Question

AT 2 Written questions Q1. Susan is a registered tax agent. For each of the followinR scenarios, identify which principles of the Code of Professional Conduct issued by Tax Practitioners Board (TPB) have been breached and explain how to avoid similar breaches in the future. Support your answers with tax legislation or case law. 1. Susan has been engaged by ABC Ltd to prepare its income tax return. Later Susan finds that ABC Ltd and her husband had entered into a business venture before she accepted the engagement. 2. Susan has employed Sam to process data for a client CBD Ltd. Sam has disclosed a list of the customers of CBD Ltd to his uncle, who is a competitor of CBD Ltd. 3. One of Susan's clients received a favourable private ATO ruling in relation to the deduction of education expenses. Susan shows the private ruling to one of her clients, who tries to claim similar deductions (Use this template to answer Q 1) Scenario Number Breach of principles of the Code of Professional Conduct How to avoid any breaches 2 Q2. Outline and explain key accounting principles and practices when reconciling accounting profits with taxable profits. Q3. Identify the relevant elements of Australian tax law in the following scenario and document the tax payable by James for the tax year 2015/16. Show your workings. → On 1 July 2015, James sold some jewellery for $5,000 which he bought on 1 April 2013 for $2.780. On 1 August 2015, James sold his camera for $22,000 which he bought on 15 June 2013 for $23,000. → On 5 October 2015, James sold a painting for $950 which he bought on 4 April 2007 for $480. On 8 June 2016, James sold CBA shares for $49,500 which he bought in 30 June 2015 for $42,400 (net costs). → On 30 June 2016, he receives interest income of $24,000 Q4. Jason and Robert are planning to open a furniture and homewares store with two employees. The projected turnover will be $200,000. Jason and Robert seek advice from you in relation to the advantages and disadvantages of conducting their business through a partnership or a company. Provide three advantages and three disadvantages from a tax perspective for choosing either a partnership or a company as their organisational entity. Provide organisational policy reasons and support your answers by citing relevant tax legislation, where applicable.

Answer 1

Q2: (answered specifically as it was highlighted with pen even though not specified which question to be answered)

Companies often follow the generally accepted accounting principles of the United States when preparing their books. Recording income according to GAAP ensures the information a company keeps is ready to share with potential lenders and investors and gives a comparable picture of how the business is doing. Tax law prescribes its own set of accounting principles, which can result in a difference between what a business makes on its books and what it reports on its taxes. Corporate tax returns include schedules to reconcile accounting income to taxable income.

Permanent Book-Return Differences

Some types of income and expenses never affect a company’s taxes. Federal income tax, for example, is treated as an expense on a company’s books when calculating net income. Tax law does not allow businesses to deduct their federal tax bill as an expense. At no point can a business deduct federal income tax paid, which creates a permanent book-return difference. Other common permanent differences include disallowed travel and entertainment expenses and tax-exempt interest income.

Temporary Book-Return Differences

Businesses might recognize some types of income or expenses at different times for accounting and tax purposes. GAAP allows companies several options for calculating depreciation expense, for example, which often recover the cost of capital purchases slower than the Internal Revenue Service-prescribed systems. The different systems lead to larger depreciation deductions on the company's tax return than on its books during the first few years, and larger book expenses for depreciation than tax deductions in later years. Over time, both methods provide the same total deduction, resolving the temporary difference in income.

Tax Return Reconciliation

The Internal Revenue Service provides two schedules on which businesses can reconcile their accounting income to their taxable income. Many businesses can use the simpler Schedules M-1 and M-2, but companies with assets of more than $10 million are required to complete the more detailed Schedule M-3 instead. The schedules start with accounting income, increase it with expenses that aren’t tax-deductible and income that is taxable but not yet reported on the books, then decreases it for book income that’s not taxed and tax deductions that exceed book expenses.

Balance Sheet Reconciliation

Accounting rules also require businesses report the differences in book-tax income that will eventually resolve. Temporary book-tax differences only change the timing, not the amount, of taxes that a company will pay. When a temporary difference results in taxable income being lower than accounting income, the company reports a deferred tax liability to reflect the taxes owed when the difference resolves. When the company pays more in taxes because of a temporary difference, it can report a deferred tax asset if it’s likely to owe enough taxes when the difference resolves.