Posted: August 16th, 2016

What adjustments (if any) should be made to the company’s reported profit for tax purposes in regard to items (ii), (iii) and (iv). What deductions (if any) are available

2016. RIP Pty Ltd holds a stock of three types of caskets as well as a range of accessories (such as religious and secular icons). In June 2016 the company prepaid $25,000 for material to be delivered in August 2016. The company obtained considerable discounts for the advance purchase.
2017. A fully franked cash dividend of $21,000 was received from RIP Finance Pty Ltd.

• An amount of $57,000 was paid on 1 March 2016 for two year’s rental of storage space. The lease expires on 28 February 2018. In the company’s financial accounts an amount of $9,500 was expensed and $47,500 capitalised.

1. On 1 June 2016 the managing director of RIP commenced three months long service leave and was paid $22,000 in advance. In the company’s accounts the amount was debited against a Provision for Long Service Leave Account.
2. In 2013 the company’s Board of Directors decided existing accommodation was inadequate and it resolved to construct a purpose built facility. In that year $250,000 was paid for preliminary architectural designs. In 2014 land costing $1.25m was acquired and $50,000 paid to demolish an existing structure. Construction of the new premises commenced on 1 September 2014 at a cost of $2.5m. Fitting and equipment was installed on 1 June 2015; operations began on 1 August 2015. On-site car parking costing $125,000 was completed on 30 September and landscaping of the site was completed on 31 January 2016 at a cost of $40,000.

Required (30% of the answer)

Advise the company about the following:

[You must refer to appropriate sections of the legislation and relevant case law.]

1. The nature of trading stock, generally, whether the caskets and accessories would be trading stock for tax purposes and how the amount of $25,000 is treated for tax purposes.
2. What adjustments (if any) should be made to the company’s reported profit for tax purposes in regard to items (ii), (iii) and (iv).

• What deductions (if any) are available for expenditure set out in item (v). Explain.