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  • Appendix 7: Deductions applicable to partners

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    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Capital allowances for primary producers and some landholders

    A partnership cannot claim a deduction under Subdivisions 40-F and 40-G of the ITAA 1997 for:

    • electricity connections and telephone lines
    • grapevines and horticultural plants
    • landcare operations and the decline in value of a water facility, fencing asset and fodder storage asset.

    Each partner can claim a deduction in accordance with any agreement on how the expenditure is to be borne or, if there is no agreement, according to each partner’s interest in the partnership income or loss.

    See also:

    Film industry incentives

    The conditions under which concessions are available for the Australian film industry are explained in Film industry incentives 2019. The concessions do not apply in the calculation of the partnership net income or loss.

    In very limited circumstances, a concession may be available to the individual partners. The law about claiming deductions for investments in Australian films has changed for 2009–10 and later years. As a consequence of the introduction of the Australian screen production incentive, Division 10B and Division 10BA of Part III of the ITAA 1936 has been repealed with effect from 1 July 2010. A partner cannot claim a deduction under Division 10BA for the 2009–10 or later years. A partner cannot claim a deduction under Division 10B for the 2010–11 or later years. For 2009–10, a partner can claim a deduction for an Australian film under Division 10B only if the partner first claimed such a deduction for that film for 2008–09.

    If you wish to claim deductions for income years prior to 2009–10, or a Division 10B deduction for 2009–10, see the publication Film industry incentives 2010–11.

    Farm management deposits scheme

    The farm management deposits (FMD) scheme reduces fluctuations in a primary producer’s income.

    A partnership cannot have an FMD or claim a deduction for a deposit to an FMD.

    A partner in a partnership that carries on a primary production business in Australia may be able to claim a deduction in the income year in which they deposit an amount into an FMD. The deposit must be made by or on behalf of only one person. Any repayments of that deposit are assessable income to the extent they have been previously claimed as a deduction.

    For information about further requirements for the FMD deduction, see question 17 Net farm management deposits or repayments in the Individual tax return instructions supplement 2019 and Information for primary producers 2019.

    Partnership losses

    If a partnership loss is incurred by a partnership in an income year, individual partners can claim a deduction for their share of the partnership loss. A partnership loss is incurred if the allowable deductions (other than deductions allowable for personal superannuation contributions or tax losses of earlier years under the ITAA 1997) exceed the assessable income of the partnership. The partnership loss is the amount of that excess.

    For the tax treatment of current year foreign losses of the partnership, see Net foreign source income.

    Rules on deferring non-commercial business losses may apply to a partner who is an individual, to defer the deduction for their share of a loss from a business activity of the partnership. An individual may be covered by an exception, or the business activity may satisfy one of four tests, or the Commissioner may exercise his discretion. For more information on these rules, see question 16 Deferred non-commercial business losses in the Individual tax return supplement 2019 and Non-commercial losses: partnerships.

    Research and development expenditure

    Eligible companies may be entitled to a tax offset for eligible expenditure incurred on qualifying R&D activities. A partner in a partnership of otherwise eligible companies (an R&D partnership) may also be entitled to the R&D tax incentive for eligible expenditure on qualifying activities. For information on how a company may claim the R&D tax incentive, see Research and development tax incentive schedule instructions 2019.

    Small business income tax offset and non-commercial losses

    The non-commercial loss rules will apply to a partner’s share of a partnership business loss and may also affect their share of net small business income. For more information on these rules, see question 16 Deferred non-commercial business losses in the Individual tax return instructions supplement 2019.

    Depending on how the non-commercial loss rules apply to the individual partner, the individual partner may need to adjust their share of the partnership’s net small business income in their own individual tax return.

    The individual partner will need to know their share of each partnership loss activity.

    Superannuation

    For information on claiming a deduction for Claiming deductions for personal super contributions, see Individual tax return instructions supplement 2019.

    Appendix 14: Small business entities

    Small businesses with an aggregated turnover of less than $10 million are called small business entities and may qualify for a range of tax concessions. Prior to 1 July 2016 the aggregated turnover threshold was $2 million.

    The $10 million aggregated turnover threshold applies to most of the small business concessions, except for:

    • the small business income tax offset, which is available to businesses with an aggregated turnover of less than $5 million from 1 July 2016 (claimed by individual partners)
    • the capital gains tax (CGT) concessions, where the aggregated turnover threshold of $2 million continues to apply
    • the aggregated turnover threshold for the fringe benefits tax concessions increases to $10 million from 1 April 2017.

    Eligible businesses can choose to use the concessions that best suit their needs. It is not necessary to elect to be a small business entity each year to access the concessions, however, eligibility must be reviewed each year.

