BFA714 Lecture Ten - Partnerships and Trusts.pptm - TASMANIAN SCHOOL OF BUSINESS AND ECONOMICS BFA714 Australian Tax Law Topic 10 – Partnerships and

BFA714 Lecture Ten - Partnerships and Trusts.pptm -...

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BFA714 Australian Tax Law Topic 10 – Partnerships and Trusts TASMANIAN SCHOOL OF BUSINESS AND ECONOMICS
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Lecture outline 1. Taxation of partnerships 2. Taxation of trusts BFA714 - 2019 2
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Taxation of partnerships Definition of a general partnership from partnership law : ‘the relationship that exists between persons carrying on business in common with a view to profit’. A ‘partnership’ itself is not a separate legal entity. For example, you cannot sue a partnership, as a partnership is not a ‘legal person.’ You must sue the individual partners, as the partners are jointly and severally liable. BFA714 - 2019 3
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Taxation of partnerships Definition of a ‘partnership’ in s 995-1 ITAA97 : partnership means an association of persons carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, but does not include a company.’ The definition of ‘partnership’ in ITAA extends the notion of ‘partnership’ beyond the general law. If a taxpayer is in receipt of assessable income jointly with another person, even though the taxpayer is not carrying on a business , a partnership exists for taxation purposes. BFA391 - 2019 4
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Taxation of partnerships A partnership lodges a partnership tax return showing the net income or loss of the partnership. However, the partnership itself pays no tax on the income disclosed in the partnership income tax return: s 91 ITAA36 Instead, the net income or loss is split up between the individual partners . The individual partners include their share of the income or loss in their own individual tax returns and pay tax accordingly. BFA714 - 2019 5
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Taxation of partnerships DIFFERENT TAX TREATMENT General partnership – partner’s individual interest is determined according to the partnership agreement Can share income and losses in whatever proportion they choose. Tax law (only) partnership – partner’s individual interest in the net income, partnership loss and non-assessable income is determined according to the interests of the partners in the property producing the income. BFA714 - 2019 6
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Taxation of partnerships FCT v McDonald 87 ATC 4541 The taxpayer and his spouse purchased rental properties as joint tenants (that is, equal ownership). They entered into an agreement to share the net rental income: Taxpayer: 25% Spouse : 75% Under the agreement the taxpayer was get all of the losses. The rental properties generated net rental losses and the taxpayer sought to claim a tax deduction for 100% of the losses. The Federal Court agreed with the Commissioner that the taxpayer and his spouse were not carrying on a business was a tax law only partnership. Hence the income and losses had to be equally shared as per the ownership interest.
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