LAW601_Chan_E_Case Study

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May 2, 2024

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CASE STUDY Submitted by: Erika Chan (A00113417). Submit to: Prof. Kimberly Kim LAW 601: Tax Laws and Practice
Introduction Understanding key sections like Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997), which govern partnership taxation, is crucial. Compliance with specific regulations for partnerships like Nicole Mania and Sam Baker ensures proper allocation of profits and deductions. Superannuation fund management falls under the Superannuation Industry (Supervision) Act 1993 (SIS Act), particularly Division 295, addressing taxation issues. Complying with legal requirements, reporting, and disclosure obligations is outlined in the Tax Administration Act of 1953. Precedents such as FCT v Stone clarify the distinction between partnership income and individual partner earnings. In the Nicole & Sam partnership, where Sam is active, earnings are evenly split between Nicole and Sam, emphasizing this difference. Legal cases like Federal Commissioner of Taxation v. Bamford highlight the importance of trust deeds in determining trust income distribution and taxation, especially concerning related entities like the BetterStream discretionary trust. Understanding these laws and precedents is essential for accurate tax advice and compliance. Client A: Nicole Mania & Sam Baker Nicole Mania and Sam Baker are equal partners in the N&S partnership, engaged in the manufacturing of pet shelters. While Nicole is a silent partner, Sam is actively involved in the business and receives an annual salary of $80,000. Their partnership agreement stipulates an equal sharing of profits. Determination of ITAA36 s 90 net income of the partnership: Under section 90 of the Income Tax Assessment Act 1936, the net income of a partnership is determined by aggregating assessable income and deducting allowable deductions. For N&S partnership: o Total Sales: $1,000,000 o Cost of Sales: $550,000 o Other Expenses (including Sam’s salary and decline in value): $210,000 o Net Income: $1,000,000 - ($550,000 + $210,000) = $240,000 Allocation of income to each partner: Adjust for proceeds from asset sales: (Net profit from business operations + Proceeds from asset sales = Net income) 240,000 + 8,900 + 7,500 + 19,000 + 120,000 =395,400 Therefore, the ITAA36 s 90 net income of the partnership is $395,400. Partner Allocation: Sam and Nicole split the partnership's earnings evenly, according to the terms of the agreement. Given the $395,400 net income, each partner will receive $197,700. Calculation of taxable income for Nicole and Sam:
Nicole's total income comprises her share of partnership profits and her salary from the Australian Bank: Total Income for Nicole = $197,700 (share of partnership profits) + $70,000 (salary) = $267,700. Sam's total income consists of his share of partnership profits and any personal income, such as the proceeds from selling Lake Resources Ltd shares: Total Income for Sam = $197,700 (share of partnership profits) + $80,000 (salary) + $1,520 (capital gain from share sale) = $279,220. Practical Recommendations: 1. Tax Planning: Considering the partnership's earnings, it might be advantageous to investigate tax planning techniques. This may include investments, deductible costs, or prospective deductions that lower the partnership's taxable income. To guarantee that net income and partner allocations are calculated accurately, keep thorough records of all earnings and outlays (Russell, 2012). 2. Understanding Tax Obligations: It's critical to make sure Darren and Julia are aware of their joint tax responsibilities. For correct reporting, they must keep records of the partnership's earnings, outlays, and payouts. 3. Seeking Professional Advice: Consulting with a tax expert or accountant knowledgeable about partnership taxes may help ensure compliance and maximize tax efficiency by providing advice that is specifically customized to their situation. To guarantee adherence to tax laws and maximize tax results, speak with a tax counsellor. 4. Reviewing the Partnership Agreement: To appropriately represent the partnership's changing dynamics, it may be wise to review the Partnership Agreement on a regular basis to allow for changes in responsibilities or contributions. Make sure that any updates to the partnership's activities or structure are reflected in the partnership agreement. Client B: Elisabeth Lee Elisabeth Lee established the BetterStream Superannuation fund, a complying superannuation fund, during the 2022/23 tax year. The fund engaged in various transactions during this period. Calculation of taxable income for BetterStream Superannuation Fund: The taxable income of the BetterStream Superannuation Fund is determined by aggregating assessable income and deducting allowable deductions:
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