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Appendix 7: Deductions applicable to partners

Last updated 26 May 2021

Capital allowances for primary producers and some landholders

A partnership can't 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 2021. 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of the Australian screen production incentive, Division 10B and Division 10BA of Part III of the ITAA 1936 has been repealed with effect from 1 July 2010.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 can't claim a deduction under Division 10BA for the 2009–10 or later years. A partner can't 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 can't 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 2021 and Information for primary producers 2021.

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 yearforeign 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 2021 and Non-commercial losses: partnerships.

Research and development tax offset

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 2021.

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 2021.

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 personal superannuation contributions, see:

Appendix 14: Small business entity concessions

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

Businesses that would be small business entities if the aggregated turnover threshold was less than $50 million may also be eligible for the following concessions:

  • immediate deduction for certain prepaid business expenses
  • immediate deduction for certain start-up expenses.

Eligible businesses can choose to use the concessions that best suit their needs. 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 (see Note)
  • CGT 50% active asset reduction (see Note)
  • CGT retirement exemption (see Note)
  • CGT rollover provisions, including the small business restructure rollover with effect from 1 July 2016 (see Note)
  • 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.

Note: Where a capital gain arises from a CGT event that involves the creation, transfer, variation or cessation of an interest or right that entitles someone to the income or capital of a partnership, the partners in the partnership can no longer access the small business CGT concessions where:

  • the CGT event occurred after 7.30pm AEST 8 May 2018, and
  • the interest or right is not a membership interest held by the person with the entitlement.

For more information, see also:

  • Tax Integrity – Enhancing the integrity of concessions in relation to partnerships
  • Basic conditions for the small business CGT concessions

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.

Eligibility

A partnership is eligible for the small business entity concessions if it meets the small business entity test; that is, the partnership:

  • is carrying on a business, and
  • has an aggregated turnover of less than $10 million.

Partnerships that would be small business entities if the aggregated turnover threshold was less than $50 million are also eligible for the immediate deduction for certain prepaid business expenses and certain start-up expenses.

‘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 entity that is connected with it, or that is 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 currentincome 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 limit

There are three ways to satisfy the $10 million aggregated turnover limit or the $50 million aggregated turnover limit. These are:

  • your 2019–20 turnover
  • your estimate of your 2020–21 turnover
  • your actual 2020–21 turnover.

Most businesses will only need to consider the first method.

Previous year turnover

If the aggregated turnover of the partnership for 2019–20 was less than $10 million, the partnership is a small business entity for 2020–21. This is regardless of its estimated or actual aggregated turnover for 2020–21.

If the aggregated turnover of the partnership for 2019–20 was less than $50 million, the partnership can access those small business entity concessions.

Estimate of current year turnover

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

If the estimated aggregated turnover of the partnership for the income year is less than $50 million, the partnership can access those small business entity concessions.

If you are estimating your turnover, you need to:

  • estimate your turnover based on the conditions you are aware of at the relevant date
  • assess whether the aggregated turnover is more likely than not to be less than $10 million or $50 million as at the relevant date.

The relevant date is either:

  • the first day of the income year, or
  • the time the business started, if the partnership started a business part way through the year.

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 whole income year.

This method can't be used if the aggregated turnover of the partnership in each of the previous two income years was equal to or more than the aggregated turnover limit.

Actual current year turnover

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

If the actual aggregated turnover of the partnership is less than $50 million at the end of the income year, the partnership can access those small business entity concessions.

This method is only needed if the first two tests can't be met.

If the partnership is a small business entity by means of this method only, it can't 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.

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