Receipts method and earnings method are the two methods that are used to recognise the received revenue. According to the verdict given in FCT v. Dunn (1989) 20 ATR 356 at 358, the respective taxpayer has the legal right to adopt the appropriate method for the recognition of the received revenue and this would purely depend on the circumstances of the business of the company(ATO, 1998). As per the judgement in Agency Company of South Australia Limited (1938) 63 CLR 10 case, when the taxpayer has received the revenue through service then it would be better to use receipts method for recognition of revenue. However, when the taxpayer’s business requires circulation of capital and also trading stock movement for generating the assessable income, then it is preferable to use earnings method (Reuters, 2017).
It can be seen that Manic is having both trading stock movement and also requires circulation of capital. Hence, it is appropriate to use earnings method for the recognition of revenue receipts of $80,000. However, it is noteworthy that the revenue would be recognised in the year in which the actual service has offered to the customer. This is because the service has not been extended to customer and hence, there is a possibility that customer can ask for the refund.
In accordance with the decision pronounced by the honourable court in Leigh v. Inland Revenue Commissioners [1928] 1 KB 73 case, the generally accepted rule with regards to recognition of interest income is that the same becomes recognisable when the actual interest amount is received or credited in the bank account (Krever, 2016). However, an exception to the above rule is when the interest arises on account of money deposited during normal business conduct and additionally income recognition for the firm is based on earnings method (Nethercott, 2016). For the given taxpayer (i.e. Manic Pty Ltd), both the necessary conditions are satisfied which implies that interest income would be taxable despite not being credited.
Deduction for trading stock can be availed as per s.8(1) ITAA 1997. However, for the recognition of good as trading stock, IT 2670 highlights that the taxpayer must be in control of the goods which implies that power to dispose must be present (CCH, 2013). This power to dispose is closely linked ownership which for sea transport based goods is inevitably linked to the bill of lading (ATO, 1936). In the given case, it is evident that the company still does not have the bill of lading for the goods in transit, thus the ownership has not been passed to the company resulting in no deduction for the goods in transit.
Any deduction on accounting of bad debt can be availed in accordance with s. 63, ITAA 1936. The key requirement for this to be applicable is that the debts must have been written off from the company’s books (CCH, 2013). This clearly is not satisfied in the given case as the CEO is still deliberating on the potential write-off and hence the bed debt deduction is not permissible for tax.
The negative limb associated with s. 8(1) highlights that capital expenditure deductions are not permissible. One of the last resorts for accommodating business related capital expenditures is s. 40-880. This provides straight line deduction on the complete expenditure for a five year period (CCH, 2013). The necessary conditions are outlined below.
The given case, the market research related expense tends to adhere to both the conditions outlined above due to which deduction over a five year period would be permissible for this.
The expenses in relation to the repairs could be available for tax deduction under s. 8(1) or s. 25(10). However, it is noteworthy that both the above highlighted sections cannot be applied together. It is noteworthy that the repairs must be in regards to the current business only and also, in relation to restore the efficiency of damaged objects without changing the basic nature of the object. As per s.25(10) and TR 97/3, the expense resulted due to the repairs would not amount deductions only when the nature of the objects has changed (Coleman, 2011). When any expenses in relation to enhance the efficiency by changing the basic nature of the object would be taken into account, then expenses would be categorised as capital expenses. Also, as per s. 8(1) the capital expenses would not be tax deductible.
In present case, the installation of new metal roof by changing the tiles has changed the nature of the object and hence, only the amount on repairing would be categorised as deduction under s(8) which would be $ 30,000.
According to s. 8(1), the expenses which are taken into account to generate the assessable income would be available for tax deduction. Further, when the expense is capital expense, then the expense would not be taken into account for tax deduction under s. 8(2). However, the received capital losses/gains would be assessable income (statutory income) under s. 6(10). In order to determine the capital gains/losses the cost base of the asset, s. 110 – 25, ITAA 1997 would be used (Coleman, 2011).
|
Cost base |
{ (1,500,000 + 28,000+36,000)} =$1,546,000 |
|
Total sale price |
$2,100,000 |
|
Capital gains/losses |
($2,100,000 – $1,546,000) = $536,000 |
|
Capital gains |
$536,000 |
Per share value = $1.50 & per share sale price = $3.50
Total buying price of shares in subsidiary = $1.50 * 10000 = $150,000
Total sale price of shares in subsidiary = $3.50*10000 =$350,000
Capital gains/losses = $350,000 – $150,000 = $200,000
Manic has received capital gains of $200,000 on account of disposal of shares. Also, there is no motive on behalf of Manic to derive profit through the disposal of shares and hence, the applicable capital gains would be considered as assessable income subject to capital gains tax (Krever, 2016).
