Sue, Scarlett and Sally are in a partnership together providing accounting services. The partnership uses the cash basis to account for income tax. Under the partnership agreement, Scarlett is to get a partner's salary of $60,000, and the balance of the net income is to be equally shared between all three partners. Any franking credits are to be shared according to the partners' relative share of net income.
During the 2009/10 income year, the partnership had invoiced clients $645,000 (incl GST) for services rendered. However, the partnership had only received $561,000 (incl GST) in cash as at 30 June 2010. In addition, the three partners had also disposed of a block of land that they had acquired on 12 October 2004 - the sale of the land gave rise to a capital gain of $75,000. The three partners were going to build office premises, but the location was found to be unsuitable.
Other receipts and expenditure items of the partnership were as follows:
Receipts
Interest income $ 12,000
Dividend income (franked to 70%) $ 60,000
Expenditure
Rental expense $ 85,800 (incl GST)
Secretary salary $ 50,000
Scarlett's salary $ 60,000
Telephone expense $ 5,720 (incl GST)
Depreciation on office equipment $ 10,000
Fringe benefits tax $ 4,800
Speeding ticket (penalty) $ 900
Electricity expense $ 2,200 (incl GST)
Drawings - Sue $ 25,000
Drawings - Sally $ 30,000
Required:
(a) In relation to the above facts, discuss and calculate what the 'net income' of the partnership is for the 30 June 2010 income year.
(b) Calculate Sue, Scarlett and Sally's share of net income of the partnership.
(c) Calculate the tax payable by Scarlett for the 30 June 2010 income year, assuming that she has no private health insurance, no dependants and no other income. You are also advised that Scarlett has net capital losses carried forward of $5,000, plus net capital losses carried forward from collectables of $1,000.
NOTE Treatment of dividend income:-
Assessable income
Include the dividend in assessable income under s 44(1) ITAA36.
Also, include the dividend gross up in assessable income under s 207-35:
Dividend amount x extent franked x 30/70
Offsets
A franking credit (offset) under s 207-45 equal to the gross up will be available to share amongst the partners (in accordance with their partnership agreement in this case).