A partnership is not a separate legal entity. The partnership does not include in income: Interest...

    

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A partnership is not a separate legal entity. The partnership does not include in income: Interest on drawings The partnership cannot claim tax deductions for: Interest on capital partners' salaries partners' superannuation . . . ● Partnerships . Key points Distribution of Partnership Income Key Points A partnership is not a separate legal entity. Partners all have joint and several liability for actions undertaken by the partnership. A partnership is not a taxable entity and does not pay tax on its income but instead passes on the net income or loss to the partners, who in their individual capacities account for it in their own individual income tax returns. Reconciliation SBE Offset Curtin University Shrek & Donkey's Star Glamping Partnership The rules governing the tax treatment of a partnership are set out in Division 5 ITAA36 (ss 90-94). ITAA36 s 90 defines the net income and loss of a partnership. Under this section, the net income or partnership loss is calculated as if the partnership was a resident taxpayer except that losses and self-employed superannuation deductions are not allowed. In addition, payments that are a distribution of profits to the partners, e.g. salary must be excluded when calculating the net income of the partnership. Moreover, interest payments to a partner are only allowable if the loan was made on an arm's length basis. There are more limitations on what a partnership can claim as an expense and recognise as income. These include interest paid to partners in respect of their capital contributions and interest paid to the partnership in respect of drawings. . Key points Distribution of Partnership Income Step one Work out the net income of the partnership. Remember: partner salaries/superannuation, interest paid on capital and interest received on drawings are not taken into account in calculating the net income of the partnership. Step two . . . Salary Received + Plus Interest on Distribute the net income of the partnership between the partners. The table below is used in this step: Partner A Capital - Minus Interest on Distribution of Partnership Income Drawings + Plus % of Distribution Total Reconciliation Partner B Total Shrek & Donkey's Star Glamping Partnership SBE Offset |||| George and Tristan, both 44 years of age, are equal partners in a business, Boys Toys which is not an SBE. The accounts for the current year show the following: Trading income Interest on drawings ($1,000 by George and $4,000 by Tristan) Trading expenses Partners' salaries - $12,000 each Staff salaries Interest paid on capital ($2,000 to George and $1,500 to Tristan) Superannuation Employees Partners ($19,000 each) $ 200,000 5,000 50,000 24,000 33,332 3,500 3,000 38,000 The partnership had made a loss of $10,000 in the previous year Calculate the net income of the partnership and the taxable income of the partners. George had taken drawings $10,000 from the business and Tristan had drawn $40,000). A partnership is not a separate legal entity. The partnership does not include in income: Interest on drawings The partnership cannot claim tax deductions for: Interest on capital partners' salaries partners' superannuation . . . ● Partnerships . Key points Distribution of Partnership Income Key Points A partnership is not a separate legal entity. Partners all have joint and several liability for actions undertaken by the partnership. A partnership is not a taxable entity and does not pay tax on its income but instead passes on the net income or loss to the partners, who in their individual capacities account for it in their own individual income tax returns. Reconciliation SBE Offset Curtin University Shrek & Donkey's Star Glamping Partnership The rules governing the tax treatment of a partnership are set out in Division 5 ITAA36 (ss 90-94). ITAA36 s 90 defines the net income and loss of a partnership. Under this section, the net income or partnership loss is calculated as if the partnership was a resident taxpayer except that losses and self-employed superannuation deductions are not allowed. In addition, payments that are a distribution of profits to the partners, e.g. salary must be excluded when calculating the net income of the partnership. Moreover, interest payments to a partner are only allowable if the loan was made on an arm's length basis. There are more limitations on what a partnership can claim as an expense and recognise as income. These include interest paid to partners in respect of their capital contributions and interest paid to the partnership in respect of drawings. . Key points Distribution of Partnership Income Step one Work out the net income of the partnership. Remember: partner salaries/superannuation, interest paid on capital and interest received on drawings are not taken into account in calculating the net income of the partnership. Step two . . . Salary Received + Plus Interest on Distribute the net income of the partnership between the partners. The table below is used in this step: Partner A Capital - Minus Interest on Distribution of Partnership Income Drawings + Plus % of Distribution Total Reconciliation Partner B Total Shrek & Donkey's Star Glamping Partnership SBE Offset |||| George and Tristan, both 44 years of age, are equal partners in a business, Boys Toys which is not an SBE. The accounts for the current year show the following: Trading income Interest on drawings ($1,000 by George and $4,000 by Tristan) Trading expenses Partners' salaries - $12,000 each Staff salaries Interest paid on capital ($2,000 to George and $1,500 to Tristan) Superannuation Employees Partners ($19,000 each) $ 200,000 5,000 50,000 24,000 33,332 3,500 3,000 38,000 The partnership had made a loss of $10,000 in the previous year Calculate the net income of the partnership and the taxable income of the partners. George had taken drawings $10,000 from the business and Tristan had drawn $40,000).

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Solution In Australia partnerships are governed by the Partnership Act 1892 NSW and the Income Tax A... View the full answer