Tax company notes fraking Essay Example
Tax company notes fraking Essay Example

Tax company notes fraking Essay Example

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  • Pages: 6 (1489 words)
  • Published: February 11, 2018
  • Type: Article
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A company exists as a separate legal entity and has its own income tax responsibilities. This structure is commonly used for businesses and provides limited liability and specific tax benefits. However, the reporting requirements for a company are more extensive. For small business owners with a company structure, they may only receive income in the form of director's fees or dividends, and if a motor vehicle is used by the owner, fringe benefits taxation applies. Unlike partnerships, company losses cannot be distributed to directors or shareholders.

Students can investigate the Personal Services Income legislation, which places limitations on using companies to avoid taxes. A company must file an income tax return that shows the income and deductions to calculate the amount that the company should pay. Currently, the taxation rate fo


r companies is 30% on taxable income, and no Medicare Levy applies. Companies are subject to deductions for expenses such as wages, stock costs, rent, bad debts, and previous year losses. Tax returns and annual reports must be submitted to both the tax office and the Australian Securities and Investments Commission.

The tax return is a reconciliation between accounting net profit and taxable income, in which items that are not permitted for taxation purposes are adjusted according to taxation rules. The due dates for return lodgment are on the back cover, and companies have a later lodgment date than individuals. For the 2011/12 tax year, the lodgment deadline is 28 February 2013, but for companies with annual income greater than $10 million, the deadline is 15th January. Payment is made when lodging the return, and assessments are based on self-assessed information provided by

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the taxpayer company. Companies are required to pay installments of their estimated taxation liability four times a year, with any balance of actual tax liability paid or refunded upon lodgment of the annual taxation return. The TAT will inform the company of the installment amount to be paid based on last year's actual tax liability, but the company may adjust this payment if desired. The company can also report its actual income and apply the rate of taxation payable on assessable income based on last year's information. The introduction of these reconciliation methods was discussed in a previous topic on partnerships.The process of calculating taxable income involves starting with the accountant's net refit and ending with the Tax agent's taxable income. The differences between the two approaches are added or subtracted in the middle, and any income or deductions that are the same under both approaches are not included. The following examples illustrate this process:

Exercise 1:
Big Spender Lad's income statement includes gross fees of $359,000 and expenses of $240,000, resulting in a net profit of $57,200. However, $20,000 of non-deductible legal expenses are included in the admit expenses.

Exercise 2:
Extra Terrestrial Lad's income statement includes fully franked dividends of $7,000 and deductible expenditure of $481,000, resulting in taxable income of $185,000. Additionally, a building previously owned by the company was disposed of during the current year.

Exercise 3:
Avatar Lad's income statement includes gross fees from trading of $449,000 and exempt income of $461,000. After deducting interest expense of $20,000 and other deductible expenses totaling $61,000, taxable income is $335,000. Note that borrowing costs of $5,000 for a 20-year loan incurred four financial years ago are included in

the statement.The income statement for Risk Management Lad shows gross fees of $750,000 and director's fees of $50,000. There was an increase in annual leave provision of $9,000 and an increase in long service leave provision, while the salary and wages totaled $173,000 and superannuation amounted to $120,000. Other deductible expenses accounted for $127,000, bringing the total income to $491,000 and total deductions to $259,000. Note 1 states that annual leave paid was $15,000 and no ILLS was paid for the year. Note 2 explains that included in the salary and wages was $45,000 paid to the Managing Director's husband for bookkeeping duties, with the Commissioner indicating that $20,000 is reasonable. Note 3 mentions that it includes $23,000 of accrued superannuation. For Exercise 5, Omega Pity Lad's net profit before tax was $120,000, including a fully franked dividend of $700, non-deductible amortization of goodwill of $4,000 and depreciation of $10,000. The company can calculate the net tax payable. For Exercise 6, Tyrannosaurus Pity Ltd net profit before tax was $220,000, including a fully franked dividend of $1,400, materials of $5,000 allowed for deduction but non-deductible entertainment of $6,000 and depreciation of $14,000. The company can claim tax depreciation of $23,500 and calculate net tax payable after reconciliation.In Exercise 7, Pepsi Pity Ltd reports a net profit after tax of $230,000, which includes $2,000 in fully franked dividends, $4,000 in amortization of goodwill, $102,000 in income tax expenses, $19,400 in depreciation, $1,800 in non-deductible entertainment expenses, and $24,800 in annual leave accrued. Additionally, the tax decline in value for the year is calculated to be $20,700 and $8,500 of annual leave was paid to staff. The

company paid an income tax installment of $103,000 during the year and needs to do a reconciliation to calculate the net tax payable.

