Financial Accounts – Timber Floors Pty Ltd– year ending 30 June 2018
Cash or Accrual Accounting for Tax purposes
Cash or accruals accounting
The accounting method you use to manage your business accounts will determine when amounts will be shown when reporting income or expenses for a specific period (for example month, quarter or year).
Cash accounting tracks the actual money coming in and out of your business. For example, if you get an invoice for something, you don't record the cost until you've actually paid the invoice.
Accrual accounting refers to recording income and expenses when they take place, instead of when money actually changes hands. For example, if you issue an invoice for a project you've completed, you record the income in your books even though you haven't received payment yet.
If your business accounts on an accruals basis, you will need to compile a list of debtors and creditors at 30 June to determine your actual income and expenses for the year for income tax purposes.
If you register for GST you will be required to choose to report GST on a cash or non-cash basis.
Reconciliation of financial accounts to tax accounting – First and foremost we need to add all non-taxation income and deductions and then adjust for taxation items.
Based on financial accounts, Net Profit -- $964,725
Add back non-tax amounts:
1
Accounting depreciation
100,000
2
Fringe benefits tax
15,000
3
Pro. For unreported claims
150,000
4
Provision for long service leave
60,000
5
Repairs
30,000
6
Wages
1,400,000
7
Purchase of trading stock
120,000
8
Annual payment to major competitor
100,000
1,975,000
Provision of long service fee
The provision of long service fee can be claimed as deductible, when it is actually paid by the organization. This tax treatment is on the basis of FCT v James Flood Pty Ltd (1953) 88 CLR 492; and s 26-10 of ITAA97. The case held that the provisions are non-deductible and the deduction can only be made in the event of actual payment. In this question, the actual amount paid as long service leave during the year was $0.
Other Provisions
Similar treatment is meted to the other provisions.
Income tax for business
Federal income tax is levied on the taxable income of a person or a business. It's calculated on assessable income less any allowable deductions.
Assessable income is generally income your business earns - it does not include GST payable on sales you make, or GST credits.
Allowable deductions are deductions for certain expenses that you necessarily incur in relation to your business.
As a sole trader, it's likely you'll pay income tax. You must lodge an income tax return for any year in which you run a business, even if you expect to have no tax liability.
Add franking credits and foreign withholding tax = $34,286, the company has received a cash dividend of $100,000 (100,000 x 30/70 x 80%) plus including withholding tax $ 20,000. It is to be noted that the amount withheld in the US has to be added back as Australia has a double tax agreement with the United States. Therefore, the total addition is $ 34,286 + $20,000 = $ 54,286
Thus, the gross profit for taxation purposes: $ 964,725 + 1,975,000 + $ 54,286 = $2,994,011
Fringe benefits
Fringe benefits are an important part of a business and can be used to attract quality workers from the rival companies. It is the tax payable by the employer for the benefits paid to the employee in place of salary or any other remuneration. There are two separate gross-up rates used to calculate fringe benefits taxable amounts:
Higher gross up rate
This method is used where you (or other benefit providers) are entitled to a GST credit for GST paid on benefits provided to an employee. These benefits are known as GST-creditable benefits
Lower gross-up rate
This used where there is no entitlement to a GST credit. .
However, there are number of taxes that a person is required to register for and it is up to the person to ascertain different types of taxation and opt for those taxation regimes that are relevant to him.
Less deductions according to tax law
1
Wages
1,370,000
2
Depreciation
64,194
3
Opening Stock
180,000
4
Cl. Stock
133,567
5
Repairs
20,000
1,500,627
Depreciation and capital expenses and allowances
You generally can't deduct spending on capital assets immediately; instead you claim the cost over time, reflecting the asset's depreciation (or decline in value). This applies if you use depreciating assets to earn assessable income, including:
small and large businesses
rental property investors
employees (for equipment and tools they provide at their own expense for use in their work).
A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it's used. Land, trading stock and some intangible assets are not depreciating assets.
General depreciation rules
To calculate your depreciation deduction for most assets you apply the general depreciation rules (unless you're eligible to use simplified depreciation for small business). These rules set out the amounts (capital allowances) that can be claimed based on the asset's effective life.
Under the general depreciation rules, an immediate write-off applies to:
Items costing up to $100 used to earn business income (but note the higher immediate write-off limit for small businesses below)
Items costing up to $300 used to earn income other than from a business (such as employee-provided tools and equipment).
Simplified depreciation rules
Small businesses can choose to use the simplified depreciation rules – which include the instant asset write-off.
Other depreciation rules. Different rules apply to:
Capital works, which are written off over a longer period than other depreciating assets.
Other business capital expenses such as the cost of setting up or ceasing a business, and project-related expenses.
Depreciation deductions are generally available only to the legal owner of the asset. However, hire purchase arrangements are generally treated as a notional sale of goods, in which case the hirer rather than the legal owner is entitled to the deduction. Depreciation deductions for partnership assets are claimed by the partnership not the individual partners.
The cost of an asset for depreciation purposes includes the amount you paid for it as well as any additional costs you incur in transporting and installing the asset, and repairing it immediately after you acquire it.
Depreciation deductions are limited to the extent to which you use an asset to earn income. For example, if you use an asset 60% for business purposes and 40% for private purposes you can only claim 60% of its total depreciation for the year.
Depreciation Working
Cost
life
Depreciation
Cl. Balance
Opening Balance
18,000
New Spray equipment
170,750
8
21,344
iPad
990
3
330
Further Assets
170,080
4
42,520
64,194
Gross Profit less deduction = $2,994,011 – $1,500,267 = $ 1,493,744
Taxable income x tax rate = 30% of $ 1,493,744 = $ 448,123
Tax payable less offsets:
PAYG installments $255,000
Net tax payable = $448,123 – $255,000 = $193,123.2
Pay as you go (PAYG) installments
This is a system of regular payments in which an employee regularly make payments on his expected tax at the year end. A person reports and pay your PAYG instalments on the business activity statement (BAS).
A person usually two options and paying the PAYG installments which will apply for the income year.
Option 1 – Instalment amount
Option 2 – Instalment rate
Division 7A (Income Tax Assessment Act ITAA 1936)
Division 7A - benchmark interest rate
Information on the 'benchmark interest rate' under Division 7A of Part 3 of the Income Tax Assessment ACT 1936. The applicable rate for an income year is the 'Indicator Lending Rates' – Housing loans; Banks; Variable; Standard; Owner-occupier' rate last published by the Reserve Bank of Australia before the start of the income year.
Division 7A calculator and decision tool
Determine if a direct transaction by a private company to a shareholder or their associate will be deemed a dividend under Division 7A, and calculate the minimum yearly repayment required on a loan to avoid a deemed dividend arising under Division 7A.
Private company benefits - Division 7A dividends
Division 7A may apply to private companies that make tax-free distributions to shareholders or shareholders' associates in the form of payments, loans or debts forgiven.
Company tax and imputation: average franking credit and rebate yields
This document provides monthly franking credit and rebate yields on a share portfolio comprising the All Ordinaries index. Yields for each month generally become available by the middle of the following month. The yields are calculated with the assistance of rating agency Standard " Poor's.
You can use these yields if you made an election under former section 160APHR of the Income Tax Assessment Act 1936 (ITAA 1936). This means you:
are a qualified person for the purposes of Division 1A of the former Part IIIA of the ITAA 1936 will not be denied a franking credit or tax offset under paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997.
