Assignment Task

Case Study Scenario

You are a tax agent and have been engaged by Royal Watch Ltd to prepare their 2020/21 Income Tax Return.

1. Royal Watch Ltd is a manufacturer and exporter of fashion watches and designer decorative clocks. Its activities have not changed during the tax year 2020/21.
2. For accounting purposes, the company uses the straight-line method to depreciate assets. For taxation purpose, it chooses to use the diminishing value method to depreciate its assets. All assets are purchased post 10 May 2006 and the leasehold improvement is in relation to the leased office. The opening adjustable values as at 1 July 2020 are:

Asset	Effective Live	Opening Adjustable Value
Plant and Machinery	10 years	$3,125,052
Leasehold improvement	15 years	$1,635,988
Office Equipment	4 years	$250,635

3. The company purchased office equipment of $50,890 on 1 November 2020.
4. The company depreciates the building over 40 years for both accounting and taxation purposes. The construction cost of the factory premises is $2,014,600.
5. Repairs and maintenance expense included the cost for the replacement of carpet in the factory meeting rooms with premier stone floor. This cost of $123,540 was paid on 1 April 2021.
6. Among the entertainment expenses, $38,450 was for food and drinks provided during five whole day in-house seminars attended by clients and employees. The balance was for lunches and dinners with customers.
7. The payment of annual leave was $35,750 during the year 2020/21.
8. A provision of 5% is made on debts which are overdue for more than 30 days except for one debt which has been overdue for more than 12 months. A full provision has been made for this debt of $230,798. However, the receivables clerk failed to mail a legal claim to the client’s correct address.
9. The company has a franking account surplus of $8,000 on 1 July 2020. In addition, the company made the following transactions:
   500. On 21 July 2020 the company made a PAYG instalment payment of $40,500.
   501. On 21 October 2020 the company made a PAYG instalment payment of $45,500.
   502. On 1 November 2020, the company received a tax refund of $35,680 for the tax year 2019/20.
   503. On 31 December 2020, the company paid a fully franked interim dividend of $350,000.
   504. On 21 January 2021 the company made a PAYG instalment payment of $55,500.
   505. On 21 April 2021 the company made a PAYG instalment payment of $50,500.
   506. On 1 June 2021 the company received a dividend of $220,000. This had a franking percentage of 75%.
   507. On 30 June 2021 the company paid a fully franked final dividend of $450,000.

Below are the financial statements for the Royal Watch Ltd.

Royal Watch Ltd – Income Statement 1 July 2020– 30 June 2021
Revenue	$
Gross Sales	16,412,356
(Less Sales Returns and Allowances)	15,860
Net Revenue	$16,396,496
Cost of Goods Sold
Beginning Inventory	1,862,792
Goods Purchased or Manufactured	9,580,365
Total Goods Available	11,443,157
(Less Ending Inventory)	(1,762,835)
Cost of Goods Sold	9,680,322
Gross Profit (Loss)	6,716,174
Operating Expenses
Wages	1,150,123
Superannuation Costs	109,262
Depreciation on Plant and Machinery	498,365
Depreciation on Factory Premises	50,365
Depreciation on Leasehold Improvements	143,854
Electricity	325,640
Insurance on Factory Premises	54,352
Advertising and Promotion Expenses	158,063
Freight and Delivery Expenses	258,647
Total Operating Expenses	2,748,671
Gross Profit (Loss) After Operating Expenses	3,967,503
Other Income
Interest Income	8,672
Bad Debt Recovery	58,600
Net Gain from Disposal of Plant and Equipment	36,872
Total Other Income	104,144
Administration Expenses
Accounting and Audit Fees	38,450
Bank Charges	3,670
Commissions	328,608
Depreciation on Office Equipment	16,616
Employee Benefits	256,344
Entertainment Expenses	60,851
Insurance	79,562
Interest Expenses	369,207
Legal and Professional Fees	179,520
Maintenance and Repairs	279,420
Office Supplies	136,825
Payroll Taxes	85,252
Office Rental	138,950
Provision for Annual Leave	136,822
Provision for Doubtful Debts	380,450
Salaries	381,633
Superannuation Costs	36,256
Travel	46,830
Utilities	68,961
Total Administration Expenses	3,024,227
Net Income before Taxes	1,047,420
Less Income Tax Expenses	272,329
Net Income after Income Taxes	775,091

Task 1: Income Tax Return and working schedules

Calculate depreciation for tax purposes using:

1. the diminishing value method for the plant and machinery, leasehold improvement and the office equipment; and
2. the straight-line method for factory premises.

