Assessing partnership income 043-03120050

A partnership is 2 or more people who own a business in common, with the aim of making a profit. A partnership agreement may be oral or written.

The partnership is not a separate legal entity, which means that although the partnership lodges a tax return, the profit or income is assessable for the individual partners. The business may be run in the:

• owners' names, or
• under a registered business name

Each partner:

• has equity in the business assets and receives a portion of the profits
• is liable for all business debts

For a customer involved in a partnership, the assessable income is the customer's portion of the assessable profit of the partnership. The assessable profit is the net amount, after the allowable costs of running the business have been deducted from the gross profit, but before income tax. The customer's share of the profit can be further reduced by allowable business deductions claimed by the customer on their personal income tax return.

When assessing the income of a partnership business, there are some points to note:

• If the shares and/or managed investments are:
• held in the name of 1 of the partners, they are regarded as that partner's personal investment
• owned jointly, the proportion of the investments owned by the customer is regarded as the customer's personal investment
• held by the customer, they are to be directly recorded as assessable assets on the customer's record

Note: where a customer is a member of a partnership in which the only income produced is derived from interest or dividends on investments, the customer is not considered to be a person who carries on a business. However, if a customer is a member of a partnership which undertakes business as an investment trader, buying and selling shares, the customer will be regarded as a person who carries on a business. The profit earned from this activity will be regarded as business income and assessed accordingly

• Loans made by partners to the partnership are not regarded as loans. They are regarded as an injection of capital into the partnership. The amount of such loans should be added back to the partner's value of share in the partnership for Assets Test purposes. No deeming is applied
• Drawings are not assessable income. They are withdrawals of capital
• When a partner receives a salary or wage, this amount is added to that partner's share of the profit to determine their income from the business. If the partnership has made a loss, the partner's share of the loss can be offset against any salary or wage paid to them
• When a partnership runs more than 1 business activity within the partnership, a loss on 1 activity cannot be offset against the profit from another activity unless the businesses are necessarily related. If that is case profit and losses can be offset between businesses
• Where a customer is a member of a partnership in which the only income produced is derived from renting, letting or leasing real estate, the customer is not considered to be a person who carries on a business. However, if the customer is a member of a partnership which undertakes business as a Property developer, they are considered to be carrying on a business, therefore income from this source can be offset by losses from a necessarily related business
• Losses from previous years cannot be offset against current year's profits.
• A customer may claim further deductions on their personal income tax return against their share of the partnership income. If these deductions are allowable, they can be used to reduce the customer’s assessable partnership income.

Service Officers and Complex Assessment Officers (CAO) must use the correct date of event for business income and assets.

Sole trader's and partnership's income from investments, loans, drawings and salaries is covered in another procedure.

Profit from a partnership is ordinary income; it is not employment income. It is used when calculating the accrual of Working Credits. The customer is unable to deplete their Working Credit balance to offset this income unless they are also paid employment income from an employer and their income is more than their applicable income free area. Note: if the customer is receiving a 'wage' from a partnership business, the customer cannot deplete their Working Credit balance to offset the wages as the 'wage' is added to their portion of partnership profits.