Taxation Law: Determination of Net Income of Partnership and Fringe Benefit Tax

This document discusses the determination of net income of partnership under division 5 of the ITAA 1936 and the accountability of employers for fringe benefit tax under section 27(a) and section 23 of FBTAA 1986.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................8
References:...............................................................................................................................11

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Answer to question 1:
Issues:
The issue is concerned with the determination of the net income of the partnership
under “division 5 of the ITAA 1936”.
Rule:
According to the “section 91, ITAA 1936” the partnership should lodge the income
tax return to reflect the amount of profit to be distributed among the partners. Consequently,
“division 5, ITAA 1936” explains that partnership under the general law is not the separate
legal entity and not required to pay tax (Becker, Reimer and Rust 2015). It is the partners
under “section 92, ITAA 1936” that pay tax in respect of the profits distributed to them. After
the allowable deductions “section 90, ITAA 1936” states that net income of partnership
should be determined.
Usually most of the income that is received by the taxpayer is termed as ordinary
income under “section 6-5, ITAA 1997”. The judicial concept of income in “Scott v CT
(1935)” denotes that income is not the word of art and requires implementation of principles
to determine the proportion of receipts should be held as income based on the ordinary
concepts and use (Tyson and Silverman 2013). Thus, gains originating from the business
activities are treated as income under “section 6-5, ITAA 1997”. To characterise the receipts
as ordinary income from business it is necessary that those receipts forms the part of normal
proceeds of the business.
The potentiality of applying “section 8-1” can be made to any person. Under the
positive limbs of “section 8-1 (1), ITAA 1997” a taxpayer is permitted to obtain deduction
from their taxable earnings for any expense or loss till the extent that it is occurred in

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producing taxable income or incurred in carrying on the business with the intent of gaining
taxable income (Rafool 2014). In “FCT v Amalgamated Zinc Ltd (1935)” gaining or
producing the taxable income should be interpreted as in the course of producing the taxable
income. Conversely, the negative limbs of general deduction rule states that a deduction for
outgoings under the general rule is denied if the expense meets any of the negative limbs
under “section 8-1 (2)”. This includes the expense of capital, domestic or private in nature.
Under “section 25-10, ITAA 1997” a taxpayer is permitted to claim for deduction
relating to expenses occurred on repairs to depreciating assets or properties that is used for
making income (Kaplan and Price 2014). Maintenance work are termed as repairs under
“section 25-10”. For instance, painting of the business property for fixing the current
deterioration and prohibiting any additional deterioration are termed as repair. The cost
incurred on replacing the items that are permanent fixtures installed on the business premises
for generating income is deductible repairs under the section 25-10. It must be noted that
deduction for replacement is only allowed of the worn out unit with the new unit of identical
design which only restores the effective functions and does results in any improvement.
The $20,000 instant write off allows the taxpayer to write-off the cost of assets that is
below the threshold limit of $20,000 up to the business portion in their tax return for the
relevant year of income (Mishra 2014).
Application:
The business activities carried on by Daniel and Olivia constitutes partnership under
“division 5, ITAA 1936”. Based on “section 91, ITAA 1936” the partnership carried on by
Daniel and Olivia should lodge the income tax return to reflect the amount of profit to be
distributed among the partners.

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The business transactions includes the business sales and debtors cash payments. The
revenue derived from business can be termed as ordinary income under “section 6-5, ITAA
1997”. Citing the event of “Scott v CT (1935)” the gains originating from the business
activities carried on by Daniel and Olivia are treated as income under “section 6-5, ITAA
1997” (Bohanon, Horowitz and McClure 2014). The cash payment and debtor’s payment
should be characterised as ordinary income from business since it forms the part of normal
proceeds of the business.
The partnership of Daniel and Olivia also reported car expenses, electricity bill,
council rates insurance etc. under the positive limbs of “section 8-1 (1), ITAA 1997” the
partners can obtained deduction. Citing “FCT v Amalgamated Zinc Ltd (1935)” the
expenses were occurred by partners in the course of producing the taxable business income.
Daniel and Olivia reported drawings in the form of cash and also drawings of items
for their private use. The partnership will be denied deduction for drawings under the general
rule because the expense meets any of the negative limbs under “section 8-1 (2)” and are
capital or private in nature.
The painting of shop property during partnership business amounts to repairs under
“section 25-10, ITAA 1997” because it involved fixing the current deterioration and
prohibiting any additional deterioration. Whereas the cost incurred on replacing the
refrigerator motor is deductible repairs under the section 25-10 because replacement involved
restoring the effective functions and does results in any improvement.
The purchase of new restaurant freezer is eligible for instant write-off because the
cost of assets is below the threshold limit of $20,000 and can be claimed for deduction from
the tax return.

