Principles Of Partnership Taxation Essay Under Division 5 Of Pt III ITAA.

Question 1

Daniel and Olivia Smith operate a mixed business called Brekkie and Lunch and OZ Bottle Shop at 50 York Street Sydney. They visit you in order to prepare their 2017 partnership tax return. During your first meeting they provide you with their cash receipts and cash payments journals, their business bank statements and a file contain all their business invoices and receipts relating to the transactions in their book.

Question 2

John is a senior executive with a printing company. As part of his remuneration package his employer pays for his child’s school fees at a private school costing $15,000. His employer also provides him with accommodation in a Sydney apartment throughout the FBT year. John must pay $100 of rent per week for the apartment. The market value rent for the apartment is $800 per week. Advise John’s employer of the FBT consequences of John’s remuneration package.

Tax liability of partners

Assessable Income of Partnership Business

Division 5 of Pt of III ITAA deals with the principles concerning partnership taxation. These are applicable to all types of partnership exclusive of limited corporate partnership. It is stated by Morse and Deutsch (2015), that, the main purpose of this division is to inflict the tax on the partners rather than partnership which is obliged to be the individual taxpayer. Further, it is the responsibility of partners to report their separate interest for each amount. Section 92 (1) asserts assessable income of a partner must comprise:

1. Individual interest of a partner in the net profit of partnership of year of income as the same is attributable to a phase when the partner was an occupant.
2. The interest of a partner in net income of partnership of the year of income as is referable to a time when the partner was non- resident.

Further, section 2 if the partnership experiences a loss, in that case, the partner is enabled to deduct its separate interest in the loss. Blakelock and King (2017), asserts that it also facilitates the partner who is not a resident with so much of loss of partnership as is attributable to Australian sources.  

In accordance with the Australian Taxation Office (ATO), while estimating the assessable income, the company is obliged to calculate gross profit or profits from the ordinary course of business. Apart from this, Chardon, Freudenberg and Brimble (2016), specifies that there are other payments also which are not the part of regular activities of firm but is necessary to be included in the assessable income. Furthermore, as per assertions of Wicker (2018), the principal amount of repayment of loan cannot be deducted from the tax.

According to Raftery (2017), the business cannot reduce the spending on capital assets instantly rather the cost can be claimed for the same, representing the value of assets that is fall in value. Depreciating assets refer to those assets which have a restricted effective life, and it could be anticipated that with the utilisation of assets there will be a fall in value. There are some assets which are not depreciating assets, and they are land, trading stock as well as intangible. Further, in order to depreciate the assets and other capital expenditure, ATO has a specified set of general rule. The effectual life of the asset, expressed in years will govern the number of years according to which the depreciation will be allocated to a specific asset.

Section 25.10 of ITAA 1997 the expenditures which are incurred on repairing of an asset or a depreciating asset are deductible which is embraced or taken into use only with the purpose of generating assessable income. Further, if the company has utilised that property partly for this objective, the business can deduct so much of expenses as is rational in the circumstances (Woellner et al., 2016).  At the same time, according to subsection 3, the capital expenses are not deductible in profit and loss account.

Deductibility of expenses

In accordance with Yin and Burke (2016), the partnership loss occurs when there is a surplus of allowable deductions which means they are more than the assessable income of the partnership firm as such the partnership was a resident taxpayer. In the case of partnership loss, there are no deductions. Though the loss incurred is distributed among the partners according to the ratio specified in the agreement. Consequently, it is considered as a deduction in the individual tax return of partner. Resident partners are enabled to proclaim for the deduction for their net loss of partnership. Along with this, there are some exceptional rules according to which the partner is declared as a non-resident for the whole or for the part of the year. Exemptions for foreign partnership loss comprises the quarantines in partnership and are not accessible for partner allocation, and losses could be taken ahead in order to harmonise the same with foreign income of following years.

