Taxation Law: Tax Treatment of Income and Expenditures for Technology Computer Pty Ltd

This report outlines the tax treatments for Technology Computer Pty Ltd's income and expenditures as per the Income Tax Assessment Act 1997 (ITAA 1997) and instructions provided by the Australian Taxation Office (ATO). It includes a tax reconciliation statement for the year ended on June 30, 2018.

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

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TAXATION LAW
Contents
Introduction:....................................................................................................................................2
Part a:...............................................................................................................................................2
Part b:...............................................................................................................................................6
References:....................................................................................................................................12

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Introduction:
In Australia, it is the Income Tax Assessment Act 1997 (ITAA 1997) which is referred to
by the tax payers, both individuals as well as corporate entities, in determining the taxable
income and resultant tax liabilities for any income year. The standard income year in the country
is from 1st of July of a year to 30th June of next year. Taking into consideration the provisions of
ITAA 1997 and the instructions provided by the Australian Taxation Office (ATO), a detailed
report outlining the tax treatments for each item is reported below.
Part a:
Technology Computer Pty Ltd, here in after to be referred to as Technology in this
document, has incurred number of expenditures and earned income from different sources during
the income year ending on June 30, 2018. The tax treatments of these items as per ITAA 1997
are enumerated below.
1. Trading stock yet to be received by Technology is not part of closing stock hence, it has been
excluded from accounting profit (White and Townsend, 2018).
2. Service revenue of $50,000 is not to be included in computing taxable income from business as
the services in relation to the revenue is not yet completed.
3. Depreciation of $300,000 is added back to deduct entire depreciation as per ITAA 1997, i.e.
$375,000 to compute taxable income from business (James, 2016).
4. The entire sale proceed received from sale of a machine is not a revenue receipt to the business.
In such case only the gain or loss from sale of such machine is to be considered for calculating
assessable income of business. Hence, the entire sale proceed receipt from sale of the machine
has to be excluded form accounting profit and only the resultant gain or loss shall be adjusted
with the profit to determine the taxable income from business. The following calculation will help

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in understanding the appropriate tax treatment for the item (Chardon, Freudenberg and
Brimble, 2016).
Details $ $
Depreciation on Machine
Depreciation as per prime cost method:
Rate of depreciation is (100/4)% 0
.25
Depreciation per year (100000 x 25%) 25,000.
00
Accumulated depreciation till the machine was sold (25000 x
2)
50,000.
00
Machine's value as per books of account as on the June 30, 2018
Machine cost 100,000.
00
Less: Accumulated depreciation 50,000.
00
Machine's value as per books of account as on the June 30,
2018
50,000.
00
Less: Proceed received from sale of the machine 30,000.

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00
Loss on sale 20,000.
00
5. Out of the total repair and maintenance costs, the cost of replacement of roof top and conversion
cost of old store room into factory space are capital expenditures. Thus, these expenditures have
to be added back to the accounting profit for computing taxable income from business.
Demolition of redundant building cost is allowed though as it is for running day to day affairs of
the company.
6. Initial borrowing cost is a capital expenditures and should be capitalized at the time of taking
loan. The capital cost shall be written off each year in pro-rata basis over the entire duration of
borrowing. The following calculation will explain the appropriate tax treatment for the borrowing
cost (Ingles and Stewart, 2018).
Annual amortization costs
Details $
Borrowing cost to be added back to accounting profit 5,00
0.00
Period of loan 10
years
Borrowing cost (annual) 5

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00.00
Amortization cost to be written off as on June 30, 2018
Annual borrowing costs (5000 /10) 5
00.00
Proportionate cost of amortization (500 x 6/12) to be deducted from
accounting profit
2
50.00
7. Sale of land is will give rise to either capital gain or loss to a tax payer thus, such transaction shall
be recorded accordingly. In this case the entire capital gain must be deducted from the accounting
profit and treated as capital gain separately from business income.
8. Employee entertainment expenses is not a deductible expenditure. Assuming that the
entertainment expenses on clients is necessary for the business, such expenditure will be allowed
as deductible expenses in computing business income (Ingles and Stewart, 2017).
9. The increase in long service and holiday expenses will not be allowed as directors are interested
and cannot sanction such increase in payment.
10. Research expenditures are deductible revenue expenditures until unless it is on development
phase.
11. The amount of bad debt $5,500 should have been adjusted at the time of acquisition and it is a
capital item. The bad debt is not allowed as expenditures hence, to be added back to accounting
profit.