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Net Income of Partnership:
Particulars Amount ($)
Receipts
Business sales 1,50,170.00$
Debtors Cash payments (Notes 1) 33,715.00$
Total Receipts 1,83,885.00$
Expenses Eligble for Deductions
Electricity Bill 1,176.00$
Council rates (Notes 6) 310.20$
Business Insurance 1,250.00$
Mobile Bills (Notes 6) 633.60$
Union Bills 284.00$
Account Charges 595.00$
Repair Expenses (Notes 7) 1,780.00$
Loan Expenses (Notes 4) 5,500.00$
Purchase of Fixed Asset 3,500.00$
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-Condition 1,200.00$
Depreciation Expenses(Notes 8) 726.20$
New Restaurant Freezer 3,500.00$
Total Expenses Eligible for Deductions 1,81,512.00$
Net Income From Partnership 2,373.00$
Computation of Partnership Net Income
For the year ended 30th June 2017
Working papers:
Notes 1
Debtors at 1st July 2016 3,925.00$
Debtors Cash Payments 32,800.00$
Debtors at 30th June 2017 3,010.00$
Debtors Net 33,715.00$

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Notes 2
Creditors at 1st July 2016 6,500.00$
Add: Repayment to Creditors 1,28,678.00$
Less: Creditors at 30 June 2017 7,010.00$
Creditors Net 1,28,168.00$
Notes 3
Cost of Sales
Stock on 1st July 2016 9,120.00$
Add: Purchase 31,155.00$
Less: Stock on 30th June 2017 9,750.00$
Notes 4 30,525.00$
Loan Repayment
Business Loan 8,500.00$
Less: Reduction of loan 3,000.00$
Net Loan Re-Payment 5,500.00$
Notes 5
Cost of Maintainance
Van 1,260.00$
Less: Business use 90% 1,134.00$
SUV 2,050.00$
Less: Business use 60% 1,230.00$
Total cost of Maintainance 2,364.00$
Notes 6
Mobile Bills 704.00$
Less: 90%Business Use 633.60$
Electricity Expenses 1,470.00$
Less: 80%Business Use 1,176.00$
Council Rates 517.00$
Less: 60%Business Use 310.20$
Notes 7
Repairs Expenses 1,780.00$
Add: Shop painting 150.00$
Add: Motor replacement expenses 140.00$
Total Repairs 2,070.00$

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Depreciation Schedule Base Value Total Days Held Depreciation
New Restaurant Freezer 3,500.00$
Less: Trade In Value @ 500 3,000.00$ 333.00$ 547.40$
Air Conditions installation 1,200.00$ 272.00$ 178.85$
Total Depreciation 726.25$
Working papers
Notes 8
Conclusion:
The partners would be conclusively liable for taxation of net income from the
partnership following the deduction of expenses under “section 92, ITAA 1936”.

