Tax Treatment Of Various Accounting Transactions For Technology Computer Pty Ltd

Valuation of Trading Stock in Hand

Under the accrual process of accounting expenses arising from the liabilities must be measured by considering the expected cash flow. Similarly, the tax expenses must replicate sum of taxes to be paid in the current or future accounting period. The report would be addressing the CFO of Technical Computer Pty Ltd for appropriate accounting treatment of transactions to reflect the correct tax amount. The report would consider appropriate provision of “ITAA 1997” and “ITAA 1936” in providing an explanation of treatment of each items.

Tax treatment for Accounting Transactions 

The tax treatment for each items is given below;

1). Valuation of Trading Stock in Hand: As per “taxation ruling of IT 2670” goods are considered as trading stock in hand inside the “section 28 of the ITAA 1936” regardless whether the goods are to be delivered physically or to the premises of taxpayer. The law court in “All States Frozen Foods Pty Ltd v FC of T (1990)” stated that goods that are in the transportation stage will be treated as trading stock in hand (Barkoczy 2014). For Technology Pty Ltd the trading stock which is in transit from Singapore should be treated as stock in hand. The amount will be included under the heads of assessable income.

2). Service revenue $50,000: As per the “taxation ruling of TR 2014/1” any amount attributable in respect of contractual obligations under “contingency of repayment” the sum will be treated as derived for assessment purpose under “section 6-5 of the ITAA 1997” when the requirements are performed exclusively (James 2016). Similarly in “Arthur Murray (NSW) Pty Ltd v FC of T (1965)” when it is noticed that the requirements of the goods is performed and repayment contingency has lapsed the sum turns from “unearned income” to “earned income” (Brokelind 2015). The amount of $50,000 shall be included for taxable purpose under “section 6-5 of the ITAA 1997” based on ordinary concepts.    

3). Depreciation charged on Plant:  The deprecation expenses that is charged on the plant stands $300,000. The sum will be treated for assessment as “amounts not deductible” in ascertaining the net sum of accounting profit (Grange, Jover-Ledesma and Maydew 2014). The reason for this is that depreciation method undertaken for accounting purpose reflects differences from the process of depreciation undertaken for taxation purpose.

4). Accounting profit made from the sale of machine: For Technology Pty Ltd the disposal of machinery has given rise to gains for accounting purpose. The gains shall be treated as the taxable profit obtained from machine on the basis of original cost (Jover-Ledesma 2015). The accounting profit that is obtained from the disposal of machine is included for taxation purpose based on actual machinery cost. The sum of $100,000 has been included for assessment purpose under the heads of “assessable amount”. 

Service Revenue $50,000

5). Repairs and Maintenance Expenditure: Below stated are the tax treatment for the repairs and maintenance for Technology Pty Ltd.

1. a) Cost of replacing the entire roof: An explanation relating to repairs has been provided under “taxation ruling of TR 93/23” where repairs carried on the premises of capital nature are not treated as allowable deductions under the “section 25-10 of the ITAA 1997” (Kenny, Blissenden and Villios 2018). The court in “Sun Newspaper Ltd v FC of T (1938)” gave its judgement by stating that cost of replacing the business structure is treated as capital expenditure. In the current situation it is noticed that cost has been incurred by the company in replacing the entire roof of the factory that is damaged in hailstorm. The cost incurred represents in entirety of the premises which is deductible under “section 25-10 of the ITAA 1997”.

b). Cost of demolishing redundant building: Technology Pty Ltd incurred expenses on demolition of the redundant building. The expenses incurred were in nature of reconstruction of the entirety. The court in “Lindsay v FC of T (1960)” explained entirety as the separately identifiable item of capital equipment (McCouat 2018). It stated that expenses occurred in replacing or establishing the profit making structure are treated as capital expenses within the meaning of “section 25-10 of the ITAA 1997”. Similarly for Technological Pty Ltd the cost of $5,400 will be added to the profits under the heads of “items not allowed as deductions”.

c). Cost of converting the old storeroom into factory space: The court in “Sun Newspaper Ltd v FC of T (1938)” provided a differentiation regarding the capital and revenue expenses (Kenny 2014). The court decision stated that outgoings incurred in enlarging the revenue yielding structures are not permitted for deductions. The expense of $14,800 reported by Technology Pty Ltd for turning the old storeroom into factory is a capital expenses of reconstruction of entirety. The sum of $14,800 is recorded under the “items not allowed as deductions”.

