Australian Taxation Law - Assignment Example

Finance and Accounting Quiz C Taxable income Taxable income is the total assessable income less deductions Taxable income = Assessable income - deductions Assessable income = Ordinary income + Statutory income Paper 1 Phillip’s total taxable income Phillip’s income $ $ Rent 55,000 5,000 60,000 Tennis racquet sales 500,000 Closing stock 100,000 Less Opening stock (56,000) 44,000 Total assessable income 604,000 Allowable deductions $ $ Repairs Air conditioner 2,000 Loan interest 5,000 Roof 2,000 Light fitting 500 9,500 Expenses Frames 150,000 Strings 100,000 Donations 10,000 Labor 75,000 Factory rent 30,000 Advertising 15,000 Wages 80,000 460,000 Total allowable deductions 469,500 Total taxable income for Philip Total assessable income 604,000 Total allowable deductions (469,500) Total taxable income $ 134,500 Phillip’s total assessable income (division 6) comprises of the rent he receives from his rental property, plus the earnings received from sales made at the tennis racquet business. The $5,000 received after the trading period qualify as income for the period ended 30 June 2010. This is in accordance with accruals accounting method; income is recognized when it is earned. All this is in accordance and requirements of section 6-5. The trading stock for Philip’s business has to be evaluated according to the general rule of accounting for stock-S70-35(1). The difference between the opening and closing stock is added to assessable income because the closing stock exceeds opening stock-S70-35(2). The allowable deductions (division 8) include the $2,000 which was an expense from the replacement of the air conditioner-S25-10. The amount is minimized to the cost that Phillip incurred since he resold the air conditioning system which generated back income-S6-5. W Thomas & co v FCT? bought a building and did not know that the building had damage when thy bought it – the courts held that the ATO will treat expenditure that remedies defects, damage or deterioration to property as capital if the defect, damage or deterioration existed at the time of acquisition of the property, and did not arise from the operations of the person who incurs the expenditure. Note – the mere fact that the purchaser did not know that initial repairs were needed at the time of purchase is irrelevant. His interest accrued on a loan that was used in renovating the rental houses resulting to generation of assessable income-S25-25(1). The $500 he used for replacing the light bulb is also a deductable income since it falls under repairs and replacement-S25-10. Fine paid by Phillip to the local does not qualify as a deduction as per the S26-5 stating that penalties are not deductable amounts. The expenses incurred in manufacturing of the tennis racquet also, are a part of the deductable allowance as it is an expense incurred in generating an assessable income-S8-1. Under Division 30, donations are deductible allowances as long as they are voluntary and, no collateral claimed. This can be related to the charity donation. However, the gifts he presented to family and the 5 racquets he took for personal use do not qualify as deductable allowance-S26-54. Paper 2 Joan’s total taxable income Joan’s income $ $ Salary 375,000 Home ware magazine 24,000 13,500 537,500 Agreement 230,000 Payment for damages through accident 360,000 590,000 Total assessable income 1,127,500 Allowable deductions $ $ Pain and suffering 10,000 University Union fees 650 Text books 750 Photocopying and writing aid 350 Travel 450 2,200 Total allowable deductions 12,200 Joan’s total taxable income Assessable income 1,127,500 Allowable deductions 12,200 Total taxable income 1,115,300 Joan’s total taxable income amounts to $1,000,300. This is her total assessable income less allowable deductions according to taxation law. Her assessable income as per division 6 is total salary earned which is $375,000 instead of $500,000 as she resigned in March leaving her with on nine months for the year ended 30 June 2010. Earnings she received from supplying the Home ware magazine. This is the total $24,000 for the first 200 customers who subscribed for the period ending 30 June 2010. The other $13,500 is half of what the 225 customers subscribed for which extends into half of the next trading year. Arthur Murry Pty Ltd Case? You do not have to bring income into account until the service is provided (provision of future goods and services) e.g. magazine subscription only account for half if halfway through providing the subscription. Part of Joan’s income also includes compensation received from an agreement that saw her not work for a week which translates to loss of wages (section 6-5). The full amount is included in assessable income as the loss was incurred in the year ended 30 June 2010, (Merrill Lynch International (Australia) Ltd & Ors v FC of T.). The payments made to Joan as compensation except for medical expenses qualify as assessable income under division 6. Joan’s allowable deductions include self education expenses-S8-1. However, not all expenses are deductable. These include HECS as stated in-S26-20, and the first $250 of the self education expenses; this has been deducted from the Union fees leaving only $650 as deductable income. All the other expenses for self education are deductable except the expense of travel from work to home as it does not relate to self education. It also does not qualify for work travel expenses in-S25-100. Finn? Architect allowed deductions for a 1 year trip to study architecture – Note that TP kept notes, photographs, sketches and reports AND TPs employer encouraged and contributed to the cost of the trip. Work Cited: Woellner, R., Barkoczy, S., Murphy, S. & Evans C. Australian Taxation Law. 2009-19th edition. CCH Australia Read More