Taxation Law: Case Study on Partnership Income and Fringe Benefits

This case study delves into two primary taxation issues. The first concerns the calculation of net income from a partnership, considering various receipts and outgoings, and applying relevant sections of the ITAA 1936 and ITAA 1997 to determine assessable income and permissible deductions. Expenses such as drawings, shop painting, and refrigerator motor replacement are analyzed for their deductibility based on whether they are capital or private in nature. The second issue focuses on the fringe benefit consequences for an employer providing benefits to an employee, including school fees and housing. The analysis involves applying the FBTAA 1986 to determine the taxable value of these benefits, considering expense payment fringe benefits and housing fringe benefits, and exploring potential reductions in tax liability through employee contributions.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................7
Answer to question 2:.................................................................................................................7
Issues:.....................................................................................................................................7
Rule:.......................................................................................................................................7
Applications:..........................................................................................................................8
Conclusion:............................................................................................................................9
References:...............................................................................................................................10

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Answer to question 1:
Issues:
The current issue is based on ascertaining the net income obtained from the
partnership during the relevant income year.
Rule:
As per “division 5 of the ITAA 1936” partnership is not treated as the separate legal
unit based on the general law and they are not required to pay taxes. “Section 91 of the ITAA
1997” requires the taxpayers to file return so that they can reveal the allocation of profit
among the stakeholders1. As defined in “sec 92, ITA Act 1997” income or loss is allocated
among the partners which attracts tax liabilities. Citing “section 995-1(1)” partnership refers
to carrying of business to earn profit. Income obtained from partnership is either treated as
statutory and ordinary income.
As per “section 6-5(4)” and “section 6-10 (3), ITAA 1997” a taxpayer is believed to
have obtained the income as and when directed by the taxpayer. Referring to “sec 6-5, ITA
Act 1997” large part of the taxpayer’s income is classified as ordinary income. The
commissioner in “Scott v CT (1935)” stated that necessary principles must be applied to
determine the receipts as the ordinary income2. Similarly, under “section 6-5, ITA Act 1997”
business receipts are treated as income according to ordinary concepts.
1 Burton, Mark. "Interpreting the Australian Income Tax Definition of Ordinary Income:
Ritual Incantation Or Analysis, When Examined through the Lens of Early Twentieth
Century Linguistic Philosophy." eJTR 16 (2018): 2.
2 Gideon, Michael. "Do individuals perceive income tax rates correctly?." Public Finance
Review 45.1 (2017): 97-117.

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“Section 8-1 of ITA Act 1997” permits the taxpayer from obtaining permissible
deduction relating to outgoings or expenses sustained while generating assessable income or
sustained during the process of generating assessable profits3. While the negative limbs of
“sec 8-1 (2), ITA Act 1997” prohibits a person from obtaining permissible deduction relating
to outgoings that carry the nature of private, domestic or capital type.
The ATO states that the taxpayers are permitted to instantly write-off for assets that
costs below 20,000. On the other hand, allows the taxpayers to obtain permissible deduction
for repairs. “Subsection 25-10 (1), ITA Act 1997” permits the taxpayer from obtaining
deduction for repairs that requires remedying the deterioration, defects or damage on the
property4. However, the taxpayers are denied deduction for repairs that are extensive or
capital in nature. Similarly, in “FC of T v Western Suburbs Cinemas (1952)” the taxpayer
was denied deduction for initial repairs because it amounted to capital in nature.
Application:
Denial and Olivia are carrying on the partnership business and reported certain
receipts as well as outgoings. The partnership derived receipts through sales and debtor’s
receipts. Referring to “section 6-5, ITA Act 1997” the sales receipts and payments from
debtors should be classified as income based on ordinary concepts which is included for
assessment of partnership income.
The partners reported drawings from the partnership that amounted to $5600, $6000.
They further reported the drawings of $3,200 that was related to private purpose of the
partners. Referring to “section 8-1 (2), ITA Act 1997”, drawings made by the partners does
3 Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
4 Black, Duncan. The incidence of income taxes. Routledge, 2018.

