Assessing partnership assets 043-03120060

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Capital and Current Accounts

The partnership accounts provide details of a partner's equity in a business and consist of a Capital Account and a Current Account for each member of the partnership.

The Capital Account is used to record amounts of capital contributed by each partner. This includes any original capital contributed subsequent additions and repayments or drawings.

The Current Account is used to reflect changes in the partner's equity as a result of profits, losses, salaries, wages, and drawings.

Where the balance sheet contains a separate Capital Account and Current Account for each member of the partnership, the equity of each partner in the business is the total of both the Capital Account and Current Account in the partner's name.

However, it is common current accounting practice to amalgamate each partner's Capital and Current Accounts and present a combined statement of the details of these accounts for each partner. A partner's equity in a business is the closing balance of the combined Capital and Current Account in the partner's name.

Note: this equity is based upon the value of assets as detailed in the partnership financial statements (known as book value), and is not necessarily the assessable asset current market value of the customer's interest in the business. The closing balance of a the combined Capital and Current Accounts for a partner provides an indication of the relative proportions of the total assets of the business in which each partner holds an interest. It is therefore the best starting point to calculate the current assessable asset value of a customer's interest in a business.

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Partnership property

Partnership property means partnership assets that is, assets 'owned' by the partnership. These may consist of assets originally owned personally by a partner, which are brought into the partnership with intention that the asset contributed to the business is no longer the personal property of the person, it becomes an asset of the business in which all partners have an interest. Where a partner contributes capital to a business in this way, an adjustment is usually made to their Capital Account to reflect this contribution and their increased interest in the business. Partnership property may also consist of assets purchased with funds provided from the business or from profits earned by the business.

The fact that an asset is utilised by a partnership does not mean that the asset is a partnership asset. Commonly, a partner may agree to allow a business to utilise an asset owned personally to produce income. Although an asset may be used by the partnership, if the asset is not contributed to the partnership it does not become a partnership asset, it remains the personal asset of the customer (e.g. a home office).

The primary reference sources for ascertaining which assets are partnership assets and for determining a partner's interest in assets of a business is the partnership agreement and the business financial statements.

The presence of a written partnership agreement may be taken as prima facie evidence of the terms of a partnership. The terms of a written partnership agreement will specify the interest of each partner in assets of the business detailed on the balance sheet and for social security Assets Test purposes is used in conjunction with the Partnership Accounts to calculate the assessable value of a partner's interest in the business i.e. if the partnership agreement specifies a proportional ownership this proportion should be applied to the relevant assets.

This applies irrespective of the legal title in which the assets are held. Although the transfer of legal title of an asset to all partners jointly would be prima facie evidence that the asset is a partnership asset, the converse does not lead to the conclusion that the property is not a partnership asset. Where an asset is included in the balance sheet of a partnership, there is a presumption that the asset is a partnership asset and that the legal owner holds the asset in trust for the partners, according to the terms of the partnership agreement.

Any assets originally owned by one of the partners and contributed to the business would have been reflected by an increase in the balance of the contributing partner's Capital Account equal to the value of the asset at the time of its introduction to the partnership. Therefore, subject to any written partnership agreement to the contrary, it is assumed that the partnership assets are held jointly for all partners and any appreciation in the value of assets held by the business is shared between partners in the same proportion as business profits are distributed. Any increase or reduction in value of partnership assets is divided accordingly between the partners' Current Account upon revaluation (that is, if there is no written agreement the change in asset value is divided between the partners in the same proportions as profits are shared).

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Example 1

A customer who is one of 3 partners in a partnership contributes land personally owned valued at $100,000 to the partnership. The land is included in the partnership balance sheet and the customer's capital account is increased by $100,000 to reflect this contribution and the increased interest the customer has in the overall value of the business. Profits in the business are divided evenly.

Over time the value of the land appreciates to $160,000. There is no written partnership agreement, however, as the land is included in the business financial statements it is assumed that it is intended to be a partnership asset and is held jointly for all partners. The amount of the growth in the value of the land of $60,000 would be shared equally between the partners (the same as profits) and the amount of $20,000 would therefore be apportioned to each partner's Current Account upon revaluation.

Where a written partnership agreement indicates that particular assets are held in trust for a partner(s), any appreciation in the value of such assets is allocated to the partners in accordance with the terms of the agreement.

