A partnership is a business entity in which two or more individuals or entities combine their skills and money, and share the profits and loss in accordance with the partnership agreement. The existence of a partnership is evidenced by the actual conduct of the parties towards each other and towards third parties during the conduct of the business.
The ATO look at the following factors in deciding whether persons are carrying on a business as partners for tax purposes.
- The mutual assent and intention of the parties,
- Joint ownership of business assets,
- Extent to which the parties are involved in the conduct of the business,
- Business records,
- Joint business bank account, and
- Trading in joint names and public recognition of the partnership.
In a typical husband and wife partnership, one partner is qualified (for example an electrician) and produces the partnership income and the other partner may be involved in administration for the partnership. Profits from the partnership are normally split 50/50 between the partners.
This structure was reviewed by the ATO in 2005 in their ‘Refocus of the income-splitting test case programme’ and accepted as legitimate because both partners are exposed to the liability for the partnership debts, so both should share the rewards. Tradespeople using husband and wife partnerships can generate substantial tax savings where one spouse has low or no other income.