On 1 July 2012 Lee commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight time frames. By the end of 2012/13 he had a small client base of local builders and private referrals and billings (fees) of $75,000. During the year Lee submitted a design as part of a national competition for the Citadel, the centrepiece of an urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises on Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2013/14 his billings were $1.75 million.
Required
Should Lee return on a cash or accrual basis in 2012/13 and 2013/14?
You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following:
• What factors affect the choice of a cash or accrual basis?
• Does Lee have a choice of the basis he adopts?
• Does the Commissioner of Taxation have a right to insist on a particular basis?
• Should Lee’s basis be the same in both years?
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