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BULAW5916-Taxation Law And Practice Case Study

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Questions:

Part 1

On 1 July 2016 Frank Lloyd commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2016/17 he had a small client base of local builders and private referrals and billings (fees) of $75,000.

During the year (2016/17) Frank submitted a design as part of a national competition for
‘The Citadel’, the centrepiece of an ambitious urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises in Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2017/18 his billings were $2.5 million.

Required 1: [Approximately 50% marks]

Should Frank return on a cash or accrual basis in 2016/17 and 2017/18?

You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following:
 
1.What factors affect the choice of a cash or accrual basis?
2.Does Frank have a choice of the basis he adopts?
3.Does the Commissioner of Taxation have a right to insist on a particular basis?
4.Should Frank’s basis be the same in both years?
5.Given the present availability of accounting software packages, in your view, is the traditional criteria for the cash/accrual distinction still relevant?

Part 2

Ruby Engineering Pty Ltd [Ruby] was incorporated in 1990 and produced engine components used in the Australian car industry. In 2016 the business and company assets were sold to Diamond Ltd. Under the terms of the agreement, Ruby remained liable for any claims arising before 2016. The company used the funds to invest in real estate and shares.
During the year ended 30 June 2018 Ruby incurred the following expenses:

Required 2:

Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
(a)Ruby has owned and rented a residential property since 2008. Rental income for the current year is $35,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $8,500.

(b)In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against the partnership alleging her injuries were caused by the poor condition of the building. Ruby incurred legal expenses to date of $7,000 and the action has not been settled at 30 June.

(c)In March 2015 the company owned sold a batch of parts that were subsequently found to be defective. The purchaser, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2017 and the company paid an amount of $750,000 to the car manufacturer.

(d)The directors of Ruby were concerned about the claim in (c) and the effect it had on the year’s reported profit. They resolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.

(e)In August 2017 the directors of Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $220,000 was paid to consultants investigating the proposal but, due to uncertainty in the motor vehicle industry, the directors decided not to proceed at the time.

Required 2

Advise the partners and directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
 
 

Answer:

Part 1:

In this current study, it is realised that the vital matters are linked with the tax implications and the accounting methods where Frank Lloyd is commencing a business on architect. In the preliminary stage of the business commencement, the garage is considered as the operation station. Frank got a fast reply and a trivial customer base as because of the occupation stipulation and providing accommodation to the native builder. In the year 2016-17 Frank as a body of the determined urban progress participated in the nationwide competition named as “the Citadel” in which the drawings were nominated by the juries, of the user. In the position of the Architect Frank was designated. Frank rented an area in the Main Terrace for better opportuneness; with two managerial staff and six draughtsmen, he achieved the state of the art apparatus. At the year closure $2.5 million dollars, becomes the salary of the architecture (Gupta & Sawyer, 2015).

As per section 6-5 of Income Tax Assessment Act 1997, income is defined as the money achieved after any professional service, or from any business commencement or any dependable bases of revenue, earning is known as income. Moreover, income can be categorised either by Accrual Accounting source or in Cash Accounting source.

According to the Accrual Accounting source income revenue, earning is known as income, though it may be received or can be not received. Again, to imitate the profit received from the actions performed, the expenditures are coordinated with the correlated returns. However, the expenditures and the returns as per Cash Accounting source are known in the financial reports whenever it is received in cash (Symes, 2016).

According to the taxation reigning TR 98/1 of the ATO, the principles of the Accrual accounting source is the measurement of the business family. Whereas, the minor tycoons of service earners who receives a little revenue or not having suitable information of about Accrual accounting is known as the Cash Accounting. Thus, a business is not considered as a minor business in which the identity of the client operates. Therefore, the client should obey the Accrual Accounting source. Cash accounting basis is not considered when in the scenario of client having a loan burden on him (McKendrick & Liu, 2015).

