Taxation and Accounting Standards for Desklib Online Library

This article discusses taxation and accounting standards for Desklib, an online library for study material with solved assignments, essays, dissertation, etc. It covers topics such as cash and accrual basis of accounting, GST laws, tax deductions, R&D tax incentive, and more.

Running Head: TAXATION 1
Taxation
Student’s Name
Institution Affiliation
Date Submitted
Part 1
a.
Cash basis of accounting tends to only recognize income when income is received,
and expenses once they are paid for hence receipts have to be provided. Therefore, this
method does not recognize the trade payables and trade receivable accounts since there is no

TAXATION 2
credit given to the customers or from the suppliers.The Accrual basis of accounting is one
that recognizes incomes and expenses in the period earned or incurred, no matter when the
money is paid for or received (Australian Taxation Office, 2017) This method is also
normally referred to as the GAAP(Generally Accepted Accounting Principles) is often used
as opposed to the cash method according to The Commissioner of Taxes (South Australia) v
The Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108.
Some of the factors that affect the choice of a cash or accrual basis include the
simplicity of the transactions based on the form of business, and the savings available for use
in the day to day activities of the business as per the case of Henderson v. Federal
Commissioner of Taxation (1970) 119 CLR 612. Additionally, is the regulatory requirements
such as the GAAP and the Accounting standards agreement on the most preferred and
convenient accounting method. Next is the understanding of the firm’sfinancial position as
well as the organization’s established framework. With this Frank can be in a position to
come up with the analysis on both methods making it easier for him to make the final
decision which will be of help in running his business according to Brent v Federal
Commissioner of Taxation [1971] HCA 48.
b.
Frankly, Frank does not have a choice of the basis he adopts, this is because in
2016/2017, he is running a start-up sole proprietorship out of his garage and has an over
billing of $75,000 hence the loss can only be carried forward to the next fiscal year as loss
that reduces his capital and also the net income of the next year. Being that the 2016/2017
ends with accrued expenses of $75,000, Frank is forced to take a loan in order to rent
property and employ staff members in 2017/2018 and even with the 1 million loan, he runs
an over billing of 2.5million. So again due to excess costs there are accrued expenses that

TAXATION 3
have not been paid for. Therefore, the only choice that Frank has is to do his accounting on
accrual basis as no cash is afloat to cater for the accrued expenses.
c.
The Commissioner of taxation has a right to insist on a particular basis by setting the
various Goods and Services Tax (GST) laws on both cash and accrual methods. As per the
Australian tax laws on GST, the method chosen affects when the GST should be reported
(Legal Database, 2018). However, the law also approved that business with turnover of less
than 10 million can use either method but other business with larger income must use accrual
basis. Under the cash basis, there are various advantages such as claiming GST credits during
the specific fiscal year in which you pay for the partly cost of business purchase.
Moreover, use of the accrual basis just means that accounting for the GST on the
business’s financial statement which covers the period in which a tax invoice is issued or a
payment for a sale received or an invoice receivedfrom the supplier, or a payment made for a
specific purchase according to FCT v Dunn (1989) 85 ALR 244. GST tax credits can be
claimed if during the reporting period a tax invoice is issued or a payment for a sale received
or an invoice received from the supplier, or a payment made for a specific purchase.
d.
Frank should use the same basis for both years being that he has several over billings.
However, the Australian tax laws allows for the changes in the accounting method from cash
to accrual which can only take effect on the first day of the period of tax as per FC of T v.
Firstenberg (1976) 27 FLR 34 at 58. During the initial tax period after the change in the
accounting method, there needs to be accountability for the purchases and sales that had not
been accounted for or claimed previously (Journal of the Australasian Tax Teachers
Association, 2018). In simple terms, there GST on any sales that had invoices issued before

