Tax (AU)
Assessment, Half A
Case examine and process
Greatest Baker Pty Restricted
Greatest Baker Pty Restricted (BB) is an Australian tax resident firm based mostly in Adelaide. BB manufactures biscuits and slices primarily for the Australian market, but it surely additionally has some worldwide patrons. BB is registered for GST and is a small enterprise entity. BB was included in 1986 and has been 100% owned by Ahn Notts since that point.
Letitia, BB’s Monetary Accountant, has offered you with BBs draft monetary statements for the revenue yr ended 30 June 2022, which embrace the next:
• assertion of revenue or loss
• assertion of economic place.
She has additionally offered further notes that will help you calculate BBs taxable revenue for the revenue yr ended 30 June 2022.
BBs assertion of revenue or loss
Notes $ $
Revenue
Gross sales 1 four,014,340
Dividend acquired 2 33,000
Different revenue 1 230,000
Complete revenue four,277,340
Bills
Value of products offered four (1,438,000)
Insurance coverage 6 (39,000)
Electrical energy (7,000)
Curiosity (22,900)
Depreciation (49,200)
Cleansing (three,720)
Fines and penalties eight (1,400)
Authorized charges 5 (11,000)
Hire (132,900)
Leisure 7 (5,800)
Repairs and upkeep 6, 9 (37,000)
Salaries and wages 10, 11 (1,151,400)
Charges (5,700)
Advertising expense (18,140)
Different bills three, 12 (15,880)
Complete bills (2,939,zero40)
Accounting revenue earlier than tax 1,338,300
BBs assertion of economic place
Notes 2022 2021
$ $
Belongings
Money at financial institution 1,780,520 406,950
Inventory 130,000 113,000
Property 1,029,000 928,000
Commerce debtors 12 143,000 185,000
Plant and tools three 480,980 315,000
Gathered depreciation (112,200) (63,000)
Complete property three,451,300 1,884,950
Liabilities
Commerce collectors 162,000 102,000
GST payable 10,000 eight,950
Provision for superannuation 11 20,000 eight,000
Provision for annual go away 10 21,000 25,000
Financial institution mortgage 402,000 243,000
Complete liabilities 615,000 386,950
Complete fairness
2,836,300
1,498,000
Fairness
Atypical shares issued 268,000 268,000
Retained earnings 2,568,300 1,230,000
Complete fairness 2,836,300 1,498,000
Notes
1. Considered one of BBs rivals purchased BBs worthwhile Lemon Tart biscuit product line, which BB had been manufacturing because the firm was included. Earlier than BB offered its Lemon Tart product line, it had not offered some other product strains. The acquisition settlement was signed and executed in June 2022. Beneath this buy settlement, BB acquired the next:
(a) $230,000 – for the Lemon Tart trademark. BBs value base in the trademark was nil. All proceeds for the trademark had been acquired in June 2022.
(b) $10,000 – for the sale of BBs inventory available of Lemon Tart biscuits at value. These biscuits had been all manufactured in Could 2022. The $10,000 is included in the gross sales quantity. On the time of sale, the market worth of those biscuits was $60,000. All proceeds for this sale had been acquired in June 2022.
2. The dividend revenue consists of:
(c) $7,000 acquired from Good Slice Restricted (Good Slice), a New Zealand tax resident firm that manufactures and distributes slices. This dividend was not topic to New Zealand withholding tax. BB has a 10% holding in Good Slice.
(d) $26,000 money dividend from Chocolate Chip Pty Ltd (Chocolate Chip), an Australian tax resident firm. Chocolate Chip is one among BBs key suppliers for chocolate chips. This dividend was absolutely franked. BB has a 1% shareholding in Chocolate Chip. Chocolate Chip has a company tax fee of 25% for imputation functions for the revenue yr ended 30 June 2022.
three. On 1 July 2021, BB bought a new espresso machine for the BB workplace kitchen for $1,980 and a bag of espresso beans for $20. For accounting functions, the espresso machine was capitalised and has an efficient life of 5 years. No depreciation has been calculated on the espresso machine for the revenue yr ended 30 June 2022. The price of the espresso beans has been included in ‘Different bills’ in the assertion of revenue or loss.
four. In Could 2022, BB found that an worker had stolen biscuits that had been manufactured in April 2022. The worker was dismissed; nevertheless, BB was unable to recuperate the price of the stolen items. The manufacturing value of the stolen biscuits was $2,500, however they may have been offered for $6,000. The price of this stolen buying and selling inventory was not recorded in the assertion of economic place.
5. On 1 January 2022, BB paid $11,000 in authorized charges to its solicitor to conduct authorized due diligence on BBs takeover try of a provider, which was unsuccessful.
