DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE ACCG8124 Taxation Law Session 1 2020 Case Study
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|
Market selling value$65,000
$1,800 of the wages are owing to staff
Car expenses: Hyundai station wagon, acquired on 1 May 2020:
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.
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.
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
Loan establishment costs and interest expenses
On 1 August 2019, the company obtained a 10-year loan of $500,000 to fund business operations.
Goodwill of $100,000 was written off.
Market research expenses of $21,250 were incurred in examining the feasibility of opening a new store in Sydney CBD.
Assuming Ben and Maggie want to maximise taxable income,
Advise Ben and Maggie on what amounts must be included in the company’s taxable income for the 2019/20 tax year. (22 Marks)
Calculate the taxable income and tax payable for the tax year ended 2019/20. (3 Marks)
Every business entity has to comply with the tax laws of the country in which the entity is operating. Tax law and regulation have been established and defined by the government and imposed on the taxpayer. They have to offer their income of the financial year as the rules of taxation and pay the tax as per tax rate decided by the government. In this report, it is an analysis that what income has to be offered as per the taxation law and what would be the tax amount for the BM fine jewelry privet limited (Australian taxation Office, 2020). Tax compliance is the obligation that the taxpayer has to follow to avoid the penalty cost for noncompliance with taxation law. This report has divulged the key implication of the taxable income and liability which needs to be undertaken by the individual for its taxation income.
2. Amount to be included in the company’s taxable income
As per the ITAA 1997, there are some income and expenditure which are to be included and no included in the taxable income and every taxpayer has to follow the rule while calculation of the income as per income tax act (Australian taxation Office, 2020). However, tax exemption and tax deductions are to be considered while determining the tax treatment and determine liability of the tax of the individual. Following are the tax treatment of each item shown in the income stamen of the BM fine jewelry privet limited:-
|Financial item of the income statement||Amount||Tax treatment as per ITAA 1997|
|Revenue||$ 9,60,000||As per the ITAA 1997, all kinds of revenue which have been earned during the ordinary course of business shall be the part business income of the taxpayers. Hence it will be included (Fry, 2017).|
|Receipts from the sale of land||$ 3,00,000||Since the sale of land is not the business activity of the company, therefore, it will not be part of business income but it will be considered as the long term capital gain of the company after deducting the cost of land.|
|Trading stock||$ 3,15,000||As per the relevant tax provision closing stock of the company has to be shown at the cost which is $ 46,000. The difference amount shall not be part of income.|
|Wages||$ 86,000||As per the provision of ITAA 1997, the wages paid on a cash basis are to allowed in income tax as deduction hence the amount of the wages of $ 1800 is still not paid by the company and will be allowed to claim as the deduction while computing the taxable income of the company (Australian taxation Office, 2020). |
|Electricity Expenses||$ 9,500||Any expenditure which has been incurred during the business hours for the business activity of the company then it will be allowed to deduct from the income. Hence electricity expenses will be allowed to deduct from the income of the company (Australian taxation Office, 2020). .|
|Car Expenses||$ 6,500||The car expenses include the running cost of a car which has been assumed here for office purpose therefore expenses of the office activity will be allowed to be deducted as the expenditure of the company (Murphy, 2019). Nonetheless, if the car expenses has been made for the personal purpose or for personal use then the deduction of the car expenses would not be allowed. |
|Purchases cost of the Car ||$ 28,000||As per the ITAA 1997 if the cost of the capital assets is less than the $ 30000 then the amount should be depreciated rather it has to be allowed in the same year in which it has been incurred. Hence it will be allowed to deduct.|
|Loan processing charge or administration ||$ 3,000||Loan processing charges are to be allowed to be deducted as it has been assumed that the loan has been taken for the business purpose. The loan deduction is allowed expenses and charged as administration expenses with the computation of the taxable income. |
|Interests Expenses||$ 23,000||Finance cost incurred for the business purpose on the amount of loan will be allowed to be deducted from the taxable income of the company. Hence interest income will be allowed. Nonetheless, if the interest payment is made for the loan undertaken for the personal purpose then it would be not allowed expenses for the assessment of the income of the company. |
|Advertisement Cost||$ 4,200||This is the expenditure that has been done to promote the business of the company and allowed to be deducted as per the ITAA 1997.|
|New Equipment cost||$ 37,500||As per the provision of the taxation, if the capital assets are having the value less than the $ 30000 then it will be allowed to be deducted as the cost of doing an ordinary activity of the business. Hence new equipment cost includes the assets which do not exceed the cost more than $ 30000 individually and allowed to be ducted from the income.|
|Miscellaneous expenses of the company||$ 4,400||In the absence of the clarification of the nature of expenses, it has been assumed it is the revenue expenditure of the business and allowed to be deducted.|
|Traveling Expenditure||$ 4,500||This expenditure is incurred for the business trip and allowed to be ducted from the income of the company as per the Income-tax act of Australia 1997.|
|Entertainment expenses||$ 2,450||It has been assumed that these expenses have been incurred for the business purpose and to attract the new consumer for the business hence this will be allowed to be deducted from the income (Australian taxation Office, 2020). |
|Market Research expenditure|| $ 21,250||Market research conducted by the company is like capital expenditure and allowed to be amortized as per the ITAA 1997 over a reasonable period of the business. Hence entire expenditure cannot be allowed in the financial year and amortize over time (Australian taxation Office, 2020). |
As per the income ITAA 1997 if the revenue of the company is lower than the $ 10,00,000 then it will be considered as the Small business enterprises hence the BM fine jewelry privet limited will be considered the small business enterprise (Australian taxation Office, 2020).
