LAW511 Australian Taxation Law

Published : 22-Oct,2021 | Views : 10

Question:

Barry Lee and Brett Wong are adult Australian residents. On 1 July 2003 they formed a partnership called ‘The Two B’s’ to run a sports supply business. The partnership supplies football clothing and equipment to football clubs in Australia. The business is registered for GST.

The partnership accounts for the business for the year ending 30 June 2017 disclose the following financial details:

The following receipts and expenses are exclusive of GST unless otherwise stated.

RECEIPTS

Gross trading receipts 3,900,000

Capital gain from sale of shares held in an Australian internet company 20,000

see note (ii) below

Cash dividend from BHP 10,500

See note (iii) below

Interest income from Bank of China 11,250

See note (iv) below

Insurance proceeds received for writing off the car 80,000

EXPENSES

Salary to Barry 40,000

Interest on loan of funds by Brett 10,000

Salaries paid to employees 950,000

Rent and power 60,000

Purchase of trading stock (see note (v) below) 620,000

Superannuation to staff 85,500

Superannuation paid on behalf of Barry 25,000

Superannuation paid on behalf of Brett 25,000

Purchase of BMW motor vehicle for Brett (see note (vi) below) 120,000

Purchase of treadmill and exercise bikes (see note (vii) below) 180,000

Interest on bank overdraft 18,623

Provision for long service leave (see note (viii) below) 25,984

Provision for bad debts (see note (ix) below) 122,000

Notes - additional information in respect of the partnership

The partnership agreement stipulates that Barry and Brett share profits and losses in respect of both income and capital gains and losses on the basis of 50% to Barry and 50% to Brett.

The partners purchased the Australian internet company shares in January 2004 and sold them on 31 May 2017.

The dividend was fully franked.

The Bank of China withheld AUD $1,250 from the gross interest

Trading stock at the beginning of the financial year was $370,000. The trading stock at the end of the year was valued as:

Market value $860,000

Cost $790,000

Replacement value $846,000

The car was purchased for use by Brett as he was responsible for sales. The car was purchased on1 January 2015. It was only used 100% for work purposes. On 31 May 2017 the car was involved in an accident and written off. The partnership received $80,000 from the insurance company on 15 June 2017. The purchase price only is exclusive of GST.

Various items of equipment were purchased on 1 July 2016 for $65,000 and 1 January 2017 for $115,000. The effective life for the equipment is 4 years. The figures are exclusive of GST. The items are used 100% for business purposes.

During the year the partnership paid out long service leave to staff of $13,507.

During the year the partnership wrote off as bad debts $36,849.

Required:

Calculate the net partnership income for the partnership for the year ended 30 June 2017.

Calculate the tax payable for Barry for the year ended 30 June 2017.

Additional information for Barry:

Income

7,000 Dividends received from an Australian resident company fully franked

30,000 Gross salary received from part-time lecturing at the University

($9,000 in PAYG W)

2,000 Refunds from Government Medicare System for medical expenses

5,000 Interest on Bank Deposits

10,000 Rental income from an investment property

Payments

1,200 Train fares for travel to and from work

2,200 Rates on family home

900 Electricity for family home

3,000 Tax agent’s fees for preparing tax return for Barry

5,000 Gross medical expenses for Barry and his wife.

2,000 Rates paid on abovementioned investment property

15,000 Interest paid on loan to acquire the investment property

5,000 Cost of painting the investment property immediately after purchasing the property

1,000 Cost of replacing roof tiles on the investment property after the roof was damaged in a severe storm in February 2017

15,000 Cost of extending the bathroom in the investment property

5,000 Maintaining Barry’s father Myron, who is a permanent resident of Australia and who earned $1,282 adjusted taxable income during the 2016-2017 income year.

Barry and his wife have Private Hospital Insurance with HCF .

