PART A (20 marks) (1,500 words)
Manic Pty Ltd (“Manic”) is an Australian resident company that leases and sells
scaffolding and charges service fees to customers in Australia and New Zealand.
Annual turnover for Manic for the last 5 years has ranged between $4 million and
$5.5 million.
Manic is in the process of finalising its income tax return for the year ended 30 June
2018 and you have been asked to review the following notes to the profit and loss:
1. An amount of $80,000, received in the form of service fees, was not included
in accounting profit in the year ended 30 June 2018 as it was believed the client
still had a right to demand a refund from Manic should the service not be
provided.
2. Interest of $10,000 had accrued but had not yet been debited to Manic’s bank
account as at 30 June 2018. No amount had been recognised in accounting
profit.
3. Trading stock to the value of $50,000 was purchased from a Hong Kong based
supplier and remained on a ship in the Pacific Ocean as at 30 June 2018. Manic
had not yet received the bill of lading but had claimed the expense of $50,000
in cost of trading stock in accounting expense.
4. A provision for doubtful debts of $30,000 was expensed during the year. As at
30 June 2018 the Managing Director could not decide whether to write off any
debts as bad.
5. Manic engaged the services of a company to research the viability of Manic
entering into a new market. Currently Manic leases and sells scaffolding but
is considering investing in the business of supply and installation of cement
blocks. Manic paid the research company $25,000 for their report.
6. On 1 June 2018 the warehouse was flooded due to a leaking ceiling. Manic
decided to replace the metal roof with tiles. The tiles cost $50,000 whilst it
would have cost $30,000 for a new metal roof. An expense $50,000 was claimed
in calculating accounting profit.
7. Manic borrowed $1.5 million to fund the purchase of a new factory in 2017
(cost $1.5 million plus costs of acquisition $28,000) that it planned to use for a
new business venture. The business venture did not go ahead yet interest on
the loan totalled $10,300 for 30 June 2018 and was treated as an accounting
expense. The factory was sold for $2,100,000 on 30 June 2018 and costs of
disposal totalled $36,000. The net amount included accounting profit was
$536,000 ($2,100,000 – ($1,500,000 + 28,000 + 36,000).
8. Manic sold 100,000 shares in Franks Pty Ltd to an unrelated company on 1
April 2018 for $3.50 per share. The shares were originally acquired by Manic
on 2 June 2009 for $2.20 per share from a wholly owned subsidiary of Manic,
whilst the shares had been independently valued at $1.50 a share on that day.
The net amount included in accounting profit was $130,000 ($350,000 –
$220,000).
9. The 2017 income tax workpapers indicate that Manic has carry-forward
capital losses in accordance with the CGT provisions of the ITAA 1997 of
$35,000.
10. Depreciation expense totals $120,000 however the depreciation deductible in
accordance with the ITAA 1997 is $112,000 for 30 June 2018.
11. Entertainment expense totals $65,000 including $32,500 relating to employees
on which Fringe Benefits Tax has been paid. The balance relates to client
entertainment
12. Included in expenses is an amount paid by Manic to prevent a former
Marketing Manager setting up a similar business in the next 5 years ie a
restrictive covenant. Manic paid $54,000 for this restrictive covenant on 1
April 2018 that would operate for the 5 year period.
REQUIRED
a) Prepare a memo to Manic’s Chief Financial Officer (CFO) explaining the
income tax treatment with respect to each of the above items including
references to sections, cases and income tax rulings where relevant.
b) Calculate Manic’s taxable income and income tax payable for 30 June 2018
assuming the net accounting profit before taxes is $620,500 and adjusting for
differences between accounting and tax. You are to use the attached excel
spreadsheet to complete your tax reconciliation/calculate tax payable. Manic
paid company tax instalments (PAYG payments) for the year ended 30 June
2018 totalling $102,500
PART B (5 marks) (500 words)
Whilst company decision makers have an obligation to maximise profit, ethical principles
and reputational risk places pressure on tax decision makers to consider a variety of
stakeholders including the community at large. The debate and commentary on company
tax contributions in Australia has been extremely negative and media and lobby groups
report on the tax compliance behaviour of high profile large companies that pay very
little or no tax in the country in which they have a substantial presence. Increasingly
corporate social responsibility and sustainability considerations impose a broader ethical
obligation on company decision makers. What is an acceptable ethical position at any
point in time reflects society’s expectations (Doyle, Hughes and Glaister, 2008) and
increasingly society expects a company to contribute an ‘appropriate’ amount to the tax
revenue in countries where they have a presence.
REQUIRED
Discuss whether an accountant should, in providing advice, incorporate an ethical
perspective to that advice or instead focus purely on compliance with the tax laws as
interpreted by the courts. In your discussion you may refer to materials available on
ilearn, in the section for this case study, and any other materials that you consider
relevant.
