Business structures
Partnership
A partnership is a business structure in which two or more people or entities carry on a business together with a view to profit, sharing income, losses and liability.
A partnership exists when two or more people, or other entities, carry on a business together and share the income or loss. It can be formal, with a written partnership agreement, or informal, arising simply from how the parties behave. Husbands and wives running a business together, or friends starting a cafe, may be in a partnership even if they have never signed anything, which is why a written agreement is strongly recommended.
For income tax, a partnership is not itself taxed on its profits. Instead it lodges a partnership tax return, which reports the net income or loss of the partnership. Each partner then reports their share of the net income in their own individual tax return and pays tax at their own rates. A partnership has its own tax file number and ABN. Partners do not receive wages from the partnership for their own work, and any payments they take are treated as drawings or distributions of profit.
A key feature is liability. In a general partnership, each partner is jointly, and often severally, liable for the debts of the partnership, which means one partner can be required to pay all of a debt incurred by another. Limited partnerships and incorporated limited partnerships also exist, in which some partners have limited liability, but they are less common for small business and have different rules.
GST is dealt with at the partnership level. The partnership, not the individual partners, registers for GST using the partnership's ABN, once its GST turnover meets the $75,000 threshold or it chooses to register. The partnership then issues tax invoices, claims credits and lodges its own BAS. Partners cannot also register individually for the same business activity. Where a partner has separate activities of their own, those are assessed separately.
Partnerships that employ staff must withhold PAYG and pay super for employees, but not for the partners. State-based obligations such as payroll tax and workers compensation are administered by state and territory authorities and differ by jurisdiction. Records should be kept for five years. A partner who retires, or a new partner who joins, can trigger consequences for income tax, CGT and sometimes GST, so advice should be sought before the change.
A common misunderstanding is that partners can split profits however they like for tax. The share each partner reports needs to reflect the partnership agreement and the real arrangement, and the ATO may challenge arrangements that do not reflect commercial reality. Another is to confuse a partnership with a joint venture, which is a different arrangement.
This is general information only, so confirm your structure with the ATO or a registered tax professional.
Worked example
Two friends, Alex and Bree, run a landscaping partnership on a 50:50 basis. In the year, the partnership earns $180,000 and has $80,000 of expenses, so net income is $100,000. The partnership lodges its return showing $100,000. Alex and Bree each include $50,000 in their own tax returns. As GST turnover exceeds $75,000, the partnership must be registered and lodge BAS.
Practical tips
- Put a written partnership agreement in place covering profit shares, drawings, and what happens if a partner leaves.
- Remember that the partnership, not each partner, is the entity registered for GST and lodging the BAS.
- Be aware of joint liability. One partner's debts or mistakes can affect all the partners.