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2.0 INTRODUCTION
According to irs.gov, a partnership is the relationship existing between two or more persons who join to carry on a trade or business. On the other word, partnership is an activity which involves two or more individuals who agree to operate business by sharing profit and loss incurred by the business. Each of the partners will have a responsibility on the profit and loss based on their profit sharing ratio. In Malaysia, partnership is under S 2 comprises S 4 (a) that is business income. Hence, each partner is required to pay for their income tax even though they are practising partnership.
2.1 LAW GOVERNING THE TAXATION OF THE PARTNERSHIP
According Choong (2009), partnership can define as an association of any kind between parties who are agreed to combine any of their rights, powers, property, labor of skill, for the purpose carrying on a business.
Partnership also can be define as the people who are agreed to make relationship to join in business together which comprise two or more persons (maximum of 20 peoples) and sharing profit and loss.
i) Types of conventional partnership and differentiated
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Full partner |
Known as equity partner where a partner shares the profit and losses and liable to all partnership debts and responsible towards management of business carry on. |
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Limited partner |
A person, at least one who are full member of conventional partnership. |
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Salaried partner |
Is the generally person (employees), who are not ready for the benefits and liabilities as a full partnership. |
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Sleeping partner |
Having unlimited liability for the debts but must pay tax as a limited partners. |
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Corporate partner |
Partners in limited company that pays corporation tax on share of profits that compute using tax rules. |
ii) How partnerships are taxed
Based on s4 (a) income, the tax of partnership is not existed simply because it is not a chargeable person to pay income tax but it is a chargeable person of Real Property Gains Tax (RPGT) where the gain occur from disposal of real property, and the profits is not a joint liability of the partnership.
The existence of a partnership can also construct without any written document but, formally it constructs with the agreement to avoid future dispute, and not satisfied partners among each other’s towards sharing profits and loss.
Each partner is taxed by individually where must fill up the form B in respective return on their share of profits and liable for the tax and national insurance on that share. Those form must fill up completely as soon as possible so easier to submit on 31st October after the end of tax year.
In provisional adjusted income, there are two things we must to know such:
- Deductable expenses (e.g. Entertainment to client where depending on company)
- Non-deductable expenses (e.g. Depreciation)
From the provisional adjusted income, the partnership can able to prepare a divisible of the income to individual partners based on the agreement where is sharing profit ratio.
The taxation of partnership can be complex and advice from the professional person is very needed to help partner can carrying on business without any problems and high risk to be taken.
2.2 COMPUTATION OF TOTAL INCOME OF EACH PARTNER
Income Tax Computation
NS Educational Partnership
YA 2006
RM |
RM |
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Net profit per account |
125 700 |
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Add: Non-allowable expenses |
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|
Private use of car by Siow (12 000 x 20%) |
2 400 |
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Donation |
19 000 |
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Depreciation |
24 000 |
|
|
Interest on capital |
10 800 |
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Partners’ salaries |
150 000 |
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|
Trade exhibition |
(8 700) |
197 500 |
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Provisional adjusted income |
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Less: Partners’ salaries |
150 000 |
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Interest on capital |
10 800 |
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Private use of car |
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Divisible income |
160 000 |
Computation of Each Partner Income
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1.1.06 – 31.3.06 (3 months) |
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Ng |
Siow |
Total |
|
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Profit sharing ratio |
50 % |
50 % |
100 % |
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Private Expenses |
– |
600 |
600 |
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Salary |
22 500 |
15 000 |
37 500 |
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Interest on capital |
1 500 |
1 200 |
2 700 |
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Divisible income |
20 000 |
20 000 |
40 000 |
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1.4.06 – 31.12.06 (9 months) |
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Profit sharing ratio |
60 % |
40 % |
100 % |
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Private expenses |
– |
1 800 |
1 800 |
|
Salary |
67 500 |
45 000 |
112 500 |
|
Interest on capital |
4 500 |
3 600 |
8 100 |
|
Divisible income |
72 000 |
48 000 |
120 000 |
|
Less: Approved donation |
(7 800) |
(5 200) |
(13 000) |
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Annual allowance |
(5 400) |
(3 600) |
(9 000) |
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|
|
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2.3 TAX PLANNING OPPORTUNITIES FOR INDIVIDUAL WITH BUSINESS
INCOME
The goal of tax planning is to arrange financial affairs so as to eliminate, minimise, or delay income tax. This tax planning purposely gives space to the tax payer to make use of their business operation from being highly charge by the tax authorities. Hence, there are few opportunities for NS Educational partnership to minimise their income tax.
Along the commencement of the business, NS Educational partnership can deduct some particular in their income tax. For example, expenses. All revenue expenses made from the production income will be deductable against the gross income.
Other than that, the partnership may do a disposal of assets during the business operation. This disposal is called ‘trading stock’. The purpose of trading stock is to resell the assets to gain profit. Trading stock will only be deductable by tax authorities.
NS Educational partnership also can send their employees for training during the commencement of business. This training expense will be deductable within the period of one year prior to the commencement of the business. In addition, the expenses also must incur on the training of potential employees to blow basic skills before the business is operating. However, the deduction will not be countable if the company receive training grants from the government.