Show your workings.

Note: Use the Opening Adjustable Values (point 2 of the Case Study Scenario above) for the purposes of the calculating depreciation using diminishing value method. 

Task 2

1. Complete the following franking account for the year ended 30 June 2021 using the information provided in the case study.

Date

Details

Debit

Credit

Balance

1. Calculate the franking deficit tax offset that would be applicable to Royal Watch Ltd.
   Show workings.

Task 3

Please complete the calculation of profit and loss and reconciliation to taxable income/loss sections of the Company Tax Return for the year ended 30 June 2021.

All blank boxes must be completed.

*Show your workings for the Non-deductible expenses (label W).

Note: The table is based on the Australian Taxation Office’s Company Tax Return for 2021.

Company Tax Return
Date from
Date to
Name of Company
Calculation of Total Profit or Loss
Income
Other sales of goods and services		C
Gross interest		F
Other gross income		R
Total Income		S
Expenses
Cost of sales		A
Contractor, sub-contractor and commission expenses		C
Superannuation expenses		D
Rent expenses		H
Interest expenses within Australia		V
Depreciation expenses		X
Repairs and maintenance		Z
All other expenses		S
Total Expenses		Q
Total Profit or Loss		T

Reconciliation to Taxable Income or Loss
Total profit or loss amount shown at T as above
Add:
Franking credits	J
Other assessable income	B
Non-deductible expenses (*list below all expenses included)	W
Sub Total
Less:
Deduction for decline in value of depreciating assets	F
Capital works deductions	I
Other income not included in assessable income	Q
Other deductible expenses	X
Subtraction items subtotal
Taxable/net income or loss

Calculation statement
Taxable or net income	A
Tax on taxable or net income	T1
R&D recoupment tax	M
Gross tax (T1 + M)	B
Non?refundable non?carry forward tax offsets	C
Subtotal 1 (B – C) (Cannot be less than zero)	T2
Non?refundable carry forward tax offsets	D
Subtotal 2 (T2 – D) (Cannot be less than zero)	T3
Refundable tax offsets	E
Subtotal 3 (T3 – E) (Cannot be less than zero)	T4
Franking deficit tax offset	F
Tax Payable (T4 – F) (Cannot be less than zero)	T5
Section 102AAM Interest Charge	G
Credit for interest on early payments – amount of interest	H1
Credit for tax withheld – foreign resident withholding (excluding capital gains)	H2
Credit for tax withheld where ABN is not quoted	H3
Tax withheld from interest or investments	H4
Credit for TFN amounts withheld from payments from closely held trusts	H5
Other credits	H7
Credit for foreign resident capital gains withholding amounts	H8
Eligible credits	H
Tax offset refunds (Unused amounts from Label E).	I
PAYG instalments raised	K
AMOUNT DUE OR REFUNDABLE (T5 + G – H – I – K)	S

Task 4

You have completed the preparation of the 2020/21 Income Tax Return for your client, Royal Watch Ltd. You are now required to prepare a Client Income Tax Return Cover Letter. 

Step 1: Review the template letter provided below.

Step 2: Edit the letter, including the client’s details and the requirement for the public officer to review and approve the Income Tax Return.

Step 3: Provide explanations for the add-back and disallowed items in the Tax Reconciliation.

Step 4: Enter the estimate of tax payable or refundable.

[Insert DD Month YYYY]

[Insert Client Name]
[Insert Client Position]
[Insert Company Name]
[Insert Client Address]
[Suburb, State, Post Code]

Dear [Insert Client Name]

Re: 2020/21 Company Tax Return

Thank you for allowing us to assist with your taxation needs. We are pleased to enclose your Income Tax Return for the year ended 30 June 2021.

Please review the Income Tax Return marked ‘Client Copy’ attached to this letter. Please note that the tax calculation is an estimate only, as PAYG Instalments are dependent on Australian Taxation Office cross-referencing. Once you are satisfied that the Income Tax Return is correct, please sign the attached Electronic Lodgement Declaration where indicated. Once you have signed the Electronic Lodgement Declaration, please send the Declaration back to this office so that the Income Tax Return can be lodged electronically with the Australian Taxation Office. You should receive your Income Tax Assessment Notice within 14 days of lodgement.

