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

This assignment discusses the net income of partnership and fringe benefit tax under Taxation Law. It includes rules, application, and computation of taxable income.

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

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to question 2:.................................................................................................................7
References:...............................................................................................................................10

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Answer to Question 1:
According to the “division 5 of the ITAA 1936” this case study is determining the net
income from a partnership.
Rule:
According to “section 91, ITAA 1936” a partnership should incur and record the
amount of profit gained by the objectives of partners and this determines the actual taxable
incomes for the partners. Similarly, “section 91, ITAA 1936” this section highlights as per
the rules of general law the partnership need not pay the tax separately (Dong 2018). In terms
of profit the partners needs to calculate their taxable income and they have pay the tax as the
profit earned. Hence the allowable deductions are omitted while calculating the taxable
income.
Under “section 6-5, ITAA 1997” the income gained from the profit of a business is
called as the ordinary income. According to the court under “Scott v CT (1935)” income is
not recognized as the word of art but this is known as proportion of entities used for meeting
the benefits of public along with highest profit throughout the business life cycle (Mares and
Queralt 2015). Hence, according to “section 6-5, ITAA 1997” the incomes and profit gained
from the business objectives are called as the ordinary income. Now the categorization of the
ordinary income must include the receipts forms that are used while gaining the business
objectives or profits.
According to the “section 8-1” the importance of paying tax over gaining profit from
the partnership is that the objective should not only satisfy the basic needs of public but also
this should be following the rules of “section 8-1”. The positive part of the “section 8-1 (1),
ITAA 1997” states that the taxpayer is allowed to get all the deduction if they have made the
expenses for the profit making with respect to their business objective and also this must be

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for gaining the taxable income throughout the business (Berliant and Gouveia 2018).
Consequently if the taxable income is following the negative limbs of the “section 8-1 (1),
ITAA 1997” if the expenses are considered as capital, domestic or private then the taxpayers
are not allowed for the deductions in their taxable incomes.
According to “section 25-10, ITAA 1997” a taxpayer is allowed to claim the
expenditure that happened for the repair in depreciating assets and also for the properties
which may lead to the increment of profit in partnership (Calabrese, Epple and Romano
2018). Under “section 25-10” any kind of maintenance work is known as repairs as painting
of business premises, repair of current business entities that may lead profit increment.
Consequently, the expense involved into this repairs and replacements includes deductions to
the taxable income for the taxpayers as they are incurring these changes for gaining more
taxable income. However, this is very important to be noted that the good or entities those
which are replaced should be same as the worn out entity but this should give more effective
results in terms of production or gaining profit. This aspect is included in order to highlight
the improvement of the business functionalities.
The taxpayer can be allowed instant $20,000 write- off if they have invested this
amount or less than it in their entity repairs and relevant expenses. Hence they will get a
deduction in their taxable income for these kinds of repairs.
Application:
Rendering to the “division 5, ITAA 1936” Daniel and Olivia ha incurred several
business activities those incurred taxable income along with different expenses into their
business (Auerbach and Hassett 2015). According to “section 91, ITAA 1936”, these
expenses along with the taxable income gained by their partnership is elaborated in this
section.

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Agreeing to “section 6-5, ITAA 1997” the business revenues gained from the direct
debtors payment and business sales are considered as ordinary income in case of Olivia and
Daniel’s partnership. Under “Scott v CT (1935)”, the partnership has gained this profit as the
ordinary income with respect to the ordinary income rules stated under “section 6-5, ITAA
1997” (Saez and Stantcheva 2018).
Apart from the gains and profits, the partnership also incurred car expenses, electricity
bills and insurance amounts are falling under the positive limbs of “section 8-1 (1), ITAA
1997”, hence the partners are allowed for the deductions for their tax payments. These
expenses happened while producing the taxable income hence they are considered as the
positive limbs.
Accordingly the partners have purchased some items for their private purpose. Hence
these expenses will not be allowing them to get deductions as per the negative limbs of
“section 8-1 (2)”. If the expenditures are capital, domestic or private in nature then the
partners are not allowed to get deductions.
Conferring to the “section 25-10, ITAA 1997” the partners are allowed deductions for
the repairs and changes made into their entities such as painting of shop and replacement of
motor for refrigerator (Akcigit et al. 2018). These changes are allowed the educations in
taxable income as these are increasing the business profit as well the replacement of the
motor is reducing the decoration of the production. Hence Daniel and Olivia are allowed for
these expenses.
Apart from this, the purchase of refrigerator is another allowable deduction as they
have less than $20,000 for purchasing it. Hence partners will get deduction from their tax
returns.
Net Income of Partnership:

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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$
Conclusion:

