Tax Implications For Frank Lloyd’s Architecture Business

Factors affecting the choice of a cash or accrual basis

As per the rules and observation of the given case, it has been observed that the critical and the major issues are related with the procedures of the accounting principles and the methods of tax implications. In this case scenario, Frank Llyod has possibly commenced a business in the segment of architecture business. During the initial stage of the business during the commencement the client base has operated from the garage. Soon as the job start qualifying for a prominent shelter for Frank, the local builder, there was a healthy response for forming a limited customer base (Basu, 2016). In the year 2016, Frank has rightly taken part in “the Citadel” that is the national competition being a member of ambitious urban development. The drawing got ample praises and was instantly selected by the client’s judges. Frank got appointed there as the planer of Architecture. As per convenience to make better appointments, the planer Frank has finally went for renting a premise in the terrace and also thought of employing six draughtsmen and at the same time two more staff for managing the administration department. This helped him to a acquire a position and state of an art equipment. This ends up making the fees of the architectural plan to be around $2.5 million (Snape & De Souza, 2016).

As per the terms of the Income Tax Assessment Act 1997, the section June5 defines that income is the net result that is generated from the performance of any service rendered professionally. The business can be commenced in any manner that may also include an expected or a reliable source for inflow of cash amount that can be recorded as per the base methods of the Cash Accounting.

In the basis of accrual accounting, the revenues can be regarded as a total income earned and it does not matter whether it has been received. In this accounting, system the expensed are matched with the revenues in the year they accrue for determining the profit from the business activities. According to the cash basis accounting, the expenditure and the revenues are recognized within the statement of finance released in the form of cash. As per the rule of taxation, TR 98/1 of ATO, it has been advice that the true measure for performing accounts of a particular business house is accrual basis accounting format. The enterprises that are administered in small scale can follow the cash basis form which does not requires the accrual accounting knowledge (Edge, 2017).

The client has to review the quantum, and according to the ruling taxation TR 98/1 ATO, the gross turnover of the whole business almost exceeds up to an amount of $ 10 million in a completely accounting year. The individual has the right of limited earning according to the section June5 of ITAA 1997. The cash basis accounting technique can be used for proceeding with the case payments that is received by the client base that would amount to $75000.

• Enterprises that has an annual turnover that is less than $10 million.
• The organization those are non-profit seeking like the charitable trusts and the government schools.
• An entity that is gift- deductible.

The taxation ruling TR 98/1 in the paragraph 8 and 9 states that the business is required to select either cash basis method or the accrual basis of accounting. Frank is operating at medium level of the business and so the clients have all the power to choose any one of the following accounting method. The discussion suggests that the accrual accounting basis is very much justifiable for Frank as the income scenario is up to the mark. The individual had also taken a loan of $ 1 million dollar (Cobiac et al., 2017).  

Choice of basis for Frank Lloyd’s Architecture Business

In accordance to the taxation ruling TR 98/1, a simple business with a turnover rate around $ 10 million requires to follow the basis of accrual accounting method. When the turnover is not exceeding to an amount of $ 10 million, then the individual has all the right to decide the method of accounting for preparation of the accounts relating to the clients income statement (McGee et al., 2016). The tax commissioner has no right to force any distinct accounting method for preceding the accounting operation. If any conflict takes place then the commissioner or the individual can be guided under tribunal.

In the given case, the individual has all the right to change the procedure of accounting as stated in the tax ruling TR 98/1. The ruling states states that the gross turnover does not actually exceeds $ 10 million. However, it advisable to follow the current accrual basis of accounting structure for evaluating the current position of the clients financial status. Even the accrual accounting to suggested following for indulgent factor of loan (Ali et al., 2017).   

The following software of accounting has been designed for following the accrual basis of accounting structure. Further, the accounting basis of cash can be followed using software like MYOB, ZERO and other popular accounting software. The software does not have the capability to identify the basic techniques of accounting and the input of the users makes some difference. The business regulators or the operation managers determine the techniques.

