Partnerships

Question 1

Are partnerships a separate tax entity explain

Do partnerships pay tax

Answer 1

Partnerships is not a separate tax entity, we don’t see partnerships as a separate person but rather a collection of people.

Partnerships do not pay any tax. Income and losses generated in a partnership “flow through” to the partners, who are the relevant taxpayers

Question 2

What is the tax law definition of partnership, how does this differ from the the general law description

What are the implication of companies and partnerships

Answer 2

Under a tax law a partnership is defined as: S 995-1 ITAA97

“an association of persons carrying on a business as partners or in receipt of ordinary income or statutory income jointly” or a Limited partnership

The tax law definition is wider than general law definition as receipt of income jointly is enough to constitute a partnership for tax purposes. For example a husband and wife who jointly derive rental income from an investment property.

Companies are excluded from the definition of a partnership, but company is separate legal person and can be a partner in partnership.

Question 3

General tax rules are contained in Div 5 of part III ITAA36 what is the distinction of limited partnership and general partnerships.

Answer 3

Division 5 is directed at “general partnership”

Limited partnership are usually taxed like companies under special corporate limited partnership rules in DIV 5A

Question 4

Explain the the two step process in determining tax liability

Answer 4

Step 1 :Calculate under S90

• Net income
• Partnership loss
• Exempt income
• Non-assessable non-exempt income

Step 2: Allocate under s 92

• Each of the above categories need to be allocated to partners according to each partners interest in the partnership
• The allocation is thaought of as if they were a resident
• For any period that a partner is a non-resident, the partner is only assessed on the amounts that are attributable to sources in Australia

Question 5

Explain the treatment of dividend imputation and partnerships

Answer 5

Assessable income of a partnership includes franking credit;

Partner’s share of partnership of net income includes share of franking credit

Partners are entitled to tax offset for share of franking credit

(all relevant sections are above)

Question 6

Explain the treatment of CGT and partnerships

Answer 6

Special rules to CGT rules in Subdiv 106-A-ITAA97 apply to partnerships

Partners have individual fractional interest in partnerships property. Partners are therefore required to individually account for capital gains and capital losses arising from CGT events to such interests. The partnerships does not recognize the CGT for the partnerships but by the partners.

Question 7

1. Explain the share of profit and losses for a general law partnerships
2. Explain the share of profit and losses for a mere tax partnerships

Answer 7

1. General law partnership- Partners usually taxed according to their interest under the partnership agreement. If no partnership agreement exist then profit and loss are shared equally.
2. In a mere tax partnership partners are taxed according to their interest in the underlying property. If the contributors of capital are 40/60 then the partners would get taxed proportionally on the income.

Question 8

How is salary treated in regards to net income for salaries.

How is a salary treated in terms of net income

Answer 8

In a partnership there is no deduction for salary when calculating net income under S90. Since the partnership is not separate entity for tax purpose, it can’t contract with its members. In contract law you can’t contract with your self.

If there is an agreement in the partnership where a part can deduct a “salary” then this is fine as long as salary is greater than net income. A tax loss can not arise where salary is deducted from a positive net income. A positive net income can only be reduced to zero within a partnership when netted against a salary.

(there are more examples in the lecture notes)