HI6028 Taxation Law: Partnership Income and Fringe Benefits Analysis

This assignment solution addresses a taxation law problem concerning a partnership, Brekkie and Lunch and OZ Bottle Shop. The solution begins by calculating the net income of the partnership, detailing the treatment of various income and expense items, including sales, car expenses, electricity, council rates, business insurance, mobile bills, union fees, account charges, repair expenses, interest on a loan, and depreciation. The calculation of depreciation uses both prime cost and diminishing value methods. The assignment then explores the implications of fringe benefits tax (FBT), specifically for a senior executive named John, calculating the taxable value of fringe benefits, considering exemptions, and determining the FBT payable. The solution references relevant sections of the Income Tax Assessment Act 1997 and the Fringe Benefits Tax Assessment Act 1986, providing detailed working notes and calculations to support the findings. The assignment is designed to provide a comprehensive understanding of partnership income and fringe benefit tax.

Taxation law

TABLE OF CONTENTS
Question 1: Calculation of net income in partnership................................................................3
General provisions related to the deduction.......................................................................3
Deduction of the expenses related to borrowing................................................................4
Provisions related to the depreciation................................................................................4
Deduction of the membership fee......................................................................................4
Question 2: Implications of fringe benefits tax..........................................................................9
References................................................................................................................................12

QUESTION 1: CALCULATION OF NET INCOME IN PARTNERSHIP
Income tax assessment act 1997, Section 995-1(1), describe the partnership as an association
of the two or more persons running business as a partner in lieu of statutory income. In the
layman language, it can be said that partnership is the relationship between the two or more
than two people carrying out the commercial activity with the view of earning a profit
(Burkhauser, Hahn, and Wilkins, 2015). The partnership is not considered as the separate
legal entity from the persons carrying the business.
The income tax is levied only on the limited partnership, other than this there is no tax charge
on the partnership firm. Along with this, the deduction of the partnership loss is not allowed
from the assessable income of the partnership firm (Chardon, Freudenberg, and Brimble,
2016).
The present study is related to the determination of the net income of the partnership firm.
There are several provisions described under the income tax related to the deduction,
exemption, allowance and many others for the computation of the assessable income of the
firm (Chardon, Freudenberg and Brimble, 2016). The related provisions are described as
below –
General provisions related to the deduction
Generally, all the expenses incurred for producing the taxable income is allowed as
deduction. Income tax assessment act 1997, section 25-10 is related with the deduction in
case of repair and maintenance expenses incurred by the assessee. Generally, all the revenue
expenses are allowed as a deduction, and no deduction can be claimed of the capital
expenditure. Along with this, only that portion of the expenses can be claimed which is
related to the commercial activity. The term repair is not defined under the Act; it is
ascertained by considering the facts and circumstances.
Moreover, the repair on the initial installation is considered as the capital expenditure, and it
is not allowed as a deduction (Daley and Wood, 2016). Further, any expense which improves
the functional quality or substantially enhances the performance is regarded as the capital
expenditure, and the same is not allowed as deduction.

As per the legal case law of Kitto J in W Thomas, expenditure incurred for maintenance of
the income-generating asset is considered as the revenue expenditure, and the same can be
claimed as a deduction.
Deduction of the expenses related to borrowing
All the expenses related to the borrowing are allowed as deduction if the borrowing is used
for the business. Generally, the expenses can be claimed during the term of the loan. The
payment of interest is allowed as a deduction (Doerrenberg, Peichl, and Siegloch, 2017).
Provisions related to the depreciation
Depreciation is allowed as a deduction from the income of the assessee. There is two methods
by which the depreciation can be computed, which are the prime cost method and the
diminishing value method (Feldstein, 2015).
Depreciation by the prime cost method
Cost of the asset*(days held/365)*100%/effective life of the asset
Depreciation by diminishing value method
If the asset is purchased before 10May 2006
Base Value*(days held/365)*150%/effective life of the asset
If the asset is purchased after 9 May 2006
Base Value*(days held/365)*200%/effective life of the asset
The income tax act prescribes the effective life of the asset separately, which is considered
while calculating the depreciation.
Deduction of the membership fee
Any payment related to the membership is allowed as a deduction only if the partner is the
member of that particular union.

