Taxation

This article discusses the difference between cash and accrual method of accounting, and how it affects taxation. It provides answers to common questions about rental deductions, legal expenses, and more. The article also covers the provisions of the ITAA 1997 and relevant court cases. Course ID and university not mentioned.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION
Table of Contents
Answer to Requirement 1:.........................................................................................................2
Answer to (I):.........................................................................................................................2
Answer to (II):........................................................................................................................2
Answer to (III):......................................................................................................................3
Answer to (IV):......................................................................................................................3
Answer to (V):........................................................................................................................4
Answer to requirement 2:...........................................................................................................6
Answer A:..............................................................................................................................6
Answer B:...............................................................................................................................6
Answer C:...............................................................................................................................7
Answer D:..............................................................................................................................8
Answer E:...............................................................................................................................8
References:...............................................................................................................................10

2TAXATION
Answer to Requirement 1:
Answer to (I):
The difference between the cash and the accrual method of accounting is based on the
sale and purchase that are recorded in the accounts (Woellner et al., 2016). As Held in
“Carden v FCT” the cash method of accounting identifies the revenue and expenditure only
on the circumstances when it changes hand however in the accrual method of accounting it
recognizes the revenue when it is earned. An individual taxpayer can use them of the cash or
accrual accounting system based on the certain factors. The cash method of accounting might
be easy to maintain and understand.
There are no accruals and allocations to compute. In the actual world not much of the
business function under the entirely cash method of accounting because a business may sell
products that are paid later or other forms of transactions that occur and payment that is
received in the later period (Braithwaite, 2017). In “Henderson v FCT” using the accrual
method accounting it provides the business with the better scenario regarding the income and
the expenditure originating out of profitability. Factors such as double entry bookkeeping
may be considered useful in choosing the method as the business would obtain the knowledge
regarding the accounting equation. Cash flow factors forms the best in deciding the
accounting method which provides a business with the better idea regarding the cash flow.
Answer to (II):
Frank has the basis of adopting either of the accounting method. Referring to decision
in As Held in “Carden v FCT” Frank can select accounting for cash basis. The basis for
adopting the cash basis of accounting would help in identifying the revenues based on the
receipt of cash and expenditure that is received (Snape & De Souza, 2016). This method

3TAXATION
would be helpful in identifying the accounts receivable or the accounts payable. Frank can
consider opting for the cash basis of accounting since it is very easy to maintain.
Furthermore, it is easy to ascertain whether the transaction has incurred and there is
no need of tracking the receivables or the payables (Bushman et al., 2016). For Frank there is
a choice of adopting the cash or the accrual basis of accounting. Accounting based on the
cash basis represents the accounting for GST on the business activity statement that would
cover the period in which a business makes the payment for the sale and purchase.
Answer to (III):
The commissioner of taxation in “FCT v Henerson” held that it has the right of
insisting on the particular basis of accounting. The taxation commissioner states that a person
is held taxable for the assessable income based on the cash basis by including the payment
that is received by a business irrespective of when the work was performed (Nallareddy et al.,
2017). The commissioner under the cash basis insist the business in including those payments
that are eventually received for the year as the taxable income. The commissioner of taxation
insists that business with aggregate yearly turnover over of less than $10 million can selected
to account for the GST based on the cash method of accounting.
Accounting for the cash basis represents that the business should account for the GST
on the business activity statement that covers the particular period in which the business
receives or makes the payment for the purpose of sale and purchase (Ball et al., 2016). The
commissioner of taxation insists that a business gains the advantage under the cash basis of
accounting as this method helps the business in better aligning the liabilities of the activity
statement and hence easy to administer the cash flow.

