Net Trust Income Calculation For Central Accounting Services Pty Ltd For The Year Ended 30 June 2016

Description of Central Accounting Services Pty Ltd

Net trust income for Central Accounting Services for the year ended 30 June 2016

Over the given scenario of Central Accounting Services, this trust has been registered as Small Business Entity and it is also registered for the GST as well. In this business entity, there are two directors as Jim Lee and Mary Lee and the net trust income will be distributed in 50% each. The accounting information has been inferences from its accounting records as June 30, 2016. The personal income is also determined with respect to the yearly income of Central Accounting Services.           

Net Income Calculation for Central Accounting Services	Description
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Amount ($)	Amount ($)
Gross income		524000	ITAA 1997 SEC 6.5
Add: other income
Interest		1800	ITAA 1997 SEC 207 -220 and ITAA 1997 SEC 6.5.
Exempt income		40000	ITAA 1997 SEC 6-20
Capital gain		40000	ITAA 1997 SEC 315-5 under subdivision 315 A
Dividend from BHP fully ranked		16540	ITAA 1997 SEC 115-280
Total gross income		622340
Less: Deductions or Expenses
Rent	40000		ITAA 1997 SEC 85-15.
Salaries to employees	67000		ITAA 1997 SEC 86-80
New photocopier 3600*2/4	1800
PAYG withholding paid to ATO	18000		ITAA 1997 SEC 205-20
Salary to Jim Lee including PAYGW of $23000	67000		ITAA 1997 SEC 86-80
Salary to Mary Lee including PAYG $15000	25000		ITAA 1997 SEC 86-80
Gaming debt	65000		ITAA 1997 SEC 165-120
Motor vehicle expense	3500		ITAA 1997
Superannuation for Jim and Marry	100000		ITAA 1997 SEC 86-75
Superannuation for employees	5674		ITAA 1997 SEC 118-305
Jim’s expenses for accounting meeting	3000		ITAA 1997 SEC 26-50
Net interest	1800		ITAA 1997 SEC 8.1
Robbed	26000		ITAA 1997 SEC 165-120
Total expenses	423774
Net income before deduction of loss		198566
Loss from the last year	20000		ITAA 1997 SEC 36.55.
Net income		178566

Working note with explanation of item

Exempt income: The exempt income is the item which is considered as an amount that is not subjected to liable for tax purpose. In the federal government, the exempt income is treated as non –taxable income or it is tax free. The major sources of tax free income are as provident fund, tax- free bonds and dividends which are not  the part of taxable income (Malherbe, 2015). The income tax assessment act 1997 of Australia, section specified as section 6-20.       

In the federal government, the exempt incomes are determined as income from government pension, government allowance and pension, bursaries, grants and scholarship from the federal government. With reference to this business, the exempt income is recorded as income for the business to determine the total revenue for business entity. In the federal accounting system, the exempt income is totally tax free (ATO, 2017).   

Capital gain: The capital gain or loss is an item that determines the value of income as how it is increased or decreased respectively. In this Central Accounting Services, the capital gains are recorded from the valuation of the assets of business (Desiderio, 2018). In federal government, the capital gain up to the $25,000 is exempted from the tax envision. For instance, if the husband and wife sold out the house then the total amount of $50000 is free from tax.

Fully franked dividends: The fully franked dividends are determined as the items of shared on which the Company has paid tax. This is also called the imputation credit or franking credit for which the shareholders are entitled for the type of money for which the tax is already paid. In the Australian federal accounting system, the government has developed a system under which the process of tax is carried out called imputation (Newnham, 2016). Under the IATT

Calculation of Gross Income

In this system, the company has already paid the tax so the shareholders offset for the tax by the amount which is tax free. In this given scenario, the amount of $16540 is fully franked or tax free for the shareholders.

PAYG: This is a withholding tax for the business which is processed in incremental manner that is accumulated toward the year end liability as the tax is paid. In the federal tax system, if the tax return is filed than it is crucial to determine the installments (Malherbe, 2015). In simple words, it can be stated that the tax payer break down the total amount of tax which is needed to be paid in the installment system so that the tax payer can easily pay the tax in efficient system. It is termed as pay as you go. Under the Income Tax Assessment Act 1997 of Australian tax law, the division 205 includes the PAYG Withholding under the section of 205-220.   

