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BULAW5916 Taxation Law And Practice

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Course Code: BULAW5916
University: Federation University

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Country: Australia

Question:

During the year Frank submitted a design as part of a national competition for  ‘The Citadel’, the centrepiece of an ambitious urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises in Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2017/18 his billings were $2.5 million.
Required 1:
Should Frank return on a cash or accrual basis in 2016/17 and 2017/18?
You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following:

What factors affect the choice of a cash or accrual basis?
Does Frank have a choice of the basis he adopts?
Does the Commissioner of Taxation have a right to insist on a particular basis?
Should Frank’s basis be the same in both years?
Given the present availability of accounting software packages, in your view, is the traditional criteria for the cash/accrual distinction still relevant?

Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
(a)Ruby has owned and rented a residential property since 2008. Rental income for the current year is $35,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $8,500.
(b)In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against the partnership alleging her injuries were caused by the poor condition of the building.  Ruby incurred legal expenses to date of $7,000 and the action has not been settled at 30 June.
(c)In March 2015 the company owned sold a batch of parts that were subsequently found to be defective. The purchaser, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2017 and the company paid an amount of $750,000 to the car manufacturer.
(d)The directors of Ruby were concerned about the claim in (c) and the effect it had on the year’s reported profit. They resolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.
(e)In August 2017 the directors of Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $220,000 was paid to consultants investigating the proposal but, due to uncertainty in the motor vehicle industry, the directors decided not to proceed at the time.

Answer:

