Taxation of Partnership Income and Fringe Benefits Tax - Desklib

This document explains the taxation of partnership income and fringe benefits tax in Australia. It covers the calculation of partnership income, exempt income, non-exempt income, and non-assessable income. It also discusses the consequences of FBT that the employer must be aware of while entering into salary sacrifice arrangements and providing employees with non-cash benefits.

Taxation law

Table of Contents
Question 1........................................................................................................................................4
Question 2......................................................................................................................................11
References......................................................................................................................................13

Question 1
Taxation of partnership income
Under the Div 5 of Pt III ITAA 36 including s90 to 94, the standard partnership taxation is
included; often these provisions are applicable of each and every partnership excluding corporate
limited partnership. Further, the Div 5 implements an approach named ‘look through’ to tax
purpose for partnership. The aim of the division is to impose a tax on the partners instead of the
partnership which is subjected to be the individual taxpayer. Under s90 ITAA 36, a partnership is
required to do the calculation of partnership’s net income, net loss, exempt income, non-exempt
income and non-assessable income (Alstadsæter and Jacob, 2016). Moreover, the partnership
income’s return is considered as n information return; it offers a base for identifying the
respective shares of the partner by considering the net income or loss of partnership. Due to the
aspect, that tax is not paid by the partnership, and it is not responsible for PAYG instalments.
However, it is required to gauge its instalment income on every quarter and state that the amount
deemed to the partner who is liable to pay for PAYG instalments are conducted on the basis of
their partnership share on income per quarter, and it can be complex if the large-scale partnership
reduces in size.
Partners are required to account for their separate interest for every amount according to s.92
ITAA 36. There is the presence of central charging provision, wherein the s.92 (1) comprise the
partner’s assessable income of their individual interest in the net income. In case, there is a loss
in partnership, the s.92 (2) enables a partner a reduction for their separate interest in the loss. In a
situation, where the partner is a non-resident, it is only included by s.92 (1) in the assessable
income higher amount of the interest of a partner in the partnership’s net income as is
contributed to Australian sources. It is only allowed by s.92 (2) a deduction to non-resident
partner for so much of the loss of partnership as is contributed to Australian sources (Griffiths,
2016).
Partnership’s exempt income, non-exempt income and non-assessable income
Exempt income of the partnership is computed as considering that partnership was a resident
taxpayer.

Calculation of the non-assessable income and non-exempt income of the partnership is done as if
the partnership were a taxpayer being a resident.
There is no consideration of superannuation contribution and losses of tax while calculating net
income or partnership loss.
Calculations are done on the basis of partnership activities, excluding partners
When money is borrowed by the partnership to repay the capital accounts of partners, then the
interest held on the same money is deductible while computing, under the new borrowing,
replace funding that was employed by the partnership while generating assessable income
(Jorgensen, 2017).
Allocating of profit on the interest of partner not on a distribution basis
 Allocation is done on the basis of the interest of partner, not on the profit distribution of
partners
 Real withdrawals of the profits of partnership by separate partners are not relevant for the
purpose of the tax.
 when the partner might be payable to amounts while the partnership gains recoverable
fees at the time of income year, assessable income is not derived by the partner as per s92
till the time the net income of the partnership is determined.
Statement presenting the income for the partnership for the year ended on 30th June 2017
Particular Amount (in $)
Income
Business Sales (Cash and Credit) (Note 1) 182055.00
Closing Stock 9750.00
Total 191805.00
Expenses
Car & Van Maintenance Expenses (Note 2) 2364.00
Electricity expenses (Note 3) 1176.00
Council rates (Note 3) 310.20
Business insurance Expenses 1250.00

Mobile bill Expenses (Note 3) 633.60
Union fees 284.00
Account charges 595.00
Repair Expenses (Note 4) 1490.00
Interest on loan (Note 5) 5500.00
Purchases (Cash and Credit) (Note 6) 160343.00
Depreciation (Note 7) 4836.52
Opening Stock 9120.00
Total Expenses 187902.32
Net Business Income 3902.68
Working Notes
Note 1
Sales
Particular Amount
Opening Balance of debtors (A) 3925
Cash Received for sales (B) 32800
Closing Balance of debtors (C) 3010
Credit Sales (A+B-C) 31885
Note 2
Car and Van Maintenance Expenses
Particular Amount
Cost of maintaining van 1260
% used in business 1134
The amount allowed as a deduction 1134
The cost to maintain SUV 2050
60% used in business 1230
The amount allowed as a deduction 1230
Total deductible maintenance expenses 2364

Note 3
Expenses are deductible only to the extent same are applied for business purpose, thus below
specified expense are deducted to the extent of they are applied in business.
Electricity Expenses
90% amount applied toward business, i.e. 1176 (90% of 1470) is treated as revenue expenditure.
Council Rate
90% of council rate is applied toward business, i.e. 310.2 has been debited to revenue and
expenditure account.
Mobile Expenses
90% of mobile expenditure is related to business, i.e. 633.3 (704*.9) has been included in the
business organization of the partnership firm.
Note 4
Repair Expenses
Air Condition Installation $1200
Shop Painting $150
Refrigerator Motor Replacement Expenses $140
Total $ 1490
In the present case, as no AC has been purchased, the installation expenditure relating to the
same has been treated as revenue expenditure. As if the asset would have been purchased, it
would have been capitalized in 3.0.3655the acquisition cost of the asset.
Note 5
Interest on Loan

