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:
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.
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.
|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||0|
|Block of Land||Sec 8-1||No nexus to income, should be saved to apply to capital gain ( if any) later.||0|
|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||0|
|Loss c/f – 30 June 2017|
|Taxable Income after carried forward losses – 30 June 2018||237500|
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