Partnership

Week 1

1
 Introduction
• Partnership = an association between parties
who have agreed to combine:
• Rights
• Power
• Property
• Labour/skill…
• For the purpose of running a business &
sharing of profits

2
Chargeable person & source of income
• Partnership is not a chargeable person
• Tax is charged on individual persons forming
the partnership, on their share of income
• Source of income = business income
The whole entire partnership is not taxable
Only the share of an individual + other source of
income = taxable

3
 Existence of partnership
• The following factors need to be present
before a partnership is said to exist:
• Carrying on a business
• Sharing of rights & responsibilities
• A view to profit
• Element of risk & reward for each partner
• Presence of partnership agreement is
persuasive but not conclusive
• Certificate of registration is strong evidence
4
 Existence of partnership
• E.g. KW & GL agreed to the following arrangements:
• KW would provide all the capital needed for setting up a
food catering business
• GL would be the cook & oversee the operations
• GL would receive a fixed salary & % of sale proceeds
• KW would receive the balance net of all operating
expenses
• Partnership does NOT exist:
• Master-servant relationship between KW & GL
• KW is sole proprietor, GL is employee
• No sharing of profits/losses but only an incentive scheme
(% of proceeds)

5
 Existence of partnership
• E.g. A & N are jointly engaged in the business of selling
hamburgers.
• Each contributed RM10,000 to start the business.
• The business was not registered with the Registrar of
Businesses
• No written agreement between them
• Verbal agreement to share profits/losses equally
• Bank account is maintained in their joint names & cheques
have to be signed by both persons
• Partnership exists:
• There is a profit sharing arrangement
• Both contributed capital
• Joint bank account, with both as signatories
6
 Assessment of
partnership business income
• A partnership is treated like any other sole
proprietorship business for tax computation
• Rules for business income/expenses apply
• First, calculate the partnership provisional
adjusted income

7
Assessment of partnership business income
Price Associates (Kang: Koo, 50%:50%) RM RM RM
Trading income 1,730,000
-Less:
Revenue expense 700,000
Depreciation 60,000
Entertainment to client (related to sales) 40,000
General provision for doubtful debts 20,000
Partnership salary:
-Kang 2,000
-Koo 2,000 4,000
Interest on capital:
-Kang 1,500
-Koo 1,500 3,000
Food from business consumed by Kang 3,000 (830,000)
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Net profit 900,000
Assessment of partnership business income
Price Associates (Kang: Koo, 50%:50%) RM RM RM
Net profit per partnership P&L Account 900,000
-Add non-allowable expenses:
Depreciation 60,000
General provision for doubtful debts 20,000
-Add partnership private expenses:
Salary 4,000
Interest on capital 3,000
Food from business consumed by Kang 3,000 90,000
Provisional adjusted income 990,000

9
 Divisible income
• Partnership income is shared based on profit sharing ratio
as per the partnership agreement
• Profit apportionment is based on divisible income
Price Associates (Kang: Koo, 50%:50%) RM RM RM
Provisional adjusted income 990,000
-Less: Partners’ salary
Kang 2,000
Koo 2,000 (4,000)
-Less: Interest on capital
Kang 1,500
Koo 1,500 (3,000)
-Less: Private expenses (Kang) (3,000)
Divisible income 980,000 10
 Adjusted income of partner
• Divisible income is divided among partners
• Partners’ expenses will be allocated to respective partner
according to actual consumption
• Price
Adjusted income
Associates (Kang:=Koo,
Allocated divisible income
50%:50%) RM +RM
partner’sRM
private expenses Kang Koo Total
Divisible income (1:1) 490,000 490,000 980,000
Partnership expenses:
Salary 2,000 2,000 4,000
Interest 1,500 1,500 3,000
Private expenses (Kang) 3,000 - 3,000
Adjusted income 496,500 493,500 990,000

11
 Change of profit sharing ratio
• Apportionment of divisible income on a time basis is done
• E.g. A & B are in partnership, divisible income for YA2019 =
RM120,000
• Profit sharing ratio between A & B:
– 1/1/2019 – 30/11/2019  1:1
– 1/12/2019 – 31/12/2019  1:4
Allotment of divisible income A B
RM RM
1/1/2019 – 30/11/2019 11/12 x RM120K = RM110K 55,000 55,000
(11 mths)
1/12/2019 – 31/12/2019 RM10,000 2,000 8,000
57,000 63,000
12
 Provisional Adjusted Loss
• Computed the same way as income
• Divisible loss is allocated to individual partners
according to profit sharing ratio

