Taxation of Partnerships: Income Statements and Tax Calculations

This assignment solution addresses partnership taxation, focusing on the "Two B's" partnership. It begins with the partnership's profit and loss income statement for the year ending June 30, 2017, detailing various income sources like trading receipts, capital gains, dividends, and interest, alongside expenses such as cost of goods sold, salaries, rent, depreciation, and interest. The solution then presents Mary Brown's taxable income statement, outlining her revenue sources (dividends, salary, interest, and rental income) and associated expenses. It meticulously calculates Mary's tax payable, considering Australian tax brackets, depreciation, and the medical levy. Furthermore, the solution includes detailed explanations of items in both statements, such as the calculation of cost of goods sold and depreciation, along with references to relevant tax regulations and case law. The document also covers the GST implications and the sharing of profits and losses between partners, providing a comprehensive analysis of the partnership's and Mary's tax positions. The solution also includes the calculation of Mary's tax payable and net tax payable after considering PAYG withholding, withholding tax, franked dividends, and GST credits.

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Partnership Taxation
Students' Name
Course Title
Instructor’s Name
Institutional Affiliation
City and State
Date of Submission

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The Two B’s
Profit & Loss Partnership Income Statement
For The Year Ended 30th June 2017
$ $
Incomes
Gross trading receipts 1900000
Capital Gain on Shares Of Internet Company Sold 20000
Cash Dividend Received From BHP 10500
Bank Interest received from China Bank 11250
Reversing back withhold tax part of interest received 1250
Total Income 1943000
Less: Cost of Goods Sold (200000)
1743000
Expenses;
Interest paid on loan of funds by Mary 10000
Salaries Paid To Employees 250000
Rent and power 60000
Mary’s salary 40000
Superannuation to staff 85500
Superannuation paid on behalf of Mary 25000
Superannuation paid on behalf of Sally 25000
Interest on bank overdrafts 18623
Bad debts written Off & Paid 36849
Long Service Leave Amount Paid 13507

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Depreciation of the 1st Purchased Item $16250
Depreciation of the 2nd Purchased Item $14375
Total Expenses (595104)
Profit before Tax 1147896
Mary Brown
Taxable Income Statement
For Year End 30th June 2017
$
Revenue;
Dividends received
7000
Share of Partnership profit
573948
Gross Salary from part-time lecturing
30000
Salary earned from working at partnership
40000
Interest on Bank Deposits
5000
Rental Income on Investment
10000
Gross Income
665948
Less Expenses
Rates On Mentioned Invest 2000

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Tax Agent Fee 3000
Interest paid on loan acquire 15000
Printing Cost of Investment 5000
Replacement Cost of Roof Tiles 1000
Bathroom extension cost 15000
Total Expenses (41000)
Net Taxable Income 624949
Mary’s Tax Payable;
The taxable income for Mary is $629949
Mary’s income lies between brackets;
$180,001 and over - $54,232 plus 45c for each $1 over $180,000 Buettner(2006.Pg 480)
It is over 180000 by=624949-180000=444949 from this we assume the over to be 444949
hence;
=45c for each $1
=45/100=0.45
The over is=0.45*444949=$200227.05
Tax payable on this, $54,232 plus the $200227.05
Total Tax payable for Mary=$54,232.5+$200227.05=$254459.55
Total Net Tax Payable Income Tax plus Medical Surge Levy
Total Tax Payable=$$13318.96(Medical Levy) +$254459.55(Tax payable) =$267778.51
It should be realized that Marys Total Tax Payable should be subjected to the portion of tax
credits and withholding charges but only to the 50%/50% ration
Mary’s Tax Payable
For Year End June 2017

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Total Tax Payable 267778.51
Less PAYG W = ($9000)
Withhold Tax Portion on Interest = ($625)
Franked Dividends partners portion = ($1991.7)
Cannavan, (2004.Pg 170)
Frank dividends Mary received = ($2660)
GST Credit Claim on Bad Debts Written Off = (1842.45)
Total Tax Net Offs =
(16119.15)
The Net Tax Payable $251659.36
Explanation on the items appearing in the partnership profit and loss, Mary’s taxable
income statements and their respective tax calculations.
Calculation of Cost of Sales of Good = COGS=$370000+$320000-$490000=$200000
While calculating Mary’s income tax payable the below Australian tax bracket has to be used
as shown this is upon consideration of the taxable income she gets.
$180,001 and over - $54,232 plus 45c for each $1 over $180,000
Depreciation;
Since we’ve been informed of the existence life of the equipment’s there exist the need to
calculate their depreciation through straight-line method;
1ST bought on 1st July=$65000/4=$16250
2nd bought on 1ST January=$115000/4=$28750 but as at the date of reporting the item had
already been used for 6months hence the need to divide the depreciation of this equipment by
two; $28750/2=$14375

