TOPIC 5

PARTNERSHIP
TAX467: TAXATION 1
 TOPIC LEARNING
OUTCOME
Able to :
• Define partnership
• Identify the element of partnership
• Compute tax liability of partnership for each partner
(Provisional Adjusted Income, Divisible Income, Statutory and
Total Income)
• To take into account change of partnership - admission &
retirement of partner(s)
• Understand the Limited Liability Partnership (LLP), conversion
into Limited Liability partnership and distinction between LLP
and partnership
 INTRODUCTION
• Definition of partnership:-
“an association between parties who have agreed to combine
rights, powers, property, labour or skill in a business and sharing
profits generated”

Excludes Hindu joint family

• Factors/ Element need to be present for partnership (Sec 2):
1. Carrying on business
2. Sharing of rights and responsibilities
3. A view to profit
4. Element of risk & reward for each partner
 CHARGEABLE PERSON
• Partnership is not a chargeable person for income tax purpose.
• Income tax is levied on the individual partners (can be
individual/companies) on their share of business income –
sec 4(a) income.

TYPES OF PARTNERS
•participates in the conduct of the partnership and
share its profits and losses.
FULL/ACTIVE PARTNER
•His income from a partnership business is taxed as a
business source under s4(a).
•an employee of a partnership and therefore the
salaries received by this partner is fixed and taxed as
SALARIED PARTNER
an employment source under s4(b).
•He does not share the losses of the partnership.
•contributed the capital to the partnership but does not
involved in the conduct of a partnership business.
SLEEPING PARTNER
•The share of profit he received is taxed as business
source under s 4(a).
COMPUTATION OF PARTNERSHIP BUSINESS
INCOME
RM (+) RM (-)
Net profit/(loss) XX
Adjustment for:
Non-business income XX
Non-allowable expenses XX
Double deductions XX
Partnership private expenses/ partners’ entitlement:
 partners salary XX
 partners interest on capital XX
 Partners drawings / other private expenses XX
XXX (XXX)
Provisional Adjusted Income XXX
(-) Partnership private expenses:
 partners salary (XX)
 partners interest on capital (XX)
 Partners drawings / other private expenses (XX)
Divisible Income
 ALLOCATION OF PARTNER’S INCOME &
COMPUTATION OF PARTNER’S TOTAL
INCOME
A B
DIVISIBLE INCOME (based on PSR) e.g PSR (1:1) ½ x DI ½ x DI

Add:
partners salary XX XX
partners interest on capital XX XX
Partners drawings / other private expenses XX XX
ADJUSTED INCOME XXX XXX
Add: Balancing charge-based on PSR XX XX
Less: Capital Allowance –based on PSR (XX) (XX)
Less: Balancing Allowance-based on PSR (XX) (XX)
STATUTORY INCOME XXXX XXXX
Add: Other Income received by partner
Rental – A XX
Sole proprietor income-B XX
AGGREGATE INCOME XXX XXX
Less: current year business loss (if partner has CY adjusted loss) (XX) (XX)
Less: Approved donation (based on PSR) (XX) (XX)
TOTAL INCOME XXX XXX
 PROVISIONAL ADJUSTED
INCOME
• A partnership is presumed to be a sole proprietorship for the
purpose of computing Partnership Adjusted Income.
• It is also known as Provisional Adjusted Income.
• Example 21.7
• The normal principles of income tax are used to ascertain the
gross income & deductions.
• The Provisional Adjusted Loss is computed similar with the Prov.
Adjusted Income.
 DIVISIBLE INCOME
• The basis to apportion the partnership income to individual
partners is based on the profit sharing ratio (PSR) as stipulated in
the partnership agreement.
• PROFIT APPORTIONMENT AMONG PARTNERS IS BASED ON
DIVISIBLE INCOME.
• Example 21.9
• 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

• If there is any change in:

 Profit sharing ratio
 Existing partnership via cessation or admission of a partner

