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Taxation Law in Emerald Gems Pty Ltd

   

Added on  2020-03-16

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TAXATION LAWIntroductionExclusive Emerald Gems Pty Ltd or EEG is an Australian resident company which isengaged into manufacturing of jewellery which is then sold directly to the retail stores. Thebalance sheet of the company has been provided. Further, there are certain transactions thathave happened and particular tax advice needs to be tendered to the company underlining thepotential implications in light of the applicable tax statutes. Discussion(a)The company has decided to shift the business operations from July 1, 2017 and has soldthe business and the underlying capital gain implications need to be estimated for thecompany. In the given case, there would be capital gains implications as the capital eventA1 has happened in line with s. 104-10 ITAA 1997 (Barkoczy, 2017).For computation of the capital gains/(losses) on disposal of a particular asset, it is imperativethat in accordance with s. 110-25, the underlying cost base of the asset needs to bedetermined. The cost base would not only consist of the acquisition cost but would alsoconsider the incidental costs related to buying and selling of asset, title maintaining, theownership costs along with the capital expenditure incurred for enhancing the value of theasset (CCH, 2013).Business PremisesBuying price of business premises = $ 1,310,000Interest paid on loan related to acquisition of business premises (Cost of ownership) = $165,000Legal fees and agent fees (Incidental cost related to selling) = $ 45,000Hence, total cost base of the business premises = 1310000 + 165000 + 45000 = $ 1,520,000Selling price of business premises = $ 1,810,000Hence, capital gains on disposal of business premises = 1810000 – 1520000 = $ 290,000Residential Premises

TAXATION LAWBuying price of residential premises = $ 550,000Legal fees and agent fees (Incidental cost related to selling) = $ 12,000Hence, total cost base of the business premises = 550000 + 12000 = $ 562,000Selling price of residential premises = $ 670,000Hence, capital gains on disposal of residential premises = 670000 – 562000 = $ 108,000Net capital gains for 2017 = 290000 + 108000 – 115000 = $ 283,000Thus, the company would have to pay CGT @30% on the capital gains of $ 283,000 for theyear ending on June 30, 2016.(b)In relation to the valuation method deployed to represent the value of the trading stock,three options are available in the form of cost, market value and replacement value andany of these may be deployed by the taxpayer (s. 70-45).Also, in accordance with IT2670,trading stock implies goods that the concerned taxpayer has the right to dispose offirrespective of whether the title and physical possession exists or not (Gilders et. al.,2016).For the given situation, the taxable income can be maximised if the inventory valuation ismore due to which the amount reflected in cost of goods sold would be lesser. It is apparentthat the market value is the highest at $ 245,000 and hence this valuation method must bedeployed. Further, in relation to the stock from Malaysia, it is apparent that given the factseven though physical possession and title possession is not confirmed, but still there is rightof disposal available with EEG and hence it is appropriate to consider the same as tradingstock or inventory as on June 30, 2017.(c)For the writeoff in bad debts to the tune of $ 20,000 a deduction would be available unders. 25-35 since the following four conditions are satisfied (Sadiq et. al., 2016).The debt was in existenceThe debt in actuality has gone badThe debt has been written off within the given income year

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