University Taxation and Accounting 13 Assignment: Detailed Analysis

This document presents a comprehensive solution to a Taxation and Accounting assignment, addressing key concepts and calculations. It begins by analyzing deductions under the Income Tax Assessment Act 1997, differentiating between allowable and non-allowable expenses. The solution then tackles input tax credit calculations, considering advertising expenditures and relevant tax rates. Furthermore, the assignment delves into the calculation of foreign tax offsets, illustrating the process with a detailed example, including the determination of taxable income and the tax offset limit. Finally, the solution calculates the net income of a partnership, considering various receipts, expenses, and adjustments, including partnership losses and specific notes regarding deductible and non-deductible items. The document provides a step-by-step approach to solving the assignment questions.

Running head: TAXATION AND ACCOUNTING
Taxation and Accounting
Student’s Name:
University Name:
Author Note

1TAXATION AND ACCOUNTING
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................4
Question 4........................................................................................................................................8
References......................................................................................................................................13

2TAXATION AND ACCOUNTING
Question 1
Under Section 8-1 of Income Tax Assessment Act 1997:
1. The cost of moving machinery to a new site will be allowed as deduction because it has
been incurred while producing or gaining the assessable income.
2. The cost of revaluing assets to effect insurance cover will not be allowed as a deduction
because it has been incurred while producing or gaining the exempt income or non-
assessable income (Tran-Nam & Evans, 2012).
3. Legal Expenses incurred by a company opposing a petition for winding up will not be
allowed as a deduction because it is considered as an outgoing of a domestic or private
nature.
4. Legal Expenses incurred for services of a solicitor in respect of a number of matters,
including conveyance, discharge of a mortgage, and general legal advice relating to a
client’s business operations will be allowed as a deduction as the cost has been incurred
while producing or gaining assessable income.
Question 2
In question 2 it can be observed that Big Bank had a budget of expending $1650000, out
of which $550,000 was given to media advertising campaign especially for promotion of
contents insurance policies and Big Bank home. The remaining $1,100,000 was spent on a
general campaign, including radio, television and print media promoting Big Bank.

3TAXATION AND ACCOUNTING
Now to calculate the input tax credit, the fact that acquisitions in relation to input taxed
supplies that is the traditional borrowing as well as deposit facilities business will not be
considered (James, 2015). Accession in relation to taxed supplies will be taken into
consideration. Therefore as in the case of Question 2 the advertisement expenditure incurred for
the promotion of Big Bank home and contents insurance policies will be considered while
calculating input tax credit but the expenditure incurred for general advertisement campaign will
only be considered for that part about which the Big Bank home and contents insurance business
is concerned that is 2 percent off $1100000.
Therefore,
PARTICULARS AMOUNT
Expenditure on advertisements for Big Bank home and content insurance
policies
(+) Expenditure on general advertisements [ 2%*1100000]
TOTAL
Bank's ability to claim input tax credits is
($572000*10%)/100+10%
$550000
$22000
$572000
$571.43
FORMULA FOR CALCULATING INPUT TAX CREDIT
{RATE(10%) * PURCHASE($572000)/100+RATE(10%)}

4TAXATION AND ACCOUNTING
METHOD
At first the total expenditures are added that is the advertisement expenditure subjected to
insurance policies and Big Bank home is added with that part of the general advertisement
expenditure that is included in taxed supplies (Kumar, 2016).
Then the input tax credit is calculated with the above mentioned formula. The Rate is
assumed to be 10% as the standard Australian rate is 10%.
Question 3
In question 3 as it can be observed that the foreign tax offset is required to be calculated
for an individual named Angelo. Before proceeding further, the term foreign tax offset must be
understood.
From 1st July 2008, the tax credits subjected to foreign income have been replaced with a
foreign income tax offset (Fleming, Peroni & Shay, 2016). The excess foreign tax credits from
the period of 1st July 2003 to 30th June 2008 should be converted to an amount known as pre-
commencement excess foreign income tax before they are made any use of. Unlike the
traditional system of foreign tax credits (applying till 30th June 2008), in calculating the amount
of the offset, no longer the foreign income has to be divided into different classes (West &
Varma, 2012). As stated in the question all of Angelo’s foreign income amounts have been
converted to Australian dollars.
Now in order to calculate the tax offset limit, the total income tax payable is calculated as
follows:

