Posted: May 17th, 2026

BFA714 Partnership and Trust Tax

BFA714 Australian Tax Law and Practice — Assignment 2: Partnership and Trust Net Income Calculations

This University of Tasmania assessment requires you to calculate the net partnership income for a sports supply business and the trust net income for a discretionary trust for the year ended 30 June. You must apply ss 90 and 95 of the Income Tax Assessment Act 1936 (Cth), the trading stock provisions in Div 70 of the ITAA 1997, depreciation rules under Div 40, and the franking credit and foreign income rules. The assignment is worth 20% of the total unit mark and requires you to show all calculations, cite relevant legislation and case law, and explain the treatment of each receipt and expense. Presented as a written report with Harvard or APA referencing, the task assesses learning outcomes relating to income tax, CGT, FBT and GST liability calculations.

Context and Purpose of the Assessment

This assignment forms a core component of BFA714 Australian Tax Law and Practice at the University of Tasmania, Tasmanian School of Business and Economics. The unit introduces students to the core concepts in Australian taxation and the framework behind those concepts. The knowledge gained enables the application of the framework to current issues faced by individuals and businesses. The unit coordinator for BFA714 is Mr Donovan Castelyn, and the unit is delivered through the Tasmanian School of Business and Economics at postgraduate level.

The assignment assesses four unit learning outcomes: interpreting relevant legislation, cases, rulings and principles of taxation law in Australia; critiquing the relevant taxation rules and demonstrating knowledge of the connection between case law and legislation; applying tax rules and conventions to a scenario to solve a taxpayer problem; and performing income tax, CGT, FBT and GST liability calculations. The task directly tests your ability to work through complex tax calculations for partnership and trust structures, two entity forms that are central to Australian tax practice. Because partnerships and trusts are pass-through entities, understanding how net income is calculated at the entity level and then distributed to partners and beneficiaries is essential for any tax professional.

Task Description and Instructions

You are required to answer two problem questions. Each question presents a set of financial data for an entity structure and requires you to calculate the net income for tax purposes. For each item of receipt and expense, you must determine whether it is assessable, deductible, or subject to special treatment, and explain your reasoning with reference to legislation and case law.

Your response should follow a structured approach: identify the entity type and the relevant statutory framework, work through each receipt and expense item, apply the law to the facts, and reach a final net income figure. Show all calculations clearly and cite the relevant provisions of the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth).

Question 1 — Partnership Net Income (10 Marks)

Bill and Mary Wong are adult Australian residents. On 1 July 2003 they formed a partnership called ‘Hobart Sports Depot’ to run a sports supply business. The partnership supplies football clothing and equipment to football clubs in Australia. The business is registered for GST.

The partnership accounts for the year ending 30 June disclose the following financial details. All receipts and expenses are exclusive of GST unless otherwise stated.

Receipts:

• Gross trading receipts: $900,000
• Capital gain from sale of shares held in an Australian internet company: $20,000 (shares purchased January 2004 and sold 31 May; see note ii)
• Cash dividend from BHP: $10,500 (fully franked; see note iii)
• Interest income from Bank of China: $11,250 (see note iv)

Expenses:

• Salary to Bill: $40,000
• Interest on loan of funds by Mary: $10,000
• Salaries paid to employees: $250,000
• Rent and power: $60,000
• Purchase of trading stock: $120,000 (see note v)
• Superannuation to staff: $85,500
• Superannuation paid on behalf of Bill: $25,000
• Superannuation paid on behalf of Mary: $25,000
• Purchase of treadmills and exercise bikes: $180,000 (see note vi)
• Interest on bank overdraft: $18,623
• Provision for long service leave: $25,984 (see note vii)
• Provision for bad debts: $122,000 (see note viii)

Additional Information:

1. The partnership agreement stipulates that Bill and Mary share profits and losses in respect of both income and capital gains and losses on the basis of 50% to Bill and 50% to Mary.
2. The partners purchased the Australian internet company shares in January 2004 and sold them on 31 May.
3. The dividend was fully franked.
4. The Bank of China withheld AUD $1,250 from the gross interest.
5. Trading stock at the beginning of the financial year was $170,000. The trading stock at the end of the year was valued as: market value $160,000; cost $190,000; replacement value $184,000.
6. Various items of equipment were purchased on 1 July for $65,000 and 1 January for $115,000. The effective life for the equipment is 4 years. The figures are exclusive of GST. The items are used 100% for business purposes. All individual items cost more than $20,000.
7. During the year the partnership paid out long service leave to staff of $13,507.
8. During the year the partnership wrote off as bad debts $36,849.

