Tutorial 7

1.         X, Y and Z run aTownsville based import/export business in partnership and havedone so for some years. When the business was established theycontributed differentially to the capital of the partnership. Theirindividual contributions were:

X      -                $80,000

Y      -                $70,000

Z      -                $50,000

To take this into account thepartnership agreement provided that each partner was to be entitledto receive 10% interest per annum on his or her capitalcontribution. Residual profits were to be shared in the proportionin which the partners had contributed to capital. The agreementprovided that individual partners could, with the consent of theirco-partners, draw amounts in excess of those provided for but that,if they did, such drawings would be debited in their currentaccounts in the books of the partnership and would incur interestat 10% per annum payable to the partnership.

The agreement also provided that eachpartner is allowed to draw up to $52,000 for the year as an advanceagainst profits.

Last year the partners decided toestablish a branch office in Singapore. X agreed to lend thepartnership the $250,000 that would be required at 10% per annum,the interest being paid annually as a first charge against profitsand the capital being repayable upon demand. The entire capitaladvance remains outstanding.

Y agreed to manage the new office,leaving X and Z to operate the Townsville main office, and he movedto Singapore with his family last July. It is expected that he willremain in Singapore for at least 3 years though, ultimately, heintends to return to Townsville. To compensate him for theadditional costs to which Y will be put his fellow partners agreedthat he should receive $1,000 weekly salary in addition to hisshare of profits rather than as a payment on account of thoseprofits.

During the current tax year the firm’saccounts showed the following receipts and business related (anddeductible) outgoings (exclusive of any payments made topartners):

Receipts           Outgoings

Townsvilleoffice:                          A$600,000        A$250,000

Singaporeoffice                           A$200,000        A$100,000

           (Note: the outgoings exclude ALL payments to partners.)

They also show a receipt of $4,000(via a book entry not included in the above figures) being interestdebited in Z’s current account on excess drawings of $40,000 duringthe year to finance extensions to his home.

Calculate:

(a)       the partnership net income;and

(b)       the taxable income of eachpartner.

Explain in detail why you include orexclude individual amounts in your calculations at each stage.

2.     Hank andIrma have operated a trucking business in partnership since 1990.To establish itself, the partnership initially borrowed heavily andHank and Irma only contributed a small amount of capitalthemselves. The partnership now owns a warehouse and leases threetrucks. It is very profitable.

Hank and Irma have three children:Tim aged 12, Anne aged 16 and Jane aged 18. Tim is at school, Anneis also at school but is interested in working in the business andJane is at University.

Hank and Irma have heard that theymight be able to reduce their overall tax liability – forBOTH the current year and future years – either bymaking the children partners in the firm or by making an Everettassignment to an existing discretionary trust in which the childrenare beneficiaries. It is now late April this year (towards the endof the current tax year). They seek your urgent advice.

Briefly discuss the incomeand CGT implications of each ofthose two options.