Which of the following statements regarding partnerships is correct? options: 1) Partnerships may come under ATO scrutiny if income is being distributed to persons, including family members, who are not really working in the partnership. 2) Partnerships are primarily used, particularly in family circumstances, because there are no capital gains payable. 3) Partnerships have the disadvantage that they cannot be classed as a small business. 4) Partnerships pay tax and then pass the dividend to each of its participants.
The correct answer and explanation is:
The correct answer is Option 1: Partnerships may come under ATO scrutiny if income is being distributed to persons, including family members, who are not really working in the partnership.
Explanation:
In a partnership, all the income earned is usually passed through to the individual partners, who are then responsible for reporting their respective share of the income on their tax returns. This means that partnerships themselves do not directly pay taxes, but each partner is taxed based on their share of the income. However, this structure can attract attention from the Australian Taxation Office (ATO) if a partnership is distributing income to individuals who are not actively contributing to the partnership’s work, especially in cases involving family members.
The ATO closely monitors income distribution practices to ensure that the allocation is not done purely for tax avoidance purposes. If a partnership is allocating significant amounts of income to individuals who do not contribute to the business, it could be seen as an attempt to divert profits to lower-taxed individuals. Such practices can be scrutinized by the ATO to determine if they are in line with the intent of partnership laws, which require that income distributions reflect the level of work or investment by each partner.
Regarding the other options:
- Option 2 is incorrect because capital gains tax (CGT) is still applicable in partnerships when assets are sold or transferred. There is no general exemption from CGT for partnerships.
- Option 3 is incorrect because partnerships can qualify as small businesses and enjoy tax benefits, including the small business income tax offset, provided they meet the necessary criteria.
- Option 4 is incorrect because partnerships themselves do not pay tax. Instead, the income is passed directly to the partners, who report it on their individual tax returns and pay tax accordingly.
In conclusion, the most accurate statement is option 1, which highlights the potential for scrutiny by tax authorities when income is distributed improperly.