Taxation Ruling

TR 2005/7A1 - Addendum

Income tax: the taxation implications of 'partnership salary' agreements


This Addendum is a public ruling for the purposes of the Taxation Administration Act 1953. It amends Taxation Ruling TR 2005/7 to include the taxation consequences of a partner's salary where the partnership is a corporate limited partnership.

TR 2005/7 is amended as follows:

1. Paragraph 3

Insert after the paragraph:

3A. Additionally, this Ruling explains the implications of a 'partnership salary' in the context of a limited partnership[1] that is a corporate limited partnership.[2]

2. Paragraph 7

Insert after the paragraph:

7A. Similarly, a 'partnership salary' is not an allowable deduction for the purposes of a corporate limited partnership[3](CLP) under Subdivision C of Division 5A of Part III of the ITAA 1936.

3. Paragraph 7

Insert after the paragraph:

9A. In the case of a CLP, section 94K of the ITAA 1936 specifically excludes the application of Division 5 of the ITAA 1936 provisions from applying. Instead, Division 5A of the ITAA 1936 applies such that if the partnership pays or credits an amount to a partner in the partnership against the profits or anticipated profits, the amount is taken to be a dividend[4] paid to the partner out of profits[5] and assessable to the partner pursuant to section 44 of the ITAA 1936.

4. Paragraph 13

Insert after the paragraph:

13A. The income from a CLP is not taxed to the partners. The scheme of Division 5A of the ITAA 1936 is that the partnership is treated as a company for certain taxation purposes and consequently the taxable income of the CLP is taxed as a company.[6]

5. Paragraph 18

Insert after the paragraph:

18A. For the same reasons, a 'partnership salary' is also not characterised as an expense of a CLP when calculating the net income of the CLP.

6. Paragraph 23

Insert after the paragraph:

23A. Sections 94L and 94M of the ITAA 1936 specifically address the taxation consequences of payments, credits and distributions made to a partner in a CLP.
23B. Section 94L of the ITAA 1936 includes a distribution, whether money or property, to a partner in a CLP, as a dividend, but not if the distribution is attributed to profit or gain from a year when the partnership was not a CLP.
23C. Likewise, section 94M of the ITAA 1936, deems that where a CLP pays or credits a partner from profits, anticipated profits, or otherwise in anticipation of profits, the amount is taken to be a dividend paid out of profits derived by the partnership.
23D. A salary paid to a partner in a CLP is not necessarily paid from profits and may be paid in anticipation of profits. In applying section 94M of the ITAA 1936, such payments are considered a distribution of profits and will be taxed as a dividend.
23E. Consequently payment of salary to a partner of a CLP will be assessable income and subject to taxation as dividends under subsection 44(1) of the ITAA 1936.
23F. Where the CLP makes a distribution of profits which includes an amount previously paid or credited in anticipation of such profits, the Commissioner must take such steps, if any, to ensure that a partner is not subject to double taxation (subsection 94M(2) of the ITAA 1936). This ensures that if a partner has been taxed on a distribution when it was credited, the partner will not be taxed again when the distribution is actually paid.

7. Legislative references


ITAA 1936 6(1)
ITAA 1936 44
ITAA 1936 44(1)
ITAA 1936 Pt III Div 5A
ITAA 1936 94D
ITAA 1936 94J
ITAA 1936 94K
ITAA 1936 94L
ITAA 1936 94M
ITAA 1936 94M(2)
ITAA 1936 92(2)
ITAA 1997 995-1(1)

This Addendum applies on and from the date of issue.

Commissioner of Taxation
5 November 2014


You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


The term 'limited partnership' is defined in subsection 995-1(1) of the Income tax Assessment Act 1997.

See section 94D of the ITAA 1936 for the meaning of the term 'corporate limited partnership'.

Refer to section 94D of the ITAA 1936 for the description of what constitutes a CLP.

The term 'dividend' is defined in subsection 6(1) of the ITAA 1936.

See section 94M of the ITAA 1936.

See section 94J of the ITAA 1936.


ATO references:

ISSN: 1039-0731