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Section 5: Working out the net income of a partnership

Last updated 17 May 2020

The notional assessable income of a CFC includes the CFC's share of the net income of a partnership. You work out the net income of the partnership in accordance with the partnership provisions of the Act. However, it is assumed that:

  • the partnership derived only certain income and gains
  • the operation of the Act is modified.

Assumption about income and gains

The assumptions made for amounts derived by a partnership mirror the assumptions made for working out the income and gains of a CFC. The amounts taken into account in working out the net income of the partnership depends on whether the CFC passes the active income test. The amounts also depend on whether the CFC is a resident of a listed country or an unlisted country.

If a CFC is resident in an unlisted country:

  • passes the active income test - the only amounts taken into account in determining the net income of the partnership are trust amounts arising for the partnership and amounts of FIF income.
  • fails the active income test - only the following amounts are taken into account in determining the net income of the partnership:
    • adjusted tainted income
    • trust amounts arising for the partnership, and
    • FIF income.
     

If a CFC is resident in a listed country:

  • passes the active income test - only the following amounts are taken into account in determining the net income of the partnership:
    • low-taxed third-country income of a kind specified in the Regulations
    • FIF income, and
    • trust amounts arising for the partnership that are not subject to comparable tax in a listed country
     
  • fails the active income test - only the following amounts are taken into account in determining the net income of the partnership:
    • eligible designated concession income that is adjusted tainted income
    • low-taxed third-country income of a kind specified in the Regulations
    • FIF income, and
    • trust amounts arising for the partnership that are not subject to comparable tax in a listed country.
     

Assumption about modifications to the Act

The modifications that apply in working out the net income of a partnership are similar to those that apply for working out notional assessable income and notional allowable deductions of a CFC - see section 3, section 4 and section 5.

Additional modifications to the Act

Three additional modifications are made in working out the net income of a partnership.

  • First, the partnership is treated as a resident of the same country as the CFC. 
  • Second, a dividend will not be notional exempt income of a partnership unless the dividend is paid out of previously attributed income. 
  • Third, the capital gains tax provisions apply to assets acquired by a partnership after 19 September 1985 - the deemed acquisition of assets on 30 June 1990 for CFCs does not apply to assets held by partnerships.

QC19443