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HI6028 Taxation Theory, Practice And Law T3

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  • Course Code: HI6028
  • University: Holmes Institute
  • Country: Australia

Questions:

Question 1
 
Daniel and Olivia Smith operate a mixed business called Brekkie and Lunch and OZ Bottle Shop at 50 York Street Sydney. They visit you in order to prepare their 2017 partnership tax return. During your first meeting they provide you with their cash receipts and cash payments journals, their business bank statements and a file contain all their business invoices and receipts relating to the transactions in their book. Details of the transactions are as follows:
 
ii. Some of the creditors were paid directly from the cash receipts account. Overall, $31,155 of stock was purchased in this method. Additionally, $5,600 in cash has been used for private purposes.
 
iii. The owners have taken $3,200 from Bottle Shop items for private use.
iv. There was a $3,000 reduction in the loan repayment, as this was the loan principal. The business loan repayment was $8,500.
v. The business has two cars: a van used 90% for business purposes and a SUV used 60% for business purposes. The cost of maintaining the van was $1,260 and the SUV $2,050.
 
All of the above discussed business assets of Brekkie and Lunch and OZ Bottle Shop were purchased before 27 February 1992 and Daniel and Olivia Smith have chosen to use the depreciation rates published by the ATO. Any new assets will have a useful life of 10 years and the Daniel and Olivia’s partnership business will use diminishing value method to depreciate their business depreciable assets.
 
ix. Daniel and Olivia live on the business properties, but 90% of mobile bills, 80% of electricity expenses and 60% of council rates relate to the Brekkie and Lunch and OZ Bottle Shop. The insurance premium paid is completely related to their business. Daniel and Olivia have a separate insurance for their personal goods.
From the information supplied, prepare the working papers and determine the net income for the partnership for the year ended 30 June 2017.
 
Question 2
 
John is a senior executive with a printing company. As part of his remuneration package his employer pays for his child’s school fees at a private school costing $15,000. His employer also provides him with accommodation in a Sydney apartment throughout the FBT year. John must pay $100 of rent per week for the apartment. The market value rent for the apartment is $800 per week.
 
 

Answers:

Question 1 Provisions related with partnership firm

Statement showing the computation of the net income of the partnership for the year ended 30June 2017

Particulars

Amount ($)

Total sales (cash and credit)                                             Note 1

182055

Increase in stock                                                                Note 2

630

Less - Purchase (cash and Credit)                                     Note 3

(160343)

Gross income

22342

Allowable deduction

 

Van expenses                                                                    Note 4

1134

SUV expenses                                                                   Note 5

1230

Electricity bill                                                                   Note 6

1176

Council rates                                                                     Note 6

310.2

Mobile bills                                                                       Note 6

633.6

Business insurance                                                            Note 7

1250

Union fees                                                                         Note 7

284

Account charges (ANZ Bank)                                          Note 7

595

Repair expenses                                                                Note 8

150

Payment of interestNote 9

5500

DepreciationNote 10

3972.47

Total Deduction

16235.27

Net Income (Gross income –Total deduction)

                              6106.73

Notes

  1. Calculation of total sales

Particulars

Amount

Cash Sales

$150170

Credit Sales*

$31885

Total Sales

$182055

*Credit Sales = Closing Debtors + Payment received from debtors – Opening debtors

= $ 3010+ $ 32800 - $ 3925

= 31885

  1. Changes in Stock in considered in the computation of the assessable income of the assesse (Richardson, Taylor, &Lanis, 2016). In the present study, there is increase in stock during the period; therefore it is included in the income of the assesse.

