LAWS20060 Australia Taxation Law

In working out its net income, a partnership claims deductions for salary it pays to a partner and for interest on a partner’s capital contribution to the partnership. Advise the partnership on the correctness or otherwise of these claims.Lemongrass Pty Ltd is a small company incorporated in Victoria, Australia. The company was incorporated in 2005 to manufacture and sell candles. Its sales revenue regularly exceeds $100,000 each year. The company sells its candles to a local retailer for $5.50 per dozen. It also sells its candles to a retailer in Vanuatu as the candles have been very popular there for $6.60 per dozen. On 1 January of the current year, Lemongrass Pty Ltd purchased a car for $22,000, which it provided to its managing director as she has to do a lot of travelling for work.

 

The car was purchased from Big Cars Pty Ltd, a large national car retailer with sales revenue in excess of a million dollars per year. Advise Lemongrass Pty Ltd of its GST consequences arising from the above information. Assume its
input tax credits are 35 cents per dozen candles.Bluebottle Pty Ltd is an Australian resident company. Assume its company tax rate is 30 percent. Its profit is $200 on which it pays $60 tax. It has two shareholders, Spoke and Sallers. Spoke is an Australian resident for tax purposes and Sallers is a resident of Vanuatu. Bluebottle declares a dividend
of $70 fully franked and pays that $70 to each of the shareholders on 30 June. Discuss the tax treatment of the dividends for each shareholder. 

Because of a contractual dispute, a company was unsure who it owed money to. It commenced proceedings and paid money into court. The court ordered that the money be held by a firm of 3 solicitors on trust for the as yet undetermined party that would ultimately be successful in the litigation. In income year 1, before the matter was resolved, the trust earnt $40,000 interest income.In income year 2 the trust earnt $20,000 in interest before the court determined on 1 December who the correct payee was. On that day the solicitors paid the quantum plus interest to that payee.Who will be taxed on the $40,000 interest earnt in income year 1, before the correct payee has been
determined Who is taxed on the $20,000 interest earnt in year 2 that has been paid to the appropriate payee.

 

Identified and clearly stated the relevant issues applied relevant legal principles to the resolution of these issues integrated and evaluated relevant knowledge from both the material covered in this unit and your own independent research developed and sustained a concise and convincing legal argument through to a logical.

Issue:

The issue to be discussed here is whether the payment of salary, bonus or allowance of any nature, here in after to be referred to as remuneration to partners, will be allowed as deduction or not in calculating the assessable profit of the partnership. Whether the payment of interest on partners’ capital will be allowed as deduction or not in computing the net income of the partnership is the important aspect here.

Rules:

According to the relevant legislation remuneration to partners is allowed as deduction to compute profit from such partnership only if the remuneration paid to the partners who have been assigned certain duties in partnership and the remuneration has been paid to the partner in his capacity as a worker. In short, only remuneration paid to working partners will be allowed as deduction in computing net income of the partnership.

The payment of interest is allowed to be deducted from the revenue of the partnership to calculate the net income of such partnership. However, the rate of interest should not be more than the prescribed rate. Thus, the rate of interest paid on the partners’ capital or the statutory rate of interest which ever lower should be charged against the revenue of the partnership to compute the net income of such partnership.

Application:

Thus, the claim of the partnership in respect of the salary payment to its partners for computing net income will be allowed as deduction provided the partners are working partners and have been paid such salary in their capacity of such worker. Another important thing to be remembered here is that the remuneration must be justified, i.e. it should not be more than the statutory amount for respective duties.     

Here, the partnership firm has provided interest to the partners’ on their capital contribution. Thus, if the rate of interest on such capital is lower or equal to the statutory rate of interest then the whole amount of interest will be allowed as expenses in the period of payment to calculate the net income of the partnership. However, in case the rate of interest is more than the prescribed statutory rate of interest then only the amount of statutory interest shall be deducted from revenue of the partnership to ascertain the net income from the partnership. In short payment of interest will be allowed as deduction to the extent the rate of interest on partners’ capital is either equal or lower than the statutory rate. In case of payment of higher rate of interest on partners’ capital only interest up-to statutory limit will be allowed.

Conclusion:

Hence, the matter to be assessed here is whether the salary paid to the partners were for certain duties assigned to them. If the salary was paid to the working partners then the net income from the partnership will be calculated after deducting such salary in the revenue statement.

Interest on partners’ capital is an allowable expenses to a prescribed limit. Anything in excess of that prescribed limit will be disallowed in computing net income of the partnership.

Issue:

The issue here to be discussed is the liability of Lemongrass Pty Ltd, a small company in Victoria, Australia, involved in the business of selling candles; in respect of the sales made by it and the purchase of a car that is provided to one of the employees of the company for the work purpose.               

Rules:

According to Division 7 of the Goods and Services Act, 1999 the liability to GST is attracted to each and every company involved in selling products other than GST-free products. Apart from GST free products an organization will liable to pay GST on sale of all other products. However, an organization can use the benefit of small trader by not paying GST in case the turnover of such organization is less than $100000.00 annually. Thus, if a company’s turnover is less than $100000.00 a year then it will not be liable to pay GST on its sales.

Sub-division 19-C of the Goods and Services Act, 1999 has provided the adjustments to be made for GST paid on acquisitions. According to this section the company paying GST on acquisitions if used for business purpose will be allowed to take credit for the same to ascertain the final GST liability of such organization.    

Application:

Lemongrass Pty Ltd is a small Australian company situated in Victoria sells candles to local retailer and others. Since the annual sales of the company exceeds $100000.00 regularly the company is liable to pay GST on its sales of candles. Since no additional information has been provided on GST except the price of candles sold to local and other retailers, the prices will be considered inclusive of GST. Thus, the liability to GST will be calculated accordingly assuming that the price of $5.50 and $6.60 are both inclusive of GST. In case of the $22000.00 car purchased by the company that has been provided to the managing director of the company. The main purpose of his job the amount of GST paid on such car will be allowed as GST credit to the company which the company will be able to set off against the overall GST liability on proportionate basis.

