Introduction

These instructions will help you complete the Partnership tax return 2010 (NAT 0659). They are not a guide to income tax law. You may need to refer to other publications.

When we refer to 'you' or 'your business' in these instructions, we are referring either to you as the partnership that conducts a business or to you as the tax agent or partner responsible for completing the tax return.

These instructions contain abbreviations for names or technical terms. Each term is spelt out in full the first time it is used and there is a list of abbreviations.

An individual does not need to lodge a partnership tax return where the only income derived jointly (or in common) with another person was:

• rent from a jointly owned property
• interest from a jointly held account
• dividends from jointly held shares.

That individual was not in a partnership carrying on a business of any of these activities. In these three instances, each individual shows their share of the income and expenses at the appropriate items on their own individual tax return.

What's new?

Reforms to income tests

In the 2008 Federal Budget the Government announced measures to reform income tests across the tax and benefit systems. These measures will help to ensure Government assistance is targeted to those most in need. The measures also remove inconsistencies in the treatment of non-wage remuneration and ensure net losses from investment activities are better accounted for in income tests. The reforms to income tests measure took effect on 1 July 2009.

We have added new questions to the partnership tax return to determine each partner's share of net financial investment income or loss and net rental property income or loss. If partners have these amounts, they will need to include them when completing the net financial investment loss and net rental property loss items in their own income tax return.

Private company dividends

Tax Laws Amendment (2010 Measures No. 2) Bill 2010 was introduced into Parliament on 17 March 2010. This Bill tightens the private company dividend rules in Division 7A to improve its fairness and integrity. The rules in Division 7A prevent private companies from making tax free distributions of profits to shareholders or their associates. These rules also apply where a private company has an unpaid present entitlement from a trust and the trust makes a loan or certain payments to, or forgives the debt of, a shareholder (or their associate) of the private company. In this case, the payments, loans and forgiven debts are treated as dividends.

The changes reduce the scope for private companies to allow company assets to be used for free or at less than their arms length value without paying tax. A range of other amendments will be made to strengthen these rules.

These changes will apply from 1 July 2010.

Extending tax file number (TFN) withholding to closely-held trusts

Tax Laws Amendment (2010 Measures No. 2) Bill 2010 was introduced into Parliament on 17 March 2010. This Bill extends the current TFN withholding arrangements to most closely-held trusts, including family trusts, to ensure that beneficiaries of these trusts include their share of the net income of the trust in their tax returns.

Beneficiaries may provide their TFN to the trustee of the trust prior to receiving a distribution or becoming presently entitled to income of the trust. Where a beneficiary has provided their TFN, trustees will be required to report the TFN and other beneficiary details to the ATO.

Where a beneficiary does not provide their TFN, the trustee will be required to withhold an amount from the distribution. This amount will then be remitted to the Tax Office. When the beneficiary lodges their annual tax return they will be able to claim a credit for the tax withheld.

When enacted, the changes will apply to income of a trust for an income year starting on or after 1 July 2010.

Entrepreneurs tax offset

Legislation has been recently passed to include an income test into the eligibility criteria for the entrepreneurs tax offset from 1 July 2009. The income test means the amount of entrepreneurs tax offset payable in respect of partnership or sole trader activities, or income from a trust is reduced if an individual's income for entrepreneurs tax offset purposes exceeds the relevant threshold. This reduction will operate in addition to the current eligibility requirements applicable to the entrepreneurs tax offset.

Deductions for political contributions and gifts

From 1 July 2008 only individuals can deduct contributions and gifts to political parties and independent members and candidates, and the individual claiming the deduction must not have made the contributions or gifts in the course of carrying on a business.

Taxation of financial arrangements (TOFA)

New rules have been introduced, the TOFA rules, which modernise the tax treatment of gains and losses on financial arrangements. The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997 which generally provides for:

• methods of taking into account gains and losses from financial arrangements, being accruals and realisation, fair value, foreign exchange retranslation, hedging, reliance on financial reports and balancing adjustment, and
• the time at which the gains and losses from financial arrangements will be brought to account.

When will the TOFA rules affect a partnership's tax return?

The TOFA rules will apply to financial arrangements that an affected partnership starts to have in its first income year commencing on or after 1 July 2010. The TOFA rules will also apply to all qualifying securities that a partnership acquires or starts to have in that or later income years (provided the qualifying security has a remaining life of at least 12 months). However, a partnership can elect to have the TOFA rules apply a year early, so that it applies to financial arrangements they start to have in their income year commencing on or after 1 July 2009.

This means that the TOFA rules will not affect a partnership's net income for 2009-10 or how a partnership's 2010 income tax return is completed unless the partnership makes an election for the TOFA rules to apply to its financial arrangements early.

Which partnerships are affected?

The TOFA rules will apply to the following partnerships:

• authorised deposit-taking institutions, securitisation vehicles and financial sector entities with an aggregated annual turnover of $20 million or more
• entities with a similar status to managed investment schemes under foreign law relating to corporate regulation with assets of $100 million or more
• any other partnership which satisfies one or more of the following
• an aggregated turnover of $100 million or more
• assets of $300 million or more
• financial assets of $100 million or more.

A partnership that does not meet these requirements can elect to have the TOFA rules apply to it.

Transitional election for existing financial arrangements

Although the TOFA rules generally apply only to new financial arrangements, an affected partnership can make a further election to have the TOFA rules apply to its existing financial arrangements. Where this election is made, the rules will also apply to financial arrangements that were entered into before the time that the TOFA rules first apply to the partnership if those financial arrangements are held at that time.

A partnership must provide a transitional election for existing financial arrangements to the Commissioner by the following dates:

Income year that the TOFA rules first apply to the partnership's financial arrangements	Date transitional election must be made by:
2009-10	lodgment date of partnership's 2009 income tax return
2010-11	lodgment date of partnership's 2010 income tax return
2011-12*	lodgment date of partnership's 2011 income tax return

* This may apply to partnerships with a substituted accounting period that have an early balance date.

Elections under the TOFA rules are irrevocable, and therefore should be carefully considered before being made.