Taxation Law Case Study: Partnership Income and Fringe Benefits
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This case study discusses the net partnership income under section 995-1 of the ITAA 1997 and the fringe benefits provided to employees in terms of payment of school fees and housing. It includes rules, applications, and conclusions.
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Running head: TAXATION LAW Taxation Law Name of the Student Name of the University Authors Note Course ID
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1TAXATION LAW Table of Contents Answer to question 1..................................................................................................................2 Issues:.....................................................................................................................................2 Rule:.......................................................................................................................................2 Application:............................................................................................................................3 Conclusion:............................................................................................................................7 Answer to questions 2:...............................................................................................................7 Issues:.....................................................................................................................................7 Rule:.......................................................................................................................................7 Application:............................................................................................................................8 Conclusion:............................................................................................................................9 References:...............................................................................................................................10
2TAXATION LAW Answer to question 1 Issues: The expenses and receipts are two main key elements which are considered in case study to discuss about the net partnership income under“section 995-1 of the ITAA 1997”. Rule: According to“division 5 of the ITAA 1936”income from a partnership business is nothing but the amount gained from the assessable income deducting the permissible expenses. As per the“Section 92 of the ITAA 1997”the partners who are liable in paying tax get the loss as well as profit distributed among themselves in terms of distribution (Willis et al. 2014). According to the“section 995-1 (1)”continuation of a business with a common objective of earning profit throughout the income years is called partnership. Ordinary income is not mentioned under the taxation acts. As per“section 6-5, ITAA 1997”ordinary income is involved within the assessable income of the taxpayer.“Scott v FCT 14 ATD 286”mentions income is declared as word of art and all the gains throughout the income year is involved in it (Willis 2014). According to the ordinary income concepts, the receipts are considered as income until the statute is indicating that the income is not under the parlance. As held in“section 8-1, ITAA 1997”there are two positive limbs for saving the taxpayers from the losses incurred while continuing the business or for any other expense those are involved into the business while involving their taxable incomes (Lind 2015). Subsequently, the negative limb of“section 8-1, ITAA 1997”is, this section restricts the tax payer in deducing any losses incurred during the involvement of taxable incomes into the business. Along with this,“section 8-1, ITAA 1997”also does not allows any domestic, capital and private losses while calculating the deductions of income tax (Laing 2015).
3TAXATION LAW Agreeing to the concepts of“section 25-10 of the ITAA 1997”,repairs are considered as some work to be done on some specific sets of machineries or plant and premises. A repair can be defined as the replacement of parts of any specific entity that is not in situation to provide profit in the business (Kwall 2019). According to the section 25-10 there are certain maintenances such painting of any plant for maintaining the condition of the plant in order to make it productive. Likewise, under“section 25-10”there are certain replacements such as locks, exhaust fans are considered as some permanent fixes those are making the area more productive or keepingtheareaproductiveasitwas,areconsideredassomedeductiblerepairs (Schwidetzky 2017). However, if the repair is not increasing the efficiency of the unit then it will not be considered as a permissible repair into that particular part. This shows lack of improvement through that particular repair. According to the Australian taxation office, any business is allowed to get instant payment through a write- off if the cost discussed is lesser than $20,000. Application: The case study of Olivia and Daniel is highlighting that they are continuing their business with a common objective of gaining profit throughout the income year under “section 995-1 (1) of the ITAA 1997”. The determination of net profit or loss is discussed according to the section 90. In contrast with this discussion, the partnership of Daniel and Olivia gained receipts from the business cash sales and debtors payments on 30thJune 2017. According to the judgement made in“Scott v FCT 14 ATD 286”the received amount from these above mentioned aspects are treated as the business receipts under a partnership. According to“section 6-5, ITAA 1997”this business receipts are determining the net income for Daniel and Olivia.
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4TAXATION LAW Daniel and Olivia are also liable for drawing cash amount $5,600 for private purpose and purchase of items from bottle shop. According to some of their drawings are involving their net income into the income tax deductions. According to“section 8-1 (2), ITAA 1997”, as they have drawn money for private reasons, they have indulge their net come for income deduction. Apart from these discussions, Olivia and Daniel also included repairs for shop painting and motor replacement of a refrigerator.Underneath“section 25-10”Olivia and Daniel has involved their income into taxable deductions as they have applied a permanent fix to the refrigerator and also for the painting of business premises. Thebusinesshasalsostatedanacquisitionofair-conditionerfor$1200. Henceforward, this is lower than $20,000, so they will be eligible for permissible taxable deductions.