The declaration that you are signing includes a commitment that you have the necessary proof of the deductions and retain all records for five years after the assessment notice issues. This will include receipts for expenses, logbooks, and other records. If you do not have these records, or have any questions about the necessary records, please contact us.

We estimate that upon assessment you will be [required to pay income tax OR receiving an income tax refund] of $xxx.xx. This amount has been calculated based on a taxable income of $xx,xxx.xx. 

We also enclose our account for the preparation and lodgement of your Income Tax Return.

Finally, we would like to thank you for your support and the opportunity to be of service to you.

If you have further queries on any details contained in this letter or on any other matter, please feel free to contact us on [insert telephone number].

Yours faithfully

[Insert Name and Title]

Encl.

Case Studies

Case Study 1

Henry, aged 61, and Beatrice, aged 58. are directors of SCG Pty Ltd. SCG Pty Ltd is the trustee of their self managed superannuation fund, the Henrice SMSF.

Henry has $750,000 in the Henrice SMSF of which $500,000 is supporting a transition to retirement account based pension. Henry’s total amount is all Taxed Element of the Taxable Component.

Beatrice has $500,000 in the Henrice SMSF. Beatrice has $100,000 Tax Free Component and $400,000 Taxed Element of the Taxable Component.

During the financial year, the following transactions was conducted by SCG Pty Ltd as Trustee for the Henrice SMSF:

• Received a $10,000 contribution from Henry’s employer;
• Received a contribution of $20,000 made by Henry on his own behalf with a Section 290-170 Notice of his intention to claim this as a tax deduction;
• Received a $5,000 contribution from Beatrice’s employer;
• Received a contribution of $100,000 made on behalf of Beatrice with no intention of Beatrice claiming this contribution as a tax deduction;
• An interest payment of $12,500;
• A capital gain of $50,000 from the disposal of an asset that was owned by SCG Pty Ltd as Trustee for the Henrice SMSF for more than 12 months;
• A capital gain of $20,000 from the disposal of an asset that was owned by SCG Pty Ltd as Trustee for the Henrice SMSF for less than 12 months;
• Dividends from publicly listed companies of $50,000 that are fully franked; and
• Paid $8,000 in life insurance premiums for a life insurance policy on the life of Henry and $6,000 in life insurance premiums for a life insurance policy on the life of Beatrice. These policies were owned by SCG Pty Ltd as Trustee for the Henrice SMSF; and
• $3,500 in ongoing fees charges regarding the operation of Henrice SMSF.

Advise SCG Pty Ltd as Trustee for the Henrice SMSF of the tax they must pay, please show workings.

Case Study 2

Identify the relevant elements of Australian tax law in the following scenarios and calculate the total tax payable (including Medicare Levy and any other tax offsets) by James for the 2021/22 financial year. Show your workings.

• On 1 July 2021, James sold some jewellery for $5,000 which he bought on 1 April 2019 for $2,780.
• On 1 August 2021, James sold his camera for $22,000 which he bought on 15 June 2019 for $23,000.
• On 5 October 2021, James sold a painting for $950 which he bought on 4 April 2013 for $480.
• On 8 November 2021, James sold some listed shares for $49,500 which he bought on 30 January 2021 for $42,400 (net costs).
• On 30 June 2022, James receives interest income of $24,000.

Case Study 3

Simpsons and Associates is a law firm which has provided the following benefits to its employees for the 2021/22 FBT year. The turnover for the firm is $12 million.

Identify the relevant elements of Australian tax law in the following scenarios and calculate the FBT payable by Simpsons and Associates for the 2021/22 tax year. Show your workings by embedding your spreadsheet or table below.

• James was provided with a Toyota which is parked at James’ home. The car was bought by the company on 1 April 2018 for $48,500 (GST inclusive), including $1,900 for registration and compulsory third party insurance.
• Susan and her family were given a weekend trip to Hunter Valley costing $3,500 (GST inclusive).
• Brad was provided with a loan from the company for $200,000 on 1 August 2021 and paid 2% per annum interest on the loan. The FBT benchmark interest rate is 4.52% for the FBT year ending 31 March 2022.
• Louis was provided car parking at the office car park. Wilson Parking is located within a one kilometre radius of where Louis’ car is parked and charges a fee of $2

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