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Partnership profit sharing

Newbie

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Replies 9

Hi,

 

One of my client has a family partnership and there is no partnership agreement. Is it possible to change the profit sharing ratio from last year or do I need to use the same ratio which was used in the last year in preparing current year tax return.

 

Thank you

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Most helpful response

Former Community Support

Replies 0

Hi @pjayasuriya 

 

If there is a partnership there should be a partnership agreement. A partnership agreement can be either written or oral. It states who the partners are and how profits and losses are to be shared.

 

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 interest in the partnership, an assessment will be made on the merits of the case.

 

It is advised that a written agreement be in place in case of any possible friction between the partners later on regarding entitlement to profits and losses.

 

The written partnership agreement can be either formal (drawn up by a solicitor or accountant) or informal (drawn up by the partners themselves).

 

A partnership cannot change the partnership distribution after the end of the financial year. Partnership agreements can be changed but the new agreement is prospective not retrospective meaning that it applies only from the date of the new agreement. This means that if on 20 November 2001 the partners decide to now split profits and losses 70% to partner A and 30% to partner B instead of 50% each for the year ended 30 June 2001, they cannot do that.

 

The previous agreement where each partner was to share profits and losses equally still applies to the financial year ended 30 June 2001. The new agreement applies from 20 November 2001 so that it will apply to the 2002 year.

For further reading see TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements.

 

I hope this assists you

 

 

9 REPLIES 9

Most helpful response

Former Community Support

Replies 0

Hi @pjayasuriya 

 

If there is a partnership there should be a partnership agreement. A partnership agreement can be either written or oral. It states who the partners are and how profits and losses are to be shared.

 

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 interest in the partnership, an assessment will be made on the merits of the case.

 

It is advised that a written agreement be in place in case of any possible friction between the partners later on regarding entitlement to profits and losses.

 

The written partnership agreement can be either formal (drawn up by a solicitor or accountant) or informal (drawn up by the partners themselves).

 

A partnership cannot change the partnership distribution after the end of the financial year. Partnership agreements can be changed but the new agreement is prospective not retrospective meaning that it applies only from the date of the new agreement. This means that if on 20 November 2001 the partners decide to now split profits and losses 70% to partner A and 30% to partner B instead of 50% each for the year ended 30 June 2001, they cannot do that.

 

The previous agreement where each partner was to share profits and losses equally still applies to the financial year ended 30 June 2001. The new agreement applies from 20 November 2001 so that it will apply to the 2002 year.

For further reading see TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements.

 

I hope this assists you

 

 

Newbie

Replies 6

In the case of a prospective client I have been advised that their partnership agreement allows them to change the profit share every year to suit / meet their individual circumstances. Following on from the query above, if you can change the profit share from year to year, for CGT tax purposes, does this mean that each time you change profit share, that there is a deemed disposal of the old cgt partnership and a deemed acquisition of a new CGT asset at market value? 

 

 

 

ATO Community Support

Replies 5

Hi @Journey2

 

Partnerships cannot hold CGT assets, and in-of themselves are not CGT assets.

 

CGT assets "held by" the partnership are, in fact, held by the individuals themselves. If the assets are moved between partners, there will be a CGT event for the person whose hands it leaves.

 

The capital proceeds and the first element of the new owner's cost base are the market value if both:

  • what they received was more or less than the market value of the property
  • they and the new owner were not dealing with each other at arm's length.

You can read about market value of assets on our website.

Newbie

Replies 4

Thank you Blake ... Yes I was aware of that and what I meant was a partner's share of the partnership business which intrinisically includes their share/right to the profit generated by the partnership. If then the partners share of partnership profit changes from year to year does it mean that their share of the partnership business (and hence the CGT asset) changes as well thus resulting in a CGT event? This was my understanding.

 

Whilst I understand a partner can be paid an additional fixed commercial amount if they work in the partnership business with the final profit split 50:50, I was always of the opinion that a partners share in the partnership's taxable profit was fixed based on the partnership agreement and that ithe profit share cannot be varied year to year (similar to a discretionary trust). How does the ATO view a partnership agreement which provides for the profit share to be varied year to year? 

ATO Community Support

Replies 3

Hi @Journey2

 

Partnership agreements can be changed but the new agreement is prospective not retrospective meaning that it applies only from the date of the new agreement.

Newbie

Replies 2

Yes thanks I was aware of that but does it constitute a CGT event

ATO Community Support

Replies 1

Hi @Journey2,

 

If the assets are moved between partners, there will be a CGT event for the person whose hands it leaves.

Newbie

Replies 0

Hi Nikki,

 

Thank you for the reply by my question was not answered.

I am asking that if you change each partners share of profit does this constitute a deed CGT event.

Does the ATO consider a change in profit share between partners a change in the underlying  "business assets" that generate the profit?

Is a change in profit share a reconstitution of the original partnership and hence a CGT event by the ATO?

ATO Community Support

Replies 0

Hi @Journey2

 

A partnership holds no assets, individuals do. Profit or Loss is distributed to the individuals as agreed. It is not a CGT event.

 

A change of profit sharing in a partnership can occur. However as previously shown, this must be future dated not retrospectively.

 

 A change therefore in "business assets" can only occur between the owners and not the partnership. Any CGT event resulting from the "business assets" however would be for the individual owners selling to report, regardless of whether it contributed to the partnerships profits previously.