Net Income of a Partnership and Partnership Profits
15.44. The profits of the partnership as determined by partnership law and the partnership agreement will not
necessarily be the same as the net income of the partnership. In some situations the partnership profits will be
greater than the net income: special tax concessions by way of accelerated depreciation and investment allowances may
be available to the business carried on by the partnership. More probably, partnership profits will be less than the
net income. The partnership agreement may
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require that provision be made for contingent liabilities and
higher depreciation charged than is allowable in calculating net income. Whatever the amount of partnership profits,
only the amount of the net income will be brought to tax in the hands of the partners. The scheme of Division 5 thus
ensures that no greater tax is imposed than would have been the case had the income not moved through the
intermediary.
15.45. The amount of partnership profits is not, however, irrelevant. It is necessary in many cases to know the amount in order to fix the individual interests of the partners, on the basis of which the net income is allocated to the partners. Where the interests of the partners are simply expressed as fractions of profits, there will be no need to look to the amount of partnership profits. But where the interests of the partners are to some extent expressed as, say, salary or interest on capital contributed, the determination of an individual interest will require a calculation of the amount of profit in order to determine the proportion of the profits of the partnership to which the partner is entitled.
15.46. Division 5 determines exclusively how a partner is to be taxed on the net income of the partnership. Actual distribution to a partner, whenever it occurs, does not involve any derivation of income by the partner.
15.47. The allocation of net income to a partner carries through to the partner the quality of exempt income that may attach to that income. There is an express provision in Division 5 to this effect. Presumably the individual interest of a partner, for this purpose, must depend on the taking of the partnership accounts and any appropriation of profits that distinguishes the income appropriated by reference to its source. It may be necessary to ensure, by express provision, that the quality of being a dividend is carried through in order that the tax credit in respect of dividend income proposed by the Committee in Chapter 16 be available to a partner.
15.48. Where expenditure is incurred by a partnership engaged in prospecting for minerals or in mining development, deductions may be available if there is income from mining or, in some circumstances, any other income to absorb them. The Act does not at present appear to make the deductions available against non-partnership income of the partners. It may be appropriate to remove the doubt by specific provisions for the carrying through of the deductions to the individual partners.