Treatment of Losses
15.49. The treatment of partnership tax losses differs from the treatment of tax losses of a trust. A tax loss is not carried forward by the partnership in determining the net income of the partnership in a subsequent year. It is distributed to the partners in accordance with the individual interests of the partners. ‘Individual interests’, for this purpose, refers to the liability of a partner to share in losses.
15.50. A partnership agreement may provide for the payment of a salary to a partner. The salary in a particular year
may be greater than the net income of the partnership or may be payable though a tax loss has been incurred by the
partnership. The application of the individual interests of the partners to determine the allocation of the net income
or of the tax loss becomes, in these circumstances, a difficult exercise. The present practice of the Commissioner in
accepting an allocation agreed to by the partners, where there is no suggestion that a tax advantage is the objective
of the allocation, seems to be satisfactory. The practice may involve a result which, curiously, taxes one partner on
an amount of net income and allows the other a loss. However, the principle is preserved that, when the tax
consequences for the partners
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are combined, no more is taxed than the net income of the partnership or no
greater loss is allowed than the tax loss.