In addition to this, the PAYG Withholding is a system in which, the employers needs to send the reports in business interval as the amount is paid to the employees and the contractor of business. The Australian government has fixed the amount for which the company needs to pay the installments (ATO, 2017). In addition to this, if the business entity is paying the PAYG Installment then it requires to lodge the return for annual tax. In context to the Central Accounting Services, PAYG amount is paid to the ATO by the amount of $18000.

Superannuation contribution: This is the amount for which the company makes the system for the employees in order to the benefits of employees. In relation to this, the employers contribute towards the super fund for employees so that the employees of business entity can get the good amount at the time of retirement (ATO, 2017). In relation to this, the employers in the Australian territory are liable to contribute by rate of 9.5% for the total income of employees. In relation to this, the employers made the contribution with the amount of $50000 for each directors as Jim Lee and Mary Lee.           

Over the transactions of business entity, the total amount of revenue is determined as $622340 and the expenses have been occurred by $423774. The net income for the Central Accounting Services business is calculated as $178566.       b)     Jim’s share of net income and tax liability

Deductions and Expenses

Over the financial transactions, the personal income for Jim is calculated which is taxable as follows  

Jim Lee’s Personal Income Year Ended 30 June 2016
Particulars	Amount ($)
Jim Lee and Marry Lee’s split equal distribution of income total as $178566	89283
Add: Revenue	6000
Total income	95283
Less: Expenses and payment
Interest paid	8000
Medical expenses for Marry and Jim as 14000	7000
Total expenses	15000
Income before loss	80283
Trading loss	36000
Capital loss	12000
Net income for Jim Lee	32283

The Jim’s share from the income of trust as $89283 and the taxable income is reported as $32283.  

The Mary Lee’s income is also calculated from the financial recording of transactions

Mary Lee Personal Income Year Ended 30 June 2016
Particulars	Amount ($)
Income from Trust	89283
Add: Income	0
Less: Expenses and Deductions
Health insurance	7000
Net income	82283

Question 2

The main aim of the business is to earn maximum profit by carrying out different economic transactions. Businesses earn income and incur expenses by carrying different business activities.  For the purpose of the development of a country or economy government imposed taxes on the income generated by the businesses for the development of the infrastructural facilities and improving the standard of living of the people in the country (ATO, 2018). The income generated by the business is classified into three main heads namely exempted income, taxable income and assessable income.

It is identified that the income that can be taxed and exceed the tax free thresholds is considered as the assessable income. This includes income from sales of goods or providing services to the customers. In addition to this, exempt income as the name suggests refers to the income generated by the business as there is no need to pay tax as government has provided relaxation/rebate on the income generated from a particular activity. In context of this, in the given case there is an individual named Joan Lee who has left the job as a corporate lawyer for a food processing company and has opened a business where he has to play a role of financial advisor (ATO, 2018).

The main role of a financial advisor is to provide advice to its clients regarding the financial and tax planning. This business deals in the provision of the financial advising services so the income generated will be taxable and the company has required making the payment of the tax to the Australian Taxation Office. The taxable income refers to the income on which there is a need to make the payment of the tax (ATO, 2018). This is the income which is remained after the deduction of the various expenses that can be claimed from the accessible income.

Assessable income – allowable expenses (Deductions) = taxable income ITAA 1997 Sec 4-15(1) (Source: Kluwer, 2018)

The deductions made in the assessable income are done for the purpose of reducing the income on which there is a need to make the payment of the tax (Caredes, 2016).

Jim Lee’s Personal Income

 For the purpose of the calculation of taxable income for the company the following table provides the detailed calculation.  

Calculation of the taxable income
Particulars	Amount ($)
Income of Joan lee financial services Pty Ltd. (	85500
Expenses
Registration fees for new company	-1980
Referral fees to accountant (8700-550)	-8150
Research expense	-1320
Legal Fees (ITAA 1997 (320-I))	-330
Accounting fees	-1650
Acquisition of laptop computer	-2499
Fixtures and fittings for the office (ITAA 1997(80(5))	-3750
Travel costs (ITAA 1997 52(CB))	-870
Mobile phone bill (ITAA 1997 Division 40-G)	-650
Prepaid maintenance to photocopier (1320*5/12)	-550
Wages to secretary	-35000
Superannuation for secretary ITAA 1997 Division 26	-3150
Stationery and postage	-7800
Professional indemnity insurance (4500*5/12) ITAA 1997 20(A)	-1875
	-69574
Net income of the company	15926

The identified income for Joan Lee financial services is 85500. This is the total income that does not consist of the various expenses that are necessary to carry out the financial planner services. The expenses that might be incurred are relating to the salaries and wages, electricity, equipment, and others (ATO, 2018). The expenses that are carried out during the assessment year registration fees for the establishment of new company, there is also need of referrals to increase the business and there is need to pay tax on these referrals this is also considered as expense for the business. 

