A partnership is one of the simplest ways for two or more people to run a business together, but its tax reporting trips up many owners. The partnership lodges its own return, yet it pays no tax itself. Each partner then pays tax on their share through their personal return. This guide explains how the partnership tax return works, what goes in it, when it is due and the traps to avoid.
Does a partnership pay tax?
No. The ATO treats a partnership as a reporting entity, not a taxable one. The partnership lodges a partnership tax return each year showing its income, expenses and net income or loss, and how that result is split between the partners. Each partner then includes their share in their own individual tax return and pays tax at their marginal rate.
Partners must declare their share whether or not the money was actually paid out to them during the year.
What the partnership tax return reports
- Business income, including sales, fees and other assessable amounts
- Allowable deductions, such as materials, rent, wages to employees, vehicle and equipment costs
- Net income or loss for the year
- Each partner’s share of the net income or loss, and of any capital gains, as set by the partnership agreement
- Partnership details, such as the ABN, business activity and partner information
When is the partnership tax return due?
If the partnership lodges its own return, it is due by 31 October after the end of the financial year. If a registered tax agent lodges it, the agent will advise the due date under the tax agent lodgment program, which is usually later. The partners’ individual returns depend on the partnership figures, so the partnership return is normally prepared first.
Partnership losses
Where a partnership makes a net loss, each partner may claim a deduction for their share of the loss in their own return. Whether that loss can be offset against other income, such as a salary, depends on the non-commercial loss rules, so get advice before relying on a partnership loss to reduce your personal tax.
Capital gains in a partnership
Partnership assets are treated as owned by the partners in proportion to their interests. When an asset is sold, each partner works out their own capital gain or loss on their share, rather than the partnership reporting one combined gain.
When a partner joins or leaves
A change in partners technically dissolves the partnership. If the business continues with at least one common partner, no gap in trading and a continuity clause in the partnership agreement (written or implied by conduct), the ATO will generally treat it as a reconstituted partnership. It keeps its ABN and TFN and lodges one return for the year. If the change amounts to a wind-up, a new partnership is formed, new registrations are needed, and two returns are lodged: one up to the dissolution date and one from the new formation date. The ATO must be told of a change within 28 days.
Common mistakes
- Partners only declaring what was paid to them, instead of their full share of net income
- Splitting profits differently from what the partnership agreement says
- Claiming private costs through the partnership
- Forgetting that GST registration is required once turnover reaches $75,000
- Lodging the individual returns before the partnership return is finalised, then having to amend them
Frequently asked questions
Do partners pay tax separately?
Yes. Each partner reports their share of the partnership’s net income or loss in their own tax return and pays tax at their individual rates.
Does a partnership need an ABN and TFN?
Yes. A partnership has its own TFN and ABN, separate from the partners’ personal ones, and uses them for its return and any GST registration.
Can a partnership pay a partner a salary?
Partners are not employees of their own partnership, so amounts paid to a partner for their work are generally treated as part of the distribution of partnership income rather than wages. Ask your accountant how to treat these payments in your partnership agreement and returns.
Partnership tax returns in Melbourne
Kennedy Tax & Business Services prepares partnership and partner returns together, so the figures match and nothing is declared twice or missed. We also advise on business structures if a partnership is no longer the right fit, and handle BAS lodgement. Contact our Footscray or Williams Landing office to book an appointment.
This article is general information only and does not take into account your personal circumstances. Speak to a registered tax agent before acting on it.
