Taxation Law: Calculation of Taxable Income for Partnership and Excel Mining Ltd

This article covers the calculation of taxable income for partnership and Excel Mining Ltd, including treatment of expenses, provision for future liabilities, and donation to local community. It also covers the concept of partnership and gross receipts from trading.

Taxation 1
Taxations Law

Taxation 2
Question 1:
Partnership is the concept were two of more parties joins together to commence business or a
specific activity. In this case the profits are shared equally by both the partners. Usually it
depends upon the mutual understanding and written partnership deed to share the profits among
the partners (Woellner, et al., 2018). In the absence of any information it is assumed that the
profits are to be shared equally whether the capital introduced by each of the partners are not
equal.
Gross receipts from trading: Under section 8-1 ITAA97 of Income Tax Act, 1994, this is the
proceeds of the sales that take place during the year so it will be the main income that happens
during the whole year it can also be termed as gross income (Australian Government, 2018). All
the expenses and losses are deducted from this head for the calculation of the net income of the
firm.
Payments: Under section 8-1 ITAA97, all the payments that are made for the various
transactions are deducted from the incomes for the calculation of the net income so the various
heads such as purchase of the trading stock, salaries of each of the partners, interest on cash
advances from peter are to be deducted from the gross receipts (Woellner, et al., 2018). The
other deductions include salaries to the employees and rent paid and legal expenses. The
amounts related to the partners and their salaries are deducted as they are treated as separate
entity as per the company law (ATO, 2018). Australian taxation office also considers a person as
individual and the incomes are taxable under various heads such as salaries, income from
business and profession, capital gains, other sources and professional income.

Taxation 3
The taxable income refers to the income earned by the firm on which there is a need to calculate
the tax that requires to be paid to the government. The main reason behind it is that taxes are
considered as the revenues for the government.
Calculation of the taxable income of Peter
In this problem first of all it is needed to identify the total income of the partnership firm.
Particulars Amount
($)
Particulars Amount ($)
Trading stock at beginning 1July 10000 Sales 300000
Purchases 100000 closing stock 30 June 20000
Gross profit (Balancing figure) 210000
Grand total 320000 Grand total 320000
From the above calculation it is identified that the total income of the partnership was $300000 and the
remaining stock that is to be carried forward for the next year will be 20000. The gross profit for the
partnership firm is $210000. This profit is also termed as gross income of the company. Thereafter, the
various expenses related to the company are to be deducted from this income for the purpose of
calculating net income for the purpose of tax (ATO, 2018). The various expenses incurred and paid by
the company/partnership firm are as below:
Particulars Amount in ($)
Gross profit 210000
Less: Interest in cash advances (2000)
Less: Salaries for employees and rent (60000)

Taxation 4
Less: Legal expenses for recovering bad debts (2000)
Net profit 146000
The amount will be available for being distributed among the partners will be 86000 [($146000 -
$60000 (salaries of both the partners 30000each)].
As per the available information peter and Jill shares the profits equally. So, the calculation of
the taxable income will be as below:
Sharing of profits equally = 86000/2 = $43000
Calculation of the taxable income of Peter:
Particulars Amount (in $)
Calculation of the total income of Peter
Share of partnership (net income share) 43000
Salary 30000
Interest on cash advances 2000
Winnings from gambling 2000
Net salary as a part time instructor 5000
Less: Deductions
Subscription to professional journals
(500)
Total taxable income 81500

Taxation 5
Question 2
Excel Mining Ltd
Excel Mining Ltd is a company that is engaged in the activity of the mining of the coal. Besides
this, it is founded in the year 1998 and operates as a subsidiary of Alliance Coal LLC. This
company operates in the industry named oil, gas and consumable fuels. For the calculation of the
tax to be paid to the government on the income earned by the company, there is a need to
calculate the taxable income for which there is a need to carry out the treatment of the different
components related to different economic transactions carried out by the company as follows.
1. Treatment of expenses of car purchased for tax purpose:
Law/Provision:
According to Australian Taxation Office, if a company purchased a car and uses it in carrying
out employment duties, the expenses of car can be claimed by the owner as deduction while
calculating the taxable income. It also includes a car purchased on hire or lease. However, if the
vehicle is used for the personal use, the expenses incurred on car cannot be claimed for
deduction in income tax (Australian Taxation Office, 2018). Also, if a car is being used by the
company for both personal as well as employment purposes, the expenses can be claimed as
deduction only to the extent of work related use of the car.
In addition to this, as per section 53 of Fringe Benefits Tax Assessment Act 1986, there are 2
ways for estimating the assessable value of car fringe benefits. The formulae specified for this by
the statue and the operating cost method are:

