Q. Am I in a business partnership?
A. For income tax purposes, persons (or entities) will be deemed to be in partnership where they are carrying on a business with a view to profit.
The definition for income tax purposes is wider than that at common law but the essential element being of ‘mutual assent’ and the intention of the parties to ‘act as partners’ such as joint ownership of business assets, entitlement and evidence to share in profits, operation of joint bank accounts, written partnership agreements and so on.
Q. Who can be a partner in a partnership?
A. Partnerships can have a number or types of partners. For example, a partnership can be a ‘Mum and Dad’ 50/50 type; a ‘Tom, Dick & Harry’ in uneven equity shares and even a partnership of companies, trusts or other partnerships. Partners themselves can be active in running the business or silent (contributing equity only). It is highly recommended that more complex partnerships should ensure that a partnership agreement is prepared by a solicitor at the outset, tabling such issues a profit distributions, admission of new partners, retirement/death of a partner, return of capital, presentation of profit reports payment of salaries and so on.
Q. Does a partnership need a tax file number?
A. Yes, a partnership must obtain a tax file number. While no direct tax is paid by the partnership itself, it must lodge an annual income tax return to evidence the source and basis of the partners’ profits. An application for a tax file number can be obtained via the Internet or by your tax agent/accountant quoting the actual tax file numbers of the partners’ themselves. It is necessary therefore that the partners (individuals or entities) must obtain a TFN in the first place before the partnership TFN is obtained. Where the partners are family trusts, this can take some time to do, so it is essential that new business partnerships get started on applications as soon as practicable.
Q. Does the partnership need to have an ABN?
A. Yes, where the partnership is carrying on an enterprise, it must obtain an Australian business number. This is usually done at the same time as making the application for a tax file number. The date of the formation of the partnership is important because this is the date from which the partnership can register for GST and therefore claim input tax credits. The date may be contained in the partnership agreement or in reference to the date of registration of the business name, signing of a contract or opening of a bank account for example.
Q. If the partnership has an ABN does that mean it is automatically registered for GST?
A. No. A business does not have to register for GST unless the turnover (gross income) is in excess of $75,000 in any 12 month period. Where the income is under $75,000 it is optional to register. Registration for GST means that the entity must lodge a business activity statement and remit GST on a regular basis to the ATO.
Q. What other registrations are required for a new partnership business?
A. Sometimes the partnership may be required to pay salaries to employees (or company directors who may be employed). If this is the case, the partnership must also register for PAYG withholding tax. The payment of salaries to owners/company directors should be discussed with your accountant before the registration is done. If salaries are paid a minimum of 9% superannuation must be remitted on a quarterly basis.
Q. Can a partnership of individuals pay a salary to one partner before distributing profits?
A. This issue is a contentious one with the Australian Taxation Office, especially in the absence of a formalised statement in the partnership agreement. A partner cannot be an employee of a partnership, nor is the salary a withholding event subject to PAYG. The distribution of partnership profits and the payment of an intended salary must therefore be discussed with your accountant at the formation of the structure.
Q. Can partners decide each year how much will be distributed to each partner?
A. No, this is not recommended. While income splitting may be an advantage with partnerships, it should not be altered from the original agreement. Care must be taken in the determination of profits and the chosen structure at the outset as problems will arise where one partner receives additional income in one year together with the partnership distribution.
Q. Can a partnership take advantage of the special capital gains tax concessions?
A. Yes, a capital gain made in a partnership actually belongs to the partners and not the partnership structure. Therefore, there is some degree of flexibility in that each partner can independently choose the CGT concessions they want. Failure by one partner to satisfy the conditions will not affect the other partner. For example, one partner may take advantage of the CGT retirement concession and the other partner may choose to utilise the CGT rollover concession to continue with a new business.
Information provided by BAMR - Business Accountants & Management Rights
To download the full Tips for Partnerships in a PDF version click here