Determination of net income of the partnership for the year ended 30 June 2017
Particular Working Notes Amount
Inflows
Sales in cash 1 $150170.00
Sales in credit 2 $31885.00
Change(Increase) in Stock 3 $630.00
Total $182685.00
Outflows
Car Expenses 4 $2364.00
Electricity expenses 5 $1176.00
Council rates 6 $310.20
Business insurance 7 $1250.00
Mobile bill 8 $633.60
Union fees 9 $284.00
Account charges 10 $595.00
Repair expenses 11 $150.00
Interest on loan 12 $5500.00
Cash Purchases 13 $31155.00
Credit Purchase 14 $129188.00
Depreciation 15 $3617.365
Total Expenses $176219.165
Net Business Income (A-B) $6465.832
Working Notes

1. Cash sales are considered as the income of the business as it is derived from the normal
business activities.
2. Calculation of credit sale
Particulars Amount
Cash received from debtors $32800
Closing Debtors $3010
Opening debtors ($3925)
Credit Sales $31885
3. Purchase and sale of stock are regarded as the normal trading activity. If the closing stock
is more than the opening stock, then it is considered in the assessable income, and if the
closing stock is less than the opening stock then the same is allowed as a deduction from the
assessable income (Pawson, 2017).
Calculation of increase or decrease in stock
Particulars Amount
Closing stock $9750
Opening Stock ($9120)
Increase in Stock $630
4. The business has two cars, a van and an SUV. The Van is used 90% for the business
purpose, and the SUV is used 60% for the business purpose. The deduction is allowed only to
the extent of it is used in the business.
Particulars Maintenance Expenses Deduction Allowed
Van $1260 $1260*90% = $1134
SUV $2050 $2050*60% = $1230

Total Deduction $2364
5. Only 80% of the electricity expenses are related to the business. Therefore, the deduction is
allowed only to the extent of the 80%, that is 1470*80% = $1176
6. Only 60% of the Council expenses is related with the business. Therefore, the deduction is
allowed only to the extent of the 60%, that is 517*60% = 310.2
7. Business insurance is considered as the revenue expenditure incurred in the course of
business. Therefore, it is fully allowed.
8. Only 90% of the Mobile Bill is related with the business. Therefore, the deduction is
allowed only to the extent of the 90%, that is 704*90% = $633.6
9. Union Fee is fully allowed as deduction as it is assumed that the partners are the member
of the Union.
10. Account Charges is considered as the revenue expenditure incurred in the course of
business. Therefore, it is fully allowed.
11. Repair expenses related to the installation of the air conditioner is considered as the
capital expenditure. Therefore, it is not allowed as a deduction. The shop painting is
considered as the revenue expenditure because it is incurred for maintenance of the capital
asset. Therefore, the same can be claimed as a deduction from the assessable income
(Woellner et al. 2016). Moreover, the repair expenses related to the refrigerator motor
replacement is not considered as the revenue expenditure because it substantially improves
the quality as well as the functionality of the asset. Therefore only $ 150 is allowed as
deduction out of the total repair expenses 1490.
12. Interest on the loan is allowed as a deduction because it is the expense related to the
borrowing.
Particulars Amount
Total repayment $8500

Principal Amount $3000
Amount of Interest $5500
13. Cash Purchase should be reduced for calculation of the net income.
14. Computation of the credit Purchase
Particulars Amount
Cash payment to the creditor $128678
Closing Creditors $7010
Opening creditors ($6500)
Credit purchase $129188
15. Depreciation is charged on the basis of the diminishing method. The effective life of the
asset is as per the life prescribed by the ATO.
* Refrigerator is considered as the general refrigerator therefore effective life is 10 year.
* Shop Fitting furniture is assumed that it is not freestanding therefore the effective life is 20
years.
* The effective life of Kitchen electrical appliances is 2 years; it is assumed that it includes
the electric jugs and kettles.
* Effective life of the car is prescribed by the ATO is 10 years. However, the depreciation is
allowed only to the extent t is used in the business.
Computation of the depreciation
Asset Adjusted
value
Effective
life
Formula Depreciation

