Partnership, Trust & Income Tax Calculation

Net income of the partnership

1.

Notes:

1. For the car sold by Alice for $26,000 there would be no capital gain or loss as the sale of personal car does not come under the purview of capital gain tax as provided the Australian Taxation Office (ATO). As per the instructions of ATO most of the personal assets are exempt from capital gain tax including home, car and personal used assets such as furniture. Thus, there would be no capital gain or loss from sale of car for $26,000.  
2. In case of shares gifted to the relatives then it will be treated as transfer of shares on the date on which the shares were gifted. The market value as on the date of the gift shall be considered as the transfer value of the shares. The cost of such shares shall be deducted from the market value to calculate capital gain or loss.
3. In case of sale shares the cost basis is reduced from sale proceeds to calculate the capital gain or loss. Discount method can be used if the shares were held for more than 12 months before the CGT event.
4. As per the Income Tax Assessment Act, 1936, s160M (6), restrictive covenant receipt is subjected to capital gain tax (Grudnoff 2015).

2.A partnership as per the ATO is a business carried on by a group of people with the motive distributing income and losses between themselves with mutual consensus. A partnership is generally governed by the agreement between the partners. As per the ITAA 1997 only business expenditures incurred for the purpose of earning income of the partnership are allowed as deduction for computation of partnership income. Any amount withdrawn by partners will not be allowed as deduction and cannot be considered as wages or salary even if provided in the partnership agreement (Vann 2016).

3.The net income of a trust is calculated by deducting deductions allowable from the assessable income of the trust for both resident and non-resident trust. Generally the income of a trust is calculated in accordance with the trust deed whereas the net income is calculated as per the tax law thus, there is often significant difference between the income as per trust deed and net income as per tax laws.

The beneficiaries of a trust are assessed for the income of the trust on the basis of their shares in the income of the trust. In case there is a trustee then the income of the trustee will be taxable in the hands of the trustee if so provided in the trust deed (Blakelock & King 2017).

Hence, it is clear that as per the tax laws Mr Luke will be taxed on $10000 of income of trust. Pauline will be taxed for receiving $25,000 of trust’s income. Jane will not be taxes as she is still a minor for $416. This amount will be added to the income of the parent who has higher income. $5,000 paid for the medical bill of Frank will be taxed in the hands Frank as it was also income of the trust. However, Frank is entitled to take credit of such amount while calculating his assessable income for tax purposes in the particular year as it was used for payment of medical expenses (Dunne, Taylor, Batten & Krapivensky 2016).

4.ATO treats the amount received as redundancy payments differently based on whether the payment is received for genuine redundancy or is it a non-genuine redundancy payment. Generally there is no requirement of paying taxes for genuine redundancy payments up-to a certain limit provided the definition and the criterions laid down by the ATO for genuine redundancy are met by such redundancy payments.    

Following are the criterions for genuine redundancy:

1. You have become redundant because the job used to be done by recipient of redundancy payments are no longer required by the employer thus, the employment has been dismissed.
2. Recipient is under the normal retirement age.   

In case income year 2017-18 a limit of $200,000 has been prescribed as tax free redundant payment provided it is genuine redundancy. Assuming that the redundancy in case of Bruce is genuine hence, the entire amount of redundancy payment of $100,000 received by him from his employer will not be tax free (Raftery 2017).   

References: 

Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.

Dunne, J., Taylor, H., Batten, N., & Krapivensky, N. (2016). 2015 case review: High ATO success rate continues. Taxation in Australia, 50(10), 609.

Grudnoff, M. (2015). Top gears: How negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices.

Raftery, A. (2017). 101 Ways to Save Money on Your Tax-Legally! 2017-2018. John Wiley & Sons.

Vann, R. (2016). Hybrid Entities in Australia: Resource Capital Fund III LP Case