Taxation of Partnership Businesses in Zimbabwe-Deeper Dive into Partnership Tax Principles

📈 Partnership Business: Deeper Dive into Partnership Tax Principles

This article expands on the core principles of partnership taxation, focusing on the concepts of income accrual, source, residence, accounting changes, and the specific treatment of partnership expenditures. Understanding these nuances is crucial for accurate compliance with the Income Tax Act.

I. Fundamental Principles

A. Accrual and Assessment

The fundamental principle governing partnership taxation remains that a partnership is a tax-transparent entity.

• Deemed Accrual: Section 10(7) of the Income Tax Act is the key deeming provision: income accruing to the partnership is deemed to have accrued to the partners in their agreed profit-sharing ratios. The partnership does not pay tax itself.

• Joint Liability to File, Separate Liability to Pay:

  • Joint Return (Section 37(5)): The partners are jointly and severally liable to submit a single, joint return to the tax authorities, detailing the partnership’s results.

  • Separate Assessment (Section 51(5)): Crucially, the partners are assessed separately and are only liable to tax on their individual share of the profit.¹

B. Determining the Source of Partnership Income

The source of income is critical in Zimbabwe, as tax is levied on income from a source within or deemed to be within Zimbabwe.² Since a partnership is not a legal person, the source of its income is determined in relation to the partner.

• The Originating Cause: The originating cause of the partnership income is the services rendered by the partners to the partnership business.

• Location of Service (Epstein v. COT): Following case law principles, the source is the place where the partner renders their services to earn the partnership income. Therefore, the source of partnership income depends on the location of the partner’s service, not the partnership’s fixed place of business.

C. Residence of a Partnership

The residence status is determined by the partners’ residency. A partnership is deemed a resident of Zimbabwe if, at any time during a tax year, at least one partner was a resident of Zimbabwe. This extends the tax net to non-resident partners carrying on a Zimbabwean trade.

II. Partnership Changes and Capital Items

A. Accounting for Partnership Changes

A change in the partnership deed—whether due to a change in profit-sharing ratios, the admission of a new partner, or the retirement/death of an existing partner—usually constitutes a fresh partnership.

• General Rule (Excluding Death): For most changes, accounts are required to be prepared for the full year up to the last day of the accounting period, with the profit simply split according to the old/new ratios for the relevant periods.

• Change due to Death: In the case of a partner’s death, the tax periods must be split:

  1. A period from the beginning of the year of assessment to the date of death of the partner (to account for the income accrued to the deceased partner).

  2. A period from the date of death to the end of the year of assessment (for the continuing partners/new partnership).

B. Partnership Goodwill

Goodwill is an item of a capital nature. When goodwill is sold or realised, any gain would typically be subject to Capital Gains Tax, not Income Tax. When goodwill is introduced or adjusted upon a change in partnership, its treatment is generally an accounting exercise affecting the partners’ capital accounts and is not an immediate revenue item for Income Tax purposes.

C. Partner’s Private Property Used for Business

Where a partner uses their personal property (e.g., a motor vehicle) for the partnership business, they are eligible to claim the related costs. This claim is made against their share of the partnership profit in their individual tax computation, covering:

• Capital Allowances on the asset (e.g., wear and tear).

• Running costs incurred by the partner.

III. Two-Stage Tax Computation

The calculation of a partner’s final tax liability is executed in two critical stages.

Stage 1: Computing Partnership Taxable Income

The partnership is treated as a taxable entity to arrive at the total trading profit. This involves adjusting the accounting net profit by adding back non-allowable expenses and deducting all statutory allowances (like capital allowances).

Stage 2: Computing Partners’ Tax Liability

1. Allocate Profit: The calculated partnership taxable income is shared among the partners in their agreed profit-sharing ratio.

2. Add Benefits: Any benefits enjoyed by the partner (e.g., salary, interest on capital, private expenses paid by the partnership) are added to their share of profit to determine their total individual taxable income.

3. Apply Tax Rates: The partner’s total taxable income is then taxed using the relevant rates (flat rate for business/investment income, sliding scales for employment income).

IV. Detailed Expenditure Treatment Guide

The table below summarises the treatment of key partnership expenditures, highlighting the critical distinction between the partnership deduction and the partner’s tax liability.

Would you like to explore a practical example of the two-stage computation process for a partnership with a salary and interest on capital?