CHAPTER 4:

PARTNERSHIP

ACT 3402 1
Learning Objectives
Types of Partnership
Provisional Adjusted Income and Divisible Income
Adjusted Income of a partner
Capital Allowances
Computation of tax liability
Changes in the Partnership

ACT 3402
Type of business in Malaysia
Sole proprietor (Jalil Enterprise)
Partnership (Ah Ba Ta Partnership)
Limited company (Jasa Berhad @ Jasa Sdn Bhd)
Foreign companies (Hazelwood Ltd)
Limited liability partnership (Ah Ba Ta LLP)

ACT 3402
Introduction
Partnership is defined as an association of any kind between parties
They have agreed to combine any of their rights, power, property, labour
or skill for the purpose of carrying on a business
Profit and losses are being shared according to the agreement.

ACT 3402
Types of partnership
General partnership
◦ Partners are sharing equal rights and responsibility
◦ Assumes full responsibility for all debts and obligations

Limited partnership
◦ Allow partners to restrict personal liability to the amount of business
investment.
◦ In this type of partnership at least one partner should play a role as general
partner and have the right to control the business

Limited liability partnership

◦ Treated similar as limited company

ACT 3402
Type of partners
General - partner in the fullest sense.
Active - partner who actively participates in the management of the
business
Dormant – sleeping partner, not active partner but liable as a partner
Quasi – not a partner but is liable for debts of the partnership
Salaried – no contribution but handling the business and receive salary

ACT 3402
Chargeable person
Income tax is levied on the individual partners on their share of business
income.
‘Partners’ refers to individuals or companies.

ACT 3402
Existence of a partnership
Based on sec 2 of the Act & case laws precedence, factors need to be
present before a partnership is said to exist:
◦ Carrying on a business
◦ Sharing of rights and responsibilities
◦ A view to profit
◦ Element of risk and reward for each partner.

ACT 3402
Existence of a partnership
Irwan, an owner of Ikhwan Sdn. Bhd. borrowed RM48,000
from Amran due to financial problem of his business. Amran
agrees to lend the money only if Irwan promised to pay him
the amount borrowed within 24 months plus an additional
10% from monthly profit throughout that period. However
Amran will not be responsible for any loss incurred.
Determine whether a partnership exists in the above
situation. Justify your answer.
Answer:
________________________________

ACT 3402
Existence of a partnership
Malico Sdn Bhd (local company) and Hazelwood Mobil Ltd (foreign
company) entered into an agreement to build a new highway from
Terengganu to Kelantan under Malaysian government development
project. During this project Malico Sdn Bhd and Hazelwood Mobil Ltd
created a consortium account to cater for all income and expenses.
Stated in the contract Malico Sdn Bhd and Hazelwood Mobil Ltd will
share the net profit 50:50 and shares all the risk which might occur. In
addition, based on the contract, both companies will perform certain
functions as specified in the agreement with the Government.
State with reasons whether a partnership exists under this situation.
Answer:
________________________________

ACT 3402
ACT 3402 11
Provisional Adjusted Income
a partner is assumed to receive an income from business source.
to calculate the partner’s income, the computation shall start with the
normal procedure as per business income computation.
Private expenses of each partner are not allowed as deduction in the
computation of statutory business income.
The computation shall start with the computation of Provisional
Adjusted Income.

ACT 3402
Provisional Adjusted Income
Net profit ( partnership profit and loss account) XX
Add: Non allowable expenses  
Depreciation XX
General provision for bad debts XX
Donation XX
Add: Partners’ private expenses  
Salary of partners XX
Interest on capital XX
Partners’ insurance XX
Assessment and quit rent (private property) XX
Food XX
Or any private and domestic expenses XX
PROVISIONAL ADJUSTED INCOME/ LOSS XX

ACT 3402
Example 1
Samihah and Syarlini are partners in a bakery business since July 2021,
contributing capital of RM40,000 and RM60,000 each respectively to
the business. The accounting periods ends on 31 December every year.
Following is the profit and loss account for the year ended 31 December
2023.