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Olivia and Daniel will be liable in the taxable part of their income and also the
deductions they gained from the tax is also elaborated in this section with examples under
“section 92, ITAA 1936”.
Answer to question 2:
Issues:
Is the payment made by employer in discharge of another person obligations to the
third party amounts to fringe benefit under “section 20, FBTAA 1986”? Is the employer
liable for FBT for granting the housing right to a person in relation to the year of tax under
“section 25, FBTAA 1986”?
Rule:
When the provider makes any kind of payment, in whole or in portions relating to the
obligation of another person or recipient for paying the amount to the third party in relation to
the expenses that is occurred by the recipient shall be taken be fringe benefit under “section
20, FBTAA 1986” (Black 2018). The expense payment fringe benefit only happens based on
the two conditions;
a. When the employer provides any reimbursement of the expenses that is occurred by
the employee. Or;
b. When the employer pay to the third party as the means of satisfying the expenses that
is occurred by the employee.
In both the above stated cases the expenses might be business expenses or the private
expenses. Whereas under “section 23, FBTAA 1986” the taxable value of the expense

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payment fringe benefit represents the amount the employer pays or reimburses to the
employee (Auerbach 2015).
“Sec 25, FBTAA 1986” describes that a housing fringe benefit takes place on the
condition where the employee is given with the right of using the unit of accommodation or
any lease or licence that grants the right which is existent at the time when the unit of
accommodation forms the normal place of residence for the employee (Mellon 2016). The
unit of accommodation generally comprises of the flat or home or accommodation in the
house. “Section 27, FBTAA 1986” deals with the market value of the housing fringe benefit.
According to “section 27, FBTAA 1986” the employer will be liable for fringe benefit tax
upon the value of housing fringe benefit which is measured by referring to the market value
of the right for occupying the unit of accommodation that is further reduced by the recipient
rent towards the rental property.
Application:
Understandably, it is found that John is working with the printing company under the
post of senior executive. The employer of John pays the school fees of his child at the private
school that costs $15,000. With reference to the “section 20, FBTAA 1986”, payment of
school fees by the employer here gives rise to the expense payment fringe benefit. This is
because the payment made by the employer is in relation to the obligation of the employee
for satisfying the third party expenses (Sheffrin 2018). The payment made by employer in
respect of John’s obligation is private expense. Within the provision of “section 23, FBTAA
1986” a fringe benefit tax will be imposed on the employer for the value of expense payment
fringe benefit provided to John in respect of the child school fees.
During the FBT year it is also noticed that the employer of John provides him with the
accommodation in Sydney apartment. However, the accommodation accompanied a

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condition where John was required to contribute a rent of $100 each week and the market
value of the apartment stood $800 each week. Providing an accommodation to John resulted
in housing fringe benefit under “section 25, FBTAA 1986”. Under “section 27, FBTAA
1986” a housing fringe benefit tax will be imposed on the employer upon the market value of
housing benefit after subtracting the recipients contribution of $100 each week as the rental
payment (Schön 2016).
Particulars Amount ($)
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 of John is liable for fringe benefit tax under “section 23, FBTAA
1986” for paying the school fees of his child. A housing fringe benefit tax under “section 27,
FBTAA 1986” will also be imposed on the employer of John for providing his employee
with an accommodation. The employer can however reduce the liability of fringe benefit tax
by claiming an income tax deduction for the cost of providing the benefit or on the amount of
FBT he pays.

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References:
Akcigit, U., Grigsby, J., Nicholas, T. and Stantcheva, S., 2018. DP13167 Taxation and
Innovation in the 20th Century.
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American
Economic Review, 105(5), pp.38-42.
Auerbach, A.J., 2015, January. Capital Income Taxation: Good Ideas and Other Ideas.
In Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the
National Tax Association (Vol. 108, pp. 1-5). National Tax Association.
Berliant, M. and Gouveia, M., 2018. On the political economy of income taxation.
Black, D., 2018. The incidence of income taxes. Routledge.
Calabrese, S., Epple, D. and Romano, R., 2018. Majority Choice of Taxation and
Redistribution in a Federation (No. w25099). National Bureau of Economic Research.
Dong, J., 2018, October. Research on the Fairness of Income Distribution from the
Perspective of Finance and Taxation Law. In 8th International Conference on Management
and Computer Science (ICMCS 2018). Atlantis Press.
Mares, I. and Queralt, D., 2015. The non-democratic origins of income
taxation. Comparative Political Studies, 48(14), pp.1974-2009.
Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.
Saez, E. and Stantcheva, S., 2018. A simpler theory of optimal capital taxation. Journal of
Public Economics, 162, pp.120-142.
Schön, W., 2016. Destination-Based Income Taxation and WTO Law: A Note.

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Sheffrin, S.M., 2018. The Domain of Desert Principles for Taxation. Erasmus Journal for
Philosophy and Economics, 11(2), pp.220-244.