Taxation: Partnership Income, FBT Consequences for John's Employer

This assignment provides a comprehensive analysis of taxation, focusing on two key areas: calculating net income for a partnership business and advising an employer on the fringe benefits tax (FBT) consequences of an employee's remuneration package. The first part involves preparing working papers and determining the net income for Brekkie and Lunch and OZ Bottle Shop, a partnership operating in Sydney, for the year ended June 30, 2017. This includes constructing a profit and loss account, detailing income, cost of sales, operating expenses, and depreciation schedules to arrive at a profit before and after tax. The second part of the assignment advises John's employer on the FBT implications of providing benefits such as subsidized rent for an apartment and the payment of the employee's child's school fees. The analysis covers FBT consequences, including taxable values, reporting requirements, and potential tax liabilities. The report also highlights the importance of FBT in attracting and retaining employees, while also addressing various exemptions and deductions. The conclusion emphasizes the significance of tax in the economy and summarizes the key findings on partnership income and FBT implications.

TAXATION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
Preparing the working papers and determining net income for the partnership for the year
ended 30 June 2017 ....................................................................................................................1
Question 2........................................................................................................................................4
Advising John’s employer of the FBT consequences of John’s remuneration package.............4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Tax is the compulsory payment to government imposed on taxpayer in order to provide
funds and thus, computation of tax even becomes important. Present report deals with two
questions in which net income for the partnership business ended on 30 June 2017 will be
produced and interpretation will be made along with working papers as necessary. On the other
hand, advise will be imparted to John's employer on behalf of fringe benefits provided to him
and applicable FBT to employer. FBT consequences will be provided which will help employer
to analyse his FBT liability in terms of benefits offered to John.
Question 1
Preparing the working papers and determining net income for the partnership for the year ended
30 June 2017
Profit and Loss account for the year ended 30 June 2017
Particulars Amount (in A$)
Income
Business Sales (Cash) + Credit
sales 182055
Opening stock 9120
Add: Purchases 31665
Less: Ending stock 9750
Cost of sales 31035
Gross Profit 151020
Expenditures
Electricity bill (80 %) 1176
Mobile bills (90 %) 634
Union fees 284
Council rates (60 %) 310
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Business Insurance 1250
Account charges (ANZ Bank) 595 4249
Repairs and maintenance
expenses
Air-condition installation 1200
Shop painting 150
Refrigerator motor replacement 140 1490
Depreciation schedule
Restaurant freezer 1304
New restaurant freezer 700
Restaurant refrigeration 2204
Shop fittings structure 967
kitchen electrical appliances 629
Car – Van including
maintenance cost (90 %) 2887
Car - SUV including
maintenance cost (60 %) 3240
Fixed asset purchased 700 12631
Operating expenses 18370
Profit Before Tax 132650
Applying corporate tax 30% 39795
Profit After Tax 92855
Working Papers-
Depreciation workings
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Items Cost
Adjusted
value
Useful life of
asset (in
years) Depreciation
Restaurant freezer 8000 1480 0 6520 1304
New restaurant freezer 3500 0 10 700
Restaurant
refrigeration 14600 3580 10 11020 2204
Shop fittings structure 7800 2965 10 4835 967
kitchen electrical
appliances 3900 754 10 3146 629.2
Car – Van including
maintenance cost 17760
90% used for business
purpose 15984 1550 10 14434 2886.8
Car - SUV including
maintenance cost 44250
60% used for business
purpose 26550 10350 10 16200 3240
Fixed asset purchased 3500 0 10 700
Debtors Account
Particulars Amount Date Particulars Amount
To bal b/d 3925 Cash payments 32800
By bal c/d 3010
Credit sales 31885
35810 35810
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Creditors
Account
Particulars Amount Date Particulars Amount
To bal c/d 7010 By bal b/d 6500
Credit Purchases 510
7010 7010
Interpretation-
It can be interpreted that Brekkie and Lunch and OZ
Bottle Shop operating in Street Sydney running partnership business is profitable. It is evident
from the fact that transactions and adjustments are accounted for (Partnership ATO. 2018). The
Profit and Loss account is made in which operating expenses and income earned are computed
for the year ended 30 June 2017. It can be ascertained that business has earned total sales
amounting to 182055 and after deducting cost of sales of 31035, gross profit comes to 151020.
Moreover, depreciation expenses, repair and maintenance expenditures and other operating
expenditures are made and as a result, profit before tax arrives at 132650. By applying corporate
tax of 39795, net profit or Profit After Tax computed is 92855. Thus, it can be said that
partnership business is earning adequate profits and overall financial position is favourable.
