Question 1 (30 marks)

Sarah is starting to go bald. Bill would do anything for Sarah, so he started researching an antibalding

serum. The early results were promising enough that he took out a patent and registered

the product name Fresh Rinse for Bald Heads (FRBH).

Sarah was excited enough about FRBH that she suggested to Bill that they open a small workshop

in Toorak where he could continue his research and she could sell the product to the public. They

agree to split the profits 50/50, however Sarah works in the shop while Bill focuses on research.

As the shop started to get busy, they hired an employee named Jane to help serve the customers.

In early 2022, Jimmy, a customer, came to the shop in search of FRBH. Bill recognised Jimmy and

was overjoyed that such a celebrity was interested in their product. When Jimmy saw Sarah and

Jane side-by-side, he exclaimed You two ladies look very similar! Bill, who was keen to impress

Jimmy, said You know, Ive never really thought about it before, but I agree with you.

Bill asked Jimmy if he would be a branding ambassador for FRBH. Jimmy agreed and they signed

a contract to pay royalties to Jimmy for the use of his image on their branding material. Just as

Jimmy was leaving the shop, he tripped on a shelf and accidentally destroyed $1,000 worth of

stock. Jimmy said he would not press charges for the trip hazard if they did not charge him for

the destroyed stock. Bill was so pleased that Jimmy would be his branding ambassador that he

told Jimmy not to worry about it.

The partnerships financial accounts at the end of the year showed that the business had a loss of

$4,000 after accounting for the following:

$80,000 purchase ingredients for FRBH to manufacture and sell.

Royalties of $15,000 paid to Jimmy.

Interest of $50,000 paid to Bill on loan made to the partnership for use as working capital.

Wages comprising $60,000 wages paid to Sarah and $50,000 wages paid to Jane.

Superannuation contributions comprising $8,000 to Sarahs super account, $7,000 to Bills

super account and $5,000 to Janes super account.

A carry forward loss of $20,000 from the previous financial year.

Changes to the stock on hand was not accounted for in preparing the above financial accounts.

The opening balance of FRBH on hand at the beginning of the year was $2,000. At the end of the

year, the cost of FRBH on hand was $8,000, however, with the recent surge in inflation, it would

now cost $10,000 to replace the stock but the stock would retail for $16,000.

Required:

A. Assume Jimmy is a Chinese resident for tax purposes. Advise Sarah and Bill of any

obligations they have with respect to the royalties paid to Jimmy. (7 marks)

B. Assume that the partnership is not a small business entity (SBE) for tax purposes and that

Sarah and Bill would like to minimize taxes next year. Discuss the income tax

consequences and calculate the net income of the partnership for the tax year ending

30 June 2022. (16 marks)

C. Assume Bill is an Australian resident and wishes to minimize his personal tax liability this

year. Discuss the income tax consequences of Bill for the tax year ending 30 June 2022.

(7 marks)