General information

An individual who was not in a partnership carrying on a business does not need to lodge a partnership tax return where the only income derived jointly (or in common) with another person was:

• rent from a jointly owned investment property
• interest from a jointly held account
• dividends from jointly held shares.

In these instances, each individual shows their share of the income and expenses at the appropriate items on their own individual tax return.

Australian business register

We are authorised by the A New Tax System (Australian Business Number) Act 1999External Link to collect certain information relating to your entity. We may use business details supplied on your tax return to update your trading name, industry classification, status of business, wind-up date, public officer, email address and main business address on the Australian Business Register (ABR). We may use postal address details from your tax return if we cannot contact you through your ABR postal address.

Where authorised by law, selected information on the ABR may be made publicly available and some may be passed to government agencies, including Commonwealth, state and local government.

You can find details of agencies regularly receiving information from the ABR at www.abr.gov.auExternal Link. You can phone us on 13 28 66 between 8.00am and 6.00pm Monday to Friday to have a list of the agencies sent to you.

These agencies may use ABR information for purposes authorised by their legislation or for carrying out other functions of their agency. Examples of possible uses include registration, reporting, compliance, validation and updating of databases.

In addition to the publicly available information, these agencies can access the:

• name of the entity's associates such as partner or public officer
• entity's address for service of notices
• entity's principal place of business
• entity's email address, and
• Australian and New Zealand Standard Industrial Classification (ANZSIC) code for the business conducted by the entity.

International taxation

Broadly, 'foreign hybrid' means entities such as non-resident limited liability partnerships, limited liability companies in the United States of America and other similar entities that are taxed in Australia as a company but taxed on a partnership basis in their country of formation. The overseas jurisdiction taxes the members on their share of the entity's income and the entity itself is not taxed.

Under Division 830 of the ITAA 1997, if certain conditions are met, non-resident limited partnerships and other foreign hybrids are treated as partnerships and not as companies for Australian income tax purposes. Investors in these entities are treated for Australian tax purposes as having partnership interests. There are special rules in addition to those normally applying to partnerships.

Foreign exchange measures

Under the foreign exchange (forex) measures, forex gains and losses are generally brought to account, as assessable income or allowable deductions. The measures cover both foreign currency denominated arrangements, and broadly, arrangements to be cash-settled in Australian currency with reference to a currency exchange rate. Some forex gains and losses of a private or domestic nature, or for exempt income or non-assessable non-exempt income, are not brought to account under the forex measures.

If a forex gain or loss is brought to account under the forex measures and under another provision of the tax law, it is assessable or deductible only under the forex measures.

In general, these gains and losses will not be assessable or deductible under the forex measures if they arise from certain acquisitions or disposals of capital assets, or acquisitions of depreciating assets, and the time between the acquisition or disposal and payment is no more than 12 months. Instead, any forex gain or loss is usually matched with or integrated into the tax treatment of the underlying asset.

In addition, if a financial arrangement of a partnership is subject to the TOFA rules, those foreign exchange gains and losses will generally be brought to account under those TOFA rules instead of the forex measures.

The general translation rule requires all tax-relevant amounts to be expressed in Australian currency regardless of whether there is an actual conversion of that foreign currency into Australian dollars.

The tax consequences of gains or losses on existing foreign currency assets, rights and obligations that were acquired or assumed before 1 July 2003 are determined under the law as it was before that date unless:

• you have made a transitional election that brings these arrangements under the forex measures, or
• there is an extension of an existing loan (for example, an extension by a new contract or a variation to an existing contract) that brings the arrangement within these measures.

 

Interposed entity elections and family trust elections

The Tax Laws Amendment (2007 Measures No. 4) Act 2007External Link amended Schedule 2F to the ITAA 1936 to:

• allow interposed entity elections to be revoked where the election was made for an entity that was already included in the family group of the individual specified in the family trust election at the election commencement time. An interposed entity election may also be revoked at a later time where the entity becomes wholly owned by members of the family group. If an interposed entity election is revoked you need to complete an Interposed entity election or revocation 2011 (NAT 2788) and attach it to the partnership's tax return
• broaden the definition of 'family' to include lineal descendants of a nephew, niece, or child of the test individual or the test individual's spouse
• ensure that the death of a family member does not by itself result in another family member ceasing to be a member of the family
• exempt distributions made to former spouses, former widows or widowers and former stepchildren from family trust distribution tax by including them within the definition of 'family group'
• allow family trust elections to be revoked if the family trust is a fixed trust or if the family trust election was not required for utilisation of tax losses, bad debt deductions or accessing franking credits
• permit family trusts that have made a family trust election in respect of the same test individual to be included in each other's 'family group' and not treated as an 'outsider to the trust' for the purposes of the income injection test
• allow the test individual specified in a family trust election to be changed only once, where the new test individual was a member of the original test individual's family, provided that no conferrals of present entitlement to (or distributions of) income or capital of the family trust (or an interposed entity) have been made outside the new test individual's family group.

