2. Under a partnership agreement (with 2 partners in total), I draw a monthly salary of $10,000 from the business and the balance of the profits is divided between my partner and myself in equal shares. How will the assessable profits of the business be allocated between us?
The allocation of the assessable profits (or adjusted loss) between partners takes into account any salary or interest on loans or capital invested which has been paid to a partner or his/her spouse. Such a payment is treated as though it were a distribution of profits to the partner concerned and the balance of the assessable profits is then apportioned on the basis of the agreed profit-sharing ratio. The following examples illustrate how this is done:
Example 1
| $ | |
| Assessable profits | 300,000 |
| Less: Salary paid to Partner A | (120,000) |
| Remaining balance | 180,000 |
| Allocation of Assessable Profits | Partner A | Partner B |
| $ | $ | |
| Salary | 120,000 | --- |
| Sharing ratio (profit) | 50% | 50% |
| Share of balance | 90,000 | 90,000 |
| Share of assessable profits | 210,000 | 90,000 |
Example 2
| $ | |
| Assessable profits | 100,000 |
| Less: Salary paid to Partner A | (120,000) |
| Remaining balance | (20,000) |
| Allocation of Assessable Profits | Partner A | Partner B |
| $ | $ | |
| Salary | 120,000 | --- |
| Sharing ratio (profit/loss) | 50% | 50% |
| Share of balance | (10,000) | (10,000) |
| Sub-total | 110,000 | (10,000) |
| Reallocation | (10,000) | 10,000 |
| Share of assessable profits | 100,000 | --- |
As the partnership in Example 2 was in a profitable position overall (i.e. it had assessable profits of $100,000), no partner could be allocated any loss. Hence, the notional loss ($10,000) of Partner B was re-allocated to Partner A who was in a “profit position” after the initial allocation.
You do not have to separately report the salary you draw from the partnership business in a Tax Return - Individual (B.I.R.60) as the amount will be included in the assessable profits of the business.
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