For the computation of the income tax return to any tax as per the ITAA 1997, some rules have to keep in mind while preparation of taxable income:-
3. The taxable income for the tax year ended 2019/20.
As per the provision of the ITAA, 1997 following are the calculation for the income for tax purpose of the BM fine jewelry privet limited:-
|Calculation of the taxable income of the BM fine jewelry privet limited|
|Income under the head of business and profession:-|| || |
|Total Revenue || || $ 960,000.00 |
|Expenditure:-|| || |
|Change in stock ( 315000-46000)|| $ 269,000.00 || |
|Wages (86000-1800)|| $ 84,200.00 || |
|Electricity Expenditure|| $ 9,500.00 || |
|Car expenditure|| $ 6,500.00 || |
|Loan Processing charges|| $ 3,000.00 || |
|Finance Cost|| $ 23,000.00 || |
|Advertisement expenditure|| $ 4,200.00 || |
|Cost of Car|| $ 28,000.00 || |
|Equipment Cost|| $ 37,500.00 || |
|Miscellaneous Expenditure|| $ 4,400.00 || |
|Traveling expenditure|| $ 4,500.00 || |
|Entertainment expenses|| $ 2,450.00 || $ 476,250.00 |
|Net income from PGBP|| || $ 483,750.00 |
| || || |
|Income under the head of Capital Gain:-|| || |
|Sale consideration of land || $ 300,000.00 || |
|Indexation Cost of Land (280000*115/69)|| $ 466,666.67 || |
|Long term loss on the sale of land (LTCL)|| || $ (166,666.67)|
| || || |
|Gross Total income of the company|| || $ 317,083.33 |
Source:- ( Please refer to the spreadsheet for details calculation)
From the above calculation, it can be seen that business income of the company is $ 483750 which are required to be offered for tax purpose and the income from the sale of land will be $(166666.67) which is the long term capital loss of the company and require to be adjusted from the total income of the company (Taylor, & Wenzel, 2019). Hence after deducting the loss from the sale of land the net income of the BM fine jewelry privet limited is $317083.33 (Australian taxation Office, 2020).
4. Tax payable for the tax year ended 2019/20.
As a peer, the ITAA 1997 following are the tax slab rate has been provided for the tax calculation:-
| Tax rate slab as per the ITAA 1997|
|Income slab||Tax Rate|
|$ 0 to $ 18200||0%|
|$ 18201 to $ 37000||19%|
|$ 37001to $ 90000||32.50%|
|$ 90001 to $ 180000||37%|
|$ 90001 and over||45%|
With the compliance of the above tax rate following are the tax calculation of the BM fine jewelry privet limited (Australian taxation Office, 2020).
| Calculation of the Tax payable by the BM fine jewelry privet limited|
|Particular||Taxable income||Tax Amount|
|Taxable income|| $ 317,083.33 || |
|$ 0 to $ 18200|| || $ - |
|$ 18201 to $ 37000|| || $ 3,572.00 |
|$ 37001to $ 90000|| || $ 17,224.68 |
|$ 90001 to $ 180000|| || $ 33,299.63 |
|$ 90001 and over|| || $ 61,687.05 |
|Total Tax Payable|| || $ 115,783.36 |
Source:- ( Please refer to the spreadsheet for details calculation)
From the above, it can be observed that the company is required to pay a tax of $ 115783.36 in the current year (Maley, & Maley, 2018). However, taxable income has been computed by assessing the tax amount accompanied by the deduction and exemption available on the assessed income (Australian taxation Office, 2020). The taxable income has been computed by using the tax payable based on the slab rate given by the Australian taxation authority.
From the deep dissuasion of tax provision in the above report, it can be observed and conclude that business organization requires to follow the tax provision which has been established by the government of that country in which they are working. BM fine jewelry privet limited has to follow the tax provision and offer the correct income statement for the tax calculation as provided in the above report. However, it has been found that the proper tax planning and methods are required by the assesse to determine the right amount of tax payment and overall tax liability on the earned income.