Case Study: Taxation Law & Practice - Accounting Method Selection

This case study examines the application of cash and accrual accounting methods in taxation law, focusing on a business owner's decision-making process and the implications for tax deductibility. Part 1 analyzes Frank's situation, recommending cash basis for the initial year (2016/2017) due to its simplicity and suitability for small businesses with minimal inventory, and then transitioning to accrual basis in 2017/2018 as the business grows and requires a more comprehensive view of financial performance. It also discusses the Commissioner of Taxation's potential insistence on accrual accounting. Part 2 delves into the tax deductibility of various expenses for Ruby Engineering Pty Ltd after its acquisition by Diamond Ltd, addressing scenarios involving repair costs, personal injury claims, and defective product fines. The analysis references relevant cases and legislation to determine whether specific expenditures qualify for tax deductions, including considerations for rental income tax, legal fees, and the Goods and Services Tax (GST).

Running head: Taxation law & Practice 1
Taxation law & Practice
Name
Institution

Taxation law & practice 2
PART 1
Introduction
A taxpayer decides when wage is determined by embracing a strategy for representing
pay. When representing salary, for tax purposes, a citizen must embrace the technique for
bookkeeping that, in the conditions, is fitting. A strategy for accounting is fitting on the off
chance that it gives a 'generously correct reflex' of that pay. This is the rule set up for
Carden's situation. Cash basis is one of the frameworks by which sole brokers and
associations can use to set up their business accounts and ascertain their assessable benefits.
The cash basis was intended to influence book keeping and finishing a self-evaluation to
expense form less demanding for the little unincorporated organizations, that is sole dealers
and associations. The money premise was presented from 6 April 2013 thus for self-appraisal
assessment forms for the 2013/14 impose year onwards. It enables organizations to represent
their salary and costs when they really get instalment or when they really pay for a cost. By
utilizing the money premise, you won't have to figure out account holders and banks at the
year-end, nor play out a stock-take or gauge accumulations and prepayments. Also known as
Generally Accepted Accounting Principle, the accruals basis utilizes fundamental book
keeping principals to guarantee that exclusive receipts and costs which apply to the
bookkeeping year are recorded in that year.
A citizen who represents things of wage on a receipts premise should keep on
adopting that strategy until the point that it is never again fitting. That will happen when the
citizen's conditions demonstrate the profit technique for bookkeeping is the more suitable
strategy by which the pay ought to be resolved for charge purposes. This may happen as a
result of the extension of the business, or on the grounds that the citizen may end up engaged
with exchanging or assembling exercises.
Factors affecting the choice of cash or accrual basis
Simplicity. The money strategy might be the least demanding to keep up and get it.
Either the cash came in or it went out. There are no collections or distributions to process.
Money premise budgetary explanations are most normal with little not-for-benefits.
Investment funds. Money premise monetary explanations may give managerial
investment funds. Without any gatherings or designations to consider, less time is required
for bookkeeping (Besley 2015). What's more, if the association has a money related

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proclamation review, there are less articulations for an evaluator to test and issue a
supposition on. This would by and large diminish the cost of a review.
Resource allocation. This is mainly intended for citizens who resolve to use accrual.
Accrual basis requires sufficient resource in order to be effective in a business premises. It is
better suited to business that don’t pay right away, giving an example of architects who send
their invoice later after completion of their projects. (Braithwait 2017).
Business size. The size of a business affects the accounting strategy of a business,
where a mature business needs accrual basis to easily keep tracks of payments, while the cash
basis is needed in small businesses. Budgetary proclamations arranged utilizing accounting
system of a business depend on a well-known system. (Newcombe & Paradell 2009). Altered
money premise financials can be exhibited in any arrangement administration picks, so they
may not be similar with the announcements of different associations.
Authoritative Documents. Like administrative prerequisites, a not-for-benefit's by-
laws may determine the premise of bookkeeping the association must utilize. Consider
looking into your association's by-laws before experiencing broad research to ensure you
have the adaptability to pick a premise of bookkeeping (Lee 2015).
Comprehension of Financial Position. Money related explanations arranged under
ATO ordinarily give per users a superior comprehension of the budgetary position of the
association at year-end. ATO-based money related explanations will demonstrate payables
and other exceptional commitments, and any dedicated receivables or vows. Money premise
proclamations frequently give restricted data (Becker, Reimer & Rust, 2015). For example, a
not-for-benefit that gets gave supplies and materials utilized in its projects would not catch
their esteem or effect to the association utilizing money premise explanations.
Recommendations for Frank
Considering the factors provided on what Frank should do, it is safe to say that in the
year 2016/2017 the most adoptable basis is the cash basis in that it is simple given that the
business books are kept on the actual flow of cash in and out of the business. Upon receival
the income is recorded and reporting of expenses is done upon payment. The cash basis is
more reliable when it comes to business with no or minimal inventory. Given that Franks
business was still small adopting cash basis for that would ensure that recording income
would be put off until the next tax year, while expenditures are counted right away (Picciotto,

