Question

Question 1 Neil is a director of HRM Pty Ltd (the Company'), a concreting company. The company had the following transactions during the year ended 30 June 2019. How are the transactions treated for income tax purposes by HRM Pty Ltd? You can assume in this question that the numbers exclude GST, unless otherwise stated. 1. HRM Pty Ltd borrowed $500,000 from the Bank on 15 April 2019. 30% of the funds were used for personal purposes by Neil and the balance by the company. The bank charged the company an application fee of $5,000. Interest paid on the loan was $30,000. The loan is for seven years. 2. HRM Pty Ltd bought a second-hand commodore car. The company traded in a Toyota corolla and received $3,000 trade-in-value. The balance the company had to pay for the commodore car was $27,000. The new car was bought on 1 July 2018. The effective life of the new car is 6 years. 3. The old Toyota car had a written-down value at the date of sale of $2,000. 4. The company employed Deb, Neil's wife as the receptionist. The company paid her a wage of $35,000. The reasonable wage for a receptionist on market-rate doing the same work is $50,000. 5. The company also donated $1,000 to a registered political Party during this year's federal election. Page 1 of 3

Answer 1

1. As 70% of the loan is used by HRM Pty Ltd., the company can claim 70% (100%-30%) of the interest as deduction ie: 30000/7year*70% =$3000.

The application fee is also qualified for tax deduction u/s 2(28a) in the same proportion ie: 5000*70% = $3500.

2. & 3. The old Toyota car brings Profit on sales on asset for $1000 (3000 transaction value - 2000 writtendown value), it should be reated as capital gain income.

The new commodore car bring depreciation of $5000 ((27000 in cash + 3000 in exchance)/6 years) for the year 2018-19. Company should deducted this depreciation expenses from the annual profit.

4. As the company paid less than the standard wages. Deb's salary of $35000 will be teated as a normal salary expenses and the same should be deducted from the annual profit of company.

5. $1500 is the maximum limit of deduction for donation to political party. Hence the company does not cross the limit the entire donation of $1000 can be claim as tax deduction.