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Net income of the partnership

1.Alice had the following transactions during 2016/17:

a.. August 2016 - Alice sold her car for $26,000. She had paid $35,000 for it in June 2015.

b. February 2017 – Alice gifted her son some shares in Optus. She had bought them in December 1995 for $75,000 and, when she gave them away, their market value was $50,000.

c. March 2017 - Alice sold some Qantas shares for $100,000. She had acquired them in June 2015 for $60,000.

d. June 2017 – Alice was dismissed from her job and agreed to sign a restrictive covenant that she would not compete with her ex-employer for 3 years for which she received $50,000.

2.Anne and Brian established a florist in partnership on 1 July 2016. In the 2016/17 year gross receipts amounted to $250,000 and outgoings included the following:

Business costs $100,000
Salary paid to Anne under the agreement $40,000
Interest on capital contribution by Anne (as agreed) $10,000
Interest on commercial loan by Brian to the partnership $20,000

The partnership agreement provides that the partners are to share the residue of profits after expenses (including all those set out above) equally. 

Calculate the net income of the partnership for tax year 2016/17 and each partner’s share of the net income of the partnership and their assessable income (you may assume that they have no income other than what they receive through the partnership).

3.The Luke Family Trust is a discretionary trust pursuant to which the family’s solicitor settled $1 on Neal Pty Ltd as trustee for the trust. Mr Luke then gifted a number of properties located both in Australia and the Cayman Islands to the trust. 

For the last tax year the trust has derived net income of $50,000 in rental profits, $25,000 of which was sourced from the overseas properties (and not taxed there as there is no income tax in the Cayman Islands).

The trustee determines to allocate the net income of $50,000 as follows:

a.$10,000 to Mr Luke who is a resident of Australia (and who has no other income);
b.$25,000 to his wife Pauline who resides in the Cayman Islands; and
c.$416 to their 15 year old daughter Jane; and
d.$5,000 applied to pay for their 18 year old insane son’s (Frank) medical expenses (Frank also receives $20,000 pa from another trust).

The trustee retains the balance for reinvestment.

Who is assessable on the income of the trust estate? Indicate, where relevant, any
entitlement to credits.

4.Bruce received a $100,000 bona fide redundancy payment in 2017/18 after 10 years and 11 months service with the same employer. How will the payment be taxed?

Net income of the partnership

1.

Particulars  

 Amount ($)

 Amount ($)

 No capital gain or loss on sale of car

 Shares gifted to son:  

 Market value of shares as on the date of gift  

     50,000.00

 Less: Cost of shares

     75,000.00

 Capital gain / (Loss)

   (25,000.00)

 Shares sold:  

 Sale proceeds from sale of shares  

   100,000.00

 Less: Cost of acquisition  

     60,000.00

 Capital gain / (Loss) before use of discount  

     40,000.00

 Less: Discount under discount method (40000 x 50%)

     20,000.00

 Capital gain / (Loss)

     20,000.00

 Capital gain for receiving non-competition fees (s160M (6)

     50,000.00

 Net capital  

     45,000.00

Notes:

  1. For the car sold by Alice for $26,000 there would be no capital gain or loss as the sale of personal car does not come under the purview of capital gain tax as provided the Australian Taxation Office (ATO). As per the instructions of ATO most of the personal assets are exempt from capital gain tax including home, car and personal used assets such as furniture. Thus, there would be no capital gain or loss from sale of car for $26,000.  
  2. In case of shares gifted to the relatives then it will be treated as transfer of shares on the date on which the shares were gifted. The market value as on the date of the gift shall be considered as the transfer value of the shares. The cost of such shares shall be deducted from the market value to calculate capital gain or loss.
  3. In case of sale shares the cost basis is reduced from sale proceeds to calculate the capital gain or loss. Discount method can be used if the shares were held for more than 12 months before the CGT event.
  4. As per the Income Tax Assessment Act, 1936, s160M (6), restrictive covenant receipt is subjected to capital gain tax (Grudnoff 2015).

