ACBUS203A Income Tax Law
For several generations, the Svendsen family in Sweden has been involved with red herrings whose natural habitat is the pristine waters of the Svendsen Fjord on the Baltic coast. Like salmon, red herrings only breed where they were born, and as the Svendsen own the entire fjord, they have a natural monopoly.
With the world becoming more health conscious and trending towards natural foods, the market for the Svendsen’s red herrings is skyrocketing, as they are naturally red and do not require chemical additives or a smoking process to make them red. They also have all the sought-after food macros that trending diets recommend.Svendsen Red Herrings AB is now going international. They currently market to all of Europe, Britain, the Mediterranean the Middle East and North America. In 2015 they sent their youngest son, Sven and his family, to Australia to develop the Asia Pacific market.
Sven Svendsen incorporated Red Herrings Australia Pty Ltd (RHA) in July 2015 soon after migrating to Australia from Sweden with his wife, Britt and twin daughters, Hildur and Hillevi, then aged 15. Sven and Britt and directors of RHA and each own 40% of the company. Hildur and Hillevi are shareholders in RHA, each owning 10%.As a new TAFE graduate, you have just joined to staff of Fivten-Sixten Accountancy, and the firm’s partner has assigned you the 2020 corporate tax return of RHA. After reviewing their financial records and meeting with key company management, you are concerned about the deductibility of the following items of expenditure for 2019-2020 Advertising and promotion.
Paid $25,000 for sponsorship of herring eating competition at the Hobart Food Festival in December 2019 covering travel & accommodation for Sven, Britt, daughters Hildur and Hillevi and their boyfriends for the 7-day duration of the festival. The purpose of the trip to Hobart was to promote Svendsen’s Red Herrings. RHA had a stand in the main tent that all six of them staffed in shifts every day from 10:00 am to 11:00 pm where they promoted the Svendsen’s Red Herrings and helped at the herring-eating competition. There were also daily cooking demonstrations by a Tasmanian MasterChef finalist that cost an additional $5,000.The daughters and their boyfriends kept proper timesheets and RHA paid them wages at standard rates as recorded in the RHA’s payroll records.
Sven charmed the hotel manager to give them two extra nights’ accommodation at the end of the Hobart festival – they all needed the rest – in exchange for $1,000 worth of Svendsen’s Red Herrings. The additional to night’s accommodation would have cost $800.The herring costing $400 was left over from the festival and RHA would have had to pay $600 to freight it back to Sydney.
This expense comprises the following: a) payments totalling $2,350 for two staff members Kylie Logue (stores assistant) and Trinity Eastwood (accounts receivable) to attend the Ausway Annual Convention in Canberra in February 2020 b) subscriptions to their Ausway training podcasts totalling $5,000, and c) Ausway cleaning products totalling $7,296 that RHA, bought from Kylie and Trinity’s personal Ausway businesses and were used in RHA’s for cleaning the office and warehouse (they would have bought these products from their usual supplier anyway, and saved $1,023 buying it from them). RHA also sponsored Kylie’s and Trinity’s Ausway business training meetings by allowing them to use the company board room at no charge.
You establish that Ausway is an established multi-level marketing organisation that sells its household cleaning and health supplement products worldwide. Prospective members join an existing member’s team, buy and use the company’s products themselves, and if they like them, they recruit others to join their team and do the same. Ausway pays all members a commission each month based upon the number of members in their team and the team’s sales. Ausway requires all members to be independent businesses with ABN’s. Hillevi Svendsen, Sven’s daughter, joined Ausway in 2017 and runs her own business part-time
whilst studying full-time at TAFE. From the commission she earns she pays her own TAFE fees and textbooks and has saved enough money to buy a new small car! She attributes her success to Ausway’s comprehensive hands-on training program in personal growth and development, and the practicalities of running a business. Hillevi recruited RHA employees Kylie Logue (stores assistant) and Trinity Eastwood (accounts receivable) at Sven’s suggestion.
You are required to:
Draft a report for the partner of Fivten-Sixten to send to the Directors of RHA regarding the deductibility or otherwise of the above items of expenditure for 2019-2020:
In addition to the instructions set out in the Subject Guide:
1. Your report must be in the following format:
2. In the body of the report you must address the expenses under the following headings:
a. Advertising and promotion
c. Staff training and development
d. Business expansion
e. Other (optional)
3. Ignore any impact of GST or FBT
4. In your discussions you must state whether or not you think each of the items of expenditure is deductible or not, and why, supporting your answer with references to appropriate legislation and/or cases.
5. All your discussions on the deductions must all relate DIRECTLY to the facts in the above case. General discussions on the deductibility of expenses, as well as discussion on the deductibility of the above expenses will not earn marks if they are generic in nature and do not relate directly to the facts of the case.
The word limit of approximately 1,500 words (plus or minus 10%), excludes any appendixes. The appendix should include any footnotes, calculations, references & citations. Referencing can be Harvard style. When you refer to statues or cases in your assignment you can provide the abbreviations in the paragraph and the full name in the reference list.