Trusts and Partnerships Lecturer: Arvin Ajay Sami LAW601 – Taxation Law Trusts and Partnerships Lecturer: Arvin Ajay Sami 24/04/2018

Overview Partnership Trust Deceased Estate 24/04/2018

Partnership In Fiji, law of partnership is stated in the Partnership Act s.2 – defines partnership “ the relationship which subsists between persons carrying on a business in common with a view of profit’ s.3 – provides that a person entitled to a share of the profits of a business is prima facie a partner in the business However, not every person sharing business profits will be a partner, e.g. employee remunerated by receiving a share of profits

Partnership Partnership is one of three principal vehicle for carrying on a business Other two are sole trade and company Essence of company is joint ownership of a business Sole trade have single owner (sole trader itself) Company carries on a business, single owner of business is company itself Partnership is uniquely the legal form for co-ownership of a business

Partnership Partnership is not a legal entity Partnership is a relation between legal entities, between the partners Partners are usually individuals, but could be and sometimes are companies One never sues a partnership, but sues the partners, i.e. the parties to the partnership relationship

Partnership A judgement against the partners is actually a judgement against each of the partners, the parties to the partnership relationship A partnership does not contract, rather each and all of the partners contract A partnership does not own property rather each and all of the partners jointly own the partnership property

Partnership Some of the more important rules include the following: Each partner is an agent of his fellow partners and the acts of any partner in the ordinary course of the partnership business bind all partners. Each partner is personally liable for all debts and obligations of the firm incurred while he is a partner. Each partner is personally liable for any wrongs committed by himself or fellow partners in the ordinary course of the partnership business. Only a judgment obtained against all partners may be enforced against partnership assets.

Partnership Each of the rules above concerns the relationship between partners and third parties. The relationship between partners – the rights, obligations and authorities among partners themselves – is usually largely determined by agreement. The agreement may be expressed formally in writing in a single document (what we commonly refer to as "the Partnership Agreement").

Partnership Alternatively the agreement between partners could be expressed in several documents, or could be partly in writing and partly oral, or could be wholly oral. Whatever the form of expression, this is still conceptually the partnership agreement, meaning the agreement between partners concerning the terms of their association together for the purposes of carrying on a stated business. 24/04/2018

Partnership Central terms to a partnership agreement include the following: the identity of the partners. the type of business to be carried on. the capital contribution of different partners. formulae for sharing profits of the business. formulae for sharing losses of the business. (This is usually the same as the agreement on profit sharing, but it could be different.) allocations of special authority to, or restrictions on, the authority of particular partners.

Partnership Conversely, the fact that parties call themselves a partnership will not by itself establish that there is a partnership. The Partnership Act does not categorise partners in any way. A partner is simply a partner.

Partnership In some jurisdictions provision exists to create a form of partnership known as a "limited partnership" In a limited partnership, partners are classified as general or limited partners. The liability of a limited partner is limited to his/her/its capital contribution to the firm. The liability of general partners is unlimited as in a regular partnership. Fiji has no legislation providing for the creation of a limited partnership.

Partnership Labels like "active partner," "sleeping partner," "silent partner," “senior/junior partner," and "salaried partner," are business rather than legal terms. They are useful in conveying some information about a partner's role in the firm but have no general legal significance.

Partnership An active partner is a partner with an active role in a firm's business. By contrast a sleeping partner is not actively involved in business operations. He or she or it provides capital but not a great deal of time or labour to operations of the firm. A partnership can be created in which all partners are largely inactive with the firm employing professional managers to conduct the day to day operations of the firm.

Partnership A silent partner is a partner who is not openly identified as being a partner so that a third party dealing with the firm may not know he is a partner. [A search of the business name (trading name) under the Registration of Business Names Act will disclose the identity of all partners.]

Partnership Titles like senior and junior partner usually reflect distinctions among partners, per the partnership agreement, concerning their profit share, their authority in making decisions concerning the firm's business, or in a professional firm their seniority within their profession.

Partnership The expression salaried partner is ambiguous. It may refer to an individual who is in truth a partner but who under the partnership agreement is entitled to a fixed "remuneration," or it may refer to an individual who is in truth only an employee of the firm but who appears to be a partner or is represented to be a partner. A person who permits himself to be represented as a partner is, viz-a-vie third parties, liable for debts of the firm as if he is in fact a partner.