Likewise the other expenses that are required to be adjusted for the calculation of the taxable income are legal fees, accounting fees, fixtures and fittings, mobile phone bill, and wages to staff. These all the expenses are deducted from the total income to calculate the net income of the company. The identified net income of the company after considering the various expenses is $15926 so; this income is to be taxed as per the Australian taxation office (ATO, 2017).     

It is identified that the tax rate for companies is 27.5% so the tax calculations for Joan lee in year 2015-16 for financial services will be as under:

Net income of the company or taxable income of the company = 15926

Tax payable for the period ending June 2016 = 15926*27.5% = $4379.65.

The goods and services tax is applicable on the businesses and government imposes this tax on them which they transfer to the customer.  businesses are required to deal with other businesses and they also pay taxes on the purchase of goods and services on the other side business also receives tax when they sell a product or provide service which is to be paid to ATO. For the purpose of elimination of double taxation as business trade with each which results in the presence of the trade-off or write-off of the taxation payable and received. This trade off of the tax is called tax input.  The tax rate applied on the given scenario is 10% established by the ATO (ATO, 2018).   

Calculation of GST payable and input tax credits
Particulars	Amount ($)
GST paid for registration (1980*10%)	198
GST paid for Financial planning course (8800*10%) (ITAA 1997 (17(5))	880
GST paid on expenses incurred by firm {(69574-1980)*10%}	6759.4
Total GST received on the sales (all income assumed to be GST)	8550
GST payable to ATO (ITAA 1997 (17(15))	712.6

(Source: Kluwer, 2018)

The above table indicates that Joan Lee has to pay GST on three transactions that is for the registration of the business, carrying out financial planning course and on the expenses incurred by the firm (ATO, 2018). In addition to this, GST received by the firm is on sales of the various items or services during the assessment year that is to be paid to the ATO.   However netting of the GST has been done as the company has received GST on the sales done by it. This is the reason the total amount of GST payable by him to ATO is $712.6.

Question 3     

The below table provides the calculation of taxable income for Ace Couriers Pty Ltd which is a resident private company of Australia that deals in the delivery of the parcels in Australia.

It is identified that there are several entries in the business that were not considered at the time of finalizing the accounts and are required to be adjusted now for the purpose of calculation of the taxable income (ATO, 2018). The total income generated from the delivery of the courier during the entire year was $4489700. The adjustments of the various expenses for the purpose of calculation of the taxable income are as below:

Franked Dividends

Dividend received = 240000 out of which 80% were fully franked the tax will be paid by the investment company. Therefore, rest 240000*20% = 48000 will be taxed for the current calculation (ATO, 2018).   

Cash Dividend

Cash dividend less withholding tax by Singapore government indicates that taxes are already paid so this will not be taxable in Australia (Kurdian & Lindfield, 2016).

Accounting depreciation

The depreciation expenses recorded in the income statement was 35000 but there are some more transactions taken place such as purchase of New motor vehicle for $17750 so the depreciation will be 17750/6 = 2958.33 (ATO, 2018).

Low value and low-cost pool of assets $80000 were available with the company and it has purchased new low-value assets worth $17080 resulting to $97080 which is depreciated for a period of 10 years = 9708 (Hurst, 2018).

Purchase of I-pad having estimated life of 3 years so the depreciation amount that will be considered for the deduction = 990/3 = 330.

Delivery van = 74232/5 = 14846.4, the estimated life of the delivery van is five years so the depreciation of 14846.4 will be incurred.

Actual cost for service leave $25000 will be considered as expense and will be deducted from the net profit.