Total payments made to bank $8500
Principal repaid $3000
Amount of Interest (Total payment- Principal) $5500
Note 6
Credit Sales
Particular Amount
Opening Balance of creditors (A) 6500
Cash paid for purchase (B) 128678
Closing Balance of creditors (C) 7010
Credit Sales (A+B-C) 129188
Note 7
Depreciation
Asset Effective
Life
% (depreciation
rate) at
diminishing value
Adjusted
Value
Depreciatio
n
New Freezer* 10 20 3500 700
freezers 20 10 1480 148
Refrigeration asset 10 20 3580 716
Shop fitting structure 25 8 2965 237.2
Kitchen Electrical
appliances (Electric )
25 8 754 60.32
Car 8 0.25 1550 387.5
SUV 8 0.25 10350 2587.5
Total Depreciation 4836.52
*As new asset has been purchased trade-off of $500 has not been considered.
Question 2
Fringe benefits tax is stated as a tax that is paid by an employed on some benefits they offer to
their employees, inclusive of their family of employees and other related associated (Australian

Taxation Office, 2019). In the case wherein the employee makes reimbursement to the employer
for the paid FBT, then the reimbursement is comprised in their assessable income. On the other
hand, it is not considered as an entitled deduction for the employee.
The present case is entitled to the salary sacrifice arrangement as the cited case fulfils the
requirement of the arrangement:
Fringe benefits: Fringe benefits offered in the salary sacrifice arrangements are generally the
expense benefits for example; school fees, as provided in the concerned case wherein the
employees pay the fees of John’s child as the part of his remuneration package (Cornish and
Lock, 2015). Thus, as the above-specified provision of Australian Taxation Office comprises
school fees, payment received by John relating to same will be taxed as per FBT provision.
Exempt benefits: A particular provision of the fringe benefit legislation shows that some benefits
are exempted from the FBT such as property or residual related benefits taking place from the
provisions of some work associated items are generally provided in salary sacrifice
arrangements. The salary sacrifice arrangements are not covered under gross payments or
income (Cortis and Eastman, 2015). Since, John is provided with accommodation benefits
wherein he has to pay $100 as rent for the property per week, which market value is $800 per
week.
The consequences of the FBT that the employer of John must be aware of are that the employer
might have FBT obligations while entering into salary sacrifice arrangement and providing
employees with non-cash benefits. The employer is also entitled to the decreased salary amount
provided in the salary sacrifice arrangement in the assessable income of the employee. In
addition, the employer will be able to make a claim for an input tax credit for the GST payable in
offering the provided benefit in case the employee is registered under GST. Furthermore, the
taxable value of the offered benefit might be decreased by the employee contribution payment.
In this way, the amount that is sacrifice s not countable under an employee contribution while
identifying the taxable value of the fringe benefit received by the employee (Raftery, 2017). It is
to be noted that the employee contributions are required to be the payable exterior of the after-tax
income of the employee. There is entitlement towards PAYG withholdings as well as payment
summaries, the PAYG tax must be paid on the basis of the gross salaries and wages and must not

be inclusive of salary sacrificed amounts. In addition, the FBT is imposed taxable value of the
benefits offered at the FBT year (Australian Taxation Office, 2019). As a general rule, the
incurred costs in offering the fringe benefit and the FBT amount payable is deductible to the
employer. The consequences are related with the income and GST tax, for which the employees
must be aware of and has been pay for the salary sacrifice arrangements.
FBT consequences relating to John package are as follows:
The school fees amounting to $15000 fulfils the requirement of FBT results as a benefit provided
to the employee by the employer. Thus the whole amount is taxable.
In the case of accommodation provided in Sydney, the taxable value is the market rental value
regarding the right of using accommodation. Further the same is reduced by the amount paid by
the employee. Thus in present case taxable value is different between the market value of rent
and actual value of rent will be
Market Value of Rent for the year – Amount paid by the employee
= (800*52) – (100*52)
= 41600 -5200
= $36400
Statement presenting FBT for John for the year
Particular Amount in $
Gross Taxable Fringe benefit on school fees 15000
Gross Taxable Fringe benefit on accommodation 36400
Total Fringe Benefit 51400
It has been assumed that Mr John belongs to Type -2 gross-up rate as he is not entitled to claim
GST credit:
Fringe Benefits Tax = Taxable amount * FBT rate of year * Type 2 gross-up rate
=$51400*47%*1.8868

Grossed up taxable value of FBT for John is = $45581.31

References
Books and Journals
Alstadsæter, A. & Jacob, M., (2016). Dividend taxes and income shifting. The Scandinavian
Journal of Economics, 118(4), pp.693-717.
Cornish, A. &Lock, H., (2015). Transport, accommodation and meals: FBT tricks and traps. Tax
Specialist, 19(2), p.58.
Cortis, N. &Eastman, C., (2015). Salary is sacrificing in Australia: are patterns of uptake and
benefit different in the not‐for‐profit sector?. Asia Pacific Journal of Human
Resources, 53(3), pp.311-330.
Griffiths, J.J., (2016). Recognition of Foreign Administrative Acts in Australia. In Recognition
of Foreign Administrative Acts(pp. 51-89). Springer, Cham.
Jorgensen, R., (2017).Division 7A structuring: The contortionist revisited. Tax Specialist, 20(3),
p.118.
Raftery, A., (2017).101 Ways to Save Money on Your Tax-Legally! 2017-2018. John Wiley &
Sons, Australia.
Online
Australian Taxation Office, (2019). Fringe benefits tax - a guide for employers. Retrieved from <
https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00002>.
Australian Taxation Office, (2019). Fringe benefits tax (FBT). Retrieved from <
https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/0002>.