9. Partnerships Flashcards
What are the three types of partnerships?
Common-law partnership
Tax law partnership
A limited partnership
What is the biggest difference between a common-law partnership and a tax law partnership?
Common law carries on business
Tax law may include two people in receipt of joint income (married couples rental property)
How is income/loss treated as a tax law partnership?
If no business is being carried on, it is shared based on the percentage owned
How is income/loss treated as a common-law partnership?
It is shared based on the partnership agreement
What is a joint venture?
Where participants come together to produce a product, not receipt of income. They then divide the product and individually decide what to do with it.
eg. mining venture, someone contributes capital, another contributes P&E. It is still that persons P&E
What are some key attributes of Limited Partnerships?
They are usually treated as public companies
Partners can change and it doesn’t change the status of the company
Is a partnership a taxable entity?
No, it does have to lodge a tax return to show a ‘net income/loss’. which is to match the partners share, which they include in their tax return
How is the residency treated for partnerships?
The net income/loss is calculated as a resident. The tax paid for the partnership is dependant on the individual partner’s resident statuses
Can a partner be an employee of the partnership?
No
Are drawings made by the partners deductible to the partnership?
No.
they can not get salaries either.
Drawings are an ‘adjustment’ when reconciling the net profit/loss
What is the refinancing principle (partnerships)?
For example if the partners financed the partnership with their own money. and then were paid back through a bank loan acquired by the partnership. The interest would be deductible to the partnership if that initial investment by the partners was to generate income (buy stock), but not if it was for capital.
What are the methods partners can use to calculate the partnerships net income/loss which is then distributed to the partners?
Income method
Equity method
Some other basis they consider to be appropriate
Can the partners’ income exceed the income of the partnership?
No. they can not force the partnership to take a loss or increase it
When a partner leaves a partnership and is paid out. Is that assessable under income or CGT?
Income, as it is viewed for their underpayment while with the partnership
If a new partner is admitted to the partnership is the old partnership dissolved?
Yes, unless there is an express clause that the original partnership must continue.