5TAXATION AND ACCOUNTING
PARTICULARS
AMOUNT($
)
Employment income from Australia 44000
Employment income from United States 12000
Employment income from United Kingdom 8000
Rental income from property in United Kingdom 2000
Dividend income from United Kingdom 1200
Interest income from United Kingdom 800
TOTAL ASSESSABLE INCOME (A) 68000
Column1 Column2
Expenses incurred in deriving employment income from Australia 4000
Expenses incurred in deriving employment income from United
States 900
Expenses incurred in deriving rental income from United Kingdom 500
Interest (debt deductions) incurred in deriving dividend income 140
Expenses (debt deductions) incurred in deriving interest income 60

6TAXATION AND ACCOUNTING
Gift to a deductible gift recipient 400
TOTAL ALLOWABLE DEDUCTIONS (B) 6000
TAXABLE INCOME OF ANGELO (A - B) 62000
Column1 Column2
Foreign Income Tax paid:
Employment income from United States 3600
Dividend income from United Kingdom 120
Interest income from United Kingdom 80
Rental income from United Kingdom 600
TOTAL FOREIGN TAX PAID 4400
Angelo will calculate his overseas boundary or limit of the income tax offset as follows:
Step 1: The tax payable on taxable income is $13289.5 (including Medicare levy)
[According to the resident tax rates - $3572 + {($62000 + $4900) - $37000}*32.5c]
Step 2: The income tax that would require payment if the assessable income is
excluded of the following foreign income:

7TAXATION AND ACCOUNTING
PARTICULARS
AMOUNT($
)
Employment income from United States 12000
Employment income from United Kingdom 8000
Rental income from property in United Kingdom 2000
Dividend income from United Kingdom 1200
Interest income from United Kingdom 800
TOTAL(A) 24000
Certain expenses are not taken into account. These are expenditures that can be linked
with financial values included in his assessable income upon which the payment of foreign
income tax has been done (Cockfield, 2013).
EXPENSES
AMOUNT($
)
Expenses incurred in deriving employment income from United
States 900
Expenses incurred in deriving rental income from United Kingdom 500

8TAXATION AND ACCOUNTING
TOTAL EXPENSES(B) 1400
The debt deductions worth $100 related to the United Kingdom dividend and interest
income are not taken into account, as nothing is mentioned in the question about Angelo having
a foreign permanent address or establishment. Nor is the $70 deduction for gift is regarded, as it
does not have any reasonable relation to the excluded assessable income amounts.
PARTICULARS
AMOUNT($
)
TOTAL ASSESSABLE INCOME 24000
(-) ALLOWABLE DEDUCTION (TOTAL EXPENSES) 1400
TAXABLE INCOME UNDER STEP 2 (A - B) 22600
Therefore tax on $22600 is $836
[According to resident tax rates - ($22600 – 18200)*19]
Now the TAX OFFSET LIMIT = $13289.5 - $836 = $12453.5
This amount is Angelo’s foreign income tax offset limit. Although he did pay foreign
income tax of $4,400, his foreign income tax offset is limited to $12453.5.

