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The non-commercial loss provisions for partnerships are no different from the ones applying to sole traders. There are just some additional rules that apply.
Non-Commercial Loss Provisions for Partnerships
The non-commercial loss provisions in Div 35 of the 97 Act apply to sole traders as well as individual partners in partnerships. And for sole traders, these are relatively straightforward – the emphasis on ‘relatively’.
But how does this change for individual partners in partnerships? How do these provisions apply to partnerships?
That is the question Ben Miller of Wolters Kluwer discusses with you in this episode.
Here is what we learned but please listen in as Ben Miller explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Non-Commercial Loss Provisions for Partnerships
The non-commercial loss provisions for partnerships only apply to individual partners. Not to any corporate partners in a partnership. In other words, not to companies or trusts.
Non-Commercial Loss Provisions
In episode 369 we spoke about the general concept of the non-commercial loss provisions. We covered how these provisions apply to sole traders. And these provisions still stand. The same provisions apply to partnerships.
But since partnerships are fundamentally different to sole traders, the provisions need additional rules to make them work as if each individual partner was a sole trader.
That is an important point. In the end, the outcome is the same as if the partners were sole traders. That is what the additional rules for partnerships aim at.
PCG 2022/1
In episode 369 we also covered the safe harbour rules which back then in November sat in PCG 2022/D2. That PCG has since been issued and is now PCG 2022/1.
The PCG applies to individual partners the same way it applies to sole traders. If an individual partner is affected by fire, drought, flooding or COVID, then this PCG 2022/1 allows you to self-assess the Commissioner’s discretion.
Each Partner Separately
The income requirement and four tests apply to each partner individually.
As a result, one partner might pass and another might not. Be it the income requirement or any of the other four tests.
Income Requirement
Just like for a sole trader the income requirement for partners has nothing to do with the actual business or businesses.
All that matters is the amount of other income of that particular individual. If total taxable income plus fringe benefits + super + investment losses are less than AUD 250k, the individual has passed the test.
The AUD 250k threshold applies per partner. And so one individual partner might pass the requirement, and the other might not.
And just like for sole traders, there is no grouping and also no subtracting. The income is what it is.
Each Business Activity Separately
Just like for a sole trader you need to look at each business activity separately.
If a partnership carries on more than one business activity, the income and deductions must be accounted for separately for each unless they are similar activities. That is the same rule as for sole traders. If a sole trader runs several businesses, you need to run the non-commercial loss provisions for each business separately. The same for partnerships.
Assessable Income Test
Just like for a sole trader, the partnership’s assessable income from a particular business activity must be at least 20k – but then there are possible adjustments at the partner level.
For an individual partner, you can add assessable income if the partner earns income from the same business activity outside of the partnership.
And you have to subtract assessable income if one of the partners is a company or trust. In other words, if you have partnership members that are companies or trusts, you must exclude their share of the assessable income.
Let’s say, Bob, Sally and a company run a business together. The partnership earned AUD 22,000 assessable income.
AUD 4,000 of that income went to the company and AUD 9,000 to each individual in the partnership. As a result, Bob and Sally don’t pass the income test: AUD 22,000 Less AUD 4,000 is AUD 18,000 and hence less than AUD 20,000.
Profits Test
The profits test is per partner and is just based on their tax return. There is no adding or subtracting.
Whatever each partner shows as a profit or loss for a particular business activity in their tax return, is what goes into the profits test. If there is a profit of at least 1 cent in three of the past five years, you passed the profits test.
Real Property Test
For the real property test, you start with the whole partnership. The real property owned by the partnership must be at least AUD 500,000 – just like for sole traders.
But then you deduct any shares attributable to corporate partners. In other words, if you have partnership members that are companies or trusts, you must exclude the value of any real property attributable to them.
And then for each individual partner, you can include property they own in their individual name if the partnership business uses this property. That is a big IF. You can only add property held in individual names if that property is used by the business. If not, it doesn’t get added.
In this interview, Ben uses the example where one partner owns the 5th office used by the partnership. That office gets added to the partner’s real property test and as a result, he passes the test.
Other Asset Test
Just like for sole traders, the value of other assets owned by the partnership must be at least AUD 100,000.
But just like the real property test, you then subtract and add.
You subtract the relevant share attributable to corporate partners, be they companies or trusts.
And you add any share owned by partners in individual names but used for business purposes.
So the same logic as in the real property test.
Conclusion
So this is a short summary of how the non-commercial loss provisions apply to a partnership. But please listen to the interview since Ben Miller explains all this much better than we ever could.
MORE
Safe Harbour for Non-Commercial Business Losses
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 06 March 2023
Tax Talks spoke to Ben Miller - Senior Editor at Wolters Kluwer - for more details.
