Case Study: Jones Brothers Pty Ltd Financial Details For The Year Ended 30 June 2018

Franking Account Details

A.Computation of Franking Credit Account 

According to the Australian taxation office the franking credit records the amount of tax paid by the franking entity can be passed to the members as the franking credit. The franking credit arises for the PayG instalment is attributable for the period in which the entity was the franking entity following any reduction under “subsection (4)”. The Australian taxation office provides that a franking credit is the most commonly recorded in the account given the entity obtains the franked distribution, pays the income tax of the PYAG instalment or occurs any liability for the franking deficit tax. The Australian taxation office explains that the credit is equivalent to the amount of tax or the PAYG instalment is paid, the franking credit is attached to the distribution received or when the franking deficit tax liability is occurred.

Similarly, for Jones Brother Pty Ltd the company paid the PAYG instalment on 21^st October 2017 therefore, the sum of $25,000 will be considered as credit and should be recorded under credit side of the franked account. The credit represents the equivalent amount of the tax of the PAYG instalment that is paid.

According to the Australian taxation office where the income tax liability is only paid partially, franking credits would not originate from the sum that remains outstanding. Any form of partial payments that was made in the direction of outstanding activity statement liabilities would be allocated in accordance with the policy.

Under “section 204-15 of the ITAA 1997” a franking credit originates for the entity when a franking debit is specified under the “subsection 201-15”. The franking credit received from Grass Pty Ltd for Jones Brother Pty Ltd would be recorded under the credit side. As evident from the above stated computation the franking credit account for the Jones Brother Pty Ltd recorded a deficit balance. This franking credit account is in deficit at a particular time because the amount of franking credit has gone past the sum of franking credits.      

B.Computation of Live Stock Trading Account 

Computation of Assessable Income for Bob Jones

According to the “paragraph 70-10 (b) of the ITAA 1997” live stock are particularly included in the definition of the trading stock and hence would be regarded as the trading stock. This represents that the purchase and selling of livestock would eventually account on the revenue account irrespective of how they are essentially used in the business. The high court of law in “Federal Commissioner of Taxation v Wade (1951)” held that the definition of livestock comprise of all the animals that are used in the primary production.

According to the Australian taxation office an individual is required to value the livestock at the end of every year for the ascertaining the net income from the primary production. An individual would be allowed to choose the valuation of livestock at the cost, at market price or at the replacement value. According to the “section 6-5 of the ITAA 1997” any receipts derived from business are treated as revenue and are considered as assessable income. The receipts from the sale of livestock by Jones Brother Pty Ltd would be treated as the taxable income and forms the part of the net income from the primary production. Other receipts such as rent received from the cold room on farm and bank interest forms the part of assessable income for Jones Brother Pty Ltd. An instances was noticed where there was a natural increase in the livestock. Therefore, according to the Australian taxation office the cost of animal that is held by Jones Brother Pty Ltd acquired through natural increase for each emu would stand $8. Therefore, each of the fifty Emu acquired through the natural increase would be valued at $8.

Other Financial Details

According to the “section 8-1 of the ITAA 1997” an individual is allowed to claim an allowable deduction from their taxable income for any loss or outgoings up to the extent that the expenses are occurred in gaining or generating the assessable income. Alternatively, a person is allowed to claim deduction under the general provision of “section 8-1 of the ITAA 1997” if the expenses are necessarily incurred in executing the business activity with the objective of deriving assessable income.

Similarly for Jones Brother Pty Ltd expenses on commercial feed for Emus constitute a business expenses and hence the sum of $5,600 would be allowed for deduction under the general provision of “section 8-1 of the ITAA 1997”. Jones Brother Pty Ltd also reports expenses for the construction of new dam. Expenses that are incurred in the construction are held as capital in nature. Referring the judgement of “Western Suburbs Cinemas v FCT” capital expenses are not allowed for deduction under the general provision of “section 8-1 of the ITAA 1997”. Therefore, cost incurred in the construction of new dam is a capital expenditure and no deduction is allowable.

C.As evident from the situation of Arnold and Bob they have decided to dispose the farm assets in the coming income year to the unit trust. According to the Australian taxation office the small business restructure rollover allows the small business to transfer the active asset from one entity to another or more entities without occurring any form of income tax liability. The taxation office of Australia defines that the small business rollover is application to the transfer of active assets that are CGT assets, trading stocks or the depreciating assets. For a business to be held eligible for the rollover, the transaction should not lead to change in the ultimate ownership of the transferred assets. The ultimate economic owners of the assets are the person that is individuals who either directly or indirectly owns the asset.

Similarly, in the current situation of Jones Brothers Pty Ltd the rollover relief is available since the transfer of assets to the unit trust genuinely forms part of restructure. The rollover relief is applicable to the rollover transfer of assets active CGT assets held by the Arnold and Bob. The transaction by Bob and Arnold does not lead to change in the economic ownership of the transferred assets. In the present situation of Jones Brothers Pty Ltd the ultimate economic owners of the asset are the Arnold and Bob as they directly own the assets. The assets that are eligible for the roll-over restructuring are the active assets that are CGT assets. They assets forms the portion of the genuine restructure of the ongoing business.

According to the Australian taxation office, assets that are generally transferred would not result in the income tax liability originating for either of the party when conducting the transfer. Similarly in the situation of Arnold and Bob Jones the transfer of farm capital assets during the process of restructure rollover would not attract any income tax liability for either of the party at the time of transfer.

d.Trust are largely used for investment and for business purpose. According to the Australian taxation office trust is referred as the obligations that are applied on the person or the other entity to hold the property in the benefit of the beneficiaries. The beneficiaries are required to include in their assessable income the share of the trust income while filing tax returns. The net income that is derived from the trust is held for assessment for the year after taking into the consideration the allowable deductions. As evident in the current situation of Arnold he intends to set up the trust for their two sons. The taxation office of Australia defines that an individual is required to pay the tax relating to the share of the trust’s net income based on the applicable tax rates. Furthermore, the trustee is also required to pay the tax on behalf of their minors depending upon the share of the trust net income. The beneficiaries are under the obligations of declaring the income in their own income tax.

The present situation of Arnold highlights that he intends to set up the trust for his two sons therefore the beneficiaries in this circumstances are the minors would be receiving the benefit from the trust. The minors form the part of the trustee and would be taxed at the highest marginal tax rate. Taking into the consideration of Arnold Jones an advice can be made in regard to setting up of trust is that the trustee would be paying the tax for the minor son who aged below the age of 18 years, While the other trust members such as his wife and his son Benjamin would be liable for taxation based on the applicable individual tax rates.