Part A (10 marks)

The partnership agreement between Paul Richardson and his wife Kylie provided that a salary of $80,000 pa is to be paid to Kylie for secretarial services and thereafter any residual profit or loss is to be shared equally between Paul and Kylie.

The accountant has provided the following information in relation to the 2019/20 tax year for the partnership:

$

Sales 800,000

Cost of sales 300,000

Other expenses (including Kylies salary of $80,000) 200,000

Capital gain on the disposal of shares 100,000

After the partnership was exposed to an audit, the Commissioner of Taxation amended Kylies salary to just $55,000 with regard to what was deemed a fair market value for secretarial services in the 2019/20 tax year.

Required:

Briefly discuss the tax implications of disallowing a portion of Kylies salary and calculate the s. 90 net partnership income and partnership distribution. Show all calculations and cite relevant legislation where appropriate to support your answer.

(10 marks) (250 words not including calculations)

Part B

Christine Evans established the Evans Family Trust in 2000 with XYZ Pty Ltd as the corporate trustee. Christine and her husband Fred are the directors of the trustee company. The trust holds a variety of investments in property and cash. The trust was primarily established to protect the investments.

The trust records for 2019-20 income year disclose the following:

Receipts ($)

100,000 Rent from investment properties

10,000 Interest from a bank account

Payments ($)

2,000 Accounting expenses for tax return

10,000 Repairs to investment properties

4,000 Interest on a loan for the investment property

1,000 Legal expenses incurred in defending a claim by a tenant

Christine does not work but Fred is a senior manager and received a salary of $180,000 during the 2019-20 tax year.

They have three children:

• a son, Callum, aged 22 years, a student at university who earned $5,000 for the year;
• a daughter, Caitlin aged 20, also a university student who earned only $2,500 for the year; and
• a second daughter, Grace, aged 14 years, a full time high school student with no other income.

Fred has his grandmother living with him and she had no income for the year. All family members are beneficiaries of the trust. Fred also established a corporate beneficiary, and this is available to receive trust distributions.

Required:

Calculate the net income of the Evans Family Trust for the 2019-20 tax year. (5 marks)

Advise Fred as to how he can distribute the net income in the most tax-effective way. Show all calculations and cite relevant legislation where appropriate to support your answer. (5 marks)

(10 marks) (250 words not including calculations)

Total (10 + 10 = 20 marks) (500 words not including calculations)