Taxation Law: Case Study on Partnership Income and Deductions

In this document we will discuss about Taxation Law and below are the summary points of this document:- The case study in taxation law focuses on treating business receipts of partnerships based on ordinary income and statutory income. The rules outlined in the ITA Act 1936 (sec-90) determine the assessment of taxable income for partnerships and the distribution of income or loss to partners. Taxpayers must meet certain criteria for deductions of business expenses, repairs are deductible while capital expenses are not.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION LAW
Table of Contents
Solution to question 1:.....................................................................................................................2
Solution to Question 2.....................................................................................................................8
Issues............................................................................................................................................8
Rulings.........................................................................................................................................8
Applications.................................................................................................................................9
Conclusion:................................................................................................................................10
Reference.......................................................................................................................................11

2TAXATION LAW
Solution to question 1:
Issues:
The objective of this case study is to appropriately treat the business receipts of the
partnerships on the basis of the ordinary income and statutory income that is paid to the partners.
Rule:
There is a chief depiction that has been in the “sec-90, ITA Act 1936” that the
partnership on making the net income is responsible for assessment of its taxable income given
the partners are the resident taxpayers following the deduction has been made for the outlays
occurred while carrying business (Belloc 2017). The taxpayers are required to follow the sec-90
so that they can calculate the partnership net income or losses.
There are also the vital guidelines has been provided to the partners in the sec-92 so that
they can make distribution of the loss or income to the partners. On the basis of the partnership
interest their net income or loss must be distributed but it should be noted that drawings are not
considered relevant.
A tax is imposed on the taxpayers if they make their taxable earnings. Most commonly, it
has been noted in “CT v Scott (1935)” a noteworthy clarification has been made for the income.
This includes that the receipts that is made during the year forms the part of the ordinary
earnings (Chambers and Chambers 2015).
Another important factor that the taxpayer is required to keep in mind that the positive
limbs should be satisfied by the taxpayers in order to be entitled for general deductions of
outgoings that has taken place during the business activities of the taxpayers for the purpose of

3TAXATION LAW
making income (Giachetto 2013). The first positive limbs require meeting test of nexus under sec
8-1. But most importantly the negative limbs do not allow the deduction for the capital or private
expenses under the “(sec 8-1(2))”.
The term repairs are not explained in the legislation of income tax. There is a vital
explanation that has been made in sec-25-10 that the repairs that has been performed by the
taxpayers when conducting business activities is permissible for deductions. Repairs of capital
expenses are not allowed for deduction under section 25-10 (2) (Maddock, Pel and Hole 2015).
As held in “FCT v Western Suburbs Cinemas Ltd (1952)” repairs of old with new one is non-
deductible. Furthermore, where replacement is performed for the part of assets is held as
deductible repairs under sec 25-10.
Applications:
The chief depiction for the case of Daniel and Olivia is that they are partners within the
reference of the sec-90. The partnership of Daniel and Olivia on making the net income is
responsible for assessment of their taxable income given the partners are the resident taxpayers
following the deduction has been made for the outlays occurred while carrying business. There is
an evidence that has been noticed that the partners have earned a cash sales and while doing the
business there was also the payments that was received from the debtors. Most notably the
partners are required to follow the sec-90 so that they can calculate the partnership net income or
losses. The reference of verdict in “CT v Scott (1935)” should made here to explain that the
receipts that is made during the year forms the part of the ordinary earnings.
The later evidence obtained gives an important scenario for deductions relating to
business outgoings in the form of rates, insurance. bills etc. The positive limbs have been

4TAXATION LAW
satisfied by both Daniel and Olivia in order to be entitled for general deductions under sec 8-1 of
outgoings that has taken place during the business activities of the taxpayers for the purpose of
making income (Smailes 2013). But most important aspect that is developed from the case study
is that they occurred drawings which is falling within negative limbs of (sec 8-1(2)) and
deduction is not allowed for drawings because they are private outlays.
The shop painting and repairs is permitted for deduction for Daniel and Olivia because
the repairs have been done on the building by the Daniel and Olivia when conducting business
activities. Additionally, there was also the replacement outgoings amounting to $140 is
permissible for deductions since no kind of improvement was made on the asset but only the
restoration of function was performed. However, citing “FCT v Western Suburbs Cinemas Ltd
(1952)” the air conditions installation costs is a capital repair so no deduction is allowed
(Stevens 2015).

5TAXATION LAW
Working Papers:

6TAXATION LAW
Conclusion:
The partners should adhere with the sec 90, so that they can dispense the net income in
the midst of themselves within the meaning of sec 92, ITA Act 1997.

