Tax treatment of a Partnership in Zimbabwe.

A partnership is not a legal persona and is not liable for income tax liabilities. In practice, the taxable income of the partnership is first determined on the basis that it is a separate taxable person. The profits apportioned among the partners according to their rights to share in the partnership profits.

The essential conditions for a partnership are:

• • each partner brings or binds himself to bring something into it, e.g. money or labour or skill
  • the business should be carried on for the joint benefit of all the partners,
  • the object should be to make profit,
  • the contract between the partners should be a legitimate contract.

Partners are required for each year of assessment, to make a joint return of income from partnership. The return must be accompanied by the financial report. Each partner is separately and individually liable for the rendering of the joint return. Partner is liable to tax only his share of profit. A partner is not an employee of the partnership. The salary is therefore, not a true salary, but a way of sharing the profits. 

Source rules.

A partnership has no separate legal entity compared to its members, because it is not a person for tax purposes. Its residence status is determined by the residency status of partners. A partnership is a resident of Zimbabwe if at any time during a tax year a partner is a resident of Zimbabwe. Its income is derived from the services of a partner. This is the place where a partner renders his services to earn the partnership income according to Epstein v. COT.

The source of partnership income therefore depends on the services of a partner, not the partnership.

Accrual of partnership income

The income accruing to a partnership is deemed to have accrued to partners in any period ending on the accounting date, in the manner they share profit/loss.

Returns and assessment

Partners must submit a joint tax return of their partnership income together with other information as is required by ZIMRA from time to time. The return must be accompanied by the financial report necessary to show the result of the partnership’s operations. Each partner is separately and individually liable for the rendering of the joint return, although he is liable to tax only on his share of partnership profit or loss.

Changes in partnership deed

A change in a partnership deed can be caused by any of the following circumstances:

• • Change in partners profit and loss sharing ratio or capital asset entitlement ratio
  • New partner(s) joining an existing partnership
  • Death of a partner
  • Partner(s) leaving or retiring from partnership with some member(s) continuing

Profit and loss allocation

Taxable income of a partner is comprised of share of partnership profit/loss and income obtainable on other contracts with partnership. For example, partner’s salary, rent, other benefits which are privately enjoyed by the partner. Such expenses are deductible in the computation of the partnership profits.

Assessed loss also belongs to the individual partners forever even if he or she leaves the partnership or dies.

Partnership property

Since a partnership is not a separate legal entity and is unable to own property in its own capacity, property held in it is held by partners jointly, as co-owners. Any capital allowances and balancing charges on such property are apportioned between the partners according to partnership agreement ratio.If a partner avails an asset for use in the partnership which he clearly states that such an asset is not to form part of the partnership property, then capital allowances and the balancing charge on that asset must be granted to that partner only.

Partnership goodwill

Goodwill is an item of a capital nature and has no tax effect to either the seller or the buyer. It is closely associated with the business income earning structure than it is with income earning operations. Goodwill can only be taxed if it relates to excess price paid in leasing.

What rate is the partnership profits taxed.

An effective rate of 24.72% will apply on the partnership.