CHAPTER 1

PARTNERSHIPS

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 Learning Outcomes
 Introduction
 Chargeable Person
 Source of Income
 Existence of a Partnerships
 Assessment of partnership business income
 Provisional adjusted income / Divisible income
 Changes in the partnership
 Admission of new partner
 Sole proprietor admitting a partner
 Capital allowances
 Partners’ statutory income
 Non business income from partnership
 Approved donation
 Partnership losses
 Real property gains tax (w.e.f 1.1.2000)
 Administration 2
 Introduction 1
 A partnership is defined as an association of any
kind between parties who have agreed to combine
any their rights, powers, property, labour or skill,
for the purpose of carrying on a business and
sharing the profits therefrom. [Section 2, ITA 1967]
 Partnership does not include Hindu joint family.

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 Chargeable Person 2
 Partnership is not a chargeable person
 Income tax is levied on the individual partners
 ‘Partners’ – refer to individuals or companies

Source of income 3
 Source is a business income
 Business income includes trade, manufacture,
profession, vocation and adventures or concern in the
nature of trade

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Existence of a partnership 4
 The following factors need to be present before a
partnership is said to exist:
 Carrying on business
 Sharing of rights and responsibilities
 A view of profit
 Element of risk and reward for each partner

(See example(s) on page 358-359, text book)

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 Type of Partners 5a
 Full partners
 Such partner shares in the profits and losses of the
partnerships and is actively involved in the conduct
of the partnership business.
 Taxed under Section 4(a), ITA 1967 as income from
a business source.
 Salaried partner
 Such partner merely received a fixed salary with or
without a commission or share profit.
 Does not have any share
 Does not have any title to the partnership goodwill
 Taxed under Section 4(b), ITA 1967 as income from
an employment (except salaried partner of stock
broking firm).
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 Type of Partners (cont’d) 5b
 Sleeping partner
 Such partner does not participate in the conduct of
the partnership business which is left to others.
 Received a share of the partnership profit through
his capital contribution to the business.
 Taxed under Section 4(a), ITA 1967.
 Limited partner
 Subscribes to a fixed amount capital for the
partnership.
 Does not take part in the management
 No power to bind the firm
 Taxed under Section 4(a), ITA 1967.

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 Type of Partners (cont’d) 5c
 Corporate partner
 A company may become a full partner or limited
partner of partnership.
 A partnership may consists purely of companies.
 Taxed under Section 4(a), ITA 1967.

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 Difference between partnership & 6a
company
Partnership Company
Number of members Between 2 – 20 person Private limited company:
2 – 50 person
Public limited company:
Minimum 2 – unlimited
members
Issue of shares No Yes
Capital Contributed by partners Selling of shares issued
P&L distribution According to partnership Dividend to be distributed to
agreement @ PA 1961 share holders according to
share owned
Management Manage by the partner Manage by BOD & staff
employed
Liability Unlimited Limited
Business life span Can be dissolved Cannot be dissolved
Deed Govern by PA 1961 Govern by CA 1965
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Difference between partnership & 6b
company (cont’d)
 Under the partnership, income tax is raise on the in the
individual partners whereas a company is taxed upon
as an entity.
 Individual partner who is resident in Malaysia is allowed
to claim deduction for personal relief and rebate.
 With effect from YA 2009, individual partner who is
resident in Malaysia is taxed on his income from a
partnership at a gradual tax rate of 0% to 27% and an
income from a company is taxed at flat rate of 25%.
 In the case of insolvency, private assets of an individual
partner may be auctioned by the IRB to settle any tax
due to them.

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Provisional Adjusted Income 7

RM
Profit before tax XX
(+) Non-allowable expenses XX
(+) Taxable business income XX
(-) Allowable expenses (X)
(-) Non-business income (X)
(-) Double deduction expense (X)
---------------------------------------------------------------
Provisional adjusted income XX
---------------------------------------------------------------

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 Divisible Income 8

RM
Provisional adjusted income XX
(-) Partners remuneration (X)
(-) Partners benefits (X)
(-) Partners private expenses (X)
---------------------------------------------------------------
Divisible income XX
---------------------------------------------------------------

Divisible income to be allocated to the respective

partners based on profit and loss sharing ratio.

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 Partnership losses 9
 Divisible loss will be allocated to respective partners
based on profit and loss sharing ratio.
 Current year business loss can be set off against other
source of income (aggregate income).
 Unabsorbed losses can be carried forward and set off
against future business income.

 Provisional adjusted loss

 The provisional adjusted loss is computed along the
same line as provisional adjusted income.

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 Changes in Partnerships 10
 Several changes could be occurred to a partnership,
such as:
 Changes in partners
 Changes of P&L sharing ratio
 Changes of capital contribution and interest rate
 Changes of partners benefits
 Changes of elements in the partnership

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 Capital Allowance 11
 Since the partnership is not a legal person, it cannot
own fixed assets. Therefore, the assets are belong
jointly to the individual partners.
 Any capital allowances, balancing charges and
balancing allowances to be allocated to the existing
partners based on the P&L sharing ratio at the end of
the basis period. No time apportionment even though
there is a change in profit and loss sharing ratio during
the basis period.
 Unabsorbed capital allowances can be carried forward
and set off against future business income.

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 Partners Statutory Income 12

RM
Adjusted income XX
(+) Balancing charge XX
----
XX
(-) Capital allowance (X)
(inclusive of unabsorbed and balancing allowance)
---------------------------------------------------------------
Statutory income XX
---------------------------------------------------------------

Divisible income to be allocated to the respective

partners based on profit and loss sharing ratio. 16
Non-business Income from partnership 13
 Dividends, interests and rents accrue to the partnership
to be apportioned among the partners involved
according to the P&L ratio.
 In practice, the computation of non-business income is
not included as part of the partnership provisional
adjusted income from business but is computed
separately.

Approved Donation 14
 Approved donation to be allocated to the partners
involved based on the P&L sharing ratio.

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 RPGT (w.e.f 1.1.2010) 15
 Although partnership is not chargeable person for
income tax purposes, partnership is a chargeable
person for RPGT purposes.
 This means that any gain arising from disposal of RP
will be subject to RPGT and partnership is liable for
such RPGT.
 The RPGT rate is 5% for disposal for RP of which
holding period of such RP is less then or equal to 5 yrs.
 No RPGT would be imposed if the RP disposed has
been held for more than 5 yrs.

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THANK YOU

HY / PA602 / JUN 2014

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