Taxation 6
 The statutory method is used when the assessable value of a car fringe benefit is
determined through total kilometres. At the point, it may produce an inducement for the
employees to travel more kilometres in order to minimize the overall taxable value of
their car.
 The operating cost method states that the actual operating costs of a car, like its expenses,
registration, depreciation, and insurance should be divided between employment purpose
and private purpose. The private use portion of the car's operating costs refers the value
of the car fringe benefit. On the other hand, the operating cost method enables a more
reliable assessment than the statutory formula. Also, it enforces a strict conformity
burden for the individuals with low levels of employment use.
The Australian Taxation Office also states that if that car is sold, transferred or damaged wholly,
the amount received on sale or from insurance (if any) would be deducted from the written down
value of the car and the income tax would be imposed on the remaining amount.
Case Analysis and Calculations:
In the presented case, Excel Mining Ltd has purchased a Mercedes Benz for $128000 on10th Oct
2017. The car is used for employment purpose up to 72% and 28% for private purpose. It means
the company would be allowed deductions on the car expenses only to the extent the car used for
employment purpose.
Thus, the allowed deduction amount = $128000*72% = $92160
The life cycle of car is 6 years. However, the car was destroyed on 18 May, 2018 (within 7
months). So, no depreciation would be applicable.

Taxation 7
The insurance claim received by the company is $87000
Thus, the taxable amount would be = $92160- $87000
= $5160
1. Treatment of hiring additional fire equipment for tax purpose:
Law/Provision:
According to the guidelines of Australia Taxation Office, capital assets are those that have long
life (generally more than a year) and are useful to business either in enlarging or improving the
structure, such as machinery, tools and fixtures, building or land. The expenses incurred on these
capital assets are called capital expenditure (Australian Taxation Office, 2018). If a company
makes any expenditure on hiring any capital asset, it can claim this expenditure as deduction
while estimating the annual taxable income in the year of purchase only.
Otherwise, the company has an option to claim the deduction for the decrease in asset value, i.e.
depreciation on the asset every year over the expected life of that asset.
Case Analysis:
Excel Mining Ltd spends $78,562 on hiring additional fire equipment to fight a fire at the mine
site. Since this expenditure is made in order to safeguard the operations and mine site from any
threat or hazard, it would be treated as a capital expenditure for the company for the tax purpose.
As a result, the expense of $78,562 on additional fire equipment would be allowed 100%
deduction to the company.
3. Treatment of expenses on legal fees and advertising by company for tax purpose:

Taxation 8
Law/Provision:
Under the section 113 of the Tax Administration Act 1994 of Australia, legal costs and
advertisement expenses are those which are incurred by an entity with respect to the business
purposes. These expenses must be treated as either revenue or capital expenditure, depending on
the amount. The general principle laid under section 113(1) is that the initial incurring of such
expenses would be treated as capital, and therefore the costs associated with that cannot be
claimed as deduction unless there is a any transfer or sale of the asset in which situation, the
amount would form part of the computations for capital gains. The Act also states that an entity
can claim the deduction on such expenses it incurs in running the business in order to minimize
the taxable income. As a general rule, the entity can also claim the everyday business operating
costs in 100%, in the year of incurring. However, the costs of capital assets like land, machinery
and tools can be claimed for deduction over a number of years.
In addition to this, According to the guidelines of Australia Taxation Office, operating expenses
refer to those which are spent by a company in its day to day functioning related to business. For
example, renting office site, office stationary, wages and salaries of employees. These costs are
also known as revenue or working expenditures (Australian Taxation Office, 2018). A company
can avail 100% deduction on such expenditure made in the same year when it was incurred. The
common examples of such expenses in business include:
 advertising and funding costs
 insurance premiums, together with disability or accident or fire, professional indemnity,
burglary, public risk, loss of profits insurance, motor vehicle or workers’ reimbursement

Taxation 9
 bad debts
 interest on money rented for
o employer super contributions, income tax debts, or delayed imbursement or
accumulation of tax
o producing measurable income or purchasing income-generating assets
 lease expenses on luxury car
 bank bills and charges
 stationery expenses
Case Analysis:
In the presented case, $583,412 was spent by Excel Mining Ltd on legal fees and advertising to
represent the company and its directors at a Government enquiry into coal mining. Since this
expense was incurred by the company for the purpose of carrying out usual business activities,
according to general principle under Australia’s tax laws for businesses this expense must be
allowed as 100% deduction to the company while computing its taxable income (Australian
Taxation Office, 2018).
4. Treatment of provision of future liabilities made by company for tax purpose:
Law/Provision:

