BCOM: ACCOUNTING

MODULE: TAXATION 3A
 TAXATION 3A

Partnership
 TAXATION 3A
Unit outcomes

- Demonstrate an understanding of the tax identity of a partnership

- Calculate the taxable income of a partnership and also that of the

partners

- Determine the correct order of deductions in a partnership

 TAXATION 3A
Introduction
 In this study unit we study the taxation of partnerships as well as the steps involved
in calculating a partner’s tax liability.

 Although a partnership is not a tax entity as such, the individual partners will be
taxed on their share of partnership profits.

 Therefore, it is important to understand clearly the mechanisms involved in

determining the taxable profit derived from the partnership and for each partner.
 TAXATION 3A
Tax identity of a partnership
 The definition of ‘person’ in the Income Tax Act does not include partnership.
Therefore, a partnership does not constitute a taxable entity.

 However, the partners of a partnership are liable for tax in their own personal
capacity. Profits and losses of a partnership are normally shared according to profit
sharing ratios agreed upon by the partners.

 In terms of section 20A, a partner may set off his/her share of the loss against his
other income earned during the year or loss may be carried forward the following
year assessment.

 Although partnerships are not recognised as an entity for income tax purposes
however, they are required to register as vendors for VAT purposes.
 TAXATION 3A
Tax identity of a partnership
Structure for the basic calculation of the taxable income of a partner.

Since it is time consuming to allocate each expense incurred and

income earned in a partnership, the taxable income of a partnership
is calculated first and then allocated to each partner according to the
partners’ profit-sharing ratios.

Thereafter, each partner’s share of the taxable income, as well as

other income that the partner might have earned from other sources, is
taxed individually.
 TAXATION 3A
Turnover tax
If a turnover of a taxpayer (including partners) does not exceed R1
million, the taxpayer may elect to be taxed according turnover tax.
However, a partner does not qualify for turnover tax if:

• any partner is not a natural person;

• one or more partners involved in more than one partnership; or
• the qualifying turnover of the partnership exceeds R1 million during
the year of assessment.
 TAXATION 3A
Distribution to Partners
Some of the expenses of the partnership include salaries to partners and interest on
current account and capital balances of partners. When calculating the profit or loss of
the partnership, these expense are deducted from partnership income.

When calculating tax payable by individual partners, the salaries and interest earned
from the partnership are taxed together with profit of each partner in the hands of
respective partners.

It is worth noting that, in essence, the amounts paid in the form of salaries and interest
to partners are part of their profit share (since a partner cannot be employment by
himself).
 TAXATION 3A – PARTNERSHIPS
Employment Relationship: exclusions
The following provisions of the act which specifically apply to employees, will not apply to
partners in a Partnership:

- Par (d) of the definition of gross income (termination gratuities) because this paragraph

refers to an office holder, employee or employer.

- Salary payable to a partner is not subject to employees’ tax..

- The provisions of s 8(1) that determine the taxable portion of travel allowance, subsistence

allowance & an allowance granted to the holder of a public office.

- S 23(m) that limits the deductions that relate to employment or office held by a person; and

- S 12M that provides that amounts that are incurred by a taxpayer as contributions to a medical

scheme in respect of a former employee or dependent of a former employee may be deducted

from the taxpayer’s income.

 TAXATION 3A – PARTNERSHIPS
1. Specific Deductions & Allowances :Annuities (S 11 (m))
Annuities paid to former employees or partners or their dependents ( S 11(m));

- A specific deduction is provided to former employees, former partners and dependents

of such former employees or partners

- In the case of former employees, the deduction is allowed if the former employee has
retired on grounds of old age, ill health or infirmity.
- In case of former partners to the partnerships, the person must have been a partner for
at
least 5 years and should have retired from the partnerships on the grounds of old age,
ill
health or infirmity.
 TAXATION 3A – PARTNERSHIPS
2. Specific Deductions & Allowances :Partnership Contributions to
fund (S 11 (l))
In terms of section 11(l), contributions made by the employer to the pension fund, provided fund or
retirement annuity fund on behalf of his/her employees are allowed as a deduction.

