Tax Treatments For Technology Computer Pty Ltd

Depreciation on Machine

In Australia, it is the Income Tax Assessment Act 1997 (ITAA 1997) which is referred to by the tax payers, both individuals as well as corporate entities, in determining the taxable income and resultant tax liabilities for any income year. The standard income year in the country is from 1^st of July of a year to 30^th June of next year. Taking into consideration the provisions of ITAA 1997 and the instructions provided by the Australian Taxation Office (ATO), a detailed report outlining the tax treatments for each item  Technology Computer Pty Ltd, here in after to be referred to as Technology in this document, has incurred number of expenditures and earned income from different sources during the income year ending on June 30, 2018. The tax treatments of these items as per ITAA 1997 are enumerated below.   

1. Trading stock yet to be received by Technology is not part of closing stock hence, it has been excluded from accounting profit (White and Townsend, 2018).
2. Service revenue of $50,000 is not to be included in computing taxable income from business as the services in relation to the revenue is not yet completed.
3. Depreciation of $300,000 is added back to deduct entire depreciation as per ITAA 1997, i.e. $375,000 to compute taxable income from business (James, 2016).
4. The entire sale proceed received from sale of a machine is not a revenue receipt to the business. In such case only the gain or loss from sale of such machine is to be considered for calculating assessable income of business. Hence, the entire sale proceed receipt from sale of the machine has to be excluded form accounting profit and only the resultant gain or loss shall be adjusted with the profit to determine the taxable income from business. The following calculation will help in understanding the appropriate tax treatment for the item (Chardon, Freudenberg and Brimble, 2016).

Out of the total repair and maintenance costs, the cost of replacement of roof top and conversion cost of old store room into factory space are capital expenditures. Thus, these expenditures have to be added back to the accounting profit for computing taxable income from business. Demolition of redundant building cost is allowed though as it is for running day to day affairs of the company.

Initial borrowing cost is a capital expenditures and should be capitalized at the time of taking loan. The capital cost shall be written off each year in pro-rata basis over the entire duration of borrowing. The following calculation will explain the appropriate tax treatment for the borrowing cost (Ingles and Stewart, 2018). 

Sale of land is will give rise to either capital gain or loss to a tax payer thus, such transaction shall be recorded accordingly. In this case the entire capital gain must be deducted from the accounting profit and treated as capital gain separately from business income.  

Employee entertainment expenses is not a deductible expenditure. Assuming that the entertainment expenses on clients is necessary for the business, such expenditure will be allowed as deductible expenses in computing business income (Ingles and Stewart, 2017).

The increase in long service and holiday expenses will not be allowed as directors are interested and cannot sanction such increase in payment.

Research expenditures are deductible revenue expenditures until unless it is on development phase. 

The amount of bad debt $5,500 should have been adjusted at the time of acquisition and it is a capital item. The bad debt is not allowed as expenditures hence, to be added back to accounting profit.  

Technology computer Pty Ltd.’s Tax Reconciliation for the year ended on June 30, 2018:

Taxable income from business is $1,380,650 and the tax payable on business income is $379,679. The net tax payable is $409,679 as the company also had capital gain from sale of land on which it required to pay a 30% tax (Braithwaite, 2017).

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References:

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Ingles, D. and Stewart, M., 2018. Australia’s Company Tax: Options for Fiscally Sustainable Reform, Updated Post Trump. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3134982 [Accessed on 5 October 2018]

Ingles, D. and Stewart, M., 2017. Australia’s company tax: Options for fiscally sustainable reform. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3168953 [Accessed on 5 October 2018]

James, K., 2016. The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), pp.345-362.

White, J. and Townsend, A., 2018. Deductibility of employee travel expenses: The ATO’s guidance. Taxation in Australia, 52(11), p.608.

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