Bob Jane Racing Pty Ltd - Income Tax Purposes by HRM Pty Ltd - Law Assessment Answer

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Law Assessment Answer

TASK: ASSIGNMENT QUESTIONS: Question 1 Bob Jane Racing Pty Ltd carries on business as a motor racing promoter and finds that flooding as a result of poorly maintained drains by the local council has caused damage to sections of its track. Repair of the track would involve reconstruction of the long straight at a cost of $58,000. The council was sued by Bob Jane Racing Pty Ltd and was ordered to compensate the company $65,000. The company decided instead to construct a bypass and reduce the length of the track by 300 metres. The bypass was constructed with exactly the same materials as the original track. The cost of the bypass was $85,000 which meant that the company only had to pay $35,000 REQUIRED: Is the amount of $65,000 received by the company assessable income and why? What amount if any would be allowed as a deduction under section 25-10 of the ITAA 1997? Question 2 Neil a director of HRM Pty Ltd, a management consulting company. He has the following questions for you: The company had the following transactions during the year ended 30 June 2019. How are they treated for income tax purposes by HRM Pty Ltd? You can assume in this question that the numbers exclude GST unless otherwise stated. 1. HRM Pty Ltd borrowed $502,000 from the Bank on 15 April 2019. 35% of the funds were used for personal purposes by Neil and the balance by the company. The bank charged the company an application fee of $5,020. Interest paid on the loan was $27,500. The loan is for seven years. 2. HRM Pty Ltd bought a second-hand Commodore car. The company traded in a Toyota Corolla and received $3,000 trade-in value. The balance the company had to pay for the Commodore car was $27,800. The new car was bought on 31/1/2019. The effective life of the new car is 8 years. 3. The old Toyota car had a written down value at the date of sale of $1,964. 4. The company employed Deb, Neil’s wife as the receptionist. The company paid her a wage of $35,000. The reasonable wage for a receptionist doing the same work is $40,000. 5. The company also donated $1,000 to the Liberal Party during this year’s federal election. 6. During June 2019, the company ordered a set of books and materials. These were printed overseas and as at 30 June 2019, they were still on a plane coming from Singapore. The cost of books and materials is $25,735. When Neil conducted a stocktake of the company’s inventory as at 30 June 2019 these items were not accounted for in the closing stock figure. 7. During the year the company earned an exempt income of $55,000 from a Government Grant. In the previous year ended 30 June 2018 it had carried forward losses of $75,000. There has been no change in the shareholding of the company since it was incorporated in 2012. REQUIRED: Explain to Neil the company director how each of the above items are treated. In your answer please carry out calculations where necessary and also refer to relevant case law and legislation. The company wishes to maximise its tax deductions.

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