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Question: music plus pty ltd quotmusic plusquot is a distributor of...

Question details

Music Plus Pty Ltd ("Music Plus") is a distributor of music equipment located in Adelaide, South Australia. During the current tax year, it experienced a significant reduction in projected sales. A major client cancelled a contract as a result of the COVID-19 restrictions shutting down music events across the country. The contract represented 65 per cent of its income earning activities and was cancelled only three years into the seven-year contract. Music Plus was paid $3.9 million by the client for the cancelled contract. Despite this receipt, Music Plus has had to lay off a small number of staff members working in the business and negotiate refinancing of loans with its bank. Fortunately, Music Plus anticipates that they will be able to establish new contracts after the COVID-19 restrictions are lifted and the music industry begins to restart.

REQUIRED:

Advise Music Plus of the tax consequences in regard to the events outlined by answering the following two questions:

1. Explain the taxation treatment of the receipt of $3.9 million by Music Plus. (9 marks)

2. Outline briefly the tests that Music Plus would have to satisfy in order to be able to apply any tax losses incurred in the

current year against future assessable income. (3 marks)

Reference should be made to appropriate legislation, case law and rulings. Calculations are not required. Disregard GST.

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