6. In the course of the revenue yr ended 30 June 2022, BB made the next funds:
(a) On 30 September 2021, BB paid $22,000 to Inexperienced Pty Ltd (Inexperienced) below a contract for Inexperienced to supply month-to-month gardening upkeep companies for 12 months. The complete quantity was included in ‘Repairs and upkeep’ in the assertion of revenue or loss.
(b) On 1 July 2021, BB paid $14,000 below a contract for insurance coverage that will particularly cowl injury or lack of items throughout transit for the 24-month interval to 30 June 2023. The complete quantity was included in ‘Insurance coverage’ in the assertion of revenue or loss.
7. To broaden its buyer base, BB hosted a excessive tea with food and drinks in February 2022 in Melbourne, Victoria, for a choose group of potential shoppers. The price of the meals (which didn’t embrace any BB merchandise) and drink (which included champagne) was $5,800 and recorded as Leisure bills. BB didn’t pay FBT in respect of the excessive tea. The BB staff who had been required to attend the perform didn’t take part in the excessive tea.
eight. BB has been fined $1,400 by the South Australian authorities. $700 of the positive pertains to unlawful dumping of waste and the opposite $700 pertains to work, well being and security breaches. Your complete expense was included in ‘Fines and penalties’ in the assertion of revenue or loss.
9. The Repairs and upkeep expense in the assertion of revenue or loss consists of $15,000 paid on 1 July 2021 for the alternative of some roof tiles on the manufacturing facility constructing BB has owned since 2017. The constructing qualifies as an industrial constructing which was constructed in 2001. The roof tiles required alternative after being cracked or displaced in a dangerous storm. The damaged tiles had been changed with an equal tile made of comparable materials. The constructing is held on the tax fastened asset register.
10. The supply for annual go away represents the quantity of accrued expenditure for workers’ annual go away entitlements that has not but been taken by staff.
11. The supply for superannuation represents the unpaid superannuation contribution in respect of June 2022 wages, which will likely be paid in July 2022. BB solely makes contributions to complying superannuation funds.
12. In relation to uncertain money owed and dangerous money owed:
(a) Commerce debtors are recorded internet of a provision for uncertain money owed of $12,000, which has not been written off as at 30 June 2022 (in 2021 this quantity was $6,300). The motion in the availability was included in ‘Different bills’ in the assertion of revenue or loss.
(b) Considered one of BB’s prospects, Custard Slice Pty Ltd (Custard Slice), went into liquidation on 1 July 2022. Custard Slice initially owed $5,000 to BB, which has beforehand been included in BBs assessable revenue. As at 30 June 2022, Custard Slice nonetheless owed BB $four,000 for slices provided.
On three July 2022, BB’s accountant reviewed the commerce debtors stability for preparation of the 30 June 2022 stability sheet and wrote this quantity off as a dangerous debt. The debt was due to this fact not included in the commerce debtors stability in the 30 June 2022 stability sheet.
Half B
Question Assignment – Half (a) (52 marks)
You are an accountant at Kleinfield Chartered Accountants (KCA). Your supervisor has requested you to evaluate a tax reconciliation ready by the monetary accountant of one among KCA’s shoppers, Dream Builder Pty Ltd (DB).
DB is an Australian tax resident firm that builds residential properties. DB has an aggregated turnover of
$60 million for the revenue yr ended 30 June 2022, which is in line with prior revenue years. DB needs to minimise its taxable revenue the place attainable.
DB has ready its tax reconciliation for the revenue yr ended 30 June 2022 with temporary notes, as follows:
Notes $ $
Revenue/(loss) per monetary statements 2,180,000
Add
Accounting depreciation 1 48,000
Workplace constructing accounting depreciation three 25,000
Journey bills 7 7,000
Leisure four 9,000
Prepayment – tax charges 6 eight,000
Complete addbacks 97,000
Subtract
Tax depreciation 1 (259,000)
Internet capital acquire 2 (40,000)
Workplace constructing tax depreciation three (1,250)
Belief distribution 5 (1,950)
Prepayment – tax charges 6 (5,000)
Complete to subtract (307,200)
Taxable revenue/(loss) 1,969,800
Notes
1. For the revenue yr ended 30 June 2022, $48,000 of depreciation was recorded in the monetary statements. The depreciation pertains to new property bought of $259,000 and put in prepared to be used through the revenue yr ended 30 June 2022 and costing lower than $150,000 every. The accounting depreciation has been calculated in accordance with the efficient lives of depreciating property on the Australian Taxation Workplaces web site. This quantity doesn’t embrace any depreciation on the workplace constructing (refer to notice three beneath).(Subject – Clarification of tax therapy – Depreciation).
