QUESTION TWO (25 Marks) The Rowe Family Trust and A1 Mechanical Pty Ltd formed a partnership to operate a wholesale business selling motor vehicle parts, called A1 Parts Australia. The Partnership is 50/50 and all partnership income is split equally. The Partnerships Financial Accountant provided you with the following profit and loss statement. THE ROWE FAMILY TRUST AND A1 MECHANICAL PTY LTD PARTNERSHIP TRADING AS A1 PARTS AUSTRALIA PROFIT AND LOSS Income: $ Sales 1,500,000 Part Sales 450,000 Interest 5,000 Government Grant 50,000 (note 1) Donation 25,000 (note 2) Total Income $2,030,000 Cost of Goods Sold $ Opening Parts Stock 200,000 Purchases 100,000 Closing Stock 50,000 Total Cost of Goods Sold $250,000 Gross Profit $1,780,000 Expenses $ Employee Wages 550,000 Interest on Partnership loans 50,000 (note 3) Staff Entertainment expenses 15,000 Rent 75,000 Electricity and Water 45,000 Penalty 5,000 (note 4) Movement in provisions 55,000 (note 5) Total Expenses $795,000 NET Profit $985,000 Notes: 1. The partnership received an apprenticeship rebate from the government to assist with the cost of apprentices that the partnership currently employs. 2. A customer of the business passed away and in his Will he left a vehicle to the business valued at 25,000. His Will stated that the vehicle was a donation to the business as a thank you to one of the managers who had always assisted him and had been a good friend. 3. The Partners had originally contributed $300,000 each to the partnership and the partnership pays the partners $20,000 each in return for this initial equity contribution. The balance of $10,000 interest relates to a loan from A1 Mechanical Pty Ltd, which was provided to assist with some cash flow issues, rather than the partnership borrowing from the bank. 4. The employees of the business incurred speeding fines totalling $5,000 for the financial year. These fines were reimbursed by the employees via a salary reduction. 5. The accountant has taken up the following movements in the provision accounts: doubtful debts $35,000, long service leave $10,000 and accrued sick leave $10,000. 6. The partnership made a loss of $85,000 in the June 2018 year In addition to the above the following information has been provided: A1 Mechanical Pty Ltd has no other income for the June 2019 financial year. A1 Mechanical Pty Ltd has carried forward tax losses of $15,000 as at 1 July 2018. The Rowe Family Trust has 3 beneficiaries Sara, Shane and two children. Sara works as an engineer and earned $180,000 in this income year. Shane received a salary of $80,000 from his employer for the current income year. They have two children: a son, John, aged 21 years, a student at university who earned $25,000 for the year; and a daughter, Kim, aged 16, who has no other income for the year. Address the following and provide justification for your answer using legislation and case law where applicable: a) Calculate the Partnerships taxable income. [Type Answer Here] b) Calculate A1 Mechanical Pty Ltd tax payable. [Type Answer Here] c) Advise the Rowe Family Trust as to how they can distribute the net income in the most tax-effective way. [Type Answer Here]

Taxation