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the date of change but pay had not been received yet need to be reported in line with Arthur
Murray (NSW) Pty Ltd v. FC of T (1965) 114 CLR 314.
e.
Having done my research, there are 15 available and recognized accounting software
packages. They incude: Nummuspay, QuickBooks Enterprise, FreshBooks,
NEWOLDSTAMP,Zoho Books, Sage 50cloud,Tipalti,NetSuite ERP,Xero,
Happay,FreeAgent,Microkeeper,FinancialForce Accounting, Brightpearl, and Sage Intacct,
(Financesonline.com, 2018). They all have the advantage of making accounting easier and
more accurate. Since the named above best accounting software’s are the best in the industry,
they after various advantage such as automatic tax deductions when directed to. Additionally,
they do give guidance on the allowable accounting methods in the various financial
statements.
However, I believe that the traditional criteria for the cash/accrual distinction still
relevant especially for start-ups and small and medium sized enterprises. They also help in
the learning of the accounting skills and knowledge which are then later advanced to the
available accounting software’s. Having the traditional knowledge allows an accountant to
easily detect any errors that the software may have or even come up with the financial
statements manually if there are technical errors.
Should Frank return on a cash or accrual basis in 2016/17 and 2017/18?
Conclusively, based on the laid above facts in the different sections, Frank should
return on an accrual basis in 2016/2017 and 2017/2018 due to the billings and the loans that
he has. Besides, the utilization of the accrual basis just implies that representing the GST on
the business' money related proclamation which covers the period in which an expense
receipt is issued or an invoice for a deal got or a receipt got from the provider, or an invoice
made for a particular buy (Kumar, 2018). GST impose credits can be asserted if amid the

TAXATION 5
announcing time frame an assessment receipt is issued or an invoice for a deal got or a receipt
got from the provider, or an invoice made for a particular buy as per J Rowe and Son Pty Ltd
v. FC of T (1971) 124 CLR 421.
Part 2
a.
Under considerations in of the Australian property law specifically the Residential
Property Investment, GST is not charged on any rental income from a residential property.
However, GST is charged on any property maintenance, management, and repairand other
costs of ownership (Cao et al., 2015). Based on this law, my advice to the directors and the
partners of Rubi property limited is that the rental income will be treated as non-taxable
income and GST will not be charged hence reducing the assessable income.
Additionally under income tax on rental properties, there are various tax deductions
that can be claimed such as gardening and maintenance, as well as depreciation on furniture,
fittings and equipment used in the rental property (Mangioni, 2015). According to the case
study, the 8500 was spent to old kitchen fittings, including cupboards that had deteriorated
through water damage and wear and tear. Therefore, based on this law, my advice to the
directors and the partners of Rubi property is that the depreciation on this fittings in the
property can be treated as capital allowance or the wear and tear allowance hence an
allowable expense that reduces the assessable income under s 8.1(2)(3a) of the ITAA 97.
They cannot be deducted.
b.
As per the Australian tax laws on residential rental properties, Ruby can claim income
tax deductions on legal expenses based on the defence of a claim on damages due to the

TAXATION 6
suffering of injuries by a third party on the company’s rental property (Christensen, 2017).
Therefore, based on the Ruby’s case study, since the visitor is a third party who actually
incurred injuries due to slipping on the steps of the property with poor conditions, a tax
deduction on the same can be offered (Australian Taxation Office, 2018). My advice to the
directors and the partners is that the $7,000 incurred legal expenses can be treated as
allowable expenses thus reducing the Ruby’s assessable income. This in turn reduces the tax
that Ruby needs to pay hence the partners, and the directors are both satisfied with the
decision under s 8.1(a)
c.
Relatively, based on the accounting standards, defective goods should be deducted
during the valuation of trading stock in determination of the profit margin that later affects
the assessable income (Simeon, & John, 2018). Being that the defective goods worth
$75,000 was paid for in 2017, the same amount should be written off in the valuation of
trading stock. With this effect, the damaged goods can be written off from the inventory
without actually changing the cost of goods sold but through the reduction of income
balances. The other option is to report the loss of the good separately hence adjusting in both
the inventory and cost of goods sold. I would then advise filing a tax deductibility claim
against cost of goods. With that then the directors and partners will be happy to recognize a
deduction in the assessable income as the claim would be an allowable expense under s
8.1(a) of the ITAA
d.
Based on recognized accounting standards, the best way to account for this
transaction is to recognize the fact that it can be treated as an inventory cost hence allowed
(Miller & Oats, 2016). Being that the carriage inwards is deducted from the stock in

