Major Questions in Taxation Analysis - Term Paper Example

TAXATION ASSIGNMENT Mary Bran Year ended 30/06 Part A Issues Can those expenditures be claimed as deductable in Mary Bran’s assessable income? 2) Are those expenditures capital in nature or revenue in nature? 3) What type of deduction can be claimed and what it is the source of that deduction? Sources: 4-15 ITAA97 (tax equation); S8-1(general deduction); S8-5 (specific deductions); Section 25-10; Section 28-13; S25-30; S70-50; S40-880; S110-25; Application： According to 4-15 ITAA97, the tax equation is: Taxable income= Assessable income-Deductions Assessable income Sales 450 560 Add debtors 25 000 Less sales return ----------- Net sales $475 560 Deduction COGS 2 500 Wages costs 36 900 Electricity costs 5 500 Car expenses 14 060 Borrowing costs Interest payment 137 833 23 000 Advertising costs 4 200 Depreciation cost on computer 1 357.88 Depreciation cost on shelving 226.03 Depreciation cost on desk 361.64 Legal and Establishment costs 1300 Miscellaneous costs 2 650 Total deduction 2$22$229 888.55 Taxable income $245671.5 The total tax payable is equal to: $245671.5 *30%= $73701.5 Deductions analysis: No. Rules Allowance deductions 1. Wages S8-1(1)(b) refers to any loss or outgoing necessary that has incurred in carrying on a business for the purpose of gaining assessable income Wages in amount of $34500 that have already been paid to employees is an outgoing for operating business, which can be deducted from assessable income, as well as $2400, even though this amount have not been paid yet, but the services have been provided by employees, and it can still be regarded as outgoing. Total can claim a deduction of $36900. 2. Electricity S8-1(1)(b) refers to any loss or outgoing necessary that has incurred in carrying on a business for the purpose of gaining assessable income Electricity cost is an essential expenditure for the outgoing activity of the firm, and can be deducted in amount of $5500 from the assessable income. 3. Car Expense Section 28-13 ITAA97 refers to the car expense, which is a loss or outgoing related with the operating and depreciation of a car used to derive assessable income, and the percentage of costs related to the business can be claimed as deduction, e.g. repair, maintenance and insurance costs. There are four alternative method are available to taxpayer to calculate the deduction for car expenses, which are provided in Appendix no.1. Chossing the cents for kilometer method, the amount is $7560 plus another car expenses $6500, arrives to a total amount of $14 060. 4. Legal and Establishment costs S8-1(1)(b) refers to any loss or outgoing necessary incurred in carrying on a business for the purpose of gaining assessable income. Section 40-880 refers to a deduction in equal amounts over five years period for certain capital expenditure not dealt with elsewhere in the income tax laws (e.g. starting a business) Establishment and legal costs were a capital cost and could be amortized over 5years. Therefore, 6500/5years= $1300, can be deductable from assessable income. 5. Stamp Duty S110-25 ITAA97 – Not deductible from assessable income 6. Borrowing costs S25-30 ITAA97 – states that a deduction is allowed for expenditure incurred for borrowing money if the money is used for producing assessable income. The deduction is spread in equal amounts over the first 5 years of the loan’ period or the period of the loan, whichever is shorter. The amount is 400000/3 years= $133 333 plus the other borrowing costs – $4500 it arrives to a total of $137833. 7. Interest payments S8-1 I S8-1 ITAA97 – refers to any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. An amount of 400000*7%*300/ 365 days= $23000 is deducted from assessable income. 8. Advertising S8-1(1)(b) refers to any loss or outgoing necessary incurred in carrying on a business for the purpose of gaining assessable income An amount of $4200 can be deducted from assessable income. 9. Depreciation on computer Section 25-10(1) of the ITAA97 refers to a deduction for expenditure on depreciating assets. And S 40-30(1) sustains that a depreciating asset has a limited effective life and can reasonably be expected to decreases in value over the time it is used. The depreciation schedule is provided in Appendix no. 2. 10. Depreciation on shelving Section 25-10(1) of the ITAA97 refers to a deduction for expenditure on depreciating assets. And S 40-30(1) sustains that a depreciating asset has a limited effective life and can reasonably be expected to decreases in value over the time it is used. The depreciation schedule is provided in Appendix no. 2. 11. Depreciation on desk Section 25-10(1) refers to a deduction for expenditure on depreciating assets. And S 40-30(1) sustains that a depreciating asset has a limited effective life and can reasonably be expected to decreases in value over the time it is used. The depreciation schedule is provided in Appendix no. 2. 