Taxation Law: Adjustments for Calculation of Taxable Profit of Technology Computer Pty Ltd

This article explains the adjustments for calculation of taxable profit of Technology Computer Pty Ltd as per the taxation laws in Australia. It covers items of income and expenditures to be included and excluded for calculating taxable profit.

Running head: TAXATION LAW
Taxation Law
Name of the Student:
Name of the University:
Authors Note:

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Contents
Introduction:....................................................................................................................................2
Part a:...............................................................................................................................................2
Conclusion:......................................................................................................................................9
References:....................................................................................................................................10

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Introduction:
Taking into consideration the rules and regulations governing the tax related matters of the
corporates in the country, a detailed explanation of the items of income and expenditures to be
included and excluded for calculation of taxable profit of Technology Computer Pty Ltd
(Technology) is provided below for the appraisal of the Chief Financial Officer of the company.
Part a:
The explanations as to treatments of the different items mentioned in the notes in relation to the
adjustments for calculation of taxable income of business of Technology are enumerated below:
1. Trading stock at the close of the year: As on 30th June, 2018, stock valuing $40,000 purchased
from a Singapore based company is yet to be received as the goods are still on a ship. However,
Technology Computer Pty Ltd (Technology) has included the value of these stock in calculating
the closing stock. Thus, the profit of the company is overvalued by the amount of stock.
Accordingly, to be deducted in computing the taxable profit of the company (Nisha, 2015).
2. Service revenue of $50,000 should not be recorded as revenue until unless the required terms and
conditions of such revenue is fulfilled. Since, the client in this case has the right to ask for refund
in case the service is not completed by technology by the end of the year. Hence, there is still
uncertainty attached with the item of revenue. Hence, it should not be considered while
calculating the taxable income of the company. Thus, excluded from accounting profit before tax
to calculate the taxable profit (Jiang et. al. 2016).
3. Amount of depreciation provided in the books of accounts, i.e. $300,000 is added back to the
accounting profit and the allowable depreciation of $375,000 is deducted for calculating taxable
income of Technology. In Tax Reconciliation Statement of the company, a net deduction of

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$75,000 ($375000 - $300,000) could have also been shown to calculate the taxable income of the
company. Thus, in both circumstances the net effect to the profit is reduction of $75,000 for
calculation of taxable profit (Smith et. al. 2016).
4. The sale proceeds received from disposal of a machine is a capital receipt and is not an assessable
amount thus, needs to be excluded from profit as it has been wrongly included in profit. The
company used prime cost method to charge depreciation. However, the gain or loss on sale of the
machine must be adjusted to the accounting profit to calculate taxable profit of the company. The
following calculation shall be helpful in determining the amount of profit or loss form sale of the
machine to adjust the accounting profit of the company (Sikka, 2017).
Particulars Amount
($)
Amount ($)
Depreciation on Machine
Under prime cost method:
Rate of depreciation is (100/4)% 0
.25
Annual depreciation (100000 x 25%) 25,000.
00
Depreciation on the machine till June 30, 2018 (25000 x2) 50,000.00
Value of the machine as on the date of sale (June 30, 2018)
Cost of the machine 100,000.

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00
Less: Depreciation till 30th June, 2018 50,000.
00
value of the machine 50,000.00
Less: Proceed received from sale of the machine 30,000.00
Loss on sale of the asset 20,000.00
Thus, the loss on sale of the machine shall be subtracted from the accounting profit to ascertain
the taxable profit of Technology (Carnegie, 2014).
5. The repair and maintenance expenditures of $110,800 includes expenditures, many of which are
not allowed as deduction.
a. Replacement of rooftop of the building is capital expenditure and to be added to the
building by capitalizing the amount. Thus, to be excluded from repair and maintenance
expenditures of the company to adjust the accounting profit for tax purposes (Taylor and
Richardson, 2014).
b. Cost incurred in demolition of a redundant building is ordinary expenditure as it is not for
development of any non-current asset, as per the information. Thus, the amount can be
deducted from revenue to compute taxable income. Since the amount is already included
in repair and maintenance expenditures thus, there is no need for any further adjustment
for such expenditures (Freebairn, 2015).
c. Conversion cost of old storeroom into a factory space in all probability will increase the
capacity of factory building thus, the amount should be capitalized in factory building

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account. However, the company has considered it as repair and maintenance expenditure
thus, the amount of $14,800 must be added back to the accounting profit to adjust the
profit for tax purpose (Li and Tran, 2016).
6. Borrowing costs in case loan needs to be capitalized and the annual amortization of the cost can
be written off in the profit and loss account of the company. Thus, the borrowing costs of $5,000
that has been deducted in computing the accounting profit of the company must be added back to
the accounting profit before writing off proportionate amortization cost for the year 2017-18.The
period of loan can be sued to calculate the annual amortization costs (Freebairn, 2016). The
annual amortization cost and the amount of amortization costs that can be deducted from the
accounting profit is calculated below:
Annual amortization costs
Particulars Amount ($)
Borrowing cost 5,000.00
Loan repayment period 10 years
Annual borrowing costs (5000 /10) 500.00
Cost of amortization to be written off in 2017-18
Annual borrowing costs (5000 /10) 500.00
Proportionate cost of amortization (500 x 6/12) 250.00

