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Key aspects of partnership tax · Tax Break: South African tax for professionals

• 0:11
  Many businesses operate as partnerships and this ranges
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  from professional service firms, farming enterprises, property Co
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  ownership arrangements, and in some cases the partnership acts
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  as the investment vehicle for other foreign investment by
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  multiple parties into into various assets or business
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  opportunities. So it is important to fully
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  understand how a partnership works and that's exactly what
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  we'll be talking about in this episode of Tax Break your your
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  podcast for South African tax professionals and tax
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  practitioners. Before I start, I would like to
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  welcome to just drop me an e-mail.
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  Right. So back to our topic for today,
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  partnerships. I guess the question would be,
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  why now? So in my practice I deal with,
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  I've dealt with various instructions and questions
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  around partnerships over the years and this I've, I've
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  realised that I think some people misunderstand how the
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  attacks on it works, but also that these partnership
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  structures can become quite complex.
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  So it is critical that you understand the basics of of how
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  they work. In addition, and that three,
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  that was really the trigger for the idea for this episode is
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  that taxpayers who are partners in a partnership, especially
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  individuals would know that in your tax returns for the last
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  few years, if you indicated that you were partnered A
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  partnership, you were required to provide very detailed
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  information about the other partners and about the overall
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  partnership do such. And that was odd to do or in
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  some cases impossible if you didn't have that information.
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  So this past week on the 19th of May, Sash announced that there's
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  a new third party return process now the IT 3 BDO process.
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  And what that really is, is a central submission to be done by
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  a designated partnership representative of the
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  information about the partners, the partnership that each
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  partner doesn't have to submit all that information.
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  And so to gather the information and submit it.
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  What the in process of that within or the outcome would be
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  of that process is that, that, that the, the designated
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  partnership representative who submitted the RT3B O will get an
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  IT 3B O number and that the partners can then use that
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  number to reference back to the third party submission.
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  If you are affected by this, there's a, a detailed guide on
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  Sasha's website on how to do the Rd. 3B O process.
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  So the focus for the episode, although the IT3B O was the
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  bigger the idea for me to, to speak about partnerships, the
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  focus is not on how to complete the IT3B O.
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  The focus is on some of the core principles relating to how the
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  taxation of a partnership works. So as a starting point, a
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  partnership is not a person and for income tax purposes, it is
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  because it's legally not a person.
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  It's also not a tax payer for income tax purposes.
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  If we look at the VET Act, though, there's a specific
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  definition of a person, which specifically includes an an
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  unincorporated venture or a partnership.
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  So already there's a bit of a difference.
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  If you look at income tax, you look through the partnership,
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  the partnership is not a person. And for that it it, it is a
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  person. So let's start off by looking at
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  some of the key principles as to how a partnership profits are
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  taxed for income tax purposes. So as I've already said, it's
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  not a person. And then the obvious question
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  that follows from that is if the partnership is not a person who
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  would be taxed on the partnerships profits that it
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  would realise from its activities.
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  Now section 24 Cap H governs that.
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  So it's got three key elements in the in in that provision.
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  The first one is that the partner is deemed to carry A.
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  So each partner is deemed to carry on the trait of the
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  partnership. Why that's important is that if
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  you want to claim deductions, one of the requirements is that
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  you must have incurred the expenditure for purposes of a
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  trade that's being carried on. So this, this deeming provision
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  now deems the partners to carry on a trade, which enables them
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  to deduct certain expenses. And we'll get back to the
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  expenses just now. The second element is that the
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  partnership income. So in other words, all the
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  inflow or all the income amounts of the partnership will be
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  deemed to accrue to the partners in their agreed proportions in
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  accordance with the partnership agreement.
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  So it's important to understand and read the partnership
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  agreement to understand how the, the, the income is this is split
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  between the partners. So this is of course different
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  from a company with a company's taxed in its own right on the
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  income. And then when the, when those
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  profits are distributed, then there's a dividend that that may
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  have further tax implications. A partnership is different.
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  It, there's a look through basis.
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  So it's really a transparent vehicle from a tax perspective.
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  And the, the income is deemed to accrue to the partners
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  immediately. Importantly, that's whether the,
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  the partner has received that income or not.
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  So it may be that the income is still the, the money is still
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  out in the partnership. Now the important part of that
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  is that this flow through treatment is not only based on
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  amounts that you've received from the partnership, it's based
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  on everything that accrued to the partnership that's allocated
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  to the partners in their agreed proportions.
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  So it might be that the partner would have to be would have to
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  pay tax on an amount whether that partner has received it or
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  not. Secondly, the when the partner
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  eventually receives the money from the partnership, there is
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  no, there's no dividends. So it's basically an amount
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  that's already accrued to the partner that's just received
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  now. Okay, so that's the income side
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  of it. The expenses and the allowance
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  would follow the same principle. So the partners are entitled to
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  deduct their proportionate share of income or of expenses and
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  allowances. So if you've got operating types
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  of expenses, the partner would get an 11A deduction for a
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  proportionate share of those operating expenses.
