Case Study of Vw's Diversity Strategy

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3.0 Derivation method

A derivation method is defined as the method for tax accounting for tax players. Derivation if of importance for both individuals and companies because it has close relationship with the cost savings of an entity because it can determine in which year the entity’s income should be levied. The resource of the income of the entity shall be taken into consideration in derivation. This can make influence on the accessible income an entity can get through tax accounting.

When accounting, cash receipts and accruals are believed to be the most important two derivation methods that taxpayers should be attached much importance to. When the taxpayers select the derivation method, they should follow the principle that the method can really reflect the true income with accurate calculation systems or methods. This is of importance to make sure that the tax the taxpayers have to pay is justified.

The cash receipts methods can be used when the cash or its equivalent is moved to the taxpayer. This method can reflect the real conditions of the taxpayers’ income through the actual and constructive calculation. The method is usually used by employees who get their income through individual regulations and provisions. It requires that the income should be levied in the year when the payments reach to the taxpayers. The Accruals method is often used to provide tax accounting for business income (Tran-Nam, 2012). Compared with the cash receipts method, the accruals method is used for the tax accounting of business income instead of personal income.

For the small business operated Buzz and Fuzz’s business, it is important to be aware of whether the business should pay tax and what kinds of tax it should pay. According to related accounting theory, to determine whether an entity should pay tax and the what kinds of tax it should pay is of importance for an business to decide which type of derivation methods the business should use for its tax accounting. Even though the brothers provide personal food service separately as different individuals, they should pay tax as a whole entity become their income is business income which is obtained from business activities. According to the mentioned analysis, the accruals method should be used for the tax accounting of the brother’s small business. Since the brothers manage the business jointly and the income is mainly from the pay of clients for their personal services, they have the obligations to pay tax to the Australia Government each year. The contractual relationship between the brothers and the clients which can be understood better through the fact that they work as both employees and professionals indicates that the brothers have the legal rights to get the fees paid for their services. As employees, they provide personal service on the delivery and picking up of food. As professionals they offer personal provisions and are responsible for management the business activities.

4.0 Evaluation and suggestion to maximize possible deductions

To determine whether small business operated by the brothers is qualified as a personal service business (PSB), it is important to understand the definition of personal service entity (PSE) which depends on personal services (PSI) to get income. The taxpayers get the payment mainly relies on their personal efforts. By using a PSE, it can help to understand what a qualified PSB is. According to the mentioned information, the two brothers obtain income mainly from their personal efforts to deliver services for clients. It indicates that the income brothers have is personal services income. The definition of a Personal services entity (PSE) is a trust, partnership or a company who obtain statutory income through PSI contributed by one or more individuals (Colmar, 2005). The formation of a PSB depends on the PSE. To determine whether a PSB is qualified, it is important to apply one of the four tests that a PSB should be consistent with. It is believed that Buzz and Fuzz’s business can be qualified as a PSB. The reasons are as following, first, the income of the business come from different resources. Second, as one of the tests requires that 80% of the PSI comes from the same resource, a business can be qualified as a PSB. Since the brothers’ business is a PSB determination.

There are general deductions and special tax concessions for the brothers’ business to be used to maximize the possible deductions for the small business. According to Australia legislation, tax decrease in business income and preferential policy in additional infringe benefit taxes are the special tax concessions that brothers’ business can apply (Marsden, 2013). Cost of utilities and costs of plants and equipment are also the possible deductions for the business. The General deductions the business can apply include the deductions excluding that mentioned in the Australian legislation. The general deductions should not include personal expenditure on business. Expenses on occupancy and running due to the use of the brother’s garage can be claimed as one of the deduction (Lingnier, 2012),. In addition, expenses spent on motor vehicles, petrol and oil to derive assessable income for the business is also likely to become a possible deduction. Since the maintenance and petrol fees occupy the most of the total expenses to run the small business, these fess can also be claimed as one of the deductions to help the brothers’ business to maximize the possible deductions.

5.0 Conclusion

From the mentioned analysis, Buzz and Fuzz’s business is qualified as a PSB. According to Australia tax legislation, the small business can share the tax concessions in Australia. for the tax accounting of this business, it is believed that the accruals method is a better choice to reflect the business income with reliability and accuracy. As a business whose business assessable income mainly comes from personal services, the brother’s business is regarded as a qualified PSB become it meets the tests mentioned. In conclusion, making full use of the preferential policies in Australia for small business to claim deductions is of significance for the brother’s business to maximize the possible deductions.

6.0 Reference

Abdel K. H., Rowena, B. & Robyn, D. (2010), “Understanding financial information used to assess small firm performance: An Australian qualitative study”, Qualitative Research in Accounting & Management, 7, 163 – 179

Bernadette K., Christian K. & Erich, K. (2012) “Tax compliance of small business owners: A review”, International Journal of Entrepreneurial Behaviour