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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:

  1. Calculate the net partnership income for the partnership for the year ended 30 June 2017.
  1. 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 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

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 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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