The income statement was prepared highlighting income earned and expenses incurred
by business. The gross profit was adequate because cost of sales were controlled in a better
manner. On the other hand, partnership firm also initiated control on the operating expenditures
which led to appropriate net profit. Hence, it can be said that business is flourishing and in the
future, more profits will be earned leading to become high-income generating firm.
Question 2
Advising John’s employer of the FBT consequences of John’s remuneration package
John pays $100 of rent weekly for the apartment in Sydney whereas market value rent is
$800 per week. On the other hand, his employer pays for his child’s school fees costing $15000.
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Fringe benefits are quite significant part of business and useful way for attracting quality and
productive employees (White and Townsend, 2018). For providing fringe benefits, tax named as
FBT is applicable and John's employer must be aware of FBT consequences and is obligatory to
pay such tax. FBT is tax payable by employers for providing benefits being paid to a worker
which are apart from regular salaries or wages. It is separate from income tax as it calculated on
taxable value of fringe benefits offered to employees.
For ensuring retaining best of the workers, it is required to offer them with non-income
related benefits for maximising their job satisfaction (Kenny, Blissenden and Villios, 2018).
Moreover, it also leads to decrease in employee turnover as business provides them with benefits
in the form of car, car parking, low interest loans, payment for private expenditures, house
accommodation etc. These are all legal form of reimbursement used by corporates for their
workers in order to offer them with extra benefits besides regular salaries. FBT is payable
whether liability occurs to pay or not just like income tax. In case of various services which does
not falls under the purview of FBT, employer can claim a tax deduction on income for cost of
providing fringe benefits and also amount of the FBT being paid by employer.
The tax liability arises of FBT and can be substituted in various ways such as replacing
fringe benefits with cash salary, benefits that are exempt from FBT, offer tax deductible benefits,
using employee contributions etc. Cash equivalents can be paid in form of salaries rather than
paying FBT. On the other hand, FBT liability can be reduced when certain benefits does not fall
under the FBT obligations. While, FBT can be saved if employer pays for or reimburse a
particular expense an employee would have been claim as an deduction of income tax. On the
other side, employee contribution can be used as employees make payments towards cost of
offering fringe benefit.
FBT cannot be charged on elements such as salary or wage payments, employee share
schemes which means that benefit provided to employee from share acquisition does not fall
under FBT liability (Fringe benefits tax - a guide for employers. 2018). Superannuation fund for
employee is exempted under FBT. Employee termination payments are made when an employee
is terminated such as corporate car given to employee. Another benefit exempted from FBT is
payment made of capital nature which means payment in restraining trade or personal injury to
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person etc. Dividends are distributable profits to shareholders or employees may also subscribe
to them are also not liable under FBT.
GST consequences of providing benefits are also liable under FBT. It can be analysed
that when computing taxable value of benefit, value of fringe benefit is inclusive of GST where
applicable. On the other hand, income tax consequences also arises in range of it. The cost
incurred by employer when providing fringe benefit or exempted is regarded as an income tax
deduction under the same. Apart from this, salary sacrifice arrangement arises between worker
and employee where former agrees to forgo part of future salary entitlement in return of
providing benefits of similar value (Martin, 2018). This term is known as total remuneration
packaging. Example include employee pays income tax on minimised salary, employer may be
liable for paying FBT. It is required that employer and employee must entail written agreement
specifying terms and conditions of salary sacrifice arrangement.
Employer of John is being advised to report fringe benefits if total taxable value of
accommodation or related fringe benefits in FBT year exceeds $2000. It is the liability of
employer to report grossed-up taxable value of these benefits on their payment summary for
corresponding income year in the best manner possible. This grossed-up value of benefit reflects
gross salary that will have to be earned for purchasing benefit from post-tax dollars. It is
computed at highest marginal tax rate applicable. These all consequences of FBT shows that
John's employer is required to pay FBT tax as he is offering accommodation in Sydney
apartment to employee. In addition to this, child's fees costing $15000 is also paid by him which
classifies that liability arises to be paid to employee. On the other hand, by providing fringe
benefits, employer can easily retain productive staff and as a result, profits gets enhanced.
Moreover, government is paid FBT and legal formalities of paying is adhered to by employer.
CONCLUSION
Hereby it can be concluded that tax plays crucial role in an economy as it provides
necessary funds to government for upgrading entire economy in broader aspect. The net profit
highlighting income earned and expenditures incurred by partnership are listed which classified
net profit earned by it. Deductions and adjustments are made by which net profit is ascertained.
On the other side, FBT consequences to employer of John are being advised which provides
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clarity to business in attaining benefits for employee in effective manner. Moreover, obligations
and exemptions of FBT are also analysed which signifies significance of FBT.
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