Principles of Taxation Law 2020

Answers to Questions

Chapter 19 — Partners and partnerships

Question 19.1

Peter and Jill are in a partnership as retailers of electrical goods. The partnership records, exclusive of GST, for this income year disclose:

Receipts ($):
300,000 Gross receipts from trading
Payments ($):
100,000 Purchases of trading stocks
30,000 Partners’ salaries (each)
2,000 Interest on cash advance made to the partnership by Peter
60,000 Salaries for employees and rent paid
2,000 Legal expenses in recovering bad debts

Other details:

  •                     ·     Peter and Jill share partnership profits equally
  •                                 ·     Gambling winnings: $2,000
  • instalments of $2,000): $5,000

Calculate Peter’s taxable income for the income year explaining your treatment of each item in this question.


(1) Net income of the partnership:

Assessable income:
– sales: s 6-5 ITAA97 300,000
– excess of closing trading stock over opening stock: s 70-35 ITAA97 10,000
– purchases of trading stock: s 8-1 ITAA97 100,000
– partners’ salaries: not deductible: Scott
– interest on cash advance: s 8-1 ITAA97 2,000
– employee salaries & rent: s 8-1 ITAA97 60,000
– bad debt recovery expense: s 8-1 ITAA97 2,000
Net income of partnership 146,000

The amount available for distribution is $86,000 (being, the net income of the partnership of $146,000 less salary paid to Peter and Jill of $60,000)

(2) Peter’s taxable income:

Assessable income:
– share of partnership’s net income ($86,000 x 50%): s 92 ITAA36 43,000
– partner’s salary 30,000
– interest on cash advance: s 6-5 ITAA97 2,000
– gambling win: not ordinary income
– salary as part-time instructor: s 6-5 ITAA97 7,000
– professional journals: s 8-1 ITAA97 500
Taxable income 81,500

Question 19.2   

Alasdair is a retired solicitor. His wife Tracy is a retired school teacher. Both wish to remain active and they invest in a gift shop that is to be managed by their daughter Carol, who is aged 35. They form a partnership of three called “Carol’s Gift Shop”.

Alasdair and Tracy contributed $40,000 each to fund the purchase of the shop. The partnership agreement provides:

  •                     ·     Both Alasdair and Tracy are to receive interest at the rate of 10% pa on their capital contribution of $40,000.

The accounts for this income year show the following:

Income ($)
Sales (excluding GST) 240,000
Expenses ($)
Cost of goods sold 130,000
Interest on capital paid to Alasdair and Tracy 8,000
Salary to Carol 25,000
Superannuation to Carol 6,000
Lease payments on car (excluding GST) 7,000
Other deductible operating expenses (excluding GST) 14,000

The leased car was used 80% of the time for business and 20% of the time for private purposes.

With reference to the facts above:

  1.                      1       Calculate the net income of the partnership. Show the allocation of net income to each of the three partners.


(1) Net income of partnership:

Assessable income:
– sales: s 6-5 ITAA97 240,000
– cost of goods sold: s 8-1 ITAA97 130,000
– car lease payments ($7,000 x 80%): ditto 5,600
– other deductible expenses: ditto 14,000
Net income of partnership 90,400

Amount available for distribution is $51,400 (being, $90,400 less $31,000 of salary and superannuation paid to Carol and $8,000 of interest paid to Alasdair and Tracy).

Distributions to partners:

Interest ($40,000 x 10%) 4,000
Share of net income of partnership ($51,400 / 3) 17,133
Interest ($40,000 x 10%) 4,000
Share of net income of partnership ($51,400 / 3) 17,133
Partner’s salary and super 31,000
Share of net income of partnership ($51,400 / 3) 17,133

(2) The provision of the motor vehicle is not subject to FBT because Carol, as a partner of the partnership, is not regarded as an employee of the partnership.

Question 19.3

Johnny and Leon are adult partners in a business selling sporting goods.

The partnership records, excluding GST, for the current income year disclose the following:

