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 (2 marks)

(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 2017? (2 marks)

NB. The income tax rate is 25%, and the income tax threshold is $1,500,000.00

HINT

CAPITAL ALLOWANCE

Prepare a CA schedule

1. E.g. Equipment WDV: 132,500 * 11.25%

CA calculation: WDV 132,500 less AA 14,906.25 = WDV 117,593.75

Do this for all of the assets

In order to advise Stephen, you need to calculate the income tax after making the necessary adjustments such as adding back all expenses that are not allowed. E.g depreciation.

Do the same for Audrey based on her status (be it if she is an employee or not)