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not qualifies for permissible deduction under the negative limbs because it amounted to
private in nature.
The ATO states that the taxpayers are permitted to instantly write-off for assets that
costs below 20,000. The partnership during the income year bought an air condition which
amounted to $1200. The base value of asset is within $20,000 and the partnership can choose
to instantly write off as the permissible deduction.
The partnership incurred outgoings for painting the shop and replacement of motor in
refrigerator. Citing the case of “FC of T v Western Suburbs Cinemas (1952)” the expenses
on shop painting and refrigerator motor replacement amounted to capital outgoing which is
non-deductible under “sect 25-10, ITA Act 1997”. The computation of partnership income is
given below together with the working paper;

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Particulars Amount ($)
Receipts
Business sales 150170
Debtors Cash payments (Notes 1) 33715
Total Receipts 183885
Expenses Eligble for Deductions
Electricity Bill 1176
Council rates (Notes 6) 310.2
Business Insurance 1250
Mobile Bills (Notes 6) 633.6
Union Bills 284
Account Charges 595
Repair Expenses 1490
Loan Expenses (Notes 4) 5500
Purchase of Fixed Asset 3500
Cost of Sales (Notes 3) 30525
Van (Notes 5) 1134
SUV (Notes 5) 1230
Repayment to Creditors (Notes 2) 128168
Installation of Air-Condition 1200
Depreciation Expenses(Notes 7) 726.2
New Restaurant Freezer 3500
Total Expenses Eligible for Deductions 181222
Net Income From Partnership 2663
Computation of Partnership Net Income
For the year ended 30th June 2017
Working Papers:
Depreciation Schedule Base Value Total Days Held Depreciation
New Restaurant Freezer 3500
Less: Trade In Value @ 500 3000 333 547.4
Air Conditions installation 1200 272 178.8
Total Depreciation 726.2
Working papers
Notes 7

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Notes 1
Debtors at 1st July 2016 3925
Debtors Cash Payments 32800
Debtors at 30th June 2017 3010
Debtors Net 33715
Notes 2
Creditors at 1st July 2016 6500
Add: Repayment to Creditors 128678
Less: Creditors at 30 June 2017 7010
Creditors Net 128168
Notes 3
Cost of Sales
Stock on 1st July 2016 9120
Add: Purchase 31155
Less: Stock on 30th June 2017 9750
Notes 4 30525
Loan Repayment
Business Loan 8500
Less: Reduction of loan 3000
Net Loan Re-Payment 5500
Notes 5
Cost of Maintainance
Van 1260
Less: Business use 90% 1134
SUV 2050
Less: Business use 60% 1230
Total cost of Maintainance 2364
Notes 6
Mobile Bills 704
Less: 90% Business Use 633.6
Electricity Expenses 1470
Less: 80% Business Use 1176
Council Rates 517
Less: 60% Business Use 310.2

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Conclusion:
On a conclusive note, the net income from the partnership amounted to $2,663 and the
same has been included for assessment purpose under “section 6-5, ITA Act 1997” as income
according to the ordinary concepts.
Answer to question 2:
Issues:
The current issue here is based on determining the fringe benefit consequences for the
employer of John relating to the receipt of fringe benefit under FBTAA 1986.
Rule:
Fringe benefit is representing the payment made the employee that is different from
wages and salary. As per FBTAA 1986 benefits given to employee as the part of employment
constitutes fringe benefit5. The tax liability paying the fringe benefit arises falls on the
employer irrespective whether the employer is sole trader partnership, trustee, government or
corporation.
“Section 20 of FBTAA1986” defines the expense payment fringe benefit. An expense
payment fringe benefit might originate when the employer pays the third party to satisfy the
outgoings occurred by the employee6. The chargeable value of the expense payment fringe
5 Hodgson, Helen, and Prafula Pearce. "TravelSmart or travel tax breaks: is the fringe benefits
tax a barrier to active commuting in Australia? 1." eJournal of Tax Research 13.3 (2015):
819.
6 Braverman, Daniel, Stephen Marsden, and Kerrie Sadiq. "Assessing Taxpayer Response to
Legislative Changes: A Case Study of In-House Fringe Benefits Rules." J. Austl. Tax'n17
(2015): 1.