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Hence, after adding back the borrowing cost of $5,000 the accounting profit should be
reduced by $250 for amortization expenses.
7. Land is non-current and non-depreciable asset thus, sale of such asset would result in either
capital gain or capital loss to a person. Such capital gain and capital loss must not be included in
business income and expenditures for calculating taxable profit of business. Hence, the same is
deducted from accounting profit (Chardon, Freudenberg and Brimble, 2016).
8. Entertainment expenses of 20,000 incurred on the employee even if GST is paid on such
entertainment expenses is not allowed as deduction. However, entertainment expense of clients
assuming it is necessary to earn revenue from business is allowed as deduction.
9. The relationship between the directors and an entity is based on the Agency theory. The directors
are expected run the affairs of the business effectively. Increasing the provision of long service
pay and holiday pay is not an allowable expense. Hence, the increase of $60,000 has to be
reversed by adding back the same to the profit of the company (Dixon and Nassios, 2016).
10. Expenditures incurred on research is allowed as deduction since it is still not feasible to capitalize
the expenditure assuming future benefits as the feasibility study has just been conducted. Since
the research expenses have been deducted to calculate accounting profit hence, not adjustment is
necessary.
11. The bad debt of $5,500 is in relation with the debtors of the entity acquired thus, it should have
been adjusted with the net assets acquired by the company at the time of acquisition. Thus,
$5,500 is to be added to the accounting profit to calculate the taxable profit from business.
Part b:

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Tax Reconciliation of Technology computer Pty Ltd for the year ended on June 30, 2018
Particulars Amount ($) Amount ($)
Profit before tax as per the books of accounts (Net accounting profit before tax) 1,500,000.
00
Add: Amounts not deductible and other amounts assessable
Depreciation charged in arriving at the accounting profit 300,000.0
0
Replacement of cost of building roof 90,600.0
0
Redundant building demolition cost is allowed -
Converting cost of old store room into factory space is a capital
cost hence, disallowed
14,800.0
0
Borrowing costs 5,000.0
0
Entertainment expenses of employees is not allowed as deduction 20,000.0
0
Increase in provision of holiday pay and long service leave is not
allowed
60,000.0
0

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Research expenses is allowed as deduction -
Bad debt is not allowed as it is in relation to an entity acquired 5,500.0
0
Total addition 495,900
.00
1,995,900.
00
Less: deductible amounts and amounts not assessable
Value of training stock that are still on a ship from Singapore 40,000.0
0
Service revenue amount not assessable as the service is yet to be
completed
50,000.0
0
Depreciation allowed for tax purposes 375,000.0
0
Amount received from sale of a machine wrongly included in
profit
30,000.0
0
Loss on sale of machine not provided for (Working note 1) 20,000.0
0
Amortization written off (Working note 2) 250.0
0

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Profit on sale of land is a capital gain thus, not assessable income
of business
100,000.0
0
Total reduction / subtraction 615,250
.00
Taxable income 1,380,650.
00
Tax payable at 27.50%
Tax: (1380650 x 27.50%) 379,678
.75
Capital gain:
Net capital gain (300,000 -200,000) 100,000.0
0
Tax on capital gain for companies @30% 30,000
.00
Net tax payable 409,678
.75

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Conclusion:
The taxable income from business of Technology for the year 2017-18 is $1,380,650.00 and tax
payable on such taxable business income is $379,678.75. In addition to that capital gain of the
company is $100,000 with tax payable on such gain at the rate 30%. Thus, net tax payable by
the company is $409,678.75 for the year 2017-18.
References:
Carnegie, G., 2014. Pastoral accounting in colonial Australia: a case study of unregulated
accounting. Routledge.
Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing
your deduction from your offset. Austl. Tax F., 31, p.321. [Online] Available from:
https://heinonline.org/HOL/LandingPage?handle=hein.journals/austraxrum31&div=16&id=&pa
ge= [Accessed 01 October 2018]
Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia.
Centre for Policy Studies, Victoria University. [Online] Available from:
https://www.copsmodels.com/ftp/workpapr/g-260.pdf [Accessed 01 October 2018]
Freebairn, J., 2015. Who Pays the Australian Corporate Income Tax?. Australian Economic
Review, 48(4), pp.357-368.
Freebairn, J., 2016. Design alternatives for an Australian allowance for corporate equity. Austl.
Tax F., 31, p.555.
Jiang, W., Lu, M., Shan, Y. and Zhu, T., 2016. Evidence of avoiding working capital deficits in
Australia. Australian Accounting Review, 26(1), pp.107-118.

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Li, E.X. and Tran, A.V., 2016. An Empirical Analysis of the Tax Burden of Mining Firms versus
Non-Mining Firms in Australia. Austl. Tax F., 31, p.167.
Nisha, N., 2015. Inventory valuation practices: A developing country perspective. International
Journal of Information Research and Review, 2(7), pp.867-874. [Online] Available from:
http://www.ijirr.com/sites/default/files/issues-files/0431.pdf [Accessed 01 October 2018]
Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate siblings?.
In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier.
Smith, F., Smillie, K., Fitzsimons, J., Lindsay, B., Wells, G., Marles, V., Hutchinson, J., Hara,
B.O., Perrigo, T. and Atkinson, I., 2016. Reforms required to the Australian tax system to
improve biodiversity conservation on private land. Environmental and Planning Law
Journal, 33, pp.443-450.
Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting:
Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1),
pp.1-15.