5TAXATION LAW ParticularsAmount ($) Receipts Business sales1,50,170.00$ Debtors Cash payments (Notes 1)33,715.00$ Total Receipts1,83,885.00$ Expenses Eligble for Deductions Electricity Bill1,176.00$ Council rates (Notes 6)310.20$ Business Insurance1,250.00$ Mobile Bills (Notes 6)633.60$ Union Bills284.00$ Account Charges595.00$ Repair Expenses (Notes 7)1,780.00$ Loan Expenses (Notes 4)5,500.00$ Purchase of Fixed Asset3,500.00$ Cost of Sales (Notes 3)30,525.00$ Van (Notes 5)1,134.00$ SUV (Notes 5)1,230.00$ Repayment to Creditors (Notes 2)1,28,168.00$ Installation of Air-Condition1,200.00$ Depreciation Expenses(Notes 8)726.20$ New Restaurant Freezer3,500.00$ Total Expenses Eligible for Deductions1,81,512.00$ Net Income From Partnership2,373.00$ Computation of Partnership Net Income For the year ended 30th June 2017
6TAXATION LAW Working Papers: Notes 1 Debtors at 1st July 20163,925.00$ Debtors Cash Payments32,800.00$ Debtors at 30th June 20173,010.00$ Debtors Net33,715.00$ Notes 2 Creditors at 1st July 20166,500.00$ Add: Repayment to Creditors1,28,678.00$ Less: Creditors at 30 June 20177,010.00$ Creditors Net1,28,168.00$ Notes 3 Cost of Sales Stock on 1st July 20169,120.00$ Add: Purchase31,155.00$ Less: Stock on 30th June 20179,750.00$ Notes 430,525.00$ Loan Repayment Business Loan8,500.00$ Less: Reduction of loan3,000.00$ Net Loan Re-Payment5,500.00$ Notes 5 Cost of Maintainance Van1,260.00$ Less: Business use 90%1,134.00$ SUV2,050.00$ Less: Business use 60%1,230.00$ Total cost of Maintainance2,364.00$ Notes 6 Mobile Bills704.00$ Less: 90% Business Use633.60$ Electricity Expenses1,470.00$ Less: 80% Business Use1,176.00$ Council Rates517.00$ Less: 60% Business Use310.20$ Notes 7 Repairs Expenses1,780.00$ Add: Shop painting150.00$ Add: Motor replacement expenses140.00$ Total Repairs2,070.00$
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7TAXATION LAW Depreciation ScheduleBase ValueTotal Days HeldDepreciation New Restaurant Freezer3,500.00$ Less: Trade In Value @ 5003,000.00$333.00$547.40$ Air Conditions installation1,200.00$272.00$178.85$ Total Depreciation726.25$ Working papers Notes 8 Conclusion: According tosection 90this can be concluded that the income of Olivia and Daniel together as a partnership showed as $2,373 for the year ended 30thJune 2017. Answer to questions 2: Issues: In this case study two thorough discussions are held in terms of fringe benefit first is payment of fees for child’s school of an employee and the housing fringe benefit provided to the employee. Rule: Fringe benefit can be defined as the payment that employer gives for sake of meeting employees several expenses, however these are not included in the salary or wages. The employee starts getting this fringe benefit when they join the company and each of the employees are eligible for availing these services. Starting from the director as well as shareholders get this fringe benefit and the company is liable for giving tax for this fringe benefit (Cooper 2016). Consequently, the situation may vary where the employer can reduce their amount of tax which they are paying for all the fringe benefits. In contrary with this the employers don’t always provide payments as fringe benefits, the employees sometimes are eligible for different facilities instead of payments. Now this kind of payment is considered as the employee contribution. These payments generally companies takes as they are providing the fringe benefit to their employees.
