ACCG8124 Calculation Of Taxable Income And Tax Payable Assessment Answer

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Question :

DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE

ACCG8124 Taxation Law Session 1 2020

Case Study

Information and Instructions

  • Weighting of this assessment task: 25%
  • Format of submission: Microsoft Word document, 12- point type, double spaced.
  • Method of submission: on-line, uploaded to iLearn
  • Your written response to this assignment must be presented in a report format. Bullet points are not acceptable.
  • Responses to this assessment task must not exceed 2,000 words.
  • No extensions will be granted. There will be a deduction of 10% of the total available marks made from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late in submission – 20% penalty). This penalty does not apply for cases in which an application for special consideration is made and approved. No submission will be accepted after solutions have been posted.

IMPORTANT:

  • You must cite relevant cases, ATO rulings, and legislative references to support your answers.
  • Your response must also provide reasons that explain and support your answers.

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:

Cash received$
Sales960,000
Proceeds from disposal of land300,000


Cash expenditure$
Trading stock315,000
Wages(staff)86,000
Electricity9,500
Car expenses6,500
Loan establishment cost3,000
Interest expense23,000
Advertising4,200
Purchase of Hyundai station wagon28,000
New equipment (computers, shelving and security system)37,500
Miscellaneous expenditure4,400
Travel (Jewellery fair)4,500
Entertainment – client2,450
Market research expenses21,250


Notes:

1. Accounts receivable as at 30/6/2020 $55,000

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

Cost$46,000

Replacement cost$58,000

Market selling value$65,000

4. Wages

$1,800 of the wages are owing to staff

5. Car expenses: Hyundai station wagon, acquired on 1 May 2020:

Cost$28,000

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.

REQUIRED

Assuming Ben and Maggie want to maximise taxable income,

  1. Advise Ben and Maggie on what amounts must be included in the company’s taxable income for the 2019/20 tax year. (22 Marks)
  2. Calculate the taxable income and tax payable for the tax year ended 2019/20. (3 Marks)
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Answer :

1. INTRODUCTION

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

ParticularsAmountIncluded/ ExcludedReason
Sales 9,60,000Included and taxableAll 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 land3,00,000Included and chargeable to taxThe 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 stock3,15,000Partially allowed as deductionThe 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.
Wages86,000Partially allowed
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
=$ 84,000
Electricity9500Full deductible expenseThe 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 expenses6500Allowable as deductionThe 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 cost3,000Allowable as deductionThe 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 expenses23,000Allowable as deductionInterest on borrowed money for Income tax obligations and for producing assessable income shall be allowed as deduction.
Advertising4,200Allowable as deductionThe expenses incurred on the publicity of business shall be allowed as deduction as per the ITAA, 1997.
Purchase of Hyundai station wagon28,000Fully deductibleThe purchase of car is less than $30,000. Hence, the same shall be deductible.
New equipment37,500Fully deductibleThe 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 expenditure4,400Allowable as deductionThe miscellaneous expenditure assumed to be incurred for the business purpose shall be allowed as deduction.
Travel 4500Allowable as deductionThe 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 -client2450Allowable as deductionThe expense incurred for the business purpose shall be allowed as deduction.
Market research expense21,250Not Allowable as deductionThe 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.


Notes:

