Question
Australian federal government on taxable income explains what qualifies for tax purpose as an income and how that income is to be taxed (Woellner, Barkoczy, Murphy, Evans, and Pinto, 2010.Pg.17.) The tax body recognizes individual incomes as what is personally earned by an individual either as salary as income from the sole proprietorship form of business. This income on the individual is taxed at the progressive rate that is in a bracket form range. The other type of taxable income is partnership and trust income that is levied precisely the same way individual incomes are levied. Corporate business incomes, on the other hand, are deemed to be incomes from registered private and public companies which are levied in two corporate rates that are different, i.e., for resident companies and non-resident ones.
According to Australian Accounting Standard Board 1 (AASB 101) and International Accounting Standard 1(IAS 1) on accrual basis concept, any expense transaction of accounting is required and expected to be matched with the related revenue which is, of course, reported when the expenditure takes place and not when cash is made. It is through this concept that Corners’ Pharmacist sales under the Pharmaceutical Benefits Scheme are being matched with the respective cost of sales and stocks difference that led to the sale. Similarly, this applies to rent and salary expense as well as the cost of sales of the product that were sold. Credit card sales are likewise seen to use the concept since only those actual credit card sales reported will be recognized and not the one with the $10000 extra reimbursed amount.
Corner’s pharmacy shop taxable income ideally is seen to result from the sales of pharmacy products as cash sales, credit card sales and as pharmaceutical benefit scheme net off the relevant costs that led to that income generation which in our case is the cost of sales, rent expenses as well as salary expenses (Freedman and Crawford, 2010.Pg.21.)
Corner’s chemist sales revenue appears as credit card sales, cash sales and as pharmaceutical benefit scheme sales. These three items form part of revenue for the pharmacy that is indeed seen to appear as credit balance items in the taxable income statement account that is matched against the cost of sales, salary and rent expenses which on the other hand are the debit balance. Cost of sales involves the actual cost of the materials that were sold, and it entails the difference between the summation of both first stock and purchased stocks that indeed give the cost of the item that was consumed. Opening stocks includes the initial balance of the stock that chemist had before the start of operation of that tax year. Purchases on the hand entail the cost of procured items in that year of tax and finally closing stock is the close balance of the chemist stocks that were counted at the end of that tax year.
It is good to note that Corner’s opening and closing stocks balance result from the stock count that is mainly conducted at the end of the tax year. It is primarily valued at the historical cost to give the actual face value of the stocks at the time of valuation. Expenses incurred during the operations of Corners chemist are likewise items that have to be accounted for in the determination of taxable income. According to the Australian Tax Office on expenses, it is prudent to match all costs that relate to revenue to form part of allowable taxable deduction mainly because they were incurred to generate revenue.
In this business, therefore, salary expense is deemed as the allowable deductible expense because the revenue generated by Corner Pharmacy was as a result of sales service offered by three assistant’s employees. Rent on the other hand is the fixed expense which must be honored to have the shelter of where the chemist will conduct its business. The cost of sales, rent, and salary expenses are indeed certain expenditure in the eyes of business operations that can’t be foregone.
The above analysis is therefore used in the calculation of Corners Pharmacy Taxable Income as illustrated;
Sales in; $ $
Cash form 300,000
Credit Card form 150,000
Pharmaceutical Benefit Scheme form 200,000 650,000
Less Cost of Goods Sold;
Opening Stock 150,000
Add Purchases 500,000
Less Closing Stock (200,000) (450, 0000
Rent 50,000
Salary 60,000 (110,000)
Total Taxable Income(Profit) 90,000
In that year of Tax Corners, chemist did a revenue worth $90,000 as the amount that is to be subjected for tax either as part of individual income tax or as a corporate tax in case Corner chemist is registered as a legal entity person for tax purposes.
References;
Freedman, J. and Crawford, C., 2010. Small business taxation.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation law. CCH Australia.
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