Partnership Tax Return And Fringe Benefits Tax: A Case Study

Provisions related to deductions, allowances and exemptions for assessable income

Income tax assessment act 1997, Section 995-1(1), describe the partnership as an association of the two or more persons running business as a partner in lieu of statutory income. In the layman language, it can be said that partnership is the relationship between the two or more than two people carrying out the commercial activity with the view of earning a profit (Burkhauser, Hahn, and Wilkins, 2015). The partnership is not considered as the separate legal entity from the persons carrying the business.

The income tax is levied only on the limited partnership, other than this there is no tax charge on the partnership firm. Along with this, the deduction of the partnership loss is not allowed from the assessable income of the partnership firm (Chardon, Freudenberg, and Brimble, 2016).

The present study is related to the determination of the net income of the partnership firm. There are several provisions described under the income tax related to the deduction, exemption, allowance and many others for the computation of the assessable income of the firm (Chardon, Freudenberg and Brimble, 2016). The related provisions are described as below –

Generally, all the expenses incurred for producing the taxable income is allowed as deduction.  Income tax assessment act 1997, section 25-10 is related with the deduction in case of repair and maintenance expenses incurred by the assessee. Generally, all the revenue expenses are allowed as a deduction, and no deduction can be claimed of the capital expenditure.  Along with this, only that portion of the expenses can be claimed which is related to the commercial activity. The term repair is not defined under the Act; it is ascertained by considering the facts and circumstances.

Moreover, the repair on the initial installation is considered as the capital expenditure, and it is not allowed as a deduction (Daley and Wood, 2016). Further, any expense which improves the functional quality or substantially enhances the performance is regarded as the capital expenditure, and the same is not allowed as deduction.

As per the legal case law of Kitto J in W Thomas, expenditure incurred for maintenance of the income-generating asset is considered as the revenue expenditure, and the same can be claimed as a deduction.

All the expenses related to the borrowing are allowed as deduction if the borrowing is used for the business. Generally, the expenses can be claimed during the term of the loan. The payment of interest is allowed as a deduction (Doerrenberg, Peichl, and Siegloch, 2017).

Computation of net income of the partnership for the year ended 30 June 2017

Depreciation is allowed as a deduction from the income of the assessee. There is two methods by which the depreciation can be computed, which are the prime cost method and the diminishing value method (Feldstein, 2015).

Depreciation by the prime cost method

Cost of the asset*(days held/365)*100%/effective life of the asset

Depreciation by diminishing value method

If the asset is purchased before 10May 2006

Base Value*(days held/365)*150%/effective life of the asset

If the asset is purchased after 9 May 2006

Base Value*(days held/365)*200%/effective life of the asset

The income tax act prescribes the effective life of the asset separately, which is considered while calculating the depreciation.

Any payment related to the membership is allowed as a deduction only if the partner is the member of that particular union.

Determination of net income of the partnership for the year ended 30 June 2017

Particular	Working Notes	Amount
Inflows
Sales in cash	1	$150170.00
Sales in credit	2	$31885.00
Change(Increase) in Stock	3	$630.00
Total		$182685.00
Outflows
Car Expenses	4	$2364.00
Electricity expenses	5	$1176.00
Council rates	6	$310.20
Business insurance	7	$1250.00
Mobile bill	8	$633.60
Union fees	9	$284.00
Account charges	10	$595.00
Repair expenses	11	$150.00
Interest on loan	12	$5500.00
Cash Purchases	13	$31155.00
Credit Purchase	14	$129188.00
Depreciation	15	$3617.365
Total Expenses		$176219.165
Net Business Income	(A-B)	$6465.832

Working Notes

1. 1. Cash sales are considered as the income of the business as it is derived from the normal business activities.
2. Calculation of credit sale

Particulars	Amount
Cash received from debtors	$32800
Closing Debtors	$3010
Opening debtors	($3925)
Credit Sales	$31885

1. Purchase and sale of stock are regarded as the normal trading activity. If the closing stock is more than the opening stock, then it is considered in the assessable income, and if the closing stock is less than the opening stock then the same is allowed as a deduction from the assessable income (Pawson, 2017).

Calculation of increase or decrease in stock

Particulars	Amount
Closing stock	$9750
Opening Stock	($9120)
Increase in Stock	$630

1. The business has two cars, a van and an SUV.  The Van is used 90% for the business purpose, and the SUV is used 60% for the business purpose. The deduction is allowed only to the extent of it is used in the business.

Particulars	Maintenance Expenses	Deduction Allowed
Van	$1260	$1260*90% = $1134
SUV	$2050	$2050*60% = $1230
Total Deduction		$2364

1. Only 80% of the electricity expenses are related to the business. Therefore, the deduction is allowed only to the extent of the 80%, that is 1470*80% = $1176
2. Only 60% of the Council expenses is related with the business. Therefore, the deduction is allowed only to the extent of the 60%, that is 517*60% = 310.2
3. Business insurance is considered as the revenue expenditure incurred in the course of business. Therefore, it is fully allowed.
4. Only 90% of the Mobile Bill is related with the business. Therefore, the deduction is allowed only to the extent of the 90%, that is 704*90% = $633.6
5. Union Fee is fully allowed as deduction as it is assumed that the partners are the member of the Union.
6. Account Charges is considered as the revenue expenditure incurred in the course of business. Therefore, it is fully allowed.
7. Repair expenses related to the installation of the air conditioner is considered as the capital expenditure. Therefore, it is not allowed as a deduction. The shop painting is considered as the revenue expenditure because it is incurred for maintenance of the capital asset. Therefore, the same can be claimed as a deduction from the assessable income (Woellner et al. 2016). Moreover, the repair expenses related to the refrigerator motor replacement is not considered as the revenue expenditure because it substantially improves the quality as well as the functionality of the asset. Therefore only $ 150 is allowed as deduction out of the total repair expenses 1490.
8. Interest on the loan is allowed as a deduction because it is the expense related to the borrowing.