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Part b:
Technology computer Pty Ltd.’s Tax Reconciliation for the year ended on June 30, 2018:
Tax Reconciliation Statement
Details Amount
($)
Amount ($)
Net accounting profit before tax 1,500,000.
00
Add: Amounts not deductible and assessable income not considered in income statement
Depreciation as per books of account (treated separately) 300,000.
00
Building roof replacement cost 90,600.
00
Building (Redundant) demolition cost is deductible expenditure -
Conversion cost of old store room into factory space, disallowed 14,800.
00
Borrowing costs 5,000.
00

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Employees entertainment expenses is not deductible expenditure 20,000.
00
Holiday pay and long service leave expenses increase is not
deductible expenditure
60,000.
00
Research expenses is allowed as deduction -
Bad debt is a capital expenditure in this case should have been
adjusted with the net asset at the time of acquisition
5,500.
00
Total addition 495,900
.00
1,995,900.
00
Less: Amounts not assessable and deductible expenses
Trading stock yet to be received 40,000.
00
Revenue recognized for services which is yet to be completed 50,000.
00
Allowable depreciation as per Income Tax Assessment Act, 1997 375,000.
00
Sale of profit on a machine is not a business income 30,000.

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00
Loss on machine sold (WN 1) 20,000.
00
Amortization to be written off (WN 2) 250
.00
Capital gain from sale of land is not to be included in computing
taxable income from business
100,000.
00
Total reduction / subtraction 615,250
.00
Taxable income 1,380,650.
00
Tax payable on business income @ 27.50%
(1380650 x 27.50%) 379,678
.75
Capital gain:
Net capital gain 100,000.
00
Tax on capital gain for companies @30% 30,000

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.00
Net tax payable 409,678
.75
Taxable income from business is $1,380,650 and the tax payable on business income is
$379,679. The net tax payable is $409,679 as the company also had capital gain from sale of land
on which it required to pay a 30% tax (Braithwaite, 2017).
WN 1:
Details $ $
Depreciation on Machine
Depreciation as per prime cost method:
Rate of depreciation is (100/4)% 0.2
5
Depreciation per year (100000 x 25%) 25,000.00
Accumulated depreciation till the machine was sold
(25000 x 2)
50,000.
00
Machine's value as per books of account as on the June 30, 2018

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Machine cost 100,000.00
Less: Accumulated depreciation 50,000.00
Machine's value as per books of account as on the June
30, 2018
50,000.
00
Less: Proceed received from sale of the machine 30,000.
00
Loss on sale 20,000.
00
WN 2:
Annual amortization costs
Details $
Borrowing cost 5,000
.00
Period of loan 10 years
Borrowing cost (annual) 50
0.00
Amortization cost to be written off as on June 30, 2018

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Annual borrowing costs (5000 /10) 50
0.00
Proportionate amortization cost to be
written off (500 x 6/12)
25
0.00

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References:
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. 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.
Ingles, D. and Stewart, M., 2018. Australia's Company Tax: Options for Fiscally Sustainable
Reform, Updated Post Trump. Available at: https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3134982 [Accessed on 5 October 2018]
Ingles, D. and Stewart, M., 2017. Australia's company tax: Options for fiscally sustainable
reform. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3168953 [Accessed on
5 October 2018]
James, K., 2016. The Australian Taxation Office perspective on work-related travel expense
deductions for academics. International Journal of Critical Accounting, 8(5-6), pp.345-362.
White, J. and Townsend, A., 2018. Deductibility of employee travel expenses: The ATO's
guidance. Taxation in Australia, 52(11), p.608.