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Midsem Solutions Paper

Electronic calculators may be brought into the examination room. Mobile phones may be brought into the examination room but must be switched off and must be placed under your desk. QUESTION ONE Barry conducts a butcher shop in Clarksville, He purchases 10 whole sheep that have already been slaughtered tort $1 10 each. He butchers the slaughtered sheep into various cuts such as chops, leg of lamb, shoulder of lamb and so on, His total sales receipts tort the cuts trot each slaughtered sheep are $440. His annual turnover is $76,000. This year he spent $4400 (SST inclusive) on new knives and chopping boards.

The SST consequences for Barry of these transactions are: (a) Barry is liable to be registered for SST_ All the purchases are SST free and all the sales are SST free as purchases and sales of food. Hence Barry does not receive any input tax credits on the purchases and is not liable for SST on his sales. (b) Barry is liable to be registered for SST. The purchase of the slaughtered sheep carcasses is SST free as purchase Of food. Barry receives an input tax credit on the purchase of the knives and the chopping boards of Sussex 10/11 x = $400.

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However, the input tax credits cannot be refunded to Barry as his sales are SST free. C) Barry is liable to be registered for SST. The purchase of the slaughtered sheep was not purchase of food as they had not yet been butchered into cuts but was input taxed. This means that no SST was payable on either of Barras purchases and hence Barry cannot receive any input tax credits. All of Fried’s (d) Barry is liable to be registered for SST, The purchase of the slaughtered sheep is SST free as a purchase of food.

Barry receives an input tax credit on the purchase of the knives and chopping boards of 54,401) x 10/11 x = $400. Barras sales are SST free and any excess input tax credits that Barry has are funded to him. (e) Barry is not liable to be registered for SST as his turnover less his annual expenses is less than the SST registration threshold. Hence Barry does not have to charge SST and cannot claim input tax credits. Correct answer was (d) QUESTION TWO Cathy and Bruce are both residents Of the newly independent country Utopia.

Cathy had a taxable income in the year ending 30 June Yell of $50,000 which was wholly derived from her salary as a teacher of English as a second language. Bruce had a taxable income in the same year of SOCIO,OHO which was wholly derived from interest in Utopian banks. Lender the Euphoria tax system salary is taxed at the following rates: 10% for the first $10,000; 15% for the next $40,000; 20% on the next $60,000; and 45% on the remaining income. Income from interest is taxed at a rate of 5% from $1.

The Euphoria tax system is: (a) Consistent with horizontal equity as it taxes $1 to interest income differently from the way it taxes SSL of salary income, (b) Consistent with vertical equity in the manner in which it taxes income other than interest but inconsistent with horizontal equity in that it taxes interest income differently to the way in which it taxes other income, c) Consistent faith vertical equity as it taxes someone with a larger amount of interest income at the same rate as it taxes someone with a lower amount of interest income.

D) Inconsistent vivid vertical equity as it taxes someone on a lower income at the same rate or a higher rate as it taxes someone on a higher income and consistent with horizontal equity as a taxpayer deriving interest income is not similarly placed for tax purposes as a taxpayer deriving other income. (e) Inconsistent with horizontal equity as taxes interest income at a lower rate than it taxes salary income but consistent With vertical equity as taxing interest t a lower rate promotes savings.

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