Taxation Law Tax Practice Wiley Coyote

Question: Discuss about the Taxation Law Tax Practice Wiley Coyote. Answer: Background information of Wiley Coyote Wiley Coyote is a businessperson who ventures in many businesses, namely: Coyote Rocket Shoes Pty Ltd and the Rocketfone Partnership he has with Ralph. Besides, Wiley Coyote has a clinic called the Rocket Science Pain Management Clinics. He has been an astute taxpayer over the years. Coyote Rocket Shoes Pty Ltd sells products such as rocket fuel, rocket repairs, shoe repairs, and osteopathy and chiropractic services through 10 clinics (Bateman, and Kingston, 2007, p.135). Due to many government restrictions that he had foreseen, Wiley Coyote sold the Coyote Rocket Shoes Pty Ltd in 2014 and remained with the Rocket Science Pain Management Clinics, which has realized an increase in profits since he sold his primary business. In 2016, Coyote Rocket Shoes Pty Ltd realized a net capital gain of $ 18,000 from the sale of his used and refurbished rocket shoes, which he had purchased two years ago. During that year, he also received partly franked dividend of $ 7,000 in a company that he had invested in which had $ 1,000 of franking credits (Jones, Rhoades-Catanach, and Lemler, 2010, pp.599-600). Despite this, he is a beneficiary of The Coyote Family Trust. On his basis income from the sale of the refurbished rocket shoes, Wiley Coyote is entitled to other deductions. These deductions include an amount of $ 1,000 for the cost of attending a seminar on how to Mix Rocket Fuel Safely and an amount of $ 700 for the expense of a decline in value of the computer he used for work-related matters. Besides, he incurred an amount of $ 560 for the cost he incurred on the repairs to the equipment he used to refurbish the second-hand rocket shoes, and an amount of $ 540, which he suffered as fees charged by his tax account ant who helped him file his tax return for the previous income year. Lastly, he donated $ 300 which he sent to a charitable organization that is a registered as a deductible gift recipient which is considered as an expense to Wiley Coyote. Here, Wiley Coyote made a donation in exchange of receives six tickets in a car raffle. Wiley also paid an amount of $ 4,000 in exchange for private health insurance for him and his wife. His PAYG withheld for the year amounted to $15,500. In determining the assessable income of Coyote Rocket Shoes Pty Ltd, we first consider what the primary business operations are. In this case, the Coyote Rocket Shoes Pty Ltd manufactures and sells rocket fuel, rocket repairs, and shoe repairs. The only income that Wiley Coyote received was the net capital gain of $ 18,000 from the sale of his used and refurbished rocket shoes since he had sold the business two years ago. His assessable income for the income year 2016 would, therefore, be the net capital gain as it was received from ordinary business operations that is the sale of rocket shoes. Taxation of dividends is done in such a way that their withholding tax is remitted to the government, which is final (King, and Fullerton, 2010). In this case, franking credits are the withholding tax on the dividends. This implies that the partly franked dividends have been taxed, if they are included in the assessable income, they will result to double taxation which means that they should n ot be included in the assessable income (Murphy, Higgins, and Lightner, 2010, pp.601-602). The same notion is used for the assessable expenses. Section 8-1 (1) of the Income Assessment Act Tax (IAAT) 1997 states that costs incurred from the ordinary business operations should be deductible for tax purposes. In this case, all the expenses incurred by Coyote Rocket Shoes Pty Ltd were out of the ordinary business operations and should, therefore, be deductible for taxation (Mankiw, Weinzierl, and Yagan, 2009, pp.147-174). Below is the preparation of the