The Tax Derivation Concept - Assignment Example

The paper "The Tax Derivation Concept " is an outstanding example of a finance and accounting assignment. The tax derivation concept used in the calculation of taxable income is the cash basis where only cash which has been paid and receipted are accounted for (Barkoczy, p341). One of the common cases supporting the cash basis is that one of FCT vs. Furstenberg where the court decided that the cash basis as the most appropriate method to be used in (Barkoczy, p341). determining taxable income.

• Allowable expenses; these includes;
• Entertainment allowances which are deducted from the net income to arrive at the taxable income. Types of entertainment include cocktails, business lunch, ticket functions and social event.
• Legal expenses; this is majorly dealt within section 8 of the tax Act. They include; legal fees that form part of borrowing expenses are deductible under s 25-25; and legal fees that form part of tax expenses are deductible under s 25-5 (Barkoczy, p412).
• Substantiation expenditure; these include expenditure from work expense, car expenses, business travel expense (Barkoczy, p412).

The car repair expenses are deducted from the net income to come up with the net taxable income. Car repair includes;

• • repairs and maintenance;
  • registration and insurance;
  • fuel and oil;
  • depreciation; and
  • interest on a car loan

There are several methods available for the taxpayer in calculating car expense; these includes

• • Logbook method;
  • 1/3 of actual expenses method;
  • 12% of original value method; and
  • Cents per km method

Since section 28 of the Act can allow only one method to be used, in our calculation we have used 1/3 of actual expense method.

• We are not told whether the business is a sole proprietorship or Company. We assumed in our calculation that the business is a company therefore it pays a corporate tax of 30% of the total taxable income (Barkoczy, p207).
• Tax relief is not given in the sample so they are also assumed in the calculation
• Capital expenditure is also deductible expenses they include;
• Right acquisition
• Shelving and
• computers

Part B

Software installation

• One of the characteristics of this expenditure is that it is being spent once and for all.
• The law provides that if the expenditure was incurred ‘once and for all’ it is more likely that the expenditure is capital in nature
• Capital expenditure in most cases is deductible expenses in tax calculation.

The common decided case here is Vallambrosa Rubber Co Ltd vs. Farmer.

The capital of expenditure in most cases is looked in the relationship between the expenditure itself and the business. In an examination of the nature of expenditure; the business entity test examines:

• The character of the advantage sought.
• The manner in which it is to be enjoyed.

The means adopted to obtain it

In our case, the software is bought and it is not given free. It is not a donation and it is meant for business purposes (Barkoczy, p287).

Does the expenditure relate to the business entity or profit-yielding structure - capital in nature?

Examples:

• • Expenditure incurred in ‘establishing’, ‘replacing’ and ‘enlarging’ the profit-yielding structure of the business
  • Likely to be ‘once and for all’ expenditure – non-recurring
  • Will bring into existence an advantage for the enduring benefit of the business
  • Is the expenditure part of the ‘income-earning process’ - normal operating costs – recurrent (revenue in nature).