Liam is in the business of selling computers

Question 1 30 Marks

Liam is in the business of selling computers and related software from a building he owns in Haymarket, Sydney. Most customers pay at the time of delivery. However, Liam provides credit to his largest customers. During the year ended 30 June 2018 Liam received $2,800,000 in cash for sales of computers and related software. Sales which had been made during the year ended 30 June 2017, but which were paid for in the year ended 30 June 2018 were $260,000 and are included in the $2,800,000 above. At 30 June 2018 sales of computers and related software not yet paid for amounted to $430,000.

During the year ended 30 June 2018 purchases of computers and related software were $1,800,000 and at the end of 30 June 2018 stock on hand was $150,000 (valued at cost) or $285,000 (valued at market). Liam’s closing stock for the year ended 30 June 2017 was $630,000. During the year ended 30 June 2018 Liam gave away 4 computers to St Vincent’s De Paul, a local charity. The computers cost him $1,240 each and had a market value of $1,630 each.

One of Liam’s customers bought a computer for $2,900 on credit on 1 April 2017 and the invoice was issued on the same day. The customer asked John for more time to pay on 1 August 2017 and so John immediately made a provision in the accounts for doubtful debts of $2,900.

In addition, during the year ended 30 June 2018 Liam received a cash inheritance of $80,000 from a relative who died on 14 August 2017.

During the year ended 30 June 2018 Liam paid rates and taxes of $5,270 on a vacant block of land. Aramis was thinking of putting a holiday house on the block of land.

Expenses that related to the business during the year ended 30 June 2018 were as follows:

  • Telephone expenses $23,500
  • Wages – this included $150,000 paid to his spouse who worked for 3

days a week in the business. Another employee who also did the same

job for 3 days a week was paid a market value wage of $90,000. $380,000

Liam had an overall loss for the year ended 30 June 2017 from all his activities of $180,000 (no capital losses were included in this amount). Included in this loss of $180,000 was a donation to a charity of $55,000. In addition, during the year ended 30 June 2017 Liam received exempt income of $16,000. Liam also had carried forward Net Capital Loss of $25,500.

All depreciating assets, if any, have an effective life of 8 years and were purchased on 1 July 2017 unless otherwise stated. He does not wish to use the SBE election.

Required:

Calculate Liam’s taxable income or loss for the year ended 30 June 2018. Liam wants to minimise his taxable income for this year.

You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculation. Ignore residency, Fringe Benefits Tax and Goods and Services Tax issues.

Details Authority Explanation Assessable
Income
Deductions
Cash Sales Sec 6-5   Ordinary income 2800000   
Opening balance Debtors – (accounts receivables)  Sec 6-5   Accruals Taxpayer   260000 
Closing balance Debtors – (accounts receivables)  Sec 6-5   Accruals Taxpayer 430000   
Stock given away Sec 70-90   4 computers @ 1630 each 6520  
But allowable deduction as given to charity in positive income year 6520
Inheritance    Gift of cash transferred through death is exempt CGT 0    
Purchases Sec 8-1   Purchase of trading stock is an allowable deduction   1800000 
Trading Stock Adjustment Valuation  Sec 70-35   O/S greater than C/S so adjustment is deductible O/S 630,000 – C/S 150,000   480000 
Telephone  Sec 8-1 Expense incurred in running the business    23500 
Wages Sec 8-1/Sec 26-35 Spouse deduction is only $90,000 being market value – Disallow $60,000   320000  
Provision – doubtful debts Sec 25-35  Debt must be bad, request for time to pay is not necessarily bad  
Block of Land  Sec 8-1  No nexus to income, should be saved to apply to capital gain ( if any) later.  
Totals     3236520  2890020 
Taxable Income before carried forward losses – 30 June 2018     346500 
Loss c/f – 30 June 2017 180000       
Donation – charity  55000  Donations not deductible in loss year    
Exempt Income 16000   Exempt income is deducted from carried forward losses   109000
Net Capital Loss c/f  25500  No Capital Gains to offset this against so c/f to next tax year  
Loss c/f – 30 June 2017        
Taxable Income after carried forward losses – 30 June 2018     237500   
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