MIDLANDS STATE UNIVERSITY

ACCOUNTING SYSTEMS IN A COMPUTER ENVIRONMENT (ACC 109)

LEVEL: 1.1
NAME REGISTRATION NO. PROGRAMME
ZOE J. ISSAH R193566H BCOM IN ACCOUNTING
JOICE JERIMANI R191672G BCOM IN ACCOUNTING
LORRAINE MAURU R191572B BCOM IN ACCOUNTING
SHARLEEN NYABINDE R192627P BCOM IN ACCOUNTING
KADUNGURE TAPIWA R191550H BCOM IN ACCOUNTING
LOUIS T MUSIRINOFA. R194061H. BCOM IN ACCOUNTING
MELODY N RUNGANGA. R195584G. BCOM IN ACCOUNTING
TRACY MOMBO R194515A. BCOM IN ACCOUNTING
FAITH MUTUSVA. R1815536P. BCOM IN ACCOUNTING
BRIAN T MUNEMO. R195566A. BCOM IN ACCOUNTING
NATHAN CHITEKA. R1815559M BCOM IN ACCOUNTING
ANTNATE MAWERE. R191403G. BCOM IN ACCOUNTING

QUESTION.

Taxation of Partnerships.

LECTURER’S COMMENTS
Partnerships
Tax liability
Gross Income refers to means the total amount received by or accrued to or in favour of a
person or deemed to have been received by or to have accrued to or in favour of a person in any
year of assessment from a source within or deemed to be within Zimbabwe excluding any
amount so received or accrued which is proved by the taxpayer to be of a capital nature.
According to section 2 of the income tax act, a person includes a company, body of persons
corporate or unincorporate (not being a partnership), local or like authority, deceased or
insolvent estate and, in relation to income the subject of a trust to which no beneficiary is
entitled, the trust.
The definition of a person under the Income Tax Act does not include a partnership, which
makes it not liable to income tax. Partners are however required to submit a joint return in
respect of income or losses generated by the partnership. Each partner is separately and
individually liable for the rendering of the joint return, but partners shall be liable to tax only in
their separate individual capacities. In practice however the income of the partners is first
determined on the assumption that a partnership is a separate taxable person by applying the
rules on gross income expenditure as if the partnership was a taxable business. After the said
joint taxable income is obtained it is then split between or amongst partners according to their
agreed profit or loss sharing ratio. Section 37(15)
The taxable income of the partners is charged at the rate of companies which is currently 24%
excluding Aids Levy.
Accrual for partnership tax
According to the income tax Act section 10(2) Income is deemed to have been received by or
accrued to or in favour of a partnership in any period ending on an accounting date shall be
deemed to be income received by or accrued to or in favour of the partners on such accounting
date in the proportions in which the partners agree to share the profits of the partnership as at
such date.
Accounting Date
The accounting date of the partnership is not necessarily the same as that of the partners. The
accounting date of the Partnership is the date in the year when the accounts are prepared by the
partnership. Example if the accounts are prepared for nine to 30 September 2020, then the
accounting date is 30 September 2020.
The accounting date of the partner is date last date of the partner’s year of assessment. For
example a partner joins a partnership on 1 December 2019 then her accounting date will be 30
November 2020.
Death of a partner (Section 37(15))

Where because of the death of a partner accounts are prepared in order to show the results of the
operations of the partnership for the period from the last accounting date to the date of the death of
the partner. The surviving partners shall not be required to include their shares of the income as shown
by such accounts in any return other than that for the year of assessment in which the first anniversary
of the accounting date prior to the date of the death of the partner falls and their shares of income shall
be deemed to accrue accordingly.