• A new partnership is said to exist if:

1. The old partnership business ceased business on the last day
of a 12 month period
2. New partnership took over the business of old partnership,
and also prepared its account for a 12 month period
 CHANGES IN PARTNERSHIP

• A continuing partnership happen when:

1. There is a change in the partner/s of a partnership
2. There is at least one existing partner who continue
in the partnership
• There is no revision in the basis period and the
partner’s share of adjusted income is calculated in
the normal way
• The continuing partner is deemed to have one
continuing source of business income.
 TREATMENT FOR CHANGES
IN PARTNERSHIP
• Divisible income will be accrued evenly over the
basis period in a YA (apportioned on TIME BASIS)

• The sharing of divisible income is referred to the

agreement subsist at the material time.
• Example 21.11 (next slide)
Example 21.11
 ADJUSTED INCOME OF A
PARTNER

The partners’
The aggregate of
expenses however
Divisible income will divisible income and
would be allocated
be divided among partner’s private
to the respective
partners based on expenses would be the
partner in
their respective profit adjusted income of the
accordance with
sharing ratio (PSR). partner. (Example
their ACTUAL
21.12)
CONSUMPTION.
CAPITAL ALLOWANCES
Capital allowances (CA) claim is attributable to the individual
partners instead of partnership.

The CA is allocated with reference to the PSR of the

partner at the END OF EACH BASIS PERIOD.

Hence, if there is any change in partnership (retirement of

old partner & admission of new partner), NEW PARTNER
admitted would enjoy a FULL YEAR CAPITAL ALLOWANCE
while a retired partner would not get any capital allowance
in the year of withdrawal.

However, asset purchased by a partner and solely used by him

in the partnership business, the whole CA will be given to that
partner only. (Example 21.17)
 NON BUSINESS INCOME OF
A PARTNERSHIP
Non-business income ( Sec 4b - 4f ) is not included
as part of the provisional adjusted income from the
business but is computed separately.

It will be added with Statutory business income in

order to arrive at Aggregate Income.

The adjusted income from other sources is to be

apportioned among partners in accordance to the
PSR.

However income received solely by partner, will

be allocated to him personally (e.g employment
income).
 APPROVED DONATION
Approved Donation
made by a partnership The
will be divided among donation
partners in accordance must be in
with the PSR when it was cash and
incurred. not in kind.

Approved donation
made by individual
partners (not by
partnership) will be
deducted wholly
from the partner
itself.
 ADMINISTRATION OF
PARTNERSHIP
• Partnership is required to submit Form P for each YA.
• The responsibility for the filing lies on the managing
partner.
• Managing partner is the principal partner appointed by all
partners to manage and making policy decision for the
partnership during a particular YA.
• Each individual partner has to include the share of
partnership statutory income in their respective return
(Form B) and would be assessed to tax on such share of
partnership profit.
 EXAMPLE OF QUESTION
Almas, Alisya and Azra are partners in a cupcake business. The partnership provisional
adjusted income was RM450,000 for the basis year 2017.

The terms of partnership agreement are as follows:

Almas Alisya Azra

Capital contribution (RM) 60,000 80,000 40,000
Interest on capital (per annum) 10% 10% 10%
Salary (per annum) 24,000 36,000 20,000
Drawings 1,600 2,400 Nil
Meal Allowance (Monthly) 500 500 500
Profit sharing ratio 1 1 1
Capital Allowance for the year 15,000

Required:

Calculate the total income of each partner for the year of assessment 2017.