Conclusion

The detailed analysis establishes the fact that the basic structure of accrual accounting is much preferable in the following context. As per the concerned definition of the income plan that is laid down under 6-5 of the ITAA, the expected income that is earned from the reliable source in the very same accounting year will actually form a part of the current year’s income. The accrual accounting system is also beneficial for the operation of the company. It would also increase the turnover of the company. The commissioner of the taxation has no such right to assess and influence any particular type of accounting method that would be used by the company. The company must choose the right type of accounting process for enabling the business operation in a much suitable way.

This part of the inquiry of comparative case study is concerned with the allowable expenses of an individual that is allowed as a deduction as expense as per Income Tax Assessment Act 1997 under section 8-1. It is stated that the expenses incurred in the course of starting up a profession or business is considered as contributory in generating Revenues for whom assessment is made.

The Section 25-5 of the ITAA 97 provides discussion for items that are not directly related in generating income but is considered an important part of the profession or business (Enste, 2018). The section 70-10: This explains the investing and selling of trading stocks along with the shares. Part 3-1 and 3-3: Under this Section 100-1 to 152-, 425 had covered mainly Capital gain Assets or CGT.

The Commissioner of Taxation’s right to insist on a particular basis

Division 43: Building Allowances has been considered as different form of depreciations.

• Case Discussion:

The given case of Ruby Pty Ltd is dealing in renting the residential properties. According to the ITAA 1997 as per Section 6-5 Ruby had earned $35,000 by renting. Without altering any layout in the kitchen, the cupboards have been replaced for $8500 during current financial year because of the wear and tear due to water.

Under ITAA Section 8-1 declares that the allowable deductions are such cost that contributes in generating income. Along with it, TR 97/23 ruling states that the repairing deductions would also come under the head of allowable deductions that is further confirmed as per Section 25-10 of ITAA. The repair is to be treated as Capital in the mentioned case (Endres & Spengel, 2015).

• Case Discussion:

In the mentioned case, a resident of another Ruby’s property has suffered an injury and sued for compensation, citing poor construction as the cause. In this for legal expenses Ruby spend $7000.

Section 8-1 of ITAA declares only expenses related to business and income generation is considered as deductible allowance. In this case the legal expenses has no direct link with generating income but is very important for the business and hence as 8-1(1) it is allowable. Bur deduction is not allowable if it is lodged for penalties as stated in the Section 26.5 of the same act (Tan et al., 2016).

• Case Discussion:

In the mentioned case, Ruby has also engaged in spare parts business of car industry. In one case a defective batch was found and sold to some manufacturer of Australian Car. Staled amount of $750000 falls as for the compensation a suit was lodged by the company.

Section 8-1 of Income Tax Assessment Act states that only such manufacturing expenses that are paid for the different purpose of the profession or business is allowable deductions. In the present context compensation is paid for damages caused to the buyer of damaged goods. Under Section 26-5 of ITAA 97 of the act, it is treated as cash penalty and is not deductible. Moreover, the deduction will not be affected as the loss is suffered for some previous action (Saad, 2014).

• Case Discussion:

After paying the compensation, Ruby decided to set aside $100000 from the business profits as provision to meet such expenses in future. The section 8-1(1) clearly stated that only the expenses required for running the business is considered as deductible expense. Under ITAA 97 section 15, any provision for uncertain debts comes under deductible expense. Any provision made or fund created for the other reasons than business are not considered as deductible expenses (Tran-Nam, 2015).

• Case Discussion:

For the motor part business of car industry Ruby Pty Ltd. made new plan of making alloy. The company engaged consultants for market research and surveys and paid $220000 as consultancy fees with an expectation of profitable business. On the conclusion of surveys, on the proposed planning consultant disagreed to operate as the present week scenario of the industry hence the plan was rejected by the company (Cook & Natalier, 2016).

The Consultancy fees are deductible expenses as it is given for proper orientation of the business and section 25-4 of ITAA 97 allows it to be considered as deductible expense. As per Section 8-1 of the same act, it is not regarded as loss rather a expense for the purpose of business.

Conclusion:

In the present case, study focuses on the deductions as per the Income Tax Assessment Act 1997. The mentioned case has been discussed with relevant analysis under the rulings of Section 8-1 along with 25 and 26 of the ITAA to bring out the deduction of the assesse to compute the income. Based on the above discussion it can be advised that provision for doubtful debt and the consultancy fees can be claimed as deduction.

References

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