Taxation Law: Partnership Profit and Deductions

This article discusses the profit gained by a partnership in the income year and the deductions available to partners. It explains the rules and regulations related to partnership taxation and provides examples and calculations.

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

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Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................7
References:...............................................................................................................................10

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Answer 1:
Issues:
Considerable discussion in this section is all about the profit gained by the partnership
during the pertinent income year.
Rule:
Conferring to the “division 5 of ITAA 1936” partnership is defined as, the partners
are not liable for paying the taxes and also they are not considered as a single unit of
operation (Thuronyi 2014). “Section 91 of ITAA 1997” elaborates that an individual
taxpayer should always prepare their return files in order to highlight the amount of profit
distributed among the shareholders. Consequently “sec 92, ITA Act 1997” section highlights
that partners are liable for incurred loss as well as profits. “Section 995-1(1)” states
partnership is the meaning of continuing the same objective of earning profit throughout the
business. The profit obtained from the partnership is considered as wither ordinary or
statutory income.
Referring to “section 6-5(4)” and “section 6-10 (3), ITAA 1997” the taxpayer is
liable for taking the income and this should be according to the directions of the taxpayer
(Markle 2016). In reference with “sec 6-5, ITA Act 1997” ordinary income is considered
from the large part of the income of taxpayer. In “Scott v CT (1935)” the commissioner
stated there are different sort of principles those are used for understanding the gains from the
ordinary income. Any kind of business receipts that is made is taken into the account as
ordinary income based on “S-6-5, ITA Act 1997”.
Rendering to “Section 8-1 of ITA Act 1997” allows the taxpayer to avail the
deductions those are his personal outgoing expenses and also these expenses are generated

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while maintaining the business objectives. Consequently, the negative aspect of the “Section
8-1 of ITA Act 1997” is, it doesn’t allow the taxpayer to maintain these deductions if he is
involving private, domestic or capital expenses (Hurst, Li and Pugsley 2014). Therefor if the
taxpayer is applying some sort of expenses those are falling under the capital, private or
domestic nature then he will be not be allowed the deductions.
According to ATO, the taxpayer is eligible in getting the deductions if their expenses
are below 20,000. Consequently, it makes the taxpayer eligible for obtaining the deductions
for repair of their assets (Nichols and Rothstein 2015). According to “Subsection 25-10 (1),
ITA Act 1997”, the taxpayer is permissible in getting the deductions for decorations,
deterioration and damages in any of their assets. In a similar manner “FC of T v Western
Suburbs Cinemas (1952)” states the taxpayer is not permissible in getting the deductions if
they are incurring capital expenses for repairs.
Application:
In accordance with the case discussed in this section Daniel and Olivia are keeping
the business objectives in order gain profit over their ordinary income and has been incurred
some receipts and outgoing expenditures. Sales and payments from the debtors are
considered as receipts. As per the “section 6-5, ITA Act 1997” the sales and payment
received from the debtors are the income gained from the business and this is according to the
concepts of ordinary income.
Two partners has drawn the amount of profit as follows $5600 AND $6000 from the
business. Along with these two amounts they have drawn $3200 amount for their private
purpose. According to “section 8-1 (2), ITA Act 1997”, as Daniel and Olivia has made these
outgoing expenses as private in nature so they are not allowed in getting the deductions under
the negative limbs (Fairfield and Jorratt De Luis 2016).

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According to the ATO the taxpayers can claim for the money if the expenses for their
assets are below 20,000. In accordance with the case being discussed here, Daniel and Olivia
has spent $12, 00 for buying air conditioner. The actual value for the asset is less than 20,000
so the partnership is allowed to get the amount as deductions which will be considered as
their ordinary income.
The partnership also indulged the outgoing expense for painting a shop and repairing
the motor for refrigerator. According to the case of “FC of T v Western Suburbs Cinemas
(1952)” the expense mentioned above is considered as the capital outgoing expense (Tanzi
2014). Hence according to the ordinary income aspects this expense will be credited to the
partners as deductions as this is in capital in nature. Conferring to “sect 25-10, ITA Act
1997” this function can be stated. This calculation is stated in the bellow table with all the
important aspects-

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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 1,490.00$
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 7) 726.20$
New Restaurant Freezer 3,500.00$
Total Expenses Eligible for Deductions 1,81,222.00$
Net Income From Partnership 2,663.00$
Computation of Partnership Net Income
For the year ended 30th June 2017

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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$
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$

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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 7
Conclusion:
This can be concluded that the actual income gained from a partnership is $2,663 and
this has been assessed according to the “section 6-5, ITA Act 1997” as per the concepts of
ordinary income.
Answer 2:
Issues:
Will the employer liable for assessment under the “Fringe Benefit Tax Assessment
Act 1986” for benefits provided to the member of staff during the part of employment?
Rule:
The fringe benefit can be defined as the payment given to the employees from their
employer keeping apart the wages and salary. According to “FBTAA 1986” fringe benefits
are permissible to all employees and this is as a part of their employment. The liability of tax
payment fall on the employer irrespective of their profession as well as position such as
trustee, sole trader or government body who all are doing business (Kaldor 2014). They have
been held responsible for paying the taxes for fringe benefits they are providing to their
employees.
“Section 20 of FBTAA1986” highlights the fringe benefits through expense payments
(Manski 2014). Outgoing fringe benefits occurs when he employer has to pay to the third
party for the outgoing expense of his employees. This is to satisfy the employee’s need and

