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TAXATION OF PARTNERSHIPS

Article by listed AttorneyNanika Prinsloo

A Partnership is not a legal entity and, because the definition of a person in the Income Tax Act does not include a person, a Partnership is therefore not registered for income tax purposes.

Since everybody in South Africa must be registered for taxes, how then, does it work?

This article will briefly explain.

You can read more about the requirements of a partnership and about how business partnerships work in our other partnership articles.

For Afrikaans version: Vennootskap Belasting

INCOME TAX AND A PARTNERSHIP

Although a Partnership is not a legal entity and not registered for income tax, the Income Tax Act does refer to partnerships in several sections.  All the partners will hand in a joint return for all the partners in respect of the business. Each partner must also hand in seperate tax returns as well.

Each partner will be taxed in his/her share of the Partnership profits, so this means that each partner is taxed individually and not the Partnership itself.  Each partner is also liable for his/her own share of normal income tax.

As we explain in our other articles, the links to which you can follow above, the partners in a Partnership will share in the profits of the Partnership in a pre-determined ratio. The rato will be set out in die Partnership Agreement, or, if there is no written agreement, the partners should have agreed upon the ratio of the profit share, each partner’s share will be in the same ratio as he/she contributed to the Partnership. 

This means that since each partner will receive income from the Partnership in the pre-determined ratio share, each partner is also liable for the income tax in the same ratio. The income is regarded to be received by each partner on the same date that the income accrued to the Partnership. Since there will also be expenses in the Partnership, this will also be deemed as to have been incurred by each partner in the same pre-determined ratio share and these expenses can be deducted in this ratio by each partner. 

Although each partner will basically receive an income from the Partnership and pay normal income tax, each partner will not be entitled to the usual tax deductions available to employees, such as certain “fringe benefits”.  However, in terms of Section 11(k) of the Income Tax Act, a partner is regarded as an employee and any contributions to a Pension Fund, Provident Fund, or medical scheme that is made, can be deducted from the income of each partner.

A PARTNERSHIP AND CAPITAL GAINS TAX

Capital gains tax will work as follows:  the estate of a deceased partner will be able to claim an exemption of R2million (2014 tax year).  Capital gains tax works as follows: if you buy an asset for, let’s say R500 000 and you sell it for R700 000, you made a gain of R200 000 and therefore you must pay capital gains tax on the    R200 000 at an inclusion rate of 33.3%.  This means that 33.3% of the R200 000, namely R66,600-00 will be taxed at your marginal tax rate.  Your marginal tax rate is the rate at which you pay yearly income tax.  If you pay, for example, 40% tax per year, then the tax that you will pay will be R66,600 x 40% = R26,664-00.

If a person however makes a capital gain on the disposal of a small business, then up to R1,800,000 of that gain can be disregarded.

When one dies, it is deemed that one disposed of one’s assets to one’s deceased estate on the day before one’s death.  An interest in a Partnership is regarded as a disposal of an interest in a small business, therefore such a partner will get the R1,800,000 exemption. If the then only made R200 000 gain, he will pay no capital gains tax.

A PARTNERSHIP AND VAT

In terms of the VAT Act, a Partnership is recognised as a person. Therefore a Partnership can register for VAT.

This article was written by Nanika Prinsloo of Prinsloo and Associates Attorneys and Conveyancers.

Cell:  072 8558 106

Email:  nanika@vodamail.co.za

Website:  www.empowerlaw.co.za