The question:

VVS Laxman Enterprises is a resident company carrying on business , based in Adelaide as an 'on-line' mail-order business. The company has two employees, Ravi and Virat , who are also the shareholders and directors.

The business is conducted from their private residence, a seven room house. One of three bedrooms is set aside as an office. Inventory is stored in an adjoining shed (SEE POINT 9 BELOW)

The following data relates to the year ended 30 June:

1. Gross sales receipts $10,000 ,

2 Advertising $8,000 ,

3. Purchases of trading stock $90,000 Stock on hand at the beginning of the year was $11,000; at the end of year $7,000.)

4. Administrative expenses $15,000,

5. Franchise fee $20,000 (The company paid $100,000 to Harbhajan Ltd for exclusive distribution rights to their products. The directors of decided to amortise the payment over 5 years)

6.Lease payments on two cars $10,400 ,( $5,200 each for two cars. Ravi uses his car 100% for business; Virat uses his 50% for business)

7.Salaries $100,000 ,

8. Fringe benefits tax $10,500 ,

9. Depreciation $1,200 ( A storage facility was constructed adjacent to the residence. It is used exclusively to store trading stock. Its cost was $12,000 and is depreciated in the company's accounts at 10%pa. )

10. Council rates $2,500 Electricity $3,000 Telephone $1,500

The questions:

• What advice do I give to the directors on the tax treatment of matters covered in point numbers 3,5,6 & 9
• What are directors tax obligations on all the outgoings ?
• What items are tax deductible?
• The directors were approached by another company with an offer to buy the business. What are the Captial Gains Tax (CGT) implications/ consequences CGT if they accept the offer.

Sources of law and any case law would be handy for consideration.