Taxation law and practice Sample Assignment
Tax is a process that is compulsory monetary contribution on the state of revenue that is assessed and it is imposed by the government. The money is imposed to the government from the business or from personal income. In this study it has been explained case study about Frank Lloyd who has commenced business as an architect. In this study it is also mentioned about the factors affecting the choice of cash or accrual basis used by Frank Lloyd. It has been also discussed about the cost of service goods and transaction that are provided as per the case study. The presentations about the accounting software package in view of traditional criteria of cash distinction are also mentioned in the study according to the case study of Frank Lloyd. In the second case study it has been also mentioned about the tax deducted.
1. What are the factors which affects choice related to cash or accrual basis of accounting?
Cash basis accounting system is able to recognise by the revenue when the Desire cash is received. In cash basis accounting system profit is recognised when all the expenses are paid. According to Braithwaite, (2017), type of method true recognition of accounts payable or accounts receivable are not been made. Cash basis accounting system is used by many small organisations because it is very easy and simple to maintain by every individual. In this process it is very much easy to determine when the transaction has occurred and as a result there is no need of tracking the payable amount and the receivable. On the other hand, accrual basis accounting system revenue and expenses are recorded when they are earned by an individual (Ato.gov.au, 2018). Accrual basis accounting system is more important and also have realistic idea about the recording of expense and income during and particular period of time. This process helps to provide a long-term picture of a individual business which is impossible by cash basis accounting system.
2. Does Frank have any choice to adopt the basis of accounting?
In this case of Frank Lloyd it has been analysed that he is starting an architect business in the year of 2016. By the year end of 2016-2017 he got a billing amount of 75000 dollars from his total clients that are based on private reference and local builders. Moreover it has been analysed that in the year of 2016 - 2017 Frank Lloyd had submitted his design on national competition where he also managed an award price. From the competition he was commissioned for building a structure for which he needed to borrow 1 million dollar. On the basis of that during the year of 2017-2018 total willing where of 2.5 million dollars. As commented by Graetz and Warren, (2016), in the real scenario the business do not operate in a cash accounting basis because they often cells product and get payment later. As the result income of this basis and payment received later. On the basis of accrual basis accounting system better picture of the organisational expense and income are analysed. Franklin was commissions to build a building structure he need to borrow 1 million dollar and this will be paid by him later. In this purpose Frank should maintain accrual accounting basis to get the appropriate result.
3. Does Commissioner of Taxation have rights to insist in particular basis?
As analysed by Enste, (2018), the amount used by the organisation must be included for assessing the total income in the present year. This helps in filing tax for an individual through cash or accrual basis accounting. It has been observed that Australia has two types of accounting methods for which GST is mainly referred to cash as well as non cash. This method is used by an organisation in various purposes and in case of Australia majority of small business use cash basis accounting method. Commissioner of taxation prevented this that the company from switching to this type of method on the basis of the nature and setup of the business. At the initial stage of business it is important for an organisation to choose the basis of accounting in the subsequent year. These types of accounting methods are required to meet various objectives in a particular area.
4. Is it better to keep Franks bases seen in both years?
According to Braithwaite (2018), taxpayers should choose an appropriate method of accounting for filing 1st taxation return. The above case study if a taxpayer wishes to change the accounting method then they must have an approval from IRS form 3115. It has been observed that in 2016 to 2017 Frank Lloyd has commenced his business and he has also on $75,000. In this case the income that is filed in that here would be received by the individual on cash basis accounting. On the other hand it is beneficial for the small business to choose cash basis accounting system as the process is very simple and easy to maintain by the organisations. It is better that Frank Lloyd to choose cash basis accounting system on 2016-2017 (Ato.gov.au, 2018). In case of the next financial year that is 2017 to 2018 Frank Lloyd must implement accrual basis accounting system as he has commissioned price for building architecture. The accrual basis accounting systems are mainly as non receipt payment and income in a positive way to avoid any type of complications.
5. Is the traditional criteria for the accounting process is still relevant?
The main distinction between cash and accrual basis accounting methods are relevant. Two methods underline in recording all the transaction. In the cash basis accounting system revenue a recorded when cash is received and expenses are recorded when payment are done to the employees of supplier (Gabaix and Farhi, 2017). On the other hand in accrual basis accounting system revenue are recorded when they are earned and expense are recorded when it is consumed. Difference between these two methods can help an individual to realise the delay of revenue recognition.
Discussion about advising the partners or directors of Ruby Private Limited for tax deductibility of the mentioned amount
(a) Ruby Engineering Private Limited is owned in a rental property which is residential since 2008. Rental income earned by Ruby in this year was $35000. Personalize that Ruby has replaced the old kitchen which includes various cupboards. Due to water damage this changes are being made by Ruby. The cupboards which of these are of same types that was previously there in the office. Cost of replacement of the old kitchen fittings was $8,500. So the expense which is made by Ruby is $8,500 that should be deducted from the rental income (Gabaix and Farhi, (2017). The money is deducted from the rental income because this is a expense of the company. Company is pending money for purchasing kitchen fittings and this is also charged against the income (legislation Act 2001, S115 and S117). All the expenses deducted from the related income and in this case also text only file once all the expenses are deducted from the income. Payment made by Ruby was $8,500 and the rental income was $35000. The resulting amount on which tax are to be paid is 26,500 dollars.
