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Principles of Taxation Law 2018
CHAPTER 16 – TAX ACCOUNTING
Your client is a small IT consulting business consisting of a husband and wife as the principals
and two employees. From the time the business was established, 1 July 2010, it has been
accounting for tax purposes on a cash basis. For the current financial year your client has
decided to account on an accruals basis as the size of the business is increasing. As at 30
June it has $40,000, which was paid to it from the previous financial year and this amount
was not included in its assessable income for that year. Must it be included in the current
Would your answer be different if your client had deliberately told the customer not to pay
its account for $40,000 until after 30 June?
Your client is a medium-sized building company and has provided you with its accounting
records for the current financial year. Included in the accounting figures are the following
amounts. How would you treat them for tax purposes?
(a) Provision for long service leave for 10 employees — $25,000. The actual amount
paid during the year was $12,000.
(b) Insurance premium on the plant and equipment — $22,500, paid on 1 June for
(c) As at 30 June, there is an outstanding electricity account for $1,500 and
telephone account for $4,500.
(d) A maintenance contract on the computer equipment for 12 months — $12,000.
The payment was made in the current year but the contract ends in May the
(e) The sum of $165,000 was paid to the sales manager as compensation for the
early termination of his employment contract. The employment contract had
one year to go; it would have ended on 30 June of the following year.
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(f) Interest expense of $56,000 on a loan that has five years to run that was
originally used to purchase a computer repair business which ceased to operate
on 30 June 2017.
For the year ended 30 June, BBNT Pty Ltd, a lawn mower manufacturer, reported an
operating (accounting) profit of $750,000. The company does not elect to be taxed as a SBE
In coming to this profit figure the financial accountant had taken into account the following
(a) $30,000 has been claimed as a deduction being the amortisation of goodwill arising
from the acquisition of a business two years earlier.
(b) A provision has been raised for future warranties equal to 2% of sales. During the
year the sales amounted to $5 million.
(c) Depreciation on the buildings was $50,000. However for tax purposes only $25,000
is tax deductible.
(d) The company spent $75,000 on legal expenses opposing an application by Heavy
Mowers Pty Ltd to extend its patent on a brand of mower. If the patent was not
extended, then BBNT could produce a similar mower.
(e) The company borrowed $200,000 on 1 January of the current year to cover the
purchase of new plant. The loan is repayable in 10 years. The cost of borrowing was
$2,500 and this amount was written as a deduction in the company financial
accounts when it was paid.
(f) Because of a shortage of working capital the company was forced to sell off some
land for $300,000 in February of the current year. The land had been bought in
October 1995 at a cost of $180,000. The company only brought to account in its
financial statements the difference between the current market value of $220,000
and the proceeds, namely $300,000, as their accounting gain on sale.
(g) The directors also advised the financial accountant to make a provision for:
(i) bad and doubtful debts of $30,000;
(ii) annual leave and long service leave of $60,000.
(h) The company also purchased for the managing director a new car at a cost of
$120,000. The car was purchased by the company on 1 July of the current year. The
effective life of the car is 7.5 years. For accounting purposes the financial
accountant has claimed depreciation in the accounts of $12,000 being 10% of the
(i) The company also needed to acquire a series of parts to hold as stock on hand. At
the end of the year the company had closing stock of $146,000. Of this figure the
directors believed that $85,000 represented obsolete stock and wished to write off
this amount. The financial accountant had not done this in deriving the profit of
$750,000 as he was unsure of how to account for it in the financial accounts. The
obsolete stock had been scrapped at the end of the year and taken to a metal
The company has carry forward losses of $150,000. There has been no change in the
ownership of the company between the start of the loss year and the end of the current
year other than 35% of the shares were sold to a Perth based (unrelated) company. The
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company received the following dividends:
• Cash dividend from BHP Ltd of $23,000 fully franked. • Dividend from Intergroup Ltd of $7,800 which was 75% franked. The company
had elected to reinvest the dividend and receive shares instead of cash.
• Cash dividend from Microsoft Inc, a US company, of A$8,200. An amount of A$1,447 had been withheld as tax by the US Internal Revenue Service.
• Dividend of $3,000 unfranked from Golden Beach Pty Ltd which was declared on 5 May of the previous year by the directors but not actually paid until 5 July of
the current year.
The company accountant had only brought to account as income the actual cash when
received in respect of the above dividends. It did not account for any dividends due.
The company directors come to you as the taxation adviser of the company and wish to
know what the taxable income is for the company and the tax payable. The company
wishes to maximise its tax deductions.