Repairs cost were consisting of $10000 for painting that is actually incurred so it will be considered for the purpose of tax calculation. In addition to this, the expensed for the replacement of rotting wooden with steel frame will also be considered for the purpose of calculation of expense. It will be considered as assets and the depreciation is to be calculated on the window frame 21000/25 years = $840, since the actual expenses incurred in the replacement of the existing frame are 21000 so depreciation will be calculated on this amount.  

While analyzing the wages by the income tax commissioned it is identified that wages consists of 50000 expenses for the purpose of marketing but the identified reasonable amount for the marketing expense was $20000 as per ATO this expense will be only considered till 20000 for the purpose of deduction from the net income and rest $30000 will be added back to the profits and it will be taxed.

Valuation of stock

Closing inventory is identified as = opening stock + purchases – sales

Purchases are already adjusted in the income statement so it is required to adjust the opening and closing stock = $230000 – $33567 = $196433. It is also indentified that the stock is to be considered for the purpose of calculation of the tax will be the book value of the stock (Athanasiou, 2015). So a total amount of $196433 will be deducted out of the total net profits.

Goodwill

The purchase of goodwill will also be considered for the purpose of tax calculation total goodwill will be purchased in installments of 100000 each year so 100000 will be deducted for the current year and deducted from the net income.

PAYG installments

Total actual payment of PAYG = $955000 will be deducted from the net income.

Building and land

The company has purchased a building earlier in the period and later it is identified that the actual cost of the building was $1200000 will only be considered at the time of the purchases and it cannot be adjusted for the purpose of tax calculation as it is a purchase of asset and tax will only be considered at the time of selling of the land and building by the company. Also the purchase of building is not considered in the income statement so there will be no adjustment for the same until the building will be sold.   

Calculation of ACE Couriers Pty Ltd. Taxable income
Particulars	Amount	Amount
Net profits of the company	3419700
Add: dividend received (240000*80%) (ITAA 1997 215(B))	48000
Cash dividend received (and tax paid)	Nil
Wages (over payment of expense for wages)	30000
		3497700
Depreciation  and other expenses: (ITAA 1997 (705(45))
low-cost pool assets (80000+17080)	9708
New motor vehicle (17750/6)	2958.33
I-Pad	330
Delivery van (74232/5)	14846.4
Actual cost for accident claim	25000
New steel window frame	840
painting of the premises	10000
Stock (230000-33567)	196433
Goodwill expense	100000
PAYG installments paid (ITAA 1997 (205(20))	955000
Purchase of building( considered as investment so treated when sold)	Nil	1315115.73
Taxable income of the company		2182584.27

(Source: Kluwer, 2018)

Form the above calculations it can be understood that the expenses that remained to be considered at the time of income calculation are now considered and will be deducted from the net income. The amount of the taxable income identified after considering the various expenses is $2182584.27.

The tax liability for the company will be 27.5% as the turnover of the company is less $10 million (ATO, 2017). So the tax to be payable by the company for the period of 2016-17 is $2182584.27*27.5% = $600210.67.

References

Athanasiou, A. (2015). Accounting for tax: Accountants’ negligence revisited. Taxation in Australia, 49(7), 411.

ATO, (2017). Changes to company tax rates. 

ATO, (2017). Eligibility. 

ATO, (2017). GST-free sales. 

ATO, (2017). Income and deductions.

ATO, (2017). Super for employers. 

ATO, (2018). GST. 

ATO, (2018). How GST works.

ATO, (2018). When you can claim a GST credit. 

Caredes, S. (2016). Tax counsel’s report: Mandatory disclosure-is this necessary in Australia?. Taxation in Australia, 51(3), 117.

Desiderio, R. (2018). Planning Tax-Exempt Organizations. USA: LexisNexis.

Hurst, G. (2018). CEO’s report: Celebrating 75 years of advocating and shaping the tax industry. Taxation in Australia, 53(2), 51.

Kluwer, W. (2018). INCOME TAX ASSESSMENT ACT 1997, TABLE OF SECTIONS.

Kurdian, N., & Lindfield, V. (2016). Alternative assets insights: Tax compliance central to Australia’s foreign investment. Taxation in Australia, 50(10), 626.

Malherbe, P. (2015). Elements of International Income Taxation. Belgium: Bruylant.

Newnham, M. (2016). Self Managed Superannuation Funds: A Survival Guide. USA: John Wiley and Sons.