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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
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
Market value $860,000
Cost $790,000
Replacement value $846,000
Required:
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 .
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 31st 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 |
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.
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 12th October 2017].
Tax deductions, 2017. Available through: < https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Rental-property-expenses/> [Accessed on 12th October 2017].
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