Introduction
A taxpayer decides when wage is determined by embracing a strategy for representing pay. When representing salary, for tax purposes, a citizen must embrace the technique for bookkeeping that, in the conditions, is fitting. A strategy for accounting is fitting on the off chance that it gives a ‘generously correct reflex’ of that pay. This is the rule set up for Carden’s situation. Cash basis is one of the frameworks by which sole brokers and associations can use to set up their business accounts and ascertain their assessable benefits. The cash basis was intended to influence book keeping and finishing a self-evaluation to expense form less demanding for the little unincorporated organizations, that is sole dealers and associations. The money premise was presented from 6 April 2013 thus for self-appraisal assessment forms for the 2013/14 impose year onwards. It enables organizations to represent their salary and costs when they really get instalment or when they really pay for a cost. By utilizing the money premise, you won’t have to figure out account holders and banks at the year-end, nor play out a stock-take or gauge accumulations and prepayments. Also known as Generally Accepted Accounting Principle, the accruals basis utilizes fundamental book keeping principals to guarantee that exclusive receipts and costs which apply to the bookkeeping year are recorded in that year.
A citizen who represents things of wage on a receipts premise should keep on adopting that strategy until the point that it is never again fitting. That will happen when the citizen’s conditions demonstrate the profit technique for bookkeeping is the more suitable strategy by which the pay ought to be resolved for charge purposes. This may happen as a result of the extension of the business, or on the grounds that the citizen may end up engaged with exchanging or assembling exercises.
Factors affecting the choice of cash or accrual basis
Simplicity. The money strategy might be the least demanding to keep up and get it. Either the cash came in or it went out. There are no collections or distributions to process. Money premise budgetary explanations are most normal with little not-for-benefits.
Investment funds. Money premise monetary explanations may give managerial investment funds. Without any gatherings or designations to consider, less time is required for bookkeeping (Besley 2015). What’s more, if the association has a money related proclamation review, there are less articulations for an evaluator to test and issue a supposition on. This would by and large diminish the cost of a review.
Resource allocation. This is mainly intended for citizens who resolve to use accrual. Accrual basis requires sufficient resource in order to be effective in a business premises. It is better suited to business that don’t pay right away, giving an example of architects who send their invoice later after completion of their projects. (Braithwait 2017).
Business size. The size of a business affects the accounting strategy of a business, where a mature business needs accrual basis to easily keep tracks of payments, while the cash basis is needed in small businesses. Budgetary proclamations arranged utilizing accounting system of a business depend on a well-known system. (Newcombe & Paradell 2009). Altered money premise financials can be exhibited in any arrangement administration picks, so they may not be similar with the announcements of different associations.
Authoritative Documents. Like administrative prerequisites, a not-for-benefit’s by-laws may determine the premise of bookkeeping the association must utilize. Consider looking into your association’s by-laws before experiencing broad research to ensure you have the adaptability to pick a premise of bookkeeping (Lee 2015).
Comprehension of Financial Position. Money related explanations arranged under ATO ordinarily give per users a superior comprehension of the budgetary position of the association at year-end. ATO-based money related explanations will demonstrate payables and other exceptional commitments, and any dedicated receivables or vows. Money premise proclamations frequently give restricted data (Becker,  Reimer & Rust, 2015). For example, a not-for-benefit that gets gave supplies and materials utilized in its projects would not catch their esteem or effect to the association utilizing money premise explanations.
Recommendations for Frank
 Considering the factors provided on what Frank should do, it is safe to say that in the year 2016/2017 the most adoptable basis is the cash basis in that it is simple given that the business books are kept on the actual flow of cash in and out of the business. Upon receival the income is recorded and reporting of expenses is done upon payment. The cash basis is more reliable when it comes to business with no or minimal inventory. Given that Franks business was still small adopting cash basis for that would ensure that recording income would be put off until the next tax year, while expenditures are counted right away (Picciotto, 2017). In relation to employees’ incomes, its best if the cash basis is adopted for the first year since the employee number has not grown substantially to exceed the required number of the cash basis. Cash basis in convenient when it comes to handling of business with a small employee count.
In the year 2017/2018 Frank can go ahead and adopt accrual accounting, given that the business has grown tremendously posing the need to understand the performance of a business over the time period. Under this accounting method, all revenue and expenses are matched together. This ensures that managing the amount of money that Fred has is eased by providing a good snapshot of a company’s performance. This method is best applicable because it provides detailed flow of cash for the company. Accrual is better suited to business that don’t pay right away, giving an example of architects who send their invoice later after completion of their projects. Given that Fred has acquired inventory it is best if he considers using accrual method since it shows a precise, current picture of any business (Hallida & Shaffer, 2015). The fact that his contract will be resolved after the construction was completed it is of utmost importance that accrual basis be considered.
Based on the above arguments it is of utmost importance to state that the stated plans are best suited for the business but still it comes down to the choice of the owner, who can decide to either pick the aforementioned plan or to choose accrual basis only. Accrual can still be considered for the first year after his win of “The citadel” competition. This is due to the fact that the construction will require a good number of employees which can be best handled by the accrual basis.
The commissioner of taxation can insist that the business uses accrual, and to be treated as a big business considering it had acquired the necessary inventory to exclude it from new business. Though the claim can be valid, it doesn’t necessarily impose any validity, considering that Franks’ business is still new and adopting cash method is the most advantageous in terms of postponing recording income until the next year (Allen & Kraakman 2016).
PART 2
In this incident we are looking into two companies involved in business, where one company, Diamond Ltd, has bought the business and company assets of Ruby engineering Pty Ltd. According to the agreement between the two companies, ruby remained liable for any claims arising before 2016. Based on the cases Ruby company was liable for some payments, and their tax deductibility was to be as follows:
Case 1
