Computation Of Partnership Net Income For The Year Ended 30 June 2017

Total Sales, Increase in Stock, and Purchase

Question 1 Provisions related with partnership firm

Statement showing the computation of the net income of the partnership for the year ended 30June 2017

Particulars	Amount ($)
Total sales (cash and credit)                                             Note 1 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	182055
Increase in stock                                                                Note 2	630
Less – Purchase (cash and Credit)                                     Note 3	(160343)
Gross income	22342
Allowable deduction
Van expenses                                                                    Note 4	1134
SUV expenses                                                                   Note 5	1230
Electricity bill                                                                   Note 6	1176
Council rates                                                                     Note 6	310.2
Mobile bills                                                                       Note 6	633.6
Business insurance                                                            Note 7	1250
Union fees                                                                         Note 7	284
Account charges (ANZ Bank)                                          Note 7	595
Repair expenses                                                                Note 8	150
Payment of interestNote 9	5500
DepreciationNote 10	3972.47
Total Deduction	16235.27
Net Income (Gross income –Total deduction)	6106.73

Notes

1. Calculation of total sales

Particulars	Amount
Cash Sales	$150170
Credit Sales*	$31885
Total Sales	$182055

*Credit Sales = Closing Debtors + Payment received from debtors – Opening debtors

= $ 3010+ $ 32800 – $ 3925

= 31885

1. Changes in Stock in considered in the computation of the assessable income of the assesse (Richardson, Taylor, &Lanis, 2016). In the present study, there is increase in stock during the period; therefore it is included in the income of the assesse.

Changes in stock = closing stock – Opening Stock

= $9750-$9120

= $630

1. 3. Calculation of Total Purchase

Particulars	Amount
Cash Purchase	$ 31155
Credit Purchase*	$ 129188
Total Purchase	$ 160343

*Credit Purchase = Closing Creditors + Payment to creditors – Opening Creditors

= $ 7010+ $ 128678 – $ 6500

= $129188

1. Van is 90% used in the business, therefore the deduction allowed

= 1260*90%

= $1134

1. SUV is 60% used in the business, therefore the deduction is allowed –

= 2050*60%

= 1230

1. According to the income tax assessment act 1997, If the assess incurred the expenses as a repair on the asset which is partly used for the business then the depreciation is allowed only to the extent of which is used for the business purpose (Pickering, 2015). In other words it can be said that no deduction is allowed if the asset is used for the personal purpose. In this problem, the deduction of the expenses incurred for the electricity, council rates and mobile bill is available only to the proportion of the business use.

 Calculation of deduction of electricity bill, council rate and mobile bill

Particulars	% used in business	Deduction allowed
Electricity Bill	1470*80%	1176
Council rates	517*60%	310.2
Mobile Bill	704*90%	633.6

1.  According to the section 25-5 of the income tax assessment act 1997, the deduction is allowed to the assesse to the extent they are incurred in relation with conducting their tax affair(Cumming, & Johan, S016).Deduction of the expenses may be allowed in the year in which they are incurred or they may be spread over a period. Business Insurance and accounting charges are incurred for the regular business operation therefore it is allowed as deduction from the assessable income (Taylor, Richardson, &Taplin, 2015). Further the payment of Union fee is also fully allowed as it is assumed that the partners are the member of the Union.
2. Section 25-10 of the income tax assessment act is specifically is related with the expenses incurred by the assesse as a repair and maintenance of the assets.  The person is allowed to claim the deduction of the expenses which is incurred for repairing of the depreciable assets or the premises or any part of the premises, subject to the condition that it must be only used for the business and for generating the assessable income (Chardon, Freudenberg, &Brimble, 2016). Section 25-10, is not applicable when the expenses incurred are in the nature of the capital expenditure.  Along with this, the deduction is not allowed on the initial repairs and the work that is regarded as the improvement. Further if because of the expenditure there is substantial change in the asset then also the deduction of the expenses is not allowed under this section (Graetz,& Warren, 2016).

According to the Tax ruling 97/23, initial repair is not regarded as the expenditure ordinarily incurred as a operating expenses for generating the assessable income. The same decision was given in the case of Law Shipping Co. Ltd.

As per the legal case law FCT v Western Suburbs Cinema, the decision of court denied the deduction of expenses incurred for replacing the ceiling as per the section 53(1) of the income tax assessment act 1936. The court held that on the notional repairs the assesse is not permitted to take the deduction.

By considering the present study, repair and maintenances expenses related with the air condition installation is considered as the capital expenditure therefore the deduction is not allowed. Further the expenses incurred for shop painting fulfills the criteria of repair and maintenance the same is considered as the revenue expenditure and allowed as deduction. Moreover expenditure on refrigerator motor replacement is considered as the capital expenditure because it results in the substantial improvement in the asset.

