Private ruling: Distribution of partnership payments 'unpaid wages'
Date of advice: 16 December 2019
Published: February 2020
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX

Ruling: Q1: Can the unpaid prior years 'partner's salary' be paid in the financial year the partnership makes a profit? | A1: Yes. Subsection 92(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a partner's assessable income includes their individual interest in the net income of the partnership. Although, the work was conducted by the partners in previous financial years, the partnership has run at a loss for the entirety of its existence. The unpaid wages from these years are assessable to each partner in the year the profit is distributed. Therefore, the Commissioner is satisfied the verbal agreement between the partners on the commencement of the partnership, is satisfactory to distribute the profits in the current financial year.

Relevant facts and circumstances: You and your spouse created a partnership. All assets of the partnership are jointly owned and the financial losses are equally allocated between the partners. You and your spouse created the partnership, the partner 1 & partner 2 partnership, many years ago. The partnership owns and operates a farm. All assets of the partnership are jointly owned by the partners and the financial losses are equally allocated between the partners. When the partnership commenced, it was verbally agreed between the partners, that partner 1 would work off-farm, while partner 2 would work off-farm but not as often. Under the verbal agreement, partner 2 would be entitled to a partner's salary. This was to compensate partner 2 for the extra work being performed. Due to the inherit nature of the farming, a regular drawing was not taken by partner 2 but amounts owing were accumulated. It is therefore considered, that both the rate and the number of days per week have remained relevant, during the entire period and therefore no change to the original verbal agreement has been required. During this period the partnership has incurred losses each financial year. During the current financial year it was projected that a profit would be made. As per the verbal agreement at the commencement of the partnership, partner 2 will be entitled to be repaid the outstanding accumulated unpaid partners salary. If current years farming profits were insufficient, any unpaid salary would continue to be accumulated to be repaid from future farming profits.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 92 | Income Tax Assessment Act 1997 section 6-5