Challenging the Audit Activity - Assignment Example

Task Dudley Doright conducts a small business but chooses not to take advantage of the small business concessions. His receipts for the year ended 30 June 2010 are as follows:- RECEIPTS $ Receipts from customers 443,500 Insurance recovery for loss of income following fire at premises 300,000 Commissions from suppliers 5,500 Proceeds of business loan 320,000 Gift from wife to assist with business cash flow 35,000 Fully franked dividends 73,500 Unfranked dividends 11,300 Proceeds of term deposit (includes capital of $30,000) 31,800 Ledger balances are as follows:- Account receivable as at 30 June 2009 29,800 Account receivable as at 30 June 2010 35,500 Trading stock held at 30 June 2009 56,000 Trading stock held at 30 June 2010 61,500 Cash drawings during the 2010 year 35,000 Stock taken during the 2010 year 4,700 Required: Calculate the assessable income of Dudley Doright under the accruals basis for the year ended 30 June 2010. = 751,700 Considering that A/R changed the calculation is needed to figure out the revenue from sales on account. Therefore, we need to add the customer receipts to the ending receivables as of 30 June 2009 then subtract the ending receivables as of 30 June 2010 to get 437,800. This number represents the taxable revenue received for the entire year. The insurance recovery is to replace any income we would have made therefore it is also taxable. Solution: A/R June 30,2009 29800 Add: Customer Receipts 443500 Less: A/R June 30,2010 35500 Balance 437800 Add: Insurance Recovery 300000 Unfranked Dividends 11300 Interest from term deposit (31800-30000) 1800 Income from trading stock (61500-56000-4700) 800 Assessable Income 751700 Task 2 – Uniform Capital Allowances System (Depreciation) Manu the chef operates a small cafe. He does not wish to take advantage of the small business concessions. Assets that Manu had acquired before 10 May 2006 and held at 1 July 2009 included. Cost ($) Adjustable Value 1/7/09 Effective Life (years) Depreciation Method Furniture 5,000 900 7 Diminishing Value Carpets 18,000 1,200 4 Diminishing Value Coffee Machine 7,000 1,400 7 Prime Cost Freezer 6,000 950 3 Diminishing Value Oven 6,100 700 6 Diminishing Value Hot water service 2,500 1,200 8 Diminishing Value Curtains 9,000 1,500 5 Prime Cost Manu had also commenced the use of a low value pool on 1 July 2005. The pool balance as at 1 July 2009 was $4,100. During the year, Manu purchased the following new depreciable assets Asset Cost ($) Date of Purchase Effective Life (years) Refrigerator 850 1/9/09 6 Notebook Computer 900 1/4/10 5 Cash Register 2,500 1/5/10 7 Required: (a) Calculate the deduction for decline in value available to Manu in respect of the year ended 30 June 2010 = 13,819.90 Solution: COST Adjusting Value Depreciable Cost life depr. Rate Depreciation Furniture 5000 900 4100 7 1.5 0.214286 878.5714286 Carpets 18000 1200 16800 4 1.5 0.375 6300 Coffee Machine 7000 1400 5600 7 1 0.142857 800 Freezer 6000 950 5050 3 1.5 0.5 2525 Oven 6100 700 5400 6 1.5 0.25 1350 Hot Water Service 2500 1200 1300 8 1.5 0.1875 243.75 Curtains 9000 1500 7500 5 1 0.2 1500 Refrigerator 850 6 1 0.166667 141.6667 0.8333 118.06 Note book/computer 900 5 1 0.2 180 0.2500 45.00 Cash register 2500 7 1 0.142857 357.1429 0.1667 59.52 Total Decline in value (Exclusive of Low Value Pool) 13,819.90 Task 3 – Capital Gains Mark Barber is a single resident taxpayer with no dependants. He following has been taken from his taxation records. Personal Residence Private residence purchased in March 1997 for $300,000 Mr Barber currently lives in the house and its market value as at 30 June 2010 is $800,000 Rental Property in Port Macquarie Purchased on 7/8/89 for $102,000 ( the property was built in 1971) Exchanged contracts for the sale of this property on 30 June 2010 for $520,000 Settlement of the sale was finalised on 12 September 2010 Legal expenses on purchase $1,800 paid August 1989 Stamp duty on purchase $2,900 paid August 1989 Additional room added to property paid for on 1 July 2006 for $20,000 Landscaping to the property paid for on 1 July 2004 for $900 Legal expenses on sale $3,000 paid September 2010 Real estate