Partners taxed on fringe benefits

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A partnership is not recognised as a ‘person’ for income tax purposes. The partnership is therefore not assessed for tax, but each individual partner is taxed on the taxable income of the partnership, based on the partner’s profit-sharing ratio. The partner’s share of the taxable income of the partnership should be declared on the partner’s individual income tax return (ITR12).

A partner is also not an employee of the partnership since the partner can’t be employed by himself (i.e. the partnership). Consequently, partners were never taxed on fringe benefits since, for the fringe benefit tax to apply, a benefit should be provided by an employer to an employee. However, from the date of promulgation of the Taxation Laws Amendment Act 2016 (19 January 2017), a partner is deemed to be an employee of the partnership for purposes of the Seventh Schedule (the Schedule of the Act that deals with the calculation of fringe benefits). Partners will therefore now be taxed on fringe benefits, like any other employee. The partner will have to include in his/her gross income the cash equivalent of all fringe benefits listed in the Seventh Schedule that were received from the partnership.

The partner will only be taxed on the value of a fringe benefit, if the underlying asset is the asset of the partnership. For example, if the partner has the right to use a computer of the partnership for private purposes, the partner will be taxed on the right of use as a fringe benefit. In calculating the taxable income of the partnership (in order to calculate the share of the taxable income that should be included in the respective taxable incomes of the individual partners), the partnership will be able to claim the cost of the asset as a deduction (capital allowances).

If, however, the asset is the asset of the partner, the partner will not be taxed on the fringe benefit. The partner will be able to claim the cost of the asset as a deduction (capital allowances) against the taxable income of the partner to the extent that the asset was used by the partner for business purposes.

It is common practice that partners make provision for specific conditions in the partnership agreement, for example that the partnership must make contributions to the partners’ respective retirement annuity funds on their behalf. With the implementation of the fringe benefit tax as discussed above, a partner will be taxed, as a fringe benefit, on the amounts contributed by the partnership to the retirement annuity fund of the partners. In the calculation of the partnership’s taxable income, these contributions made by the partnership, are deductible in terms of section 11(l). From 1 March 2016 all contributions to retirement funds (that is, contributions to pension funds, provident funds and retirement annuity funds) qualify for a deduction against the taxable income of the partner in terms of the amended section 11(k). The combined total contributions (employer and employee contributions) to all of the aforementioned funds should be calculated since the deduction is not applied on a fund-by-fund basis but are applied in respect of the contributions to all the funds in total. The deduction is limited to the lesser of

  • R350 000 or
  • 27,5% of the higher of

– “remuneration” as defined in the Fourth Schedule (that is for employees’ tax purposes), or

– taxable income.

Since a partner is not an employee for purposes of the Fourth Schedule, the deduction for a partner will be limited to the lesser of R350 000 or 27.5% of taxable income (if it is assumed that the partner is also not an employee of another employer).

Contribution amounts in excess of the above limitation, should be carried forward to the following year of assessment and is deemed to be contributions made to retirement funds in that following year of assessment. The carried-forward contribution amount should therefore be added to that year’s current contributions made in order to calculate the deduction in terms of section 11(k) in that year.

Annelize Oosthuizen (CA(SA)) is a senior lecturer in Taxation  at the School of Accountancy, University of the Free State