In Exercise 8, Blenheim Pity Ltd reports a profit after tax of $310,050 which includes $2,450 in fully franked dividends and $3,500 in amortization of goodwill. The net income tax expense is reported as $124,500 with salaries and wages at $105,400 and depreciation at $18,680. Other expenses include non-deductible entertainment, freight cost totaling $23,200 along with annual leave accrued at $11,870 and rent of factory cost of $450. The tax decline in value for the year is calculated to be $20,120 with annual leave paid to staff at $12,500. PAYS income tax installment during the year amounted to $118,000. The company needs to do a reconciliation to calculate the taxable income and net tax payable.

It's important to note that certain items of income may need to be adjusted for taxation purposes when calculating taxable income for a company.Generally, the gross profit is acceptable for tax purposes unless using trading stock valuations like LIFO. Local interest is considered assessable income and dividends received from resident companies are as well. The FRANKING CREDIT is included as assessable income but can be offset during assessment. However, unused imputation credits claimed as offsets will not be refunded in cash. Unframed dividends without a franking credit are also assessed. Dividends received from a company's reserves representing return of capital are not considered income and are not assessed. Overseas subsidiary income or consolidated profit must be shown as assessable income. The total income amount must be shown and foreign tax paid can be credited in tax calculation. Overseas

interest is assessed and a tax credit can be claimed later, but it can't exceed the Australian taxation payable on the income. Profits or losses from selling plant and equipment must be recalculated based on taxation depreciation rules, leading to either an assessable amount or deduction.

According to taxation rules, capital gains from the sale of assets must be calculated based on current regulations rather than historic costs. The 50% discount method is not an option for companies. To determine assessable income, consider the following accounts for the year ending on June 30th, 2012: gross trading profit valued at $270,000, interest from bank and debentures of $1,000, dividends received from a public and private company with imputation credits of $2,250 and $2,813 respectively, unframed dividends from a public company, profits from a United Kingdom subsidiary totaling $10,000, overseas interest (net of $1,000 overseas tax deducted) valued at $14,000, and a profit of $5,000 from selling equipment with an accounting written down value of $10,000 and a taxation written down value of $14,000. It's important to review revenue statement expenses to ensure all deductions are permitted for taxation purposes. Expenses such as entertainment expenses, fines, and private expenses are generally not deductible.

If entertainment expenses are subject to FAT, they can be deducted if for employees, but not if for clients. Provisions, including doubtful debts and long service leave provisions, income taxation and installment paid, and late lodgment penalty, are not deductible. However, the general interest charge (GIG) is deductible. Fringe benefits taxation and state taxes like land tax, bank fees, payroll tax, and workforce premiums are deductible. Accounting depreciation must be adjusted to reflect taxation

rates. Expenses can be deducted only when incurred and management policies regarding write off policies can be ignored. Goodwill impairment (amortization) and share issue costs are examples. Superannuation contributions are fully deductible, except if they are for non-complying funds or the SEC charge applies. Excessive director's fees can be deemed not tax deductible to the company and treated as unframed dividends in the hands of the director. Excessive wages to persons associated with directors are not deductible.

The Commissioner has the authority to classify a loan made to a shareholder of a private company as profits and subject it to assessment as an unframed dividend. This assessment takes into account several commercial aspects of the loan such as its intention to be repaid, the interest paid or payable, and if the security pledged is sufficient to cover the loan. Losses incurred by overseas subsidiaries cannot be tax deductible and will be retained for deduction against future profits in the same location. In addition, legal expenses may require adjustments in accordance with taxation law.

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