In relation to transfer pricing, section 284-255 of Schedule 1 to the Taxation Administration Act 1953 sets out specific record keeping requirements for the partners to be eligible to have a reasonably arguable position, see TR 2014/8 Income Tax: transfer pricing documentation and Subdivision 284-E.
A partnership for income tax purposes is an association of persons carrying on a business as partners or receiving income jointly, see 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 (capital gains tax) events occurring for partnership assets must be disclosed on the partner’s tax return, see Partnerships and capital gains tax.
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.
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, we 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 or, in the absence of a written partnership agreement, the conduct of the partners is consistent with continuity
- 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).
For more information, see GSTR 2003/13 Goods and services tax: general law partnerships.
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.
For information on how to supply this information to us, see Other attachments to the tax return.
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; and 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 two 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, see Non-resident partner.
Keep a copy of the partnership tax return and related documents because there may be a charge for obtaining a copy from us.
Send the partnership tax return to the relevant lodgment address:
Australian Taxation Office
GPO Box 9845
IN YOUR CAPITAL CITY
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).
A partnership return is not required if the partnership was a subsidiary member of a consolidated group or Multiple Entry Consolidated (MEC) group for the full income year. Where this is the case, the head company of the group will have the responsibility for reporting any partnership income in its tax return and preparing any necessary schedules.
Where a return is required because the partnership had one or more periods in the income year when it was not a member of a consolidated group or MEC group (a non-membership period) the partnership should prepare a partnership return and prepare any necessary schedules.
For information about reporting multiple non-membership periods during the year, see the following parts of the Consolidation reference manual:
- ‘Part C - Detailed information’
- ‘C9 – Determine tax liabilities, determine obligations’
Certain limited partnerships which are taxed as companies must lodge a Company tax return 2016 (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 limited 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 deduction of their losses) and are not taxed as companies.
In the case of foreign limited partnerships, see 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 Other Australian income
- where the partnership has paid or credited unfranked dividends or interest to a foreign resident or has received unfranked dividends or interest on behalf of a foreign resident, 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 under Reconstituted 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 of page 1 of the tax return.
Partnerships and capital gains tax
A partnership does not own assets for capital gains tax (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 2016.
Last modified: 10 Aug 2016QC 48217