Electronic lodgments

Tax agents who lodge partnership returns through the electronic lodgment service (ELS) must complete the Partnerships and trusts rental property schedule 2011 if item 9 Rent is completed. You do not have to complete that schedule if you are lodging a paper version of the partnership tax return.

Information matching

The ATO is making increasing use of information-matching technology to verify the correctness of tax returns. Ensure all information is fully and correctly declared on your tax returns. Certain claims made may be subject to additional scrutiny by the ATO.

In particular, we will be checking the following on the 2011 tax returns:

• distributions from partnerships and trusts,
• total salary and wages paid against the pay as you go (PAYG) withholding system
• interest and dividend income
• franking credits claimed (including that include franked dividends are correctly grossed up).

Hobby or business

It is important to determine whether the partnership is carrying on a business as distinct from pursuing a hobby, sport or recreational activity that does not produce assessable income.

The factors or 'business indicators' various courts and tribunals have taken into account in determining if a business exists for tax purposes include whether the activity:

• has actually started
• has a significant commercial purpose or character
• is undertaken with a purpose of profit as well as a prospect of profit
• is carried out in a manner that is characteristic of the industry
• has repetition, regularity or continuity
• is planned, organised and carried on in a business-like manner
• is of a sufficient size, scale and permanency to generate a profit
• is not more properly described as a hobby, recreation or sporting activity.

 

Private ruling by the Commissioner of Taxation

A private ruling is a written expression of opinion by the Commissioner of Taxation (the Commissioner) about the way in which tax laws and other specified laws administered by the Commissioner apply, or would apply to, an entity for a specified scheme.

An application for a private ruling must be made in the approved form and in accordance with Divisions 357 and 359 of Schedule 1 to the Taxation Administration Act (TAA) 1953.

The required information and documentation that accompany a private ruling request must be sufficient for the Commissioner to make a private ruling and include:

• the entity to whom the ruling is to apply
• the facts describing the relevant scheme
• relevant supporting documents such as transaction documents
• issues and questions raised relate to the relevant provision to which the ruling relates, and
• your arguments and references on such questions.

The Commissioner may request additional information to make a ruling. The Commissioner will then consider the request and either issue or, in certain limited circumstances, refuse to issue a private ruling.

Publication

To further improve the administration of the private rulings system, the ATO now publishes all notices of private rulings for public record on the Legal Database.

Private rulings are published in an edited form to safeguard taxpayer privacy.

Private ruling applicants are invited to provide a statement detailing any information they believe should be removed from the published version of their private ruling.

If the information the applicant wants removed is more than simply names and addresses, reasons why publication of this information will breach the applicant's privacy should be provided.

Before publication, applicants can comment on the edited version of their private ruling.

Review rights

Generally, taxpayers can object to adverse private rulings or a failure to make a private ruling in much the same way that they can object to assessments. If a taxpayer is dissatisfied with the Commissioner's decision on objection, they can apply to the AAT for review of, or appeal to the Federal Court against the decision. An explanation of review rights and how to exercise them is issued with the private ruling.

A taxpayer cannot object to a private ruling if there is an assessment for the taxpayer for the same income year to which the ruling relates. If this is the case, the taxpayer can only object against the assessment

Where a taxpayer has objected to a private ruling the taxpayer cannot object to a later assessment relating to the same matter ruled on, unless the assessment relates to facts that are materially different from those dealt with in the private ruling, or deals with the application of tax law provisions not dealt with in the private ruling (for example, the application of Part IVA of the ITAA 1936).

Private rulings dealing with the ITAA 1936 continue to apply to the ITAA 1997, to the extent that the old law to which the ruling applies expresses the same ideas as the new law in the ITAA 1997.

