TOPIC 10

PARTNERSHIPS

TOPIC OUTLINE:
10.1 Definition of Partnership
10.2 Types of Partners
10.3 Basis Period
10.4 Computation of Provisional Adjusted
Income & Divisible Income
10.5 Computation of Adjusted Income &
Statutory Income
10.6 Changes in Partnership

OBJECTIVES OF STUDY:
To define what is partnership and to

identify chargeable person for income

purpose

tax

To assess of partnership business income

through determine provisional adjusted
income, divisible income and statutory
income

Definition
Section 2, ITA 1967
Partnership an association of any kind
between parties who have agreed to combine
any of their rights, powers, property, labor or
skill, for the purpose of carrying on a business
and sharing the profits therefrom.
Sec. 3, Partnership Act 1961:
The relation which subsists between
persons, carrying on business in common
with a view of profit.

Definition cont.

Partnership does not only involve

individual which sharing loss and profit
from carrying on business but can be also
consist of joint venture between two
companies or between individual and
company.

Chargeable person:
Partnership is not a chargeable person
for income tax purpose. Income tax is
levied on the individual partners on their
share of income.
The source of income:
As partnership is the relationship
comprises 2 or more persons (restricted
to a maximum of 20 persons) carrying
on business in common with a view of
profit, the source is a business income.

Existence of Partnership

Section 2 ITA 1967,

the following factors should present for a
p/ship to exist:
1. Carrying on business
2. Sharing of rights and responsibilities
3. A view to profit

Example

Alish and Alisha are jointly engaged in the

business of selling burgers. Each of them
contributed RM10,000 to start up a
business. The business was not registered
with the SSM. Whilst there is no written
agreement between them, it has been
verbally agreed that they will equally
share the profits / losses from the
business. A bank account is maintained in
their joint names and all cheques issued
have to be signed by both of them.
Does the partnership exists?

A partnership exists in this case on the

grounds that:
There is an agreed profit sharing
arrangement between them.
There was a contribution of capital by
both of them to start off the business.
A joint bank account is maintain with
both of them as cheque signatories.

Basis Period

A basis period for a partnership is same as

basis period for business (follows accounting
year). However, for income tax purposes the
partnership itself not taxable but only on every
partner. Thus, income from the partnership will
be distributed for each partner.

Where a new partner enter in a partnership, a

basis period will be divided into two: (1) old
partnership (before new partner enter in the
partnership) and (2) New partnership (after
new partner enter in the partnership).
Therefore, partnerships income also need to
be distributed into two period (old and new
period of partnership).

Return form by Partnership

The return must declare:

The divisible income or divisible loss
[sec.86(2)(a)]
All information to determine the
statutory income from all sources.
[(sec.86(2)(b)]
Other information as required .
[(sec.86(2)(c)]

Provisional Adjusted Income-Sec.55(2)

A partnership is postulated as a sole proprietorship

for purposes of computing partnership adjusted
income, known as provisional adjusted
income[Sec.55(2)]. From the provisional income the
following are deducted to arrive at the divisible
income:
Remuneration of partners;
Interest to any partner upon capital money paid
or advanced;
Private and domestic expenses, if any, of a
partner;
Reimbursement of private or domestic expenses
incurred by that partner.

Example

Price Associates is a partnership between

AB and AC. They share profit and loss
equally. The profit and loss account (in
000) for the year ended 31 December
2003 was as follows:
Trading income
1,730
Less:
Revenue expense 700
Depreciation 60
Entertainment to client 40
General provision for doubtful debt

20

Partnership expense
Salary:
AB
2
AC
2
Interest on capital
AB
1.5
AC
1.5
Food consumed by AB
Net profit

3
3

(830)
900

The computation of provisional adjusted

income would be as follows:
Net profit per p/ship P&L a/c
900
Add: Non-allowable expenses
Depreciation
60
Entertainment to client (50% x 40) 20
General prov. for bad debt
20
Add: Partnership private expense
Salary
4
Interest on capital
3
Food
3
110
Provisional adjusted income
1,010

Divisible income

The basis to allocate the taxable income to individual partners is

based on the ratio as stipulated in a partnership agreement on
the divisible income.
Divisible income is arrived as follows:
Provisional adjusted income
1,010
Section 55(3)
Less: (a) Remuneration to partners (salary)
Kang
2
Khoo
2
(4)
(b) Interest on capital/advances to partner
Kang
1.5
Khoo
1.5
(3)
(c) Any expenses charged to p/ship
a/c-private & domestic Kang
(3)
Divisible income
1,000

Change of profit sharing ratio

Divisible income is presumed accrued evenly over the

basis period. If there is a change of profit sharing ratio
during the basis period, an apportion on time basis
based on the old and new ratio will be done.
Example:
A and B are in p/ship. The divisible income for the year
ended 1/1/2003 31/12/2003 (in 000) is RM120.
The profit sharing ratio between A &B for:
1/1/03 30/11/03
1:1
1/12/03 31/12/03 1:4
The divisible income (in 000) allocated to A and B:
A B
1/1/03 30/11/03 : (11/12 x 120)/2
55
55
1/12/03 31/12/03: (1/5 x 10) & (4/5 x 10) 2
8
57
63