Calculate the net partnership income for the partnership for the year ended 30 June.

Question 2 — Trust Net Income (10 Marks)

Tim and Kim are the two directors of the private company, ABC Pty Ltd. The company acts as the trustee of the ABC Trust. The Deed of Settlement establishing the ABC Trust was executed in 2017.

The trust accounts for the ABC Trust for the year ending 30 June disclose the following:

Receipts:

• Consulting receipts: $236,000
• Interest: $800 (see note iv)
• Exempt income: $10,000
• Capital gain from the sale of shares in an Australian company: $10,000 (see note v)
• Dividend from ANZ Bank fully franked: $6,500

Expenses:

• Rent: $4,000
• Salaries to employees including: $27,000
• Salary to Tim: $55,000
• Salary to Kim: $40,000
• Payment of Tim’s golf club subscription: $1,000
• Superannuation contributions for Tim: $5,674
• Superannuation contributions for Kim: $5,000
• New computer system (effective life 4 years): $19,000

Additional Information:

1. The Trust is a discretionary trust and Tim and Kim have as the trustees full discretion as to how the net trust income will be distributed.
2. The trust is a Small Business Entity (SBE).
3. The Trust is registered for GST and all figures are exclusive of GST where appropriate.
4. Net interest of $1,800 from Singapore after withholding tax of $200 was withheld.
5. The trust purchased the shares in January 2016 and sold them on 31 May.
6. In the income year ending 30 June of the prior year, the trust made a loss of $12,000 in respect of the business.

Calculate the trust net income for the year ended 30 June.

Submission Requirements and Formatting

• Format: MS Word. 12-point Times New Roman or Arial, 1.5 line spacing, 2.5 cm margins.
• Referencing: Harvard or APA style. In-text citations and a reference list are required.
• Structure: A structured written report with headings for each question and sub-headings for each item of receipt or expense. Present calculations in tables with clear labels.
• Submission: Via the MyLO portal. Plagiarism checking applies.
• Late penalties: Standard University of Tasmania late submission penalties apply.

Marking Rubric and Grading Criteria

Criteria	High Distinction (80–100)	Distinction (70–79)	Credit (60–69)	Pass (50–59)
Identification of assessable income items	All assessable income items correctly identified and classified with precise legislative references	Most items correctly identified with appropriate references	Key items identified with some references	Limited identification of assessable income
Treatment of deductions and losses	All deductions correctly classified and calculated, including quarantined losses and provisions	Most deductions correctly classified with minor errors	Some deductions correctly classified	Major errors in deduction treatment
Application of trading stock and depreciation rules	Correct method chosen for stock valuation and depreciation with clear reasoning	Correct methods with minor calculation errors	Methods mostly correct but some errors	Incorrect methods or major calculation errors
Treatment of franking credits and foreign income	Correct gross-up and offset calculations with full legislative references	Correct treatment with minor errors	Some errors in gross-up or offset	Major errors or omission
Calculation accuracy and presentation	All calculations accurate, clearly presented in tables with logical structure	Minor calculation errors, good presentation	Some calculation errors, adequate presentation	Major errors, poor presentation