taxable income of Wiley Coyote. Coyote Rocket Shoes Pty Ltd Taxable Income As at 2015/ 2016 Details Amount ($) Net capital gain $ 18,000.00 Deductions Franking credits $ 1,000.00 Cost of seminar he attended on 'How to Mix Rocket Fuel Safely' $ 700.00 Repairs to equipment $ 560.00 Accountant's salary $ 540.00 Donation to charity (deductible) $ 300.00 Private health insurance $ 4,000.00 Taxable Income $ 10,900.00 Tax payable/ (refundable) Taxable Income $ 10,900.00 Less: Medical levy (2%* $ 10,900) $ 218.00 Less: PAYG Withheld $ 15,500.00 Net Taxable Income $ -4,818.00 Tax $ - Total tax payable/ (refundable) $ -4,818.00 Based on the computation of the taxable income of Coyote Rocket Shoes Pty Ltd, Wiley Coyote is a little earner since his taxable income for the year amounted to $ 10,900.00, and therefore he is subject to $ 0 taxes as seen in the table above (Shan, 2011, pp.177-188). However, it is a compulsory requirement that any individual remits PAYG withheld and a medical levy of 2% before paying any taxes (Tanzi, 2014). Coyote Rocket Shoes Pty Ltd has a PAYG withheld amounted to $ 15,500.00 while his medical levy that he was subject to is $ 218.00. The net tax income of Wiley Coyote is, therefore, -$ 4,818, which was computed by deducting the PAYG withheld of $ 15,500.00 and medical levy of $ 218.00 from the taxable income of $ 10,900.00 (Woellner, Barkoczy, Murphy, Evans, and Pinto, 2016). To conclude on this part, Coyote Rocket Shoes Pty Ltd has a tax refundable of -$ 4,818.00. This was derived by taking charge of $ 0 plus a net taxable income of -$ 4,818.00. This is because anyone who earns between $ 0 and $ 18,200 is exempt from taxes as he or she is a low-income earner and therefore pays $ 0 taxes (Spilker, Ayers, Robinson, Outslay, Worsham, Barrick, Weaver, and Mcguire, 2010, pp.602-603). Taxation of Rocket Science Pain Management Clinics for the Financial Year 2015/16 Calculation of the taxable income According to section 8-1 (1) of the IAAT 1997, any revenue received and payments made out of the ordinary business operations should be assessed or deductible for tax purposes. The receipts of Rocket Science Pain Management Clinics include fees of $ 820,000 from cash patients, fees of $ 1,075,000 from health funds, an amount of $ 46,800, which was the money, received from the sale of burn lotions, and workers compensation receipts amounting to $ 67,000. The clinics expenses, on the other hand, included staff salaries (net of PAYG withholding) amounting to $ 640,000, the PAYG withholding forwarded to the ATO amounting to $ 295,000. The clinic also had PAYG installments of $ 165,000; a superannuation guarantees Levy of $ 84,000 and entertainment for special customers at sports venues amounting to $ 2,000. In addition, Rocket Science Pain Management Clinics incurred an amount of $ 11,000 for linen, which comprised of towels, bed sheets, and pillow slips with a useful life of fewer than twelve months. Besides, he paid laundry expenses of $ 6,000, aromatherapy oils and candles of $ 58,000, artworks of $ 8,000, rent amounting to $ 286,000, and other expenses amounting to $ 63,000. All these are deductible expenses except the PAYG withholding forwarded to the ATO and the PAYG installments (Murphy, Higgins, and Lightner, 2010, pp.601-602). Rocket Science Pain Management Clinics had beginning creditors of $ 1,000 and closing creditors of $ 500. Wiley, therefore, made a payment of $ 500 to the creditors, which should be included in the deductible expenses. The amount of $ 700 used for the family household should not be included in the deductible expenses since it was not incurred out of the normal business operation. Lastly, Wiley had a tax loss of $ 3,800 for the previous income year, which should be offset in this financial years taxable income, and he accepted a bike as a payment from a client at a market value of $ 250. These should be included in the