1

TOPIC 8

PARTNERSHIPS
 TOPIC OUTLINE: 2

10.1 Definition of Partnership

10.2 Types of Partners
10.3 Basis Period
10.4 Computation of Provisional Adjusted Income &
Divisible Income
10.5 Computation of Adjusted Income & Statutory
Income
10.6 Changes in Partnership
 OBJECTIVES OF STUDY: 3

To define what is partnership and to

identify chargeable person for income
tax purpose
To assess of partnership business income
through determine provisional adjusted
income, divisible income and statutory
income
 4
Definition

Section 2, ITA 1967

Partnership an association of any kind between
parties who have agreed to combine any of their
rights, powers, property, labor or skill, for the
purpose of carrying on a business and sharing the
profits therefrom.

Sec. 3, Partnership Act 1961:

The relation which subsists between persons,
carrying on business in common with a view of
profit.
 5
Definition cont.

Partnership does not only involve

individual which sharing loss and profit
from carrying on business but can be also
consist of joint venture between two
companies or between individual and
company.
 6

Chargeable person:
Partnership is not a chargeable person for income
tax purpose. Income tax is levied on the individual
partners on their share of income.

The source of income:

As partnership is the relationship comprises 2 or
more persons (restricted to a maximum of 20
persons) carrying on business in common with a
view of profit, the source is a business income.
 7
Existence of Partnership

Section 2 ITA 1967,

The following factors should present for a
p/ship to exist:

1. Carrying on business
2. Sharing of rights and responsibilities
3. A view to profit
Example 8

Alish and Alisha are jointly engaged in the business of

selling burgers. Each of them contributed RM10,000 to
start up a business. The business was not registered
with the Companies Commission of Msia (CCM)
[Suruhanjaya Syarikat Malaysia (SSM)]. Whilst there
is no written agreement between them, it has been
verbally agreed that they will equally share the
profits/losses from the business. A bank account is
maintained in their joint names and all cheques issued
have to be signed by both of them.
Does the partnership exists?
 9
A partnership exists in this case on the
grounds that:

There is an agreed profit sharing arrangement

between them.
There was a contribution of capital by both of
them to start off the business.
A joint bank account is maintain with both of
them as cheque signatories.
 10
Basis Period

A basis period for a partnership is same as basis period for

business (follows accounting year). However, for income
tax purposes the partnership itself not taxable but only on
every partner. Thus, income from the partnership will be
distributed for each partner.

Where a new partner enter in a partnership, a basis period

will be divided into two: (1) old partnership (before new
partner enter in the partnership) and (2) New partnership
(after new partner enter in the partnership). Therefore,
partnerships income also need to be distributed into two
period (old and new period of partnership).
 11
Return form by Partnership

The return must declare:

The divisible income or divisible loss
[sec.86(2)(a)]
All information to determine the statutory
income from all sources.[(sec.86(2)(b)]
Other information as required .[(sec.86(2)(c)]
 12
Provisional Adjusted Income-
Sec.55(2)

A partnership is postulated as a sole proprietorship for

purposes of computing partnership adjusted income,
known as provisional adjusted income[Sec.55(2)]. From
the provisional income the following are deducted to
arrive at the divisible income:
Remuneration of partners;
Interest to any partner upon capital money paid or
advanced;
Private and domestic expenses, if any, of a partner;
Reimbursement of private or domestic expenses
incurred by that partner.
Example 13

Price Associates is a partnership between AB and AC.

They share profit and loss equally. The profit and loss
account (in 000) for the year ended 31 December 2014
was as follows:

Trading income 1,730

Less:
Revenue expense 700
Depreciation 60
Entertainment to client 40
General provision for doubtful debt 20
 14

Partnership expense
Salary:
AB 2
AC 2 4
Interest on capital:
AB 1.5
AC 1.5 3
Food consumed by AB 3 (830)
Net profit 900
The computation of Provisional Adjusted 15
Income would be as follows:

Net profit per p/ship P&L a/c 900

Add: Non-allowable expenses
Depreciation 60
Entertainment to client (50% x 40) 20
General prov. for bad debt 20
Add: Partnership private expense
Salary 4
Interest on capital 3
Food 3 110
Provisional adjusted income 1,010
 Divisible income
The basis to allocate the taxable income to individual16
partners is based on the ratio as stipulated in a
partnership agreement on the divisible income.

