INSTRUCTIONS See the Instructions and Assessment Criteria in the Course Description and make sure you follow them! Please answer all parts of the question All essays must be accompanied by a signed...

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INSTRUCTIONS



  1. See the
    Instructions

    and Assessment Criteria in the Course Description and make sure you follow them!






  1. Please answer all parts of the question









  1. All essays must be accompanied by a signed official cover sheet ('Plagiarism Declaration Form'), available at www.federation.edu.au/ard/business/student_info_webct.shtml and lodged as appropriate for your campus.





  1. You MUST reference in the body of the essay every time you use information from other people. This requires you to keep a track of where you are taking information from and then writing the reference up.
    You should use the Harvard/APA style; and use the University’s new Presentation of Academic Work. The Library’s website also has a citation style guide site. If you plagiarise (intentionally OR unintentionally) you will be given zero: see Regulation 6.1.1 for more details.





  1. DUE DATE:…….[Week 9]
    Please check with the Course Description for details of where and when to submit your assignment. If you need an extension you must ask for one BEFORE the due date (unless this is impossible).





  1. The assignment should not exceed approximately 2000 words.





  1. The assignment is worth 30%.






Part 1




On 1 July 2016 Frank Lloyd commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2016/17 he had a small client base of local builders and private referrals and billings (fees) of $75,000.




During the year (2016/17) Frank submitted a design as part of a national competition for


‘The Citadel’, the centrepiece of an ambitious urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises in Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2017/18 his billings were $2.5 million.





Required 1:
[Approximately 50% marks]





Should Frank return on a cash or accrual basis in 2016/17 and 2017/18?




You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following:


· What factors affect the choice of a cash or accrual basis?


· Does Frank have a choice of the basis he adopts?


· Does the Commissioner of Taxation have a right to insist on a particular basis?


· Should Frank’s basis be the same in both years?


· Given the present availability of accounting software packages, in your view, is the traditional criteria for the cash/accrual distinction still relevant?








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Part 2




Ruby Engineering Pty Ltd [Ruby] was incorporated in 1990 and produced engine components used in the Australian car industry. In 2016 the business and company assets were sold to Diamond Ltd. Under the terms of the agreement, Ruby remained liable for any claims arising before 2016. The company used the funds to invest in real estate and shares.


During the year ended 30 June 2018 Ruby incurred the following expenses:






Required 2:


Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.


(a) Ruby has owned and rented a residential property since 2008. Rental income for the current year is $35,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $8,500.






(b) In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against the partnership alleging her injuries were caused by the poor condition of the building. Ruby incurred legal expenses to date of $7,000 and the action has not been settled at 30 June.




(c) In March 2015 the company owned sold a batch of parts that were subsequently found to be defective. The purchaser, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2017 and the company paid an amount of $750,000 to the car manufacturer.




(d) The directors of Ruby were concerned about the claim in (c) and the effect it had on the year’s reported profit. They resolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.




(e) In August 2017 the directors of Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $220,000 was paid to consultants investigating the proposal but, due to uncertainty in the motor vehicle industry, the directors decided not to proceed at the time.





Required 2.
[Approximately 50% of marks]


Advise the partners and directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.







Answered Same DaySep 07, 2020BULAW5916

Answer To: INSTRUCTIONS See the Instructions and Assessment Criteria in the Course Description and make sure...

Pulkit answered on Sep 13 2020
133 Votes
Part 1
Australian Taxation Office permits a tax payer to choose a method of accounting from the two methods available which are cash or accrual basis of accounting. These two methods are not related to the two methods of accounting which have been allowed and discussed for the GST purposes. Rather these m
ethods are specifically defined and discussed in the Income Tax laws.
Some of the factors that majorly affect the choice of tax accounting methods include:
· Size of business:
· If the business size is small the preferable method is Cash basis (in case of Carden- sole doctor practicing in a small town; Firstenberg – solicitor with one employee; Dunn – an accountant with 6 employees).
· If the size of business is large the preferable method would be Accrual basis (in case of Henderson – partner of a huge accounting firm with 295 employees; Barratt – revenue was around $2 million and 92000 patients treated)
· How much efforts are being done by the taxpayer for generating the revenue in business:
· It was held in the case of Carden, that majorly all of the work that generated the income was done by the taxpayer on its own. In such a case opting for Cash method was justified.
· In case of Barratt, it was decided that when the major chunk of revenues have been done due to the work done by employees then benefit of cash method cannot be allowed and the income has be offered for tax on accrual basis only.
· How much complex the enterprise is:
· When there is huge complexity involved in the business enterprise, substantial fixed and working capital is involved, there is some trading stock, huge support services are required in such a case the method of accounting preferable would be Accrual method of accounting. (Barratt)
· Where lesser complexity is involved the method of accounting should be cash.
· Normal practice in terms of method of accounting used:
· The method of accounting used by the business is day to day book keeping and recording factor can be a determining factor for the method of accounting to be selected although it is not a decisive factor. (Arthur Murray vs. FCT)
· In case of Firsternberg it was stated that where there was no balance sheet presented and drafted in a business, the method of accounting to be used was the Accrual method of accounting.
In the given case Frank Lloyd commenced business as an architect. He has been operating as a sole proprietor from a converted garage at the rear of his residence. He was more engaged into preparation of building designs and specifications for local council building permits. During the course of his starting up he could quickly gain a reputation for quality drawings prepared within tight timeframes.
This was, by the end of 2016/17 he had a small client base of local builders and private referrals and billings (fees) of $75,000.
Further in the same year (2016/17) Frank participated in a national competition ‘The Citadel’, the centrepiece of an ambitious urban redevelopment by submitting a drawing. He was awarded the prize and commissioned to build...
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