PARTNERSHIPS- ALLOCATION OF PROFITS
In terms of Section GD3
of the Income Tax Act 1994 Inland Revenue Department have the ability to
allocate profits of a partnership between the partners for taxation purposes.
However, IRD are only
able to allocate profits between partners who are relatives.
IRD will do this if
they consider that the amount of profit allocated to the relatives is not
reasonable. In determining what is reasonable, IRD will have regard
to the value of the contributions made by the partners to the partnership by way
of capital, services or any other maters considered relevant.
IRD are unable to
upset the allocation of profits where there is a bona fide partnership
agreement. For a partnership agreement to be bona fide, the
following conditions must be met:
| It must be in writing |
| All partners are over 20 years of
age |
| The term must be a minimum of 3
years |
| Each partner must have real and
effective control over their environment |
| The share of the profits does not constitute a gift |
In husband/ wife
partnerships there is often no agreement at all.
A 50%/ 50% allocation of profits is acceptable to the IRD, or
alternatively a split more representative of input.
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