4TAXATION
Answer to (IV):
As understood from the case study it can be stated that during the year ended 2016/17
the company has earned a sum of $75,000 while in the subsequent year of 2017-18 the annual
turnover of the company stood $2.5 million. In both the financial year of 2016/17 and
2017/18 the annual turnover of the business stood lower than the prescribed limit of $10
million (Miller & Oats, 2016). The basis of accounting under the cash basis requires an entity
to account for the cash basis if the annual turnover of the business is lower than $2 million
and $10 million respectively.
As evident in the situation of frank the basis of accounting method would change for
the accounting year as the business is primarily small and is below the annual turnover limit
of $10 million. As evident the commissioner in “Dunnv FCT (1989)” assessed the taxpayer
on accrual basis. Frank should attribute the input tax credit for the creditable purpose during
the tax period in which it offers considerations for acquisitions but only till the extent that
Frank provides the consideration during that tax period (Robin, 2017). Hence, the basis of
accounting for Frank would change for the accounting period of 2018. Referring to “Dunnv
FCT (1989)” Frank should return based on the accrual basis.
Answer to (V):
The present availability of software packages makes the traditional criteria of
accounting cash or accrual basis is not relevant anymore. The use of electronic system creates
differences than the traditional method of accounting (Blakelock & King, 2017). The cash
basis of accounting is considered to be highly suitable for the business that has the turnover
of less than $2 million.
The cash and accrual method of accounting is different from the traditional
accounting because it helps in treatment of some items in a different manner. For example,

5TAXATION
maintenance of business records becomes easier which includes keeping track of the records
relating to the income and expenditure such as purchase of business assets, valuation of stock
at the end of the accounting period and payment of employees (Burton, 2017). With the
availability of accounting software packages, it is simple to keep track of the business cash
flow and provides a better picture of total amount of money that a business has as a cash in
hand and bank accounts.

6TAXATION
Answer to requirement 2:
Answer A:
“Section 8-1 of the ITAA 1997” allows a taxpayer to deduction from their assessable
income the expenses that are incurred in gaining the assessable income except on the
conditions that the expenses are not capital in nature (Maley, 2018). An individual is allowed
to claim rental deductions for the expenses that is incurred when the property is rented out or
available for rent. According to the “subsection 25-10 (1)” the meaning of repair includes the
restoration of the asset to its previous conditions without altering the necessary character or
function.
The repair might involve renewal and replacement of subsidiary portions of a whole
but does not include an entire reconstruction. The cost incurred by Ruby for replacing the
kitchen fittings along with the deteriorated cupboard destroyed in storm can be allowed for
general deductions under “section 8-1 of the ITAA 1997” as these repairs constitutes general
repairs for which deductions can be claimed (Bankman et al., 2017). The repair constitutes
the restoring the efficiency and function of the asset and does not cause any change or
improving its character.
Answer B:
As held in “FC of T v Snowden & Wilson Pty Ltd (1958)” taxpayers is allowed t
claim deductions for cost incurred in gaining taxable income. Citing the case of “Herald &
Weekly Times Ltd v Federal Commissioner of Taxation (1991)” there is some legal
expenditure that are incurred in producing the rental income are considered deductible. These
comprises of cost incurred in evicting the non-paying tenant, undertaking any court action for
the loss of rental income and for defending the claims relating to the injuries that is suffered
by the third party on the rental property (Schenk, 2017). Similarly, there are most of the legal

7TAXATION
expenditure that are capital in nature and hence non-deductible. Non-deductible legal
expenditure that are capital in nature might however become the part of the cost of property
for the purpose of capital gains tax.
Ruby reported a legal expenditure of $7,000 as one of her tenants slipped on the steps
and suffered injuries. Referring to “Herald & Weekly Times Ltd v Federal Commissioner of
Taxation (1991)” the, legal expense of $7,000 will be allowed as deductions since the
expenses constituted defending the damage claims originating from the injuries that is
suffered by the tenant on the rental property. The expenditure originated as the letting out of
premises to the tenant with the objective of generating assessable income (Murphy &
Higgins, 2016). The legal expenditure that is occurred by Ruby possess connection with the
rental income such that the expenditure is held as incidental and relevant in producing the
taxable rental income. There was no such enduring benefit that was generated by the
expenses and hence it is appropriate to consider the expenses as being the revenue account.
Answer C:
According to “section 8-1 of the ITAA 1997” it allows for deductions relating to all
the losses and outgoings till the extent that the outgoings are occurred in producing the
taxable income, excluding the circumstances where the losses or outgoings are capital in
nature and it is related to the derivation of the exempted income (Buenker, 2018). The court
in “Hallstroms Pty Ltd v FCT (1946)” in ascertaining whether the deductions for the legal
expenditure is allowable under the provision of “section 8-1 of the ITAA 1997”, the nature of
the expenditure should be considered. As evident in the current situation of Ruby Pty Ltd the
company incurred expenses on paying the compensation damage. The settlement of claim
amount stood $750,000 for the car manufacturing company.