8TAXATION LAW According to the taxation commissioner of“FC of T v J & G Knowles (2000)”, the expense which is taken care by their company should be having materialistic relation with.“sub-paragraph 65A (ii) of the FBTAA 1986”states that the if the child of the employee is pursuing a full time education then the employer is liable to provide them the deductions in terms of the fringe benefit calculated (Braverman, Marsden and Sadiq 2015). The employee should be allowed this deduction as he is indulging his child into the full time education. Consequently, according to“section 25 of the FBTAA 1986”the housing fringe benefit is coming into the picture when the employee is using a part of the house or apartment owned by his company asa permanent residence. The housing fringe benefit can be a flat or part ofan apartment (Butler and Calcott 2018). The important aspect in this case is that if a company is providing housing fringe benefit then the employee and the employee shares the same rights to use the property. Additionally the rent value for these accommodations is calculated depending upon the market value of the housing (Barry and Caron 2015). Hence, the rental charges and rental properties are taxable for the employer in terms of the fringe benefits which the employer is providing to their employees. Application: John is a senior executive in a company whose employer is paying $15,000 for his kid’s schooling. According to“section 20 of FBTAA 1986”the concept of fringe benefit is highlighted in this case study as the employer is liable here to pay the school fees of John’s kid. In accordance to the discussion of fringe benefit this highlighted in this section that the payment of kid’s school fees is considered as the fringe benefit as John’s kid is pursuing a full time education. Hence he is having materialistic relation to his expense. The employer of
9TAXATION LAW John is liable in providing deductions in John materialist expense.According to“sub- paragraph 65A (ii) of the FBTAA 1986”the employer is gaining one advantage, he is allowed to reduce the deductions from the fringe benefit hence he has to pay less amount of fringe benefit tax (Soled and Thomas 2016). After discussing the scenario of education now if we discuss about the housing fringe benefit, the market value of the house which John got from his employer is $800 per week however, he is paying $100 per week. As John is using this part of house as permanent residence hence John is liable to pay $100 per week to his employer which is lesser than the market value of the property. As per“section 27 (1), FBTAA 1986”,John and employer share the same rights for the rented house (Clemens, Kahn and Meer 2018).This fringe benefit is considered as fringe rental allowance as John is using this property, he is liable for the rent and this has to be his expense. According to the above discussions, the chargeable fringe benefits are elaborated in the following tables: ParticularsAmount ($) Rent Per Week800.00$ Annualized Market Value41,600.00$ (800 x 52 weeks) Less: Employee’s Contribution (100 x 52 weeks)5,200.00$ Taxable Value36,400.00$ Computation of Taxable value of rent Conclusion: The conclusion can be drawn that the employer reduces the fringe benefit tax by reducing the value which is being paid by the employees. Hence the employer will be liable here for paying the tax for housing fringe benefit and the expenses that he is providing to his employees.
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10TAXATION LAW References: Barry, J.M. and Caron, P.L., 2015. Tax regulation, transportation innovation, and the sharing economy.U. Chi. L. Rev. Dialogue,82, p.69. Braverman,D.,Marsden,S.andSadiq,K.,2015.AssessingTaxpayerResponseto Legislative Changes: A Case Study of In-House Fringe Benefits Rules.J. Austl. Tax'n,17, p.1. Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use.International Tax and Public Finance,25(3), pp.654-672. Clemens, J., Kahn, L.B. and Meer, J., 2018.The Minimum Wage, Fringe Benefits, and Worker Welfare(No. w24635). National Bureau of Economic Research. Cooper, R., 2016. How to tax cellphones in the workplace: fringe benefits.Tax Breaks Newsletter,2016(369), pp.4-6. Kwall, J.L., 2019. The Federal Income Taxation of Corporations, Partnerships, Limited Liability Companies and Their Owners, Part One. Laing, S., 2015.Partnership Taxation 2015/16. Bloomsbury Publishing. Lind,S.A.ed.,2015.FundamentalsofPartnershipTaxation:CasesandMaterials. Foundation Press. Schwidetzky, W., 2017. Partnership Tax Allocations: The Basics.Colo. Law.,46, p.39. Soled, J.A. and Thomas, K.D., 2016. Revisiting the Taxation of Fringe Benefits.Wash. L. Rev.,91, p.761.
11TAXATION LAW Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland GroupPtyLtdvCommissionerofTaxation.AustralianResourcesandEnergyLaw Journal,34(1), p.17. Willis, A.B., 2014.Willis on Partnership Taxation. McGraw-Hill. Willis,A.B.,Pennell,J.S.,Postlewaite,P.F.andAlexander,J.H.,2014.Partnership taxation(pp. 131-16). Shepard's/McGraw-Hill.