(This question is a tax reconciliation question. The financial accounts now have to be reconciled to taxation accounting in order for you to prepare the tax return for the company. You must look at Question 16.3 in the textbook and the answer to that question before you attempt this question. This is important as it sets out the way in which the question needs to be answered. There is no need to reconstruct the accounts. In practice you will deduct from the accounting net profit non-taxation law items and add items that comply with taxation law. Remember that financial accounting is not the same as tax accounting.)

QUESTION:

Charcoal Foods Pty Ltd is a private company with Con and his wife Eva being the two Directors and each owning one ordinary share. It has been operating since 2005. They migrated from Greece 40 years ago. In Melbourne they established a successful chicken take away shop. The company is registered for GST. Also the Company is registered as a Small Business Entity and uses the SBE taxation accounting system.

For the year ended 30 June 2017 their accountant, Theo prepared the following financial accounts. The figures in the financial accounts are net of GST (that is they have already excluded the GST from the figures) except where specifically stated.

Sales of chickens and other food items$1,234,052

Opening stock 12,000

Purchases155,000

Closing stock18,000

Cost of sales$149,000

Gross profit$1,085,052

Operating expenses

Administration expenses$485,375

Selling expenses$324,678

Total expenses$810,053

Net profit for accounting purposes$274,999

In preparing the financial accounts, Theo provided the following information:

Administration expenses:

This includes the following items:

Accounting depreciation $55,351

Provision for annual leave $19,752

Provision for wastage of food$13,578

Fine for breaching Health and Safety regulations$4,250

Prepaid rental for the shop (Note 1)$18,000

Wage to Brad (Note 2)$25,750

Loan application fee charged by Bank (Note 3)$4,500

Interest on loan$10,417

Repairs (Note 4)$25,780

Normal operating expenses$307,997

Total administration expenses$485,375

Selling expenses are made up of the following:

Bad debts (Note 5)$2,985

Purchase of consumables (Note 6)$7,953

Advertising in the local paper$12,758

Cleaning costs$22,589

Normal operating costs$278,393

Total selling costs$324,678

Notes:

Note 1: The Company prepaid the 18 months rent for the shop for the period 1 August 2016 to 1 January 2018.

Note 2: Brad is aged 15. He is still at high school. The task he undertook was helping his grandmother Eva to prepare the salads after school. He only works for 2 hours a day for three days a week. The normal pay for a person to do this job would have been $6,670.

Note 3: The Company borrowed $250,000 from the bank. The bank charged a loan application fee of $4,500. The loan is for 10 years. The funds were borrowed on 1 July 2016.

Note 4: The repairs consisted of the following:

• $800 to replace the shop window damaged by an act of vandalism,
• $1,600 to install a new awning at the front of his shop. This was done on 17 April 2017,
• $15,000 spent on initial repairs to a second hand freezer used for extra storage,
• $4,300 spent to put in a sprinkler system to meet Fire Safety Regulations,
• $4,080 on maintenance costs on the fryer, roaster and register caused by normal wear and tear.

Note 5: The bad debts represent a customer that they sold chickens to for a wedding on credit that refused to pay on the grounds that the chicken was too salty.

Note 6: This represents the purchase of cleaning aids, serviettes and plastic forks.

Other information:

In preparing the accounts Theo advises you that the following items were not taken into consideration in preparing the above financial accounts:

Dividends: Theo has not taken into account any of the following dividends as he was not sure what to do about the imputation credits.

• Cash dividend from the ANZ Bank of $12,465 which was fully franked,
• Dividend from Apple Corporation in New York of AUD equivalent of $18,000 with $2,000 withheld in the US,
• A cash dividend from Santos Ltd of $8,744 franked to 50%.

Depreciating assets of the Company and new acquisitions: The figures are inclusive of GST.

• Chicken Roaster purchased on 1 September 2016 at a cost of $55,600. The cost of installation was $6,696. The effective life of the machine is 5 years.

• Counters and benches were installed on 1 July 2016 at a cost of $25,780. The effective life is 8 years.

• Cash register purchased on 1 July 2016 at a cost of $3,750. The effective life is 6 years.

• A minivan for deliveries - this was purchased on 1 June 2017. The cost was $48,750. The effective life is 5 years.
• The Company bought a new luxury motor car for Con and Eva to use for whatever purpose they like on 1 April 2017 for $110,500. The company paid Fringe Benefits Tax of $3,057. This amount has not been included in the financial accounts as Theo is not sure what to do about the FBT expense.
• The general small business pool of assets as at 1 July 2016 was $245,786. GST has already been excluded from this figure. The above items have been added to the pool during the financial year.

Trading stock:

The value of the closing stock as at 30 June 2017 is:

Cost $18,000

Market value$11,890

In addition Con and Eva used some chicken for their own consumption. The estimated personal consumption amount is $1,800.

In addition $10,250 of chicken wings were in transit from Ingham in Queensland and as at 30 June 2017 were in Sydney on a truck which arrived in their shop on 5 July 2017. They had paid for the chicken wings and the cost has been taken up in the purchases figure in the financial accounts prepared by Theo. This amount had not been included in the closing stock figure.

PAYG Instalments: The Company made the following payments of income tax to the ATO:

• 1 October 2016 - $12,000
• 1 January 2017 - $12,000
• 1 April 2017 - $14,000
• 30 June 2017 - $12,000

REQUIRED:

Theo has now given you the file in order to prepare the tax return for the company. You are very experienced in taxation law having studied very hard in this subject when at university. Theo did not study very hard in taxation law and as a result is only working as a basic accountant in the accounting practice.

Please calculate the tax payable for the company. You are required to provide a brief explanation of each item and why it is included or excluded.

(30 MARKS)