Question

QUESTION 1 Part A Suman gained a Degree in Business when he was a young lad and with skill and hard work, he has used that knowledge to start his own business He operates his own business selling computers and related equipment. Over the last financial year, sales of computers and equipment were paid for at the time of sale. During the year ended 30 June 2019, Suman received $3,000,000 in cash for sales of computers. Purchases during the year ended 30 June 2019 were $1,200,000 and at the end of the year ended 30 June 2019 his stock on hand was $950,000 (valued at cost). Suman’s closing stock for the year ended 30 June 2018 was $650,000. Suman took 2 computers from his stock for his own use during the year. These computers cost him $220 each and had a market value of $330 each. Suman also gave away another 10 similar computers to his friends during the year. He paid wages of $1,420,000 to his 20 staff members. This included an amount of $30,000 paid to his brother, who is still at school. The work of the brother could have been done by an unrelated person for $10,000. He also paid $200,000 into his staff’s complying superannuation funds as concessional employer contributions. Explain how you would calculate the income from his business and the amount of all deductions that would be allowed for the year ending 30 June 2019. You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculation. Ignore residency, Fringe Benefits Tax and Goods and Services Tax issues. You must apply the law to the facts given in this question and provide YOUR OWN analysis of the issues. Calculations must be included where relevant.

QUESTION 1 (Cont.) Part B One of Suman’s customers bought some computer equipment for $600 on credit on 21 June 2018 but could not pay the account, which was issued on the same day. The customer went bankrupt in November 2018. Suman wrote off the debt on 1 July 2019. In May 2018, Suman decided to take a night off and go to Star City Casino. It was his lucky night. He won $300,000 playing the card game “blackJack”. His friends told him it was “beginners luck”. Explain how you would account for these events from the perspective of the Income Tax return for the year ending 30 June 2019 You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings and the relevant case law. If relevant, you must show your calculation. Ignore residency, Fringe Benefits Tax and Goods and Services Tax issues You must apply the law to the facts given in this question and provide YOUR OWN analysis of the issues. Calculations must be included where relevant.

Answer 1

PART A:

Calculation of Income from Business:

sales : $3,000,000

Less: Purchases: $1,200,000

Less: Opening Stock: $650,000

Add: Closing Stock: $950,000

Therefore Gross Profit : $2,100,000

Less: wages of $1,420,000

Less: staff’s complying superannuation funds : $200,000

Therefore Net Income is $480,000

Notes:

1. Suman took 2 computers from his stock for his own use during the year - This are already adjusted from closing stock and hence no adjustment required. these are treated as withdrawals and assumed no taxation impact else Market Value of these computers shall be added to income.

2. Suman also gave away another 10 similar computers to his friends during the year. - Same treatment as in note 1 above.

3. Wages of an amount of $30,000 paid to his brother, who is still at school. The work of the brother could have been done by an unrelated person for $10,000 - It is assumed that it has been paid as per the skill set he belongs even if he is at school and the same be allowed for taxation purpose and disclosre be provided in financial statements for the same and if its not allowed for taxation purpose then difference of $20,000 be added to income.

Part B:

1. Winnings of $300,000 by playing the card game “blackJack” shall be treated as speculation gain. Speculation gain shall be taxable at specified rate as per the relevent tax law.

2.Credit Sale of $600 was made on 21st June 2018 i.e., in preceeding year but the customer went bankrupt on November 2018. Also Suman should write off the debt in November 2018 itself resulting in reduction of Business income to the extent of $600.