1. Shortly after he retired in November 2009, Paul Martyn decided to set up a coffee retail shop in leased premises close to the Camberwell where he lived. The main products sold were coffee, tea, machines, tea and drinks. To keep things simple, Paul elected to conduct the business in his own name as a sole proprietor. Because there had been an excess of commercial property at the time, Paul was offered a lease incentive of $19,000 by the landlord when the lease was being negotiated. Paul was obliged to be registered for GST.
2. Paul determined, at the time of the business's commencement, that his gross annual sales would be approximately $170,000 growing by 5 percent per annum for the first five years. At the end of the first financial year of trading he had $28,000 of stock on hand and trade debtors amounting to $5,700.
3. Although several items of equipment were purchased for the business, most cost less than $1,000 inclusive of GST. The business also purchased fixtures and fittings which were installed in the customer area and manager's office. Computer software was acquired to keep accounting records and prepare BAS documentation. Paul also used his private motor vehicle for business purposes with a 60 percent taxable usage.
4. In January 2010 Paul invited Angela to be a partner in the business. After receiving advice from her accountant, she accepted the offer and the necessary legal documentation was prepared. The partnership commenced on 1 March 2010. It was agreed that profits and losses would be shared on an equal basis. Each partner would receive interest on the capital invested at a rate of 5 percent per annum. They would also receive an agreed salary although Paul's figure would be higher than for Angela reflecting the longer weekly hours he worked in the business. To help finance business expansion, Paul also lent $69,000 to the partnership at a market rate of interest. Legal expenses incurred in regard to the loan amounted to $600. On the advice of the partnership's accountant, the business also contributes $500 per month to superannuation for each partner.
5. Three months after the partnership had commenced, a partnership business asset was sold for a capital loss.
With expansion of the business it was decided to employ Angela's daughter, Georgina, on a part-time basis during peak periods. Georgina served mainly at the counter. For this work she is paid $42 per hour. The business also pays her an allowance for the use of her motor vehicle during work time.
The business provided Angela with an all-expenses paid overseas holiday to New Zealand and Paul with a lap-top computer.
6. Working part-time suits Georgina because it gives her time to devote to her personal training business. In the current financial year she expects to earn assessable income of $6,000. Although Georgina will make a loss this year from the personal training business she is confident that her business will generate profits within 1 or 2 years.
7. After expressions of concern from Paul about the physical access to the business, the landlord, Ces, agreed to replace the existing balcony and access steps with a pre-formed masonry structure. The original access had been made of timber but this had deteriorated over time. The work cost Ces $14,000.
8. Paul plans is to sell his interest in the partnership to Angela's daughter later in 2012. When Paul moves out of the business he will enter into a restrictive covenant in which he will agree not to establish a similar business within a radius of 50 km of the location of the present business. The partners anticipate that Paul will receive $25,000 in consideration for entering into this agreement.
REQUIRED:
You are required to advise each person ie Paul, Angela, Georgina and Ces of the taxation implications of the above activities.
For each taxpayer you need to identify the issues, what is the relevant legislation, what is the case law, what are the tax rulings and come to a conclusion about each issue.