Question

Please note that the tax rate for the respective country is 25%

Graded Problem: Capital Allowance

Stephen Marsh operates a successful paint distributor business. The accounts for his business in 2017 showed a profit of $5,450,000 after charging:

• $380,000 depreciation of building, equipment, and furniture;
• $880,000 for salary to his wife Audrey who supervises the office;
• $350,000 to his 18-year-old son Paul, and $1,200,000 to himself
• $120,000 being $78,000 bad debts written off and $42,000 doubtful debts representing 2% of year-end receivables balance.

At year-end December 2016, Stephen Marsh's business assets consist of:

a) Equipment at cost $200,000 (WDV $132,500; A.A. 11.25% SL)

b) Furniture and fixtures at cost of $480,000 (WDV $192,000; A.A. 11.25% SL)

c) A pickup truck purchased in 2014 for $500,000; (WDV $312,500; A.A. 12.5% SL)

d) A non-residential building, acquired in 2010 for $5 million (WDV 3.5 m; A.A 2.5%)

e) There were no acquisitions or disposals of assets in 2017

The Commissioner has determined that the salaries paid to Audrey and Paul are commensurate with their respective responsibilities.

(i) Prepare a summary of Stephen's capital allowances for year-end 2017

(ii) Advise Stephen of his income tax liability for the year of assessment 2017 (1 mark)

(iii) Audrey's only income is her salary from the shop. What is her tax liability for 2013?   

Answer 1

(i) Prepare a summary of Stephen's capital allowances for year-end 2017.:

Capital Allowances for the year end 2017
Name of Asset	Cost Price	Allowance Rate	Allowance
Equipment	2,00,000.00	11.25	22,500.00
Furniture & Fixure	4,80,000.00	11.25	54,000.00
Pick up Truck	5,00,000.00	12.50	62,500.00
No Residential Building	50,00,000.00	2.50	1,25,000.00
Total Allowance			2,64,000.00

(ii) Advise Stephen of his income tax liability for the year of assessment 2017.:

Income tax liability for the year of assessment 2017
Particulars		Amount
Profit as per Books		54,50,000.00
Add: Deoreciation as per books	3,80,000.00
Less: Capital Allowance		2,64,000.00
Add: Salary Paid to himself	12,00,000.00
Net Adjusted Income		67,66,000.00
Tax @ 25%		16,91,500.00

(iii) Audrey's only income is her salary from the shop. What is her tax liability for 2013?

There may be mistake in quetion that ask for tax liability for 2013. i have calculated for the current year 2017.

Tax Liability of Audrey's for 2017
Particulars		Amount
Profit as per Books		8,80,000.00
Net Adjusted Income		8,80,000.00
Tax @ 25%		2,20,000.00