Factors to choose Accounting Methods:

According to the taxation ruling TR98/1 ATO, in this situation the client must review the quantum as it is declared that whenever in an accounting year if the gross revenue overdoes $10 million then the individual of the taxation required to be abide by the accrual accounting method.  Despite of section 6-5 of ITAA 1997, if the individual’s income is more than $10 million by following Cash Accounting source for preparing the accounting then in that scenario cash accounting system is followed for recognising income and expenditure (Evans et al., 2015). The revenue that is received is considered as the revenue for the same year that is 2016-17. The section 6-5 of ITAA 97 defines that the main cause of any revenue that is not acknowledged but has a consistent origin is counted as that financial year’s revenue. A business is required to fulfil some regulations as to acquire Cash Accounting Basis:

  • An article that is gift deductible.
  • Non-profitable sectors as like trustee or charitable institution, government schools or numerous such assets.
  • Minor businesses whose yearly overdoing is less than $10 million.

The Available Chooses of Accounting:

According to TR98/1 subsection 8 and 9 of taxation ruling, the calculations are done either based on Accrual Accounting that is earning method or is based on the Cash Accounting that is Receipt Method. As in this case Frank is functioning a business on medium level then in this scenario the client is authorised to make choices between two accounting processes while as per section 6-5 of ITAA 97 the total gross revenue not overdoes by $10 million, also mentioned TR98/1 section 7. Supplementary, TR98/1 of taxation ruling in paragraph 20 it is also declared that the most suitable source of accounting is the Accrual Accounting basis. Thus, it is observed on the ground of such discussion that Frank is justified as the individual has permitted to receive a debt of $1 million with a revenue that is well good (Atkins et al., 2017). 

 

Right of the commissioner of taxation:

According to TR 98/1 of taxation ruling, a business achieving a turnover amount of $10 million should be abide by the Accrual accounting basis. The individual has the power to elect the accounting type if the business turnover does not meet an amount of over $10 million and thus the evaluating tax commissioner cannot force. Whereas, he can pledge the individual to track a process by the exercise, and in case of any conflicts the commissioner either taxes or the individual will be led under court.

Accounting method for next year:

Accordance with TR98/1 in the current scenario, the individual can make choice of the accounting type, as the gross turnover not beats by $10 million. It is advisable to track the Accrual accounting source for getting prepared for the coming financial year as to imitate the current place of the clientele (de Castro et al., 2018). As instance, it is better to obey the Accrual accounting because of the generous of the loan issue and remaining of the fees.

Use of accounting software:

The software of accounting is planned on the Accrual Accounting source; rather, accounting software like MYOB, ZERO and the cash accounting sources maintains numerous others. The software is unable to recognise the accounting methods as these are resolute by business operatives or regulators whether the user effort make the changes (Bird & Zolt, 2014). 

 

Conclusion:

This is viewed from the whole assessment that the most desirable in this framework is the Accrual Accounting method. As of ITAA 97 under section 6-5, the revenue is defined as the desired amount that is generated from the specific financial year that derives from the consistent origins and which meanderingly indicates the method of the accrual accounting. As the company’s turnover is desired to expand thus to function in a broad way for the company the accrual accounting method will be an added advantage. The Taxation commissioner does not bear any rights to order the individual to make choice s of any process that is to be castoff.

Part 2:

According to the Income Tax Assessment Act shortly as ITAA 1997, on the ground of this current case study which is linked with the allowable expenditures the individual can deduct an expense. As per section 8-1 of ITAA 97, the permissible deductions can be defined by the governing sections. The experiences of expenses that happened during inauguration of a business or occupations is limited to be influential for the individuals’ revenue generation.

Case Discussion:

In the current scenario, Ruby in one more chargeable possession, a visitor caused wound due to sliding in the resident. Thus, for the poor creation of the apartment he charged Ruby. Therefore, in this position Ruby has to repay an amount of $7000 as lawful expenses (Tran-Nam, 2016).