Divisible income is arrived as follows:

Provisional adjusted income 1,010
Section 55(3)
Less: (a) Remuneration to partners (salary)
AB 2
AC 2 (4)
(b) Interest on capital/advances to partner
AB 1.5
AC 1.5 (3)
(c) Any expenses charged to p/ship
Private & domestic: Food AB (3)
Divisible income 1,000
 XTRA

Adjusted Income of Partner 17

Divisible income 1,000

The ratio is shared equally among AB & AC:
AB AC Total
Divisible income 500 500 1,000
Add: P/ship expenses (actual)
Salary 2 2 4
Interest 1.5 1.5 3
Private & domestic 3 - 3
Adjusted income 506.5 503.5 1,010
 18
Provisional Adjusted Loss

Computed along the same line as

provisional adjusted income. Where a
divisible loss arises, the loss is allocated to
individual partners according to the
relevant profit sharing ratio at the material
time.
 Change of Profit Sharing Ratio 19

Divisible income is presumed accrued evenly over the basis period. If there is a
change of profit sharing ratio during the basis period, an apportion on time basis
based on the old and new ratio will be done.
Example:
A and B are in p/ship. The divisible income for the year ended 1/1/2014
31/12/2014 (in 000) is RM120.
The profit sharing ratio between A &B for:
1/1/14 30/11/14 1:1
1/12/14 31/12/14 1:4
The divisible income (in 000) allocated to A and B:
A B
1/1/14 30/11/14 : (11/12 x 120)/2 55 55
1/12/14 31/12/14: (1/5 x 10) & (4/5 x 10) 2 8
 20
Changes in Partnership

When a partner withdrew from the

partnership or a new person is admitted as
partner into the existing partnership, this
would resulted in a cessation of old
partnership and commencement of new
p/ship.
 Continuing Partnership 21
(no change of basis period)

Where there is a change in p/ship and at least a

person who was a partner in the old p/ship
continues to be a partner in the new p/ship, the
p/ship is treated as continuing even though the
change takes place half way through the
accounting year. There is no revision of basis
periods and that partners share of adjusted
income is calculated in the normal way. This is
applicable only where the accounting date for the
new p/ship and the old p/ship are the same; and
the business is substantially the same.
 22
Example

J, K and L are in equal partnership and prepare their

accounts on 31 December every year. On 31 August 2013, J
retired whilst K and L carried on the partnership as equal
partners. On 1 December 2013, M was admitted into
partnership as an equal partner. The partnership continues
to prepare its account annually to 31 December. Compute the
adjusted income from the partnership for each partner for
the relevant years of assessment assuming the following:
Year ended Adj. Income
31 December 2012 RM60,000
31 December 2013 RM36,000
31 December 2014 RM48,000
 23
Suggested Solution

There are 2 cessations in 2013, i.e. on 31 August 2013 and 30 November 2013.
K and L were continuing partners. No break in their source of income.
J K L M
YA 2012 (60K)
1/1/12-31/12/12 20 20 20

YA 2013 (36K)
1/1/13-31/8/13 8 8 8
1/9/13-30/11/13 4.5 4.5
1/12/13-31/12/13 1 1 1

YA 2014 (48K)
1/1/14-31/12/14 16 16 16
 Continuing p/ship 24
(changes in basis period)

W.e.f YA 2004, the basis period for a YA will

be restricted to calendar year (31
December).
Thus, the issue of change in accounting
period does not arise.
 Admitting a New Partner 25

In the case of a new partner admitted into an existing

partnership which continues to prepare its accounts to its
normal year end, the DG will direct the basis period for the new
partner for the first YA from the date of entering into
partnership to the next annual accounting date.
Example:
If C is admitted on 1 October 2013 as a partner in the firm of AB
& Co, which continues to prepare its accounts to 31 December,
the basis period for C would be as follows:
YA Basis period
2013 1/10/2013 31/12/2013
2014 1/01/2014 31/12/2014
 26
Sole Proprietor Admitting a Partner

Where a sole proprietor admitting in a partner into

the business and forms p/ship, the existing sole
proprietor business and the p/ship business will be
treated as one continuing business if the p/ship
prepares accounts to the same year end as the sole
proprietor.
 27
Capital Allowances

Although the p/ship is a business source, capital

allowance claim is attributable to the individual
partners instead of the p/ship.
The qualifying assets will be entitled to capital
allowances according to the Income Tax (Qualifying
Plant Annual Allowances) Rules 2000 at the end of
each YA.
The capital allowances is allocated with reference
to the profit sharing ratio of the partner at the end
of each basis period.
 28
Capital Allowances

Admission or retirement of partners will not affect

the claim of capital allowances as the p/ship is
treated as continuing if at least one partner of the
old p/ship continues to be partner in the new
p/ship.
Since capital allowance is computed at year end, a
new partner admitted would enjoy a full year
capital allowance while a retired partner would not
get any capital allowance for the year of
withdrawal.
 29
Partners Statutory Income

Adjusted income xx
+ Balancing charge xx
xx
- Capital allowance
(inclusive unabsorbed and
balancing allowance) (xx)
Statutory income xx
 30
Partnership Losses

When p/ship suffers losses, the provisional adjusted loss

will result in divisible loss which will be shared by
individual partners according to their profit sharing
ratio per p/ship deed.
As business loss can be set off against all other income in
the current year, the individual partner may be able to
lower his tax liability if he also derives employment
income and investment income. Any unabsorbed losses
can be carried forward indefinitely to be set off against
future business income (statutory income).
 31

NEXT TOPIC:
INCOME TAX
ADMINISTRATION (PBL)
Please be ready with your
presentation