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this is also falling under the fringe benefit that is being provided to the employees by the
employer. Outgoing fringe benefits mainly happens when the employer pays the amount as
reimbursement to the employee accordingly their usages. In contrary to these facts, tax
bearing amounts can be decreased if the employer provides a part of the fringe benefit costs.
Rendering to “subparagraph 65A (ii), FBTAA 1986” payment processed for the full
time education of the employee’s child is considered as the fringe benefit provided by the
employer as this is in relation with the occupation of the employee (Gaertner 2014). The
employer is liable to pay the tax for this kind of fringe benefit. As stated in “J & G Knowles
v FCT (2000)” the receiver of this fringe benefit should possess the relation between his
occupation and materialistic need for the benefit.
Mentioning the “section 25, FBTAA 1986” the housing fringe benefit is the rights to
use the house as general residence that has been provided by the employer to their employer
(Schizer 2014). This particular fringe benefit is also taxable and the value for this taxable is
determined through the market value of the unit of housing (Evers, Miller and Spengel 2015).
However, the value for housing is higher than what the employee has to pay to their employer
as a rental amount for that particular housing unit.
Applications:
John is getting the education fees for his child from his employer as the fringe benefit
as $15,000. According to the “sec 20, FBTAA 1986” this amount is paid by the employer of
John to him as this expense is being incurred as the third party payment for his child and also
this is in relation with his occupation with his employment (Alley et al. 2013). In reference to
“J & G Knowles v FCT (2000)” John holds a materialistic relation with the need for his
children, so according to the concepts of ordinary income and fringe benefits he is eligible for
getting the deductions in rental charges. Hence John will be responsible for FBT however; he

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can decrease the liability for tax because his child is having the full time education which is
considered for being permissible in getting the deductions as fringe benefits.
John is also using the rented house that has been provided to him by his employer,
hence he is having the same right that his employer was pertaining to the property (Ambrus
and Kaufman 2014). Apart from this as John is the paying a part for the fringe benefit tax as
$100, whereas the market value of the property is $800, it is reducing the pressure on his
employer to pay the total amount of fringe benefit tax. The calculations is shown below-
Particulars Amount ($)
Rent Per Week 800
Annualized Market Value 41600
(800 x 52 weeks)
Less: Employee’s Contribution
(100 x 52 weeks) 5200
Taxable Value 36400
Computation of Taxable value of rent
Conclusion:
This can be concluded that the employer of John is easily lowering the amount of
fringe benefit tax as John is paying one part of it and that is known as the fringe benefit to
John as he is getting the house in a lowered rental amount.

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References:
Alley, C., Coleman, J., Elliffe, C., Gousmett, M., Gupta, R., Hodson, A., Maples, A.,
Marriott, L., Marshall, T., Scrimgeour, F. and Tan, L.M., 2013. New Zealand taxation 2013:
Principles, cases and questions. Thomson Reuters.
(http://researcharchive.wintec.ac.nz/2613/)
Ambrus, R. and Kaufman, I., 2014. Tax-saving, innovative incentives for small and medium-
sized enterprises in Hungary. Journal of Economics and Business Research, 18(1), pp.33-42.
(https://www.ceeol.com/content-files/document-575753.pdf)
Evers, L., Miller, H. and Spengel, C., 2015. Intellectual property box regimes: effective tax
rates and tax policy considerations. International Tax and Public Finance, 22(3), pp.502-530.
(https://link.springer.com/article/10.1007/s10797-014-9328-x)
Fairfield, T. and Jorratt De Luis, M., 2016. Top Income Shares, Business Profits, and
Effective Tax Rates in Contemporary C hile. Review of Income and Wealth, 62, pp.S120-
S144.
(https://onlinelibrary.wiley.com/doi/abs/10.1111/roiw.12196)
Gaertner, F.B., 2014. CEO after‐tax compensation incentives and corporate tax
avoidance. Contemporary Accounting Research, 31(4), pp.1077-1102.
(https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12058)
Hurst, E., Li, G. and Pugsley, B., 2014. Are household surveys like tax forms? Evidence from
income underreporting of the self-employed. Review of economics and statistics, 96(1),
pp.19-33. (https://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00363)
Kaldor, N., 2014. Expenditure tax. Routledge.

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(https://books.google.co.in/books?
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+2014.+Expenditure+tax.
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Manski, C.F., 2014. Identification of income–leisure preferences and evaluation of income
tax policy. Quantitative Economics, 5(1), pp.145-174.
(https://onlinelibrary.wiley.com/doi/abs/10.3982/QE262)
Markle, K., 2016. A comparison of the tax‐motivated income shifting of multinationals in
territorial and worldwide countries. Contemporary Accounting Research, 33(1), pp.7-43.
(https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12148)
Nichols, A. and Rothstein, J., 2015. The earned income tax credit (eitc) (No. w21211).
National Bureau of Economic Research.
(https://www.nber.org/papers/w21211)
Schizer, D.M., 2014. Limiting Tax Expenditures. Tax L. Rev., 68, p.275.
(https://heinonline.org/HOL/LandingPage?handle=hein.journals/
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Tanzi, V., 2014. Inflation, indexation and interest income taxation. PSL Quarterly
Review, 29(116).
(https://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/11493)
Thuronyi, V., 2014. Comparative tax law.

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