(10 marks)
 COMPUTATION OF DIVISIBLE
INCOME
C. Computation of provisional adjusted income and divisible income for YA 2017

RM RM
Provisional Adjusted Income 450,000
Less : Benefit to partners
Interest on capital
Almas [60,000 x 10%] 6,000 √
Alisya [80,000 x 10%] 8,000 √
Azra [40,000 x 10%] 4,000 √
(18,000)
Salary
Almas 24,000 √
Alisya 36,000 √
Azra 20,000 √
(80,000)
Drawings
Almas 1,600 √
Alisya 2,400 √
(4,000)
Meal Allowance
Almas [500 x 12] 6,000 √
Alisya [ 500 x 12] 6,000 √
Azra [500 x 12] 6,000 √
(18,000)
Divisible Income √ 330,000
 COMPUTATION OF PARTNERS’
TOTAL INCOME
Almas Alisya Azra
DIVISIBLE INCOME (based on PSR) 110,000 110,000 110,000

Add:
partners interest on capital 6,000 8,000 4,000
partners salary 24,000 36,000 20,000
Partners drawings 1,600 2,400 Nil
partners meal allowances 6,000 6,000 6,000
ADJUSTED INCOME 147,600 162,400 140,000
Less: Capital Allowance –based on PSR (5,000) (5,000) (5,000)
STATUTORY INCOME 142,600 157,400 135,000
Add: Other Income received by partner Nil Nil Nil
AGGREGATE INCOME 142,600 157,400 135,000
Less: Approved donation (based on PSR) Nil Nil Nil
TOTAL INCOME 142,600 157,400 135,000
LIMITED LIABILITY
PARTNERSHIP
 INTRODUCTION
• Limited Liability Partnership (LLP) – the most tax efficient
business vehicle in Malaysia – it overcomes the limitations
of sole proprietor or conventional partnership
• An LLP has hybrid features of a company and a partnership
that provides limited liability to its partners.
• Low compliance cost:
1. Accounts are not required to be audited
2. Company secretary is not required to be appointed
• It is governed by Limited Liability Partnership Act 2012
• LLP is set up by registering with Companies Commission
of Malaysia (CCM)
 INTRODUCTION
• An LLP or a foreign LLP that is registered under the LLPA
with effect from 26 December 2012 should end with the
abbreviation ‘PLT’ after the partnership’s name.
• LLP has the advantages of separate legal entity, distinguished
from the partners (will not jointly and severally liable on
liabilities as the conventional partnership)
• Being a separate legal entity with its partners, LLP is capable of:
1. suing or being sued;
2. acquiring, owning, holding and developing or disposing of
properties; and
3. doing and responsible for such other acts as a body corporate
may lawfully do.
 INTRODUCTION
• An LLP agreement shall consist of the following particulars:
1. the name of the LLP;
2. the nature of business of the LLP;
3. the partners of the conventional partnership have agreed
to become partners of the LLP;
4. the amount of capital contribution by each partner; and
5. remuneration or similar payment to each partner.

