Business School
BULAW 3731 Income Taxation Law & Practice
Assignment: Semester 2/ 2018
INSTRUCTIONS
See the Instructions and Assessment Criteria in the Course Description and make sure you follow them!
Please answer all parts of the question
All work presented for assessment in this course must comply with the
format outlined in the University's Presentation of Academic Work
publication, available from the bookshop or on-line at
www.federation.edu.au/generalguide.
All essays must be accompanied by a signed official cover sheet ('Plagiarism Declaration Form'), available at www.federation.edu.au/ard/business/student_info_webct.shtml and lodged as appropriate for your campus.
You MUST reference in the body of the essay every time you use information from other people. This requires you to keep a track of where you are taking information from and then writing the reference up. You should use the Harvard/APA style; and use the University’s new Presentation of Academic Work. The Library’s website also has a citation style guide site. If you plagiarise (intentionally OR unintentionally) you will be given zero: see Regulation 6.1.1 for more details.
DUE DATE: Friday, 14 September 2018 [Week 9] Please check with the Course Description for details of where and when to submit your assignment. If you need an extension you must ask for one BEFORE the due date (unless this is impossible).
The assignment should not exceed approximately 2000 words.
The assignment is worth 30%.
Part 1
On 1 July 2016 Frank Lloyd commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2016/17 he had a small client base of local builders and private referrals and billings (fees) of $75,000.
During the year (2016/17) 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: [Approximately 50% marks]
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?
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Part 2
Ruby Engineering Pty Ltd [Ruby] was incorporated in 1990 and produced engine components used in the Australian car industry. In 2016 the business and company assets were sold to Diamond Ltd. Under the terms of the agreement, Ruby remained liable for any claims arising before 2016. The company used the funds to invest in real estate and shares.
During the year ended 30 June 2018 Ruby incurred the following expenses:
Required 2:
Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
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.
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.
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.
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.
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.
Required 2. [Approximately 50% of marks]
Advise the partners and directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.