7TAXATION LAW
Solution to Question 2
Issues
Will the fringe benefit liability be applicable to the employer under the provisions of
“FBTAA 1986” for the welfares which is delivered during the term of employment of the
employee?
Rulings
Fringe benefits can be regarded as the additional benefits which is provided by an
employer to employee throughout the progression of employment. Such benefits are generally
non-monetary in nature and are separate from the usual salary received by the employee. In other
words, any benefit which the employee receives from the employer in exchange of the services
can be referred to as fringe benefits. The requirements of “FBTAA 1986” positions that Fringe
benefits are covered and forms part of the term of agreement of employment of an individual.
The rulings further make it clear that the actual liability which is associated with Fringe Benefits
are to be bear by the employers as they need to pay taxes (O'Connell, Martin and Chia 2013).
This is applicable to the employers irrespective of the profession if the employer is providing
such benefits to the employees.
Similarly, it is to be noted that any expenses which is paid or incurred by the employer on
behalf of the employees are also considered to be outgoing fringe benefits. The employer
undertakes such expenses so that the employee is motivated but the same is considered to a be
benefit and therefore is subjected to tax. The provisions of “S-20, FBTAA 1986” covers the

8TAXATION LAW
expenses made by employers on behalf of the employees of the business. Outgoing Fringe
Benefits are also applicable when employers reimburse the expenses which is incurred by the
employee (Maddison and Denniss 2013). The amount of Fringe Benefit taxes depends on the
amount which is reimbursed or incurred by the employer.
In case an employer provides assistance to an employee in financial terms for meeting the
full-time education expenses of employee’s child than the same would be considered as Fringe
benefits, the only condition being that the financial assistance should be provided during the
course of employment of the concerned employee (Highfield and Warren 2015). This is justified
in “subparagraph 65A (ii), FBTAA 1986” of taxation rulings which is applicable for Fringe
Benefits. A case law of J & G Knowles v FCT (2000)” can be referred to explain the conditions
under which the Fringe benefit would be taxable (Eslake 2015). The case laws show that the
employee should have a materialistic need for such assistance and the employee should be
engaged in the employment in order to assess the same as fringe benefit.
As per the provisions stated in “section 25, FBTAA 1986” housing fringe benefits arises
when an employee is provided with a general residence during the course of employment from
the company. The taxable value of such benefit is computed considering the market value of the
house which is provided to the employee. In case the employee has to pay some rent, the reduced
rent which is paid for the house is analysed with the actual value of the property.
Applications
As per the case study, John is an employee in an organization from where he is getting
coverage for all education expenses for his child for $ 15,000 which is a fringe benefit. The
provisions of “sec 20, FBTAA 1986” confirms that the amount is incurred by the employer to

9TAXATION LAW
provide financial assistance and also during the course of employment of John. Adhering to “J
& G Knowles v FCT (2000)”, John has a materialistic need for providing for his child and
therefore he is eligible for deductions in rentals charges (Hemmings and Tuske 2015). John can
reduce his tax liability by claiming the full-time education for his child which is a permissible
deduction under FBT laws.
The case study also shows that John is also using rented house for which he is
paying a reduced rent of $ 100 while the valuation of the property shows that the actual rent
should be $ 800. The computation of the taxable amount for fringe benefits considering the
reduced rent which is paid by John is shown below:
Conclusion:
The above discussion shows that Fringe benefits is being provided to John for both
the rented house and the education expenses which is incurred by the employer. While John pays
a part of the rental payment which results in lowering of the fringe benefit tax amount which is
shown in the computation. Thus, it can be said that the lowered rented house of John is part of
the fringe benefits received by him from the employer.

10TAXATION LAW

11TAXATION LAW
Reference
Belloc, H. 2017. On. Freeport, N.Y.: Books for Libraries Press.
Chambers, D. and Chambers, C. 2015. Taxed out.
Eslake, S., 2015. Reforming the Australian taxation system: a principled approach. Australian
Financial Review Tax Reform Summit.
Giachetto, P. 2013. Corporate income tax system: Nova Science.
Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.
Highfield, R. and Warren, N., 2015. Does the Australian Higher Education Loan Program
(HELP) undermine personal income tax integrity?. eJournal of Tax Research, 13(1).
Maddison, S. and Denniss, R., 2013. An introduction to Australian public policy: theory and
practice. Cambridge University Press.
Maddock, R., Pel, B. and Hole, G. 2015. Taxation (Goods and services) (2015 Reissue).
O'Connell, A., Martin, F. and Chia, J., 2013. Law, policy and politics in Australia's recent not-
for-profit sector reforms. Austl. Tax F., 28, p.289.
Smailes, D. 2013. Tolley's income tax 2013. London: LexisNexis.
Stevens, M. 2015. Taxation of financial products and transactions, 2015.

12TAXATION LAW