Partnership Tax

A partnership is made up of two or more individuals working together as a group. This kind of entity allows for equal or nominated distributions of taxable profits and deductions.

For example a partnership could be two business associates working together, each puts up 50/50 equity into getting the business started and each works equally in the business to ensure its completes its requirements and remains profitable.

Another example may be 5 associates collaborating together for a specific business project or purpose – each holding 20% equity and stake in the partnership.

The partnership has its own ABN and GST / Employer obligations (it can hire employees within the business) but this kind of entity cannot retain profit and although a tax return must be lodged, the partnership itself will not hold any income tax liabilities.

This structure is simple to set up (very much like a sole trader) but should always be accompanied by a Partnership Agreement so that there is a very clear understanding of the roles and responsibilities of each partner, the financial and physical contribution each partner will make and the expected percentage split of each partner once profits are determined. The Partnership Agreement should also clearly step out an exit strategy for one or more of the partners, should the business relationship fail to thrive.

A partnership structure is relatively low cost to set up and maintain, however the Partnership Agreement can be a costly legal exercise – especially if not completed correctly. This is something that we can help with here at Vault.

The main drawback with a partnership structure is the limited options available with regards to tax planning and tax strategies. As the partnership itself cannot hold profits, or pay tax in its own right, all profits must be distributed to each of the partners (individuals) at the end of the financial year. These profits are declared as taxable income in the individuals tax returns and may increase your personal tax liability – we can assist with this with our comprehensive tax planning program.

Another issue with a partnership structure is the event of liability, all partners would be equally at risk should something happen to the business and the assets & liabilities that the partnership holds. If you are one of several partners in a partnership, your are potentially putting yourself personally at risk for a colleagues errors or misjudgements.

This structure whilst cost effective to set up and manage may not be the best structure for your enterprise if you have complex needs or other personal wealth considerations.

A partnership structure is, however, ideal for life partners to work together to manage investments, assets or other small or start up business enterprises. A partnership may also be an option to consider if you are looking to purchase your first investment property with a friend, associate or business partner.

Speak to us today to see if we can help you set up your partnership or discuss alternative options specific to your needs and business activities.