Changes in stock = closing stock – Opening Stock

= $9750-$9120

= $630

  1. 3. Calculation of Total Purchase

Particulars

Amount

Cash Purchase

$ 31155

Credit Purchase*

$ 129188

Total Purchase

$ 160343

*Credit Purchase = Closing Creditors + Payment to creditors – Opening Creditors

= $ 7010+ $ 128678 - $ 6500

= $129188

  1. Van is 90% used in the business, therefore the deduction allowed

= 1260*90%

= $1134

  1. SUV is 60% used in the business, therefore the deduction is allowed –

= 2050*60%

= 1230

  1. According to the income tax assessment act 1997, If the assess incurred the expenses as a repair on the asset which is partly used for the business then the depreciation is allowed only to the extent of which is used for the business purpose (Pickering, 2015). In other words it can be said that no deduction is allowed if the asset is used for the personal purpose. In this problem, the deduction of the expenses incurred for the electricity, council rates and mobile bill is available only to the proportion of the business use.

 Calculation of deduction of electricity bill, council rate and mobile bill

Particulars

% used in business

Deduction allowed

Electricity Bill

1470*80%

1176

Council rates

517*60%

310.2

Mobile Bill

704*90%

633.6

  1.  According to the section 25-5 of the income tax assessment act 1997, the deduction is allowed to the assesse to the extent they are incurred in relation with conducting their tax affair(Cumming, & Johan, S016).Deduction of the expenses may be allowed in the year in which they are incurred or they may be spread over a period. Business Insurance and accounting charges are incurred for the regular business operation therefore it is allowed as deduction from the assessable income (Taylor, Richardson, &Taplin, 2015). Further the payment of Union fee is also fully allowed as it is assumed that the partners are the member of the Union.
  2. Section 25-10 of the income tax assessment act is specifically is related with the expenses incurred by the assesse as a repair and maintenance of the assets.  The person is allowed to claim the deduction of the expenses which is incurred for repairing of the depreciable assets or the premises or any part of the premises, subject to the condition that it must be only used for the business and for generating the assessable income (Chardon, Freudenberg, &Brimble, 2016). Section 25-10, is not applicable when the expenses incurred are in the nature of the capital expenditure.  Along with this, the deduction is not allowed on the initial repairs and the work that is regarded as the improvement. Further if because of the expenditure there is substantial change in the asset then also the deduction of the expenses is not allowed under this section (Graetz,& Warren, 2016).

According to the Tax ruling 97/23, initial repair is not regarded as the expenditure ordinarily incurred as a operating expenses for generating the assessable income. The same decision was given in the case of Law Shipping Co. Ltd.

As per the legal case law FCT v Western Suburbs Cinema, the decision of court denied the deduction of expenses incurred for replacing the ceiling as per the section 53(1) of the income tax assessment act 1936. The court held that on the notional repairs the assesse is not permitted to take the deduction.

By considering the present study, repair and maintenances expenses related with the air condition installation is considered as the capital expenditure therefore the deduction is not allowed. Further the expenses incurred for shop painting fulfills the criteria of repair and maintenance the same is considered as the revenue expenditure and allowed as deduction. Moreover expenditure on refrigerator motor replacement is considered as the capital expenditure because it results in the substantial improvement in the asset.

Deduction is allowed on the payment of interest on the borrowings only if the borrowings are used in the business (McGregor-Lowndes,  &Crittall, 2017). It is assumed that the firm used the borrowing for conducting its business activities therefore the payment of interest is allowed as deduction.

Interest = Total Payment – Principle Amount

= $ 8500 - $ 3000

= $ 5500

  1. According to the ITAA 97, Division 40, depreciation means decline in the value of the depreciation asset. The assesse is permitted to claim the deduction of the depreciation expenses. There are two methods by which the depreciation can be computed, prime cost method and the diminishing method.

In the given study, the depreciation is computed by diminishing method.

Assets purchased before to 10 may 2006

= Base Value * Days held/ 365 * 150%/ effective life of the asset.

Assets purchased after 10 may 2006

= Base Value * Days held/ 365 * 200%/ effective life of the asset.

In the present problem, all assets are purchased before 2006 except the new refrigerator. The effective life of the asset is prescribed by the ATO and same is considered for the computation of the depreciation.

