The paper "Assessable Income for Cut and Chop for Tax Purposes" is an outstanding example of a finance and accounting assignment. Sale of business premises is expected to result in either a capital gain or capital loss. CGT is charged on the net capital gain made in an income year. A capital loss is carried forward and is deducted in the capital gain in the subsequent years. The capital gain or capital loss constitutes the difference in an asset’ s cost base (cost of purchase plus other costs incurred on the asset) and the capital proceeds/selling price.
The cost base involves various costs associated with acquiring the asset. Also, the sale of commercial residential premises is subject to GST (Barkoczy, 2015). Capital gain on sale of business premises Cost base of business premises 1st element $1,950,000 Legal fees and agent fees 2nd element $55,000 Total cost base = $1,950,000 + $55,000 $2,005,000 Capital proceeds $2,650,000 Capital gain $2,650,000 – $2,005,000 $645,000 Capital gain on sale of residential premises Cost base of residential premises 1st element $510,000 Legal fees and agent fees 2nd element $15,000 Total cost base = $1,950,000 + $15,000 Capital proceeds $710,000 Capital gain $710,000 – $525,000 $185,000 Amount to be included in assessable income for tax purposes Total capital gain $645,000 + $185,000 $830,000 Carried forward capital losses $120,000 Amount to be included in assessable income for tax purposes $710,000 Therefore, Cut and Chop will include $710,000 in the assessable income for tax purposes. The issue is to find the most appropriate valuation method Cut and Chop can adopt for taxation purposes so as to minimise taxable income.
The part also covers an explanation on whether Cut and Chop have correctly included in stock on hand the knives ordered from the UK. According to section 70-10 of the ITAA (1997), trading stock refers to “ whatever is produced, factory-made or acquired and is held for purposes of manufacture, sale or exchange in the ordinary course of business including livestock” .
Under section 28 of the ITAA (1936) trading stock has to be considered in determining a taxpayer’ s taxable income. Section 70-45 of the ITAA (1997) gives the taxpayer the freedom to select the value of the trading stock on hand using either the cost, market selling value or replacement value. According to section 28 of the ITAA (1936) regardless of whether the goods are not within the taxpayer’ s premises/outlet, they still amount to trading stock on hand if the taxpayer can dispose of the goods.
In the case of All States Frozen Foods Pty Ltd v. F.C. of T. it was held that goods in transit at sea should certainly be treated as a taxpayer’ s trading stock in hand. In conclusion, Cut and Chop should use the cost method ($350,000) since it is high and therefore minimises the taxable income. Also, given that Cut and Chop possess the ‘ bill of landing’ for the goods, they have dispositive power over the goods (Farnsworth v.
F. C. of T. ). Therefore, the knives are correctly included in the trading stock. The issue is to assess the income tax implication of employee leave liability/payments and doubtful debt/bad debt provisions on Cut and Chop. Under section 8-1 of the ITAA 1997, an employer is entitled to a tax deduction due to the amounts set aside for employee leave payments. However, section 26-10 of the ITAA 1997, indicates that an amount cannot be tax-deductible unless it is actually paid or is an accrued amount. Section 8-1 of the ITAA 1997 indicates that a taxpayer can deduct a debt or part of it that has been written off.