ACCG924 Taxation Case Study: Financial Analysis of Manic Pty Ltd, S1

This case study provides a detailed analysis of the taxation implications for Manic Pty Ltd, focusing on the determination of taxable income and tax payable. It includes a memo addressing the tax treatment of various transactions, such as service fees, interest income, trading stock, bad debts, market research expenses, repairs, interest on loans, and profits from the sale of assets. The analysis applies relevant sections of the ITAA 1997 and relevant case law to justify the inclusion or exclusion of items in the assessable income and allowable deductions. Additionally, the case study presents a tax reconciliation, calculating the taxable income and tax payable for Manic Pty Ltd, considering items like accrued interest, service fees, profits from asset sales, capital loss carryforwards, trading stock, market research expenses, interest on loans, depreciation, and entertainment expenses. Desklib provides access to this and other solved assignments for students.

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

1TAXATION
Table of Contents
Part A:........................................................................................................................................2
Answer to requirement A:..........................................................................................................2
Answer to Requirement B..........................................................................................................6
Reference List:...........................................................................................................................8

2TAXATION
Part A:
Answer to requirement A:
Memo
To Chief Financial Officer
Manic Pty Ltd
According to “Section 6 of the ITAA 1997” income that are generated from the
personal exertion represents income that comprises of the earnings, salaries, wages,
commissions, fees, bonuses, pensions, superannuation’s or proceeds from any form of
business that is carried on by the taxpayer either in alone or through partnership. “Section 6-
5 of the ITAA 1997” defines that income that earned through ordinary concept will be
considered for assessment (Woellner et al., 2016). As held in the case of “Scott v
Commissioner of Taxation (1935)” receipts would be considered assessable as income that
are in accordance with the ordinary concepts. Similarly, in the present situation an amount of
$80,000 received from service fees will be included in the assessable income under “section
6 of the ITAA 1936” of Manic Pty Ltd as income from personal exertion.
According to the Australian taxation office an individual deriving income when it
beneficially comes home to taxpayer. According to 6-5 of the ITAA 1997 ordinary income
constitutes income that are in accordance with the ordinary concept of the mankind
(Barkoczy, 2016). As evident an interest of $10,000 will be included in the amounts that will
be held assessable under “section 6-5 of the ITAA 1997”.
According to Australian Taxation Office an individual can claim deductions for the
amount incurred on the trading stock (Vann, 2016). A rise in the trading stock value during
the year represents assessable income while a decrease in the trading stock represents an

3TAXATION
allowable deduction. Including the trading stock for computation of taxable income for an
income year makes sure that the during the ordinary course of business the taxpayer for
trading stock purchased in the year portrays the costs the costs of sales that is involved in that
year. The purchase of trading stock from the Hong Kong based shall be included for
deductions during the accounting expenses.
The “taxation ruling of 92/18” provides the circumstances for the taxpayer to claim
allowable deduction for bad debts that are incurred (Tan et al., 2016). Any form business
losses or outgoings such as revenue in nature are considered for allowable deductions under
section 51 (1) when such losses or outgoings are incurred. The court of law in “Crane Sales
Ltd v Federal Commissioner of Taxation (1971)” stated that debt represents the purpose
under section “63 of the ITAA 1997” where the taxpayer is merely entitled for an equitable
entitlement for debt (Cao et al., 2015).
A deduction is only available to taxpayer for a debt that is written off in the form of
bad debt in an income year. Similarly, in the situation of Manic Pty Ltd the provision for bad
debt shall not be allowed for deductions. This is because no such bad debt has been reported
by the business during the income year (Braithwaite, 2017). Additionally, there is no such
written off as bad debt by Manic Pty Ltd during the year of income in which deductions can
be claimed.
According to the Australian taxation office it allows for deductions for some of the
capital expenditure (Davis et al., 2015). These deductions are only available given the
expenditure does not become the part of the cost of depreciating assets. An individual that
incur expenditure in respect to the current business or a business that an individual earlier
carried on or propose to carry on, the expenses to that extent shall be considered deductible to
the extent the business proposes to carry on. The Australian taxation office allows deductions

4TAXATION
for costs of feasibility studies, market research or setting up of a business entity (Saad, 2014).
The payment of $25,000 to research company for conducting the market research relating to
the viability of entering into the new market will be allowed for allowable deductions.
“Section 25-10 of the ITAA 1997” allows an individual to deduct expenses for
repairs to the premises or the depreciating assets that they hold or used entirely for the
purpose of generating taxable income (Miller & Oats, 2016). Repair represents the restoration
of asset to its previous conditions without changing the necessary function of character of the
asset. expenses that are occurred for repairs are not considered as allowable deductions under
section 25-10 if the expenditure constitutes capital in nature.
The guidelines have been established between the capital and revenue outgoings in
“Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” represents the
expenditure that is occurred in gaining or establishing or replacing the business structure
rather working or operating expenditure (Robin & Barkoczy, 2018). An individual is allowed
to claim deductions only when the objective of making good deterioration with the help of
wear and tear. This generally involve renewing or replacing the subsidiary part but not the
entirety. Therefore, cost of $50,000 for replacing the metal roof with tiles constitute repair of
capital expenditure and therefore Manic will not be able to claim deductions under
“subsection 25-10 (3) of the ITAA 1997”.
An individual is allowed to claim deductions for interest that is charged on the money
borrowed to purchase shares and other related investments through which an individual
generates assessable income or dividend income (Miller & Oats, 2016). Manic Reported an
interest on loan to purchase the new factory will be included for deductions under section 8-1
of the ITAA 1997. The expenditure possesses sufficient amount of connection in the positive
limbs and therefore a deduction is allowable in this respect.