When rulings are binding

A private ruling is binding on the Commissioner where it applies to an entity and the entity has relied on the ruling by acting (or omitting to act) in accordance with the private ruling. An entity can stop relying on a private ruling at any time (unless prevented by a time limit imposed by a taxation law) by acting (or omitting to act) in a way that is not in accordance with the private ruling; and can subsequently resume relying on the private ruling by acting accordingly. The Commissioner cannot withdraw a private ruling. However, where the scheme to which a private ruling relates has not begun to be carried out and where the private ruling relates to an income year or other accounting period, and that period has not begun, the Commissioner can make a revised private ruling.

Penalties and interest charges

The law imposes penalties on partners for:

• failing to lodge a tax return on time and in the approved form (which includes all applicable schedules)
• having a tax shortfall or over-claiming a credit that is caused by
  
  • making a false or misleading statement
  • taking a position that is not reasonably arguable
   
• refusing to provide a tax return from which the Commissioner can determine a liability
• failing to keep and produce proper records
• preventing access to premises and documents
• failing to retain or produce declarations.

Partners are liable for interest charges (generally called the 'general interest charge') where they have:

• not paid a tax, penalty or certain other amounts by the due date
• varied their PAYG instalment amount or rate to less than 85% of the amount or rate that would have covered the partner's actual liability on business and investment income for the year, or
• amended their income tax assessment to increase their liability (for the 2004-05 and later income years this interest charge is known as the 'shortfall interest charge').

Shortfall interest charge

Where an assessment is amended because of a tax shortfall, the due date for payment of the amended assessment is 21 days after the Commissioner gives the notice increasing the liability. Generally the partners are liable to pay a shortfall interest charge from the due date of the original assessment to the day before the issue date of the amended notice of assessment on the increase. The partners will be notified of the amount of the shortfall interest charge and it will be due 21 days after the notice is given. The general interest charge will apply automatically to any unpaid amount of the amended assessment and the shortfall interest charge once the due date has passed.

The shortfall interest charge is calculated at a rate 4% lower than the general interest charge.

Penalties

In addition to interest charges, penalties may be applied to any tax shortfall.

If a taxpayer does not follow a private ruling they have obtained, penalties may apply for a tax shortfall that arises if, for example, they have not exercised reasonable care or do not have a 'reasonably arguable' position.

The Commissioner must explain, in writing, the reasons for a penalty and, if remission of a penalty has been considered but not fully granted, the reasons for the decision.

Purchase or sale of a business during the income year

Keep a record of the following:

• the name and address of the other party to the transaction
• the purchase or sale price, including details of the allocation of purchase or sale price to all items purchased or sold, including stock on hand and depreciating assets
• a copy of the contract of purchase or sale.

Requirements

Record keeping requirements and retention

If you are carrying on a business, you must keep records relevant for any taxation purpose that record and explain all transactions and other acts you are engaged in. Subsection 262A(2) of the ITAA 1936 prescribes the records to be kept as including:

• any documents relevant for the purpose of ascertaining a person's income or expenditure
• documents containing particulars of any election, estimate, determination or calculation made by a person for taxation purposes and, in the case of an estimate, determination or calculation, particulars showing the basis on which and the method by which the estimate, determination or calculation was made.

 

Generally, the partnership must keep all relevant records for five years after they were prepared or obtained, or five years after the completion of the transactions or acts to which they relate, whichever is the later. This period may be extended in certain circumstances. Keep records in writing and in English. You can keep them electronically as long as the records are in a form that we can access and understand to ascertain your taxation liability. See Taxation Ruling TR 2005/9 - Income tax: record keeping - electronic records.

Partnership records

Keep the following records:

• a copy of the partnership agreement; if none exists, a copy of the partnership's certificate of registration; if none exists, documentary evidence that partners were carrying on their activities as a partnership
• commencement date of the partnership or the date of reconstitution
• detailed statement of assets and liabilities
• details of each partner's capital accounts and sources of capital contributed
• details of each partnership bank account including the name and number of the account, the bank and branch at which it is kept, the date the account was opened and the names of persons authorised to operate the account and the date of such authorisation
• the family relationship of the partners and, if the partners are husband and wife, details of the nature and extent of the services rendered by each to the partnership
• whether the partners own jointly or in common, any property from which interest, dividends, rents or royalties are derived
• the names in which business contracts are made
• details of any services rendered in the production of assessable income by a partner under 18 years old, or by a beneficiary under 18 years old in a trust where the trustee is a partner; details must include the nature, extent and value of the services rendered
• whether the partnership is constituted or conducted such that any partners cannot, of their own will, deal with any part of their share of the partnership income
• whether any partners are required to use any part of their share of the profits to meet any debt to another person
• records that show you have met your choice of superannuation fund employer obligations; for more information, see Super funds or phone 13 28 64.