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Therefore this two set of item depreciation should be seen relieving tax burden for the
partnership.
Medical Levy Charge=Gross revenue*2%
Medical Levy for Mary=2%*665948 = $13318.96
Mary’s withholding tax portion =1250/2=625
NB; the above revenue and expenses are GST inclusive where applicable De La
Feria(2009.Pg 900).
The agreement states the two partner’s i.e. Mary and Sally should share profits and losses
equally or rather in the ratio 50%/50% hence the need to divide the profit into two; Avi-
Yonah(2008.Pg 10).
This profit is to be shared equally between Mary and Sally in the ratio 1:1
Mary=1147896*50%=573948
Sally=1105268*50%=573948
It should be noted that we could only proceed with calculating Marys taxable income
only after we’ve realized her portion share of profits that is expected to form part of the
revenue for her taxable income statement as shown below Dyte(2005.Pg 16); Since taxable
income equal gross income less allowable deductions (expenses relating to the income) we
have no option but to identify Mary’s income and subject that income to any expense
incurred to earn it the revenue Braithwaite(2007.Pg 10). There is further the need to accept
the fact that any expense relating to salary earned by Mary or Sally will not be captured in
calculation of either of their income but any expense relating to any other source will
considered Lignier(2016.Pg 14).
There exist the need for the partnership to claim GST on the bad debts written of this
claim tax credit of =36849*10%=3684.9, Yusuf(2007.Pg 9) the 10% rate is as per Australian
Tax Office prevailing rate 2016/2017.Therefore the GST portion claim by

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Mary=3684.9/2=1842.45 Evans(2011.Pg 140).There exist a presumption that the tax agent
paid the witholding tax on behalf of the partnership McKerchar(2005.Pg 289)
Refunds from government Medicare system for medical expenses should not be
treated as income for tax purpose since initially it had been subjected to at the medical levy
stage hence excluded for tax purpose as Mary’s income Cernius(2016.Pg 70).
Mary’s expenses that are personal in nature and that which relates to family issue like
rates on family, electricity for family home, expenses on her father’s Bill as well as her travel
expenses should not form part of allowable expense since they were deemed considered at
that time of agreeing the package Mary was to be paid. It is expected that at the time of
signing employment contract on what she wanted to be paid she must have factored all
expenses while making consideration for the job, this explains why we are not considering
the expenses as allowable in her taxable income statement Woellner(2011.Pg 21).

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References;
Avi-Yonah, R.S., Clausing, K.A. and Durst, M.C., 2008. Allocating business profits for tax
purposes: A proposal to adopt a formulary profit split.
Braithwaite, V., 2007. Responsive regulation and taxation: Introduction. Law & Policy,
29(1), pp.3-10.
Buettner, T., 2006. The incentive effect of fiscal equalization transfers on tax policy. Journal
of Public Economics, 90(3), pp.477-497.
Cannavan, D., Finn, F. and Gray, S., 2004. The value of dividend imputation tax credits in
Australia. Journal of Financial Economics, 73(1), pp.167-197.
Cernius, G., Birskyte, L. and Balkevicius, A., 2016. Influence of Rules for Computing
Corporate Income Tax on the Accuracy of Financial Statements of Lithuanian Companies.
Scientific Annals of Economics and Business, 63(1), pp.65-81.
De La Feria, R. and Walpole, M., 2009. Options for taxing financial supplies in value added
tax: EU VAT and Australian GST models compared. International & Comparative Law
Quarterly, 58(4), pp.897-932.
Dyte, R., 2005, June. What is the use of financial compliance? The case of small business in
Australia. In INTERNATIONAL COUNCIL FOR SMALL BUSINESS (ICSB) WORLD
CONFERENCE (Vol. 50, pp. 15-18).

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Evans, M., Peacock, and C., 2011. The GST Treatment of Financial Services in Australia.
GST in Australia: Looking Forward from the First Decade, pp.133-160.
Lignier, P. and Evans, C., 2012. The rise and rise of tax compliance costs for the small
business sector in Australia.
McKerchar, M., Ingraham, L.R. and Karlinsky, S., 2005. Tax complexity and small business:
A comparison of the perceptions of tax agents in the United States and Australia. J. Austl.
Tax'n, 8, p.289.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2011. Australian Taxation
Law Select: legislation and commentary. CCH Australia.
Yusuf, M.A., 2007, October. Management of Tax Debt Collection. In ITD Global
Conference on Taxation of SMEs. Buenos Aires, Argentina.