 


The effective life of the freezer and refrigerator asset is 10 year, shop fitting structure is 20 years, Kitchen electrical appliances is 2 years and on the Car is 20 years. It has been assumed that kitchen electric appliances are consisting of electric appliances such as jugs and kettles and further shop fitting structure is the general fittings.

Statement of depreciation

Asset

Adjusted value

Effective life

Formula

Depreciation

New Freezer

3500

10

3500*334/365*200%/10

640.6

Freezers

1480

10

1480*365/365*150%/10

222

Refrigeration asset

3580

10

3580*365/365*150%/10

537

Shop fitting  structure

2965

20

2965*365/365*150%/20

222.375

Kitchen Electrical appliances

754

2

754*365/365*150%/2

565.5

Car

1550

8

1550*365/365*150%/10

232.5

SUV

10350

8

10350*365/365*150%/10

1552.5

Total Depreciation

 

 

 

$3972.475

Question 2 Provisions of Fringe benefit tax

Some times employer along with the salary and wages provides some non cash benefits to its employee, on which the Australian taxation office charges the tax, is known the fringe benefit tax. It is essential that the benefit must be provided by the employer in the course of employment (Hodgson, & Pearce, 2015). There are several types of fringe benefit on which tax is imposed on the employer under the Fringe benefit tax act 1986.

The Fringe benefit tax is calculated by the multiplying the fringe benefit tax rate on the taxable value of the fringe benefit. Along with this, the value is required to be gross up by higher or lower rate as the case may be (Braverman,Marsden, &Sadiq, 2015). The higher value applicable, when the credit of goods and service tax is available on the benefit provided by the employer and the lower gross up rate apply in case of the credit is not available. The taxable value is derived as per the valuation method prescribed under the act and every fringe benefit has own rule of the valuation. For the in-house benefit sometimes concessional treatment implemented however under the salary sacrifice arrangement, it is not applicable (Pearce,& Hodgson, 2015).

Significance of fringe benefit tax on the employer

In the present study the employer pay the school fee of the child, whole amount of the school fee is considered as a taxable value of fringe benefit.

Employer also provides the concessional rate on the accommodation as the market value of the accommodation is $ 800 per week;employee has to pay only $ 100 per week therefore the taxable value of the accommodation is -

Market value of house – Amount charged from employee

= 800-100

= $700 per Week

For 12 month = 700*52 week = $36400

Total taxable value of fringe benefit

$15000+$36400

= $51400

Fringe benefit tax liability

= $51400*49%*1.9608

= $49384.70

*31March 2017, rate of FBT is considered.

*Credit of GST is not apply therefore the lower gross up rate is considered.

 

References

Braverman, D., Marsden, S., &Sadiq, K. (2015).Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, 1.

Chardon, T., Freudenberg, B., &Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.

Cumming, D., & Johan, S. (2016). Venture’s economic impact in Australia. The Journal of Technology Transfer, 41(1), 25-59.

Graetz, M. J., & Warren, A. C. (2016).Integration of corporate and shareholder taxes. Sage.

Hodgson, H., & Pearce, P. (2015).TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), 819.

McGregor-Lowndes, M., &Crittall, M. (2017). An examination of tax-deductible donations made by individual Australian taxpayers in 2014-15.Australian Centre for Philanthropy and Nonprofit Studies, Queensland University of Technology.

Pearce, P., & Hodgson, H. (2015).Promoting smart travel through tax policy. The Tax Specialist, 19, 2-8.

Pickering, M. E. (2015). An Exploratory Study of Profit Reporting Differences of Publicly Owned Professional Service Firms and Partnerships. Australian Accounting Review, 25(3), 262-278.

Richardson, G., Taylor, G., &Lanis, R. (2016). Women on the board of directors and corporate tax aggressiveness in Australia: An empirical analysis. Accounting Research Journal, 29(3), 313-331.

Taylor, G., Richardson, G., &Taplin, R. (2015). Determinants of tax haven utilization: evidence from Australian firms. Accounting & Finance, 55(2), 545-574.

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