(b) In the others rental property of Ruby Engineering Private Limited visitor of the tenant has slipped down through the staircase that got injured. For this reason the visitor required for medical attention which is to be provided by Ruby. The allegation of the visitors was that he was injured for the poor condition of the staircase in the building (Tax Assessment Act 1936, section 51(1). The situation Ruby was incurred with a legal expense of $7,000 and which must be settled till 30 June. The amount is also tax deductible as an expense. Accident which took place was due to the loss of staircase Accident would not be happening if the staircase was incorrect condition. In order to the accident the company is liable to pay medical expenses to the visitor.
(c) In the year 2015, the company Ruby Engineering Pty Limited had sold their customer defective batch parts which were owned by the company. In the month of March of 2015, the customer who purchased the defective batch parts is an Australias car manufacturer. The car manufacturer got to know about the defectiveness of the car parts. Due to the defectiveness in batch parts of car, the customer lodged a legal claim against the company Ruby Engineering Pty Limited in Australias Federal Court. The claim of the purchaser against Ruby Company finally got settled in the month of November 2017. The legal claim led the company towards payment of $750,000 as penalty to the purchaser of cars parts. As commented by Jaimovich and Rebelo, (2017), a company should pay the amount of fine to the purchaser in the matter of illegal practices taken. It can be said that the amount paid by Ruby Company to Australian car manufacturer should be treated in the years tax deductible. The company would not have to pay the fine if the illegal activity was not performed.
(d) The claim which the purchaser of car parts had made against Ruby Engineering Pty Limited was finally settled in the month of November 2017.In this situation the company paid $750,000 as fine to the purchaser of cars. Rubys directors were highly concerned in relation to the claim with its effect on the companys current years profit reported. The profitability of the company at the end of the year had reduced in paying the fine by $750,000 (Inglesand Stewart, 2017). Evaluating this case the company Ruby had decided for keeping a fund of small amount at the end of the year in fulfilling the future fines and claims. As decided by the directors, the total amount of $100,000 is to be kept as a provision and reserve in the accounts of Ruby Company for the year ended 30 June. It can be mentioned that the sum of $100,000 is an expense incurred by the company and is tax deductible as per laws. The company incurred an expense in creating the fund of $100,000 which will help the company to prevent the future cases of risks and therefore it is tax deductible.
(e) In the year 2017, directors of company Ruby had agreed on reutilizing the damaged parts of car for selling causes. In the month of August the process of investigation was to be done by the consultants of Ruby Company. The investment was in relation to the opportunities of entering the car parts manufacturing industry of using an alloy. The directors decided to spend $220,000 in paying the consultants who will be engaged in investigating process. But, some uncertainties occurred in the motor industry and the directors agreed to delay the investigation (Saez and Stantcheva, 2018). It can be concluded that the tax deductibility of an incurred expense depends on motive behind the occurrence of expense. Therefore theexpense of $220,000 which needs to be paid in investigation is tax deductible.
Recording of taxation is important in Australia for analysing the present scenario of the organisation after paying tax. Can be concluded from the study about that there was two cases where taxable income are to be analysed. In the first case the study was related to Frank Lloyd and his tax deduction in cash or accrual basis of accounting. It can be analysed that the accounting system is chosen by Frank Lloyd from the present scenario. Second case study in has been also analyse about the financial condition of Ruby Private Limited and Advisors for the tax deductibility. The amount of expenses is to be deducted from Ruby Private Limited also mentioned in the study. It has been analyse that Ruby private limited has to pay $8,500 as repairing of kitchen ant $7,000 for expense regarding medical purpose for the visitor. The study highlights the assignment of taxation law based on Australia and proper practices that are explained.
Ato.gov.au (2018), Accounting methods, Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Assessable-income/Accounting-methods/ [Accessed on 5 Sep 2018] Braithwaite, V., (2017). Taxing democracy: Understanding tax avoidance and evasion. Abingdon: Routledge.
Enste, D.H., (2018). The shadow economy in OECD and EU accession countries–empirical evidence for the influence of institutions, liberalization, taxation and regulation.In Size, Causes and Consequences of the Underground Economy (pp. 135-150). Abingdon: Routledge.
Gabaix, X. and Farhi, E., (2017).Optimal Taxation with Behavioral Agents. In 2017 Meeting Papers, 56(1), pp. 1523-1634. Graetz, M.J. and Warren, A.C., (2016). Integration of corporate and shareholder taxes. Ingles, D. and Stewart, M., (2018). Australia's Company Tax: Options for Fiscally Sustainable Reform, Updated Post Trump.
Ishikawa, D., Wang, D.Y. and Nakazawa, M., (2018).The Effects of Capital Taxation Using Dynamic Macro-Econometric Model of the EconomySimulation Analysis Including Households without Financial Assets. Public Policy Review, 14(4), pp.585-612.
Jaimovich, N. and Rebelo, S., (2017). Nonlinear effects of taxation on growth. Journal of Political Economy, 125(1), pp.265-291.
Saez, E. and Stantcheva, S., (2018). A simpler theory of optimal capital taxation. Journal of Public Economics, 162(2), pp.120-142.
Stantcheva, S., (2017).Optimal taxation and human capital policies over the life cycle. Journal of Political Economy, 125(6), pp.1931-1990.
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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