LU9 – SOLE PROPRIETORSHIPS, PARTNERSHIPS, COMPANIES AND TRUSTS.
SOLE PROPRIETORSHIPS
A sole proprietorship is not a separate tax-paying entity and all taxable income from sole proprietorship will be
taxed in the hands of the sole proprietor.
Taxable income from a sole proprietorship is calculated by applying the rules of the ITA, and a sole proprietor is
entitled to deduct all expenses incurred in the production of his income as well as specific deductions and capital
allowances.
TRAVELLING EXPENSES
Where an accurate logbook has been kept the deduction will equal:
business km travelled
Total vehicle expense x
total km travelled
DO QUESTION 9.1 PAGE 238
PARTNERSHIPS
DEFINITION: A contractual relationship between 2> persons carrying on a joint business venture with a view to
profit, each incurring liability for losses and the right to share profits.
Partners may equally share profits or losses or they may agree to share profits and losses in a set proportion (e.g.
60% to one partner, 40% to another partner)
A partnership is a contract and not a separate legal entity. Therefore, it is not recognized as a taxpayer.
I.t.o the ITA each partner will be assessed individually on his/her share of the partnership profits or losses.
TYPES OF PARTNERSHIPS
ORDINARY
All partners = jointly and severally liable for all debts incurred by any partner acting within the scope of his powers
in the course of partnership business.
LIMITED PARTNERSHIP
In this partnership, one (or several) of the partner’s liability towards creditors is limited to his contributions to the
partnership.
TAXATION OF PARTNERSHIPS
, Partners are tan their profits regardless of their drawings
Although a partner can receive a salary from a partnership, this is generally regarded as a way of sharing
profits. He cannot be an employee of the partnership as he is one of the principles. Therefore, paragraphs
(d) (termination of gratuities) and (i) (fringe benefits) of the gross income definition do not apply to
partners.
If the partner sells his goodwill, the receipt is of capital nature unless payment is received in the form of
an annuity (in which case will be included in gross income i.t.o paragraph (a)).
I.t.o S11F the total deduction allowed for contributions to pension, provident and retirement annuity
funds is limited to the lesser of:
a) R350k
b) 27.5% of the higher of:
Remuneration (excl. retirement lump sum benefits, retirement fund lump sum
withdrawal and severance benefits)
Taxable income (excl. retirement lump sum benefits, retirement fund lump sum
withdrawal and severance benefits) before any deductions under S11F itself and 18A.
c) Taxable income before the S11F deduction and the inclusion of any taxable capital gain.
Therefore one must perform calculations to establish the amounts i.t.o paragraph (b) and (c) and
thereafter establish which the lesser amount between these two and R350k is.
Note: the amount to be deducted cannot exceed the actual contribution plus any carried forward balance
that was not allowed as a deduction in the prior tax year.
Note: for the purposes of S11F a partner in a partnership is treated as an employee of the partnership
amd the partnership is treated as that person’s employer. As such partnership’s remuneration for the
purposes of his S11F deduction will be equal to that partner’s share of partnership profits.
The s11(i) deduction for bad debts is only available to those partners who include the original sale (giving
rise to the debt) in their income.
SEE EXAMPLE 9.1 PAGE 240
SECTIONS OF THE ACT THAT DEAL SPECIFICALLY WITH PARTNERSHIPS:
S66 (15) –requires that partnerships submit a joint return to SARS. Generally a copy of the partnership’s
financial statements would suffice.
S77 (7) – states that the partners are liable for tax in their individual capacities. SARS therefore apportions
the taxable income of the partnership amongst the partners in their profit sharing ratios. Each partner will be
taxed on his share of the profits.
S24H (3) – this section restricts any deduction or allowance that might be claimed by a limited partner to:
The amount for which he may be held to be liable; and
Any income received by him from the partnership.
Any allowance or deduction which exceeds this limit may be carried forward to the following year of
assessment.
