Partnership

Question 1

Provide some background on partnership.

Answer 1

A partnership is not a person as defined for income tax purpose. However a partnership does have to furnish records to SARS annually. The individual member of partnership needs to account for income from the partnership and is liable for the tax on their share of the income.

Question 2

What is a partnership?

Answer 2

A partnership is a:

• legal relationship between
• two or more persons who
• carry on a lawful business or undertaking to which
• each contributes money or labour or anything else with
• the object of making a profit and sharing it between them

Question 3

What are the essential elements of a partnership?

Answer 3

1. Each partner must bring something into the partnership
2. Business for joint benefit of partners
3. Object is to make a profit
4. Contract must be legitimate
5. Customers, creditors and other business connections must be notified of the existence
6. Separate bank account

Question 4

What is important to note for partnership for the individual partners?

Answer 4

Partnership is not employer for individual partners, therefore salaries are not subject to employees tax and fringe benefit and allowances are not deductible.

Question 5

What is considered as income from partnership?

Answer 5

Where any income has in common been received by or accrued to the members of any partnership, a portion (determined in accordance with any agreement between such members as the ratio in which the profit or loss of the partnership are to be shared) of such income shall, notwithstanding anything to the contrary contained in any law or the relevant agreement of partnership be deemed to have been received by or have accrued to each such partner individually on the date upon which such income was received by or accrued to them in common.

Question 6

What is the treatment for an assessed loss in partnership?

Answer 6

Apportion assessed loss to ‘full’ partners and not limited partners. It can be deducted from other income

Question 7

What are the allowable deductions from partnership income?

Answer 7

1. Salaries payable to partners
2. Interest on capital payable to partners
   NB these amounts must be included in partners own taxable income

Question 8

What are the specific deductions from a partnership income?

Answer 8

1. Annuities paid to former partner that has retired
2. Life insurance policies
3. Section 11(k) pension fund deductions
4. Section 11(I) contribution to a fund
5. Allowance for bad debts

Question 9

What are the requirements for specific deduction allowed for annuities paid to former partners?

Answer 9

1. Person must have been a partner for at least 5 years
2. Retirement must be due to old age, ill health or infirmity
3. Amount must be reasonable in light of service rendered
4. Must not be a payment that represent the former partners Interest or goodwill in partnership
5. It must be a genuine annuity
6. There is not limitation for deduction

Question 10

What is the requirement for specific deduction for life insurance policies in partnership?

Answer 10

The policies must be on life of partner if amounts is payable to other partners/partnership unless partnership agreement states that it is capital or if the partnership is the owner of the policy and is required to make the payments of the premium.

Question 11

What is the requirement for specific deduction for pension fund contribution?

Answer 11

The total deduction is limited to the greater of:
- R1750
- 7,5% of persons income derived from retirement funding employment (RFE)
NB if a person was an employee of the partnership before he becomes a member, his deduction will be limited to his income in the 12 months before he becomes a partner

Question 12

What is the requirement for specific deduction for contributions to a fund?

Answer 12

Deduction is limited to:

10% of approved remuneration

Question 13

What is the requirement for allowance for bad debt?

Answer 13

1. The amount must have been previously included in taxpayers income
2. It must be due to that taxpayer
   NB apportion!
   NB if it was a subsequent bad debt after the introduction of new partner there is no deduction for the new partner, and old partners claim bad debts in new partnership ratio

Question 14

What are the requirements for specific deduction for capital allowances and recoupment?

Answer 14

Partnership is not legal entity therefore does not own assets!
The allowance and recoupment must be apportion according to the partnership ratio.
If however the asset is not jointly own by the partners, the owner claims the full allowance.

Question 15

What is a limited partner?

Answer 15

1. Any member of a partnership en commandite, an anonymous partnership or any similar partnership, if such members liability towards a creditor of the partnership is limited to the amount which he has contributed or undertaken to contribute to the partnership or is in any other way limited.
2. Where any trade or business is carried on in partnership, each member of such partnership shall, notwithstanding the fact that he may be a limited partner, be deemed for the purpose if this Act be carrying on such trade or business
3. Notwithstanding anything to the contrary to the Act contained, the amount of any allowance or deduction which may be granted to any taxpayer under any provision of this Act in respect if or in connection with any trade or business carried on by him in a partnership in relation to which he is a limited partner shall not in the aggregate exceed the sum of:
   - the amount, whether it consists of the taxpayers contribution to the partnership or of any other amount for which the taxpayer is or may be held liable to any creditors of the partnership
   - any income received by or accrued to the taxpayer from such trade or business

Question 16

What is the general steps to follow to calculate partnership?

Answer 16

1. Determine taxable income of partnership as separate entity (amounts to be shared equally)
   - income earned by the partnership
   - deduction of partnership (only if the partners get deduction equally)
2. Apportion taxable income according to share
3. Assess partner individually (partnership income plus income from other sources)
   NB remember the order of deduction:
   - s 11(a) other deductions and allowances
   - pension fund (current and arrear)
   - RAF (current and arrear)
   - medical expenses