ATO Interpretative Decision

ATO ID 2002/564 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. The current ATO position on this issue is contained in Taxation Ruling TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a salary paid to a partner in a corporate limited partnership deemed a dividend by Division 5A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. A salary paid to a partner of a corporate limited partnership will be deemed a dividend by Division 5A of the ITAA 1936.

Facts

A resident corporate limited partnership pays a salary to a partner. The partner is an individual.

Reasons for Decision

Sections 94L and 94M of the ITAA 1936 specifically address the taxation consequences of payments, credits and distributions made to a partner in a corporate limited partnership.

Section 94L of the ITAA 1936 includes a distribution, whether money or property, to a partner in a corporate limited partnership, as a dividend, but not if the distribution is attributed to profit or gain from a year when the partnership was not a corporate partnership.

Likewise, section 94M of the ITAA 1936, deems that where a corporate limited partnership 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.

A salary paid to a partner in a corporate limited partnership 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.

Taxation Ruling IT 2218 confirms that a salary paid to a partner will not be subject to pay as you go instalment deductions and will not be an allowable deduction to the partnership. Rather, in cases where a bona fide salary has been paid it will represent a distribution of profits by the partnership.

Consequently payment of salary to a partner of a corporate limited partnership will be assessable income and subject to taxation as dividends under subsection 44(1) of the ITAA 1936.

Where the corporate limited partnership 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.

Legislative References:
Income Tax Assessment Act 1936
   Division 5A
   section 94L
   section 94M
   subsection 94M(2)
   subsection 44(1)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2218

Keywords
Limited partnerships
Partnerships - PAYG issue
Salary

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  31 May 2002

ISSN: 1445-2782