Adjustments required to arrive at taxable profit for Timber Floors Pty. Ltd.

In the case of Timber Floors Pty. Ltd., which is an Australian resident private company for tax
purpose, accounting profit has been computed by the Amanda, the accountant in accordance
with the accounting standards but that cannot be taken by the tax authorities as a base for
computing tax thereon since various adjustments would be required to be made from the same
to arrive at taxable profit in the nature of deductions and disallowances as per the Income tax
Act 1997, various rulings and judicial cases which allows certain expenditure and disallows
certain expenditure which would have been allowed under accounting standards.
Profitability is a measure of organization performance and hence accounting profit which is the
excess of revenue over expenses computed within the framework of financial accounting set of
rules forms the basis of how the company is performing. Taxable profits on the other hand, are
more of the calculation performed for the purpose of ascertaining the tax liability of the
organization and hence are different from the accounting profit since the laws governing the
computation and the purpose of both are different.
Accounting profit is a publicly accessible data and can be accessed from the company’s website
or from companies filing but taxable profit is a limited access data and is only accessed under
the supervision of the Australian tax officer with very limited access to the public at large and is
more of secretive nature.
So in case of Timber Floors Pty. Ltd., to arrive at the taxable profit various adjustments have to
be done in accounting profit, a synopsis of the same are shown as below:
1. Allowance for depreciation on depreciating Assets (Note 1 and 4)
In the case of Timber Floors Pty. Ltd., depreciation has been computed and deducted from fees
to arrive at accounting profit, so in normal parlance no adjustment should have been required
since depreciation is also allowable expenditure to compute taxable income but the difference
lies in the method of computation of depreciation.
Computation of depreciation as per books of accounts involves use of management estimated
life of assets wherein the asset is depreciation over the estimated useful life based on
management estimate, so an asset of $10,000 with useful life of 10 years and Nil salvage value
will have an annual depreciation of $1,000. However, for the purpose of depreciation as per
Income tax act, the scenario may be different.
In the case of computation of depreciation as per the income tax act, there are set of rules
which apply to the capital asset or depreciating assets, which states the assets to be
depreciated over the effective life of the asset expressed in years. Moreover, deduction for
depreciation is available only if the same is used for the purpose of business and are allowed to
be claimed only to the extent to which one uses the asset in the business to earn income, for

example if an asset is used for 20% of the time for business purpose then one can claim only
20% of the depreciation in the current year.
In the case of Timber Floors Pty. Ltd. the accounting depreciation as per note 4 comes out to be
$150,000 which is based on director’s estimate of effective life of all assets being 5 years and
has not been computed under the tax laws and hence has been added back to the accounting
profit and an allowance for depreciating assets has been made as per the Income tax rules and
acts.
Depreciation on New Spray Equipment, new Truck and three further assets
As per Section 376.185 (Income Tax Assessment Act 1997) “In determining an amount of
expenditure for the purpose of this Division, the expenditure is taken to exclude GST”, in our
example new spray equipment and new truck includes GST and hence the same has to be
excluded while computing depreciation.
Capital cost for the purpose of depreciation of New Spray Equipment excluding GST @10%
comes to $155,227 and that of new truck comes $157,484, since the further three assets were
purchased at a exclusive GST price we have considered the acquisition price at $ 170,080.
As per Section 40.102 (Income Tax Assessment Act 1997) relating to capping life of certain
depreciating assets, the effective life has been capped at 6 2/3 Years which comes to ~ 15% of
the assets value. Total value of assets as mentioned above comes to $482,791, depreciated at
15% gives depreciation of $72,419 since all the assets have been purchased on 1 July 2017.
Pool Assets - Depreciation
Timber Floors Pty Ltd.’s final records show that on 1 July 2017 the opening balance of the
company’s pooled depreciating assets was $18,000 and hence as per Section 328.185 (Income
Tax Assessment Act 1997) “If you are a small business entity for an income year and you have
chosen to use this Subdivision for that year, you deduct amounts for your depreciating assets
(except assets for which you have deducted or can deduct an amount under section 328-180)
through a pool, which allows you to deduct amounts for them as if they were a single asset,
thereby simplifying your calculations. You use one rate for the pool” and the rate of
depreciation on the pool asset has been defined in Section 328.190 (Income Tax Assessment
Act 1997) as the Opening pool balance X 30% which on $18,000 at a rate of 30% has been
applied calculates depreciation on pool assets to $5,400
Depreciation on Assets costing less than $1,000
Timber Floors Pty Ltd.’s also purchased a new Ipad at a cost of $990 (GST inclusive) which when
GST excluded as mentioned above will be $900 @ 10% GST since the same would be available