8TAXATION
The court of law in “Sun Newspaper Ltd v FCT (1938)” held that expenditure that is
devoted in the direction of structural instead of operational purpose, then such expenditure is
regarded as capital nature and the expenditure are non-allowable deductions (Schmalbeck et
al., 2015). The compensation that is occurred by the Ruby Pty Ltd cannot be allowed as
allowable deductions. The expenses were much devoted towards structural purpose rather
than the operational purpose. The expenditure is capital expenses and hence the expenses will
not be allowed for deductions for Ruby Pty Ltd.
Answer D:
According to Australian taxation office provision expenditure is considered as non-
allowable deductions over the eligible period. To obtain deduction under the section 63 of the
Act, the expenses should exist before it can be allowed as deductions. A deduction is allowed
to the taxpayer under the “subsection 63 (1)” given the taxpayer has written off a part of the
expenses (Woellner et al., 2016). Under the current situation it is noticed that Ruby set aside
a provision of $100,000 in the accounts for the income year ended 30 June. As the general
rule the provisional business expenditure is not allowed for deductions since they are not
incurred in gaining the assessable income and hence non-allowable as deductions under the
general provision of “section 8-1 of the ITAA 1997”.
Answer E:
The court in “Goodman Fiekdr Wattie v FCT” held that any type of losses or
outgoings that are preliminary in the commencement of the income generating business
activities are not occurred in the course of such as activity are not considered as allowable
deductions under the general provision of “section 8-1 of the ITAA 1997”. Referring to the
decision in “Softwood Pulp & Paper v FCT (1976)” the company incurred expenditure on
feasibility study and other relevant expenses to ascertain whether the start a new production
unit of paper mill (Miller & Oats, 2016). The commissioner of in its judgement stated that the

9TAXATION
costs incurred by taxpayer on feasibility study would not be allowed as allowable deductions
as everything which was done was considered preliminary in nature in the commencement of
the income generating activities.
As evident in the current situation of Ruby Pty Ltd the company incurred
investigation expenditure of $220,000 for a possible entry into the car manufacturing
industry. Citing the reference of “Softwood Pulp & Paper v FCT (1976)” the expenses that
were incurred by the company are preliminary to the beginning of the income generating
activities and the same is not incurred in the course of generating the taxable income.
Therefore, the market investigation expenses cannot be considered as the allowable
deductions under the general provision of “section 8-1 of the ITAA 1997”.

10TAXATION
References:
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and
operating profitability in the cross section of stock returns. Journal of Financial
Economics, 121(1), 28-45.
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income
Taxation. Wolters Kluwer Law & Business.
Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), 18.
Braithwaite, V. (2017). Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Buenker, J. D. (2018). The Income Tax and the Progressive Era. Routledge.
Burton, M. (2017). A Review of Judicial References to the Dictum of Jordan CJ, Expressed
in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the
Purposes of the Australian Income Tax. J. Austl. Tax'n, 19, 50.
Bushman, R. M., Lerman, A., & Zhang, X. F. (2016). The changing landscape of accrual
accounting. Journal of Accounting Research, 54(1), 41-78.
Maley, M. N. (2018). Australian Taxation Office Guidance on the Diverted Profits Tax.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage
Learning.
Nallareddy, S., Sethuraman, M., & Venkatachalam, M. (2017). The changing landscape of
accrual accounting: Implications for operating cash flow predictability.

11TAXATION
Robin, h. (2017). Australian taxation law 2017. Oxford University Press.
Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.
Schmalbeck, R., Zelenak, L., & Lawsky, S. B. (2015). Federal Income Taxation. Wolters
Kluwer Law & Business.
Snape, J., & De Souza, J. (2016). Environmental taxation law: policy, contexts and practice.
Routledge.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation
Law 2016. OUP Catalogue.