Tax Treatment Of Partnership Firms And Fringe Benefits In Australia

Assessable income of Partnership Firm

Provisions

The provision related with the determination of the assessable income of the partnership firm is contained in the Pt III of Division 5 of the Income Tax Assessment Act 1997.  Tax is chargeable on the all income which is derived by the firm from the ordinary course of the business activity (Butler, and Giles, 2018). Along with this, normally all the expenses which are incurred for carrying the business activity are allowed as deduction while calculating the assessable income (Datt, and Keating, 2018). The provision related to the partnership firm is described as below –

As per the Income Tax Assessment Act 1997, section 25-5, the person can avail the deduction of the expenses to the extent they are related with managing the tax affairs of the business.  Section 25-10 of the ITAA is related with the deduction of expenses related with the repairs; it states that person can deduct expenses incurred for repairing the premises or depreciating assets which are solely used for producing the assessable income (Wilkins, 2015). If the property is used party for the business purpose then only so much of expenses are allowed for the deduction.  Further, the deduction of the capital expenditure is not allowed. Generally, the repair and maintenance related to the initial installation of the asset are not deductible (Burkhauser, Hahn, and Wilkins, 2015). As per the legal case law FCT v Western Suburbs Cinema, the court held that deduction is not allowed as the taxpayer chose to make the capital expenditure by replacing the ceiling, therefore, it is notional repair which is not deductible. Therefore if the item is considered as the improvement, then no deduction is allowed. If the repair results in substantially replacing the asset, it is the capital expenditure as per the decision was given under Lindsay v FCT.  Further functional improvement in the quality of the asset is not considered as the repair of the asset (Bloch, and Bhattacharya, 2016).

Trading stock is considered as the revenue assets, therefore, it is dealt as per the normal income tax provisions (Chardon, Freudenberg, and Brimble, 2016). Receipt from sale of trading stock is considered as the ordinary income which is assessable under section 6-5.

Section 25-25 of the ITAA 1997 is related to the deduction of the borrowing expenses. This section states that the deduction is allowed for the expenditure incurred for borrowing the money used in generating the assessable income. These expenses are normally deducted over the term of the loan amount. Interest on money loaned to the partnership is deductible expenses to the partnership firm (Barth, 2017).

Deduction of Expenses

Depreciation can be calculated by two methods which are prime cost method and the diminishing value method.  In the prime cost, method depreciation is charged over the useful life of asset uniformly (Richardson Taylor, and Lanis, 2015). In the case of the diminishing method,

 If the assets are hold before 10 May, 2006 then formula of depreciation =

Base vale * (days held/365)*150% / effective life of assets)

If the assets are hold after 10 May 2006 then the formula of depreciation =

Base vale * (days held/365)*200% / effective life of assets)

Drawings of the partners are not deductible expenses from the assessable income (Cumming, and Johan, 2016).

Payment of the fee is allowed as deduction if the partner is the member of the union. In this study, it is assumed that the partner is the member of the union, therefore, the deduction is allowed.

1. Calculation of credit sales

1. Calculation of credit purchase

1. Increase or decrease in stock

1.  The expenditure incurred for buying the trading stock is essential for carrying out the business, therefore, it is deductible under section 8-1 of the ITAA 1997.  Therefore the $31155 is allowed as a deduction to the firm.
2. In the given study, it has been stated that a van used 90% in the business purpose and SUV used 60% for the business purpose. Therefore the maintenance cost only to the extent of percentage used in the business is allowed for the deduction.  Cost of maintaining the van was $1260, the deduction is allowed $ 1134 (1260*90%), and the cost of maintaining the SUV was $ 2050, the deduction is allowed $ 1230 (2050*60%). Therefore the total deduction of $ 2364 is allowed in respect of maintenance cost.
3. Out of the total mobile bill, electricity expenses and council rates only 90%, 80% and 60% are allowed as deduction.

1.  Repair and maintenance related to the air condition installation are considered as the capital expenditure as it is related to the initial installation, therefore, it is not allowed.  Repair and maintenance expenses related to the shop painting are allowed as revenue expenditure because it is incurred for maintaining the capital asset of the business. Further, the expenses incurred for refrigerator motor replacement results in the functional improvement, therefore, it is considered as the capital expenditure and not allowed as deduction.
2. From the total repayment of $ 8500, the $ 3000 is related with the principal amount, which is not allowed as deduction. Therefore the remaining amount that is $5500 (total repayment – principle amount) is related with interest payment which is allowed as deduction.
3. Calculation of the depreciation

*New restaurant freezer is purchased on 1^st August 2016, therefore effective days will be (365-31) = 334 days.