12.Miscellaneous costs S8-1(1)(b) refers to any loss or outgoing necessary incurred in carrying on a business for the purpose of gaining assessable income Conclusion: As shown by the deductions analysis and by the computations, the taxable income equals the assessable income less allowance deductions, and is $245671.5. Considering that the tax rate is 30%, the amount of tax is $73701.5. There are no tax offsets so that total tax liability is equal to the amount of $73701.5. Part B Australian Taxation Office PO Box 9990 PENRITH NSW 2740 Dear Mr. / Ms., On 1 July 2012, it was constituted a partnership between Mary Bran (former sole proprietor) and Joe Mason. The business was previously started on 1 September 2011 by Mary Bran, and consisted of an architect’s practice, which main area of service is to provide services to home builders and small business. The business was located in Northcote and still is, and the startup costs were in amount of $ 600.000 (partly financed with debt). In what concerns the contribution of the new partner – Joe Mason, this was in amount of $ 600.000. The contribution of the new partner Joe Mason was made in capital, and no other resources were brought as initial contribution. In application of section 92 of the Income Tax Assessment Act 1936 (ITAA36), the partnerships assets include dutiable property (in this case it was the office premise valued at an amount of $ 800.000), so the transfer of a partnership interest is likely to determine a change in the beneficial ownership of the partnership property. Besides the office premise in amount of $ 800.000, the business also has other assets consisting of new equipment (computer, desk and shelving) and a vehicle (Audi) in amount of $ 8800, which are in the first year of utilization, and also are depreciated using the prime cost method and respectively, cents per kilometer method. It also must be mentioned that the business was firstly financed with debt that is with a mortgage of $ 400 000 at a fixed interest rate of 7% for three years. A tax return was provided for the year end 30 June 2012, which included all the deductions from the assessable income and was in amount of $ 73701.5, whereas the total taxable income, was in amount of $ 245671.5. As it is specified in the law mentioned above, each of the partners pays income tax on the net income and loss of the partnership proportionate to their partnership interest. The tax losses of this partnership are supported by the individual partners. In the case of a loss in a year of income, then (under section 92 (2) of the ITAA36) a partner is able to deduct to the level of the partners interest in the partnership, loss attributable to a period when the partner was a resident in Australia for tax purposes. In the previous mentioned law, it is indicated that the business constituted as a partnership allows the partners to interpret what proportion of the profits each of the partners is entitled to. Here, there is no restriction or relation between a partners share and the amount of initial capital they have contributed to the partnership. So, although I and my partner Joe Mason form a partnership for which we made unequal contributions to the initial capital, if we agree that each is going to receive an equal proportion of the partnerships earnings. Because this situation brings tax consequences for we as partners (starting from the fact that we must pay taxes separately for each share in the partnership and we must provide an annual tax return to the Australian Taxation Office (ATO), under the section 91 ITAA36), I seek professional advice about this tax issue. This issue particularly concerns me due to the fact that as the law requires, partners are being exposed to tax on their share of the earnings of the partnership or are entitled to a deduction for their share of the losses supported by the partnership, as shown in their own tax returns. Also, because I started this business as a sole proprietorship, it is in my interest to make the right decision concerning this taxation matter. Due to the fact that this matter is over your expertise, your advice will be fully appreciated. I hope it was provided in this letter all the necessary information, relevant to give the proper advices, and notifications in changes to documents mentioned above. I would be grateful to receive your advice by 1 August 2012 in order to apply correct actions for this situation. Yours sincerely, Mary Bran Date: 6 September, 2012 Name of the practice: Mary Bran References: Barkoczy, S 2012, Foundations of Tax, 3rd ed., CCH Australia Limited, Sydney. Appendix Appendix no. 1 Purchased value Logbook Method One-third of actual expenses Method 12% of original value Method Cents per kilometer Method Audi $ 65,000 $ 24,486.3 $ 16,324.20 $ 5,876.71 $ 7,560.00 Appendix no. 2: Depreciation Expense Purchased value Acquired date Days of ownership Effective life Prime Cost Method Diminishing Returns Method Computer $ 6,500 1-Sep-11 305 4 $ 1,357.88 $ 2,036.82 Shelving $ 4,500 1-Oct-11 275 15 $ 226.03 $ 339.04 Desk $ 4,800 1-Oct-11 275 10 $ 361.64 $ 542.47 Read More