According to s. 165 – CA, ITAA 199, the present year’s capital gains would be adjusted against the previous year’s capital losses incurred from the same type of asset (Deutsch, et. al., 2015). Hence, the carry forward capital losses would be adjusted with the current year’s capital gains that result through the disposal of factory’s share. In this adjustment, the total capital tax liability for Manic would be reduced.
The tax treatment for depreciation expenses requires separate treatment based on the difference of tax rules and accounting rules (Nethercott, 2016). Hence, it would be preferable to make subsequent adjustment of this depreciation expenses in the books of the company and then compute the net taxable income.
According to the division 9A, Fringe Benefits Tax Assessment Act 1986, the expenses paid by the employer on the meal fringe benefits for employees and clients would result in fringe benefit tax liability for the employer. Also, expenses incurred on meal and entertainment of clients and business personals would not be tax deductible for employer. However, for similar expense on employees, a tax deduction can be claimed. In present case, employer Manic would use 50-50 split method to reduce the fringe benefits tax liability (Krever, 2016).
|
Total expense |
$65,000 |
|
Expenses on employees |
$32,500 |
|
Tax deduction |
=50%*$32500 = $16,250 |
According to the tax ruling TR 95/35, the payment by the taxpayer to any person in regards to restrict his capability to work in a particular location or with a particular firm or to commence similar business would be considered as capital expense. Additionally, as per s. 8(1), taxpayer cannot claim any tax deduction on the capital expenses. Therefore, this capital business expense would be deductible under s. 40-880 (Woellner, 2017).
|
Amount of restrictive covenant |
$54,000 |
|
As per s. 40-880, the annual tax deduction |
= $5400 /5 = $10,800 |
In regards for any further information or clarification, kindly contact me.
Yours Sincerely
STUDENT NAME
A key concern in the society is with regards to the low taxes that are paid by the companies and hence there emerges an ethical viewpoint that companies must pay a reasonable amount of tax in geographies where they make money. It needs to be analysed in the wake this concern, whether companies should consider such an ethical argument or continue to abide by the applicable tax laws.
A key argument forwarded in the defence of not paying any incremental taxes beyond what is required by the law is the legal right that a reporting entity has to manage tax affairs and engage in planning of tax so as to lower the resulting tax outflows. This has been put forward in the landmark IRC v Duke of Westminster [1936] AC 1 case (Barkoczy, 2017). Post this judgement, there was ample abuse of the legal right granted and hence since 1980’s changes have been made to rectify this loophole. However, tax laws still provide various concessions that the companies can avail. Also, a higher tax outflow would adversely impact the interests of the shareholders as valuation of firm is closely linked with EPS (Earnings per share). Besides, practically in all business decisions, tax consideration play a vital role as the aim is to ensure lowest tax outflow. In such an environment, it seems highly inconsistent to consider any suggestion of higher tax outflow purely on ethical grounds (Deutsch, et. al., 2015).
With regards to paying a fair tax, the key argument would be the shift in corporate focus from shareholders to stakeholders and hence the managers must take into consideration the wishes of wider stakeholders into consideration. Also, reference can be made to increasing spend by companies on CSR activities even though it is not mandated by law. However, this argument has one difference in terms of higher tax outflow. The CSR spending is done directly by the firm and hence requisite visibility can be achieved. However, higher tax payment would be paid to the government which can use the money as per its priorities (Gilders, et. al., 2016). Thus, in case of higher tax outflows, the chance for garnering positive reputation and word of mouth is comparatively lesser.
In wake of the arguments on either side, it would be appropriate that the accountant while offering advice should focus only on compliance with the tax laws since the at the present it is difficult to link incremental tax outflows with any tangible benefits that may arise in the long run. As a result, it is unlikely that a higher tax outflow suggestion would receive support from the higher management.
References
ATO, (1936) Income tax: Meaning of “trading stock on hand”. Available online https://www.ato.gov.au/law/view/document?Docid=ITR/IT2670/NAT/ATO/00001 [Accessed on May 4, 2018]
ATO, (1998) Income tax: Determination of Income; Receipts versus earnings. Available online https://www.ato.gov.au/law/view/document?DocID=TXR/TR981/NAT/ATO/00001&PiT=99991231235958 [Accessed on May 4, 2018]
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th edn. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, ., Sydney: Wolters Kluwer
Coleman, C. (2011) Australian Tax Analysis. 4th edn. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook. economics. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th edn. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd edn. Brisbane: THOMSON LAWBOOK Company.
Nethercott, L., Richardson, G., & Devos, K. (2016) Australian Taxation Study Manual 2016. 8th edn. Sydney: Oxford University Press.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th edn. Sydney. THOMSON REUTERS.
Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select Legislation and Commentary Curtin 2017. 2nd edn. Sydney: Oxford University Press Australia.
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