Home – New Forums Starting your journey Need a quick overview of partnership stuff (finance, and legal)

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  • #966208
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    Hi all!

    I’m looking for a quick overview of the requirements (legal and financial) to setup and run a partnership.

    Is the following correct:
    * The partnership has an ABN, TFN and bank account of its own
    * Money due for work done by the partnership (i.e. payment for invoices that we issue) goes into that bank account
    * The partnership submits a BAS when required
    * The partnership submits a “Partnership Tax Return” when required (in addition to the BAS?)
    * We make deductions from the amount the partnership has made for business purchases (e.g. business travel, computer equipment, printing, postage, mobile phones etc.)
    * We then split amount of money the partnership has earnt each year amongst the partners (equally OR as the partnership agreement dictates)
    * The individual partners then pay personal income tax on the money they receive (their % of the partnership)
    * What is the difference between the % of the partnerships earnings over the year that the partners receive and the term “drawings” which I see on the ATO website sometimes? The ATO’s “small business tax guide” says: “If you are a sole trader or partner in a partnership, you should not confuse amounts you draw from the business to live on (drawings) with taxable income. You have to pay tax on the business’ taxable income, regardless of the amount of drawings you make over the year.” I do not understand this.
    * Where do the deductions the partnership made for business operations come into play? How can the deductions be used to lessen the income tax each partner pays individually? Would someone be able to provide an overview (not just link to the ATO website) on how the partnerships money system works (i.e. going from “money from clients”->”partnerships bank account”->”individual partners/and their income tax” and where “deductions” and “personal services” stuff comes in).

    Thanks! Please don’t tell me to consult an accountant! I have an appointment to get the ball rolling next week, just looking to learn about this stuff in advance so I don’t sound like a total newbie :) The ATO website is a bit impenetrable!

    Cheers,
    Kevin

    #1016768
    Solo Lawyer
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    Dear Kevin

    That certainly is a lot of questions.

    I will do my best to answer them quickly.

    Is the following correct:
    * The partnership has an ABN, TFN and bank account of its own
    Yes, the partnership would need an ABN and TFN. It would also be advisable to get a separate bank account for the partnership.

    * Money due for work done by the partnership (i.e. payment for invoices that we issue) goes into that bank account
    Yes, money paid to the partnership for work should go into a separate bank account. It is best to keep the partnerships income and expenses separate from your own personal finances.

    * The partnership submits a BAS when required
    Yes, the partnership will have to submit a BAS on a quarterly basis.

    * The partnership submits a “Partnership Tax Return” when required (in addition to the BAS?)
    Yes, the partnership will have to submit a Partnership Tax Return at the end of the financial year.

    * We make deductions from the amount the partnership has made for business purchases (e.g. business travel, computer equipment, printing, postage, mobile phones etc.)
    Yes, expenses incurred by the partnership are deductible. If a partnership expense is part-business and part-personal it will have to be apportioned. There are also different rules about how to keep records of some costs – for example car expenses.

    * We then split amount of money the partnership has earnt each year amongst the partners (equally OR as the partnership agreement dictates)
    Yes, profits from the partnership are usually split evenly. The exception is where there is a partnership agreement which provides for a different profit split.

    * The individual partners then pay personal income tax on the money they receive (their % of the partnership)
    Yes, the profit from the partnership is divided between the partners and then recorded on their personal tax returns.

    * What is the difference between the % of the partnerships earnings over the year that the partners receive and the term “drawings” which I see on the ATO website sometimes? The ATO’s “small business tax guide” says: “If you are a sole trader or partner in a partnership, you should not confuse amounts you draw from the business to live on (drawings) with taxable income. You have to pay tax on the business’ taxable income, regardless of the amount of drawings you make over the year.” I do not understand this.
    An example may help here. Say your partnership has income of $100,000 and expenses of $50,000. You also make drawings of $10,000. The taxable income of the partnership is $50,000, You cannot treat the drawings as an expense to the partnership. The alternative is for the partnership to pay you a wage which would be a deductible expense for the partnership.

