Income Taxation

Income Taxation Assignment

Requirement 1)

Part 1) SE Machinery Pty Ltd

Background of the case

SE Machinery Pty Ltd [SEM] is a private resident Australian company incorporated in 1981. The company develops and manufactures Teftoffel, a component used in the manufacture of small engines.

For the modification of the Teftoffel, company needed $500,000 which was agreed by the customer to contribute to the cost of modifications. The amount was been describe as “capital contribution to establishment and construction costs” in the contract terms. The advance payment was made and Teftoffelex supposed to be supply in August 2012. The agreed price was as followed:

Capital contribution to modifications $ 500,000

100 cartons @ $7,000 $ 700,000

$1,200,000

This amount was included in the Gross profit which means that this should be taxed at the end of the year. As it is a contribution from the customer, being taxpayer it should be clear which amount is taxable and which is not under section 6.5 which state the “Income according to ordinary concepts (ordinary income)” which is part of Division 6: Assessable income and exempt income.

Discussion

Income according to the Australian Law is any amount earned or derived or received for your or company used or advantage or any payment (periodic) or advantage received as an allowance or gift. Section 6.5 state the ordinary income which is according to the judicial notion is the flow of cash that is coming in instead of than any gain or rise in wealth whereas Statutory income which comprises of statutory provisions which are like capital gains tax which is not a part of ordinary income (LAWS5144 - Introduction to Taxation Law, 2009).

Section 6.5 is basically income according to ordinary concepts (ordinary income). The below diagram will clear the different aspect of division 6.

As this section only include assessable income according to the ordinary concepts i.e. ordinary income. As far as Australian residents is concerned the assessable income would the ordinary income that came immediately or circuitously from entire sources no matter they are from or inside the Australia in year of income.

If a foreign resident then assemble income would be income that came immediately or circuitously from entire sources no matter they are from Australia origins in year of income.

The last part of section 6.5 state the doctrine of constructive receipt. This relates to the income you derived from s 6-5(4) doctrine of constructive receipt is working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

In the case of SE Machinery Pty Ltd, the amount of $500,000 which was used for the modification the company's production falls in Income must “come in” to the taxpayer where the source of money is derived from external sources. Such as membership in clubs, members paying fees for clubs improvement or activities. The amount of $500,000 is assessable ...