Note re tax treatment of partnerships

partnership basics
The term partnership is defined in the Partnership Act as the relation that exists between
persons carrying on business in common with a view of profit.

An alternative less formal definition is that a partnership exists where two or more people
jointly own a business. In the case of a company there is a business with a single owner,
namely the company. In the case of a sole trader there is a business with a single owner,
namely the individual we call the sole trader. In the case of a partnership there is a business
with two or more owners.

In the language of the law, a partnership is also known as a ‘firm’. The law reserves the word
‘firm’ to refer to the partners collectively. (A corollary is that a company is not a firm. A
company is a company. A ‘firm’ is a partnership.) In a tax contest as in AF205 the legal
terminology must be used with care and precision. A partnership should never be called a
company. A company should never be called a firm.

Importantly a partnership is not a legal entity. Partnership is a relationship. Each partner is an

agent of his fellow partners. What we commonly call a liability of the firm is in truth a
liability of each of the different partners. Each partner is potentially 100% liable for debts of
the firm. One doesn’t sue the firm. There is no such entity to sue. There is only the different
partners. A party ‘suing the firm’ is in fact suing each of the partners.

partnerships and tax

Partnerships provide no particular or unique challenges for income tax law. The usual tax
treatment can be stated in a few simple propositions.
- Tax law follows partnership law in seeing a partnership as a relationship among persons
rather than an entity.
- In consequence tax is not levied on a firm.
- Rather tax is levied on each of the partners composing the firm.
- Each partner includes in his chargeable income his share of firm profit for the year.
Where the firm has a loss year, each partner includes in his chargeable income his share of
the firm loss.

ITA 2015
The ITA 2015 deals with partnerships in Division 9 (Application of Income Tax to Persons)
Sub-division 2 (Partnerships).

Where all partners are residents the tax treatment is straightforward. Indeed it is precisely as
stated above. Some minor complexity arises where a partner is a non-resident.

Let’s start with the standard story where all partners are residents of Fiji.

Resident partners
Every partnership carrying on business in Fiji must file an annual return. While the firm will
not be taxed, information on firm profit or loss is required in order to determine the dollar
value of profit or loss to be included in each partner’s chargeable income. Section 51(2)
drives home the point:

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 ‘(2) A partnership is liable to furnish a partnership return of income in accordance
with s.104, but the partners, and not the partnership, are liable to pay Income Tax
in respect of the partnership’s activities as set out in this Subdivision.’

In determining each partner’s net income or loss for the year, the first step is to determine the
collective net income or loss - in other words the firm’s net income or loss for the year. To do
this we create the concept of ‘chargeable partnership income’.

Section 52(1) and (2) provide:

‘(1) … the chargeable partnership income of a partnership for a tax year is –
(a) the gross income of the partnership for that year calculated as if the
partnership were a resident person; less
(b) the total amount of deductions allowed under this Act for expenditures or
losses to the extent incurred by the partnership in deriving that income,
other than the deduction allowed under s.30.
(2) … a partnership has a partnership loss for a tax year if the amount in subs(1)
(b) exceeds the amount in subs(1)(a) for the year, and the amount of the excess is
the amount of the partnership loss.’

Note that the calculation of ‘chargeable partnership income’ does not include any loss carry
forward. The loss in any year is allocated among partners in that year. In consequence no past
loss exists for the firm to carry forward.

Presuming the ‘chargeable partnership income’ reveals a profit, the profit is then allocated
among partners by reference to the partnership agreement. Each partner includes his profit
share in his individual annual return. Section 53 is headed ‘Taxation of partners’. Section
53(1) provides:
‘(1) The gross income of a partner in a partnership for a tax year includes –
(a) if the partner is a resident person for the whole of the tax year, the partner’s
share of the chargeable partnership income of the partnership for the year;
…’

In the event that the firm has a loss for the year, the loss is allocated among partners. Section
53(2) provides:
‘(2) A partner in a partnership is allowed a deduction for a tax year –
(a) if the partner is a resident person for the whole of the tax year, for the
partner’s share of a partnership loss of the partnership for the year; …’

Each partner’s share of the firm’s profit or loss for the year is determined by the terms of the
partnership agreement regarding the allocation of profit. Section 53(8) provides:
‘(8) … a partner’s share of chargeable partnership income or a partnership loss is
equal to the partner’s percentage interest in the income of the partnership as set
out in the partnership agreement.’

The above is the entire story where all partners are residents. Nothing could be simpler.

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non-resident partners
Things can be a little more complex where a partner is a non-resident.

The complexity results from the different definitions of gross income for residents and non-
residents in s.14. The gross income of a resident is worldwide income (s.14(3)(a)). The gross
income of a non-resident is limited to Fiji sourced income (s.14(3)(b)).

In line with these definitions, a non-resident partner will only include in gross income his
share of firm profit derived in Fiji. His share of any firm profit derived outside Fiji will not be
subject to Fiji tax. Similar source rules will apply where the firm shows a loss for the year.

Section 53(1) provides:

‘(1) The gross income of a partner in a partnership for a tax year includes –
(a) if the partner is a resident person …
(b) if the partner is a non-resident person for the whole of the tax year, the
partner’s share of the chargeable partnership income for the year that is
attributable to income derived from sources in Fiji; …’

Section 53(2) provides:

‘(2) A partner in a partnership is allowed a deduction for a tax year –
(a) if the partner is a resident person …
(b) if the partner is a non-resident person for the whole of the tax year, for the
partner’s share of a partnership loss of the partnership for the year that is
attributable to income derived from sources in Fiji; …’

Section 53(7) provides:

‘(7) Income derived, or expenditure or losses incurred, by a partnership retain
their character as to geographic source and type of income, expenditure or loss in
the hands of the partners, and are allocated to partners on a pro rata basis.’

Where an individual partner’s residency status changes during the year the allocation of that
partner’s share of chargeable partnership income must be separately calculated for the
resident period and non-resident period. (see s.53(1)(c) and s.53(2)(c).

Note that there can be two different scenarios involving a non-resident partner. One scenario
is where there is a mix, with one partner or partners being residents and another partner or
partners being non-residents. An alternative scenario is where all partners are non-residents.
In both cases we retain the concept of ‘chargeable partnership income’ in s.51(1) and (2).
Notwithstanding that all partners may be non-residents, the initial calculation of ‘chargeable
partnership income’ is undertaken ‘as if the partnership were a resident person’ per s.51(1)
(a).