Reference no: EM133060459

ACCG3020 Taxation Law and Practice - Macquarie University

Assignment: Information and Instructions

Task Overview:

• Your written response to this assignment must be presented in a business report format - (It must have an introduction/executive summary, a main body, and a conclusion). Bullet points are not acceptable.

• Responses to this assessment task must not exceed 1,500 words.

• You must cite relevant cases, ATO rulings, and legislative references to support your answers.

• Your response must also provide reasons that explain and support your answers.

EGR, a resident company, was incorporated in 2001. The company has developed a revolutionary lithium battery for electric cars, which it manufactures in Australia and exports overseas via its branch offices for distribution to its sales channels.

Annual turnover for EGR for the last 5 years has ranged between $10 million and $15.5 million. EGR is in the process of finalising its income tax return for the year ended 30 June 2021 and you have been asked to review the following notes to the statement of profit or loss:

1. In September 2020, EGR lent $500,000 to a subsidiary company, EGRR Pty Ltd, for a period of 10 years at an interest rate of 5% pa. It was an interest only loan with the full principal required to be paid to EGR at the end of the 10-year period. In October 2020, EGR sold the right to receive interest for the 5-year period to NAC Bank for a lump sum payment of $190,000. A capital gain of $190,000 was recognised as accounting profit.

2. A provision for doubtful debts of $120,000 was expensed during the year. As at 30 June 2021, the Managing Director expected that the full amoumt of the provision could be recovered. The provision for doubtful debts was recognised in the accounting profit as expense.

3. On 1 June 2020, EGR expanded its operation by acquiring certain assets and businesses of GLS Pty Ltd, an unrelated company. Included in the acquired assets was GLS' account receivables of $300,000. In December 2020, EGR recovered $40,000 from one such debtor. Another debtor, who owed $360,000, offered to pay EGR 15 cents in the dollar, and EGR accepted this offer. As a result, EGR wrote off the bad debt expense of $306,000 in its of accounts.

4. EGR engaged the services of an external marketing research consulting company to conduct a research on the viability of EGR entering into a new market. Currently EGR produce lithium battery but is considering investing in an electric car charging business. EGR paid the marketing research company $80,000 for the report and recognised the amount incurred as EGR's marketing expense.

5. On 1 June 2020, EGR's warehouse was flooded due to a leaking roof. EGR decided to replace the tiled roofing with a Colorbond metal roofing. The metal roofing costs
$100,000 whilst it would have cost $60,000 for a new tiled roof. Metal roofing has a longer life span and requires lesser maintenance. An expense of $50,000 was recognised in computing EGR's accounting profit.

6. EGR borrowed $3 million to fund the purchase of a factory in July 2020 that it planned to use for a new business venture. Soon after taking possession of the factory, EGR found some of its timber structures need to be replaced because of termite infestation. The total replacement cost was $28,000 and was recognised in accounting as an other operating expense item. Although the business venture did not go ahead, the interest on the factory loan totalled $120,000 for 30 June 2021 was recognised in accounting as the interest expense. The factory was sold for $3,900,000 on 30 June 2021 with additional costs of disposal totalled $72,000. The net amount included accounting profit from disposal of the factory was $828,000 ($3,900,000 - ($3,000,000 + 72,000)).

7. The income tax workpapers of the year 2020 show that EGR has carry-forward capital losses of $85,000 in accordance with the CGT provisions of the ITAA 1997.

8. The depreciation expenses amounted $98,000 was recognised in EGR's accounts. It is EGR's company policy to adopt the same tax rate of depreciation
for accounting purposes on all fixed (non-current) assets. The company has elected to depreciate all assets (including motor vehicles) on the prime cost method and not on diminishing value. Depreciation in the accounting report includes all assets acquired during the year. The following is the new asset acquired during the year 2021:
- Motor vehicle (100% business usage):
Purchased on 1 June 2021; estimated life 8 years $110,500

9. EGR had made an annual leave provision of $160,000 for the year ended 30 June 2021. Annual leave is paid to employees when taken in the current and future periods. During the year ended 30 June 2021, the actual payments to employees for annual leave amounted to $105,000.

10. EGR has incurred the following expenses which are classified as repairs and maintenance in its accounting records:

Cost of converting an old warehouse into a lunch room and changing room for company employees. Completed 1 April 2021 with an estimated life of 8 years:
- Installation of showers and toilets $80,000
- Partitioning and panelling of the walls $40,000
- Furniture for the lunch room $20,000

REQUIRED: Prepare a report to EGR's Chief Financial Officer (CFO) that address the income tax treatment with respect to each of the above items (Assume EGR is not a small business entity).