Particular	Note	Amount (in $)
Income
Business Sales (Cash)		150170.00
Business Sales (Credit)	1	31885.00
Increase in Stock	2	630.00
Total		182685.00
Expenses
Car Expenses	3	2364.00
Electricity expenses	4	1176.00
Council rates	5	310.20
Business insurance		1250.00
Mobile bill	6	633.60
Union fees		284.00
Account charges		595.00
Repair expenses	7	1490.00
Interest on loan	8	5500.00
Cash Purchases		31155.00
Credit Purchase	9	129188.00
Depreciation	10	4836.52
Total Expenses		178782.32
Net Business Income		3902.68

Notes to Account

Working Note 1

Calculation of Credit Sales (Debtors Account)

Particular	Amount (Dr.)	Particular	Amount Cr.
Balance B/d	3925	Bank / Cash	32800
Credit Sales (b/f)	31885	Balance c/d	3010
Total	35810		35810

Working Note 2

Calculation of Increase/Decrease in Stock

Particular	Amount
Closing Stock (A)	9750
Opening Stock (B)	9120
Increase in Stock (A-B)	630

Working Note 3

Calculation of Car and Van Maintenance

Particular	Amount
Cost of maintaining van	1260
% used in business	1134
Deductible expenses	1134
Cost of maintaining SUV	2050
60% used in business	1230
Deductible expenses	1230
Total deductible maintenance expenses	2364

Working Note 4

Electricity Expenses

Particular	Amount
Total Bill	1470
Business Use (90%)	1176
Deductible Expenses	1176

Working Note 5

Council Rates

Particular	Amount
Total amount	517
Business Use (90%)	310.2
Deductible Expenses	310.2
Working Note 6 Mobile Bills
Particular	Amount
Total Bill	704
Business Use (90%)	633.6
Deductible Expenses	633.6

Working Note 7

Calculation of Repairs and Maintenance

Particulars	Amount (in $)
Air Condition Installation	1200
Shop Painting	150
Refrigerator motor replacement	140
Total	1490

Note: Installation expenses are added in cost. Since in the present year no air conditioner is acquired due to which it will be treated as revenue expenditure.

Working Note 8

Calculation of Interest on Loan 

Particulars	Amount (in $)
Repayment of Loan	8500
Principal	3000
Interest	5500
(Repayment of Loan - Principal)

Working Note 9

Creditors Account

Particular	Amount (Dr.)	Particular	Amount Cr.
Bank/ Cash	128678	Balance b/d	6500
Balance c/d	7010	Credit Purchase (b/f)	129188
Total	135688		135688

Working Note 10

Calculation of Depreciation

Union Fees

Union Fees is fully deductible expense in case the partner is a union member. In the present case, it is assumed that partners are a union member. Thus, the full amount is deductible.

Fringe benefits tax (FBT), is applied on non-cash benefits offered apart from cash salary. These type of benefits are generally paid regarding an employment association. These benefits include such as providing car, entertainment expenses and laptops (Braverman, Marsden and Sadiq, 2015). The procedure for scheming FBT accountability includes following steps Working out the taxable value of the benefits offered to the workers, by applying any pertinent tax credits for deciding companies fringe benefits ‘taxable amount’. This is further, multiplied by the present FBT rate.

Reduction in taxable value

 Value of a fringe benefit is reduced by the “otherwise deductible” rule and contributions/payments by the recipient.

Otherwise Deductible Rule

The otherwise deductible rule relates in the situation, where a worker had incurred the expenses individually, they would have been allowed to a once-only inference (Shields and North-Samardzic, 2015).   It is essential to note that depreciation does not meet the criteria as it would affect in numerous deductions.

FBT consequences of John remuneration package

School Fees: The amount paid by the employer as school fees accomplish the requirement of expenses refereed as a fringe benefit to the employee. Thus the whole amount of $15000 will be included in fringe benefits taxable value. Moreover, no GST credit is available on same due to which it will be included in the lower gross value category.

Taxable benefit relating to accommodation:

= Market Value of Rent – Amount Reimbursed by employee

= $41600 - $5200

= $36400

Thus the total taxable value of FBT = $15000+$36400

  = $51400

FBT Tax to be paid by John is = Taxable amount * FBT rate of the year * Lower gross-up    rate

=$51400*47%*1.8868

= $ 45581.31

References

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

Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, p.1.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Morse, S.C. and Deutsch, R., 2015. Tax Anti-Avoidance Law in Australia and the United States. The International Lawyer, 49(2), pp.111-148.

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

Sakurai, Y. and Braithwaite, V., 2019. Taxpayers' perceptions of the ideal tax adviser: Playing safe or saving dollars?. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, Australia.

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance and Reward: Concepts, Practices, Strategies, 1(1). p.218.

Wicker, H., 2018. Tax consolidation: A review of the recommended changes. Taxation in Australia, 53(5), p.242.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue, Australia.

Yin, G.K. and Burke, K.C., 2016. Partnership Taxation. Wolters Kluwer Law, Florida.