Income in this case is deemed to have accrued on the accounting date prior to the death of the
other partner.
Source of Income
The source of the partnership income is the place where the partner renders his service to earn
income like in the case CIR V Epstein.
Deductions
Salaries and Interests
Salaries paid to a partner are not remuneration on that basis it is not subject to employees’ tax.
However, the salary is a deductable expenditure when determining joint taxable income of
partners but then included in the taxable income of the individual partner. Therefore, the fact that
a partner shall receive a salary does not affect how a partner is taxed or the nature of the
partnership income. The salary is deducted in computation of partnership income and aggregated
with other incomes in determining the partner’s income.
Interest on the partners’ capital accounts is deductible to the partnership and brought back into
the partner’s taxable income. Any other payments e.g. domestic expense of a partner payable or
paid to a partner or on behalf of a partner by the partnership are deductible in the joint taxable
income statement and taxable to the beneficial partner. Deductible are also payments to a partner
in respect of assets which they own personally and which they have rented or hired to the
partnership. The rent likewise is then brought into the gross income of the partner.
Interest on money borrowed to purchase interest in the partnership or for on-lending to the
partnership, by a partner, is deductible expense to the partner. The interest is regarded to have
been incurred in the production of a partner’s income. On the other hand, a partner who incurs
interest on drawings from the partnership is not allowed to deduct the interest despite the interest
being taxable to the partnership. The drawings themselves are of capital nature. They are neither
taxable to the partner nor deductible to the partnership.
Insurance Policies
A partnership may take out a policy on the joint lives of the partners. Joint survivorship policies
are policies which provide liquid funds for the partnership in the event of a death of a partner.
The purpose of such an arrangement is usually to provide ready cash to pay out either the whole
or a portion of a deceased partner’s goodwill, as well as the amount standing to the credit of his
capital account. The premiums payable under joint survivorship is non tax deductible to the
partnership. When the policy matures the proceeds payable or paid out of the policy are non-
taxable they are accrual of a capital nature.
Where instead of the joint survivorship policy, each individual partner takes out a separate policy
on his life whose premiums are paid by the partnership; the premium shall be deductible to the
partnership. A partner will then be taxed on the premiums of the separate accident/life policy
paid on his behalf by the partnership. The payment of the premium on behalf of a partner is
considered to be an allocation of partnership profits. Where instead a partner takes out a separate
policy but which he then cedes to the partnership, i.e. the partnership then becomes responsible
for paying the premiums; such arrangement will be treated in the same manner as if it were a
joint survivorship policy. Premiums of public liability policies are business expenses which are
tax deductible also to the partnership. Since they do not benefit the partners but the general
public once deducted in the joint taxable statement no further tax implication accrues to the
partner.
Pension, annuities paid to former partners
Annuities, allowances or pensions paid voluntarily to former partners or their dependents have
limited deduction. Such payments are called ex-gratia payments. A partner must have retired on
grounds of ill health, old age or infirmity. The deductible amount must not exceed $200 for each
payment to a former partner. This amount is reduced by any pension received by a partner from
any fund, wherever situated, to which the partnership contributed in respect of that former
partner. Annuities, pensions or allowances paid to dependents of a former partner are deductible
up to a maximum of $200 per former, regardless of the number of dependents. A dependent is a
person who relied on for his maintenance upon a former partner and depend on a person
immediately prior his death.
Medical expenses
Contributions paid to medical aid societies by partnerships on behalf of partners are a deductible
expense to partnerships. Since a partner is not an employee as required by the Act, the
contribution is simply another private expense of a partner paid by a partnership on behalf of a
partner. After the deduction by the partnership, the contributions will then constitute taxable
income a partner. A partner may then claim a tax credit in respect of the medical contributions.
The same treatment is accorded to medical expenses paid by the partnership on behalf of the
partner.
Membership of pension funds
Notwithstanding the law that a partnership cannot be an employer of a partner, an exception
applies in respect of benefit or pension fund rules. As such an employer in relation to a member
of a benefit or pension fund means the partnership. The partnership can therefore deduct
contributions it makes on behalf of a partner to a pension fund i.e. up to $ 5400 per year for
pension contributions and $ 1500 per year of assessment in the case of a benefit fund
contributions. No further adjustment is made whether to the partnership or partner after allowing
to the partnership the statutory limits.
A different treatment is implied for retirement annuity contributions made on behalf of the
partner by the partnership. Since the Act does not provide for deduction of a retirement annuity
contribution by an employer, retirement annuity contributions made by the partnership should be
deductible in full to the partnership and fully taxable to the partner. A partner can then deduct
those contributions up to $5400 per annum as if they were made by him.
Trade convention and mission
Expenditure incurred on a trade convention and on a trade mission is tax deductible. A trade
convention must be related to the partnership’s trade, while a trade mission needs the approval of
the Minister of Finance and Economic Development. If a partner attends a trade mission or a
trade convention whose cost is incurred by the partnership, a deduction shall be allowed to the
partners in proportion to their profit or loss sharing ratios. The deduction shall only be granted
for one convention and one mission for each partner up to a maximum of $2500 each. If a trade
mission or convention commences in one year and ends in another, the deduction is granted in
the year in year in which it ends.
Subscriptions
Subscriptions paid on behalf of a partner by a partnership are deductible to the partnership and
taxable to the partner. A partner can then deduct the same subscriptions. If dual usage can be
established, a partner will be called upon to submit his estimate of business and private usage
with a view to allow a deduction in respect of his business usage only.
Passage benefit
The cost of partner’s business trip is deductible to the partnership even if he uses the opportunity
to take a holiday after the business has been concluded. However, if the partnership bears the
cost of a holiday for partner the amount is taxable to the partner deductible to the partnership.
Bad debt 15(2g)
Bad debts are deductible on the joint income of the partnership on condition that the debt must
be: due and payable, the taxpayer can prove to the commissioner that the debt is irrecoverable
and the debt should been included in the taxpayers’ gross income in the current year of
assessment or any prior years. The treatment of bad debts is similar to the general rules.
It is important to note that an incoming partner cannot claim any bad debts arising out of those
debts which occurred before he was a partner.
Deductions
A partnership, like other legal structures can deduct expenses incurred by it in the production of
income. If a partner bears a burden of partnership loss or obligation to a creditor on behalf of a
fellow partner he cannot claim a deduction of amount paid to a creditor. The amount is
considered as of a capital nature. It is considered as paid as a result of partnership law and not in
the production of income; partners are jointly and severally liable to the debts of a partnership.
However if a partner overdraws funds from the partnership and later default on the obligation,
the fellow partners cannot deduct the irrecoverable amount.
Change in Profit sharing ratios
If the profit sharing arrangements change part way through the period of account, the profits,
salaries and interest for the period of account must be prorated accordingly when the partners’
joint income is determined.
Tangible assets
A partnership cannot 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 properly are
apportioned between the partners according to their sharing ratio.
When there is a change in membership or when a sole trader forms a partnership, the sole trader
or the old partnership is deemed to have sold its business at its market value to the new
partnership. The resulting recoupment or scrapping allowance shall be attributed to the sole
trader or old partners in proportion to their old sharing ratio.
Goodwill
Goodwill is 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.
The only time goodwill is taxable is when it is used as a trade good in a profit making scheme or
sold to one of the remaining partners. For example, a goodwill exchanged by a partner for
payments representing partnership share of profits is taxable to the seller (partner).To the
purchaser, goodwill is still considered an amount of capital nature.