    Depending on its aggregated turnover for an income year, the small business entity may be eligible for the following concessions:

    • CGT 15-year asset exemption
    • CGT 50% active asset reduction
    • CGT retirement exemption
    • CGT rollover provisions, including the small business restructure rollover with effect from 1 July 2016
    • simplified depreciation rules
    • immediate deduction for certain prepaid business expenses
    • immediate deduction for a range of business start-up expenses
    • simplified trading stock rules
    • choice to account for GST on a cash basis
    • annual apportionment of (GST) input tax credits in certain circumstances
    • paying GST by instalments
    • FBT car parking exemption
    • FBT portable electronic device exemption
    • PAYG instalments based on GDP-adjusted notional tax
    • a concessional corporate tax rate
    • simplified BAS with effect from 1 July 2017.

    Some of these concessions have additional eligibility conditions that must also be satisfied.

    A partner who is an individual may be entitled to a tax offset on the tax payable on their share of net small business income earned by a partnership that is a small business entity with an aggregated turnover of less than $5 million. See item 5 Business income and expenses.

    For more information about small business entity concessions, see Small business entity concessions or phone 13 28 66.

    Eligibility

    The partnership will be a small business entity if it is carrying on a business and has an aggregated turnover of less than $10 million. This is known as the small business entity test.

    ‘Business’ is defined broadly to include ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. ‘Carrying on a business’ is not defined in the tax law and, therefore, takes its ordinary meaning. An entity is taken to be carrying on a business for the purposes of the small business entity test in an income year if:

    • the entity is winding up a business it formerly carried on, and
    • it was a small business entity in the income year that it stopped carrying on the business.

    Aggregated turnover is the annual turnover of the partnership, plus the annual turnovers of any entities that are connected with it, or that are its affiliate.

    For more information on calculating aggregated turnover, including the meaning of connected with the partnership and affiliated with the partnership, see Small business entity concessions.

    Eligibility must be reviewed each year.

    Calculating turnover

    Turnover includes all ordinary income the partnership earned in the ordinary course of business for the income year. The following are some examples of amounts included and not included in ordinary income of a business.

    Include these amounts:

    • sales of trading stock
    • fees for services provided
    • interest from business bank accounts
    • amounts received to replace something that would have had the character of business income.

    Do not include these amounts:

    • GST the partnership has charged on a transaction
    • proceeds from the sale of business capital assets
    • insurance proceeds for the loss or destruction of a business asset
    • amounts received from repayments of farm management deposits.

    There are special rules for calculating the annual turnover if the partnership has retail fuel sales or business dealings with associates that are not at market value.

    For more information on calculating turnover, see Eligibility.

    Aggregation rules

    Special rules called the aggregation rules will determine who the partnership is connected or affiliated with.

    These rules prevent larger businesses from structuring or restructuring their affairs to take advantage of the small business entity concessions.

    An entity that is connected with the partnership, or that is its affiliate, is referred to as a relevant entity.

    When calculating the aggregated turnover of the partnership, do not include income from:

    • dealings between the partnership and a relevant entity
    • dealings between any relevant entities of the partnership
    • a relevant entity when it was not a relevant entity of the partnership.

    For more information on the aggregation rules, including the meaning of ‘connected with’ or ‘affiliated with’ the partnership, see Small business entity concessions.

    If the partnership carries on a business during the current income year and has an aggregated turnover of less than $10 million under the aggregation rules discussed above, then the partnership is a small business entity.

    Business operated for only part of the year

    If the partnership, or a relevant entity, carries on a business for only part of the income year, annual turnover must be worked out using a reasonable estimate of what the turnover would have been if the partnership, or a relevant entity, had carried on a business for the whole of the income year.

    Satisfying the aggregated turnover threshold

    There are three ways to satisfy the $10 million aggregated turnover requirement, but most businesses will only need to consider the first method.

    Previous year turnover

    If the aggregated turnover of the partnership for the previous income year was less than $10 million, it will be a small business entity for the current year. This is regardless of its estimated or actual aggregated turnover for the current year.

    Estimate of current year turnover

    If the estimated aggregated turnover of the partnership for the current income year is less than $10 million, it will be a small business entity for the current year.

    If you are estimating your turnover, you need to assess whether you are more likely than not to have less than $10 million aggregated turnover as at the first day of the income year or, if you have started a business part way through the year, as at the time you started your business. You should estimate your turnover based on the conditions you are aware of at the beginning of the income year or, if you have started a business part way through the year, at the time that you started your business. Partnerships that commenced carrying on a business in the current year need to make a reasonable estimate of what their turnover would have been had the business been carried on for the entire year.

    This method cannot be used if the aggregated turnover of the partnership in each of the previous two income years was $10 million or more.

    Actual current year turnover

    If the actual aggregated turnover of the partnership is less than $10 million as at the end of the income year, it will be a small business entity for that year.

    This method is only needed if the first two tests cannot be met.

    If the partnership is a small business entity by means of this method only, it cannot use the GST and PAYG concessions for that income year, as those particular concessions must have been chosen earlier in the income year.

    Former STS taxpayers

    There is a transitional rule for former STS taxpayers that deals with the continued use of the STS accounting method.

    There is also a special rule that applies if the partnership is winding up a business this year that it previously carried on and it was an STS taxpayer in the income year it ceased business. For more information, see Small business entity concessions.

    Last modified: 30 May 2019QC 58661