Conclusion:

Taking into consideration the relevant rules and regulations in regards to GST in the country it can be said that the Lemongrass Pty Ltd is liable to pay GST for the sales of candles. It is also to be noted that GST paid by the company in acquiring the car to be used by its managing director shall be allowed as GST credit to be set off against GST liability in respect to the total sales of candles by the company. Hence, the GST liability of the company will be ascertained accordingly.

Issue:

Discussing the tax treatment in the hands of the shareholders for receiving fully franked dividends from an Australian resident company is the main issue here.

Rules:

Firstly, it is important to know what fully franked dividend is to assess the implication of such dividends in the hands of the recipient. Fully franked dividends are the dividend on which the company has already paid the tax due, thus, the shareholders, i.e. the recipient of such dividend can take credit of such tax while assessing their overall tax liabilities and accordingly, can adjust their tax payment. Whether the recipient of fully franked dividend is an Australian resident or a non-resident Australian the tax implications will be similar for both of them. Thus, the recipient of fully franked dividend will be allowed to take credit for the tax paid on such dividend by a company.

Hence, the complete treatment in the hands of the recipient of fully franked dividend is as following;

Firstly, the recipient will have to add the dividend received from the company to his / her other assessable income to ascertain the taxable income of such individual. After the computation of taxable income, the relevant tax rates shall be used to ascertain the tax liability of such an individual for the relevant income year. The final liability of the individual will be calculated by deducting the tax paid by the company on fully franked dividend received him / her from the company.

Application:

Bluebottle Pty Ltd is an Australian company having made an after tax profit of $140 has paid fully franked dividend to its shareholders. Since the company has only two shareholders namely, Spoke and Sallers both have received $70 each as dividend. The company has already paid tax on this dividend. Thus, Spoke and Sallers both will after ascertaining their income tax liability in accordance with the steps provided in the previous paragraph, the income tax liability of both the shareholders shall be adjusted for the tax paid on dividends by Bluebottle Pty Ltd.   

Conclusion:

Irrespective of the residential status of Spoke and Sallers, the two shareholders of Bluebottle Pty Ltd, both will be allowed to take credit of for the tax paid on such dividend by the company in ascertaining their final income tax liabilities in Australia for the relevant income year. It is to be noted here that while ascertaining the assessable income of Spoke and Sallers for income tax purposes in Australia the grossed up value of dividends received by them from the company shall be considered.

Issue:

The matter to be ascertained here is the liability in respect of interest on funds held by solicitors in trust for a final payee to be decided by a court of law. Thus, the issue here is to ascertain the liability in respect of interests earned on such funds held in trust by the solicitor / solicitors over a period of time.

Rules:

The rules and regulations that governs the solicitors trust accounts are provided in Legal Profession Act, 2004 and Legal Profession Regulation 2005. Periodic random audit of such trust accounts along with external examination in every year shall be conducted on such trust account. In case the funds held in trust earns interest then the solicitor will not be liable for such interest to pay taxes to the Government. The person that will be liable to pay tax on the amount of interest is the final recipient of such amount, i.e. both the principal amount of fund as well as the interest. It is to be understood that a solicitor is only holding the fund in trust for the final beneficiary and he is not the beneficiary. A person holding funds in trust for a beneficiary will not be liable to the Government for payment of tax for the interest accrued to such funds. The amount of interest earned will be taxed in the hands of the final beneficiary who is going to receive the whole amount of the fund.

Application:

In this case due to uncertainty of a company in paying its dues as a consequence of contractual dispute the court has asked the company to pay the dues to a fund which is to be held by a solicitor in trust for the final payee. The trust has earned interests of $40000 and $20000 in first and second year after which the court has decided the final payee and the fund amount along with interests have been transferred to the final payee as decided by the court. The interest earned in income year 1 of $40000 as well as the interest earned in income year 2 of $20000 both will be taxed in the hands of the final recipient and the solicitors will not be charged for any of the interests earned to ascertain their income tax liability. The solicitors only held the fund in trust for the payee and have no right on the principal and on interests thus, only the final beneficiary will be liable to pay taxes for the interests earned on such funds.

Conclusion:

Taking into consideration the fact as discussed in the above it can be said that for the interest of $40000 earned in income year 1 and interest of $20000 earned in income year 2 it is the payee to whom the whole amount of fund has been paid will be liable to pay tax. The solicitors held the fund in trust for the final beneficiary till the time the court decided the final payee to whom the payment is to be made hence, the solicitors will not be liable to pay taxes.    

Reference

Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion. Routledge, 2017.

Douglas, Heather, Francesca Bartlett, Trish Luker, and Rosemary Hunter, eds. Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing, 2014.

Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance. Pearson Higher Education AU, 2015.

Lignier, Philip, Chris Evans, and Binh Tran-Nam. "Tangled up in tape: The continuing tax compliance plight of the small and medium enterprise business sector." (2014).

McLachlan, Rosalie. "Deep and Persistent Disadvantage in Australia-Productivity Commission Staff Working Paper." (2013).

Richardson, Grant, Grantley Taylor, and Roman Lanis. "The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis." Journal of Accounting and Public Policy 32, no. 3 (2013): 68-88.

Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’ view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

van den Nouwelant, Ryan, Gethin Davison, Nicole Gurran, Simon Pinnegar, and Bill Randolph. "Delivering affordable housing through the planning system in urban renewal contexts: converging government roles in Queensland, South Australia and New South Wales." Australian Planner 52, no. 2 (2015): 77-89.