Question

Emma runs a business selling scarves. She purchases the scarves directly from scarf makers in Cambodia and sells them in makers markets in Victoria. The following transactions have taken place during the 2019/20 income year. Please advise Emma as to the tax consequences of each of these transactions (from (a)-(d)), referring where appropriate to legislation in your answer:

(a) Emma purchased $3,000 of scarves on 5 July 2019 from a scarf maker in Cambodia. The scarves were loaded onto a ship the next day and under the terms of the contract, Emma was to take ownership and control of the scarves once they were loaded on that ship. Half of the scarves were delivered to Emma on 8 August. The rest of the scarves were delivered directly to a customer in Indonesia on 10 August. The customer had purchased the scarves from Emma on 20 July.

(b) At 30 June 2020, Emma had 30 scarves in stock. The pieces had cost her $3 each.

(c) Emma took 10 scarves out of her stock to give as gifts to friends and family at Christmas time. The scarves cost $30 and had a market selling value of $300.

(d) Emma gave 8 scarves to a creditor in satisfaction of a $210 debt. The scarves cost Emma $24 and have a market selling value of $240.

Answer 1

Emma's tax consequences on various transactions

Explanation:

(a) Emma incurred the cost of the scarves on 5 July 2019 and the sale was made on 20 July 2019. Therefore, the accrual concept of recognizing revenues will dictate that the revenue was earned on 20 July 2019. The tax of the sale for monthly tax returns will have the sale reported for the month of July 2019.

(b) The 30 pieces of scarves will be used to compute the closing stock that will determine the exact cost of scarves sold (cost of goods sold). It will lead to a closing stock of $90 that will be deducted from the cost of goods sold but be included in the balance sheet. Since the closing stock is low, the gross profit will be lower hence leading to Emma paying less taxes.

(c) Gifts related to business are tax deductible but gifts to family members and friends are not deductible for tax. Therefore, it will be assumed that the scarves were sold by Emma and she will have to pay taxes including the scarves gave out as gifts that would have been sold for $300.

(d) Emma will deduct the 8 scarves given to a creditor who satisfied a debt of $210. Gifts to a creditor are business related and qualify for deduction. Therefore, the market selling value of $240 of the 8 scarves will be deducted from the taxable income to reduce Emma's tax liability.