See Taxation Determination TD 2007/2 - Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

Record keeping for overseas transactions

Keep records of any overseas transactions in which the partnership is involved, or has an interest, during the income year.

The involvement can be direct or indirect, for example, through individuals, trusts, companies or other entities. The interest can be vested or contingent, and includes a case where the partnership has direct or indirect control of:

• any income from sources outside Australia not disclosed elsewhere on the tax return, or
• any property, including money, situated outside Australia. Where this is the case keep a record of
  
  • the location and nature of the property
  • the name and address of any partnership, trust, business, company, or other entity in which the partnership has an interest, and
  • the nature of the interest.
   

If an overseas interest was created by exercising any power of appointment, or if the partnership had an ability to control or achieve control of overseas income or property, keep a record of:

• the location and nature of the property
• the name and address of any partnership, trust, business, company, or other entity in which the partnership has an interest.

Partnerships

A partnership is an association of persons carrying on a business as a partner or receiving income jointly. See Taxation Ruling TR 94/8 - Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships).

A partnership is not a taxable entity but it must lodge a tax return at the end of each income year. Partners are taxed on their share of the profits of the partnership or are entitled to a deduction for their share of the losses incurred by the partnership as disclosed in their own tax returns.

Some deductions are not available to the partnership but may be claimed by the partners, see appendix 7.

A partnership asset is owned by the partners (and not the partnership) in the proportion to which the partners have agreed. A partner's share of the capital gains or losses relating to CGT events occurring for partnership assets must be disclosed on the partner's tax return. See Partnerships and capital gains tax.

Non-resident partner

A partner who is not a resident of Australia is not taxed on the share of net income of the partnership attributable to sources outside Australia. Similar rules apply to temporary residents. If it is believed that any partner who has a share of such income is not an Australian resident, or, is a temporary resident, keep a record of their name and residential address, the basis of any contention and the partner's share of income derived from sources outside Australia.

Variation of partnership agreement

Keep a copy of any variation to the partnership agreement for the life of the partnership plus five years.

Reconstituted partnerships

Under the law, if the composition of a partnership changes, for example a partner retires or dies or a new partner is admitted, the partnership is dissolved and a new partnership is formed.

However, if the change in the composition amounts only to a technical dissolution of the partnership, the partnership may be able to continue as a reconstituted continuing entity. As such it avoids the need to change its tax file number (TFN) and Australian business number (ABN), and only one partnership tax return is required at the end of the income year.

Generally, the ATO will treat a changed partnership as a reconstituted continuing entity if the original partnership agreement incorporated a provision for a change in membership or shares and the following factors apply:

• the partnership is a general law partnership
• at least one of the partners is common to the partnership before and after reconstitution
• there is no period where there is only one 'partner' (that is, in a two person partnership, there is a direct transfer of interest from the outgoing partner to a new partner)
• the partnership agreement includes an express or implied continuity clause
• there is no break in the continuity of the enterprise or firm (that is, the partnership's assets remain with the continuing partnership and there are no changes to the nature of the business, the client or customer base, the business name or name of the firm).

 

At the end of the income year, a reconstituted continuing partnership needs to lodge only one partnership tax return covering the full income year. The tax return must include the distributions made to every person who was a partner at any time during the income year, including those who left the partnership during the year.

When lodging the partnership tax return, supply the following details:

• the date of dissolution
• the date of the reconstitution
• the names of the new, continuing and retiring partners
• the TFN or address and date of birth of all new partners
• details of the changes if the persons authorised to act on behalf of the partnership have changed.

See 'Other attachments to the tax return' below for information on how to supply this information to the ATO.

If the changes in membership amount to more than a technical dissolution of the partnership, a new partnership is formed. This new partnership needs a new TFN and ABN. Both partnerships will need to lodge a partnership tax return. Lodge one tax return for the old partnership from the beginning of the income year to the date of its dissolution. Lodge another tax return for the new partnership from the date of its formation to the end of the income year.