Answer:

Calculate net partnership income

Particulars	Amount
Gross trading receipts	3900000
Cash Dividend(W.N.2)	0
Interest income from bank of china(W.N.3)	10000
Insurance proceeds received for writing off the clear	80000
Total	3990000
Salary to Barry	40000
Interest on loan of funds by Brett	10000
Salaries paid to employees	950000
Rent and power	60000
Purchase of trading stock(W.n.4)	200000
Superannuation to staff	85500
Superannuation paid on behalf of Barry	25000
Superannuation paid on behalf of Brett	25000
Purchase of BMV motor vehicle(W.N.5)	40000
Purchase of treadmill(W.N.6)	135000
Interest on bank overdraft	18623
Provision for long service(W.N.7)	12477
Provision for bad debts(W.N.8)	85151
Total	1686751
Income from partnership income	2303249
GST @10%(Section 8.1 of ITAA 1997)	230324.9
Franking credit on BHP shares	10500
Net Income of partnership	2062424
Barry	1031212
Brett	1031212
Capital gain	13426.88
Barry	6713.439
Brett	6713.439

Working notes
Particulars	Amount
Capital gain	20000
Indexation factor	0.671344
Indexed capital gain	13426.88
CPI of 1999	164.3
CPI in 2017	244.733
CPI of 1999/CPI in 2017	0.671344

Indexation rules has application in determining the indexed capital gain arises from the sales of shares from the Australian company. It is long term capital gain as the shares acquired by an individual in January 2004 and sold the same on 31^st may 2017 that is the reason it falls under the category of long term capital gain as the shares held with the individual for more than one year (Indexation, 2017). Shares acquired by an individual in 2004 which according to the principle falls in the slab of post September 1999 for ascertaining the indexation factor.

Indexation factor is determined by dividing consumer price index of 1999 with the consumer price index of the sale year to ascertain the indexation factor.

Cash dividend received by the partnership from the BHP is not treated as the normal receipt as this dividend is fully franked as the tax paid on the total amount of the dividend is used as a tax deduction from the total taxable income of the firm. It is deducted from the total income of the partnership to reduce its overall tax obligations.

Particulars	Amount
Gross interest	11250
Tax withheld (S207)	1250
Net interest received	10000

Out of total interest income received by the firm from bank of china $1250 is keeps as tax withheld amount that reduces the total interest amount of $11250.

Particulars	Amount
Opening stock	370000
Purchase	620000
Less: closing stock	790000
Balance	200000

The valuation of the closing stock based on the inventory valuation principles of IAS that closing stock is determined on lower of costs or net realisable value. Cost of closing stock is $790000 and net realisable value is $860002 out of which $790000 is consider as the suitable amount.

Particulars	Amount
Purchase price	120000
Insurance receipts	80000
Balance	40000

Particulars	Amount
Purchase	180000
Depreciation (S40-230)	45000
Balance	135000

Particulars	Amount
Long service leave	25984
Paid	13507
Balance (Section 15.5 of ITAA1997)	12477

Particulars	Amount
Provision for bad debt	122000
Bad debt written off	36849
Balance	85151

Calculate tax payable of Barry

Particulars		Amount
Capital gain		6713.439
Partnership income		1031212
Dividend received from an Australian resident company		7000
Gross salary(W.N.1)		39000
Refunds from Government Medicare systems		2000
Interest on Bank deposits		5000
Rental income from an investment property		10000
Total		1100925
Train fares for travel to and from work		1200
Rates on family home		2200
Electricity for family home		900
Tax agent's fees		3000
Gross medical expenses		5000
Rates paid on investment property		2000
Interest paid on loan		15000
Cost of painting		5000
Cost of replacing roof tiles		1000
Cost of extending the bathroom		15000
Maintenance expenses(W.n.2)		3718
Total expenses		54018
Gross income		1046907
Tax deductions
Train fares for travel to and from work		1200
Rates on family home		2200
Electricity for family home		900
Tax agent's fees		3000
Gross medical expenses		5000
Rates paid on investment property		2000
Interest paid on loan		15000
Cost of painting		5000
Cost of replacing roof tiles		1000
Cost of extending the bathroom		15000
Maintenance expenses(W.n.2)		3718
Total deductions		54018
Taxable income		992889.5

Taxable income	992889.5
$0-$18200	0
$180000 and above	446800.3
Total tax	446800.3
Medicare levy @2%	8936.005
Total tax	455736.3

Tax is calculated as per the individual tax rates slab as tax rate of 45% as the taxable income of Barry is higher than $180000 in a particular year (Tax deductions, 2017). The current taxable income is lesser due to the tax deductions received by the firm to reduce its overall tax liabilities imposed in a particular year.

References

Indexation, 2017. Available through: < https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-indexation-method-of-calculating-your-capital-gain/> [Accessed on 12^th October 2017].

Tax deductions, 2017. Available through: < https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Rental-property-expenses/> [Accessed on 12^th October 2017].