deductible expenses and the assessable income respectively (Shan, 2011, pp.177-188). Below is the computation of the taxable income of Rocket Science Pain Management Clinics. Rocket Science Pain Management Clinic Taxable income As at 2015/ 2016 Details Amount ($) Receipts Bike as payment by client $ 250.00 Fees from cash patients $ 820,000.00 Fees from health funds $ 1,075,000.00 Sale of burn lotions- cash received ($ 46,800-$ 11,000) $ 36,800.00 Workers' compensation receipts ($ 67,000-$ 13,000) $ 54,000.00 Total receipts $ 1,986,050.00 Less: Expenses Staff salaries (Net of PAYG Withholding) $ 640,000.00 Linen (Towels, Bed sheets, Pillow ships)(Effective life is less than 12 months) $ 11,000.00 Laundry expenses (External services) $ 6,000.00 Aromatherapy oils and candles ($ 58,000-$ 3,000) $ 55,000.00 Artworks (Each piece under $ 1,000 purchased 1/9/15) $ 8,000.00 Rent (includes $ 32,000 paid up to 31 July 2016) $ 286,000.00 Other expenses (all deductible) $ 63,000.00 Payment of creditors ($ 1,000-$ 500) $ 500.00 Tax loss as at 30/6/2015 $ 3,800.00 Depreciation of clinic beds $ 9,000.00 Depreciation of desktop PC $ 6,750.00 Depreciation of laptop PC $ 500.00 Depreciation of office furniture $ 1,927.39 Depreciation of clinic furniture $ 1,997.26 Depreciation of low value pool $ 2,250.00 Total expenses $ 1,095,724.65 Taxable income $ 890,325.35 Calculation of depreciation of ten clinic beds Calculation of depreciation of ten desktop PC Calculation of depreciation of one laptop PC Calculation of depreciation of office furniture (each piece $ 1,000) Calculation of depreciation of clinic furniture (each piece $ 1,000) Calculation of depreciation of low-value pool (ii). Calculation of closing balance of clinics low-value pool Calculation of the Taxable income of Rockectfone Taxable income of Rockectfone Taxable income of Rockectfone As at 2015/ 2016 Details Amount ($) Receipts Income from trading $ 396,000.00 Total receipts $ 396,000.00 Payments Trading stock and overheads $ 84,000.00 Superannuation contribution on behalf of Wiley $ 24,000.00 Salary paid to Anita Coyote $ 45,000.00 Total payments $ 153,000.00 Net income (Taxable income) $ 243,000.00 Section 8-1 (1) of the IAAT 1997 states that any income realized and expenses made should be out of the ordinary business operations to be considered as assessable income or deductible expenses for taxation purposes. The revenues of Rockectfone included income from trading amounting to $ 396,000, fully franked dividends from Investopedia Ltd amounting to $ 28,000, and proceeds from the sale of shares in Lamb Supreme Ltd amounting to $ 7,000. The only assessable income, in this case, is the revenue from trading of $ 396,000 since it was realized from ordinary business operations (Spilker, Ayers, Robinson, Outslay, Worsham, Barrick, Weaver, and Mcguire, 2010, pp.602-603). Taxation of franked dividends is final, and only the franking credits should be recognized. The payments made by Rockectfone Corporation included trading stock and overheads amounting to $ 84,000, salary paid to Wiley amounting to $ 75,000, salary to Anita Coyote amounting to $ 45,000, and rent paid to Wiley amounting to $ 55,000 which included an advance of $ 30,000. Besides, the business paid interest to Ralph on loan amounting to $ 17,000, and interest on capital paid to Wiley amounting to $ 15,000. Furthermore, the company paid interest on money to Ralph amounting to $ 12,000, and superannuation contributed on behalf of Wiley amounting to $ 24,000 (Woellner, Barkoczy, Murphy, Evans, and Pinto, 2016). All these are deductible expenses to the business except the salary paid to Wiley, the rent paid to Wiley, the interest paid to Ralph on loan, and the interest on capital paid to Ralph and Wiley. Based on the table above, Rockectfone Corporation had a net income or taxable income of $ 243,000.00. Distribution of Net Income Distribution of Net Income (Taxable income) Details Wiley Ralph Total Salary $ 75,000.00 $ - $ 75,000.00 Rent paid $ 25,000.00 $ - $ 25,000.00 Interest on capital $ 15,000.00 $ 12,000.00 $ 27,000.00 Interest on loan $ - $ 17,000.00 $ 17,000.00 Profit or loss share (2:1) $ 66,000.00 $ 33,000.00 $ 99,000.00 Total Net income (Taxable income) $ 181,000.00 $ 62,000.00 $ 243,000.00 Since this is a small partnership entity, an apportionment of net income or taxable income ought to be prepared as shown above. This statement of distribution divides the taxable income between the partners that is Wiley and Ralph in the ratio of 2:1. Based on the above table, the profit to be distributed amounted to $ 99,000. Wiley received a benefit from the partnership of $ 66,000 while Ralph received a profit of $ 33,000. The total taxable income for Wiley amounted to $ 181,000 while that of Ralph amounted to $ 62,000 as seen in the table above (Bateman, and Kingston, 2007, p.135).Other Considerations When preparing Wileys tax returns, other elements should be considered. These include the PAYG withholding forwarded to the ATO, PAYG installments and any other levies such as the medical tax and insurance levy that the company is subject to (Jones, Rhoades-Catanach, and Lemler, 2010, pp.599-600). In addition, one should consider whether Rocket Science Pain Management Clinics is a loss-making firm or a profit-making company. Ideally, if a company realizes a loss, it should not be taxed, but rather it should be given tax exemptions. Accounting for the Coyote Trust The Coyote Trust Net income As at 2015/ 2016 Details Amount ($) Gross income $ 545,000.00 Total receipts $ 545,000.00 Less: Deductible trust expenses Wages paid to Sandy $ 30,000.00 Salaries paid to casual staff $ 40,000.00 Deductible overheads $ 145,000.00 Gifts to Desert Views (a DGR) $ 5,000.00 Total payments $ 220,000.00 Net income $ 325,000.00 Distribution of Net Income Net income $ 325,000.00 Amount to be distributed $ 292,500.00 To Wiley $ 113,750.00 To Aby $ 48,750.00 To Sandy $ 48,750.00 To Jack $ 48,750.00 To Lambchops $ 16,250.00 To The Society for the Prevention of Cruelty to Roadrunners $ 16,250.00 Balance $ 32,500.00 Based on the table above, Wiley will receive an amount of $ 113,750.00 from the trust, Aby, Sandy, and Jack will receive $ 48,750.00 each while Lambchops and The Society for the Prevention of Cruelty to Roadrunners will receive $ 16,250.00 each. The balance that should remain in the partnership amounts to $ 32,500.00 (King, and Fullerton, 2010). References Bateman, H. and Kingston, G., 2007. Superannuation and personal income tax reform.Austin. Tax F.,22, p.135. Retrieved on 26 January 2017. Jones, S.M., Rhoades-Catanach, S.C. and Lemler, B., 2010. Principles of taxation for business and investment planning.Issues in Accounting Education,25(3), pp.599-600. Retrieved on 26 January 2017. King, M.A., and Fullerton, D., 2010.The taxation of income from capital: A comparative study of the United States, the United Kingdom, Sweden and West Germany. University of Chicago Press. Retrieved on 26 January 2017. Mankiw, N.G., Weinzierl, M., and Yagan, D., 2009. Optimal taxation in theory and practice.The Journal of Economic Perspectives,23(4), pp.147-174. Retrieved on 26 January 2017. Murphy, K.E., Higgins, M. and Lightner, T., 2010. Concepts in Federal Taxation.Issues in Accounting Education,25(3), pp.601-602. Retrieved on 26 January 2017 Shan, H., 2011. The effect of capital gains taxation on home sales: Evidence from the Taxpayer Relief Act of 1997.Journal of Public Economics,95(1), pp.177-188. Retrieved on 26 January 2017. Spilker, B.C., Ayers, B.C., Robinson, J.R., Outslay, E., Worsham, R.G., Barrick, J.A., Weaver, C.D., and Mcguire, S.T., 2010. Taxation of Individuals.Issues in Accounting Education,25(3), pp.602-603. Retrieved on 26 January 2017. Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press. Retrieved on 26 January 2017.