Q What are the tax consequences for the partnership and each partner Home, - What are the tax consequences Question 1 - Referring to relevant statutory provisions and common law, discuss whether the following amounts would be as an allowable deduction against assessable income. a) Provision of doubtful debts of $4,200 for a detective agency. Under sections 25 to 35 (1) of Income Tax Assessment Act 1997, provision of doubtful debts is not an allowable deduction against assessable income. Bad debt are allowed as a deduction only when they actually turn bad. They are not allowed as a deduction while they are doubtful. b) Speeding fines of $ 700 paid by an owner to a driver. Speeding fines are not deductible against assessable income. Section 26 - 5 of the Income tax Assessment Act 1997 clearly states that any fine that is imposed for breaking of any Australian law is not a deductible expense. So the fine of $ 700 will not be deductible. c) An amount of $1,000 paid to a solicitor for preparing a partnership deed. The amount of $1000 paid to a solicitor for preparing a partnership deed is a legal fee. It is deductible against assessable income under section 8- 1 of the Income Tax Assessment Act 1997. d) Travel cost of a business executive to attend a trade fair in Munich paid by the employer. Business travel costs paid by the business are deductible against the assessable income of the business, under Income Tax Assessment Act 1997. e) Newspapers purchased by an accountant who advises clients on financial and investment matters. Section 8-1 of the Income Tax Assessment Act 1997, states that any expense incurred towards earning of income is a deductible expense. For the accountant who advises clients on financial and investment matters, newspapers are a deductible expense. Question 2 - Andrew and Piter are paterners, carrying on a business as a partnership. The partnership agreement provides that Andrew is to be paid an annual salary of $40,000. The balance is to be distributed equally between Andrew and Piter. The partnership agreement also provides that the partners are to share the losses equally in the case of losses. The partnership's assessable income for the income year is $100,000. Deductible expenses are $120,000. What are the tax consequences for the partnership and each partner? Answer - As per Tax Ruling 94/8, a partnership is not a taxable entity. The profits of the partnership are taxed as personal incomes of the partners. As per Tax Ruling (TR) 2005/7, salary drawn by partners is not a deductible expense while calculating the profit of the partnership. Assessable income of the partnership : $100000 Add back the salary drawn by Andrew: $40000 Less deductible expenses : 120000 Taxable income of the partnership: 20000 This $20000 will be divided equally between the partners. Each will get $10,000. This $10,000 will be taxed as their personal income. Related: Explain the Income Tax Assessment Act What are the tax consequences Calculate what amount is allowed as deduction What is meant by term tax evasion
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