BUSINESS TAXATION ASSIGNMENT -
ASSIGNMENT QUESTION - Carson Pty Ltd ("Carson"), an Australian resident company for tax purposes, carries on numerous business activities.
In the first half of 2014, Carson has thoughts of expanding their operations, and conducts studies into the feasibility of manufacturing electric guitars for sale. The feasibility studies cost $8,000 (paid in March 2014). As a result of the feasibility studies, Carson decides to proceed with the venture.
On 1 July 2014, Carson purchases land with a derelict building on it in Victoria for $850,000. Between 1 July and 31 July 2014, Carson spends $80,000 on demolishing the derelict building. On 1 August 2014, Carson enters into a contract with Ramjet Pty Ltd (an Australian resident company for tax purposes) to construct a factory on the land so they can manufacture the electric guitars. The total cost of construction was $1,300,000 paid as follows:
- A deposit of $200,000 on signing the contract (1 August 2014)
- Four progress payments of $250,000 on the first of each subsequent month (i.e. 1 September 2014, 1 October 2014, 1 November 2014, 1 December 2014)
- A final payment of $100,000 on 1 January 2015 when construction is completed.
To fund the venture, Carson had borrowed $1,600,000 from Aus Bank Ltd (an Australian resident bank) on 1 July 2014 on an interest only basis at a rate of 6% to partly fund the purchase of the land and the construction of the theatre building. Interest is payable on first (1st) of each month. (Note that an interest only loan means that only the interest is paid each month - no part of the principal is repaid).
The balance of the purchase price and costs of construction were paid from Carson's retained earnings. Carson paid stamp duty of $30,000 on the purchase of the land. Legal fees associated with the purchase of the land were $9,000.
As noted above, construction of the factory is completed on 1 January 2015. On 1 January 2015, Carson purchases the following equipment to manufacture electric guitars:
|
Item of equipment
|
Cost
|
Cost of transport/installation
|
Effective life
|
|
Machine A
|
$95,000
|
$5,000
|
5 years
|
|
Machine B
|
$210,000
|
$18,000
|
10 years
|
|
Machine C
|
$150,000
|
$10,000
|
8 years
|
Carson decides to use the prime cost method of depreciation for all pieces of equipment.
Manufacturing of guitars commences on 15 January 2015. Unfortunately, soon after manufacturing commences, Carson starts to gets complaints from neighbouring factories about the noise of manufacturing and testing the electric guitars. To solve this problem, noise reducing rubber is affixed to the walls and ceiling of the factory. Once it is affixed it is unable to be removed without causing significant damage to the underlying walls and ceiling. The installation of the rubber commences on 1 March 2015 and is completed on 15 March 2015. The total cost was $90,000 of which $15,000 was labour.
On 1 March 2018, Carson decides to sell the electric guitar manufacturing business.
The business sells for $3,000,000, allocated as follows:
- $2,500,000: land and factory
- $50,000: Machine A
- $180,000: machine B
- $120,000: Machine C
- $150,000: Goodwill
The contract for the sale is signed on 1 June 2018. On receipt of the $3,000,000 (received on 15 July 2018), Carson repays the $1,600,000 bank loan to Aus Bank Ltd.
REQUIRED: Advise Carson Pty Ltd on the tax consequences for each of the above transactions. This includes:
- Advising Carson Pty Ltd as to whether, and if so when and to what extent, any of the above expenditures that it incurs will be deductible to in for Australian income tax purposes.
- Advising Carson Pty ltd as to the tax consequences (including capital gains tax) on the sale of the business.
Further instructions / Notes:
- Assume all figures are GST exclusive. You can ignore GST for the purposes of answering this question.
- You can assume that Carson Pty Ltd is NOT a small business entity for tax purposes.
- You are not required to calculate Carson Pty Ltd's taxable income each year as you do not have the information to do so. Rather, you are meant to advise Carson Pty Ltd as to the deductibility of any of the expenditures (and the amount of those deductions); and the taxation consequences on sale of the business.
Attachment:- Assignemnt Files.rar