ACT 3402
Profit and Loss Statement for the year ended 31.12.2021
Gross Profit 143,014
Rental income 3,000
Less:
Salary 65,600
Partners’ Salary 30,000
EPF 1,950
Depreciation 8,000
Donation 3,400
Trade Bad Debt Written Off 1,300
Marketing Expenses 9,200
Loss on sales of fixed assets 4,800
Travelling allowance 6,000
Entertainment Expenses (clients related) 2,000
Interest on partner’s capital 5,000
Total expenses (137,250)
Total net profit 8,764

ACT 3402 15
Example 1
Additional information:
1. Salary included salary to the partners and Puan Nita (disabled employee)
who was employed by the partnership since 1 June 2023. She was paid
RM1100 per month. Samihah and Syarlini received monthly salary of
RM1000 and RM1500 respectively
2. EPF is in respect of employer’s contribution for employees only and the
contribution is less than 19%.
3. The partnership made cash donation of RM3,000 to the one of the
registered organization approved by IRBM.
4. Traveling allowance included RM200 per month given to Samihah and
RM250 per month to Syarlini
5. Rental income of RM3,000 is for the period 1 Jan 2023 to 31 Dec 2023. This
income belongs to a shop lot registered under Syarlini’s name.

Compute the provisional adjusted income.

ACT 3402
Answer 1
Net profit /(loss) 8,764
Add: Non-allowable expenses:
Depreciation 8,000
Donation 3,400
Loss on Fixed Assets Disposal 4,800

Partnership private expenses:

Partner’s salary
Samihah 12,000
Syarlini 18,000
Partner’s travelling allowance:
Samihah 2,400
Syarlini 3,000
Interest 5,000
56,600
Less: Rental income 3,000
Less: Double deduction - handicapped employee’s salary 13,200
(16,200)
PROVISIONAL ADJUSTED INCOME 49,164

ACT 3402
Divisible Income
The basis to apportion the partnership income to individual partners is based on
the profit-sharing ratio (as stipulated in the partnership agreement)
The profit apportionment among partners is based on divisible income.

PROVISIONAL ADJUSTED INCOME/ LOSS XX

Less:  
Partners’ salary (XX)
Interest on capital payable to partners (XX)
Any expenses charged to partnership account (private and domestic) (XX)

DIVISIBLE INCOME XX

ACT 3402
 Example 2
Continued from Example 1, Samihah and Syarlini agreed with the arrangement below.
  Samihah (RM) Syarlini (RM)

Capital Contribution 40,000 60,000

Interest on capital (per annum) 5% 5%

Profit/loss sharing ratio up 1/3 2/3

Salary per month (up to December 2021) RM1000 RM1500

Compute the divisible income.

ACT 3402
Answer 2
PROVISIONAL ADJUSTED INCOME   49,164
Less: Partner’s expenses    
 
Samihah’s salary   12,000 
Syarlini’s salary 18,000 
Travelling allowance 5,400 
Interest on capital  
Samihah 2,000 
Syarlini 3,000
DIVISIBLE INCOME
DIVISIBLE INCOME DISTRIBUTED 8,764

ACT 3402
Adjusted Income
The divisible income will be divided among partners based on their respective
profit sharing ratio.
The partners’ expenses however would be allocated to the respective partner in
accordance with their actual consumption.
The aggregate of divisible income and partner’s private expenses would be the
adjusted income of the partner.

ACT 3402
 Adjusted income
PARTNERS’ INCOME FROM PARTNERSHIP      
Assuming profit sharing ratio of 1:1:2  A  B C 
Divisible income XX XX 2XX
Add: Partnership expenses (according to the      
amount received by each partner)
- Salary of partners XX XX 2XX
- Interest on capital XX XX 2XX
- Partners’ insurance XX    
- Assessment and quit rent (private property)   XX 2XX
- Food XX   2XX
- Or any private and domestic expenses XX XX 2XX
ADJUSTED INCOME (OF PARTNER) XX* XX* 2XX*
     
  Total of this * = Provisional adjusted
income/loss

ACT 3402
Example 3
The total divisible income as per computed in Example 2 is RM????. Using the
information below:
  Samihah Syarlini

Interest on capital (per annum) 5% 5%

Profit/loss sharing ratio 1/3 2/3

Salary per month (up to March 2020) RM1000 RM1500

Compute the Adjusted Income of Samihah and Syarlini.

