Question

Question 5 - Repairs, capital works, depreciation, common business deductions, FBT

Jardin Pty Ltd (Jardin) is a landscaping materials distributor which operates from its own premises, comprising a 1-hectare block of land, which includes a small office. Jardin uses the land as a storage facility and does not manufacture any products on its premises. In September 201W Jardin decided to expand its products line, which required the following investments in its current infrastructure:

1. A large storage shed was built on the land in December 201W. The site required levelling, which was completed at a cost of $30,000 on 15 January 201X. Construction of the storage shed started on 16 January 201X and was completed by 1 March 201X at a cost of $280,000. Because of supplier delays, the first trading stock shipment was only received and stocked at the new storage shed on 1 April 201X.                                                 
2. A new forklift truck was purchased at a cost of $15,000 (effective life 11 years). The new forklift was first used in stocking the new storage shed for the first time.                                                                                                                                                       
3. Due to a heavy hail storm, two out of ten window glass panels in the storage shed were broken and had to be replaced. The repair works were done on 5 July 201X.                                                                                                                                                         
4. Due to the increase in its operations, Jardin hired a new business manager on a part-time basis. At the 30 June 201X Jardin had paid the new manager $60,000 in salaries.                                                                                                                                        
5. Jardin also provided the new business manager with a car (a Kia Carnival costing $55,000) on 1 April 201X. He drives the car to and from work on a continuous basis during the year, and he is only required to cover the fuel costs of $600 per year.                                                                                                                                                                             

Required

For each of the expenses listed in (a) to (e) above, advise Jardin Pty Ltd on whether such expenses would be deductible in the year ending 30 June 201X, stating your calculations (if any) and applying legislation and case law to support your answer.

                                                                                                                                  

Answer 1

Answer:

1)Not deductible

2)Not deductible

3)Deductible

4)Deductible

5)Deductible

.

Explanation:

1)

Cost of new shed includes cost of dismantling old shed, land levelling cost and construction cost such as supervision, materials, supplies, labour, tools, equipment, transportation etc.,

Hence land levelling cost of 30,000 and construction of storage shed of 280,000 should be capitalized.

Hence, cost of site levelling expense is not deductible.

.

2)

Forklift truck purchased for lifting materials should be capitalised and depreciated yearly because the truck is used for more than one year that is the useful life is 11 years so truck should be capitalized and depreciated yearly.

Forklift truck expense not deductible.

.

3)Repair charges made to window glass should be treated as expenses for the year.

Small repairs made to shed or building can be treated as expense so glass cost is deductible.

.

4)Salary paid to business manager on parttime basis should be treated as expense, hence it is allowed as a deduction.

.

5)Car provided to business manager for official use should be capitalized and should be depreciated in the company books.

Fuel costs more than 600 has to be treated as perquisite which is treated as part of salary expense paid to manager, hence it is deductible.