6). Written off borrowing expenses: As per “section 8-1, ITAA 1997” taxpayers are permitted to claim deductions for expenses occurred in derivation of assessable income. The court in “FC of T v Lunney & Anor (1958)” held that the character of the outgoings must be judged whether they are occurred in derivation of assessable income (Sadiq et al. 2018). The borrowing expenses reported by Technology Pty Ltd is associated to derivation of assessable income. Hence, the borrowing cost is recorded under “deductible and non-assessable” for subtraction purpose.

7). Surplus on sale of land: Under “section 104-10 (1) of the ITAA 1997” a CGT event A1 happens when a commercial property is sold and result in capital gains or loss (Morgan, Mortimer and Pinto 2017). As understood Technology Pty Ltd makes a capital gains in the form of accounting profit upon the disposal of surplus land. The gains under “section 104-10 (1) of the ITAA 1997” has given rise to CGT event A1. The profit is recorded as taxable amount under heads of assessable income.

8). Employee entertainment cost: As evident the company has reported an expenditure towards employee entertainment. The employee entertainment expenses has been identified in the expenditure and it is treated as deductible expenditure.

Depreciation Charged on Plant

9). Provision for long service leave and holiday: Provision for long holiday and long service leave in the form of accrued expenses constitute liability for the company based on the accounting standards. In determining tax, a deduction is disregarded for accrued leave or provision for holiday. Deductions are only allowed when the expenses are actually incurred. Under “section 705-80” the expenses must be adjusted and such provision are included as liability for the joining entity (Woellner et al. 2018). As evident in Technology Pty Ltd a provision was increased by the directors relating to holiday and long service leave that amounted to $60,000. The provision expense constitute liability for the company here and sum will be added back under “amounts non-deductible”.   

10). Research expenses on feasibility of opening new factory: Losses or outgoings that are preliminary in the start of business activities are not treated as incurred during the course of business. Therefore, the pre-commencement expenses are non-deductible under provision of “section 8-1, ITAA 1997”.

In “Softwood Pulp and Paper v FC of T (1976)” the taxpayer was denied deductions for feasibility expenses since the expenses were incurred as preliminary in start of business (Taylor et al. 2018). For Technology Pty Ltd feasibility expenses on opening new factory is preliminary in start of business and non-allowable deductions. The sum is recorded under “amounts not deductible.

11). Bad debt write off $5,500: As per the “taxation ruling of TR 92/18” explanation relating to the deductions for bad debt is only allowed when the debt has become bad and permitted deductible for taxation purpose. As per “section 63 of the ITAA 1997” the taxpayer must write off the expenses in the year of income before making any claims for deductions (McCouat 2018). As understood in the present state of affairs for Technology Pty Ltd the company reports bad debt expenses of $5,500 as written off for the accounting year. The sum of bad debt is recorded for subtraction purpose under “deductible amounts” for ascertaining total tax payable.

The total amount of taxable income and the amount of income tax payable for the year ended 30 June 2018 has been given below:

In the Books of
Technology Computer Pty Ltd Tax Reconciliation
For the year ended 30 June 2018
Particulars	Amount ($)
Net Accounting Profit before tax	1500000
Amounts not deductible and other assessable amounts
Add back
Trading Stock	40000
Unearned Service Revenue	50000
Depreciation Expenses	300000
Gains on Sale of Machinery	30000
Accounting profit on sale of land	100000
Cost of demolishing redundant building	5400
Feasibility Expenses	80000
Long service leave	60000
Cost of converting old storeroom into factory	14800
Total Add back	2180200
Amounts Deductible and amounts not assessable
Subtract
Cost of replacing roof	90600
Borrowing Cost	5000
Employee entertainment cost	45000
Bad Debts written off	5500
Total Subtract	146100
Total Income	2034100
Tax Payable at	27.50%
Net tax payable	559377.5

Conclusion:

On a conclusive note the net sum of tax that is payable by Technology Pty Ltd constitutes the sum which is payable by the entity to the taxation office. The report appropriately addresses each items listed by the company with reference to the appropriate case laws, rulings and legislations in order to offer the CEO with the better understanding of each items for taxation purpose.

References:

Barkoczy, S. 2014. Foundations of taxation law.

Brokelind, C. 2015. Principles of law.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2014.Principles of business taxation.

James, S. 2016. The economics of taxation.

Jover-Ledesma, G. 2015. Principles of business taxation: Cch Incorporated.

Kenny, P. 2014. Australian tax.

Kenny, P., Blissenden, M. and Villios, S. 2018. Australian Tax.

McCouat, P. 2018. Australian master GST guide.

Morgan, A., Mortimer, C. and Pinto, D. 2017. A practical introduction to Australian taxation law.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A. 2018. Principles of taxation law.

Taylor, C., Walpole, M., Burton, M., Ciro, T. and Murray, I. 2018. Understanding taxation law 2018.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2018. Australian taxation law.