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ACCG 8124 Taxation Law
Questions:
Bream Pty Ltd (Bream) is a resident Australian private company based in Epping that manufactures electronic components. The company has one director and one shareholder, Mr Trevor Walsh who hold 50 shares in Bream. These shares were acquired for $4,000 per share on 15 December 1999 when Bream was incorporated.
Balance Sheet of Bream as at 30 June 2020 is as follows:
|
Assets |
Liabilities |
||
|
Cash at bank |
$1,200,000 |
Trade creditors |
$180,000 |
|
Accounts receivable |
$350,000 |
Bank loan |
$2,300,000 |
|
Trading stock |
$0 |
||
|
Plant & Equipment |
$130,000 |
Shareholders’ Equity |
|
|
Business premise |
$1,310,000 |
Issued share capital |
$200,000 |
|
Residential premise |
$550,000 |
Retained earnings |
$860,000 |
Balance Sheet of Bream as at 30 June 2021 is as follows:
|
Assets |
Liabilities |
||
|
Cash at bank |
$3,000,000 |
Trade creditors |
$3,310,000 |
|
Accounts receivable |
$1,360,000 |
Bank loan |
$2,400,000 |
|
Trading stock |
$240,000 |
||
|
Receivable-selling two premises |
$2,950,000 |
||
|
Plant & Equipment |
$104,000 |
Shareholders’ Equity |
|
|
Business premise |
Issued share capital |
$200,000 |
|
|
Residential premise |
Retained earnings |
$1,744,000 |
Bream reported a net accounting profit of $884,000 for the year ended 30 June 2021. In preparing its income tax return for the year ended 30 June 2021, you have been asked to review the following notes:
Trading stock to the value of $25,000 was purchased from US based supplier. However, as at 30 June 2021, the goods were still on board a ship at sea. Bream had the bill of lading, but this amount didn’t include in the Trading stock account as at 30 June 20212.
Depreciation on plant and equipment for tax purposes amounted to $52,000. However, only $26,000 had been charged as an expense in arriving at the net accounting profit.
On 1 July 2020, Bream purchased the machine at a cost of $50,000. Bream determined the machine to have an effective life of four years and claimed depreciation by using the prime cost method. Bream used the machine exclusively
for business purposes. It sold the machine on 30 June 2021 for $30,000. The amount of $7,500 was included in the net profit from selling the machine. Depreciation on this machine for tax purpose amounted to $5,000.
Repairs and maintenance expenses of $27,600 included the following items:
|
1/8/2020 Repair to leaking roof |
$2,800 |
|
15/9/2020 Painting outside of business building |
$5,600 |
|
10/4/2021 Resealing customer car park |
$7,100 |
|
30/6/2021 Replacement of vinyl flooring in reception room |
$12,100 |
Bream borrowed $100,000 on 1 December 2020 to fund the purchase of new plant and equipment. The loan is repayable in 10 years. The interest expense was claimed in calculating the accounting profit. The borrowing costs of $1,500 were written off immediately and treated as an accounting expense.
Because of a shortage of working capital during the year, Bream sold the following assets:
- Business premises: acquired on 1 February 2000 for $1,310,000 which included the administration office, factory and warehouse. Entered into a contract on 20 June 2021 to sell for $1,800,000. The sale was settled, and the proceeds received on 15 July 2021. The accounting profit was $490,000.
- Residential premises: acquired from Mr Trevor Walsh for $550,000 on 10 March 2001. However, a registered valuer had advised Bream that the market value of the premises was only $350,000 at the time. Entered into a contract on 25 May 2021 to sale for $1,150,000. The sale was settled, and the proceeds received on 2 July 2021. The accounting profit was $600,000.
Included in expenses was $36,000 incurred in respect of entertainment. $16,000 of this amount was attributed to the entertainment for employees on which Fringe Benefits Tax has been paid. The balance of the amount relates to client entertainment expenses.
Included the following legal expenses:
1/10/2020 $3,000 for preparation of documents associated with a debenture issue. The debentures will mature in 10 years, when they will be redeemed. The funds from issue will be used for working capital. 15/2/2021 $1,800 for amendments to the company’s articles of association.
Research expenses and other fees of $40,000 were incurred in assessing the feasibility of opening a new factory in Brisbane during the year.
Bream purchased a business as a going concern in September 2020. The purchase agreement listed debtors as $50,000. However, by the end of the year, the company was only able to recoup $15,000. The company estimated that only 60 per cent of the remaining $35,000 could be recouped. On this basis, it decided to write-off $14,000 as a bad debt expense.
REQUIRED:
- Prepare a report for Bream’s Chief Financial Officer(CFO) that addresses the tax treatment of the items listed above (Assuming Bream is not small business entity). (17 Marks)
In your report, you are required to provide explanations for your answers AND refer to relevant statutory provisions, cases and /or rulings.
- Calculate Bream’s taxable income and income tax payable for 30 June 2021. You are to use the attached table to complete your tax reconciliation/calculate tax payable. Bream paid company tax instalments (PAYG payments) for the year ended 30 June 2021 totalling $210,000. (3 Marks)
ACCG 8124 Taxation Law
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