Lodging a partnership tax return

A partnership tax return is lodged by the resident partner with the most individual interest in the partnership net income or loss. If partners have equal interests, or 2 partners have the same greatest interest, any of those partners may lodge the return. If there is no resident partner, the agent in Australia lodges the tax return. For information relating to non-residents, seeNon-resident partner.

Keep a copy of the partnership tax return and related documents as there may be a charge for obtaining a copy from the ATO.

Send the partnership tax return to the relevant lodgment address:

Australian Taxation Office
GPO Box 9845
[insert the name and postcode of your capital city]

For example;

Australian Taxation Office
GPO Box 9845
SYDNEY NSW 2001

Do not lodge a partnership tax return where:

• the only income derived jointly (or in common) with another person was
  
  • rent from a jointly owned property
  • interest from a jointly held account
  • dividends from jointly held shares
  • and you were not in a partnership carrying on a business (in the above three instances each person shows their share of the income and expenses at the appropriate items on their own tax return)
   
• the partnership was a subsidiary member of a consolidated group for the full income year, or
• an application for exemption from lodging a partnership tax return has been approved by the ATO.

Exemption from lodging a partnership tax return

An exemption may be granted if each partner gives an undertaking to provide details of all relevant income, expenditure and deduction items, as well as distribution details, in their own tax return.

The application for exemption must confirm that the partners have authorised their tax agent to show information pertaining to the partnership on each partner's tax return. If granted, an exemption applies to all future year tax returns until the partners or the ATO cancels the exemption.

An exemption will not be granted if a partner is claiming a credit for amounts withheld under the no ABN withholding rules from payments made to a partnership.

Where your interest in the partnership arises from you making an election to treat your interest in a limited partnership or foreign hybrid company as an interest in a partnership, and you have less than 10% interest in that partnership, you do not have to lodge a Partnership tax return for your interest. You must include details of your share of the partnership income and expenses in your own tax return. The election must have been made by you under sub-section 485AA(1) or (2) of the ITAA 1936 or subsection 830-10(2) or 830-15(5) of the ITAA 1997.

Where your interest in a partnership is 10% or more, or you have an interest in another partnership for which you have not made an election, see Lodging a Partnership Tax Return to determine whether you are required to lodge a Partnership tax return for each additional partnership you have an interest in.

Limited partnerships

Certain limited partnerships which are taxed as companies must lodge a Company tax return 2011 (NAT 0656).

This does not apply to a limited partnership (including an incorporated limited partnership) that is a venture capital management partnership, or a limited partnership that is unconditionally registered with Innovation Australia as a venture capital partnership, an early stage venture capital limited partnership, or an Australian venture capital fund of funds. These limited partnerships are taxed as ordinary partnerships (subject to special rules about the utilisation of their losses) and are not taxed as companies.

In the case of foreign limited partnerships, see General Information - International Taxation.

Other attachments to the tax return

In some cases we need more information about the partnership to raise correct assessments for the individual partners. These are:

• where the partnership attaches an election, notification, request or application when lodging the partnership tax return
• where the partnership has received a bonus or other amount in respect of a short-term life assurance policy issued after 7 December 1983, see item 14 Other Australian income
• where the partnership has paid or credited unfranked dividends or interest to a non-resident of Australia or has received unfranked dividends or interest on behalf of a non-resident of Australia, see appendix 1
• reconstituted partnerships where the dissolution of the partnership was only technical and the partnership business carried on as per GSTR 2003/13 - see the details that must be supplied when lodging the partnership tax return underReconstituted partnerships.

If any of the above circumstances apply, attach separate pages, headed SCHEDULE OF ADDITIONAL INFORMATION, showing the full details, the partnership name and TFN, and attach them to the partnership tax return. Print X in the Yes box at Have you attached any 'other attachments'? at the top page 1 of the tax return.

Partnerships and capital gains tax

A partnership does not own assets for CGT purposes. A partnership asset is owned by the partners in the proportion to which they have agreed. If a CGT event happens to a partnership during the income year, or the partnership received a share of a capital gain from a trust, each partner must include their share of the capital gain or capital loss on their own tax return. For more information about how a partner returns their share of a capital gain or capital loss, see the Guide to capital gains tax 2010-11.