CHAPTER 8

PARTNERSHIPS
Partnership Act 1961

Definition
Income Tax Act 1967
an association of any kind between parties who
have agreed to combine any of their rights,
powers, property, labor or skill, for the purpose of
carrying on a business and sharing the profits
therefrom
It includes joint ventures, syndicates and cases
where a party to the association is itself a
partnership.
Sec 2

Partnership Act 1961

The relation which subsists between persons,
carrying on business in common with a view of
profit.
Sec 3
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 income.
Source of income
As partnership is the relationship
comprises 2 or more persons (max of
20) carrying on business in common with
a view of profit, the source is a business
income.
3

Existence of Partnership
The following factors should present :
1.Carrying on business
2.Sharing of rights & responsibilities
3.A view to profit
4.Element of risk & reward for each partner

Types of Partners
Full/principal partner
real partner who share in the conduct of the

business and in the profit/loss it generates

Also known as managing partner
Appointed by all partners to manage and make
decision/policy for the partnership

Salaried partner
Merely employees of the partnership drawing a

fixed salary with or without commission or

bonus
Do not share in the profit/loss
Have no title to the goodwill
No right to direct the partnership
Source of income: S4(b) - employment

Cont
Sleeping partner
Only contribute capital to the business
Does not take part in the management of the

business

Limited partner
Only subscribe to a certain fixed amount of

capital
Liabilities are limited to the amount of capital
Does not take part in the management of the
business
Normally has no power to bind the organisation

Corporate partner
A company which is a partner in a partnership

Basis Period (BP)

BP for a partnership

BP for business

Where there is a change in the partnership

[admission of new partner(s) / withdrawal of
existing partner(s)], the BP will be divided
into two period:
1. old partnership (before
partnership)
2. new partnership (after
partnership)

change

in

the

change

in

the

In this case, the partnerships income also

need to be distributed into those two period
7

Return form by Partnership

The return (form P) must declare:
The divisible income or divisible loss
[sec.86(2)(a)]

All information to determine the statutory

income from all sources
[(sec.86(2)(b)]

Other information as required

[(sec.86(2)(c)]

Assessment of Partnership Business

Income

Provisional Adjusted Income

[Sec.55(2)]

A partnership is postulated as a sole

proprietorship for the purposes of

computing partnership adjusted income
For partnership, this adjusted income is

known as provisional adjusted income

The normal rules of allowable/disallowable

are employed to determine the gross

income & deductions
See previous chapter on business Income
10

Computation of Provisional
Adjusted Income
[Sec.55(2)]
Net
profit/loss
xxx
(-) non-business income/non-taxable items
(xx)
(-) double-deduction
(xx)
(+) non-allowable expenses/items
(+) partners remuneration/benefits
xx
(+) partners private expenses
charged to partnership account
(xx)

xx

Provisional adjusted income

xxx
11

Example 1

(e.g. 18.7 CKF 2010, p360)

Price Associates is a partnership between Kang and

Khoo. They share profit and loss equally. The profit
and loss account (in 000) for the year ended
31/12/2010 was as follows:

40

Trading income
1,730
Less:
Revenue expense
Depreciation
60
Entertainment to client (sales)

700

General provision for doubtful debt

20

12

Cont
Partnership expense
Salary:
Kang
2
Khoo
2
Interest on capital:
Kang
1.5
Khoo
1.5
Food consumed by Kang
(830)
Net profit

3
3
900

13

The computation of provisional adjusted income

Net profit per p/ship P&L a/c
900,000
Add: Non-allowable expenses
Depreciation60,000
General prov. for bad debt 20,000
Add: Partnership private expense
Salary
4,000
Interest on capital
3,000
Food
3,000 10,000
90,000
Provisional adjusted income
990,000

14

Divisible Income
[Sec.55(3)]

From the provisional adjusted income the

following are deducted to arrive at the divisible
income:
Remuneration of partners
Interest to any partner

on capital paid or

advanced
Private and domestic expenses, if any, of a
partner
(including reimbursement by the partner)
The basis to allocate the partnership income to
individual partners is based on the ratio as
stipulated in a partnership agreement
15

Computation of Divisible
Income
[Sec.55(3)]

Provisional adjusted income/loss

xxx
(-) partners remuneration/benefits
(xx)
(-) partners private expenses
charged to partnership
account (xx)
Divisible income/loss
xxx
16

Example 1 - contd

(e.g. 18.9 CKF 2010,

p361)

The computation of divisible income

Provisional Adjusted Income (from e.g. 18.7)
990,000
Less: Partners salary
- Kang
2,000
- Khoo
2,000
4,000
Interest on capital
- Kang
1,500
- Khoo
1,500
3,000
Private expenses
- Kang
3,000 (10,000)
Divisible income
980,000
17

Change of profit sharing

ratio
Divisible income is presumed accrued

evenly over the basis period.

