Partnership • • • • The principles for computation of a partnership tax adjusted profit or loss are the same as those for

a Sole trader. The tax adjusted profit or loss is allocated between the partners according to their profit sharing ratio. Partner’s salaries and interest on capital are not allowable. If a partnership changes its basis of profit sharing ratio during a period of account, then the profit or loss will need to be time-apportioned prior to allocation of profits

Example 1 D & P are partners. Their tax adjusted profit for the year ended 30.09.09 was $16,500. Up to 30.06.09, profits were shared between D & P in the ratio 3:2, after paying salaries of $3,000 and $2,000. From 01.07.09 profits are shared 2:1 after paying salaries of $6,000 and $4,000. Show the allocation of profits for 2009/10. Solution to D & P D $ 01 Oct 08 to 30 June 09 Profits ($16,500 x 9/12 = $12,375) Salaries (9/12*$3,000/2,000) Share of profits - balance (3:2 ) ($12,375-$3,750) P $ Total $

2,250 1,500 3,750 5,175 3,450 8,625 7,425 4,950 12,375

01 July 09 to 30 Sept 09 Profits ($16,500 x 3/12 = $4,125) Salaries (3/12*$6,000/4,000) Share of profits - balance (3:1 ) ($4,125-$2,500)

1,500 1,000 1,083 542 2,583 1,542

2,500 1,625 4,125

Total

10,008 6,492 16,500

• Commencement and cessation The normal commencement and cessation rules apply upon the commencement and cessation of a partnership. A partner will be treated as commencing when he or she joins the partnership, and will be treated as ceasing when he/she leaves the partnership • Partnership loss Losses are allocated between partners in exactly the same way as profits. The loss relief claims available to partners are the same as those for the sole traders. Example 2 – a change in partnership A & B have been in partnership since 01 July 2006 making up their accounts to 30 June each year. On 1 July 08 C joins the partnership. The partnership’s tax adjusted profits are as follows: $ Year ended 30 June 2007 10,000 Year ended 30 June 2008 13,500 Year ended 30 June 2009 18,000 Profits are shared equally. Show the amounts assessed on the individuals partners for 2006/07 to 2009/10? Page 1 of 2

Solution to A B and C Step 1 - Allocate the tax adjusted profits for accounting period between partners A B C $ $ $ Y/e 30.06.07 5,000 5,000 0 Y/e 30.06.08 Y/e 30.06.09 6,750 6,000 6,750 6,000 0 6,000

Total $ 10,000 13,500 18,000

Step 2 - Compute each partner's schedule D Case 1 profits, as they were sole trader. A & B will both be assessed as follows, based on commencement on 01 July 2002 $ 2006/07 2007/08 2008/09 2009/10 01 July 2006 to 5 April 2007 ($5,000 x 9/12) Y/e 30.06.07 Y/e 30.06.08 Y/e 30.06.09 3,750 5,000 6,750 6,000

They will both carry forward overlap profits of $3,750

C will be treated as commencing on 01 July 2004, and will be assessed on her share of the partnership as follows: 01 July 2004 to 5 April 2005 ($6,000 x 9/12) Y/e 30.06.05

2008/09 2009/10

4,500 6,000

Question 1 C & E have been in partnership since 1993 but ceased trading on 30 Nov 09.The TAP profits and losses for the final four years before allocation between partners are as follows: $ 2006/07 10,000 2007/08 14,000 2008/09 11,200 2009/10 (33,500) Profits and losses have always been shared 40% to C and 60% to E. C Is single and has no other income or outgoings apart from the bank interest of $3,850 (gross) received on 01 Dec 2006 from investing a recent inheritance. He has a capital gain of $22,600 for 2009/10 I r o the disposal of an asset on 01 June 2009. The asset was acquired in 2007 as part of his inheritance. Assume that the 2009/10 rates and allowances apply to all years. Ignored overlap profits. Required: (a) Advise the partners of the possible ways of relieving the partnership loss fro 2004/05 (b) Advise tha partners as to which loss relief claims would be the most beneficial (c) After taking into account the advice in (b), calculate the partner’s taxable income for 2006/07 to 2009/10, and E’s net chargeable gains for 2009/10 Profits are shared equally. Show the amounts assessed on the individuals partners for 2007/08 to 2009/10? Page 2 of 2

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