Case Study ACCG924 session 2 2014
a.)When Cut and Chop entered into a contract to sell the business premises on 1 May 2014, CGT event A1 occurred.(s104-10)
According to sec100-50, the net capital gain or net capital loss for the income year is calculated as follow:
Current year capital gain=capital proceeds-cost base or indexed cost base In this case, the capital proceeds is 2.65 million (s116-20). Since the business premise is acquired on 1 June 2009 (after 21 September 1999) indexation method cannot be applied for calculating the cost base (Div 114). The cost base of the premise (s110-25) including purchase price (2.38million), incidental costs (s110-35) (legal fees $13500 and agents fees$45000).
So Current year Capital gain is 2.65million-(2.38million+13,500+45,000)=$211,500. This amount Less unapplied net capital losses for a previous year ($70,000) (s102-5): 211,500-70,000=$141,500
Lastly, the Cut and Chop is a company, it cannot use discount method (Div 115). So, net capital gain to be included in assessable income for the year ended 30 June 2014 as a result of the sale of the business premise is $141,500.
b.) If Cut and Chop want to minimize taxable income as at 30 June 2014, the most appropriate valuation method for it to adopt to value the trading stock is replacement method.
Under sec 70-35: where the value of trading stock on hand at the end of the year is more than trading stock on hand at the beginning of the year, the difference is included in assessable income, and where the value of trading stock on hand at the end of the year is less than trading stock on hand at the beginning of the year, the difference is deductible.
Taxpayer can choose to value each item of stock on hand at the end of the year based on: (1) its cost, (2) its market selling value or (3) its replacement value (s 70-45). Taxpayer can also use a reasonable lower value for obsolete trading stock (s 70-50). In this case, the cost of the trading stock is $230,000, the market selling value is
$350,000, and the replacement value is 195,000.
Under cost method, there will be no difference between the beginning and the ending value of the trading stock.
Under market selling value method, the ending value is more than beginning value ($350,000-$230,000=$120,000) the difference of $120,000 will be included in assessable income.
Under replacement method, the ending value of the trading stock is less than the beginning value ($195,000-$230,000=$-35000), the difference of 35000 is deductible. So, replacement method is most appropriate.
c.)The amount of $180,000 that Cut and Chop set aside for long service, annual and sick leave as at 30 June 2014 is not deductible(s26-10). The actual payments of $87,000 to employees in relation to leave entitlements during the year ended 30 June 2014 is deductible.
Sec 25-35 provides a deduction for a debt (or part of a debt) written off as bad in an income year if four conditions are satisfied:
(1)There must be a debt in existence
(2)The debt must have gone bad
(3)The debt must have been written off during the year, and
(4)The debt was included in the taxpayer’s assessable income, or arose in the course of a business of lending money.
The amount of $50,000 that Cut and Chop set aside for doubtful debts are not satisfied with the above requirements, thus not deductible. The actual bad debts written off against the provision account during the year ($67,000) satisfied the above requirement, thus deductible.
d.) When Cut and Chop received compensation of $70,000 through a claim under an insurance policy in respect of the stolen artwork on 31 August 2014, CGT event C1 occurred. (s104-20). The amount of $70,000 is the capital proceeds. The artwork was acquired for $105,000 by Cut and Chop on 1 January 2014 from Mrs
Parisis. The cost base is $105,000(s110-25). No exemption for collectibles acquired for more than $500(S118-18(1))
So there is a net capital loss...
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