  1. For the taxation perspective, it is first evident to assess if the business is small business or large business. The small business can be defined as the one which has a turnover of less than $10,00,000. Here, in this case the jewelry business can be regarded as the small business.
  2. For claiming the business deductions, there are rules which are required to be followed:
  3. The expenses are required to be incurred for business use only and not for any private use.
  4. If the expense has been incurred for both business and private use, then only expense for the private portion is admissible as a deduction.
  5.  There should be proper records to prove that expense have actually been incurred.
  6. As per the Income tax act Australia, 1997, the value of stock at the year ends is usually similar to the stock at next year however, if there arise some difference in the value of closing stock i.e. if it is more than closing stock the difference will be a part of assessable income and if the opening stock is less than assessable income the difference will be allowed as deduction.
  7. There are deductions admissible on the operating expenses that are incurred by the business in general. (Braithwaite and Wirth 2019) The common operating expense of the business include:
  8. Trading stock purchase along with delivery charges
  9. Advertising and sponsorship cost
  10. PR expenses
  11. Legal expenses incurred by the company for tax advice, borrowing money and defending future earnings
  12. Tender cost
  13. Bad debts
  14. Bank fees and charges
  15. Insurance premiums, fire, burglary, public risk, worker compensation, loss of profit and professional indemnity.
  16. Interest on borrowed money for:
  17. Income tax obligations
  18. Producing assessable income
  19. Luxury car expenses
  20. Stationary expenses
  21. Cost of running commercial website for instance for content updation, maintaining site and internet service fee
  22. Subscription fees for software
  23. Transport and freight expenses
  24. Parking fees
  25. Waste recycling expenses
  26. Small items having a value of up to $100
  27. Expenses associated with employing people shall also be allowed as a deduction. The expenses include:
  28. Salary and wages
  29. Fringe benefits along with the cost of any benefit provided and the associated FBT.
  30. Travelling expense and the relocation allowance for employees
  31. Loss incurred due to the misappropriation of money such as through fraud, theft or embezzlement.
  32. Business premises operating expenses shall also be deductible. The expenses include:
  33. Electricity Expenses
  34. Telephone expenses
  35. Water expenses
  36. Rates
  37. Rent expenses or leasing business premises
  38. Land tax
  39. The tax related expenses shall also be deductible. (McGregor-Lowndes, M. and Crittall, M., 2017)  The tax related expenses include:
  40. Registered tax agent or fees to accountant
  41. Tax related expenses such as:
  42. Bookkeeper salary for the preparation of business records
  43. Preparing or lodging tax returns
  44. Getting tax consultations for the business
  45. Attending an ATO audit
  46. Object or appeal against assessment
  47. Credit card fee associated to the payment of a tax liability for business.
  48. The business can claim tax deduction on the capital expenses. The business can write-off asset instantly. The instant written off helps the business in claiming a deduction for the business part of purchase cost of asset with the relevant threshold in the year of purchase of asset when it was first used and installed ready for use.

The capital expenses that is incurred by the business may be either:

  1. Expense of a depreciating asset which includes the amount paid for asset and expense from transporting and installing it.
  2. Expense associated to establishment, replacement, enlargement or improvement of the business.
  3. The type of depreciable asset includes:
  4. Machinery and equipment
  5. Computers
  6. Motor vehicles
  7. Furniture, carpet and curtains

The above-mentioned asset includes both personally own and brought to business or purchased for the business for producing the assessable income.

  1. It is evident to determine the effective life of depreciating asset as the effective life of asset will help in the determination of number of years over which the deduction for the depreciation can be claimed.
  2. The deduction can be claimed for the decrease in the value of the depreciable asset every year over the effective life of asset. The simple depreciation method can be used to claim capital expense for assets in the purchase year. The amount claimed may be less due to:
  3. Owning of asset for less than a year
  4. The partial use of asset for the purpose of business.
  5. Owning the asset before start of business
  6. The deductions in relation to depreciation on construction can be claimed by the business. The deduction is admissible for a number of years for the construction expenditure of building and other capital works for instance structural improvements.
  7.  On the asset costing up to $30,000 can be written off immediately. The qualifying asset for this category are:
  8. Computers and laptop
  9. Cash registers
  10. Cars, vans and other vehicles
  11. Plant and machinery
  12. Fitting and fixtures
  13. Security systems
  14. Accounting software

3. CALCULATION OF TAXABLE INCOME AND TAX PAYABLE

The taxable income is:

Income from business and profession   
Revenue 9,60,000 
Expenses:    
Trading stock (315000-46000)269000  
Wages (86000-1800)84200  
Electricity9500  
Car expenses6500  
Loan establishment cost3000  
Interest expense23000  
Advertising4200  
Purchase of Wagon28000  
Equipment37500  
Miscellaneous expenses4400  
Travel (Jewellery fair)4500  
Entertainment2450476250 
Income from business and profession  4,83,750
Income from capital gain   
Sale of land 3,00,000 
indexed Cost of acquisition280000*114.8/68.7467889.4 
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 thresholdsRateTax payable on this income
$0 – $18,2000%Nil
$18,201 – $37,00019%19 c for each $1 over $18,200
$37,001 – $90,00032.50%$3,572 plus 32.5% of amounts over $37,000
$90,001 – $180,00037%$20,797 plus 37% of amounts over $90,000
$180,001 and over45%$54,096 plus 45% of amounts over $180,000


Hence, the taxable income is 

= (5,67,694-1,80,000) *45%= $174462.3

=$174462.3+$54,096= $2,28,558.3

4. CONCLUSION

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.