Partnership tax obligations in Australia, a practical guide

Running a business as a partnership is common in Australia, but the tax treatment surprises many owners. The partnership itself does not pay income tax. The partners pay tax on their share of the profits, while the partnership still has real compliance duties: it must register with the Australian Taxation Office (ATO), lodge a partnership tax return every year, and handle goods and services tax (GST) and employer obligations.

This article sets out the tax obligations that come with operating as a partnership, who each obligation falls on, and what happens if they are missed. It covers registration, the annual return, how partners are taxed on income and losses, GST and employee taxes, and capital gains tax (CGT) when the partnership sells business assets.

Is your business actually a partnership?

A partnership is the relation between two or more people carrying on a business in common with a view to profit, under s 1 of the Partnership Act 1892 (NSW) and the equivalent Acts in other states and territories. If you and another person run a business together and share its profits, you are likely in a partnership even if you never signed anything.

A partnership is not a separate legal entity. The partners are jointly and severally liable for the debts of the business, which means a creditor can pursue any one partner for the whole of a partnership debt. This is a real risk to weigh up before choosing the structure, and it is why some businesses use a company as a partner to limit personal exposure.

For tax purposes, the important point is that the partnership is a reporting entity, not a taxpayer. Use these checks to work out whether your situation is caught:

Partnership: two or more people carrying on a business together with a view to profit, sharing the income and losses.
Not a partnership: jointly owning an investment property, a bank account or shares and sharing the rent, interest or dividends. The ATO's partnership return instructions say each person reports their own share in their individual return in this situation.
No paperwork needed: a partnership can exist without a written agreement, but the default rules of the Partnership Act then apply, including equal sharing of capital and profits under s 24. A written partnership agreement overrides those defaults.

Register the partnership with the ATO before you trade

Three registrations matter from day one:

ABN: the partnership must apply for its own Australian business number and use it for all business activities.
TFN: the partnership has its own tax file number, separate from the personal TFNs of the partners.
GST: the partnership must register for GST once its GST turnover reaches $75,000 in a 12-month period ($150,000 for not-for-profits), when it provides taxi, limousine or ride-sourcing services regardless of turnover, or when it wants to claim fuel tax credits.

The $75,000 threshold is based on gross business income, not profit, and the ATO includes the turnover of affiliates and connected entities when working it out. If you start a business expecting to reach the threshold in the first year, you must register before you trade. Once registration is required, the ATO allows 21 days to do it.

If you do not register for GST in time, you may have to pay GST on sales made since the date registration was required, even if you never added GST to the price, plus penalties and interest. Once registered, the partnership generally lodges business activity statements (BAS) and, if it has employees, withholds pay as you go (PAYG) tax from their wages. The partnership may also report PAYG instalments through its BAS.

Lodge the partnership tax return every year

If the partnership carries on a business, it must lodge a partnership tax return each financial year. The ATO describes the return as showing all business income and deductions and how the income or loss is distributed between the partners. Its main job is reconciliation: the ATO uses it to check that the shares each partner reports in their personal tax returns match what the partnership reported.

You do not need to lodge a partnership return if the only income you and the other owners derived jointly was rent from an investment property, interest on a joint account or dividends on joint shares. Each person simply reports their own share in their individual return.

The return is usually lodged through registered tax agent software, standard business reporting software, or on paper. Late or incorrect lodgment can attract ATO penalties, and interest can be charged on tax paid late. Because the return is the matching record for every partner's personal return, getting it wrong creates risk for everyone in the structure.

Partnerships are flow-through structures. The partnership does not pay income tax; each partner reports their share of the net partnership income in their own tax return and is personally liable for the tax on it.

The amount of tax depends on the partner, not the partnership:

Individual partners: pay tax at their marginal rates, so their share of partnership profit is added to their other income.
Company partners: pay tax on their share at the company tax rate.
Drawings: amounts partners take out of the business are not wages for tax purposes and are not deductible, but they may affect how partnership income is allocated.

Because the partnership can have employees, employer obligations sit with the partnership: it must withhold PAYG from employee wages and pay superannuation guarantee for its employees. Partners are not employees of the partnership and are responsible for their own superannuation.

Losses flow through, with limits for individuals

If the partnership makes a loss, the loss is shared between the partners in the same proportions as income. Each partner can generally offset their share against other income in their own return. This is a real difference from a company, where losses stay trapped inside the company until future profits absorb them.

There is an important limit for individual partners. The ATO's non-commercial loss rules say an individual may offset their share of a partnership loss against other income only if they pass the income requirement and one of four tests (assessable income, profits, real property or other assets). If none of the tests are met, the loss is deferred and carried forward. A tax agent can work through the four tests quickly, and this is one area where advice usually pays for itself.

