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:

1. What authority, if any, does the Commissioner have in disallowing the claim for salary? (2.5 marks)

ANSWER:

2. What course of action, if any, is available to the partners in disputing the assessment?
   (2.5 marks)

ANSWER:

3. Will Julian’s wife be required to pay tax on $2,000, or $12,000, for the current income year. Why? (2.5 marks)

ANSWER:

4. On what basis should future salary payments be made to Julian’s wife? (2.5 marks)

Answer 1

Answer a. The commissioner possesses full right to not allow the salary given to the female spouse because salary could have been given with an intention to lower the income and pay less taxes. If commissioner do not find any supporting document for the same, he cannot allow salary paid to wife as expenses.

Answer b. Partners if have proper documentation or they didn't pay with an intention to avoid taxation and the female spouse is paid on the required skill she possesses, then partners can take the case to the arbitration or the tribunal forum

Answer c. Nowhere in the tax an assessee has to pay double tax. All the laws are made to avoid double taxation. Therefore, tax has been paid by partners on $10,000 and his female spouse’s income is considered only $2000. Therefore, she has to pay tax on just $2000.

Answer d. Female spouse should be paid on the basis of proper documentation bill and should be raised for the services provided by her and she should have knowledge or has been provided those services to others also like any other professional employee. Payment should also be paid on the basis of her actual fees incurred and must be general for everyone rendering the same kind of services.