    * Where do the deductions the partnership made for business operations come into play? How can the deductions be used to lessen the income tax each partner pays individually? Would someone be able to provide an overview (not just link to the ATO website) on how the partnerships money system works (i.e. going from “money from clients”->”partnerships bank account”->”individual partners/and their income tax” and where “deductions” and “personal services” stuff comes in).
    Expenses incurred by the partnership are deductible. However partnership expenses cannot (as far as I am aware) be used to reduce the partners individual income tax. The expenses of the partnership have to stay in the partnership.

    I am willing to be corrected on any of my advice by any accountants out there who may deal with some of these issues more regularly than me.

    Bye

    Michael Terceiro
    Solo Lawyer
    http://www.terceiro.com.au

    #1016769
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    Hi Michael,

    Thanks for that. Very illuminating.

    Another question If I may!
    * We submit a “Partnership Tax Return” and a “BAS” – what are the differences, and when is each submitted?
    * The Partnership Tax Return lists partnership earnings and things we are deducting, correct?
    * On our personal tax returns, we declare 50% of the partnership earnings (splitting 50/50 AFTER the deductions that occur on the Partnership Tax Return, is that correct?) and then we pay personal income tax as appropriate for our tax bracket

    In summary, please confirm the following scenario:

    e.g.
    If the partnership earns $200,000 in a year.
    And we spend $40,000 on business travel.
    Our Partnership Tax Returns indicates:
    partnership has made: $200,000
    (less) deduction for business travel: $40,000
    leaving a taxable: $160,000

    Half of $160,000 is $80,000, so we each declare $80,000 on our personal tax (REGARDLESS of whether we actually took that money from the partnership’s bank account, correct?)

    i.e. partnership receives money, we deduct business expenses from that money, then we declare what remains on Partnership Tax Return, then we split the number that remains and declare our individual share on our personal tax returns

    Is that correct?

    #1016770
    Solo Lawyer
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    Dear Kevin

    I think that is five more questions!

    * We submit a “Partnership Tax Return” and a “BAS” – what are the differences, and when is each submitted?
    A Partnership Tax Return shows your income, expenses and the Partnership taxable income. It is submitted at the usual tax time. A BAS tells the ATO about the following issues

    • goods and services tax (GST)
    • luxury car tax (LCT)
    • wine equalisation tax (WET)
    • pay as you go (PAYG) withholding and instalments
    • fringe benefits tax (FBT) instalments, and
    • deferred company instalments.

    You submit your BAS on a quarterly basis.

    * The Partnership Tax Return lists partnership earnings and things we are deducting, correct?
    Yes.

    * On our personal tax returns, we declare 50% of the partnership earnings (splitting 50/50 AFTER the deductions that occur on the Partnership Tax Return, is that correct?) and then we pay personal income tax as appropriate for our tax bracket.
    Yes.

    * Half of $160,000 is $80,000, so we each declare $80,000 on our personal tax (REGARDLESS of whether we actually took that money from the partnership’s bank account, correct?)
    Yes, any drawings you take out of the business will be effectively taxed as personal income tax at your marginal tax rate. If the profits sit in the partnership bank account and do not actually make their way to you, you still include it in your personal income tax return.

    * i.e. partnership receives money, we deduct business expenses from that money, then we declare what remains on Partnership Tax Return, then we split the number that remains and declare our individual share on our personal tax returns

    Is that correct?
    Yes, spot on.

    Michael Terceiro
    Solo Lawyer
    http://www.terceiro.com.au

    #1016771
    10001
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    Thank you so much, you’re amazing :)

    Cheers,
    K.

    #1016772
    PerfectNotes-Kathy
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    Thanks for that! It’s clarified a couple of things for me too (which I don’t need to worry about till next July, but knowledge is a good thing.)

    Kathy

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