Professional Documents
Culture Documents
Lecture 6
Part 4
Taxation Accounting Chapter 16
Trading Stock Chapter 17
Tax Accounting
ITAA97 s6-5 the ordinary income section uses
the term derived a number of times.
ITAA97 s995 defines derive as derive has a
meaning affected by subsection 6-5(4)
Derived
Ss6-5(4) states
In working out whether you have derived an
amount of ordinary income, and (if so) when
you derived it, you are taken to have
received the amount as soon as it is applied
or dealt with in any way on your behalf or as
you direct.
Derivation of Income
In Brent v FCT Gibbs J held that unless the Act
makes some specific provision on the point
the amount of income derived is to be
determined by the application of ordinary
business and commercial principles and that
the method of accounting to be adopted is
that which is calculated to give a
substantially correct reflex of the taxpayers
true income.
Derivation of income:
Cash vs accruals
For tax purposes, accruals or cash basis can be adopted.
accounting
Derivation of income
Recognition of when income is received:
Accruals basis
Cash basis
Which method?
Derivation of income:
Cash vs accruals
Illustration:
accounting
Invoice issued
Payment
$10,000
received
30 June 20X1
30 June 20X2
Derivation of income:
SBE taxpayers & large
SBE taxpayers
firms
Businesses eligible to be a Small Business Entity (SBE) can
Prepayments
In Arthur Murray (NSW) Pty Ltd v
FCT (1965) 114 CLR 314 the taxpayer provided dancing lessons and
students paid for tuition in advance. These fees
were put into an untaught lessons account and
transferred into earned income once the lesson
had been taken. The Commissioner assessed
the taxpayer on the total income received prior
to the end of the financial year.
Incurred (cont)
For a debt to be incurred, per TR97/7
it is not sufficient if the liability is merely
contingent or no more than pending,
threatened or expected, no matter how
certain it is in the year of income that the loss
or outgoing will be incurred in the future. It
must be a presently existing liability to pay a
pecuniary sum.
Expenses of an earlier
income year
In Placer Pacific Management Pty Ltd v FCT
the Federal Court held the expenses were
deductible because;
to preclude deductibility when those liabilities
come to fruition on the basis that the active
trading business which gave rise to them
ceased would be unjust.
Prepaid expenses
Under ITAA36 s82KZL expenditure for loan
interest, rents, lease payments and
insurances are taken to be incurred during
the period to which the payment relates.
Bad Debts
ITAA97 s25-35 provides that you can deduct an
amount written off for bad debts if;
a) It was included in your assessable income
for the income year or for an earlier income
year.
Recall the case of Point v FCT
(a)
(b)
Livestock
Work in Progress
Work in Progress raw materials and partly
finished goods are considered trading stock.
However, products that represent the
provision of services are not considered
trading stock. That is, the work of lawyers
and accountants does not give rise to trading
stock even if their work results in a report, an
opinion or a set of accounts.
Tax treatment
Section 70-35 Bringing trading stock to
account for tax purposes compares the
value of trading stock at the end of a
financial year with the value of trading
stock at the beginning of a financial year.
Section 70-35(2) Where the value of trading
stock at the end of the year is greater than
trading stock at the beginning of the year,
the difference is included as assessable
income.
Tax treatment
Section 70-35(3) Where the value of trading
stock at the end of the year is less that the
value of the trading stock at the beginning
of the year, the difference is an allowable
deduction.
Section 70-40 The closing value of trading
stock in one financial year becomes the
opening value of trading stock in the next
year.
trading stock on hand at the start and at the end of the year:
Value of
trading stock
at year-end
Value of
trading stock
at start of year
Difference is
included in
assessable
income
Value of
trading stock
at year-end
Value of
trading stock
at start of year
Difference is
included in
deductions
Trading Stock
Stock on Hand has been determined in case law.
FCT v Sutton Motors (Chullora) Wholesale Pty Ltd
(1985) 157 CLR 277
Homework
Questions 16.2, 16.6, 17.1 and 17.4