Capital gains tax when the partnership sells assets

CGT applies to capital gains on business assets such as goodwill, land and equipment when a CGT event happens. For a partnership, the gain on the asset is shared between the partners, who include their share in their own returns.

Individual partners can generally halve their share of the gain with the 50% CGT discount if the asset was owned for at least 12 months and they are Australian residents for tax purposes. Companies cannot use the CGT discount, which matters if a company is one of the partners.

The small business CGT concessions

Partnerships selling a business asset can often reduce the tax bill further through the small business CGT concessions. There are four: the 15-year exemption, the 50% active asset reduction, the retirement exemption and the roll-over. The ATO applies them in a set order: the 15-year exemption first, then capital losses, then the CGT discount, then the 50% active asset reduction, then the retirement exemption or roll-over.

To access any of them, the basic conditions must be met. For a partnership, the partnership itself, not the individual partner, must be the small business entity for the CGT concessions, which requires aggregated turnover of less than $2 million in the relevant income year. Alternatively, the total net value of the CGT assets owned by the partners, connected entities and affiliates must not exceed $6 million just before the CGT event. The asset must also be an active asset, meaning it is used in the course of carrying on the business; the goodwill of a business is the classic example. If the asset is owned by an individual partner but used in the partnership's business, it can still qualify.

15-year exemption

If you are 55 or older and the sale happens in connection with your retirement, or you are permanently incapacitated at any age, and you have continuously owned the asset for at least 15 years, the entire capital gain can be disregarded. This is the most generous concession, and the ATO applies it first.

50% active asset reduction

After the CGT discount, an eligible individual partner can reduce the remaining gain by a further 50%. The two halvings can cut a gain to a quarter of its original amount. The reduction applies automatically when the basic conditions are met, unless you choose for it not to apply.

Retirement exemption

The retirement exemption lets an individual disregard up to $500,000 of capital gains over their lifetime. If you are under 55, the amount you disregard must be paid into a complying superannuation fund or a retirement savings account. If you are 55 or older, there is no requirement to pay anything into super. You must keep a written record of the amount you choose to disregard.

Roll-over

If you sell an active asset and acquire a replacement active asset, or spend money on capital improvements to an existing asset, you can defer all or part of the gain until you later dispose of the replacement asset. The replacement asset period ends two years after the CGT event, or later where a look-through earnout right is involved. If you do not acquire a replacement asset or make the improvements in time, the deferred gain becomes taxable.

Consequences of getting it wrong

Most of the risk in a partnership sits with the partners personally. If the partnership under-reports income, the ATO can reassess the partners, because each partner is personally liable for tax on their share. Failing to register for GST when required can mean paying GST on sales made since the date registration was required, even if GST was never added to the price, plus penalties and interest. Late or incorrect lodgment can attract penalties and interest charges.

Beyond tax, remember the exposure built into the structure: partners are jointly and severally liable for the debts of the business, which is why the tax and reporting side deserves the same care as the trading side.

A compliance checklist for your partnership

Work through these items to keep the partnership on the right side of its obligations:

Register: apply for the partnership ABN and TFN before trading, and register for GST if turnover is $75,000 or more, or is expected to reach it in the first year.
Lodge: lodge the partnership tax return every year the partnership carries on a business, and make sure the shares match what each partner reports.
Employees: withhold PAYG from employee wages and pay superannuation guarantee for employees.
Losses: check the non-commercial loss rules before an individual partner offsets a share of a partnership loss against other income.
CGT: keep records of cost bases and ownership dates for business assets, and check the aggregated turnover and net asset tests before selling.
Agreement: put a written partnership agreement in place so profit sharing, capital and exit arrangements are not left to the default rules.

When to involve a lawyer or accountant

A partnership is simple to start, but the obligations spread across registration, lodgment, employee taxes and CGT. A registered tax agent can lodge the partnership return and work through the non-commercial loss rules. An accountant can help with GST, PAYG instalments and the small business entity tests. A lawyer is worth involving when the structure is set up, so the partnership agreement deals with profit sharing, capital and what happens when a partner leaves, and again before a business asset is sold, so the CGT concessions are planned rather than hoped for.

The obligation most partnerships underestimate

The annual partnership return is easy to treat as paperwork, but it is the ATO's matching record for every partner's personal tax return. A partnership that lodges late, or whose return does not reconcile with what the partners reported, creates risk for everyone in the structure. And when a sale of the business is on the horizon, the CGT concessions depend on conditions that must be met at the partnership level before the event, not after. If you run a partnership, confirm the ABN, TFN and GST registration are in place first. If you are about to sell a business asset, get advice before the sale is signed, because that is the point at which the concessions are won or lost.