Tutor profile: Megha C.
Bob is a 37-year-old and is an account manager for a large telecom company. He's been dragging his feet with his retirement plan, opting instead for expensive trips to Vegas and Aspen. He has decided its time to get serious about saving for his retirement. He plans to retire at age 67 and travel the world. Because of this plan he figures he needs approx. 70,000/year in retirement. His grandfather lived until he was 86 and his dad is in perfect health at age 70, therefore bob figures he should plan to be around until he's 90. So far, he has 11,000 saved for retirement and because of his aggressive investment philosophy, is planning for a return on all his investments before the retirement of 8%. Following retirement, he will invest more conservatively and will plan for a 5% return on investments. His company’s retirement plan is defined contribution, so he doesn’t plan on getting a pension. He is not counting on social security to be around, so he isn’t including that in his plan. Thus, his entire retirement will be funded on his own savings. How much will Bob have saved at the end of his work life if he doesn’t add to his current savings? How much will money will bob need during retirement based on his calculations? How much will bob need to save EACH YEAR to be ready for retirement at age 67?
Question: How much will Bob have saved at the end of his work life if he doesn’t add to his current savings? Solution Since e is having 11000 at present, the total amount he will be having at the retirement can be calculated using the compounding annual growth of 8% as follows: Years to retire 20 Return Rate 8% Savings at present 11000 At the age of 67, Savings 51270.53 Question: How much will money will bob need during retirement based on his calculations? Solution: Since there are no social security benefits, therefore, the entire requirement will be funded out of his savings. His total requirement, in this case, has been calculated hereunder: Need 70000/year From 67 to 90 years 23 years Total requirement 23*70000 Total requirement 1610000 Question: How much will bob need to save EACH YEAR to be ready for retirement at age 67? Solution: the Total value that will be required after the retirement has been calculated as in the previous part. Therefore, per year amount that needs to be set aside each year can be calculated as follows using the present value factor theme: a) Needs 1610000 b) PVAF (8%,20) 9.818147 c) Years 1 0.925926 2 0.857339 3 0.793832 4 0.73503 5 0.680583 6 0.63017 7 0.58349 8 0.540269 9 0.500249 10 0.463193 11 0.428883 12 0.397114 13 0.367698 14 0.340461 15 0.315242 16 0.29189 17 0.270269 18 0.250249 19 0.231712 20 0.214548 d) Per year saving (b/a) 163982.1
1. Facts: 1.1 The advance has been received prior to 1st July 2017 for the Banquet services. However, the function has been held on 2nd November 2017 and the invoice has also been raised in November 2017. 2. Query: 2.1. What is the treatment of the aforesaid transaction in the books of account and GST return?
3. Answer: 3.1. We are made to understand that the company received an advance from the customer on which service tax had been paid in accordance with the provisions of Finance Act, 1994. Now, with the advent of GST, there arose an ambiguity regarding levy of tax at the time of performance of services or issuance of invoice. In order to get the answer to this query, we need to refer transitional provision under GST Law. 3.2. As per Section 142 (11), (b) of the CGST Act, 2017 “notwithstanding anything contained in Section 13, no tax shall be payable on services under this act to the extent the tax was leviable in the said services under Chapter V of the Finance Act, 1994. Therefore, in case Services Tax has already been levied in that case there is no need to pay GST again for the same amount/transaction. Now, the question arose as for how the effect of already paid tax will be given in the books of account as well GST return. So, in order to bring out the answer to this query we need to refer relevant transitional provisions in conjunction with the procedures laid under rules for filing return under GST. 3.3. On perusal of the various transitional provision, it came out that there is no specific legal provisions has been laid to give effect to such cases. However, in order to give effect to this transaction in the light of transition provision regarding the taxability under Section 142(11)(b) we are left with the following alternative: An alternative- The amount of tax already paid needs to be reversed by simply reversing the complete journal entry. Simultaneously, the effect to this reversal entry should be given in the GSTR-1 by raising a credit note and showing it in the line item “Credit note to unregistered person” with the reason for reversal as “others”. Thereafter a fresh GST invoice needs to be raised to the customer as per the agreement whether the consideration is inclusive of tax or exclusive of tax. 3.4. The accounting procedure to be followed has been elaborated hereunder: Journal Date Particulars Amount ( Dr.) Amount (Cr.) 8-May-17 Bank A/c Dr. 250000 To City Ledger-Banquet Advance A/C 226,245 To Service Tax Payable A/C 22,171 To Swach Bharat Cess payable A/C 792 To Krishi Kalyan Cess Payable A/C 792 6-Jul-17 Service Tax Payable A/c Dr. 22171 Swach Bharat Cess payable A/C 792 Krishi Kalyan Cess Payable A/C 792 To Bank A/c 23755 21-Nov-17 CGST Payable A/c Dr. 20,362.05 SGST Payable A/c Dr. 20,362.05 City Ledger-Banquet Advance A/C 226,245 To Party A/c 266,969.10 (Being Refund voucher/Credit Note Issued) 21-Nov-17 Party A/c Dr. 295000 To Banquet Sale A/c 250000 To CGST Payable A/c 22500 To SGST Payable A/c 22500 Party Ledger A/c Date Particulars Amount Date Particulars Amount 21-Nov-17 To Banquet Sale A/c 250000 21-Nov-17 CGST Payable A/c 20362.05 21-Nov-17 To CGST Payable A/c 22500 21-Nov-17 SGST Payable A/c 20362.05 21-Nov-17 To SGST Payable A/c 22500 21-Nov-17 City Ledger-Banquet Advance A/C 226245 By Bank A/c (b/f) 28030.9 295000 295000 3.5. It is to be noted that aforesaid alternative is based on the understanding of relevant transitional provisions under GST Law. Since there is no specific provision to deal with the specified cases viz. how to give effect in the books of account as well as in the return, the department may take a different view to invite litigation.
