Partnership Business Income Calculation

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This assignment focuses on calculating the net income of a partnership business. It provides a detailed list of income and expenses, requiring you to apply relevant tax rules and principles. Tasks include calculating interest on partner capital and loans, analyzing various expense categories, and determining the net income based on provided figures. The final step involves understanding how previous year's net loss affects the current year's calculation.
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TAXATION LAW
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Taxation
Answer-1
Issue
Whether the following are allowable as deductions under s 8-1 of ITAA 1997?
Rule
Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either
incurred in earning the assessable income or are incurred while carrying on the business through
which the said assessable income shall be earned. Deduction of those expenses is not allowed as
a deduction which is either capital in nature or private/ domestic in nature or the expenses which
are in relation to earning of exempt income (Kobestky, 2005).
Application
a. The cost of moving machinery to a new site – in case, this expense pertains to brand new
machinery which is being moved from the place of purchase to the new site, then the
expense shall be included in the capital cost of purchase of machinery and shall be
deemed to be of capital nature. Hence such expense will not be allowable under section
8-1 of ITAA 1997, as the same is of capital nature and expenses of capital nature are
disallowed under s 8-1. The expense shall be added up or allowed as expenses shall
solely depend upon the nature of asset whether it is a new asset or old asset. In case it is
brand new machinery, all the expenses incurred up to its use date shall be added up to its
cost and it shall be part of the cost of the asset (Fullerton et. al, 2017). For example
Transportation expenses, Installation, and commissioning expenses.
In case this expense is for moving the old machinery from existing site to a new site, then
it shall be deemed to be a transportation cost and hence would be allowable as deduction.
b. The cost of revaluing assets to effect insurance cover
The expenses incurred in the revaluing of assets for the purpose of claiming exemption
are allowable if the same are incurred for the recovery of loss of incomes directly or
indirectly attributable to the assessable income. There can be two circumstances in case
of an insurance claim (Fullerton et. al, 2017). In the case where the asset for which
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Taxation
insurance claim is being received is of capital nature, it means that the capital asset was
destroyed and the insurance cover is for recovery of loss from destruction of a capital
asset. In this case, the expenses that will be incurred for recovery of insurance claim shall
be deducted from the insurance claim amount received and will not be considered as a
business expense in the income statement.
On the other hand, where the insurance claim is for claiming loss of assets which are
held as stock in trade, it means that the assets are not capital assets and are directly
related to the assessable income which is shown in the income statement. In such a case,
the expenses incurred for claiming recovery of loss of stock are allowable as a business
expense. It is done for the business benefit so it shall be allowed as business expenses.
Such expenses shall be charged to profit and loss account and treated as expenses
incurred for recovery of losses of stock (Hopewell, 2017).
Hence, in the given case if the revaluing of assets held as the stock is being done, then
the expenses on revaluing shall be allowable under s 8-1 of the ITAA 1997.
c. Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are
either incurred in earning the assessable income or are incurred while carrying on the
business through which the said assessable income shall be earned. Deduction of those
expenses is not allowed as a deduction which is either capital in nature or private/
domestic in nature or the expenses which are in relation to earning of exempt income.
Hence, if we interpret the given situation with reference to s8-1, the legal expenses
incurred by the company opposing a petition for winding up does not fall under s 8-1
because it is not being incurred for earning assessable income and also it is not the
expenses to be incurred necessarily to carry on the business to earn the assessable income
(Renton, 2005). The expenses paid is also to be checked in light of its total amount as
well because larger the amount spent by the company, it can’t be treated as business
expenses.
But, as it is a legal expense which has been incurred for the continuance of the business
by opposing to its winding up, it is an expense specifically allowable under section 25-5.
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Taxation
d. Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are
either incurred in earning the assessable income or are incurred while carrying on the
business through which the said assessable income shall be earned. Deduction of those
expenses is not allowed as a deduction which is either capital in nature or private/
domestic in nature or the expenses which are in relation to earning of exempt income
(Sadiq et. al, 2017).