Restaurant
Freezer
$1480 10 1480*(365/365)*(150%/10) $222
Restaurant
refrigerator
$3580 10 3580*(365/365)*(150%/10) $537
Shop Fitting
structure
$2965 20 2965*(365/365)*(150%/20) $222.375
Kitchen
electrical
appliances
$754 2 754*(365/365)*(150%/2) $565.5
Car – Van $1550 8 1550*(365/365)*(150%/8) 290.625*90% =
$261.56
Car – SUV $10350 8 10350*(365/365)*(150%/8) 1940.625*60%
= $1164.38
New
restaurant
freezer
$3500 10 3500*(334/365)*(200%*10) $640.55
Total depreciation $3613.37
QUESTION 2: IMPLICATIONS OF FRINGE BENEFITS TAX
Fringe benefits are the extra (non-cash) amenities provided to the employees over and above
their usual salary or wages (Hodgson and Pearce, 2015). These benefits are offered by the
companies as a supplement to the basic salaries, which helps in attracting the best talent from
the market. By providing fringe benefits, the employers have the upper hand in the
recruitment process and enjoy a lower employee turnover ratio due to an increased
employment term in the employer’s organisation (Butler and Calcott, 2018).
Fringe benefits usually encompass amenities like health insurance, company sponsored
vaccination, educational aid, food coupons and other miscellaneous freebies (Braverman,
Marsden and Sadiq, 2015). It may be noted that the fringe benefits, depending upon their

categorisation done by the Internal Revenue Department, might be brought within the scope
of taxation. However, the liability to discharge the fringe benefits tax lies upon the employer
and not the employee, under the Australian tax system vide the Fringe Benefits Tax
Assessment Act, 1986 (Tang and Wan, 2015).
Applicable Provisions and Laws
The FBT (Fringe Benefits Tax) rate for the FBT year ending March 2019 is fixed at 47%, a
sum total of the highest marginal tax rate which tantamounts to 45% and the Medicare Levy
currently fixed at 2%, to be paid by the employer. The taxable amount of the fringe benefits
will be calculated as follows: -
Gross Value of the Fringe Benefits Paid by the Employer
Less: Any Reimbursement, whether in Part or Full, Made by the Employee
= Taxable Amount of Fringe Benefits
However, it shall be noted that the Fringe Benefits Tax is imposed only if the value exceeds
the threshold limit, and is even exempt in some cases. Following are the fringe benefits that
are exempted under the Australian tax system:-
 Employee Relocation Expenditure
 Backward Area Accommodation
 House Rent Allowance, subject to certain conditions
 Other ancillary benefits such as free laptops, briefcases and mobile phones.
FBT Consequences in John’s Case
In the given case, John, a senior executive in a printing company is receiving fringe benefits
to the tune of $56, 600, calculated as follows: -
Child’s Education Allowance = $15, 000
Add: Apartment Accommodation = $41, 600 ($800 per week x 52 weeks)
Total Fringe Benefits Provided = $56, 600
Since the above two benefits do not fall in the exemption list, the liability to pay the FBT
persists upon the employer. However, the amount paid by John in respect of the

accommodation will be deducted from the gross taxable value, and the final amount
chargeable to tax will be: -
Gross Value of Fringe Benefits Provided (as calculated above) = $56, 600
Less: Reimbursement Value to be Deducted ($100 x 52 weeks) = $5, 200
Net Taxable Value of Fringe Benefits = $51, 400
Since the above fringe benefits fall in type 2 (lower gross up rate) category, no GST credit
claim will be available. Hence, the calculation for FBT for the year ending March 2019 in
John’s case will be: -
Net Taxable Value of Fringe Benefits x FBT Rate x Type 2 Gross-up Rate
= $51, 400 x 47% x 1.8868
Fringe Benefits Tax = $45, 581.3144

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