9TAXATION AND ACCOUNTING
Question 4
In question 4 it can be observed that the net income of the partnership for a particular
financial year is required (Gale & Brown, 2013).
For this the net profit of the firm whose partners are Johnny and Leon is calculated as
below. Net operating profit can be calculated by subtracting all the payments or expenses
incurred by the firm as a whole from all the payments (Steingold, 2015).
CALCULATION OF ALL RECEIPTS AND EXPENSES:
RECEIPTS
AMOUNT($
)
AMOUNT($
)
Sale of sporting goods 400000
(-) goods stolen as mentioned in Note 3 -3000
37000
Interest on bank deposits 10000
Dividend received 21000
Bad debt recovered 10000
Exempt income 50000
Capital gain from disposal of shares 30000

10TAXATION AND ACCOUNTING
(-) loss acquired as mentioned in Note 4 -15000
15000
TOTAL RECEIPTS 143000
EXPENSES
AMOUNT($
)
AMOUNT($
)
Salary to Johnny 10000
Salary to Leon 15000
Fringe benefits tax 16000
Interest on capital provided by Johnny 2000
Interest on loan made by Johnny to the partnership 4000
Legal fees for the renewal of lease of the office building 2000
Legal expenses for preparation of a partnership agreement 1200
Legal expenses for preparation of new lease of business premises 700
Debt collection expenses paid to a solicitor 500
Council rates on business premises 500
Staff salaries 25000
(-) Personal expense as mentioned in Note 6 -10000

11TAXATION AND ACCOUNTING
15000
Stock at the beginning of the year 20000
Purchase of sporting goods supplies 30000
(-) Sale of stock {(20000 + 30000) - 16000} -34000
16000
Loss on sale of stock {(18000/20000)*34000} = 30600 (34000 -
30600) = 3400 3400
Rent on retail shop 20000
Provision for doubtful debts 30000
(-) Debt beyond recovery as mentioned in Note 10 -30000
NIL
Johnny and Leon made a net partnership loss of $40,000 last year 40000
Business lunches with expensive buyers as mentioned in Note 11
(50%*10000) 5000
TOTAL EXPENSES 151300
NOTES:

12TAXATION AND ACCOUNTING
In Note 5 it is said that Johnny takes work home, but this is not considered as a business
expense hence no entry is made for this.
In Note 6 staff salaries include $10000 for washing the partner’s car which is again a
personal expense hence not considered.
In Note 7 the opening stock is shown as $20000 and at the end of the year it is $16000.
Therefore the opening stock is added with the purchase at first and then the stock worth $ 34000
is subtracted from it in order to keep the closing stock as $16000.
Now the stock worth $34000 is sold at $30600 thus incurring a loss of $3400
In Note 10 the provision for doubtful debt is made nil as there is no action for recovery.
In Note 11 Johnny and Leon spends $10000 on business lunch with overseas buyers, for
which only fifty percent of the expenditure is taken into account as per rule.
In Note 12 the net partnership loss of $40000 is taken into account they have made an
election under Section 328-285 of ITAA97 as mentioned in Note 9.
Therefore Net Profit = (143000 – 151300) = -8300
The net profit cannot be a negative figure, therefore it is net loss, $8300 and has to be
borne by both the partners in 1:1 ratio that is equally.

13TAXATION AND ACCOUNTING
References
Cockfield, A. J. (2013). The Limits of the International Tax Regime as a Commitment Projector.
Va. Tax Rev., 33, 59.
Fleming, J. C., Peroni, R. J., & Shay, S. E. (2016). Two Cheers for the Foreign Tax Credit, Even
in the BEPS Era.
Gale, W. G., & Brown, S. (2013). Small business, innovation, and tax policy: A review.
James, K. (2015). The rise of the value-added tax. Cambridge University Press.
Kumar, R. (2016). Comparison between Goods and Services Tax and Current Taxation System
A Brief Study. International Journal of Allied practice, Research and Review, 3(4), 09-
16.
Steingold, F. S. (2015). Legal guide for starting & running a small business. Nolo.
Tran-Nam, B., & Evans, C. (2012). Tax policy simplification: An evaluation of the proposal for
a standard deduction for work related expenses.
West, P. R., & Varma, A. P. (2012). The Past and Future of the Foreign Tax Credit. Int'l Tax J.,
38, 47.