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Edited version of your written advice
Authorisation Number: 1012995741054
Date of advice: 14 April 2016
Ruling
Subject: Partnership distribution
Question
Are the payments for the disputed fees assessable as a partnership distribution in the year of receipt?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commenced on
1 July 2014
Relevant facts
The partnership operated a business for several years.
Throughout the years partner A received commissions from services provided. Partner A derived associated income by reason of their capacity as a partner of the partnership.
The commissions were not declared as income of the partnership. The fees were retained by partner A.
Partner B became aware of the existence of the commissions being received by partner A.
A deed has been prepared to effect that partner A redistributes to the partnership an amount equal to the amount of commissions received by partner A times the interest that you had in the partnership at the time the commissions were received personally by partner A. Incidental costs and interest were also part of the deed. As part of the deed, partner A has agreed to pay you an amount so that you receive an amount to compensate you for the difference in any potential tax rates.
Partner A retired from the partnership.
Partner A paid some money to the partnership which was all redirected to you in the relevant financial year. A further amount was paid by partner A in the subsequent financial year.
There was no written partnership agreement.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 92.
Reasons for decision
Subsection 92(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a partner's assessable income includes their individual interest in the net income of the partnership.
The net income of the partnership will only be ascertainable at the end of each accounting period and refers to the assessable income of the partnership, calculated as if the partnership were a resident taxpayer for the income year in question, less all allowable deductions (section 90 of the ITAA 1936).
A partnership is not a separate legal entity and as such does not pay tax on its income. Each partner is taxable, in their own individual capacity on their share of the net partnership income under section 92 of the ITAA 1936 and must include it in their own personal income tax return.
In your case, the payments received represent your entitlement as a partner in the share of the profits.
Although the associated services were carried out in prior years by partner A, the money was not paid to the partnership until the relevant financial years. The payments were then directed to you. As the distribution of profits was not made until these years, it is then that your share of the partnership profit is assessable.