Tax Reconciliation for Timber Floors Pty Ltd - Year Ended 30 June 2018

(This is a tax reconciliation question. Please read question 16.3 and the answer in the
textbook.)
QUESTION
Timber Floors Pty. Ltd. is an Australian resident private company for tax purposes and carries on
the business of manufacturing timber floors. It is registered for GST.
Amanda, the accountant has prepared the income statement for the year ended 30 June 2018 in
accordance with the accounting standards:
Fees $3,089,725
Less:
Operating expenses:
Advertising 100,000
Accounting depreciation (note 4) 150,000
Fringe benefits tax 15,000
Provision for unreported claims (note 5) 150,000
Provision for long service leave 60,000
Repairs (note 6) 30,000
Wages (note 7) 1,4 00,000
Purchase of trading stock (note 8) 120,000
Annual payment to major competitor (note 9) 100,000 2,125,000
Net profit (Accounting) $964,725
Additional Information
(1) Unless otherwise stated the figures are GST exclusive.
(2) On 30 November 2017, the company received a cash dividend of $100,000 (franked to
80%). This dividend is not recorded in the above Income Statement. (Refer Section 207-20(1),
207-35(1), 207-35(3))
(3) On 31 August 2017, the company also received a cash dividend of $120,000 from a US
company. Withholding tax of $20,000 had been withheld in the US. Australia has a double tax
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agreement with the US. This dividend is not recorded in the above Profit and Loss Statement.
(Refer Section 207-20(1), 207-35(1), 207-35(3))
(4) The accounting depreciation of $150,000 is based on the directors estimating the
effective life of all assets being 5 years. Amanda advises you that for taxation purposes the
following information is applicable:
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. (Refer Section 328-175, 328-185, 328.195,
328.200, 328.210),
(”Guide to Depreciating assets 2017”)
(https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Guide-to-depreciating-
assets_2017.pdf”)
During the year the company also purchased the following assets:
o New spray equipment at a cost of $170,750 (GST inclusive) on 1 July 2017. The
estimated life is 8 years.
o A new i Pad at a cost of $990 (GST inclusive) on 1 July 2017. The estimated life
is 3 years.
o A new truck was purchased on 1 July 2018 for $173,232. The amount paid was
GST inclusive. The estimated life given the kilometers they will travel in the truck
is 7 years.
o The company purchased three further assets for $170,080 on 1 July 2017 with an
effective life of 4 years.
(5) The provision for unreported claims was based on the company’s estimate of anticipated
costs (based on statistical experience) of unreported remedial work that it would be required to
perform under warranties.
(6) The repairs of $30,000 consisted of painting the company premises for $10,000 and
replacing the old rotting wooden office window frames with new steel window frames for
$20,000. The painting was to the west wall which got the afternoon sun and had not been
painted for seven years. The existing paint was peeling and needed to be done before the timber
also started to rot. The cost of replacing the old wooden office window frames with new wooden
window frames would have been $21,000. The new steel window frames had the advantage of
not being subject to rotting but had the disadvantage, unlike the old wooden frames, of being
subject to rust. (Refer Section 25.10)
(7) Wages of $1,400,000 include $50,000 paid for marketing services provided by a
director’s daughter. The Commissioner considers that $20,000 is a reasonable amount for the
services provided. (Refer Section 26.35)
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