Agent Code of Professional Conduct in this scenario?

Accepted Answer

The answer of Jack maintains a bank account in a...

Question 11

John and Jim Page operate a bookshop in partnership. The partners do all the work and do not employ anybody. On the advice of their accountant they settled (created) a discretionary trust with a corporate trustee and themselves and their immediate family members as beneficiaries. It was intended that the trustee would provide management services to the bookshop for a fee and the profits of this management would be distributed to the beneficiaries in accordance with their marginal tax rates. Their accountant made journal entries into the books of the partnership and the trust to effect fees for services provided and the trustees resolved to distribute all the profits to tax advantaged beneficiaries.
Comment on the effectiveness of this arrangement for tax purposes.

Accepted Answer

The answer of John and Jim Page operate a bookshop...

Question 12

What is required for Part IVA to apply? Select all that apply

Accepted Answer

A)  A scheme 
B)  A tax benefit 
C)  A dominant purpose of obtaining a tax benefit from the scheme 
D)  A reduction in tax payable in some way 
E)  An admission from the taxpayer that they wanted to reduce their tax payable

Question 13

What are teleological ethical theories concerned with?

Accepted Answer

A)  The consequences or the result of a person's conduct 
B)  The motives for conduct 
C)  People feeling good about their actions 
D)  People being able to justify their behaviour

Question 14

Chevmon Australia Ltd is a subsidiary of Chevmon Co, which is headquartered in the USA and is a significant global entity. Last financial year, Chevmon Australia paid Chevmon Co $2 billion of interest on loans that Chevmon Co provided to the Australian subsidiary. If the interest rates charged on those loans by the US parent company were 5 times the interest rate that the subsidiary could have obtained, is this arrangement likely to be affected by Australia's new diverted profits tax?

Accepted Answer

A)  No, as this is an intra-group transaction, there is no real tax issue at stake 
B)  No as different countries have different tax rules and tax rates 
C)  No, as this is tax evasion 
D)  Yes, this is exactly the arrangement that the diverted profits tax is looking to attack

Question 15

What action can the Commissioner take under Part IVA when the multinational anti-avoidance rule applies?

Accepted Answer

A)  Cancel the tax benefit 
B)  Impose a financial penalty 
C)  Impose a criminal penalty 
D)  Ban the relevant entity from operating in Australia

Question 16

If Part IVA applies, what action can Commissioner take under Part IVA for most schemes?

Accepted Answer

A)  Cancel the tax benefit from the scheme 
B)  Void the transaction for tax purposes 
C)  Reconstruct the transaction to what should have happened instead 
D)  Prosecute the taxpayer

Question 17

Which of the following is not one of Australia's specific anti-avoidance tax rules?

Accepted Answer

A)  A non-commercial loss under Division 35 ITAA97 
B)  The Diverted Profits Tax Act 2017 
C)  The deemed dividend rules under Division 7A of ITAA36 
D)  The general anti-avoidance rules found in Part IVA ITAA36

Question 18

A discretionary trust had a large amount of trust net income it needed to distribute and had recently acquired a unit trust, that had accumulated tax losses, and so the trustee of the discretionary trust sought to distribute most of the income of the discretionary trust to the unit trust. The attempted distributions of trust income were never in fact made. How is this arrangement likely to be seen by a court?

Accepted Answer

A)  As a sham and therefore of no legal effect 
B)  As a sham and so effective for tax purposes 
C)  As a genuine trust arrangement that cannot be challenged 
D)  As serious tax evasion

Question 19

A couple (the Blarts) were advised by their financial planner to buy an investment property and to pay all their loan repayments only against the loan they had for their private property and to let the interest on the investment loan capitalise and thereby to let the balance of the loan on the investment property continue to increase as this would then provide for them additional deductions. Is this arrangement likely to be disallowed under the provisions of Part IVA of the Income Tax assessment Act 1936?

Accepted Answer

A)  No. This is an example of tax avoidance 
B)  No. This is an example of tax evasion 
C)  No. This is an example of a sham 
D)  Yes as the taxpayers have no subjective intent to avoid tax

Question 20

A decision to invest a large sum of capital at much lower interest rates, than can be obtained in Australia, in an overseas bank through a complicated series of transactions involving multiple countries, due to a provision that did operate at that time under Australia's domestic tax rules to treat such foreign income as tax exempt, is most likely to be viewed as tax avoidance under what set of rules?

Accepted Answer

A)  A diversion of profits under the Diverted Profits Tax Act 
B)  The use of unlawful transfer pricing 
C)  The general anti-avoidance rules found in Part IVA 
D)  Tax avoidance under the multi-national anti-avoidance laws

Exam 14: Ethics, Tax Avoidance and Evasion

Alistair has a discretionary trust and this last year (2020) ; he has distributed $10,000 of the trust net income to his 8 year old son. At what rate of tax will this income distributed to the 8 year old son be taxed?