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| Partnerships |
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Taxation of a partnership A partnership itself does not pay income tax, but under s.91 ITAA36 it is required to lodge a Partnership tax return - Form P Partners share of income Each partner is individually taxed on their share of partnership net income (PNI) It must be included as assessable income in the partner’s individual income tax return - s.92 ITAA36 If there is a partnership loss, then each partner's share of the loss is a deduction in their own income tax return - s.92(2) ITAA36 Partnership net income (PNI) s.90 ITAA36 defines net income as "the balance left after deducting from the partnership assessable income all allowable deductions and allowable losses" s.90 PNI is divided between the partners in accordance with their profit/loss sharing ratio A Partnership tax return requires the completion of a Statement of Distribution which shows for each partner:
Dividend imputation Where a partnership receives a franked dividend, the following rules apply:
Payments to relatives s.26-35(1) gives the ATO the discretion to allow only what they consider “reasonable” as a deduction for payments made to relatives and associated persons and related entities Excessive payments which are disallowed need to be added back to net profit so as to determine s.90 PNI Uncontrolled partnership income (UPI) s.94 ITAA36 is designed to minimise tax avoidance by imposing a special further tax on any uncontrolled partnership income This rate for 2006/2007 is 45% reduced by the average rate of ordinary tax (excluding tax offsets and credits) on the taxpayer's taxable income It is a penalty tax imposed on partners who do not have real and effective control over their share of s.90 PNI It applies only to persons aged 18 years and over on the last day of the income year Uncontrolled partnership income (UPI) The rate of further tax is calculated as follows: 45% less (Tax on taxable Y x 100%) 
taxable Y
s.94(8) ITAA36 gives the FCT the discretionary power not to apply UPI penalty tax where "special circumstances" exist |
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s.995(1) defines a partnership as "an association of persons carrying on a business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company" Creation of partnership For tax purposes the existence of a partnership is a question of fact determined according to the facts relevant to each particular circumstance A formal written partnership agreement is not a pre-requisite for a partnership to be held to exist for tax purposes The following factors are prima facie evidence of a partnership:
Income splitting A partnership may be formed between family members as a means to split income and therefore reduce the family's overall tax liability This is a means of tax minimisation and is a legitimate tax planning technique Determination of s.90 PNI Financial dealings with partners in partnership capacity are not considered in determining s.90 PNI Thus, the following payments to partners are not deductions for the partnership but instead are treated as distributions of profits
Alternatively, the following receipts from partners are not assessable income for the partnership
Financial dealings with partners not in partnership capacity are considered in determining s.90 PNI
Partnership losses A partnership cannot carry forward a loss for deduction against income in a future year Losses are distributed to the individual partners as per s.92(2) ITAA36 in the year in which the loss was incurred Partnership capital gains/losses A capital gain or loss is not included in the calculation of s.90 PNI Instead, the individual partners are assessed on their respective shares of any capital gain/loss A partnership is not allowed a deduction for:
Such payments are instead deductions for the partners individually Real and effective control Factors to consider are:
Structural changes Trading Stock A change in the ownership of a partnership (e.g. due to formation, admission or dissolution) is treated for tax purposes as a notional disposal of the stock by the old owner(s) to the new owner(s) Under s.70-90 any profit (loss) upon from revaluation is assessable income (deduction) of the old owner(s) As per s.70-100(4) an agreement can be made by the old and new owners that s.70-90 does not apply (i.e. the owners of the new business structure may elect to use the value of trading stock that would have been taken into account if no disposal had occurred) Under s.70-100 any profit (loss) upon from revaluation is assessable income (deduction) of the new owner(s) The s.70-100(4) agreement can only be made where:
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