| Subject Code : | ACCY963 | Country : | Australia |
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Assignment Task:
1. From an income tax perspective, describe the differences between a partnership, company and trust.
The main differences between these structures are noted below:
Partnerships
• Section 995-1 ITAA 1997 — an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company
• The partnership net income is calculated as if the partnership were a resident taxpayer (assessable income – deductions) per s 90 ITAA 1936
• A partner is liable to his/her share of net partnership income
• Section 91 of the ITAA 1936 requires that a partnership furnishes an income tax return, although the partnership is not liable for the income tax (the partners are liable). The main function of the partnership return is to disclose the net income or partnership loss of the partnership Trusts
• The scheme of the ITAA dealing with trusts aims to ensure that tax is paid on the net income of the trust by the trustee or the beneficiary. The trust provisions are contained in Pt III Div 6 of the ITAA 1936
• A trust is a fiduciary obligation imposed on a person (the trustee) to hold property or income for a particular purpose or purposes, or for the benefit of other persons or classes of persons who may or may not include the trustee
• Must have a settlor, trustee and beneficiary
• Section 95(1) sets out trust net income = assessable income – deductions
• However, losses are not deductible for trust beneficiaries (unlike partners in a partnership) but can be carried forward in the trust Companies
• A company is a body corporate or any other unincorporated association or body of persons, but it does not include a partnership, per s 995-1 ITAA 1997
• Calculation of taxable income is the same as for an individual: taxable income = assessable income – deductions per s 4-15 ITAA 1997
• However, losses are not deductible for shareholders (unlike partners in a partnership) but can be carried forward in the company (subject to certain tests).
3. Sam and Mick are in partnership 50:50. During the income tax year, Sam, as managing partner, receives $100,000 salary, while Mick is a silent partner and receives no salary at all. The partnership profit for the year is $100,000 after Sam’s wage is deducted. a. What is partnership net income for income tax purposes? b. What is Sam’s and Mick’s share of the net partnership income for income tax purposes?
a. Partnership net income per s 90 ITAA 1936 equals $100,000 + $100,000 (add Sam’s salary back on) = $200,000. b. Assuming that the ATO follows its traditional practice, the partners’ shares of the net income are: Sam = $100,000 + (50% of $100,000) = $150,000 Mick= $50,000 (50% of $100,000)
4. Lidia and Tony are partners in an accounting business. In the current income year, the partnership has a net income of $950,000. This includes a salary payment of $900,000 to Lidia and a $350,000 salary payment to Tony. The net income of the partnership to be distributed after the payment of salaries is divided in the ratio 50:50. What is the taxable income for Lidia and Tony for the year ended 2017?
To determine net taxable income for the partnership under s 90 of the ITAA 1936, the salary payments are treated as distributions of profit and need to be added back. Partnership Income: $950,000 Add Back: Salaries $900,000 $350,000 $1,250,000 Partnership net taxable income $2,200.000
The partners Lidia and Tony share partnership profits on a on a 50:50 ratio. Therefore, the taxable income for each is as follows: Lidia: $900,000 + $475,000 = $1,375,000 Tony $350,000 + $475,000 = $ 825,000
5. On 1 January 2018, Billy and Eliza Lennon purchased four units at a cost of $1 million. At the same time, they signed a partnership agreement that provided that any losses of the partnership would be Billy’s obligation only and that if there were any partnership profits, these would be shared under the ratio 50:50. On 30 June 2018, the four units produced a net loss of $30,000. Is the partnership agreement between Billy and Eliza valid for tax purposes?
It is strongly arguable that Billy and Eliza are not partners at common law because they are only receiving income from their investments. For tax purposes however, their respective income will be based on their share of the investment. Where it is shown that they own the investment property in equal portions, then any losses borne by them will be divided equally regardless of any partnership agreement that states otherwise... See Taxation Ruling TR 98/4. If on the other hand their ownership of the 4 units constituted the carrying of a business, then the partnership losses could be apportioned according to the partnership agreement terms.
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