Question

Timber Floors Pty. Ltd. is an Australian resident private company for tax purposes and carries on the business of manufacturing timber floors. It is registered for GST.

Amanda, the accountant has prepared the income statement for the year ended 30 June 2018 in accordance with the accounting standards:

                       

Fees                                                                                                                 $3,089,725

Less:

Operating expenses:

Advertising                                                                 100,000

Accounting depreciation (note 4)                               150,000

Fringe benefits tax                                                      15,000

Provision for unreported claims (note 5)                    150,000

Provision for long service leave                                  60,000            

Repairs (note 6)                                                           30,000

Wages (note 7)                                                            1,400,000     

Purchase of trading stock (note 8)                              120,000

Annual payment to major competitor (note 9)            100,000           2,125,000

Net profit (Accounting)                                                                                  $964,725

                       

                       

Additional Information

(1)        Unless otherwise stated the figures are GST exclusive.

(2)        On 30 November 2017, the company received a cash dividend of $100,000 (franked to 80%). This dividend is not recorded in the above Income Statement.

(3)        On 31 August 2017, the company also received a cash dividend of $120,000 from a US company. Withholding tax of $20,000 had been withheld in the US. Australia has a double tax agreement with the US. This dividend is not recorded in the above Profit and Loss Statement.

(4)        The accounting depreciation of $150,000 is based on the directors estimating the effective life of all assets being 5 years. Amanda advises you that for taxation purposes the following information is applicable:

Timber Floors Pty Ltd.’s final records show that on 1 July 2017 the opening balance of the company’s pooled depreciating assets was $18,000.

During the year the company also purchased the following assets:

           

New spray equipment at a cost of $170,750 (GST inclusive) on 1 July 2017. The estimated life is 8 years.

A new i Pad at a cost of $990 (GST inclusive) on 1 July 2017. The estimated life is 3 years.

A new truck was purchased on 1 July 2018 for $173,232. The amount paid was GST inclusive. The estimated life given the kilometers they will travel in the truck is 7 years.

The company purchased three further assets for $170,080 on 1 July 2017 with an effective life of 4 years.

           

(5)        The provision for unreported claims was based on the company’s estimate of anticipated costs (based on statistical experience) of unreported remedial work that it would be required to perform under warranties.

(6)        The repairs of $30,000 consisted of painting the company premises for $10,000 and replacing the old rotting wooden office window frames with new steel window frames for $20,000. The painting was to the west wall which got the afternoon sun and had not been painted for seven years. The existing paint was peeling and needed to be done before the timber also started to rot. The cost of replacing the old wooden office window frames with new wooden window frames would have been $21,000. The new steel window frames had the advantage of not being subject to rotting but had the disadvantage, unlike the old wooden frames, of being subject to rust.

(7)        Wages of $1,400,000 include $50,000 paid for marketing services provided by a director’s daughter. The Commissioner considers that $20,000 is a reasonable amount for the services provided.

(8)        Timber Floors Pty Ltd has carried out a stock take and values its closing trading stock at the following amounts:

           

            Cost     $133,567                    

            Market value   $135,278

            Replacement value      $167,889

            Stock at the beginning of the income year was:         $180,000

Amanda has not included the opening and closing stock figures in calculating the financial accounting net profit of $964,725.

                       

(9)        Timber Floors Pty Ltd entered into a restraint of trade agreement whereby its major competitor agreed not to compete with Timber Floors Pty Ltd in Australia for five years in exchange for five annual payments of $100,000.

(10) The actual amount paid as long service leave during the year was $0.

(11) The company paid a total of $255,000 in PAYG Installments during the financial year.

(12) The company has advised that it wishes to pay the minimum amount of tax and wants to claim the maximum deductions allowable.

REQUIRED

Calculate Timber Floors Pty Ltd.’s taxable income and tax liability for the year ended 30

June 2018.

Answer 1

Item		Amount
Net profit		964725
Adjustments
Dividend received in austrailia		100000
Dividend received from us		140000
Add back depreciation	150000	150000
Less- depreciation on pooled assets	18000*37.5%
Depreciation on spray equipment	170750/8
Depreciation on ipad	990*18.75%
Dep on truck	173232/7
Other assets	170080/4
Wages paid to director daughter unreasonable		30000
Add - closing stock		133567
Less - opening stock		(180000)
Adjusted income		1289178

Tax on adjusted income - 1289178 * 27.5% = 358392

Less - payg installment - 255000

Less - withholding tax. - 20000

Less - franking credit - 20000

Tax payable - $ 63392