Question 3 (6 Marks)

In late 2018 Helen and Wendy, two elderly ladies set themselves up to run a cake stall at the local shopping centre. They had opened a joint bank account to do this. The stall has grown and they have come to you to sort out the tax effect of what they have been doing. When they started Helen lent the business $20,000 to meet set up costs, and in the eight months of the 2018/2019 financial year they had lost $18,000.

In the 2019/2020 it had been agreed that Helen would be paid interest on her loan at an agreed rate of 10%. Wendy, who spent most of her time at the stall would be paid a salary of $40,000 and Helen who cooked the cakes would be paid $20,000 in salary. Any residual profits would be split 50/50.

After paying interest, salaries and all expenses, the stall had made a profit of $50,000.

They approach you and ask what will be the effect on each of their tax returns.

Required: (please refer Australian Tax law)

Prepare a table showing the distribution of profit between the two partners.