According to irs.gov viewed 11th April 2010, a partnership is the relationship existing between two or more persons who join to carry on a trade or business. In other words, partnership is an association 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 income is S 4 (a) business income. Hence, each partner is required to pay for their own income tax even though they are practising partnership.
1. LAW GOVERNING THE TAXATION OF THE PARTNERSHIP
According to Choong (2009), a partnership defined as an association of two or more people (maximum of 20 persons) to join or doing business together with a view to making profit where sharing profit and loss, combine any of their rights, powers, property, labor of skill, for the purpose of carrying on a business.
2. HOW PARTNERSHIPS ARE TAXED
Based on S 4 (a) income, the tax of partnership does not exist simply because it is not a chargeable person to pay income tax but it is a chargeable person of Real Property Gains Tax Act 1976 (RPGT) where the gain occur from disposal of real property, and the profits is not a joint liability of the partnership.
Each partner is taxed individually where they 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 forms must be filled up completely as soon as possible so that it can be submitted on 31st October after the end of tax year.
2.1. EXISTENCE OF A PARTNERSHIP
Under the s 2 of Tax Act, and the case law preference, the factors need to be present before a partnership exist such as, carrying business, share of rights and responsibilities, earn the profits, and taking more seriously element of risk and rewards towards partners. The existence of a partnership can also be constructed without any written document but, formally it is constructed with the agreement to avoid future dispute, and dissatisfaction among partners regarding the share of profits and loss.
2.2. PROVISIONAL ADJUSTED INCOME
In provisional adjusted income, a partnership is assumed to be a sole proprietorship for the purpose to computing partnership adjusted income. From the provisional adjusted income, the partnership is able to prepare a divisible of the income to individual partners based on the agreement where is sharing profit ratio. There are two things which we must bear in mind such as:
- Deductable expenses (e.g. Entertainment to client where depending on company)
- Non-deductable expenses (e.g. Depreciation)
2.3. NON BUSINESS INCOME FROM PARTNERS
When a partnership received non business income from partners such as dividend and rental, it is also included in the partnership computation in arriving at the partner's divisible income whether it is allocated to partners or not. The computation of non business income basically is not included in a partnership but computed separately. The adjusted income and approved donation from the other sources can be divided among partners according to the profit sharing ratio.
3. COMPUTATION OF TOTAL INCOME OF EACH PARTNER
COMPUTATION OF PROVISIONAL ADJUSTED INCOME AND DIVISIBLE INCOME FOR NS EDUCATIONAL PARTNERSHIP
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
Computation of Each Partner Income
| Ng | Siow | Total | |
| 1.1.06 - 31.3.06 (3 months) | |||
| 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 |
CALCULATION ON COMPUTATION OF EACH PARTNER INCOME
1) Private use of car by Siow
= RM2 000 x 20%
= RM2 400
2) Trade exhibition
= RM8 700 x 2 (double deduction)
= RM17 400
(In provisional adjusted income only RM8 700 is deducted because another RM8 700 is already
deducted in profit & loss account under business expenses)
1/1/06 - 31/3/06 where profit share ratio is 1:1
1) Private expenses
Siow: 1 month = RM200
3 month = RM 200 x 3
= RM 600
2) Salary
Ng : 1 month = RM7 500
3 month = RM7 500 x 3
= RM22 500
Siow : 1 month = RM5 000
3 month = RM5 000 x 3
= RM15 000
Total = RM22 500 + RM15 000 = RM37 500
3) Interest on capital
Ng: 1 month = RM500
3 month = RM 500 x 3
= RM1 500
Siow : 1 month = RM 400
3 month = RM 400 x 3
= RM 1 200
Total = RM1 500 + RM1 200 = RM2 700
4) Divisible income:
3/12 x RM160 000 = RM40 000
Ng (50%) =RM20 000
Siow (50%) =RM20 000
1/4/06 - 31/12/06 where profit share ratio is 3:2
1) Private expenses
Siow: 1 month = RM200
9 month = RM200 x 9
= RM1 800
2) Salary
Ng : 1 month = RM7 500
9 month = RM7 500 x 9
= RM67 500
Siow : 1 month = RM5 000
9 month = RM5 000 x 9
= RM45 000
Total = RM67 500 + RM45 000 = RM112 500
3) Interest on capital
Ng: 1 month = RM500
9 month = RM500 x 9
= RM4 500
Siow: 1 month = RM400
9 month = RM400 x 9
= RM3 600
Total= RM 4 500 + RM 3 600 = RM8 100
4) Divisible income
9/12 x RM160 000 = RM120 000
Ng (60%) = RM72 000
Siow (40%) = RM48 000
5)Approve donations
Ng : 60% x RM13 000 = RM7 800
Siow : 40% x RM13 000 = RM5 200
Total = RM7 800 + RM5 200 = RM13 000
6) Annual allowance
Ng : 60% x RM9 000 = RM5 400
Siow : 40% x RM9 000 = RM3 600
Total = RM5 400 + RM3 600 = RM9 000
4. TAX PLANNING OPPORTUNITIES FOR INDIVIDUAL WITH BUSINESS
INCOME
The goal of tax planning is to organise 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 charged 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 business expenses in their income tax. All revenue expenses made from the production income will be deductable against the gross income. For instance lease rental. This lease rental is an expense which is incurred in the production of gross income. Assuming NS Educational partnership is an accounting consultancy service. They may lease a premise for the purpose of business. NS Educational will organise the company's operation at the premise.
Other than that, the partnership may perform 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. Therefore, NS Educational partnership may sell some of their assets to reduce the tax payable.
NS Educational partnership also can send their employees for training during the early commencement of business. This training expense will be deducted within the period of one year prior to the commencement of the business. In addition, the expenses must be incurred on the training of potential employees to develop basic skills before the business start its operation. However, the deduction will not be given if the company receive training grants from the government.
In addition, NS Educational partnership may be involved in social responsibility activity. According to the Choong (2009) the payment for social responsibility activity falls under S 34 (6) (h), (ha), where the taxpayer has contributed to a charity project approved by the Minister. This type of social activity will be fully revenue deducted. NS Educational Company may educate the community on managing their personal financial and helping them from being a victim of illegal loan.
