Introduction

These instructions will help you complete the Partnership tax return 2011 (NAT 0659). They are not a guide to income tax law. You may need to refer to other publications.

When we say 'you' or 'your business' in these instructions, we mean either you as the partnership that conducts a business or you as the tax agent or partner responsible for completing the tax return.

These instructions contain abbreviations for names or technical terms. Each term is spelt out in full the first time it is used and there is a list of abbreviations.

What's new?

Deductibility of employer contributions for former employee

Employers can claim a deduction for superannuation contributions made in respect of a former employee within four months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests. Currently employers are restricted to a two month time limit.

TFN withholding for closely held trusts

TFN withholding arrangements have been extended to most closely-held trusts, including family trusts, to ensure that beneficiaries of these trusts include their share of the net income of the trust in their tax returns.

From the first income year starting on or after 1 July 2010, beneficiaries may provide their TFN to the trustee of the trust prior to receiving a distribution or becoming presently entitled to income of the trust. Where a beneficiary has provided their TFN, the trustee is required to report the TFN and other details to the Australian Taxation Office (ATO).

Where a beneficiary does not provide their TFN, the trustee is required to withhold an amount from the distribution (at the top marginal rate plus Medicare levy). This amount will then be remitted to the ATO. When the beneficiary lodges their tax return they will be able to claim a credit for the amount withheld.

Legislation to bring this measure into effect was contained in Act No. 75 - Tax Laws Amendment (2010 Measures No. 2) Act 2010 which received royal assent on 28 June 2010.

Repeal of foreign investment fund and deemed present entitlement rules

The Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010 repealed section 96A, Part XI (the FIF rules) and sections 96B and 96C (the deemed present entitlement rules) of the ITAA 1936. The repeal is applicable to the 2010-11 year of income and later years of income. In the absence of the FIF and deemed present entitlement rules, resident beneficiaries holding interests in foreign trusts will need to turn to the ordinary trust rules contained in Division 6 and the transferor trust provisions in Division 6AAA of the ITAA 1936 in order to determine their tax obligations. The ordinary trust rules will also continue to apply in precedence to the transferor trust rules.

Reforms to income tests

In the 2008 Federal Budget the Government announced measures to reform income tests across the tax and benefit systems. These measures will help to ensure Government assistance is targeted to those most in need. The measures also remove inconsistencies in the treatment of non-wage remuneration and ensure net losses from investment activities are better accounted for in income tests. The reforms to income tests measure took effect on 1 July 2009.

We have added new questions to the partnership tax return to determine each partner's share of net financial investment income or loss and net rental property income or loss. If partners have these amounts, they will need to include them when completing the net financial investment loss and net rental property loss items in their own income tax return.

Private company dividends

Tax Laws Amendment (2010 Measures No. 2) Act 2010 received royal assent on 28 June 2010. This Act tightens the private company dividend rules in Division 7A to improve its fairness and integrity. The rules in Division 7A prevent private companies from making tax free distributions of profits to shareholders or their associates. These rules also apply where a private company has an unpaid present entitlement from a trust and the trust makes a loan or certain payments to, or forgives the debt of, a shareholder (or their associate) of the private company. In this case, the payments, loans and forgiven debts are treated as dividends.

The changes reduce the scope for private companies to allow company assets to be used for free or at less than their arms length value without paying tax. A range of other amendments will be made to strengthen these rules.

These changes apply from 1 July 2010.

Taxation of financial arrangements (TOFA)

The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997, which generally provides for:

• methods of taking into account gains and losses from financial arrangements, being accruals and realisation, fair value, foreign exchange retranslation, hedging, reliance on financial reports and balancing adjustment, and
• the time at which the gains and losses from financial arrangements will be brought to account.

Which entities are affected?

The TOFA rules will apply to the following entities:

• authorised deposit-taking institutions, securitisation vehicles and financial sector entities with an aggregated annual turnover of $20 million or more
• managed investment schemes or entities with a similar status under foreign law relating to corporate regulation with assets of $100 million or more
• any other entity (excluding individuals) which satisfies one or more of the following:
  
  • an aggregated turnover of $100 million or more
  • assets of $300 million or more
  • financial assets of $100 million or more.
   

An entity that does not meet these requirements can elect to have the TOFA rules apply to it.

Regardless of whether the TOFA rules would otherwise apply, they apply to all qualifying securities acquired during or after the first income year starting on 1 July 2010 that have a remaining life of more than 12 months after the entity starts to have them.

When will the TOFA rules affect a partnership's tax return?

The TOFA rules will apply to financial arrangements that an affected partnership starts to have in its first income year commencing on or after 1 July 2010 (unless it elected for the rules to apply a year earlier).

Transitional election for existing financial arrangements

Although the TOFA rules generally apply only to new financial arrangements, an affected partnership can make a transitional election to have the TOFA rules apply to its existing financial arrangements. Where this election is made, the rules will also apply to financial arrangements that were entered into before the time that the TOFA rules first apply to the partnership if those financial arrangements are held at that time.

A partnership must provide a transitional election for existing financial arrangements to the Commissioner by the following dates:

Income year that the TOFA rules first apply to the partnership's financial arrangements	Date transitional election must be made by:
2010-11	The due date for lodgment of the partnership's 2010 tax return
2011-12*	The due date for lodgment of the partnership's 2011 tax return

* This may apply to partnerships with a substituted accounting period that have an early balance date.