DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCEACCG8124 Taxation Law Session 1 2020Case Study
Information and Instructions
On 1 July 2019, Ben and Maggie took over directly the whole shareholding in BM Fine Jewellery Pty Ltd. The company operates a jewellery shop in Southland shopping centre. They acquired this business by paying the previous owner cash of $400,000. This constitutes $300,000 for the shop while the balance of the consideration is for the Goodwill on acquisition.
Details for the year ending 30 June 2020 are:
|Proceeds from disposal of land||300,000|
|Loan establishment cost||3,000|
|Purchase of Hyundai station wagon||28,000|
|New equipment (computers, shelving and security system)||37,500|
|Travel (Jewellery fair)||4,500|
|Entertainment – client||2,450|
|Market research expenses||21,250|
2. The company sold its land for $300,000 in May 2020. The land had been originally acquired on 1 January 2000 at a cost of $280,000. The land is held for long-term investment.
3. Trading stock on hand – 1/7/2019Nil Trading stock on hand – 30/6/2020
Market selling value$65,000
$1,800 of the wages are owing to staff
Running costs(excluding depreciation)$6,500
The effective life of the car is five years and that it is only used for the business purposes.
6. Jewellery fair
On 1 March 2020, Maggie attended a jewellery fair in Hong Kong in order to update her knowledge on the latest jewellery designs and customer trends. The travel costs were $4,500. This amount covered the expenditure for airfare, accommodation and registration.
7. Acquired the following new equipment:
1 September 2019: Computer$10,500
15 October 2019: Shelving$24,500
1 January 2020: Security system$2,500
8 June 2020 Air conditioning (unpaid as at 30 June 2020)$25,000
8. Loan establishment costs and interest expenses On 1 August 2019, the company obtained a 10-year loan of $500,000 to fund business operations.
9. Goodwill of $100,000 was written off.
10. Market research expenses of $21,250 were incurred in examining the feasibility of opening a new store in Sydney CBD.
Assuming Ben and Maggie want to maximise taxable income,
The report presents the calculation of the taxable income and the tax payable by the assessee for the year 2019-20. The report is divided into two parts where first part presents the amount that should be included in the taxable income of company along with the reasons and the second part presents the calculation of the taxable income and the tax that is payable. (Warren, 2016)
The calculation is done as per the case study which has been given. The case study is about Ben and Maggie who took the whole shareholding of BM fine jewelry Pty ltd. They acquired the business by paying owner the cash of $400,000 out which 3,00,000 is for the shop and 1,00,000 is for goodwill. Details of the balances have been given in the account along with some of the adjustments and it is required to evaluate as to what will be includible and excludible from the taxable income.
2. AMOUNT INCLUDED IN THE TAXABLE INCOME OF COMPANY
|Sales||9,60,000||Included and taxable||All business income that is earned from the every day business activities shall be chargeable to tax as per the Income tax act Australia, 1997. (Woellner,Barkoczy, Murphy, Evans,and Pinto, D., 2016)|
|Proceeds from disposal of land||3,00,000||Included and chargeable to tax||The amount derived from the sale of land is a capital gain transaction and should be chargeable to tax under the Income tax Australia, 1997. The income shall be chargeable to tax under the head capital gain by reducing the cost of acquisition of land.|
|Trading stock||3,15,000||Partially allowed as deduction||The amount at which the trading stock is value at is $3,15,000. Whereas the cost of trading stock is 46,000. The difference amount shall be allowed as deduction for the business. It shall be $2,69,000.|
The expense in relation to the operating of business shall be deductible. The wages of staff shall be deductible from the business income. Although the outstanding wages which are not paid by the business shall not be allowed as deduction.
=$86,000- $ 1800
|Electricity||9500||Full deductible expense||The expense in relation to operation of business being deductible. Hence, the electricity expenses that is incurred for the business operations shall be deductible from the gross income of the business.|
|Car expenses||6500||Allowable as deduction||The expense in relation to the operating of business shall be deductible. The car expenses is assumed to be incurred for the business purpose. Hence, it is deductible.|
|Loan establishment cost||3,000||Allowable as deduction||The expense in relation to the business operations shall be deductible. The loan is assumed to have been occupied for the business purpose hence the expense in relation to obtaining loan shall be allowed as deduction.|
|Interest expenses||23,000||Allowable as deduction||Interest on borrowed money for Income tax obligations and for producing assessable income shall be allowed as deduction.|
|Advertising||4,200||Allowable as deduction||The expenses incurred on the publicity of business shall be allowed as deduction as per the ITAA, 1997.|
|Purchase of Hyundai station wagon||28,000||Fully deductible||The purchase of car is less than $30,000. Hence, the same shall be deductible.|
|New equipment||37,500||Fully deductible||The asset having a cost of up to $30,000 can be written off in the same year. The assets include computer costing $10,500, shelving costing $24,500 and security system costing $2,500. All the assets are acquired for less than $30,000 hence, will be allowed to deduction.|
|Miscellaneous expenditure||4,400||Allowable as deduction||The miscellaneous expenditure assumed to be incurred for the business purpose shall be allowed as deduction.|
|Travel||4500||Allowable as deduction||The travel expense in relation to the business shall be allowed as eligible business expenditure and hence will be liable to deduction from the business taxable income . the travel has been made to the jewelry fair for the business purpose.|
|Entertainment -client||2450||Allowable as deduction||The expense incurred for the business purpose shall be allowed as deduction.|
|Market research expense||21,250||Not Allowable as deduction||The market research expenses incurred by the company shall not be allowed to deduction as it is not incurred for the running and operating of the business.|
The capital expenses that is incurred by the business may be either:
The above-mentioned asset includes both personally own and brought to business or purchased for the business for producing the assessable income.
3. CALCULATION OF TAXABLE INCOME AND TAX PAYABLE
The taxable income is:
|Income from business and profession|
|Trading stock (315000-46000)||269000|
|Loan establishment cost||3000|
|Purchase of Wagon||28000|
|Travel (Jewellery fair)||4500|
|Income from business and profession||4,83,750|
|Income from capital gain|
|Sale of land||3,00,000|
|indexed Cost of acquisition||280000*114.8/68.7||467889.4|
|Gain on sale of land||1,67,889|
|50% is taxable on capital gain||83,944|
|Gross total income||5,67,694|
Note: As per the Income tax act Australia, the capital gain tax on the asset which is held for more than 1 year shall be allowed a deduction of 50%.(Ingles, D., 2015) Hence, the gain on sale of land is deducted by 50% and the rest 50% is charged to tax.(Evans, C., Minas, J. and Lim, Y., 2015)
The tax slab applicable for the year 2019-20 is:
|Income thresholds||Rate||Tax payable on this income|
|$0 – $18,200||0%||Nil|
|$18,201 – $37,000||19%||19 c for each $1 over $18,200|
|$37,001 – $90,000||32.50%||$3,572 plus 32.5% of amounts over $37,000|
|$90,001 – $180,000||37%||$20,797 plus 37% of amounts over $90,000|
|$180,001 and over||45%||$54,096 plus 45% of amounts over $180,000|
Hence, the taxable income is
= (5,67,694-1,80,000) *45%= $174462.3
After the preparation of report, it has been inferred that for the calculation of gross total income which is chargeable to tax requires the assessment of various sections of the income tax act Australia, 1997. This report has been prepared after thorough assessment and analysis of various sections after which the taxable income has been calculated.