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What is a partnership and what are the tax consequences?

by , 29 January 2014
The tax treatment of partnerships is very different to that of companies? That's because you and your partners are personally liable for any tax owed by the partnership. Sounds confusing? It's not. Continue reading to find out everything you need to know about partnerships and its tax consequences.

Before we tell you about the tax consequences of a partnership, let's look at what exactly a partnership is.

The Practical Tax Loose Leaf Service explains that, according to case law, a partnership is merely an agreement between two or more people who agree to contribute to the partnership in return for a share in the partnership profits or capital.

The Income Tax Act's treatment of partnerships also agrees with this legal definition in that it doesn't regard partnerships as taxable entities for South African tax purposes. Instead, it treats them as 'fiscally transparent', meaning it taxes the partners on any income the partnership generates.

Does the Vat Act treat partnerships the same way?

Not quite.

The Vat Act treats partnerships as 'persons'

Section 1 of the Vat Act specifically includes partnerships in the definition of a person.

Unlike the Income Tax Act, the Vat Act makes an exception for partnerships in that it allows a partnership to apply to be registered as a vendor despite the fact that a partnership is not a legal person.

This is because the Vat Act requires every 'person' who carries on an enterprise, in which the total value of all taxable supplies made by that person exceeds or will exceed R1 million in any twelve-month period, to register as a Vat vendor.

That said; while the partnership is seen as a vendor for Vat purposes, the individual partners are jointly and severally liable for the vendor's duties under the Vat Act, including the payment of Vat due to SARS.

That means you and your other partners are liable the partnerships' Vat obligations until your partnership terminates.

This means partnerships are separately liable for Vat

Where a partnership carries on an enterprise, the partnership is treated as if it's carrying on an enterprise separate from its members.

This means that the partnership, and not the partners, must be registered as a vendor. The Vat liability of the partnership will be determined separately from that of the partners making it up (who will be separately and jointly liable for any taxes or penalties due by the partnership).

What are the tax consequences of partnerships?

In assessing the partners for tax, SARS will tax the partners at their normal tax rates.

In other words, partners which are companies will be taxed at a flat rate of 28% and partners who are natural persons will be taxed at the marginal rates that apply to individuals.

Although it's the partners, and not the partnership, that are taxed (meaning that each of them has to account for the income and any tax payable on it, in their own tax returns), the Act still requires the partners to submit a joint tax return (Section 66(15)).

Caution: Although the partners are required to submit joint returns, each partner is still assessed for tax separately (Section 77(7)).

Now that we've told you all you need to know about partnerships and the tax consequences, read this article to find out the tax implications if you or your partner dissolves your partnership.

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