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Ruby Engineering Pty Ltd [Ruby] was incorporated in 1990 and produced engine components used in the Australian car industry. In 2008 the business and company assets were sold to Diamond Ltd. Under the terms of the agreement, Ruby remained liable for any claims arising before 2008. The company used the funds to invest in real estate and shares.
During the year ended 30 June 2013 Ruby incurred the following expenses:
(a)
Ruby has owned and rented a residential property since 2008. Rental income for the current year is $15,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $6,500.
(b)
In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against Ruby alleging her injuries were caused by the poor condition of the building. Ruby incurred legal expenses of $4,000 and the action has not been settled at 30 June.
(c)
In 2006 Ruby sold a batch of parts that were subsequently found to be defective. The buyer, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2012 and Ruby paid $750,000 to the manufacturer.
(d)
The directors of Ruby were concerned about the claim in (c) and the effect it had on the year’s reported profit. Theyresolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.
(e)
In August 2012 Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $120,000 was paid to consultants investigating the proposal but the directors decided not to proceed at this time because the project did not appear commercially viable.
Required 2.
Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
During the year ended 30 June 2013 Ruby incurred the following expenses:
(a)
Ruby has owned and rented a residential property since 2008. Rental income for the current year is $15,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $6,500.
(b)
In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against Ruby alleging her injuries were caused by the poor condition of the building. Ruby incurred legal expenses of $4,000 and the action has not been settled at 30 June.
(c)
In 2006 Ruby sold a batch of parts that were subsequently found to be defective. The buyer, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2012 and Ruby paid $750,000 to the manufacturer.
(d)
The directors of Ruby were concerned about the claim in (c) and the effect it had on the year’s reported profit. Theyresolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.
(e)
In August 2012 Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $120,000 was paid to consultants investigating the proposal but the directors decided not to proceed at this time because the project did not appear commercially viable.
Required 2.
Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts. You must make reference to appropriate authorities and legislation.
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