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Partnership Drawings or Salary

Discussion in 'Starting a business' started by rw2830, Apr 1, 2010.

  1. rw2830

    rw2830 New Member

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    Hi,

    Just wondering what would be better....drawings from the partnership or salary. It would only be a small amount of probably $500/month which would cover the business loan we got to purchase the business. Assuming that the business doesn't pay the business loan and can only claim interest on loan as a deduction at EOFY.

    Thanks

    Bec
  2. PerfectNotes-Kathy

    PerfectNotes-Kathy Active Member

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    Admittedly, I'm no expert on this, but my understanding is that as one of the owners of the business, if it's a partnership NOT a company, you can only take drawings. I believe that employees are only those people who are not partners owning the business - and they can get a salary.

    Anyway, I'm sure one of our tax experts will comment soon. (And then I'll learn whether my understanding is right or not, too!)

    Kathy
  3. FletcherTax

    FletcherTax Member

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    Hi Bec & Kathy

    A partnership can pay you via distribution or via wages.

    In terms of better - one is paying tax (and super!) as you go and the other is paying tax in one lump sum at year end. Once you've lodged a Return or two, the ATO will enter you (individually) into a PAYG Instalment system whereby you pay income tax quarterly based on your prior Returns' submissions.

    Janna


    Please note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.
  4. Avatar Consulting

    Avatar Consulting Member

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    If you are in partnership, this will already have been answered in your Partnership contract terms, as to how each partner recieves their payments. But if you havent already discussed it, you will have to decide if you want to set your business systems up to handle being treated as employees instead of owners because this would increase admin and possible other taxes [workcover and payroll etc].

    Normally business expenses are paid from your business cash inflows, and drawings are taken out after all your expenses are met or you risk bleeding your business cash flow and running aground later.

    If you are in a partnership, you should also check out the Partnership Act which is the legislation that manages partnerships where you might find the exact answers you need for this question.
  5. akagrp

    akagrp Active Member

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    Hello Bec

    Drawing a salary from a partnership is a complex area of tax, as though you may declare it as a salary, current tax law will added it back to final partnership profits and then distribute profits based on partnership agreement.

    It is important that the partners salary is documented in a contractual agreement before end of income year in question. As if the partners salary results in a loss for the partnership this loss will be scaled back, and the partners salary will be taken to be an advance on future profits.

    For example lets take your $500 a week = $26,000 a year. Lets also assume the partnership after allowing for your salary makes a loss ($36,000)

    Partnership Loss after salary $(36,000)
    addback Bec's Salary $26,000

    Partnership Taxable Loss ($10,000)

    Though the partnership has a loss of $36,000 after Becs salary, the losses are limited to $10,000 under tax law, so $5000 each and the $26,000 you have taken as salary will be seen as an advance on future profits from a tax


    I hope I have not confused you. Please let me know

    The advice above is general in nature and should not be taken as professional advice. It is recommended you seek a professional for such advice
  6. CruzAccountant

    CruzAccountant Member

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    The profits in a partnership are distributed equally as "distributions" - ie not technically a "partner's salary". You need to be mindful of overdrawing funds in a partnership, and the ATO's view on that.

    Both partners also need to formally agree if one partner will be drawing out more from the partnership.

    Technically, the partner is not an employee of the partnership.

    Richard
  7. PerfectNotes-Kathy

    PerfectNotes-Kathy Active Member

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    So, basically, my understanding is kind of right and kind of wrong! LOL

    Well, at least experts have jumped in to give information.

    Kathy
  8. Jake@EmroyPrint

    Jake@EmroyPrint Well-Known Member

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    Isn't it great to have so many talented accountants on the forums!

    Regards,

    Jake
  9. FS Concierge

    FS Concierge Administrator Staff Member

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    Jake, you are SO right! Thanks one and all for everything you do for us :)

    Happy Easter to you
    Jayne

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