1. PARTNERSHIP INCOME By: Associate Professor Dr. GholamReza Zandi zandi@segi.edu.my

2. Definition of a Partnership Key features o It is an association of any kind between parties who have agreed to combine any of their rights, power, property, labour or skill for the purpose of carrying on a business and sharing the profits therefrom. A partnership excludes a Hindu joint family although a such family may be a partner in a partnership. o A partnership may consists of two or more persons but restricted to a maximum of 20 persons. o There need not be a written agreement for the existence of a partnership – it is purely a question of fact. o A partnership is not a person. Thus income tax is levied not on the partnership but instead on the individual partners on their share of the business income. 2

3. Assessment of a Partnership o The taxable profit of the partnership is determined as if the partnership was a separate entity from its partners. o The profit is apportioned among the partners according to their profit sharing ratios. o Each partner is then assessed individually on their respective share of the profit from the partnership o The partner pays tax according to his aggregate income (which includes his share of the partnership income). 3

4. Partnership Computation o Compute partnership’s net profits. o Deduct any non-taxable items such as exempt income and capital profits. o Add back items like partners’ salaries, partnership private expenses (to arrive at the Partner’s Provisional Adjusted Income) o Calculate the partners’ entitlement to the partnership divisible income based on their respective share of the profits/losses of the partnership business. o Compute partnership’s capital allowances and determine entitlement of CA for each partner. 4

5. Taxable Income of a Partner o Compute the partner’s divisible income. Divisible income of the partnership is the provisional adjusted income less the amount of partner’s entitlement to salaries, private expenses (i.e. insurance premiums) and interest on capital. o Each partner is taxed on his share of the divisible profit, remuneration, expense payments (like partner’s insurance premiums paid by the partnership) and interest on capital contribution and any income from other sources [sec 55(5)]. 5

6. Adjusted Income of Partner o Partner’s Salary Add: i. Interest on Capital ii. Domestic Expenses iii. Share of divisible income or divisible loss = Adjusted Income of Partner 6

7. Capital Allowances o Capital allowances (CA) are given for qualifying expenditure. o CA allocated to partners based upon their profit sharing ratio. o CA allocated only to partners in existence at end of relevant YA. 7

8. Partnership Loss o Divisible loss will be shared among partners in accordance with profit sharing ratio. o Current year business loss can be set-off against aggregate income. o Unabsorbed losses can be carried forward indefinitely to be set off against future statutory income from business. 8

9. Continuing Partnership o Partnership business is treated as continuing if there is at least a person who was a partner in the old partnership and the new partnership’s year end is the same as the old partnership. o Continuing partner has one continuing source of business income. 9

10. Partnership and RPGT o Gain from disposal of real property will be subject to Real Property Gains Tax (RPGT). o Partnership is a chargeable person for RPGT purposes. 10

11. Filing a Return o A partnership must file a return of it’s income in Form P annually whether or not there is a profit (sec 77). o Form P must be filed on or before 30 th April of the following year. o The precedent partner is responsible to file the partnership return. 11

12. Limited Liability Partnership o Limited Liability Partnership (LLP) is a hybrid of a corporation and a partnership. o Registered under the Limited Liability Partnership Act 2012 which was gazetted in February 2012. o Individuals or body corporate can be partners of LLP. o The definition of ‘person’ in the Income Tax Act, 1967 now includes an LLP. 12

13. The End