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6.3 Partnerships%28word%290

6.3 Partnerships%28word%290 - AFIS 254 2 APRIL 2009 LECTURE...

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AFIS 254 – 2 APRIL 2009 LECTURE 18 TAXATION OF PARTNERSHIPS 1. TAXATION OF PARTNERSHIPS [NZT 15] 1.1. What is a Partnership? Subpart HG ITA 2007 [NZT 15.2.1 – 15.2.2] 1.1.1 The ITA 2007 The term "partnership" is defined in the Income Tax Act 2007. Section YA 1 provides that a “partnership” means: “(a) a group of 2 or more persons who have, between themselves, the relationship described in section 4(1) of the Partnership Act 1908: (b) a joint venture, if the joint venturers all choose to be treated as a partnership for the purposes of this Act [ITA 2007] and the Tax Administration Act 1994; (c) co-owners of property … [with specific exclusions noted]: (d) a limited partnership.” We will consider item (a) in this lecture. Limited partnerships (item (d)) will be considered along with Company Taxation. In this lecture the terms “partnership” and “general partnership” are used interchangeably and mean a partnership that is not a limited or special partnership. 1.1.2 “Partnership” defined For the purposes of (a), s 4(1) of the Partnership Act 1908 defines a partnership as "the relation which subsists between persons carrying on a business in common with a view to profit ." The three elements essential for a partnership to exist are therefore: (1) A business (defined in s 2 Partnership Act 1908 to include: “every trade, occupation or profession”), (2) Carried on with a view to a profit, and (3) By or on behalf of the parties. Whether a partnership exists is a question to be determined in the light of all the surrounding factors. Factors indicating the existence of a partnership include: (1) the existence of a partnership agreement. A written contract between the partners is not essential; (2) input of capital (money) and/or services by the parties; (3) use of a joint bank account; (4) registration of the business in joint names; (5) joint leasing/ownership of business premises and assets; (6) evidence of drawings by the parties against profits; and (7) notification to third parties that a partnership exists. Partnerships are common eg between husband and wife, and in the accountancy and legal professions. Note: the term “partner” is defined in s YA 1 ITA 2007 to mean a person who is a member of a partnership.
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1.2 General Principles of Partnership Taxation [NZT 15.2.2- 15.2.3] In law, partnerships are not legal entities, unlike companies. This means that they have no legal existence separate from the individual partners that comprise them. As such assets of the partnership are vested in (ie owned by) all the partners together in accordance with the partnership agreement. Each partner is jointly and severally liable for the liabilities of the partnership. The same principle applies to the taxation of partnership income. For tax purposes, the ITA 2007 adopts the “flow through” (aggregate) taxation approach unless the context of the legislation indicates otherwise. According to this approach, a partner, and not the partnership, will be treated as: (i) carrying on the activity carried on by the partnership; and (ii)
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6.3 Partnerships%28word%290 - AFIS 254 2 APRIL 2009 LECTURE...

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