Partnership Taxation

Partnership Taxation

Definition of partnership under Income Taxation Act 1967:

The Income Tax Act 1967 defines partnership as “an association of any kind (including joint venture, syndicates and cases where a party to the association is itself a partnership) between two or more parties who have agreed to combine any of their rights, power, property, labor or skill for the purpose of carrying on a business and sharing the profits or losses there form, but exclude Hindu Joint Family although such a family may be a partner in a partnership.”

In the definition of a “person” in Income Tax Act 1967, partnership is not listed as a “person”, thus no assessment can be raised on the partnership. However individual partners can be assessed on their share of income.

Types of partners

1.      Full partners

2.      Limited partners

3.      Salaried partners

4.      Sleeping partners

5.      Corporate partners

Assessment of partners

Net profit before taxation                                                                                           xxx

Add:    1. Partners’ remuneration                                                        xx

            2. Partner’s interest on capital or advanced                            xx

            3. Private and domestic expenses of partners                         xx

            4. Any item (Not Allowable) / Expenses Not Allowed          xx

 by Partnership Business

Less:    Other incomes (as in financial statement)

-          Other incomes (not from core of business)                             xx

-          Real Property Gain                                                                 xx

-          Statutory Income of Dividend, Rental and Interest               xx

-          Profit on disposal of  assets                                                    xx                    (xx)

Less: Double Deduction (disabled workers, R&D, insurance for ex/imp)                 (xx)

PROVISIONAL ADJUSTED INCOME                                       xxx

Less: Items under Section 55 (3) (show the calculation)

1.      Partners’ remuneration (Salary, Allowance, Bonus)

Partner A/B/C                                                                         (xx)

2.      Partner’s Interest on capital or advanced

Partner A/B/C                                                                         (xx)

3.      Private and domestic expenses, if any, of a partner

Partner A/B/C                                                                         (xx)

DIVISION INCOME                                                                       XXX

(Divide based on agreement or sharing profits and loss equally)

Computation of Statutory Income

	Partners
	A	B	C
Partners’ remuneration (Salary, Allowance, Bonus) Partners’ interest on capital or advanced Private and domestic expenses of a partner Divisible Income ADJUSTED INCOME (PARTNERS) Add:   Balancing Charge [divide equally or based on agreement – for partners who are remained in partnership] Less:    Balancing Allowance / Capital Allowance [divide equally or based on agreement – for partners who are remained in partnership] Sec 4(a) : Statutory Income of Partnership Business Add:       Other Incomes (from other sources) Sec 4(b): Statutory Income of Salary Sec 4(c): Statutory Income of Dividend & Interest Sec 4(d): Statutory Income of Rental & Royalty Sec 4(e): Statutory Income of Pension & Annuity Sec 4(f): Other than sec 4(a)-(e) AGGREGATE INCOME (-) Donation for approval institution [7% or paid up – lower] TOTAL INCOME Less:     Personal Relief Tax payer (RM 9000) Spouse / wife / husband (RM5000) Children (1000/4000/9000/5000) Insurance & etc CHARGEABLE  INCOME	X X X X XX X X XX X X X X X XX X XX X X X X XXX	X X X X XX X X XX X X X X X XX X XX X X X X XXX	X X X X XX X X XX X X X X X XX X XX X X X X XXX

Preparation of Form P

Form P is partnership return form. This form is prescribed under section 152 Income Tax Act 1967. The precedent partner is responsible to submit a partnership return or returns of income. The precedent partner is the person whose name appears as the first name in the partnership agreement.

Changes in partnership

When a partner withdrew from the partnership or a new person is admitted as partner into the existing partnership, this would tantamount to a cessation of old partnership and commencement of new partnership.

Thus the business will be divided into two different partnership businesses which are:

a.       Before new admit or retirement – old partnership

b.      After new admit or retirement – new partnership

The changes will effect as follows:

a.       Changing in period of accounting

b.      Changing in sharing of profits and loss

c.       Changing in capital contribution

d.      Changing in partner salary and interest on capital

Allocation of capital allowance among the partners

a.       Although the partnership is assessed as business source, capital allowance claim is attributable to the individual partners of the partnership.

b.      The capital allowance is allocated with reference to the profit sharing ratio of the partner at the end of each basis period.

c.       Admission or retirement of partners will not affect the claim of capital allowances as the partnership is treated as a continuing business if at least one partner of the old partnership continues to be partner in the new partnership.

d.      Since capital allowance is computed at the year end, new partner admitted would enjoy full year capital allowance; a retired partner would not get any capital allowance in the year of withdrawal.

The Self Assessment System has been introduced to companies since 2001. Under this system, companies are required to determine their own tax liability and make payment to the IRB.

The Self Assessment System has been introduced to companies since 2001. Under this system, companies are required to determine their own tax liability and make payment to the IRB. The process starts with furnishing an estimate of taxable by a company.

Under Self-Assessment System, companies are required to furnish an estimate of its tax payable to IRB for each year of assessment. The estimate is done by filling up a form, namely CP 204. This form has to be be submitted to IRB not later than 30 days before the beginning of the basis period. Upon receiving the completed CP 204 furnished by the company, IRB will then issue Notice of Instalment Payment (CP 205). If a company fails to furnish an estimate by the required date, the Director General of Inland Revenue (DGIR) will issue a direction to the company to make instalment payments. The DGIR may also institute a legal proceeding against the company for the failure to furnish an estimate.

It is important to note that the estimated amount of tax payable for a current year by the company should not be less than the tax estimate to be paid for the immediate preceding year of assessment. However, the company is allowed to revise its original estimate in the sixth month of the basis period for a year of assessment. Following this, the remaining instalment have to be revised accordingly. The application for revision is done using the same prescribed form (CP 204), indicating that it is to provide a "revised estimate". A Notice of Revised Instalement Payment (CP 206) will be issued by IRB to confirm instalment payments following the revised estimate.

If the estimated tax payable is understated (to be known not more than six (6) months after year end), it should be noted that if the difference between the actual tax payable and the estimated tax payable (or the revised estimated tax payable) is more than 30 percent of the actual tax payable,  a 10 percent increase in tax will be imposed on the difference in excess of the 30 percent.