Research Problem 1. Wonderful Wilderness, Inc., is a tax-exempt organization. Its mission is to “explore, enjoy, and protect the wild places of the earth; practice and promote the responsible use of the earth’s ecosystems and resources; educate and enlist humanity to protect and restore the quality of the natural and human environment; and use all lawful means to carry out these objectives.” Lloyd Morgan, the chief financial officer, presents you with the following information. Wonderful Wilderness raises funds to support its mission in a variety of ways, including contributions and membership fees. As part of this effort, Wonderful Wilderness develops and maintains mailing lists of its members, donors, catalog purchases, and other supporters. Wonderful Wilderness holds exclusive ownership rights to its mailing lists. To acquire the names of additional prospective members and supporters, Wonderful Wilderness occasionally exchanges membership lists with other organizations. In addition, Wonderful Wilderness permits other tax-exempt organizations and commercial entities to pay a fee, as set forth in a fee schedule, to use its mailing lists on a one-time basis per transaction. Morgan is aware that the Federal income tax law applies a UBIT. He is also aware of the § 512(b)(2) provision that excludes royalties from the UBIT. An IRS agent has raised the issue that the revenue from the use of the mailing lists by other entities may be taxable as unrelated business income. Morgan wants you to research this issue for him. Write a letter to Morgan that contains your findings, and prepare a memo for the tax research files. Wonderful Wilderness’s address is 100 Wilderness Way, Pocatello, ID 83209.
To Lloyd Morgan Chief Financial Officer Wonderful Wilderness, Inc 100 Wilderness Way, Pocatello, ID 83209 Subject: Applicability of § 512(b)(2) provision and taxability under unrelated income Sir, As per the facts cited to us, the company named Wonderful Wilderness Inc is engaged in providing the services such as to fulfill the social cause or ensures the welfare of general public. The various kinds of activities that are being provided by the company includes educating the children and the future of the country, managing the system of ecosystem in order to ensure the required balance in the environment, promoting the judicious use of the natural resources since they are on the verge of extinction and improving the quality of the environment we are living in. Other than the aforementioned purpose, the company is also generating income from letting the use of the mailing list that been exclusively owned by the company including the names of contributors, donors etc. The company charges in this regard per transaction. Therefore, the litigation has arisen on this issue in the context of the taxability. As per Chief Financial Officer named Lloyd Morgan of this company, the income that is being earned by the company in the form of use of the mailing list based on the charge per transaction amounts to the royalty income and therefore, will be excluded from the unrelated business taxable income in the form of deduction. He contended the same based on the awareness of the § 512(b)(2) provision that excludes royalties from the UBIT. As per § 512(b)(2) provision, unrelated business taxable income means the income that can be earned from the unrelated trade or business by the organization. However, in order to compute the net unrelated business taxable, the specified items or the deductions are permissible. As provided in subsection (b) royalties that are connected with the trade will be excluded from the taxable income. Therefore, you are of the view that the same shall not be taxable. It is to be noted here that the revenue authority is of the view that the income that is being derived from the use of the mailing list will not be covered under the term royalty as contended by you. Therefore, the same shall be taxable under the taxation provisions and will not be excluded from the unrelated business taxable income. After analyzing and considering both the viewpoints, I would like to draw your attention towards the case of Disabled American Veterans v. United States wherein the court held that the earnings from the use of mailing list would not be classified under the head Royalty under 512(b)(2) and therefore this activity would be considered the additional revenue earned by the company to be taxable. Thanks & Regards Your Consultant Reference 1. LII. (n.d.). 26 U.S. Code § 512 - Unrelated business taxable income. Retrieved from https://www.law.cornell.edu/uscode/text/26/512 2. D. ROYALTIES. (n.d.). Retrieved from https://www.irs.gov/pub/irs-tege/eotopicd89.pdf
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