In the given case, the solicitor account does not separate the costs for various matters and
hence the various legal expenses cannot be bifurcated into capital or revenue nature. The
legal expenses for all the matters mentioned have been assumed here as incurred for
business purposes only. Further, all these expenses have been incurred for recovery of the
income which shall further become a part of the assessable income.
.
Conclusion
So in the above solution, answers have been provided with its proper reasoning as to why the
expenses shall be allowed or not allowed in the business. If we separate the given purposes
mentioned above, the legal expense for the discharge of mortgage can be treated as a capital
nature purpose and hence shall not be allowed under s 8-1. Other expenses shall be allowable as
deduction
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Taxation
Issue
Can Big Bank's claim input tax credits in regard to its advertising expenditure of $1,650,000?
Rule
In the given case, the Big Bank Limited is a bank that operates on a national basis and is
registered under GST. Similar instance was held in the case of Hua-Aus Pty Ltd v Commissioner
of Taxation [2010] FCA 341 that the taxpayers should endure the responsibility of proving that
an evaluation is excessive, the taxpayer provided responsibility of proving that there is no
adverse presence of credit and that the taxpayer provided a proper explanation of moneys then
there is no rejection of procedural fairness.
It has more than 50 branches and has a huge 10-storey office and numerous call centers for
calling up its customers. Since past many years, the Big Bank Ltd. has been providing facilities
of loans and deposits to customers in Australia. It provided facilities to its customers. It has also
recently launched a new product which is home and contents insurance policies and it is
considered as one of the major steps in company’s business but the bank needs to change its
computerized accounting system because GST has to be charged on the premium policies which
shall be collected by the company from its customers. The company also needs to promote and
advertise its new product in a big way. The company has also made a big budget to advertise its
product and is ready to go with full force in the insurance business. The company has planned to
advertise its product through various advertising platforms like television, radio and print media.
Application
For the purpose of promotion of its facilities and new product launched, the Big Bank Ltd. had to
spend on advertising campaign an amount of $16,50,000 which included about $5,50,000 for
promoting the new product launched and the balance for its existing facilities. The advertising
consultant had issued a tax invoice of $16,50,000. The input tax credit of GST shall be available
to Big Bank Ltd. as the Bank is registered under GST provisions and can claim GST credits.
The business shall be allowed the tax credit of gst paid on advertising bill because it is a business
expense and also it is incurred exclusively for business only. It shall not be capitalized because
of it, not one-time expenses, this is a recurring expense whose life is short and hence it shall not
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Taxation
be added up or treated as an asset of the company (Pratt & Kulsrud, 2013). When a business
enterprise pays for an expense for its business purposes and such expense includes GST, then
such business enterprise can claim the credit for GST paid on it. This is called GST Credit or
input tax credit (Nethercott et. al, 2013).
GST can be claimed if the following conditions are fulfilled:
i. The expenses incurred for the purchase of goods and supplies are for the purpose of
business and not for personal use.
ii. The purchase price of the goods or supplies is inclusive of GST.
iii. A consideration is to be paid for the purchase of goods or supplies.
iv. The supplier of goods or supplies has issued a tax invoice for the particular goods or
supplies and it includes GST.
Conclusion
The business expense incurred by the company is of the big amount but it shall be allowed as
advertising expenditure because it is wholly incurred for promoting its insurance business. Also,
the company shall be able to claim entire input tax credit against its existing GST tax liabilities.
The payment made by the company to its advertising consultants constitutes $ 5,50,000 allocated
to television, advertisement and $ 11,00,000 for other advertisement media. The above expense
will allow the company to almost increase its business and it shall be approximately 2% of entire
bank’s business (Khadem, 2017). So, 98% of business shall accrue to traditional banks income
sources which are loan distributions and deposit facilities to its customers for which they charge
interest and commission respectively (Kenny et. al, 2016). All these conditions are fulfilled in
the case of Big Bank Ltd., hence it is eligible to claim the input credit of GST on the advertising
expenditure bill issued to Big Bank Ltd.