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2017). In relation to employees’ incomes, its best if the cash basis is adopted for the first year
since the employee number has not grown substantially to exceed the required number of the
cash basis. Cash basis in convenient when it comes to handling of business with a small
employee count.
In the year 2017/2018 Frank can go ahead and adopt accrual accounting, given that
the business has grown tremendously posing the need to understand the performance of a
business over the time period. Under this accounting method, all revenue and expenses are
matched together. This ensures that managing the amount of money that Fred has is eased by
providing a good snapshot of a company’s performance. This method is best applicable
because it provides detailed flow of cash for the company. Accrual is better suited to business
that don’t pay right away, giving an example of architects who send their invoice later after
completion of their projects. Given that Fred has acquired inventory it is best if he considers
using accrual method since it shows a precise, current picture of any business (Hallida &
Shaffer, 2015). The fact that his contract will be resolved after the construction was completed
it is of utmost importance that accrual basis be considered.
Based on the above arguments it is of utmost importance to state that the stated plans
are best suited for the business but still it comes down to the choice of the owner, who can
decide to either pick the aforementioned plan or to choose accrual basis only. Accrual can
still be considered for the first year after his win of “The citadel” competition. This is due to
the fact that the construction will require a good number of employees which can be best
handled by the accrual basis.
The commissioner of taxation can insist that the business uses accrual, and to be
treated as a big business considering it had acquired the necessary inventory to exclude it
from new business. Though the claim can be valid, it doesn’t necessarily impose any validity,
considering that Franks’ business is still new and adopting cash method is the most
advantageous in terms of postponing recording income until the next year (Allen & Kraakman
2016).

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PART 2
In this incident we are looking into two companies involved in business, where one
company, Diamond Ltd, has bought the business and company assets of Ruby engineering
Pty Ltd. According to the agreement between the two companies, ruby remained liable for
any claims arising before 2016. Based on the cases Ruby company was liable for some
payments, and their tax deductibility was to be as follows:
Case 1
According to the case of western suburbs it was expedited that expenditure incurred
by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to
any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or
articles held, occupied or used by him for the purpose of producing assessable income, or in
carrying on business for that purpose, shall be an allowable deduction. The verdict on the
case was that the repair expenditure was not of capital nature and thus not deductible. Due to
the repairs carried out of replacing the old kitchen fittings that resulted to an expenditure of
8500, the tax levied was to be of the rental income amount in accordance to the tax law since
the repair was not of capital nature. This repair could be treated as an allowable repair since
the fittings and cupboards had deteriorated and the kitchen was not altered substantially. This
is achieved by subtracting the expenses that one incurs in order to get the property ready to
rent, and for maintenance. According to the legislation. The company only caters for the
rental income tax. Rental and other rental-related wage is everything of lease and related
instalments that you get, or end up qualified for, when you lease your property, regardless of
whether it is paid to you or your operator. You should incorporate your offer of everything of
lease you win in your expense form (Baamir, 2016). Lease and related instalments might be as
merchandise and enterprises. You should work out the money related estimation of these. For
instance, if the inhabitant gives you property or products as lease rather than cash, you
incorporate the market estimation of the property or merchandise as rental wage in your
expense form.
Case 2
An associated case of Snowden & Wilson proprietary limited where the company was
supposedly charged tax on every payment offered up for their ongoing case, this was upheld
by majority of board review. In another instance involving Ruby company a visitor slipped
on steps and sustained injury. The company has been paying the plaintiff a fee despite the

