⚖️ Taxation of Partnerships: Partnerships and Income Tax.
The taxation of partnership businesses in Zimbabwe is governed by the Income Tax Act [Chapter 23:06] and subsequent Finance Acts, which reinforce the principle that a partnership is a transparent entity for tax purposes. This technical article explores the key legislative principles and calculation steps required for partnership taxation.
The Legal and Tax Status of a Partnership
A partnership is unique in that it is similar to a corporate taxpayer in its business operations but is not a legal entity and is specifically excluded from the definition of a ‘person’ in Section 2 of the Income Tax Act.
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No Separate Taxpayer Status: Consequently, the partnership itself cannot be a taxpayer.
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Income Deemed to Partners: Income that accrues to the partnership is legally deemed to be accruing to the partners in proportion to their agreed-upon profit-sharing ratio (Section 10(2)).
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Joint Return, Separate Assessment: While Section 37(15) requires persons carrying on a trade in partnership to submit a joint return supported by accounts, Section 51(5) provides for separate assessments to be made on each partner. Each partner is individually liable for their share of the tax.
Calculating the Tax Liability of Individual Partners
The tax calculation is a two-step process that requires treating the partnership as a distinct entity first, before allocating the resultant income to the individual partners.
Step 1: Calculating the Partnership’s Taxable Income
The partnership is first treated as if it were a taxable entity, applying the standard principles of gross income and allowable deductions.
Key Considerations for Partnership Expenses
Certain expenses related to the partners require specific tax treatment:
| Expense Type | Deduction at Partnership Level | Taxable to Partner | Rationale |
| Partner Benefits (e.g., Medical Aid, Pension Contributions, Subscriptions paid for partner’s benefit) | Deductible | Taxable (Subject to maximum thresholds, e.g., current maximum for pension contribution) | This expense is incurred wholly and exclusively for the trade of the partnership, but it constitutes an employment or private benefit to the partner. |
| Insurance Premiums (General) (Insuring partnership assets) | Allowable | Not Applicable | Standard business expense. |
| Joint Survivorship Policy (Partnership is beneficiary) | Not Allowable | Not Applicable | Considered a capital nature expense/investment for the partnership. |
| Separate Partner Life Policies (Partner is beneficiary, partnership pays) | Allowable | Taxable (on the premium paid on their behalf) | Treated as an appropriation of profit/benefit for the partner. |
| Separate Partner Life Policies (Partnership is beneficiary, partnership pays) | Not Allowable | Not Applicable | Considered a capital nature expense/investment for the partnership. |
| Ceded Partner Policies (Originally partner’s, now partnership is beneficiary) | Not Allowable | Not Applicable | Now benefits the partnership (capital nature). |
| Private Expenses (Paid by partnership on behalf of partner) | Not Allowable (for the partnership) | Taxable (as a benefit in kind) | Not incurred for the purpose of the partnership trade. |
Step 2: Calculating the Partner’s Individual Tax Liability
Once the partnership’s taxable income is determined, it is allocated to the partners based on their profit-sharing ratio. The partner then calculates their individual tax liability on their total taxable income.
Partner’s Income Composition
Partners may have income from two primary sources from the partnership:
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Business Income: Their share of the trading profit of the partnership.
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Employment Income: Salaries and other benefits received for services rendered in an employee capacity.
Tax Rates and Levy
A key differentiation in the calculation is the application of tax rates:
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Business Income (Trade or Investment): This is taxed at a flat rate of 25% plus the 3% AIDS Levy on the tax amount, resulting in an effective rate of 25.75%.
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Employment Income (Salary/Wages): This is taxed on sliding scales (progressive tax rates) as stipulated in the relevant Finance Act for the year of assessment, plus the 3% AIDS Levy on the tax amount.
Note: If the question only requires the computation of the partner’s total taxable income, the separate sources do not need to be distinguished, but for calculating the final tax liability, they must be separated to apply the correct rates.
Taxable Benefits for Partners
All private or personal expenses and benefits paid by the partnership on a partner’s behalf are taxable in the hands of the partner, including:
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Medical Aid and Pension Contributions: The value of contributions made on their behalf is taxable, though pension contributions are subject to a statutory maximum threshold (e.g., currently up to $5,400 per annum).
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Private Use of Assets (e.g., Motor Vehicles): The benefit is valued as the proportion of private use multiplied by the cost of using or maintaining the asset.
Conclusion
Partnership taxation operates on the principle of fiscal transparency, whereby the partnership serves as an income-generating vehicle, and the liability rests with the individual partners. Correctly distinguishing between deductible partnership expenses and taxable benefits to the partners is critical for accurate compliance under the Income Tax Act.
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