How to identify a partnership 043-03120010

A partnership must involve a minimum of 2 people who have a view to make a profit. The individuals within the partnership each own a share of the assets of the business and are entitled to a share of the profits made by the business. Every member of a partnership business is jointly liable for all the debts of the business.

The following factors may identify the existence of a partnership:

• Partnership income tax return - which is completed in addition to the individual income tax return (ITR)
• a 'Statement of Distribution' - which will generally be attached to the Partnership income tax return and indicates the share of the profit and loss applicable to each member of the partnership
• only the individual partner's portion of the net profit of a partnership is declared on the individual ITR
• business balance sheets which refer to either 'Partner Capital Account' or 'Partners Current Account'
• a partnership agreement exists
• customer advises they are in a partnership on the Business Details (MOD F)

If the business structure is not clearly identifiable, contact the accountant listed on the MOD F for confirmation.

Features of a partnership can include that:

• The business may be run in the owners' names or under a registered business name
• Each partner owns a share of the business assets and receives a share of the profits. Profits and losses are shared equally unless agreed otherwise
• Each partner is 'jointly and severally' liable for all business debts. This means if one partner defaults, the others are liable for all the business debts
• A partnership agreement may have been made. This can be oral, written or inferred
• Upon windup of a partnership, the partnership assets are divided proportionally as per partnership agreement after payment of debts and the return of capital contributed by each member of the partnership unless agreed otherwise
• A partnership usually winds up at the resignation or death of one of the partners. However the partnership may continue to operate where an agreement has been made for this to occur and the continuing members purchase the interest of the retiring or deceased partner

A partnership agreement set outs the rights and interest of each member of the partnership. A partnership agreement can either be written, oral or inferred by the conduct of the members involved.

The terms of a written agreement can be varied with the consent of all the partners. This consent may either be written, oral or inferred.

Where a written agreement exists it may specify:

• the amount of the business that is held for each partner
• the interest of a partner in relation to a particular asset
• the method of distribution of capital upon the winding up of the partnership

Partnership agreements may vary considerably from very concise details to a broad statement of the interest of the partners.

Where there is no partnership agreement, state partnership acts contain provisions outlining the rights and interest of each member of the partnership.

Partnerships must lodge a partnership ITR each financial year. These are used by the Australian Taxation Office (ATO) for information and cross referencing purposes.

As part of the partnership ITR, the statement of distribution indicates the share of the profit or loss for each member of the partnership.

Where a partnership operates at a loss, this loss can be distributed among the partners. The ATO allows such a loss to be claimed as a deduction by each member of the partnership on their personal ITRs against other sources of income. While offsetting of business losses is allowed for tax purposes, it is not allowed for Centrelink income test purposes.

Each state has a Partnership Act. These acts set out that if there is no agreement to the contrary between the partners, that profits and losses are to be divided evenly and that the capital of the partnership is held equally for all the partners.

These acts also specify that upon dissolution of the business, the assets are to be applied to liabilities and then distributed to partners in a particular order.

Assessments of partnerships are done by a Service Officer or referred to a Complex Assessment Officer.