Question

Richard is a retired solicitor. His wife Tracy is a retired school teacher. Both wish to remain active and they invest in a gift shop that is to be managed by their daughter Alice, who is aged 35. They form a partnership of three called “Alice's Gift Shop”. Richard and Tracy contributed $40,000 each to fund the purchase of the shop. The partnership agreement provides: • Both Richard and Tracy are to receive interest at the rate of 10% p.a. on their capital contribution of $40,000. • Alice will receive a salary of $25,000 for the management of the shop, as well as superannuation contributions of $6,000. • A car will be leased by the business and provided to Alice. • All profits and losses are to be shared equally between the three partners. The accounts for this income year show the following: Income ($) Sales (excluding GST) 240,000 Expenses ($) Cost of goods sold 130,000 Interest on capital paid to Richard and Tracy 8,000 Salary to Alice 25,000 Superannuation to Alice 6,000 Lease payments on car (excluding GST) 7,000 Other deductible operating expenses (excluding GST) 14,000 The leased car was used 80% of the time for business and 20% of the time for private purposes. Required: With reference to the facts above: A.Calculate the net income of the partnership. B.Show the allocation of net income to each of the three partners. C.You must refer to relevant legislation and/or case law in your answer. (as per ATO)

Answer 1

Given informations are:

Capital - $40000 , Income sales - $240000 , Interest on capital - $8000, Lease payments- $7000, Deducting Expenses-$ 14000 , Salary - $25000, Superannuation-$ 6000, Cost of goods sold- $130,000

(a) Formula to find the income = Total Income- Total Expense

Total income :

Capital - $40000

Income sales - $240000

Total income = $40000+$240000=$280000

Total Expense:

Cost of goods sold- $130,000

Salary - $25000

Superannuation - $6000

Interest on capital - $8000

Lease payments - $7000

Deducting Expenses- $14000

Total Expense = $130000+$25000+$6000+$8000+$7000+$14000=$190000

Net Income= Total income- Total Expense

Net Income= $280000-$190000

Net Income= $90000

(b) allocation of net income to each of 3 partners is done equally

allocation of net income = $90000/3=$30000

(c)

As per ATO,

1. The Australian Taxation Office (ATO) intends that self managed superannuation funds should use market values for all valuation purposes. This includes valuations for determining the purchase price of a pension and the use of market value accounting for all financial statements.Australian Accounting Standard AAS 25 which applies to reporting entities requires superannuation funds to value their assets at their net market value as at the reporting date. However, most self managed superannuation funds can appropriately be classified as non-reporting entities and therefore not required to comply with this standard.