What is a partnership?Trusts:
On what basis are they taxed?
On what basis are partnerships taxed?
A partnership is a relationship existing between persons carrying on business in common with a view to profit - but note that the definitions section (sec 6 in the 1936 Assessment Act) defines the term more widely than this - that does not concern us at the moment
What is a trust?
A trust is a legal obligation binding a person to deal with property which he controls for the benefit of other persons. In other words where a person (known as a trustee) has the right to control property for the benefit of others (known as beneficiaries) we say that a trust exists.
So what???...
Well, when either of these relationships exist between people and income is produced by their activities or their assets, that income is taxed under 2 specific provisions of the Act - and not under the general provisions we have considered so far
On what basis are partnerships taxed?
Division 5 of the 1936 Assessment Act governs the assessment of the income of a partnership - have a look at sec 91
Section 91 provides that a partnership shall furnish a return of its income but not be liable to pay tax on that income
Instead sec 92 requires that the individual partners include their share of the partnership income in their own returns.
Sec 90 defines the net income, which the partnership must return.
It is the assessable income of the partnership calculated as if the partnership was a resident taxpayer less allowable deductions.
One advantage of operating as a partnership is that splitting the income can reduce the effective rate of tax. Take a look at the tax rates scale and work through a case such as that a business earning $70,000
If you compare the amount of tax paid by a single taxpayer earning $70,000 and the amount of tax paid by two taxpayers in partnership deriving $35,000 each you will see the saving that can be made by splitting income
For a married businessman with a wife who assists in the business, a partnership enables income to be split and tax to be reduced accordingly.
It is worth bearing in mind that even if a spouse plays no part in the conduct of the business the definition of 'partnership' in the Act includes
persons in receipt of income jointly.Provided the income is received jointly, it should be returned in accordance with sec 91.
Answer this question….
A partnership pays tax on assessable income derived by it
Yes No
Under sec 91 a partnership is not liable to pay tax on its net income?
Answer this question….
A partner is assessed on his interest in the income of the partnership
Yes No
It is the share of 'net income' which is included in the partner's income
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