Private ruling: Partnership distribution of profits
Published: February 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: ! July 2012

Ruling: Q1: Can you continue to distribute partnership business profits equally for tax purposes? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936, Section 92

Reasons for decision: Detailed Reasoning - General law partnership: You have stated that you have carried on a partnership business for almost 10 years and are registered as a business with the state government. It is assumed that you are carrying on a business as partners and would be considered that a partnership exists at general law. Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) sets out the factors in deciding whether persons are carrying on business as partners in a given year of income. Intention · the mutual assent and intention of the parties Conduct (a) joint ownership of business assets (b) registration of business name (c) joint business account and the power to operate it (d) extent to which parties are involved in the conduct of the business (e) extent of capital contributions (f) entitlements to share of net profits (g) business records (h) trading in joint names and public recognition of the partnership | Detailed Reasoning - Partner's interest in the net partnership income: A partner's interest in the net partnership income or partnership loss is usually determined in accordance with the partnership agreement. However, if that is completely out of proportion to the partners' true interests in the partnership, an assessment will be made on the merits of the case (IT2316). This ruling reported on a case where there were jointly owned rental properties (50/50) and the partnership agreement was distributing income in the proportions of - 96% husband and, 4% wife, which was based on the amount standing to credit in the capital account. The Board held that a partnership existed at general law and that the distribution of rental losses must be regulated by the terms of the written partnership agreement. It was considered that the finding of the board was open to it on the facts. The decision is seen as being consistent with the previously stated policy that net income of a partnership should be distributed according to the basic agreement between the partners for the sharing of profits and losses (IT 2218 - paragraph 6). You have been involved in a partnership business for some time and profits have been distributed equally. It was not necessarily based on the hours worked by each partner, as you have stated that you were contributing more income to the partnership to date, but your spouse did contribute in other ways. There are no set rules for what is in a partnership agreement. Partners' interests as specified in the partnership agreement may be varied on agreement between the partners and this would be expected to be done prior to the start of the year. It would only be where the sole or dominant purpose of the variation is to obtain a tax benefit that a variation may be caught by the general anti-avoidance provisions. You can continue to distribute the profits in the same manner in the future if they are in line with your partnership agreement.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You have been in a partnership business with your spouse. | The partnership is registered with the state government as a business. | At the end of each financial year the business profits have been split equally for tax purposes. | You have turned 60 and plan to retire and limit your work in the partnership to10 hours per week. Your spouse will work for approximately 25 hours per week in the partnership business. | In the past you were working longer hours than your spouse, but they were contributing in other ways.