Sample Answer: Partnership Net Income — Trading Stock and Depreciation

The net partnership income for Hobart Sports Depot must be calculated under s 90 of the Income Tax Assessment Act 1936 (Cth), which defines net income as the assessable income of the partnership less allowable deductions. The partnership is not a separate taxpayer; Bill and Mary each include their 50% share of the net income in their individual assessable income under s 92(1). Gross trading receipts of $900,000 are assessable as ordinary income under s 6-5 of the ITAA 1997. The capital gain from the sale of shares is calculated under the CGT provisions. The shares were purchased in January 2004 and sold on 31 May, so they were held for more than 12 months. The partnership is not eligible for the 50% CGT discount under Div 115 because partnerships do not qualify as individuals or trusts for discount purposes. The $20,000 gain is included in full. The ATO’s guidance on capital gains tax confirms that partnerships are transparent for CGT purposes and the partners may be able to access the discount individually if the gain is allocated to them. The cash dividend of $10,500 is assessable under s 44 of the ITAA 1936, and the franking credits attached must be included in assessable income under Div 207. The interest income from the Bank of China is assessable, with the $1,250 withheld treated as foreign tax paid. Trading stock requires the closing stock to be valued at the lower of cost, market value, or replacement value under s 70-45 of the ITAA 1997. The three values are $160,000, $190,000, and $184,000; the taxpayer can choose the lowest, which is market value at $160,000. The opening stock of $170,000 and purchases of $120,000 are deducted, and the closing stock of $160,000 is added back, producing a net trading stock deduction of $130,000. Equipment purchased for $65,000 on 1 July and $115,000 on 1 January is depreciated under Div 40. The items are used 100% for business purposes, and the effective life is 4 years.

Follow-Up Paragraph 1: Provisions versus Actual Liabilities — Long Service Leave and Bad Debts

The treatment of the provision for long service leave and the provision for bad debts illustrates a key principle in Australian tax law: a deduction is generally available only for expenses that have been incurred, not for provisions made in anticipation of future liabilities. The provision for long service leave of $25,984 is not deductible because the partnership has not paid or become definitively committed to the amount. Only the $13,507 actually paid out during the year is deductible under s 8-1 of the ITAA 1997. Similarly, the provision for bad debts of $122,000 is not deductible; only the $36,849 actually written off as bad debts is deductible under s 25-35. The distinction between a provision and a write-off is critical. In FCT v James Flood Pty Ltd (1953) 88 CLR 492, the High Court held that a liability is not incurred until it is definite and ascertainable. A provision for future long service leave fails this test because the entitlement depends on future events such as staff continuing employment. Students often assume that any amount set aside for future obligations is deductible, but the law is stricter. The ATO’s Taxation Ruling TR 97/7 on long service leave explains the conditions under which a deduction is available, including the requirement that the employer is definitively committed to the payment. For bad debts, s 25-35 requires the debt to be bad and written off before a deduction is allowed; a provision is not sufficient.

Follow-Up Paragraph 2: How Do Franking Credits Work for Partnerships?

A question students frequently search for is how franking credits attached to dividends received by a partnership are treated. The partnership includes the cash dividend of $10,500 in its assessable income and also grosses up the amount by the franking credit attached. The franking credit is calculated as the cash dividend multiplied by the corporate tax rate divided by one minus the corporate tax rate. If the company tax rate is 30%, the franking credit is $10,500 multiplied by 30 divided by 70, which equals $4,500. The partnership includes $15,000 in its assessable income (cash dividend plus franking credit) and then claims a tax offset of $4,500. Because the partnership is a flow-through entity, the franking credit and the offset flow through to the partners in proportion to their share of the partnership income. Bill and Mary each include $7,500 in their assessable income and claim a $2,250 tax offset. The ATO’s dividends and franking credits guide explains the gross-up and offset mechanism for different entity types. Students should also consider whether the partnership is eligible for the franking credit offset; the offset is available to resident taxpayers, and the partnership must satisfy the holding period rule. If the shares were held for less than 45 days, the franking credit may be denied. For the Bank of China interest, the $1,250 withheld is foreign tax paid, and the partners may be entitled to a foreign income tax offset under Div 770 of the ITAA 1997.

