PARTNERSHIPS
11.1 Introduction
A partnership is defined as
- an association of any kind between parties
- who have agreed to combine any of their rights, powers, property, labour or skill,
- for the purpose of carrying on a business and sharing the profits therefrom.
11.2 Chargeable person
Partnership is not a chargeable person for income tax purpose.
Income tax is levied on
- the individual partners on their share of business income.
‘Partners’ here can refer to individuals or companies.
11.3 Source of income
As partnership is the relationship which comprises of
- two or more persons (restricted to a maximum of 20 person)
- carrying on business in common
- with a view of profit, the source is a business income.
Business income includes
- trade, manufacture, profession, vocation and adventures or concern in the nature of trade.
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,11.4 Existence of a partnership
The following factors need to be present before a partnership is said to exist:
(a) carrying on business;
(b) sharing of rights and responsibilities;
(c) a view to profit;
(d) element of risk and reward for each partner.
Format
Net profit for the partnership x
Add: Deduction not allowed x
Add: Partners’ private expenses x
Provisional adjusted income x
Less: Partners’ private expenses (x)
Divisional income x
Divisional income (each partner) xx
+ Partners’ private expenses xx
Adjusted income xx
+ Balancing charge xx
xx
- Capital allowance
(inclusive of unabsorbed and balancing allowance) (xx)
Statutory income xx
Other income: Dividend, rental income etc xx
Aggregate income xx
Less: Approved donations (xx)
Total income xx
11.5 Assessment of partnership business income
Provisional adjusted income
A partnership is presumed to be
- a sole proprietorship for the purposes of computing partnership adjusted income.
It is also known as ‘provisional’ adjusted income.
The normal principles of income tax are used to ascertain the gross income and deductions.
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, Example 11.1
Price Associates is a partnership between Kang and Khoo. They share profit and loss equally.
The profit and loss account for the year ended 31.12.2023 was as follows:
RM RM RM
Trading income 1,730,000
Less:
Revenue expense 700,000
Depreciation 60,000
Entertainment to client (related to sales) 40,000
General provision for doubtful debts 20,000
Partnership expense
Salary
- Kang 2,000
- Khoo 2,000 4,000
Interest on capital
- Kang 1,500
- Khoo 1,500 3,000
Food from the business consumed by Kang 3,000 (830,000)
Net profit 900,000
Answer
The computation of provisional adjusted income:
RM RM RM
Net profit 900,000
Add: Non-allowable expenses
- Depreciation 60,000
- Entertainment to client -
- General provision for doubtful debts 20,000
Add: Partnership private expense
(i) Salary 4,000
(ii) Interest on capital 3,000
(iii) Food 3,000 10,000 90,000
Provisional adjusted income 990,000
Quiz question – What are the expenses that are not allowed in determining the provisional
partnership income?
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11.1 Introduction
A partnership is defined as
- an association of any kind between parties
- who have agreed to combine any of their rights, powers, property, labour or skill,
- for the purpose of carrying on a business and sharing the profits therefrom.
11.2 Chargeable person
Partnership is not a chargeable person for income tax purpose.
Income tax is levied on
- the individual partners on their share of business income.
‘Partners’ here can refer to individuals or companies.
11.3 Source of income
As partnership is the relationship which comprises of
- two or more persons (restricted to a maximum of 20 person)
- carrying on business in common
- with a view of profit, the source is a business income.
Business income includes
- trade, manufacture, profession, vocation and adventures or concern in the nature of trade.
1
,11.4 Existence of a partnership
The following factors need to be present before a partnership is said to exist:
(a) carrying on business;
(b) sharing of rights and responsibilities;
(c) a view to profit;
(d) element of risk and reward for each partner.
Format
Net profit for the partnership x
Add: Deduction not allowed x
Add: Partners’ private expenses x
Provisional adjusted income x
Less: Partners’ private expenses (x)
Divisional income x
Divisional income (each partner) xx
+ Partners’ private expenses xx
Adjusted income xx
+ Balancing charge xx
xx
- Capital allowance
(inclusive of unabsorbed and balancing allowance) (xx)
Statutory income xx
Other income: Dividend, rental income etc xx
Aggregate income xx
Less: Approved donations (xx)
Total income xx
11.5 Assessment of partnership business income
Provisional adjusted income
A partnership is presumed to be
- a sole proprietorship for the purposes of computing partnership adjusted income.
It is also known as ‘provisional’ adjusted income.
The normal principles of income tax are used to ascertain the gross income and deductions.
2
, Example 11.1
Price Associates is a partnership between Kang and Khoo. They share profit and loss equally.
The profit and loss account for the year ended 31.12.2023 was as follows:
RM RM RM
Trading income 1,730,000
Less:
Revenue expense 700,000
Depreciation 60,000
Entertainment to client (related to sales) 40,000
General provision for doubtful debts 20,000
Partnership expense
Salary
- Kang 2,000
- Khoo 2,000 4,000
Interest on capital
- Kang 1,500
- Khoo 1,500 3,000
Food from the business consumed by Kang 3,000 (830,000)
Net profit 900,000
Answer
The computation of provisional adjusted income:
RM RM RM
Net profit 900,000
Add: Non-allowable expenses
- Depreciation 60,000
- Entertainment to client -
- General provision for doubtful debts 20,000
Add: Partnership private expense
(i) Salary 4,000
(ii) Interest on capital 3,000
(iii) Food 3,000 10,000 90,000
Provisional adjusted income 990,000
Quiz question – What are the expenses that are not allowed in determining the provisional
partnership income?
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