A general law partnership is formed when two or more people (and up to, but no more than, 20 people)\u00a0go into business together. Partnerships are generally set up so that all partners are equally responsible for the management of the business, but each also has liability for the debts that business may incur.<\/p>\n
Tax law also provides for the notion of a \u201ctax law partnership\u201d \u2013 which occurs when individuals are in receipt of income jointly \u2013 such as an investment property.<\/p>\n
A typical scenario when launching a business based on a general law partnership structure sees each partner advance some capital to start up the enterprise. As the income years come and go, each partner takes a share of the profit and counts this as part of their personal assessable income for tax purposes.<\/p>\n
However as the business becomes established, or better yet proves to be viable and becomes a successful operation, there is likely to come a time when its working capital \u2014 which had been financed from each partners\u2019 pocket \u2014 can be refinanced through the partnership business borrowing funds.<\/p>\n
The refinancing principle<\/strong><\/p>\n For such partnerships, there is a \u201crefinancing principle\u201d under tax law that provides some general principles governing the deductibility of loan interest in such circumstances.<\/p>\n As a general rule, interest expenses from a borrowing to fund repayment of money originally advanced by a partner, and used as partnership capital, will be tax deductible. This is covered in a tax ruling (you can ask this office for a copy).<\/p>\n The ruling states that to qualify for a tax deduction, the interest expense \u201cmust have sufficient connection\u201d to the assessable income producing activities of the business, and must not be \u201cof a capital, private or domestic nature\u201d.<\/p>\n However interest on borrowings will not continue to be deductible if the borrowed funds cease to be employed in the borrower\u2019s business or income producing activity. Nor will deductibility be maintained should borrowed funds be used to \u201cpreserve assessable income producing assets\u201d. There is also a limitation on deductibility of loan interest in that borrowings to repay partnership capital can never exceed the amount contributed by the partners.<\/p>\n The ability to make these interest expense deductions under the \u201crefinancing principle\u201d is generally limited to general law partnerships \u2014 and not tax law partnerships.\u00a0 This principle would also not apply to companies or individuals. (There are prescribed conditions where, for example, a company may make such a claim, but under very specific circumstances.)<\/p>\n Set-up costs<\/strong><\/p>\n Partnerships can be less expensive to set up as a business structure than starting business as a sole trader, as there will likely be greater financial resources than if you operated on your own. On the flip side however, you and your partners are responsible for any debts the partnership owes, even if you personally did not directly cause the debt.<\/p>\n Joint and several liability<\/strong><\/p>\n Each partner’s private assets may still be fair game to settle serious partnership debt. This is known as \u201cjoint and several liability\u201d \u2013 the partners are jointly liable for each other’s debts entered into in the name of the business, but if any partners default on their share, then each individual partner may be severally held liable for the whole debt as well.<\/p>\n Other tax factors <\/strong><\/p>\n Other general factors to note about partnerships include:<\/p>\n This information has been prepared without taking into account your objectives, financial situation, or needs.\u00a0 Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.\u00a0Content in partnership with Taxpayers Australia<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" A general law partnership is formed when two or more people (and up to, but no more than, 20 people)\u00a0go into business together. Partnerships are generally set up so that all partners are equally responsible for the management of the business, but each also has liability for the debts that business may incur. Tax law […]<\/p>\n","protected":false},"author":3,"featured_media":3720,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_kad_blocks_custom_css":"","_kad_blocks_head_custom_js":"","_kad_blocks_body_custom_js":"","_kad_blocks_footer_custom_js":"","footnotes":""},"categories":[29,27],"tags":[],"acf":[],"yoast_head":"\nPartnership facts and foibles<\/h3>\n
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