YesBULAW 5916 Taxation Law & Practice Semester 2 2020 Written Assignment Total maximum marks:...

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YesBULAW 5916 Taxation Law & Practice  Semester 2 2020  Written Assignment  Total maximum marks: 100, weighted to 30% of the final mark for the course  Due Date: Friday of Week 9, 11.55 pm (through Moodle)  Length: While it is difficult to set a required word count, it is anticipated your  assignment will need to be between 2000 and 2500 words to adequately  respond to all requirements. ASSIGNMENT TOPIC  The focus of this Assignment is the business activities of Luxwood Pty Ltd, you are  required to analyse facts, research and apply relevant law and provide considered  advice to the company.    Luxwood is a resident private company established in 2011 to manufacture quality  furniture that is sold to retailers under several brand names and directly to the public. The  Assignment comprises four tasks which are largely independent of each other. In respect  of each task, the requirement is that you:  Identify the issue/issues raised  20% of the available marks for each Task are allocated for this requirement.   Identify and discuss the relevant provisions of the legislation, case law,  ATO rulings and determinations.   30% of the available marks for each Task are allocated for this requirement.   Advise the company what amounts are assessable or deductible for each  Task. In your advice you should also ‘resolve’ the issues raised by each task,  and where appropriate advise what options or alternatives are available.   50% of the available marks for each Task are allocated for this requirement Note: Disregard GST and Small Business Entity related matters You will not receive  marks for discussing these.             Task 1 (30 marks)    Luxwood operates a customer loyalty programme as follows:    Under a LuxRewards Card™ system, each year, on the anniversary of the issue of  each customer’s card, the store grants a non-refundable credit to each customer’s  account according to a sliding scale based on aggregate purchases for the previous 12  months period. The credit is 2% up to $5,000, 3% for the next $5,000 and 4%  thereafter. There is no limit. The credit may only be used to reduce the amount payable  for LuxRewards Card™ credit purchases.    For example: Customer A commenced his credit card account a few years ago on  1 February so he is entitled to a credit on the anniversary of that date each year,  based on his actual purchases for the previous 12 months. Therefore, at balance  date, 30 June, an accrual is made based on the actual sales since 1 February  although the actual credit cannot be accurately calculated and neither will it arise  until the following financial year. At 30 June 2020 Luxwood estimates that for the period up to that date its liability in  respect of these credits is $220,000. In addition, it has already credited $245,000 during  the year ended 30/6/20. The store estimates that, on average, 10% of these credits will  lapse.      Task 2 (30 marks) Luxwood prides itself on its “no questions asked” refund policy for return of defective  goods. It has gathered statistics over the previous 8 years since it adopted this policy and  it concludes, as a reliable estimate, that of all its refunds under this policy, 60% are  covered by supplier warranties. It bears the balance as a cost of doing business.  In this respect the store has made the following entry in its journal for the year ended  30 June 2020:  Dr. Profit and Loss 25,000  Cr. Provision for warranties 25,000  Narration: Being 40% of estimated refunds for claims in respect of defective  goods sold during the year ended 30 June2020 for which no supplier  warranty is available. Task 3 (20 marks)    During the year it came to the directors’ attention that a rival firm was marketing a lounge  suite that appeared identical to Luxwood’s best-selling line. An action to recover  damages was commenced. The matter is yet to be finalised but the company’s legal  advisors are confident. At June 30 only $1,500 had been paid in legal fees but estimated  additional costs of $24,000 had accrued although no account had been received.      Task 4 (20 marks)    In November 2019 a visitor to Luxwood showroom slipped on the steps and sustained  injuries requiring medical attention. She claims one of the steps was loose and  commenced legal proceedings against Luxwood alleging her injuries were caused by the  poor condition of the building. Luxwood has so far incurred legal expenses of $4,000 and  the action has not been settled at 30 June.

Riddhi · Accepted Answer

Luxwood is a company established in the year 2011, in the business of manufacturing good quality of furniture. This furniture is sold to retailers and then they sell it under various brand names. The company also sells the furniture to directly the customers.  
Section 8-1 of Income tax assessment Act 1997 overviews the allowability of the deductions. As per the section expense is allowable as deduction if there is an outgoing or loss relating to the assessable income. Sec 8-1 of the income tax act deals with the meaning of the word incurred in the outgoing or loss and the timing of deduction. This section outlines that in most cases deduction of expenses is allowed when the amount is spent on the expenses and not when a provision or future liability arises. The timing of deduction of expenses for a future obligation will be allowed in future when the actual payment for expense is made. Deduction for any kind of provision is not allowable unless in few cases where there are exceptions. There is various ruling by court and case laws to suggest that the definition of the term incurred becomes exhaustive in providing the correct meaning.
The following general rules are set out to bring in clear understanding – 
A) An actual payment in respect of expense need not necessarily made if there is sure commitment of the expense in the same year as the year of income. The obligation to make payment should be a present obligation and not future and the expense should not be contingent in nature.
B) The obligation or liability to pay for the expense should have existed on the present date. It need not depend on any outcome.
C)  The obligation or liability of the expense is determined or committed on a present day and there is reasonable estimation of the amount of liability. The estimate amount of expense should suffice even if it is not accurate.
D) Liability should have raised on the present scenario and should not be consistent in nature.
E) Payment is made in respect of liability that is not existing in present scenario, but payment deemed to have considered outgoing or loss.
Task 1
Issue 
In the event of anniversary of Luxwood store, they issue non-refundable credit to every customer based on their purchases in last 12 months. This card is issued as a customer loyalty programme. The issue here is whether the amount on the credit of each customer is allowable as a deduction from the assessable income.
Rule 
As per Taxation ruling TR 1999/6 of the Income tax, Customer loyalty points are credited to the customers card at the time of accrual in the form of Provision. The actual expense related to such loyalty points accrues only when the customer uses or redeems those points to claim against the points. To ascertain whether deduction is allowable or not, sec 8-1, of ITAA 1997, states that to avail deduction expense should be incurred. Expense is said to be incurred when there is something that is outgoing or a loss of any kind. To determine actual loss or outgoing, a liability as on the present day should have been existed. In the case law of Nilsen Development Pty Ltd V FC of T 144 CLR 166 at 624, it had been clarified that a liability as on present day should have existed to claim deduction. Liability should be not contingent in nature. Here, the Liability is contingent in nature because there are many factors pertaining to claim of reward points. For E.G. If a store that is providing loyalty points has 50 items to sell, at the time of crediting points to the customer it is also not clear which product will be bought against reward points.
As per the provisions of Sec 8 – 1 of the Income tax Act, the amount of outgoing must have nexus with the assessable income. The amount of outgoing should be for the same year of the year of expense and assessable income. If the expense provision is for one year and obligation to pay is for other period, the difference in timing will also change the year of deduction to the year of actual payment and the year when the expense actually incurred.
Application 
Luxwood has a policy to issue Loyalty reward points to its customers on every anniversary depending upon their purchase during the year. Currently company expect that on 30th June 2020 the total credit will be $2,20,000 on account of credit points but in the current financial year additional amount added shall be $2,45,000 for the year ended 30th June 2020. The store expects 10% of the credit to lapse at the end of the year. Since, the above is not a current liability and the liability will arise only at the time of redeeming reward points,

BULAW 5916 Taxation Law & Practice Semester 2 2020 Written Assignment Total maximum marks: 100, weighted to 30% of the final mark for the course Due Date: Friday of Week 9, 11.55 pm (through Moodle)...

Answer To: BULAW 5916 Taxation Law & Practice Semester 2 2020 Written Assignment Total maximum marks: 100,...

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