ACT 3402
Answer 3
 Divisible income 8,764
Samihah (1/3) Syarlini (2/3)
Divisible income (1:2) 2,921 5,843

Salary 12,000 18,000

Travelling allowance 2,400 3,000
Interest on capital 2,000 3,000
Adjusted business income 19,321 29,843
 

ACT 3402
Capital Allowances
In a partnership, capital allowance (CA) is attributable to the individual partners
instead of the partnership.
The CA is allocated with reference to the profit sharing ratio of the partners at
the end of each basis period.
The partnership is treated as a continuing business; even though there are changes
in the partners of a partnership (admission or retirement/death of partners)
provided at least one partner of the old partnership continues to be partner in the
new partnership
- no revision of basis period
- Partner’s adjusted income calculated in the normal way
- will not affect the claim of CA.

ACT 3402
Capital Allowances
It is common for partnership to incurr qualifying
expenditute in purchasing asset which is solely used by only
one partner for individual purpose (eg: car).

In this situation the whole of the capital allowance will then

be given to that partner only.

ACT 3402
Statutory Business Income
ADJUSTED INCOME (OF PARTNER) XX XX 2XX
Add:      
Balancing charge XX XX 2XX
Less:
Capital Allowance (XX) (XX) (2XX)
Balancing allowance (XX) (XX) (2XX)
STATUTORY BUSINESS INCOME XX XX 2XX
From here we can proceed with the computation of each partner’s net income
tax payable. The format is similar with that of an individual with business source
of income.

ACT 3402
 Example 4
Refer to question in Example 1
The depreciation of RM8,000 in Example 1 is on the following assets:
Assets Purchase date Cost (RM) Annual Allowance
Motor van (commercial) YA 2021 80,000 20%
Equipment YA 2022 25,500 10%
Computer YA 2023 6,700 20%

ACT 3402
Example 4
For the same year of assessment, balancing charge and balancing
allowance from the disposal of partnership’s assets are RM1,500 and
RM800 respectively.
Balancing allowance related to disposal of computer purchased by
Samihah for her business usage (the computer was disposed of because
it was damaged. The value was NIL when it was disposed)
Samihah did not receive any other income for that year.
However Syarlini received rental income of RM3,600 for that year
(inclusive of the RM3,000 appeared in the partnership account)
Both are single and do not claim any other reliefs. Compute statutory
income for both Samihah and Syarlini.

ACT 3402
Answer 4
Assets % allowance Total Allowance allocation
claim allowance (RM)
claim
(RM)

      Samihah Syarlini
(1/3) (2/3)
Motor van 20% X80,000 16000 5333 10667
(commercial)  
Equipment 10% X25,500 2,550 850 1700
Computer 20% X6,700 1,340 447 893
Total 6630 13,260

ACT 3402
Answer
Balancing charge computation

  Samihah Syarlini

1500 500 1000

ACT 3402
Answer
Balancing allowance computation

  Samihah Syarlini

800 267 533

ACT 3402
Answer
  Samihah Syarlini
Adjusted business income 19,321 29,843
Add: Balancing charge (RM1,500) 500 1,000
Less: Capital allowances ( refer to the workings 6,630 13,260
above)
Less: Balancing allowance 267 533
Statutory Business Income 12,924 17,050
Add: income from other sources:
Rental nil 3,600
Aggregate income
Less: Approved Donation 1,000 2,000
Total income 11,924 18,650
Less: Personal relief 9,000 9,000
Chargeable income 2924 9,650

ACT 3402
Total income
A partnership can received income from non-business source.
The non-business income will be computed separately from statutory
business income.
The non-business income will then be allocated to each partner based
on profit sharing ratio.
However if the non-business income was received by an individual
partner, the income will then will be computed only for that partner in
arriving at his aggregate income.

ACT 3402
Approved donation
It will be allocated to each partner based on profit/loss sharing ratio.
Each partner will deduct the approved donation allocated against their
respective aggregate income.

