CHAPTER 16 – TAX ACCOUNTING

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Principles of Taxation Law 2018

CHAPTER 16 – TAX ACCOUNTING

Question 16.1

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

financial year?

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?

Question 16.2

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

12 months.

(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

following year.

(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.

Question 16.3

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

taxpayer.

In coming to this profit figure the financial accountant had taken into account the following

items:

(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

cost.

(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

recycler.

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.