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Answer to question 2:
Issues:
Whether the employers are held accountable for the fringe benefit tax whey provide
the employee with the right of housing fringe benefit under the provision of “section 27 (a),
FBTAA 1986”? Whether the employer are accountable under the “section 23, FBTAA
1986” for the expense payment benefit provided to the third party on behalf of employee?
Rule:
As per the “section 20, FBTAA 1986” an expense payment benefit for an employer
arises in two ways particularly;
a. When the employer reimburses the employee for any kind of expenditure that is
occurred by them (Braithwaite and Reinhart 2019).
b. When the employer pays the third party for the satisfaction of the expenditure that is
occurred by the employee.
In both of the above stated circumstances the expenditure can be either the private
expense or the business expenditure or may possess the combination of both. As a general
rule, when the expenditure that has been occurred by the employee and the expenditure has
been subsequently reimbursed to the employee or paid directly to the third party then an
expense payment fringe benefit happens (Woellner et al. 2016). The taxable value of the
expense payment fringe benefit under “section 23, FBTAA 1986” represents the amount that
employer pays or reimburses to employee.
Denoting “section 23, FBTAA 1986” a housing fringe benefit happens when the
employee is given by the employer with the right of using a unit of accommodation as the
employee’s usual place of residence (Middleton 2015). “Section 27 (a) of the FBTAA 1986”

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deals with the market value of housing fringe benefit. As per “section 27 (a), FBTAA 1986”
the taxable value of the housing fringe benefit is measured by referring to the market value of
the right for occupying the housing right further reduced by any recipient’s rents effecting the
rental property.
Applications:
Indications from the case study suggest that John was employed with the printing
company and worked as the senior executive. The employer as his salary package provided
John with the school fees of his child that included the cost of $15,000. Denoting the
explanation of “section 20, FBTAA 1986” an expense payment benefit for the employer has
arisen in this case. This is because the employer here has paid the private school fees
occurred by John to the third party for the satisfaction of the expenditure that is occurred by
the employee (Chardon 2014). The expenses incurred here can be termed as private expense.
The employer will be considered taxable under “section 23, FBTAA 1986” for the value of
fringe benefit that is paid to third party for meeting the expense.
In the following part of the case it is noticed that the employer provided John with the
flat in Sydney. As an agreement John has to pay $100 as rent per week for the apartment
while the Sydney apartment had the market value of $800 per week. Denoting “section 23,
FBTAA 1986” a housing fringe benefit has occurred for the employer because John was
provided with the right of using a unit of accommodation as the his usual place of residence.
Under “section 27 (a) of the FBTAA 1986” the employer will be measured for
taxation purpose under the legislation of Fringe Benefit Act for the market value of the right
for occupying the housing right further reduced by John’s contributions of $100 as rent in
effect of the Sydney apartment.

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Particulars Amount ($)
Rent Per Week 800.00$
Annualized Market Value 41,600.00$
(800 x 52 weeks)
Less: Employee’s Contribution
(100 x 52 weeks) 5,200.00$
Taxable Value 36,400.00$
Computation of Taxable value of rent
Conclusion:
The employer here in case of John will be considered liable for taxation under
“section 23, of the FBTAA 1986” for the expense payment fringe benefit made during the
FBT year for John’s child school fees. The employer would also be liable for fringe benefit
tax under “section 27(a), FBTAA 1986” for providing the housing right to John less the
contribution made by him. To reduce the tax liability the employer can claim an income tax
deduction for the value of fringe benefit provided during the FBT year.

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References:
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International.
Bohanon, C.E., Horowitz, J.B. and McClure, J.E., 2014. Saying too little, too late: Public
finance textbooks and the excess burdens of taxation. Econ Journal Watch, 11(3), p.277.
Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?.
Chardon, T., 2014. Taxation and superannuation literacy in Australia: What do people know
(or think they know)?. JASSA, (1), p.42.
Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation:
Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, p.281.
Middleton, T., 2015. Banning, disqualification and licensing powers: ACCC, APRA, ASIC
and the ATO–regulatory overlap, penalty privilege and law reform. Company and Securities
Law Journal, 33, pp.555-580.
Mishra, A.V., 2014. Australia's home bias and cross border taxation. Global Finance
Journal, 25(2), pp.108-123.
Rafool, M., 2014, May. A Guide To Property Taxes: An Overview. Denver: National
Conference of State Legislatures.
Tyson, E. and Silverman, D.J., 2013. Taxes for dummies: 2013 edition. Wiley Publishing,
Incorporated.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.

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