Topic 9

Partnership
 Definition

“An association of any kind (including joint ventures,

syndicates and cases where a party to the
association is itself a partnership) between parties
who have agreed to combine any of their rights,
powers, property, labour and skill for the purpose of
carrying on a business and sharing the profits there
from but it excludes a Hindu joint family although
such a family may be a partner in a partnership”
[sec 2 of ITA 1967]
 Definition
Also includes “any association which is established
pursuant to a scheme of financing in accordance
with the principles of Syariah” [effective YA 2007]
• A partnership is not a person within the meaning of
sec 2 of the ITA 1967, therefore no assessment can
be raised on partnership.
• Each partner will be assessed on individual basis
based on his/her share of partnership income
• Formed by at least 2 persons but not exceeding 20
persons
 Determining Partnership
• Existence of partnership agreement
• In the absence of agreement, partnership may exists if
– Preparation of P&L accounts showing partner’s share of
profits and losses
– Manner in which partners operate their bank accounts &
whether there are limitations to the signing cheques.
– Name used in carrying on the business as shown in trade
directories & business correspondence
– Records showing partners’ remuneration, drawings,
capital contribution & interest paid for capital loaned to
the business.
– In Malaysia, certificate of registration is prima facie
evidence for partnership’s existence
 Determining Partnership
• Partnership can exist between an individual and a
company [John Gardner and Bowring Hardy & Co Ltd v
CIR]
• Deed of partnership exist but was never followed is not
a partnership [Dickenson v Gross]
• A minor may be a partner but cannot be held personally
liable for any obligations of the firm until he/she
reached legal age.
• All partners are jointly and liable for all contractual &
other debts . A partner is liable to the extent of hid
personal assets in the event of claim by creditors
 Types of Partners
• Full partner
– Actively engaged in partnership business
– Main partner responsible to submit the
partnership tax return form to IRB
• Salaried partner
– Obtained salary from partnership with/without a
share of profits
 Types of Partners
• Sleeping partner
– Does not participate in activities of partnership
business
• Corporate partner
– A company who is a partner of a partnership
business
• Limited partner
– partner that suscribe to a fixed amount of capital
for the partnership and is not actively engaged in
the management of the business
 Assessment
• Similar to business income
• Adjust profit figure for
– Partners’ salaries
– Interest on partners’ capital
– Other personal expenses charged in the
partnership accounts
• Basis period: calendar year
 Divisible Income
• Divisible income [sec 55(3)] for the basis
period is the provisional adjusted
income less:
– Partners’ wage or salaries
– Interest payable to a partner
– Private expenses of the partners charged to the
partnership account
Adjusted Income & Statutory Income
• Adjusted income for individual partner [sec
55(5)] is
– The share of divisible income/loss, and
– Remuneration, interest and private expenses
from the partnership
• Statutory income is adjusted income plus
proportion of balancing charge minus
proportion of capital allowance.
• Proportion is based on profit sharing ratio
 Example
The following accounts are prepared for Nona and Noni
Enterprise, a partnership for the basis year 2017
RM RM RM
Sales 300,000
Less: COGS 180,000
Gross profit 120,000
Less: Administrative expenses 21,000
Depreciation 15,000
Partner’s salaries: Nona 24,000
Partners’ Interest: Nona 2,000
Noni 6,000 8,000
Partners’ private expenses: Nona 2,000 70,000
Net profit 50,000
 Example

Q. Calculate the partners’ divisible income and

partners’ statutory income. Assume Nona &
Noni share the profit/loss equally and capital
allowance for the YA 2017 is RM12,000.
 Example
A. Provisional adjusted income
Net profit 50,000
Add: Depreciation 15,000
Partner’s salaries 24,000
Partners’ interest 8,000
Partner’s private expenses 2,000 49,000
Provisional Adjusted income 99,000
 Example
A. Divisible income
Provisional adjusted income 99,000

Less:

Partner’s salaries 24,000

Partners’ interest 8,000

Partner’s private expenses 2,000 34,000

Divisible income 65,000

Nona and Noni divisible income are RM32,500 each

 Example
A. Partners’ statutory income
Nona Noni
Salaries 24,000 -
Interest on capital 2,000 6,000
Private expenses 2,000 -
Share of divisible income 32,500 32,500
Adjusted income 60,500 38,500
Less: capital allowance 6,000 6,000
Statutory income 54,500 32,500
 Changes in Partnership
• If at least one person who is a partner in the old
partnership and continues to be a partner in the
new partnership, the partnership business is
treated as continuing business although the
changes occur during the basis period.
• The continuing partner is deemed to have one
source of business income
 Changes in Partnership

• Since profit sharing ratio changed, apportionment

need to be carried out on the time basis.
• The sharing of divisible income is referred to the
agreement subsists at the time.
• Capital allowance are only given to partners
existing at the end of the year
 Example
Chen and Chow commenced partnership business on
1.1.2013 and accounts are closed on 31 Dec annually. The
partnership agreement are as follows:
• Interest on capital: 10% per annum for each partner
• Capital contribution: Chen RM80,000; Chow RM120,000
• Salary (per month): Chen RM2,500; Chow RM2,500
• Share of profit/loss: Chen 2/5 ; Chow 3/5
On 30.6.2017, Chow left the partnership & withdrew his
accumulated capital and profits up to that date.
 Example
On 1.7.2017, Wong joined the partnership & new
partnership agreement are as follows:
• Interest on capital: 10% per annum for each
partner
• Capital contribution: Chen 100,000 ; Wong
RM100,000
• Salary per month: Chen RM2,500; Wong RM2,500
• Share of profit/loss: Chen ½ ; Wong ½
 Example
Profit and loss account for the year 2017 are as follows
RM
Sales 6,000,000
Less: COGS 4,500,000
Gross profit 1,500,000
Less: Expenses 800,000
Net income 700,000
Included in the expenses are depreciation of RM15,000; salaries to partners
and interest on capital to partners.
Capital allowances for the YA 2017 is RM13,500

Q. Calculate the statutory income for each partner for the YA 2017
 Example
RM
Net profit 700,000
Add: Depreciation 15,000
Salaries to partners (2,500 x 2 x 12 months) 60,000
Interest on capital [(8,000+12,000) x 6/12] + [(10,000+10,000) 20,000
x 6/12
Provisional adjusted income 795,000
Less: Partners’ salaries 60,000
Partners’ interest on capital 20,000
Divisible income 715,000
Divisible income for 6 months (accrued evenly) 357,500
 Example
Chen Chow Wong

Salary 30,000 15,000 15,000

Interest on capital 9,000 6,000 5,000

Share of divisible income 1.1.17 – 30.6.17 143,000 214,500 -

Share of divisible income 1.7.17 – 31.12.17 178,750 - 178,750

Adjusted income 360,750 235,500 198,750

Less: Capital allowance 6,750 - 6,750

Statutory income 354,000 235,500 192,000

 Other Issues
• Approved donation
– deducted from aggregate income of each partners in
their tax return based on their profit sharing ratio on
the last day of the basis period
• Asset purchased by partner & solely used by him
for partnership business
– entitled for capital allowance
• Non business income of a partnership
– Income will be shared by individual partners according
to their profit sharing ratio.
End of Topic..