Case Discussion:

Allowances are subtracted in case of any connection of the business or group of revenue as followed by Income Tax Assessment Act of section 8-1. As the lawful expenses are believed as not straight attributable with the income cohort. Thus, as per ITAA 1997 under section 8-1 the expenditures are permissible. But as in this study, the case registered for the drawbacks so, as per ITAA under section 26.5 the amount is not permissible as deductions.

Case Discussion:

In this study Ruby, is engaged in the extra fragments of the motor vehicle industry as business. If in some cases, a batch is found out to be faulty then those parts are retailed in the Australian Car Manufacturer. The company is then charged and fined an amount of $750000 as for compensation.

In this case study, as per ITAA under section 8-1 reductions are permissible when the amount is repaid for the construction of other drives of the profession or business. Whether in this scene it is transparent that the compensation is the amount that is to be paid to the buyer of the spoiled products who occurred damages. Thus, ITAA under section 26.5 it is not mentioned as a deductible expense rather is a cash penalty. As loss is already suffered for the preceding actions thus it is not going to disturb the deduction. 

 

Case Discussion:

Ruby decided to create small requirements for future occasion of the same types after compensating such a huge amount of compensation. Because of this from the business profits, an amount of $100000 is set aside.

As mentioned in the section 8-1(1) Deductible expenses are the amount which is carry forwarded because of the business. According to Income Tax Assessable Act 1997 under section 15, the deductible expenses are the doubtful loans of the provisions. The sum amount is not to be subtracted as expense on any necessities or any extra funds that are created for somewhat other mission (Douglas et al., 2014).

Case Discussion:

The firm Ruby PTY. Ltd., now re constructed a strategy in car motorized fragments operation. The main view of this company is to produce alloy. The firm employed consultants as because of the thoughtful process and market investigation and paid an amount of $22000 for the market surveys as per service. It is expected to be a profitable amount as because of the upcoming plan. As in the present study of the car manufacturing, it appears feeble to finance, thus, after the inspection the consultants disagreed to salary on the projected plan resulting which the company excluded the plan. 

 


Deductible Expense is the amount that is rewarded as the consultation fee. The amount that is rewarded is a portion for turning the business and production of sturdy influence on making choice. As of Income Tax Assessment Act 97 under section 25-4, the salary is considered as the deductible expense. Thus, loss is not to be considered as the deductible amount somewhat it is considered as the expenditure in the business procedure and is a deductible as per ITAA under section 8-1.

Conclusion:

In the whole scenario of the given case, analysis has been made in harmony with the Income Tax Assessment Act 1997. The study included more specifications on the deduction. In the specified case the section 25, 8-1 and 26 of ITAA 97, the details related to deductions are provided. 

 

References

Atkins, K., De Lacey, S., Britton, B., & Ripperger, R. (2017). Ethics and law for Australian nurses. Cambridge University Press.

Bird, R. M., & Zolt, E. M. (2014). Redistribution via taxation: the limited role of the personal income tax in developing countries. Annals of Economics and Finance, 15(2), 625-683.

de Castro, V. B., & Kober, R. (2018). THE PRINCIPALITY OF HUTT RIVER: A Territory Marooned in the Western Australian Outback. Shima, 12(1).

Douglas, H., Bartlett, F., Luker, T., & Hunter, R. (Eds.). (2014). Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing.

Evans, C., Lignier, P., & Tran-Nam, B. (2016). The tax compliance costs of large corporations: An empirical inquiry and comparative analysis.

Gupta, R., & Sawyer, A. (2015). The costs of compliance and associated benefits for small and medium enterprises in New Zealand: Some recent findings. Austl. Tax F., 30, 135.

McKendrick, E., & Liu, Q. (2015). Contract Law: Australian Edition. Macmillan International Higher Education.

Symes, C. F. (2016). Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Routledge.

Tran-Nam, B. (2016). Tax Reform and Tax Simplification: Conceptual and Measurement Issues and Australian Experiences. In The Complexity of Tax Simplification (pp. 11-44). Palgrave Macmillan, London.

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