What is the main purpose of partnership agreement in your tax ?

Story of tax case

- The taxpayer operated 2 petrol stations which were registered as a sole proprietorship.

- However, the business carried out by way of partnership with his 2 children:

i. taxpayer declared 50% share of profits

ii. his children declared the remaining profits

Tax issue

- DGIR had rejected the claim of partnership because no evidence of partnership had been furnished during an audit.

- Additional assessment was raised on the taxpayer as a sole proprietor and the assessments on his two children were accordingly reduced.

Taxpayer’s argument

- During the hearing, Partnership Agreement was provided by taxpayer to claim as evidence of partnership.

- Therefore, the income derived from the business was assessable as a partnership.

DGIR’s argument

- Taxpayer failed to prove any participation in the capital or other significant contribution by partners

- DGIR has no basis to raise the assessment on a partnership because the return form for partnership (Form P) was not filed.

Therefore, the income from the business was correctly assessed as a sole proprietor.

High court

The High Court allowed the DGIR’s appeal and confirmed the additional assessments raised by the DGIR.

Why a partnership agreement is important?

The partnership agreement includes the details terms of the partnership and outlines important information between the partners.

For example:

1. Capital contribution

2. Profit distribution

3. Rights and duties of the partners

4. Conduct and management of the firm

What if there is no partnership agreement?

If there is no partnership agreement, the partnership rules will follow the Section 26 of Partnership Act 1961.

It included, but not limited to the followings:

1. Partner will share the profits and losses in the business equally.

2. No interest on the capital if no profit

3. 8% interest will be charged on loan from partner (other than capital contribution).

4. Partners are not allowed to draw a salary

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