Going into business with a partner changes more than just the day-to-day decision-making. It also changes how the ATO taxes the business, in ways that catch some new partnerships off guard. However, understanding the basics before you start (or shortly after) makes ongoing compliance far more straightforward.
A partnership itself doesn’t pay income tax as a separate entity. Instead, the partnership lodges a tax return that reports the business’s income and expenses. It then distributes the resulting profit or loss to each partner according to the partnership agreement. Each partner pays tax on their share at their own marginal tax rate. Consequently, the partnership return is largely an information return, while the individual partners pay the actual tax on their share of the profit.
The partnership agreement generally governs how partners split profits and losses. This doesn’t necessarily need to mirror the ownership percentage of the business — partners can agree to different profit-sharing arrangements based on their specific contributions or agreement. Therefore, having a clear, documented partnership agreement is essential, since it directly determines how much tax each partner is personally responsible for.
If a partnership makes a loss, the partnership generally distributes that loss to partners in the same way it would distribute profits. Each partner can then potentially offset their share of the loss against their other income, subject to specific rules. Consequently, this is one of the genuine advantages of a partnership structure compared to a company. A company traps losses within the company itself, rather than making them immediately available to offset against an owner’s personal income.
If the partnership’s turnover exceeds the GST threshold, the partnership itself needs to register for GST and lodge BAS as a single entity. This sits separate from each partner’s individual tax obligations. Therefore, GST and BAS compliance sits at the partnership level, while income tax ultimately sits with the individual partners.
Unlike employees, the partnership itself generally doesn’t pay partners superannuation guarantee contributions. Instead, partners are responsible for arranging their own superannuation contributions from their share of the partnership profit. Consequently, this is an important planning consideration that’s easy to overlook, since there’s no automatic employer-style contribution happening in the background.
Compared to a sole trader, a partnership allows shared ownership and responsibility, but requires a clear agreement to avoid disputes over profit sharing and decision-making.
Compared to a company, a partnership offers simpler compliance in some respects. However, it doesn’t provide the same asset protection, since partners can generally be personally liable for the partnership’s debts and obligations.
Therefore, choosing between these structures depends on factors well beyond tax alone, including liability exposure and how you expect the business to grow.
Not having a clear written partnership agreement. Ambiguity around profit splits can create both business disputes and tax complications.
Forgetting to arrange personal superannuation. Without an employer contributing automatically, it’s easy for partners to under-fund their retirement savings over time.
Mixing up partnership and individual tax obligations. Confusion between what’s reported at the partnership level versus each partner’s individual return is a common source of errors.
EBATS helps business partners structure profit-sharing arrangements, manage partnership tax and GST obligations, and plan superannuation contributions correctly.
📍 Suite 2.2/47 Queen St, Campbelltown NSW 2560, Australia 📞 0404 471 816 🌐 www.ebats.com.au 📧 [email protected]
Ethical Accounting & Taxation Services | Campbelltown NSW | Trusted Tax, Accounting & Business Support Since 2011