Taxation Laws For Hairdresser Franchise Business
Valuation of Stock
As per the Australian tax laws, there are various methods that can be used to value stock such as the cost price method that includes all the insurance, excise and custom duties among other expenses involved in stick valuation. Next is the replacement value method that is meant to compare the set product with what is already available in the market. Finally is the market selling value method that the stock’s current value is used to determine the net income (Australian Taxation Office, 2017). All three methods are allowed according to the law and one can select the easiest or one that gives the minimum assessable income to reduce on taxes. Jane should value the trading stock at cost as it minimizes her assessable income.
|
Part A |
|
||||
|
|
Using Replacement Value Method |
||||
|
Sales |
$ 600,000.00 |
Sales |
$ 600,000.00 |
||
|
Less Cost of goods sold |
|
Less Cost of goods sold |
|
||
|
Opening stock |
$ 300,000.00 |
Opening stock |
$ 300,000.00 |
||
|
Purchase |
$ 250,000.00 |
Purchase |
$ 250,000.00 |
||
|
Less closing stock |
$ (400,000.00) |
Less closing stock |
$ (450,000.00) |
||
|
Cost of goods sold |
$ (150,000.00) |
Cost of goods sold |
$ (100,000.00) |
||
|
Gross profit |
$ 450,000.00 |
Gross profit |
$ 500,000.00 |
||
|
Using market selling value method |
|
||||
|
Sales |
$ 600,000.00 |
||||
|
Less Cost of goods sold |
|
||||
|
Opening stock |
$ 300,000.00 |
||||
|
Purchase |
$ 250,000.00 |
||||
|
Less closing stock |
$ (500,000.00) |
||||
|
Cost of goods sold |
$ (50,000.00) |
||||
|
Gross profit |
$ 550,000.00 |
Part B
Under the taxation laws, for all the fixed assets, there needs to be a calculation of the capital allowances which is an allowable expense that reduces assessable income. The fixed assets are classified into four classes and furniture and fittings falls under class IV which means that the percentage of capital allowance is 12.5% (Australia, 2016). With the fittings ownership of 100,000 then Jane will have an increase in assets leading to increase in capital allowance of 12.5% which is an allowable expense thus reducing the assessable income. The reimbursement on relocation cost of $10, 000 increases the assessable income by the same amount since it is added back.
Part C
In accounting, sale of shares on a gain leads to income that is taxable hence the assessable income increases, the loss on sale of shares is a disallowable expense that increases the taxable income (Gitman, Juchau, & Flanagan, 2015). Additionally, sale of land on a profit is a nontaxable income that reduces the assessable income. Both the sale of shares and the land would have an impact on the assessable income. The Sale of shares in ABC NL, at $100,000 results into capital gains of $60,000 which is taxable income hence increasing the assessable income. Gains on sale on revalued land is nontaxable income hence reduces the assessable income.
Part D
|
Part D |
|
|
2015/2016 |
|
|
Iron at cost |
$ 800.00 |
|
Depreciation |
$ (400.00) |
|
$ 400.00 |
|
|
2016/2017 |
|
|
Iron value |
$ 400.00 |
|
Depreciation |
$ (200.00) |
|
$ 200.00 |
Under Accounting and taxation laws, depreciation is a necessary and disallowable expense, there are two types of depreciation that is straight line method and Diminishing value method or the double declining method which is used depending on the company’s policy (Maffei, 2016). Being that the expense is disallowable, it increses the assessable income of the business. There will be an increase in taxable income due to the loss on disposal of the iron of $100 as the iron was worth $ 200 by the day of sale. There will also be a depreciation expense of $200 that is a disallowable expense.
Part E
According to accounting and tax laws, when acquiring a bank loan, there are various expenses that are allowable such as bank charges, and the interest expenses hence they reduce the assessable income. On travelling expenses, on the business related expenses like from the salon to the bank are allowable (Woellner, et al., 2016). The one from bank to home are personal expenses hence disallowable with the effect of increasing taxable income.
The bank charges of $2000, and the interest expense of $3000 are both allowable expenses that will reduce the taxable income. Under the travelling expenses, the cost of $ 15 from the salon to the bank and back should be treated as an allowable expense, however on the other $20, only $7.5 should be an allowable expense which is from the salon to the bank hence reducing taxable income. The remaining $12.5 is a disallowable expense that increases taxable income.
|
Part E |
|
|
Allowable expenses |
|
|
Loan interest |
$ 3,000.00 |
|
Bank charges |
$ 2,000.00 |
|
Travel expenses(1st time) |
$ 15.00 |
|
Travel expenses(2ND time) |
$ 7.50 |
|
$ 5,022.50 |
|
|
Disallowable expense |
|
|
Travel expense(2nd time |
$ 12.50 |
References
Australia, C. C. H. (2016). Australian Master Tax Guide: 2016. CCH Australia.
Australian Taxation Office. (2017, April 03). Valuing trading stock. Retrieved August 26, 2018, from https://www.ato.gov.au/Business/Income-and-deductions-for-business/Reconciliation-activities/Accounting-for-trading-stock/Valuing-trading-stock/
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Basu, S. (2016). Global perspectives on e-commerce taxation law. Routledge.Higher Education AU.
Maffei, M. (2016). Amortization and Depreciation. Global Encyclopedia of Public Administration, Public Policy, and Governance, 1-7.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.