Question

Question 5

Julian and Jenna carry on a partnership business and for the income year ended 30 June, the partnership net income was $38,000, as returned by their accountant. However, included in the deductions was a salary of $12,000 paid to Julian’s wife (who is not a business partner). The Commissioner disallows all but $2,000 of this amount. Required:

a) What authority, if any, does the Commissioner have in disallowing the claim for salary

b) What course of action, if any, is available to the partners in disputing the assessment?

c)Will Julian’s wife be required to pay tax on $2,000, or $12,000, for the current income year. Why?

d) On what basis should future salary payments be made to Julian’s wife?

Answer 1

Answer - (a)

Partnership business are not seprate legal entities. Salary paid to Partners are a deductible expense. However, salary paid to wife of Partner is not allowed as deduction. If the Partners are claiming wife's salary as dectuction, the intention behind this is to evade tax by showing lower profits (supressing the profits of the firm). The comissioner has full authority in this case to disallow the calim for salary paid to Partner's wife.

Answer (b)

The Partners can approach and file appeal in higher authority forum in dispute with the assessment. (In US the dispute w.r.t tax matters is done by IRS. IRS provides appeal system and fair decisions on tax payments).

Answer (c)

Julian's wife is required to pay tax on $12,000 for the current year. As Julia is filing her individual tax return and for her income is $12,000.

Answer (d)

For making future salary payments to Julian's wife is to make her one of the Partner in Partnership business. In this way the partnership firm could pay her salary, and claim deduction on salary of Partner under prescribed limit. This would provide tax benefit to the Partnership business. The other way is to pay in the form of interest against capital contribution.