BULAW 5916 Taxation Law & Practice

The focus of this Assignment is the business activities of Chesters Pty Ltd. Disregard GST and Small Business Entity related matters.

Chesters is a resident private company established in 2006 to manufacture quality furniture that is sold to retailers under several brand names and directly to the public. The Assignment comprises eight Modules which are largely independent of each other. In respect of each Module, the requirement is that you:

• Identify the issue/issues raised. [In some cases, this is specifically stated.]

• Identify and discuss the relevant provisions of the legislation, case law and ATO Rulings. [Some judgment is required by you of the appropriate weighting (in terms of word count) of each Module.]

• Resolve the issues identified in the course of advising the company what amounts are assessable/deductible, and, where applicable, what options or alternatives are available.

Module 1

Sales are made for cash, by credit card and by external financing arrangements [personal loan, chattel mortgage etc]. The only in-house financing arrangement by Chesters is their ‘Homemakers’ Club’. Under this arrangement customers may select furnishings from Chesters catalogue (or the showroom floor) and pay by periodic instalment over an agreed timeframe. If the selected material is not in stock, a production order is issued and the payment schedule usually corresponds to the projected delivery date. Title and possession of the items does not pass until the final payment. If the stock is already available, a ‘sold’ sticker is attached and it is put to one side.

i) Should Chesters return for tax purposes on a cash or accrual basis?

ii) How should the company deal with payments received under the Homemakers’ Club arrangements? What tax consequences follow if customers default or fail to make all agreed payments?

iii) How is trading stock the subject of Homemakers’ Club arrangements to be dealt with?

Module 2

Chesters operates a customer loyalty programme as follows:

Under a ChesterCard™ system, each year, on the anniversary of the issue of each customer’s card, the store grants a non-refundable credit to each customer’s account according to a sliding scale based on aggregate purchases for the previous 12 months period. The credit is 2% up to $5,000, 3% for the next $5,000 and 4% thereafter. There is no limit. The credit may only be used to reduce the amount payable for ChesterCard™ credit purchases.

For example: Customer A commenced his credit card account a few years ago on 1 February so he is entitled to a credit on the anniversary of that date each year, based on his actual purchases for the previous 12 months. Therefore, at balance date, 30 June, an accrual is made based on the actual sales since 1 February although the actual credit cannot be accurately calculated and neither will it arise until the following financial year.

At 30 June 2015 Chesters estimates that for the period up to that date its liability in respect of these credits is $220,000. In addition, it has already credited $245,000 during the year ended 30/6/15. The store estimates that, on average, 10% of these credits will lapse.

Module 3

Chesters is a member of nationwide purchasing cooperative, Cosco Wholesalers. Each year it is entitled to a bonus based on the aggregate amount of its purchases of trading stock and related supplies from Cosco Wholesalers. The bonus is credited, approximately 6 months in arrears. It is never paid in cash nor is it refundable in cash should the membership of the cooperative cease.

In this respect, the accounting records for Chesters show:

Bonus receivable account.

Balance at 1 July 2014 232,000 Dr.

Credit granted (215,000) Cr.

Provision for credit to come 223,000 Dr

Balance 30 June 2015 240,000 Dr

i) Is the bonus receivable ($223,000) and/or the credit granted of $215,000 assessable income for the year ended 30 June 2015?

ii) If either amount is not assessable income, how is it to be dealt with for taxation purposes?

Module 4

Chesters prides itself on its “no questions asked” refund policy for return of defective goods. It has gathered statistics over the previous 8 years since it adopted this policy and it concludes, as a reliable estimate, that of all its refunds under this policy, 60% are covered by supplier warranties. It bears the balance as a cost of doing business.

In this respect the store has made the following entry in its journal for the year ended 30 June 2015:

Dr. Profit and Loss 25,000

Cr. Provision for warranties 25,000

Narration: Being 40% of estimated refunds for claims in respect of defective goods sold during the year ended 30 June2015 for which no supplier warranty is available.

Module 5

Production is carried out at a workshop built by the company in 2008 at a cost of $875,000. Extensions costing $380,000 were completed in February 2015.

Timber used in the production of furniture is first cut and formed into required shapes. It is then treated to prevent infestation, polished, painted and finished in desired stains. The process involves the use of some toxic and corrosive chemicals and in the past was carried out in conditions far from ideal. To overcome the problems a special treatment and finishing room was built onto the existing factory workshop. The following costs were incurred:

– Frame and exterior cladding 130,000 [3/10/14]

– Corrosive resistant lining 60,000 [15/12/14]

– Foundations 35,000 [1/8/14]

– Fume exhaust system 65,000 [4/2/15]

– Hanging racks for drying 29,000 [10/2/15]

– Painting and treatment equipment 61,000 [10/2/15]

380,000

The construction was completed and ready for use on 28/2/15.

Module 6

During the year it came to the directors’ attention that a rival firm was marketing a lounge suite that appeared identical to Chesters’s best-selling line. An action to recover damages was commenced. The matter is yet to be finalised but the company’s legal advisors are confident. At June 30 only $1,500 had been paid in legal fees but estimated additional costs of $24,000 had accrued although no account had been received.

Module 7

In November 2014 a visitor to Chesters showroom slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against Chesters alleging her injuries were caused by the poor condition of the building. Chesters incurred legal expenses of $4,000 and the action has not been settled at 30 June.

Module 8

In accordance with a resolution of the directors, the company paid the school fees of the directors’ children. The reason given for the policy was to provide a standard of educational instruction appropriate to the possible future directors of the company.