Kangaroo Avionics Pty Company Financial Analysis - Case Study Example

Taxation Assignment Insert Name Insert Course Insert Lecturer’s Name 10th December 2009 Taxation assignment: Companies Tax Liability Kangaroo avionics Pty Company is an Australian resident company that is registered for GST purposes. The company is therefore entitled to pay tax on their income which has been derived from all sources. Taxable Income of the Company Land bought was $900, 000 exclusive of GST Construction cost was $2, 650, 000 Cost of buying a computer software programme is $5, 500 Company’s ordinary income (1.643(a)-3(b) (1)) for the year ending 2009 was $4,400,000 Deductible expenses were $3, 000,000 Total expenses of the company are $900, 000 +$2, 650, 000+$5, 500= $3, 555, 500 Other deductible expenses of the company are $3, 000, 000 total expenses are $6, 555,500 The total ordinary income of the company for the year is $4, 400, 000 It therefore means that the company incurred a loss of $2, 155,500 Since the company incurred a loss at the end of the financial year there was no taxable income. RYAN’S TAXABLE INCOME Ryan’s taxable income will be calculated on all his income including his share in the company. Since there were two shareholders in the company and the company incurred a loss, the loss will be divided into two and thus Ryan’s share will be $1,777,500 His other incomes include the property which he acquired from his grandfather who acquired it from his mother. The total gains from the property are Initial price of the property was $300 000 on first June 1980 and $400, 000 on 20th September 1985, the gain was $100, 000 Ryan acquired the property when it was coasting $700 000 which means he had a gain of $300, 000 The land was abandoned and therefore depreciated to $500 000, the value of depreciation was 200, 000, he also incurred an expense of $10, 000 He sold the property on 1st June 2009 for $900, 000 His ordinary income were $40 000 and deductible expenses were $30, 000 Capital gains from property is $900, 000-$700, 000=$200, 000 Add ordinary income which is $40, 000 (1.643(a)-3(b)(1)) Total deductions are $30, 000+$10, 000+$20, 000=$60, 000 His statutory taxable income (sec 42) is $240, 000-$60, 000=$180, 000 GST ISSUES Companies that are engaged in business enterprises are to register themselves with the goods and services acts GST. This is true for companies that register a turnover of $75, 000 Australian dollars for profit making organisations and a total sum of $150, 000 dollars for non profit making organisations. Registered entities may also be required to pay a 10% GST on all goods that are supplied in Australia. There are however certain types of goods that and services that are excluded from GST1. The company which is involved in the production of aircraft will therefore be required to pay GST on the supply of the products. In above case, the GST was not calculated since we are not given the details of the aircrafts that were supplied in Australia. We are only given the total income of the company for the whole year. Organisations that have been registered are also entitled to an input tax credit. This amount is equal to the GST that is charged on the purchase when it is verified that the goods purchased were used for credible purposes. The company will therefore be in a position to enjoy such services if the products that they buy to aid in the manufacture of the aircrafts are used for credible purposes. There are few exemptions to the GST general rule above, the GST zero supply are supplies which are provided to their customers free of GST. Companies that give this are also free to claim input tax credits on their credible business acquisitions2. Examples of such enterprises are health and education providers and certain food companies. The second exemption is the input taxed supplies which are extended by companies to their customers free of GST. The companies are however not allowed to claim input tax credits on business acquisitions that are creditable. Examples of such enterprises include residential accommodation supplies and financial service providers3. The GST that is usually collected from clients is given to the government on either a monthly or quarterly basis depending on how much the company gains as profits. Tax Treatment on the Sale of Sydney Property The income that Ryan obtained from the sale of the property was 900, 000 thousand dollars of which he will be required to pay a tax of 58, 000 Australian dollars. Considering that he had paid $10 000 Australian dollars to the accountant which is non refundable brings the deduction to $68 000. He may also be subjected to other tax laws in the country considering that he is transacting the business there as a resident. The case may be different if he decided to develop the property4. Ryan could however consider the annual income that he received by tenanted, there have also been management costs and other taxes that he was also required to pay to the government which may have been costly. There may be also other risks that Ryan would be exposed to such certain death of which the beneficiary is uncertain. If the property earned him a substantial income, them he should have considered to continue tenanting it to a resident. As long as Ryan tenants the property it will be well maintained and thus appreciating in value. He should therefore consider