agents commission on sale $2,500 paid September 2010 Shares Up Ltd shares sold on 11 February 2010 for $20,000, purchased on 1 May 1985 for $12,000 Down Ltd shares sold on 20 April 2010 for $15,000, purchased on 1 June 1993 for $14,000 Left Ltd shares sold on 2 August 2009 for $100,000, purchased 1 May 2005 for $25,000 Right Ltd shares sold on 30 June 2010 for $30,000, purchased on 1 April 2010 for $18,000 Other information Mr Barber has capital losses carried forward from previous year of $5,000 Rental income from Port Macquarie property from 1 July 2007 to date of sale $10,200 Total allowable deductions in respect of this rental income for the year ended 30 June 2010 was $17,600 (including capital write off 2.5% x $20,000 = $500) Required: (a) Calculate the net capital gain for Mr Barber for the year ended 30 June 2010 (b) Calculate the taxable income of Mr Barber for the year ended 30 June 2010 Task 4 – Audit Activity Mr. Jack Cashman (senior) of 100 George Street Sydney 2000 lodges his own returns and does not have a tax agent. On 1 February 2009, he received an amended assessment for the year ended 30 June 2008 from the Commissioner of Taxation as a result of an ATO audit. The amended assessment included an amount of $6,500 omitted interest from an account No 246810 held at the St George Bank in Market Street. The amended assessment imposed an amount of $3,500 additional tax and penalties. Mr. Jack Cashman has checked his records and has ascertained that this bank account does not belong to him and he does not have any accounts at that Bank. However he knows that his son who has the same name as himself i.e. Mr. Jack Cashman (junior) and who lives at the same address as himself does have accounts at that branch and he suspects that the account really belongs to his son. Required: Advise Mr. Cashman of his objection rights indicating what steps he has to take to ensure that the objection is valid. Mr. Cashman needs to obtain copies of his identification such as his birth certificate and proof of his tax payer id as well as that of his son’s. He can also obtain a certified letter from his son and the bank indicating that the account belongs to his son (junior) and not senior. He could also go so far as to take his son down to the office with him and meet with someone from the Commissioner of Taxation office to straighten the matter out. As a last resort, he can obtain a tax attorney to help him ensure the objection is valid. Task 5 – Tax Offsets Paul is a 58 year old resident of Australia who is married with the following dependants: Joanne, his wife who has separate net income of $95,000 Son Con aged 23, who is a full time student and has separate net income of $1,840 Son Bill aged 19, who is engaged in full-time employment and has separate net income of $33,000 Daughter Angela aged 15, who has separate net income of $600 Paul’s father Richard who has separate net income of $9,000 Joanne’s mother Doreen has separate net income of $3,000. Doreen passed away on 31 March 2010. A summary of Paul’s medical expenses for the year ended 30 June 2010 shows: ITEM PERSON GROSS AMOUNT $ MEDICAL REFUND $ Doctor Paul 800 300 Hospital Angela 1,400 500 Chiropractor Paul 750 200 Doctor Con 700 200 Doctor Joanne 120 Nil Doctor Bill 550 300 Hearing Aid Doreen 650 350 Chemist Joanne 140 Nil Chemist Richard 380 Nil Naturopath Paul 600 Nil Physiotherapist Joanne 420 100 Health Insurance Paul 3,000 N/A Other information Paul was entitled to a $100 medical fund refund for Joanne’s physiotherapy expenses but chose not to claim it until July 2010 Joanne’s chemist expenses included $60 of non-prescribed vitamins Richard’s chemist expenses all related to prescription medicines The health insurance included hospital cover. The reduced premium was not taken Joanne’s physiotherapy treatment was referred by her doctor Paul’s chiropractor and naturopath was suggested but not referred by his doctor During the year, Paul’s taxable income was comprised of interest from investments of $40,000 and wages from a part time job of $57,000 Required: Calculate any tax offsets to which Paul is entitled Paul can take the net of his medical spending as a tax offset: 7,560.00 (subtracted