Receipts ($):  
400,000 Sales of sporting goods (see Note 3)
10,000 Interest on bank deposits
21,000 Dividend franked to 60% received from an Australian resident company
10,000 Bad debts recovered
50,000 Exempt income
30,000 Capital gain from the disposal of shares acquired in 2009 and sold in June this income year (see Note 4)
Payments ($):  
10,000 Salary to Johnny
15,000 Salary to Leon
16,000 Fringe benefits tax
2,000 Interest on capital provided by Johnny
4,000 Interest on loan made by Johnny to the partnership
3,000 Johnny’s travelling expenses from home to work and return (see Note 5)
2,000 Legal fees for the renewal of lease of the office building
1,200 Legal expenses for preparation of a partnership agreement
700 Legal expenses for preparation of new lease of business premises
500 Debt collection expenses paid to a solicitor
500 Council rates on business premises
25,000 Staff salaries (see Note 6)
30,000 Purchase of sporting goods supplies
20,000 Rent on retail shop
30,000 Provision for doubtful debts (see Note 10)
10,000 Business lunches (see Note 11)
1. Partnership profits and losses are shared between Johnny and Leon on an equal basis.
2. The partnership is registered as a Small Business Entity (SBE).
3. On 1 January this income year the partners discovered that an employee had stolen $3,000 cash in respect of money received from sales to customers.
4. Johnny and Leon made a capital loss of $15,000 from the disposal of shares acquired in 2006 and sold in 2011.
5. Johnny often takes work home as he finds it convenient to plan the next day’s work in his home study.
6. Staff salaries include $10,000 paid to Johnny’s son Johnny Jr for washing the partners’ cars. The Commissioner considers $5,000 to be a reasonable commercial rate for washing the cars.
7. Stock at beginning of the year was: $20,000.
8. Stock at end of the year was: Cost $16,000
  (a) Market selling value $18,000
  (b) Replacement $17,000
9. Johnny and Leon did not make an election under s 328-285(2) of ITAA 1997.
10. Johnny and Leon are owed $30,000 by a debtor who is bankrupt. They believe it is very unlikely that they will recover any money from the debtor, and do not take any action to recover the money.
11. Johnny and Leon spent $10,000 on business lunches with overseas buyers at expensive restaurants.
12. In the last income year, Johnny and Leon made a net partnership loss of $40,000.
13. Johnny and Leon wish to minimise their tax liabilities for the income year.

Calculate the net income for the partnership for the income year.


Assessable income:
– sales: s 6-5 ITAA97 400,000
– bank interest: ditto 10,000
– dividend: s 44 ITAA36 21,000
– imputation gross up ($21,000 x 30/70 x 60%): s 207-20 ITAA97 5,400
– bad debt recovered: s 20-30 ITAA97 10,000
– exempt income: not assessable: s 6-20 ITAA97
– capital gain: regarded as made by the partners individually: s 106-5 ITAA97
– sales proceeds stolen by employee: s 25-45 ITAA97 3,000
– partners’ salaries: not deductible: Scott
– FBT: s 8-1 ITAA97 16,000
– interest on partner’s capital: not deductible
– interest on partner’s loan: deductible: s 8-1 ITAA97 4,000
– travel expenses of Johnny between home and office: personal expenses: not deductible
– legal fees for office lease renewal: s 8-1 ITAA97 2,000
– legal expenses for preparation of partnership agreement: capital expenses: ditto
– legal fees for new office lease: ditto 700
– debt collection expenses: ditto 500
– council rates: ditto 500
– staff salaries ($25,000 – 5,000): ss 8-1 & 26-35 ITAA97 20,000
– purchase of trading stock: s 8-1 ITAA97 30,000
– rent on shop: ditto 20,000
– provision for bad debts: not deductible until written off: s 25-35 ITAA97
– business lunches: not deductible assuming the expenses are not subject to FBT: ss 32-5 & 32-20ITAA97
– excess of opening stock over closing stock ($20,000 – 16,000): s 70-35 ITAA97 4,000
– net partnership loss last income year: not deductible, as the amount was attributed to partners last income year
Net income of partnership 345,700

Question 19.4

Gary and Matt are partners in a partnership running a Thai restaurant. They share profits and losses equally under the partnership agreement. In addition, Gary receives salaries of $30,000 every year from the partnership for taking on the daily management role in the restaurant. In this income year, the partnership makes a loss of $45,000 after deducting the salaries paid to Gary.

Explain the tax implications of Gary and Matt in this income year.



– Salaries to partner: not deductible to partnership: Scott

– Net loss of partnership = $(45,000) + 30,000 = $(15,000)


– Share of net loss = $(15,000) / 2 = $(7,500), available to offset against his other income

– “Salaries” of $30,000 received: not treated as income; instead, as an advance from partnership: TR 2005/7


– Share of net loss = $(7,500)

Question 19.5

Peter and Paul are partners in a partnership. Their shares of the partnership profits and losses are 60% and 40%, respectively. Peter is a resident and Paul is a non-resident. In this income year, the partnership derived the following income:

  • interest income from an Australian bank account: $30,000;
  • interest income from an overseas bank account: $18,000.

Calculate the net income of the partnership and explain how that amount will be allocated and assessed in the hands of Peter and Paul.


– Net income of partnership = $30,000 + 18,000 = $48,000

– Under the attribution system, the character of the income is preserved through a partnership.  Therefore, the share of the overseas bank interest remains as foreign-sourced income in the hands of the partners.

– Peter: share of net income = $48,000 x 60% = $28,800: s.92(1)(a) ITAA 1936

– Paul: share of net income = $30,000 x 40% = $12,000: s.92(1)(b) ITAA 1936.

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