Particulars	Amount
Total repayment	$8500
Principal Amount	$3000
Amount of Interest	$5500

1. Cash Purchase should be reduced for calculation of the net income.
2. Computation of the credit Purchase

Particulars	Amount
Cash payment to the creditor	$128678
Closing Creditors	$7010
Opening creditors	($6500)
Credit purchase	$129188

1. Depreciation is charged on the basis of the diminishing method. The effective life of the asset is as per the life prescribed by the ATO.

* Refrigerator is considered as the general refrigerator therefore effective life is 10 year.

* Shop Fitting furniture is assumed that it is not freestanding therefore the effective life is 20 years.

* The effective life of Kitchen electrical appliances is 2 years; it is assumed that it includes the electric jugs and kettles.

* Effective life of the car is prescribed by the ATO is 10 years. However, the depreciation is allowed only to the extent t is used in the business.

Asset	Adjusted value	Effective life	Formula	Depreciation
Restaurant Freezer	$1480	10	1480*(365/365)*(150%/10)	$222
Restaurant refrigerator	$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 – Van	$1550	8	1550*(365/365)*(150%/8)	290.625*90% = $261.56
Car – SUV	$10350	8	10350*(365/365)*(150%/8)	1940.625*60% = $1164.38
New restaurant freezer	$3500	10	3500*(334/365)*(200%*10)	$640.55
Total depreciation	$3613.37

Fringe benefits are the extra (non-cash) amenities provided to the employees over and above their usual salary or wages (Hodgson and Pearce, 2015). These benefits are offered by the companies as a supplement to the basic salaries, which helps in attracting the best talent from the market. By providing fringe benefits, the employers have the upper hand in the recruitment process and enjoy a lower employee turnover ratio due to an increased employment term in the employer’s organisation (Butler and Calcott, 2018).

Fringe benefits usually encompass amenities like health insurance, company sponsored vaccination, educational aid, food coupons and other miscellaneous freebies (Braverman, Marsden and Sadiq, 2015). It may be noted that the fringe benefits, depending upon their categorisation done by the Internal Revenue Department, might be brought within the scope of taxation. However, the liability to discharge the fringe benefits tax lies upon the employer and not the employee, under the Australian tax system vide the Fringe Benefits Tax Assessment Act, 1986 (Tang and Wan, 2015).

Fringe Benefits Tax liability

Applicable Provisions and Laws

The FBT (Fringe Benefits Tax) rate for the FBT year ending March 2019 is fixed at 47%, a sum total of the highest marginal tax rate which tantamounts to 45% and the Medicare Levy currently fixed at 2%, to be paid by the employer. The taxable amount of the fringe benefits will be calculated as follows: –

Gross Value of the Fringe Benefits Paid by the Employer

Less:  Any Reimbursement, whether in Part or Full, Made by the Employee

= Taxable Amount of Fringe Benefits

However, it shall be noted that the Fringe Benefits Tax is imposed only if the value exceeds the threshold limit, and is even exempt in some cases. Following are the fringe benefits that are exempted under the Australian tax system:-

• Employee Relocation Expenditure
• Backward Area Accommodation
• House Rent Allowance, subject to certain conditions
• Other ancillary benefits such as free laptops, briefcases and mobile phones.

FBT Consequences in John’s Case

In the given case, John, a senior executive in a printing company is receiving fringe benefits to the tune of $56, 600, calculated as follows: –

Child’s Education Allowance  = $15, 000

Add: Apartment Accommodation  = $41, 600 ($800 per week x 52 weeks)

Total Fringe Benefits Provided           = $56, 600 

Since the above two benefits do not fall in the exemption list, the liability to pay the FBT persists upon the employer. However, the amount paid by John in respect of the accommodation will be deducted from the gross taxable value, and the final amount chargeable to tax will be: –

Gross Value of Fringe Benefits Provided (as calculated above) = $56, 600

Less: Reimbursement Value to be Deducted ($100 x 52 weeks)    = $5, 200

Net Taxable Value of Fringe Benefits   = $51, 400

Since the above fringe benefits fall in type 2 (lower gross up rate) category, no GST credit claim will be available. Hence, the calculation for FBT for the year ending March 2019 in John’s case will be: –

Net Taxable Value of Fringe Benefits x FBT Rate x Type 2 Gross-up Rate

= $51, 400 x 47% x 1.8868

Fringe Benefits Tax     = $45, 581.3144

References 

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

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use. International Tax and Public Finance, 25(3), pp.654-672.

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

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

Daley, J. and Wood, D., 2016. Fiscal challenges for Australia: The next decade and beyond. Asia & the Pacific Policy Studies, 3(3), pp.475-494.

Doerrenberg, P., Peichl, A. and Siegloch, S., 2017. The elasticity of taxable income in the presence of deduction possibilities. Journal of Public Economics, 151, pp.41-55.

Feldstein, M., 2015. Raising revenue by limiting tax expenditures. Tax Policy and Economy, 29(1), pp.1-11.

Hodgson, H. and 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), p.819.

Pawson, M. 2017. Reflections on the Australian tax system. Taxation in Australia, 52(3), 106.

Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), p.17.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. 2016. Australian Taxation Law 2016. OUP Catalogue.