Deduction is allowed on the payment of interest on the borrowings only if the borrowings are used in the business (McGregor-Lowndes,  &Crittall, 2017). It is assumed that the firm used the borrowing for conducting its business activities therefore the payment of interest is allowed as deduction.

Interest = Total Payment – Principle Amount

= $ 8500 – $ 3000

= $ 5500

1. According to the ITAA 97, Division 40, depreciation means decline in the value of the depreciation asset. The assesse is permitted to claim the deduction of the depreciation expenses. There are two methods by which the depreciation can be computed, prime cost method and the diminishing method.

In the given study, the depreciation is computed by diminishing method.

Assets purchased before to 10 may 2006

= Base Value * Days held/ 365 * 150%/ effective life of the asset.

Assets purchased after 10 may 2006

= Base Value * Days held/ 365 * 200%/ effective life of the asset.

In the present problem, all assets are purchased before 2006 except the new refrigerator. The effective life of the asset is prescribed by the ATO and same is considered for the computation of the depreciation.

Gross Income and Allowable Deductions

The effective life of the freezer and refrigerator asset is 10 year, shop fitting structure is 20 years, Kitchen electrical appliances is 2 years and on the Car is 20 years. It has been assumed that kitchen electric appliances are consisting of electric appliances such as jugs and kettles and further shop fitting structure is the general fittings.

Statement of depreciation

Asset	Adjusted value	Effective life	Formula	Depreciation
New Freezer	3500	10	3500*334/365*200%/10	640.6
Freezers	1480	10	1480*365/365*150%/10	222
Refrigeration asset	3580	10	3580*365/365*150%/10	537
Shop fitting  structure	2965	20	2965*365/365*150%/20	222.375
Kitchen Electrical appliances	754	2	754*365/365*150%/2	565.5
Car	1550	8	1550*365/365*150%/10	232.5
SUV	10350	8	10350*365/365*150%/10	1552.5
Total Depreciation				$3972.475

Some times employer along with the salary and wages provides some non cash benefits to its employee, on which the Australian taxation office charges the tax, is known the fringe benefit tax. It is essential that the benefit must be provided by the employer in the course of employment (Hodgson, & Pearce, 2015). There are several types of fringe benefit on which tax is imposed on the employer under the Fringe benefit tax act 1986.

The Fringe benefit tax is calculated by the multiplying the fringe benefit tax rate on the taxable value of the fringe benefit. Along with this, the value is required to be gross up by higher or lower rate as the case may be (Braverman,Marsden, &Sadiq, 2015). The higher value applicable, when the credit of goods and service tax is available on the benefit provided by the employer and the lower gross up rate apply in case of the credit is not available. The taxable value is derived as per the valuation method prescribed under the act and every fringe benefit has own rule of the valuation. For the in-house benefit sometimes concessional treatment implemented however under the salary sacrifice arrangement, it is not applicable (Pearce,& Hodgson, 2015).

Significance of fringe benefit tax on the employer

In the present study the employer pay the school fee of the child, whole amount of the school fee is considered as a taxable value of fringe benefit.

Employer also provides the concessional rate on the accommodation as the market value of the accommodation is $ 800 per week;employee has to pay only $ 100 per week therefore the taxable value of the accommodation is –

Market value of house – Amount charged from employee

= 800-100

= $700 per Week

For 12 month = 700*52 week = $36400

Total taxable value of fringe benefit

$15000+$36400

= $51400

Fringe benefit tax liability

= $51400*49%*1.9608

= $49384.70

*31March 2017, rate of FBT is considered.

*Credit of GST is not apply therefore the lower gross up rate is considered.

References

Braverman, D., Marsden, S., &Sadiq, K. (2015).Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, 1.

Chardon, T., Freudenberg, B., &Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.

Cumming, D., & Johan, S. (2016). Venture’s economic impact in Australia. The Journal of Technology Transfer, 41(1), 25-59.

Graetz, M. J., & Warren, A. C. (2016).Integration of corporate and shareholder taxes. Sage.

Hodgson, H., & Pearce, P. (2015).TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), 819.

McGregor-Lowndes, M., &Crittall, M. (2017). An examination of tax-deductible donations made by individual Australian taxpayers in 2014-15.Australian Centre for Philanthropy and Nonprofit Studies, Queensland University of Technology.

Pearce, P., & Hodgson, H. (2015).Promoting smart travel through tax policy. The Tax Specialist, 19, 2-8.

Pickering, M. E. (2015). An Exploratory Study of Profit Reporting Differences of Publicly Owned Professional Service Firms and Partnerships. Australian Accounting Review, 25(3), 262-278.

Richardson, G., Taylor, G., &Lanis, R. (2016). Women on the board of directors and corporate tax aggressiveness in Australia: An empirical analysis. Accounting Research Journal, 29(3), 313-331.

Taylor, G., Richardson, G., &Taplin, R. (2015). Determinants of tax haven utilization: evidence from Australian firms. Accounting & Finance, 55(2), 545-574.