X H16028 Tutorial Question Assig… •••
Week 4 John owns a convenience shop called City Cony. The following events ouurred for .n during 2019-2020 financial year.
Iii John Incurred legal expenses as he was sued for false advertising. John Purchased new fridge to the shop – $800. In addition, his builder added more space to the shop front. This cost him $22,000. Pe, John ordered 1000 new T-shirts. h printed City Com, logos for marketing purposes. These cots him $1,500. pv, John r ecelved a City of Sydney fine for putting his sales item for display outside his shop vdthout a permit. He required to apply for a permit to use the footpath.
Required: With reference to relevant legislation and case law advise John on the a…ability and/or deductibility of above events. (10 marks)
HCIMES
Weak S A. Alex purchased a CNC machine on 1st October 2019 at a cost of $110,000 (including GS, This machinery is estimated to have a useful life of seven yea.. B. Alex purchased a Holden or on 1 May, 2019 at a cost of $63,000, estimated to have a useful life of five years.
Required: With reference to relevant legislation and case law, disoss and calculate what amount is allowed as a deduction for the decline in value of the machine, and the Holden or discussed above, using both prime cast and diminishing value methods. (10 marks)
Sub… Directions:
The assignment has to be submitted via Blackboard. Each student will be permitted one submission to Blackboard only. Each student needs to ensure that the document submitted is the correct one.
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Further InfororotIoni For further information and additional learning resources, students should refer to their Discussion Board for the unit.
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Taxation Laws
By (Student Name)
Week 4
Expenses that are incurred wholly and exclusively in the generation of income are allowed for deduction in the computation of income tax. Therefore, in this case john will only deduct legal expenses for false advertising, and for the marketing T-shirts that he ordered. However, the fine he paid for displaying without a permit will not be deductible in the computation of income tax for City Conv (Barkoczy, 2019, pg.184). The fine is not an expense incurred in the generation of income for the company. The decision is based on the provisions of Division 8 Section 1 (1) (a) of the Income Tax Assessment Act of 1997 which says that deductions are allowable only if the expenses are incurred in producing or gaining the assessable income (Revenue v Capital (FCA) [2014] FedJSchol 24)
On the other hand, purchase of a fridge and additional space will be capitalised and these will be treated as capital expenses. Capital expenses are deductible in the long term and the depreciable amount is charged every year until the lapse of its useful life. The amount of depreciation reduces the total amount of the asset and is allowable in computation of assessable income tax of a firm.
Therefore john will only deduct legal expenses, marketing expenses, depreciation of fridge and building when assessing the income tax payable.
Week 5
Machinery (1st October 2019)
Cost $110,000, useful life 7yrs
Prime Cost method
Depreciation = Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)
= $110,000*(365/365)*(100%/7)
= $110,000*0.5836*(100%/7)
= $9,170.25
Diminishing value Method
Depreciation = Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)
= $110,000*(61/365)*(200%/7)
= $ 5252.18
Depreciation = $(110,000-5,252.18) *28.57%
= $ 16,498.55
Holden car (1st May 2019)
Cost $63,000, useful life 5 years
Prime Cost
Depreciation = $63000*(365/365)*(100%/5)
= $12,600
Diminishing value method
Depreciation = $63,000*(214/365)*(200%/5)
= $14,774.79
Depreciation = (63000-14774.79)*40%
= $19,290.08
A company is allowed to deduct the amount of depreciation when assessing income for taxation purposes. Depreciation is allowed on the capital expenditure of the business according to the provision of the Income Tax Assessment Act. The act further provides for how the amount of depreciations is charged by using either the prime cost method or diminishing value method. The prime cost method assumes that the value of an asset declines with a uniform value until the end of its useful life. The diminishing value method assumes that the value of an asset reduces yearly and the amount of depreciation is charged on the diminishing value of the asset (Barkoczy, 2019, pg.184)
According to the provisions of the Income Tax Assessment Act 1997, companies are allowed to deduct depreciation expenses on the assets of a capital nature. The amount of depreciation may be treated as a capital allowance in the assessment of income tax of a person (Mavropoulos, 2017, pg.319). Therefore, due to this, Alex will claim the depreciation amount on the machinery and the Holden car until their useful life elapses. Thus, the depreciation amount will help on reducing his tax payable only if the assets are used in the generation of income for the business.
References
Barkoczy, S., 2019. Foundations of Taxation Law. Oxford. 11th Edition.
Income Tax Assessment Act 1997.
Mavropoulos, B., 2017. Tax help for Australian start-ups. Taxation in Australia, 52(6), p.319.
Revenue v Capital (FCA) [2014] FedJSchol 24