tenanting it until when it has appreciated at a good value. This will be a double benefit for him because he will be earning income from it as he waits for its value to increase5. He may however also reconsider his earlier project of developing the property. Ryan had earlier own made considerations and identified that the property would earn him a substantial income if he succeeded to rezone it and develop it into a commercial premise. Ryan was to ultimately sell the property but desired to sell it for a profit. Considering that the company is not performing well at the moment developing the property would be a good alternative to earn him extra income. However he may also use the money that he has obtained from the property to invest in another profitable business considering the opportunities available in his home country. Ryan may not enjoy the tax benefits when the property remains in Sydney because he has not registered for GST purposes. This could have been the probable reason why he decided to sell it to Daphne who was registered. There was no assurance of the property appreciating in value considering that the property depreciated to $500 000 Canadian dollars6. Ryan could have given up on developing the property and decided to sell it off once he got a better deal for it. In deciding whether to keep the property and sell it at a later date, he is to consider its location and the commercial values of the project and thus making a decision on whether there is a possibility of it appreciating in value or not. Depending on what the tenant is using the land for, it may be made into a productive property or not. If the property is also located at a place that is likely to experience growth in the near future, then its value is likely to appreciate and thus not selling it immediately. However if the property is located in a remote area, it may not attract investors and thus the likely of it depreciating in value7. Considering that the property had earlier on depreciated in value, the probability of Ryan selling the property at a higher price than what he was given was almost zero. The Company The company was not doing well considering that its expenses and other deductions exceeded the income that the company received during the financial year. The company might have made a business deal that might have been so big than the capital which was available. However, the company may have just been established and had therefore not been well grounded in the market8. During its establishment, the company will need to incur a lot of expenses to get the necessary equipments and services to aid in its production. The company has just commenced its business practices and has a life of thirty years. There are measures that the company should consider employing so as to minimize on its tax liability. The company may consider venturing into tax exempt investments such as the national savings investments. Shares that are bought under the enterprise investment schemes are exempted from tax and the company should consider applying for them. Other funds that the company can take advantage of are PEPs and ISAs. Income tax on the company’s assets will be determined considering their estimated effective life because the company is not subjected to pooling depreciation assets. Since the company has been established for commercial purposes, it will have a special write off of up to 4% on a straight line basis. The company may use this for all the costs that it will incur in the establishment of buildings and plants. Since the company incurred capital losses and there were no capital gains, the capital loss will be carried off to a future date when there will be capital gains9. The company will hence not have to worry about the capital losses as they will not be deducted from the total income for the purposes of calculation tax liability. The company being owned by resident shareholders will be allowed an offset of tax as long as they have franking credits on their dividends. Ryan may also get a tax relief if he decides to invest the amount received from the sale of the Sydney property into the aircraft company. Such a deduction is usually allowed on any income that has been earned from the sell of such property in Australia. To minimize on tax payment the company should register to pay as an entire entity rather than on individual basis. Bibliography Barkoczy, Stephen. Australian tax casebook. Sydney: CCH Australia Limited, 2008. Gaffikin Michael. Corporate Accounting in Australia. New South Wales: UNSW Press, 2003. Hey-Cunningham, David. Financial statements demystified, New South Wales: Allen & Unwin, 2007. Martin, Barbara. Tax concessions and dividend imputation. Sydney, Australian Govt. Public Service, 1993. Perren, Richard. Taste, trade and technology: the development of the international meat industry since 1840. Guildford: Ashgate Publishing, Ltd., 2006. Viney, Christopher. Financial Institutions Instruments and Markets. New York: McGraw-Hill Higher Education, 2006. Wankel, Charles. Encyclopedia of Business in Today's World. California: SAGE Publications, 2009. Wanjialin, Guy. An International Dictionary of Accounting and Taxation: 12,000 + Entries on Accounting, Auditing & Taxation in the USA, Canada, UK & Australia. Bloomington Universe, 2004. Woellner, Rob. Australian taxation law 2009. Sydney: CCH Australia Limited, 2009. Read More