• Basis period of LLP can be either 31 December or non 31

December
 RESIDENCE STATUS OF LLP
(SEC 8(1A)
An LLP that carries
on a business:
The LLP is resident in
Malaysia for the basis year
for a year of assessment
(YA) if at any time during
that basis year the
management and control of
its business or any one of its
businesses are exercised in
Malaysia.
Other LLPs
Any other LLP is resident in
Malaysia for the basis year
for a year of assessment if at
any time during that basis
year the management and
control of its affairs are
exercised in Malaysia by its
partners.
COMPARISON BETWEEN LLP,
PARTNERSHIP & COMPANY
 COMPARISON BETWEEN LLP,
PARTNERSHIP & COMPANY
(CONT’D)
Features LLP Partnership Company
Basis period 31 Dec / Non 31 31 Dec 31 Dec / Non 31
Dec Dec
Chargeable person Yes No. Each partner Yes
is assessed as
sole proprietor
Tax return form PT P for partnership, C
B for each partner
Income tax rate a) On the first Individual tax rate a) On the first
a) Capital Rm150,000 @ 0% - 28% Rm150,000
contribution/paid @15%, next @15%, next
up ≤ RM2.5 mil RM450,000 @ RM450,000 @
b) Others 17%, excess 17%, excess
RM600,000 @ RM600,000 @
24% 24%
a) Flat rate @ a) Flat rate @
24% 24%
 CONVERSION TO LLP
(FROM CONVENTIONAL PARTNERSHIP
@ COMPANY) – SEC 29 & 30 OF LPPA
From a • The LLP partners comprise of all the
conventional partners of the conventional partnership
only (mandatory).
partnership • The % of PSR can however be redefined in
the LLP agreement
to LLP –
• the LLP partners comprise of all the
shareholders of the company; and
From a • there is no security interest in its asset
subsisting or in force at the time of
company to application.*
• *In other words, the assets of the
an LLP – company are not subject to any changes
at the time of conversion
 CONVERSION TO LLP
(FROM CONVENTIONAL PARTNERSHIP
@ COMPANY)
• A company may not be allowed to convert to an LLP if it still has
outstanding taxes or debt due to the Government (if individual
partner/company has outstanding tax payable to IRB)
• Thus the company is advised to get a tax clearance letter from the
DGIR to be submitted to the CCM for registration purposes.
• The CCM will only approve the conversion of a conventional
partnership or a company to an LLP if it complies with all the
conditions
• For income tax purposes the business of an LLP is regarded as a
continuous business. Therefore the value of each item in the
balance sheet, such as trading stocks, debtors and creditors at the
date of conversion shall continue to be used in the LLP
CHANGES OF PARTNERS
IN A LLP
• If there is a change of partners in an LLP where
existing partners cease from the LLP due to
retirement, death or other reasons or new
partners participate in the LLP, the change has
no impact on the business of the LLP and it is still
regarded as an on-going business.
 OTHER TAX TREATMENTS
UPON CONVERSION TO LLP
ITEM TAX TREATMENT
Imposition of tax  Income from LLP will be taxed at LLP level (chargeable
income)
 Any provisions of the ITA, exemption orders and income
tax rules applicable to 'person' shall apply to the LLP
 The tax rate for LLP with total contribution (cash/in-kind)
of ≤ RM2.5 mil will be 15% for the first RM150,000, next
RM450,000 @17% and 24% for the excess
Restrictions on  refers to basic salary and fixed allowances but does not
partner’s salary include EPF contribution, SOCSO or insurance
deduction  As a separate legal entity, remuneration to partners is
deductible to LLP and remains taxable as employment
income for each partner.
 To be eligible for tax deduction, the amount of salary
must be clearly stated in the LLP agreement (s 39(1)(n)
Incorporation  LLP with capital contribution ≤ RM2.5 mil shall be
expenses allowed a deduction in respect of incorporation
expenses for the basis period for a year of assessment
 OTHER TAX TREATMENTS
UPON CONVERSION TO LLP
ITEM TAX TREATMENT
Losses and  Adjusted loss
capital  Sec 44(5E) of ITA – the CY loss shall be allowed to
allowances deducted against aggregate income
 Any unabsorbed business loss shall be allowed to be c/f to
be set off against statutory income in the subsequent YAs

 Unabsorbed CA
 Sec 3 of ITA – the unabsorbed CA shall be allowed to be c/f
to be set off against adjusted income in the subsequent YAs

Qualifying  Upon conversion to an LLP, the transfer of assets to the LLP

expenditure on is deemed a control transfer.
assets acquired  The QE on assets acquired by the LLP is in accordance with
by an LLP para 39 and 40 of Sch 3 of the ITA: the amount of RE of the
assets (not the MV or the sale price of the assets (if any))
will be taken as the QCE for the purpose of claiming CA by
the LLP
 OTHER TAX TREATMENTS
UPON CONVERSION TO LLP
ITEM TAX TREATMENT
Exempt income  The profits after tax that are paid, credited or
(para 12C, Sch distributed to partners by LLP is a tax-exempt in the
6) hands of partners.
 EXAMPLE 1
• X and Y carry on the cosmetic trading goods through partnership
with the following agreed terms:
X Y
PSR 60% 40%
Annual salaries (RM) 30,000 60,000