Follow-Up Paragraph 3: Common Misconceptions About Trust Net Income

A frequent misconception among students is that trust net income is calculated in the same way as partnership net income. While both are pass-through entities, the trust provisions in Div 6 of the ITAA 1936 operate differently. Section 95 defines the net income of a trust estate as the assessable income of the trust less allowable deductions, calculated as if the trust were a resident taxpayer. However, the trust deed may define income differently from the statutory definition, and the trustee must determine the distributable income in accordance with the deed. A second misconception concerns exempt income. The $10,000 of exempt income is not included in the trust’s net income under s 95, and it cannot be distributed to beneficiaries as assessable income. A third misconception involves the treatment of the salary to Tim and the golf club subscription. The salary to Tim is deductible if it is reasonable and paid for services rendered. The golf club subscription is not deductible because it is a private expense that is not sufficiently connected to the income-producing activities of the trust. The superannuation contributions for Tim and Kim are deductible under the superannuation provisions, subject to the contribution caps. The new computer system costing $19,000 is a depreciating asset under Div 40, and the trust can claim a deduction for the decline in value. Because the trust is a Small Business Entity, it may be eligible for the simplified depreciation rules, including the instant asset write-off if the threshold is met. The ATO’s depreciating assets page provides detailed guidance on the effective life and the choice of depreciation method.

Frequently Asked Question

Can a trust deduct a prior year business loss against current year income?

No, a trust cannot distribute a tax loss to its beneficiaries. Under Div 6 of the ITAA 1936, a trust’s tax loss is quarantined and must be carried forward to offset against future trust income. The $12,000 business loss from the prior year is not deductible against the current year’s trust net income unless the trust satisfies the trust loss provisions in Sch 2F of the ITAA 1936. These provisions include the family trust election rules, which require the trust to make a valid family trust election to access prior year losses. The ATO’s trust losses guide explains that a trust can only deduct prior year losses if it meets the conditions in Sch 2F, including the 50% stake test or the pattern of distributions test. For the ABC Trust, the trustee must consider whether the loss can be carried forward and whether any concessions are available. If the trust has made a family trust election, it may be able to access the loss, subject to the conditions in the trust deed.

Why This Matters in Practice

The issues in this assignment mirror the questions tax advisers answer for clients operating through partnerships and trusts. A partnership with multiple income streams needs to correctly classify each receipt and expense, apply the trading stock rules, and calculate depreciation. A trust with a corporate trustee needs to understand the Div 6 provisions, the treatment of exempt income, and the quarantine rules for tax losses. Getting these calculations wrong has financial consequences for partners and beneficiaries and professional consequences for advisers. The skills you develop in this assignment, reading legislation, applying case law, and reaching reasoned conclusions with clear calculations, are the same skills you will use in practice. The ATO’s compliance focus on trust and partnership distributions means that accurate reporting is essential.

References and Learning Materials

Australian Taxation Office. (2026). Capital gains tax. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/capital-gains-tax

Australian Taxation Office. (2026). Depreciating assets. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/depreciating-assets

Australian Taxation Office. (2026). Dividends and franking credits. https://www.ato.gov.au/individuals-and-families/investments-and-assets/dividends-and-franking-credits

Australian Taxation Office. (2026). Trust losses. https://www.ato.gov.au/businesses-and-organisations/trusts/trust-losses

Barkoczy, S. (2023). Foundations of taxation law (15th ed.). Oxford University Press.

FCT v James Flood Pty Ltd (1953) 88 CLR 492. https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/1953/65.html

Income Tax Assessment Act 1936 (Cth).

Income Tax Assessment Act 1997 (Cth).

Sadiq, K., Black, C., Clements, J., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., & Walpola, S. (2025). Principles of taxation law 2025 (18th ed.). Thomson Reuters.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2023). Australian taxation law (33rd ed.). Oxford University Press.

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Next Assessment: Research Memorandum (Week 12)

Research Memorandum — BFA714 Australian Tax Law and Practice

The final assessment for BFA714 is a research memorandum due in Week 12, worth 30% of the total unit mark. The memorandum requires you to research a current taxation issue, analyse the relevant legislation and case law, and provide a written opinion on a specific tax problem. The task assesses your ability to interpret legislation, apply case law, and communicate your analysis in a professional format.

You will be provided with a scenario or question requiring you to advise a taxpayer on a specific issue, such as the deductibility of expenses, the application of CGT concessions, or the treatment of income under a particular structure. The memorandum should be approximately 2,000 words and use Harvard or APA referencing. Prepare by reviewing the tutorial problems and the assignment feedback from earlier in the semester. The skills you have developed in calculating partnership and trust net income will serve you well in the research memorandum and the final open-book examination.

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