Edited version of your private ruling

Authorisation Number: 1012521408462

Ruling

Subject: Partnership distribution

Question

In the absence of a partnership agreement, should the net income or loss of the partnership be distributed evenly between the partners?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2013

Relevant facts

A business is carried on as a partnership.

There is no written partnership agreement.

In previous financial years, the partnership has distributed its' net income on an equal shares basis.

For the 2012-13 financial year one partner wants to have the partnership distribution based on a drawings basis. The other partner wants the partnership income distributed on an equal shares basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 92

Reasons for decision

Summary

The net income or loss of the partnership should be distributed equally between the two partners as a written or oral agreement providing for a different distribution does not exist.

Detailed reasoning

Section 92 of the Income Tax Assessment Act 1936 (ITAA 1936) includes in the assessable income of a partner an amount that represents their interest in the net income of the partnership for the income year. Conversely, a partner may claim a deduction for an amount that represents their interest in the net loss of the partnership for the income year.

The individual interest of the partners in the net income or loss of the partnership will be expressed in the partnership agreement or in the absence of any agreement by the provisions of the Partnership Act 1891 (QLD) (Partnership Act).

Subsection 27(1) of the Partnership Act states:

The interests of partners in the partnership property and their rights and duties in relation to the partnership must be decided, subject to any agreement express or implied between the partners, by the following rules-

(a) all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm;

....

You advise that no formal partnership agreement exists between the two partners.

One partner wishes the net partnership income for the 2012-13 financial year be distributed on a drawings basis whilst the other partners wishes it to be distributed on an equal shares basis. As the partners are in disagreement about how the net partnership income is to be distributed, the Commissioner does not consider there is an implied or oral agreement in existence.

Senior Member R Hunt stated in De Bijl v. FC of T 2004 ATC 2370; [2004] AATA 1237, at ATC 2373, that:

[a]ctual drawings by the partners have no bearing on the calculation of partnership income attributable to the partners. For example, some partners may make drawings in the nature of "salary" but these drawings do not affect the calculation of partnership income and what proportion is attributed to each partner for tax purposes. This depends on the partnership interest. See Case 7/2000 2000 ATC 168; [1999] AATA 1025.

As no written or implied agreement exists between the partners, the net income or loss from the partnership's activities for the 2012-13 financial year should be distributed between the partners on an equal shares basis.