question archive Jay Jay’s is a large pizza bar restaurant chain of 3 shops in Melbourne (located city, north and south) owned by Jagjeet and Jiera
Jay Jay’s is a large pizza bar restaurant chain of 3 shops in Melbourne (located city, north and south) owned by Jagjeet and Jiera
Subject:FinancePrice:2.86 Bought11
Jay Jay’s is a large pizza bar restaurant chain of 3 shops in Melbourne (located city, north and south) owned by Jagjeet and Jiera. The books of account for 2020 income year reveal the following: Sales 15,00,000 Closing stock 20,000 Opening Stock 10,000 Purchases 300,000 Various business expenses - Advertising 6,000 - Electricity 12,000 - Insurance 9,000 - Interest on loan - premises 160,000 - Rent 100,000 - Staff wages 300,000 - Telephone 2,000 Other expenses 121,000 - Bad Debt 1,000 - Depreciation 100,000 - Repairs 15,000 - Tax agent expenses Salaries - Salary for Jagjeet - Salary for Jiera 5,000 52,000 31,200 Jagjeet and Jiera’s partnership agreement provides that profits are to be distributed equally and that wages should be paid weekly by the partnership to the partners as mutually agreed. Jagjeet is paid $1,000 a week and JIera is paid $600 a week. REQUIRED Part 1 8 marks Advise what is the net income of the partnership – hint use this table to prepare your answer Part 2 3 marks Are the partners salaries deductible - advise your reasons and provide case law and relevant rulings.? Part 3 4 marks Advise the tax liability of Jagjeet only, taking into account the distribution of the partnership net income 1,500,000 20,000 10,000 300,000 589,000 83,200
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
TRADING AND PROFIT AND LOSS ACCOUNT
DR CR
| PARTICULARS | AMOUNT | PARTICULARS | AMOUNT |
| TO OPENING STOCK | 10,000 | BY SALES | 15,00,000 |
| TO PURCHASES | 3,00,000 | BY CLOSING STOCK | 20,000 |
| TO GROSS PROFIT | 12,10,000 | ||
| 15,20,000 | 15,20,000 | ||
| TO RENT | 1,00,000 | BY GROSS PROFIT | 12,10,000 |
| TO SALARIES | 3,00,000 | ||
| TO ELECTIRICTY | 12,000 | ||
| TO ADVERTISING | 6,000 | ||
| TO INSURANCE | 9,000 | ||
| TO INTEREST ON LOAN | 1,60,000 | ||
| TO TELEPHONE | 2,000 | ||
| TO OTHER | 1,21,000 | ||
| TO BAD DEBTS | 1,000 | ||
| TO DEPRECIATION | 1,00,000 | ||
| TO REPAIRS | 15,000 | ||
| TO TAX AGENT SALARIES | 5,000 | ||
| TO NET PRIOFIT | 3,79,000 | ||
| 12,10,000 | 12,10,000 | ||
B)
PROFIT AND LOSS APPROPRIATION ACCOUNT
| PARTICULARS | AMOUNT | PARTICULARS | AMOUNT |
| TO WAGES JIERA | 31,200 | BY NET PROFIT | 3,79,000 |
| TO WAGES JAGJEET | 52,000 | ||
| TO PROFIT JAGJEET | 1,47,900 | ||
| TO PROFIT JIERA | 1,47,900 | ||
| 3,79,000 | 3,79,000 | ||
C) Salaries paid to partners of a partnership are not deductible in working out the net income or loss of the partnership.
In Scott v Federal Commissioner of Taxation (2002) 50 ATR 1235 the Court held that:
“While an individual partner may be both a principal and an agent, he cannot be a party to a contract of employment with the partnership, since that would mean he was entering into a contract with himself. That is a legal nonsense.”
The courts have variously characterised partnership “salary” agreements as not creating the relation of employer and employee, but rather, as an agreement to vary the sharing of partnership profits between the partners. As such, the payment of a salary to a partner is viewed as an advance or drawing and does not constitute an allowable deduction to the partnership under section 8-1 of the 1997 Act that is taken into account in calculating the net income or partnership loss of the partnership under section 90 of the 1936 Act.
D) PROFITS RECEIVED BY PARTNERS FROM PARTNERSHIP FIRM ARE NOT EXEMPTED FROM TAX IN HANDS OF PARTNERS. THE PARTNERS MUST INCLUDE THEIR SHARE OF PROFIT OR LOSS RECEIVED FROM PARTNERSHIP FIRM IN THEIR TAX RETURN.ON A FLOW THROUGH BASIS AND EACH PARTNER WILL BE LIABLE TO PAY TAX ON THEIR SHARE OF PROFITS.
the distribution of the partnership net income 1,500,000 20,000 10,000 300,000 589,000 83,200