If there is a change of profit sharing ratio

during the basis period, an apportion on

time basis based on the old and new ratio
will be done.
See Example 18.11 CKF2010, p 362

18

Example 2

(e.g. 18.11, CKF 2010, p

362)
A and B are in p/ship. The divisible income for the

year ended 1/1/2010 31/12/2010 is RM120,000.

The profit sharing ratio between A & B for:
1/1/10 30/11/10
1/12/10 31/12/10

1:1
1:4

The divisible income allocated to A and B:

A
B
1/1/10 30/11/10 : (11/12 x 120,000)
55,000
55,000
1/12/10 31/12/10: (1/5 x 10k) & (4/5 x 10k)
2,000
8,000
57,000
63,000
19

Adjusted Income of
individual partner
The divisible income of the partnership is
then divided among partners based on
their respective profit sharing ratio
The partners individual divisible income
and their relevant
actual partners
salary/interest on capital/private expenses,
would be the adjusted income of each
partner.
20

Adjusted Income of
individual partner
Share of divisible income/loss
(+) partners remuneration/benefits
xx
(+) private expenses charged to
partnership account
Adjusted income/loss

xx

xx
xx

The total of partners adjusted

income/loss will equal to partnerships

provisional adjusted income/loss.
21

Example 1 - contd
(e.g. 18.12, CKF 2010, p 363)
Divisible income (from e.g. 18.7)

980,000

(shared equally among Kang & Khoo)

Kang
Khoo
Total
Divisible income
490,000 490,000
980,000
Add: p/ship expenses
Salary
2,000
2,000
4,000
Interest
1,500
1,500
3,000
Private expenses
3,000
3,000
Adjusted income
496,500
493,500
990,000

22

Example 3
Ace Tailors is a partnership between A and B. The
trading results for year ending 31.12.2010 are as
follows:
Profit and Loss account for the year ending 31.12.2010
RM
Gross profit
Wages

4,000

Partners interest

1,500

Depreciation

2,000

Bank interest

400

Assessment

600

Partners food

1,500

Partners insurance

2,000

RM
46,500

12,000

23

Others details
The partnership commenced on 1.8.2006
The ratio of profit sharing between A & B is:
For the period 1.1.2010 -30.6.2010 = 1 :
1
For the period 1.7.2010 -31.12.2010 = 3 :
1
A & B consumed food equally.
Interest on capital
A = RM800 pa; B = RM700 pa
Partners insurance of RM2,000 is in respect
of A and B equally on their wives.
Partners salary
A = RM 2,000; B = RM 1,000
Given the above details, the provisional adjusted

24

RM

RM

Net profit as per profit & loss account

34,500
Add:

Partnership interest

1,500

Depreciation

2,000

Partners salary

3,000

Food

1,500

Partners insurance

2,000 10,000

Provisional adjusted income [sec.55(2)]

44,500
Less:

Partners interest

1,500

Partners salary

3,000

Partners food

1,500

Partners insurance

2,000

Divisible income [sec.55(3)]

8,000
36,500

25

The divisible income is assumed to accrue evenly

and is allocated as follows:
Partner Interest Salary Food Insurance
Share of profit
Share
of profit
(RM)
(RM) (RM) (RM)
1.1.10-30.6.10
1.7.1031.12.10
(RM)
(RM)
A
13,688
B
4,562

800

2,000

750

1,000

9,125

700

1,000

750

1,000

9,125

Total
18,250

1,500

3,000

1,500

2,000

18,250

26

Thus, the adjusted income of each partner

for YA 2010:
Partner A

Partner B

Interest
Salary
Food
Insurance
Share of profit

800
2,000
750
1,000
22,813

700
1,000
750
1,000
13,687

Adjusted
Income

27,363

17,137

27

Provisional Adjusted Loss

Computed along the same line as

provisional adjusted income

Where a divisible loss arises, the loss is

allocated to individual partners according to

the relevant profit sharing ratio at the
material time.

