2.0 INTRODUCTION

According to irs.gov, a partnership is the relationship existing between two or more persons who join to carry on a trade or business. On the other word, partnership is an activity which involves two or more individuals who agree to operate business by sharing profit and loss incurred by the business. Each of the partners will have a responsibility on the profit and loss based on their profit sharing ratio. In Malaysia, partnership is under S 2 comprises S 4 (a) that is business income. Hence, each partner is required to pay for their income tax even though they are practising partnership.

2.1 LAW GOVERNING THE TAXATION OF THE PARTNERSHIP

According Choong (2009), partnership can define as an association of any kind between parties who are agreed to combine any of their rights, powers, property, labor of skill, for the purpose carrying on a business.

Partnership also can be define as the people who are agreed to make relationship to join in business together which comprise two or more persons (maximum of 20 peoples) and sharing profit and loss.

i) Types of conventional partnership and differentiated

Full partner

Known as equity partner where a partner shares the profit and losses and liable to all partnership debts and responsible towards management of business carry on.

Limited partner

A person, at least one who are full member of conventional partnership.

Salaried partner

Is the generally person (employees), who are not ready for the benefits and liabilities as a full partnership.

Sleeping partner

Having unlimited liability for the debts but must pay tax as a limited partners.

Corporate partner

Partners in limited company that pays corporation tax on share of profits that compute using tax rules.

ii) How partnerships are taxed

Based on s4 (a) income, the tax of partnership is not existed simply because it is not a chargeable person to pay income tax but it is a chargeable person of Real Property Gains Tax (RPGT) where the gain occur from disposal of real property, and the profits is not a joint liability of the partnership.

The existence of a partnership can also construct without any written document but, formally it constructs with the agreement to avoid future dispute, and not satisfied partners among each other's towards sharing profits and loss.

Each partner is taxed by individually where must fill up the form B in respective return on their share of profits and liable for the tax and national insurance on that share. Those form must fill up completely as soon as possible so easier to submit on 31st October after the end of tax year.

In provisional adjusted income, there are two things we must to know such:

  • Deductable expenses (e.g. Entertainment to client where depending on company)
  • Non-deductable expenses (e.g. Depreciation)

From the provisional adjusted income, the partnership can able to prepare a divisible of the income to individual partners based on the agreement where is sharing profit ratio.

The taxation of partnership can be complex and advice from the professional person is very needed to help partner can carrying on business without any problems and high risk to be taken.

2.2 COMPUTATION OF TOTAL INCOME OF EACH PARTNER

Income Tax Computation

NS Educational Partnership

YA 2006

RM

RM

Net profit per account

125 700

Add: Non-allowable expenses

Private use of car by Siow (12 000 x 20%)

2 400

Donation

19 000

Depreciation

24 000

Interest on capital

10 800

Partners' salaries

150 000

Trade exhibition

(8 700)

197 500

Provisional adjusted income

323 200

Less: Partners' salaries

150 000

Interest on capital

10 800

Private use of car

2 400

(163 200)

Divisible income

160 000

Computation of Each Partner Income

1.1.06 - 31.3.06 (3 months)

Ng

Siow

Total

Profit sharing ratio

50 %

50 %

100 %

Private Expenses

-

600

600

Salary

22 500

15 000

37 500

Interest on capital

1 500

1 200

2 700

Divisible income

20 000

20 000

40 000

1.4.06 - 31.12.06 (9 months)

Profit sharing ratio

60 %

40 %

100 %

Private expenses

-

1 800

1 800

Salary

67 500

45 000

112 500

Interest on capital

4 500

3 600

8 100

Divisible income

72 000

48 000

120 000

Less: Approved donation

(7 800)

(5 200)

(13 000)

Annual allowance

(5 400)

(3 600)

(9 000)

174 800

126 400

301 200

2.3 TAX PLANNING OPPORTUNITIES FOR INDIVIDUAL WITH BUSINESS

INCOME

The goal of tax planning is to arrange financial affairs so as to eliminate, minimise, or delay income tax. This tax planning purposely gives space to the tax payer to make use of their business operation from being highly charge by the tax authorities. Hence, there are few opportunities for NS Educational partnership to minimise their income tax.

Along the commencement of the business, NS Educational partnership can deduct some particular in their income tax. For example, expenses. All revenue expenses made from the production income will be deductable against the gross income.

Other than that, the partnership may do a disposal of assets during the business operation. This disposal is called ‘trading stock'. The purpose of trading stock is to resell the assets to gain profit. Trading stock will only be deductable by tax authorities.

NS Educational partnership also can send their employees for training during the commencement of business. This training expense will be deductable within the period of one year prior to the commencement of the business. In addition, the expenses also must incur on the training of potential employees to blow basic skills before the business is operating. However, the deduction will not be countable if the company receive training grants from the government.

Source: Essay UK - http://turkiyegoz.com/free-essays/finance/partnership-is-the-relationship-existing.php


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