Tax Return Preparation For Brekkie And Lunch And OZ: Partnership Net Income Calculation

Partnership Net Income Calculation

The partnerships are not levied for taxation since it is not the separate legal entity. The partners are held taxable based on their individual share for their partnership income under “section 92 (1) of the ITAA 1936”. As stated in “section 995-1 of the ITAA 1997” partnership represents an association of person that are carrying on the business of partners or they receive ordinary income or statutory income in a joint manner (Braithwaite 2017). As per the “section 90 of the ITAA 1936” the net income of the partnership is defined as the partnership income after deducting the permissible deductions given the partnership were residents.

As understood in the current situation of Daniel and Olivia they operated a mixed business. The partnership reported certain receipts and expenses which would be eligible for deductions. As defined in “Sect 6-5 of the ITAA 1997” ordinary income generally means that income which is obtained by the taxpayer as the ordinary income. The judicial concept of “sect 6-5” is defined in “Scott v CT (1935)” where ordinary income as receipts based on the ordinary concepts and use of mankind (Woellner et al. 2014). The receipts from sales and debtors cash payments constitutes ordinary income and it is included for assessment in case of Daniel and Olivia Smith. The receipts are obtained during the ordinary course of business and hence it is included in the determination of partnership income.

As per the “section 8-1 of the ITAA 1997” the two positive limbs allow the taxpayer to obtain deduction for any losses or outgoings till the extent that it is occurred in gaining or generating the assessable income or incurred necessarily while carrying on the business for producing assessable income (Pinto 2014). The partnerships report the drawings for private purposes. In partnership the drawings made by the partners are not allowed to claim as deduction under “section 8-1 of the ITAA 1997”.

According to the ATO it allows the taxpayer to instantly write-off the assets that have the cost base of less than $20,000. Similarly, the purchase of air conditions is less than $1,200 which is below the $20,000 and is treated as instant write-off for deduction. As stated in “section 25-10 of the ITAA 1997” an individual is allowed to claim deduction for the repairs on the depreciating assets which is held or used entirely for generating assessable income (Tomasic and Pentony 2015). Under “section 25-10 (3)” the taxpayers are not allowed to claim deduction for the capital expenses. This includes the expenses occurred in replacing or enlarging the profit producing asset of business or expenses of initial repair are not allowed for deduction.

In the leading case of “FC of T v Western Suburbs Cinemas Ltd (1952)” expenses occurred for repairs is not allowed as deduction under section 25-10 given the repairs involves extensive improvement of capital in nature (Hamilton, Deutsch and Raneri 2014). The partnership reports expenses on shop painting on 1^st December and motor replacement expenses on 1^st April. With reference to “section 25-10 (3)” these expenses will not be allowed for deduction as they are capital expenses. The expenses on shop painting and refrigerator motor replacement is not allowed for deduction under “section 25-10 (3)” as they are repairs of capital expenses.

Eligibility of Receipts and Expenses for Deduction

The net income of the partnership along with the working paper is stated below;

Fringe benefit refers to the payment that is made to the employee which is different from the wages or salary. As defined under the fringe benefit tax legislation, fringe benefit is defined as the benefit that is provided to the employee in respect of the employment. The employers are held liable for taxation relating to any amount of fringe benefit provided to the employee (Miller and Oats 2016). The employer can however, claim deduction from the income tax relating to the cost of providing the fringe benefit and for the sum of fringe benefit tax that they pay. “Section 20 of the FBTAA 1986” deals with expense payment fringe benefit. This implies that fringe benefit provided by employer to employee by means of paying expenses.

In the current situation it is understood that John is the senior executive and as the part of his remuneration package John’s employer pays the school fees for his child that costs $15,000. According to the “subparagraph 65A (a)(ii) of the FBTAA 1986” for an expense to be eligible as the decrease in the taxable value of the expense payment fringe benefit provided to the recipients of the expenses should be in relation to the full phase learning of the employees child (Bird 2015). The court of law in “J & G Knowles v Federal Commissioner of Taxation (2000)” stated that there should be adequate or substantial relation amongst the assistance and occupation.

In the current context of John, the school fees paid by the employer for his child is in respect of the full time schooling of the child while necessarily not directly occurred in the full time education and has the adequate or substantial association to the full time education of the child (Ato.gov.au 2018). Accordingly, for John’s employer the recipient child school fees is in relation to the full time employment of the child and hence will be entitled for decrease under the “section 65A of the FBTAA 1986”.

An accommodation fringe benefit originates where the member of staff is offered with the right of using the unit of accommodation and the lease that grants the right for using the unit of housing as the usual place of lodging for the employee. The “section 25 of the FBTAA 1986” deals with the housing benefits. The unit of housing includes the house, flat or lodging in house (Ato.gov.au 2018). The member of staff does not have the elite right of using the lodging. The use of shared lodging as the normal place of house is regarded as the housing fringe benefit. The chargeable worth of the housing fringe benefit is measured by referring to the marketplace worth or the right of occupying the unit of housing that is abridged by the receivers rent which is in effect of the rental payments (Woellner et al. 2014). The taxable value of the housing fringe benefit represents the rental value of the accommodation which is reduced by any sum of rental payments that is made by the employee.

As evident in the current situation of John he was provided with an accommodation apartment in Sydney all through the FBT year. John also paid $100 rent each week for using the apartment however the market value of the apartment is $800 each week. The use of apartment by John provided by employer gives rise to the housing fringe benefit because the rental payment made by John represents the consideration which is paid to his employer of the housing benefit in relation to the housing right. In the current context of John, the taxable value represents the market rental value of using the accommodation, reduced by the rental payments that is made by the employee. The market value of accommodation in context of John is computed by referring to the period of FBT year where the employee has the right of using the accommodation. The taxable value of the fringe benefit is computed below;      

Rent Per Week = 800

Annualized Market Value = 800 x 52 weeks = $41,600

$41,600 / 365 x 365 = $41,600

Evidently the taxable value of the fringe benefit for John’s employer in accordance with the period of occupancy stands $41,600.

References:

Ato.gov.au. (2018). Legal Database. [online] Available at: https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00010 [Accessed 28 Dec. 2018].

Ato.gov.au. (2018). Legal Database. [online] Available at: https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00011 [Accessed 28 Dec. 2018].

Bird, R., 2015. Global taxes and international taxation: Mirage and reality.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Christie, M., 2015. Principles of Taxation Law 2015.

Hamilton, R., Deutsch, R.L. and Raneri, J., 2014. Guidebook to Australian international taxation. LexisNexis Butterworths.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Picciotto, S., 2015. Indeterminacy, complexity, technocracy and the reform of international corporate taxation. Social & Legal Studies, 24(2), pp.165-184.

Pinto, D., 2014. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

Tomasic, R. and Pentony, B., 2015. Taxation law compliance and the role of professional tax advisers. Australian & New Zealand Journal of Criminology, 24(3), pp.241-257.

Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Australian taxation law. CCH Australia.

Www7.austlii.edu.au. (2018). FRINGE BENEFITS TAX ASSESSMENT ACT 1986. [online] Available at: https://www7.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/fbtaa1986312/ [Accessed 28 Dec. 2018].

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