• On 1.1.2023, the partnership was converted into LLP with the same
agreed terms as in the previous partnership. For YA 2023, the
partnership has unabsorbed business loss b/f of RM24,000.
• Plant & machinery of the partnership was transferred to LLP on
1.1.2023 with the following particulars:
Motor vehicles Office equipment
Cost (RM) 80,000 360,000
Residual Expenditure (RM) 32,000 144,000

• Advise on the tax implications arising from the conversion from

partnership to LLP
 ANSWER
• The transfer of P&M to LLP constitute a control transfer as both
partners remain the same as in partnership and LLP.
• LLP would claim annual allowance by reference to the QE,
subject to the remaining RE
• For the partnership, the disposal of P&M would be deemed
disposal at RE, thus, there is no balancing adjustment.
LLP
Computation of CA for YA 2023
Motor vehicles RM Capital allowance (RM)
QCE 80,000
RE 32,000
(-) AA (20% of RM80,000) (16,000) 16,000
RE 16,000
Office equipment
QCE 360,000
RE 144,000
(-) AA (10% of RM360,000) (36,000) 36,000
RE 108,000
 EXAMPLE 2
• A and B are partners in AB PLT selling electrical appliances in
Megamall Klang Valley. The LLP agreement provides the
followings:
A B
Interest on capital 4% p.a for each partner
Capital contribution 100,000 60,000 (as at 1.1.2023)
20,000 (add. capital as
at 1.10.2023)
Salaries (per month) 3,600 5,000
Share of profit / loss 40% 60%
• The details of the LLP’s income statement for the year ended
31.12.2019 are as follow:
 RM RM
Sales 1,600,000
(-) Cost of sales (640,000)
Gross profit 960,000
(-) Expenses
Partners’ salaries 103,200
Interest on capital 6,600
Depreciation 46,000
Entertainment wholly to existing trade debtors 23,000
Staff amenities 45,200
Advertising and promotion 18,000
Travelling and accommodation (business) 9,600
Approved donation 6,000
Other tax deductible expenses 12,000 (269,600)
Net profit before tax 690,400
(-) taxation (130,000)
Net profit after tax 560,400

• Note:
1. CA for YA 2019 is RM25,000
2. For the year ended 31.12.2019, A received rental income of RM18,000
from the letting of his own property
ANSWER
 ANSWER

Computation of total income for YA 2019

A (RM) B (RM)
Sec 4(b) Employment income 43,200 60,000
Sec 4 (c) Interest on capital 4,000 2,600
Sec 4 (d) Rental income 18,000 Nil
Total Income 65,200 62,600
 ANSWER
Profit and loss appropriation account for the year ended 31.12.2019
RM RM RM
Balance as at 1.1.2019 (from 19,600
last year)
Add: Net profit after tax 560,400
580,000
Less: Profit distributed to 500,000
partners
A (40%) (200,000)
B (60%) (300,000) (500,000) (500,000)
Balance as at 31.12.2019 Nil 80,000

• LLP and partners are separate legal entity. Partners’ salaries are revenue
expenses and deductible under s 33(1), provided that the salaries are stated in
the LLP agreement. Any remuneration not specified in the LLP agreement will
be disallowed under the Act (s 39(1)(n)
• Any profit paid, credited or distributed to partners by LLP from the profit and
loss appropriation account would be exempted from income tax in the hands
of partners. (Para 12C, Sch 6)
ANNUAL DECLARATION
• Every LLP is required to lodge an annual declaration
with the LLP Registrar (annually) within 90 days from
the end of financial year of LLP
• Compliance officer:
 Obliged to lodge the annual declaration, LLP return
& changes in the LLP particulars
 Can be appointed from one of the LLP partners or
employees. W.e.f 28.12.2018, an approved company
secretary can act as compliance officer for any LLP