refund amount from gross amount then added all of them up) Paul can take a tax offset for his son Con: 2,190.00 (used max amount since income was low) Paul can take a tax offset for his daughter Angela: 2,190.00 (used max amount since income was low) Paul can take a tax offset for Joanne’s mother Doreen: 1,645.00 (used max amount since income was low) Task 6 – Deductions for self employed Robert is a self employed plumber in his own business and has incurred the following expenses: Car expenses (see note 1) 12,900 Subscription to local Golf club (Robert often meets with his large clients over lunch in the club to secure future jobs) 50 Borrowing expenses for loan to purchase new plumbing equipment (loan was for 4 years and was incurred on 1/4/10) 800 Advertising in local paper 370 Purchase of protective overalls 230 Personal superannuation contributions 2,000 Subscription to Australian Plumbers Association 220 Entertainment expenses (lunches with clients in Golf club) 350 Laundry of protective overalls 220 Note 1 Robert leased a 3000cc motor vehicle and maintained a log book for 12 weeks during the year. During the 12 week period Robert travelled 4,000kms of which 1,000kms were business related. Costs incurred during the year include Petrol, oil and servicing 2,100 Lease payments 7,600 Registration and insurance 2,700 Speeding fines 500 TOTAL 12,900 Note that the car had a market value of $30,000 at the inception of the lease Required: Identify which amounts Robert is able to claim as deductions in the year ended 30 June 2010. Show all four methods of calculating the motor vehicle expenses. - for the four methods of calculating the motor vehicle expenses - for the other deductions Task 7 – Prepare Income Tax Return Please use the information provided for the year ended 30 June 2010, (a) Calculate the taxable income of the taxpayer showing all workings (b) Calculate the tax payable of the taxpayer showing all workings (c) Complete the individual tax return (d) Complete the supplementary tax return (e) Complete the business schedule Background Mr John Philips John is single and is a electrician employed on salary and wages. Also runs a business working for himself as a self employed electrician on weekends. Born on 15 May 1956. Postal and home address is 200 Chisel Street Arncliffe NSW 2205 Phone 9770-2345 Tax File Number 123456789 He does not want any tax refund deposited in his bank account Receipts Gross Wages from XYZ Electricals (ABN 12345678910) Gross wages $57,000 (PAYG $16,000), employed 1/7/09 to 30/6/10 Interest from ANZ Bank deposit $1,070 (net of $930 TFN tax withheld) Franked dividends from David Jones Ltd $900 plus $300 franking credit Income from part time army reserve $3,000 Payments Replacement of tools $300 Donations to Salvation Army $200 Life insurance $600 Course to update electrical knowledge $800 Medical expenses after rebate $3,500 Protective work clothes $120 Tax agents fee $150 Self employed details John has earned $17,000 in his weekends as a self-employed electrician under the name “John Philips Electrical Services” (ABN 8888888888). His expenses to that earn that income are: Insurance $1,400 Income protection insurance $600 Stationery $240 Entertainment of clients $400 His mobile telephone bill for the year was $800 of which he estimates 70% business John uses his car at weekends as a self-employed electrician to carry bulky tools to jobs. He drives a 3 litre Falcon and has travelled 6,000 kilometers in the year. Other information John has private health insurance with HCF and has combined hospital and general cover. His membership number is 987654321. John has taken the high premium option with HCF and has paid $2,000 in premiums. (a) Calculate the taxable income of the taxpayer showing all workings – 68,160.00 (b) Calculate the tax payable of the taxpayer showing all workings – 15,020.40 (c) Complete the individual tax return – plug numbers from above into tax return (d) Complete the supplementary tax return - plug numbers above into tax return (e) Complete the business schedule – plug numbers above into schedule Note: A blank tax return, supplementary tax return, and business schedule were not provided. Read More