Taxation Ruling

TR 2005/7A1 - Addendum

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

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Addendum

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

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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

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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

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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

Insert:

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ITAA 1936 6(1)

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ITAA 1936 44

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ITAA 1936 44(1)

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ITAA 1936 Pt III Div 5A

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ITAA 1936 94D

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ITAA 1936 94J

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ITAA 1936 94K

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ITAA 1936 94L

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ITAA 1936 94M

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ITAA 1936 94M(2)

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ITAA 1936 92(2)

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ITAA 1997 995-1(1)

This Addendum applies on and from the date of issue.

Commissioner of Taxation
5 November 2014

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References

ATO references:
NO 1-5XLFZGM