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

This article provides a tax reconciliation for Timber Floors Pty Ltd for the year ended 30 June 2018. It includes the calculation of taxable income and tax liability, and adjustments for non-taxation income and deductions. The article also explains the depreciation of assets, provision for unreported claims, and other relevant information.

(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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(8) Timber Floors Pty Ltd has carried out a stock take and values its closing trading stock at
the following amounts:
Cost $133,567
Market value $135,278
Replacement value $167,889
Stock at the beginning of the income year was: $180,000
Amanda has not included the opening and closing stock figures in calculating the financial
accounting net profit of $964,725. (Refer Section 328.295)
(9) Timber Floors Pty Ltd entered into a restraint of trade agreement whereby its major
competitor agreed not to compete with Timber Floors Pty Ltd in Australia for five years in
exchange for five annual payments of $100,000. (Refer Section 230.100)
(10) The actual amount paid as long service leave during the year was $0.
(11) The company paid a total of $255,000 in PAYG Installments during the financial year.
(Refer Section 205.20)
(12) The company has advised that it wishes to pay the minimum amount of tax and wants to
claim the maximum deductions allowable.
REQUIRED
Calculate Timber Floors Pty Ltd.’s taxable income and tax liability for the year ended 30
June 2018.
(30 marks)
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Answer:
Financial Accounts - Timber Floors Pty. Ltd. – Year ending 30 June 2018
Reconciliation of financial accounting to tax accounting – you need to add back non-taxation income and
deductions and adjust for taxation items.
Net Profit based on the financial accounts – $964,725
Add: Non-tax amounts and other taxable income not included in amount above:
1. Accounting Depreciation $150,000
2. Provision for unreported claims $150,000
3. Provision for long service leave $60,000
4. Cash Dividend received $134,286 (($100,000/70*30*80%)+$100,000)
5. Cash Dividend from US $140,000
6. Repairs $30,000
7. Wages to Director’s Daughter $30,000
8. Purchase of Trading Stock $120,000
$814,286
Less: Deductions allowed while computing taxable Income:
1. Depreciation on Assets $89,221
2. Depreciation on Capital Work $1,929
3. Decrease in Trading stock $12,111
4. Payment to Major competitor $400,000
$503,261
Taxable Income $1,275,750
Tax Payable @ 30% $382,725
Less: Tax Credits:
1. Dividend Franking Credit $34,286
2. Witholding Tax (US) $20,000
3. PAYG Installement $255,000
$309,286
Net Tax Payable $73,439
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1. Calculation of Depreciation on Assets:
Asset Value
($)
Rate
(%)
Depreciation
($)
Pool
deduction
($)
Instant
asset
write-off
($)
Total
deduction
($)
Pool Asset 18,000 30 - 5,400 - 5,400
Pool Asset added during
the year:
1. IPAD
990 - - - 900 900
New Spray Equipment
($170,750/110*100)
155,227 8
Years
19,403 - - 19,403
Truck
($173,232/110*100)
157,483 7.5
Years
20,998 - - 20,998
Three further assets 170,080 4
years
42,520 - - 42,520
82,921 5400 900 89,221
Assumption:
 GST rate is assumed at 10%
 Trucks having assumed a gross vehicle mass greater than 3.5 tonnes and capped effective life of
7.5 years
2. Depreciation on Capital works
a. Depreciation on Painting works (Exterior) = $10,000/7=$1,429
b. Depreciation on Replacement of Wooden frames = $20,000/40 =$500 (Assumed 40
years life)
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