ACT 3402
CHANGES IN PARTNERSHIP
Any changes would lead to a cessation of the old partnership and
commencement of a new partnership.
New partnership is said to exist if:
◦ The old partnership ceased business on the last day of a 12-month period.
◦ The new partnership took over the business of the old partnership and also
prepared its accounts for a 12-month period.

ACT 3402
Changes in the partnership
A partnership business is treated as continuing (unbroken) even though the
change takes place half way through the accounting year.
For instance:
◦ A change or changes in the partners of a partnership
◦ At least a person who is a partner in the old partnership and that person
continues to be a partner in the old partnership.

ACT 3402
Example 5
Changes in profit sharing ratio
Harlini and Juliana are partners in a partnership business since January
2021. They contributed capital amounted to RM100,000 and
RM300,000 respectively. The profit sharing ratio is based on capital
contribution. The partnership makes up its account to 31 Dec annually.
However due to personal financial problem, Juliana decided to
withdrew RM200,000 of her contribution in the partnership business on
1 July 2023. The profit sharing ratio is now based on new capital
contribution which is 1:1. For YA 2023 the divisible of this partnership is
RM120,000. Calculate the divisible income allocated to Harlini and
Juliana.

ACT 3402
 Answer 5
Period Ratio Divisible Harlini Juliana
Income
1.1.2023 – 30.6.2023 (6 months) 1:3 60,000 15,000 45,000

1.7.2023 – 31.12.2023 (6 months) 1:1 60,000 30,000 30,000

Total   120,000 45,000 75,000

ACT 3402
Example 6
Withdrawal of partner
Rizal, Khairul and Azman are close friends and had set up a partnership
business with the capital contribution of RM100,000, RM200,000 and
RM150,000 respectively since January 2020. The partnership prepares
its account to 31 December annually. They agree that the profit sharing
ratio is based on the ratio of 2:2:1. On 31 March 2023, Azman decided
to retire from the partnership business (all the capital contributed was
withdrawn) leaving Rizal and Khairul to continue with the partnership
business. The partnership’s business accounting year end on 31
December is maintained. The new profit sharing ratio is based on
capital contribution. For YA 2023, the divisible income of this
partnership is RM480,000. Calculate the divisible income allocated to
each partner.

ACT 3402
 Answer 6
Period Ratio Divisible Income Rizal Khairul Azman
1.1.2023 – 31.3.2023 (3 months) 2:2:1 120,000 48,000 48,000 24,000

1.4.2023 – 31.12.2023 (9 months) 1:2 360,000 120,000 240,000 nil

Total   480,000 168,000 288,000 24,000

ACT 3402
 Example 7
Admission of a new partner
Mizan and Rajni were in a partnership business since 1 January 2020.
The partnership makes up their account up to 31 December every year.
On 1 April 2023, Adni joined the partnership. The divisible loss of the
partnership for the year ended 31 December 2023 was RM140,000.
 The profit sharing arrangement was as follows:
    Salary Share of
Divisible Income /Loss
1/1/2023 – 31/3/2023 Mizan 2,000 2/5
  Rajni 8,000 3/5
1/4/2023 – 31/12/2023 Mizan 2,000 1/5
  Rajni 12,000 2/5
  Adni 10,000 2/5

ACT 3402
 Answer 7
Period Ratio Divisible Mizan Rajni Adni
Loss
1.1.2023 – 31.3.2023 2:3 (35,000) (14,000) (21,000)
(3 months)
1.4.2023 – 31.12.2023 1:2:2 (105,000) (21,000) (42,000) (42,000)
(9 months)
Total   (140,000) (35,000) (63,000) (42,000)

ACT 3402
Answer 7
  Mizan Rajni Adni
Divisible loss (35,000) (63,000) (42,000)
Salary 4,000 20,000 10,000
Adjusted business income/loss (31,000) (43,000) (32,000)

ACT 3402
Tax liability
Partnership is not a chargeable person under the Act
The responsibility for the filing lies on the managing partner.
◦ Person responsible to manage and make policy decision for the partnership
during a particular YA
◦ He/she is the principal partner appointed by all partners.

ACT 3402