Hence, further purposes of section 11(l), a partner is deemed to be an employee of the partnership.
Therefore, a partnership can claim the above-mentioned contributions as a deduction when calculating
its taxable income.
 TAXATION 3A – PARTNERSHIPS
3 .Specific Deductions & Allowances: Partners Contributions to fund
(S11 F)
A natural person is allowed to deduct the contributions made to a pension fund, provident fund or RAF,
subject to certain
limitations.
For the purposes of this deduction, a partner in a partnership is deemed to be an employee of the
partnership and the partnership is deemed to an employee. This means a partner may also deduct
contributions to a pension fund, provident fund or RAF.
The total amount deducted may not exceed the lesser of:
- R350 000, or
- 27.5% of the higher of the person’s
Remuneration, or
Taxable income as defined including any taxable capital gain
The person’s taxable income before allowing this deduction, a deduction for foreign taxes, S 18A donations
 TAXATION 3A – PARTNERSHIPS
4. Specific Deductions & Allowances: Key Person Insurance
Contributions (s 11 (w))

Where a partnership takes out a key person insurance policy on the life of an employee, the premiums
paid will qualify for a deduction under s11 (w).

The partners of a partnership are not employees or directors of the partnership. This means that a

partnership will not be entitled to deduct the premiums paid under s 11 (w). These premiums are also not

deductible in terms of s11(a), since it is expenditure of capital nature. When the policy matures and the

remaining partners receive the proceeds, the amounts are not included in the partners’ gross income, since

the receipt are capital in nature.

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5. Specific Deductions & Allowances: Capital Allowances

The property of the partnership does not belong to a partnership since the partnership is not a
legal entity, & hence it can’t own assets.
Any capital allowances granted on assets must be apportioned amongst partners according to
the profit/losses sharing ratio.
The recoupments are also included in the same profit/losses sharing ratio.
If the asset in question is not jointly owned by the partners (i.e. owned by one
partner), then the allowances (recoupments) will be claimed (recovered) by that
partner only.
 TAXATION 3A – PARTNERSHIPS

6. Specific Deductions & Allowances: Motor Vehicle expenses

The provisions of the act relating to travel allowances do not apply to partners since partners are not
employees of a partnership.
Partners may claim motor vehicles expenses based on actual costs incurred in respect of actual distance
travelled for business purposes.

- A partner may therefore not use the deemed cost tables in calculating the amount expended in respect of

travelling for business purposes.

- A travel allowance is not a fringe benefit.
 TAXATION 3A – PARTNERSHIPS

Fringe Benefits (par 2A Second schedule)

A partner is deemed to be an employee of a partnership for fringe benefits purposes (par 2A of the
second schedule).
The partners will therefore be subjected to income tax on fringe benefits, similar to fringe benefits
provided to an employee.
 TAXATION 3A – PARTNERSHIPS

7. Specific Deductions & Allowances: Bad Debts (s 11 (i))

When a debt due to the partnership becomes bad during the year of assessment, the deduction is
apportioned among the partners according to their profit/loss sharing ratio.
A deduction is allowed provided that the deduction was included in the partner’s gross income in the current
or previous years of assessment.

On admitting a new partner to the partnership, the new partner may acquire an interest on debt that is
owed to the partnership. Should the debt become bad, the new partner will claim a capital loss as the
amount was not previously included in gross income.
 TAXATION 3A – PARTNERSHIPS
Order of deductions
It is important to note that the deductions must accounted for in the particular order, i.e., all
deductions in respect of section 11(a) and allowances must be deducted first.

Thereafter, deductions in respect of contributions to retirement funds are deducted second.

The last deduction is respect of qualifying donations, which is limited to 10% of the taxable
income after all deductions but before the donations deductions.
 TAXATION 3A – PARTNERSHIPS
Summary
When the tax calculation of a partner is performed, it is very important to firstly ensure that the
partnership profit available for distribution has been calculated taking the relevant tax principles
and special rules for partnerships into account.

The expenses that can be claimed in the partner’s hands must be excluded from the
partnership’s calculation as well as any interest received by the partnership in order for the
partner (who is a natural person) to enjoy the interest exemption.