TAXATION 7
obtaining the cost of sales then the inventory cost should be taken as an expense. The amount
will then be taken into account as an allowable expense. Tax is twisting up continuously
indispensable as contention for remote wander heightens and associations end up being more
adaptable. Australia's corporate tax rate is high stood out from various countries we battle
with for hypothesis, especially those in the Asia Pacific region.
While association tax is paid by associations, the weight is passed on to speculators,
clients and specialists. A more forceful business tax condition would stimulate bigger
measures of enthusiasm for Australia and preferred standpoint all Australians through
extended work and wages as time goes on. According to tax laws, allowable expenses results
into tax deductibility due to the reduced assessable income. My advice then to the directors
and the partners is to treat this as explained above under s 23-35 of ITAA 97.
e.
The R&D Tax Incentive gives a tax reduction to organizations to help counterbalance
a portion of the cost of leading qualified innovative work exercises. The tax incentive on
R&D which is a program of self-evaluation program, suggeststhat one has control of
surveying whether the research and development program and the company meet the
necessary standards of qualifications (Department of Industry, 2018). These prerequisites are
dictated by enactment. To apply for the R&D Tax Incentive, you should enlist your qualified
R&D with the Department of Industry, Innovation and Science (the division).My advice to
the partners and directors is the application of the R & D tax incentive hence the company
will be in a position to spend the $200,000 and till have a tax reduction on the assessable
income.
Conclusively, as explained above, I believe that Ruby ltd will be in a position to have
a minimized taxable income. This based on tax deductibility due to the fact that GST is not
charged on any rental income from a residential property, the fact that income tax deductions

TAXATION 8
can be claimed on legal expenses based on the fact that the victim is a visitor is a third party
who actually incurred injuries due to slipping on the steps of the property with poor
conditions. Additionally, the is the application of the research and development incentive on
taxes, and the fact that is a evaluation program for the company itself under s 8.1(a) of the
ITAA 97
References
6 factors to choose the right basis of accounting for your not-for-profit.
(n.d.).Blog.Aicpa.Org. Retrieved August 28, 2018, from

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http://blog.aicpa.org/2017/11/choose-the-right-basis-of-accounting-for-your-not-for-
profit.html#sthash.PNhXDrWJ.dpbs
Kumar, N. (2018). GST and its Control over the Tax Collection. GST Simplified Tax System:
Challenges and Remedies, 1(1), 214-217.
Journal of the Australasian Tax Teachers Association. (n.d.). Retrieved August 28, 2018,
from http://classic.austlii.edu.au/au/journals/JlATaxTA/2005/6.html
15 Best Accounting Software Systems For Your Business. (n.d.). Retrieved August 28, 2018,
from https://financesonline.com/15-best-accounting-software-systems-business/
Mangioni, V. (2015). Land Tax in Australia: Fiscal reform of sub-national government.
Routledge.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ...&Wende, S.
(2015). Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
Christensen, S. A. (2017). Tax update for property buyers. Australian Property Law
Bulletin, 32(4), 63-65.
Simeon, E. D., & John, O. (2018). Implication of Choice of Inventory Valuation Methods on
Profit, Tax and Closing Inventory.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Australian Taxation Office. (2017, June 30). Choosing an accounting method. Retrieved
August 28, 2018, from https://www.ato.gov.au/business/gst/accounting-for-gst-in-
your-business/choosing-an-accounting-method/
Department of Industry. (2018, June 29). R&D Tax Incentive. Retrieved August 28, 2018,
from https://www.business.gov.au/assistance/research-and-development-tax-incentive
Australian Taxation Office. (2018, August 09). Expenses deductible immediately -
management, maintenance, interest. Retrieved August 28, 2018, from

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https://www.ato.gov.au/general/property/residential-rental-properties/expenses-
deductible-immediately---management,-maintenance,-interest/
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https://www.ato.gov.au/law/view/document?DocID=TXR/TR981/NAT/ATO/00001&
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