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Taxation law Assignment Brief
1. This taxation law assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook.
2. It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students can submit all assignments for plagiarism checking (self-check) on Turnit- in before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook
3. There are three questions that required calculations. Show all workings on a separate attachment.
Paladin Pty Ltd is a private company incorporated in 1995 and engaged in the development and sale of computer hardware.
The company makes sales on terms that require a 10% deposit and the balance payable in equal monthly instalments over three years at 10% interest pa. Income in respect of term sales is brought into accounting income over the term of the agreement. This is the first year that sales have been made on this basis. Previously terms were "net 30 days".
This year (2012/13) the company commenced to provide a facility whereby customers can enter into a maintenance agreement in respect of new hardware purchased. The agreement is for three years and Paladin undertakes to provide maintenance servicing when required at no additional cost to the customer. The cost of the agreement is $10,000 p.a,payable in advance. The agreement provides that it is non-assignable and non-refundable in the event of disposal of the hardware. However, the company sales' representatives state that there will be an abatement of the maintenance agreement charges if equipment, the subject of the agreement, is traded-in for new equipment with Paladin during the term of the agreement.
The following financial data for Paladin Pty Ltd has been assembled for the year ended 30/6/13:-
- Accounting Net Profit before tax is $2,100,000
- Income in respect of term sales is brought into accounting income over the term of the agreement. Deferred income at 30/6/13 is $225,000 which amount includes interest of $82,500.
- Income in respect of maintenance agreements is brought into accounting income over the period of the maintenance agreement. Deferred income liability at 30/6/13 is $74,500. It has been estimated that of this amount, possibly $30,000 of contracted service will not be met because customers have disposed of equipment to third parties.
- In June 2013 the company prepaid $25,000 for trading stock to be delivered in August. The company obtained considerable discounts for the advance purchase. The amount was capitalised in the accounts.
- For tax purposes, trading stock on hand is valued at cost and includes material costing $15,000 that has become obsolete and should be scrapped, although it might realise $2,000 at auction.
- A fully franked cash dividend of $10,500 from a resident Australian public company is included in net profit.
- At 30 June 2013 provisions were raised, for the first time, for the following anticipated future expenses;
- Warranty $20,000
- Stock Obsolesence $15,000.
- No amounts have been charged against these provisions during the current year.
- An amount of $57,000 was paid on 1 March 2013 for two year's rental of office space. The lease expires on 28 February 2015. In the company’s financial accounts an amount of $9,500 was expensed and $47,500 capitalised.
- On 1 June 2013 the managing director commenced three months long service leave and was paid $22,000 in advance. The amount was debited against a Provision for Long Service Leave Account.
- In 2008 the company’s board decided existing rented accommodation was inadequate and it resolved to construct a purpose built facility. In that year $250,000 was paid for preliminary architectural designs. In 2009 land costing $1.25m was acquired and $50,000 paid to demolish an existing structure. Construction of the new factory commenced on 1 September 2011 at a cost of $2.5m. Machinery equipment was installed on 1 June 2012 and manufacturing operations began on 1 August 2012. Landscaping of the factory site was completed on 30 September 2012 at a cost of $40,000. Factory depreciation expense in the company’s accounts was $284,000.
i) Refer to the decision in Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314.
In your own words, briefly describe the facts, issues and conclusion in that case.
ii) Advise Paladin Pty Ltd whether the principle in Arthur Murray applies to:
- Deferred income on term sales; or
- Deferred income on maintenance agreements.
- Advise how the amount of $82,500 interest is treated for tax purposes for the 30th June 2013.
- Advise how the amount of $30,000 warranty services is treated for tax purposes for 30th June 2013.
[Note: Case reports and extracts of Arthur Murray are widely available or the decision may be accessed via www.hcourt.gov.au]
Advise how items (iv) to (ix) are treated for tax purposes and indicate whether, in determining taxable income, the amount of $2.1m net profit should be increased or decreased. Refer to appropriate sections of the Acts and authorities. [That is, does the tax treatment differ from how the items would have been dealt with in the companys’accounts. If the tax treatment is the same as the accounting treatment, you should explain how that comes about and what sections of the Acts apply.]
i) Refer to item (x). Advise the company what tax deductions are available for the costs connected with the new factory under s8-1, Div 40 or Div 43. [You should include calculations of any allowable deductions.]
ii) Calculate Paladin’s tax liability using $2.1m as the base and making the necessary adjustments calculated in Required 2 & 3(i).