2. On 1 June 2022, DB signed a contract to promote vacant land held for long-term funding, making a revenue of $40,000 on the sale that was included in accounting revenue. The contract accomplished in July 2022. DB additionally has $50,000 of carry ahead capital losses from the sale of a portray it bought seven years in the past for $75,000. There have been no incidental prices referring to the acquisition and the sale of the vacant land. (Subject – Clarification of tax therapy – Internet capital acquire).
three. On 1 July 2021, DB accomplished the acquisition of a pre-used workplace constructing for $1,000,000 and began to make use of the constructing immediately. It was initially constructed in 1970 for $50,000, and the earlier proprietor made $200,000 value of structural enhancements in 2020. The constructing and enhancements qualify for the two.5% fee for capital works. DB has adopted the identical fee for accounting functions. (Subject – Clarification of tax therapy – Workplace depreciation).
four. In the course of the revenue yr ended 30 June 2022, DB bought $9,000 value of reward hampers from a native Indigenous enterprise. The baskets contained food and drinks, and so they had been offered to native shoppers upon completion of their respective constructing tasks. This quantity was included in the monetary statements as an leisure expense. No FBT was paid referring to this expense. (Subject -Clarification of tax therapy – Leisure).
5. In the course of the revenue yr ended 30 June 2022, DB acquired a $1,950 distribution from a unit belief, which was recorded in accounting revenue. DBs share of the web revenue of the unit belief was $1,400 (the distinction being timing variations between accounting and tax depreciation). Earlier than the distribution, DB had a $1,800 value base in the models. (Subject – Clarification of tax therapy – Belief distribution).
6. DB pay as you go its tax charges to a tax agent for its 2022 tax return, which is to be accomplished in August 2022. The monetary statements embrace a prepayment for the tax charges of $eight,000 at 30 June 2022. The pay as you go tax charges stability at 30 June 2021 was $5,000. (Subject – Clarification of tax therapy – Prepayment – tax charges)
7. DB paid $7,000 of journey bills on behalf of its gross sales representatives who visited the residential properties with potential shoppers. (Subject – Clarification of tax therapy – Journey bills)
Question Assignment – Half (b) (28 marks)
You are a tax advisor in accounting firm A-Plus Accounts Ltd (AAL). You have been requested to advise on the next consumer conditions referring to the revenue yr ended 30 June 2022. The shoppers (and their conditions) are not related to 1 one other, and all are Australian tax residents.
1. The Aroha Partnership
(Subject – Clarification of revenue tax therapy – Partnership curiosity incurred)
Rahul and Huhana are companions in the Aroha Partnership that carries on a enterprise offering wedding ceremony planning companies and venue rent for occasions. Every companion has contributed 50% of the partnerships $1,000,000 preliminary capital.
On 1 January 2022, the Aroha Partnership borrowed $400,000 from OzBank at an rate of interest of 5% per yr. The funds had been used to repay $200,000 of every companion’s unique capital contribution. Rahul used the cash to renovate his household residence and Huhana used the cash to begin a separate enterprise (impartial of the partnership).
Rahul and Huhana are not sure how a lot, if any, of the curiosity paid by the Aroha Partnership is deductible in the revenue yr ended 30 June 2022.
2. Rugged Up Pty Ltd (RUPL)
(Subject – Clarification of revenue tax therapy – Disposal of buying and selling inventory)
RUPL is a firm that manufactures woollen jackets and scarves. RUPL just lately donated 100 scarves to For the Youngsters Australia (FCA). FCA is a deductible reward recipient and can public sale the scarves to lift funds for its trigger. RUPL was named as a donor on FCA’s web site and talked about on the public sale occasion in trade for the donation. This donation was a part of RUPL’s advertising and marketing actions and in line with its firm values, which embrace giving again to the neighborhood. Every scarfs market promoting value is $120 and the manufacturing value is $55. All the donated scarves had been manufactured through the prior revenue yr and RUPL data its buying and selling inventory at value.
RUPL’s accountant is not sure the way to account for the donated scarves in the revenue yr ended 30 June 2022.
three. Cash Waster Pty Ltd (MW)
(Subject – Clarification of revenue tax therapy – Loss carry again tax offset)
MW is a firm that’s not a base fee entity. Since its incorporation in 1992, MW has maintained a good tax compliance historical past with all tax returns and different lodgements occurring on time.
• Within the revenue yr ended 30 June 2022, MW had an aggregated turnover of $1 billion and made a tax lack of
$four million. Its closing franking account stability as at 30 June 2022 was $three million.
• Within the revenue yr ended 30 June 2021, MW made a tax lack of $eight million.
• Within the revenue yr ended 30 June 2020, MW paid $2 million in revenue tax and derived $300,000 of internet exempt revenue.
MW is in search of to maximise its revenue tax refund for the revenue yr ended 30 June 2022
