While I’d prefer discussing business insurance with you, tax is always fun.
I mean think about it, should the partnership be viewed as a funnel with all the money pouring in the top, all the expenses being deducted, tax paid on whatever’s left over by the partnership, and the tax-free profit split equally between the partners?
Or should all the money flow into the funnel, all partnership expenses deducted from this, and whatever’s left over split proportionately between the partners who then pay the tax on it?
What’s interesting from a value added tax (VAT) perspective is that a partnership is regarded as a person, but from an income tax perspective, a partnership is not recognised as such.
What is a person?
Now before you shoot me down with, “Duh… Lawrence, it’s obvious that a partnership isn’t a person!” let me explain;
As far as the income tax act is concerned, you get two types of persons:
- Natural persons (you and I)
- Juristic persons (companies, trusts).
So how is the partnership income taxed?
What happens is that the partnership must make the joint return with respect to the business, but separate income tax assessments are done for each partner. So each partner ends up being individually taxed on his or her share of the profits. Expenses are also divided proportionately between the partners.
In other words, if the business has two partners and the profit-sharing is a 60/40 split, then partner A gets 60% of the profits and 60% of the expenses.
In the case of limited (silent and hopefully not of the Italian kind) partners, their tax deduction is limited to the amount for which they are personally liable to creditors as well as the income received by them. In other words they can’t use the partnership to write off tax losses in that year…capish?
And capital gains?
I’d love to be able to tell you that partnerships don’t pay capital gains tax, and it would be partially true.
The truth is that the partners pay this in their individual capacities.
One last thing…
While a partner in a business is not an employee (There’s no employer-employee relationship since the partners own the business), they are seen as employees from a pension fund contribution point of view. The partner (employee) can therefore claim a deduction of either R1, 750 per annum or 7, 5% of his or her annual pension funding income in his or her personal capacity. The partnership (employer) can also claim the deduction allowed to all employers.
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Until next time.
The InsuranceFundi Team