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benefit happens when the employer reimburses or pays the outgoings. There are situations
where the tax liability of fringe benefit expenses can be lowered if the employer makes
contributions towards the fringe benefit costs.
Denoting “subparagraph 65A (ii), FBTAA 1986” payment of expenses payment
fringe benefit is permitted for reduction in tax liability for the employer given the child fees
occurred is in relation to the full time child’s education of employee7. As held in “J & G
Knowles v FCT (2000)” the recipient expenses hold material and sufficient relation among
the employees benefit and occupation.
Accordingly, “section 25, FBTAA 1986” states that a housing fringe benefit denotes
a situation where the employee is offered with the rights of using the house as the employee’s
general residential place. The taxable value of the housing fringe benefit is determined by
referring to the market value of the unit of housing given by the employer to an employee
lowered by any sum of recipient rent that are in effect of the rental accommodation.
Applications:
Accordingly, in the case of John, the employer pays the child school fees that
amounted to $15,000. Citing the “sec 20, FBTAA 1986” the expense payment fringe benefit
arises here for the employer of John because the expenses were incurred by the employee to
satisfy the third party payment. Citing the judgement of “J & G Knowles v FCT (2000)” the
expenses of John’s employer hold material and sufficient relation among the employee
benefit and occupation8. Therefore, John would be liable for FBT however he can reduce the
7 White, Judy, and Adele Townsend. "Deductibility of employee travel expenses: The ATO's
guidance." Taxation in Australia52.11 (2018): 608.
8 Cortis, Natasha, and Christine Eastman. "Salary sacrificing in A ustralia: are patterns of
uptake and benefit different in the not‐for‐profit sector?." Asia Pacific Journal of Human

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tax liability as the child fees occurred is in respect to the full time child’s education of
employee.
John as the part of employment was also provided with the housing as the usual
residence. John contributed $100 each week as rent while $800 was contributed by employer.
The taxable amount of housing fringe benefit is determined by referring to the market value
of housing after deducting any contribution of recipient rent that effects the rental property.
Referring to “sec 25, FBTAA 1986” the accommodation provided by employer constitutes
housing fringe benefit. The taxable value of the housing fringe benefit is computed below;
Computation of Taxable value of rent
Particulars Amount ($)
Rent Per Week 800
Annualized Market Value 41600
(800 x 52 weeks)
Less: Employee’s Contribution
(100 x 52 weeks) 5200
Taxable Value 36400
Conclusion:
The employer of John here can lower the fringe benefit tax liability after deducting
the contributions made by John for the cost involved in giving fringe benefit.
Resources 53.3 (2015): 311-330.

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References:
Black, Duncan. The incidence of income taxes. Routledge, 2018.
Braverman, Daniel, Stephen Marsden, and Kerrie Sadiq. "Assessing Taxpayer Response to
Legislative Changes: A Case Study of In-House Fringe Benefits Rules." J. Austl. Tax'n17
(2015): 1.
Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
Burton, Mark. "Interpreting the Australian Income Tax Definition of Ordinary Income: Ritual
Incantation Or Analysis, When Examined through the Lens of Early Twentieth Century
Linguistic Philosophy." eJTR 16 (2018): 2.
Cortis, Natasha, and Christine Eastman. "Salary sacrificing in A ustralia: are patterns of
uptake and benefit different in the not‐for‐profit sector?." Asia Pacific Journal of Human
Resources 53.3 (2015): 311-330.
Gideon, Michael. "Do individuals perceive income tax rates correctly?." Public Finance
Review 45.1 (2017): 97-117.
Hodgson, Helen, and Prafula Pearce. "TravelSmart or travel tax breaks: is the fringe benefits
tax a barrier to active commuting in Australia? 1." eJournal of Tax Research 13.3 (2015):
819.
White, Judy, and Adele Townsend. "Deductibility of employee travel expenses: The ATO's
guidance." Taxation in Australia52.11 (2018): 608.