Question

QUESTION 2 20 MARKS
William and Paul own a business selling face masks and hand sanitiser. They agreed that
profits will be spilt 80% to William and 20% to Paul and that losses will be split 50% to each of
them. They also agreed that before any profits or losses are split Paul gets a salary and William
gets interest on his capital contributions. Paul gets a salary because he spends most of his time
in the shop dealing with customers. William only provided capital to the business. William also
made an arm’s length loan to the business.
The partners provide you with the following information for the year ended 30 June 2019:
Sales of trading stock for the business $330,000
Interest paid to William (Capital Contribution) $13,000
Salary to Staff of the business $75,000
Purchase of trading stock for the business $200,000
Opening Stock on 1 July 2018 $37,000
Closing Stock on 30 June 2019 $23,000
Interest paid to William (Loan) $5,000
Superannuation for Paul $9,000
Superannuation for Staff of the business $6,000
Required:
Calculate the partnership distribution for each partner for the year ended 30 June 2019.
You must give reasons for your answer. Your discussion must include an analysis of the pertinent
sections of the relevant legislation, rulings, and the relevant case law. If relevant, you must show
your calculation. You must apply the law to the facts and provide YOUR OWN analysis of the
issues and write a comprehensive answer to the question.
[Answer

Answer 1

RULES:

The payment of Remuneration to a working partner should be authorized by and should be in accordance with the terms of the partnership deed. Moreover, this amount would be allowed to be claimed as a deduction only if the partnership deed either specified the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

Moreover, the payment of Remuneration and Interest should relate to a period falling after the date of partnership deed i.e. the partnership deed should not provide for payment of remuneration and interest from retrospective effect (i.e. any earlier period prior to the date of partnership deed).

All the above norms in relation to deduction of remuneration and interest for income tax purposes apply to all firms irrespective of whether they are registered or unregistered.

Calculation of Profit for Year ended 30^th June 2019

TRADING & PROFIT AND LOSS ACCOUNT

Particulars	Amount $	Particulars	Amount $
To Opening Stock	37,000	By Sales	330,000
To Purchase	200,000
		By Closing Stock	23,000
To Gross Profit c/d	116,000
	353,000		353,000
To Salary to Staff	75,000	By Gross Profit b/d	116,000
To Superannuation to Staff	6,000
To Interest on Loan	5,000
To Superannuation to Paul	9,000
To Interest to William	13,000
To Net Profit	8,000
	116,000		116,000

• As per Section 40(b), Interest & Salary paid to the Partners by the Partnership Firm are allowed to be deducted as an expense only in case all the specified conditions are being adhered to.

• Payment of Salary, Bonus, Commission or Remuneration, by whatever name called is allowed only to a Working Partner. If it is paid to be a non-working partner, the same shall be disallowed. As Paul is a full time working Partner superannuation to Paul is allowed.

• The payment of interest to a partner should not exceed the amount calculated at the rate 12% p.a simple interest. Any amount in excess of 12% will be disallowed. The payment of interest can be to any partner whether working or non-working. As William has provided only capital and he is non - working partner, he is entitled to interest on capital and loan.

Partnership Distribution of Net Profit

Paul = 8,000 * 20% = $1,600

William = 8,000 * 80% = $6,400

Total Amount of Paul = 9,000 + 1,600 = $10,600

Total Amount of William = 13,000 + 6,400 = $19,400