Tax Law

Question 2 (22 marks)

George and Martha operate a grocery store in partnership. For the income tax year ended 30 June 2021, interim calculations revealed the net income of the partnership to be $200,000, but this amount has not considered any of the information provided below.

Additional information for the year ended 30 June 2021 (not included above):

1. Martha and George have a daughter aged 4 years. To operate the business, their daughter must be placed in childcare since they have no other family to care for her. This cost $8,000.

2. George is an amateur musician having played the violin for many years since he was a child, an activity that he enjoyed while relaxing at home. He purchased an old violin from a friend 5 years ago for $250 and sold it in January 2021 for $1100.

3. The partnership agreement provides that Martha be paid a salary of $20,000 after which the profits are shared equally. This salary is a reflection of Marthas working more in the partnership than George.

Required

Based on the information provided, calculate: the net income or loss of the partnership; the amounts distributable to the partners and the taxable incomes of the partners for the year ended 30 June 2021.

In doing the above calculations, write in your own words, reasonably argued positions using the cite, describe, apply method where appropriate, to support the appropriate tax treatment of all the tax issues raised herein. Note that small business concessions must be ignored and that calculations of tax payable for the partners is not required.