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Taxation
Answer-3
If a person has income from the country where he is a resident as well as from other countries
also, then he shall be eligible for foreign tax offset (Barcokzy, 2010). The person has income
from more than one country also he has incurred expenses against this income which have been
treated in the calculation. Such offset is allowable only when:
i. The said person has actually paid foreign income tax from the income derived from
the foreign country meaning that the income has already been paid and
ii. The said person has included the foreign income in the total assessable income for
calculation of income tax payable.
Case 1
Computation of tax on $62,000
The initial step that needs to be taken into consideration will be evaluating the tax payable on the
income that is under the ambit of tax. The tax will be on $62,000 taking into consideration that
every medical expense is not deductible in nature. The payable tax amount will be $12,627 and
this contains the medical levy.
Case 2
The tax payable if the income excludes any amount in tune to the foreign income tax till the time
such tax is directed towards the foreign income tax and other applicable non source amount.
Employment income in US $12,000
Less: deduction that is allowable ($4400 + $200) = $4600
Going by the assumptions the taxable income stands at $39400
taxable income 44000
less deduction
payment of foreign tax + foreign debt
4400+200 4600
taxable income 39400
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Taxation
Tax on $39,400 = 4943
Now deducting 4943 from 12627 = 7684
In this scenario, it needs to be noted that Angelo has paid a foreign tax income amounting to
$4400 and therefore eligible for a full tax offset.
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Taxation
Answer-4
The question deals with the allowability of income and expenses in the business done by Johny
and Leon. Due treatment of various adjustments and events have been incorporated within the
business transactions as they have happened during the reporting period. Figures have been
regrouped and added up wherever required for calculation purposes. No tax rates have been
assumed in the question.
Computation of Net taxable income of partnership
Particulars Amt ($)
Sales of sporting Goods 400000
Interest on Bank deposits 10000
Dividend franked-60% 26400
(21000 +($21,000x30/70x/60%)
Bad debts recovered 10000
Income exempted -
investment disposal capital loss -
Deductions:
Cash embezzlement employees 3000
Salary of partner -
FBT 16000
Interest on partner capital -
Interest on loan by partner 4000
Partner commutation expenses -
Legal fee
Lease renewal 2000
Agreement of partnership 0
new premises lease 700
rate of council 500
debt collection 500
Staff salary 20000
(10,000 + 15,000 – 5000)
purchase of sporting supplies 30000
Shop rent 20000
Bad and doubtful debts -
Expenses of meal -
Adjustment of stock 4000
(20000-16000)
Net loss previous year -
net income partnership 345700
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Taxation
The equation that is followed in the above case is:
Net income of business partnership = Assessable income in total minus the overall deductions
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Taxation
References
Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd
Fullerton,I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax
Handbook Tax Return Edition 2017, Thomson Reuters: Australia
Gilders, Taylor, Walpole, Burton & Ciro, Understanding Taxation Law 2016
Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 9 September 2017,
www.zdnet.com.au.
Kenny, P, Blissenden, M, & Villios, S 2016, Australian Tax 2017, Thomson Reuters: Australia
Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation
Press
Khadem, S 2017, News Australia loses appeal in Federal Court on $15m tax bill, viewed 10
September 2017 http://www.smh.com.au/business/the-economy/news-australia-loses-appeal-in-
federal-court-on-15m-tax-bill-20170609-gwnz0b.html
Nethercott, L, Richardson, G.,& Devos,K. 2013, Australian Taxation Study Manual, Sydney.
Pratt, J. W & Kulsrud, W N 2013, Federal Taxation, Oxford university press.
Renton N.E 2005, Income Tax and Investment, 2nd edition, Sydney
Sadiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting, A
2017, Principles of Taxation Law 2017, Law book Australia
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