13
 Changes in partnership
• Withdrawal of partner
• Admission of new partner
• = cessation of old partnership & commencement
of new partnership
• New partnership
– Old partnership ceased business on last day of 12-mth
period
– New partnership took over business, and prepares its
accounts for a 12-month period

14
 Changes in partnership
• Continuing partnership
– If there is at least 1 partner from the old
partnership who continues in the new partnership
– Partnership is treated as continuing eventhough
changes takes place part way through the year
– Partners’ share of adjusted income is calculated in
the normal way
– Continuing partner deemed to have 1 continuing
source of business income – if the accounting date
of the old & new partnerships are the same
15
 Changes in partnership
• Continuing partnership
– A partnership business comprising of Choong,
Ronnie & Irene commenced business on 1.1.2014.
Subsequent changes in partnership are set out
below.
– On 1.1.2018, the partnership was converted to a
company.
– The firm’s income tax computation for the 4 years
to 31.12.2017 was as follows:

16
 Changes in partnership
Year end 31.12.2014 31.12.2015 31.12.2016 31.12.2017
Divisible income 24,000 36,000 48,000 24,000
Partners’ salaries 4,800 6,000 6,000 4,800
Partners’ food 1,200 1,200 1,200 1,200
Interest on capital 600 1,200 600 -
Travelling allowance (partner) 600 600 600 600
31,200 45,000 56,400 30,600

• Choong was entitled to the whole of the interest on capital. He was also
entitled to ½ of the balance of profit to YE2014 and thereafter to 1/3. He
left the partnership business on 31.12.2016.
• Ronnie was entitled to 1/3 of the profit throughout. He was also entitled
to the full travelling allowance. He received a salary of RM200 per month
which was reduced to RM100 per month on 1.1.2015 and to nil on
1.1.2017.
17
 Changes in partnership
• Irene managed one of the firm’s lorries and was entitled
to take certain goods from stocks as a perquisite. She
received a salary of RM200 per month and 1/6 of the
balance of profit up to 31.12.2016. From 1.1.2017, she
was entitled to 1/3 of the profit.
• Ivan was admitted to the firm on 1.1.2015. He was
entitled to 1/6 of the profit until 31.12.2016, and
thereafter 1/3. He was also entitled to salary of RM200
per month throughout.

18
 Changes in partnership
• Compute the adjusted income of each
partner:
• Choong: YA2014-2016
• Ronnie: YA2014-2017
• Irene: YA2014-2017
• Ivan: YA2015-2017

19
 Changes in partnership
YA Choong Ronnie Irene Ivan
2014
Interest 600 - -
Salary - 2,400 2,400
Food - - 1,200
Travelling allowance - 600 -
Divisible income 12,000 8,000 4,000
12,600 11,000 7,600
2015
Interest 1,200 - - -
Salary - 1,200 2,400 2,400
Food - - 1,200 -
Travelling allowance - 600 - -
Divisible income 12,000 12,000 6,000 6,000
13,200 13,800 9,600 8,400
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 Changes in partnership
YA Choong Ronnie Irene Ivan
2016
Interest 600 - - -
Salary - 1,200 2,400 2,400
Food - - 1,200 -
Travelling allowance - 600 - -
Divisible income 16,000 16,000 8,000 8,000
16,600 17,800 11,600 10,400
2017
Interest - - - -
Salary - 1,200 2,400 2,400
Food - - 1,200 -
Travelling allowance - 600 - -
Divisible income - 8,000 8,000 8,000
- 9,800 11,600 10,400
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 Sole proprietor + new partner
• Existing sole proprietorship + new partner will be
treated as continuing business if both businesses end
at same financial year end date
• E.g. sole proprietor F has YE 31/12. It is joined by S on
1/12/2016 to form a partnership. YE remains as 31/12.

SOLE PROPRIETORSHIP PARTNERSHIP

(F ONLY) (F & S)

31/12/15 30/11/16 31/12/16 31/12/17 31/12/18

YA2015 YA2016 YA2016 YA2017 YA2018

22
 Capital allowances
• Partnership is considered a business (and is
assessed under business taxation)
• But capital allowances claim is attributable to
individual partners (instead of partnership)
• Allocated wrt profit sharing ratio at end of basis
period
• Admission/retirement of partners will not affect
CA claim
• New partner enjoys full year’s CA & retired
partner will get zero CA for that year of change
23
 Capital allowances
• Assets purchased by a partner & solely used by him
– Whole CA given to that partner only
• E.g. Price Associates incurred the following qualifying exp
during the year: Office equipment RM40,000; Furniture
& fittings RM20,000.
• Kang used his own BMW for business purposes. He
purchased the car for RM400,000 2 years ago, it is
estimated that 60% is for business use.