5TAXATION
The profit of $536,000 reported from the sale of factory along with the profits from
the sale of shares represents assessable income under “section 6-5 of the ITAA 1997”. The
profit derived from the business represents an income of income that is derived in the form of
amount of the realisable value (Davis et al., 2015). To possess the character of income an
item should be a gain by the taxpayer that derives it. There cannot be any gain unless an item
has been derived beneficially by the taxpayer. Similarly, the sale of factory and sale of shares
represents gain that is beneficially derived by Manic Pty Ltd therefore these receipts would
be included for assessment in the determination of taxable income.
If an individual realises loss from the disposal of investment namely shares and the
loss constitute a capital loss it can only be offset against the capital gains (Cao et al., 2015).
As evident the carry forward capital loss of $35,000 is in compliance with the CGT
provisions of the ITAA 1997. Manic Pty Ltd can offset in this respect from the profits made
from the sale of shares.
“Section 40-25 (1) of the ITAA 1997” defines that an entity is allowed to claim
deductions for the amount that is equivalent to the declining value for an income year of the
depreciating asset that is held in the year (Tan et al., 2016). A depreciating asset can be
defined as the one that possess limited effective life and can be reasonably anticipated to
decline in the value over the period of time it is used. Manic reported a depreciation
expenditure of $120,000 however in compliance with the ITAA 1997 Manic can claim an
allowable deduction under “section 40-25 (1) of the ITAA 1997”.
A business entertainment expenditure incurred on clients will be considered for
allowable deductions. The entertainment expenditure constitutes work related and the same
will be considered for deductions under “section 8-1 of the ITAA 1997” (Robin & Barkoczy,
2018). Payments that originates from the compensation might be considered for deductions

6TAXATION
under division 8 or section 40-880 for capital expenditure under ITAA 1997. A provision has
been laid down under the “section 25-50 of the ITAA 1997” and “subdivision 3AA of the
ITAA 1936” allows an individual to deduction certain kind of specific payments (Woellner et
al., 2016).
An expenditure that is occurred by an individual for once and for all is generally
regaded as the capital in nature while the expenditure that is incurred regularly is considered
as revenue in nature. An expenditure that has the enduring benefit incurred in bringing into
the existence the asset of lasting in nature is generally held as the capital expenditure.
As stated under the division 8 of the ITAA 1997 an individual is not allowed to claim
deductions relating to the losses or outgoings of capital or capital in nature. A differences
between the losses and expense of revenue in one hand and capital in other hand has been
elucidated in the case of “Sun Newspaper v Federal Commissioner of Taxation”. A
payment that are made for the restrictive covenants is usually but not necessarily made on the
capital account (Davis et al., 2015). Similarly, in the situation of Manic the payment of
restrictive covenants represents capital expenditure and the same will not be considered as
allowable deductions.
Answer to Requirement B
Manic Pty Ltd Tax Reconciliation
Particulars Amount ($) Amount ($)
Net Accounting Profit Before Tax 620500
Add: Amounts no deductible and other amounts assessable
Accrued Interest 10000
Receipt of service fees 80000
Profit from sale of factory 536000
Profit from sale of shares 130000
Less: Capital loss bought forward 35000
Total Addback 1341500
Less: Amounts deductible and amounts not assessable

7TAXATION
Trading Stock 50000
Market Research expenses 25000
Interest on Loan 10300
Depreciation 112000
Entertainment expenses 32500
Total Subtraction 229800
Total Taxable Income 1111700
Tax Payable 473497
Add: Medicare levy 22234
Less: PayG 102500
Total tax payable 393231

8TAXATION
Reference List:
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ... & Wende, S.
(2015). Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2015). Do socially
responsible firms pay more taxes?. The accounting review, 91(1), 47-68.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Robin & barkoczy woellner (stephen & murphy, shirley et al.). (2018). Australian taxation
law 2018. Oxford University Press.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’
view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay
with their practitioners? Trust, competence and aggressive advice. International
Small Business Journal, 34(3), 329-344.
Vann, R. (2016). Hybrid Entities in Australia: Resource Capital Fund III LP Case.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation
Law 2016. OUP Catalogue.

9TAXATION