The Current Account of each partner (or the closing balance of the combined Capital and Current accounts) should also reflect the interest of each partner in assets of the partnership acquired through business activities undertaken by the enterprise. Therefore, subject to any written partnership agreement to the contrary, any appreciation in the value of such assets held by the business is once again shared equally by all partners and upon revaluation is divided evenly between the partners' Current Account in the same proportions as profits are shared.

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Example 2

Four unrelated persons decide to form a business partnership. They buy a corner store for $100,000, contributing funds in the following shares:

• Partner A $40,000
• Partner B $30,000
• Partner C $20,000
• Partner D $10,000

The land on which the corner store is located is legally owned by all partners as joint proprietors. Partners C and D also contribute stock of $10,000 (combined) to the business. The value of the corner store and the stock is included in the partnership balance sheet and the Partnership Accounts reflect the respective capital contributions of each partner. Profits in the business are divided evenly.

• Corner store $100,000
• Stock $10,000

Over time the value of the corner store appreciates to $160,000 and the total stock held by the business increases to $50,000. The partnership agreement indicates all partners share equally in the assets of the business, except for the corner store, which is held in trust for the partners in the proportion in which they contributed to its purchase.

• Corner store $160,000
• Stock $50,000

The amount of the growth in the value of the stock of $40,000 would be shared equally between the partners (the same as profits) and the amount of $10,000 would therefore be apportioned to each partner's Current Account upon revaluation.

Under the terms of the partnership agreement, the increase in the value of the land would be shared according to the proportion of the total funds contributed to the cost of the original purchase price by each partner. Accordingly, the appreciation in the value of this asset of $60,000 would be allocated to each partner's Current Account upon revaluation in the following proportions:

• Partner A $24,000 (40%)
• Partner B $18,000 (30%)
• Partner C $12,000 (20%)
• Partner D $ 6,000 (10%)

Although not common, assets which are not partnership assets will sometimes be incorrectly included on the balance sheet of a partnership. Although technically personal assets should not be included in the business financial statements, it is not necessary to remove such assets when calculating the value of each partner's share in the value of the business. The inclusion of a personal asset in the partnership balance sheet by the business accountant would have been reflected by an increase in the balance of the Capital Account of the partner who owns the asset equal to the value of the asset at the time of its introduction to the partnership. As the asset is a personal asset of one of the partners, not a business asset, any appreciation in the value of the asset should be totally credited to the Partnership Account of the owner upon revaluation.

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Example 3

The balance sheet of a partnership in which a customer is one of the 3 partners includes land valued at $100,000. The land is included in the partnership balance sheet and the owner's capital account was increased by $100,000 at the time of its inclusion to reflect this contribution. Profits in the business are divided evenly.

Over time the value of the land appreciates to $160,000. There is no written partnership agreement, however, the customer provides evidence that the land is owned personally by one of the other partners and although utilised by the partnership to undertake business activities is not a partnership asset. The amount of the growth in the value of the land of $60,000 would be totally apportioned to Current Account of the property owner upon revaluation.

This procedure will achieve the same result, but is administratively much simpler, than the alternative of removing the personally owned asset from the balance sheet, adjusting the owner's partnership accounts and maintaining the asset directly as an assessable asset owned personally by the owner. The result will also be correct irrespective of whether the amount of any liabilities associated with a personally owned asset have been included in the partnership balance sheet by the business accountant.

The inclusion of personally owned assets in the financial statements of a partnership most commonly occurs with farming businesses conducted between different generations of the same family. Usually there will be no written partnership agreement in such cases, or if there is, the agreement will contain no specific provisions regarding assets owner personally by a partner, but utilised by the business. . Claims that assets included on the balance sheet are personal rather than business assets should only be accepted where suitable evidence is provided by the customer, due to the implications for assets test assessment. As the assertion that assets included on the balance sheet are personal rather than business assets may provide a means of avoidance of the Assets Test, such claims should only be accepted where suitable evidence is provided by the customer.

Where there is no written partnership agreement, or the agreement does not indicate that a special interest is held in any assets by a partner(s), it can be assumed that all assets on the partnership balance sheet are partnership assets held jointly for all partners. In this situation the Partnership Accounts, can therefore be used as the starting point to calculate the current assessable asset value of a customer's interest in a business.