ADVICE FOR THE PARTNERSHIP
This tax firm is a general law partnership according to the definition in s 995-1, as the partners are carrying on a business together. For the purposes of calculating the net income of the partnership, the partnership is treated as a separate entity. The net income will be the assessable income less allowable deductions (s 90). The assessable income for the 2003-04 income year was $1.5 million. The partners will then have their share of the net income included in their assessable income (s 92).
General Deductions
Deductions must satisfy a positive limb in s 8-1(1) and not fall within one of the negative limbs in s 8-1(2).
Employment of staff
The cost of employment of staff is incidental and relevant to gaining assessable income (Ronpibon), and a necessary aspect of running a business, therefore this cost is deductible (s 8-1(1)(b); Charles Moore).
Purchase of land
The acquisition of land is an addition to capital, therefore the $1 million purchase price is not deductible (Sun Newspapers). Whilst the actual property is capital, expenses related to the carrying on of a business with the property are revenue. Thus the interest expense and legal expenses may be deductible (Sun Newspapers).
Legal expenses
In Broken Hill Theatres, the taxpayer was not permitted to claim legal expenses as a deduction, but in that case, the expenses were of a capital nature because they gave the advantage of preventing competition. In this case, the legal fees were necessary in order to gain authority to carry through with the development project. They were an integral part of the transaction to acquire an income-producing asset, and as such would be deductible, as they would meet the positive limb in s 8-1(1), and not be excluded as capital expenditures under s 8-1(2) (Steele).
Interest expense whilst the partnership was in the business of developing property
S 8-1(1)(b) requires that an expense be necessarily incurred in carrying on a business or for the purpose of gaining or producing income. An expense will be necessarily incurred if it is related to the business ends to which it is directed (Snowden & Wilson).
The interest expense incurred will meet the test in s 8-1(1)(b), and will not be excluded under 8-1(2) if the loan is used to acquire a profit-making structure (Steele). The partnership intended to develop the property in order to take advantage of the expanding market. This intention is relevant as the partnership’s expenditure in relation to the property exceeded the income derived from the property (Fletcher). The fact that the partnership did not get the opportunity to make income from the property does not stop the interest expense from being deductible (Steele).
Interest expenses after the partnership ceased its development business
The partnership does not have the option of repaying the principle on the loan until 30 June 2004, at which date they propose to do so. Therefore, even though they have the funds available to repay the loan in Eastern Bank, the interest expense will continue to be deductible (Jones). The period between the cessation of the development venture and the interest liability is short enough that the interest payments are sufficiently proximate to the activities of the business to be deductible (Brown).
New York Office
A partnership in Australia is ordinarily taxed as a resident taxpayer, that is, on worldwide income (s 90). However, Australia has a tax treaty with the US whereby the US has taxing rights over Australian enterprises which have a permanent establishment in the US. An office is considered a permanent establishment, therefore the US would have taxing rights over business profits attributable to the New York office (Art 7).
ADVICE FOR AMANDA
At present, Amanda is an Australian resident for tax purposes under s 6(1). She is assessable on her 25% share of partnership income (s 92) less deductions (s 4-15).
Medication
To be deductible, the medication expense must be incurred in gaining or producing assessable income (s 8-1(1)(a)). The expense will be deductible if it is relevant and incidental to deriving income, even if the cost seems excessive (Ronpibon). Even though this is an unusual expense, it is incurred in order to increase income, and thus meets the positive limb of s 8-1 (Charles Moore).
The commissioner may argue that the expense should be disallowed under s8-1(2) as a private expense, since Amanda does not have a medical condition that requires her to take medication (Cooper). However, Amanda is not gaining any personal benefit from the medication, and the medication is not necessary to sustain life (as was the case in Cooper), therefore, the deduction would probably be allowed.
Discretionary trust
This trust is a resident trust as Amanda, the trustee, was resident in Australia during the year (s 95(2)(a)). The net income of the trust estate for 2003-04 is $50,000 less any allowable deductions (s 95).
In 2001, Amanda exercised her discretion under the trust in favour of her daughter (though we are told the money has been allocated, it is unclear whether the money has been paid, and thus whether it will need to be paid out of this year’s trust income). At the time of allocation, her daughter became presently entitled to the funds. There are insufficient facts to determine whether Amanda’s daughter has acquired US Domicile, for example, we do not know whether she has a permanent place of abode in the US (Applegate). However, whether or not the daughter is determined to be a resident of Australia, she will be assessed on her share of the net income of the trust, since the trust income is sourced in Australia – through a rental property in Canberra (s 97(1)).
Since the daughter is presently entitled and apparently not under a legal disability, Amanda will not be taxable on the trust income.
Implications of Amanda’s possible move to New York
Under s 90(1), a partnership’s assessable income will be determined as if the partnership is a resident taxpayer. However, in determining the share of the partnership income that is to be included in Amanda’s assessable income, s92(1) applies. This section only includes income attributable to a period when the partner was a resident of Australia, and income which was sourced in Australia during a period when the partner was not an Australia resident. Here, the source of the income would be the US, where the tax advice would be provided (French). Therefore, the applicability of s 92 would turn on whether or not Amanda was considered a resident of Australia. This is impossible to tell without more information as to Amanda’s intentions.
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