Problem:
For the year ended 30 June, BBNT Pty Ltd, a lawn mower manufacturer, reported an operating (accounting) profit of $750,000. The company does not elect to be taxed as a SBE taxpayer.
In coming to this profit figure the financial accountant had taken into account the following items:
(a) $30,000 has been claimed as a deduction being the amortization of goodwill arising from the acquisition of a business two years earlier.
(b) A provision has been raised for future warranties equal to 2% of sales. During the year the sales amounted to $5 million.
(c) Depreciation on the buildings was $50,000. However for tax purposes only $25,000 is tax deductible.
(d) The company spent $75,000 on legal expenses opposing an application by Heavy Mowers Pty Ltd to extend its patent on a brand of mower. If the patent was not extended, then BBNT could produce a similar mower.
(e) The company borrowed $200,000 on 1 January of the current year to cover the purchase of new plant. The loan is repayable in 10 years. The cost of borrowing was $2,500 and this amount was written as a deduction in the company financial accounts when it was paid.
(f) Because of a shortage of working capital the company was forced to sell off some land for $300,000 in February of the current year. The land had been bought in October 1995 at a cost of $180,000. The company only brought to account in its financial statements the difference between the current market value of $220,000 and the proceeds, namely $300,000, as their accounting gain on sale.
(g) The directors also advised the financial accountant to make a provision for:
(i) bad and doubtful debts of $30,000;
(ii) annual leave and long service leave of $60,000.
(h) The company also purchased for the managing director a new car at a cost of $120,000. The car was purchased by the company on 1 July of the current year. The effective life of the car is 7.5 years. For accounting purposes the financial accountant has claimed depreciation in the accounts of $12,000 being 10% of the cost.
(i) The company also needed to acquire a series of parts to hold as stock on hand. At the end of the year the company had closing stock of $146,000. Of this figure the directors believed that $85,000 represented obsolete stock and wished to write off this amount. The financial accountant had not done this in deriving the profit of $750,000 as he was unsure of how to account for it in the financial accounts. The obsolete stock had been scrapped at the end of the year and taken to a metal recycler.
Please answer that the company directors come to you as the taxation adviser of the company and wish to know how each of the items mentioned above are to be treated for taxation purposes.
NOTE: You are not required to calculate the taxable income of the company. You are required to explain how each item is treated for taxation purposes only. You must refer to relevant case law or sections of the legislation