24
 Capital allowances
Partnership assets Non-partnership asset
Office equipment 40,000
- Initial allowance (20%) 8,000
- Annual allowance (10%) 4,000
Furniture & fittings 20,000
- Initial allowance (20%) 4,000
- Annual allowance (10%) 2,000
Motor vehicle (restricted) 50,000
Annual allowance (20%) x 60% 6,000

Total CA on common partnership assets 18,000

Kang: (1/2 x RM18,000) + 6,000 15,000
Koo: ½ x RM18,000 9,000
25
 Partner’s statutory income
• Adjusted income
• + Balancing charge
• - Capital allowances (unabsorbed CA &
balancing allowances)
• = Statutory income

26
 Partner’s statutory income
Price Associates (Kang: Koo, 50%:50%) RM RM
Kang Koo
Adjusted income 496,500 493,500
Less: Capital allowance (15,000) (9,000)
Statutory income 481,500 484,500

27
Non-business income & donations
• Non-business income from partnership
– E.g. dividends, rental
– Included in partnership tax computation in
arriving at divisible income
• Approved donations made by partnership
– Divided amongst partners in profit-sharing
ratio
– This will be set-off against partner’s own
aggregate income (Reduced at division income)
28
 Partnership losses
• Provisional adjusted loss  divisible loss
• Shared according to profit sharing ratio
• Adjusted loss – when divisible loss
allocated > partner’s expense
• Business loss can be set off against other
income in the CY
• Unabsorbed losses can be c/f indefinitely
against future business income (statutory
income) 29
 Real property gains tax
• Partnership is a chargeable person for
RPGT (Real Property Gains Tax) purposes
• Follow RPGT rates (see later lecture)
• Gain distributed to partner is a capital gain
& not exposed to income tax

30
 Administration
• Partnership needs to submit Form P every
YA
• Responsibility for filing lies with managing
partner
• Every individual partner needs to include
share of partnership statutory income in
their individual tax return (Form B)

31
Worked Example

32
The partnership of Aidi & Atta commenced on 1.1.2000
and accounts are prepared to 31 Dec annually. The
partnership agreement provided for the following:
Interest on capital: 10% per annum for each RM
partner
Capital contribution
-Aidi 70,000
-Atta 105,000
Salary per month
-Aidi 2,000
-Atta 2,500
Share of divisible income/loss
-Aidi 2/5
-Atta 3/5

33
On 30.6.201X, Aidi left the partnership and withdrew his
accumulated capital and profits up to that date.
On 1.7.201X, John joined the partnership and the new
partnership agreement provided for the following:
Interest on capital: 10% per annum for each RM
partner
Capital contribution
-John 100,000
-Atta 100,000
Salary per month
-John 2,500
-Atta 2,500
Share of divisible income/loss
-John ½
-Atta ½
34
The partnership’s trading profit and loss account for
YE31.12.201X was as follows:
RM
Income from construction contract 8,418,600
-Less: Cost of construction (7,961,400)
Profit from construction 457,200
Other income 190,700
647,900
Less: General overhead (420,300)
Net profit for the year 227,600
Included in the general overhead are:
Partners’ salary 57,000
Partners’ interest on capital 18,750
Depreciation on fixed asset 30,700
Capital allowance for YA201X was RM30,500.
Calculate the statutory income of each partner for YA201X.
35
Aidi & Atta RM
Net profit for the year 227,600
Add:
Partners’ salary 57,000
Partners’ interest on capital 18,750
Depreciation on fixed asset 30,700
Provisional adjusted income 334,050
Less:
Partners’ salary 57,000
Partners’ interest on capital 18,750
Divisible income 258,300
Divisible income for 6 mths (accrued evenly) 129,150

36
For period 1.1.201X Salary Interest Divisible Adjusted
- 30.6.201X (6 mths) on capital Income Income
RM RM RM RM
Aidi (2/5) 12,000 3,500 51,660 67,160
Atta (3/5) 15,000 5,250 77,490 97,740
37,000 8,750 129,150 164,900
For period 1.7.201X
-31.12.201X
(6 mths)
Atta (1/2) 15,000 5,000 64,575 84,575
John (1/2) 15,000 5,000 64,575 84,575
30,000 10,000 129,150 169,150

37
Partners’ statutory income RM
Aidi 67,160

Atta
Adjusted income (97,740 + 84,575) 182,315
Less: Capital allowances (1/2)* (15,250)
167,065

John
Adjusted income 84,575
Less: Capital allowances (1/2)* (15,250)
69,325

*Capital allowances are only given to partners

existing at the end of the year.
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