Adjusted income of partner

XTRA

E.g. (from Price Associates)

Divisible income 1,000
The ratio is shared equally among AB & AC:
AB
AC
Total
Divisible income 500
500
1,000
Add: p/ship expenses (actual)
Salary
2
2
4
Interest 1.5
1.5
3
Private & domestic 3
3
Adjusted income 506.5
503.5 1,010

Provisional adjusted loss

Computed along the same line as

provisional adjusted income. Where a
divisible loss arises, the loss is allocated to
individual partners according to the
relevant profit sharing ratio at the material
time.

Changes in partnership

When a partner withdrew from the

partnership or a new person is admitted as
partner into the existing partnership, this
would resulted in a cessation of old
partnership and commencement of new
p/ship.

Continuing p/ship (no change of basis

period)

Where there is a change in p/ship and at

least a person who was a partner in the
old p/ship continues to be a partner in the
new p/ship, the p/ship is treated as
continuing even though the change takes
place half way through the accounting
year. There is no revision of basis periods
and that partners share of adjusted
income is calculated in the normal way.
This is applicable only where the
accounting date for the new p/ship and the
old p/ship are the same; and the business
is substantially the same.

Example

J, K and L are in equal partnership and prepare

their accounts on 31 December every year. On
31 August 2002, J retired whilst K and L carried
on the partnership as equal partners. On 1
December 2002, M was admitted into
partnership as an equal partner. The partnership
continues to prepare its account annually to 31
December. Compute the adjusted income from
the partnership for each partner for the relevant
years of assessment assuming the following:
Year ended
Adj. Income
31 December 2001 RM60,000
31 December 2002 RM36,000
31 December 2003 RM48,000

Suggested solution

There are 2 cessations, I.e. on 31 August 2002

and 30 November 2002.
K and L were continuing partners. No break in
their source of income.
J
K
L
M
Y/A 01
1/1/01-31/12/01
20 20 20
Y/A 02
1/1/02-31/8/02
8
8
8
1/9/02-30/11/02
4.5 4.5
1/12/02-31/12/02
1
1
1
Y/A 03
1/1/03-31/12/03
16 16 16

Continuing p/ship (changes in basis

period)

When there is change in p/ship and the

p/ship adopted different year-end from
the old p/ship, the DG will direct the
basis period for the existing partner.
This is to avoid a change in p/ship so as
to reduce the adjusted income for some
partners, by transferring income from a
YA where the individual partner is
subject to high rate of tax to a lower tax
rate in the following year.

Admitting a new partner

In the case of a new partner admitted into an

existing partnership which continues to
prepare its accounts to its usual year end, the
basis period will start on the day one becomes
a partner to the end of the accounting period
[Sect. 21(5)]
Example:
If C is admitted on 1 October 2000 as a partner
in the firm of AB & Co, which continues to
prepare its accounts to 30 June annually, the
basis period for C would be as follows:
Y/A Basis period
2001
1/10/2000 30/6/2001
2002
1/7/2001 30/6/2002

Sole Proprietor admitting a partner

Where a sole proprietor admitting

in a partner into the business and
forms p/ship, the existing sole
proprietor business and the p/ship
business will be treated as one
continuing business if the p/ship
prepares accounts to the same
year end as the sole proprietor.

Capital Allowances

Although the p/ship is a business source, capital

allowance claim is attributable to the individual
partners instead of the p/ship. The qualifying
assets will be entitled to capital allowances
according to the Income Tax (Qualifying Plant
Annual Allowances) Rules 2000 at the end of
each YA. The capital allowances is allocated
with reference to the profit sharing ratio of the
partner at the end of each basis period.
Admission or retirement of partners will not
affect the claim of capital allowances as the
p/ship is treated as continuing if at least one
partner of the old p/ship continues to be partner
in the new p/ship.

Continue

Since capital allowance is

computed at year end, a new
partner admitted would enjoy a full
year capital allowance while a
retired partner would not get any
capital allowance for the year of
withdrawal.

Partners statutory income

Adjusted income
+ Balancing charge

xx
xx
xx

- Capital allowance
(inclusive unabsorbed and
balancing allowance)
Statutory income
xx

(xx)

Partnership Losses

When p/ship suffers losses, the provisional

adjusted loss will result in divisible loss
which will be shared by individual partners
according to their profit sharing ratio per
p/ship deed.
As business loss can be set off against all
other income in the current year, the
individual partner may be able to lower his
tax liability if he also derives employment
income and investment income. Any
unabsorbed losses can be carried forward
indefinitely to be set off against future
business income (statutory income).

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