Taxation 10
Accounting Standard 137 of The Australian Accounting Standards Board, the Provisions,
Contingent Liabilities and Contingent Assets apply to both entities and non-entities. Section 334
of the Australian Corporations Act 2001 defines provisions as those liabilities that have uncertain
amount or timing. In Australia, the term ‘provision’ is applied in context of those items whose
payable amounts or time period is not known. Such items include tearing of assets, depreciation,
and uncertain debts. According to general principle under Australia’s tax laws, the expenses
estimated by a company to be incurred in future are need to be debited in the statement of profit
and loss for the purpose of accounting, in the form of provision. However, this provision for
future expense are permitted to be deducted for the taxation purpose in the succeeding year
(Australian Taxation Office, 2018).
For example, expenditures made by business such as duties, taxes, cess, fee must be debited as
per accrual basis of accounting but they are allowable on payment basis only for calculating the
taxable income, when the liability actually arises.
Case Analysis:
In the presented case, the Excel Mining Ltd has also made a provision for $568,438 in the
company accounts for the future liabilities from claims by the townspeople against illnesses that
has the probability to occur from the effects of the coal mine fire. Since the loss has not actually
occurred, the amount must be debited to the statement of profit and loss account by the company.
However, the company can claim 100% deduction on it only in the year when it would actually
occur.
5. Treatment of donation to local community made by company for tax purpose:

Taxation 11
Law/Provision:
Section 6(1)(b) of Charities Act of Australia states that when an individual or an entity gives a
gift or donates to a local community, the amount can be claimed for a tax deduction while
computing the total chargeable amount under the provisions of The Taxation Administration Act
1953 of Australia. However, the amount that can be allowed largely depends on the kind of gift
or donation made by the entity. Apart from this, According to the guidelines issued by the
Australian Taxation Office, when a company donates money to an official charity (registered
under "ATO"), the entire amount can be claimed for 100% deduction while computing the
taxable income for the year. If an organization is registered by the ATO as a “Deductible Gift
Recipient institution”, then such donations made to them must be tax deductible(Australian
Taxation Office, 2018). On the other hand, if such donation is made in kind or other than cash,
the company cannot claim for 100% deduction on the amount. Moreover, if the institution to
which the donation is made, is not registered under ATO, no deduction must be allowed to the
donor.
In addition to this, given that the amount of donation is $2 or more, and the company makes it to
a deductible gift recipient charity, the company can claim the 100% amount of money donated
on the your tax return. As per the rule of Section D9 of Australian Tax Laws on your tax return
(Gifts and Donations) deals particularly with charitable donations, guiding donors on how to
record their donations in tax return.
Case Analysis:

Taxation 12
In the presented case, the Excel Mining Limited donated $55,000 to the local community SES
Fire services. A fire and emergency services fund is a public fund established by Australian
government and maintained by Australian government agency to provide volunteer based
emergency services (Australian Taxation Office, 2018). Since SES is registered under ATO, the
amount donated to it is allowed as 100% deduction to the company.

Taxation 13
References
ATO, (2018) Individuals: 24 Other income 2018. [Online]. Available at:
https://www.ato.gov.au/Individuals/Tax-return/2018/Supplementary-tax-return/Income-
questions-13-24/24-Other-income-2018/ (Accessed: 24 September 2018).
ATO, (2018) Partnerships. [Online]. Available at:
https://www.ato.gov.au/tax-professionals/prepare-and-lodge/tax-agent-lodgment-program/tax-
returns-by-client-type/partnerships/ (Accessed: 24 September 2018).
Australian Government, (2018) Partnerships. [Online]. Available at:
https://www.ato.gov.au/business/non-commercial-losses/partnerships/ (Accessed: 24 September
2018).
Australian Taxation Office (2018) Tax Deductions. Australian Government, [Online]. Available
at https://www.cancercouncil.com.au/ways-to-donate/tax-deductible-donations/ (Accessed: 24th
September, 2018)
Australian Taxation Office (2018) Tax Deductions. Australian Government, [Online]. Available
at https:/ https://www.ato.gov.au/business/income-and-deductions-for-business/reconciliation-
activities/depreciating-assets-and-capital-expenses// (Accessed: 24th September, 2018)
Australian Taxation Office (2018) Tax Deductions. Australian Government, [Online]. Available
at https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-
and-travel-expenses/car-expenses/ (Accessed: 24th September, 2018)

Taxation 14
Woellner, R. Barkoczy, S. Murphy, S. Pinto, D. and Evans, C. (2018) Australian Taxation Law
2018. Australia: Oxford University Press.