According to the case of western suburbs it was expedited that expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied or used by him for the purpose of producing assessable income, or in carrying on business for that purpose, shall be an allowable deduction. The verdict on the case was that the repair expenditure was not of capital nature and thus not deductible. Due to the repairs carried out of replacing the old kitchen fittings that resulted to an expenditure of 8500, the tax levied was to be of the rental income amount in accordance to the tax law since the repair was not of capital nature. This repair could be treated as an allowable repair since the fittings and cupboards had deteriorated and the kitchen was not altered substantially. This is achieved by subtracting the expenses that one incurs in order to get the property ready to rent, and for maintenance. According to the legislation. The company only caters for the rental income tax. Rental and other rental-related wage is everything of lease and related instalments that you get, or end up qualified for, when you lease your property, regardless of whether it is paid to you or your operator. You should incorporate your offer of everything of lease you win in your expense form (Baamir, 2016). Lease and related instalments might be as merchandise and enterprises. You should work out the money related estimation of these. For instance, if the inhabitant gives you property or products as lease rather than cash, you incorporate the market estimation of the property or merchandise as rental wage in your expense form.
Case 2
An associated case of Snowden & Wilson proprietary limited where the company was supposedly charged tax on every payment offered up for their ongoing case, this was upheld by majority of board review. In another instance involving Ruby company a visitor slipped on steps and sustained injury. The company has been paying the plaintiff a fee despite the fact the claim has not been settled. The legal fee was eligible for taxation. Given the fact that the fee is legal, a tax levy is imposed on the fee. It is assumed that the company is liable for injuries of visitors because landlord’s negligence has caused the injuries. The best way to avoid such incidents is to ensure that the property is in great shape. To avoid further taxation the company needs to hire a lawyer to push for the finalisation of the case before end of financial year (Kucuri, 2015). An all-around composed property protection arrangement can shield a landowner’s investment property from misfortunes caused by numerous hazards, including fire, tempests, thievery, and vandalism. (Seismic tremor and surge protection are normally safeguarded under independent approaches.) An extensive general obligation (“CGL”) arrangement gives risk protection, covering wounds or misfortunes endured by others as the consequence of flawed conditions on the property. Similarly, critical, obligation protection takes care of the expense (for the most part attorneys’ bills) of shielding individual damage claims (Edge 2017).
Case 3
In a similar case of Magna Alloy & Research where there was an involvement of company dispatching of goods that were not the actual goods intended by the company manufacturing. Their case was treated as criminal conspiracy. They were taxed for all the fines they paid, this builds up to this case in relation to taxation of the payable fine. The company was also accused for selling a batch of parts that were subsequently found to be defective. They were required to pay a fine of $750,000 to the car manufacturer. Ruby could impose the GST plan to avoid paying tax for the damaged goods. They are to pay a further tax to the court for conducting the case to be calculated from the payable amount to the car manufacturer. GST is an expansive construct assessment of 10% with respect to most products, administrations and different things sold or expended in Australia (the circuitous duty zone) and furthermore on most imports of merchandise. Fares of products and ventures from Australia are for the most part without GST (Basu 2016). In case you’re enlisted for GST, this implies: you do exclude GST in the cost of your fares you can even now assert credits for the GST incorporated into the cost of buys you use to make your sent-out merchandise and enterprises.
Case 4
The amount set aside was to be taxed annually after the company stated their annual profits and wealth. This is in accordance to the law governing caution money. It is to be considered as part of the company’s wealth and thus is taxable. The taxation is imposed on the annual income of the company. A tax of 30% or 27.5% is imposed on the total income of the company depending on the yearly turnover. On the off chance that you are carrying on a business, most wage you get is assessable for charge purposes. The case can be based on griffin coal mining company over the allowable deductions of the annual income, it is stated that the designated percentage of tax to be considered for a company, is to include all the deductible income of the company. This incorporates all your gross profit, or continues from the customary course of your business, including net capital additions and remote salary. Different sums, that may not be a piece of the regular running of your professional sums owed to you, and the adjustments in benefit of exchanging stock, may should be considered while computing assessable salary. Assessable salary does exclude GST you have gathered (James 2017). Different special cases incorporate salary got from exercises not identified with your business, for example, income from a pastime. The annual turnover of the companies profit is to be considered for taxation which suggest that the caution money is to be added to the taxable amount of the year.
Case 5
A similar case of Robert Mitchum in relation to source of income was addressed in court, where the respondent was eligible to be taxed on the income earned. Later the directors decided to investigate if it was possible to re-enter car parts manufacturing business. A substantial amount as paid to a consultant who due to uncertainty decided to wait for a different time. The company is not eligible for any tax payment in this instance. The consultant is obviously in the line of tax payment. The tax is deductible in the provided amount by the company to the consultant (Lang 2014). As an Australian occupant for assess purposes: you should pronounce all salary you earned anyplace on the planet on your Australian assessment form you’re qualified for the tax-exempt limit – this implies there is no assessment on your salary up to a specific sum you may need to pay the Medicare exact. Australian inhabitants (for assess purposes) with a duty document number for the most part pay a lower rate of expense than outside occupants.
References
Aust, A. (2013). Modern treaty law and practice. Cambridge University Press.
Newcombe, A. P., & Paradell, L. (2009). Law and practice of investment treaties: standards of treatment. Kluwer Law International.
Lewis, A., & Taylor, J. (2014). Sport: law and practice. Bloomsbury Professional.
Becker, J., Reimer, E., & Rust, A. (2015). Klaus Vogel on Double Taxation Conventions. Kluwer Law International.
Baamir, A. Y. (2016). Shari’a Law in Commercial and Banking Arbitration: Law and Practice in Saudi Arabia. Routledge.
Edge, P. W. (2017). Religion and law: An introduction. Routledge.
Basu, S. (2016). Global perspectives on e-commerce taxation law. Routledge.
Lee, N. (2015). Revenue law: principles and practice. Bloomsbury Publishing.
James, A. (2017). Constructing justice for existing practice: Rawls and the status quo. In John Rawls (pp. 69-104). Routledge.
Lang, M. (2014). Introduction to the law of double taxation conventions. Linde Verlag GmbH.
Dudin, M., Prokofev, M., Fedorova, I., Frygin, A., & Kucuri, G. (2015). International Practice of Generation of the National Budget Income on the Basis of the Generally Accepted Financial Reporting Standards (IFRS).
Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business organization. Wolters Kluwer law & business.
Picciotto, S. (2017). Rights, responsibilities and regulation of international business. In Globalization and International Investment (pp. 177-198). Routledge.
Besley, T. (2015). Law, regulation, and the business climate: The nature and influence of the World Bank Doing Business project. Journal of Economic Perspectives, 29(3), 99-120.
Braithwaite, V. (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Halliday, T. C., & Shaffer, G. (Eds.). (2015). Transnational legal orders. Cambridge University Press.

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