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  If we have, for example, an asset that qualifies for 11 E
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  allowances, the partner would then get a proportionate share
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  or a portion of that 11 year allowance on the asset.
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  The other complexity that may arise is if you've got an
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  uncommon deed partnership, then there's a limitation on on the
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  expenses that can be claimed as deductions by the partners.
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  The the, the limitation is essentially to say that the
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  partners can only deduct expenditure to the extent that
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  they are that they've got exposure do do do losses by the
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  partnership linked to to the income and the expense
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  treatment. There is the point that it's
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  often quite complex. If you start looking at salaries
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  being paid to to partners by the partnership, do they extend
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  that, that that salary is paid from the partners own profits
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  that that were already included in, in, in growth in gross
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  income, less expenses. You need to keep all your
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  bearings to make sure that first all the partnership profits are
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  essentially taxed. We're taxed once or not taxed
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  more than once. So it must, it must be subject
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  to tax, but only once. So you need to fully understand
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  that relationship between the partner and the partnerships.
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  Is it really that that there's an expense being incurred or is
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  it the method of extracting the profits from the partnership?
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  So that can become quite complex when we talk about income tax.
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  There's also, of course the, the, the aspect of capital gains
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  tax. So the core principle there is
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  that the partner owns a fractional interest in the
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  assets. So when the partner acquires an
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  interest in the partnership, the partner essentially acquires and
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  a fractional interest in the assets of the partnership.
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  And when there's a disposal, and they could be various forms of
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  disposals, then the partner would dispose of that fractional
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  interest in the assets. So it's important to understand
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  what are you acquiring and when and what could the partner
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  possibly be disposing. There's also the question of if
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  a partnership is dissolved or changes, then strictly speaking,
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  every time that that happens when you've got a new partner,
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  someone leaving, you've got the new partnership sash in, in the
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  capital gains tax guide, they, they describe a pragmatic
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  approach to this. But I think the point is that
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  you need to clearly understand as a partner, when would you
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  have disposals when with this movement in the composition of
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  the partnership. Of course, if you dispose of an
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  asset, we or your fractional interest in an asset where you
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  previously claimed the portion of those allowances, like any
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  other disposal, you could then also have a recruitment of that
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  allowances that you've previously claimed in respect of
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  your interest in the partnership asset that's being disposed of.
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  Right. And then to complete the loop
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  from an income tax perspective, where does the IT 3 be O fit in?
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  So sash needs to see the full picture as to who needs to
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  declare all of the partnership profits in their taxable income.
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  That's the purpose of the IT 3B O is for a single submission to
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  say, but these are the profits and these are the people who
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  need to declare the, the, the, the, the profits in their
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  taxable income. When we then look at that, as
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  I've already mentioned, the partnership is a tax payer for
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  that and it could therefore be a VAT vendor.
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  Now there's a lot of complexity again with these transactions or
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  arrangements between the partnership and the partners.
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  And the complexity primarily stems from having to establish
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  whether that transaction or arrangement between the part and
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  the partnership involves a supply being made by one of the
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  two parties, in which case there might have to be VAT on that or
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  whether there's no supply. So if you, if it's just an, A
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  distribution or an extraction of profits from the partnership,
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  it's arguably similar to a dividend.
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  So there's no supply by the by the counterparty for that amount
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  being extracted. So it's very important that you
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  need to look at your your partnership agreement to
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  understand, is there some form of rights that's being supplied
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  the right of use Babs, is there services being rendered or what?
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  What's the, the, the, the, the, the transaction between the
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  partner and the partnership? 4 And lastly, I've also seen
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  that in some of these arrangements, the you, you might
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  have one of the partners who act on behalf of the partnership and
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  so you've got an agency arrangement and section 54 of
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  the VAT Act comes into play then.
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  So although it sounds fairly simple to say, but the
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  partnership is a vendor on its own.
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  So it works like any other vendor.
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  There is this relationship between the partners and the
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  partnership that could be quite complex depending on on on the
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  fact pattern, right? So what are the points to take
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  home after this episode? I would say firstly, from an
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  income tax perspective, it's important to know that the
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  partnership is not a person. We've got specific sections,
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  section 24-H and specific capital gains tax rules that
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  that regulate how the partnership profits are should
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  be taxed. Secondly, from a VAT
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  perspective, the partnership is a person and that's got its own
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  challenges when it comes to supplies and transactions
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  between the partner and the partnerships or the partners and
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  the partnership. And then lastly, from a
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  compliance perspective, it's worth being aware of the IT3B O
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  process that would require something of the partnership or
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  at least a a designated partnership representative.
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  That's it for today's episode. As always, I would like to
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  remind you that nothing in this episode was intended to be tax
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  advice or a replacement for fact specific tax advice.
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  Until next time, goodbye.