S24H(5) – This section states that any income received by or accrued to the partnership is deemed to accrue
to the partners in their profit sharing ratio on the same date that it is received by or accrued to the
SOLE PROPRIETORSHIPS
A sole proprietorship is not a separate tax-paying entity and all taxable income from sole proprietorship will be
taxed in the hands of the sole proprietor.
Taxable income from a sole proprietorship is calculated by applying the rules of the ITA, and a sole proprietor is
entitled to deduct all expenses incurred in the production of his income as well as specific deductions and capital
allowances.
TRAVELLING EXPENSES
Where an accurate logbook has been kept the deduction will equal:
business km travelled
Total vehicle expense x
total km travelled
DO QUESTION 9.1 PAGE 238
PARTNERSHIPS
DEFINITION: A contractual relationship between 2> persons carrying on a joint business venture with a view to
profit, each incurring liability for losses and the right to share profits.
Partners may equally share profits or losses or they may agree to share profits and losses in a set proportion (e.g.
60% to one partner, 40% to another partner)
A partnership is a contract and not a separate legal entity. Therefore, it is not recognized as a taxpayer.
I.t.o the ITA each partner will be assessed individually on his/her share of the partnership profits or losses.
TYPES OF PARTNERSHIPS
ORDINARY
All partners = jointly and severally liable for all debts incurred by any partner acting within the scope of his powers
in the course of partnership business.
LIMITED PARTNERSHIP
In this partnership, one (or several) of the partner’s liability towards creditors is limited to his contributions to the
partnership.
TAXATION OF PARTNERSHIPS
, Partners are tan their profits regardless of their drawings
Although a partner can receive a salary from a partnership, this is generally regarded as a way of sharing
profits. He cannot be an employee of the partnership as he is one of the principles. Therefore, paragraphs
(d) (termination of gratuities) and (i) (fringe benefits) of the gross income definition do not apply to
partners.
If the partner sells his goodwill, the receipt is of capital nature unless payment is received in the form of
an annuity (in which case will be included in gross income i.t.o paragraph (a)).
I.t.o S11F the total deduction allowed for contributions to pension, provident and retirement annuity
funds is limited to the lesser of:
a) R350k
b) 27.5% of the higher of:
Remuneration (excl. retirement lump sum benefits, retirement fund lump sum
withdrawal and severance benefits)
Taxable income (excl. retirement lump sum benefits, retirement fund lump sum
withdrawal and severance benefits) before any deductions under S11F itself and 18A.
c) Taxable income before the S11F deduction and the inclusion of any taxable capital gain.
Therefore one must perform calculations to establish the amounts i.t.o paragraph (b) and (c) and
thereafter establish which the lesser amount between these two and R350k is.
Note: the amount to be deducted cannot exceed the actual contribution plus any carried forward balance
that was not allowed as a deduction in the prior tax year.
Note: for the purposes of S11F a partner in a partnership is treated as an employee of the partnership
amd the partnership is treated as that person’s employer. As such partnership’s remuneration for the
purposes of his S11F deduction will be equal to that partner’s share of partnership profits.
The s11(i) deduction for bad debts is only available to those partners who include the original sale (giving
rise to the debt) in their income.
SEE EXAMPLE 9.1 PAGE 240
SECTIONS OF THE ACT THAT DEAL SPECIFICALLY WITH PARTNERSHIPS:
S66 (15) –requires that partnerships submit a joint return to SARS. Generally a copy of the partnership’s
financial statements would suffice.
S77 (7) – states that the partners are liable for tax in their individual capacities. SARS therefore apportions
the taxable income of the partnership amongst the partners in their profit sharing ratios. Each partner will be
taxed on his share of the profits.
S24H (3) – this section restricts any deduction or allowance that might be claimed by a limited partner to:
The amount for which he may be held to be liable; and
Any income received by him from the partnership.
Any allowance or deduction which exceeds this limit may be carried forward to the following year of
assessment.
S24H(5) – This section states that any income received by or accrued to the partnership is deemed to accrue
to the partners in their profit sharing ratio on the same date that it is received by or accrued to the