*no depreciation is charged on trade –in of $ 500 permitted in the old unit.

* It is assumed that shop fitting furniture is not freestanding therefore effective life of asset 20 years.

* Life of refrigerator is 10years assuming it is a general refrigerator.

* It is assumed that kitchen electrical appliances consist of electric jugs and kettles, therefore, the effective life of the asset is 2 years.

* The effective life of the car is prescribed by the ATO is 8 years.

1. As per the general rule, all the expenses related with the business is allowed as deduction.  Amount of $ 3200 taken by the owner from bottle shop item for the private use is not allowed.

Provisions

Fringe benefits, as per the definition stated under the Australian tax system, refer to some additional comforts and facilities (mostly in kind) that are offered to the employees in addition to their normal salary package. It is considered as a part of the cost to the company, and is separately chargeable to tax under the Australian tax system. In Australia, fringe benefits are advanced to the employees or their associates as a part of the employment agreement with the employer (Goetzel, 2018). There’s no distinction between the statuses of the employee – he or she can be a current employee, a past employee or even future recruitment. Further, as per the proviso contained in the law, it has been stated that the contractors are not included in the definition of employees; they are a separate entity and shall not be treated at par with the employees.

The Australian tax system has assigned the fringe benefits into various categories, depending upon their value and frequency of availing. This is followed by laying down of rules for the taxation of these benefits, which may differ from case to case. Following are some of the categories according to which the final liability may be calculated: –

• Car Fringe Benefits
• Parking Fringe Benefits
• Lodging and Housing Fringe Benefits
• Loan Granting Fringe Benefits

Trading Stock

The Assessment Procedure

Once the assessee (the taxpayer) gets acquainted of the category in which the benefits paid by him fall, he can then proceed to chalk out the final liability imposed on him (Freebairn, 2018). The FBT can then be calculated easily by following some simple steps as enumerated below: –

• Calculate the gross value of the taxable fringe benefits
• Deduct any amount which has been recovered, either in part or full, from the employee
• Multiply the amount so calculated with the FBT rate followed by a boost with gross-up rate
• The resulting amount will be the total liability payable by the employer in regards to fringe benefits tax

John, who is working with a printing company, has been provided with two different types of fringe benefits, namely housing and education aid. Hence, in the light of the above laws and as per the latest provisions made in regards to FBT, the final liability in case of John’s perks can be calculated as follows: –

[(Housing Allowance + Educational Aid) x FBT Rate for the Assessment Year Ending March 2019 x Type – 2 Gross-Up Rate] – Recovery Made from John

• [($800 x 52 weeks – $100 x 52 weeks) + $15000) x 47% x 1.8868]
• [($41, 600 – $5200 + $15000) x 47% x 1.8868]
• $45, 581.3144

Hence, the final tax liability conferred upon the employer regarding the fringe benefits paid to John amounts to $45, 581.3144. However, the fringe benefits enjoyed by John shall also be reported by the employer on John’s PAYG payment summary (erstwhile group certificate), since the quantum of benefits paid exceeds $2000.

References

Barth, J., (2016). Agenda for Australia: Reality of family unit must underlie the tax system. News Weekly, Issue 3007 (21 Oct 2017) p.7.

Bloch, H. and Bhattacharya, M., (2016). Promotion of innovation and job growth in small?and medium?sized enterprises in Australia: Evidence and policy issues. Australian Economic Review, 49(2), pp.192-199.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., (2015). Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Butler, T. and Giles, A., 2018. Tax and inequality. Australian Options, (88), p.10.

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.

Cumming, D. and Johan, S., (2016).Venture’s economic impact in Australia. The Journal of Technology Transfer, 41(1), pp.25-59.

Datt, K.H. and Keating, M., (2018). April. The Commissioner’s obligation to make compensating adjustments for income tax and GST in Australia and New Zealand. In Australian Tax Forum (Vol. 33, No. 3).

Freebairn, J., (2018). Federalism and Tax Reform. Australian Economic Review, 51(2), pp.262-268.

Goetzel, R.Z., (2018). Review of Promoting Worker Health: A New Approach to Employee Benefits in the Twenty-First Century. Journal of Occupational and Environmental Medicine, 60(12), p.e681.

Richardson, G., Taylor, G. and Lanis, R., (2015). The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Wilkins, R., (2015). Measuring income inequality in Australia. Australian Economic Review, 48(1), pp.93-102.

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