CHAPTER 19 — PARTNERS AND PARTNERSHIPS
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.
Answer
(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 |
| Deductions: | |
| – 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 |
| Deductions: | |
| – 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 Calculate the net income of the partnership. Show the allocation of net income to each of the three partners.
Answer
(1) Net income of partnership:
| $ | |
| Assessable income: | |
| – sales: s 6-5 ITAA97 | 240,000 |
| Deductions: | |
| – 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:
| $ | |
| Alasdair | |
| Interest ($40,000 x 10%) | 4,000 |
| Share of net income of partnership ($51,400 / 3) | 17,133 |
| Tracy | |
| Interest ($40,000 x 10%) | 4,000 |
| Share of net income of partnership ($51,400 / 3) | 17,133 |
| Carol | |
| 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) |
| Notes | ||
| 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.
Answer
| $ | |
| 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 | – |
| Deductions: | |
| – 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.
Answer
Partnership:
– Salaries to partner: not deductible to partnership: Scott
– Net loss of partnership = $(45,000) + 30,000 = $(15,000)
Gary:
– 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
Matt:
– 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.
Answer
– 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.
