Question

Ross, Joey and Chandler are partners in an accountancy partnership. Chandler retires from the partnership on 1 January 2018 and is paid $50,000 for his share of the firm’s work in progress. As at 30 June 2018, $30,000 of the work in progress has been billed to clients by Ross and Joey. It is reasonable to expect that a further $15,000 will be billed by 1 January 2019. Advise Ross, Joey and Chandler regarding the tax treatment of the $50,000 work in progress payment.

[Based on the Australian taxation system]

Answer 1

PAYMENT TO THE OUTGOING PARTNER FOR WIP WILL BE ASSESSABLE INCOME IN THE PARTNER'S HANDS AS MONEY RECEIVED IN THE PLACE OF FUTURE INCOME. THUS $50000 WILL BE CHARGED AS TAXABLE INCOME TO CHANDLER.

A PARTNERSHIP IS ENTITLED TO A DEDUCTION IN THE YEAR OF THE PAYOUT LIMITED TO THE AMOUNT IT IS LIKELY TO RECOVER WITHIN 12 MONTHS OF THE PAYMENT. THUS IN 2018 THE PARTNERSHIP WOULD BE ENTITLED TO A DEDUCTION OF $30000 + $15000 = $45000 AND THE REST $5000 WILL BE DEDUCTIBLE IN 2019.