28

Changes in Partnership
When

a partner withdrew from the

partnership or a new person is admitted as
partner into the existing partnership, this
would resulted in a cessation of old
partnership and commencement of new
p/ship

See earlier slide on Basis Period

29

Continuing Partnership
If the p/ship change & at least one existing

partner in the old p/ship continues to be a

partner in the new p/ship,

the p/ship is treated as continuing even

though the change takes place half way

through the basis year.

There is no revision of basis periods & that

partners share of adjusted income is

calculated in the normal way.
This
applicable
if
the
partnership
businesses (old & new) are substantially the
same.
30

Example
Jay, Kay and Yel are in equal partnership and

prepare their accounts on 31 December every

year.
On 31 August 2009, Jay retired whilst Kay and El
carried on the partnership as equal partners.
On 1 December 2009,
Em was admitted into
partnership as an equal partner.
The partnership continues to prepare its account
annually to 31 December. Compute the divisible
income from the partnership for each partner for
the relevant years of assessment assuming the
following:
Year ended Divisible Income
31 December 2008 RM60,000
31 December 2009 RM36,000
31 December 2010 RM48,000
31

Suggested solution
There are 2 cessations, i.e. on 31 August
2009 and 30 November 2009.
Kay & El were continuing partners. No
break in their source of income.

YA 2008
- 1/1/08-31/12/08
YA 2009
- 1/1/09-31/8/09
- 1/9/09-30/11/09
- 1/12/09-31/12/09
1
YA 2010
- 1/1/10-31/12/10

Jay

Kay

El

Em

20

20

20

8
-

8
4.5
-

8
4.5
1

16

16

16
32

Admitting a new partner

In the case of a new partner admitted into an

existing partnership which continues to

prepare its accounts to its usual year end, the
basis period will start on the day one becomes
a partner to the end of the accounting period
[S21(5)]

Example:

If C is admitted on 1 October 2009 as a partner in

the firm of Ebico, which continues to prepare its
accounts to 31 Dec annually, the basis period for C
would be as follows:
Y/A
Basis period
2009
1/10/2009 31/12/2009
2010
1/ 1/2010 31/12/2010
33

Sole Proprietor admitting a

partner

Where a sole proprietor admitting in a

partner into the business & forms

p/ship,

the existing sole proprietor business &

the p/ship business will be treated as
one continuing business if the p/ship
prepares accounts to the same year
end as the sole proprietor.

See example 18.16 CKH p366

34

Capital Allowances
Capital allowance claim is attributable to

the individual partners instead of the

p/ship
The qualifying assets are entitled to CA

according to the Income Tax (Qualifying

Plant Annual Allowances) Rules 2000 at
the end of each YA
Thus the CA is allocated with reference to

the profit sharing ratio of the partner at

the end of each BP
35

Capital Allowances
contd

Admission or retirement of partners will not

affect the claim of CA as the p/ship is treated

as continuing if at least one partner of the
old p/ship continues to be partner in the new
p/ship.
Since capital allowance is computed at year

end,

a new partner admitted would enjoy a full

year capital allowance

while a retired partner would not get any

capital allowance for the year of withdrawal

36

Partners statutory
income
Adjusted income
+ Balancing charge

xx
xx
xx

- Capital allowance
(inc unabsorbed CA & balancing allowance)

(xx)
Statutory income
xx

37

Partnership Losses
When p/ship suffers losses, the provisional

adjusted loss will result in divisible loss

which will be shared by individual partners
according to their profit sharing ratio per
p/ship deed
As business loss can be set off against all
other income in the current year, the
individual partner may be able to lower his
tax liability if he also derives employment
income and investment income. Any
unabsorbed losses can be carried forward
indefinitely to be set off against future
business income (statutory income).
38

Non-business Income from partnership

The adjusted income from the relevant

sources (i.e. dividend, rental) are to be

apportioned among partners according
to their applicable profit sharing ratio
Approved Donations
Approved donations are also to be

divided among partners following their

profit sharing ratio at the time of
payments
39

Examples
E.g. 18.19 & 18.20 (CKF 2010, p 368-

372)

40

Thank you

41