Taxation law & practice 6
fact the claim has not been settled. The legal fee was eligible for taxation. Given the fact that
the fee is legal, a tax levy is imposed on the fee. It is assumed that the company is liable for
injuries of visitors because landlord’s negligence has caused the injuries. The best way to
avoid such incidents is to ensure that the property is in great shape. To avoid further taxation
the company needs to hire a lawyer to push for the finalisation of the case before end of
financial year (Kucuri, 2015). An all-around composed property protection arrangement can
shield a landowner's investment property from misfortunes caused by numerous hazards,
including fire, tempests, thievery, and vandalism. (Seismic tremor and surge protection are
normally safeguarded under independent approaches.) An extensive general obligation
("CGL") arrangement gives risk protection, covering wounds or misfortunes endured by
others as the consequence of flawed conditions on the property. Similarly, critical, obligation
protection takes care of the expense (for the most part attorneys' bills) of shielding individual
damage claims (Edge 2017).
Case 3
In a similar case of Magna Alloy & Research where there was an involvement of
company dispatching of goods that were not the actual goods intended by the company
manufacturing. Their case was treated as criminal conspiracy. They were taxed for all the
fines they paid, this builds up to this case in relation to taxation of the payable fine. The
company was also accused for selling a batch of parts that were subsequently found to be
defective. They were required to pay a fine of $750,000 to the car manufacturer. Ruby could
impose the GST plan to avoid paying tax for the damaged goods. They are to pay a further
tax to the court for conducting the case to be calculated from the payable amount to the car
manufacturer. GST is an expansive construct assessment of 10% with respect to most
products, administrations and different things sold or expended in Australia (the circuitous
duty zone) and furthermore on most imports of merchandise. Fares of products and ventures
from Australia are for the most part without GST (Basu 2016). In case you're enlisted for
GST, this implies: you do exclude GST in the cost of your fares you can even now assert
credits for the GST incorporated into the cost of buys you use to make your sent-out
merchandise and enterprises.
Case 4
The amount set aside was to be taxed annually after the company stated their annual
profits and wealth. This is in accordance to the law governing caution money. It is to be

Taxation law & practice 7
considered as part of the company’s wealth and thus is taxable. The taxation is imposed on
the annual income of the company. A tax of 30% or 27.5% is imposed on the total income of
the company depending on the yearly turnover. On the off chance that you are carrying on a
business, most wage you get is assessable for charge purposes. The case can be based on
griffin coal mining company over the allowable deductions of the annual income, it is stated
that the designated percentage of tax to be considered for a company, is to include all the
deductible income of the company. This incorporates all your gross profit, or continues from
the customary course of your business, including net capital additions and remote salary.
Different sums, that may not be a piece of the regular running of your professional sums
owed to you, and the adjustments in benefit of exchanging stock, may should be considered
while computing assessable salary. Assessable salary does exclude GST you have gathered
(James 2017). Different special cases incorporate salary got from exercises not identified with
your business, for example, income from a pastime. The annual turnover of the companies
profit is to be considered for taxation which suggest that the caution money is to be added to
the taxable amount of the year.
Case 5
A similar case of Robert Mitchum in relation to source of income was addressed in
court, where the respondent was eligible to be taxed on the income earned. Later the directors
decided to investigate if it was possible to re-enter car parts manufacturing business. A
substantial amount as paid to a consultant who due to uncertainty decided to wait for a
different time. The company is not eligible for any tax payment in this instance. The
consultant is obviously in the line of tax payment. The tax is deductible in the provided
amount by the company to the consultant (Lang 2014). As an Australian occupant for assess
purposes: you should pronounce all salary you earned anyplace on the planet on your
Australian assessment form you're qualified for the tax-exempt limit – this implies there is no
assessment on your salary up to a specific sum you may need to pay the Medicare exact.
Australian inhabitants (for assess purposes) with a duty document number for the most part
pay a lower rate of expense than outside occupants.

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