Partnership Tax treatment of partnerships: The ITA does not legislate any special definition for the term "partnership". For tax purposes “partnership” bears its regular legal meaning.

Partnership The ITA utilizes the regular legal conception of a partnership in the tax treatment of firm profits and losses. No tax is levied on the firm. There is no taxpayer "the firm". Rather tax is levied on each and every partner in regard to his/her/its share of the partnership profit or loss.

Partnership We could state the point another way. Partners are co-owners of a business. Tax is levied on each co-owner on his share of business profit. Each partner is a legal person and a taxpayer. Each partner includes in total income his share of the firm profit or loss for the year. Thus tax comes to be levied on firm income as it forms a part of the total income of each member of the firm for the year.

Partnership The basic treatment under the ITA is stated expressly in s.51. s.51(1) requires a firm to make a return. It then provides; "… The income of any partner from the partnership for the income year shall be deemed to be the share to which such partner is entitled in the income of the partnership for that year …"

Partnership The basic tax treatment involves a two step process. First, profit or loss of the firm for the year is determined. This involves treating the firm as an accounting entity. Profit or loss of the accounting entity is determined using the regular tax rules on income and expenses. Section 51(1) provides; "… (such income being ascertained in accordance with the provisions of this Act) …" In effect we calculate a total income figure for the firm for the year

Partnership Second, each partner includes in total income his share, per the partnership agreement, of the total income figure for the firm. Note there is no reference here to profit being distributed or paid to a partner. The concept of a distribution of profit is irrelevant to a partnership

Partnership Partnership profit is, without anything more, the profit of the individual partners. The concept of distributing business profit to members is a company law idea. In a company situation, the company and its members (shareholders) are separate legal persons. Shareholders derive income if and only if the company makes a distribution.

Partnership A partner’s drawings may be lesser or greater than his share of partnership profit. A partner who leaves profit invested in the business has still derived profit. A partner who removes sums greater than profit has withdrawn capital from the business.

Partnership In one only respect the calculation of the firm's profit for the tax year differs from the usual calculation of total income. This is in relation to past losses. In calculating firm profit there are never any losses from past years to be carried forward to be set against income of the present year. If in any year a firm makes an overall loss then each partner in that year reports his share of the loss and includes it in calculating his total income for the year. A loss could of course be carried forward in the hands of an individual partner but this is quite a different thing.

Partnership Partner receiving "salary" Partnership agreements will sometimes provide for a partner to receive a "salary" from the firm. In Ellis v Joseph Ellis & Co [1905] 1 KB 324 the English Court of Appeal explained an arrangement like that in the example as follows. "… the arrangement made between him and his co-partners as to the payment of wages to him was really an agreement with regard to the mode in which accounts were to be taken between the partners, and to the share of profits to be received by him in excess of that received by the other partners in consideration of the work done by him."

Partnership For tax purposes we must first calculate profit of the firm. This involves adding back any "salary" expense in the calculation of profit. The resultant profit figure is then allocated in accordance with the partnership agreement. This is unexceptional where firm profits exceed the "salary" figure, but in other circumstances may produce results that at first glance appear odd.

Partnership New and retiring partners It is a characteristic of some partnerships, particularly in the legal or accounting professions, that over time old partners retire or die and new partners join the firm. Technically any change in the identity of partners involves a dissolution of the partnership

Partnership Where during the tax year there is a change in the identity of partners, separate firm returns under s.51(1) should be made for the periods before and after the change.

Partnership Non-resident partners A firm carrying on business in Fiji could include among its number a partner who is a non-resident. Conceivably a firm composed wholly of non-residents could carry on business in Fiji. It is suggested that the approach taken in the two situations is different. In the latter case, the firm return needs only to report the income of the firm derived in Fiji.

Partnership In the former, the firm return reports the world-wide income of the firm. Resident partners include in total income their share of profit of the firm. Non-resident partners include in total income only a percentage of their share of firm profit. The percentage figure is supplied by the percentage of firm profit derived in Fiji. In short non-resident partners are not liable to Fiji tax on their share of firm profit derived outside of Fiji.

Partnership Trusts, partnerships and tax avoidance Trusts and partnerships may be used as vehicles to avoid tax. The ITA has several anti-avoidance provisions specifically directed at the mis-use of trusts and partnerships.