Seminar 9 Troy and Jenny (both Australian residents)

Seminar 9

Troy and Jenny (both Australian residents) have a takeaway coffee outlet in Brisbane city. They are carrying on the GST-registered business together in a partnership using the accruals basis to account for income tax and the non-cash basis for GST. Under the partnership agreement, Troy receives an annual salary of $70,000 as he is actively running the business and Jenny receives interest on capital contribution of $10,000, as she contributed $200,000 of capital when the partnership commenced. The balance of the net income is to be equally shared between the two partners. Troy had made a loan to the partnership and in 2016/17 he received interest income of $1,000 in relation to this loan.

During the 2017 income year, the partnership had received $491,500 in cash, and had one outstanding invoice for coffee beans from CBC Bank Ltd for $500 as at 30 June 2017.

On 3 March 2017 income year the two partners disposed of office premises that they had acquired under a contract dated 1 July 2016 (with a 60% interest for Troy and 40% interest for Jenny) – the sale of the premises gave rise to a capital gain of $80,000. The partners were going to convert the premises into a café, but the location was found to be unsuitable.

Receipts and expenses for the partnership during the 2016/17 income year are as follows:

Receipts:

Sales - coffee $ 462,000 (including GST)

Sales – coffee beans $ 30,000

Expenditure (inclusive ofGSTwhere applicable):

Coffee supplies (coffee beans, milk, & sugar) $ 124,500

Supplies (disposable coffee cups, etc.) $ 30,800 (including GST)

Bank charges $ 1,100

Bribe to health official $ 5,000

Electricity $ 16,500 (including GST)

Rental expenses $ 44,000 (including GST)

Telephone expenses $ 6,050 (including GST)

Salaries - staff $ 85,900

Salary Troy $70,000

Drawings – Troy $ 20,800

Drawings – Jenny $ 20,800

The partners advise you that they hold valid tax invoices for all their acquisitions (that is, for all of the above expenditure).

Required:

1) In relation to the above facts, discuss and calculate the ‘net income’ of the partnership for the income year ending 30 June 2017. Please ensure you include in your answer whether the assessable income and the allowable deductions should include or exclude GST (where applicable), and why.

2) Calculate the partnership’s net amount of GST payable or (refundable) to / (from) the ATO for the income year ending 30 June 2017.

3) Calculate each partner’s share of THE net income of the partnership as well as their taxable income.

4) Calculate TROY’S income tax payableforthe income year ending 30 June 2017, assuming that he has no private health insurance, no dependants and no other income. You are also advised that Troy has net capital losses carried forward of $8,000, plus net capital losses carried forward from collectables of $900.

Notes:

(i) For all the above questions, make sureyou support your answerwith appropriate legislative references.

(ii) Assume that the partnership isnot a small business entity (ignore the small business CGT concessions in Div 152).

SOLUTIONS:

(1) In relation to the above facts, discuss and calculate the ‘net income’ of the partnership for the 2016/17 income year.

As per s 90 of the ITAA36, the ‘net income’ is

The partnership is registered for GST and would be making:

· taxable supplies in relation to the______________ and

· GST free supplies in relation to the______________.

Any GST charged/collected on the sale of coffee is______________ assessable income: s______________ITAA97, so this income would be assessed on the GST______________ amount.

The business expenses that include GST would be____________________________for the partnership (as they are acquisitions made in relation to their GST registered enterprise which is making taxable supplies or GST-free supplies).

Therefore, where GST is included in the price, the partnership is able to claim an_________________________for the GST paid and accordingly, anyallowable deductions should be________________________: s____________ITAA97

Section 90: Net Income = Assessable Incomeless deductions (except….)

Assessable income:

	Amount	GST	s 90 amount	Law and Reasons
Sale of coffee	$462,000	$	$
Sale of coffee beans	$30,000	$	$
Capital gain	$80,000	assume $0	$	Note 1
Total Assessable Income			$

Note 1. Net Capital Gain

Capital Gains are / are not included in the “net income” of the partnership. Partners are/ are not assessed on their proportional share of the capital gain: (section ____________ITAA 1997), aseach individual partner will/ will not have their own CGT event in respect to the sale of the premises.

Allowable deductions

	Amount	GST	s 90 amount	Law and Reasons
Purchases
Coffee supplies	$124,500	$	$
Supplies (cups, etc.)	$30,800	$	$
Bank charges	$1,100	$	$
Bribe to health official	$5,000	assume $0	$
Electricity	$16,500	$	$
Rental expenses	$44,000	$	$
Telephone expense	$6,050	$	$
Staff salaries	$85,900	$	$
Troy’s salary	$70,000	$	$
Interest on capital account - Jenny	$10,000	$	$
Interest on loan from Troy	$1,000	$	$
Drawings – Troy	$20,800	$	$
Drawings – Jenny	$20,800	$	$
Total Allowable Deductions			$

Net Income = Assessable Income less Deductions

$ = $ less $ .

(2) Calculate the partnership’s net amount of GST payable or (refundable) to / (from) the ATO for the income year ended 30 June 2017

	Amount	Law – GST Act
Taxable supplies (note items)
	$
LessInput tax credits (note items)
	$
	$
	$
	$
GST OWING TO THE ATO	$

(3) Calculate each partner’s share of net income and their taxable income

Share of net income:Troy’s and Jenny’s individual interest in the net income of the partnership is as follows (as per section ___________):

	Troy (50%)	Jenny (50%)	TOTAL
Partners’ Salary	$	$	$
½ distribution	$	$	$
TOTAL	$	$	$

In addition to their share of partnership income in their Taxable Income, Troy and Jenny will have each potentially a net capital gain in respect of the sale of office premises.

Initial Capital gain for partners (s 106-5):

Troy (60%) $______________

Jenny (40%) $______________

$80,0000

Are either Troy or Jenny entitled to the 50% discount or indexation method for the sale of the office premises? Why or why not?

Which capital losses is Troy able to use to reduce his capital gain?

TROY Office premises

Current year capital gains $

less current year capital losses -

less carried forward capital losses ($ )

$

Apply 50% discount N/A

Net capital gain $

Note: Troy has net losses from collectables ($900) which should be __________________________

JENNY Office premises

Current year capital gains $

less current year capital losses -

less carried forward capital losses -

Apply 50% discount ___________

Net capital gain $

Troy Jenny

Assessable income

Partnership distribution $ $ s92

Net capital gain $ $ s102-5

(other?) $ $

Total assessable income $ $________

Less

Allowable deductions

Total allowable deductions $ $________

Taxable income $ $

(4) Calculate the tax payable by Troy for the 30 June 2017 income year, assuming that he has no private health insurance, no dependants and no other income.

Taxable Income	$	Reasons (including sections)
BITL	$
Less non-refundable offsets
LITO	$
Net Tax Payable	$
Plus
Temporary budget repair levy	$
Medicare levy (TI x 2%)	$
Medicare Levy Surcharge (TI + RFBA) x ___%	$	ISP ___ Tier __
Less Refundable Offsets &/or tax credits
	$
Tax Payable	$