2.A partnership as per the ATO is a business carried on by a group of people with the motive distributing income and losses between themselves with mutual consensus. A partnership is generally governed by the agreement between the partners. As per the ITAA 1997 only business expenditures incurred for the purpose of earning income of the partnership are allowed as deduction for computation of partnership income. Any amount withdrawn by partners will not be allowed as deduction and cannot be considered as wages or salary even if provided in the partnership agreement (Vann 2016).

Net income of the partnership

 Particulars  

 Amount ($)

 Amount ($)

 Gross receipts

   250,000.00

 Less: allowable expenditures for tax purposes

 Business cost  

   100,000.00

 Partner's salary is not allowed  

 Interest on partners' capital is not allowable deduction  

 Interest on commercial loan is allowed even if provided by a partner  

     20,000.00

   120,000.00

 Net profit  

   130,000.00

 Share of Anne (130000 x 1/2)

     65,000.00

 Share of Brian (130000 x 1/2)

     65,000.00

Assessable income of Anne

 Particulars  

 Amount ($)

 Amount ($)

 Interest on capital received from partnership  

     10,000.00

 Salary received from partnership  

     40,000.00

 Share of profit from partnership  

     65,000.00

 Assessable income of Anne

   115,000.00

 Assessable income of Brian

 Particulars  

 Amount ($)

 Amount ($)

 Interest on loan provided to the partnership  

     20,000.00

 Share of profit from partnership  

     65,000.00

 Assessable income of Brian

     85,000.00

3.The net income of a trust is calculated by deducting deductions allowable from the assessable income of the trust for both resident and non-resident trust. Generally the income of a trust is calculated in accordance with the trust deed whereas the net income is calculated as per the tax law thus, there is often significant difference between the income as per trust deed and net income as per tax laws.

The beneficiaries of a trust are assessed for the income of the trust on the basis of their shares in the income of the trust. In case there is a trustee then the income of the trustee will be taxable in the hands of the trustee if so provided in the trust deed (Blakelock & King 2017).

Hence, it is clear that as per the tax laws Mr Luke will be taxed on $10000 of income of trust. Pauline will be taxed for receiving $25,000 of trust’s income. Jane will not be taxes as she is still a minor for $416. This amount will be added to the income of the parent who has higher income. $5,000 paid for the medical bill of Frank will be taxed in the hands Frank as it was also income of the trust. However, Frank is entitled to take credit of such amount while calculating his assessable income for tax purposes in the particular year as it was used for payment of medical expenses (Dunne, Taylor, Batten & Krapivensky 2016).

4.ATO treats the amount received as redundancy payments differently based on whether the payment is received for genuine redundancy or is it a non-genuine redundancy payment. Generally there is no requirement of paying taxes for genuine redundancy payments up-to a certain limit provided the definition and the criterions laid down by the ATO for genuine redundancy are met by such redundancy payments.    

Following are the criterions for genuine redundancy:

  1. You have become redundant because the job used to be done by recipient of redundancy payments are no longer required by the employer thus, the employment has been dismissed.
  2. Recipient is under the normal retirement age.   

In case income year 2017-18 a limit of $200,000 has been prescribed as tax free redundant payment provided it is genuine redundancy. Assuming that the redundancy in case of Bruce is genuine hence, the entire amount of redundancy payment of $100,000 received by him from his employer will not be tax free (Raftery 2017).   

References: 

Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.

Dunne, J., Taylor, H., Batten, N., & Krapivensky, N. (2016). 2015 case review: High ATO success rate continues. Taxation in Australia, 50(10), 609.

Grudnoff, M. (2015). Top gears: How negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices.

Raftery, A. (2017). 101 Ways to Save Money on Your Tax-Legally! 2017-2018. John Wiley & Sons.

Vann, R. (2016). Hybrid Entities in Australia: Resource Capital Fund III LP Case

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[Accessed 14 July 2024].

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