Partnerships
In Section 2
(1) of the Income Tax Act the
definition of a “person”
includes partnership but a “partnership”
is not defined in the Act.
What is a partnership?
A partnership
is a body of persons carrying
on business together with a
view to profit.
A Partnership
is treated like a sole trader
for the purpose of computing
profits.
The computation of partnership
Profit and Losses
(a) The Partnership’s
tax adjusted profit or loss
are the same as those of a Sole
Trader
(b) Partners’ salaries
and interest on capital are
not deductible expenses and
must be added back in computing
profits, because they are a
form of drawings.
The Allocation of the Profit
or Loss
(a) The tax
adjusted profit or loss is allocated
between partners according to
their profit sharing ratio for
that income year.
(b) Partners may be entitled
to salaries (as agreed to) and
interest on
capital. The balance will be
allocated in the profit sharing
ratio.
(c) A partnership may have non
– Trading income eg. Rental
income.
Such income will be allocated
between partners according to
the profit sharing ratio
The Tax position of Individual
Partners
Each partner
is taxed like a sole trader
who runs a business which;
- starts when
he joins the partnership
- finishes
when he leaves the partnership
- has the
same income year as the partnership
( except partners who join
or leave during a period will
have a period which starts
or ends part way through the
partnership’s period)
- makes profits
or losses equal to the partner’s
share of the partnership’s
profits or loss.
Partnership Capital Allowance
(a) Capital
Allowance are deducted as an
expense in calculating the tax
adjusted profit or loss. The
profit allocated between the
partners are after capital allowances.
(b) Individual partners cannot
claim capital allowances on
their own behalf.
The Allocation of Assessable
Losses
Losses are allocated
between partners in exactly
the same way as profits.
Loss Relief
Partners are
entitled to the same loss relief
as sole traders
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